Filed Pursuant to Rule 424(b)(5)
Registration No. 333-52822
Subject to Completion
Preliminary Prospectus Supplement dated December 6, 2001
PROSPECTUS SUPPLEMENT [LOGO]
- --------------------- PROTECTED GROWTH/SM/ INVESTING
(To prospectus dated January 24, 2001) Pursuit of Growth, Protection
of Principal
2,500,000 Units
Merrill Lynch & Co., Inc.
Market Index Target-Term Securities(R)
based upon the Dow Jones Industrial Average/SM/
due December , 2008
"MITTS(R) Securities"
$10 principal amount per unit
----------------
The MITTS Securities: Payment at maturity:
. 100% principal protection at maturity. . On the maturity date, for each unit of MITTS Securities you
own, we will pay you an amount equal to the sum of the
. No payments before the maturity date. principal amount of each unit and an additional amount
based on the percentage increase, if any, in the value of the
. Senior unsecured debt securities of Merrill Lynch & Dow Jones Industrial Average, reduced by an annual
Co., Inc. adjustment factor which is expected to be between 2.1% and
2.6%, as described in this prospectus supplement.
. Linked to the value of the Dow Jones Industrial Average.
. At maturity, you will receive no less than the principal
. We have applied to have the MITTS Securities quoted on amount of your MITTS Securities.
The Nasdaq National Market under the symbol "MTDB".
. Expected initial settlement date: December , 2001.
Investing in the MITTS Securities involves risk.
See "Risk Factors" beginning on page S-8 of this prospectus supplement.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
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 fee 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 December , 2001.
"MITTS" and "Market Index Target-Term Securities" are registered service marks
of Merrill Lynch & Co., Inc.
"Dow Jones", "Dow Jones Industrial Average/SM/" and "DJIA/SM/" are service
marks of Dow Jones & Company, Inc. and have been licensed for use for certain
purposes by Merrill Lynch, Pierce, Fenner & Smith Incorporated. The MITTS
Securities are not sponsored, endorsed, sold or promoted by Dow Jones.
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
Who publishes the Index and what does the Index measure?............................................. S-6
How has the Index performed historically?............................................................ S-6
What about taxes?.................................................................................... S-6
Will I receive interest payments on the MITTS Securities?............................................ S-7
Will the MITTS Securities be listed on a stock exchange?............................................. S-7
What is the role of MLPF&S?.......................................................................... S-7
Who is ML&Co.?....................................................................................... S-7
Are there any risks associated with my investment?................................................... S-7
RISK FACTORS............................................................................................. S-8
You may not earn a return on your investment......................................................... S-8
Your yield may be lower than the yield on other debt securities of comparable maturity............... S-8
Your return will not reflect the return of owning the stocks included in the Index................... S-8
There may be an uncertain trading market for the MITTS Securities.................................... S-8
Many factors affect the trading value of the MITTS Securities; these factors interrelate in complex
ways and the effect of any one factor may offset or magnify the effect of another factor........... S-8
Amounts payable on the MITTS Securities may be limited by state law.................................. S-10
Purchases and sales by us and our affiliates may affect your return.................................. S-10
Potential conflicts.................................................................................. S-10
Uncertain tax consequences........................................................................... S-10
DESCRIPTION OF THE MITTS SECURITIES...................................................................... S-11
Payment at maturity.................................................................................. S-11
Hypothetical returns................................................................................. S-12
Adjustments to the Index; Market Disruption Events................................................... S-14
Discontinuance of the Index.......................................................................... S-14
Events of Default and Acceleration................................................................... S-15
Depositary........................................................................................... S-15
Same-Day Settlement and Payment...................................................................... S-18
THE INDEX................................................................................................ S-18
Historical Data on the Index......................................................................... S-20
License Agreement.................................................................................... S-21
UNITED STATES FEDERAL INCOME TAXATION.................................................................... S-22
General.............................................................................................. S-22
U.S. Holders......................................................................................... S-23
Hypothetical Table................................................................................... S-25
Non-U.S. Holders..................................................................................... S-25
Backup withholding................................................................................... S-26
ERISA CONSIDERATIONS..................................................................................... S-26
USE OF PROCEEDS AND HEDGING.............................................................................. S-27
WHERE YOU CAN FIND MORE INFORMATION...................................................................... S-27
UNDERWRITING............................................................................................. S-28
VALIDITY OF THE MITTS SECURITIES......................................................................... S-28
EXPERTS.................................................................................................. S-29
INDEX OF DEFINED TERMS................................................................................... S-30
S-2
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...................................... 34
PLAN OF DISTRIBUTION...................................................... 36
WHERE YOU CAN FIND MORE INFORMATION....................................... 37
INCORPORATION OF INFORMATION WE FILE WITH THE SEC......................... 37
EXPERTS................................................................... 38
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 Market Index Target-Term Securities(R) based upon the
Dow Jones Industrial Average/SM/ due December , 2008. You should carefully
read this prospectus supplement and the accompanying prospectus to fully
understand the terms of the MITTS Securities, the Dow Jones Industrial Average
(the "Index") and the tax and other considerations that are important to you in
making a decision about whether to invest in the MITTS Securities. You should
carefully review the "Risk Factors" section, which highlights certain risks
associated with an investment in the MITTS Securities, to determine whether an
investment in the MITTS Securities is appropriate for you.
References in this prospectus supplement to "ML&Co.", "we", "us" and
"our" are to Merrill Lynch & Co., Inc., and references to "MLPF&S" are to
Merrill Lynch, Pierce, Fenner & Smith Incorporated.
What are the MITTS Securities?
The MITTS Securities will be a series of senior debt securities issued by
ML&Co. and will not be secured by collateral. The MITTS Securities will rank
equally with all of our other unsecured and unsubordinated debt. The MITTS
Securities will mature on December , 2008. We cannot redeem the MITTS
Securities at an earlier date. We will not make any payments on the MITTS
Securities until maturity. We have designed the MITTS Securities for investors
who want to protect their investment by receiving at least the principal amount
of their investment at maturity and who also want to participate in possible
increases in the value of the Index as reduced by the Adjustment Factor.
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?
On the stated maturity date, you will receive a cash payment on the MITTS
Securities equal to the sum of two amounts: the "principal amount" and the
"Supplemental Redemption Amount", if any.
Principal Amount
The "principal amount" per unit is $10.
Supplemental Redemption Amount
The "Supplemental Redemption Amount" per unit will equal:
( Adjusted Ending Value - Starting Value )
$10 X ( -------------------------------------- )
( Starting Value )
but will not be less than zero.
The "Starting Value" means the closing value of the Index on the date the
MITTS Securities are priced for initial sale to the public (the "Pricing
Date"). We will disclose the Starting Value in the final prospectus supplement
delivered to you in connection with sales of the MITTS Securities.
The "Adjusted Ending Value" means the average, arithmetic mean, of the
values of the Index at the close of the market on five business days shortly
before the maturity of the MITTS Securities as reduced each day by the
application of the Adjustment Factor. We may calculate the Adjusted Ending
Value by reference to fewer than five or even a single day's closing value if,
during the period shortly before the stated maturity date of the MITTS
Securities, there is a disruption in the trading of a sufficient number of
stocks included in the Index or certain futures or options contracts relating
to the Index.
S-4
The "Adjustment Factor" will be a fixed percentage expected to be between
2.1% and 2.6% per year and will be pro-rated based on a 365-day year and
applied over the entire term of the MITTS Securities on each calendar day to
reduce the closing values of the Index used to calculate the Supplemental
Redemption Amount during the Calculation Period. As a result of the cumulative
effect of this reduction, the values of the Index used to calculate the
Supplemental Redemption Amount during the Calculation Period will be
approximately 13.68% to 16.65% less than the actual closing value of the Index
on each day during the Calculation Period. We will determine the Adjustment
Factor on the Pricing Date and it will appear in the final prospectus
supplement delivered to you in connection with sales of the MITTS Securities.
For a detailed discussion of how the Adjustment Factor will affect the value of
the Index used to calculate the Supplemental Redemption Amount, see
"Description of the MITTS Securities--Payment at Maturity" in this prospectus
supplement.
For more specific information about the Supplemental Redemption Amount,
please see the section "Description of the MITTS Securities" in this prospectus
supplement.
We will pay you a Supplemental Redemption Amount only if the Adjusted
Ending Value is greater than the Starting Value. If the Adjusted Ending Value
is less than, or equal to, the Starting Value, the Supplemental Redemption
Amount will be zero. We will pay you the principal amount of your MITTS
Securities regardless of whether any Supplemental Redemption Amount is payable.
