RULE NO. 424(b)(5)
REGISTRATION NO. 333-68747
[LOGO] Merrill Lynch
PROSPECTUS SUPPLEMENT PROTECTED GROWTH(SM) INVESTING
(To prospectus dated May 6, 1999) Pursuit of Growth, Protection of Prinipal
4,400,000 Units
Merrill Lynch & Co., Inc.
Energy Select Sector SPDR(R) Fund
Market Index Target-Term Securities(R)
due September 20, 2006
"MITTS(R) Securities"
$10 principal amount per unit
--------------
The MITTS Securities: Payment at maturity:
. On the maturity date, for each unit
. 100% principal protection at of the MITTS Securities you own, we
maturity. will pay you an amount equal to the
. No payments or deliveries before the sum of the principal amount of each
maturity date. unit and an additional amount based
. Senior unsecured debt securities of on the increase, if any, in the net
Merrill Lynch & Co., Inc. asset value per share of the Energy
. Linked to the net asset value per Select Sector SPDR Fund, reduced by
share of the Energy Select Sector an annual adjustment factor of
SPDR Fund, a registered index fund. 1.25%.
. The MITTS Securities have been . At maturity, you will receive no
approved for listing on the American less than the principal amount of
Stock Exchange under the trading your MITTS Securities.
symbol "ESY". . At maturity we will pay you all
. Closing date: September 20, 1999. amounts due under the MITTS
Securities by delivering to you
shares of the Energy Select Sector
SPDR Fund or paying you cash with an
equal value.
Investing in the MITTS Securities involves risk.
See "Risk Factors" beginning on page S-10 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.
Per unit Total
-------- -----
Public offering price............................... $10.00 $44,000,000
Underwriting discount............................... $.30 $1,320,000
Proceeds, before expenses, to Merrill Lynch & Co.,
Inc. .............................................. $9.70 $42,680,000
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 $9.90 per unit
and $.20 per unit, respectively,
and
(b)500,000 units or more will be $9.85 per unit and $.15 per unit,
respectively.
--------------
Merrill Lynch & Co.
--------------
The date of this prospectus supplement is September 14, 1999.
"MITTS" and "Market Index Target-Term Securities" are registered service marks
and "Protected Growth" is a service mark of Merrill Lynch & Co., Inc.
"SPDRs", "Select Sector SPDR", "Select Sector SPDRs" and "Select Sector
Standard & Poor's Depositary Receipts" are trademarks of The McGraw-Hill
Companies, Inc.
TABLE OF CONTENTS
Prospectus Supplement
Page
SUMMARY INFORMATION--Q&A................................................ S-4
What are the MITTS Securities?........................................ S-4
What will I receive on the stated maturity date of the MITTS
Securities?.......................................................... S-4
How is the Net Asset Value determined?................................ S-6
When will I receive cash instead of shares of the Energy SPDR Fund?... S-6
Will I be charged any transaction fees or expenses with respect to the
shares of the Energy SPDR Fund?...................................... S-7
What is the Energy SPDR Fund?......................................... S-7
What about taxes?..................................................... S-8
Will the MITTS Securities be listed on a stock exchange?.............. S-8
What is the role of MLPF&S?........................................... S-8
Who is ML&Co.?........................................................ S-9
Are there any risks associated with my investment?.................... S-9
RISK FACTORS............................................................ S-10
You may not earn a return on your investment.......................... S-10
Your return will not reflect the return of owning shares of the Energy
SPDR Fund or the securities and other assets comprising the Energy
SPDR Fund's investment portfolio..................................... S-10
Changes in the Net Asset Value per share of the Energy SPDR Fund will
not exactly mirror changes in the Energy Select Sector Index......... S-10
Your yield may be lower than the yield on a standard debt security of
comparable maturity.................................................. S-10
There may be an uncertain trading market for the MITTS Securities..... S-11
Many factors affect the trading value of the MITTS Securities; these
factors interrelate in complex ways and the effect of any one factor
may offset or magnify the effect of another factor................... S-11
Absence of prior active market for shares of the Energy SPDR Fund..... S-12
Concentration in energy-related securities............................ S-12
No affiliation between ML&Co. and the Energy SPDR Fund................ S-13
No shareholder's rights............................................... S-13
Amounts payable on the MITTS Securities may be limited by state law... S-13
Purchases and sales by us and our affiliates may affect your return... S-13
Potential conflicts................................................... S-14
Uncertain tax consequences............................................ S-14
DESCRIPTION OF THE MITTS SECURITIES..................................... S-15
Delivery at maturity.................................................. S-15
Fractional Shares..................................................... S-17
Hypothetical returns.................................................. S-17
Adjustments to the Energy SPDR Fund; Market Disruption Events......... S-18
Termination of the Energy SPDR Fund................................... S-18
Events of Default and Acceleration.................................... S-20
Depositary............................................................ S-20
Same-Day Settlement and Payment....................................... S-22
THE ENERGY SPDR FUND.................................................... S-23
License Agreement..................................................... S-24
UNITED STATES FEDERAL INCOME TAXATION................................... S-26
General............................................................... S-26
U.S. Holders.......................................................... S-27
S-2
Non-U.S. Holders....................................................... S-29
Backup withholding..................................................... S-30
New withholding regulations............................................ S-30
ERISA CONSIDERATIONS..................................................... S-30
USE OF PROCEEDS AND HEDGING.............................................. S-31
WHERE YOU CAN FIND MORE INFORMATION...................................... S-31
ML&Co. ................................................................ S-31
The Energy SPDR Fund................................................... S-31
UNDERWRITING............................................................. S-32
VALIDITY OF THE MITTS SECURITIES......................................... S-32
INDEX OF DEFINED TERMS................................................... S-33
Prospectus
Page
MERRILL LYNCH & CO., INC. ................................................ 2
USE OF PROCEEDS........................................................... 2
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS.............................. 3
THE SECURITIES............................................................ 3
DESCRIPTION OF DEBT SECURITIES............................................ 4
DESCRIPTION OF DEBT WARRANTS.............................................. 10
DESCRIPTION OF CURRENCY WARRANTS.......................................... 12
DESCRIPTION OF INDEX WARRANTS............................................. 14
DESCRIPTION OF PREFERRED STOCK............................................ 19
DESCRIPTION OF DEPOSITARY SHARES.......................................... 24
DESCRIPTION OF PREFERRED STOCK WARRANTS................................... 28
DESCRIPTION OF COMMON STOCK............................................... 30
DESCRIPTION OF COMMON STOCK WARRANTS...................................... 33
PLAN OF DISTRIBUTION...................................................... 35
WHERE YOU CAN FIND MORE INFORMATION....................................... 36
INCORPORATION OF INFORMATION WE FILE WITH THE SEC......................... 36
EXPERTS................................................................... 37
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SUMMARY INFORMATION--Q&A
This summary includes questions and answers that highlight selected
information from this prospectus supplement and the accompanying prospectus of
Merrill Lynch & Co., Inc. to help you understand the Energy SPDR(R) Fund Market
Index Target-Term Securities(R) due September 20, 2006. You should carefully
read this prospectus supplement and the accompanying prospectus of Merrill
Lynch & Co., Inc. to fully understand the terms of the MITTS Securities and the
tax and other considerations that are important to you in making a decision
about whether to invest in the MITTS Securities. You should carefully review
the "Risk Factors" section, which highlights certain risks associated with an
investment in the MITTS Securities, to determine whether an investment in the
MITTS Securities is appropriate for you.
References in this prospectus supplement to "ML&Co.", "we", "us" and
"our" are to Merrill Lynch & Co., Inc.
References in this prospectus supplement to "MLPF&S" are to Merrill
Lynch, Pierce, Fenner & Smith Incorporated.
References in this prospectus supplement to the "Energy SPDR Fund" are to
the Energy Select Sector SPDR Fund.
We have attached the prospectus for the Energy SPDR Fund (the "Fund
Prospectus"). You should carefully read the Fund Prospectus to fully understand
the operation and management of the Energy SPDR Fund, particularly the fees and
expenses associated with shares of the Energy SPDR Fund which affect the Net
Asset Value per share of the Energy SPDR Fund and which will directly apply to
you if we choose to deliver these shares of the Energy SPDR Fund to you at
maturity of the MITTS Securities. Our affiliate, MLPF&S, is both a soliciting
dealer in the shares of the Energy SPDR Fund and the index compilation agent
for the Energy Select Sector Index. However, we are not affiliated with the
Energy SPDR Fund or the Energy Select Sector Index. The Energy SPDR Fund will
not receive any of the proceeds from the sale of the MITTS Securities and will
not have any obligations with respect to the MITTS Securities.
We have attached the Fund Prospectus and are delivering it to you
together with this prospectus supplement and the accompanying prospectus of
ML&Co. for the convenience of reference only. The Fund Prospectus does not
constitute a part of this prospectus supplement or the accompanying prospectus
of ML&Co., nor is it incorporated by reference into this prospectus supplement
or in the accompanying prospectus of ML&Co.
What are the MITTS Securities?
The MITTS Securities will be a series of senior debt securities issued by
ML&Co. and will not be secured by collateral. The MITTS Securities will rank
equally with all of our other unsecured and unsubordinated debt. The MITTS
Securities will mature on September 20, 2006. We cannot redeem the MITTS
Securities at any earlier date. We will not deliver to you any shares of the
Energy SPDR Fund or make any other payments on the MITTS Securities until
maturity.
Each unit of MITTS Securities represents $10 principal amount of MITTS
Securities. You may transfer the MITTS Securities only in whole units. You will
not have the right to receive physical certificates evidencing your ownership
except under limited circumstances. Instead, we will issue the MITTS Securities
in the form of a global certificate, which will be held by The Depository Trust
Company, also known as DTC, or its nominee. Direct and indirect participants in
DTC will record your ownership of the MITTS Securities. You should refer to the
section "Description of the MITTS Securities--Depositary" in this prospectus
supplement.
What will I receive on the stated maturity date of the MITTS Securities?
We have designed the MITTS Securities for investors who want to protect
their investment by receiving at least the principal amount of their investment
at maturity and who also want to participate in the appreciation, if any, in
the Net Asset Value per share of the Energy SPDR Fund as
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reduced by the Adjustment Factor. On the stated maturity date, you will receive
a number of shares of the Energy SPDR Fund equal in value to the sum of the
principal amount and the Supplemental Redemption Amount, if any, and an amount
of cash equal to the value of any fractional shares. We will determine the
number of shares to be delivered to you based on the Ending Value. At our
option, instead of delivering to you the shares of the Energy SPDR Fund to
which you would otherwise be entitled, we may pay you cash.
Principal amount
The "principal amount" per unit is $10.
Supplemental Redemption Amount
The "Supplemental Redemption Amount" per unit will equal:
( Adjusted Ending Value - Starting Value )
$10 X ( -------------------------------------- )
( Starting Value )
but will not be less than zero.
The "Starting Value" equals 29.27, the Net Asset Value of one share of
the Energy SPDR Fund on September 14, 1999, the date the MITTS Securities were
priced for initial sale to the public (the "Pricing Date").
The "Adjusted Ending Value" means the Ending Value as reduced by the
application of the Adjustment Factor to the Net Asset Value used to calculate
the Ending Value on each calculation day during the calculation period.
