Filed Pursuant to Rule 424(b)(5)
Registration No. 333-52822
PROSPECTUS SUPPLEMENT
- ---------------------
(To prospectus dated January 24, 2001)
[LOGO]
2,500,000 Units
Merrill Lynch & Co., Inc.
Enhanced Return Notes/SM/ Linked to the Nasdaq-100 Index(R)
due March 1, 2004
(the "Notes")
$10 original public offering price per unit
----------------
The Notes: Payment at maturity:
. No payments before the maturity date. . The amount you receive at maturity will be based upon
the percentage change in the value of the Nasdaq-100
. We cannot redeem the Notes before their maturity date. Index. If the value of the Nasdaq-100 Index has
increased, at maturity you will receive a payment per
. Senior unsecured debt securities of Merrill Lynch & Co., Note based upon twice the percentage increase, not to
Inc. exceed a maximum payment of $15.00 per Note. If the
value of the Nasdaq-100 Index has declined, at maturity
. Linked to the value of the Nasdaq-100 Index(R), index you will receive a payment per Note based on the
symbol "NDX". percentage decrease. As a result, you may receive less,
and possibly significantly less, than the original public
. The Notes have been approved for quotation on The offering price of $10 per Note.
Nasdaq National Market under the trading symbol
"ERNB", subject to official notice of issuance.
. Expected settlement date: March 1, 2002.
Investing in the Notes involves risks that are described in the "Risk
Factors" section beginning on page S-7 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)............................... $10.00 $25,000,000
Underwriting discount.................................. $.20 $500,000
Proceeds, before expenses, to Merrill Lynch & Co., Inc. $9.80 $24,500,000
(1)The public offering price and the underwriting discount for any
single transaction to purchase 50,000 units or more will be $9.90 per
unit and $.10 per unit, respectively.
----------------
Merrill Lynch & Co.
----------------
The date of this prospectus supplement is February 26, 2002.
"Nasdaq", "Nasdaq-100" and "Nasdaq-100 Index" are trademarks, trade names or
service marks owned by The Nasdaq Stock Market, Inc.
"Enhanced Return Notes" is a service mark of Merrill Lynch & Co., Inc.
TABLE OF CONTENTS
Prospectus Supplement
Page
----
SUMMARY INFORMATION--Q&A................................................................................. S-4
What are the Notes?................................................................................... S-4
What will I receive on the stated maturity date of the Notes?......................................... S-4
Who publishes the Nasdaq-100 Index and what does the Nasdaq-100 Index measure?........................ S-5
How has the Nasdaq-100 Index performed historically?.................................................. S-5
What about taxes?..................................................................................... S-6
Will I receive interest payments on the Notes?........................................................ S-6
Will the Notes be listed on a stock exchange?......................................................... S-6
What is the role of MLPF&S?........................................................................... S-6
Who is ML&Co.?........................................................................................ S-6
Are there any risks associated with my investment?.................................................... S-6
RISK FACTORS............................................................................................. S-7
Your investment may result in a loss.................................................................. S-7
Your yield may be lower than the yield on a standard debt security of comparable maturity............. S-7
Your return is limited and will not reflect the return of owning the stocks included in the
Nasdaq-100 Index.................................................................................... S-7
There may be an uncertain trading market for the Notes................................................ S-7
Many factors affect the trading value of the Notes; these factors interrelate in complex ways and the
effect of any one factor may offset or magnify the effect of another factor......................... S-8
Amounts payable on the Notes may be limited by state law.............................................. S-9
Purchases and sales by us and our affiliates may affect your return................................... S-9
Potential conflicts................................................................................... S-9
Uncertain tax consequences............................................................................ S-9
DESCRIPTION OF THE NOTES................................................................................. S-10
Payment at maturity................................................................................... S-10
Hypothetical returns.................................................................................. S-11
Adjustments to the Nasdaq-100 Index; Market Disruption Events......................................... S-12
Discontinuance of the Nasdaq-100 Index................................................................ S-13
Events of Default and Acceleration.................................................................... S-14
Depositary............................................................................................ S-14
Same-Day Settlement and Payment....................................................................... S-16
THE NASDAQ-100 INDEX..................................................................................... S-17
Computation of the Nasdaq-100 Index................................................................... S-17
Historical Data on the Nasdaq-100 Index............................................................... S-20
License Agreement..................................................................................... S-21
UNITED STATES FEDERAL INCOME TAXATION.................................................................... S-22
General............................................................................................... S-22
Tax Treatment of the Notes............................................................................ S-23
Non-U.S. Holders...................................................................................... S-23
Backup Withholding and Information Reporting.......................................................... S-24
ERISA CONSIDERATIONS..................................................................................... S-24
USE OF PROCEEDS AND HEDGING.............................................................................. S-24
WHERE YOU CAN FIND MORE INFORMATION...................................................................... S-24
UNDERWRITING............................................................................................. S-25
VALIDITY OF THE NOTES.................................................................................... S-26
EXPERTS.................................................................................................. S-26
INDEX OF DEFINED TERMS................................................................................... S-27
S-2
Prospectus
Page
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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 Enhanced Return Notes/SM/ Linked to the Nasdaq-100
Index(R) due March 1, 2004 (the "Notes"). You should carefully read this
prospectus supplement and the accompanying prospectus to fully understand the
terms of the Notes, the Nasdaq-100 Index and the tax and other considerations
that are important to you in making a decision about whether to invest in the
Notes. You should carefully review the "Risk Factors" section, which highlights
certain risks associated with an investment in the Notes, to determine whether
an investment in the Notes 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 Notes?
The Notes will be a series of senior debt securities issued by ML&Co. and
will not be secured by collateral. The Notes will rank equally with all of our
other unsecured and unsubordinated debt. The Notes will mature on March 1, 2004.
Each unit will represent a single Note with an original public offering
price of $10.00. You may transfer the Notes 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 Notes 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 Notes. You should refer to the section
entitled "Description of the Notes--Depositary" in this prospectus supplement.
What will I receive on the stated maturity date of the Notes?
On the stated maturity date for each unit of Notes you own you will
receive a payment equal to the "Redemption Amount". The Redemption Amount to
which you will be entitled depends entirely on the relation of the Ending Value
to the Starting Value:
(i) If the Ending Value is greater than the Starting Value, the
Redemption Amount per unit will equal:
( ( Ending Value - Starting Value ))
$10 + ( $20 X ( ----------------------------- ))
( ( Starting Value ))
provided, however, the Redemption Amount cannot exceed $15.00 per unit
(the "Capped Value").
(ii) If the Ending Value is less than or equal to the Starting Value, the
Redemption Amount per unit will equal:
( Ending Value )
$10 X ( -------------- )
( Starting Value )
The "Starting Value" equals 1,401.19, which was the closing value of the
Nasdaq-100 Index on February 26, 2002, the date the Notes were priced for
initial sale to the public (the "Pricing Date").
The "Ending Value" means the average of the values of the Nasdaq-100
Index at the close of the market on five business days shortly before the
maturity date. We may calculate the Ending Value by reference to fewer than
five or even by reference to a single day's closing value if, during the period
shortly before the maturity date of the Notes, there is a disruption in the
trading of the component stocks included in the Nasdaq-100 Index or certain
futures or options contracts relating to the Nasdaq-100 Index.
You should understand that the opportunity to participate in the possible
increases in the value of the Nasdaq-100 Index through an investment in the
Notes is limited because the amount that you receive on the maturity date will
never exceed the Capped Value, which represents an appreciation of 50% over the
original public offering price of the Notes.
