Filed Pursuant to Rule 424(b)(5)
Registration No. 333-52822
Subject to Completion
Preliminary Prospectus Supplement dated March 7, 2002
PROSPECTUS SUPPLEMENT
(To prospectus dated January 24, 2001)
$1,000,000,000
[LOGO]
Merrill Lynch & Co., Inc.
Liquid Yield Option/TM/ Notes due 2032
(Zero Coupon -- Senior)
----------------
The Offering:
We are offering the LYONs at an issue price of $1,000 per LYON. We will
not pay interest on the LYONs prior to maturity unless contingent interest
becomes payable, as described below. Instead, on March 13, 2032, the maturity
date of the LYONs, a holder will receive the contingent principal amount of a
LYON, which will be equal to the original principal amount of $1,000 per LYON
increased daily by a yield which yield will be reset quarterly to 3-month LIBOR
minus % per annum. This yield will never be less than zero. The initial
yield will be % per annum. After March 13, 2007, this yield will not exceed
5.5%. The LYONs will rank equally with all of our existing and future unsecured
and unsubordinated indebtedness.
Convertibility of the LYONs:
Holders may convert their LYONs into shares of our common stock,
subject to adjustment, (1) if the sale price of our common stock issuable upon
conversion of a LYON reaches specified thresholds, (2) during any period in
which the credit rating of the LYONs is below a specified level, (3) if the
LYONs are called for redemption, or (4) if specified corporate transactions
have occurred. Our common stock currently trades on the New York Stock Exchange
under the symbol "MER." The last reported sale price of our common stock on the
New York Stock Exchange was $54.40 per share on March 6, 2002.
Contingent Interest:
We will pay contingent interest to the holders of LYONs during the
six-month period commencing June 1, 2007 and during any six-month period
thereafter if the average market price of a LYON for a certain measurement
period preceding the applicable six-month period equals 120% or more of the
contingent principal amount of such LYON. During any period in which contingent
interest shall be payable, the contingent interest payable per LYON in either
the first three months or second three months of such period will be equal to
the greater of (i) the sum of all regular cash dividends paid by us per share
on our common stock during those three months multiplied by the number of
shares of common stock issuable upon conversion of a LYON at the then
applicable conversion rate or (ii) $0.16 multiplied by . For United States
Federal income tax purposes, the LYONs will constitute contingent payment debt
instruments. You should read the discussion of selected United States Federal
income tax considerations relevant to the LYONs beginning on page S-27.
Purchase of the LYONs by ML&Co. at the Option of the Holder:
Holders may require us to purchase all or a portion of their LYONs on
March 13, 2005, 2007, 2012, 2017, 2022 and 2027 at the prices calculated as
described in "Description of LYONs--Purchase of LYONs at the Option of the
Holder." We may choose to pay the purchase price in cash or in common stock or
a combination of cash and common stock. In addition, upon a change in control
of ML&Co. occurring on or before March 13, 2007, holders may require us to
repurchase for cash all or a portion of their LYONs.
Redemption of the LYONs at the Option of ML&Co.:
We may redeem for cash all or a portion of the LYONs at any time on or
after March 13, 2007 at prices calculated as described in "Description of
LYONs--Redemption of LYONs at the Option of ML&Co."
Investing in the LYONs involves risks, some of which are described in the
"Risk Factors Relating to the LYONs" section beginning on page S-7 of this
prospectus supplement.
----------------
Per LYON Total
-------- -----
Public offering price............................. $1,000 $1,000,000,000
Underwriting discount............................. $ $
Proceeds, before expenses, to ML&Co............... $ $
The underwriter may also purchase up to an additional $150,000,000
aggregate original principal amount of LYONs from ML&Co. within 30 days from
the date of this prospectus supplement to cover over-allotments, if any.
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.
The LYONs will be ready for delivery in book-entry form only through The
Depository Trust Company on or about March 13, 2002.
----------------
Merrill Lynch & Co.
----------------
The date of this prospectus supplement is March , 2002.
/TM/Trademark of Merrill Lynch & Co., Inc.
TABLE OF CONTENTS
Prospectus Supplement
Page
----
Summary ................................................................... S-3
Risk Factors Relating to the LYONs ........................................ S-7
Use of Proceeds ........................................................... S-8
Common Stock .............................................................. S-8
Description of LYONs ...................................................... S-10
Certain United States Federal Income Tax Considerations ................... S-27
ERISA Considerations ...................................................... S-31
Where You Can Find More Information ....................................... S-32
Underwriting .............................................................. S-33
Validity of the LYONs ..................................................... S-35
Index of Defined Terms .................................................... S-36
Prospectus
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-2
SUMMARY
This summary highlights selected information from this prospectus
supplement and the accompanying prospectus to help you understand the Liquid
Yield Option Notes due 2032 (the "LYONs"). You should carefully read this
prospectus supplement and the accompanying prospectus to fully understand the
terms of the LYONs and the tax and other considerations that are important to
you in making a decision about whether to invest in the LYONs. You should also
carefully review the "Risk Factors Relating to the LYONs" section, which
highlights certain risks associated with an investment in the LYONs, to
determine whether an investment in the LYONs 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, the underwriter. References
to our common stock include references to our preferred stock purchase rights
issued pursuant to our Amended and Restated Rights Agreement. See "Description
of Common Stock--Rights to Purchase Series A Junior Preferred Stock" in the
accompanying prospectus.
The Offering
LYONs....................... $1,000,000,000 aggregate original principal
amount ($1,150,000,000 aggregate original
principal amount if MLPF&S exercises its
over-allotment option in full) of LYONs due
2032. We will not pay interest on the LYONs
prior to maturity unless contingent interest
becomes payable. Each LYON will be issued at a
price of $1,000 per LYON and will have an
original principal amount of $1,000.
Maturity of LYONs........... March 13, 2032
Yield of LYONs.............. On the maturity date of the LYONs, a holder will
receive the contingent principal amount of a
LYON, which will be equal to the original
principal amount of $1,000 per LYON increased
daily by a yield which will initially equal %
per annum and which will be reset quarterly to
3-month LIBOR minus % per annum. This yield
will never be less than zero. The contingent
principal amount will accrue daily at the
applicable yield. The rate of accrual will be
applied to the contingent principal amount per
LYON as of the day preceding the most recent
yield reset date. Yield reset dates will be each
March 13, June 13, September 13 and December 13
of each year, commencing on June 13, 2002. The
yield will be calculated using the actual number
of days elapsed between the yield reset dates
divided by 360. The yield is in addition to
contingent interest, if any, which is described
below. After March 13, 2007, the yield will not
exceed 5.5%.
Ranking..................... The LYONs will be unsecured and unsubordinated
indebtedness of ML&Co. and will rank equally
with ML&Co.'s other existing and future
unsecured and unsubordinated indebtedness. See
"Description of Debt Securities--Terms of Debt
Securities" in the accompanying prospectus.
S-3
Conversion Rights........... For each LYON surrendered for conversion, if the
conditions for conversion are satisfied, a
holder will receive shares of our common
stock. The conversion rate will be adjusted for
reasons specified in the indenture, but will not
be adjusted for increases in the contingent
principal amount. Upon conversion, a holder will
not receive any cash payment representing
increases in the contingent principal amount.
Instead, increases in the contingent principal
amount will be deemed paid by the shares of
common stock received by the holder on
conversion. See "Description of
LYONs--Conversion Rights."
If, as of the last day of any calendar quarter
beginning with the quarter ending June 30, 2002,
the closing sale price of our common stock for
at least 20 trading days in a period of 30
consecutive trading days ending on the last
trading day of such quarter is more than 120% of
the accreted conversion price per share of
common stock on the last day of such quarter,
then on and after the first day of the following
quarter holders may surrender LYONs for
conversion into shares of common stock. The
accreted conversion price per share as of any
day will equal the contingent principal amount
on that day, with that sum divided by the number
of shares of common stock issuable upon the
conversion of a LYON.
Holders may also surrender a LYON for conversion
when the credit rating assigned to the LYONs is
Baa1 or lower by Moody's Investors Service
("Moody's"), BBB+ or lower by Standard & Poor's
Credit Market Services, a division of The
McGraw-Hill Companies ("Standard & Poor's") or
BBB+ or lower by Fitch, Inc. ("Fitch").
LYONs or portions of LYONs in integral multiples
of $1,000 original principal amount called for
redemption may be surrendered for conversion
until the close of business on the second
business day prior to the redemption date. In
addition, if we make a significant distribution
to our shareholders or if we are a party to
certain consolidations, mergers or binding share
exchanges, LYONs may be surrendered for
conversion as provided in "Description of
LYONs--Conversion Rights." See "Certain United
States Federal Income Tax Considerations" and
"Description of LYONs--Conversion
Rights--Conversion Rights Upon Notice of
Redemption."
