Subject to Completion
Preliminary Prospectus Supplement dated October 1, 2001
PROSPECTUS SUPPLEMENT
--------------------
(To prospectus dated January 24, 2001)
[LOGO]
2,500,000 Units
Merrill Lynch & Co., Inc.
8% Callable Stock Return Income DEbt Securities /SM/
due October , 2003
"Callable STRIDES /SM/"
Payable at maturity with Cisco Systems, Inc. common stock
--------------
The Callable STRIDES: Payment at maturity:
. Principal amount per unit and . If we have not called the Callable
original issue price per unit of STRIDES prior to or on the stated
the Callable STRIDES will be equal maturity date, for each Callable
to the closing market price of one STRIDES you own at maturity, in
share of Cisco Systems, Inc. addition to accrued and unpaid
common stock on the date the interest, we will deliver to you
Callable STRIDES are priced for one share of Cisco Systems, Inc.
initial sale to the public. common stock, subject to
adjustment for certain corporate
. We will pay interest on the events relating to Cisco Systems,
principal amount of the Callable Inc. as described in this
STRIDES quarterly, at the rate of prospectus supplement.
8% per year, beginning January ,
2002. . At maturity, if the price of Cisco
Systems, Inc. common stock has
decreased, the value of the Cisco
. Callable at the option of Merrill Systems, Inc. common stock that
Lynch & Co., Inc. beginning you will receive will be less than
October , 2002. the principal amount of your
Callable STRIDES.
. Senior unsecured debt securities Payment if called by Merrill Lynch &
of Merrill Lynch & Co., Inc. Co., Inc.:
. If we call the Callable STRIDES on
. Linked to the price of Cisco or after October , 2002, we will
Systems, Inc. common stock pay you a cash amount that,
(trading symbol "CSCO"). together with all other payments
made on the Callable STRIDES to
. We have applied to have the and including the call date, will
Callable STRIDES listed on the provide a yield to call expected
American Stock Exchange under the to be between 30% and 35% per
trading symbol "CSN". annum on the principal amount of
the Callable STRIDES from the
. Expected settlement date: October original issue date until the call
, 2001. date. The actual yield to call
will be determined on the date we
price the Callable STRIDES for
initial sale to the public and
will appear in the final
prospectus supplement.
Investing in the Callable STRIDES 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(1)................................... $ $
Underwriting discount...................................... $ $
Proceeds, before expenses, to Merrill Lynch & Co., Inc. ... $ $
(1) Plus accrued interest from October , 2001, if settlement occurs
after that date
The public offering price and the underwriting discount for any single
transaction to purchase 100,000 units or more will be $ per unit and $
per unit, respectively.
--------------
Merrill Lynch & Co.
--------------
The date of this prospectus supplement is October , 2001.
"STock Return Income DEbt Securities" and "STRIDES" are service marks of
Merrill Lynch & Co., Inc.
TABLE OF CONTENTS
Prospectus Supplement
Page
----
SUMMARY INFORMATION--Q&A.................................................. S-4
What are the Callable STRIDES?.......................................... S-4
When will I receive interest?........................................... S-4
What will I receive on the stated maturity date of the Callable
STRIDES?............................................................... S-4
How does the call feature work?......................................... S-5
Who is Cisco?........................................................... S-5
How has Cisco common stock performed historically?...................... S-6
When will I receive cash instead of shares of Cisco common stock?....... S-6
What about taxes?....................................................... S-6
Will the Callable STRIDES be listed on a stock exchange?................ S-6
What is the role of MLPF&S?............................................. S-6
Who is ML&Co.?.......................................................... S-7
Are there any risks associated with an investment in the Callable
STRIDES?............................................................... S-7
RISK FACTORS.............................................................. S-8
Your investment may result in a loss.................................... S-8
The Callable STRIDES are subject to being called at our option.......... S-8
Your yield may be lower than the yield on other standard debt securities
of comparable maturity................................................. S-8
Your return may be limited and will not be identical to the return of
owning Cisco common stock.............................................. S-8
There may be an uncertain trading market for the Callable STRIDES....... S-8
Many factors affect the trading value of the Callable STRIDES; these
factors interrelate in complex ways and the effect of any one factor
may offset or magnify the effect of another factor..................... S-9
Amounts payable on the Callable STRIDES may be limited by state law..... S-10
No affiliation between ML&Co. and Cisco................................. S-10
No stockholder's rights................................................. S-10
Purchases and sales of Cisco common stock by us and our affiliates may
affect your return..................................................... S-10
Potential conflicts..................................................... S-11
Uncertain tax consequences.............................................. S-11
DESCRIPTION OF THE CALLABLE STRIDES....................................... S-12
Interest................................................................ S-12
Payment at maturity..................................................... S-12
Fractional Shares....................................................... S-13
Call at the option of ML&Co............................................. S-13
Estimated Hypothetical Call Prices...................................... S-13
Hypothetical returns at maturity........................................ S-15
Events of Default and Acceleration...................................... S-16
Dilution and Reorganization Adjustments................................. S-16
Depositary.............................................................. S-21
Same-Day Settlement and Payment......................................... S-23
CISCO COMMON STOCK........................................................ S-24
Cisco Systems, Inc. .................................................... S-24
Historical Data......................................................... S-25
UNITED STATES FEDERAL INCOME TAXATION..................................... S-26
General................................................................. S-26
Tax Treatment of a Callable STRIDES..................................... S-27
Sale, Exchange or Redemption of the Callable STRIDES.................... S-27
S-2
Page
----
Premium................................................................ S-28
Possible Alternative Tax Treatments of an Investment in a Callable
STRIDES............................................................... S-28
Constructive Ownership Law............................................. S-28
Non-U.S. Holders....................................................... S-29
Backup Withholding and Information Reporting........................... S-29
New Withholding Regulations............................................ S-29
ERISA CONSIDERATIONS..................................................... S-29
USE OF PROCEEDS AND HEDGING.............................................. S-30
WHERE YOU CAN FIND MORE INFORMATION...................................... S-30
ML&Co. ................................................................ S-30
Cisco Systems, Inc. ................................................... S-30
UNDERWRITING............................................................. S-31
VALIDITY OF THE CALLABLE STRIDES......................................... S-31
EXPERTS.................................................................. S-31
INDEX OF DEFINED TERMS................................................... S-33
ANNEX A.................................................................. A-1
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 Callable STock Return Income DEbt Securities SM due
October , 2003 (the "Callable STRIDES SM") payable at maturity with Cisco
Systems, Inc. ("Cisco") common stock. You should carefully read this prospectus
supplement and the accompanying prospectus to fully understand the terms of the
Callable STRIDES, as well as the tax and other considerations that are
important to you in making a decision about whether to invest in the Callable
STRIDES. You should carefully review the "Risk Factors" section, which
highlights certain risks, to determine whether an investment in the Callable
STRIDES 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 Callable STRIDES?
The Callable STRIDES will be a series of senior debt securities issued by
ML&Co. and are not secured by collateral. The Callable STRIDES will rank
equally with all of our other unsecured and unsubordinated debt. The Callable
STRIDES will mature on October , 2003, if not called by us on or prior to that
date.
Each unit of Callable STRIDES represents $ principal amount of Callable
STRIDES, which will be equal to the closing market price of one share of Cisco
common stock on the date the Callable STRIDES are priced for initial sale to
the public (the "Pricing Date"). The actual principal amount will be disclosed
in the final prospectus supplement delivered to you in connection with sales of
the Callable STRIDES. For a detailed explanation of the closing market price,
please see the section entitled "Description of the Callable STRIDES--Dilution
and Reorganization Adjustments".
You may transfer the Callable STRIDES only in whole units. You will not
have the right to receive physical certificates evidencing your ownership
except under limited circumstances. Instead, we will issue the Callable STRIDES
in the form of a global certificate, which will be held by The Depository Trust
Company, also known as DTC, or its nominee. Direct and indirect participants in
DTC will record your ownership of the Callable STRIDES. You should refer to the
section entitled "Description of the Callable STRIDES--Depositary" in this
prospectus supplement.
When will I receive interest?
Interest on the Callable STRIDES will accrue at the rate of 8% per year
on the principal amount of each unit from October , 2001 to but excluding the
maturity or the date we call the Callable STRIDES. You will receive quarterly
interest payments on January , April , July and October of each year,
beginning January , 2002. If any interest payment date is not a Business Day,
you will receive payment on the following Business Day.
What will I receive on the stated maturity date of the Callable STRIDES?
We have designed the Callable STRIDES for investors who want to receive
interest payments on their investment and who also want to participate in the
possible increase in the price of Cisco common stock over the term of the
Callable STRIDES, subject to ML&Co.'s right to call the Callable STRIDES. If we
have not called the Callable STRIDES on or prior to the stated maturity date,
for each unit of the Callable STRIDES that you own at maturity, in addition to
accrued and unpaid interest, we will deliver to you one share of Cisco common
stock, subject to adjustment to account for certain corporate events relating
to Cisco described in this prospectus supplement.
For more specific information regarding the corporate events referred to
above, please see the section entitled "Description of the Callable STRIDES--
Payment at Maturity" in this prospectus supplement.
S-4
You should understand that the opportunity to participate in possible
increases in the price of Cisco common stock through an investment in the
Callable STRIDES is limited because if we call the Callable STRIDES the total
yield on your investment will never exceed an amount expected to be between %
and % per year. However, in the event that the price of Cisco common stock
declines over the term of the Callable STRIDES, you will realize the entire
decline in the value of the Callable STRIDES and may lose a part or all of your
initial investment. For more information about risks associated with the
Callable STRIDES, please see the section entitled "Risk Factors" in this
prospectus supplement.
How does the call feature work?
We may call the Callable STRIDES on any scheduled Business Day beginning
on October , 2002, through and including the maturity date (the "Call Date")
by giving notice to the trustee of the Callable STRIDES at least 20 calendar
days prior to the Call Date as described in this prospectus supplement and
specifying the Call Date, Call Price and amount of accrued and unpaid interest
payable on the Call Date. The "Call Price" is determined based upon the
applicable Call Date. The Call Price is expected to equal $ if we were to
call the Callable STRIDES on October , 2002, the first date the Callable
STRIDES may be called, and $ if we were to call the Callable STRIDES on
October , 2003, the last date the Callable STRIDES may be called. For a list
of estimated hypothetical month-end, midmonth, first and last Call Prices for
September 2002 through the maturity date, please see the section entitled
"Description of the Callable STRIDES--Estimated Hypothetical Call Prices" in
this prospectus supplement; and for an example of the Call Price calculation,
please see Annex A to this prospectus supplement. If we elect to exercise our
call option, the Call Price will be disclosed to DTC, or its nominee, while the
Callable STRIDES are held by DTC as depositary. So long as DTC, or its nominee,
is the registered holder of the Callable STRIDES, notice of our election to
exercise the call option will be forwarded as described in the section entitled
"Description of the Callable STRIDES--Depositary" in this prospectus
supplement. These Call Prices do not include the amount of unpaid interest
accrued to but excluding the Call Date; instead, on the Call Date you will
receive an amount equal to the Call Price plus any accrued and unpaid interest
to but excluding the Call Date (the "Final Amount").