Examples
Here are two examples of Supplemental Redemption Amount calculations
assuming an investment term of seven years and an Adjustment Factor of 2.35%
per year, the midpoint of the expected range of 2.1% to 2.6%:
Example 1--The Index, as adjusted, is below the hypothetical Starting Value
at maturity:
Hypothetical Starting Value: 10,114.29
Hypothetical average closing value of the Index for the calculation period:
10,620.00
Hypothetical Adjusted Ending Value: 9,007.93
( 9,007.93 - 10,114.29 ) (Supplemental
Supplemental Redemption Amount (per unit) = $10 X ( -------------------- ) = $0 Redemption
( 10,114.29 ) Amount cannot
be less than zero)
Total payment at maturity (per unit) = $10 + $0 = $10
Example 2--The Index, as adjusted, is above the hypothetical Starting Value
at maturity:
Hypothetical Starting Value: 10,114.29
Hypothetical average closing value of the Index for the calculation period:
18,205.72
Hypothetical Adjusted Ending Value: 15,442.17
( 15,442.17 - 10,114.29 )
Supplemental Redemption Amount (per unit) = $10 X ( --------------------- ) = $5.27
( 10,114.29 )
Total payment at maturity (per unit) = $10 + $5.27 = $15.27
S-5
Who publishes the Index and what does the Index measure?
The Dow Jones Industrial Average/SM/ is a price-weighted index published
by Dow Jones & Company, Inc. ("Dow Jones") which means a component stock's
weight in the Index is based on its price per share rather than the total
market capitalization of the issuer of that component stock. The Index is
designed to provide an indication of the composite price performance of 30
common stocks of corporations representing a broad cross-section of U.S.
industry. The component stocks of the Index are selected by the editors of The
Wall Street Journal ("WSJ"). The corporations represented in the Index tend to
be market leaders in their respective industries and their stocks are typically
widely held by individuals and institutional investors. The corporations
currently represented in the Index are incorporated in the U.S. and its
territories and their stocks are traded on the New York Stock Exchange and The
Nasdaq National Market. As of December 5, 2001, the market capitalization of
the stocks in the Index ranged from approximately $9.2 billion to $372.8
billion, with the average market capitalization being $114.5 billion.
The value of the Index is the sum of the primary exchange prices of each
of the 30 common stocks included in the Index, divided by a divisor that is
designed to provide a meaningful continuity in the value of the Index. Because
the Index is price-weighted, stock splits or changes in the component stocks
could result in distortions in the Index value. In order to prevent these
distortions related to extrinsic factors, the divisor may be changed in
accordance with a mathematical formula that reflects adjusted proportions
within the Index. The current divisor of the Index is published daily in the
WSJ and other publications. In addition, other statistics based on the Index
may be found in a variety of publicly available sources.
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
Index.
How has the Index performed historically?
We have provided tables showing the closing values of the Index on the
last business day of each month from January 1996 to November 2001 and each
year from 1946 to 2000, as published by Dow Jones. You can find these tables in
the section "The Index--Historical data on the Index" in this prospectus
supplement. We have provided this historical information to help you evaluate
the behavior of the Index in various economic environments; however, past
performance of the Index is not necessarily indicative of how the Index will
perform in the future.
What about taxes?
Each year, you will be required to pay taxes on ordinary income from the
MITTS Securities over their term based upon an estimated yield for the MITTS
Securities, even though you will not receive any payments from us until
maturity. We have determined this estimated yield, in accordance with
regulations issued by the U.S. Treasury Department, solely in order for you to
figure the amount of taxes that you will owe each year as a result of owning a
MITTS Security. This estimated yield is neither a prediction nor a guarantee of
what the actual Supplemental Redemption Amount will be, or that the actual
Supplemental Redemption Amount will even exceed zero. We have determined that
this estimated yield will equal % per annum, compounded semiannually.
Based upon this estimated yield, if you pay your taxes on a calendar year
basis and if you buy a MITTS Security for $10 and hold the MITTS Security until
maturity, you will be required to pay taxes on the following amounts of
ordinary income from the MITTS Security each year: $ in 2001, $ in
2002, $ in 2003, $ in 2004, $ in 2005, $ in 2006, $ in
2007 and $ in 2008. However, in 2008, 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
S-6
which you could deduct against other income you may have in 2008, 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 I receive interest payments on the MITTS Securities?
You will not receive any interest payments on the MITTS Securities, but
will instead receive the principal amount plus the Supplemental Redemption
Amount, if any, at maturity. We have designed the MITTS Securities for
investors who are willing to forego market interest payments on the MITTS
Securities, such as floating interest rates paid on standard senior
non-callable debt securities, in exchange for the ability to participate in
possible increases in the Index.
Will the MITTS Securities be listed on a stock exchange?
We have applied to have the MITTS Securities quoted on The Nasdaq
National Market under the symbol "MTDB". You should be aware that the quotation
of the MITTS Securities on The Nasdaq National Market will not necessarily
ensure that a liquid trading market will be available for the MITTS Securities.
You should review "Risk Factors--There may be an uncertain trading market for
the MITTS Securities" in this prospectus supplement.
What is the role of MLPF&S?
Our subsidiary, MLPF&S, is the underwriter for the offering and sale of
the MITTS Securities. After the initial offering, MLPF&S intends to buy and
sell the MITTS Securities to create a secondary market for holders of the MITTS
Securities, and may stabilize or maintain the market price of the MITTS
Securities during the initial distribution of the MITTS Securities. However,
MLPF&S will not be obligated to engage in any of these market activities or
continue them once it has started.
MLPF&S will also be our agent for purposes of calculating, among other
things, the Adjusted Ending Value and the Supplemental Redemption Amount. Under
certain circumstances, these duties could result in a conflict of interest
between MLPF&S' status as a subsidiary of ML&Co. and its responsibilities as
calculation agent.
Who is ML&Co.?
Merrill Lynch & Co., Inc. is a holding company with various subsidiary
and affiliated companies that provide investment, financing, insurance and
related services on a global basis. For information about ML&Co. see the
section "Merrill Lynch & Co., Inc." in the accompanying prospectus. You should
also read the other documents we have filed with the SEC, which you can find by
referring to the section "Where You Can Find More Information" in this
prospectus supplement.
Are there any risks associated with my investment?
Yes, an investment in the MITTS Securities is subject to risk. Please
refer to the section "Risk Factors" in this prospectus supplement.
S-7
RISK FACTORS
Your investment in the MITTS Securities will involve risks. You should
carefully consider the following discussion of risks before deciding whether an
investment in the MITTS Securities is suitable for you.
You may not earn a return on your investment
You should be aware that if the Adjusted Ending Value does not exceed the
Starting Value on the stated maturity date, the Supplemental Redemption Amount
will be zero. This will be true even if the value of the Index, as reduced by
the Adjustment Factor over the term of the MITTS Securities, was higher than
the Starting Value at some time during the life of the MITTS Securities but
later falls below the Starting Value. If the Supplemental Redemption Amount is
zero, we will pay you only the principal amount of your MITTS Securities.
Your yield may be lower than the yield on other debt securities 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 other senior non-callable debt securities 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
Index
The return on your MITTS Securities will not reflect the return you would
realize if you actually owned the stocks included in the Index and received the
dividends paid on those stocks because of the cumulative effect of the
reduction caused by the Adjustment Factor and because the value of the Index is
calculated by reference to the prices of the stocks included in the Index
without taking into consideration the value of dividends paid on those stocks.
There may be an uncertain trading market for the MITTS Securities
We have applied to have the MITTS Securities quoted on The Nasdaq
National Market under the symbol "MTDB". 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 Index.
If the trading market for the MITTS Securities is limited, there may be a
limited number of buyers for your MITTS Securities if you do not wish to hold
your investment until maturity. This may affect the price you receive.
Many factors affect the trading value of the MITTS Securities; these factors
interrelate in complex ways and the effect of any one factor may offset or
magnify the effect of another factor
The trading value of the MITTS Securities will be affected by factors
that interrelate in complex ways. It is important for you to understand that
the effect of one factor may offset the increase in the trading value of the
MITTS Securities caused by another factor and that the effect of one factor may
exacerbate the decrease in the trading value of the MITTS Securities caused by
another factor. For example, an increase in U.S. interest rates may offset some
or all of any increase in the trading value of the MITTS Securities
attributable to another factor, such as an increase in the value of the Index.
The following paragraphs describe the expected impact on the market value of
the MITTS Securities given a change in a specific factor, assuming all other
conditions remain constant.
S-8
The value of the Index is expected to affect the trading value of the
MITTS Securities. We expect that the market value of the MITTS Securities will
depend substantially on the amount by which the Index, as reduced by the
Adjustment Factor over the term of the MITTS Securities, is greater or less
than the Starting Value. If you choose to sell your MITTS Securities when the
value of the Index, as reduced by the Adjustment Factor over the term of the
MITTS Securities, exceeds the Starting Value, you may receive substantially
less than the amount that would be payable at maturity based on that value
because of the expectation that the Index will continue to fluctuate until the
Adjusted Ending Value is determined. If you choose to sell your MITTS
Securities when the value of the Index is below, or not sufficiently above, the
Starting Value, you may receive less than the $10 principal amount per unit of
MITTS Securities. In general, rising U.S. dividend rates or dividends per share
may increase the value of the Index while falling U.S. dividend rates may
decrease the value of the Index.
Changes in the levels of interest rates are expected to affect the
trading value of the MITTS Securities. Because we will pay, at a minimum, the
principal amount per unit of MITTS Securities at maturity, we expect that
changes in U.S. interest rates will affect the trading value of the MITTS
Securities. In general, if U.S. interest rates increase, we expect that the
trading value of the MITTS Securities will decrease and, conversely, if U.S.
interest rates decrease, we expect the trading value of the MITTS Securities
will increase. Rising U.S. interest rates may lower the value of the Index and,
thus, the MITTS Securities. Falling U.S. interest rates may increase the value
of the Index and, thus, may increase the value of the MITTS Securities.
