Filed Pursuant to Rule No. 424(b)(5)
Registration No. 333-68747
Subject to Completion
Preliminary Prospectus Supplement dated October 27, 1999
PROSPECTUS SUPPLEMENT
(To prospectus dated May 6, 1999) [LOGO] Merrill Lynch
PROTECTED GROWTH(SM) INVESTING
Pursuit of Growth, Protection of Principal
2,500,000 Units
Merrill Lynch & Co., Inc.
Global Market Index Target-Term Securities(R)
due November , 2004
"MITTS(R) Securities"
$10 principal amount per unit
--------------
The MITTS Securities: Payment at maturity:
. 100% principal protection at . On the maturity date, for each unit
maturity. of the MITTS Securities you own, we
. No payments before the maturity will pay you an amount equal to the
date. sum of the principal amount of each
. Senior unsecured debt securities of unit and an additional amount based
Merrill Lynch & Co., Inc. on changes in the values of the S&P
. Linked to the values of the S&P 500 Index, the Nikkei 225 Index and
500(R) Index, the Nikkei 225 Index the Euro STOXX 50 Index reduced by
and the Dow Jones Euro STOXX 50 (SM) an annual adjustment factor expected
Index. to be between 1.5% and 2.0%.
. 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 "GMM".
. Closing date: November , 1999.
Investing in the MITTS Securities involves risk.
See "Risk Factors" beginning on page S-9 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 $25,000,000
Underwriting discount............................... $ $
Proceeds, before expenses, to Merrill Lynch & Co.,
Inc. .............................................. $ $
The public offering price and the underwriting discount for any single
transaction to purchase:
(a) between 100,000 units and 499,999 units will be $ per unit
and $ per unit, respectively, and
(b) 500,000 units or more will be $ per unit and $ per unit,
respectively.
--------------
Merrill Lynch & Co.
--------------
The date of this prospectus supplement is November , 1999.
"MITTS" and "Market Index Target-Term Securities" are registered service marks
and "Protected Growth" is a service mark of Merrill Lynch & Co., Inc.
"Standard & Poor's(R)", "Standard & Poor's 500", "S&P 500(R)", "S&P(R)" and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use by Merrill Lynch Capital Services, Inc., and Merrill Lynch & Co., Inc.
is an authorized sublicensee.
The Dow Jones Euro STOXX 50 is owned by STOXX LIMITED. The Dow Jones Euro STOXX
50 is a service mark of DOW JONES & COMPANY, INC. and has been licensed for
certain purposes by Merrill Lynch & Co., Inc.
(C) 1998 by STOXX LIMITED. All rights reserved.
Euro STOXX 50 is a mark of STOXX LIMITED and has been licensed for certain
purposes by Merrill Lynch & Co., 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
Will I receive interest payments on the MITTS Securities?............... S-6
Who publishes the Underlying Indices and what do they measure?.......... S-7
How have the Underlying Indices performed historically?................. S-7
What about taxes?....................................................... S-7
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-8
Are there any risks associated with my investment?...................... S-8
RISK FACTORS.............................................................. S-9
You may not earn a return on your investment............................ S-9
Your yield may be lower than the yield on a standard debt security of
comparable maturity.................................................... S-9
Your return will not reflect the return of owning the stocks included in
the Underlying Indices................................................. S-9
Your return will not be adjusted for changes in currency exchange
rates.................................................................. S-9
There may be an uncertain trading market for the MITTS Securities....... S-9
Many factors affect the trading value of the MITTS Securities; these
factors interrelate in
complex ways and the effect of any one factor may offset or magnify the
effect of another factor............................................... S-10
Amounts payable on the MITTS Securities may be limited by state law .... S-11
Risks associated with the Japanese and European securities markets...... S-11
Purchases and sales by us and our affiliates may affect your return..... S-12
Potential conflicts..................................................... S-12
Uncertain tax consequences.............................................. S-12
DESCRIPTION OF THE MITTS SECURITIES....................................... S-13
Payment at maturity..................................................... S-13
Hypothetical returns.................................................... S-14
Adjustments to the Underlying Indices; Market Disruption Events......... S-15
Discontinuance of an Underlying Index................................... S-16
Events of Default and Acceleration...................................... S-17
Depositary.............................................................. S-17
Same-Day Settlement and Payment......................................... S-20
THE UNDERLYING INDICES.................................................... S-20
The S&P 500 Index....................................................... S-20
Computation of the S&P 500 Index........................................ S-20
Historical Data on the S&P 500 Index.................................... S-22
License Agreement....................................................... S-22
The Nikkei 225 Index.................................................... S-23
The Tokyo Stock Exchange................................................ S-24
Historical Data on the Nikkei 225 Index................................. S-25
The Euro STOXX 50....................................................... S-25
Historical Data on the Euro STOXX 50.................................... S-26
HISTORICAL MONTH-END CLOSING VALUES OF THE HYPOTHETICAL INDEX............. S-28
UNITED STATES FEDERAL INCOME TAXATION..................................... S-28
General................................................................. S-29
S-2
Page
----
U.S. Holders............................................................. S-30
Hypothetical table....................................................... S-31
Non-U.S. Holders......................................................... S-32
Backup withholding....................................................... S-33
New withholding regulations.............................................. S-33
ERISA CONSIDERATIONS....................................................... S-33
USE OF PROCEEDS AND HEDGING................................................ S-33
WHERE YOU CAN FIND MORE INFORMATION........................................ S-34
UNDERWRITING............................................................... S-34
VALIDITY OF THE MITTS SECURITIES........................................... S-35
INDEX OF DEFINED TERMS..................................................... S-36
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
S-3
SUMMARY INFORMATION--Q&A
This summary includes questions and answers that highlight selected
information from this prospectus supplement and the accompanying prospectus to
help you understand the Global Market Index Target-Term Securities(R) due
November , 2004. You should carefully read this prospectus supplement and the
accompanying prospectus to fully understand the terms of the MITTS Securities,
the S&P 500 Index (the "S&P 500"), the Nikkei Stock Average (the "Nikkei 225
Index"), the Dow Jones Euro STOXX 50 Index (the "Euro STOXX 50") 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.
The S&P 500, the Nikkei 225 Index and the Euro STOXX 50 are referred to
collectively as the "Underlying Indices" in this prospectus supplement.
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 November , 2004. We cannot redeem the MITTS
Securities at any earlier date. We will not make any payments on the MITTS
Securities until maturity.
Each unit of MITTS Securities represents $10 principal amount of MITTS
Securities. You may transfer the MITTS Securities only in whole units. You
will not have the right to receive physical certificates evidencing your
ownership except under limited circumstances. Instead, we will issue the MITTS
Securities in the form of a global certificate, which will be held by The
Depository Trust Company, also known as DTC, or its nominee. Direct and
indirect participants in DTC will record your ownership of the MITTS
Securities. You should refer to the section "Description of the MITTS
Securities--Depositary" in this prospectus supplement.
What will I receive on the stated maturity date of the MITTS Securities?
We have designed the MITTS Securities for investors who want to protect
their investment by receiving at least the principal amount of their
investment at maturity and who also want to participate in possible increases
in the Underlying Indices as reduced by the Adjustment Factor. On the stated
maturity date, you will receive a payment on the MITTS Securities equal to the
sum of two amounts: the "principal amount" and the "Supplemental Redemption
Amount".
Principal amount
The "principal amount" per unit is $10.
Supplemental Redemption Amount
The "Supplemental Redemption Amount" per unit will equal the sum of the
Index Redemption Amounts for each of the Underlying Indices but will not be
less than zero.
The "Index Redemption Amount" means, for each of the Underlying Indices:
( Adjusted Ending Value - Starting Value) 1
$10 X ( --------------------------------------) X -
( Starting Value ) 3
"Starting Value" for each Underlying Index means the closing value of
that Underlying Index on the date the MITTS Securities are priced for initial
sale to the public (the "Pricing Date"). We will disclose the Starting Values
to you in the
S-4
final prospectus supplement delivered to you in connection with the sales of
the MITTS Securities.
"Adjusted Ending Value", for each Underlying Index, will be the average
of the values of that Underlying Index at the close of the market on five
business days shortly before the maturity of the MITTS Securities as reduced on
each day by the application of the Adjustment Factor. We may calculate the
Adjusted Ending Values by reference to fewer than five or even a single day's
closing value if, during the period shortly before the stated maturity date of
the MITTS Securities, there is a disruption in the trading of a sufficient
number of the component stocks included in any of the Underlying Indices or
certain futures or options contracts relating to any of the Underlying Indices.
The "Adjustment Factor" will be a fixed percentage which is expected to
be between 1.5% and 2.0% 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 closing values of the Underlying Indices used to calculate the
Index Redemption Amounts during the Calculation Period. As a result of the
cumulative effect of this reduction, the values used to calculate the Index
Redemption Amounts during the Calculation Period at the stated maturity of the
MITTS Securities will be approximately 7.23% to 9.53% less than the actual
closing values of the Underlying Indices on each day during the Calculation
Period. We will determine the Adjustment Factor on the Pricing Date and it will
appear in the final prospectus supplement delivered to you in connection with
sales of the MITTS Securities. For a detailed discussion of how the Adjustment
Factor will affect the value of the Underlying Indices used to calculate the
Index Redemption Amounts and the Supplemental Redemption Amount, see
"Description of the MITTS Securities--Payment at maturity" in this prospectus
supplement.
For more specific information about the Index Redemption Amounts and 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 sum of the
Index Redemption Amounts is greater than zero. If the sum of the Index
Redemption Amounts is less than, or equal to, zero the Supplemental Redemption
Amount will be zero. We will pay you the principal amount of your MITTS
Securities regardless of whether any Supplemental Redemption Amount is payable.