The Call Price on any Call Date is the amount of cash, per Callable
STRIDES, that when discounted from the Call Date to the original issue date by
a discount factor based on an annual yield to call expected to be between 30%
and 35% and added to the present value of all interest payments discounted to
the original issue date by that same discount factor, will equal the original
issue price. The actual yield to call will be determined on the Pricing Date
and disclosed in the final prospectus supplement delivered to you in connection
with sales of the Callable STRIDES. The yield to call represents the interest
rate per year used in determining the present values, discounted to the
original issue date, of all future payments made on the Callable STRIDES,
including the Call Price and all interest payments, such that the sum of these
present values is equal to the original issue price.
If we elect to call your Callable STRIDES, you will receive only the
Final Amount, and you will not be entitled to receive Cisco common stock at
maturity.
Who is Cisco?
Cisco Systems, Inc. states that it is engaged in networking for the
Internet and that its hardware, software and service offerings are used to
create Internet solutions that increase the accessibility of information. We
are not affiliated with Cisco, and Cisco will not receive any of the proceeds
from the sale of, or have any obligations under, the Callable STRIDES. You
should independently investigate Cisco and decide whether an investment in the
Callable STRIDES linked to the Cisco common stock is appropriate for you.
Because Cisco common stock is registered under the Securities and
Exchange Act of 1934, Cisco is required to file periodically certain financial
and other information specified by the Securities and Exchange Commission. For
more information about Cisco and the Cisco common stock that you may receive at
maturity, information provided to or filed with the SEC by Cisco can be located
by reference to SEC file number 0-18225 and inspected at the SEC's public
reference facilities or accessed over the Internet through a web site
maintained by the SEC at http://www.sec.gov. In addition, information regarding
Cisco may be obtained from other sources
S-5
including, but not limited to, press releases, newspaper articles and other
publicly disseminated information. We make no representation or warranty as to
the accuracy or completeness of any such information. For further information,
please see the sections entitled "Cisco Common Stock--Cisco Systems, Inc." and
"Where You Can Find More Information" in this prospectus supplement.
How has Cisco common stock performed historically?
You can find a table with the closing high and low prices per share of
Cisco common stock during each quarter from 1998 to the present in the section
entitled "Cisco Common Stock--Historical Data" in this prospectus supplement.
We have provided this historical information to help you evaluate the behavior
of Cisco common stock in various economic environments; however, past
performance of Cisco common stock is not necessarily indicative of how it will
perform in the future.
The price of Cisco common stock declined after the terrorist attacks on
September 11, 2001. We are unable to predict the effect of these events or
related events on the future price or volatility of Cisco common stock.
When will I receive cash instead of shares of Cisco common stock?
If we call the Callable STRIDES, you will receive the Call Price in cash.
Please see the section entitled "Description of the Callable STRIDES--Call at
the option of ML&Co." in this prospectus supplement.
Also, in the event that the number of shares of Cisco to be delivered for
each unit of Callable STRIDES is adjusted to account for certain corporate
events described in this prospectus supplement, on the maturity date for each
unit of Callable STRIDES you own, you may be entitled to receive a number of
shares of Cisco common stock that is not divisible by a whole number. We will
not distribute any fractional shares of Cisco common stock. We will aggregate
all amounts due to you for the total number of Callable STRIDES you hold on the
maturity date, and in lieu of delivering to you a fractional share of Cisco
common stock to which you would otherwise be entitled, we will pay you the cash
value of the fractional share.
What about taxes?
The U.S. Federal income tax consequences of an investment in the Callable
STRIDES are complex and uncertain. Pursuant to the terms of the Callable
STRIDES, ML&Co. and you agree, in the absence of an administrative or judicial
ruling to the contrary, to characterize a Callable STRIDES for all tax purposes
as an investment unit consisting of a debt instrument of ML&Co. and a forward
contract to acquire Cisco common stock. Under this characterization of the
Callable STRIDES, for U.S. Federal income tax purposes, you will generally
include payments of interest on the Callable STRIDES in income in accordance
with your regular method of tax accounting. You should review the discussion
under the section entitled "United States Federal Income Taxation" in this
prospectus supplement.
Will the Callable STRIDES be listed on a stock exchange?
We have applied to have the Callable STRIDES listed on the AMEX under the
trading symbol "CSN". You should be aware that listing of the Callable STRIDES
on the AMEX will not necessarily ensure that a liquid trading market will be
available for the Callable STRIDES. You should review the section entitled
"Risk Factors--There may be an uncertain trading market for the Callable
STRIDES" in this prospectus supplement.
What is the role of MLPF&S?
MLPF&S, our subsidiary, is the underwriter for the offering and sale of
the Callable STRIDES. After the initial offering, MLPF&S intends to buy and
sell Callable STRIDES to create a secondary market for holders of the Callable
STRIDES, and may stabilize or maintain the closing market price of the Callable
STRIDES during the initial distribution. However, MLPF&S will not be obligated
to engage in any of these market activities or to continue them once it has
started.
MLPF&S also will be our agent for purposes of calculating, among other
things, the Call Price and the number of shares of Cisco common
S-6
stock deliverable to you at maturity. Under certain circumstances, these duties
could result in a conflict of interest between MLPF&S's status as our
subsidiary and its responsibilities as calculation agent.
Who is ML&Co.?
Merrill Lynch & Co., Inc. is a holding company with various subsidiaries
and affiliated companies that provide investment, financing, insurance and
related services on a global basis. For information about ML&Co., please see
the section entitled "Merrill Lynch & Co., Inc." in the accompanying
prospectus. You should also read the other documents we have filed with the
SEC, which you can find by referring to the section entitled "Where You Can
Find More Information" in this prospectus supplement.
Are there any risks associated with an investment in the Callable STRIDES?
Yes, an investment in the Callable STRIDES is subject to certain risks.
Please refer to the section entitled "Risk Factors" in this prospectus
supplement.
S-7
RISK FACTORS
Your investment in the Callable STRIDES will involve certain risks. You
should consider carefully the following discussion of risks before you decide
that an investment in the Callable STRIDES is suitable for you.
Your investment may result in a loss
The Callable STRIDES do not provide for a minimum repayment amount at
maturity. If we do not elect to exercise our call option on or prior to the
maturity date, you will receive one share of Cisco common stock at maturity,
subject to adjustment as described in this prospectus supplement. Because the
price of Cisco common stock is subject to market fluctuations, the value of the
Cisco common stock that we will deliver to you at maturity may be more or less
than the principal amount of your Callable STRIDES. The value of the Callable
STRIDES may decline, and that decline could be substantial. If you purchased
your Callable STRIDES in the initial distribution, and if, at maturity, the
closing market price of Cisco common stock is less than the initial issue price
of each Callable STRIDES, your investment in the Callable STRIDES will result
in a loss to you of part or all of your initial investment.
The Callable STRIDES are subject to being called at our option
We may call all of the Callable STRIDES on any scheduled Business Day
beginning October , 2002 to and including the maturity date. In the event that
we elect to call the Callable STRIDES, you will receive only the Call Price and
any accrued and unpaid interest to but excluding the Call Date, and you will
not be entitled to receive shares of Cisco common stock at maturity. You should
not expect to obtain a total annualized yield of more than 30% to 35% on the
original issue price.
Your yield may be lower than the yield on other standard debt securities of
comparable maturity
The interest payments and the value of the Cisco common stock that we
deliver to you at maturity may together be less than the return you could earn
on other investments. Your yield may be less than the yield you would earn if
you bought a standard senior non-callable debt security of ML&Co. with the same
stated maturity date. Your investment may not reflect the full opportunity cost
to you when you take into account factors that affect the time value of money.
Unlike standard senior non-callable debt securities, the Callable STRIDES do
not guarantee the return of a principal amount at maturity.
Your return may be limited and will not be identical to the return of owning
Cisco common stock
You should understand that the opportunity to participate in the possible
increases in the price of Cisco common stock through an investment in the
Callable STRIDES is limited because the amount you receive if we call the
Callable STRIDES will never exceed a total annualized yield which is expected
to be between 30% and 35% per year. However, if we choose not to exercise our
call option and the value of Cisco common stock declines over the term of the
Callable STRIDES, you will realize the entire decline in value of the Callable
STRIDES, and will lose a part or all of your initial investment.
In addition, your return on the Callable STRIDES will not reflect the
return you would realize if you actually owned Cisco common stock and received
the dividends, if any, paid on Cisco common stock. You will not be entitled to
receive dividends, if any, paid on the Cisco common stock unless and until you
actually hold Cisco common stock on the applicable record date for the payment
of a dividend.
There may be an uncertain trading market for the Callable STRIDES
We have applied to have the Callable STRIDES listed on the AMEX under the
trading symbol "CSN". Listing the Callable STRIDES on the AMEX does not
necessarily ensure that a trading market will develop for the Callable STRIDES.
If a trading market does develop, there can be no assurance that there will
S-8
be liquidity in the trading market. The development of a trading market for the
Callable STRIDES will depend on our financial performance and other factors
such as the appreciation, if any, in the price of Cisco common stock. In
addition, it is unlikely that the secondary market price of the Callable
STRIDES will correlate exactly with the price of Cisco common stock.
If the trading market for the Callable STRIDES is limited, there may be a
limited number of buyers if you decide to sell your Callable STRIDES rather
than hold your investment until the maturity date. This may affect the price
you receive.
Many factors affect the trading value of the Callable STRIDES; these factors
interrelate in complex ways and the effect of any one factor may offset or
magnify the effect of another factor
The trading value of the Callable STRIDES will be affected by factors
that interrelate in complex ways. It is important for you to understand that
the effect of one factor may offset the increase in the trading value of the
Callable STRIDES caused by another factor, and that the effect of one factor
may exacerbate the decrease in the trading value of the Callable STRIDES caused
by another factor. For example, an increase in U.S. interest rates may offset
some or all of any increase in the trading value of the Callable STRIDES
attributable to another factor, such as an increase in the price of Cisco
common stock. The following paragraphs describe the expected impact on the
market value of the Callable STRIDES given a change in a specific factor,
assuming all other conditions remain constant.
The price of Cisco common stock is expected to affect the trading value
of the Callable STRIDES. We expect that the market value of the Callable
STRIDES will depend substantially on the price of Cisco common stock, as
adjusted for certain dilution and reorganization events described in this
prospectus supplement. However, you generally should not expect the market
value of your Callable STRIDES to be identical to the market value of the Cisco
common stock. For example, if you choose to sell your Callable STRIDES when the
price of Cisco common stock, as adjusted, exceeds the principal amount, you may
receive substantially less than the current market value of the Cisco common
stock because of the expectation that the price of Cisco common stock will
continue to fluctuate until the maturity date.
Changes in the levels of interest rates are expected to affect the
trading value of the Callable STRIDES. We expect that changes in interest rates
will affect the trading value of the Callable STRIDES. In general, if U.S.
interest rates increase, we expect that the trading value of the Callable
STRIDES will decrease and, conversely, if U.S. interest rates decrease, we
expect that the trading value of the Callable STRIDES will increase.