S-4
However, in the event that the value of the Nasdaq-100 Index declines over the
term of the Notes, you will realize the entire decline in the value of the
Notes and may therefore lose a part or all of your initial investment in the
Notes.
For more specific information about the Redemption Amount, please see the
section entitled "Description of the Notes" in this prospectus supplement.
Examples
Set forth below are three examples of Redemption Amount calculations:
Example 1--The hypothetical Ending Value is equal to 50% of the Starting
Value at maturity:
Starting Value: 1,401.19
Hypothetical Ending Value: 700.60
( 700.60 )
Redemption Amount (per unit) = $10 X ( --------- ) = $5.00
( 1,401.19 )
Example 2--The hypothetical Ending Value is equal to 105% of the Starting
Value at maturity:
Starting Value: 1,401.19
Hypothetical Ending Value: 1,471.25
( (1,471.25-1,401.19))
Redemption Amount (per unit) = $10 + ( $20 X (-----------------)) = $11.00
( ( 1,401.19 ))
Example 3--The hypothetical Ending Value is equal to 190% of the Starting
Value at maturity:
Starting Value: 1,401.19
Hypothetical Ending Value: 2,662.26
( (2,662.26-1,401.19))
Redemption Amount (per unit) = $10 + ( $20 X (-----------------)) = $15.00
( ( 1,401.19 ))
(Redemption Amount cannot
be greater than
the Capped Value)
Who publishes the Nasdaq-100 Index and what does the Nasdaq-100 Index measure?
The Nasdaq-100 Index is a modified capitalization-weighted index of 100
of the largest and most actively traded stocks of non-financial companies
listed on the Nasdaq National Market(R) tier of The Nasdaq Stock Market. The
Nasdaq-100 Index is currently calculated and published by The Nasdaq Stock
Market, Inc. (the "Nasdaq"(R)).
Please note that an investment in the Notes does not entitle you to any
ownership interest in the stocks of the companies included in the Nasdaq-100
Index.
How has the Nasdaq-100 Index performed historically?
You can find a table with the month-end closing values of the Nasdaq-100
Index from January 1996 through January 2002 in the section entitled "The
Nasdaq-100 Index" in this prospectus supplement. We have provided this
historical information to help you evaluate the behavior of the Nasdaq-100
Index in various economic environments; however, past
S-5
performance of the Nasdaq-100 Index is not necessarily indicative of how the
Nasdaq-100 Index will perform in the future.
What about taxes?
The U.S. federal income tax consequences of an investment in the Notes
are complex and uncertain. Pursuant to the terms of the Notes, ML&Co. and you
agree, in the absence of an administrative or judicial ruling to the contrary,
to characterize a Note for all tax purposes as a pre-paid cash-settled forward
contract linked to the value of the Nasdaq-100 Index. Under this
characterization of the Notes, you should be required to recognize gain or loss
to the extent that you receive cash on the maturity date or upon a sale or
exchange of a Note prior to the maturity date. You should review the discussion
under the section entitled "United States Federal Income Taxation" in this
prospectus supplement.
Will I receive interest payments on the Notes?
You will not receive any interest payments on the Notes, but will instead
receive the Redemption Amount at maturity. We have designed the Notes for
investors who are willing to forego market interest payments on the Notes, such
as floating interest rates paid on standard senior non-callable debt
securities, in exchange for the ability to participate in changes in the value
of the Nasdaq-100 Index over the term of the Notes.
Will the Notes be listed on a stock exchange?
The Notes have been approved for quotation on The Nasdaq National Market
under the trading symbol "ERNB", subject to official notice of issuance. You
should be aware that the quotation of the Notes on The Nasdaq National Market
will not necessarily ensure that a liquid trading market will be available for
the Notes. You should review the section entitled "Risk Factors--There may be
an uncertain trading market for the Notes" in this prospectus supplement.
What is the role of MLPF&S?
Our subsidiary MLPF&S is the underwriter for the offering and sale of the
Notes. After the initial offering, MLPF&S intends to buy and sell Notes to
create a secondary market for holders of the Notes, and may stabilize or
maintain the market price of the Notes during the initial distribution of the
Notes. However, MLPF&S will not be obligated to engage in any of these market
activities or continue them once it has started.
MLPF&S will also be our agent for purposes of calculating, among other
things, the Ending Value and the Redemption Amount. Under certain
circumstances, these duties could result in a conflict of interest between
MLPF&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 subsidiary
and affiliated companies that provide investment, financing, insurance and
related services on a global basis.
For information about ML&Co., see the section entitled "Merrill Lynch &
Co., Inc." in the accompanying prospectus. You should also read other documents
ML&Co. has filed with the SEC, which you can find by referring to the section
entitled "Where You Can Find More Information" in this prospectus supplement.
Are there any risks associated with my investment?
Yes, an investment in the Notes is subject to risk. Please refer to the
section entitled "Risk Factors" in this prospectus supplement.
S-6
RISK FACTORS
Your investment in the Notes will involve risks. You should carefully
consider the following discussion of risks before deciding whether an
investment in the Notes is suitable for you.
Your investment may result in a loss
We will not repay you a fixed amount of principal on the Notes at
maturity. The payment at maturity on the Notes will depend on the change in the
value of Nasdaq-100 Index. Because the value of the Nasdaq-100 Index is subject
to market fluctuations, the amount of cash you receive at maturity may be more
or less than the original public offering price of the Notes. If the Ending
Value is less than the Starting Value, the Redemption Amount will be less than
the original public offering price of each Note, in which case your investment
in the Notes will result in a loss to you. Additionally, although any positive
return on the Notes is based on twice the amount of the percentage increase in
the Nasdaq-100 Index, in no event will the amount you receive at maturity be
greater than the Capped Value.
Your yield may be lower than the yield on a standard debt security of
comparable maturity
The amount we pay you at maturity may be less than the return you could
earn on other investments. Your yield may be less than the yield you would earn
if you bought a standard senior non-callable debt security of ML&Co. with the
same maturity date. Your investment may not reflect the full opportunity cost
to you when you take into account factors that affect the time value of money.
Your return is limited and will not reflect the return of owning the stocks
included in the Nasdaq-100 Index
You should understand that the opportunity to participate in the possible
increases in the value of the Nasdaq-100 Index through an investment in the
Notes is limited because the amount that you receive on the maturity date will
never exceed the Capped Value, which represents an appreciation of 50% over the
original public offering price of the Notes. However, in the event that the
value of the Index declines over the term of the Notes, you will realize the
entire decline and will lose a part or all of your initial investment.
In addition, your return will not reflect the return you would realize if
you actually owned the stocks underlying the Nasdaq-100 Index and received the
dividends paid on those stocks because Nasdaq calculates the Nasdaq-100 Index
by reference to the prices of the common stocks included in the Nasdaq-100
Index without taking into consideration the value of dividends paid on those
stocks.
There may be an uncertain trading market for the Notes
The Notes have been approved for quotation on The Nasdaq National Market
under the trading symbol "ERNB", subject to official notice of issuance. You
cannot assume that a trading market will develop for the Notes. If a trading
market does develop, there can be no assurance that there will be liquidity in
the trading market. The development of a trading market for the Notes will
depend on our financial performance and other factors such as the increase, if
any, in the value of the Nasdaq-100 Index.
If the trading market for the Notes is limited, there may be a limited
number of buyers for your Notes if you do not wish to hold your investment
until maturity. This may affect the price you receive.