Examples
Here are two examples of Supplemental Redemption Amount calculations
assuming an investment term of five years and an Adjustment Factor of
1.75% per year, the midpoint of the expected range of 1.5% and 2.0%:
Example 1--The sum of the hypothetical Index Redemption Amounts is less than
zero at maturity:
Hypothetical S&P 500 Index Starting Value: 1,281.91
Hypothetical closing value of the S&P 500 Index at maturity: 1,538.29
Hypothetical Adjusted Ending Value of the S&P 500 Index: 1,409.27
( 1,409.27 - 1,281.91 ) 1
S&P 500 Index Redemption Amount (per unit) = $10 X ( ------------------- ) X --- = $0.33
( 1,281.91 ) 3
Hypothetical Nikkei 225 Index Starting Value: 17,671.79
Hypothetical closing value of the Nikkei 225 Index at maturity: 21,206.15
Hypothetical Adjusted Ending Value of the Nikkei 225 Index: 19,427.57
( 19,427.57 - 17,671.79 ) 1
Nikkei 225 Index Redemption Amount (per unit) = $10 X ( --------------------- ) X --- = $0.33
( 17,671.79 ) 3
S-5
Hypothetical Euro STOXX 50 Index Starting Value: 3,771.46
Hypothetical closing value of the Euro STOXX 50 Index at maturity: 3,205.74
Hypothetical Adjusted Ending Value of the Euro STOXX 50 Index: 2,936.87
( 2,936.87 - 3,771.46 ) 1
Euro STOXX 50 Index Redemption Amount (per unit) = $10 X ( ------------------- ) X - = -$0.74
( 3,771.46 ) 3
Supplemental Redemption Amount = $0.33 + $0.33 - $0.74 = $0.00
(Supplemental Redemption Amount cannot be less than zero)
Total payment at maturity (per unit) = $10 + $0 = $10
Example 2--The sum of the hypothetical Index Redemption Amounts is greater
than zero at maturity:
Hypothetical S&P 500 Index Starting Value: 1,281.91
Hypothetical closing value of the S&P 500 Index at maturity: 2,051.06
Hypothetical Adjusted Ending Value of the S&P 500 Index: 1,879.03
( 1,879.03 - 1,281.91 ) 1
S&P 500 Index Redemption Amount (per unit) = $10 X ( ------------------- ) X - = $1.55
( 1,281.91 ) 3 ----
Hypothetical Nikkei 225 Index Starting Value: 17,671.79
Hypothetical closing value of the NIkkei 225 Index at maturity: 28,274.86
Hypothetical Adjusted Ending Value of the Nikkei 225 Index: 25,903.43
( 25,903.43 - 17,671.79 ) 1
Nikkei 225 Index Redemption Amount (per unit) = $10 X ( --------------------- ) X - = $1.55
( 17,671.79 ) 3
Hypothetical Euro STOXX 50 Index Starting Value: 3,771.46
Hypothetical closing value of the Euro STOXX 50 Index at maturity: 5,657.19
Hypothetical Adjusted Ending Value of the Euro STOXX 50 Index: 5,182.72
( 5,182.72 - 3,771.46 ) 1
Euro STOXX 50 Index Redemption Amount (per unit) = $10 X ( ------------------- ) X - = $1.25
( 3,771.46 ) 3
Supplemental Redemption Amount = $1.55 + $1.55+ $1.25 = $4.35
Total payment at maturity (per unit) = $10 + $4.35 = $14.35
Will I receive interest payments on the MITTS Securities?
You will not receive any interest payments on the MITTS Securities, but
will instead receive the principal amount plus the Supplemental Redemption
Amount, if any, at maturity. We have designed the MITTS Securities for
investors who are willing to forego market interest payments on the MITTS
Securities, such as floating interest rates paid on standard senior non-
callable debt securities, in
S-6
exchange for the ability to participate in possible increases in the Underlying
Indices.
Who publishes the Underlying Indices and what do they measure?
The S&P 500 Index is published by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc., and is intended to provide an indication of the
pattern of common stock price movement in the United States. The value of the
S&P 500 Index is based on the relative value of the aggregate market value of
the common stocks of 500 companies as of a particular time compared to the
aggregate average market value of the common stocks of 500 similar companies
during the base period of the years 1941 through 1943. The market value for the
common stock of a company is the product of the market price per share of the
common stock and the number of outstanding shares of common stock. As of
September 30, 1999, the 500 companies included in the S&P 500 Index represented
approximately 85% of the aggregate market value of common stocks traded on the
New York Stock Exchange; however, these 500 companies are not the 500 largest
companies listed on the NYSE and not all of these 500 companies are listed on
the NYSE. As of September 30, 1999, the aggregate market value of the 500
companies included in the S&P 500 Index represented approximately 78% of the
aggregate market value of United States domestic, public companies. Standard &
Poor's chooses companies for inclusion in the S&P 500 Index with the aim of
achieving a distribution by broad industry groupings that approximates the
distribution of these groupings in the common stock population of the NYSE,
which Standard & Poor's uses as an assumed model for the composition of the
total market.
The Nikkei 225 Index is a stock index published by Nihon Keizai Shimbun,
Inc. ("NKS") that measures the composite price performance of selected Japanese
stocks. The Nikkei 225 Index is currently based on 225 common stocks traded on
the Tokyo Stock Exchange (the "TSE") and represents a broad cross section of
Japanese industry. All 225 underlying stocks (the "Underlying Stocks") are
stocks listed in the First Section of the TSE and are, therefore, among the
most actively traded stocks on the TSE. The Nikkei 225 Index is a modified,
price-weighted index, which means an Underlying Stock's weight in the Nikkei
225 Index is based on its price per share rather than the total market
capitalization of the issuer.
The Euro STOXX 50 was created by STOXX, a joint venture founded by SWX-
Swiss Exchange, SBF-Bourse de Paris, Deutsche Borse AG and Dow Jones.
Publication of the Euro STOXX 50 began on February 26, 1998. The Euro STOXX 50
consists of the stocks of 50 European companies that are among the largest in
market capitalization, highest in liquidity and are the leaders of their
industrial sectors.
Please note that an investment in the MITTS Securities does not entitle
you to any ownership interest in the stocks of the companies included in the
Underlying Indices.
How have the Underlying Indices performed historically?
We have set forth the closing values of each of the Underlying Indices on
the last business day of each month from January 1992 to September 1999. You
can find tables with these values in the section entitled "Underlying Indices"
in this prospectus supplement. We have also provided a graph to illustrate how
the combination of the Underlying Indices has performed in the past. For
further details on the calculation of the graph please refer to the section
"Historical Month-End Closing Values of the Hypothetical Index" in this
prospectus supplement. We have provided this historical information to help you
evaluate the behavior of the Underlying Indices in various economic
environments; however, past performance of the Underlying Indices is not
necessarily indicative of how the Underlying Indices will perform in the
future.
What about taxes?
Each year, you will be required to pay taxes on ordinary income from the
MITTS Securities over their term based upon an estimated yield for the MITTS
Securities, even though you will not receive any payments from us until
maturity. We have determined this estimated yield, in accordance with
S-7
regulations issued by the U.S. Treasury Department, solely in order for you to
figure the amount of taxes that you will owe each year as a result of owning a
MITTS Security. This estimated yield is neither a prediction nor a guarantee of
what the actual Supplemental Redemption Amount will be, or that the actual
Supplemental Redemption Amount will even exceed zero. We have determined that
this estimated yield will equal % per annum, compounded semiannually.
Based upon this estimated yield, if you pay your taxes on a calendar year
basis and if you buy a MITTS Security for $10 and hold the MITTS Security until
maturity, you will be required to pay taxes on the following amounts of
ordinary income from the MITTS Securities each year: $ in 1999, $ in
2000, $ in 2001, $ in 2002, $ in 2003 and $ in 2004. However, in
2004, the amount of ordinary income that you will be required to pay taxes on
from owning each MITTS Security may be greater or less than $ , depending
upon the Supplemental Redemption Amount, if any, you receive. Also, if the
Supplemental Redemption Amount is less than $ , you may have a loss which you
could deduct against other income you may have in 2004, but under current tax
regulations, you would neither be required nor allowed to amend your tax
returns for prior years. For further information, see "United States Federal
Income Taxation" in this prospectus supplement.
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 "GMM", 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 Values, the Index Redemption Amounts and the
Supplemental Redemption Amount. Under certain circumstances, these duties could
result in a conflict of interest between MLPF&S' status as a subsidiary of
ML&Co. and its responsibilities as calculation agent.
Who is ML&Co.?
Merrill Lynch & Co., Inc. is a holding company with various subsidiaries
and affiliated companies that provide investment, financing, insurance and
related services on a global basis. For information about ML&Co. see the
section entitled "Merrill Lynch & Co., Inc." in the accompanying prospectus.
You should also read the other documents we have filed with the SEC which you
can find by referring to the section "Where You Can Find More Information" in
this prospectus supplement.
Are there any risks associated with my investment?
Yes, an investment in the MITTS Securities is subject to risk. Please
refer to the section entitled "Risk Factors" in this prospectus supplement.
S-8
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 sum of the Index Redemption Amounts does
not exceed zero on the stated maturity date, the Supplemental Redemption Amount
will be zero. This will be true even if the value of one or more of the Index
Redemption Amounts is greater than zero but the sum of the Index Redemption
Amounts is less than zero at maturity. If the Supplemental Redemption Amount is
zero, we will pay you only the principal amount of your MITTS Securities.
Your yield may be lower than the yield on a standard debt security of
comparable maturity
The amount we pay you at maturity may be less than the return you could
earn on other investments. Your yield may be less than the yield you would earn
if you bought a standard senior non-callable debt security of ML&Co. with the
same stated maturity date. Your investment may not reflect the full opportunity
cost to you when you take into account factors that affect the time value of
money.
Your return will not reflect the return of owning the stocks included in the
Underlying Indices
The value of each Underlying Index is calculated by reference to the
prices of the common stocks included in that Underlying Index without taking
into consideration the value of dividends paid on those stocks. The return on
your MITTS Securities will not reflect the return you would realize if you
actually owned the stocks included in each Underlying Index and received the
dividends paid on those stocks because of the cumulative effect of the
reduction caused by the Adjustment Factor applied to the closing values of each
Underlying Index used to calculate that Underlying Index's Index Redemption
Amount and because the value of each Underlying Index is calculated by
reference to the prices of the stocks included in that Underlying Index without
taking into consideration the value of dividends paid on those stocks.
Your return will not be adjusted for changes in currency exchange rates
Although the stocks included in the Nikkei 225 Index and the Euro STOXX
50 are traded in various currencies and the MITTS Securities are denominated in
U.S. dollars, we will not adjust the amount payable at maturity for the
currency exchange rate in effect at the maturity of the MITTS Securities. Any
amount in addition to the principal amount of each unit payable to you at
maturity is based solely upon changes in the value of the Underlying Indices.
Changes in exchange rates, however, may reflect changes in a country's economy
which in turn may affect the value of an Underlying Index and the MITTS
Securities.
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 "GMM", subject to official notice of issuance. While there have
been a number of issuances of series of Market Index Target-Term Securities,
trading volumes have varied historically from one series to another and it is
therefore impossible to predict how the MITTS Securities will trade. You cannot
assume that a trading market will develop for the MITTS Securities. If a
trading market does develop, there can be no assurance that there will be
liquidity in the trading market. The development of a trading market for the
MITTS Securities will depend on our financial performance, and other factors
such as the increase, if any, in the value of the Underlying Indices.