Changes in the volatility of Cisco common stock are expected to affect
the trading value of the Callable STRIDES. Volatility is the term used to
describe the size and frequency of price and/or market fluctuations. If the
volatility of Cisco common stock increases, we expect the trading value of the
Callable STRIDES will decrease; and, if the volatility of Cisco common stock
decreases, we expect that the trading value of the Callable STRIDES will
increase.
As the time remaining to maturity of the Callable STRIDES decreases, the
"time premium or discount" associated with the Callable STRIDES will decrease.
We anticipate that before their maturity, the Callable STRIDES may trade at a
value above or below that which would be expected based on the level of
interest rates and the price of Cisco common stock. This difference will
reflect a "time premium or discount" due to expectations concerning the price
of Cisco common stock during the period before the stated maturity of the
Callable STRIDES. As the time remaining to maturity decreases, any discount or
premium attributed to the trading value of the Callable STRIDES will diminish,
increasing or decreasing the trading value of the Callable STRIDES.
S-9
Changes in dividend yields of Cisco common stock are expected to affect
the trading value of the Callable STRIDES. The current dividend yield on Cisco
common stock is zero. If the dividend yield on Cisco common stock were to
increase, we expect that the value of the Callable STRIDES would decrease.
However, should there be a subsequent decrease in the dividend yield on Cisco
common stock, we expect the value of the Callable STRIDES would increase.
Changes in our credit ratings may affect the trading value of the
Callable STRIDES. Our credit ratings are an assessment of our ability to pay
our obligations. Consequently, real or anticipated changes in our credit
ratings may affect the trading value of the Callable STRIDES. However, because
your return on your Callable STRIDES is dependent upon factors in addition to
our ability to pay our obligations under the Callable STRIDES, such as the
percentage change in the price of Cisco common stock at maturity, an
improvement in our credit ratings will not reduce the other investment risks
related to the Callable STRIDES.
In general, assuming all relevant factors are held constant, we expect
that the effect on the trading value of the Callable STRIDES of a given change
in most of the factors listed above will be less if it occurs later in the term
of the Callable STRIDES than if it occurs earlier in the term of the Callable
STRIDES. However, we expect that the effect on the trading value of the
Callable STRIDES of a given change in the price of Cisco common stock will be
greater if it occurs later in the term of the Callable STRIDES than if it
occurs earlier in the term of the Callable STRIDES.
The price of Cisco common stock has declined after the terrorist attacks
on September 11, 2001. We are unable to predict the impact that these attacks
or related events may have on the future price or volatility of Cisco common
stock and the risk factors previously mentioned.
Amounts payable on the Callable STRIDES may be limited by state law
New York State law governs the 1983 Indenture under which the Callable
STRIDES will be issued. New York has usury laws that limit the amount of
interest that can be charged and paid on loans, which includes debt securities
like the Callable STRIDES. Under present New York law, the maximum rate of
interest is 25% per annum on a simple interest basis. This limit may not apply
to debt securities in which $2,500,000 or more has been invested.
While we believe that New York law would be given effect by a state or
Federal court sitting outside of New York, many other states also have laws
that regulate the amount of interest that may be charged to and paid by a
borrower. We promise, for the benefit of the holders of the Callable STRIDES,
to the extent permitted by law, not to voluntarily claim the benefits of any
laws concerning usurious rates of interest.
No Affiliation Between ML&Co. and Cisco
We are not affiliated with Cisco, and Cisco has no obligations relating
to the Callable STRIDES or amounts to be paid to you, including any obligation
to take the needs of ML&Co. or of beneficial owners of the Callable STRIDES
into consideration for any reason. Cisco will not receive any of the proceeds
of the offering of the Callable STRIDES and is not responsible for, and has not
participated in, the offering of the Callable STRIDES and is not responsible
for, and will not participate in, the determination or calculation of the
amount receivable by beneficial owners of the Callable STRIDES.
No stockholder's rights
Beneficial owners of the Callable STRIDES will not be entitled to any
rights in Cisco common stock including, for example, the right to receive
dividends or other distributions, voting rights and the right to tender or
exchange common stock in any tender or exchange offer by Cisco or any third
party.
Purchases and sales of Cisco common stock by us and our affiliates may affect
your return
We and our affiliates may from time to time buy or sell Cisco common
stock or futures or option contracts on Cisco common stock for our own accounts
for business reasons. We expect to enter into such transactions in connection
with hedging our obligations under the Callable STRIDES. These transactions
could
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affect the price of Cisco common stock and, in turn, the value of the Callable
STRIDES in a manner that would be adverse to your investment in the Callable
STRIDES. Any purchases by us, our affiliates or others on our behalf on or
before the Pricing Date may temporarily increase the price of Cisco common
stock. Temporary increases in the market price of Cisco common stock may also
occur as a result of the purchasing activities of other market participants in
anticipation of this transaction. Consequently, the price of Cisco common stock
may decline subsequent to the Pricing Date reducing the market value of the
Callable STRIDES.
Potential conflicts
The calculation agent for the Callable STRIDES is MLPF&S, our subsidiary.
Under certain circumstances, MLPF&S' role as our subsidiary and its
responsibilities as calculation agent for the Callable STRIDES could give rise
to conflicts of interests. MLPF&S is required to carry out its duties as
calculation agent in good faith and using its reasonable 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 obligations in connection with the
Callable STRIDES. This subsidiary expects to make a profit in connection with
this arrangement. We did not seek competitive bids for this arrangement from
unaffiliated parties.
Uncertain tax consequences
You should consider the tax consequences of investing in the Callable
STRIDES, aspects of which are uncertain. See the section entitled "United
States Federal Income Taxation" in this prospectus supplement.
S-11
DESCRIPTION OF THE CALLABLE STRIDES
ML&Co. will issue the Callable STRIDES as a series of senior debt
securities under the 1983 Indenture which is more fully described in the
accompanying prospectus. The Callable STRIDES will mature on October , 2003.
The Callable STRIDES may be called by ML&Co. as described below, but are
not otherwise subject to redemption by us or at the option of any beneficial
owner before maturity. If an Event of Default occurs with respect to the
Callable STRIDES, beneficial owners of the Callable STRIDES may accelerate the
maturity of the Callable STRIDES, as described under the sections entitled
"Events of Default and Acceleration" in this prospectus supplement and
"Description of Debt Securities Events of Default" in the accompanying
prospectus of ML&Co.
ML&Co. will issue the Callable STRIDES in denominations of whole units
with a principal amount per unit of $ , the closing market price of one share
of Cisco common stock on the Pricing Date.
The Callable STRIDES will not have the benefit of any sinking fund.
Interest
The Callable STRIDES will bear interest at a rate of 8% per year on the
principal amount of each unit from October , 2001 or from the most recent
interest payment date for which interest has been paid or provided for, to but
excluding the stated maturity date or the Call Date, as applicable. We will pay
interest on the Callable STRIDES in cash quarterly in arrears on January ,
April , July and October of each year and on the maturity date or Call
Date, beginning January , 2002. We will pay this interest to the persons in
whose names the Callable STRIDES are registered at the close of business on the
immediately preceding January , April , July and October , respectively,
whether or not a Business Day. Interest on the Callable STRIDES will be
computed on the basis of a 360-day year of twelve 30-day months. If an interest
payment date falls on a day that is not a Business Day, that interest payment
will be made on the next Business Day and no additional interest will accrue as
a result of the delayed payment.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in The City of New York are
authorized or obligated by law to close and with respect to the stated maturity
is also a day that is a Trading Day.
Payment at maturity
If we do not call the Callable STRIDES on or prior to the maturity date,
then at maturity, for each unit of Callable STRIDES you own, you will receive a
cash payment of accrued and unpaid interest and one share of Cisco common
stock; provided, however, if the Share Multiplier is more or less than one (1)
due to certain corporate events, you will receive the number of shares equal to
the product of one (1) and the Share Multiplier.
If the maturity date is not a Business Day, we will deliver the Cisco
common stock and make all accrued and unpaid interest payments on the first
Business Day following the maturity date and no additional interest will
accrue.
"Share Multiplier" initially means 1.0, but is subject to adjustment for
certain events described under "--Dilution and Reorganization Adjustments."
"Trading Day" means a day on which the New York Stock Exchange, the AMEX
and the Nasdaq Stock Market are open for trading as, determined by the
calculation agent.
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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 beneficial owners of the Callable STRIDES.
Fractional Shares
In the event that the Share Multiplier is adjusted to account for certain
corporate events described in this prospectus supplement, on the maturity date
for each unit of Callable STRIDES you own, you may be entitled to receive a
number of shares of Cisco common stock that is not divisible by a whole number.
We will not distribute any fractional shares of Cisco common stock. We will
aggregate all amounts due to you for the total number of Callable STRIDES you
hold on the maturity date, and in lieu of delivering to you a fractional share
of Cisco common stock to which you would otherwise be entitled, we will pay you
the cash value of the fractional share based on the closing market price.
Call at the option of ML&Co.
ML&Co., in its sole discretion, may call the Callable STRIDES, in whole
but not in part, on any scheduled Business Day beginning on October , 2002, to
and including the maturity date (the date on which the call, if any, occurs
being the "Call Date") by giving notice to the trustee on any Business Day at
least 20 calendar days prior to the Call Date. The notice to the trustee will
specify the Call Date, Call Price and amount of interest payable on the Call
Date. The trustee will provide notice of the call election to the registered
holders of the Callable STRIDES, specifying the Call Date, Call Price and
amount of interest payable on the Call Date. While the Callable STRIDES are
held at the depositary, the registered holder will be the depositary, and the
depositary will receive the notice of the call. So long as the depositary is
the registered holder of the Callable STRIDES, notice of our election to
exercise the call option will be forwarded as more fully described below under
"--Depositary".
The Call Price on any Call Date is the amount of cash, per Callable
STRIDES, that when discounted from the Call Date to the original issue date by
a discount factor based on an annual yield to call expected to be between 30%
and 35% and added to the present value of all interest payments discounted to
the original issue date by that same discount factor, will equal the original
issue price. The actual yield to call will be determined on the Pricing Date
and disclosed in the final prospectus supplement delivered to you in connection
with sales of the Callable STRIDES. The Call Price will not include the amount
of unpaid interest accrued to but excluding the Call Date; however, on the Call
Date you will receive the Call Price plus an amount equal to the accrued and
unpaid interest (the "Final Amount"). The yield to call represents the annual
interest rate used in determining the present values, discounted to the
original issue date, of all future payments made on the Callable STRIDES,
including the Call Price and all interest payments, such that the sum of these
present values is equal to the original issue price.
Estimated Hypothetical Call Prices
The following table sets forth the estimated hypothetical month-end,
midmonth, first and last Call Prices from September 30, 2002 to September 29,
2003 based on the assumptions specified below. For an example of the Call Price
calculation please see Annex A to this prospectus supplement. The actual Call
Dates and Call Prices will be determined on the Pricing Date and will be
disclosed in the final prospectus supplement delivered to you in connection
with sales of the Callable STRIDES. If we elect to exercise our call option,
the Call Price will be disclosed to you in the notice you receive in connection
with our call of the Callable STRIDES.
