Filed Pursuant to Rule 424(b)(5)
Registration No. 333-52822
Subject to Completion
Preliminary Prospectus Supplement dated February 28, 2002
PROSPECTUS SUPPLEMENT [LOGO] Merrill Lynch
- --------------------- Protected Growth/SM/ Investing
(To prospectus dated January 24, 2001) Pursuit of Growth, Protection of Principal
2,500,000 Units
Merrill Lynch & Co., Inc.
Market Index Target-Term Securities(R)
based upon the Russell 2000(R) Index
due March , 2009
"MITTS(R) Securities"
$10 principal amount per unit
----------------
The MITTS Securities: Payment at maturity:
. 100% principal protection at maturity. . On the maturity date, for each unit of
MITTS Securities you own, we will pay you
. No payments before the maturity date. an amount equal to the sum of the
principal amount of each unit and an
. Senior unsecured debt securities of Merrill additional amount based on the percentage
Lynch & Co., Inc. increase, if any, in the value of the
Russell 2000 Index, reduced by an annual
. Linked to the value of the Russell 2000 Index, adjustment factor expected to be between
an index designed to track the price 2.2% and 2.7%.
performance of the common stock of 2,000
corporations with small capitalizations . At maturity, you will receive no less than
relative to other stocks in the U.S. equity the principal amount of your MITTS
market. Securities.
. We have applied to have the MITTS Securities
listed on the American Stock Exchange under the
trading symbol "RRM".
. Expected initial settlement date: March ,
2002.
Investing in the MITTS Securities involves risks that are described in
the "Risk Factors" section 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)................................... $10.00 $25,000,000
Underwriting discount...................................... $ $
Proceeds, before expenses, to Merrill Lynch & Co., Inc..... $ $
(1) The public offering price and the underwriting discount for any
single transaction to purchase units or more will be $ per unit and
$ per unit, respectively.
----------------
Merrill Lynch & Co.
----------------
The date of this prospectus supplement is March , 2002.
"MITTS" and "Market Index Target-Term Securities" are registered service marks
of Merrill Lynch & Co., Inc.
The use of, and reference to, the terms "Russell 2000" and "Russell 2000 Index"
in this prospectus supplement has been consented to by Frank Russell Company.
TABLE OF CONTENTS
Prospectus Supplement
Page
----
SUMMARY INFORMATION--Q&A.................................................. S-4
What are the MITTS Securities?......................................... S-4
What will I receive on the stated maturity date of the MITTS
Securities?.......................................................... S-4
Who publishes the Russell 2000 Index and what does the Russell 2000
Index measure?....................................................... S-6
How has the Russell 2000 Index performed historically?................. S-6
What about taxes?...................................................... S-6
Will I receive interest payments on the MITTS Securities?.............. S-6
Will the MITTS Securities be listed on a stock exchange?............... S-7
What is the role of MLPF&S?............................................ S-7
Who is ML&Co.?......................................................... S-7
Are there any risks associated with my investment?..................... S-7
RISK FACTORS.............................................................. S-8
You may not earn a return on your investment........................... S-8
Your yield may be lower than the yield on other debt securities of
comparable maturity.................................................. S-8
Your return will not reflect the return of owning the stocks included
in the Russell 2000 Index............................................ S-8
There may be an uncertain trading market for the MITTS Securities...... S-8
Many factors affect the trading value of the MITTS Securities; these
factors interrelate in complex ways and the effect of any one factor
may offset or magnify the effect of another factor................... S-8
Amounts payable on the MITTS Securities may be limited by state law.... S-10
Purchases and sales by us and our affiliates may affect your return.... S-10
Potential conflicts.................................................... S-10
Uncertain tax consequences............................................. S-10
DESCRIPTION OF THE MITTS SECURITIES....................................... S-11
Payment at maturity.................................................... S-11
Hypothetical returns................................................... S-12
Adjustments to the Russell 2000 Index; Market Disruption Events........ S-14
Discontinuance of the Russell 2000 Index............................... S-14
Events of Default and Acceleration..................................... S-15
Depositary............................................................. S-16
Same-Day Settlement and Payment........................................ S-18
THE RUSSELL 2000 INDEX.................................................... S-18
Selection of stocks underlying the Russell 2000 Index.................. S-18
Historical data on the Russell 2000 Index.............................. S-21
UNITED STATES FEDERAL INCOME TAXATION..................................... S-23
General................................................................ S-23
U.S. Holders........................................................... S-24
Hypothetical Table..................................................... S-25
Non-U.S. Holders....................................................... S-26
Backup withholding..................................................... S-27
ERISA CONSIDERATIONS...................................................... S-27
USE OF PROCEEDS AND HEDGING............................................... S-28
WHERE YOU CAN FIND MORE INFORMATION....................................... S-28
UNDERWRITING.............................................................. S-29
VALIDITY OF THE MITTS SECURITIES.......................................... S-29
EXPERTS................................................................... S-30
INDEX OF DEFINED TERMS.................................................... S-31
S-2
Prospectus
Page
----
MERRILL LYNCH & CO., INC................................................. 2
USE OF PROCEEDS.......................................................... 2
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS............................ 3
THE SECURITIES........................................................... 3
DESCRIPTION OF DEBT SECURITIES........................................... 4
DESCRIPTION OF DEBT WARRANTS............................................. 10
DESCRIPTION OF CURRENCY WARRANTS......................................... 12
DESCRIPTION OF INDEX WARRANTS............................................ 14
DESCRIPTION OF PREFERRED STOCK........................................... 19
DESCRIPTION OF DEPOSITARY SHARES......................................... 24
DESCRIPTION OF PREFERRED STOCK WARRANTS.................................. 28
DESCRIPTION OF COMMON STOCK.............................................. 30
DESCRIPTION OF COMMON STOCK WARRANTS..................................... 34
PLAN OF DISTRIBUTION..................................................... 36
WHERE YOU CAN FIND MORE INFORMATION...................................... 37
INCORPORATION OF INFORMATION WE FILE WITH THE SEC........................ 37
EXPERTS.................................................................. 38
S-3
SUMMARY INFORMATION--Q&A
This summary includes questions and answers that highlight selected
information from this prospectus supplement and the accompanying prospectus to
help you understand the Market Index Target-Term Securities(R) based upon the
Russell 2000 Index due March , 2009. You should carefully read this
prospectus supplement and the accompanying prospectus to fully understand the
terms of the MITTS Securities, the Russell 2000 Index and the tax and other
considerations that are important to you in making a decision about whether to
invest in the MITTS Securities. You should carefully review the "Risk Factors"
section, which highlights certain risks associated with an investment in the
MITTS Securities, to determine whether an investment in the MITTS Securities is
appropriate for you.
References in this prospectus supplement to "ML&Co.", "we", "us" and
"our" are to Merrill Lynch & Co., Inc., and references to "MLPF&S" are to
Merrill Lynch, Pierce, Fenner & Smith Incorporated.
What are the MITTS Securities?
The MITTS Securities will be a series of senior debt securities issued by
ML&Co. and will not be secured by collateral. The MITTS Securities will rank
equally with all of our other unsecured and unsubordinated debt. The MITTS
Securities will mature on March , 2009. We cannot redeem the MITTS Securities
at an earlier date. We will not make any payments on the MITTS Securities until
maturity. We have designed the MITTS Securities for investors who want to
protect their investment by receiving at least the principal amount of their
investment at maturity and who also want to participate in possible increases
in the value of the Russell 2000 Index as reduced by the Adjustment Factor.
Each unit of MITTS Securities represents $10 principal amount of MITTS
Securities. You may transfer the MITTS Securities only in whole units. You will
not have the right to receive physical certificates evidencing your ownership
except under limited circumstances. Instead, we will issue the MITTS Securities
in the form of a global certificate, which will be held by The Depository Trust
Company, also known as DTC, or its nominee. Direct and indirect participants in
DTC will record your ownership of the MITTS Securities. You should refer to the
section "Description of the MITTS Securities--Depositary" in this prospectus
supplement.
What will I receive on the stated maturity date of the MITTS Securities?
On the stated maturity date, you will receive a cash payment on the MITTS
Securities equal to the sum of two amounts: the "principal amount" and the
"Supplemental Redemption Amount".
Principal Amount
The "principal amount" per unit is $10.
Supplemental Redemption Amount
The "Supplemental Redemption Amount" per unit will equal:
(Adjusted Ending Value - Starting Value)
$10 x (--------------------------------------)
( Starting Value )
but will not be less than zero.
The "Starting Value" means the closing value of the Russell 2000 Index on
the date the MITTS Securities are priced for initial sale to the public (the
"Pricing Date"). We will disclose the Starting Value in the final prospectus
supplement delivered to you in connection with the sales of the MITTS
Securities.
The "Adjusted Ending Value" means the average, arithmetic mean, of the
values of the Russell 2000 Index at the close of the market on five business
days shortly before the maturity of the MITTS Securities as reduced each day by
the application of the Adjustment Factor. We may calculate the Adjusted Ending
Value by reference to fewer than five or even a single day's closing value if,
during the period shortly before the stated maturity date of the MITTS
Securities, there is a disruption in the trading
S-4
of a sufficient number of the component stocks included in the Russell 2000
Index or certain futures or options contracts relating to the Russell 2000
Index.
The "Adjustment Factor" will be a fixed percentage expected to be between
2.2% and 2.7% per year and will be pro-rated based on a 365-day year and
applied over the entire term of the MITTS Securities on each calendar day to
reduce the closing values of the Russell 2000 Index used to calculate the
Supplemental Redemption Amount during the Calculation Period. As a result of
the cumulative effect of this reduction, the values of the Russell 2000 Index
used to calculate the Supplemental Redemption Amount during the Calculation
Period will be approximately 14.28% to 17.23% less than the actual closing
value of the Russell 2000 Index on each day during the Calculation Period. We
will determine the Adjustment Factor on the Pricing Date, and it will appear in
the final prospectus supplement delivered to you in connection with the sales
of the MITTS Securities. For a detailed discussion of how the Adjustment Factor
will affect the value of the Russell 2000 Index used to calculate the
Supplemental Redemption Amount, see "Description of the MITTS
Securities--Payment at Maturity" in this prospectus supplement.