S-7
Many factors affect the trading value of the Notes; 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 Notes 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 Notes
caused by another factor and that the effect of one factor may exacerbate the
decrease in the trading value of the Notes caused by another factor. For
example, a change in the volatility of the Nasdaq-100 Index may offset some or
all of any increase in the trading value of the Notes attributable to another
factor, such as an increase in the value of the Nasdaq-100 Index. The following
paragraphs describe the expected impact on the market value of the Notes given
a change in a specific factor, assuming all other conditions remain constant.
The value of the Nasdaq-100 Index is expected to affect the trading value
of the Notes. We expect that the market value of the Notes will depend
substantially on the amount, if any, by which the value of the Nasdaq-100 Index
exceeds or does not exceed the Starting Value. If you choose to sell your Notes
when the value of the Nasdaq-100 Index exceeds the Starting Value, you may
receive substantially less than the amount that would be payable at maturity
based on this value because of the expectation that the Nasdaq-100 Index will
continue to fluctuate until the Ending Value is determined. In addition, the
payment at maturity on the Notes will not exceed the Capped Value, therefore we
do not expect the Notes will trade in the secondary market above the Capped
Value. If you choose to sell your Notes when the value of the Nasdaq-100 Index
is below the Starting Value, you may receive less than the $10 original public
offering price per Note.
Changes in the volatility of the Nasdaq-100 Index are expected to affect
the trading value of the Notes. Volatility is the term used to describe the
size and frequency of price and/or market fluctuations. If the volatility of
the Nasdaq-100 Index increases or decreases the trading value of the Notes may
be adversely affected.
Changes in the levels of interest rates are expected to affect the
trading value of the Notes. We expect that changes in interest rates will
affect the trading value of the Notes. In general, if U.S. interest rates
increase, we expect that the trading value of the Notes will decrease and,
conversely, if U.S. interest rates decrease, we expect that the trading value
of the Notes will increase.
Changes in dividend yields of the stocks included in the Nasdaq-100 Index
are expected to affect the trading value of the Notes. In general, if dividend
yields on the stocks included in the Nasdaq-100 Index increase, we expect that
the value of the Notes will decrease and, conversely, if dividend yields on
these stocks decrease, we expect that the value of the Notes will increase.
Changes in our credit ratings may affect the trading value of the
Notes. 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 Notes. However, because the return on your
Notes is dependent upon factors in addition to our ability to pay our
obligations under the Notes, such as the percentage increase in the value of
the Nasdaq-100 Index at maturity, an improvement in our credit ratings will not
reduce the other investment risks related to the Notes.
In general, assuming all relevant factors are held constant, we expect
that the effect on the trading value of the Notes of a given change in most of
the factors listed above will be less if it occurs later in the term of the
Notes than if it occurs earlier in the term of the Notes. However, so long as
the value of the Nasdaq-100 Index is less than 25% above the Starting Value, we
expect that the effect on the trading value of the Notes of a given increase or
decrease in the value of the Nasdaq-100 Index will be greater if it occurs
later in the term of the Notes than if it occurs earlier in the term of the
Notes.
S-8
Amounts payable on the Notes may be limited by state law
New York State law governs the 1983 Indenture under which the Notes 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 Notes.
Under present New York law, the maximum rate of interest is 25% per annum on a
simple interest basis. This limit may not apply to debt securities in which
$2,500,000 or more has been invested.
While we believe that New York law would be given effect by a state or
Federal court sitting outside of New York, many other states also have laws
that regulate the amount of interest that may be charged to and paid by a
borrower. We will promise, for the benefit of the Noteholders, to the extent
permitted by law, not to voluntarily claim the benefits of any laws concerning
usurious rates of interest.
Purchases and sales by us and our affiliates may affect your return
We and our affiliates may from time to time buy or sell the stocks
underlying the Nasdaq-100 Index or futures or options contracts on the
Nasdaq-100 Index for our own accounts for business reasons and expect to enter
into these transactions in connection with hedging our obligations under the
Notes. These transactions could affect the price of these stocks and, in turn,
the value of the Nasdaq-100 Index in a manner that could be adverse to your
investment in the Notes.
Potential conflicts
Our subsidiary MLPF&S is our agent for the purposes of calculating the
Ending Value and the Redemption Amount. Under certain circumstances, MLPF&S'
role as our subsidiary and its responsibilities as calculation agent for the
Notes could give rise to conflicts of interest. These conflicts could occur,
for instance, in connection with its determination as to whether the value of
the Nasdaq-100 Index can be calculated on a particular trading day, or in
connection with judgments that it would be required to make in the event of a
discontinuance of the Nasdaq-100 Index. See the sections entitled "Description
of the Notes--Adjustments to the Nasdaq-100 Index; Market Disruption Events"
and "--Discontinuance of the Nasdaq-100 Index" in this prospectus supplement.
MLPF&S is required to carry out its duties as calculation agent in good faith
and using its reasonable judgment. However, you should be aware that because we
control MLPF&S, potential conflicts of interest could arise.
We have entered into an arrangement with one of our subsidiaries to hedge
the market risks associated with our obligation to pay amounts due at maturity
on the Notes. 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 Notes,
aspects of which are uncertain. See the section entitled "United States Federal
Income Taxation" in this prospectus supplement.
S-9
DESCRIPTION OF THE NOTES
ML&Co. will issue the Notes as a series of senior debt securities under
the 1983 Indenture, which is more fully described in the accompanying
prospectus. The Notes will mature on March 1, 2004.
While at the stated maturity a beneficial owner of a Note will receive an
amount equal to the Redemption Amount, there will be no other payment of
interest, periodic or otherwise. See the section entitled "--Payment at
maturity".
The Notes will not be subject to redemption by ML&Co. or at the option of
any beneficial owner before maturity. If an Event of Default occurs with
respect to the Notes, registered holders of the Notes may accelerate the
maturity of the Notes, as described under "--Events of Default and
Acceleration" in this prospectus supplement and "Description of Debt
Securities--Events of Default" in the accompanying prospectus.
ML&Co. will issue the Notes in denominations of whole units each with an
original public offering price of $10.00 per Note.
The Notes will not have the benefit of any sinking fund.
Payment at maturity
At the stated maturity, a beneficial owner of a Note will be entitled to
receive the Redemption Amount of that Note, as provided below.
Determination of the Redemption Amount
The "Redemption Amount" for a Note will be determined by the calculation
agent as described below.
(i) If the Ending Value is greater than the Starting Value, the
Redemption Amount per unit will equal:
( ( Ending Value - Starting Value ))
$10 + ( $20 X ( ------------------------------- ))
( ( Starting Value ))
provided, however, the Redemption Amount cannot exceed $15.00 per unit
(the "Capped Value").
(ii) If the Ending Value is less than or equal to the Starting Value, the
Redemption Amount per unit will equal:
( Ending Value )
$10 X ( -------------- )
( Starting Value )
The "Starting Value" equals 1,401.19, which was the closing value of the
Nasdaq-100 Index on the Pricing Date.
The "Ending Value" will be determined by the calculation agent and will
equal the average, arithmetic mean, of the closing values of the Nasdaq-100
Index determined on each of the first five Calculation Days during the
Calculation Period. If there are fewer than five Calculation Days, then the
Ending Value will equal the average, arithmetic mean, of the closing values of
the Nasdaq-100 Index on those Calculation Days. If there is only one
Calculation Day, then the Ending Value will equal the closing value of the
Nasdaq-100 Index on that Calculation Day. If no Calculation Days occur during
the Calculation Period, then the Ending Value will equal the closing value of
the Nasdaq-100 Index determined on the last scheduled Index Business Day in the
Calculation Period, regardless of the occurrence of a Market Disruption Event
on that day.