The hypothetical Call Prices appearing below have been calculated
assuming all payments are made on the applicable day scheduled for each
payment. Because the hypothetical Call Price calculation takes into account the
time value of all payments, if a payment is not made on the calendar day, the
actual Call Price for each subsequent date will be affected. A delay in payment
may arise for reasons such as a scheduled interest payment falling on a day
that is not a Business Day and, as a result, the payment being delayed until
the next succeeding Business Day. We do not expect the delay in payment of one
or more interest payments to
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substantially alter the estimated Call Prices. If we elect to call the Callable
STRIDES, the actual Call Price for the applicable Call Date, the amount of any
accrued and unpaid interest to be paid on that Call Date and the Final Amount
will appear in the call notice delivered to you.
The table below also assumes:
. original issue date: September 28, 2001
. original issue price: $12.18 per Callable STRIDES (for purposes of
this table we have
assumed this price was the closing price of
Cisco common stock
on the hypothetical Pricing Date)
. interest rate: 8% per year
. interest payment dates: On the 29th day of each March, June,
September and December
beginning on December 29, 2001 (computed on
the basis of a
360-day year of twelve 30-day months)
. earliest call date: September 30, 2002
. yield to call: 32.50%, the midpoint of the expected range
between 30% and
35% (computed on the basis of a 360-day year
of twelve 30-day
months compounded annually)
. maturity date: September 29, 2003
Final
Amount
per
Call Price per Interest Payable on Call Date Callable
Call Date Callable STRIDES per Callable STRIDES STRIDES
--------- ---------------- ----------------------------- --------
September 30, 2002...... $15.0706 $0.0027 $15.0734
October 15, 2002........ $15.2078 $0.0433 $15.2511
October 31, 2002........ $15.3565 $0.0866 $15.4431
November 15, 2002....... $15.4885 $0.1245 $15.6130
November 29, 2002....... $15.6224 $0.1624 $15.7848
December 16, 2002....... $15.7876 $0.2084 $15.9960
December 31, 2002....... $15.9353 $0.0054 $15.9407
January 15, 2003........ $16.0728 $0.0433 $16.1161
January 31, 2003........ $16.2323 $0.0866 $16.3189
February 18, 2003....... $16.4046 $0.1326 $16.5372
February 28, 2003....... $16.5073 $0.1597 $16.6670
March 17, 2003.......... $16.7053 $0.2111 $16.9164
March 31, 2003.......... $16.8531 $0.0054 $16.8586
April 15, 2003.......... $17.0008 $0.0433 $17.0441
April 30, 2003.......... $17.1612 $0.0839 $17.2451
May 15, 2003............ $17.3240 $0.1245 $17.4485
May 30, 2003............ $17.4892 $0.1651 $17.6543
June 16, 2003........... $17.6681 $0.2084 $17.8765
June 30, 2003........... $17.8267 $0.0027 $17.8294
July 15, 2003........... $17.9964 $0.0433 $18.0397
July 31, 2003........... $18.1801 $0.0866 $18.2667
August 15, 2003......... $18.3432 $0.1245 $18.4677
August 29, 2003......... $18.5086 $0.1624 $18.6710
September 15, 2003...... $18.7002 $0.2057 $18.9059
September 29, 2003
(maturity date)........ $18.8704 $0.2436 $19.1140
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Hypothetical returns at maturity
Based on the assumptions described below, the following table
illustrates, for a range of hypothetical closing market prices of Cisco common
stock at maturity:
. the percentage change from the hypothetical closing market price on
the Pricing Date to the hypothetical closing market price at
maturity,
. the Final Amount payable on the Callable STRIDES, including the
payment of accrued and unpaid interest on the maturity date,
. the total annualized yield on the Callable STRIDES at maturity, and
. the total yield from direct ownership of Cisco common stock.
For the purpose of calculating this table, we have assumed:
. original issue date: September 28, 2001
. original issue price: $12.18 per Callable STRIDES (for purposes of
this table we have
assumed this price was the closing price of
Cisco common stock
on the hypothetical Pricing Date)
. interest rate: 8% per year
. interest payment dates: On the 29th day of each March, June,
September and December
beginning on December 29, 2001 (computed on
the basis of a
360-day year of twelve 30-day months)
. earliest call date: September 30, 2002
. yield to call: 32.50%, the midpoint of the expected range
between 30% and
35% (computed on the basis of a 360-day year
of twelve 30-day
months compounded annually)
. maturity date: September 29, 2003
This table also assumes that the Callable STRIDES have not been called
prior to the maturity date and will be called by ML&Co. on the maturity date if
the total annualized yield on the Callable STRIDES would otherwise be greater
than or equal to 32.5% at maturity.
Percentage
change from
the hypothetical Final
closing market price Amount Total annualized
Hypothetical on the Pricing Date payable Total annualized yield from
closing market to the hypothetical on the yield on the direct ownership of
price at closing market price Callable Callable STRIDES Cisco common
maturity at maturity STRIDES(1) at maturity(2) stock(3)
-------------- -------------------- --------- ---------------- -------------------
2.44 -80% $ 2.6796 -45.15% -55.23%
4.87 -60% $ 5.1156 -27.67% -36.71%
7.31 -40% $ 7.5516 -13.90% -22.51%
9.74 -20% $ 9.9876 -2.16% -10.54%
12.18(4) 0% $12.4236 8.25% 0.00%
14.62 20% $14.8596 17.69% 9.53%
17.05 40% $17.2956 26.40% 18.29%
19.49 60% $19.1140 32.50% 26.45%
21.92 80% $19.1140 32.50% 34.11%
24.36 100% $19.1140 32.50% 41.35%
--------
(1) The Final Amounts specified in this column include payment of accrued and
unpaid interest payable on the maturity date.
(2) The total annualized yield at maturity represents the interest rate per
year used in determining the present values, discounted to the original
issue date (computed on the basis of a 360-day year of twelve 30-day
months), of all future payments made on the Callable STRIDES, including the
Call Price and all interest
S-15
payments, the sum of these present values being equal to the original issue
price. This annualized yield assumes:
(a) coupon payments are made quarterly on the 29th of March, June,
September and December of each year beginning December 29, 2001,
(b) an investment term of two years, and
(c) computed on the basis of a 360-day year of twelve 30-day months
compounded annually.
(3) Assumes the dividend yield on Cisco common stock is zero for the term of
the Callable STRIDES.
(4) This is the closing market price of Cisco common stock on September 28,
2001 and for purposes of this table we have assumed this price was the
closing price on the Pricing Date related to this hypothetical table. The
principal amount of the STRIDES Securities will be the closing market
price of Cisco common stock on the Pricing Date.
Events of Default and Acceleration
In case an Event of Default with respect to any Callable STRIDES has
occurred and is continuing, the amount payable to a beneficial owner of a
Callable STRIDES upon any acceleration permitted by the Callable STRIDES will
be equal to the consideration due at maturity, calculated as though the date
of acceleration were the maturity date. The value of such consideration shall
not, however, be greater than an amount equal to the Final Amount, calculated
as though the date of acceleration were the Call Date (whether or not such
date is before or after October , 2002). If a bankruptcy proceeding is
commenced in respect of ML&Co., the claim of the beneficial owner of a
Callable STRIDES may be limited, under Section 502(b)(2) of Title 11 of the
United States Code, to the principal amount of the Callable STRIDES plus an
additional amount of contingent interest calculated as though the date of the
commencement of the proceeding were the maturity date of the Callable STRIDES.
In case of default in payment of the Callable STRIDES, whether at any
interest payment date, the stated maturity date, the Call Date or upon
acceleration, from and after that date the Callable STRIDES will bear
interest, payable upon demand of their beneficial owners, at the rate of %
per annum, to the extent that payment of such interest shall be legally
enforceable, on the unpaid amount due and payable on that date in accordance
with the terms of the Callable STRIDES to the date payment of that amount has
been made or duly provided for.
Dilution and Reorganization Adjustments
The Share Multiplier used to determine the number of shares of Cisco
common stock to be delivered at maturity is subject to adjustment by the
calculation agent as a result of the dilution and reorganization adjustments
described in this section.
Stock splits and reverse stock splits
If Cisco common stock is subject to a stock split or reverse stock
split, then once any split has become effective, the Share Multiplier relating
to Cisco common stock will be adjusted to equal the product of the prior Share
Multiplier and the number of shares which a holder of one share of Cisco
common stock before the effective date of that stock split or reverse stock
split would have owned or been entitled to receive immediately following the
applicable effective date.
Stock dividends
If Cisco common stock is subject to a (i) stock dividend, i.e., issuance
of additional shares of Cisco common stock, that is given ratably to all
holders of shares of Cisco common stock or (ii) distribution of shares of
Cisco common stock as a result of the triggering of any provision of the
corporate charter of Cisco, then, once the dividend has become effective and
the shares are trading ex-dividend, the Share Multiplier will be adjusted so
that the new Share Multiplier shall equal the prior Share Multiplier plus the
product of:
. the number of shares of Cisco common stock issued with respect to one
share of Cisco common stock and
. the prior Share Multiplier.
S-16
Extraordinary Dividends
There will be no adjustments to the Share Multiplier to reflect any cash
dividends or distributions paid with respect to Cisco common stock other than
distributions described under clause (e) of the section entitled "--
Reorganization Events" below and Extraordinary Dividends as described below.
An "Extraordinary Dividend" means, with respect to a cash dividend or
other distribution with respect to Cisco common stock, a dividend or other
distribution which exceeds the immediately preceding non-Extraordinary Dividend
for Cisco common stock (as adjusted for any subsequent corporate event
requiring an adjustment hereunder, such as a stock split or reverse stock
split) by an amount equal to at least 10% of the closing market price of Cisco
common stock on the Trading Day preceding the ex-dividend date with respect to
the Extraordinary Dividend (the "ex-dividend date"). If an Extraordinary
Dividend occurs with respect to Cisco common stock, the Share Multiplier will
be adjusted on the ex-dividend date with respect to the Extraordinary Dividend
so that the new Share Multiplier will equal the product of:
. the prior Share Multiplier and
. a fraction, the numerator of which is the closing market price per share
of Cisco common stock on the Trading Day preceding the ex-dividend date,
and the denominator of which is the amount by which the closing market
price on the Trading Day preceding the ex-dividend date exceeds the
Extraordinary Dividend Amount.
The "Extraordinary Dividend Amount" with respect to an Extraordinary
Dividend for Cisco common stock will equal:
. in the case of cash dividends or other distributions that constitute
quarterly dividends, the amount per share of that Extraordinary Dividend
minus the amount per share of the immediately preceding non-
Extraordinary Dividend for such shares of Cisco common stock, or
. in the case of cash dividends or other distributions that do not
constitute quarterly dividends, the amount per share of that
Extraordinary Dividend.