For more specific information about the Supplemental Redemption Amount,
please see the section "Description of the MITTS Securities" in this prospectus
supplement.
We will pay you a Supplemental Redemption Amount only if the Adjusted
Ending Value is greater than the Starting Value. If the Adjusted Ending Value
is less than, or equal to, the Starting Value, the Supplemental Redemption
Amount will be zero. We will pay you the principal amount of your MITTS
Securities regardless of whether any Supplemental Redemption Amount is payable.
Examples
Here are two examples of Supplemental Redemption Amount calculations
assuming an investment term of seven years and an Adjustment Factor of 2.45%
per year, the midpoint of the expected range of 2.2% and 2.7%:
Example 1--The Russell 2000 Index, as adjusted, is below the hypothetical
Starting Value at maturity:
Hypothetical Starting Value: 472.61
Hypothetical average closing value of the Russell 2000 Index at
maturity: 496.24
Hypothetical Adjusted Ending Value: 417.97
(Supplemental
( 417.97 - 472.61 ) Redemption
Supplemental Redemption Amount (per unit) = $10 X ( --------------- ) = $0 Amount cannot
( 472.61 ) be less than zero)
Total payment at maturity (per unit) = $10 + $0 = $10
Example 2--The Russell 2000 Index, as adjusted, is above the hypothetical
Starting Value at maturity:
Hypothetical Starting Value: 472.61
Hypothetical average closing value of the Russell 2000 Index at
maturity: 850.71
Hypothetical Adjusted Ending Value: 716.52
( 716.52 - 472.61 )
Supplemental Redemption Amount (per unit) = $10 X ( --------------- ) = $5.16
( 472.61 )
Total payment at maturity (per unit) = $10 + $5.16 = $15.16
S-5
Who publishes the Russell 2000 Index and what does the Russell 2000 Index
measure?
The Russell 2000 Index is published by Frank Russell Company ("FRC") and
is designed to track the performance of 2,000 common stocks of corporations
with small capitalizations relative to other stocks in the U.S. equity market.
Market capitalization is the value of a corporation's stock in the public
market determined by multiplying the number of outstanding shares by the
current price of a share. As of January 31, 2002, the market capitalization of
the stocks in the Russell 2000 Index ranged from approximately $4.11 million to
$2.84 billion, with the weighted average market capitalization being $.86
billion. The corporations in the Russell 2000 Index are domiciled in the U.S.
and its territories and their stocks are traded on the AMEX, on the New York
Stock Exchange, or in the over-the-counter market.
Please note that an investment in the MITTS Securities does not entitle
you to any ownership interest in the stocks of the companies included in the
Russell 2000 Index.
How has the Russell 2000 Index performed historically?
We have provided tables showing the closing values of the Russell 2000
Index on the last business day of each quarter from March 1979 to December
2001, as published by FRC. You can find these tables in the section "The
Russell 2000 Index--Historical data on the Russell 2000 Index" in this
prospectus supplement. We have provided this historical information to help you
evaluate the behavior of the Russell 2000 Index in various economic
environments; however, past performance of the Russell 2000 Index is not
necessarily indicative of how the index will perform in the future.
What about taxes?
Each year, you will be required to pay taxes on ordinary income from the
MITTS Securities over their term based upon an estimated yield for the MITTS
Securities, even though you will not receive any payments from us until
maturity. We have determined this estimated yield, in accordance with
regulations issued by the U.S. Treasury Department, solely in order for you to
figure the amount of taxes that you will owe each year as a result of owning a
MITTS Security. This estimated yield is neither a prediction nor a guarantee of
what the actual Supplemental Redemption Amount will be, or that the actual
Supplemental Redemption Amount will even exceed zero. We have determined that
this estimated yield will equal % per annum, compounded semiannually.
Based upon this estimated yield, if you pay your taxes on a calendar year
basis and if you buy a MITTS Security for $10 and hold the MITTS Security until
maturity, you will be required to pay taxes on the following amounts of
ordinary income from the MITTS Security each year: $ in 2002, $ in
2003, $ in 2004, $ in 2005, $ in 2006, $ in 2007, $ in 2008
and $ in 2009. However, in 2009, the amount of ordinary income that you
will be required to pay taxes on from owning each MITTS Security may be greater
or less than $ , depending upon the Supplemental Redemption Amount, if any,
you receive. Also, if the Supplemental Redemption Amount is less than $ ,
you may have a loss which you could deduct against other income you may have in
2009, but under current tax regulations, you would neither be required nor
allowed to amend your tax returns for prior years. For further information, see
"United States Federal Income Taxation" in this prospectus supplement.
Will I receive interest payments on the MITTS Securities?
You will not receive any interest payments on the MITTS Securities, but
will instead receive the principal amount plus the Supplemental Redemption
Amount, if any, at maturity. We have designed the MITTS Securities for
investors who are willing to forego market interest payments on the MITTS
Securities, such as floating interest rates paid on standard senior
non-callable debt securities, in exchange for the ability to participate in
possible increases in the Russell 2000 Index.
S-6
Will the MITTS Securities be listed on a stock exchange?
We have applied to have MITTS Securities listed on the AMEX under the
trading symbol "RRM". You should be aware that the listing of the MITTS
Securities on the AMEX will not necessarily ensure that a liquid trading market
will be available for the MITTS Securities. You should review "Risk
Factors--There may be an uncertain trading market for the MITTS Securities" in
this prospectus supplement.
What is the role of MLPF&S?
Our subsidiary, MLPF&S, is the underwriter for the offering and sale of
the MITTS Securities. After the initial offering, MLPF&S intends to buy and
sell the MITTS Securities to create a secondary market for holders of the MITTS
Securities, and may stabilize or maintain the market price of the MITTS
Securities during the initial distribution of the MITTS Securities. However,
MLPF&S will not be obligated to engage in any of these market activities or
continue them once it has started.
MLPF&S will also be our agent for purposes of calculating, among other
things, the Adjusted Ending Value and the Supplemental Redemption Amount. Under
certain circumstances, these duties could result in a conflict of interest
between MLPF&S' status as a subsidiary of ML&Co. and its responsibilities as
calculation agent.
Who is ML&Co.?
Merrill Lynch & Co., Inc. is a holding company with various subsidiary
and affiliated companies that provide investment, financing, insurance and
related services on a global basis. For information about ML&Co. see the
section "Merrill Lynch & Co., Inc." in the accompanying prospectus. You should
also read the other documents we have filed with the SEC, which you can find by
referring to the section "Where You Can Find More Information" in this
prospectus supplement.
Are there any risks associated with my investment?
Yes, an investment in the MITTS Securities is subject to risk. Please
refer to the section "Risk Factors" in this prospectus supplement.
S-7
RISK FACTORS
Your investment in the MITTS Securities will involve risks. You should
carefully consider the following discussion of risks before deciding whether an
investment in the MITTS Securities is suitable for you.
You may not earn a return on your investment
You should be aware that if the Adjusted Ending Value does not exceed the
Starting Value on the stated maturity date, the Supplemental Redemption Amount
will be zero. This will be true even if the value of the Russell 2000 Index, as
reduced by the Adjustment Factor over the term of the MITTS Securities, was
higher than the Starting Value at some time during the life of the MITTS
Securities but later falls below the Starting Value. If the Supplemental
Redemption Amount is zero, we will pay you only the principal amount of your
MITTS Securities.
Your yield may be lower than the yield on other debt securities of comparable
maturity
The amount we pay you at maturity may be less than the return you could
earn on other investments. Your yield may be less than the yield you would earn
if you bought other senior non-callable debt securities of ML&Co. with the same
stated maturity date. Your investment may not reflect the full opportunity cost
to you when you take into account factors that affect the time value of money.
Your return will not reflect the return of owning the stocks included in the
Russell 2000 Index
The return on your MITTS Securities will not reflect the return you would
realize if you actually owned the stocks included in the Russell 2000 Index and
received the dividends paid on those stocks because of the cumulative effect of
the reduction caused by the Adjustment Factor and because the value of the
Russell 2000 Index is calculated by reference to the prices of the stocks
included in the Russell 2000 Index without taking into consideration the value
of dividends paid on those stocks.
There may be an uncertain trading market for the MITTS Securities
We have applied to have the MITTS Securities listed on the AMEX under the
trading symbol "RRM". While there have been a number of issuances of series of
Market Index Target-Term Securities, trading volumes have varied historically
from one series to another and it is therefore impossible to predict how the
MITTS Securities will trade. You cannot assume that a trading market will
develop for the MITTS Securities. If a trading market does develop, there can
be no assurance that there will be liquidity in the trading market. The
development of a trading market for the MITTS Securities will depend on our
financial performance, and other factors such as the increase, if any, in the
value of the Russell 2000 Index.
If the trading market for the MITTS Securities is limited, there may be a
limited number of buyers for your MITTS Securities if you do not wish to hold
your investment until maturity. This may affect the price you receive.
Many factors affect the trading value of the MITTS Securities; these factors
interrelate in complex ways and the effect of any one factor may offset or
magnify the effect of another factor
The trading value of the MITTS Securities will be affected by factors
that interrelate in complex ways. It is important for you to understand that
the effect of one factor may offset the increase in the trading value of the
MITTS Securities caused by another factor and that the effect of one factor may
exacerbate the decrease in the trading value of the MITTS Securities caused by
another factor. For example, an increase in U.S. interest rates may offset some
or all of any increase in the trading value of the MITTS Securities
attributable to another factor, such as an increase in the value of the Russell
2000 Index. The following paragraphs describe the
S-8
expected impact on the market value of the MITTS Securities given a change in a
specific factor, assuming all other conditions remain constant.