S-9
If the trading market for the MITTS Securities is limited, there may be a
limited number of buyers for your MITTS Securities if you do not wish to hold
your investment until maturity. This may affect the price you receive.
Many factors affect the trading value of the MITTS Securities; these factors
interrelate in complex ways and the effect of any one factor may offset or
magnify the effect of another factor
The trading value of the MITTS Securities will be affected by factors
that interrelate in complex ways. It is important for you to understand that
the effect of one factor may offset the increase in the trading value of the
MITTS Securities caused by another factor and that the effect of one factor may
exacerbate the decrease in the trading value of the MITTS Securities caused by
another factor. For example, an increase in U.S. interest rates may offset some
or all of any increase in the trading value of the MITTS Securities
attributable to another factor, such as an increase in the value of an
Underlying Index. The following paragraphs describe the expected impact on the
market value of the MITTS Securities given a change in a specific factor,
assuming all other conditions remain constant.
The values of the Underlying Indices are 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 each
Underlying Index, as reduced by the Adjustment Factor over the term of the
MITTS Securities, exceeds the Starting Value for that Underlying Index. If you
choose to sell your MITTS Securities when the value of each Underlying Index,
as reduced by the Adjustment Factor over the term of the MITTS Securities,
exceeds the corresponding Starting Value of each Underlying Index, you may
receive substantially less than the amount that would be payable at maturity
based on that value because of the expectation that the Underlying Indices will
continue to fluctuate until the Adjusted Ending Value is determined. If you
choose to sell your MITTS Securities when the value of each Underlying Index is
below, or not sufficiently above, the corresponding Starting Value of each
Underlying Index, you may receive less than the $10 principal amount per unit
of MITTS Securities. Because the Supplemental Redemption Amount equals the sum
of the Index Redemption Amounts, an increase in the value of an Underlying
Index may be offset by a decrease in the value of another Underlying Index. In
general, rising dividend rates or dividends per share may increase the value of
the Underlying Indices, while falling dividend rates may decrease the value of
the Underlying Indices. Political, economic and other developments that affect
the stocks underlying the Underlying Indices may also affect the value of the
Underlying Indices and, indirectly, the value of the MITTS Securities.
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 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 that the trading value of the MITTS
Securities will increase. In general, if interest rates in Japan or Europe
increase, we expect that the trading value of the MITTS Securities will
increase. If interest rates in Japan or Europe decrease, we expect that the
trading value of the MITTS Securities will decrease. The level of interest
rates in the U.S., Japan or Europe may also affect the applicable economies
and, in turn, the value of the relevant Underlying Index. Rising interest rates
may lower the value of an Underlying Index and, thus, may decrease the value of
the MITTS Securities. Falling interest rates may increase the value of an
Underlying Index and, thus, may increase the value of the MITTS Securities.
Changes in the volatility of the Underlying Indices 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 Underlying Indices increases, we expect that
the trading value of the MITTS Securities will increase and, conversely, if the
volatility of the Underlying Indices 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
S-10
Securities may trade at a value above that which would be expected based on the
level of interest rates and the Underlying Indices. This difference will
reflect a "time premium" due to expectations concerning the value of the
Underlying Indices during the period before the stated maturity of the MITTS
Securities. However, as the time remaining to the stated maturity of the MITTS
Securities decreases, we expect that this time premium will decrease, lowering
the trading value of the MITTS Securities.
Changes in dividend yields of the stocks included in the Underlying
Indices are expected to affect the trading value of the MITTS Securities. In
general, if dividend yields on the stocks included in the Underlying Indices
increase, we expect that the value of the MITTS Securities will decrease and,
conversely, if dividend yields on the stocks included in the Underlying Indices
decrease, we expect that the value of the MITTS Securities will increase.
Changes in our credit ratings may affect the trading value of the MITTS
Securities. Our credit ratings are an assessment of our ability to pay our
obligations. Consequently, real or anticipated changes in our credit ratings
may affect the trading value of the MITTS Securities. However, because your
return on your MITTS Securities is dependent upon factors in addition to our
ability to pay our obligations under the MITTS Securities, such as the
percentage increase in the value of the Underlying Indices 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 change in the value of each Underlying Index will
be greater if it occurs later in the term of the MITTS Securities than if it
occurs earlier in the term of the MITTS Securities.
Amounts payable on the MITTS Securities may be limited by state law
New York State law governs the 1983 Indenture under which the MITTS
Securities will be issued. New York has usury laws that limit the amount of
interest that can be charged and paid on loans, which includes debt securities
like the MITTS Securities. Under present New York law, the maximum rate of
interest is 25% per annum on a simple interest basis. This limit may not apply
to debt securities in which $2,500,000 or more has been invested.
While we believe that New York law would be given effect by a state or
Federal court sitting outside of New York, many other states also have laws
that regulate the amount of interest that may be charged to and paid by a
borrower. We 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.
Risks associated with the Japanese and European securities markets
The stocks that constitute the Nikkei 225 Index and the Euro STOXX 50
have been issued by companies in Japan and various European countries. You
should be aware that investments in securities indexed to the value of these
equity securities involve certain risks. The Japanese and European securities
markets may be more volatile than U.S. or other securities markets and may be
affected by market developments in different ways than U.S. or other securities
markets. Direct or indirect government intervention to stabilize the Japanese
and European securities markets and cross-shareholdings in companies on those
markets may affect prices and volume of trading on those markets. Also, there
is generally less publicly available information about Japanese and European
companies than about those U.S. companies that are subject to the reporting
requirements of the SEC, and Japanese and European companies are subject to
accounting, auditing and financial reporting standards and requirements that
differ from those applicable to U.S. reporting companies.
S-11
Securities prices in each country are subject to political, economic,
financial and social factors that apply in that country. These factors, which
could negatively affect that country's securities markets, include the
possibility of recent or future changes in the government's economic and fiscal
policies, the possible imposition of, or changes in, currency exchange laws or
other laws or restrictions applicable to companies or investments in a
country's equity securities and the possibility of fluctuations in the rate of
exchange between currencies. Moreover, the economy of each country may differ
favorably or unfavorably from the U.S. economy with regard to growth of gross
national product, rate of inflation, capital reinvestment, resources and self-
sufficiency.
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 Underlying Indices or futures or options contracts on the
Underlying Indices 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
Underlying Indices in a manner that could be adverse to your investment in the
MITTS Securities.
Potential conflicts
Our subsidiary, MLPF&S, is our agent for the purposes of calculating the
Adjusted Ending Values, Index Redemption Amounts 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 values of the Underlying Indices 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 an Underlying Index. See "Description of
the MITTS Securities--Adjustments to the Underlying Indices; Market Disruption
Events" and "--Discontinuance of the Underlying Indices" in this prospectus
supplement. MLPF&S is required to carry out its duties as calculation agent in
good faith and using its reasonable judgment. However, you should be aware that
because we control MLPF&S, potential conflicts of interest could arise.
We have entered into an arrangement with one of our subsidiaries to hedge
the market risks associated with our obligation to pay the amounts due at
maturity. 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-12
DESCRIPTION OF THE MITTS SECURITIES
ML&Co. will issue the MITTS Securities as a series of senior debt
securities under the 1983 Indenture which is more fully described in the
accompanying prospectus. The MITTS Securities will mature on November , 2004.
While at maturity a beneficial owner of a MITTS Security will receive the
principal amount of the MITTS Security plus the Supplemental Redemption Amount,
if any, there will be no other payment of interest, periodic or otherwise. See
"--Payment at maturity".
The MITTS Securities are not subject to redemption by ML&Co. or at the
option of any beneficial owner before maturity. If an Event of Default occurs
with respect to the MITTS Securities, beneficial owners of the MITTS Securities
may accelerate the maturity of the MITTS Securities, as described under the
section "--Events of Default and Acceleration" in this prospectus supplement
and "Description of Debt Securities--Events of Default" in the accompanying
prospectus.
ML&Co. will issue the MITTS Securities in denominations of whole units of
$10.00 per unit.
The MITTS Securities will not have the benefit of any sinking fund.
Payment at maturity
At maturity, a beneficial owner of a MITTS Security will be entitled to
receive the principal amount of that MITTS Security plus a Supplemental
Redemption Amount, if any, all as provided below. If the Supplemental
Redemption Amount does not exceed zero, you will be entitled to receive only
the principal amount of your MITTS Securities.
The "Supplemental Redemption Amount" for a MITTS Security will be
determined by the calculation agent and will equal the sum of the Index
Redemption Amounts, provided, however, that in no event will the Supplemental
Redemption Amount be less than zero.
The "Index Redemption Amount" means, for each of the Underlying Indices:
( Adjusted Ending Value - Starting Value ) 1
principal amount of each MITTS Security ($10 per unit) X ( -------------------------------------- ) X -
( Starting Value ) 3
"Starting Value" for each Underlying Index means the closing value of
that Underlying Index on the Pricing Date. We will disclose the Starting Values
to you in the final prospectus supplement delivered to you in connection with
the sales of the MITTS Securities.
The "Adjusted Ending Value" for each Underlying Index will be determined
by the calculation agent and will equal the average or arithmetic mean of the
closing values of that Underlying Index, as reduced by the application of the
Adjustment Factor on each Calculation Day, determined on each of the first five
Calculation Days during the Calculation Period. If there are fewer than five
Calculation Days during the Calculation Period, then the Adjusted Ending Values
will equal the average or arithmetic mean of the closing values of the
applicable Underlying Index on those Calculation Days, as reduced by the
application of the Adjustment Factor on each Calculation Day. If there is only
one Calculation Day, then the Adjusted Ending Values will equal the closing
value of the applicable Underlying Index on that Calculation Day, as reduced by
the application of the Adjustment Factor on that Calculation Day. If no
Calculation Days occur during the Calculation Period, then the Adjusted Ending
Values will equal the closing value of the applicable Underlying Index
determined on the last scheduled Index Business Day in the Calculation Period,
as reduced by the
S-13
application of the Adjustment Factor on that Index Business Day, regardless of
the occurrence of a Market Disruption Event on that Index Business Day.
The "Adjustment Factor" will be a fixed percentage which is expected to
be between 1.5% and 2.0% 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 values used to calculate the Index Redemption Amounts on
each Calculation Day during the Calculation Period. As a result of the
cumulative effect of this reduction, the values used to calculate the Index
Redemption Amounts during the Calculation Period will be approximately 7.23% to
9.53% less than the actual closing values of the Underlying Indices on each
Calculation Day during the Calculation Period. We will determine the Adjustment
Factor on the Pricing Date and it will appear in the final prospectus
supplement delivered to you in connection with sales of the MITTS Securities.