"Ending Value" means the average of the Net Asset Values of one share of
the Energy SPDR Fund as determined by the Energy SPDR Fund at the close of the
market on five calculation days shortly before the maturity of the MITTS
Securities. We may calculate the Ending Value by reference to fewer than five
or even a single day's Net Asset Value if, during the calculation period, there
is a disruption in the trading of a number of the component stocks of the
Energy Select Sector Index or options relating to the shares of the Energy SPDR
Fund, the Energy SPDR Fund is unable or otherwise fails to issue a Net Asset
Value for the shares of the Energy SPDR Fund or the Energy SPDR Fund suspends
the creation or redemption of its shares. Please see the section entitled
"Description of the MITTS Securities--Adjustments to the Energy SPDR Fund;
Market Disruption Events" in this prospectus supplement.
The "Adjustment Factor" equals 1.25% per year and will be prorated based
on a 365-day year and applied over the entire term of the MITTS Securities on
each calendar day to reduce the Net Asset Value per share of the Energy SPDR
Fund used to calculate the Supplemental Redemption Amount on each Calculation
Day during the Calculation Period. As a result of the cumulative effect of this
reduction, the values used to calculate your Supplemental Redemption Amount at
the maturity of the MITTS Securities will be approximately 8.38% less than the
actual Net Asset Values per share of the Energy SPDR Fund on each day during
the Calculation Period. For a detailed discussion of how the Adjustment Factor
will affect the Net Asset Value per share of the Energy SPDR Fund used to
calculate your Supplemental Redemption Amount, see "Description of the MITTS
Securities--Delivery at maturity" and "--Hypothetical Returns" in this
prospectus supplement. For more specific information about the Supplemental
Redemption Amount, please see the section entitled "Description of the MITTS
Securities" in this prospectus supplement.
We will pay you a Supplemental Redemption Amount only if the Adjusted
Ending Value is greater than the Starting Value. If the Adjusted Ending Value
is less than, or equal to, the Starting Value, the Supplemental Redemption
Amount will be zero. We will pay you the principal amount of your MITTS
Securities regardless of whether any Supplemental Redemption Amount is payable.
S-5
Examples
Here are two examples of Supplemental Redemption Amount calculations assuming
an investment term equal to that of the MITTS Securities and an Adjustment
Factor of 1.25% per year:
Example 1--The hypothetical Adjusted Ending Value is below the Starting Value
at maturity:
Starting Value: 29.27
Hypothetical Ending Value at maturity: 30.73
Hypothetical Adjusted Ending Value: 28.15
(Supplemental
Redemption
( 28.15 -- 29.27 ) Amount cannot
Supplemental Redemption Amount (per unit) = $10 X ( -------------- ) = $0.00 be less than zero)
( 29.27 )
Total payment at maturity (per unit) = $10 + $0 = $10
Example 2--The hypothetical Adjusted Ending Value is above the Starting Value
at maturity:
Starting Value: 29.27
Hypothetical Ending Value at maturity: 52.68
Hypothetical Adjusted Ending Value: 48.26
( 48.26 -- 29.27 )
Supplemental Redemption Amount (per unit) = $10 X ( -------------- ) = $6.49
( 29.27 )
Total payment at maturity (per unit) = $10 + $6.49 = $16.49
How is the Net Asset Value determined?
The "Net Asset Value" means the net asset value per share of the Energy
SPDR Fund as determined by the Energy SPDR Fund. The Energy SPDR Fund
calculates its Net Asset Value per share by dividing the value of its net
assets, i.e., the value of its total assets less total liabilities, by its
total number of shares outstanding. Expenses and fees, including the
management, administration and distribution fees, of the Energy SPDR Fund are
accrued daily and taken into account for purposes of determining Net Asset
Value. The Net Asset Value per share of the Energy SPDR Fund is determined by
the Energy SPDR Fund on each Business Day after the close of trading on the New
York Stock Exchange, ordinarily 4:00 p.m., New York City time. Shares of the
Energy SPDR Fund are listed on the AMEX under the trading symbol "XLE".
When will I receive cash instead of shares of the Energy SPDR Fund?
If we choose to pay you the amount due to you at maturity in cash instead
of in shares of the Energy SPDR Fund which you would otherwise be entitled to
receive, we will pay you an amount of cash equal to the sum of the principal
amount and the Supplemental Redemption Amount, if any. In addition, if at any
time MLPF&S ceases to be a soliciting dealer in the shares of the Energy SPDR
Fund, we will pay the amount due to you in cash instead of shares. Please see
the section entitled "Description of the MITTS Securities--Delivery at
maturity" in this prospectus supplement.
In addition, in the event that we choose to deliver shares of the Energy
SPDR Fund at maturity, we will not distribute any fractional shares to you.
S-6
We will aggregate all amounts due to you in respect of the total number of
units you hold on the stated maturity date, and, in lieu of delivering to you
any fractional shares of the Energy SPDR Fund to which you would otherwise be
entitled, we will pay you the cash value of these fractional shares based on
the Ending Value.
Will I be charged any transaction fees or expenses with respect to the shares
of the Energy SPDR Fund?
Unless and until we deliver shares of the Energy SPDR Fund to you in
satisfaction of our obligations under the MITTS Securities at maturity, you
will not be directly charged any management, administration, distribution or
other transaction fees or other expenses with respect to the shares of the
Energy SPDR Fund. However, because the Energy SPDR Fund accrues these fees and
expenses daily for purposes of determining the Net Asset Value of its shares,
the Net Asset Values used to calculate your Supplemental Redemption Amount will
reflect the deduction of these fees and expenses as well as the reduction
resulting from the application of the Adjustment Factor.
If at maturity we deliver to you shares of the Energy SPDR Fund, you will
then become directly subject to ongoing account maintenance fees and certain
other transaction expenses with respect to your shares so long as you hold
those shares.
The accompanying Fund Prospectus describes the fees and expenses charged
by the Energy SPDR Fund in greater detail.
What is the Energy SPDR Fund?
The Energy SPDR Fund is an index fund whose stated investment objective
is to provide investment results that, before expenses, correspond generally to
the price and yield performance of the publicly traded equity securities
comprising the Energy Select Sector Index. The Energy Select Sector Index
consists of the equity securities of publicly traded companies that are
components of the S&P 500 Index and are involved in the development and
production of energy products. Companies in the Energy Select Sector Index
develop and produce crude oil and natural gas, and provide drilling and other
energy related services. As of September 14, 1999, the Energy Select Sector
Index included 31 component stocks. A list of these securities and their index
weightings as of September 14, 1999 is set forth under the section entitled
"The Energy SPDR Fund" in this prospectus supplement. Our affiliate, MLPF&S, is
both a soliciting dealer in the shares of the Energy SPDR Fund and the index
compilation agent for the Energy Select Sector Index. We are not affiliated
with the Energy SPDR Fund or the Energy Select Sector Index. The Energy SPDR
Fund will not receive any of the proceeds from the sale of the MITTS Securities
and will not have any obligations with respect to the MITTS Securities. You
should independently decide whether an investment in the MITTS Securities and
the Energy SPDR Fund is appropriate for you.
The Energy SPDR Fund is one of nine investment funds comprising the
Select Sector SPDR Trust, a management investment company registered under the
Investment Company Act of 1940, as amended. Each fund's investment portfolio is
comprised principally of constituent companies whose equity securities are
components of the S&P 500 Index, each representing one of nine specified market
sector indices. Each stock in the S&P 500 Index is allocated to only one Select
Sector Index. The combined companies of the nine Select Sector Indices
represent all of the companies whose stocks are components of the S&P 500
Index.
You should carefully read the Fund Prospectus accompanying this
prospectus supplement and prospectus of ML&Co. to fully understand the
operation and management of the Energy SPDR Fund. In addition, because the
Select Sector SPDR Trust is subject to the registration requirements of the
Securities Act of 1933, as amended, and the Investment Company Act, the Select
Sector SPDR Trust is required to file periodically certain information
specified by the SEC. For more information about the Energy SPDR Fund and the
shares that you may receive at maturity, information provided to or filed with
the SEC by the Select Sector SPDR Trust can be inspected at the SEC's public
reference facilities or accessed over the Internet through a web site
maintained by the SEC at http://www.sec.gov. You
S-7
may also obtain copies of these documents at no cost by calling the Select
Sector SPDR Trust at (800) 843-2639 or by writing the Select Sector SPDR Trust
c/o ALPS Mutual Funds Services, Inc., at 370 17th Street, Suite 3100, Denver,
CO 80202. Neither the Fund 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.
What about taxes?
Each year, you will be required to pay taxes on ordinary income from the
MITTS Securities over their term based upon an estimated yield for the MITTS
Securities, even though you will not receive any payments from us until
maturity. We have determined this estimated yield, in accordance with
regulations issued by the U.S. Treasury Department, solely in order for you to
figure the amount of taxes that you will owe each year as a result of owning a
MITTS Security. This estimated yield is neither a prediction nor a guarantee of
what the actual Supplemental Redemption Amount will be, or that the actual
Supplemental Redemption Amount will even exceed zero. We have determined that
this estimated yield will equal 7.08% per annum, compounded semiannually.
Based upon this estimated yield, if you pay your taxes on a calendar year
basis and if you buy a MITTS Security for $10 and hold the MITTS Security until
maturity, you will be required to pay taxes on the following amounts of
ordinary income from the MITTS Securities each year: $.1987 in 1999, $.7347 in
2000, $.7878 in 2001, $.8445 in 2002, $.9039 in 2003, $.9721 in 2004, $1.0406
in 2005 and $.7909 in 2006. However, in 2006, the amount of ordinary income
that you will be required to pay taxes on from owning each MITTS Security may
be greater or less than $.7909, depending upon the Supplemental Redemption
Amount, if any, you receive. Also, if the Supplemental Redemption Amount is
less than $6.2732, you may have a loss which you could deduct against other
income you may have in 2006, but under current tax regulations, you would
neither be required nor allowed to amend your tax returns for prior years. If
you receive shares of the Energy SPDR Fund on the stated maturity date, your
aggregate initial tax basis in such shares of the Energy SPDR Fund should be an
amount equal to the sum of $10 and the Supplemental Redemption Amount, less any
cash received by you. Your holding period for any shares of the Energy SPDR
Fund that you receive on the maturity date should begin on the day immediately
following the maturity date. For further information, see "United States
Federal Income Taxation" in this prospectus supplement.
Will the MITTS Securities be listed on a stock exchange?
The MITTS Securities have been approved for listing on the AMEX under the
trading symbol "ESY", subject to official notice of issuance. You should be
aware that the listing of the MITTS Securities on the AMEX will not necessarily
ensure that a liquid trading market will be available for the MITTS Securities.
You should review "Risk Factors--There may be an uncertain trading market for
the MITTS Securities" in this prospectus supplement.
What is the role of MLPF&S?
Our subsidiary, MLPF&S, is the underwriter for the offering and sale of
the MITTS Securities. After the initial offering, MLPF&S intends to buy and
sell MITTS Securities to create a secondary market for holders of the MITTS
Securities, and may stabilize or maintain the market price of the MITTS
Securities during the initial distribution of the MITTS Securities. However,
MLPF&S will not be obligated to engage in any of these market activities or
continue them once it has started.