The value of the Russell 2000 Index is expected to affect the trading
value of the MITTS Securities. We expect that the market value of the MITTS
Securities will depend substantially on the amount by which the Russell 2000
Index, as reduced by the Adjustment Factor over the term of the MITTS
Securities, is greater or less than the Starting Value. If you choose to sell
your MITTS Securities when the value of the Russell 2000 Index, as reduced by
the Adjustment Factor over the term of the MITTS Securities, exceeds the
Starting Value, you may receive substantially less than the amount that would
be payable at maturity based on that value because of the expectation that the
Russell 2000 Index will continue to fluctuate until the Adjusted Ending Value
is determined. If you choose to sell your MITTS Securities when the value of
the Russell 2000 Index is below, or not sufficiently above, the Starting Value,
you may receive less than the $10 principal amount per unit of MITTS
Securities. In general, rising U.S. dividend rates or dividends per share may
increase the value of the Russell 2000 Index while falling U.S. dividend rates
may decrease the value of the Russell 2000 Index.
Changes in the levels of interest rates are expected to affect the
trading value of the MITTS Securities. Because we will pay, at a minimum, the
principal amount per unit of MITTS Securities at maturity, we expect that
changes in U.S. interest rates will affect the trading value of the MITTS
Securities. In general, if U.S. interest rates increase, we expect that the
trading value of the MITTS Securities will decrease and, conversely, if U.S.
interest rates decrease, we expect the trading value of the MITTS Securities
will increase. Rising U.S. interest rates may lower the value of the Russell
2000 Index and, thus, the MITTS Securities. Falling U.S. interest rates may
increase the value of the Russell 2000 Index and, thus, may increase the value
of the MITTS Securities.
Changes in the volatility of the Russell 2000 Index are expected to
affect the trading value of the MITTS Securities. Volatility is the term used
to describe the size and frequency of price and/or market fluctuations. In
general, if the volatility of the Russell 2000 Index increases, we expect that
the trading value of the MITTS Securities will increase and, conversely, if the
volatility of the Russell 2000 Index decreases, we expect that the trading
value of the MITTS Securities will decrease.
As the time remaining to maturity of the MITTS Securities decreases, the
"time premium" associated with the MITTS Securities will decrease. We
anticipate that before their maturity, the MITTS Securities may trade at a
value above that which would be expected based on the level of U.S. interest
rates and the Russell 2000 Index. This difference will reflect a "time premium"
due to expectations concerning the value of the Russell 2000 Index during the
period before the stated maturity of the MITTS Securities. However, as the time
remaining to the stated maturity of the MITTS Securities decreases, we expect
that this time premium will decrease, lowering the trading value of the MITTS
Securities.
Changes in dividend yields of the stocks included in the Russell 2000
Index are expected to affect the trading value of the MITTS Securities. In
general, if dividend yields on the stocks included in the Russell 2000 Index
increase, we expect that the value of the MITTS Securities will decrease and,
conversely, if dividend yields on the stocks included in the Russell 2000 Index
decrease, we expect that the value of the MITTS Securities will increase.
Changes in our credit ratings may affect the trading value of the MITTS
Securities. Our credit ratings are an assessment of our ability to pay our
obligations. Consequently, real or anticipated changes in our credit ratings
may affect the trading value of the MITTS Securities. However, because your
return on your MITTS Securities is dependent upon factors in addition to our
ability to pay our obligations under the MITTS Securities, such as the
percentage increase in the value of the Russell 2000 Index at maturity, an
improvement in our credit ratings will not reduce the other investment risks
related to the MITTS Securities.
S-9
In general, assuming all relevant factors are held constant, we expect
that the effect on the trading value of the MITTS Securities of a given change
in most of the factors listed above will be less if it occurs later in the term
of the MITTS Securities than if it occurs earlier in the term of the MITTS
Securities. However, we expect that the effect on the trading value of the
MITTS Securities of a given increase in the value of the Russell 2000 Index
will be greater if it occurs later in the term of the MITTS Securities than if
it occurs earlier in the term of the MITTS Securities.
Amounts payable on the MITTS Securities may be limited by state law
New York State law governs the 1983 Indenture under which the MITTS
Securities will be issued. New York has usury laws that limit the amount of
interest that can be charged and paid on loans, which includes debt securities
like the MITTS Securities. Under present New York law, the maximum rate of
interest is 25% per annum on a simple interest basis. This limit may not apply
to debt securities in which $2,500,000 or more has been invested.
While we believe that New York law would be given effect by a state or
Federal court sitting outside of New York, many other states also have laws
that regulate the amount of interest that may be charged to and paid by a
borrower. We will promise, for the benefit of the holders of the MITTS
Securities, to the extent permitted by law, not to voluntarily claim the
benefits of any laws concerning usurious rates of interest.
Purchases and sales by us and our affiliates may affect your return
We and our affiliates may from time to time buy or sell the stocks
included in the Russell 2000 Index or futures or options contracts on the
Russell 2000 Index for our own accounts for business reasons or in connection
with hedging our obligations under the MITTS Securities. These transactions
could affect the price of these stocks and, in turn, the value of the Russell
2000 Index in a manner that would be adverse to your investment in the MITTS
Securities.
Potential conflicts
Our subsidiary MLPF&S is our agent for the purposes of calculating the
Adjusted Ending Value and the Supplemental Redemption Amount payable to you at
maturity. Under certain circumstances, MLPF&S' role as our subsidiary and its
responsibilities as calculation agent for the MITTS Securities could give rise
to conflicts of interests. These conflicts could occur, for instance, in
connection with its determination as to whether a value of the Russell 2000
Index can be calculated on a particular trading day, or in connection with
judgments that it would be required to make in the event of a discontinuance or
unavailability of the Russell 2000 Index. See "Description of the MITTS
Securities--Adjustments to the Russell 2000 Index; Market Disruption Events"
and "--Discontinuance of the Russell 2000 Index" in this prospectus supplement.
MLPF&S is required to carry out its duties as calculation agent in good faith
and using its reasonable judgment. However, you should be aware that because we
control MLPF&S, potential conflicts of interest could arise.
We have entered into an arrangement with one of our subsidiaries to hedge
the market risks associated with our obligation to pay the amounts due at
maturity on the MITTS Securities. This subsidiary expects to make a profit in
connection with this arrangement. We did not seek competitive bids for this
arrangement from unaffiliated parties.
Uncertain tax consequences
You should also consider the tax consequences of investing in the MITTS
Securities, aspects of which are uncertain. See "United States Federal Income
Taxation" below.
S-10
DESCRIPTION OF THE MITTS SECURITIES
ML&Co. will issue the MITTS Securities as a series of senior debt
securities under the 1983 Indenture, which is more fully described in the
accompanying prospectus. The MITTS Securities will mature on March , 2009.
While at maturity a beneficial owner of a MITTS Security will receive the
sum of the principal amount of the MITTS Security plus the Supplemental
Redemption Amount, if any, there will be no other payment of interest, periodic
or otherwise. See "--Payment at maturity".
The MITTS Securities 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 MITTS Securities, holders of the MITTS Securities
may accelerate the maturity of the MITTS Securities, as described under
"--Events of Default and Acceleration" in this prospectus supplement and
"Description of Debt Securities--Events of Default" in the accompanying
prospectus.
ML&Co. will issue the MITTS Securities in denominations of whole units
each with a principal amount of $10.00 per unit.
The MITTS Securities will not have the benefit of any sinking fund.
Payment at maturity
At maturity a holder of a MITTS Security will be entitled to receive the
principal amount of that MITTS Security plus a Supplemental Redemption Amount,
if any, all as described below. If the Adjusted Ending Value does not exceed
the Starting Value, you will be entitled to receive only the principal amount
of your MITTS Securities.
The "Supplemental Redemption Amount" for a MITTS Security will be
determined by the calculation agent and will equal:
(Adjusted Ending Value - Starting Value)
principal amount of each MITTS Security ($10 per unit) x (--------------------------------------)
( Starting Value )
provided, however, that in no event will the Supplemental Redemption Amount be
less than zero.
The "Starting Value" means the closing value of the Russell 2000 Index on
the Pricing Date. We will disclose the Starting Value in the final prospectus
supplement delivered to you in connection with sales of the MITTS Securities.
The "Adjusted Ending Value" will be determined by the calculation agent
and will equal the average, arithmetic mean, of the closing values of the
Russell 2000 Index, as reduced by the application of the Adjustment Factor on
each Calculation Day, determined on each of the first five Calculation Days
during the Calculation Period. If there are fewer than five Calculation Days
during the Calculation Period, then the Adjusted Ending Value will equal the
average, arithmetic mean, of the closing values of the Russell 2000 Index on
those Calculation Days, as reduced by the application of the Adjustment Factor
on each Calculation Day. If there is only one Calculation Day during the
Calculation Period, then the Adjusted Ending Value will equal the closing value
of the Russell 2000 Index on that Calculation Day, as reduced by the
application of the Adjustment Factor on that Calculation Day. If no Calculation
Days occur during the Calculation Period, then the Adjusted Ending Value will
equal the closing value of the Russell 2000 Index determined on the last
scheduled Index Business Day in the Calculation Period, as reduced by the
application of the Adjustment Factor on that day, regardless of the occurrence
of a Market Disruption Event on that Index Business Day.
S-11
The "Adjustment Factor" means a fixed percentage expected to be between
2.2% and 2.7% per year and will be applied over the entire term of the MITTS
Securities. For each calendar day during the term of the MITTS Securities, we
will apply this percentage on a pro-rated basis based on a 365-day year to
reduce the values of the Russell 2000 Index used to calculate the Supplemental
Redemption Amount during the Calculation Period. As a result of the cumulative
effect of this reduction, the values of the Russell 2000 Index used to
calculate your Supplemental Redemption Amount during the Calculation Period
will be approximately 14.28% to 17.23% less than the actual value of the
Russell 2000 Index on each day during the Calculation Period. We will determine
the Adjustment Factor on the Pricing Date and it will appear in the final
prospectus supplement delivered to you in connection with the sales of the
MITTS Securities.
The "Calculation Period" means the period from and including the seventh
scheduled Index Business Day before the maturity date to and including the
second scheduled Index Business Day before the maturity date.
A "Calculation Day" means any Index Business Day during the Calculation
Period on which a Market Disruption Event has not occurred.
An "Index Business Day" means any day on which the AMEX and the NYSE are
open for trading and the Russell 2000 Index or any successor index is
calculated and published.