S-10
The "Calculation Period" means the period from and including the seventh
scheduled Index Business Day prior to the maturity date to and including the
second scheduled Index Business Day prior to the maturity date.
A "Calculation Day" means any Index Business Day during the Calculation
Period on which a Market Disruption Event has not occurred.
An "Index Business Day" means a day on which The Nasdaq Stock Market, the
New York Stock Exchange and the American Stock Exchange are open for trading
and the Nasdaq-100 Index or any successor index is calculated and published.
All determinations made by the calculation agent shall be at the sole
discretion of the calculation agent and, absent a determination by the
calculation agent of a manifest error, shall be conclusive for all purposes and
binding on ML&Co. and the holders and beneficial owners of the Notes.
Hypothetical returns
The following table illustrates, for a range of hypothetical Ending
Values of the Nasdaq-100 Index:
. the percentage change from the Starting Value to the hypothetical
Ending Value,
. the total amount payable at maturity for each Note,
. the total rate of return to beneficial owners of the Notes,
. the pretax annualized rate of return to beneficial owners of the
Notes, and
. the pretax annualized rate of return of an investment in the stocks
included in the Nasdaq-100 Index, which includes an assumed aggregate
dividend yield of 0.07% per annum, as more fully described below.
Pretax
Percentage Pretax annualized rate
change from annualized of return of
Starting Value rate of stocks included
to the Total amount Total rate of return on in the
Hypothetical hypothetical payable at return on the the Nasdaq-100
Ending Value Ending Value maturity per Note Notes Notes(1) Index(1)(2)
- ------------ -------------- ----------------- ------------- ---------- ---------------
700.60 -50% $ 5.00 -50.00% -31.78% -31.68%
840.71 -40% $ 6.00 -40.00% -23.95% -23.86%
980.83 -30% $ 7.00 -30.00% -17.04% -16.96%
1,120.95 -20% $ 8.00 -20.00% -10.84% -10.76%
1,261.07 -10% $ 9.00 -10.00% -5.19% -5.12%
1,401.19(3) 0% $10.00 0.00% 0.00% 0.07%
1,541.31 10% $12.00 20.00% 9.31% 4.88%
1,681.43 20% $14.00 40.00% 17.53% 9.38%
1,751.49 25% $15.00 50.00% 21.31% 11.52%
1,821.55 30% $15.00 50.00% 21.31% 13.60%
1,961.67 40% $15.00 50.00% 21.31% 17.59%
2,101.79 50% $15.00 50.00% 21.31% 21.36%
2,241.90 60% $15.00 50.00% 21.31% 24.96%
2,382.02 70% $15.00 50.00% 21.31% 28.38%
2,522.14 80% $15.00 50.00% 21.31% 31.67%
2,662.26 90% $15.00 50.00% 21.31% 34.81%
S-11
- --------
(1)The annualized rates of return specified in the preceding table are
calculated on a semiannual bond equivalent basis.
(2)This rate of return assumes:
(a)a percentage change in the aggregate price of the underlying stocks that
equals the percentage change in the Nasdaq-100 Index from the Starting
Value to the relevant hypothetical Ending Value;
(b)a constant dividend yield of 0.07% per annum, paid quarterly from the
date of initial delivery of the Notes, applied to the value of the
Nasdaq-100 Index at the end of each quarter assuming this value
increases or decreases linearly from the Starting Value to the
applicable hypothetical Ending Value;
(c)no transaction fees or expenses; and
(d)an investment term from March 1, 2002 to March 1, 2004.
(3)This is the Starting Value of the Nasdaq-100 Index.
The above figures are for purposes of illustration only. The actual
Redemption Amount received by investors and the resulting total and pretax
annualized rates of return will depend on the actual Ending Value as described
in this prospectus supplement.
Adjustments to the Nasdaq-100 Index; Market Disruption Events
If at any time Nasdaq changes its method of calculating the Nasdaq-100
Index, or the value of the Nasdaq-100 Index changes, in any material respect,
or if the Nasdaq-100 Index is in any other way modified so that the Nasdaq-100
Index does not, in the opinion of the calculation agent, fairly represent the
value of the Nasdaq-100 Index had those changes or modifications not been made,
then, from and after that time, the calculation agent shall, at the close of
business in New York, New York, on each date that the closing value of the
Nasdaq-100 Index is to be calculated, make any adjustments as, in the good
faith judgment of the calculation agent, may be necessary in order to arrive at
a calculation of a value of a stock index comparable to the Nasdaq-100 Index as
if those changes or modifications had not been made, and calculate the closing
value with reference to the Nasdaq-100 Index, as so adjusted. Accordingly, if
the method of calculating the Nasdaq-100 Index is modified so that the value of
the Nasdaq-100 Index is a fraction or a multiple of what it would have been if
it had not been modified, e.g., due to a split, then the calculation agent
shall adjust the Nasdaq-100 Index in order to arrive at a value of the
Nasdaq-100 Index as if it had not been modified, e.g., as if a split had not
occurred.
"Market Disruption Event" means either of the following events, as
determined by the calculation agent:
(a)a suspension, material limitation or absence of trading on The Nasdaq
Stock Market of 20% or more of the underlying stocks which then
comprise the Nasdaq-100 Index or a successor index during the
one-half hour period preceding the close of trading on The Nasdaq
Stock Market or the applicable exchange (without taking into account
any extended or after-hours trading session); or
(b)the suspension or material limitation on The Nasdaq Stock Market or
any other major futures or securities market from trading in futures
or options contracts related to the Nasdaq-100 Index or a successor
index during the one-half hour period preceding the close of trading
on The Nasdaq Stock Market or the applicable exchange (without taking
into account any extended or after-hours trading session).
For the 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 Nasdaq Stock Market or
the relevant exchange;
2. a decision to permanently discontinue trading in the relevant futures
or options contract will not constitute a Market Disruption Event;
S-12
3. a suspension in trading in a futures or options contract on the
Nasdaq-100 Index by a major securities market for more than two hours
by reason of:
. a price change violating limits set by that securities market,
. an imbalance of orders relating to those contracts, or
. a disparity in bid and ask quotes relating to those contracts
will constitute a suspension or material limitation of trading in
futures or options contracts related to the Nasdaq-100 Index; and
4. an absence of trading on The Nasdaq Stock Market will not include any
time when The Nasdaq Stock Market is closed for trading under
ordinary circumstances.
As a result of the terrorist attacks, the financial markets were closed
from September 11, 2001 through September 14, 2001, and values of the
Nasdaq-100 Index are not available for those dates. These market closures would
have constituted Market Disruption Events.
Discontinuance of the Nasdaq-100 Index
If Nasdaq discontinues publication of the Nasdaq-100 Index and Nasdaq or
another entity publishes a successor or substitute index that the calculation
agent determines, in its sole discretion, to be comparable to the Nasdaq-100
Index (a "successor index"), then, upon the calculation agent's notification of
any determination to the trustee and ML&Co., the calculation agent will
substitute the successor index as calculated by Nasdaq or any other entity for
the Nasdaq-100 Index and calculate the closing value as described above under
"--Payment at maturity". Upon any selection by the calculation agent of a
successor index, ML&Co. shall cause notice to be given to holders of the Notes.