MLPF&S will also be our agent for purposes of calculating, among other
things, the Adjusted Ending Value and the Supplemental Redemption Amount. Under
certain circumstances, these duties could result in a conflict of interest
between MLPF&S' status as a subsidiary of ML&Co. and its responsibilities as
calculation agent.
MLPF&S also is a soliciting dealer in the shares of the Energy SPDR Fund
and is the index compilation agent for the Energy Select Sector Index. Under
certain circumstances, these duties
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could result in a conflict of interest between MLPF&S' status as our subsidiary
and its responsibilities to the Energy SPDR Fund and the Energy Select Sector
Index. Please see the section entitled "Risk Factors--Potential conflicts" in
this prospectus supplement.
Who is ML&Co.?
Merrill Lynch & Co., Inc. is a holding company with various subsidiary
and affiliated companies that provide investment, financing, insurance and
related services on a global basis. For information about ML&Co., see the
section 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 MITTS Securities is subject to risk. Please
refer to the section entitled "Risk Factors" in this prospectus supplement.
S-9
RISK FACTORS
Your investment in the MITTS Securities will involve risks. You should
carefully consider the following discussion of risks before deciding whether an
investment in the MITTS Securities is suitable for you.
You may not earn a return on your investment
You should be aware that if the Adjusted Ending Value does not exceed the
Starting Value at the stated maturity date, the Supplemental Redemption Amount
will be zero. This will be true even if the Net Asset Value per share of the
Energy SPDR Fund, as reduced by the Adjustment Factor over the term of the
MITTS Securities, was higher than the Starting Value at some time during the
life of the MITTS Securities but later falls below the Starting Value. If the
Supplemental Redemption Amount is zero, we will pay you only the principal
amount of your MITTS Securities.
Your return will not reflect the return of owning shares of the Energy SPDR
Fund or the securities and other assets comprising the Energy SPDR Fund's
investment portfolio
When determining the Supplemental Redemption Amount, if any, paid to you
at maturity, the Energy SPDR Fund's Net Asset Value per share, which reflects
the reduction of fund assets resulting from the accrual of the Energy SPDR
Fund's fees and expenses and any distributions made by the Energy SPDR Fund,
will also be reduced by the application of the Adjustment Factor over the term
of the MITTS Securities. Consequently, your return on the MITTS Securities will
not reflect the return of owning the shares of the Energy SPDR Fund or the
securities and other assets included in the Energy SPDR Fund's investment
portfolio.
Changes in the Net Asset Value per share of the Energy SPDR Fund will not
exactly mirror changes in the Energy Select Sector Index
As indicated in the Fund Prospectus, the Energy SPDR Fund's investment
objective is to provide investment results that, before expenses, correspond
generally to the price and yield performance of the publicly traded equity
securities included in the Energy Select Sector Index. However, changes in the
value of the Energy Select Sector Index and in the Net Asset Value per share of
the Energy SPDR Fund are not expected to be identical because:
. the Energy SPDR Fund's investment portfolio may not hold all of the
stocks in the Energy Select Sector Index or may not hold each stock
in the same weighting as the Energy Select Sector Index,
. the Energy SPDR Fund may hold assets other than equity securities,
and
. the Net Asset Value per share of the Energy SPDR Fund reflects the
reduction of fund assets resulting from the accrual of fees and
expenses and the payment of distributions, if any.
As stated in the Fund Prospectus, the investment adviser to the Energy
SPDR Fund believes that "over time, "the tracking error' of the Energy SPDR
Fund relative to the performance of the Energy Select Sector Index, adjusted
for the effect of the Energy SPDR Fund's expenses, will be less than 5%". There
is no assurance that the tracking error will not be greater than 5% at any
time, including the time that you may wish to sell your MITTS Securities before
the maturity date or at the time the calculation agent determines the
Supplemental Redemption Amount, if any.
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
S-10
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.
There may be an uncertain trading market for the MITTS Securities
The MITTS Securities have been approved for listing on the AMEX under the
trading symbol "ESY", subject to official notice of issuance. While there have
been a number of issuances of series of Market Index Target-Term Securities,
trading volumes have varied historically from one series to another and it is
therefore impossible to predict how the MITTS Securities will trade. You cannot
assume that a trading market will develop for the MITTS Securities. If a
trading market does develop, there can be no assurance that there will be
liquidity in the trading market. The development of a trading market for the
MITTS Securities will depend on our financial performance, and other factors
such as the increase, if any, in the Net Asset Value per share of the Energy
SPDR Fund.
If the trading market for the MITTS Securities is limited, there may be a
limited number of buyers for your MITTS Securities if you do not wish to hold
your investment until maturity. This may affect the price you receive.
Many factors affect the trading value of the MITTS Securities; these factors
interrelate in complex ways and the effect of any one factor may offset or
magnify the effect of another factor
The trading value of the MITTS Securities will be affected by factors
that interrelate in complex ways. It is important for you to understand that
the effect of one factor may offset the increase in the trading value of the
MITTS Securities caused by another factor and that the effect of one factor may
exacerbate the decrease in the trading value of the MITTS Securities caused by
another factor. For example, an increase in interest rates may offset some or
all of any increase in the trading value of the MITTS Securities attributable
to another factor, such as an increase in the Net Asset Value per share of the
Energy SPDR Fund. The following paragraphs describe the expected impact on the
market value of the MITTS Securities given a change in a specific factor,
assuming all other conditions remain constant.
The Net Asset Value per share of the Energy SPDR Fund is expected to
affect the trading value of the MITTS Securities. We expect that the market
value of the MITTS Securities will depend substantially on the amount, if any,
by which the Net Asset Value per share of the Energy SPDR Fund, as reduced by
the Adjustment Factor over the term of the MITTS Securities, exceeds the
Starting Value. If you choose to sell your MITTS Securities when the Net Asset
Value per share of the Energy SPDR Fund, as reduced by the Adjustment Factor
over the term of the MITTS Securities, exceeds the Starting Value, you may
receive substantially less than the amount that would be payable at maturity
based on that value because of the expectation that the Net Asset Value per
share of the Energy SPDR Fund will continue to fluctuate until the Adjusted
Ending Value is determined. If you choose to sell your MITTS Securities when
the Net Asset Value per share of the Energy SPDR Fund is below, or not
sufficiently above, the Starting Value, you may receive less than the $10
principal amount per unit of MITTS Securities. In general, rising U.S. dividend
rates or dividends per share may increase the Net Asset Value per share of the
Energy SPDR Fund while falling U.S. dividend rates may decrease the Net Asset
Value per share of the Energy SPDR Fund.
Changes in the levels of interest rates are expected to affect the
trading value of the MITTS Securities. Because we will pay, at a minimum, the
principal amount per unit of MITTS Securities at maturity, we expect that
changes in U.S. interest rates will affect the trading value of the MITTS
Securities. In general, if U.S. interest rates increase, we expect that the
trading value of the MITTS Securities will decrease and, conversely, if U.S.
interest rates decrease, we expect the trading value of the MITTS Securities
will increase. Rising U.S. interest rates may lower the Net Asset Value per
share of the Energy SPDR Fund and, as a result, may lower the trading value of
the MITTS Securities. Falling U.S. interest rates may increase the Net Asset
Value per share of the Energy SPDR Fund and, as a result, may increase the
value of the MITTS Securities.
S-11
Changes in the volatility of the Net Asset Value per share of the Energy
SPDR Fund are expected to affect the trading value of the MITTS
Securities. Volatility is the term used to describe the size and frequency of
price and/or market fluctuations. In general, if the volatility of the Net
Asset Value per share of Energy SPDR Fund increases, we expect that the trading
value of the MITTS Securities will increase and, conversely, if the volatility
of the Net Asset Value per share of the Energy SPDR Fund decreases, we expect
that the trading value of the MITTS Securities will decrease.
As the time remaining to maturity of the MITTS Securities decreases, the
"time premium" associated with the MITTS Securities will decrease. We
anticipate that before their maturity, the MITTS Securities may trade at a
value above that which would be expected based on the level of interest rates
and the Net Asset Value per share of the Energy SPDR Fund. This difference will
reflect a "time premium" due to expectations concerning the Net Asset Value per
share of the Energy SPDR Fund during the period before the stated maturity date
of the MITTS Securities. However, as the time remaining to the stated maturity
date of the MITTS Securities decreases, we expect that this time premium will
decrease, lowering the trading value of the MITTS Securities.
Changes in dividend yields of the stocks included in the Energy SPDR Fund
are expected to affect the trading value of the MITTS Securities. In general,
if dividend yields on the stocks included in the Energy SPDR Fund increase, we
expect that the value of the MITTS Securities will decrease and, conversely, if
dividend yields on the stocks included in the Energy SPDR Fund decrease, we
expect that the value of the MITTS Securities will increase.
Changes in our credit ratings may affect the trading value of the MITTS
Securities. Our credit ratings are an assessment of our ability to pay our
obligations. Consequently, real or anticipated changes in our credit ratings
may affect the trading value of the MITTS Securities. However, because your
return on your MITTS Securities is dependent upon factors in addition to our
ability to pay our obligations under the MITTS Securities, such as the
percentage increase in the Net Asset Value per share of the Energy SPDR Fund at
maturity, an improvement in our credit ratings will not reduce the other
investment risks related to the MITTS Securities.
In general, assuming all relevant factors are held constant, we expect
that the effect on the trading value of the MITTS Securities of a given change
in most of the factors listed above will be less if it occurs later in the term
of the MITTS Securities than if it occurs earlier in the term of the MITTS
Securities. However, we expect that the effect on the trading value of the
MITTS Securities of a given increase in the Net Asset Value per share of the
Energy SPDR Fund will be greater if it occurs later in the term of the MITTS
Securities than if it occurs earlier in the term of the MITTS Securities.
Absence of prior active market for shares of the Energy SPDR Fund
The Energy SPDR Fund is a recently organized investment company and has a
limited operating history. Although its shares are listed for trading on the
AMEX and a number of similar products have been traded on the AMEX for varying
periods of time, there is no assurance that an active trading market will
develop for the shares of the Energy SPDR Fund. If a trading market does
develop, there is no assurance that there will be liquidity in the trading
market.
Concentration in energy-related securities
Because the Energy SPDR Fund's investment portfolio is predominantly
comprised of securities of companies in the energy-producing field, the value
of the MITTS Securities may be adversely affected by an economic downturn in
the energy industry. The companies whose securities comprise the Energy SPDR
Fund's investment portfolio produce crude oil and natural gas and provide
drilling and other energy production and distribution related services. Stock
prices for these types of companies are affected by supply and demand both
S-12
for their specific product or service and for energy products in general. The
price of oil and gas, exploration and production spending, government
regulation, political events and economic conditions will likewise affect the
performance of these companies. Correspondingly, companies in the energy field
are subject to swift energy price and supply fluctuations caused by events
relating to international politics, energy conservation, the results of
exploration projects, and tax and other governmental policies. Weak demand for
these companies' products or services or for energy products and services in
general, as well as negative developments in these other areas, would adversely
affect the performance of the Energy SPDR Fund and in turn, the trading value
of the MITTS Securities.