S-4
Contingent Interest......... We will pay contingent interest to the holders
of LYONs during any six-month period from June 1
to November 30, and from December 1 to May 31,
with the initial six-month period commencing
June 1, 2007, if the average market price of a
LYON for the five trading days ending on the
third trading day immediately preceding the
first day of the applicable six-month period
equals 120% or more of the contingent principal
amount of such LYON.
During any period when contingent interest shall
be payable, the contingent interest payable per
LYON in either the first three months or the
second three months of such period will be equal
to the greater of (i) the sum of all regular
cash dividends paid by us per share on our
common stock during those three months
multiplied by the number of shares of common
stock issuable upon conversion of a LYON at the
then applicable conversion rate or (ii) $0.16
multiplied by . Therefore, during any
applicable six-month period when contingent
interest is payable, the contingent interest
will not be less than $0.32 multiplied by the
number of shares of common stock initially
issuable upon conversion of a LYON.
Notwithstanding the above, if we declare a
dividend for which the record date falls prior
to the first day of a six-month period but the
payment date falls within that six-month period,
then the five trading day period for determining
the average market price of a LYON will be the
five trading days ending on the third trading
day immediately preceding such record date.
Contingent interest, if any, will be payable to
holders of LYONs as of the record date for the
related common stock dividend or, if we do not
pay a regular cash dividend on our common stock
during the relevant six-month period, to holders
of LYONs as of the 15th day preceding the last
day of the relevant six-month period. We will
make contingent interest payments on the payment
date of the related common stock dividend or, if
we do not pay a regular cash dividend on our
common stock during the relevant six-month
period, on the last day of the relevant
six-month period. The contingent principal
amount will continue to increase at the
applicable yield whether or not contingent
interest is paid.
Tax Original Issue
Discount.................. The LYONs will be debt instruments subject to
the United States Federal income tax contingent
payment debt regulations. You should be aware
that, even if we do not pay any contingent
interest on the LYONs, you will be required to
include interest in your gross income for United
States Federal income tax purposes. This imputed
interest, also referred to as tax original issue
discount, will accrue at a rate equal to %
per year, computed on a semi-annual bond
equivalent basis, which represents the yield on
our noncontingent, nonconvertible, fixed-rate
debt with terms otherwise similar to the LYONs.
We anticipate that the rate at which the tax
original issue discount will accrue for United
States Federal income tax purposes will exceed
the stated yield based upon 3-month LIBOR minus
% per annum.
S-5
You will also recognize gain or loss on the
sale, exchange, conversion or redemption of a
LYON in an amount equal to the difference
between the amount realized on the sale,
exchange, conversion or redemption, including
the fair market value of any common stock
received upon conversion or otherwise, and your
adjusted tax basis in the LYON. Any gain
recognized by you on the sale, exchange,
conversion or redemption of a LYON generally
will be ordinary interest income; any loss will
be ordinary loss to the extent of the interest
previously included in income, and thereafter,
capital loss. See "Certain United States Federal
Income Tax Considerations."
Purchase of LYONs by ML&Co.
at the Option of
the Holder................ Holders may require us to purchase all or a
portion of their LYONs on March 13, 2005, 2007,
2012, 2017, 2022 and 2027 at a price equal to
the contingent principal amount of the LYONs on
the purchase date. We may choose to pay the
purchase price in cash or in common stock (based
on the prevailing market price thereof) or a
combination of cash and common stock. See
"Description of LYONs--Purchase of LYONs at the
Option of the Holder."
Change in Control........... Upon a change in control of ML&Co. occurring on
or before March 13, 2007, each holder may
require us to repurchase all or a portion of
such holder's LYONs for cash at a price equal to
100% of the contingent principal amount of such
LYONs on the date of repurchase. See
"Description of LYONs--Change in Control Permits
Purchase of LYONs at the Option of the Holder."
Redemption of LYONs at the
Option of ML&Co........... We may redeem all or a portion of the LYONs for
cash at any time on or after March 13, 2007 at a
redemption price equal to the contingent
principal amount of the LYONs on the purchase
date. See "Description of LYONs--Redemption of
LYONs at the Option of ML&Co."
Sinking Fund................ None.
DTC Eligibility............. The LYONs will be issued in book-entry form and
will be represented by permanent global
certificates without coupons deposited with a
custodian for and registered in the name of a
nominee of DTC in New York, New York. Beneficial
interests in any such securities will be shown
on, and transfers will be effected only through,
records maintained by DTC and its direct and
indirect participants, and any such interest may
not be exchanged for certificated securities,
except in limited circumstances. See
"Description of LYONs--Depositary--DTC
Procedures."
Listing..................... ML&Co. does not intend to list the LYONs on any
securities exchange.
Trading Symbol for
our Common Stock.......... Our common stock is traded on the NYSE under the
symbol "MER."
S-6
RISK FACTORS RELATING TO THE LYONs
Your investment in the LYONs involves risks. You should carefully
consider the following discussion of risks before deciding whether an
investment in the LYONs is suitable for you.
The yield on the LYONs cannot be determined at this time and may be lower than
the yield on a standard debt security of comparable maturity and may be zero.
The yield on the LYONs is based on 3-month LIBOR, which is the London
Interbank Offered Rate. This represents the interest rate London banks offer
for deposits of U.S. dollars for a period of three months. At March 6, 2002,
3-month LIBOR was %. The yield on the LYONs will be reset every three
months. If LIBOR is below % at the start of any three month period, no
contingent principal will accrue on the LYONs during that period. Therefore,
the contingent principal amount of a LYON at maturity cannot be determined at
this time and there can be no assurance that we will pay you on the maturity
date more than the $1,000 you pay for a LYON.
The amount we pay you may be less than the return you could earn on other
investments. Your yield may be less than the yield you would earn if you bought
a standard senior debt security of ML&Co. with the same stated maturity date.
Your investment may not reflect the full opportunity cost to you when you take
into account factors that affect the time value of money.
We expect that the trading value of the LYONs will be significantly affected by
the price of our common stock and other factors.
The market price of the LYONs is expected to be significantly affected by
the market price of our common stock. This may result in greater volatility in
the trading value of the LYONs than would be expected for nonconvertible debt
securities we issue. In addition, the LYONs have a number of features,
including conditions to conversion, which, if not met, could result in a holder
receiving less than the value of the common stock into which a LYON is
otherwise convertible. These features could adversely affect the value and the
trading prices for the LYONs.
Certain provisions in our certificate of incorporation, bylaws and rights
agreement may deter potential acquirors and may depress our stock price.
Our certificate of incorporation, bylaws and rights agreement contain
provisions that could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of ML&Co. See "Description of Common Stock--Voting Rights", "--Rights
to Purchase Series A Junior Preferred Stock" and "--Material Charter
Provisions" in the accompanying prospectus.
The trading market for LYONs may be limited.
The LYONs comprise a new issue of securities for which there is currently
no public market. If the LYONs are traded, they may do so at a discount from
their initial public offering price, depending on prevailing interest rates,
the market for similar securities, the market prices for our common stock, our
financial performance and other factors. The LYONs will not be listed on any
securities exchange, and we do not know whether an active trading market will
develop or be maintained for the LYONs. To the extent that an active trading
market for the LYONs does not develop, their liquidity and trading price may be
harmed.
After the distribution of the LYONs is completed, due to certain
regulatory restrictions arising from its affiliation with ML&Co., MLPF&S will
not be able to make a market in the LYONs or, except on a limited, unsolicited
basis, effect any transactions for the account of any customer in the LYONs.
Other broker-dealers unaffiliated with ML&Co. will not be subject to such
prohibitions.
S-7
You should consider the United States Federal income tax consequences of owning
LYONs.
The LYONs will be characterized as indebtedness of ours for United States
Federal income tax purposes. Accordingly, you will be required to include, in
your income, interest with respect to the LYONs.
The LYONs will constitute contingent payment debt instruments. As a
result, you will be required to include amounts in income, as ordinary income,
in advance of the receipt of the cash or other property attributable thereto.
We anticipate that the amount of interest income required to be included by you
for each year will be in excess of the yield of the LYONs. You will recognize
gain or loss on the sale, purchase by us at your option, exchange, conversion
or redemption of a LYON in an amount equal to the difference between the amount
realized on the sale, purchase by us at your option, exchange, conversion or
redemption, including the fair market value of any of our common stock received
upon conversion or otherwise, and your adjusted tax basis in the LYON. Any gain
recognized by you on the sale, purchase by us at your option, exchange,
conversion or redemption of a LYON generally will be ordinary interest income;
any loss will be ordinary loss to the extent of the interest previously
included in income, and thereafter, capital loss. A summary of the United
States Federal income tax consequences of ownership of the LYONs is described
in this prospectus supplement under the heading "Certain United States Federal
Income Tax Considerations."