Changes in the volatility of the Index are expected to affect the trading
value of the MITTS Securities. Volatility is the term used to describe the size
and frequency of price and/or market fluctuations. In general, if the
volatility of the Index increases, we expect that the trading value of the
MITTS Securities will increase and, conversely, if the volatility of the Index
decreases, we expect that the trading value of the MITTS Securities will
decrease.
As the time remaining to maturity of the MITTS Securities decreases, the
"time premium" associated with the MITTS Securities will decrease. We
anticipate that before their maturity, the MITTS Securities may trade at a
value above that which would be expected based on the level of U.S. interest
rates and the Index. This difference will reflect a "time premium" due to
expectations concerning the value of the Index during the period before the
stated maturity of the MITTS Securities. However, as the time remaining to the
stated maturity of the MITTS Securities decreases, we expect that this time
premium will decrease, lowering the trading value of the MITTS Securities.
Changes in dividend yields of the stocks included in the Index are
expected to affect the trading value of the MITTS Securities. In general, if
dividend yields on the stocks included in the Index increase, we expect that
the value of the MITTS Securities will decrease and, conversely, if dividend
yields on the stocks included in the Index decrease, we expect that the value
of the MITTS Securities will increase.
Changes in our credit ratings may affect the trading value of the MITTS
Securities. Our credit ratings are an assessment of our ability to pay our
obligations. Consequently, real or anticipated changes in our credit ratings
may affect the trading value of the MITTS Securities. However, because your
return on your MITTS Securities is dependent upon factors in addition to our
ability to pay our obligations under the MITTS Securities, such as the
percentage increase in the value of the Index at maturity, an improvement in
our credit ratings will not reduce the other investment risks related to the
MITTS Securities.
In general, assuming all relevant factors are held constant, we expect
that the effect on the trading value of the MITTS Securities of a given change
in most of the factors listed above will be less if it occurs later in the term
of the MITTS Securities than if it occurs earlier in the term of the MITTS
Securities. However, we expect that the effect on the trading value of the
MITTS Securities of a given increase in the value of the Index will be greater
if it occurs later in the term of the MITTS Securities than if it occurs
earlier in the term of the MITTS Securities.
S-9
Amounts payable on the MITTS Securities may be limited by state law
New York State law governs the 1983 Indenture under which the MITTS
Securities will be issued. New York has usury laws that limit the amount of
interest that can be charged and paid on loans, which includes debt securities
like the MITTS Securities. Under present New York law, the maximum rate of
interest is 25% per annum on a simple interest basis. This limit may not apply
to debt securities in which $2,500,000 or more has been invested.
While we believe that New York law would be given effect by a state or
Federal court sitting outside of New York, many other states also have laws
that regulate the amount of interest that may be charged to and paid by a
borrower. We will promise, for the benefit of the holders of the MITTS
Securities, to the extent permitted by law, not to voluntarily claim the
benefits of any laws concerning usurious rates of interest.
Purchases and sales by us and our affiliates may affect your return
We and our affiliates may from time to time buy or sell the stocks
included in the Index or futures or options contracts on the Index for our own
accounts for business reasons or in connection with hedging our obligations
under the MITTS Securities. These transactions could affect the price of these
stocks and, in turn, the value of the Index in a manner that would be adverse
to your investment in the MITTS Securities.
Potential conflicts
Our subsidiary MLPF&S is our agent for the purposes of calculating the
Adjusted Ending Value and the Supplemental Redemption Amount payable to you at
maturity. Under certain circumstances, MLPF&S' role as our subsidiary and its
responsibilities as calculation agent for the MITTS Securities could give rise
to conflicts of interests. These conflicts could occur, for instance, in
connection with its determination as to whether a value of the Index can be
calculated on a particular trading day, or in connection with judgments that it
would be required to make in the event of a discontinuance or unavailability of
the Index. See "Description of the MITTS Securities--Adjustments to the Index;
Market Disruption Events" and "--Discontinuance of the Index" in this
prospectus supplement. MLPF&S is required to carry out its duties as
calculation agent in good faith and using its reasonable judgment. However, you
should be aware that because we control MLPF&S, potential conflicts of interest
could arise.
We have entered into an arrangement with one of our subsidiaries to hedge
the market risks associated with our obligation to pay the amounts due at
maturity on the MITTS Securities. This subsidiary expects to make a profit in
connection with this arrangement. We did not seek competitive bids for this
arrangement from unaffiliated parties.
Uncertain tax consequences
You should also consider the tax consequences of investing in the MITTS
Securities, aspects of which are uncertain. See "United States Federal Income
Taxation" below.
S-10
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 December , 2008.
While at maturity a beneficial owner of a MITTS Security will receive the
sum of the principal amount of the MITTS Security plus the Supplemental
Redemption Amount, if any, there will be no other payment of interest, periodic
or otherwise. See "--Payment at maturity".
The MITTS Securities are not subject to redemption by ML&Co. or at the
option of any beneficial owner before maturity. If an Event of Default occurs
with respect to the MITTS Securities, holders of the MITTS Securities may
accelerate the maturity of the MITTS Securities, as described under "--Events
of Default and Acceleration" in this prospectus supplement and "Description of
Debt Securities--Events of Default" in the accompanying prospectus.
ML&Co. will issue the MITTS Securities in denominations of whole units
each with a principal amount of $10.00 per unit.
The MITTS Securities do not have the benefit of any sinking fund.
Payment at maturity
At maturity a holder of a MITTS Security will be entitled to receive the
principal amount of that MITTS Security plus a Supplemental Redemption Amount,
if any, all as described below. If the Adjusted Ending Value does not exceed
the Starting Value, you will be entitled to receive only the principal amount
of your MITTS Securities.
The "Supplemental Redemption Amount" for a MITTS Security will be
determined by the calculation agent and will equal:
( Adjusted Ending Value - Starting Value )
principal amount of each MITTS Security ($10 per unit) X ( -------------------------------------- )
( Starting Value )
provided, however, that in no event will the Supplemental Redemption Amount be
less than zero.
The "Starting Value" means the closing value of the Index on the Pricing
Date. We will disclose the Starting Value to you in the final prospectus
supplement delivered to you in connection with sales of the MITTS Securities.
The "Adjusted Ending Value" will be determined by the calculation agent
and will equal the average, arithmetic mean, of the closing values of the
Index, as reduced by the application of the Adjustment Factor on each
Calculation Day, determined on each of the first five Calculation Days during
the Calculation Period. If there are fewer than five Calculation Days during
the Calculation Period, then the Adjusted Ending Value will equal the average,
arithmetic mean, of the closing values of the Index on those Calculation Days,
as reduced by the application of the Adjustment Factor on each Calculation Day.
If there is only one Calculation Day during the Calculation Period, then the
Adjusted Ending Value will equal the closing value of the Index on that
Calculation Day, as reduced by the application of the Adjustment Factor on that
Calculation Day. If no Calculation Days occur during the Calculation Period,
then the Adjusted Ending Value will equal the closing value of the Index
determined on the last scheduled Index Business Day in the Calculation Period,
as reduced by the application of the Adjustment Factor on that day, regardless
of the occurrence of a Market Disruption Event on that Index Business Day.
S-11
The "Adjustment Factor" means a fixed percentage expected to be between
2.1% and 2.6% per year and will be applied over the entire term of the MITTS
Securities. For each calendar day during the term of the MITTS Securities, we
will apply this percentage on a pro-rated basis based on a 365-day year to
reduce the values of the Index used to calculate the Supplemental Redemption
Amount during the Calculation Period. As a result of the cumulative effect of
this reduction, the values of the Index used to calculate your Supplemental
Redemption Amount during the Calculation Period will be approximately 13.68% to
16.65% less than the actual value of the Index on each day during the
Calculation Period. We will determine the Adjustment Factor on the Pricing Date
and it will appear in the final prospectus supplement delivered to you in
connection with sales of the MITTS Securities.
The "Calculation Period" means the period from and including the seventh
scheduled Index Business Day before the maturity date to and including the
second scheduled Index Business Day before the maturity date.
A "Calculation Day" means any Index Business Day during the Calculation
Period on which a Market Disruption Event has not occurred.
An "Index Business Day" means any day on which the NYSE and the Nasdaq
Stock Market are open for trading and the Index or any successor index is
calculated and published.
All determinations made by the calculation agent shall be at the sole
discretion of the calculation agent and, absent a determination by the
calculation agent of a manifest error, shall be conclusive for all purposes and
binding on ML&Co. and the holders and beneficial owners of the MITTS Securities.
Hypothetical returns
The following table illustrates, for a range of hypothetical average
closing values of the Index during the Calculation Period:
. the percentage change from the hypothetical Starting Value to the
hypothetical average closing value,
. the Adjusted Ending Value used to calculate the Supplemental
Redemption Amount,
. the total amount payable at maturity for each unit of MITTS
Securities,
. the total rate of return to beneficial owners of MITTS Securities,
. the pretax annualized rate of return to beneficial owners of MITTS
Securities, and
. the pretax annualized rate of return of an investment in the stocks
included in the Index, which includes an assumed aggregate dividend
yield of 1.79% per annum, as more fully described below.