No affiliation between ML&Co. and the Energy SPDR Fund
Our affiliate MLPF&S is both a soliciting dealer in the shares of the
Energy SPDR Fund and the index compilation agent for the Energy Select Sector
Index. However, we are not affiliated with the Energy SPDR Fund or the Energy
Select Sector Index. The Energy SPDR Fund has no obligations with respect to
the MITTS Securities or amounts to be paid to you, including any obligation to
take the needs of ML&Co. or of beneficial owners of the MITTS Securities into
consideration for any reason. The Energy SPDR Fund will not receive any of the
proceeds from this offering and is not responsible for, and has not
participated in, the determination or calculation of the amount you will
receive on your MITTS Securities at maturity. In addition, the Energy SPDR Fund
is not involved with the administration or trading of the MITTS Securities and
has no obligations with respect to any amounts due under the MITTS Securities.
No shareholder's rights
Unless and until we deliver shares of the Energy SPDR Fund to you at the
maturity of the MITTS Securities, you will not be entitled to any rights with
respect to these shares, including, without limitation, the right to receive
distributions on, to vote or to redeem these shares. For example, if the Energy
SPDR Fund sets a record date for a matter to be voted on by shareholders before
our delivery of the shares of the Energy SPDR Fund to you, you will not be
entitled to vote on that matter.
Amounts payable on the MITTS Securities may be limited by state law
New York State law governs the 1983 Indenture under which the MITTS
Securities will be issued. New York has usury laws that limit the amount of
interest that can be charged and paid on loans, which includes debt securities
like the MITTS Securities. Under present New York law, the maximum rate of
interest is 25% per annum on a simple interest basis. This limit may not apply
to debt securities in which $2,500,000 or more has been invested.
While we believe that New York law would be given effect by a state or
Federal court sitting outside of New York, many other states also have laws
that regulate the amount of interest that may be charged to and paid by a
borrower. We promise, for the benefit of the holders of the MITTS Securities,
to the extent permitted by law, not to voluntarily claim the benefits of any
laws concerning usurious rates of interest.
Purchases and sales by us and our affiliates may affect your return
We and our affiliates may from time to time buy or sell the stocks
included in the Energy SPDR Fund or futures or options in the Energy SPDR Fund
for our own accounts, for business reasons or in connection with hedging our
obligations under the MITTS Securities. These transactions could affect the
price of these stocks and, in turn, the value of the Energy SPDR Fund in a
manner that could be adverse to your investment in the MITTS Securities.
S-13
Potential conflicts
Our subsidiary, MLPF&S, is our agent for the purposes of calculating the
Adjusted Ending Value and the Supplemental Redemption Amount payable to you at
maturity. Under certain circumstances, MLPF&S' role as our subsidiary and its
responsibilities as calculation agent for the MITTS Securities could give rise
to conflicts of interests. These conflicts could occur, for instance, in
connection with its determination as to whether the value of the Energy SPDR
Fund can be calculated on a particular trading day, or in connection with
judgments that it would be required to make in the event of a discontinuance of
the Energy SPDR Fund. See "Description of the MITTS Securities--Adjustments to
the Energy SPDR Fund; Market Disruption Events" and "--Termination of the
Energy SPDR Fund" in this prospectus supplement. MLPF&S is required to carry
out its duties as calculation agent in good faith and using its reasonable
judgment. However, you should be aware that because we control MLPF&S,
potential conflicts of interest could arise.
MLPF&S is also a soliciting dealer in the shares of the Energy SPDR Fund.
Under certain circumstances, MLPF&S' role as calculation agent for the MITTS
Securities and its role as a soliciting dealer in these shares could give rise
to conflicts of interests between the calculation agent and holders of the
MITTS Securities. These conflicts could occur in connection with its
determination as to the Adjusted Ending Value and the number of shares to be
delivered at maturity.
Additionally, MLPF&S serves as index compilation agent for the Energy
Select Sector Index. In its capacity as index compilation agent, MLPF&S
determines, in consultation with S&P, which securities of the S&P 500 are to be
included in the Energy Select Sector Index. Under certain circumstances,
MLPF&S' role as calculation agent for the MITTS Securities and its role as
index compilation agent could give rise to conflicts of interests between the
calculation agent and holders of the MITTS Securities.
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 MITTS
Securities, aspects of which are uncertain. See "United States Federal Income
Taxation" in this prospectus supplement.
S-14
DESCRIPTION OF THE MITTS SECURITIES
ML&Co. will issue the MITTS Securities as a series of senior debt
securities under the 1983 Indenture, which is more fully described in the
accompanying prospectus of ML&Co. The MITTS Securities will mature on September
20, 2006.
While at maturity a beneficial owner of a MITTS Security will receive the
number of shares of the Energy SPDR Funds equal in value to the sum of the
principal amount of the MITTS Security plus the Supplemental Redemption Amount,
if any, there will be no other payment of interest, periodic or otherwise. At
our option, instead of delivering to you the shares of the Energy SPDR Fund to
which you would otherwise be entitled, we may pay you cash with an equal value.
See "--Delivery at maturity". The number of shares to be delivered at maturity
will be determined based on the Ending Value.
The MITTS Securities are not subject to redemption by ML&Co. or at the
option of any beneficial owner before maturity. If an Event of Default occurs
with respect to the MITTS Securities, beneficial owners of the MITTS Securities
may accelerate the maturity of the MITTS Securities, as described under "--
Events of Default and Acceleration" in this prospectus supplement and
"Description of Debt Securities--Events of Default" in the accompanying
prospectus of ML&Co.
ML&Co. will issue the MITTS Securities in denominations of whole units of
$10.00 per unit.
The MITTS Securities will not have the benefit of any sinking fund.
Delivery at maturity
At maturity, a beneficial owner of a MITTS Security will be entitled to
receive the number of shares of the Energy SPDR Fund equal in value to the
principal amount of each MITTS Security plus the Supplemental Redemption
Amount, if any, all as provided below. The amount to be paid by ML&Co. to any
holder of the MITTS Securities on the maturity date will be aggregated based on
the total number of units then held by that holder and rounded to the nearest
cent. If the Adjusted Ending Value does not exceed the Starting Value, a
beneficial owner of a MITTS Security will be entitled to receive only the
number of shares of the Energy SPDR Fund or cash with value equal to the
principal amount of the MITTS Security. The number of shares to be delivered at
maturity will be determined based on the Ending Value.
If ML&Co. delivers shares of the Energy SPDR Fund to holders of the MITTS
Securities at the maturity date, ML&Co. or one of its affiliates will deliver
shares of the Energy SPDR Fund that are then newly issued by the Energy SPDR
Fund.
ML&Co. may, at its option, in lieu of delivering shares of the Energy
SPDR Fund, pay cash in an amount equal to the sum of the principal amount of
the MITTS Securities and the Supplemental Redemption Amount, if any. In
addition, if at any time MLPF&S ceases to be a soliciting dealer in the shares
of the Energy SPDR Fund, ML&Co. will pay the amount due to holders of the MITTS
Securities in cash instead of shares.
The "Supplemental Redemption Amount" for a MITTS Security will be
determined by the calculation agent and will equal:
( Adjusted Ending Value - Starting Value )
Principal amount of the MITTS Security ($10 per unit) X ( -------------------------------------- )
( Starting Value )
provided, however, that in no event will the Supplemental Redemption Amount be
less than zero.
S-15
The "Starting Value" equals 29.27, the Net Asset Value of one share of
the Energy SPDR Fund on the Pricing Date.
"Net Asset Value" means the net asset value per share of the Energy SPDR
Fund as determined by the Energy SPDR Fund. The Energy SPDR Fund calculates its
Net Asset Value per share by dividing the value of its net assets, i.e., the
value of its total assets less total liabilities, by its total number of shares
outstanding. Expenses and fees, including the management, administration and
distribution fees, of the Energy SPDR Fund are accrued daily and taken into
account for purposes of determining Net Asset Value. The Net Asset Value per
share of the Energy SPDR Fund is determined by the Energy SPDR Fund on each
Business Day after the close of trading on the New York Stock Exchange,
ordinarily 4:00 p.m., New York City time. Shares of the Energy SPDR Fund are
listed on the AMEX under the trading symbol "XLE".
The "Adjusted Ending Value" will be determined by the calculation agent
and will equal the Ending Value as reduced by the application of the Adjustment
Factor to the Net Asset Value used to calculate the Ending Value on each
Calculation Day during the Calculation Period.
The "Ending Value" will equal the average, or arithmetic mean, of the Net
Asset Values per share of the Energy SPDR Fund as determined by the Energy SPDR
Fund on each of the first five Calculation Days during the Calculation Period.
If there are fewer than five Calculation Days in the Calculation Period, the
Ending Value will equal the average, or arithmetic mean, of the Net Asset
Values of the Energy SPDR Fund on each of these Calculation Days, and if there
is only one Calculation Day, then the Ending Value will be equal to the Net
Asset Value per share of the Energy SPDR Fund on that Calculation Day. If no
Calculation Days occur during the Calculation Period because of Market
Disruption Events, then the Ending Value shall mean the Net Asset Value per
share of the Energy SPDR Fund on the last Trading Day before the Calculation
Period for which the Net Asset value per share of the Energy SPDR Fund was
determined.
The "Adjustment Factor" equals 1.25% per year and will be applied over
the entire term of the MITTS Securities. On each calendar day during the term
of the MITTS Securities, we will apply this percentage on a prorated basis
based on a 365-day year to reduce the value used to calculate the Supplemental
Redemption Amount on each Calculation Day during the Calculation Period. As a
result of the cumulative effect of this reduction, the values used to calculate
the Supplemental Redemption Amount during the Calculation Period will be
approximately 8.38% less than the actual Net Asset Value per share of the
Energy SPDR Fund on each Calculation Day during the Calculation Period.
The "Calculation Period" means the period from and including the seventh
scheduled Trading Day before the maturity date to and including the second
scheduled Trading Day before the maturity date.
A "Calculation Day" means any Trading Day during the Calculation Period
on which a Market Disruption Event has not occurred.
A "Trading Day" is a day on which the shares of the Energy SPDR Fund:
. are not suspended from trading on any national or regional securities
exchange or association or over-the-counter market at the close of
business; and
. have traded at least once on a national or regional securities
exchange or association or over-the-counter market that is the
primary market for the trading of the shares of the Energy SPDR Fund.
S-16
Fractional Shares
ML&Co. will not distribute fractional shares of the Energy SPDR Fund at
maturity. In the event ML&Co. pays holders of the MITTS Securities in shares of
the Energy SPDR Fund, all amounts due to any holder of the MITTS Securities in
respect of the total number of units held by that holder will be aggregated,
and in lieu of delivering any fractional share to that holder, that holder will
receive the cash value of that fractional share based on the Ending Value.
All determinations made by the calculation agent shall be at the sole
discretion of the calculation agent and, absent a determination by the
calculation agent of a manifest error, shall be conclusive for all purposes and
binding on ML&Co. and the holders and beneficial owners of the MITTS
Securities.