To the extent an Extraordinary Dividend is not paid in cash, the value of
the non-cash component will be determined by the calculation agent, whose
determination shall be conclusive. A distribution on Cisco common stock
described in clause (e) of the section entitled "--Reorganization Events" below
that also constitutes an Extraordinary Dividend shall only cause an adjustment
to the Share Multiplier pursuant to clause (e) under the section entitled "--
Reorganization Events".
Closing market price means:
If Cisco common stock (or any other security for which a closing market
price must be determined for purposes of the Callable STRIDES) is listed on a
national securities exchange in the United States, is a Nasdaq National Market
System ("Nasdaq NMS") security or is included in the OTC Bulletin Board Service
("OTC Bulletin Board") operated by the National Association of Securities
Dealers, Inc. (the "NASD"), then the closing market price for any date of
determination on any Trading Day means for one share of Cisco common stock (or
any other security for which a closing market price must be determined for
purposes of the Callable STRIDES):
. the last reported sale price, regular way, on that day on the principal
United States securities exchange registered under the Exchange Act on
which that security is listed or admitted to trading (without taking
into account any extended or after-hours trading session), or
. if not listed or admitted to trading on any such securities exchange or
if the last reported sale price is not obtainable, the last reported
sale price on the over-the-counter market as reported on the NMS or OTC
Bulletin Board on that day (without taking into account any extended or
after-hours trading session), or
S-17
. if the last reported sale price is not available for any reason,
including, without limitation, the occurrence of a Market Disruption
Event, pursuant to (1) and (2) below, the mean of the last reported bid
and offer price of the principal trading session on the over-the-counter
market as reported on the Nasdaq Stock Market or OTC Bulletin Board on
that day as determined by the calculation agent or from as many dealers
in such security, but not exceeding three, as have made the bid prices
available to the calculation agent after 3:00 p.m., local time in the
principal market, on that date (without taking into account any extended
or after-hours trading session).
If Cisco common stock (or any other security for which a closing market
price must be determined for purposes of the Callable STRIDES) is not listed on
a national securities exchange in the United States, is not a Nasdaq NMS
security or included in the OTC Bulletin Board Service operated by the NASD,
then the closing market price for any date of determination on any Trading Day
means for one share of Cisco common stock (or any other security for which a
closing market price must be determined for purposes of the Callable STRIDES)
the last reported sale price on that day on the securities exchange on which
that security is listed or admitted to trading with the greatest volume of
trading for the calendar month preceding such Trading Day as determined by the
calculation agent; provided that if such last reported sale price is for a
transaction which occurred more than four hours prior to the close of that
exchange, then the closing market price shall mean the average (mean) of the
last available bid and offer price on that exchange.
If Cisco common stock (or any other security for which a closing market
price must be determined for purposes of the Callable STRIDES) is not listed or
admitted to trading on any such securities exchange or if such last reported
sale price or bid and offer are not obtainable, then the closing market price
shall mean the average (mean) of the last available bid and offer prices in
such market of the three dealers which have the highest volume of transactions
in that security in the immediately preceding calendar month as determined by
the calculation agent based on information that is reasonably available to it.
"Market Disruption Event" means:
(1) a suspension, absence, including the absence of an official closing
price, or material limitation of trading of Cisco common stock on the
primary market for Cisco common stock for more than two hours of
trading or during the one-half hour period preceding or at the close of
trading, as determined by the calculation agent in its sole discretion;
or the suspension or material limitation on the primary market for
trading in options contracts related to Cisco common stock, if
available, during the one-half hour period preceding or at the close of
trading in the applicable market, in each case as determined by the
calculation agent in its sole discretion; and
(2) a determination by the calculation agent in its sole discretion that
the event described in clause (1) above materially interfered with the
ability of ML&Co. or any of its affiliates or MLPF&S to unwind all or a
material portion of the hedge with respect to the notes.
For purposes of determining whether a Market Disruption Event has
occurred:
(1) a limitation on the hours 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,
(2) a decision to permanently discontinue trading in the relevant
options contract will not constitute a Market Disruption Event,
(3) limitations pursuant to any rule or regulation enacted or
promulgated by the NYSE or the Nasdaq Stock Market or other
regulatory organization with jurisdiction over the NYSE or the
Nasdaq Stock Market on trading during significant market
fluctuations will constitute a suspension or material limitation of
trading in Cisco common stock,
(4) a suspension of trading in an options contract on Cisco common stock
by the primary securities market trading in the options, if
available, by reason of:
. a price change exceeding limits set by the securities exchange or
market,
S-18
. an imbalance of orders relating to the contracts, or
. a disparity in bid and ask quotes relating to the contracts
will constitute a suspension or material limitation of trading in
options contracts related to Cisco common stock, and
(5) a suspension, absence or material limitation of trading on the
primary securities market on which options contracts related to
Cisco common stock are traded will not include any time when that
securities market is itself closed for trading under ordinary
circumstances.
If the Reorganization Event Amount includes the market price of
securities other than Cisco common stock, then the above definition shall be
revised to include each such security in the same manner as Cisco common stock
is considered in determining whether a Market Disruption Event exists.
Issuance of transferable rights or warrants
If Cisco issues transferable rights or warrants to all holders of Cisco
common stock to subscribe for or purchase Cisco common stock, including new or
existing rights to purchase Cisco common stock pursuant to a shareholder's
rights plan or arrangement, once a triggering event shall have occurred
thereunder, at an exercise price per share less than the closing market price
of one share of Cisco common stock on:
. the date the exercise price of those rights or warrants is
determined, and
. the expiration date of those rights or warrants,
then, in each case, if the expiration date of those rights or warrants precedes
the maturity date of the Callable STRIDES, then the Share Multiplier will be
adjusted to equal the product of:
. the prior Share Multiplier and
. a fraction, the numerator of which shall be the number of shares of
Cisco common stock outstanding immediately prior to the issuance of
such rights or warrants plus the number of additional shares of Cisco
common stock offered for subscription or purchase pursuant to those
rights or warrants and the denominator of which shall be the number
of shares of Cisco common stock outstanding immediately prior to the
issuance of such rights or warrants plus the number of additional
shares of Cisco common stock which the aggregate offering price of
the total number of shares of Cisco common stock so offered for
subscription or purchase pursuant to those rights or warrants would
purchase at the closing market price of one share of Cisco common
stock on the expiration date of those rights or warrants, which shall
be determined by multiplying the total number of shares offered by
the exercise price of those rights or warrants and dividing the
product so obtained by such closing market price.
Reorganization Events
If prior to the maturity date of the Callable STRIDES,
(a) there occurs any reclassification or change of Cisco common stock,
including, without limitation, as a result of the issuance of
tracking stock by Cisco,
(b) Cisco, or any surviving entity or subsequent surviving entity of
Cisco (a "Successor Entity"), has been subject to a merger,
combination or consolidation and is not the surviving entity,
(c) any statutory exchange of securities of Cisco or any Successor
Entity with another corporation occurs, other than pursuant to
clause (b) above,
(d) Cisco is liquidated or is subject to a proceeding under any
applicable bankruptcy, insolvency or other similar law,
(e) Cisco issues to all of its shareholders equity securities of an
issuer other than Cisco, other than in a transaction described in
clauses (b), (c) or (d) above (a "Spin-off Event"), or
(f) a tender or exchange offer or going-private transaction is
consummated for all the outstanding shares of Cisco (an event in
clauses (a) through (f) a "Reorganization Event"),
S-19
then at maturity your will receive the Reorganization Event Amount described
below.
The "Reorganization Event Amount" shall be determined by the calculation
agent and shall equal for each unit of the Callable STRIDES the sum of the
following:
(1) for any cash received in a Reorganization Event, an amount equal to
the amount of cash received per share of Cisco common stock
multiplied by the Share Multiplier in effect on the date all of the
holders of shares of Cisco common stock irrevocably receive such
cash,
(2) for any property other than cash or securities received in a
Reorganization Event, the market value, as determined by the
calculation agent, of the property received for each share of Cisco
common stock at the date of the receipt of the property multiplied
by the Share Multiplier in effect and payable in cash,
(3) for any security received in a Reorganization Event, an amount in
cash equal to (a) the average of the closing market prices for such
security calculated over one to ten trading days from the date of
the distribution of such security, as selected at the sole
discretion of the calculation agent, in the same manner as the
closing market price of Cisco common stock is calculated (or, if the
use of the same manner of determining the closing market price of
such security is not possible, in a manner determined by the
calculation agent), multiplied by (b) the number of units of such
security received for each share of Cisco common stock multiplied by
the Share Multiplier in effect, and
(4) for any security received in the case of a Spin-off Event, in
addition to the shares of Cisco common stock, an amount in cash
equal to (a) the average of the closing market prices for such
security calculated over one to ten trading days from the date of
the distribution of such security, as selected at the sole
discretion of the calculation agent, in the same manner as the
closing market price of Cisco common stock is calculated (or, if the
use of the same manner of determining the closing market price of
such security is not possible, in a manner determined by the
calculation agent), multiplied by (b) the number of units of such
security received for each share of common stock of Cisco multiplied
by the Share Multiplier in effect.
In the case of a Spin-off Event, if Cisco common stock is outstanding after the
Reorganization Event, then instead of receiving the Reorganization Event Amount
at maturity, the Share Multiplier may be adjusted in the discretion of the
calculation agent to equal the Share Multiplier in effect for Cisco common
stock at the time of the issuance of the securities received in the Spin-off
Event plus a value equal to the Reorganization Event Amount divided by the
average of the closing market prices specified in (4) above. Such adjustment
may be made by the calculation agent in its sole discretion instead of paying
the Reorganization Event Amount described in (4) above.
In the event of a tender or exchange offer with respect to Cisco common
stock or any security received in a reorganization event in which an offeree
may elect to receive cash or other property, Cisco common stock or any such
security received in a reorganization event shall be deemed to include the kind
and amount of cash and other property received by offerees who elect to receive
cash.
Adjustments to the Share Multiplier
No adjustments to the Share Multiplier will be required unless the Share
Multiplier adjustment would require a change of at least 0.1% in the Share
Multiplier then in effect. The Share Multiplier resulting from any of the
adjustments specified above will be rounded to the nearest one-thousandth with
five ten-thousandths being rounded upward.
No adjustments to the Share Multiplier will be required other than those
specified above. However, ML&Co. may, at its sole discretion, cause the
calculation agent to make additional adjustments to the Share Multiplier to
reflect changes occurring in relation to Cisco common stock or any other
security received in a reorganization event in other circumstances where ML&Co.
determines that it is appropriate to reflect those changes. The required
adjustments specified above do not cover all events that could affect the
closing market
S-20
price of Cisco common stock, including, without limitation, a partial tender or
exchange offer for Cisco common stock.
MLPF&S, as calculation agent, shall be solely responsible for the
determination and calculation of any adjustments to the Share Multiplier and of
any related determinations and calculations with respect to any distributions
of stock, other securities or other property or assets, including cash, in
connection with any corporate event described above, and its determinations and
calculations shall be conclusive absent manifest error.
No adjustments will be made for certain other events, such as offerings
of common stock by Cisco for cash or in connection with acquisitions or the
occurrence of a partial tender or exchange offer for Cisco common stock by
Cisco or any third party.