For the purposes of calculating this table, we have applied the
Adjustment Factor of 2.35% per annum, the midpoint of the expected range of
2.1% to 2.6%.
S-12
Percentage
change
from the
hypothetical
Hypothetical Starting Total amount Pretax Pretax
average Value to payable at Total rate annualized annualized
closing value hypothetical maturity per of return rate of rate of return
during the average Adjusted unit of the on the return on of stocks
calculation closing Ending MITTS MITTS the MITTS included in
period value Value (1) Securities Securities Securities (2) the Index (2)(3)
- --------------- ------------ -------------- ------------- ---------- -------------- ----------------
2,022.86 -80% 1,715.80 $10.00 0.00% 0.00% -19.73%
4,045.72 -60% 3,431.59 $10.00 0.00% 0.00% -10.86%
6,068.57 -40% 5,147.39 $10.00 0.00% 0.00% -5.39%
8,091.43 -20% 6,863.19 $10.00 0.00% 0.00% -1.39%
10,114.29(4) 0% 8,578.98 $10.00 0.00% 0.00% 1.79%
12,137.15 20% 10,294.78 $10.18 1.78% 0.25% 4.44%
14,160.01 40% 12,010.57 $11.87 18.75% 2.47% 6.71%
16,182.86 60% 13,726.37 $13.57 35.71% 4.41% 8.71%
18,205.72 80% 15,442.17 $15.27 52.68% 6.13% 10.49%
20,228.58 100% 17,157.96 $16.96 69.64% 7.69% 12.10%
22,251.44 120% 18,873.76 $18.66 86.60% 9.11% 13.58%
24,274.30 140% 20,589.56 $20.36 103.57% 10.41% 14.93%
26,297.15 160% 22,305.35 $22.05 120.53% 11.61% 16.19%
28,320.01 180% 24,021.15 $23.75 137.50% 12.74% 17.36%
30,342.87 200% 25,736.94 $25.45 154.46% 13.79% 18.46%
- --------
(1)The Adjusted Ending Values specified in this column are approximately 15.18%
less than the hypothetical average closing values of the Index as a result
of the application of the Adjustment Factor of 2.35% per annum over the term
of the MITTS Securities.
(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 Index from the Starting Value to the
relevant hypothetical average closing value;
(b)a constant dividend yield of 1.79% per annum, paid quarterly from the
date of initial delivery of the MITTS Securities, applied to the
value of the Index at the end of each quarter assuming this value
increases or decreases linearly from the hypothetical Starting Value
to the applicable hypothetical average closing value;
(c)no transaction fees or expenses; and
(d)an investment term of seven years.
(4)This is the hypothetical Starting Value of the Index. The actual Starting
Value will equal the closing value of the Index on the Pricing Date.
The above figures are for purposes of illustration only. The actual
Supplemental Redemption Amount, received by you and the resulting total and
pretax annualized rate of return will depend on the actual Starting Value and
the actual Adjusted Ending Value determined by the calculation agent as
described in this prospectus supplement.
S-13
Adjustments to the Index; Market Disruption Events
If at any time Dow Jones changes its method of calculating the Index, or
the value of the Index changes, in any material respect, or if the Index is in
any other way modified so that the Index does not, in the opinion of the
calculation agent, fairly represent the value of the Index had those changes or
modifications not been made, then, from and after that time, the calculation
agent shall, at the close of business in New York, New York, on each date that
the closing value of the Index is to be calculated, make those adjustments as,
in the good faith judgment of the calculation agent, may be necessary in order
to arrive at a calculation of a value of a stock index comparable to the Index
as if those changes or modifications had not been made, and calculate the
closing value with reference to the Index, as so adjusted. Accordingly, if the
method of calculating the Index is modified so that the value of the Index is a
fraction or a multiple of what it would have been if it had not been modified,
e.g., due to a split, then the calculation agent shall adjust the Index in
order to arrive at a value of the Index as if it had not been modified, e.g.,
as if a split had not occurred.
"Market Disruption Event" means either of the following events as
determined by the calculation agent:
(A)the suspension or material limitation on trading for more than two
hours of trading, or during the one-half hour period preceding the
close of trading, on the applicable exchange, in 20% or more of the
stocks which then comprise the Index; or
(B)the suspension or material limitation, in each case, for more than
two hours of trading, or during the one-half hour period preceding
the close of trading, on the applicable exchange, whether by reason
of movements in price otherwise exceeding levels permitted by the
relevant exchange or otherwise, in option contracts or futures
contracts related to the Index, or any successor index, which are
traded on any major U.S. exchange.
For the purpose of the above definition:
(1)a limitation on the hours in a trading day and/or number of days of
trading will not constitute a Market Disruption Event if it results
from an announced change in the regular business hours of the
relevant exchange and
(2)for the purpose of clause (A) above, any limitations on trading
during significant market fluctuations under NYSE Rule 80A, or any
applicable rule or regulation enacted or promulgated by the NYSE or
any other self regulatory organization or the SEC of similar scope as
determined by the calculation agent, will be considered "material".
As a result of the terrorist attacks in Manhattan and Washington, D.C.,
the financial markets were closed from September 11, 2001 through September 14,
2001 and values of the Index are not available for such dates. Such market
closures would have constituted Market Disruption Events.
Discontinuance of the Index
If Dow Jones discontinues publication of the Index and Dow Jones or
another entity publishes a successor or substitute index that the calculation
agent determines, in its sole discretion, to be comparable to the Index (a
"successor index"), then, upon the calculation agent's notification of its
determination to the trustee and ML&Co., the calculation agent will substitute
the successor index as calculated by Dow Jones or any other entity for the
Index and calculate the Adjusted Ending Value as described above under "Payment
at maturity". Upon any selection by the calculation agent of a successor index,
ML&Co. shall promptly give notice to the beneficial owners of the MITTS
Securities by publication in a United States newspaper with a national
circulation.
In the event that Dow Jones discontinues publication of the Index and:
. the calculation agent does not select a successor index, or
. the successor index is no longer published on any of the Calculation
Days,
S-14
the calculation agent will compute a substitute value for the Index in
accordance with the procedures last used to calculate the Index before any
discontinuance. If a successor index is selected or the calculation agent
calculates a value as a substitute for the Index as described below, the
successor index or value will be used as a substitute for the Index for all
purposes, including for purposes of determining whether a Market Disruption
Event exists.
If Dow Jones discontinues publication of the Index before the Calculation
Period and the calculation agent determines that no successor index is
available at that time, then on each Business Day until the earlier to occur of:
. the determination of the Adjusted Ending Value, and
. a determination by the calculation agent that a successor index is
available,
the calculation agent will determine the value that would be used in computing
the Supplemental Redemption Amount as described in the preceding paragraph as
if that day were a Calculation Day. The calculation agent will cause notice of
each value to be published not less often than once each month in the WSJ or
another newspaper of general circulation, and arrange for information with
respect to these values to be made available by telephone.
A "Business Day" is any day on which the NYSE and the Nasdaq Stock Market
are open for trading.
Notwithstanding these alternative arrangements, discontinuance of the
publication of the Index may adversely affect trading in the MITTS Securities.
Events of Default and Acceleration
In case an Event of Default with respect to any MITTS Securities has
occurred and is continuing, the amount payable to a beneficial owner of a MITTS
Security upon any acceleration permitted by the MITTS Securities, with respect
to each $10 principal amount of MITTS Securities, will be equal to the
principal amount and the Supplemental Redemption Amount, if any, calculated as
though the date of early repayment were the stated maturity date of the MITTS
Securities, provided, however, the Adjustment Factor will be applied to the
values used to calculate the Supplemental Redemption Amount as if the MITTS
Securities had not been accelerated and had remained outstanding to the stated
maturity date. See "--Payment at maturity" in this prospectus supplement. If a
bankruptcy proceeding is commenced in respect of ML&Co., the claim of the
holder of a MITTS Security may be limited, under Section 502(b)(2) of Title 11
of the United States Code, to the principal amount of the MITTS Security plus
an additional amount of contingent interest calculated as though the date of
the commencement of the proceeding were the maturity date of the MITTS
Securities.
In case of default in payment of the MITTS Securities, whether at the
stated maturity date or upon acceleration, from and after the maturity date the
MITTS Securities will bear interest, payable upon demand of their holders, at
the rate of % per annum to the extent that payment of any interest is
legally enforceable on the unpaid amount due and payable on that date in
accordance with the terms of the MITTS Securities to the date payment of that
amount has been made or duly provided for.
Depositary
Description of the Global Securities
Upon issuance, all MITTS Securities will be represented by one or more
fully registered global securities. Each global security will be deposited
with, or on behalf of, DTC (DTC, together with any successor, being a
"depositary"), as depositary, registered in the name of Cede & Co., DTC's
partnership nominee. Unless and until it is exchanged in whole or in part for
MITTS Securities in definitive form, no global security may
S-15
be transferred except as a whole by the depositary to a nominee of the
depositary or by a nominee of the depositary to the depositary or another
nominee of the depositary or by the depositary or any nominee to a successor of
the depositary or a nominee of that successor.