In the event that Nasdaq discontinues publication of the Nasdaq-100 Index
and:
. the calculation agent does not select a successor index, or
. the successor index is no longer published on any of the Calculation
Days,
the calculation agent will compute a substitute value for the Nasdaq-100 Index
in accordance with the procedures last used to calculate the Nasdaq-100 Index
before any discontinuance. If a successor index is selected or the calculation
agent calculates a value as a substitute for the Nasdaq-100 Index as described
below, the successor index or value will be used as a substitute for the
Nasdaq-100 Index for all purposes, including for purposes of determining
whether a Market Disruption Event exists.
If the Nasdaq discontinues publication of the Nasdaq-100 Index before the
period during which the Redemption Amount is to be determined and the
calculation agent determines that no successor index is available at that time,
then on each Business Day until the earlier to occur of:
. the determination of the Ending Value, or
. a determination by the calculation agent that a successor index is
available,
the calculation agent will determine the value that would be used in computing
the Redemption Amount as described in the preceding paragraph as if that day
were a Calculation Day. The calculation agent will cause notice of each value
to be published not less often than once each month in The Wall Street Journal
or another newspaper of general circulation, and arrange for information with
respect to these values to be made available by telephone.
S-13
A "Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a day on which banking institutions in The City of New York
are authorized or obligated by law to close and that is a day on which the
NYSE, The Nasdaq National Market and the AMEX are open for trading.
Notwithstanding these alternative arrangements, discontinuance of the
publication of the Nasdaq-100 Index may adversely affect trading in the Notes.
Events of Default and Acceleration
In case an Event of Default with respect to any Notes has occurred and is
continuing, the amount payable to a beneficial owner of a Note upon any
acceleration permitted by the Notes, with respect to each $10 original public
offering price of each unit, will be equal to the Redemption Amount, calculated
as though the date of early repayment were the stated maturity date of the
Notes. If a bankruptcy proceeding is commenced in respect of ML&Co., the claim
of the beneficial owner of a Note may be limited, under Section 502(b)(2) of
Title 11 of the United States Code, to the original public offering price of
the Note plus an additional amount of contingent interest calculated as though
the date of the commencement of the proceeding were the maturity date of the
Notes.
In case of default in payment of the Notes, whether at their stated
maturity or upon acceleration, from and after the maturity date the Notes will
bear interest, payable upon demand of their beneficial owners, at the rate of
2.1% per annum to the extent that payment of any interest is legally
enforceable on the unpaid amount due and payable on that date in accordance
with the terms of the Notes to the date payment of that amount has been made or
duly provided for.
Depositary
Description of the Global Securities
Upon issuance, all Notes 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 Notes 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 Notes represented by the global security for all
purposes under the 1983 Indenture. Except as provided below, the beneficial
owners of the Notes will not be entitled to have the Notes represented by a
global security registered in their names, will not receive or be entitled to
receive physical delivery of the Notes in definitive form and will not be
considered the owners or holders of the Notes 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-14
DTC Procedures
The following is based on information furnished by DTC:
DTC will act as securities depositary for the Notes. The Notes 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 Notes in the aggregate original public offering price of
such issue, and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a clearing
agency registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC holds securities that its participants
deposit with DTC. DTC also facilitates the settlement among participants of
securities transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in participant's 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 Notes under DTC's system must be made by or through
direct participants, which will receive a credit for the Notes 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 Notes are
to be made by entries on the books of participants acting on behalf of
beneficial owners.
To facilitate subsequent transfers, all Notes deposited with DTC are
registered in the name of DTC's partnership nominee, Cede & Co. The deposit of
the Notes 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 Notes; DTC's records reflect only the identity of the direct
participants to whose accounts such Notes 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
Notes. 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 Notes are credited
on the record date.
Principal, premium, if any, and/or interest, if any, payments made in
cash on the Notes 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
S-15
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 shall be the
responsibility of DTC, and disbursement of any 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 Notes,
the global securities will be exchangeable for Notes in definitive form of like
tenor in whole units and multiples of units. The definitive Notes 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 Notes 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, Note 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, Note
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 Notes will be made by the underwriter in immediately
available funds. ML&Co. will make all payments of the Redemption Amount in
immediately available funds so long as the Notes are maintained in book-entry
form.
S-16
THE NASDAQ-100 INDEX
The Nasdaq-100 Index is a modified capitalization-weighted index of 100
of the largest and most actively traded stocks of non-financial companies
listed on the Nasdaq National Market tier of The Nasdaq Stock Market. The
Nasdaq-100 Index was first published in January 1985 and includes companies
across a variety of major industry groups. As of January 31, 2002, the major
industry groups covered in the Nasdaq-100 Index (listed according to their
respective capitalization in the Nasdaq-100 Index) were as follows: computer
and office equipment (36.0%), computer software/services (30.5%), biotechnology
(11.8%), telecommunications (11.5%), retail/wholesale trade (4.6%), services
(2.6%), health care (2.1%) and manufacturing (0.9%). The identity and
capitalization weightings of the five largest companies represented in the
Nasdaq-100 Index as of February 26, 2002 were as follows: Microsoft Corporation
(10.74%), Intel Corporation (6.98%), Cisco Systems, Inc. (4.02%), Oracle
Corporation (3.79%) and QUALCOMM Incorporated (3.17%). Current information
regarding the market value of the Nasdaq-100 Index is available from the Nasdaq
as well as numerous market information services. The Nasdaq-100 Index is
determined, comprised and calculated by the Nasdaq without regard to the Notes.
The Nasdaq-100 Index share weights of the component securities of the
Nasdaq-100 Index at any time are based upon the total shares outstanding in
each of the 100 Nasdaq-100 Index securities and are additionally subject, in
certain cases, to rebalancing. Accordingly, each underlying stock's influence
on the value of the Nasdaq-100 Index is directly proportional to the value of
its Nasdaq-100 Index share weight.
Computation of the Nasdaq-100 Index
Underlying Stock Eligibility Criteria and Annual Ranking Review
To be eligible for inclusion in the Nasdaq-100 Index, a security must be
traded on the Nasdaq National Market tier of The Nasdaq Stock Market and meet
the following criteria:
. the security must be of a non-financial company;
. only one class of security per issuer is allowed;
. the security may not be issued by an issuer currently in bankruptcy
proceedings;
. the security must have average daily trading volume of at least
100,000 shares;
. the security must have "seasoned" on The Nasdaq Stock Market or
another recognized market (generally, a company is considered to be
seasoned by Nasdaq if it has been listed on a market for at least two
years; in the case of spin-offs, the operating history of the spin-
off will be considered);
. if a security would otherwise qualify to be in the top 25% of the
issuers included in the Index by market capitalization, then a one
year "seasoning" criteria would apply;
. if the security is of a foreign issuer, the company must have a
worldwide market value of at least $10 billion, a U.S. market value
of at least $4 billion, and average trading volume on The Nasdaq
Stock Market of at least 200,000 shares per day; in addition, foreign
securities must be eligible for listed options trading; and
. the issuer of the security may not have entered into a definitive
agreement or other arrangement which would result in the security no
longer being listed on The Nasdaq Stock Market within the next six
months.
These Nasdaq-100 Index eligibility criteria may be revised from time to
time by the National Association of Securities Dealers, Inc. without regard to
the Notes.