All determinations made by the calculation agent shall be at the sole
discretion of the calculation agent and, absent a determination by the
calculation agent of a manifest error, shall be conclusive for all purposes and
binding on ML&Co. and the holders and beneficial owners of the MITTS Securities.
Hypothetical returns
The following table illustrates, for a range of hypothetical average
closing values of the Russell 2000 Index during the Calculation Period:
. the percentage change from the hypothetical Starting Value to the
hypothetical average closing value,
. the Adjusted Ending Value used to calculate the Supplemental
Redemption Amount,
. the total amount payable at maturity for each unit of MITTS
Securities,
. the total rate of return to beneficial owners of MITTS Securities,
. the pretax annualized rate of return to beneficial owners of MITTS
Securities, and
. the pretax annualized rate of return of an investment in the stocks
included in the Russell 2000 Index, which includes an assumed
aggregate dividend yield of 1.33% per annum, as more fully described
below.
S-12
For the purposes of calculating this table, we have applied the
Adjustment Factor of 2.45% per annum, the midpoint of the expected range of
2.2% and 2.7%.
Percentage
change
from the
hypothetical Pretax
Hypothetical Starting Total amount Pretax annualized
average Value to payable at annualized rate of return
closing value hypothetical maturity Total rate of rate of of stocks
during the average Adjusted per unit of return on the return on included in
calculation closing Ending the MITTS MITTS the MITTS the Russell
period value Value (1) Securities Securities Securities (2) 2000 Index (2)(3)
- ------------- ------------ --------- ------------ ------------- -------------- -----------------
94.52 -80% 79.61 $10.00 0.00% 0.00% 20.24%
189.04 -60% 159.23 $10.00 0.00% 0.00% 11.33%
283.57 -40% 238.84 $10.00 0.00% 0.00% 5.85%
378.09 -20% 318.46 $10.00 0.00% 0.00% 1.84%
472.61(4) 0% 398.07 $10.00 0.00% 0.00% 1.33%
567.13 20% 477.69 $10.11 1.07% 0.15% 3.97%
661.65 40% 557.30 $11.79 17.92% 2.37% 6.24%
756.18 60% 636.91 $13.48 34.77% 4.30% 8.23%
850.70 80% 716.53 $15.16 51.61% 6.03% 10.00%
945.22 100% 796.14 $16.85 68.46% 7.58% 11.60%
1,039.74 120% 875.76 $18.53 85.30% 9.00% 13.06%
1,134.26 140% 955.37 $20.21 102.15% 10.30% 14.41%
1,228.79 160% 1,034.98 $21.90 118.99% 11.51% 15.65%
1,323.31 180% 1,114.60 $23.58 135.84% 12.63% 16.82%
1,417.83 200% 1,194.21 $25.27 152.68% 13.68% 17.91%
- --------
(1) The Adjusted Ending Values specified in this column are approximately
15.77% less than the hypothetical average closing values of the Russell
2000 Index as a result of the application of a hypothetical Adjustment
Factor of 2.45% per annum over the term of the MITTS Securities.
(2) The annualized rates of return specified in the preceding table are
calculated on a semiannual bond equivalent basis.
(3) This rate of return assumes:
(a) a percentage change in the aggregate price of the stocks that equals
the percentage change in the Russell 2000 Index from the hypothetical
Starting Value to the relevant hypothetical average closing value;
(b) a constant dividend yield of 1.33% per annum, paid quarterly from the
date of initial delivery of the MITTS Securities, applied to the
value of the Russell 2000 Index at the end of each quarter assuming
this value increases or decreases linearly from the hypothetical
Starting Value to the applicable hypothetical average closing value;
(c) no transaction fees or expenses; and
(d) an investment term of seven years.
(4) This is the hypothetical Starting Value of the Russell 2000 Index. The
actual Starting Value will equal the closing value of the Russell 2000
Index on the Pricing Date.
The above figures are for purposes of illustration only. The actual
Supplemental Redemption Amount, received by you and the resulting total and
pretax annualized rate of return will depend on the actual Starting Value and
the actual Adjusted Ending Value determined by the calculation agent as
described in this prospectus supplement.
S-13
Adjustments to the Russell 2000 Index; Market Disruption Events
If at any time FRC changes its method of calculating the Russell 2000
Index, or the value of the index changes, in any material respect, or if the
Russell 2000 Index is in any other way modified so that the Russell 2000 Index
does not, in the opinion of the calculation agent, fairly represent the value
of the Russell 2000 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
Russell 2000 Index is to be calculated, make those adjustments as, in the good
faith judgment of the calculation agent, may be necessary in order to arrive at
a calculation of a value of a stock index comparable to the Russell 2000 Index
as if those changes or modifications had not been made, and calculate the
closing value with reference to the Russell 2000 Index, as so adjusted.
Accordingly, if the method of calculating the Russell 2000 Index is modified so
that the value of the Russell 2000 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 Russell 2000 Index in order to arrive at a
value of the Russell 2000 Index as if it had not been modified, e.g., as if a
split had not occurred.
"Market Disruption Event" means either of the following events as
determined by the calculation agent:
(A) the suspension or material limitation on trading for more than two
hours of trading, or during the one-half hour period preceding the
close of trading, on the applicable exchange, in 20% or more of the
stocks which then comprise the Russell 2000 Index; or
(B) the suspension or material limitation, in each case, for more than
two hours of trading, or during the one-half hour period preceding
the close of trading, on the applicable exchange, whether by reason
of movements in price otherwise exceeding levels permitted by the
relevant exchange or otherwise, in option contracts or futures
contracts related to the Russell 2000 Index, or any successor index,
which are traded on any major U.S. exchange.
For the purpose of the above definition:
(1) a limitation on the hours in a trading day and/or number of days of
trading will not constitute a Market Disruption Event if it results
from an announced change in the regular business hours of the
relevant exchange and
(2) for the purpose of clause (A) above, any limitations on trading
during significant market fluctuations under NYSE Rule 80A, or any
applicable rule or regulation enacted or promulgated by the NYSE or
any other self regulatory organization or the SEC of similar scope as
determined by the calculation agent, will be considered "material".
As a result of the terrorist attacks in Manhattan and Washington, D.C.,
the financial markets were closed from September 11, 2001 through September 14,
2001 and values of the Russell 2000 Index are not available for such dates.
Such market closures would have constituted Market Disruption Events.
Discontinuance of the Russell 2000 Index
If FRC discontinues publication of the Russell 2000 Index and FRC or
another entity publishes a successor or substitute index that the calculation
agent determines, in its sole discretion, to be comparable to the Russell 2000
Index (a "successor index"), then, upon the calculation agent's notification of
its determination to the trustee and ML&Co., the calculation agent will
substitute the successor index as calculated by FRC or any other entity for the
Russell 2000 Index and calculate the Adjusted Ending Value as described above
under "--Payment at maturity". Upon any selection by the calculation agent of a
successor index, ML&Co. shall promptly give notice to the beneficial owners of
the MITTS Securities by publication in a United States newspaper with a
national circulation.
S-14
In the event that FRC discontinues publication of the Russell 2000 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 Russell 2000
Index in accordance with the procedures last used to calculate the Russell 2000
Index before any discontinuance. If a successor index is selected or the
calculation agent calculates a value as a substitute for the Russell 2000 Index
as described below, the successor index or value will be used as a substitute
for the Russell 2000 Index for all purposes, including for purposes of
determining whether a Market Disruption Event exists.
If FRC discontinues publication of the Russell 2000 Index before the
Calculation Period and the calculation agent determines that no successor index
is available at that time, then on each Business Day until the earlier to occur
of:
. the determination of the Adjusted Ending Value, and
. a determination by the calculation agent that a successor index is
available,
the calculation agent will determine the value that would be used in computing
the Supplemental Redemption Amount as described in the preceding paragraph as
if that day were a Calculation Day. The calculation agent will cause notice of
each value to be published not less often than once each month in The Wall
Street Journal or another newspaper of general circulation, and arrange for
information with respect to these values to be made available by telephone.
A "Business Day" is any day on which the AMEX and the NYSE are open for
trading.
Notwithstanding these alternative arrangements, discontinuance of the
publication of the Russell 2000 Index may adversely affect trading in the MITTS
Securities.
Events of Default and Acceleration
In case an Event of Default with respect to any MITTS Securities has
occurred and is continuing, the amount payable to a beneficial owner of a MITTS
Security upon any acceleration permitted by the MITTS Securities, with respect
to each $10 principal amount of MITTS Securities, will be equal to the
principal amount and the Supplemental Redemption Amount, if any, calculated as
though the date of early repayment were the stated maturity date of the MITTS
Securities, provided, however, the Adjustment Factor will be applied to the
values used to calculate the Supplemental Redemption Amount as if the MITTS
Securities had not been accelerated and had remained outstanding to the stated
maturity date. See "--Payment at maturity" in this prospectus supplement. If a
bankruptcy proceeding is commenced in respect of ML&Co., the claim of the
holder of a MITTS Security may be limited, under Section 502(b)(2) of Title 11
of the United States Code, to the principal amount of the MITTS Security plus
an additional amount of contingent interest calculated as though the date of
the commencement of the proceeding were the maturity date of the MITTS
Securities.
In case of default in payment of the MITTS Securities, whether at the
stated maturity date or upon acceleration, from and after the maturity date the
MITTS Securities will bear interest, payable upon demand of their holders, at
the rate of % per annum to the extent that payment of any interest is legally
enforceable on the unpaid amount due and payable on that date in accordance
with the terms of the MITTS Securities to the date payment of that amount has
been made or duly provided for.
S-15
Depositary
Description of the Global Securities
Upon issuance, all MITTS Securities will be represented by one or more
fully registered global securities. Each global security will be deposited
with, or on behalf of, DTC (DTC, together with any successor, being a
"depositary"), as depositary, registered in the name of Cede & Co., DTC's
partnership nominee. Unless and until it is exchanged in whole or in part for
MITTS Securities in definitive form, no global security may be transferred
except as a whole by the depositary to a nominee of the depositary or by a
nominee of the depositary to the depositary or another nominee of the
depositary or by the depositary or any nominee to a successor of the depositary
or a nominee of that successor.