So long as DTC, or its nominee, is a registered owner of a global
security, DTC or its nominee, as the case may be, will be considered the sole
owner or holder of the MITTS Securities represented by the global security for
all purposes under the 1983 Indenture. Except as provided below, the beneficial
owners of the MITTS Securities represented by a global security will not be
entitled to have the MITTS Securities represented by a global security
registered in their names, will not receive or be entitled to receive physical
delivery of the MITTS Securities in definitive form and will not be considered
the owners or holders of the MITTS Securities including for purposes of
receiving any reports delivered by ML&Co. or the trustee under the 1983
Indenture. Accordingly, each person owning a beneficial interest in a global
security must rely on the procedures of DTC and, if that person is not a
participant of DTC, on the procedures of the participant through which that
person owns its interest, to exercise any rights of a holder under the 1983
Indenture. ML&Co. understands that under existing industry practices, in the
event that ML&Co. requests any action of holders or that an owner of a
beneficial interest in a global security desires to give or take any action
which a holder is entitled to give or take under the 1983 Indenture, DTC would
authorize the participants holding the relevant beneficial interests to give or
take that action, and those participants would authorize beneficial owners
owning through those participants to give or take that action or would
otherwise act upon the instructions of beneficial owners. Conveyance of notices
and other communications by DTC to participants, by participants to indirect
participants and by participants and indirect participants to beneficial owners
will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
DTC Procedures
The following is based on information furnished by DTC:
DTC will act as securities depositary for the MITTS Securities. The MITTS
Securities will be issued as fully registered securities registered in the name
of Cede & Co., DTC's partnership nominee. One or more fully registered global
securities will be issued for the MITTS Securities in the aggregate principal
amount of such issue, and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member, of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC holds securities that its participants
deposit with DTC. DTC also facilitates the settlement among participants of
securities transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in participants' accounts,
thereby eliminating the need for physical 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
S-16
interests in the MITTS Securities are to be made by entries on the books of
participants acting on behalf of beneficial owners.
To facilitate subsequent transfers, all MITTS Securities deposited with
DTC are registered in the name of DTC's partnership nominee, Cede & Co. The
deposit of MITTS Securities with DTC and their registration in the name of Cede
& Co. effect no change in beneficial ownership. DTC has no knowledge of the
actual beneficial owners of the MITTS Securities; DTC's records reflect only
the identity of the direct participants to whose accounts the MITTS Securities
are credited, which may or may not be the beneficial owners. The participants
will remain responsible for keeping account of their holdings on behalf of
their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the MITTS
Securities. Under its usual procedures, DTC mails an omnibus proxy to ML&Co. as
soon as possible after the applicable record date. The omnibus proxy assigns
Cede & Co.'s consenting or voting rights to those direct participants
identified in a listing attached to the omnibus proxy to whose accounts the
MITTS Securities are credited on the record date.
Principal, premium, if any, and/or interest, if any, payments made in
cash on the MITTS Securities will be made in immediately available funds to
DTC. DTC's practice is to credit direct participants' accounts on the
applicable payment date in accordance with their respective holdings shown on
the depositary's records unless DTC has reason to believe that it will not
receive payment on that date. Payments by participants to beneficial owners
will be governed by standing instructions and customary practices, as is the
case with securities held for the accounts of customers in bearer form or
registered in "street name", and will be the responsibility of that participant
and not of DTC, the trustee or ML&Co., subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of principal,
premium, if any, and/or interest, if any, to DTC is the responsibility of
ML&Co. or the trustee, disbursement of those payments to direct participants
will be the responsibility of DTC, and disbursement of those payment 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.
S-17
DTC may discontinue providing its services as securities depositary with
respect to the MITTS Securities at any time by giving reasonable notice to
ML&Co. or the trustee. Under these circumstances, in the event that a successor
securities depositary is not obtained, MITTS Security certificates are required
to be printed and delivered.
ML&Co. may decide to discontinue use of the system of book-entry
transfers through DTC or a successor securities depositary. In that event,
MITTS Security certificates will be printed and delivered.
The information in this section concerning DTC and DTC's system has been
obtained from sources that ML&Co. believes to be reliable, but ML&Co. takes no
responsibility for its accuracy.
Same-Day Settlement and Payment
Settlement for the MITTS Securities will be made by the underwriter in
immediately available funds. ML&Co. will make all payments of principal and the
Supplemental Redemption Amount, if any, in immediately available funds so long
as the MITTS Securities are maintained in book-entry form.
THE INDEX
Unless otherwise stated, all information herein on the Index is derived
from Dow Jones or other publicly available sources. This information reflects
the policies of Dow Jones as stated in the publicly available sources and the
policies are subject to change by Dow Jones. Dow Jones is under no obligation
to continue to publish the Index and may discontinue publication of the Index
at any time.
The Index is a price-weighted index, i.e., the weight of a component
stock in the Index is based on its price per share rather than the total market
capitalization of the issuer of the component stock, comprised of 30 common
stocks chosen by the editors of the WSJ as representative of the broad market
of U.S. industry. The corporations represented in the Index tend to be leaders
within their respective industries and their stocks are typically widely held
by individuals and institutional investors. Changes in the composition of the
Index are made entirely by the editors of the WSJ without consultation with the
corporations represented in the Index, any stock exchange, any official agency
or ML&Co. Changes to the common stocks included in the Index tend to be made
infrequently. Historically, most substitutions have been the result of mergers,
but from time to time, changes may be made to achieve what the editors of the
WSJ deem to be a more accurate representation of the broad market of U.S.
industry. In choosing a new corporation for the Index, the editors of the WSJ
look for leading industrial companies with a successful history of growth and
wide interest among investors. The component stocks of the Index may be changed
at any time for any reason. Dow Jones, publisher of the WSJ, is not affiliated
with ML&Co. and has not participated in any way in the creation of the
Securities.
The Index initially consisted of 12 common stocks and was first published
in the WSJ in 1896. The Index was increased to include 20 common stocks in 1916
and to 30 common stocks in 1928. The number of common stocks in the Index has
remained at 30 since 1928, and, in an effort to maintain continuity, the
constituent corporations represented in the Index have been changed on a
relatively infrequent basis.
The value of the Index is the sum of the primary exchange prices of each
of the 30 common stocks included in the Index, divided by a divisor that is
designed to provide a meaningful continuity in the value of the Index. Because
the Index is price-weighted, stock splits or changes in the component stocks
could result in distortions in the Index value. In order to prevent these
distortions related to extrinsic factors, the divisor is changed in accordance
with a mathematical formula that reflects adjusted proportions within the
Index. The current divisor of the Index is published daily in the WSJ and other
publications. In addition, other statistics based on the Index may be found in
a variety of publicly available sources.
S-18
ML&Co. or its affiliates may presently or from time to time engage in
business with one or more of the issuers of the component stocks of the Index,
including extending loans to, or making equity investments in, the issuers or
providing advisory services to the issuers, including merger and acquisition
advisory services. In the course of its business, ML&Co. or its affiliates may
acquire non-public information with respect to the issuers. ML&Co. does not
make any representation to any purchaser of the MITTS Securities with respect
to any matters whatsoever relating to the issuers. Any prospective purchaser of
the MITTS Securities should undertake an independent investigation of the
issuers of the component stocks of the Index as in its judgment is appropriate
to make an informed decision about an investment in the MITTS Securities. The
composition of the Index does not reflect any investment or sell
recommendations of ML&Co. or its affiliates.
The following table presents the listing symbol, industry group, price
per share, total number of shares outstanding and market capitalization for
each of the component stocks in the Index based on publicly available
information as of December 5, 2001.