The "Calculation Period" means the period from and including the seventh
scheduled Index Business Day before the maturity date to and including the
second scheduled Index Business Day before the maturity date.
"Calculation Day" means any Index Business Day during the Calculation
Period on which a Market Disruption Event has not occurred.
An "Index Business Day" is a day on which the NYSE and the AMEX are open
for trading and the Underlying Indices or any successor indices are calculated
and published.
All determinations made by the calculation agent shall be at the sole
discretion of the calculation agent and, absent a determination by the
calculation agent of a manifest error, shall be conclusive for all purposes and
binding on ML&Co. and the holders and beneficial owners of the MITTS
Securities.
Hypothetical returns
The following table illustrates, for a range of average percentage
changes from the Starting Value to the hypothetical closing value for the
Underlying Indices:
. 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 the stocks
included in the Underlying Indices, which includes an assumed
aggregate dividend yield of 1.41% per annum, as more fully described
below.
S-14
Pretax
Percentage change Total amount Pretax annualized
from the hypothetical payable at Total rate annualized rate of return
Starting Value to maturity per of return rate of of stocks
the hypothetical unit of on the return on included in
closing value of the the MITTS MITTS the MITTS the Underlying
Underlying Indices(1) Securities Securities Securities(2) Indices(2)(3)
- --------------------- ------------ ---------- ------------- --------------
-80% 10.00 0.00% 0.00% -28.24%
-60% 10.00 0.00% 0.00% -16.12%
-40% 10.00 0.00% 0.00% -8.58%
-20% 10.00 0.00% 0.00% -3.02%
0% 10.00 0.00% 0.00% 1.41%
20% 10.99 9.94% 1.90% 5.13%
40% 12.83 28.26% 5.03% 8.33%
60% 14.66 46.58% 7.79% 11.14%
80% 16.49 64.90% 10.25% 13.66%
100% 18.32 83.23% 12.47% 15.94%
120% 20.15 101.55% 14.50% 18.03%
140% 21.99 119.87% 16.38% 19.95%
160% 23.82 138.19% 18.11% 21.74%
180% 25.65 156.52% 19.73% 23.41%
200% 27.48 174.84% 21.25% 24.98%
- --------
(1) The percentage change in the hypothetical Starting Value and the
hypothetical closing value of each of the Underlying Indices does not
reflect the application of the Adjustment Factor.
(2) The annualized rates of return specified in the preceding table are
calculated on a semiannual bond equivalent basis.
(3) This rate of return assumes:
(a) a percentage change in the aggregate price of the stocks that equals
the percentage change in the Underlying Indices from the hypothetical
aggregate Starting Value to the relevant hypothetical aggregate closing
value;
(b) a constant dividend yield of 1.41% per annum, paid quarterly from the
date of initial delivery of the MITTS Securities, applied to the value
of the Underlying Indices at the end of each quarter assuming this
value increases or decreases linearly from the hypothetical aggregate
Starting Value to the applicable hypothetical aggregate closing value;
(c) no transaction fees or expenses in connection with purchasing and
holding stocks included in the Underlying Indices; and
(d) an investment term of five years.
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 Starting Values,
the Adjustment Factor and the actual Adjusted Ending Values determined by the
calculation agent as provided in this prospectus supplement.
Adjustments to the Underlying Indices; Market Disruption Events
If at any time the publisher of an Underlying Index changes its method of
calculating that Underlying Index, or the value of an Underlying Index changes,
in any material respect, or if an Underlying Index is in any other way modified
so that the Underlying Index does not, in the opinion of the calculation agent,
fairly represent the value of that Underlying Index had those changes or
modifications not been made, then, from and
S-15
after that time, the calculation agent shall, at the close of business in New
York, New York, on each date that the closing value of that Underlying Index is
to be calculated, make any adjustments as, in the good faith judgment of the
calculation agent, may be necessary in order to arrive at a calculation of a
value of a stock index comparable to that Underlying Index as if those changes
or modifications had not been made, and calculate the closing value with
reference to the Underlying Index, as adjusted. Accordingly, if the method of
calculating an Underlying Index is modified so that the value of that
Underlying Index is a fraction or a multiple of what it would have been if it
had not been modified, e.g., due to a split, then the calculation agent shall
adjust that Underlying Index in order to arrive at a value of that Underlying
Index as if it had not been modified, e.g., as if the split had not occurred.
"Market Disruption Event" means, with respect to any Underlying Index,
the occurrence or existence of any suspension of, or limitation imposed on,
trading, by reason of movements in price exceeding limits permitted by the
relevant exchange or otherwise, during the one-half hour period that ends at
the regular official weekday time at which trading on the Index Exchange
related to that Underlying Index occurs, on:
(A) the Index Exchange in securities that comprise 20% or more of the
value of that Underlying Index or
(B) any exchanges on which futures or options on that Underlying Index
are traded in those options or futures if, in the determination of
the calculation agent, that suspension or limitation is material.
For the purpose of the above definition:
(1) a limitation on the hours and number of days of trading will not
constitute a Market Disruption Event if it results from an announced
change in the regular hours of the relevant exchange, and
(2) a limitation on trading imposed during the course of a day by reason
of movements in price otherwise exceeding levels permitted by the
relevant exchange will constitute a Market Disruption Event.
"Index Exchange" means, with respect to any Underlying Index, the
principal exchange on which the shares comprising that Underlying Index are
traded.
Discontinuance of an Underlying Index
If publication of any Underlying Index is discontinued and the
calculation agent determines, in its sole discretion, that a published
successor or substitute is comparable to that Underlying Index (a "successor
index"), then, upon the calculation agent's notification of any determination
to the trustee and ML&Co., the calculation agent will substitute the successor
index for that Underlying Index and calculate the closing value as described
above under "--Payment at maturity". Upon any selection by the calculation
agent of a successor index, ML&Co. shall cause notice to be given to holders of
the MITTS Securities.
In the event that the publication of any underlying Index is discontinued
and:
. the calculation agent does not select a successor index, or
. the successor index is no longer published on any of the Index
Business Days during the Calculation Period,
the calculation agent will compute a substitute value for that Underlying Index
in accordance with the procedures last used to calculate that Underlying Index
before any discontinuance. If a successor index is selected or the calculation
agent calculates a value as a substitute for any Underlying Index as described
below, the successor index or value shall be substituted for that Underlying
Index for all purposes, including for purposes of determining whether a Market
Disruption Event exists.
S-16
If the publication of any Underlying Index is discontinued before the
period during which the Index Redemption Amounts are to be determined and the
calculation agent determines that no successor index is available at that time,
then on each Business Day until the earlier to occur of:
. the determination of the Adjusted Ending Value for that Underlying
Index and
. a determination by the calculation agent that a successor index is
available,
the calculation agent will determine the value that would be used in computing
the Index Redemption Amount as described in the preceding paragraph as if that
day were a Calculation Day. The calculation agent will cause notice of each
value to be published not less often than once each month in The Wall Street
Journal or another newspaper of general circulation, and arrange for
information with respect to these values to be made available by telephone.
A "Business Day" is any day on which the NYSE and the AMEX are open for
trading.
Notwithstanding these alternative arrangements, discontinuance of the
publication of any Underlying Index may adversely affect trading in the MITTS
Securities.
Events of Default and Acceleration
In case an Event of Default with respect to any MITTS Securities has
occurred and is continuing, the amount payable to a beneficial owner of a MITTS
Security upon any acceleration permitted by the MITTS Securities, with respect
to each $10 principal amount of 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 "--Payment at maturity" in this prospectus supplement. If a
bankruptcy proceeding is commenced in respect of ML&Co., the claim of the
beneficial owner of a MITTS Security may be limited, under Section 502(b)(2) of
Title 11 of the United States Code, to the principal amount of the MITTS
Security plus an additional amount of contingent interest calculated as though
the date of the commencement of the proceeding were the maturity date of the
MITTS Securities.
In case of default in payment of the MITTS Securities, whether at the
stated maturity or upon acceleration, from and after the maturity date the
MITTS Securities will bear interest, payable upon demand of their beneficial
owners, at the rate of % per annum, to the extent that payment of any
interest is legally enforceable, on the unpaid amount due and payable on that
date in accordance with the terms of the MITTS Securities to the date payment
of that amount has been made or duly provided for.
Depositary
Description of the Global Securities
Upon issuance, all MITTS Securities will be represented by one or more
fully registered global securities. Each global security will be deposited
with, or on behalf of, DTC (DTC, together with any successor, being a
"depositary"), as depositary, registered in the name of Cede & Co., DTC's
partnership nominee. Unless and until it is exchanged in whole or in part for
MITTS Securities in definitive form, no global security may be transferred
except as a whole by the depositary to a nominee of the depositary or by a
nominee of the depositary to the depositary or another nominee of the
depositary or by the depositary or any nominee to a successor of the depositary
or a nominee of that successor.
So long as DTC, or its nominee, is a registered owner of a global
security, DTC or its nominee, as the case may be, will be considered the sole
owner or holder of the MITTS Securities represented by the global
S-17
security for all purposes under the 1983 Indenture. Except as provided below,
the beneficial owners of the MITTS Securities represented by a global security
will not be entitled to have the MITTS Securities represented by a global
security registered in their names, will not receive or be entitled to receive
physical delivery of the MITTS Securities in definitive form and will not be
considered the owners or holders of the MITTS Securities including for purposes
of receiving any reports delivered by ML&Co. or the trustee under the 1983
Indenture. Accordingly, each person owning a beneficial interest in a global
security must rely on the procedures of DTC and, if that person is not a
participant of DTC, on the procedures of the participant through which that
person owns its interest, to exercise any rights of a holder under the 1983
Indenture. ML&Co. understands that under existing industry practices, in the
event that ML&Co. requests any action of holders or that an owner of a
beneficial interest in a global security desires to give or take any action
which a holder is entitled to give or take under the 1983 Indenture, DTC would
authorize the participants holding the relevant beneficial interests to give or
take that action, and those participants would authorize beneficial owners
owning through those participants to give or take that action or would
otherwise act upon the instructions of beneficial owners. Conveyance of notices
and other communications by DTC to participants, by participants to indirect
participants and by participants and indirect participants to beneficial owners
will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
DTC Procedures
The following is based on information furnished by DTC:
DTC will act as securities depositary for the MITTS Securities. The MITTS
Securities will be issued as fully registered securities registered in the name
of Cede & Co., DTC's partnership nominee. One or more fully registered global
securities will be issued for the MITTS Securities in the aggregate principal
amount of such issue, and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC holds securities that its participants
deposit with DTC. DTC also facilitates the settlement among participants of
securities transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in participants' accounts,
thereby eliminating the need for physical 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
S-18
beneficial owners of the MITTS Securities; DTC's records reflect only the
identity of the direct participants to whose accounts the MITTS Securities are
credited, which may or may not be the beneficial owners. The participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the MITTS
Securities. Under its usual procedures, DTC mails an omnibus proxy to ML&Co. as
soon as possible after the applicable record date. The omnibus proxy assigns
Cede & Co.'s consenting or voting rights to those direct participants
identified in a listing attached to the omnibus proxy to whose accounts the
MITTS Securities are credited on the record date.