So long as DTC, or its nominee, is a registered owner of a global
security, DTC or its nominee, as the case may be, will be considered the sole
owner or holder of the MITTS Securities represented by the global security for
all purposes under the 1983 Indenture. Except as provided below, the beneficial
owners of the MITTS Securities represented by a global security will not be
entitled to have the MITTS Securities represented by a global security
registered in their names, will not receive or be entitled to receive physical
delivery of the MITTS Securities in definitive form and will not be considered
the owners or holders of the MITTS Securities including for purposes of
receiving any reports delivered by ML&Co. or the trustee under the 1983
Indenture. Accordingly, each person owning a beneficial interest in a global
security must rely on the procedures of DTC and, if that person is not a
participant of DTC, on the procedures of the participant through which that
person owns its interest, to exercise any rights of a holder under the 1983
Indenture. ML&Co. understands that under existing industry practices, in the
event that ML&Co. requests any action of holders or that an owner of a
beneficial interest in a global security desires to give or take any action
which a holder is entitled to give or take under the 1983 Indenture, DTC would
authorize the participants holding the relevant beneficial interests to give or
take that action, and those participants would authorize beneficial owners
owning through those participants to give or take that action or would
otherwise act upon the instructions of beneficial owners. Conveyance of notices
and other communications by DTC to participants, by participants to indirect
participants and by participants and indirect participants to beneficial owners
will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
DTC Procedures
The following is based on information furnished by DTC:
DTC will act as securities depositary for the MITTS Securities. The MITTS
Securities will be issued as fully registered securities registered in the name
of Cede & Co., DTC's partnership nominee. One or more fully registered global
securities will be issued for the MITTS Securities in the aggregate principal
amount of such issue, and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member, of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC holds securities that its participants
deposit with DTC. DTC also facilitates the settlement among participants of
securities transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
Direct participants of DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. DTC is owned
by a number of its direct participants and by the NYSE, the AMEX, and the
National Association of Securities Dealers, Inc. Access to DTC's system is also
available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a direct
participant, either directly or indirectly. The rules applicable to DTC and its
participants are on file with the SEC.
S-16
Purchases of the MITTS Securities under DTC's system must be made by or
through direct participants, which will receive a credit for the MITTS
Securities on DTC's records. The ownership interest of each beneficial owner is
in turn to be recorded on the records of direct and indirect participants.
Beneficial owners will not receive written confirmation from DTC of their
purchase; but beneficial owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the direct or indirect participants through which the beneficial
owner entered into the transaction. Transfers of ownership interests in the
MITTS Securities are to be made by entries on the books of participants acting
on behalf of beneficial owners.
To facilitate subsequent transfers, all MITTS Securities deposited with
DTC are registered in the name of DTC's partnership nominee, Cede & Co. The
deposit of MITTS Securities with DTC and their registration in the name of Cede
& Co. effect no change in beneficial ownership. DTC has no knowledge of the
actual beneficial owners of the MITTS Securities; DTC's records reflect only
the identity of the direct participants to whose accounts the MITTS Securities
are credited, which may or may not be the beneficial owners. The participants
will remain responsible for keeping account of their holdings on behalf of
their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the MITTS
Securities. Under its usual procedures, DTC mails an omnibus proxy to ML&Co. as
soon as possible after the applicable record date. The omnibus proxy assigns
Cede & Co.'s consenting or voting rights to those direct participants
identified in a listing attached to the omnibus proxy to whose accounts the
MITTS Securities are credited on the record date.
Principal, premium, if any, and/or interest, if any, payments made in
cash on the MITTS Securities will be made in immediately available funds to
DTC. DTC's practice is to credit direct participants' accounts on the
applicable payment date in accordance with their respective holdings shown on
the depositary's records unless DTC has reason to believe that it will not
receive payment on that date. Payments by participants to beneficial owners
will be governed by standing instructions and customary practices, as is the
case with securities held for the accounts of customers in bearer form or
registered in "street name", and will be the responsibility of that participant
and not of DTC, the trustee or ML&Co., subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of principal,
premium, if any, and/or interest, if any, to DTC is the responsibility of
ML&Co. or the trustee, disbursement of those payments to direct participants
will be the responsibility of DTC, and disbursement of those payment will be
the responsibility of direct participants and indirect participants.
Exchange for Certificated Securities
If:
. the depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by ML&Co.
within 60 days,
. ML&Co. executes and delivers to the trustee a company order to the
effect that the global securities shall be exchangeable, or
. an Event of Default under the 1983 Indenture has occurred and is
continuing with respect to the MITTS Securities,
the global securities will be exchangeable for MITTS Securities in definitive
form of like tenor and of an equal aggregate principal amount, in denominations
of $10 and integral multiples of $10. The definitive MITTS
S-17
Securities will be registered in the name or names as the depositary shall
instruct the trustee. It is expected that instructions may be based upon
directions received by the depositary from participants with respect to
ownership of beneficial interests in the global securities.
DTC may discontinue providing its services as securities depositary with
respect to the MITTS Securities at any time by giving reasonable notice to
ML&Co. or the trustee. Under these circumstances, in the event that a successor
securities depositary is not obtained, MITTS Security certificates are required
to be printed and delivered.
ML&Co. may decide to discontinue use of the system of book-entry
transfers through DTC or a successor securities depositary. In that event,
MITTS Security certificates will be printed and delivered.
The information in this section concerning DTC and DTC's system has been
obtained from sources that ML&Co. believes to be reliable, but ML&Co. takes no
responsibility for its accuracy.
Same-Day Settlement and Payment
Settlement for the MITTS Securities will be made by the underwriter in
immediately available funds. ML&Co. will make all payments of principal and the
Supplemental Redemption Amount, if any, in immediately available funds so long
as the MITTS Securities are maintained in book-entry form.
THE RUSSELL 2000 INDEX
Unless otherwise stated, all information herein on the Russell 2000 Index
is derived from FRC or other publicly available sources. This information
reflects the policies of FRC as stated in the publicly available sources and
the policies are subject to change by FRC. FRC is under no obligation to
continue to publish the Russell 2000 Index and may discontinue publication of
the Russell 2000 Index at any time.
The Russell 2000 Index is an index calculated, published and disseminated
by FRC, and measures the composite price performance of stocks of 2,000
companies domiciled in the U.S. and its territories. All 2,000 stocks are
traded on either the NYSE or the AMEX or in the over-the-counter market and
form a part of the Russell 3000(R) Index. The Russell 3000(R) Index is
composed of the 3,000 largest U.S. companies as determined by market
capitalization and represents approximately 98% U.S. equity market.
The Russell 2000 Index consists of the smallest 2,000 companies included
in the Russell 3000(R) Index and represented approximately 8.27% of the total
market capitalization of the Russell 3000(R) Index as of December 31, 2001. The
Russell 2000 Index is designed to track the performance of the small
capitalization segment of the U.S. equity market.
Selection of stocks underlying the Russell 2000 Index
Only common stocks belonging to corporations domiciled in the U.S. and
its territories are eligible for inclusion in the Russell 3000 Index and the
Russell 2000 Index. Stocks traded on U.S. exchanges but domiciled in other
countries are excluded. Preferred stock, convertible preferred stock,
participating preferred stock, paired shares, warrants and rights are also
excluded. Trust receipts, Royalty Trusts, limited liability companies, OTC
Bulletin Board companies, pink sheets, closed-end mutual funds, and limited
partnerships that are traded on U.S. exchanges, are also ineligible for
inclusion. Real Estate Investment Trusts and Beneficial Trusts are eligible for
inclusion, however. In general, only one class of securities of a company is
allowed in the Russell 3000 Index, although exceptions to this general rule
have been made where FRC has determined that each class of securities acts
independent of the other.
S-18
The primary criteria used to determine the initial list of securities
eligible for the Russell 3000 Index is total market capitalization, which is
defined as the price of the shares times the total number of shares
outstanding. Based on closing values on May 31 of each year, FRC reconstitutes
the composition of the Russell 3000 Index using the then existing market
capitalizations of eligible companies. As of June 30 of each year, the Russell
2000 Index is adjusted to reflect the reconstitution of the Russell 3000 Index
for that year. Real-time dissemination of the Russell 2000 Index began on
January 1, 1987.
As a capitalization-weighted index, the Russell 2000 Index reflects
changes in the capitalization, or market value, of the component stocks
relative to the capitalization on a base date. The current Russell 2000 Index
value is calculated by adding the market values of the Russell 2000 Index's
component stocks, which are derived by multiplying the price of each stock by
the number of shares outstanding, to arrive at the total market capitalization
of the 2,000 stocks. The total market capitalization is then divided by a
divisor, which represents the "adjusted" capitalization of the Russell 2000
Index on the base date of December 31, 1986. To calculate the Russell 2000
Index, last sale prices will be used for exchange-traded and NASDAQ stocks. If
a component stock is not open for trading, the most recently traded price for
that security will be used in calculating the Russell 2000 Index. In order to
provide continuity for the Russell 2000 Index's value, the divisor is adjusted
periodically to reflect events including changes in the number of common shares
outstanding for component stocks, company additions or deletions, corporate
restructurings and other capitalization changes.
The value of the Russell 2000 Index is reported on the AMEX under the
symbol "RTY", on Bloomberg under the symbol "RTY" and on Reuters under the
symbol "RUT".
S-19
All disclosure contained in this prospectus supplement regarding the
Russell 2000 Index, or its publisher, is derived from publicly available
information. All copyrights and other intellectual property rights relating to
the Russell 2000 Index are owned by FRC. FRC has no relationship with ML&Co. or
the MITTS Securities; it does not sponsor, endorse, authorize, sell or promote
the MITTS Securities, and has no obligation or liability in connection with the
administration, marketing or trading of the MITTS Securities.