Hypothetical returns
The following table illustrates, for a range of hypothetical Ending
Values:
. the percentage change from the Starting Value to the hypothetical
Ending Value,
. the Adjusted Ending Value used to calculate the Supplemental
Redemption Amount,
. the total amount payable at maturity for each unit of MITTS
Securities,
. the total rate of return to beneficial owners of the MITTS
Securities,
. the pretax annualized rate of return to beneficial owners of the
MITTS Securities, and
. the pretax annualized rate of return of an investment in shares of
the Energy SPDR Fund which includes an assumed aggregate dividend
yield of 2.04% per annum, as more fully described below.
Percentage Total amount Pretax
change from payable at Pretax annualized
the Starting maturity Total rate of annualized rate of return
Hypothetical Value to the Adjusted per unit of the return on the rate of return on shares of the
Ending hypothetical Ending MITTS MITTS on the MITTS Energy SPDR
Value Ending Value Value(1) Securities Securities Securities(2) Fund(2)(3)
------------ ------------ -------- --------------- ------------- -------------- ----------------
5.85 -80% 5.36 10.00 0.00% 0.00% -19.47%
11.71 -60% 10.73 10.00 0.00% 0.00% -10.62%
17.56 -40% 16.09 10.00 0.00% 0.00% -5.15%
23.41 -20% 21.45 10.00 0.00% 0.00% -1.14%
29.27(4) 0% 26.81 10.00 0.00% 0.00% 2.04%
35.12 20% 32.18 10.99 9.94% 1.36% 4.70%
40.97 40% 37.54 12.83 28.26% 3.58% 6.98%
46.83 60% 42.90 14.66 46.58% 5.53% 8.98%
52.68 80% 48.26 16.49 64.91% 7.27% 10.77%
58.54 100% 53.63 18.32 83.23% 8.83% 12.39%
64.39 120% 58.99 20.16 101.55% 10.26% 13.87%
70.24 140% 64.35 21.99 119.88% 11.57% 15.23%
76.10 160% 69.72 23.82 138.20% 12.78% 16.49%
81.95 180% 75.08 25.65 156.52% 13.91% 17.67%
87.80 200% 80.44 27.48 174.85% 14.97% 18.77%
- --------
(1) The Adjusted Ending Values specified in this column are approximately 8.38%
less than the hypothetical Ending Values as a result of the cumulative
effect of the application of the Adjustment Factor of 1.25% per annum over
the term of the MITTS Securities.
S-17
(2) The annualized rates of return specified in the preceding table are
calculated on a semiannual bond equivalent basis.
(3) This rate of return assumes:
(a) a constant dividend yield of 2.04% per annum, paid quarterly from the
date of initial delivery of the MITTS Securities, applied to the Net
Asset Value per share of the Energy SPDR Fund at the end of each
quarter assuming this Net Asset Value per share increases or decreases
linearly from the Starting Value to the applicable hypothetical Ending
Values;
(b) no transaction fees or expenses in connection with purchasing and
holding shares of the Energy SPDR Fund;
(c) an investment term from September 20, 1999 to September 20, 2006; and
(d) a final Net Asset Value per share of the Energy SPDR Fund equal to the
hypothetical Ending Value.
(4) This is the 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 Adjusted
Ending Value determined by the calculation agent as provided in this prospectus
supplement.
Adjustments to the Energy SPDR Fund; Market Disruption Events
If at any time the shares of the Energy SPDR Fund are subject to a split
or reverse split, the calculation agent shall adjust the Net Asset Value per
share of the Energy SPDR Fund used to calculate the Ending Value in order to
arrive at a Net Asset Value per share of the Energy SPDR Fund as if a split or
reverse split, as the case may be, had not occurred.
"Market Disruption Event" means any of the following events as determined
by the calculation agent:
(A) the suspension or material limitation on trading for more than two
hours of trading, or during the one-half hour period preceding the
close of trading on the applicable exchange, in 20% or more of the
stocks which then comprise the Energy Select Sector Index;
(B) the suspension or material limitation, in each case, for more than
two hours of trading, or during the one-half hour period preceding
the close of trading on the applicable exchange, whether by reason
of movements in price otherwise exceeding levels permitted by the
relevant exchange or otherwise, in option contracts related to the
Energy SPDR Fund which are traded on any major U.S. exchange; or
(C) the Energy SPDR Fund (1) is unable or otherwise fails to issue a Net
Asset Value for any shares of the Energy SPDR Fund after the close
of business on the NYSE or (2) suspends the creation or redemption
of shares of the Energy SPDR Fund.
For the purposes of clauses (A) and (B) of this definition, a limitation
on the hours in a trading day and/or number of days of trading will not
constitute a Market Disruption Event if it results from an announced change in
the regular business hours of the relevant exchange and for the purpose of
clause (A) above, any limitations on trading during significant market
fluctuations under NYSE Rule 80A, or any applicable rule or regulation enacted
or promulgated by the NYSE or any other self regulatory organization or the SEC
of similar scope as determined by the calculation agent, will be considered
"material".
Termination of the Energy SPDR Fund
If the Energy SPDR Fund is liquidated or otherwise terminated, for
purposes of calculating the Supplemental Redemption Amount payable at the
maturity of the MITTS Securities, the calculation agent will
S-18
calculate the Net Asset Value per share of the Energy SPDR Fund as follows: the
Net Asset Value per share of the Energy SPDR Fund on the Trading Day occurring
immediately before any liquidating distribution will equal the Net Asset Value
for that day (the "Pre-liquidation Date"). The calculation agent will then
calculate the Net Asset Value after the close of trading on each Trading Day
following the Pre-liquidation Date (each date, a "Determination Date") by
increasing or decreasing, as the case may be, the Net Asset Value as of the
immediately preceding Trading Day by the percentage by which the closing value
of the Energy Select Sector Index increases or decreases from the immediately
preceding Trading Day to that Determination Date and further decreasing the Net
Asset Value by fees, expenses and non-liquidating distributions (together,
"Fund Expenses") that the calculation agent, in its sole judgment but with
reference to the Fund Expenses actually incurred by the Energy SPDR Fund before
its liquidation or termination, deems would reasonably have been accrued and
included in the calculation of the Net Asset Value per share of the Energy SPDR
Fund had it not been liquidated or terminated, from the immediately preceding
Trading Day to that Determination Date. The calculation agent will cause notice
of each value to be published not less often than once each month in The Wall
Street Journal, or another newspaper of general circulation, and arrange for
information with respect to such values to be made available by telephone.
If the Energy SPDR Fund is liquidated or otherwise terminated and the
Energy Select Sector Index is no longer calculated or published (an "Index
Termination Event"), the calculation agent will select a successor index that
it determines, in its sole discretion, to be comparable to the Energy Select
Sector Index (a "successor index"), then, upon the calculation agent's
notification of its determination to the trustee and ML&Co., the calculation
agent will substitute the successor index for the Energy Select Sector Index
and calculate the closing value as described above under "--Delivery at
maturity". Upon any selection by the calculation agent of a successor index,
ML&Co. shall promptly give notice to the beneficial owners of the MITTS
Securities by publication in a United States newspaper with a general
circulation.
In the event that an Index Termination Event occurs and:
. the calculation agent does not select a successor index, or
. the successor index is no longer published on any of the Calculation
Days,
the calculation agent will compute a substitute index for the Energy Select
Sector Index for that Calculation Day in accordance with the procedures last
used to calculate the Energy Select Sector Index before any discontinuance. The
calculation agent will calculate the Net Asset Value in accordance with the
procedures referred to in the first paragraph of this section with reference to
a substitute index. Upon any calculation of a substitute index in accordance
with this paragraph, ML&Co. shall promptly give notice to the beneficial owners
of the MITTS Securities by publication in a United States newspaper with a
general circulation.
If Standard & Poor's ("S&P") discontinues publication of the S&P 500
Index subsequent to an Index Termination Event and
. the calculation agent does not select a successor index or the
successor index is no longer published on any of the Calculation Days
and
. the calculation agent is unable to calculate a substitute index for
the Energy Select Sector Index,
the calculation agent will compute a substitute index for the S&P 500 Index for
that Calculation Day in accordance with the procedures last used to calculate
the S&P 500 Index prior to any discontinuance. If the calculation agent
calculates a substitute index for the S&P 500 Index, the calculation agent will
use that substitute index to calculate the substitute index for the Energy
Select Sector Index.
S-19
Notwithstanding these alternative arrangements, liquidation or
termination of the Energy SPDR Fund or the discontinuance of the publication of
the Energy Select Sector Index or the S&P 500 Index may adversely affect
trading in the MITTS Securities.
A "Business Day" is any day on which the NYSE and the AMEX are open for
trading.
Events of Default and Acceleration
In case an Event of Default with respect to any MITTS Securities has
occurred and is continuing, the amount payable to a beneficial owner of a MITTS
Security upon any acceleration permitted by the MITTS Securities, with respect
to each $10 principal amount of the 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 MITTS
Securities, provided, however, the Adjustment Factor will be applied to the
values used to calculate the Supplemental Redemption Amount as if the MITTS
Securities had not been accelerated and had remained outstanding to the stated
maturity date. See "--Delivery at maturity" in this prospectus supplement. If a
bankruptcy proceeding is commenced in respect of ML&Co., the claim of the
beneficial owner of a MITTS Security may be limited, under Section 502(b)(2) of
Title 11 of the United States Code, to the principal amount of the MITTS
Security plus an additional amount of contingent interest calculated as though
the date of the commencement of the proceeding were the maturity date of the
MITTS Securities.
In case of default in payment of the MITTS Securities, whether at the
stated maturity or upon acceleration, from and after the maturity date the
MITTS Securities will bear interest, payable upon demand of their beneficial
owners, at the rate of 7.08% per annum, to the extent that payment of any
interest is legally enforceable, on the unpaid amount due and payable on that
date in accordance with the terms of the MITTS Securities to the date payment
of that amount has been made or duly provided for.
Depositary
Description of the Global Securities
Upon issuance, all MITTS Securities will be represented by one or more
fully registered global securities. Each global security will be deposited
with, or on behalf of, DTC (DTC, together with any successor, being a
"depositary"), as depositary, registered in the name of Cede & Co., DTC's
partnership nominee. Unless and until it is exchanged in whole or in part for
MITTS Securities in definitive form, no global security may be transferred
except as a whole by the depositary to a nominee of the depositary or by a
nominee of the depositary to the depositary or another nominee of the
depositary or by the depositary or any nominee to a successor of the depositary
or a nominee of that successor.