USE OF PROCEEDS
The net proceeds from the sale of the LYONs, expected to be $
($ if MLPF&S exercises its over-allotment option in full) before deducting
the expenses of the offering, will be used as described under "Use of Proceeds"
in the accompanying prospectus.
COMMON STOCK
Terms of Our Common Stock
Under our restated certificate of incorporation, we are authorized to
issue up to 3,000,000,000 shares of common stock, par value $1.33 1/3 per
share. As of February 26, 2002, there were 853,408,629 shares of common stock
and 4,185,009 exchangeable shares outstanding. The exchangeable shares are
exchangeable at any time into our common stock on a one-for-one basis and
entitle holders to dividend, voting and other rights equivalent to our common
stock. Our common stock is traded on the NYSE, the Chicago Stock Exchange, the
Pacific Exchange, the Paris Bourse, the London Stock Exchange and the Tokyo
Stock Exchange. For a description of our common stock, see "Description of
Common Stock" in the accompanying prospectus and our restated certificate of
incorporation, which is filed as an exhibit to the registration statement of
which the accompanying prospectus is a part.
S-8
Market Price of Our Common Stock
Our common stock is listed and traded on the NYSE under the symbol "MER".
There were approximately 13,965 registered holders of our common stock as of
February 26, 2002. The table below sets forth the high and low sales prices of
the common stock as reported for NYSE Composite Transactions and the quarterly
cash dividends declared per share of the common stock during the periods
indicated. The common stock prices and dividends reflect the retroactive effect
of a two- for-one stock split, effected in the form of a 100% stock dividend,
paid on August 31, 2000. The common stock prices have been rounded to the
nearest one- hundredth and the dividends have been rounded to the nearest
one-thousandth.
Price Range Cash
------------- Dividend
Calendar Quarter Low High Declared
- ---------------- ------ ------ --------
1999
First Quarter......................................... $32.81 $47.25 $.120
Second Quarter........................................ 33.03 51.25 .135
Third Quarter......................................... 31.00 40.72 .135
Fourth Quarter........................................ 31.19 44.22 .135
2000
First Quarter......................................... $36.31 $57.59 $.135
Second Quarter........................................ 42.25 61.16 .150
Third Quarter......................................... 56.81 74.63 .160
Fourth Quarter........................................ 54.75 73.50 .160
2001
First Quarter......................................... $50.31 $80.00 $.160
Second Quarter........................................ 51.15 71.50 .160
Third Quarter......................................... 33.50 59.85 .160
Fourth Quarter........................................ 38.49 54.65 .160
2002
First Quarter (through March 6, 2002)................. $44.15 $59.32 $.160
On March 6, 2002, the last sale price per share of our common stock on
the NYSE was $54.40 per share.
Dividends
We may pay dividends on our common stock out of funds legally available
for the payment of dividends as, if and when declared by our Board of Directors
or a duly authorized committee of our Board of Directors.
As of December 28, 2001, we had outstanding $425 million of 9% Cumulative
Preferred Stock, Series A and our subsidiaries had outstanding approximately
$2.7 billion of Trust Originated Preferred Securities, or "TOPrS." In
connection with the issuance of these securities, we agreed, among other
things, that if full dividends on the preferred stock or distributions on the
TOPrS have not been paid or set apart for payment, or we are in default of our
related guarantee obligations under the TOPrS, we, with certain exceptions,
will not declare or pay dividends, make distributions with respect to, or
redeem, purchase or acquire, or make a liquidation payment with respect to any
of our capital stock, including our common stock.
S-9
DESCRIPTION OF LYONs
We will issue the LYONs under an indenture between ML&Co. and JPMorgan
Chase Bank, as trustee, to be dated as of March 13, 2002. The following
summarizes some, but not all, of the provisions of the LYONs and the indenture.
The LYONs are a series of debt securities as described in the accompanying
prospectus. The following description supplements, and to the extent it is
inconsistent, supercedes, the statements under "Description of Debt Securities"
in the accompanying prospectus. We refer you to the accompanying prospectus for
a description of the debt securities. The following summary does not purport to
be complete and is subject to, and qualified by reference to, all of the
provisions of the indenture, which we urge you to read because they define your
rights as a LYONs holder. As used in this description, the words "we," "us,"
"ML&Co.," "our" or "Merrill Lynch" do not include any current or future
subsidiary of ML&Co.
General
The LYONs will be limited to $1,000,000,000 aggregate original principal
amount ($1,150,000,000 aggregate original principal amount if the underwriter
exercises the over-allotment option in full). The LYONs will mature on March
13, 2032. The original principal amount of each LYON is $1,000. On the maturity
date of the LYONs, a holder will receive the contingent principal amount of a
LYON. The contingent principal amount will equal the original principal amount
of $1,000 per LYON increased daily by a yield which will initially equal %
per annum and which will be reset quarterly to equal 3-month LIBOR minus %.
This yield will never be less than zero. The yield will be calculated using the
actual number of days elapsed between the yield reset dates divided by 360. The
contingent principal amount will accrue daily at the applicable yield. The rate
of accrual will be applied to the contingent principal amount per LYON as of
the day preceding the most recent yield reset date. Yield reset dates will be
each March 13, June 13, September 13 and December 13, commencing June 13, 2002.
After March 13, 2007, the yield will not exceed 5.5%. The yield is in addition
to contingent interest, if any, which is described below.
The LYONs will be payable at the office of the paying agent, which
initially will be an office or agency of the trustee, or an office or agency
maintained by us for such purpose, in the Borough of Manhattan, The City of New
York. Except as described below under "--Contingent Interest", we will not make
periodic payments of interest on the LYONs.
The LYONs will be debt instruments subject to the contingent payment debt
regulations. The LYONs will be issued with original issue discount for United
States Federal income tax purposes. Even if we do not pay any contingent
interest on the LYONs, holders will be required to include accrued tax original
issue discount in their gross income for United States Federal income tax
purposes. We anticipate that the rate at which the tax original issue discount
will accrue will exceed the stated yield based upon 3-month LIBOR . See
"Certain United States Federal Income Tax Considerations."
The LYONs will rank equally with all of our existing and future unsecured
and unsubordinated indebtedness. See "Description of Debt Securities--Terms of
Debt Securities" in the accompanying prospectus.
Maturity, conversion, purchase by us at the option of a holder or
redemption of a LYON at our option will cause the applicable yield and
contingent interest, if any, to cease to accrue on such LYON. We may not
reissue a LYON that has matured or been converted, purchased by us at your
option, redeemed or otherwise cancelled, except for registration of transfer,
exchange or replacement of such LYON.
LYONs may be presented for conversion at the office of the conversion
agent, and for exchange or registration of transfer at the office of the
registrar, each such agent initially being the trustee. We will not charge a
service fee for any registration of transfer or exchange of LYONs.
S-10
LIBOR
The yield on the LYONs will be reset on each March 13, June 13, September
13 and December 13, commencing on June 13, 2002. If any yield reset date would
otherwise be a day that is not a business day, that reset date will be
postponed to the next succeeding business day, except if that business day
falls in the next succeeding calendar month, that reset date will be the
immediately preceding business day.
We will determine 3-month LIBOR on the second London banking day
preceding the related reset date, which we refer to as the reset determination
date.
"3-month LIBOR" means:
(a) the rate for 3-month deposits in United States dollars
commencing on the related yield reset date, that appears on the Moneyline
Telerate Page 3750 as of 11:00 A.M., London time, on the reset
determination date, or
(b) if fewer than two offered rates appear, or no rate appears, as
the case may be, on the particular reset determination date on the
Moneyline Telerate Page 3750, the rate calculated by us of at least two
offered quotations obtained by us after requesting the principal London
offices of each of four major reference banks (which will not include our
affiliates) in the London interbank market to provide us with its offered
quotation for deposits in United States dollars for the period of three
months, commencing on the related yield reset date, to prime banks in the
London interbank market at approximately 11.00 A.M., London time, on that
reset determination date and in a principal amount that is representative
for a single transaction in United States dollars in that market at that
time, or
(c) if fewer than two offered quotations referred to in clause (b)
are provided as requested, the rate calculated by us as the arithmetic
mean of the rates quoted at approximately 11:00 A.M., New York time, on
the particular reset determination date by three major banks (which will
not include our affiliates) in The City of New York selected by us for
loans in United States dollars to leading European banks for a period of
three months and in a principal amount that is representative for a
single transaction in United States dollars in that market at that time,
or
(d) if the banks so selected by us are not quoting as mentioned in
clause (c), LIBOR in effect on the particular reset determination date.
"Moneyline Telerate Page 3750" means the display on Moneyline Telerate
(or any successor service) on such page (or any other page as may replace such
page on such service) for the purpose of displaying the London interbank rates
of major banks for United States dollars.