Below is a breakdown of the component stocks of the Russell 2000 Index by
industry group as of December 31, 2001:
Percentage of
Russell 2000
Number of Index Market
Industry Companies Capitalization
-------- --------- --------------
Technology........................................... 327 14.6%
Health Care.......................................... 267 12.9%
Consumer Discretionary and Services.................. 359 18.1%
Consumer Staples..................................... 49 3.1%
Integrated Oils...................................... 2 0.0%
Other Energy......................................... 73 2.9%
Materials and Processing............................. 170 8.7%
Producer Durables.................................... 152 9.2%
Autos and Transportation............................. 65 3.6%
Financial Services................................... 377 21.0%
Utilities............................................ 75 5.0%
Other................................................ 15 0.8%
----- -----
Total............................................. 1,931/(1)/ 100%/(2)/
- --------
Source: FRC.
(1) The total number of companies included in the Russell 2000 Index may not
add up to 2000 due to the manner in which FRC maintains the Russell 2000
Index. For instance, although on the date of its annual reconstitution the
Russell 2000 Index consists of 2000 companies, any companies which are
deleted from the Russell 2000 Index between reconstitution dates are not
replaced and spin-offs are the only additions between reconstitution dates.
(2) Total value may not add up to 100 due to rounding.
As of December 31, 2001, the ten largest holdings in the Russell 2000
Index represented 2.4% of the aggregate market capitalization of the Russell
2000 Index. Fourteen of the stocks in the Russell 2000 Index were also
components of the S&P 500 Index. These 14 stocks represented 1.82% of the
Russell 2000 Index market capitalization. The dividend yield on the Russell
2000 Index as of December 31, 2001 was 1.27%.
S-20
Historical data on the Russell 2000 Index
The following table sets forth the closing level of the Russell 2000
Index at the end of each quarter, in the period from March 1979 through
December 2001. All historical data presented in the following table relating to
periods prior to January 1, 1987, the date FRC commenced real-time
dissemination of the Russell 2000 Index, are presented as if the Russell 2000
Index had existed during these periods and these closing levels have been
calculated hypothetically on the same basis that the Russell 2000 Index is
calculated. All historical data presented in the following table relating to
periods after January 1, 1987 are based on actual data from the Russell 2000
Index. These historical data on the Russell 2000 Index are not necessarily
indicative of the future performance of the Russell 2000 Index or what the
value of the MITTS Securities may be. Any historical upward or downward trend
in the closing level of the Russell 2000 Index during any period set forth
below is not any indication that the Russell 2000 Index is more or less likely
to decline at any time during the term of the MITTS Securities.
March June September December
------ ------ --------- --------
1979.......................................... 46.94 49.62 54.68 55.91
1980.......................................... 48.27 57.47 69.94 74.80
1981.......................................... 80.25 82.56 67.55 73.67
1982.......................................... 66.21 64.67 70.84 88.90
1983.......................................... 103.77 124.17 117.43 112.27
1984.......................................... 104.10 100.30 105.17 101.49
1985.......................................... 114.92 118.38 112.65 129.87
1986.......................................... 147.63 154.23 134.73 135.00
1987.......................................... 166.79 164.75 170.81 120.42
1988.......................................... 142.15 151.30 149.09 147.36
1989.......................................... 157.90 167.43 178.21 168.31
1990.......................................... 163.64 169.12 126.74 132.20
1991.......................................... 171.01 167.61 180.16 189.94
1992.......................................... 203.69 188.64 192.92 221.01
1993.......................................... 229.21 233.35 252.95 258.59
1994.......................................... 251.06 240.29 256.12 250.36
1995.......................................... 260.77 283.63 310.38 315.97
1996.......................................... 330.77 346.61 346.38 362.61
1997.......................................... 342.56 396.37 453.82 437.02
1998.......................................... 480.68 457.39 363.59 429.60
1999.......................................... 397.63 457.68 427.30 504.75
2000.......................................... 539.09 517.23 521.37 483.53
2001.......................................... 450.53 512.80 404.87 488.50
The closing value of the Russell 2000 Index on February 27, 2002 was
472.61.
S-21
The following graph sets forth the historical performance of the Russell
2000 Index at the end of each quarter from March 1979 through December 2001.
Past movements of the Russell 2000 Index are not necessarily indicative of the
future Russell 2000 Index values.
[THE GRAPH APPEARING HERE SETS FORTH HISTORICAL PERFORMANCE OF THE RUSSELL 2000
INDEX AT THE END OF EACH QUARTER FROM MARCH 1979 THROUGH DECEMBER 2001, AS SET
FORTH IN THE TABLE ON THE PREVIOUS PAGE. THE VERTICAL AXIS HAS A RANGE OF
NUMBERS FROM 0 TO 600 IN INCREMENTS OF 50. THE HORIZONTAL AXIS HAS A RANGE OF
DATES FROM MARCH 1979 THROUGH DECEMBER 2001 IN INCREMENTS OF THREE MONTHS.]
The Russell 2000 Index is a trademark of FRC and has been licensed for
use by ML&Co. The MITTS Securities are not sponsored, endorsed, sold or
promoted by FRC and FRC makes no representation regarding the advisability of
investing in the MITTS Securities.
The MITTS Securities are not sponsored, endorsed, sold or promoted by
FRC. FRC makes no representation or warranty, express or implied, to the owners
of the MITTS Securities or any member of the public regarding the advisability
of investing in securities generally or in the MITTS Securities particularly or
the ability of the Russell 2000 Index to track general stock market performance
or a segment of the same. FRC's publication of the Russell 2000 Index in no way
suggests or implies an opinion by FRC as to the advisability of investment in
any or all of the securities upon which the Russell 2000 Index is based. FRC's
only relationship to ML&Co. is the licensing of certain trademarks, and trade
names of FRC and of the Russell 2000 Index which is determined, composed and
calculated by FRC without regard to ML&Co. or the MITTS Securities. FRC is not
responsible for and has not reviewed the MITTS Securities or any associated
literature or publications and FRC makes no representation or warranty express
or implied as to their accuracy or completeness, or otherwise. FRC reserves the
right, at any time and without notice, to alter, amend, terminate or in any way
change the Russell 2000 Index. FRC has no obligation or liability in connection
with the administration, marketing or trading of the MITTS Securities.
FRC DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE RUSSELL 2000
INDEX OR ANY DATA INCLUDED THEREIN AND FRC SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. FRC MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY ML&CO., INVESTORS, OWNERS OF THE MITTS
SECURITIES, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE RUSSELL 2000
INDEX OR ANY DATA INCLUDED THEREIN. FRC MAKES NO EXPRESS OR IMPLIED WARRANTIES,
AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
S-22
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE RUSSELL 2000 INDEX OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL FRC
HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL
DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH
DAMAGES.
UNITED STATES FEDERAL INCOME TAXATION
Set forth in full below is the opinion of Sidley Austin Brown & Wood LLP,
tax counsel to ML&Co., as to certain United States Federal income tax
consequences of the purchase, ownership and disposition of the MITTS
Securities. This opinion is based upon laws, regulations, rulings and decisions
now in effect, all of which are subject to change (including retroactive
changes in effective dates) or possible differing interpretations. The
discussion below deals only with MITTS Securities held as capital assets and
does not purport to deal with persons in special tax situations, such as
financial institutions, insurance companies, regulated investment companies,
dealers in securities or currencies, traders in securities that elect to mark
to market, tax-exempt entities, persons holding MITTS Securities in a
tax-deferred or tax-advantaged account, or persons holding MITTS Securities as
a hedge against currency risks, as a position in a "straddle" or as part of a
"hedging" or "conversion" transaction for tax purposes. It also does not deal
with holders other than original purchasers (except where otherwise
specifically noted in this prospectus supplement). The following discussion
also assumes that the issue price of the MITTS Securities, as determined for
United States Federal income tax purposes, equals the principal amount thereof.
Persons considering the purchase of the MITTS Securities should consult their
own tax advisors concerning the application of the United States Federal income
tax laws to their particular situations as well as any consequences of the
purchase, ownership and disposition of the MITTS Securities arising under the
laws of any other taxing jurisdiction.
As used in this prospectus supplement, the term "U.S. Holder" means a
beneficial owner of a MITTS Security that is for United States Federal income
tax purposes (a) a citizen or resident of the United States, (b) a corporation,
partnership or other entity treated as a corporation or a partnership created
or organized in or under the laws of the United States, any state thereof or
the District of Columbia (other than a partnership that is not treated as a
United States person under any applicable Treasury regulations), (c) an estate
the income of which is subject to United States Federal income taxation
regardless of its source, (d) a trust if a court within the United States is
able to exercise primary supervision over the administration of the trust and
one or more United States persons have the authority to control all substantial
decisions of the trust, or (e) any other person whose income or gain in respect
of a MITTS Security is effectively connected with the conduct of a United
States trade or business. Notwithstanding clause (d) of the preceding sentence,
to the extent provided in Treasury regulations, certain trusts in existence on
August 20, 1996, and treated as United States persons prior to that date that
elect to continue to be treated as United States persons also will be U.S.
Holders. As used herein, the term "non-U.S. Holder" means a beneficial owner of
a MITTS Security that is not a U.S. Holder.
General
There are no statutory provisions, regulations, published rulings or
judicial decisions addressing or involving the characterization, for United
States Federal income tax purposes, of the MITTS Securities or securities with
terms substantially the same as the MITTS Securities. However, although the
matter is not free from doubt, under current law, each MITTS Security should be
treated as a debt instrument of ML&Co. for United States Federal income tax
purposes. ML&Co. currently intends to treat each MITTS Security as a debt
instrument of ML&Co. for United States Federal income tax purposes and, where
required, intends to file information returns with the Internal Revenue Service
(the "IRS") in accordance with this treatment, in the absence of any change or
clarification in the law, by regulation or otherwise, requiring a different
characterization of the MITTS Securities. Prospective investors in the MITTS
Securities should be aware, however, that the IRS is not bound by ML&Co.'s
characterization of the MITTS Securities as indebtedness, and the IRS could
possibly take a different position as to the proper characterization of the
MITTS Securities for
S-23
United States Federal income tax purposes. The following discussion of the
principal United States Federal income tax consequences of the purchase,
ownership and disposition of the MITTS Securities is based upon the assumption
that each MITTS Security will be treated as a debt instrument of ML&Co. for
United States Federal income tax purposes. If the MITTS Securities are not in
fact treated as debt instruments of ML&Co. for United States Federal income tax
purposes, then the United States Federal income tax treatment of the purchase,
ownership and disposition of the MITTS Securities could differ from the
treatment discussed below with the result that the timing and character of
income, gain or loss recognized in respect of a MITTS Security could differ
from the timing and character of income, gain or loss recognized in respect of
a MITTS Security had the MITTS Securities in fact been treated as debt
instruments of ML&Co. for United States Federal income tax purposes.