So long as DTC, or its nominee, is a registered owner of a global
security, DTC or its nominee, as the case may be, will be considered the sole
owner or holder of the MITTS Securities represented by the global security for
all purposes under the 1983 Indenture. Except as provided below, the beneficial
owners of the MITTS Securities represented by a global security will not be
entitled to have the MITTS Securities represented by a global security
registered in their names, will not receive or be entitled to receive physical
delivery of the MITTS Securities in definitive form and will not be considered
the owners or holders of the MITTS Securities including for purposes of
receiving any reports delivered by ML&Co. or the trustee under the 1983
Indenture. Accordingly, each person owning a beneficial interest in a global
security must rely on the procedures of DTC and, if that person is not a
participant of DTC, on the procedures of the participant through which that
person owns its interest, to exercise any rights of a holder under the 1983
Indenture. ML&Co. understands that under existing industry practices, in the
event that ML&Co. requests any action of holders or that an owner of a
beneficial interest in a global security desires to give or take any action
which a holder is entitled to give or take under the 1983 Indenture, DTC would
authorize the participants holding the relevant beneficial interests to give or
take that action, and those participants would authorize beneficial owners
owning
S-20
through those participants to give or take that action or would otherwise act
upon the instructions of beneficial owners. Conveyance of notices and other
communications by DTC to participants, by participants to indirect participants
and by participants and indirect participants to beneficial owners will be
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
DTC Procedures
The following is based on information furnished by DTC:
DTC will act as securities depositary for the MITTS Securities. The MITTS
Securities will be issued as fully registered securities registered in the name
of Cede & Co., DTC's partnership nominee. One or more fully registered global
securities will be issued for the MITTS Securities in the aggregate principal
amount of such issue, and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC holds securities that its participants
deposit with DTC. DTC also facilitates the settlement among participants of
securities transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
Direct participants of DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. DTC is owned
by a number of its direct participants and by the NYSE, the AMEX, and the
National Association of Securities Dealers, Inc. Access to DTC's system is also
available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a direct
participant, either directly or indirectly. The rules applicable to DTC and its
participants are on file with the SEC.
Purchases of the MITTS Securities under DTC's system must be made by or
through direct participants, which will receive a credit for the MITTS
Securities on DTC's records. The ownership interest of each beneficial owner is
in turn to be recorded on the records of direct and indirect participants.
Beneficial owners will not receive written confirmation from DTC of their
purchase, but beneficial owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the direct or indirect participants through which the beneficial
owner entered into the transaction. Transfers of ownership interests in the
MITTS Securities are to be made by entries on the books of participants acting
on behalf of beneficial owners.
To facilitate subsequent transfers, all MITTS Securities deposited with
DTC are registered in the name of DTC's partnership nominee, Cede & Co. The
deposit of MITTS Securities with DTC and their registration in the name of Cede
& Co. effect no change in beneficial ownership. DTC has no knowledge of the
actual beneficial owners of the MITTS Securities; DTC's records reflect only
the identity of the direct participants to whose accounts the MITTS Securities
are credited, which may or may not be the beneficial owners. The participants
will remain responsible for keeping account of their holdings on behalf of
their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the MITTS
Securities. Under its usual procedures, DTC mails an omnibus proxy to ML&Co. as
soon as possible after the applicable record
S-21
date. The omnibus proxy assigns Cede & Co.'s consenting or voting rights to
those direct participants identified in a listing attached to the omnibus proxy
to whose accounts the MITTS Securities are credited on the record date.
Principal, premium, if any, and/or interest, if any, payments made in
cash on the MITTS Securities will be made in immediately available funds to
DTC. DTC's practice is to credit direct participants' accounts on the
applicable payment date in accordance with their respective holdings shown on
the depositary's records unless DTC has reason to believe that it will not
receive payment on that date. Payments by participants to beneficial owners
will be governed by standing instructions and customary practices, as is the
case with securities held for the accounts of customers in bearer form or
registered in "street name", and will be the responsibility of that participant
and not of DTC, the trustee or ML&Co., subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of principal,
premium, if any, and/or interest, if any, to DTC is the responsibility of
ML&Co. or the trustee, disbursement of those payments to direct participants
will be the responsibility of DTC, and disbursement of those payments to the
beneficial owners will be the responsibility of direct participants and
indirect participants.
Exchange for Certificated Securities
If:
. the depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by ML&Co.
within 60 days,
. ML&Co. executes and delivers to the trustee a company order to the
effect that the global securities shall be exchangeable, or
. an Event of Default under the 1983 Indenture has occurred and is
continuing with respect to the MITTS Securities,
the global securities will be exchangeable for MITTS Securities in definitive
form of like tenor and of an equal aggregate principal amount, in denominations
of $10 and integral multiples of $10. The definitive MITTS Securities will be
registered in the name or names as the depositary shall instruct the trustee.
It is expected that instructions may be based upon directions received by the
depositary from participants with respect to ownership of beneficial interests
in the global securities.
DTC may discontinue providing its services as securities depositary with
respect to the MITTS Securities at any time by giving reasonable notice to
ML&Co. or the trustee. Under these circumstances, in the event that a successor
securities depositary is not obtained, MITTS Security certificates are required
to be printed and delivered.
ML&Co. may decide to discontinue use of the system of book-entry
transfers through DTC or a successor securities depositary. In that event,
MITTS Security certificates will be printed and delivered.
The information in this section concerning DTC and DTC's system has been
obtained from sources that ML&Co. believes to be reliable, but ML&Co. takes no
responsibility for its accuracy.
Same-Day Settlement and Payment
Settlement for the MITTS Securities will be made by the underwriter in
immediately available funds. ML&Co. will make all payments of principal and the
Supplemental Redemption Amount, if any, by delivering shares of the Energy SPDR
Fund. If ML&Co. elects, at its option, to pay cash in lieu of delivering shares
of the Energy SPDR Fund, ML&Co. will make payment in immediately available
funds so long as the MITTS Securities are maintained in book-entry form.
S-22
THE ENERGY SPDR FUND
ML&Co. has attached the Fund Prospectus describing the Energy SPDR Fund
and is delivering it to purchasers of the MITTS Securities together with this
prospectus supplement and the accompanying prospectus of ML&Co. for the
convenience of reference only. The Fund Prospectus does not constitute a part
of this prospectus supplement or the accompanying prospectus of ML&Co., nor is
it incorporated by reference 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 Energy SPDR Fund and the Energy
Select Sector Index included in the attached Fund Prospectus.
As stated in the Fund Prospectus, the Energy SPDR Fund is an index fund
whose investment objective is to provide investment results that, before
expenses, correspond generally to the price and yield performance of the
publicly traded equity securities included in the Energy Select Sector Index.
The Energy Select Sector Index consists of the equity securities of publicly
traded companies that are components of the S&P 500 Index and are involved in
the development and production of energy products. Companies in the Energy
Select Sector Index develop and produce crude oil and natural gas, and provide
drilling and other energy related services. As of September 14, 1999, the
Energy Select Sector Index included 31 component stocks.
The components of the Energy Select Sector Index by index weight as of
September 14, 1999 are listed below.
Company Name Trading Symbol Index Weight
- ------------ -------------- ------------
Exxon Corp.......................................... XON 20.92%
Royal Dutch Petroleum Company....................... RD 17.24%
Texaco Inc. ........................................ TX 4.64%
Enron Corp. ........................................ ENE 4.44%
Mobil Corp. ........................................ MOB 4.41%
Atlantic Richfield Co............................... ARC 4.34%
Schlumberger Ltd.................................... SLB 4.24%
Chevron Corp. ...................................... CHV 4.07%
Halliburton Co...................................... HAL 3.38%
Williams Companies Inc.............................. WMB 2.78%
Conoco Inc. ........................................ COC/B 2.26%
Phillips Petroleum Co............................... P 2.26%
Baker Hughes Inc.................................... BHI 1.97%
Unocal Corporation.................................. UCL 1.84%
USX-Marathon Group.................................. MRO 1.83%
Coastal Corp........................................ CGP 1.76%
Occidental Petroleum Corp........................... OXY 1.73%
Apache Corp......................................... APA 1.66%
Burlington Resources Inc............................ BR 1.46%
Kerr-McGee Corp. ................................... KMG 1.46%
Amerada Hess Corp. ................................. AHC 1.39%
Consolidated Natural Gas Co......................... CNG 1.37%
Union Pacific Resources Group Inc................... UPR 1.32%
Sonat Inc........................................... SNT 1.17%
Columbia Energy Group............................... CG 1.17%
Anadarko Petroleum Corp............................. APC 1.01%
Rowan Companies Inc. ............................... RDC 0.94%
Sunoco Inc.......................................... SUN 0.80%
Helmerich & Payne................................... HP 0.79%
Ashland Inc......................................... ASH 0.77%
McDermott International Inc......................... MDR 0.57%
-----
100%*
- --------
* Percentages may not add to 100% due to rounding.
S-23
Holdings and weightings are subject to change subsequent to September 14,
1999.
Although ML&Co.'s subsidiary, MLPF&S, provides certain services to the
Energy SPDR Fund and the Energy Select Sector Index, ML&Co. is not affiliated
with the Energy SPDR Fund or the Energy Select Sector Index, and the Energy
SPDR Fund will not receive any of the proceeds from the sale of, or have any
obligations with respect to the MITTS Securities. A prospective purchaser of
the MITTS Securities should independently decide whether an investment in the
MITTS Securities and the Energy SPDR Fund is appropriate.
The Energy SPDR Fund is one of nine investment funds comprising the
Select Sector SPDR Trust. Each fund's investment portfolio is comprised
principally of constituent companies whose equity securities are components of
the S&P 500 Index, each representing one of nine specified market sector
indices. Each stock in the S&P 500 Index is allocated to only one Select Sector
Index. The combined companies of the nine indices represent all of the
companies whose stocks are components of the S&P 500 Index. The Energy SPDR
Fund's initial public offering occurred on December 16, 1998 and therefore it
has limited operating history.
Because the Select Sector SPDR Trust is subject to the registration
requirements of the Securities Act and the Investment Company Act, the Trust is
required to file periodically certain information specified by the SEC. For
more information about the Energy SPDR Fund and the shares that a holder of the
MITTS Securities may receive at maturity, information provided to or filed with
the SEC by the Select Sector SPDR Trust can be inspected at the SEC's public
reference facilities or accessed over the Internet through a web site
maintained by the SEC at http://www.sec.gov. Copies of these documents may also
be obtained at no cost by calling the Select Sector SPDR Trust at (800) 843-
2639 or by writing the Select Sector SPDR Trust c/o ALPS Mutual Funds Services,
Inc., at 370 17th Street, Suite 3100, Denver, CO 80202. Neither the Fund
Prospectus nor such other documents are incorporated by reference into this
prospectus supplement, and ML&Co. makes no representation or warranty as to the
accuracy or completeness of any such documents.
ML&Co. is not affiliated with the Energy SPDR Fund, and the Energy SPDR
Fund has no obligations with respect to the MITTS Securities. This prospectus
supplement relates only to the MITTS Securities offered hereby and does not
relate to the shares of the Energy SPDR Fund or any other securities relating
to the Energy SPDR Fund. The information contained in this prospectus
supplement regarding the Energy SPDR Fund has been derived from the publicly
available documents described in the preceding paragraph. ML&Co. makes no
representation that these publicly available documents or any other publicly
available information regarding the Energy SPDR Fund are accurate or complete.
Furthermore, there can be no assurance that all events occurring prior to the
date of this prospectus supplement (including events that would affect the
accuracy or completeness of the publicly available documents described in the
preceding paragraph) that would affect the trading price of the shares of the
Energy SPDR Fund, and therefore the trading price of the MITTS Securities, have
been publicly disclosed. Subsequent disclosure of any such events or the
disclosure of or failure to disclose material future events concerning the
Energy SPDR Fund could affect the Supplemental Redemption Amount, if any, to be
received at maturity and therefore the trading value of the MITTS Securities.
MLPF&S, a subsidiary of ML&Co., is a soliciting dealer in the shares of
the Energy SPDR Fund. Additionally, MLPF&S serves as index compilation agent
for the Energy Select Sector Index. In its capacity as index compilation agent,
MLPF&S determines, in consultation with S&P, the composition of the securities
measured by the Energy Select Sector Index.