"London banking day" means a day on which commercial banks are open for
business, including dealings in United States dollars, in London.
"business day" means any day, other than a Saturday or Sunday, that is
neither a legal holiday nor a day on which commercial banks are authorized or
required by law, regulation or executive order to close in The City of New York.
S-11
Conversion Rights
Holders may surrender LYONs for conversion into shares of our common
stock only if at least one of the conditions described below is satisfied. The
initial conversion rate is shares of common stock per LYON, subject to
adjustment upon the occurrence of certain events described below. LYONs may be
submitted for conversion in multiples of $1,000 original principal amount. A
holder of a LYON otherwise entitled to a fractional share will receive cash in
an amount equal to the value of such fractional share based on the sale price,
as defined below, on the trading day immediately preceding the conversion date.
Upon determination that LYON holders are or will be entitled to convert
their LYONs into shares of common stock in accordance with the following
provisions, we will issue a press release and publish such information on our
website as soon as practicable.
Conversion Rights Based on Common Stock Price. If, as of the last day of
any calendar quarter beginning with the quarter ending June 30, 2002, the sale
price (as defined below) of our common stock for at least 20 trading days in a
period of 30 consecutive trading days ending on the last trading day of such
quarter is more than 120% of the accreted conversion price per share of common
stock on the last day of such quarter, then on and after the first day of the
following quarter holders may surrender LYONs for conversion into shares of
common stock at any time at their option until the close of business on the
business day immediately preceding March 13, 2032. If the LYONs become
convertible pursuant to this provision, they will remain convertible regardless
of future changes in the sales prices of our common stock. The accreted
conversion price per share as of any day will equal the contingent principal
amount of a LYON on that day, with that amount divided by the number of shares
of common stock issuable upon the conversion of a LYON (the "conversion trigger
price").
"Trading day" means a day during which trading in securities generally
occurs on the NYSE or, if the common stock is not listed on the NYSE, on the
principal other national or regional securities exchange on which the common
stock is then listed or, if the common stock is not listed on a national or
regional securities exchange, on the National Association of Securities Dealers
Automated Quotation system or, if the common stock is not quoted on the
National Association of Securities Dealers Automated Quotation System, on the
principal other market on which the common stock is then traded.
The contingent principal amount of a LYON will be equal to the original
principal amount of $1,000 per LYON increased daily by the applicable yield
which will initially equal % per annum and which will be reset quarterly to
3-month LIBOR minus % per annum. Because the accreted conversion price of a
LYON at any time is dependent upon the contingent principal amount of a LYON at
that time, the conversion trigger price per share of our common stock, which is
based on the contingent principal amount at that time, cannot be determined at
this time. The following table indicates what the conversion trigger prices
would be for each of the 20 quarters through the second quarter of 2007 and at
the end of each calendar year thereafter, assuming LIBOR was a constant 2.00%,
5.00% and 8.00%. This table represents an example of only three possibilities
and you should realize that because LIBOR and therefore the yield on the LYONs
will fluctuate, the accreted conversion price, and therefore the conversion
trigger price, will differ, and may differ significantly, from the amounts
shown below.
S-12
Hypothetical Conversion Trigger Prices
Assuming 2.00% LIBOR Assuming 5.00% LIBOR Assuming 8.00% LIBOR
--------------------- --------------------- ---------------------
Accreted Conversion Accreted Conversion Accreted Conversion
Conversion Trigger Conversion Trigger Conversion Trigger
Quarter * Price Price Price Price Price Price
- --------- ---------- ---------- ---------- ---------- ---------- ----------
2002
Third Quarter... $ $ $ $ $ $
Fourth Quarter..
2003
First Quarter...
Second Quarter..
Third Quarter...
Fourth Quarter..
2004
First Quarter...
Second Quarter..
Third Quarter...
Fourth Quarter..
2005
First Quarter...
Second Quarter..
Third Quarter...
Fourth Quarter..
2006
First Quarter...
Second Quarter..
Third Quarter...
Fourth Quarter..
2007
First Quarter...
Second Quarter..
Year End
2007............
2008............
2009............
2010............
2011............
2012............
2013............
2014............
2015............
2016............
2017............
2018............
2019............
2020............
2021............
2022............
2023............
2024............
2025............
2026............
2027............
2028............
2029............
2030............
2031............
2032............
- --------
* This table assumes no events have occurred that would require an adjustment
to the conversion rate.
Conversion Rights Based on Credit Ratings Downgrade. Holders may also
surrender a LYON for conversion during any period in which the credit rating
assigned to the LYONs is Baa1 or lower by Moody's, BBB+ or lower by Standard &
Poor's or BBB+ or lower by Fitch. The LYONs will cease to be convertible
pursuant to this paragraph during any period or periods in which all of the
credit ratings are increased above such levels.
S-13
Conversion Rights Upon Notice of Redemption. A holder may surrender for
conversion a LYON called for redemption at any time prior to the close of
business on the second business day immediately preceding the redemption date,
even if it is not otherwise convertible at such time. A LYON for which a holder
has delivered a purchase notice or a change in control purchase notice as
described below requiring us to purchase the LYON may be surrendered for
conversion only if such notice is withdrawn in accordance with the indenture.
Conversion Rights Upon Occurrence of Certain Corporate Transactions. If
we are party to a consolidation, merger or binding share exchange pursuant to
which our shares of common stock would be converted into cash, securities or
other property, the LYONs may be surrendered for conversion at any time from
and after the date which is 15 days prior to the anticipated effective date of
the transaction until 15 days after the actual date of such transaction and, at
the effective time, the right to convert a LYON into shares of common stock
will be changed into a right to convert it into the kind and amount of cash,
securities or other property of ML&Co. or another person which the holder would
have received if the holder had converted the holder's LYON immediately prior
to the transaction. If such transaction also constitutes a change in control,
the holder will be able to require us to purchase all or a portion of such
holder's LYONs as described under "--Change in Control Permits Purchase of
LYONs at the Option of the Holder."
In the event we elect to make a distribution described in the third or
fourth bullet of the first paragraph under "--Conversion Rate Adjustments"
below which, in the case of the fourth bullet, has a per share value equal to
more than 15% of the sale price of our shares of common stock on the day
preceding the declaration date for such distribution, we will be required to
give notice to the holders of LYONs at least 20 days prior to the ex-dividend
date for such distribution and, upon the giving of such notice, the LYONs may
be surrendered for conversion at any time until the close of business on the
business day prior to the ex-dividend date or until we announce that such
distribution will not take place. No adjustment to the conversion rate or the
ability of a holder of a LYON to convert will be made if we provide that
holders of LYONs will participate in the transaction without conversion or in
certain other cases.
Delivery of Common Stock. On conversion of a LYON, a holder will not
receive any cash payment of interest representing the increases in the
contingent principal amount or accrued tax original issue discount or, except
as described below, contingent interest. Our delivery to the holder of the full
number of shares of common stock into which the LYON is convertible, together
with any cash payment for such holder's fractional shares, will be deemed:
. to satisfy our obligation to pay the original principal amount at
maturity of the LYON; and
. to satisfy our obligation to pay increases in the contingent
principal amount and accrued tax original issue discount and, except
as described below, contingent interest attributable to the period
from the issue date through the conversion date.
As a result, the increases in the contingent principal amount and accrued
tax original issue discount and, except as described below, contingent interest
are deemed to be paid in full rather than cancelled, extinguished or forfeited.
If contingent interest is payable to holders of LYONs during any
particular six-month period, and such LYONs are converted after the applicable
accrual or record date therefor and prior to the next succeeding contingent
interest payment date, holders of such LYONs at the close of business on the
accrual or record date will receive the contingent interest payable on such
LYONs on the corresponding interest payment date notwithstanding the
conversion. Such LYONs, upon surrender for conversion, must be accompanied by
funds equal to the amount of contingent interest payable on the principal
amount of LYONs so converted, unless such LYONs have been called for
redemption, in which case no such payment shall be required.
S-14
The conversion rate will not be adjusted for increases in the contingent
principal amount or any contingent interest. A certificate for the number of
full shares of common stock into which any LYON is converted, together with any
cash payment for fractional shares, will be delivered through the conversion
agent as soon as practicable following the conversion date. For a discussion of
the tax treatment of a holder receiving shares of common stock upon conversion,
see "Certain United States Federal Income Tax Considerations--Sale, Exchange,
Conversion or Redemption."
To convert a LYON into shares of common stock, a holder must:
. complete and manually sign the conversion notice on the back of the
LYON or complete and manually sign a facsimile of the conversion
notice and deliver the conversion notice to the conversion agent;
. surrender the LYON to the conversion agent;
. if required by the conversion agent, furnish appropriate endorsements
and transfer documents; and
. if required, pay all transfer or similar taxes.
Under the indenture, the date on which all of the foregoing requirements have
been satisfied is the conversion date.