Principal, premium, if any, and/or interest, if any, payments made in
cash on the MITTS Securities will be made in immediately available funds to
DTC. DTC's practice is to credit direct participants' accounts on the
applicable payment date in accordance with their respective holdings shown on
the depositary's records unless DTC has reason to believe that it will not
receive payment on that date. Payments by participants to beneficial owners
will be governed by standing instructions and customary practices, as is the
case with securities held for the accounts of customers in bearer form or
registered in "street name", and will be the responsibility of that participant
and not of DTC, the trustee or ML&Co., subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of principal,
premium, if any, and/or interest, if any, to DTC is the responsibility of
ML&Co. or the trustee, disbursement of those payments to direct participants
will be the responsibility of DTC, and disbursement of those payments to the
beneficial owners will be the responsibility of direct participants and
indirect participants.
Exchange for Certificated Securities
If:
. the depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by ML&Co.
within 60 days,
. 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.
S-19
The information in this section concerning DTC and DTC's system has been
obtained from sources that ML&Co. believes to be reliable, but ML&Co. takes no
responsibility for its accuracy.
Same-Day Settlement and Payment
Settlement for the MITTS Securities will be made by the underwriter in
immediately available funds. ML&Co. will make all payments of principal and the
Supplemental Redemption Amount, if any, in immediately available funds so long
as the MITTS Securities are maintained in book-entry form.
THE UNDERLYING INDICES
The S&P 500 Index
Standard & Poor's publishes the S&P 500 Index. The S&P 500 Index is
intended to provide an indication of the pattern of common stock price
movement. The calculation of the value of the S&P 500 Index, discussed below in
further detail, is based on the relative value of the aggregate market value of
the common stocks of 500 companies as of a particular time compared to the
aggregate average market value of the common stocks of 500 similar companies
during the base period of the years 1941 through 1943. As of September 30,
1999, the 500 companies included in the S&P 500 Index represented approximately
85% of the aggregate market value of common stocks traded on the NYSE; however,
these 500 companies are not the 500 largest companies listed on the NYSE and
not all of these 500 companies are listed on the NYSE. As of September 30,
1999, the aggregate market value of the 500 companies included in the S&P 500
Index represented approximately 78% of the aggregate market value of United
States domestic, public companies. Standard & Poor's chooses companies for
inclusion in the S&P 500 Index with the aim of achieving a distribution by
broad industry groupings that approximates the distribution of these groupings
in the common stock population of the NYSE, which Standard & Poor's uses as an
assumed model for the composition of the total market. Relevant criteria
employed by Standard & Poor's include the viability of the particular company,
the extent to which that company represents the industry group to which it is
assigned, the extent to which the market price of that company's common stock
is generally responsive to changes in the affairs of the respective industry
and the market value and trading activity of the common stock of that company.
Four main groups of companies comprise the S&P 500 Index with the number of
companies currently included in each group indicated in parentheses:
Industrials (377), Utilities (41), Transportation (11) and Financial (71).
Standard & Poor's may from time to time, in its sole discretion, add companies
to, or delete companies from, the S&P 500 Index to achieve the objectives
stated above. The S&P 500 Index does not reflect the payment of dividends on
the stocks included in the S&P 500 Index.
Computation of the S&P 500 Index
Standard & Poor's currently computes the S&P 500 Index as of a particular
time as follows:
(a) the product of the market price per share and the number of then
outstanding shares of each component stock is determined as of that
time (referred to as the "market value" of that stock);
(b) the market values of all component stocks as of that time are
aggregated;
(c) the mean average of the market values as of each week in the base
period of the years 1941 through 1943 of the common stock of each
company in a group of 500 substantially similar companies is
determined;
S-20
(d) the mean average market values of all these common stocks over the
base period are aggregated (the aggregate amount being referred to
as the "base value");
(e) the current aggregate market value of all component stocks is
divided by the base value; and
(f) the resulting quotient, expressed in decimals, is multiplied by ten.
While Standard & Poor's currently employs the above methodology to
calculate the S&P 500 Index, no assurance can be given that Standard & Poor's
will not modify or change this methodology in a manner that may affect the
Supplemental Redemption Amount, if any, payable to beneficial owners of MITTS
Securities upon maturity or otherwise.
Standard & Poor's adjusts the foregoing formula to offset the effects of
changes in the market value of a component stock that are determined by
Standard & Poor's to be arbitrary or not due to true market fluctuations. These
changes may result from causes such as:
. the issuance of stock dividends,
. the granting to shareholders of rights to purchase additional shares
of stock,
. the purchase of shares by employees pursuant to employee benefit
plans,
. consolidations and acquisitions,
. the granting to shareholders of rights to purchase other securities
of ML&Co.,
. the substitution by Standard & Poor's of particular component stocks
in the S&P 500 Index, and
. other reasons.
In these cases, Standard & Poor's first recalculates the aggregate market
value of all component stocks, after taking account of the new market price per
share of the particular component stock or the new number of outstanding shares
of that stock or both, as the case may be, and then determines the new base
value in accordance with the following formula:
Old Base Value X New Market Value = New Base Value
----------------
Old Market Value
The result is that the base value is adjusted in proportion to any change
in the aggregate market value of all component stocks resulting from the causes
referred to above to the extent necessary to negate the effects of these causes
upon the S&P 500 Index.
S-21
Historical Data on the S&P 500 Index
The following table sets forth the value of the S&P 500 Index at the end
of each month from January 1992 through September 1999. These historical data
on the S&P 500 Index are not necessarily indicative of the future performance
of the S&P 500 Index or what the value of the MITTS Securities may be. Any
historical upward or downward trend in the value of the S&P 500 Index during
any period set forth below is not any indication that the S&P 500 Index is more
or less likely to increase or decrease at any time during the term of the MITTS
Securities.
1992 1993 1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------ -------- --------
January....... 408.78 438.78 481.61 470.42 636.02 786.16 980.28 1,279.64
February...... 412.70 443.38 467.14 487.39 640.43 790.82 1,049.34 1,238.33
March......... 403.69 451.67 445.77 500.71 645.50 757.12 1,101.75 1,286.37
April......... 414.95 440.19 450.91 514.71 654.17 801.34 1,111.75 1,335.18
May........... 415.35 450.19 456.51 533.40 669.12 848.28 1,090.82 1,301.84
June.......... 408.14 450.53 444.27 544.75 670.63 885.14 1,133.84 1,372.71
July.......... 424.22 448.13 458.26 562.06 639.95 954.29 1,120.67 1,328.72
August........ 414.03 463.56 475.50 561.88 651.99 899.47 957.28 1,320.41
September..... 417.80 458.93 462.71 584.41 687.31 947.28 1,017.01 1,282.71
October....... 418.68 467.83 472.35 581.50 705.27 914.62 1,098.67 --
November...... 431.35 461.79 453.69 605.37 757.02 955.40 1,163.63 --
December...... 435.71 466.45 459.27 615.93 750.74 970.43 1,229.23 --
On October 26, 1999 the closing value of the S&P 500 was 1,281.91.
License Agreement
Standard & Poor's ("S&P") does not guarantee the accuracy and/or the
completeness of the S&P 500 Index or any data included in the S&P 500 Index.
S&P makes no warranty, express or implied, as to results to be obtained by
ML&Co., MLPF&S, holders of the MITTS Securities, or any other person or entity
from the use of the S&P 500 Index or any data included in the S&P 500 Index in
connection with the rights licensed under the license agreement described in
this prospectus supplement or for any other use. S&P makes no express or
implied warranties, and hereby expressly disclaims all warranties of
merchantability or fitness for a particular purpose with respect to the S&P 500
Index or any data included in the S&P 500 Index. Without limiting any of the
above information, in no event shall S&P have any liability for any special,
punitive, indirect or consequential damage, including lost profits, even if
notified of the possibility of these damages.
S&P and Merrill Lynch Capital Services, Inc. have entered into a non-
exclusive license agreement providing for the license to Merrill Lynch Capital
Services, Inc., in exchange for a fee, of the right to use indices owned and
published by S&P in connection with some securities, including the MITTS
Securities, and ML&Co. is an authorized sublicensee of Merrill Lynch Capital
Services, Inc.
The license agreement between S&P and Merrill Lynch Capital Services,
Inc. provides that the following language must be stated in this prospectus
supplement:
"The MITTS Securities are not sponsored, endorsed, sold or promoted by
S&P. S&P makes no representation or warranty, express or implied, to the
holders of the MITTS Securities or any member of the public regarding the
advisability of investing in securities generally or in the MITTS Securities
particularly or the ability of the S&P 500 Index to track general stock market
performance. S&P's only relationship to Merrill Lynch Capital Services, Inc.
and ML&Co. (other than transactions entered into in the ordinary course of
business) is the licensing of certain service marks and trade names of S&P and
of the S&P 500 Index which is determined, composed and calculated by S&P
without regard to ML&Co. or the MITTS Securities. S&P has no
S-22
obligation to take the needs of ML&Co. or the holders of the MITTS Securities
into consideration in determining, composing or calculating the S&P 500 Index.
S&P is not responsible for and has not participated in the determination of the
timing of the sale of the MITTS Securities, prices at which the MITTS
Securities are to initially be sold, or quantities of the MITTS Securities to
be issued or in the determination or calculation of the equation by which the
MITTS Securities are to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing or trading of the
MITTS Securities."
The Nikkei 225 Index
All disclosure contained in this prospectus supplement regarding the
Nikkei 225 Index, including, without limitation, its make-up, method of
calculation and changes in its components, unless otherwise stated, has been
derived from the Stock Market Indices Data Book published by NKS and other
publicly available sources. The information reflects the policies of NKS as
stated in these sources; and the policies are subject to change at the
discretion of NKS.