U.S. Holders
On June 11, 1996, the Treasury Department issued final regulations (the
"Final Regulations") concerning the proper United States Federal income tax
treatment of contingent payment debt instruments such as the MITTS Securities,
which apply to debt instruments issued on or after August 13, 1996 and,
accordingly, will apply to the MITTS Securities. In general, the Final
Regulations cause the timing and character of income, gain or loss reported on
a contingent payment debt instrument to substantially differ from the timing
and character of income, gain or loss reported on a contingent payment debt
instrument under general principles of prior United States Federal income tax
law. Specifically, the Final Regulations generally require a U.S. Holder of
such an instrument to include future contingent and noncontingent interest
payments in income as that interest accrues based upon a projected payment
schedule. Moreover, in general, under the Final Regulations, any gain
recognized by a U.S. Holder on the sale, exchange, or retirement of a
contingent payment debt instrument is treated as ordinary income, and all or a
portion of any loss realized could be treated as ordinary loss as opposed to
capital loss (depending upon the circumstances). The Final Regulations provide
no definitive guidance as to whether or not an instrument is properly
characterized as a debt instrument for United States Federal income tax
purposes.
In particular, solely for purposes of applying the Final Regulations to
the MITTS Securities, ML&Co. has determined that the projected payment schedule
for the MITTS Securities will consist of payment on the maturity date of the
principal amount thereof and a projected Supplemental Redemption Amount equal
to $ per unit (the "Projected Supplemental Redemption Amount"). This
represents an estimated yield on the MITTS Securities equal to % per annum,
compounded semiannually. Accordingly, during the term of the MITTS Securities,
a U.S. Holder of a MITTS Security will be required to include in income as
ordinary interest an amount equal to the sum of the daily portions of interest
on the MITTS Security that are deemed to accrue at this estimated yield for
each day during the taxable year (or portion of the taxable year) on which the
U.S. Holder holds the MITTS Security. The amount of interest that will be
deemed to accrue in any accrual period (i.e., generally each six-month period
during which the MITTS Securities are outstanding) will equal the product of
this estimated yield (properly adjusted for the length of the accrual period)
and the MITTS Security's adjusted issue price (as defined below) at the
beginning of the accrual period. The daily portions of interest will be
determined by allocating to each day in the accrual period the ratable portion
of the interest that is deemed to accrue during the accrual period. In general,
for these purposes a MITTS Security's adjusted issue price will equal the MITTS
Security's issue price (i.e., $10), increased by the interest previously
accrued on the MITTS Security. At maturity of a MITTS Security, in the event
that the actual Supplemental Redemption Amount, if any, exceeds $ per unit
(i.e., the Projected Supplemental Redemption Amount), a U.S. Holder will be
required to include the excess of the actual Supplemental Redemption Amount
over $ per unit (i.e., the Projected Supplemental Redemption Amount) in
income as ordinary interest on the stated maturity date. Alternatively, in the
event that the actual Supplemental Redemption Amount, if any, is less than
$ per unit (i.e., the Projected Supplemental Redemption Amount), the amount
by which the Projected Supplemental Redemption Amount (i.e., $ per unit)
exceeds the actual Supplemental Redemption Amount will be treated first as an
offset to any interest otherwise includible in income by the U.S. Holder with
respect to the MITTS Security for the taxable year in which the stated maturity
date occurs to the extent of the amount of that
S-24
includible interest. Further, a U.S. Holder will be permitted to recognize and
deduct, as an ordinary loss that is not subject to the limitations applicable
to miscellaneous itemized deductions, any remaining portion of the Projected
Supplemental Redemption Amount (i.e., $ per unit) in excess of the actual
Supplemental Redemption Amount that is not treated as an interest offset
pursuant to the foregoing rules. In addition, U.S. Holders purchasing a MITTS
Security at a price that differs from the adjusted issue price of the MITTS
Security as of the purchase date (e.g., subsequent purchases) will be subject
to the rules providing for certain adjustments to the foregoing rules and these
U.S. Holders should consult their own tax advisors concerning these rules.
Upon the sale or exchange of a MITTS Security prior to the stated
maturity date, a U.S. Holder will be required to recognize taxable gain or loss
in an amount equal to the difference, if any, between the amount realized by
the U.S. Holder upon such sale or exchange and the U.S. Holder's adjusted tax
basis in the MITTS Security as of the date of disposition. A U.S. Holder's
adjusted tax basis in a MITTS Security generally will equal such U.S. Holder's
initial investment in the MITTS Security increased by any interest previously
included in income with respect to the MITTS Security by the U.S. Holder. Any
taxable gain will be treated as ordinary income. Any taxable loss will be
treated as ordinary loss to the extent of the U.S. Holder's total interest
inclusions on the MITTS Security. Any remaining loss generally will be treated
as long-term or short-term capital loss (depending upon the U.S. Holder's
holding period for the MITTS Security). All amounts includible in income by a
U.S. Holder as ordinary interest pursuant to the Final Regulations will be
treated as original issue discount.
All prospective investors in the MITTS Securities should consult their
own tax advisors concerning the application of the Final Regulations to their
investment in the MITTS Securities. Investors in the MITTS Securities may also
obtain the projected payment schedule, as determined by ML&Co. for purposes of
applying the Final Regulations to the MITTS Securities, by submitting a written
request for such information to Merrill Lynch & Co., Inc., Corporate
Secretary's Office, 222 Broadway, 17th Floor, New York, New York 10038,
(212) 670-0432, corporatesecretary@exchange.ml.com.
The projected payment schedule (including both the Projected Supplemental
Redemption Amount and the estimated yield on the MITTS Securities) has been
determined solely for United States Federal income tax purposes (i.e., for
purposes of applying the Final Regulations to the MITTS Securities), and is
neither a prediction nor a guarantee of what the actual Supplemental Redemption
Amount will be, or that the actual Supplemental Redemption Amount will even
exceed zero.
Hypothetical Table
The following table sets forth the amount of interest that would be
deemed to have accrued with respect to each unit of the MITTS Securities during
each accrual period over an assumed term of approximately seven years for the
MITTS Securities based upon a hypothetical projected payment schedule for the
MITTS Securities (including both a hypothetical Projected Supplemental
Redemption Amount and a hypothetical estimated yield equal to 5.664% per annum
(compounded semianually)) as determined by ML&Co. for purposes of illustrating
the application of the Final Regulations to the MITTS Securities as if the
MITTS Securities had been issued on February 28, 2002 and were scheduled to
mature on February 28, 2009. The following table is for illustrative purposes
only. The actual projected payment schedule for the MITTS Securities (including
both the actual Projected Supplemental Redemption Amount and the actual
estimated yield) will be determined by ML&Co. on the Pricing Date and will
depend upon actual market interest rates (and thus ML&Co.'s borrowing costs for
debt instruments with comparable maturities) as of that date. The actual
projected payment schedule for the MITTS Securities (including both the actual
Projected Supplemental Redemption Amount and the actual estimated yield) and
the actual tax accrual table will be set forth in the final prospectus
supplement delivered to investors in connection with the sales of the MITTS
Securities:
S-25
Total interest deemed
Interest to have accrued on
deemed to MITTS Securities
accrue during as of end of
accrual period accrual period
Accrual Period (per unit) (per unit)
-------------- -------------- ---------------------
February 28, 2002 through August 31, 2002... $0.2856 $0.2856
September 1, 2002 through February 28, 2003. $0.2912 $0.5768
March 1, 2003 through August 31, 2003....... $0.2996 $0.8764
September 1, 2003 through February 29, 2004. $0.3080 $1.1844
March 1, 2004 through August 31, 2004....... $0.3167 $1.5011
September 1, 2004 through February 28, 2005. $0.3258 $1.8269
March 1, 2005 through August 31, 2005....... $0.3349 $2.1618
September 1, 2005 through February 28, 2006. $0.3444 $2.5062
March 1, 2006 through August 31, 2006....... $0.3542 $2.8604
September 1, 2006 through February 28, 2007. $0.3642 $3.2246
March 1, 2007 through August 31, 2007....... $0.3745 $3.5991
September 1, 2007 through February 29, 2008. $0.3851 $3.9842
March 1, 2008 through August 31, 2008....... $0.3961 $4.3803
September 1, 2008 through February 28, 2009. $0.4072 $4.7875
- --------
Hypothetical Projected Supplemental Redemption Amount = $4.7875 per unit.
Non-U.S. Holders
A non-U.S. Holder will not be subject to United States Federal income
taxes on payments of principal, premium (if any) or interest (including
original issue discount, if any) on a MITTS Security, unless such non-U.S.
Holder is a direct or indirect 10% or greater shareholder of ML&Co., a
controlled foreign corporation related to ML&Co. or a bank receiving interest
described in section 881(c)(3)(A) of the Internal Revenue Code of 1986, as
amended. However, income allocable to non-U.S. Holders will generally be
subject to annual tax reporting on IRS Form 1042-S. For a non-U.S. Holder to
qualify for the exemption from taxation, any person, U.S. or foreign, that has
control, receipt, or custody of an amount subject to withholding, or who can
disburse or make payments of an amount subject to withholding (the "Withholding
Agent") must have received a statement that (a) is signed by the beneficial
owner of the MITTS Security under penalties of perjury, (b) certifies that such
owner is a non-U.S. Holder and (c) provides the name and address of the
beneficial owner. The statement may generally be made on IRS Form W-8BEN (or
other applicable form) or a substantially similar form, and the beneficial
owner must inform the Withholding Agent of any change in the information on the
statement within 30 days of that change by filing a new IRS Form W-8BEN (or
other applicable form). Generally, a Form W-8BEN provided without a U.S.
taxpayer identification number will remain in effect for a period starting on
the date the form is signed and ending on the last day of the third succeeding
calendar year, unless a change in circumstances makes any information on the
form incorrect. If a MITTS Security is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide a signed statement to the Withholding Agent. Under
certain circumstances, the signed statement must be accompanied by a copy of
the applicable IRS Form W-8BEN (or other applicable form) or the substitute
form provided by the beneficial owner to the organization or institution.