Conversion Rate Adjustments. The conversion rate will be adjusted for:
. dividends or distributions on our common stock payable in our common
stock or other capital stock;
. subdivisions, combinations or certain reclassifications of our common
stock;
. distributions to all holders of our common stock of certain rights to
purchase our common stock for a period expiring within 60 days at
less than the sale price at the time; and
. distributions to the holders of our common stock of our assets or
debt securities or certain rights to purchase our securities
(excluding cash dividends or other cash distributions from current or
retained earnings other than extraordinary cash dividends).
"Extraordinary cash dividends" means the amount of any cash dividend
or distribution that, together with all other cash dividends paid
during the preceding 12-month period, are on a per share basis in
excess of the sum of (i) 5% of the sale price of the shares of common
stock on the day preceding the date of declaration of such dividend
or distribution, and (ii) the quotient of the amount of any
contingent interest paid on a LYON during such 12-month period
divided by the number of shares of common stock issuable upon
conversion of a LYON at the conversion rate in effect on the payment
date of such contingent interest.
In the event that we pay a dividend or make a distribution on shares of
our common stock consisting of capital stock of, or similar equity interests
in, a subsidiary or other business unit of ours, the conversion rate may be
adjusted based on the market value of the securities so distributed relative to
the market value of our common stock, in each case based on the average sale
prices of those securities for the 10 trading days commencing on and including
the fifth trading day after the date on which "ex-dividend trading" commences
for such dividend or distribution on the NYSE or such other national or
regional exchange or market on which the securities are then listed or quoted.
If a shareholder rights plan, such as our Rights Agreement described
under "Description of Common Stock--Rights to Purchase Series A Junior
Preferred Stock" in the accompanying prospectus, under which any rights are
issued provides that each share of common stock issued upon conversion of LYONs
at any time prior to the distribution of separate certificates representing
such rights will be entitled to receive such rights, there shall not be any
adjustment to the conversion privilege or conversion rate as a result of:
. the issuance of the rights;
S-15
. the distribution of separate certificates representing the rights;
. the exercise or redemption of such rights in accordance with any
rights agreement; or
. the termination or invalidation of the rights.
The indenture permits us to increase the conversion rate from time to
time.
If we are party to a consolidation, merger or binding share exchange or a
transfer of all or substantially all of our assets, the right to convert a LYON
into common stock will be changed into a right to convert it into the kind and
amount of securities, cash or other assets of ML&Co. or another person which
the holder would have received if the holder had converted the holder's LYONs
immediately prior to the transaction.
No adjustment need be made for any transaction referred to above if
holders of the LYONs are to participate in a transaction on a basis and with
notice that our board of directors determines to be fair and appropriate in
light of the basis and notice on which holders of common stock participate in
the transaction.
Holders of the LYONs may, in certain circumstances, be deemed to have
received a distribution subject to United States Federal income tax as a
dividend in the amount of:
. a taxable distribution to holders of common stock that results in an
adjustment of the conversion rate; or
. an increase in the conversion rate at our discretion.
See "Certain United States Federal Income Tax Considerations--Constructive
Dividends."
Contingent Interest
Subject to the accrual and record date provisions described below, we
will pay contingent interest to the holders of LYONs during any six-month
period from June 1 to November 30 and from December 1 to May 31, with the
initial six-month period commencing June 1, 2007, if the average market price
of a LYON for the five trading days ending on the third trading day immediately
preceding the first day of the applicable six-month period equals 120% or more
of the contingent principal amount of such LYON to the day immediately
preceding the first day of the applicable six-month period. Notwithstanding the
above, if we declare a dividend for which the record date falls prior to the
first day of a six-month period but the payment date falls within such
six-month period, then the five trading day period for determining the average
market price of a LYON will be the five trading days ending on the third
trading day immediately preceding such record date.
During any period when contingent interest shall be payable, the
contingent interest payable per LYON in either the first three months or the
second three months of such period will equal the greater of (i) the sum of the
regular cash dividends paid by us per share on our common stock during those
three months multiplied by the number of shares of common stock issuable upon
conversion of a LYON at the then applicable conversion rate or (ii) $0.16
multiplied by .
Contingent interest, if any, will accrue and be payable to holders of
LYONs as of the record date for the related common stock dividend or, if we do
not pay a regular cash dividend on our common stock during the relevant
six-month period, to holders of LYONs as of the 15th day preceding the last day
of the relevant six-month period. We will make contingent interest payments on
the payment date of the related common stock dividend or, if we do not pay a
regular cash dividend on our common stock during the relevant six-month period,
on the last day of the relevant six-month period. The contingent principal
amount will continue to increase at the applicable yield to whether or not
contingent interest is paid.
Regular cash dividends mean quarterly or other periodic cash dividends on
our common stock as declared by our Board of Directors as part of its cash
dividend payment practices and that are not designated by it as extraordinary
or special or other nonrecurring dividends.
S-16
The market price of a LYON on any date of determination means the average
of the secondary market bid quotations per LYON obtained by the bid
solicitation agent for $10 million original principal amount of LYONs at
approximately 4:00 p.m., New York City time, on such determination date from
three independent nationally recognized securities dealers we select, provided
that if:
. at least three such bids are not obtained by the bid solicitation
agent; or
. in our reasonable judgment, the bid quotations are not indicative of
the secondary market value of the LYONs,
then the market price of the LYON will equal (a) the then applicable conversion
rate of the LYONs multiplied by (b) the average sale price of our common stock
on the five trading days ending on such determination date, appropriately
adjusted.
The bid solicitation agent will initially be . We
may change the bid solicitation agent, but the bid solicitation agent will not
be our affiliate. The bid solicitation agent will solicit bids from securities
dealers that are believed by us to be willing to bid for the LYONs.
Upon determination that LYON holders will be entitled to receive
contingent interest during a relevant six-month period, we will issue a press
release and publish such information on our website as soon as practicable.
Purchase of LYONs at the Option of the Holder
On March 13, 2005, 2007, 2012, 2017, 2022 and 2027, holders may require
us to purchase any outstanding LYON for which the holder has properly delivered
and not withdrawn a written purchase notice, subject to certain additional
conditions. Holders may submit their LYONs for purchase to the paying agent at
any time from the opening of business on the date that is 20 business days
prior to the purchase date until the close of business on the business day
immediately preceding the purchase date.
The purchase price of a LYON will be the contingent principal amount of
the LYON on the applicable purchase date. The contingent principal amount of a
LYON will be equal to the original principal amount of $1,000 per LYON
increased daily by the applicable yield which will initially equal % per
annum and which will be reset quarterly to 3-month LIBOR minus % per annum.
Because the purchase price of a LYON at any time is dependent upon the
contingent principal amount of a LYON at that time, the purchase price cannot
be determined at this time. See "--Redemption of LYONs at the Option of ML&Co."
for examples of purchase prices under hypothetical LIBOR levels.
We may, at our option, elect to pay the purchase price in cash, shares of
common stock, or any combination thereof. For a discussion of the tax treatment
of a holder receiving cash, shares of common stock or any combination thereof,
see "Certain United States Federal Income Tax Considerations--Sale, Exchange,
Conversion or Redemption."
We will be required to give notice on a date not less than 20 business
days prior to each purchase date to all holders at their addresses shown in the
register of the registrar, and to beneficial owners as required by applicable
law, stating among other things:
. whether we will pay the purchase price of LYONs in cash or common
stock or any combination thereof, specifying the percentages of each;
. if we elect to pay in common stock, the method of calculating the
market price of the common stock; and
. the procedures that holders must follow to require us to purchase
their LYONs.
S-17
The purchase notice given by each holder electing to require us to
purchase LYONs shall be given to the paying agent no later than the close of
business on the business day immediately preceding the purchase date and must
state:
. the certificate numbers of the holder's LYONs to be delivered for
purchase;
. the portion of the original principal amount of LYONs to be
purchased, which must be $1,000 or an integral multiple of $1,000;
. that the LYONs are to be purchased by us pursuant to the applicable
provisions of the LYONs; and
. in the event we elect, pursuant to the notice that we are required to
give, to pay the purchase price in common stock, in whole or in part,
but the purchase price is ultimately to be paid to the holder
entirely in cash because any of the conditions to payment of the
purchase price or portion of the purchase price in common stock is
not satisfied prior to the close of business on the purchase date, as
described below, whether the holder elects:
(1)to withdraw the purchase notice as to some or all of the LYONs to
which it relates, or
(2)to receive cash in such event in respect of the entire purchase
price for all LYONs or portions of LYONs subject to such purchase
notice.
If the holder fails to indicate the holder's choice with respect to the
election described in the final bullet point above, the holder shall be deemed
to have elected to receive cash in respect of the entire purchase price for all
LYONs subject to the purchase notice in these circumstances.