S-17
The Nasdaq-100 Index securities are evaluated on an annual basis, except
under extraordinary circumstances which may result in an interim evaluation, as
follows (such evaluation is referred to herein as the "Ranking Review").
Securities listed on The Nasdaq Stock Market which meet the above eligibility
criteria are ranked by market value using closing prices as of the end of
October and publicly available total shares outstanding as of the end of
November. Index-eligible securities which are already in the Nasdaq-100 Index
and which are in the top 150 eligible securities (based on market value) are
retained in the Nasdaq-100 Index provided that such security was ranked in the
top 100 eligible securities as of the previous ranking review. Securities not
meeting such criteria are replaced. The replacement securities chosen are those
Index-eligible securities not currently in the Nasdaq-100 Index which have the
largest market capitalization.
Generally, the list of annual additions and deletions is publicly
announced via a press release in the early part of December and replacements
are made effective after the close of trading on the third Friday in December.
Moreover, if at any time during the year a Nasdaq-100 Index security is no
longer traded on The Nasdaq Stock Market, or is otherwise determined by the
Nasdaq to become ineligible for continued inclusion in the Nasdaq-100 Index,
the security will be replaced with the largest market capitalization security
not currently in the Nasdaq-100 Index and meeting the Nasdaq-100 Index
eligibility criteria listed above.
In addition to the Ranking Review, the securities in the Nasdaq-100 Index
are monitored every day by the Nasdaq with respect to changes in total shares
outstanding arising from secondary offerings, stock repurchases, conversions,
or other corporate actions. The Nasdaq has adopted the following quarterly
scheduled weight adjustment procedures with respect to such changes. If the
change in total shares outstanding arising from such corporate action is
greater than or equal to 5.0%, such change is made to the Nasdaq-100 Index on
the evening prior to the effective date of such corporate action or as soon as
practical thereafter. Otherwise, if the change in total shares outstanding is
less than 5.0%, then all such changes are accumulated and made effective at one
time on a quarterly basis after the close of trading on the third Friday in
each of March, June, September, and December. In either case, the Nasdaq-100
Index share weights for such underlying stocks are adjusted by the same
percentage amount by which the total shares outstanding have changed in such
Nasdaq-100 Index securities. Ordinarily, whenever there is a change in the
Nasdaq-100 Index share weights or a change in a component security included in
the Nasdaq-100 Index, Nasdaq adjusts the divisor to assure that there is no
discontinuity in the value of the Nasdaq-100 Index which might otherwise be
caused by any such change.
Rebalancing of the Nasdaq-100 Index
The Nasdaq-100 Index is calculated under a "modified
capitalization-weighted" methodology, which is a hybrid between equal weighting
and conventional capitalization weighting. This methodology is expected to: (1)
retain in general the economic attributes of capitalization weighting; (2)
promote portfolio weight diversification (thereby limiting domination of the
Nasdaq-100 Index by a few large stocks); (3) reduce Index performance
distortion by preserving the capitalization ranking of companies; and (4)
reduce market impact on the smallest Nasdaq-100 Index securities from necessary
weight rebalancings.
Under the methodology employed, on a quarterly basis coinciding with the
Nasdaq's quarterly scheduled weight adjustment procedures, the Nasdaq-100 Index
securities are categorized as either "Large Stocks" or "Small Stocks" depending
on whether their current percentage weights (after taking into account such
scheduled weight adjustments due to stock repurchases, secondary offerings, or
other corporate actions) are greater than, or less than or equal to, the
average percentage weight in the Nasdaq-100 Index (i.e., as a 100-stock index,
the average percentage weight in the Nasdaq-100 Index is 1.0%).
Such quarterly examination will result in a Nasdaq-100 Index rebalancing
if either one or both of the following two weight distribution requirements are
not met: (1) the current weight of the single largest market capitalization
Nasdaq-100 Index security must be less than or equal to 24.0% and (2) the
"collective weight" of those Nasdaq-100 Index securities whose individual
current weights are in excess of 4.5%, when added together, must be less than
or equal to 48.0%. In addition, Nasdaq may conduct a special rebalancing if it
is determined necessary to maintain the integrity of the Nasdaq-100 Index.
S-18
If either one or both of these weight distribution requirements are not
met upon quarterly review, or Nasdaq determines that a special rebalancing is
required, a weight rebalancing will be performed. First, relating to weight
distribution requirement (1) above, if the current weight of the single largest
Nasdaq-100 Index security exceeds 24.0%, then the weights of all Large Stocks
will be scaled down proportionately towards 1.0% by enough for the adjusted
weight of the single largest Nasdaq-100 Index security to be set to 20.0%.
Second, relating to weight distribution requirement (2) above, for those
Nasdaq-100 Index securities whose individual current weights or adjusted
weights in accordance with the preceding step are in excess of 4.5%, if their
"collective weight" exceeds 48.0%, then the weights of all Large Stocks will be
scaled down proportionately towards 1.0% by just enough for the "collective
weight," so adjusted, to be set to 40.0%.
The aggregate weight reduction among the Large Stocks resulting from
either or both of the above rescalings will then be redistributed to the Small
Stocks in the following iterative manner. In the first iteration, the weight of
the largest Small Stock will be scaled upwards by a factor which sets it equal
to the average Nasdaq-100 Index weight of 1.0%. The weights of each of the
smaller remaining Small Stocks will be scaled up by the same factor reduced in
relation to each stock's relative ranking among the Small Stocks such that the
smaller the Nasdaq-100 Index security in the ranking, the less the scale-up of
its weight. This is intended to reduce the market impact of the weight
rebalancing on the smallest component securities in the Nasdaq-100 Index.
In the second iteration, the weight of the second largest Small Stock,
already adjusted in the first iteration, will be scaled upwards by a factor
which sets it equal to the average index weight of 1.0%. The weights of each of
the smaller remaining Small Stocks will be scaled up by this same factor
reduced in relation to each stock's relative ranking among the Small Stocks
such that, once again, the smaller the stock in the ranking, the less the
scale-up of its weight.
Additional iterations will be performed until the accumulated increase in
weight among the Small Stocks exactly equals the aggregate weight reduction
among the Large Stocks from rebalancing in accordance with weight distribution
requirement (1) and/or weight distribution requirement (2).
Then, to complete the rebalancing procedure, once the final percent
weights of each of the Nasdaq-100 Index securities are set, the Nasdaq-100
Index share weights will be determined anew based upon the last sale prices and
aggregate capitalization of the Nasdaq-100 Index at the close of trading on the
Thursday in the week immediately preceding the week of the third Friday in
March, June, September, and December. Changes to the Nasdaq-100 Index share
weights will be made effective after the close of trading on the third Friday
in March, June, September, and December and an adjustment to the Index divisor
will be made to ensure continuity of the Nasdaq-100 Index.
Ordinarily, new rebalanced weights will be determined by applying the
above procedures to the current Nasdaq-100 Index share weights. However, Nasdaq
may from time to time determine rebalanced weights, if necessary, by instead
applying the above procedure to the actual current market capitalization of the
Nasdaq-100 Index components. In such instances, Nasdaq would announce the
different basis for rebalancing prior to its implementation.
S-19
Historical Data on the Nasdaq-100 Index
The following table sets forth the month-end closing value of the
Nasdaq-100 Index from January 1996 through January 2002. These historical data
on the Nasdaq-100 Index are not necessarily indicative of the future
performance of the Nasdaq-100 Index or what the value of the Notes may be. Any
historical upward or downward trend in the level of the Nasdaq-100 Index during
any period set forth below is not an indication that the Nasdaq-100 Index is
more or less likely to increase or decrease at any time during the term of the
Notes.