Price Per Total Shares Market
Issuer of Component Stock(1) Symbol Industry Share Outstanding(2) Capitalization(2)
- ---------------------------- ------ ------------------------- --------- -------------- -----------------
ALCOA INC...................... AA Metals $39.95 849,303 $33,929,670
American Express Co............ AXP Financial Services $34.61 1,334,220 $46,177,360
AT&T Corp...................... T Util-Telecom $17.57 3,538,031 $62,163,200
Boeing Co., The................ BA Aerospace/Defense $35.89 797,972 $28,639,220
Caterpillar Inc................ CAT Machine Construction $50.55 343,257 $17,351,640
Citigroup Inc.................. C Financial/Banking $49.00 5,144,813 $252,095,860
Coca-Cola Co., The............. KO Beverages $47.12 2,486,773 $117,176,730
Disney (Walt) Co............... DIS Entertainment $21.65 2,093,298 $45,319,900
Du Pont (E.I.) De Nemours & Co. DD Chemicals $45.26 1,025,162 $46,398,850
Eastman Kodak Co............... EK Manufacturing $31.77 290,929 $9,242,820
Exxon Mobil Corporation........ XOM Oil/Gas $38.88 6,840,000 $265,939,220
General Electric Co............ GE Electronics $37.55 9,927,381 $372,773,160
General Motors Corp............ GM Auto & Truck $51.13 555,504 $28,402,930
Hewlett-Packard Co............. HWP Computers $23.32 1,940,027 $45,241,430
Home Depot Inc................. HD Retail-Building Products $49.90 2,343,337 $116,932,540
Honeywell International Inc.... HON Diversified Manufacturing $34.50 813,189 $28,055,010
Intel Corp..................... INTC Electronic Components $34.61 6,712,000 $232,302,330
International Business Machines
Corp.......................... IBM Computers $121.40 1,722,642 $209,128,730
International Paper Co......... IP Forest Products $41.35 481,960 $19,929,050
J.P. Morgan Chase & Co......... JPM Financial/Banking $39.02 1,972,993 $76,986,190
Johnson & Johnson.............. JNJ Pharmaceutics $56.60 3,048,073 $172,520,920
McDonald's Corp................ MCD Restaurant/Food Service $27.48 1,285,442 $35,323,950
Merck & Co..................... MRK Pharmaceutics $66.24 2,274,710 $150,676,780
Microsoft Corp................. MSFT Applications Software $68.10 5,385,753 $366,769,810
Minnesota Mining &
Manufacturing Co.............. MMM Manufacturing $118.86 392,085 $46,603,220
Morris (Philip) Cos............ MO Tobacco $46.13 2,166,694 $99,949,610
Procter & Gamble Co............ PG Household Products $76.70 1,295,622 $99,374,220
SBC Communications Inc......... SBC Telephone-Integrated $38.37 3,361,561 $128,983,080
United Technologies Corp....... UTX Aerospace/Defense $61.65 468,539 $28,885,430
Wal-Mart Stores Inc............ WMT Retail-Dept $56.57 4,457,088 $252,137,450
Total Market Capitalization: $3,435,410,310
Average Market Capitalization: $114,513,677
- --------
(1)The inclusion of a component stock in the portfolio should not be considered
a recommendation to buy or sell that stock, and neither ML&Co. nor any of
its affiliates make any representation to any purchaser of the MITTS
Securities as to the performance of the portfolio or any component stock.
Beneficial owners of the MITTS Securities will not have any right to the
component stocks or any dividends paid on the component stocks.
(2)Shares and Market Capitalization in thousands.
S-19
Historical Data on the Index
The following table sets forth the closing values of the Index on the
last business day of each year from 1946 through 2000. The historical
experience of the Index should not be taken as an indication of future
performance and no assurance can be given that the value of the Index will not
decline and thereby reduce the Supplemental Redemption Amount, if any, which
may be payable to beneficial owners of MITTS Securities at maturity or
otherwise.
Year-End Value of the Index
Closing Closing Closing Closing
Year Value Year Value Year Value Year Value
---- ------- ---- -------- ---- -------- ---- ---------
1946 177.20 1960 615.89 1974 616.24 1988 2,168.57
1947 181.16 1961 731.14 1975 852.41 1989 2,753.20
1948 177.30 1962 652.10 1976 1,004.65 1990 2,633.66
1949 200.13 1963 762.95 1977 831.17 1991 3,168.83
1950 235.41 1964 874.13 1978 805.01 1992 3,301.11
1951 269.23 1965 969.26 1979 838.74 1993 3,754.09
1952 291.90 1966 785.69 1980 963.99 1994 3,834.44
1953 280.90 1967 905.11 1981 875.00 1995 5,117.12
1954 404.39 1968 943.75 1982 1,046.54 1996 6,448.27
1955 488.40 1969 800.36 1983 1,258.64 1997 7,908.25
1956 499.47 1970 838.92 1984 1,211.57 1998 9,181.43
1957 435.69 1971 890.20 1985 1,546.67 1999 11,497.12
1958 583.65 1972 1,020.02 1986 1,895.95 2000 10,786.85
1959 679.36 1973 850.86 1987 1,938.83
Month-End Closing Values of the Index
The following table sets forth the closing level of the Index at the end
of each month, in the period from January 1996 through November 2001. This
historical data on the Index is not necessarily indicative of the future
performance of the Index or what the value of the MITTS Securities may be. Any
historical upward or downward trend in the closing level of the Index during
any period set forth below is not any indication that the Index is more or less
likely to decline at any time during the term of the MITTS Securities.
1996 1997 1998 1999 2000 2001
------- ------- ------- -------- -------- --------
January.................... 5,395.3 6,813.1 7,906.5 9,358.8 10,940.5 10,887.4
February................... 5,485.6 6,877.7 8,545.7 9,306.6 10,128.3 10,495.3
March...................... 5,587.1 6,583.5 8,799.8 9,786.2 10,921.9 9,878.8
April...................... 5,569.1 7,009.0 9,063.4 10,789.0 10,733.9 10,735.0
May........................ 5,643.2 7,331.0 8,900.0 10,559.7 10,522.3 10,911.9
June....................... 5,654.6 7,672.8 8,952.0 10,970.8 10,447.9 10,502.4
July....................... 5,528.9 8,222.6 8,883.3 10,655.2 10,522.0 10,522.8
August..................... 5,616.2 7,622.4 7,539.1 10,829.3 11,215.1 9,949.8
September.................. 5,882.2 7,945.3 7,842.6 10,337.0 10,650.9 8,847.6
October.................... 6,029.4 7,442.1 8,592.1 10,729.9 10,971.1 9,075.1
November................... 6,521.7 7,823.1 9,116.6 10,877.8 10,414.5 9,851.6
December................... 6,448.3 7,908.3 9,181.4 11,497.1 10,786.8
The closing value of the Index on December 5, 2001 was 10,114.29.
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The following graph plots the historical month-end performance of the
Index from January 1996 through November 2001. Past movements of the Index are
not necessarily indicative of future Index values.
[THE GRAPH APPEARING HERE SETS FORTH THE MONTH-END CLOSING VALUES OF THE DOW
JONES INDUSTRIAL AVERAGE FROM JANUARY 1996 THROUGH NOVEMBER 2001, AS SET FORTH
IN THE TABLE ON THE PREVIOUS PAGE. THE VERTICAL AXIS HAS A RANGE OF NUMBERS FROM
0 TO 12,000 IN INCREMENTS OF 1000. THE HORIZONTAL AXIS HAS A RANGE OF DATES FROM
JANUARY 1996 THROUGH NOVEMBER 2001 IN INCREMENTS OF ONE MONTH.]
License Agreement
"Dow Jones", "Dow Jones Industrial Average/SM/", and "DJIA/SM/" are
service marks of Dow Jones & Company, Inc. Dow Jones has no relationship to
MLPF&S or ML&Co., other than the licensing of the Dow Jones Industrial
Average/SM/ and its service marks for use in connection with the MITTS
Securities.
Dow Jones does not:
. Sponsor, endorse, sell or promote the MITTS Securities.
. Recommend that any person invest in the MITTS Securities or any
other securities.
. Have any responsibility or liability for or make any decisions
about the timing, amount or pricing of MITTS Securities.
. Have any responsibility or liability for the administration,
management or marketing of the MITTS Securities.
. Consider the needs of the MITTS Securities or the owners of the
MITTS Securities in determining, composing or calculating the Dow
Jones Industrial Average/SM/ or have any obligation to do so.
Dow Jones will not have any liability in connection with the MITTS
Securities. Specifically,
. Dow Jones does not make any warranty, express or implied, and
Dow Jones disclaims any warranty about:
. The results to be obtained by the MITTS Securities, the owner
of the MITTS Securities or any other person in connection
with the use of the Dow Jones Industrial Average/SM/ and the
data included in the Dow Jones Industrial Average/SM/;
. The accuracy or completeness of the Dow Jones Industrial
Average/SM/ and its data;
. The merchantability and the fitness for a particular purpose
or use of the Dow Jones Industrial Average/SM/ and its data;
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. Dow Jones will have no liability for any errors, omissions or
interruptions in the Dow Jones Industrial Average/SM/ or its data;
. Under no circumstances will Dow Jones be liable for any lost profits or
indirect, punitive, special or consequential damages or losses, even if
Dow Jones knows that they might occur.
The licensing agreement between MLPF&S and Dow Jones is solely for their
benefit and not for the benefit of the owners of the MITTS Securities or any
other third parties.
UNITED STATES FEDERAL INCOME TAXATION
Set forth in full below is the opinion of Sidley Austin Brown & Wood LLP,
tax counsel to ML&Co., as to certain United States Federal income tax
consequences of the purchase, ownership and disposition of the MITTS
Securities. This opinion is based upon laws, regulations, rulings and decisions
now in effect, all of which are subject to change (including retroactive
changes in effective dates) or possible differing interpretations. The
discussion below deals only with MITTS Securities held as capital assets and
does not purport to deal with persons in special tax situations, such as
financial institutions, insurance companies, regulated investment companies,
dealers in securities or currencies, traders in securities that elect to mark
to market, tax-exempt entities, persons holding MITTS Securities in a
tax-deferred or tax-advantaged account, or persons holding MITTS Securities as
a hedge against currency risks, as a position in a "straddle" or as part of a
"hedging" or "conversion" transaction for tax purposes. It also does not deal
with holders other than original purchasers (except where otherwise
specifically noted in this prospectus supplement). The following discussion
also assumes that the issue price of the MITTS Securities, as determined for
United States Federal income tax purposes, equals the principal amount thereof.