A holder may withdraw any purchase notice by delivering a written notice
of withdrawal to the paying agent prior to the close of business on the
purchase date.
The notice of withdrawal shall state:
. the original principal amount of the LYONs being withdrawn, which
must be $1,000 or an integral multiple of $1,000;
. the certificate numbers of the LYONs being withdrawn; and
. the original principal amount, if any, of the LYONs that remain
subject to the purchase notice.
If we elect to pay the purchase price, in whole or in part, in shares of
our common stock, the number of shares we deliver shall be equal to the portion
of the purchase price to be paid in common stock divided by the market price of
a share of common stock.
We will pay cash based on the market price for all fractional shares of
common stock in the event we elect to deliver common stock in payment, in whole
or in part, of the purchase price. See "Certain United States Federal Income
Tax Considerations--Sale, Exchange, Conversion or Redemption."
The "market price" means the average of the sale prices of our common
stock for the five trading day period ending on (if the third business day
prior to the applicable purchase date is a trading day, or if not, then on the
last trading day prior to) the third business day prior to the applicable
purchase date, appropriately adjusted to take into account the occurrence,
during the period commencing on the first of such trading days during such five
trading day period and ending on such purchase date, of certain events that
would result in an adjustment of the conversion rate with respect to our common
stock.
The "sale price" of our common stock on any date means the closing per
share sale price (or if no closing sale price is reported, the average of the
bid and ask prices or, if more than one in either case, the average of the
average bid and the average ask prices) on such date on the NYSE on such other
principal United States
S-18
securities exchange on which the common stock is traded or, if the common stock
is not listed on a United States national or regional securities exchange, as
reported by the National Association of Securities Dealers Automated Quotation
System or by the National Quotation Bureau Incorporated. In the absence of a
quotation, we will determine the sale price on the basis of such quotations as
we consider appropriate.
Because the market price of our common stock is determined prior to the
applicable purchase date, holders of LYONs bear the market risk with respect to
the value of the common stock to be received from the date such market price is
determined to such purchase date. We may pay the purchase price or any portion
of the purchase price in common stock only if the information necessary to
calculate the market price is published in a daily newspaper of national
circulation or by other appropriate means.
Upon determination of the actual number of shares of common stock to be
issued for each $1,000 original principal amount of LYONs in accordance with
the foregoing provisions, we promptly will issue a press release and publish
such information on our website.
In addition to the above conditions, our right to purchase LYONs, in
whole or in part, with common stock is subject to our satisfying various
conditions, including:
. listing such common stock on the principal United States securities
exchange on which our common stock is then listed or, if not so
listed, on Nasdaq;
. the registration of the common stock under the Securities Act and the
Exchange Act, if required; and
. any necessary qualification or registration under applicable state
securities law or the availability of an exemption from such
qualification and registration.
If such conditions are not satisfied with respect to a holder prior to
the close of business on the purchase date, we will pay the purchase price of
the LYONs of the holder entirely in cash. See "Certain United States Federal
Income Tax Considerations--Sale, Exchange, Conversion or Redemption." We may
not change the form or components or percentages of components of consideration
to be paid for the LYONs once we have given the notice that we are required to
give to holders of the LYONs, except as described in the paragraph above.
In connection with any purchase offer, we will to the extent applicable:
. comply with the provisions of Rule 13e-4, Rule 14e-1 and any other
tender offer rules under the Exchange Act which may then be
applicable; and
. file Schedule TO or any other required schedule under the Exchange
Act.
Our obligation to pay the purchase price of a LYON for which a purchase
notice has been delivered and not validly withdrawn is conditioned upon the
holder delivering the LYON, together with necessary endorsements, to the paying
agent at any time after delivery of the purchase notice. We will cause the
purchase price of the LYON to be paid promptly following the later of the
purchase date or the time of delivery of the LYON.
If the paying agent holds money or securities sufficient to pay the
purchase price of the LYON on the business day following the purchase date in
accordance with the terms of the indenture, then, immediately after the
purchase date, the LYON will cease to be outstanding and the contingent
principal amount of such LYON will cease to increase, whether or not the LYON
is delivered to the paying agent. Thereafter, all other rights of the holder
shall terminate, other than the right to receive the purchase price upon
delivery of the LYON.
We may not purchase any LYONs for cash at the option of holders if an
event of default with respect to the LYONs has occurred and is continuing,
other than a default in the payment of the purchase price with respect to such
LYONs.
S-19
Redemption of LYONs at the Option of ML&Co.
No sinking fund is provided for the LYONs. Prior to March 13, 2007, we
cannot redeem the LYONs at our option. Beginning on March 13, 2007, we may
redeem the LYONs for cash as a whole at any time, or in part from time to time.
We will give not less than 30 days nor more than 60 days notice of redemption
by mail to holders of LYONs. The redemption price of a LYON will be the
contingent principal amount of such LYON on the redemption date.
The contingent principal amount of a LYON will be equal to the original
principal amount of $1,000 per LYON increased by the applicable yield, which
will initially equal % per annum and which will be reset quarterly to
3-month LIBOR minus % per annum. Because the redemption price of a LYON at
any time is dependent upon the contingent principal amount of a LYON at that
time, the redemption price cannot be determined at this time. The following
table indicates what the redemption prices would be on each date below if LIBOR
was a constant 2.00%, 5.00% and 8.00%. This table represents an example of only
three possibilities and you should realize that because LIBOR and therefore the
yield on the LYONs will fluctuate, any increases in contingent principal amount
and redemption prices will differ, and may differ significantly, from the
results shown below. The redemption price of a LYON redeemed between the dates
below would include an additional amount reflecting the additional yield
accrued since the next preceding date in the table.
Hypothetical Redemption Prices
Assuming 2.00% LIBOR Assuming 5.00% LIBOR Assuming 8.00% LIBOR
--------------------------------- --------------------------------- -------------------------------
(1) (2) (3) (1) (2) (3) (1) (2) (3)
Increase in Increase in Increase in
LYON Contingent LYON Contingent LYON Contingent
Issue Principal Redemption Issue Principal Redemption Issue Principal Redemption
Redemption Date Price Amount Price (1) + (2) Price Amount Price (1) + (2) Price Amount Price (1)+(2)
--------------- ----- ----------- --------------- ----- ----------- --------------- ----- ----------- -------------
March 13, 2005* (Purchase
only at the Option of the
Holder)..................
March 13, 2007*............
March 13, 2008.............
March 13, 2009.............
March 13, 2010.............
March 13, 2011.............
March 13, 2012*............
March 13, 2013.............
March 13, 2014.............
March 13, 2015.............
March 13, 2016.............
March 13, 2017*............
March 13, 2018.............
March 13, 2019.............
March 13, 2020.............
March 13, 2021.............
March 13, 2022*............
March 13, 2023.............
March 13, 2024.............
March 13, 2025.............
March 13, 2026.............
March 13, 2027*............
March 13, 2028.............
March 13, 2029.............
March 13, 2030.............
March 13, 2031.............
At Stated Maturity.........
- --------
* Dates on which holders may require ML&Co. to purchase outstanding options at
a price equal to the redemption price above.
S-20
If we redeem less than all of the outstanding LYONs, the trustee will
select the LYONs to be redeemed on a pro rata basis in original principal
amounts of $1,000 or integral multiples of $1,000 by lot, pro rata, based on
the ownership thereof, or by any other method the trustee considers fair and
appropriate. If a portion of a holder's LYONs is selected for partial
redemption and the holder converts a portion of the LYONs, the converted
portion will be deemed to be the portion selected for redemption.
Change in Control Permits Purchase of LYONs at the Option of the Holder
In the event of a change in control (as defined below) occurring on or
prior to March 13, 2007 with respect to ML&Co., each holder will have the
right, at its option, subject to the terms and conditions of the indenture, to
require us to purchase for cash all or any portion of the holder's LYONs in
integral multiples of $1,000 original principal amount, at a price equal to the
contingent principal amount of such LYONs on the purchase date. We will be
required to purchase the LYONs no later than 35 business days after the
occurrence of such change in control. We refer to this date in this prospectus
supplement as the "change in control purchase date."
Within 15 business days after the occurrence of a change in control, we
must mail to the trustee and to all holders of LYONs at their addresses shown
in the register of the registrar and to beneficial owners as required by
applicable law a notice regarding the change in control, which notice shall
state, among other things:
. the events causing a change in control;
. the date of such change in control;
. the last date on which a holder may exercise the purchase right;
. the change in control purchase price;
. the change in control purchase date;
. the name and address of the paying agent and the conversion agent;
. the conversion rate and any adjustments to the conversion rate;
. that LYONs with respect to which a change in control purchase notice
is given by the holder may be converted, if otherwise convertible,
only if the change in control purchase notice has been withdrawn in
accordance with the terms of the indenture; and
. the procedures that holders must follow to exercise these rights.