1996 1997 1998 1999 2000 2001 2002
------ -------- -------- -------- -------- -------- --------
January................... 591.82 921.55 1,071.13 2,127.19 3,570.05 2,593.00 1,550.17
February.................. 622.83 850.46 1,194.13 1,925.28 4,266.94 1,908.32
March..................... 609.69 797.06 1,220.66 2,106.39 4,397.84 1,573.25
April..................... 666.73 874.74 1,248.12 2,136.39 3,773.18 1,855.15
May....................... 692.39 958.85 1,192.07 2,089.70 3,324.08 1,799.89
June...................... 677.30 957.30 1,337.34 2,296.77 3,763.79 1,830.19
July...................... 636.01 1,107.03 1,377.26 2,270.93 3,609.35 1,683.61
August.................... 663.57 1,074.17 1,140.34 2,396.87 4,077.59 1,469.70
September................. 737.58 1,097.17 1,345.48 2,407.90 3,570.61 1,168.37
October................... 751.99 1,019.62 1,400.52 2,637.44 3,282.30 1,364.78
November.................. 834.01 1,050.51 1,557.96 2,966.71 2,506.54 1,596.05
December.................. 821.36 990.80 1,836.01 3,707.83 2,341.70 1,577.05
The following graph sets forth the month-end closing values of the
Nasdaq-100 Index from January 1996 through January 2002. Past movements of the
Nasdaq-100 Index are not necessarily indicative of the future Nasdaq-100 Index
values. On February 26, 2002, the closing value of the Nasdaq-100 Index was
1,401.19.
[THE GRAPH APPEARING HERE SETS FORTH THE MONTH-END CLOSING VALUES OF THE
NASDAQ-100 INDEX FROM JANUARY 1996 THROUGH JANUARY 2002, AS SET FORTH IN THE
TABLE ABOVE. THE VERTICAL AXIS HAS A RANGE OF NUMBERS FROM 0 TO 5000 IN
INCREMENTS OF 500. THE HORIZONTAL AXIS HAS A RANGE OF DATES FROM JANUARY 1996
THROUGH JANUARY 2002 IN INCREMENTS OF ONE MONTH.]
This graph is for historical information only and should not be used or
interpreted as a forecast or indication of future stock market performance,
interest rate levels or variable returns applicable to the Notes.
S-20
License Agreement
The Nasdaq Stock Market, Inc. and Merrill Lynch & Co., Inc. have entered
into a non-exclusive license agreement providing for the license to ML&Co., in
exchange for a fee, of the right to use the Nasdaq-100 Index in connection with
certain securities, including the Notes.
The license agreement between the Nasdaq and ML&Co. provides that the
following language must be stated in this prospectus supplement:
"The Notes are not sponsored, endorsed, sold or promoted by, The Nasdaq
Stock Market, Inc. (including its affiliates) (Nasdaq, with its
affiliates, are referred to as the "Corporations"). The Corporations have
not passed on the legality or suitability of, or the accuracy or adequacy
of descriptions and disclosures relating to, the Notes. The Corporations
make no representation or warranty, express or implied to the owners of
the Notes or any member of the public regarding the advisability of
investing in securities generally or in the Notes particularly, or the
ability of the Nasdaq-100 Index(R) to track general stock market
performance. The Corporation's only relationship to ML&Co. is in the
licensing of the Nasdaq-100(R), Nasdaq-100 Index(R), and Nasdaq(R)
trademarks or service marks, and certain trade names of the Corporations
and the use of the Nasdaq-100 Index(R) which is determined, composed and
calculated by Nasdaq without regard to ML&Co. or the Notes. Nasdaq has no
obligation to take the needs of ML&Co. or the owners of the Notes into
consideration in determining, composing or calculating the Nasdaq-100
Index(R). The Corporations are not responsible for and have not
participated in the determination of the timing of, prices at, or
quantities of the Notes to be issued or in the determination or
calculation of the equation by which the Notes is to be converted into
cash. The Corporations have no liability in connection with the
administration, marketing or trading of the Notes.
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED
CALCULATION OF THE NASDAQ-100 INDEX(R) OR ANY DATA INCLUDED THEREIN. THE
CORPORATIONS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY ML&CO., OWNERS OF THE NOTES, OR ANY OTHER PERSON OR ENTITY
FROM THE USE OF THE NASDAQ-100 INDEX(R) OR ANY DATA INCLUDED THEREIN. THE
CORPORATIONS MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY
DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR USE WITH RESPECT TO THE NASDAQ-100 INDEX(R) OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT
SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY LOST PROFITS OR
SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES, EVEN
IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES."
All disclosures contained in this prospectus supplement regarding the
Nasdaq-100 Index, including its make-up, method of calculation and changes in
its components, are derived from publicly available information prepared by
Nasdaq. ML&Co. and MLPF&S do not assume any responsibility for the accuracy or
completeness of such information.
S-21
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 Notes 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
Notes 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 Notes 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 Notes 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 Notes arising
under the laws of any other taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a Note
that is for U.S. 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 Note 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 Note 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 Notes or securities with terms
substantially the same as the Notes. Accordingly, the proper U.S. federal
income tax characterization and treatment of the Notes is uncertain. Pursuant
to the terms of the Notes, ML&Co. and every holder of a Note agree (in the
absence of an administrative determination or judicial ruling to the contrary)
to characterize the Notes for all tax purposes as a pre-paid cash-settled
forward contract linked to the value of the Nasdaq-100 Index. In the opinion of
Tax Counsel, such characterization and tax treatment of the Notes, 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. The treatment of the Notes described above is not, however,
binding on the IRS or the courts. No statutory, judicial or administrative
authority directly addresses the characterization of the Notes or instruments
similar to the Notes for U.S. federal income tax purposes, and no ruling is
being requested from the IRS with respect to the Notes.
Due to the absence of authorities that directly address instruments that
are similar to the Notes, significant aspects of the U.S. federal income tax
consequences of an investment in the Notes 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 the Notes (including alternative characterizations of the Notes)
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 described above is
accepted for U.S. federal income tax purposes.
S-22
Tax Treatment of the Notes
Assuming the characterization of the Notes as set forth above, Tax
Counsel believes that the following U.S. federal income tax consequences should
result.
Tax Basis. A U.S. Holder's tax basis in a Note will equal the amount
paid by the U.S. Holder to acquire the Note.
Payment on the Maturity Date. Upon the receipt of cash at maturity of
the Notes, a U.S. Holder will recognize gain or loss. The amount of such gain
or loss will be the extent to which the amount of the cash received differs
from the U.S. Holder's tax basis in the Note. It is uncertain whether any such
gain or loss would be treated as ordinary income or loss or capital gain or
loss. Absent a future clarification in current law (by an administrative
determination or judicial ruling), where required, ML&Co. intends to report any
such gain or loss to the IRS in a manner consistent with the treatment of such
gain or loss as capital gain or loss. If such gain or loss is treated as
capital gain or loss, then any such gain or loss will generally be long-term
capital gain or loss, as the case may be, if the U.S. Holder held the Note for
more than one year at maturity.
Sale or Exchange of the Notes. Upon a sale or exchange of a Note prior
to the maturity of the Notes, a U.S. Holder will generally recognize capital
gain or loss equal to the difference between the amount realized on such sale
or exchange and such U.S. Holder's tax basis in the Note so sold or exchanged.