ML&Co. will, within ten Business Days following the occurrence of an
event that requires an adjustment to the Share Multiplier, or if ML&Co. is not
aware of this occurrence, as soon as practicable after becoming so aware,
provide written notice to the trustee, which shall provide notice to the
holders of the Callable STRIDES of the occurrence of this event and, if
applicable, a statement in reasonable detail setting forth the adjusted Share
Multiplier.
Depositary
Description of the Global Securities
Upon issuance, all Callable STRIDES will be represented by one or more
fully registered global securities. Each global security will be deposited
with, or on behalf of, DTC (DTC, together with any successor, being a
"depositary"), as depositary, registered in the name of Cede & Co., DTC's
partnership nominee. Unless and until it is exchanged in whole or in part for
Callable STRIDES in definitive form, no global security may be transferred
except as a whole by the depositary to a nominee of the depositary or by a
nominee of the depositary to the depositary or another nominee of the
depositary or by the depositary or any nominee to a successor of the depositary
or a nominee of that successor.
So long as DTC, or its nominee, is a registered owner of a global
security, DTC or its nominee, as the case may be, will be considered the sole
owner or holder of the Callable STRIDES represented by the global security for
all purposes under the 1983 Indenture. Except as provided below, the beneficial
owners of the Callable STRIDES represented by a global security will not be
entitled to have the Callable STRIDES represented by a global security
registered in their names, will not receive or be entitled to receive physical
delivery of the Callable STRIDES in definitive form and will not be considered
the owners or holders of the Callable STRIDES 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.
S-21
DTC Procedures
The following is based on information furnished by DTC:
DTC will act as securities depositary for the Callable STRIDES. The
Callable STRIDES 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 Callable STRIDES in the aggregate
principal amount of such issue, and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC holds securities that its participants deposit with DTC. DTC also
facilitates the settlement among participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
of DTC include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of its
direct participants and by the NYSE, the AMEX, and the National Association of
Securities Dealers, Inc. Access to DTC's system is also available to others
such as securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a direct participant, either
directly or indirectly. The rules applicable to DTC and its participants are on
file with the SEC.
Purchases of the Callable STRIDES under DTC's system must be made by or
through direct participants, which will receive a credit for the Callable
STRIDES on DTC's records. The ownership interest of each beneficial owner is in
turn to be recorded on the records of direct and indirect participants.
Beneficial owners will not receive written confirmation from DTC of their
purchase, but beneficial owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the direct or indirect participants through which the beneficial
owner entered into the transaction. Transfers of ownership interests in the
Callable STRIDES are to be made by entries on the books of participants acting
on behalf of beneficial owners.
To facilitate subsequent transfers, all Callable STRIDES deposited with
DTC are registered in the name of DTC's partnership nominee, Cede & Co. The
deposit of Callable STRIDES with DTC and their registration in the name of Cede
& Co. effect no change in beneficial ownership. DTC has no knowledge of the
actual beneficial owners of the Callable STRIDES; DTC's records reflect only
the identity of the direct participants to whose accounts the Callable STRIDES
are credited, which may or may not be the beneficial owners. The participants
will remain responsible for keeping account of their holdings on behalf of
their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the
Callable STRIDES. Under its usual procedures, DTC mails an omnibus proxy to
ML&Co. as soon as possible after the applicable record date. The omnibus proxy
assigns Cede & Co.'s consenting or voting rights to those direct participants
identified in a listing attached to the omnibus proxy to whose accounts the
Callable STRIDES are credited on the record date.
S-22
Principal, premium, if any, and/or interest, if any, payments made in
cash on the Callable STRIDES will be made in immediately available funds to
DTC. DTC's practice is to credit direct participants' accounts on the
applicable payment date in accordance with their respective holdings shown on
the depositary's records unless DTC has reason to believe that it will not
receive payment on that date. Payments by participants to beneficial owners
will be governed by standing instructions and customary practices, as is the
case with securities held for the accounts of customers in bearer form or
registered in "street name", and will be the responsibility of that
participant and not of DTC, the trustee or ML&Co., subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
principal, premium, if any, and/or interest, if any, to DTC is the
responsibility of ML&Co. or the trustee, disbursement of those payments to
direct participants will be the responsibility of DTC, and disbursement of
those payments to the beneficial owners will be the responsibility of direct
participants and indirect participants.
Exchange for Certificated Securities
If:
. the depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by ML&Co.
within 60 days,
. ML&Co. executes and delivers to the trustee a company order to the
effect that the global securities shall be exchangeable, or
. an Event of Default under the 1983 Indenture has occurred and is
continuing with respect to the Callable STRIDES,
the global securities will be exchangeable for Callable STRIDES in definitive
form of like tenor and of an equal aggregate principal amount, in
denominations of the principal amount per unit and integral multiples of the
principal amount per unit. The definitive Callable STRIDES will be registered
in the name or names as the depositary shall instruct the trustee. It is
expected that instructions may be based upon directions received by the
depositary from participants with respect to ownership of beneficial interests
in the global securities.
DTC may discontinue providing its services as securities depositary with
respect to the Callable STRIDES at any time by giving reasonable notice to
ML&Co. or the trustee. Under these circumstances, in the event that a
successor securities depositary is not obtained, Callable STRIDES certificates
are required to be printed and delivered.
ML&Co. may decide to discontinue use of the system of book-entry
transfers through DTC or a successor securities depositary. In that event,
Callable STRIDES certificates will be printed and delivered.
The information in this section concerning DTC and DTC's system has been
obtained from sources that ML&Co. believes to be reliable, but ML&Co. takes no
responsibility for its accuracy.
Same-Day Settlement and Payment
Settlement for the Callable STRIDES will be made by the underwriter in
immediately available funds. ML&Co. will make all payments in immediately
available funds so long as the Callable STRIDES are maintained in book-entry
form.
S-23
CISCO COMMON STOCK
Cisco Systems, Inc.
The following information has been derived from publicly available
documents published by Cisco. We make no representation or warranty as to the
accuracy or completeness of the following information.
Information provided to or filed with the SEC by Cisco can be located at
the SEC's facilities or through the SEC's web site at http://www.sec.gov by
reference to SEC file number 0-18225 for Cisco. See "Where You Can Find More
Information". ML&Co. makes no representation or warranty as to the accuracy or
completeness of the information or reports.
The selection of Cisco common stock is not a recommendation to buy or
sell Cisco common stock and neither ML&Co. nor any of its affiliates make any
representation to any purchaser of the Callable STRIDES as to the performance
of Cisco common stock.
Cisco common stock trades on the Nasdaq National Market under the symbol
"CSCO".
ML&Co. is not affiliated with Cisco and Cisco does not have any
obligations with respect to the Callable STRIDES. This prospectus supplement
relates only to the Callable STRIDES and does not relate to Cisco common stock
or other securities of Cisco. All disclosures contained in this prospectus
supplement regarding Cisco are derived from the publicly available documents
described above. Neither ML&Co. nor MLPF&S has participated in the preparation
of these documents or made any due diligence inquiry with respect to Cisco in
connection with the offering of the Callable STRIDES. Neither ML&Co. nor MLPF&S
makes any representation that the publicly available documents or any other
publicly available information regarding Cisco are accurate or complete.
Furthermore, there can be no assurance that all events occurring prior to the
date hereof, including events that would affect the accuracy or completeness of
the publicly available documents described in the preceding paragraph, that
would affect the trading price of Cisco common stock have been publicly
disclosed. Subsequent disclosure of any events or the disclosure of or failure
to disclose material future events concerning Cisco could affect the value of
the Cisco common stock to be received at maturity of the Callable STRIDES and
therefore the trading prices of the Callable STRIDES. Neither ML&Co. nor any of
its affiliates make any representation to any purchaser of the Callable STRIDES
as to the performance of Cisco common stock.
ML&Co. or its affiliates may presently or from time to time engage in
business, directly or indirectly, with Cisco including extending loans to, or
making equity investments in, Cisco or providing investment banking or advisory
services to Cisco, including merger and acquisition advisory services. In the
course of such business, ML&Co. or its affiliates may acquire non-public
information with respect to Cisco and, in addition, one or more affiliates of
ML&Co. may publish research reports with respect to Cisco.
Any prospective purchaser of the Callable STRIDES should undertake an
independent investigation of Cisco as in its judgment is appropriate to make an
informed decision with respect to an investment in the Callable STRIDES.
S-24
Historical data
Cisco common stock is principally traded on the Nasdaq National Market.
The following table sets forth the high and low closing prices for the calendar
quarters during calendar years 1998, 1999, 2000 and 2001. On October 1, 2001,
the last recorded transaction price on the Nasdaq National Market for Cisco
common stock was $11.90 per share. The closing prices listed below were
obtained from Bloomberg Financial Markets. The historical closing prices of
Cisco common stock should not be taken as an indication of future performance,
and no assurance can be given that the price of Cisco common stock will not
decrease. In addition, no assurance can be given that the price of Cisco common
stock will increase above the original issue price so that the value of Cisco
common stock that the beneficial owners of the Callable STRIDES may receive at
maturity, if not previously called by us, will exceed the principal amount of
the Callable STRIDES.
High Low
------- -------
1998
First Quarter........................................... $11.594 $9.042
Second Quarter.......................................... $15.344 $11.083
Third Quarter........................................... $17.323 $13.646
Fourth Quarter.......................................... $24.125 $10.969
1999
First Quarter........................................... $28.750 $23.781
Second Quarter.......................................... $32.219 $25.000
Third Quarter........................................... $36.750 $29.375
Fourth Quarter.......................................... $53.563 $33.250
2000
First Quarter........................................... $80.063 $50.000
Second Quarter.......................................... $74.938 $50.547
Third Quarter........................................... $69.625 $55.188
Fourth Quarter.......................................... $58.563 $36.500
2001
First Quarter........................................... $42.625 $15.250
Second Quarter ......................................... $23.480 $13.625
Third Quarter........................................... $20.300 $11.240
S-25
UNITED STATES FEDERAL INCOME TAXATION
The following discussion is based upon the opinion of Sidley Austin Brown
& Wood llp, counsel to ML&Co. ("Tax Counsel"). As the law applicable to the
U.S. Federal income taxation of instruments such as the Callable STRIDES is
technical and complex, the discussion below necessarily represents only a
general summary. The following summary is based upon laws, regulations, rulings
and decisions now in effect, all of which are subject to change (including
changes in effective dates) or possible differing interpretations. It deals
only with Callable STRIDES 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, persons holding Callable STRIDES as a hedge against currency risks,
as a position in a "straddle" or as part of a "hedging" or "conversion"
transaction for tax purposes, or persons whose functional currency is not the
United States dollar. It also does not deal with holders other than original
purchasers (except where otherwise specifically noted). Persons considering the
purchase of the Callable STRIDES should consult their own tax advisors
concerning the application of United States Federal income tax laws to their
particular situations as well as any consequences of the purchase, ownership
and disposition of the Callable STRIDES arising under the laws of any other
taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a
Callable STRIDES that is for United States Federal income tax purposes (i) a
citizen or resident of the United States, (ii) a corporation or a partnership
(including an entity treated as a corporation or a partnership for United
States Federal income tax purposes) created or organized in or under the laws
of the United States, any state thereof or the District of Columbia (unless, in
the case of a partnership, Treasury regulations are adopted that provide
otherwise), (iii) an estate whose income is subject to United States Federal
income tax regardless of its source (iv) 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 (v) any other person whose income or
gain in respect of a Callable STRIDES is effectively connected with the conduct
of a United States trade or business. Certain trusts not described in clause
(iv) above in existence on August 20, 1996 that elect to be treated as a United
States person will also be a U.S. Holder for purposes of the following
discussion. As used herein, the term "non-U.S. Holder" means a beneficial owner
of a Callable STRIDES that is not a U.S. Holder.