To exercise this right, the holder must deliver a written notice so as to
be received by the paying agent no later than the close of business on the
change in control purchase date. The required purchase notice upon a change in
control must state:
. the certificate numbers of the LYONs to be delivered by the holder;
. the portion of the original principal amount of LYONs to be
purchased, which portion must be $1,000 or an integral multiple of
$1,000; and
. that we are to purchase the LYONs pursuant to the applicable
provisions of the LYONs.
A holder may withdraw any change in control purchase notice by delivering
to the paying agent a written notice of withdrawal prior to the close of
business on the change in control purchase date. The notice of withdrawal must
state:
. the original principal amount of the LYONs being withdrawn, which
must be $1,000 or an integral multiple of $1,000;
. the certificate numbers of the LYONs being withdrawn; and
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. the original principal amount, if any, of the LYONs that remain
subject to a change in control purchase notice.
Our obligation to pay the change in control purchase price for a LYON for
which a change in control purchase notice has been delivered and not validly
withdrawn is conditioned upon delivery of the LYON, together with necessary
endorsements, to the paying agent at any time after the delivery of such change
in control purchase notice. We will cause the change in control purchase price
for such LYON to be paid promptly following the later of the change in control
purchase date or the time of delivery of such LYON.
If the paying agent holds money sufficient to pay the change in control
purchase price of the LYON on the change in control purchase date in accordance
with the terms of the indenture, then, immediately after the change in control
purchase date, contingent principal amount and contingent interest, if any, on
such LYON will cease to accrue, whether or not the LYON is delivered to the
paying agent. Thereafter, all other rights of the holder shall terminate, other
than the right to receive the change in control purchase price upon delivery of
the LYON.
Under the indenture, a "change in control" of ML&Co. is deemed to have
occurred at such time as:
. any person, including its respective affiliates and associates, other
than ML&Co., its subsidiaries or their employee benefit plans, files
a Schedule 13D or Schedule TO (or any successor schedule, form or
report under the Exchange Act) disclosing that such person has become
the beneficial owner of 50% or more of the aggregate voting power of
our common stock and other capital stock with equivalent voting
rights, or other capital stock into which the common stock is
reclassified or changed, with certain exceptions; or
. there shall be consummated any share exchange, consolidation or
merger of ML&Co. pursuant to which the common stock would be
converted into cash, securities or other property in which the
holders of our common stock and other capital stock with equivalent
voting rights immediately prior to the share exchange, consolidation
or merger, have, directly or indirectly, less than a majority of the
total voting power in the aggregate of all classes of capital stock
of the continuing or surviving corporation immediately after the
share exchange, consolidation or merger.
The indenture does not permit our board of directors to waive our
obligation to purchase LYONs at the option of holders in the event of a change
in control.
In connection with any purchase offer in the event of a change in
control, we will to the extent applicable:
. comply with the provisions of Rule 13e-4, Rule 14e-1 and any other
tender offer rules under the Exchange Act which may then be
applicable; and
. file Schedule TO or any other required schedule under the Exchange
Act.
The change in control purchase feature of the LYONs may in certain
circumstances make more difficult or discourage a takeover of ML&Co. The change
in control purchase feature, however, is not the result of our knowledge of any
specific effort:
. to accumulate shares of our common stock;
. to obtain control of ML&Co. by means of a merger, tender offer,
solicitation or otherwise; or
. part of a plan by management to adopt a series of anti-takeover
provisions.
Instead, the change in control purchase feature is a standard term
contained in other LYONs offerings that have been marketed by MLPF&S.
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We could, in the future, enter into certain transactions, including
certain recapitalizations, that would not constitute a change in control with
respect to the change in control purchase feature of the LYONs but that would
increase the amount of our (or our subsidiaries') outstanding indebtedness.
We may not purchase LYONs at the option of holders upon a change in
control if there has occurred and is continuing an event of default with
respect to the LYONs, other than a default in the payment of the change in
control purchase price with respect to the LYONs.
Events of Default and Acceleration
The following are events of default for the LYONs:
(1)default in payment of the contingent principal amount, redemption
price, purchase price or change in control purchase price with
respect to any LYONs when such becomes due and payable;
(2)default in payment of any contingent interest, which default
continues for 30 days;
(3)our failure to comply with any of our other agreements in the LYONs
or the indenture upon our receipt of notice of such default from the
trustee or from holders of not less than 25% in aggregate original
principal amount of the LYONs then outstanding, and our failure to
cure (or obtain a waiver of) such default within 60 days after we
receive such notice; or
(4)certain events of bankruptcy or insolvency affecting us.
In case an event of default with respect to any LYON has occurred and is
continuing, the amount payable to a beneficial owner of a LYON upon any
acceleration permitted by the LYONs, with respect to each LYON, will be the
contingent principal amount of the LYON plus the applicable yield on the LYON
accrued through the date of such acceleration, and any accrued and unpaid
contingent interest through the date of acceleration. If a bankruptcy
proceeding is commenced in respect of us, the claim of the beneficial owner of
a LYON may be limited, under Section 502(b)(2) of Title 11 of the United States
Code, to the issue price of the LYON plus the yield and any contingent interest
which has accrued as of the commencement of the proceeding.
In case of default in payment of the LYONs, whether at the stated
maturity or upon acceleration, from and after the maturity date the LYONs will
bear interest, payable upon demand of their beneficial owners, at the
applicable yield, to the extent that payment of any interest is legally
enforceable, on the unpaid contingent principal amount due and payable on that
date in accordance with the terms of the LYONs to the date payment of that
amount has been made or duly provided for.
The events of default set forth under "Description of Debt
Securities--Events of Default" in the accompanying prospectus are not
applicable to the LYONs.
Modification
In addition to those modifications that require the consent of each
holder set forth under "Description of Debt Securities--Modification and
Waiver" in the accompanying prospectus, the following modifications would
require the consent of the holders of each outstanding LYON:
. alter the manner or rate of accrual or payment of contingent
principal or contingent interest on any LYON;
. make any LYON payable in money or securities other than that stated
in the LYON;
. reduce the original principal amount, contingent principal amount,
redemption price, purchase price or change in control purchase price
with respect to any LYON;
. make any change that affects the right of a holder to convert any
LYON in any adverse manner;
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. make any change that adversely affects the right to require us to
purchase a LYON; and
. impair the right to institute suit for the enforcement of any payment
with respect to, or conversion of, the LYONs.
ML&Co. may modify the Indenture or the LYONs without the consent of the
holders to cure any ambiguity, omission, defect or inconsistency, provided that
such modification does not materially adversely affect the rights of any LYON
holder.
Calculations in Respect of LYONs
We will be responsible for making all calculations called for under the
LYONs. These calculations include, but are not limited to, determination of the
yield and the contingent principal amount and of the average market prices of
the LYONs and of our common stock and amounts of contingent interest payments,
if any, payable on the LYONs. We will make all these calculations in good faith
and, absent manifest error, our calculations will be final and binding on
holders of LYONs. Upon request, we will provide a schedule of our calculations
to the trustee, and the trustee is entitled to rely upon the accuracy of our
calculations without independent verification.
Depositary
Description of the Global Securities
Upon issuance, all LYONs 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 LYONs in definitive
form, no global security may be transferred except as a whole by the depositary
to its nominee or by such nominee of 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 LYONs represented by the global security for all
purposes under the indenture. Except as provided below, the beneficial owners
of the LYONs represented by a global security will not be entitled to have the
LYONs registered in their names, will not receive or be entitled to receive
physical delivery of the LYONs in definitive form and will not be considered
the owners or holders of the LYONs including for purposes of receiving any
reports delivered by ML&Co. or the trustee under the 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 indenture. We understand that under
existing industry practices, in the event that we request 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
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.
To ensure that notices of conversion and purchase at the option of a
holder or upon a change in control of ML&Co. (or any other notices or actions
permitted or required to be taken by holders of LYONs under the indenture) are
received by the paying agent by the times required, holders may need to give
substantially earlier instructions to their broker or other intermediary.
Different brokerage firms and intermediaries may have
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different cut-off times for accepting and implementing instructions from their
clients. Therefore, you should consult with your broker and other intermediary,
if applicable, as to applicable cut-off times and other notice mechanics.
DTC Procedures
The following is based on information provided by DTC.
DTC will act as securities depositary for the LYONs. The LYONs 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 LYONs in the aggregate principal amount of such issue, and
will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC holds securities that its participants deposit with DTC. DTC also
facilities the settlement among participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
of DTC include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of its
direct participants and by the NYSE, the AMEX, and the National Association of
Securities Dealers, Inc. Access to DTC's system is also available to others
such as securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a direct participant, either
directly or indirectly. The rules applicable to DTC and its participants are on
file with the SEC.