The Nikkei 225 Index is a stock index calculated, published and
disseminated by NKS that measures the composite price performance of selected
Japanese stocks. The Nikkei 225 Index is currently based on 225 Underlying
Stocks trading on the TSE and represents a broad cross-section of Japanese
industry. All 225 Underlying Stocks are stocks listed in the First Section of
the TSE. Stocks listed in the First Section are among the most actively traded
stocks on the TSE. Futures and options contracts on the Nikkei 225 Index are
traded on the Singapore International Monetary Exchange, the Osaka Securities
Exchange and the Chicago Mercantile Exchange.
The Nikkei 225 Index is a modified, price-weighted index. Each stock's
weight in the Nikkei 225 Index is based on its price per share rather than the
total market capitalization of the issuer. NKS calculates the Nikkei 225 Index
by: multiplying the per share price of each Underlying Stock by the
corresponding weighting factor for that Underlying Stock (a "Weight Factor"),
calculating the sum of all these products and dividing that sum by a divisor.
The divisor, initially set in 1949 at 225, was 10.74327 as of October 25, 1999,
and is subject to periodic adjustments as set forth below. Each Weight Factor
is computed by dividing (Yen)50 by the par value of the relevant Underlying
Stock, so that the share price of each Underlying Stock when multiplied by its
Weight Factor corresponds to a share price based on a uniform par value of
(Yen)50. Each Weight Factor represents the number of shares of the related
Underlying Stock which are included in one trading unit of the Nikkei 225
Index. The stock prices used in the calculation of the Nikkei 225 Index are
those reported by a primary market for the Underlying Stocks, which is
currently the TSE. The level of the Nikkei 225 Index is calculated once per
minute during TSE trading hours.
In order to maintain continuity in the level of the Nikkei 225 Index in
the event of certain changes due to non-market factors affecting the Underlying
Stocks, such as the addition or deletion of stocks, substitution of stocks,
stock dividends, stock splits or distributions of assets to stockholders, the
divisor used in calculating the Nikkei 225 Index is adjusted in a manner
designed to prevent any instantaneous change or discontinuity in the level of
the Nikkei 225 Index. The divisor remains at the new value until a further
adjustment is necessary as the result of another change. As a result of each
change affecting any Underlying Stock, the divisor is adjusted in such a way
that the sum of all share prices immediately after the change multiplied by the
applicable Weight Factor and divided by the new divisor, the level of the
Nikkei 225 Index immediately after the change, will equal the level of the
Nikkei 225 Index immediately prior to the change.
Underlying Stocks may be deleted or added by NKS. However, to maintain
continuity in the Nikkei 225 Index, the policy of NKS is generally not to alter
the composition of the Underlying Stocks except when an Underlying Stock is
deleted in accordance with the following criteria. Any stock becoming
ineligible for listing in the First Section of the TSE due to any of the
following reasons will be deleted from the Underlying Stocks: bankruptcy of the
issuer; merger of the issuer into, or acquisition of the issuer by, another
company; delisting of the stock or transfer of the stock to the "Seiri-Post"
because of excess debt of the issuer or
S-23
because of any other reason; or transfer of the stock to the Second Section of
the TSE. Upon deletion of a stock from the Underlying Stocks, NKS will select,
in accordance with certain criteria established by it, a replacement for the
deleted Underlying Stock. In an exceptional case, a newly listed stock in the
First Section of the TSE that is recognized by NKS to be representative of a
market may be added to the Underlying Stocks. As a result, an existing
Underlying Stock with low trading volume and not representative of a market
will be deleted.
NKS is under no obligation to continue the calculation and dissemination
of the Nikkei 225 Index. The MITTS Securities are not sponsored, endorsed, sold
or promoted by NKS. No inference should be drawn from the information contained
in this prospectus supplement that NKS makes any representation or warranty,
implied or express, to ML&Co., the holder of the MITTS Securities or any member
of the public regarding the advisability of investing in securities generally
or in the MITTS Securities in particular or the ability of the Nikkei 225 Index
to track general stock market performance. NKS has no obligation to take the
needs of ML&Co. or the holder of the MITTS Securities into consideration in
determining, composing or calculating the Nikkei 225 Index. NKS is not
responsible for, and has not participated in the determination of the timing
of, prices for, 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 settled in cash. NKS has no obligation or liability in connection with
the administration or marketing of the MITTS Securities.
The use of and reference to the Nikkei 225 Index in connection with the
MITTS Securities have been consented to by NKS, the publisher of the Nikkei 225
Index.
None of ML&Co., the calculation agent and MLPF&S accepts any
responsibility for the calculation, maintenance or publication of the Nikkei
225 Index or any successor index. NKS disclaims all responsibility for any
errors or omissions in the calculation and dissemination of the Nikkei 225
Index or the manner in which the Nikkei 225 Index is applied in determining any
Starting Values or Ending Values or any Supplemental Redemption Amount upon
maturity of the MITTS Securities.
The Tokyo Stock Exchange
The TSE is one of the world's largest securities exchanges in terms of
market capitalization. Trading hours are currently from 9:00 A.M. to 11:00 A.M.
and from 12:30 P.M. to 3:00 P.M., Tokyo time, Monday through Friday.
Due to the time zone difference, on any normal trading day, the TSE will
close prior to the opening of business in The City of New York on the same
calendar day. Therefore, the closing level of the Nikkei 225 Index on a trading
day will generally be available in the United States by the opening of business
on the same calendar day.
The TSE has adopted certain measures, including daily price floors and
ceilings on individual stocks, intended to prevent any extreme short-term price
fluctuations resulting from order imbalances. In general, any stock listed on
the TSE cannot be traded at a price lower than the applicable price floor or
higher than the applicable price ceiling. These price floors and ceilings are
expressed in absolute Japanese yen, rather than percentage limits based on the
closing price of the stock on the previous trading day. In addition, when there
is a major order imbalance in a listed stock, the TSE posts a "special bid
quote" or a "special asked quote" for that stock at a specified higher or lower
price level than the stock's last sale price in order to solicit counter-orders
and balance supply and demand for the stock. Prospective investors should also
be aware that the TSE may suspend the trading of individual stocks in certain
limited and extraordinary circumstances, including, for example, unusual
trading activity in that stock. As a result, changes in the Nikkei 225 Index
may be limited by price limitations or special quotes, or by suspension of
trading, on individual stocks which comprise the Nikkei 225 Index, and these
limitations may, in turn, adversely affect the value of the MITTS Securities.
S-24
Historical Data on the Nikkei 225 Index
The following table sets forth the level of the Nikkei 225 Index at the
end of each month from January 1992 through September 1999. These historical
data on the Nikkei 225 Index are not necessarily indicative of the future
performance of the Nikkei 225 Index or what the value of the MITTS Securities
may be. Any historical upward or downward trend in the level of the Nikkei 225
Index during any period set forth below is not an indication that the Nikkei
225 Index is more or less likely to increase or decrease at any time during the
term of the MITTS Securities.
1992 1993 1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------ ------ ------
January................. 22,023 17,024 20,229 18,650 20,813 18,330 16,628 14,499
February................ 21,339 16,953 19,997 17,053 20,125 18,557 16,832 14,368
March................... 19,346 18,591 19,112 16,140 21,407 18,003 16,527 15,837
April................... 17,391 20,919 19,725 16,807 22,041 19,151 15,641 16,702
May..................... 18,348 20,552 20,974 15,437 21,956 20,069 15,671 16,112
June.................... 15,952 19,590 20,644 14,517 22,531 20,605 15,830 17,530
July.................... 15,910 20,380 20,449 16,678 20,693 20,331 16,379 17,862
August.................. 18,061 21,027 20,629 18,117 20,167 18,229 14,108 17,437
September............... 17,399 20,106 19,564 17,913 21,556 17,888 13,406 17,605
October................. 16,767 19,703 19,990 17,655 20,467 16,459 13,565 --
November................ 17,684 16,407 19,076 18,744 21,020 16,636 14,884 --
December................ 16,925 17,417 19,723 19,868 19,361 15,259 13,842 --
On October 26, 1999 the closing value of the Nikkei 225 Index was
17,671.79.
The Euro STOXX 50
The Euro STOXX 50 was created by STOXX, a joint venture founded by SWX-
Swiss Exchange, SBF-Bourse de Paris, Deutsche Borse AG and Dow Jones.
Publication of the Euro STOXX 50 began on February 26, 1998, based on an
initial value of the Euro STOXX 50 of 1,000 at December 31, 1991.
The Euro STOXX 50 is currently calculated by (i) multiplying the per
share price of each underlying security by the number of outstanding shares
(and, if the stock is not quoted in euro, then multiplied by the country
currency and an exchange factor which reflects the exchange rate between the
country currency and the euro); (ii) calculating the sum of all these products
(this sum being hereinafter the "Index Aggregate Market Capitalization"); and
(iii) dividing the Index Aggregate Market Capitalization by a divisor which
represents the Index Aggregate Market Capitalization on the base date of the
Euro STOXX 50 and which can be adjusted to allow changes in the issued share
capital of individual underlying securities, including the deletion and
addition of stocks, the substitution of stocks, stock dividends and stock
splits, to be made without distorting the Euro STOXX 50. Because of this
capitalization weighting, movements in share prices of the underlying
securities of companies with relatively greater market capitalization will have
a greater effect on the value of the entire Euro STOXX 50 than will movements
in share prices of the underlying securities of companies with relatively
smaller market capitalization.
The composition of the Euro STOXX 50 is reviewed annually, and changes
are implemented on the third Friday in September, using market data from the
end of July as the basis for the review process. Changes in the composition of
the Euro STOXX 50 are made to ensure that the Euro STOXX 50 includes those
companies which, within the eligible countries and within each industry sector,
have the greatest market capitalization. Changes in the composition of the Euro
STOXX 50 are made entirely by STOXX without consultation with the corporations
represented in the Euro STOXX 50 or ML&Co.. The Euro STOXX 50 is also reviewed
on an ongoing basis, and change in the composition of the Euro STOXX 50 may be
necessary if
S-25
there have been extraordinary events for one of the issuers of the underlying
securities, e.g., delisting, bankruptcy, merger or takeover. In these cases,
the event is taken into account as soon as it is effective. The underlying
securities may be changed at any time for any reason. Neither STOXX nor any of
its founders is affiliated with ML&Co. and has participated in any way in the
creation of the MITTS Securities.
ML&Co. or its affiliates may presently or from time to time engage in
business with the publishers, owners, founders or creators of the Euro STOXX 50
or any of its successors or one or more of the issuers of the underlying
securities, including extending loans to, making equity investments in or
providing advisory services, including merger and acquisition advisory
services, to the publishers, their successors, founders or creators or to any
of the issuers. In the course of business with issuers, ML&Co. or its
affiliates may acquire non-public information with respect to the issuers.