General
There are no statutory provisions, regulations, published rulings or
judicial decisions addressing or involving the characterization and treatment,
for U.S. Federal income tax purposes, of the Callable STRIDES or securities
with terms substantially the same as the Callable STRIDES. Accordingly, the
proper U.S. Federal income tax characterization and treatment of the Callable
STRIDES is uncertain. Pursuant to the terms of the Callable STRIDES, ML&Co. and
every holder of a Callable STRIDES agree (in the absence of an administrative
determination or judicial ruling to the contrary) to characterize a Callable
STRIDES for all tax purposes as an investment unit consisting of the following
components (the "Components"): (i) a debt instrument of ML&Co. (the "Debt
Instrument") with a fixed principal amount unconditionally payable on the
maturity date equal to the principal amount of the Callable STRIDES and bearing
stated interest at the stated interest rate for the Callable STRIDES (the
"Interest Rate") and (ii) a contract (the "Forward Contract") pursuant to which
the holder agrees to use the principal payment due on the Debt Instrument to
make a payment to ML&Co. in exchange for the right to receive one share of
Cisco common stock at maturity, subject to adjustment as described in this
prospectus supplement. In the opinion of Tax Counsel, such characterization and
tax treatment of the Callable STRIDES, although not the only reasonable
characterization and tax treatment, is based on reasonable interpretations of
law currently in effect and, even if successfully challenged by the Internal
Revenue Service (the "IRS"), will not result in the imposition of penalties.
Furthermore, based on ML&Co.'s determination of the relative fair market values
of the Components at the time of issuance of the Callable STRIDES, ML&Co. will
assign $ (i.e., %) of the initial issue price of the Callable STRIDES to
the Debt Instrument and will assign $ (i.e., %) of the initial issue
price of the Callable STRIDES to the Forward Contract. Based upon the
foregoing, a U.S. Holder who acquires a Callable
S-26
STRIDES in connection with the original issuance thereof will be treated as
having purchased the Debt Instrument for $ and as having received an initial
payment (the "Initial Forward Contract Payment") with respect to the Forward
Contract in an amount equal to $ . The initial payment deemed to have been
received by a U.S. Holder with respect to the Forward Contract (i.e., the
Initial Forward Contract Payment) should only be taken into account by the U.S.
Holder as an additional amount realized with respect to the Forward Contract on
the earlier of the sale or other disposition of the Callable STRIDES by the
U.S. Holder or at maturity (which would reduce the U.S. Holder's tax basis in
any Cisco common stock received thereby at maturity). ML&Co.'s allocation of
the issue price will be binding on a U.S. Holder of a Callable STRIDES, unless
such U.S. Holder timely and explicitly discloses to the IRS that its allocation
is different from ML&Co.'s. The treatment of the Callable STRIDES described
above and ML&Co.'s allocation are not, however, binding on the IRS or the
courts. No statutory, judicial or administrative authority directly addresses
the characterization of the Callable STRIDES or instruments similar to the
Callable STRIDES for U.S. Federal income tax purposes, and no ruling is being
requested from the IRS with respect to the Callable STRIDES.
Due to the absence of authorities that directly address instruments that
are similar to the Callable STRIDES, significant aspects of the U.S. Federal
income tax consequences of an investment in the Callable STRIDES are not
certain, and no assurance can be given that the IRS or the courts will agree
with the characterization described above. Accordingly, prospective purchasers
are urged to consult their tax advisors regarding the U.S. Federal income tax
consequences of an investment in a Callable STRIDES (including alternative
characterizations of a Callable STRIDES) and with respect to any tax
consequences arising under the laws of any state, local or foreign taxing
jurisdiction. Unless otherwise stated, the following discussions are based on
the assumption that the treatment and the allocation described above are
accepted for U.S. Federal income tax purposes.
Tax Treatment of a Callable STRIDES
Interest on the Debt Instrument. As described above, the Debt Instrument
is treated as bearing interest at a stated rate of 8% per annum (i.e., the
Interest Rate). A U.S. Holder will include "qualified stated interest" equal to
the stated interest on the Callable STRIDES in income in accordance with the
U.S. Holder's method of accounting for U.S. Federal income tax purposes
(subject to the bond premium rules). Based on ML&Co.'s determination set forth
above, the U.S. Holder's tax basis in the Debt Instrument will initially be %
of the issue price.
Settlement of the Forward Contract. Upon the final settlement of the
Forward Contract on the maturity date, a U.S. Holder would be deemed to have
applied an amount (the "Forward Contract Payment Amount") equal to the
principal amount of the Debt Instrument less the Initial Forward Contract
Payment toward the purchase of Cisco common stock, and such U.S. Holder should
not recognize any gain or loss with respect to the Cisco common stock received
upon the final settlement of the Forward Contract. However, a U.S. Holder would
be required to recognize gain or loss with respect to any cash received in lieu
of fractional shares of Cisco common stock. The amount of such gain or loss
would be equal to the difference, if any, between the amount of cash received
and the portion of the Forward Contract Payment Amount that is allocable to
such fractional shares. Any such gain or loss would be treated as short-term
capital gain or loss. A U.S. Holder's tax basis in the Cisco common stock so
received would be equal to the Forward Contract Payment Amount less the portion
of the Forward Contract Payment Amount that is allocable to any fractional
shares. Such U.S. Holder's holding period for the Cisco common stock would
begin on the day immediately following the maturity date.
Sale, Exchange or Redemption of the Callable STRIDES
Upon a sale, exchange or redemption of a Callable STRIDES prior to the
maturity of the Callable STRIDES, a U.S. Holder would recognize taxable gain or
loss equal to the difference between the amount realized on such sale, exchange
or redemption (as allocated among the Components in accordance with their
relative fair market values) and such U.S. Holder's tax basis in the Components
deemed so sold, exchanged or
S-27
redeemed. Any such gain or loss would generally be long-term or short-term
capital gain or loss (depending on the U.S. Holder's holding period for the
Callable STRIDES). For these purposes, the amount realized does not include any
amount attributable to accrued interest on the Debt Instrument, which would be
taxed as described under "Tax Treatment of a Callable STRIDES--Interest on the
Debt Instrument" above.
Premium
If a U.S. Holder purchases the Debt Instrument for an amount that is
greater than the sum of all amounts payable on the Debt Instrument after the
purchase date other than payments of qualified stated interest (i.e., the
principal amount), such U.S. Holder will be considered to have purchased the
Debt Instrument with "amortizable bond premium" equal in amount to such excess.
A U.S. Holder may elect to amortize such premium using a constant yield method
over the remaining term of the Debt Instrument and may offset interest
otherwise required to be included in respect of the Debt Instrument during any
taxable year by the amortized amount of such excess for the taxable year.
However, since the Callable STRIDES may be optionally called by ML&Co. on or
after October , 2002, special rules would apply which could possibly result
in a deferral of the amortization of some bond premium until later in the term
of the Debt Instrument. U.S. Holders are urged to consult their own tax
advisors regarding the application of these special rules. Any election to
amortize bond premium applies to all taxable debt instruments acquired by the
U.S. Holder on or after the first day of the first taxable year to which such
election applies and may be revoked only with the consent of the IRS.
Possible Alternative Tax Treatments of an Investment in a Callable STRIDES
Due to the absence of authorities that directly address the proper
characterization of the Callable STRIDES, no assurance can be given that the
IRS will accept, or that a court will uphold, the characterization and tax
treatment described above. In particular, the IRS could seek to analyze the
U.S. Federal income tax consequences of owning a Callable STRIDES under
Treasury regulations governing contingent payment debt instruments (the
"Contingent Payment Regulations").
ML&Co. will take the position that the Contingent Payment Regulations do
not apply to the Callable STRIDES. If the IRS were successful in asserting that
the Contingent Payment Regulations applied to the Callable STRIDES, the timing
and character of income thereon would be significantly affected. Among other
things, a U.S. Holder would be required to accrue as original issue discount,
subject to the adjustments described below, income at a "comparable yield" on
the issue price, regardless of the U.S. Holder's usual method of accounting for
U.S. Federal income tax purposes. In addition, the Contingent Payment
Regulations require that a projected payment schedule, which results in such a
"comparable yield," be determined, and that adjustments to income accruals be
made to account for differences between actual payments and projected amounts
(including upon receipt of Cisco common stock at maturity). Furthermore, any
gain realized with respect to a Callable STRIDES would generally be treated as
ordinary income, and any loss realized would generally be treated as ordinary
loss to the extent of the U.S. Holder's prior ordinary income inclusions (which
were not previously reversed) with respect to the Callable STRIDES.
Even if the Contingent Payment Regulations do not apply to the Callable
STRIDES, other alternative U.S. Federal income characterizations or treatments
of the Callable STRIDES are also possible, which may also affect the timing and
the character of the income or loss with respect to the Callable STRIDES.
Accordingly, prospective purchasers are urged to consult their tax advisors
regarding the U.S. Federal income tax consequences of an investment in a
Callable STRIDES.
Constructive Ownership Law
Section 1260 of the Internal Revenue Code of 1986, as amended (the
"Code") treats a taxpayer owning certain types of derivative positions in
property as having "constructive ownership" of that property, with the result
that all or a portion of any long-term capital gain recognized by such taxpayer
with respect to
S-28
the derivative position will be recharacterized as ordinary income. In its
current form, Section 1260 of the Code does not apply to a Callable STRIDES. If
Section 1260 of the Code were to apply to a Callable STRIDES in the future,
however, the effect on a U.S. Holder of a Callable STRIDES would be to treat
all or a portion of any long-term capital gain recognized by such U.S. Holder
on the sale, exchange, redemption or maturity of a Callable STRIDES (or upon
the sale of any Cisco common stock received thereon) as ordinary income. In
addition, Section 1260 of the Code would impose an interest charge on any such
gain that was recharacterized. U.S. Holders should consult their tax advisors
regarding the potential application of Section 1260 of the Code, if any, to the
purchase, ownership and disposition of a Callable STRIDES.