Persons considering the purchase of the MITTS Securities should consult their
own tax advisors concerning the application of the United States Federal income
tax laws to their particular situations as well as any consequences of the
purchase, ownership and disposition of the MITTS Securities arising under the
laws of any other taxing jurisdiction.
As used in this prospectus supplement, the term "U.S. Holder" means a
beneficial owner of a MITTS Security that is for United States Federal income
tax purposes (a) a citizen or resident of the United States, (b) a corporation,
partnership or other entity treated as a corporation or a partnership created
or organized in or under the laws of the United States, any state thereof or
the District of Columbia (other than a partnership that is not treated as a
United States person under any applicable Treasury regulations), (c) an estate
the income of which is subject to United States Federal income taxation
regardless of its source, (d) a trust if a court within the United States is
able to exercise primary supervision over the administration of the trust and
one or more United States persons have the authority to control all substantial
decisions of the trust, or (e) any other person whose income or gain in respect
of a MITTS Security is effectively connected with the conduct of a United
States trade or business. Notwithstanding clause (d) of the preceding sentence,
to the extent provided in Treasury regulations, certain trusts in existence on
August 20, 1996, and treated as United States persons prior to that date that
elect to continue to be treated as United States persons also will be U.S.
Holders. 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
(the "IRS") in accordance with this treatment, in the
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absence of any change or clarification in the law, by regulation or otherwise,
requiring a different characterization of the MITTS Securities. Prospective
investors in the MITTS Securities should be aware, however, that the IRS is not
bound by ML&Co.'s characterization of the MITTS Securities as indebtedness, and
the IRS could possibly take a different position as to the proper
characterization of the MITTS Securities for United States Federal income tax
purposes. The following discussion of the principal United States Federal
income tax consequences of the purchase, ownership and disposition of the MITTS
Securities is based upon the assumption that each MITTS Security will be
treated as a debt instrument of ML&Co. for United States Federal income tax
purposes. If the MITTS Securities are not in fact treated as debt instruments
of ML&Co. for United States Federal income tax purposes, then the United States
Federal income tax treatment of the purchase, ownership and disposition of the
MITTS Securities could differ from the treatment discussed below with the
result that the timing and character of income, gain or loss recognized in
respect of a MITTS Security could differ from the timing and character of
income, gain or loss recognized in respect of a MITTS Security had the MITTS
Securities in fact been treated as debt instruments of ML&Co. for United States
Federal income tax purposes.
U.S. Holders
On June 11, 1996, the Treasury Department issued final regulations (the
"Final Regulations") concerning the proper United States Federal income tax
treatment of contingent payment debt instruments such as the MITTS Securities,
which apply to debt instruments issued on or after August 13, 1996 and,
accordingly, will apply to the MITTS Securities. In general, the Final
Regulations cause the timing and character of income, gain or loss reported on
a contingent payment debt instrument to substantially differ from the timing
and character of income, gain or loss reported on a contingent payment debt
instrument under general principles of prior United States Federal income tax
law. Specifically, the Final Regulations generally require a U.S. Holder of
such an instrument to include future contingent and noncontingent interest
payments in income as that interest accrues based upon a projected payment
schedule. Moreover, in general, under the Final Regulations, any gain
recognized by a U.S. Holder on the sale, exchange, or retirement of a
contingent payment debt instrument is treated as ordinary income, and all or a
portion of any loss realized could be treated as ordinary loss as opposed to
capital loss (depending upon the circumstances). The Final Regulations provide
no definitive guidance as to whether or not an instrument is properly
characterized as a debt instrument for United States Federal income tax
purposes.
In particular, solely for purposes of applying the Final Regulations to
the MITTS Securities, ML&Co. has determined that the projected payment schedule
for the MITTS Securities will consist of payment on the maturity date of the
principal amount thereof and a projected Supplemental Redemption Amount equal
to $ per unit (the "Projected Supplemental Redemption Amount"). This
represents an estimated yield on the MITTS Securities equal to % per annum,
compounded semiannually. Accordingly, during the term of the MITTS Securities,
a U.S. Holder of a MITTS Security will be required to include in income as
ordinary interest an amount equal to the sum of the daily portions of interest
on the MITTS Security that are deemed to accrue at this estimated yield for
each day during the taxable year (or portion of the taxable year) on which the
U.S. Holder holds the MITTS Security. The amount of interest that will be
deemed to accrue in any accrual period (i.e., generally each six-month period
during which the MITTS Securities are outstanding) will equal the product of
this estimated yield (properly adjusted for the length of the accrual period)
and the MITTS Security's adjusted issue price (as defined below) at the
beginning of the accrual period. The daily portions of interest will be
determined by allocating to each day in the accrual period the ratable portion
of the interest that is deemed to accrue during the accrual period. In general,
for these purposes a MITTS Security's adjusted issue price will equal the MITTS
Security's issue price (i.e., $10), increased by the interest previously
accrued on the MITTS Security. At maturity of a MITTS Security, in the event
that the actual Supplemental Redemption Amount, if any, exceeds $ per unit
(i.e., the Projected Supplemental Redemption Amount), a U.S. Holder will be
required to include the excess of the actual Supplemental Redemption Amount
over $ per unit (i.e., the Projected Supplemental Redemption Amount) in
income as ordinary interest on the stated maturity date. Alternatively, in the
event that the actual Supplemental Redemption Amount, if any, is less than $
per unit
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(i.e., the Projected Supplemental Redemption Amount), the amount by which the
Projected Supplemental Redemption Amount (i.e., $ per unit) exceeds the
actual Supplemental Redemption Amount will be treated first as an offset to any
interest otherwise includible in income by the U.S. Holder with respect to the
MITTS Security for the taxable year in which the stated maturity date occurs to
the extent of the amount of that includible interest. Further, a U.S. Holder
will be permitted to recognize and deduct, as an ordinary loss that is not
subject to the limitations applicable to miscellaneous itemized deductions, any
remaining portion of the Projected Supplemental Redemption Amount (i.e., $
per unit) in excess of the actual Supplemental Redemption Amount that is not
treated as an interest offset pursuant to the foregoing rules. 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 the rules providing for certain
adjustments to the foregoing rules and these U.S. Holders should consult their
own tax advisors concerning these rules.
Upon the sale or exchange of a MITTS Security prior to the stated
maturity date, a U.S. Holder will be required to recognize taxable gain or loss
in an amount equal to the difference, if any, between the amount realized by
the U.S. Holder upon 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
taxable gain will be treated as ordinary income. Any taxable loss will be
treated as ordinary loss to the extent of the U.S. Holder's total interest
inclusions on the MITTS Security. Any remaining loss generally will be treated
as long-term or short-term capital loss (depending upon the U.S. Holder's
holding period for the MITTS Security). All amounts includible in income by a
U.S. Holder as ordinary interest pursuant to the Final Regulations will be
treated as original issue discount.
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
applying the Final Regulations to the MITTS Securities, by submitting a written
request for such information to Merrill Lynch & Co., Inc., Corporate
Secretary's Office, 222 Broadway, 17th Floor, New York, New York 10038, (212)
670-0432, corporatesecretary@exchange.ml.com.
The projected payment schedule (including both the Projected Supplemental
Redemption Amount and the estimated yield on the MITTS Securities) has been
determined solely for United States Federal income tax purposes (i.e., for
purposes of applying the Final Regulations to the MITTS Securities), and is
neither a prediction nor a guarantee of what the actual Supplemental Redemption
Amount will be, or that the actual Supplemental Redemption Amount will even
exceed zero.
S-24
Hypothetical Table
The following table sets forth the amount of interest that would be
deemed to have accrued with respect to each unit of the MITTS Securities during
each accrual period over an assumed term of approximately seven years for the
MITTS Securities based upon a hypothetical projected payment schedule for the
MITTS Securities (including both a hypothetical Projected Supplemental
Redemption Amount and a hypothetical estimated yield equal to 5.372% per annum
(compounded semianually)) 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 December 6, 2001 and were scheduled to
mature on December 6, 2008. The following table is for illustrative purposes
only. The actual projected payment schedule for the MITTS Securities (including
both the actual Projected Supplemental Redemption Amount and the actual
estimated yield) will be determined by ML&Co. on the date the MITTS Securities
are priced for initial sale to the public and will depend upon actual market
interest rates (and thus ML&Co.'s borrowing costs for debt instruments with
comparable maturities) as of that date. The actual projected payment schedule
for the MITTS Securities (including both the actual Projected Supplemental
Redemption Amount and the actual estimated yield) and the actual tax accrual
table will be set forth in the final prospectus supplement delivered to
investors in connection with the sales of the MITTS Securities:
Total interest deemed
Interest to have accrued on
deemed to MITTS Securities
accrue during as of end of
accrual period accrual period
Accrual Period (per unit) (per unit)
-------------- -------------- ---------------------
December 6, 2001 through June 6, 2002 0.2679 0.2679
June 7, 2002 through December 6, 2002 0.2757 0.5436
December 7, 2002 through June 6, 2003 0.2833 0.8269
June 7, 2003 through December 6, 2003 0.2908 1.1177
December 7, 2003 through June 6, 2004 0.2986 1.4163
June 7, 2004 through December 6, 2004 0.3066 1.7229
December 7, 2004 through June 6, 2005 0.3149 2.0378
June 7, 2005 through December 6, 2005 0.3233 2.3611
December 7, 2005 through June 6, 2006 0.3321 2.6932
June 7, 2006 through December 6, 2006 0.3409 3.0341
December 7, 2006 through June 6, 2007 0.3501 3.3842
June 7, 2007 through December 6, 2007 0.3595 3.7437
December 7, 2007 through June 6, 2008 0.3691 4.1128
June 7, 2008 through December 6, 2008 0.3791 4.4919
- --------
Hypothetical Projected Supplemental Redemption Amount = $4.4919 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 1042-S. For a non-U.S. Holder to
qualify for the exemption from taxation, any person, U.S. or foreign, that has
control, receipt, or custody of an amount subject to withholding, or who can
disburse or make payments of an amount subject to withholding (the "Withholding
Agent") must have received a statement that (a) is signed by the beneficial
owner of the MITTS Security under penalties of perjury, (b) certifies that such
owner is a non-U.S. Holder and (c) provides the name and address of the
beneficial owner. The statement may generally be made on IRS Form W-8BEN (or
other applicable form) or a substantially similar form, and the beneficial
owner must inform the Withholding Agent of any change in the information on the
statement within 30 days of that change by filing a new IRS Form W-8BEN (or
other applicable form). Generally, a Form W-8BEN provided without a U.S.