ML&Co. may also act as market maker for the common stocks of the issuers.
ML&Co. does not make any representation to any purchaser of MITTS Securities
with respect to any matters whatsoever relating to any of the publishers, their
successors, founders or creators or to any of the issuers. Any prospective
purchaser of MITTS Securities should undertake an independent investigation of
the issuers of the underlying securities and with respect to the competency of
its publisher to formulate and calculate the Euro STOXX 50 as in its judgment
is appropriate to make an informed decision with respect to an investment in
the MITTS Securities. The composition of the Euro STOXX 50 does not reflect any
investment or sell recommendations of ML&Co. or its affiliates.
A representative of an affiliate of ML&Co. may from time to time be a
member of the STOXX Limited Advisory Committee. STOXX states in its Guide to
the Dow Jones STOXX Indexes that STOXX's Advisory Committee advises the
Supervisory Board on matters relating to the Euro STOXX 50. This advisory
committee proposes changes in the composition of the Euro STOXX 50 to the
Supervisory Board and makes recommendations with respect to the accuracy and
transparency of the index computation. Decisions on the composition and changes
in the Euro STOXX 50 are reserved to the Supervisory Board.
Historical Data on the Euro STOXX 50
Publication of the Euro STOXX 50 began on February 26, 1998. We have set
forth the month-end historical values of the Euro STOXX 50 from January 1992
through September 1999 in this prospectus supplement. All historical data
relating to periods before February 1998 were calculated as if the Euro STOXX
50 had existed during this period, based on an initial value of 1,000 on
December 31, 1991. All historical data relating to periods after January 1998
are based on actual data from the Euro STOXX 50. These historical data on the
Euro STOXX 50 are not necessarily indicative of the future performance of the
Euro STOXX 50 or what the value of the MITTS Securities may be. Any historical
upward or downward trend in the level of the Euro STOXX 50 during any period
set forth below is not an indication that the Euro STOXX 50 is more or less
likely to increase or decrease at any time during the term of the MITTS
Securities.
1992 1993 1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- -------- -------- --------
January................. 1,035.71 1,039.76 1,463.33 1,268.39 1,590.70 1,967.48 2,799.84 3,446.25
February................ 1,050.05 1,090.16 1,375.29 1,269.13 1,589.79 2,050.98 3,001.93 3,456.85
March................... 1,020.69 1,129.45 1,307.61 1,279.41 1,591.05 2,116.57 3,229.29 3,566.53
April................... 1,076.59 1,108.23 1,350.29 1,316.24 1,630.73 2,179.41 3,173.02 3,763.67
May..................... 1,102.19 1,122.36 1,285.87 1,350.12 1,626.68 2,255.19 3,322.08 3,607.75
June.................... 1,036.58 1,164.87 1,236.04 1,343.59 1,621.99 2,425.08 3,417.88 3,747.38
July.................... 990.44 1,225.39 1,294.36 1,393.56 1,573.84 2,664.28 3,486.95 3,623.91
August.................. 958.00 1,288.59 1,342.86 1,414.67 1,608.98 2,444.21 3,016.22 3,699.76
September............... 984.90 1,264.45 1,265.38 1,434.58 1,682.84 2,637.42 2,709.61 3,629.61
October................. 986.09 1,344.31 1,297.59 1,435.20 1,703.85 2,430.47 2,914.87 --
November................ 1,027.26 1,332.15 1,295.05 1,488.64 1,817.31 2,516.30 3,203.08 --
December................ 1,057.56 1,429.10 1,298.78 1,538.23 1,850.10 2,633.63 3,320.25 --
S-26
On October 26, 1999 the closing value of the Euro STOXX 50 was 3,771.46.
STOXX Ltd. and ML&Co. have entered into a non-exclusive license agreement
providing for the license to ML&Co., in exchange for a fee, of the right to use
the Euro STOXX 50, which is owned and published by STOXX, in connection with
certain securities, including the MITTS Securities.
The license agreement between STOXX and ML&Co. provides that the
following language must be set forth in this prospectus supplement:
"The MITTS Securities are not sponsored, endorsed, sold or promoted by
STOXX LIMITED ("STOXX") or Dow Jones & Company, Inc. ("Dow Jones"). Neither
STOXX nor Dow Jones makes any representation or warranty, express or implied,
to the owners of the MITTS Securities or any member of the public regarding the
advisability of investing in securities generally or in the MITTS Securities
particularly. The only relationship of STOXX to ML&Co. is as the licensor of
the Dow Jones STOXX, the Dow Jones Euro STOXX 50 and of certain trademarks,
trade names and service marks of STOXX, and as the sublicensor of the Dow Jones
STOXX, the Dow Jones Euro STOXX and of certain trademarks, trade names and
service marks of Dow Jones. The aforementioned indices are determined, composed
and calculated by STOXX or Dow Jones, as the case may be, without regard to
ML&Co. or the MITTS Securities. Neither STOXX nor Dow Jones is responsible for
or has participated in the determination of the timing of, prices at, or
quantities of the MITTS Securities to be issued or in the determination or
calculation of the equation by which the MITTS Securities are to be converted
into cash. Neither STOXX nor Dow Jones has any obligation or liability in
connection with the administration, marketing or trading of the MITTS
Securities.
NEITHER STOXX NOR DOW JONES GUARANTEES THE ACCURACY AND/OR THE
COMPLETENESS OF THE INDICES OR ANY DATA INCLUDED THEREIN AND NEITHER SHALL HAVE
ANY LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. NEITHER STOXX
NOR DOW JONES MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY ML&CO., OWNERS OF THE MITTS SECURITIES, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE INDICES OR ANY DATA INCLUDED THEREIN. NEITHER STOXX
NOR DOW JONES MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES, OR MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE INDEXES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL EITHER STOXX OR DOW JONES HAVE ANY
LIABILITY FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL
DAMAGES OR LOSSES, EVEN IF NOTIFIED OF THE POSSIBILITY THEREOF. THERE ARE NO
THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN STOXX AND
ML&CO."
The Dow Jones Euro STOXX 50 is owned by STOXX Ltd. and is a service mark
of Dow Jones & Company, Inc., and has been licensed for certain purposes by
ML&Co.(C) 1998 by STOXX Ltd. All rights reserved.
S-27
HISTORICAL MONTH-END CLOSING VALUES OF THE HYPOTHETICAL INDEX
In order to let you see how the Underlying Indices performed in the past,
we have prepared a hypothetical index that shows how the combination of the
Underlying Indices has performed in prior periods. Past movements of the
Underlying Indices are not necessarily indicative of the future closing values
of the Underlying Indices. To prepare this index we have done the following:
. We set the index to 100 as of January 1992 and we calculated a
multiplier for each Underlying Index so that at the conception of the
index the sum of the products of each multiplier and the relevant
Underlying Index equaled 100.
. The value of the index at any time equals the sum of the products of
each multiplier and the relevant Underlying Index. While the relative
values of each of the Underlying Indices changed over time, the
multiplier applicable to each Underlying Index remained constant.
[THE GRAPH APPEARING HERE SETS FORTH THE PERFORMANCE OF A HYPOTHETICAL INDEX
PREPARED TO SHOW HOW THE COMBINATION OF THE UNDERLYING INDICES HAS PERFORMED
FROM JANUARY 1992 THROUGH SEPTEMBER 1999. THE VERTICAL AXIS HAS A RANGE OF
NUMBERS FROM 0 TO 300 IN INCREMENTS OF 50. THE HORIZONTAL AXIS HAS A RANGE OF
DATES FROM JANUARY 1992 TO SEPTEMBER 1999 IN INCREMENTS OF ONE MONTH. THE TABLE
BELOW SETS FORTH THE POINTS PLOTTED ON THE GRAPH.
1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ----
January........ 100.00 95.01 116.89 107.33 134.53 155.09 195.13 237.14
February....... 99.74 96.83 112.57 106.33 133.78 158.54 207.56 233.87
March.......... 95.06 101.30 107.36 106.41 136.16 157.06 218.72 243.55
April.......... 94.80 103.17 110.05 109.75 139.14 164.38 216.39 255.19
May............ 97.05 103.88 110.37 110.24 140.10 172.04 219.52 246.59
June........... 90.76 103.89 107.20 109.63 140.98 181.34 226.35 258.99
July........... 90.49 106.77 109.91 115.90 134.12 194.24 228.35 251.95
August......... 91.90 111.12 113.23 118.75 135.43 179.49 196.39 253.02
Setember....... 92.09 108.51 108.05 120.88 142.77 189.10 190.37 248.01
October........ 91.25 111.21 110.49 120.33 143.26 177.67 203.89 --
November....... 94.94 105.34 107.54 125.59 151.97 183.96 220.45 --
December....... 95.16 110.32 109.06 129.76 150.03 186.90 227.93 --]
This graph is for historical information only and should not be used or
interpreted as a forecast or indication of future values of the Underlying
Indices or returns applicable to the MITTS Securities.
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
S-28
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 for
United States Federal income tax purposes created or organized in or under the
laws of the United States, any state thereof or the District of Columbia (other
than a partnership that is not treated as a United States person under any
applicable Treasury regulations), (c) an estate the income of which is subject
to United States Federal income taxation regardless of its source, (d) a trust
if a court within the United States is able to exercise primary supervision
over the administration of the trust and one or more United States persons have
the authority to control all substantial decisions of the trust, or (e) any
other person whose income or gain in respect of a MITTS Security is effectively
connected with the conduct of a United States trade or business.
Notwithstanding clause (d) of the preceding sentence, to the extent provided in
Treasury regulations, certain trusts in existence on August 20, 1996, and
treated as United States persons prior to that date that elect to continue to
be treated as United States persons also will be a U.S. Holder. As used 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 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.