License Agreement
S&P, the AMEX and MLPF&S have entered into a non-exclusive license
agreement providing for the license to MLPF&S, in exchange for a fee, of the
right to use indices owned and published by S&P in connection with certain
securities, including the MITTS Securities, and ML&Co. is an authorized
sublicensee of MLPF&S.
S-24
The license agreement among S&P, the AMEX and MLPF&S provides that the
following language must be stated in this prospectus supplement:
"Standard & Poor's(R)", "Standard & Poor's 500", "S&P 500(R)", "S&P(R)",
"500", "Standard & Poor's Depositary Receipts", "SPDRs", "Select Sector SPDR"
and "Select Sector Standard & Poor's Depositary Receipts" are trademarks of
Standard & Poor's, a division of The McGraw-Hill Companies, Inc., and have been
licensed for use by MLPF&S. ML&Co., is an authorized sublicensee of MLPF&S. The
stocks comprising the Energy Select Sector Index were selected by MLPF&S, as
index compilation agent, in consultation with S&P from the universe of
companies represented by the S&P 500 Index. The composition and weightings of
the stocks included in the Energy Select Sector Index can be expected to differ
from the composition and weighting of stocks included in any similar S&P 500
sector index published and disseminated by S&P.
The MITTS Securities, the Energy SPDR Fund and the Energy Select Sector
Index are not sponsored, endorsed, sold or promoted by S&P. S&P makes no
representation or warranty, express or implied, to the holders of the MITTS
Securities or any member of the public regarding the advisability of investing
in securities generally or in the MITTS Securities particularly or in the
ability of the Energy SPDR Fund to track the performance and yield of the
Energy Select Sector Index or in the ability of the Energy Select Sector Index
to track the performance of the energy sector represented in the stock market.
The stocks included in the Energy Select Sector Index were selected by MLPF&S
as the index compilation agent in consultation with S&P from a universe of
companies involved in the development and production of energy products and
represented by the S&P 500 Index. S&P's only relationship to the index
compilation agent is the licensing of certain trademarks and trade names of S&P
and of the S&P 500 Index which is determined, composed and calculated by S&P
without regard to the index compilation agent or the MITTS Securities. S&P has
no obligation to take the needs of the index compilation agent, ML&Co. or the
holders of the MITTS Securities into consideration in determining, composing or
calculating the S&P 500 Index. S&P is not responsible for and has not
participated in any determination of the timing of the sale of the MITTS
Securities, prices at which the MITTS Securities are initially to be sold, or
quantities of the MITTS Securities to be issued or in the determination or
calculation of the equation by which the MITTS Securities are to be converted
into shares of the Energy SPDR Fund or cash. S&P has no obligation or liability
in connection with the administration, marketing or trading of the MITTS
Securities.
S&P does not guarantee the accuracy and/or the completeness of the S&P
500 Index, the Energy Select Sector Index or any data included therein. S&P
makes no warranty, express or implied, as to results to be obtained by ML&Co.,
MLPF&S, the holders of the MITTS Securities, or any other person or entity from
the use of the S&P 500 Index, the Energy Select Sector Index or any data
included therein in connection with the rights licensed under the license
agreement described herein or for any other use. S&P makes no express or
implied warranties, and expressly disclaims all warranties of merchantability
or fitness for a particular purpose with respect to the S&P 500 Index, the
Energy Select Sector Index or any data included therein. Without limiting the
generality of the foregoing, in no event shall S&P have any liability for any
special, punitive, indirect or consequential damages (including lost profits),
even if notified of the possibility of such damages."
All disclosures contained in this prospectus supplement regarding the S&P
500 Index or the Energy Select Sector Index, including its respective make-up,
method of calculation and changes in its components, are derived from publicly
available information prepared by S&P and the Trust, respectively. ML&Co. and
MLPF&S do not assume any responsibility for the accuracy or completeness of
such information.
S-25
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 MITTS Securities. This opinion is
based upon laws, regulations, rulings and decisions now in effect, all of which
are subject to change (including retroactive changes in effective dates) or
possible differing interpretations. The discussion below deals only with MITTS
Securities held as capital assets and does not purport to deal with persons in
special tax situations, such as financial institutions, insurance companies,
regulated investment companies, dealers in securities or currencies, tax-exempt
entities, persons holding MITTS Securities in a tax-deferred or tax-advantaged
account, or persons holding MITTS Securities as a hedge against currency risks,
as a position in a "straddle" or as part of a "hedging" or "conversion"
transaction for tax purposes. It also does not deal with holders other than
original purchasers (except where otherwise specifically noted in this
prospectus supplement). The following discussion also assumes that the issue
price of the MITTS Securities, as determined for United States Federal income
tax purposes, equals the principal amount thereof. Persons considering the
purchase of the MITTS Securities should consult their own tax advisors
concerning the application of the United States Federal income tax laws to
their particular situations as well as any consequences of the purchase,
ownership and disposition of the MITTS Securities arising under the laws of any
other taxing jurisdiction.
As used in this prospectus supplement, the term "U.S. Holder" means a
beneficial owner of a MITTS Security that is for United States Federal income
tax purposes (a) a citizen or resident of the United States, (b) a corporation,
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 MITTS Security is effectively connected with the conduct of a United
States trade or business. Notwithstanding clause (d) of the preceding sentence,
to the extent provided in Treasury regulations, certain trusts in existence on
August 20, 1996, and treated as United States persons prior to that date that
elect to continue to be treated as United States persons also will be a U.S.
Holder. As used herein, the term "non-U.S. Holder" means a beneficial owner of
a MITTS Security that is not a U.S. Holder.
General
There are no statutory provisions, regulations, published rulings or
judicial decisions addressing or involving the characterization, for United
States Federal income tax purposes, of the MITTS Securities or securities with
terms substantially the same as the MITTS Securities. However, although the
matter is not free from doubt, under current law, each MITTS Security should be
treated as a debt instrument of ML&Co. for United States Federal income tax
purposes. ML&Co. currently intends to treat each MITTS Security as a debt
instrument of ML&Co. for United States Federal income tax purposes and, where
required, intends to file information returns with the Internal Revenue Service
in accordance with this treatment, in the absence of any change or
clarification in the law, by regulation or otherwise, requiring a different
characterization of the MITTS Securities. Prospective investors in the MITTS
Securities should be aware, however, that the IRS is not bound by ML&Co.'s
characterization of the MITTS Securities as indebtedness, and the IRS could
possibly take a different position as to the proper characterization of the
MITTS Securities for United States Federal income tax purposes. The following
discussion of the principal United States Federal income tax consequences of
the
purchase, ownership and disposition of the MITTS Securities is based upon the
assumption that each MITTS Security will be treated as a debt instrument of
ML&Co. for United States Federal income tax purposes. If the MITTS Securities
are not in fact treated as debt instruments of ML&Co. for United States Federal
income tax purposes, then the United States Federal income tax treatment of the
purchase, ownership and disposition of the MITTS Securities could differ from
the treatment discussed below with the result that the timing and character
S-26
of income, gain or loss recognized in respect of a MITTS Security could differ
from the timing and character of income, gain or loss recognized in respect of
a MITTS Security had the MITTS Securities in fact been treated as debt
instruments of ML&Co. for United States Federal income tax purposes.
U.S. Holders
On June 11, 1996, the Treasury Department issued final regulations (the
"Final Regulations") concerning the proper United States Federal income tax
treatment of contingent payment debt instruments such as the MITTS Securities,
which apply to debt instruments issued on or after August 13, 1996 and,
accordingly, will apply to the MITTS Securities. In general, the Final
Regulations cause the timing and character of income, gain or loss reported on
a contingent payment debt instrument to substantially differ from the timing
and character of income, gain or loss reported on a contingent payment debt
instrument under general principles of prior United States Federal income tax
law. Specifically, the Final Regulations generally require a U.S. Holder of
such an instrument to include future contingent and noncontingent interest
payments in income as that interest accrues based upon a projected payment
schedule. Moreover, in general, under the Final Regulations, any gain
recognized by a U.S. Holder on the sale, exchange, or retirement of a
contingent payment debt instrument is treated as ordinary income, and all or a
portion of any loss realized could be treated as ordinary loss as opposed to
capital loss (depending upon the circumstances). The Final Regulations provide
no definitive guidance as to whether or not an instrument is properly
characterized as a debt instrument for United States Federal income tax
purposes.
In particular, solely for purposes of applying the Final Regulations to
the MITTS Securities, ML&Co. has determined that the projected payment schedule
for the MITTS Securities will consist of payment on the maturity date of the
principal amount thereof and a projected Supplemental Redemption Amount equal
to $6.2732 per unit (the "Projected Supplemental Redemption Amount"). This
represents an estimated yield on the MITTS Securities equal to 7.08% per annum,
compounded semiannually. Accordingly, during the term of the MITTS Securities,
a U.S. Holder of a MITTS Security will be required to include in income the sum
of the daily portions of interest on the MITTS Security that are deemed to
accrue at this estimated yield for each day during the taxable year (or portion
of the taxable year) on which the U.S. Holder holds the MITTS Security. The
amount of interest that will be deemed to accrue in any accrual period (i.e.,
generally each six-month period during which the MITTS Securities are
outstanding) will equal the product of this estimated yield (properly adjusted
for the length of the accrual period) and the MITTS Security's adjusted issue
price (as defined below) at the beginning of the accrual period. The daily
portions of interest will be determined by allocating to each day in the
accrual period the ratable portion of the interest that is deemed to accrue
during the accrual period. In general, for these purposes a MITTS Security's
adjusted issue price will equal the MITTS Security's issue price (i.e., $10),
increased by the interest previously accrued on the MITTS Security. At maturity
of a MITTS Security, in the event that the actual Supplemental Redemption
Amount, if any, exceeds $6.2732 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 $6.2732 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 $6.2732 per unit (i.e., the Projected
Supplemental Redemption Amount), the excess of $6.2732 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 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 Redemption Amount (i.e., $6.2732 per
unit) in excess of the actual Supplemental Redemption Amount that is not
treated as an interest offset pursuant to the foregoing rules. In general, if a
U.S. Holder receives shares of the Energy SPDR Fund on the maturity date, such
U.S. Holder's initial aggregate tax basis in the shares of the Energy SPDR Fund
received by the U.S. Holder should equal the sum of the principal amount of the
MITTS Security and the actual Supplemental Redemption Amount (less any cash
received in lieu of fractional shares of
S-27
the Energy SPDR Fund). This aggregate tax basis should be allocated among the
shares of the Energy SPDR Fund received by the U.S. Holder in accordance with
the relative fair market value of such shares of the Energy SPDR Fund.
Moreover, such U.S. Holder's holding period for any shares of the Energy SPDR
Fund received by the U.S. Holder should begin on the day immediately following
the maturity date. U.S. Holders purchasing a MITTS Security at a price that
differs from the adjusted issue price of the MITTS Security as of the purchase
date (e.g., subsequent purchases) will be subject to rules providing for
certain adjustments to the foregoing rules and such U.S. Holders should consult
their own tax advisors concerning these rules.