Capital gain or loss will generally be long-term capital gain or loss if the
U.S. Holder held the Note for more than one year at the time of disposition.
Possible Alternative Tax Treatments of an Investment in the Notes
Due to the absence of authorities that directly address the proper
characterization of the Notes, 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 the Notes under Treasury regulations
governing contingent payment debt instruments (the "Contingent Payment
Regulations").
If the IRS were successful in asserting that the Contingent Payment
Regulations applied to the Notes, the timing and character of income thereon
would be significantly affected. Among other things, a U.S. Holder would be
required to accrue original issue discount on the Notes every year at a
"comparable yield" for us, determined at the time of issuance of the Notes.
Furthermore, any gain realized at maturity or upon sale or other disposition of
the Notes would generally be treated as ordinary income, and any loss realized
at maturity would be treated as ordinary loss to the extent of the U.S.
Holder's prior accruals of original issue discount and capital loss thereafter.
Even if the Contingent Payment Regulations do not apply to the Notes,
other alternative federal income tax characterizations or treatments of the
Notes may also be possible, and if applied could also affect the timing and the
character of the income or loss with respect to the Notes. Accordingly,
prospective purchasers are urged to consult their tax advisors regarding the
U.S. federal income tax consequences of an investment in the Notes.
Non-U.S. Holders
Based on the treatment of each Note as a pre-paid cash-settled forward
contract linked to the value of the Nasdaq-100 Index, in the case of a non-U.S.
Holder, a payment made with respect to a Note on the maturity date will not be
subject to United States withholding tax, provided that such non-U.S. Holder
complies with applicable certification requirements and that such payments are
not effectively connected with a United States trade or business of such
non-U.S. Holder. Any capital gain realized upon the sale or other disposition
of a Note 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
S-23
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, or
the gain is not attributable to a fixed place of business maintained by such
individual in the United States and such individual does not have a "tax home"
(as defined for United States federal income tax purposes) in the United States.
As discussed above, alternative characterizations of the Notes for United
States federal income tax purposes are possible. Should an alternative
characterization of the Notes, by reason of a change or clarification of the
law, by regulation or otherwise, cause payments with respect to the Notes to
become subject to withholding tax, ML&Co. will withhold tax at the statutory
rate. Prospective non-U.S. Holders of the Notes should consult their own tax
advisors in this regard.
Backup Withholding and Information Reporting
A beneficial owner of a Note may be subject to information reporting and
to backup withholding at a current rate of 30% (which rate is scheduled to be
reduced periodically through 2006) of certain amounts paid to the beneficial
owner unless such beneficial owner provides proof of an applicable exemption or
a correct taxpayer indentification 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 U.S. federal income tax provided the required information is
furnished to the IRS.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Internal Revenue Code (the "Code") prohibit
various transactions between certain parties and the assets of employee benefit
plans, unless an exemption is available; governmental plans may be subject to
similar prohibitions. Because transactions between a plan and ML&Co. may be
prohibited absent an exemption, each fiduciary, by its purchase of any Note on
behalf of any plan, represents on behalf of itself and the plan, that the
acquisition, holding and any subsequent disposition of the Note will not result
in a violation of ERISA, the Code or any other applicable law or regulation.
USE OF PROCEEDS AND HEDGING
The net proceeds from the sale of the Notes will be used as described
under "Use of Proceeds" in the accompanying prospectus and to hedge market
risks of ML&Co. associated with its obligation to pay the Redemption Amount.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC. Our
SEC filings are also available over the Internet at the SEC's web site at
http://www.sec.gov. The address of the SEC's Internet site is provided solely
for the information of prospective investors and is not intended to be an
active link. You may also read and copy any document we file at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for more information on the
public reference rooms and their copy charges. You may also inspect our SEC
reports and other information at the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.
S-24
We have filed a registration statement on Form S-3 with the SEC covering
the Notes and other securities. For further information on ML&Co. and the
Notes, you should refer to our registration statement and its exhibits. The
prospectus accompanying this prospectus supplement summarizes material
provisions of contracts and other documents that we refer you to. Because the
prospectus may not contain all the information that you may find important, you
should review the full text of these documents. We have included copies of
these documents as exhibits to our registration statement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not, and the underwriter has not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus
supplement and the accompanying prospectus is accurate as of the date on the
front cover of this prospectus supplement only. Our business, financial
condition and results of operations may have changed since that date.
UNDERWRITING
MLPF&S, the underwriter of the offering, has agreed, subject to the terms
and conditions of the underwriting agreement and a terms agreement, to purchase
from ML&Co. $25,000,000 aggregate original public offering price of Notes. 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 Notes if any are purchased.
The Notes are ineligible assets in MLPF&S' asset-based brokerage service
Unlimited Advantage, which means that purchasers will not pay Unlimited
Advantage annual asset-based fees on the Notes but will pay commissions on any
secondary market purchases and sales on the Notes.
The underwriter has advised ML&Co. that it proposes initially to offer
all or part of the Notes 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 Notes 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 Notes 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 Notes. These transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Notes.
If the underwriter creates a short position in the Notes in connection
with the offering, i.e., if it sells more Notes than are set forth on the cover
page of this prospectus supplement, the underwriter may reduce that short
position by purchasing Notes 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 or, where no overallotment option exists, sales in excess
of the number of units an underwriter has agreed to purchase from the issuer.
Because MLPF&S, as underwriter for the Notes, has no overallotment option, it
would be required to close out a short position in the Notes by purchasing
Notes 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 Notes. 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.
S-25
MLPF&S may use this prospectus supplement and the accompanying prospectus
for offers and sales related to market-making transactions in the Notes. 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 NOTES
The validity of the Notes 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.
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 reports 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 that interim financial information. Accordingly, the
degree of reliance on their reports on such information should be restricted in
light of the limited nature of the review procedures applied. Deloitte & Touche
LLP are not subject to the liability provisions of Section 11 of the Securities
Act of 1933, as amended, for their reports on the unaudited interim financial
information because those reports are not "reports" 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-26
INDEX OF DEFINED TERMS
Page
----
Business Day............................................................. S-14
Calculation Day.......................................................... S-11
Calculation Period....................................................... S-11
Capped Value............................................................. S-4
Code..................................................................... S-24
Contingent Payment Regulations........................................... S-23
Corporations............................................................. S-21
depositary............................................................... S-14
DTC...................................................................... S-4
Ending Value............................................................. S-4
ERISA.................................................................... S-24
Index Business Day....................................................... S-11
IRS...................................................................... S-22
Market Disruption Event.................................................. S-12
ML&Co.................................................................... S-4
MLPF&S................................................................... S-4
Nasdaq................................................................... S-5
non-U.S. Holder.......................................................... S-22
Notes.................................................................... S-1
Pricing Date............................................................. S-4
Ranking Review........................................................... S-18
Redemption Amount........................................................ S-4
Starting Value........................................................... S-4
successor index.......................................................... S-13
Tax Counsel.............................................................. S-22
U.S. Holder.............................................................. S-22
S-27
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[LOGO]
2,500,000 Units
Merrill Lynch & Co., Inc.
Enhanced Return Notes/SM/ Linked to the Nasdaq-100 Index(R)
due March 1, 2004
(the "Notes")
$10 original public offering price per unit
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PROSPECTUS SUPPLEMENT
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Merrill Lynch & Co.
February 26 , 2002
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