S-29
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 $ per unit (the "Projected Supplemental Redemption Amount"). This
represents an estimated yield on the MITTS Securities equal to % per annum,
compounded semiannually. Accordingly, during the term of the MITTS Securities,
a U.S. Holder of a MITTS Security will be required to include in income the sum
of the daily portions of interest on the MITTS Security that are deemed to
accrue at this estimated yield for each day during the taxable year (or portion
of the taxable year) on which the U.S. Holder holds the MITTS Security. The
amount of interest that will be deemed to accrue in any accrual period (i.e.,
generally each six-month period during which the MITTS Securities are
outstanding) will equal the product of this estimated yield (properly adjusted
for the length of the accrual period) and the MITTS Security's adjusted issue
price (as defined below) at the beginning of the accrual period. The daily
portions of interest will be determined by allocating to each day in the
accrual period the ratable portion of the interest that is deemed to accrue
during the accrual period. In general, for these purposes a MITTS Security's
adjusted issue price will equal the MITTS Security's issue price (i.e., $10),
increased by the interest previously accrued on the MITTS Security. At maturity
of a MITTS Security, in the event that the actual Supplemental Redemption
Amount, if any, exceeds $ per unit (i.e., the Projected Supplemental
Redemption Amount), a U.S. Holder will be required to include the excess of the
actual Supplemental Redemption Amount over $ per unit (i.e., the Projected
Supplemental Redemption Amount) in income as ordinary interest on the maturity
date. Alternatively, in the event that the actual Supplemental Redemption
Amount, if any, is less than $ per unit (i.e., the Projected Supplemental
Redemption Amount), the excess of $ per unit (i.e., the Projected
Supplemental Redemption Amount) over the actual Supplemental Redemption Amount
will be treated first as an offset to any interest otherwise includible in
income by the U.S. Holder with respect to the 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., $ per unit) in excess of the actual
Supplemental Redemption Amount that is not treated as an interest offset
pursuant to the foregoing rules.
Upon the sale or exchange of a MITTS Security prior to the 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
S-30
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.
Prospective investors in the MITTS Securities should be aware that if a
significant percentage of the total aggregate amount of the MITTS Securities
originally issued are sold at a discount from the principal amount thereof,
which is not expected to be the case, then the issue price of the MITTS
Securities, as determined for United States Federal income tax purposes, may be
less than the principal amount of the MITTS Securities. In that event, if a
U.S. Holder purchases a MITTS Security in connection with the original issuance
thereof for an amount equal to the principal amount thereof, the amount of the
difference between the principal amount of the MITTS Securities and the issue
price thereof generally should be allocated by the U.S. Holder to daily
portions of interest that are deemed to accrue on each relevant date as an
offset to that interest on each relevant date. In addition, on each relevant
date, the U.S. Holder's adjusted tax basis in the MITTS Security will be
reduced by the amount treated as an interest offset pursuant to the foregoing
rule. Alternatively, in the event that the issue price of the MITTS Securities,
as determined for United States Federal income tax purposes, equals the
principal amount thereof and a U.S. Holder purchases a MITTS Security in
connection with the original issuance thereof for an amount that is less than
the principal amount thereof, the amount of the difference between the
principal amount of the MITTS Security and the amount paid by the U.S. Holder
to purchase the MITTS Security generally would be allocated by the U.S. Holder
to daily portions of interest that are deemed to accrue on each relevant date
as additional ordinary interest includible in income by the U.S. Holder on each
relevant date. In that event, on each relevant date, the U.S. Holder's adjusted
tax basis in the MITTS Security will be increased by the amount treated as
additional ordinary interest income. In addition, U.S. Holders purchasing a
MITTS Security at a price that differs from the adjusted issue price of the
MITTS Security as of the purchase date (e.g., subsequent purchases) will be
subject to rules providing for certain adjustments to the foregoing rules and
these U.S. Holders should consult their own tax advisors concerning these
rules.
All prospective investors in the MITTS Securities should consult their
own tax advisors concerning the application of the Final Regulations to their
investment in the MITTS Securities. Investors in the MITTS Securities may also
obtain the projected payment schedule, as determined by ML&Co. for purposes of
the application of the Final Regulations to the MITTS Securities, by submitting
a written request for such information to Merrill Lynch & Co., Inc., Attn:
Darryl W. Colletti, Corporate Secretary's Office, 100 Church Street, 12th
Floor, New York, New York 10080-6512.
The projected payment schedule (including both the Projected Supplemental
Redemption Amount and the estimated yield on the MITTS Securities) has been
determined solely for United States Federal income tax purposes (i.e., for
purposes of applying the Final Regulations to the MITTS Securities), and is
neither a prediction nor a guarantee of what the actual Supplemental Redemption
Amount will be, or that the actual Supplemental Redemption Amount will even
exceed zero.
Hypothetical table
The following table sets forth the amount of interest that will be deemed
to have accrued with respect to each unit of the MITTS Securities during each
accrual period over an assumed term of approximately five years for the MITTS
Securities based upon a hypothetical projected payment schedule for the MITTS
Securities (including both a hypothetical Projected Supplemental Redemption
Amount and a hypothetical estimated yield equal to 6.98% per annum (compounded
semiannually)) as determined by ML&Co. for purposes of illustrating the
application of the Final Regulations to the MITTS Securities as if the MITTS
Securities had been issued on October 27, 1999. The following table is for
illustrative purposes only. The actual projected payment schedule for the MITTS
Securities (including both the actual Projected Supplemental
S-31
Redemption Amount and the actual estimated yield) will be determined by ML&Co.
on the date the MITTS Securities are priced for initial sale to the public and
will depend upon actual market interest rates (and thus ML&Co.'s borrowing
costs for debt instruments with comparable maturities) as of that date. The
actual projected payment schedule for the MITTS Securities (including both the
actual Projected Supplemental Redemption Amount and the actual estimated yield)
and the actual tax accrual table will be set forth in the final prospectus
supplement delivered to investors in connection with sales of the MITTS
Securities.
Total interest
deemed to have
Interest deemed accrued on the
to accrue MITTS Securities
during as of the end of
accrual period accrual period
Accrual Period (per unit) (per unit)
-------------- --------------- ----------------
October 27, 1999 through April 27, 2000....... $0.3502 $0.3502
April 28, 2000 through October 27, 2000....... $0.3614 $0.7116
October 28, 2000 through April 27, 2001....... $0.3741 $1.0857
April 28, 2001 through October 27, 2001....... $0.3871 $1.4728
October 28, 2001 through April 27, 2002....... $0.4006 $1.8734
April 28, 2002 through October 27, 2002....... $0.4146 $2.2880
October 28, 2002 through April 27, 2003....... $0.4291 $2.7171
April 28, 2003 through October 27, 2003....... $0.4441 $3.1612
October 28, 2003 through April 27, 2004....... $0.4596 $3.6208
April 28, 2004 through October 27, 2004....... $0.4756 $4.0964
- --------
Hypothetical Projected Supplemental Redemption Amount = $4.0964 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.
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.
S-32
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.
USE OF PROCEEDS AND HEDGING
The net proceeds from the sale of the MITTS Securities will be used as
described under "Use of Proceeds" in the accompanying prospectus and to hedge
market risks of ML&Co. associated with its obligation to pay the principal
amount and the Supplemental Redemption Amount.
S-33
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC. Our
SEC filings are also available over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York, and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for more information
on the public reference rooms and their copy charges. You may also inspect our
SEC reports and other information at the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005.
We have filed a registration statement on Form S-3 with the SEC covering
the MITTS Securities and other securities. For further information on ML&Co.
and the MITTS Securities, you should refer to our registration statement and
its exhibits. The prospectus accompanying this prospectus supplement summarizes
material provisions of contracts and other documents that we refer you to.
Because the prospectus may not contain all the information that you may find
important, you should review the full text of these documents. We have included
copies of these documents as exhibits to our registration statement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not, and the underwriter has not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus
supplement and the accompanying prospectus is accurate as of the date on the
front cover of this prospectus supplement only. Our business, financial
condition and results of operations may have changed since that date.
UNDERWRITING
MLPF&S, the underwriter of the offering, has agreed, subject to the terms
and conditions of the underwriting agreement and a terms agreement, to purchase
from ML&Co. $ aggregate principal amount of MITTS Securities. The
underwriting agreement provides that the obligations of the underwriter are
subject to certain conditions and that the underwriter will be obligated to
purchase all of the MITTS Securities if any are purchased.
The underwriter has advised ML&Co. that it proposes initially to offer
all or part of the MITTS Securities directly to the public at the offering
prices set forth on the cover page of this prospectus supplement. After the
initial public offering, the public offering price may be changed. The
underwriter is offering the MITTS Securities subject to receipt and acceptance
and subject to the underwriter's right to reject any order in whole or in part.
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
S-34
could cause the price of the security to be higher than it might be in the
absence of these purchases. Neither ML&Co. nor the underwriter makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the MITTS
Securities. In addition, neither ML&Co. nor the underwriter makes any
representation that the underwriter will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
The underwriter may use this prospectus supplement and the accompanying
prospectus for offers and sales related to market-making transactions in the
MITTS Securities. The underwriter may act as principal or agent in these
transactions, and the sales will be made at prices related to prevailing market
prices at the time of sale.
VALIDITY OF THE MITTS SECURITIES
The validity of the MITTS Securities will be passed upon for ML&Co. and
for the underwriter by Brown & Wood LLP, New York, New York.
S-35
INDEX OF DEFINED TERMS
Page
-----
Adjusted Ending Value..................................................... S-5
Adjustment Factor......................................................... S-5
Base Value................................................................ S-21
Business Day.............................................................. S-17
Calculation Day........................................................... S-14
Calculation Period........................................................ S-14
Code...................................................................... S-33
Depositary................................................................ S-17
DTC....................................................................... S-4
Dow Jones................................................................. S-27
ERISA..................................................................... S-33
Euro STOXX 50............................................................. S-4
Final Regulations......................................................... S-30
Index Aggregate Market Capitalization..................................... S-25
Index Business Day........................................................ S-14
Index Exchange............................................................ S-16
Index Redemption Amount................................................... S-4
Market Disruption Event................................................... S-16
Market Value.............................................................. S-20
MITTS Securities.......................................................... S-1
ML&Co..................................................................... S-4
MLPF&S.................................................................... S-4
New Regulations........................................................... S-33
Nikkei 225 Index.......................................................... S-4
NKS....................................................................... S-7
Non-U.S. Holder........................................................... S-29
Pricing Date.............................................................. S-4
Principal Amount.......................................................... S-4
Projected Supplemental Redemption Amount.................................. S-30
S&P....................................................................... S-22
S&P 500 Index............................................................. S-4
Starting Value............................................................ S-4
STOXX..................................................................... S-27
Successor Index........................................................... S-16
Supplemental Redemption Amount............................................ S-4
TSE....................................................................... S-7
U.S. Holder............................................................... S-29
Underlying Indices........................................................ S-4
Underlying Stocks......................................................... S-7
Weight Factor............................................................. S-23
Withholding Agent......................................................... S-32
S-36
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[Merrill Lynch LOGO]
2,500,000 Units
Merrill Lynch & Co., Inc.
Global Market Index Target-Term Securities(R)
due November , 2004
"MITTS(R) Securities"
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
Merrill Lynch & Co.
November , 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------