Upon the sale or exchange of a 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
MITTS Security as of the date of disposition. A U.S. Holder's adjusted tax
basis in a MITTS Security generally will equal such U.S. Holder's initial
investment in the MITTS Security increased by any interest previously included
in income with respect to the MITTS Security by the U.S. Holder. Any 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 MITTS Security. Any remaining loss generally will be treated
as long-term or short-term capital loss (depending upon the U.S. Holder's
holding period for the MITTS Security). All amounts includible in income by a
U.S. Holder as ordinary interest pursuant to the Final Regulations will be
treated as original issue discount.
All prospective investors in the MITTS Securities should consult their
own tax advisors concerning the application of the Final Regulations to their
investment in the MITTS Securities. Investors in the MITTS Securities may also
obtain the projected payment schedule, as determined by ML&Co. for purposes of
the application of the Final Regulations to the MITTS Securities, by submitting
a written request for such information to Merrill Lynch & Co., Inc., Attn:
Darryl W. Colletti, Corporate Secretary's Office, 100 Church Street, 12th
Floor, New York, New York 10080-6512.
The projected payment schedule (including both the Projected Supplemental
Redemption Amount and the estimated yield on the MITTS Securities) has been
determined solely for United States Federal income tax purposes (i.e., for
purposes of applying the Final Regulations to the MITTS Securities), and is
neither a prediction nor a guarantee of what the actual Supplemental Redemption
Amount will be, or that the actual Supplemental Redemption Amount will even
exceed zero.
S-28
The following table sets forth the amount of interest that will be deemed
to have accrued with respect to each unit of the MITTS Securities during each
accrual period the term of the MITTS Securities based upon a projected payment
schedule for the MITTS Securities (including both the Projected Supplemental
Redemption Amount and the estimated yield equal to 7.08% per annum (compounded
semiannually)) as determined by ML&Co. for purposes of applying the Final
Regulations to the MITTS Securities:
Total interest
deemed to have
accrued on the
Interest deemed MITTS
to accrue Securities
during as of the end of
accrual period accrual period
(per unit) (per unit)
Accrual Period --------------- ----------------
September 20, 1999 through March 20, 2000..... $0.3530 $0.3530
March 21, 2000 through September 20, 2000..... $0.3665 $0.7195
September 21, 2000 through March 20, 2001..... $0.3795 $1.0990
March 21, 2001 through September 20, 2001..... $0.3929 $1.4919
September 21, 2001 through March 20, 2002..... $0.4068 $1.8987
March 21, 2002 through September 20, 2002..... $0.4212 $2.3199
September 21, 2002 through March 20, 2003..... $0.4361 $2.7560
March 21, 2003 through September 20, 2003..... $0.4516 $3.2076
September 21, 2003 through March 20, 2004..... $0.4675 $3.6751
March 21, 2004 through September 20, 2004..... $0.4841 $4.1592
September 21, 2004 through March 20, 2005..... $0.5013 $4.6605
March 21, 2005 through September 20, 2005..... $0.5190 $5.1795
September 21, 2005 through March 20, 2006..... $0.5373 $5.7168
March 21, 2006 through September 20, 2006..... $0.5564 $6.2732
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Projected Supplemental Redemption Amount = $6.2732 per unit.
Non-U.S. Holders
A non-U.S. Holder will not be subject to United States Federal income
taxes on payments of principal, premium (if any) or interest (including
original issue discount, if any) on a MITTS Security, unless 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 1042S. For a non-U.S. Holder to
qualify for the exemption from taxation, the last United States payor in the
chain of payment prior to payment to a non-U.S. Holder (the "Withholding
Agent") must have received in the year in which a payment of interest or
principal occurs, or in either of the two preceding calendar years, a statement
that (a) is signed by the beneficial owner of the MITTS Security under
penalties of perjury, (b) certifies that such owner is not a 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 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. If a MITTS Security
is held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide a signed statement to
the Withholding Agent. However, in 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.
S-29
Under current law, a MITTS Security will not be includible in the estate
of a non-U.S. Holder unless the individual is a direct or indirect 10% or
greater shareholder of ML&Co. or, at the time of such individual's death,
payments in respect of such 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 MITTS Securities to registered
owners who are not "exempt recipients" and who fail to provide certain
identifying information (such as the registered owner's taxpayer identification
number) in the required manner. Generally, individuals are not exempt
recipients, whereas corporations and certain other entities generally are
exempt recipients. Payments made in respect of the MITTS Securities to a U.S.
Holder must be reported to the IRS, unless the U.S. Holder is an exempt
recipient or establishes an exemption. Compliance with the identification
procedures described in the preceding section would establish an exemption from
backup withholding for those non-U.S. Holders who are not exempt recipients.
In addition, upon the sale of a MITTS Security to (or through) a broker,
the broker must withhold 31% of the entire purchase price, unless either (a)
the broker determines that the seller is a corporation or other exempt
recipient or (b) the seller provides, in the required manner, certain
identifying information and, in the case of a non-U.S. Holder, certifies that
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 under penalties of perjury, although in certain cases it may
be possible to submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to
a beneficial owner would be allowed as a refund or a credit against 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
generally be effective for payments made after December 31, 2000, subject to
certain transition rules. Prospective investors are urged to consult their own
tax advisors regarding the New Regulations.
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 MITTS Security on behalf of any plan, represents on behalf of itself and
the plan, that the acquisition, holding and any subsequent disposition of the
MITTS Security will not result in a violation of ERISA, the Code or any other
applicable law or regulation.
S-30
USE OF PROCEEDS AND HEDGING
The net proceeds from the sale of the MITTS Securities will be used as
described under "Use of Proceeds" in the accompanying prospectus and to hedge
market risks of ML&Co. associated with its obligation to pay the principal
amount and the Supplemental Redemption Amount.
WHERE YOU CAN FIND MORE INFORMATION
ML&Co.
We file reports, proxy statements and other information with the SEC. Our
SEC filings are also available over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York, and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for more information
on the public reference rooms and their copy charges. You may also inspect our
SEC reports and other information at the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005.
We have filed a registration statement on Form S-3 with the SEC covering
the MITTS Securities and other securities. For further information on ML&Co.
and the MITTS Securities, you should refer to our registration statement and
its exhibits. The prospectus of ML&Co. 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 into this prospectus supplement and the accompanying prospectus of
ML&Co. 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 of ML&Co. 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.
The Energy SPDR Fund
The Select Sector SPDR Trust is subject to the registration requirements
of the Securities Act and the Investment Company Act and is required to file
periodically certain information specified by the SEC. For more information
about the Energy SPDR Fund and the shares that you may receive at maturity,
information provided to or filed with the SEC by the Select Sector SPDR Trust
can be inspected at the SEC's public reference facilities or accessed over the
Internet through its web site. You may also obtain copies of these documents at
no cost by calling the Select Sector SPDR Trust at (800) 843-2639 or by writing
the Select Sector SPDR Trust c/o ALPS Mutual Funds Services, Inc., at 370 17th
Street, Suite 3100, Denver, CO 80202. Neither the Fund Prospectus nor these
other documents are incorporated by reference in this prospectus supplement,
and we make no representation or warranty as to the accuracy or completeness of
that information.
S-31
UNDERWRITING
MLPF&S, the underwriter of the offering, has agreed, subject to the terms
and conditions of the underwriting agreement and a terms agreement, to purchase
from ML&Co. $44,000,000 aggregate principal amount of MITTS Securities. The
underwriting agreement provides that the obligations of the underwriter are
subject to certain conditions and that the underwriter will be obligated to
purchase all of the MITTS Securities if any are purchased.
The underwriter has advised ML&Co. that it proposes initially to offer
all or part of the MITTS Securities directly to the public at the offering
prices set forth on the cover page of this prospectus supplement. After the
initial public offering, the public offering price may be changed. The
underwriter is offering the MITTS Securities subject to receipt and acceptance
and subject to the underwriter's right to reject any order in whole or in part.
In addition to the commissions payable at the time of the original sale
of the MITTS Securities, the underwriter will pay a commission on each of up to
six anniversary dates of the issuance of the MITTS Securities to brokers whose
clients purchased the units in the initial distribution and who continue to
hold their MITTS Securities.
The underwriting of the MITTS Securities will conform to the requirements
set forth in the applicable sections of Rule 2720 of the Conduct Rules of the
NASD.
The underwriter is permitted to engage in certain transactions that
stabilize the price of the MITTS Securities. These transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
MITTS Securities.
If the underwriter creates a short position in the MITTS Securities in
connection with the offering, i.e., if it sells more units of the MITTS
Securities than are set forth on the cover page of this prospectus supplement,
the underwriter may reduce that short position by purchasing units of the MITTS
Securities in the open market. In general, purchases of a security for the
purpose of stabilization or to reduce a short position could cause the price of
the security to be higher than it might be in the absence of these purchases.
Neither ML&Co. nor the underwriter makes any representation or prediction as to
the direction or magnitude of any effect that the transactions described above
may have on the price of the MITTS Securities. In addition, neither ML&Co. nor
the underwriter makes any representation that the underwriter will engage in
these transactions or that these transactions, once commenced, will not be
discontinued without notice.
The underwriter may use this prospectus supplement and the accompanying
prospectus of ML&Co. for offers and sales related to market-making transactions
in the MITTS Securities. The underwriter may act as principal or agent in these
transactions, and the sales will be made at prices related to prevailing market
prices at the time of sale.
VALIDITY OF THE MITTS SECURITIES
The validity of the MITTS Securities will be passed upon for ML&Co. and
for the underwriter by Brown & Wood LLP, New York, New York.
S-32
INDEX OF DEFINED TERMS
Page
----
Adjusted Ending Value ..................................................... S-5
Adjustment Factor ......................................................... S-5
Business Day .............................................................. S-20
Calculation Day ........................................................... S-16
Calculation Period ........................................................ S-16
Code ...................................................................... S-30
Depositary ................................................................ S-20
Determination Date ........................................................ S-19
Ending Value .............................................................. S-5
ERISA ..................................................................... S-30
Final Regulations ......................................................... S-27
Fund Expenses ............................................................. S-19
Fund Prospectus............................................................ S-4
Index Termination Event ................................................... S-19
Market Disruption Event ................................................... S-18
MITTS Securities........................................................... S-1
ML&Co. .................................................................... S-4
MLPF&S .................................................................... S-4
Net Asset Value ........................................................... S-6
New Regulations ........................................................... S-30
Non-U.S. Holder ........................................................... S-26
Pre-liquidation Date ...................................................... S-19
Pricing Date .............................................................. S-5
Principal Amount........................................................... S-5
Projected Supplemental Redemption Amount .................................. S-27
S&P ....................................................................... S-19
Starting Value ............................................................ S-5
Successor Index ........................................................... S-19
Supplemental Redemption Amount ............................................ S-5
Trading Day ............................................................... S-16
U.S. Holder ............................................................... S-26
Withholding Agent.......................................................... S-29
S-33
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[LOGO]
4,400,000 Units
Merrill Lynch & Co., Inc.
Energy Select Sector SPDR(R) Fund
Market Index Target-Term Securities(R)
due September 20, 2006
"MITTS(R) Securities"
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PROSPECTUS SUPPLEMENT
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Merrill Lynch & Co.
September 14, 1999
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