Non-U.S. Holders
In the case of a non-U.S. Holder, ML&Co. intends to withhold applicable
United States withholding taxes at a rate of 30% on payments of interest made
with respect to the Callable STRIDES subject to reduction by applicable treaty
or upon the receipt of a Form W-8ECI from a non-U.S. Holder claiming that the
payments are effectively connected with the conduct of a United States trade or
business. Any capital gain realized upon the sale or other disposition of a
Callable STRIDES by a non-U.S. Holder will generally not be subject to United
States Federal income tax if (i) such gain is not effectively connected with a
United States trade or business of such non-U.S. Holder and (ii) in the case of
an individual non-U.S. Holder, such individual is not present in the United
States for 183 days or more in the taxable year of the sale or other
disposition and such individual does not have a "tax home" (as defined for
United States Federal income tax purposes) in the United States.
Backup Withholding and Information Reporting
A beneficial owner of a Callable STRIDES may be subject to information
reporting and to backup withholding on certain amounts paid to the beneficial
owner unless such beneficial owner provides proof of an applicable exemption or
a correct taxpayer identification number, and otherwise complies with
applicable requirements of the backup withholding rules.
Any amounts withheld under the backup withholding rules from a payment to
a beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations which
make certain modifications to the withholding, backup withholding and
information reporting rules described above. The new regulations attempt to
unify certification requirements and modify reliance standards. The new
regulations are generally effective for payments made after December 31, 2000,
subject to certain transitional rules. Prospective investors are urged to
consult their own tax advisors regarding the new regulations.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Internal Revenue Code, as amended (the
"Code") prohibit various transactions between certain parties and the assets of
employee benefit plans, unless an exemption is available; governmental plans
may be subject to similar prohibitions. Because transactions between a plan and
ML&Co. may be prohibited absent an exemption, each fiduciary, by its purchase
of any Callable STRIDES on behalf of any plan, represents on behalf of itself
and the plan, that the acquisition, holding and any subsequent disposition of
the Callable STRIDES will not result in a violation of ERISA, the Code or any
other applicable law or regulation.
S-29
USE OF PROCEEDS AND HEDGING
The net proceeds from the sale of the Callable STRIDES will be used as
described under "Use of Proceeds" in the accompanying prospectus and to hedge
market risks of ML&Co. associated with its obligations in connection with the
Callable STRIDES.
WHERE YOU CAN FIND MORE INFORMATION
ML&Co.
We file reports, proxy statements and other information with the SEC. Our
SEC filings are also available over the Internet at the SEC's web site at
http://www.sec.gov. 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 by visiting 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 further
information about the public reference rooms and their copy charges. You may
also inspect our SEC reports and other information at the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
We have filed a registration statement on Form S-3 with the SEC covering
the Callable STRIDES and other securities. For further information on ML&Co.
and the Callable STRIDES, you should refer to our registration statement and
its exhibits. The prospectus accompanying this prospectus supplement summarizes
material provisions of contracts and other documents that we refer you to.
Because the prospectus may not contain all the information that you may find
important, you should review the full text of these documents. We have included
copies of these documents as exhibits to our registration statement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not, and the underwriter has not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus
supplement and the accompanying prospectus is accurate as of the date on the
front cover of this prospectus supplement only. Our business, financial
condition and results of operations may have changed since that date.
Cisco Systems, Inc.
Cisco files reports, proxy statements and other information with the SEC.
Information provided to or filed with the SEC by Cisco pursuant to the
Securities Exchange Act of 1934 can be located at the SEC's facilities or
accessed through the SEC's web site by reference to SEC file number 0-18225.
You may also inspect Cisco's SEC reports and other information at the Nasdaq
National Market. In addition, information regarding Cisco may be obtained from
other sources including, but not limited to, press releases, newspaper articles
and other publicly disseminated documents. We make no representation or
warranty as to the accuracy or completeness of the information or reports.
S-30
UNDERWRITING
MLPF&S has agreed, subject to the terms and conditions of the
underwriting agreement and a terms agreement, to purchase from ML&Co. $
aggregate principal amount of Callable STRIDES. The underwriting agreement
provides that the obligations of the underwriter are subject to certain
conditions and that the underwriter will be obligated to purchase all of the
Callable STRIDES if any are purchased.
The underwriter has advised ML&Co. that it proposes initially to offer
the Callable STRIDES 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 Callable STRIDES subject to receipt and acceptance and subject to
the underwriter's right to reject any order in whole or in part. Proceeds to be
received by ML&Co. will be net of the underwriting discount and expenses
payable by ML&Co.
The underwriting of the Callable STRIDES will conform to the requirements
set forth in the applicable sections of Rule 2720 of the Conduct Rules of the
NASD.
The underwriter is permitted to engage in certain transactions that
stabilize the price of the Callable STRIDES. These transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Callable STRIDES.
If the underwriter creates a short position in the Callable STRIDES in
connection with the offering, i.e., if it sells more units of the Callable
STRIDES than are set forth on the cover page of this prospectus supplement, the
underwriter may reduce that short position by purchasing units of the Callable
STRIDES 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 close out a short position in the Callable STRIDES by purchasing
Callable STRIDES 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 Callable
STRIDES. In addition, neither ML&Co. nor the underwriter makes any
representation that the underwriter will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
MLPF&S may use this prospectus supplement and the accompanying prospectus
for offers and sales related to market-making transactions in the Callable
STRIDES. 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 CALLABLE STRIDES
The validity of the Callable STRIDES will be passed upon for ML&Co. and
for the underwriter by Sidley Austin Brown & Wood LLP, New York, New York.
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.
S-31
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 is 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-32
INDEX OF DEFINED TERMS
Page
----
Business Day............................................................... S-12
Call Date.................................................................. S-5
Call Price................................................................. S-5
Callable STRIDES........................................................... S-1
Cisco...................................................................... S-4
Code....................................................................... S-28
Components................................................................. S-26
Contingent Payment Regulations............................................. S-28
Debt Instrument............................................................ S-26
depositary................................................................. S-21
DTC........................................................................ S-4
ERISA...................................................................... S-29
ex-dividend date........................................................... S-17
Extraordinary Dividend..................................................... S-17
Extraordinary Dividend Amount.............................................. S-17
Final Amount............................................................... S-5
Forward Contract........................................................... S-26
Forward Contract Payment Amount............................................ S-27
Initial Forward Contract Payment........................................... S-27
Interest Rate.............................................................. S-26
IRS........................................................................ S-26
Market Disruption Event.................................................... S-18
ML&Co...................................................................... S-4
MLPF&S..................................................................... S-4
NASD....................................................................... S-17
NASDAQ NMS................................................................. S-17
Non-U.S. Holder............................................................ S-26
OTC Bulletin Board......................................................... S-17
Pricing Date............................................................... S-4
Reorganization Event....................................................... S-19
Reorganization Event Amount................................................ S-20
Share Multiplier........................................................... S-12
Spin-off Event............................................................. S-19
Successor Entity........................................................... S-19
Tax Counsel................................................................ S-26
Trading Day................................................................ S-12
U.S. Holder................................................................ S-26
S-33
ANNEX A
Call Price Calculation Methodology
The Call Price is the amount of cash, per Callable STRIDES, that when
discounted from the Call Date to the original issue date by a discount factor
based on an annual yield to call expected to be between 30% and 35% and added
to the present value of all interest payments discounted to the original issue
date by that same discount factor, will equal the original issue price.
The following steps describe the calculation of the Call Price for May
30, 2003:
. First, the sum of the present values on the original issue date of
all interest payments made (assuming a discount factor based on an
annual yield to call of 32.5%, the midpoint of the expected range of
30% to 35% per year) on the Callable STRIDES through and including
the applicable Call Date is calculated. For a more detailed
description of this calculation, please see the table below.
The following table illustrates, for the hypothetical interest payment
dates and the hypothetical Call Date the:
(a) amount of interest payable (computed on the basis of a 360-day
year of twelve 30-day months) on the applicable date;
(b) years from the original issue date to the applicable interest
payment date (computed on the basis of a 360-day year of twelve
30-day months);
(c) discount factor (/1/) based upon the yield to call of 32.5%, the
midpoint of the expected range of 30% to 35%;
(d) present value at the original issue date of the interest
payments; and
(e) the sum of the present values of all interest payments
discounted to the original issue date.
For the purpose of calculating the following table we have assumed:
. original issue date: September 28, 2001
. original issue price: $12.18 per Callable STRIDES (for the
purposes of this table,
we have assumed this price was the closing
price of Cisco
common stock on the hypothetical Pricing
Date)
. interest rate: 8% per year
. interest payment dates: On the 29th day of each March, June,
September and December
beginning on December 29, 2001 (computed on
the basis of a
360-day year of twelve 30-day months)
. yield to call: 32.50%, the midpoint of the expected range
between 30% and
35% (computed on the basis of a 360-day year
of twelve 30-day
months, compounded annually)
. maturity date: September 29, 2003
Discount
Years Factor
From based on Present Value at
Interest Original the Original Issue
Interest Payment Amount Issue Yield to Date of Interest
Date Payable Date Call Payments
---------------- -------- -------- -------- ----------------
September 28, 2001 - - 0.0000 1.0000 - -
December 29, 2001 $0.2463(2) 0.2528 0.9313 $0.2294
March 29, 2002 $0.2436 0.5028 0.8681 $0.2115
June 29, 2002 $0.2436 0.7528 0.8091 $0.1971
September 29, 2002 $0.2436 1.0028 0.7541 $0.1837
December 29, 2002 $0.2436 1.2528 0.7029 $0.1712
March 29, 2003 $0.2436 1.5028 0.6551 $0.1596
May 30, 2003 $0.1651 1.6722 0.6246 $0.1031
-------
Sum of the present values of all interest
payments: $1.2556
=======
( 1 )/x/
(1) The hypothetical discount factor is equal to (-----), where X is the number
(1.325)
of years from the original issue date (computed on the basis of a 360-day
year of twelve 30-day months compounded annually). The actual discount
factor will be determined on the Pricing Date based upon the actual yield to
call and will be disclosed in the final prospectus supplement delivered in
connection with sales of the Callable STRIDES.
(2) The hypothetical coupon payment paid on December 29, 2001 was calculated
from and including September 28, 2001 to but excluding December 29, 2001.
A-1
. Next, the sum of the present values of the interest payments is
subtracted from the original issue price to produce the present value
of the Call Price on the original issue date:
$12.18-$1.2556 = $10.9244 (the present value of the Call Price).
. Finally, the present value of the Call Price is divided by the
applicable discount factor(/1/), the quotient being the present value
of the Call Price payable on the applicable Call Date:
$10.9244
------- = $17.4892 (the Call Price).
$0.6246
( 1 )/x/
(1) The hypothetical discount factor is equal to (-----), where X is the number
(1.325)
of years from the original issue date (computed on the basis of a 360-day
year of twelve 30-day months). The actual discount factor will be determined
on the Pricing Date based upon the actual yield to call and will be
disclosed in the final prospectus supplement delivered in connection with
sales of the Callable STRIDES.
A-2
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[LOGO]
2,500,000 Units
Merrill Lynch & Co., Inc.
8% STock Return Income DEbt Securities /SM/
due October , 2003
"Callable STRIDES /SM/"
Payable at maturity with Cisco common stock
----------------------------------
PROSPECTUS SUPPLEMENT
----------------------------------
Merrill Lynch & Co.
October , 2001
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