taxpayer identification number will remain in effect for a period starting on
the date the form is signed and ending on the last day of the third succeeding
calendar year, unless a change in circumstances makes any information on the
form incorrect. If a MITTS Security is held through a securities
S-25
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-8BEN (or other applicable form) 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.
Backup withholding
Backup withholding of United States Federal income tax 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 on 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-8BEN (or other applicable form) 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.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Internal Revenue Code (the "Code") prohibit
various transactions between certain parties and the assets of employee benefit
plans, unless an exemption is available; governmental plans may be subject to
similar prohibitions.
The U.S. Department of Labor has granted ML&Co. an administrative
exemption (Prohibited Transaction Exemption 2000-63, 65 F.R. 76306 (December 6,
2000)) from some of the prohibited transaction rules under ERISA and the
related excise tax provisions under Section 4975 of the Code. The exemption
applies with respect to (1) the purchase or sale by employee benefit plans
("Plans"), other than Plans sponsored by ML&Co. or its affiliates, of MITTS
Securities, and (2) the extension of credit by the Plans to ML&Co. and its
affiliates in connection with the holding of the MITTS Securities.
In order to qualify for the exemption, certain conditions, including but
not limited to the following, must be met:
. The decision to invest in the MITTS Securities is made by a Plan
fiduciary (or a participant in a Plan that provides for
participant-directed investments) which is independent of ML&Co.
. ML&Co. does not have any discretionary authority or control or
provide any investment advice with respect to the Plan assets involved in
the MITTS Securities transactions.
S-26
. The Plans pay no fees or commissions to us or our affiliates in
connection with the MITTS Securities transactions, other than certain
principal mark-ups.
. A Plan generally should not invest more than 15 percent of the
Plan's assets (at the time of the acquisition) in any of the MITTS
Securities.
. The terms of a Plan's investment in the MITTS Securities are at
least as favorable to the Plan as those available to an unrelated
non-Plan investor in a comparable arm's length transaction at the time of
such acquisition.
If either of the following events occur, the investment will cease to
qualify for the exemption.
. The MITTS Securities are no longer quoted on the National
Association of Securities Dealers Automated Quotations Systems and are
not listed on the NYSE or the AMEX.
. The MITTS Securities are no longer rated in one of the three
highest generic rating categories by at least one nationally-recognized
statistical rating service at the time of their acquisition.
For a complete description of conditions, please review the full text of
the exemption granted to ML&Co. You may obtain a copy of the exemption by
submitting a written request for such information to Merrill Lynch & Co., Inc.,
Corporate Secretary's Office, 222 Broadway, 17th Floor, New York, New York
10038, corporatesecretary@exchange.ml.com. Prospective Plan investors are
encouraged to consult with their legal advisors regarding the impact of ERISA
and the Code, the applicability of the exemption, and the potential
consequences in their specific circumstances of an investment in MITTS
Securities.
Each Plan investor by its purchase of any MITTS Security on behalf of any
Plan, represents on behalf of itself and the Plan, that the acquisition,
holding and any subsequent disposition of the MITTS Security will not result in
a violation of ERISA, the Code or any other applicable law or regulation.
USE OF PROCEEDS AND HEDGING
The net proceeds from the sale of the MITTS Securities will be used as
described under "Use of Proceeds" in the accompanying prospectus and to hedge
market risks of ML&Co. associated with its obligation to pay the principal
amount and the Supplemental Redemption Amount.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC. Our
SEC filings are also available over the Internet at the SEC's web site at
http://www.sec.gov. The address of the SEC's Internet site is provided solely
for the information of prospective investors and is not intended to be an
active link. You may also read and copy any document we file at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for more information on the
public reference rooms and their copy charges. You may also inspect our SEC
reports and other information at the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.
We have filed a registration statement on Form S-3 with the SEC covering
the 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.
S-27
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 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 prices 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.
Proceeds to be received by ML&Co. will be net of the underwriting discount and
expenses payable by ML&Co.
The underwriting of the MITTS Securities will conform to the requirements
set forth in the applicable sections of Rule 2720 of the Conduct Rules of the
NASD.
The underwriter is permitted to engage in certain transactions that
stabilize the price of the MITTS Securities. These transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
MITTS Securities.
If the underwriter creates a short position in the MITTS Securities in
connection with the offering, i.e., if it sells more units of the MITTS
Securities than are set forth on the cover page of this prospectus supplement,
the underwriter may reduce that short position by purchasing units of the MITTS
Securities in the open market. In general, purchases of a security for the
purpose of stabilization or to reduce a short position could cause the price of
the security to be higher than it might be in the absence of these purchases.
"Naked" short sales are sales in excess of the underwriter's overallotment
option. Because the underwriter has no overallotment option, it would be
required to closeout a short position in the MITTS Securities by purchasing
MITTS Securities in the open market. 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.
MLPF&S may use this prospectus supplement and the accompanying prospectus
for offers and sales related to market-making transactions in the MITTS
Securities. MLPF&S may act as principal or agent in these transactions, and the
sales will be made at prices related to prevailing market prices at the time of
sale.
VALIDITY OF THE MITTS SECURITIES
The validity of the MITTS Securities will be passed upon for ML&Co. and
for the underwriter by Sidley Austin Brown & Wood LLP, New York, New York.
S-28
EXPERTS
The consolidated financial statements and the related financial statement
schedule incorporated in this prospectus supplement by reference from the
Annual Report on Form 10-K of Merrill Lynch & Co., Inc. and subsidiaries for
the year ended December 29, 2000 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports, which are incorporated herein
by reference, and have been so incorporated in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
With respect to unaudited interim financial information for the periods
included in the Quarterly Reports on Form 10-Q which are incorporated herein by
reference, Deloitte & Touche LLP have applied limited procedures in accordance
with professional standards for a review of such information. However, as
stated in their report included in each of the Quarterly Reports on Form 10-Q
and incorporated by reference herein, they did not audit and they do not
express an opinion on such interim financial information. Accordingly, the
degree of reliance on their report on such information should be restricted in
light of the limited nature of the review procedures applied. Deloitte & Touche
LLP are not subject to the liability provisions of Section 11 of the Securities
Act of 1933, as amended, for their reports on unaudited interim financial
information because such report is not a "report" or a "part" of the
Registration Statement prepared or certified by an accountant within the
meaning of Sections 7 and 11 of the Securities Act of 1933, as amended.
S-29
INDEX OF DEFINED TERMS
Page
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Adjusted Ending Value..................................................... S-4
Adjustment Factor......................................................... S-5
Business Day.............................................................. S-15
Calculation Day........................................................... S-12
Calculation Period........................................................ S-12
Code...................................................................... S-26
depositary................................................................ S-15
Dow Jones................................................................. S-6
DTC....................................................................... S-4
ERISA..................................................................... S-26
Final Regulations......................................................... S-23
Index..................................................................... S-4
Index Business Day........................................................ S-12
IRS....................................................................... S-22
Market Disruption Event................................................... S-14
MITTS Securities.......................................................... S-1
ML&Co..................................................................... S-4
MLPF&S.................................................................... S-4
non-U.S. Holder........................................................... S-22
Plans..................................................................... S-26
Pricing Date.............................................................. S-4
principal amount.......................................................... S-4
Projected Supplemental Redemption Amount.................................. S-23
Starting Value............................................................ S-4
successor index........................................................... S-14
Supplemental Redemption Amount............................................ S-4
U.S. Holder............................................................... S-22
Withholding Agent......................................................... S-25
WSJ....................................................................... S-6
S-30
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[LOGO]
2,500,000 Units
Merrill Lynch & Co., Inc.
Market Index Target-Term Securities(R)
based upon the Dow Jones Industrial Average
due December , 2008
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PROSPECTUS SUPPLEMENT
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Merrill Lynch & Co.
December , 2001
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