Under current law, a MITTS Security will not be includible in the estate
of a non-U.S. Holder unless the individual is a direct or indirect 10% or
greater shareholder of ML&Co. or, at the time of such individual's death,
payments in respect of such MITTS Security would have been effectively
connected with the conduct by such individual of a trade or business in the
United States.
S-26
Backup withholding
Backup withholding at the applicable statutory rate of United States
Federal income tax may apply to payments made in respect of the MITTS
Securities to registered owners who are not "exempt recipients" and who fail to
provide certain identifying information (such as the registered owner's
taxpayer identification number) in the required manner. Generally, individuals
are not exempt recipients, whereas corporations and certain other entities
generally are exempt recipients. Payments made in respect of the MITTS
Securities to a U.S. Holder must be reported to the IRS, unless the U.S. Holder
is an exempt recipient or establishes an exemption. Compliance with the
identification procedures described in the preceding section would establish an
exemption from backup withholding for those non-U.S. Holders who are not exempt
recipients.
In addition, upon the sale of a MITTS Security to (or through) a broker,
the broker must withhold on the entire purchase price, unless either (a) the
broker determines that the seller is a corporation or other exempt recipient or
(b) the seller provides, in the required manner, certain identifying
information (e.g., an IRS Form W-9) and, in the case of a non-U.S. Holder,
certifies that such seller is a non-U.S. Holder (and certain other conditions
are met). Such a sale must also be reported by the broker to the IRS, unless
either (a) the broker determines that the seller is an exempt recipient or (b)
the seller certifies its non-U.S. status (and certain other conditions are
met). Certification of the registered owner's non-U.S. status would be made
normally on an IRS Form W-8BEN (or other applicable form) under penalties of
perjury, although in certain cases it may be possible to submit other
documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to
a beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Internal Revenue Code (the "Code") prohibit
various transactions between certain parties and the assets of employee benefit
plans, unless an exemption is available; governmental plans may be subject to
similar prohibitions.
The U.S. Department of Labor has granted ML&Co. an administrative
exemption (Prohibited Transaction Exemption 2000-63, 65 F.R. 76306 (December 6,
2000)) from some of the prohibited transaction rules under ERISA and the
related excise tax provisions under Section 4975 of the Code. The exemption
applies with respect to (1) the purchase or sale by employee benefit plans
("Plans"), other than Plans sponsored by ML&Co. or its affiliates, of MITTS
Securities, and (2) the extension of credit by the Plans to ML&Co. and its
affiliates in connection with the holding of the MITTS Securities.
In order to qualify for the exemption, certain conditions, including but
not limited to the following, must be met:
. The decision to invest in the MITTS Securities is made by a Plan
fiduciary (or a participant in a Plan that provides for
participant-directed investments) which is independent of ML&Co.
. ML&Co. does not have any discretionary authority or control or
provide any investment advice with respect to the Plan assets involved in
the MITTS Securities transactions.
. The Plans pay no fees or commissions to us or our affiliates in
connection with the MITTS Securities transactions, other than certain
principal mark-ups.
S-27
. A Plan generally should not invest more than 15 percent of the
Plan's assets (at the time of the acquisition) in any of the MITTS
Securities.
. The terms of a Plan's investment in the MITTS Securities are at
least as favorable to the Plan as those available to an unrelated
non-Plan investor in a comparable arm's length transaction at the time of
such acquisition.
If either of the following events occur, the investment will cease to
qualify for the exemption.
. The MITTS Securities are no longer quoted on the National
Association of Securities Dealers Automated Quotations Systems and are
not listed on the NYSE or the AMEX.
. The MITTS Securities are no longer rated in one of the three
highest generic rating categories by at least one nationally-recognized
statistical rating service at the time of their acquisition.
For a complete description of conditions, please review the full text of
the exemption granted to ML&Co. You may obtain a copy of the exemption by
submitting a written request for such information to Merrill Lynch & Co., Inc.,
Corporate Secretary's Office, 222 Broadway, 17th Floor, New York, New York
10038, corporatesecretary@exchange.ml.com. Prospective Plan investors are
encouraged to consult with their legal advisors regarding the impact of ERISA
and the Code, the applicability of the exemption, and the potential
consequences in their specific circumstances of an investment in MITTS
Securities.
Each Plan investor by its purchase of any MITTS Security on behalf of any
Plan, represents on behalf of itself and the Plan, that the acquisition,
holding and any subsequent disposition of the MITTS Security will not result in
a violation of ERISA, the Code or any other applicable law or regulation.
USE OF PROCEEDS AND HEDGING
The net proceeds from the sale of the MITTS Securities will be used as
described under "Use of Proceeds" in the accompanying prospectus and to hedge
market risks of ML&Co. associated with its obligation to pay the principal
amount and the Supplemental Redemption Amount.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC. Our
SEC filings are also available over the Internet at the SEC's web site at
http://www.sec.gov. The address of the SEC's Internet site is provided solely
for the information of prospective investors and is not intended to be an
active link. You may also read and copy any document we file at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for more information on the
public reference rooms and their copy charges. You may also inspect our SEC
reports and other information at the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.
We have filed a registration statement on Form S-3 with the SEC covering
the MITTS Securities and other securities. For further information on ML&Co.
and the MITTS Securities, you should refer to our registration statement and
its exhibits. The prospectus accompanying this prospectus supplement summarizes
material provisions of contracts and other documents that we refer you to.
Because the prospectus may not contain all the information that you may find
important, you should review the full text of these documents. We have included
copies of these documents as exhibits to our registration statement.
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
S-28
person to provide you with different information. If anyone provides you with
different or inconsistent information, you should not rely on it. We are not,
and the underwriter is not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus
supplement and the accompanying prospectus is accurate as of the date on the
front cover of this prospectus supplement only. Our business, financial
condition and results of operations may have changed since that date.
UNDERWRITING
MLPF&S has agreed, subject to the terms and conditions of the
underwriting agreement and a terms agreement, to purchase from ML&Co. $
aggregate principal amount of MITTS Securities. The underwriting agreement
provides that the obligations of the underwriter are subject to certain
conditions and that the underwriter will be obligated to purchase all of the
MITTS Securities if any are purchased.
The underwriter has advised ML&Co. that it proposes initially to offer
all or part of the MITTS Securities directly to the public at the offering
prices set forth on the cover page of this prospectus supplement and to certain
dealers at such prices less a concession not in excess of % of the original
public offering price of the Notes. The underwriter may allow, and such dealers
may reallow, a discount not in excess of % of the original public offering
price of the Notes to certain dealers. After the initial public offering, the
public offering prices may be changed. The underwriter is offering the MITTS
Securities subject to receipt and acceptance and subject to the underwriter's
right to reject any order in whole or in part. Proceeds to be received by
ML&Co. will be net of the underwriting discount and expenses payable by ML&Co.
The underwriting of the MITTS Securities will conform to the requirements
set forth in the applicable sections of Rule 2720 of the Conduct Rules of the
NASD.
The underwriter is permitted to engage in certain transactions that
stabilize the price of the MITTS Securities. These transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
MITTS Securities.
If the underwriter creates a short position in the MITTS Securities in
connection with the offering, i.e., if it sells more units of the MITTS
Securities than are set forth on the cover page of this prospectus supplement,
the underwriter may reduce that short position by purchasing units of the MITTS
Securities in the open market. In general, purchases of a security for the
purpose of stabilization or to reduce a short position could cause the price of
the security to be higher than it might be in the absence of these purchases.
"Naked" short sales are sales in excess of the underwriter's overallotment
option 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 MITTS Securities, has no overallotment option, it would
be required to closeout a short position in the MITTS Securities by purchasing
MITTS Securities in the open market. Neither ML&Co. nor the underwriter makes
any representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the MITTS
Securities. In addition, neither ML&Co. nor the underwriter makes any
representation that the underwriter will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
MLPF&S may use this prospectus supplement and the accompanying prospectus
for offers and sales related to market-making transactions in the MITTS
Securities. MLPF&S may act as principal or agent in these transactions, and the
sales will be made at prices related to prevailing market prices at the time of
sale.
VALIDITY OF THE MITTS SECURITIES
The validity of the MITTS Securities will be passed upon for ML&Co. and
for the underwriter by Sidley Austin Brown & Wood LLP, New York, New York.
S-29
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-30
INDEX OF DEFINED TERMS
Page
----
Adjusted Ending Value.................................................... S-4
Adjustment Factor........................................................ S-5
Business Day............................................................. S-15
Calculation Day.......................................................... S-12
Calculation Period....................................................... S-12
Code..................................................................... S-27
depositary............................................................... S-16
DTC...................................................................... S-4
ERISA.................................................................... S-27
Final Regulations........................................................ S-24
FRC...................................................................... S-6
Index Business Day....................................................... S-12
IRS...................................................................... S-23
Market Disruption Event.................................................. S-14
MITTS(R) Securities...................................................... S-1
ML&Co.................................................................... S-4
MLPF&S................................................................... S-4
non-U.S. Holder.......................................................... S-23
Plans.................................................................... S-27
Pricing Date............................................................. S-4
principal amount......................................................... S-4
Projected Supplemental Redemption Amount................................. S-24
Starting Value........................................................... S-4
successor index.......................................................... S-14
Supplemental Redemption Amount........................................... S-4
U.S. Holder.............................................................. S-23
Withholding Agent........................................................ S-26
S-31
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[LOGO]
2,500,000 Units
Merrill Lynch & Co., Inc.
Market Index Target-Term Securities(R)
based upon the Russell 2000(R) Index
due March , 2009
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PROSPECTUS SUPPLEMENT
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Merrill Lynch & Co.
March , 2002
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