Purchases of the LYONs under DTC's system must be made by or through
direct participants, which will receive a credit for the LYONs 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 LYONs are
to be made by entries on the books of participants acting on behalf of
beneficial owners.
To facilitate subsequent transfers, all LYONs deposited with DTC are
registered in the name of DTC's partnership nominee, Cede & Co. The deposit of
LYONs 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 LYONs; DTC's records reflect only the identity of the direct
participants to whose accounts the LYONs 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
LYONs. 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 LYONs are credited
on the record date.
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Payments of contingent principal amounts and any contingent interest
amounts made in cash on the LYONs 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 contingent
principal amounts, premium, if any, and/or contingent interest, if any, to DTC
is the responsibility of ML&Co. or the trustee, disbursement of those payments
to direct participants will be the responsibility of DTC, and disbursement of
those payments to the beneficial owners will be the responsibility of direct
participants and indirect participants.
Exchange for Certificated Securities
If:
. the depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by us within
60 days,
. we execute and deliver to the trustee a company order to the effect
that the global securities shall be exchangeable, or
. an event of default under the indenture has occurred and is
continuing with respect to the LYONs,
the global LYONs will be exchangeable for LYONs in definitive form of like
tenor and of an equal aggregate original principal amount, in denominations of
$1,000 original principal amount and integral multiples of $1,000. The
definitive LYONs 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 LYONs.
DTC may discontinue providing its services as securities depositary with
respect to the LYONs at any given time by giving reasonable notice to us or the
trustee. Under these circumstances, in the event that a successor securities
depositary is not obtained, LYONs certificates are required to be printed and
delivered.
We may decide to discontinue use of the system of book-entry transfers
through DTC or a successor securities depositary. In that event, LYONs
certificates will be printed and delivered.
The information in this section concerning DTC and DTC's system has been
obtained from sources that we believe to be reliable, but we take no
responsibility for its accuracy.
Same-Day Settlement and Payment
Settlement for the LYONs will be made by the underwriter in immediately
available funds. We will make all payments of contingent principal amounts and
contingent interest, if any, in immediately available funds so long as the
LYONs are maintained in book-entry form.
Governing Law
The indenture and the LYONs will be governed by, and construed in
accordance with, the law of the State of New York.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
General
Set forth in full below is the opinion of Sidley Austin Brown & Wood LLP,
our counsel, as to certain United States Federal income tax consequences of the
purchase, ownership and disposition of the LYONs. 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 LYONs
held as capital assets and does not purport to deal with persons in special tax
situations, such as financial institutions, insurance companies, regulated
investment companies, dealers in securities or currencies, tax-exempt entities,
persons holding LYONs in a tax-deferred or tax-advantaged account, or persons
holding LYONs as a hedge against currency risks, as a position in a "straddle"
or as part of a "hedging", "conversion" or "integrated" transaction for tax
purposes. Persons considering the purchase of the LYONs 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 LYONs arising under the laws of any
other taxing jurisdiction.
We do not address all of the tax consequences that may be relevant to an
investor. In particular, we do not address:
. the United States Federal income tax consequences to shareholders in,
or partners or beneficiaries of, an entity that is a holder of LYONs;
. the United States Federal estate, gift or alternative minimum tax
consequences of the purchase, ownership or disposition of LYONs;
. persons who hold the LYONs whose functional currency is not the
United States dollar;
. any state, local or foreign tax consequences of the purchase,
ownership or disposition of LYONs; or
. any Federal, state, local or foreign tax consequences of owning or
disposing of the common stock.
Accordingly, you should consult your own tax advisor regarding the tax
consequences of purchasing, owning and disposing of the LYONs and the common
stock in light of your own circumstances.
A U.S. Holder is a beneficial owner of the LYONs who or which is:
. a citizen or individual resident of the United States, as defined in
Section 7701(b) of the Internal Revenue Code of 1986, as amended
(which we refer to as the Code);
. a corporation or partnership, including any entity treated as a
corporation or partnership for United States Federal income tax
purposes, created or organized in or under the laws of the United
States, any state thereof or the District of Columbia unless, in the
case of a partnership, Treasury regulations are enacted that provide
otherwise;
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. an estate if its income is subject to United States Federal income
taxation regardless of its source; or
. a trust if (1) a United States court can exercise primary supervision
over its administration and (2) one or more United States persons
have the authority to control all of its substantial decisions.
Notwithstanding the preceding sentence, certain trusts in existence on August
20, 1996, and treated as a U.S. Holder prior to such date, may also be treated
as U.S. Holders. A Non-U.S. Holder is a beneficial owner of LYONs other than a
U.S. Holder.
No statutory, administrative or judicial authority directly addresses the
treatment of the LYONs or instruments similar to the LYONs for United States
Federal income tax purposes. No rulings have been sought or are expected to be
sought from the Internal Revenue Service (which we refer to as the IRS) with
respect to any of the United States Federal income tax consequences discussed
below, and no assurance can be given that the IRS will not take contrary
positions. As a result, no assurance can be given that the IRS will agree with
the tax characterizations and the tax consequences described below.
We urge prospective investors to consult their own tax advisors with
respect to the tax consequences to them of the purchase, ownership and
disposition of the LYONs and the common stock in light of their own particular
circumstances, including the tax consequences under state, local, foreign and
other tax laws and the possible effects of changes in United States Federal or
other tax laws.
Classification of the LYONs
We have received an opinion from our counsel, Sidley Austin Brown & Wood
LLP, that the LYONs will be treated as indebtedness for United States Federal
income tax purposes and that the LYONs will be subject to the special Treasury
regulations governing contingent payment debt instruments (which we refer to as
the CPDI regulations).
Accrual of Interest on the LYONs
Pursuant to the terms of the indenture, we and each holder of the LYONs
agree, for United States Federal income tax purposes, to treat the LYONs as
debt instruments that are subject to the CPDI regulations. Pursuant to these
regulations, U.S. Holders of the LYONs will be required to accrue interest
income on the LYONs, in the amounts described below, regardless of whether the
U.S. Holder uses the cash or accrual method of tax accounting. Accordingly, we
anticipate that U.S. Holders will be required to include interest in taxable
income in each year in excess of the yield on the LYONs for non-tax purposes
and in excess of any contingent interest payments actually received in that
year.
The CPDI regulations provide that a U.S. Holder must accrue an amount of
ordinary interest income, as original issue discount for United States Federal
income tax purposes, for each accrual period prior to and including the
maturity date of the LYONs that equals:
(1) the product of (i) the adjusted issue price (as defined below) of the
LYONs as of the beginning of the accrual period; and (ii) the
comparable yield to maturity (as defined below) of the LYONs,
adjusted for the length of the accrual period;
(2) divided by the number of days in the accrual period; and
(3) multiplied by the number of days during the accrual period that the
U.S. Holder held the LYONs.
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A LYON's issue price is the first price to the public at which a
substantial amount of the LYONs is sold, excluding sales to bond houses,
brokers or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers. The adjusted issue price of a
LYON is its issue price increased by any interest income previously accrued,
determined without regard to any adjustments to interest accruals described
below, and decreased by the amount of any projected payments, as defined below,
with respect to the LYONs.
Sidley Austin Brown & Wood LLP, our counsel, has advised us that the term
"comparable yield" means the annual yield we would pay, as of the initial issue
date, on a fixed-rate, nonconvertible debt security with no contingent
payments, but with terms and conditions otherwise comparable to those of the
LYONs. Based in part on that advice, we intend to take the position that the
comparable yield for the LYONs is %, compounded semi-annually. The precise
manner of calculating the comparable yield is not absolutely clear.
The CPDI regulations require that we provide to U.S. Holders, solely for
United States Federal income tax purposes, a schedule of the projected amounts
of payments, which we refer to as projected payments, on the LYONs. This
schedule must produce the comparable yield. The projected payment schedule
includes estimates for certain payments of contingent interest and an estimate
for a payment at maturity taking into account the conversion feature.
The comparable yield and the schedule of projected payments will be set
forth in the indenture. U.S. Holders may also obtain the projected payment
schedule 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 or to corporatesecretary@exchange.ml.com.
For United States Federal income tax purposes, a U.S. Holder must use the
comparable yield and the schedule of projected payments in determining its
interest accruals, and the adjustments thereto described below, in respect of
the LYONs, unless such U.S. Holder timely discloses and justifies the use of
other estimates to the IRS. A U.S. Holder that determines its own comparable
yield or schedule of projected payments must also establish that our comparable
yield or schedule of projected payments is unreasonable.
The comparable yield and the schedule of projected payments are not
determined for any purpose other than for the determination of a U.S. Holder's
interest accruals and adjustments thereof in respect of the LYONs for United
States Federal income tax purposes and do not constitute a projection or
representation regarding the actual amounts payable on the LYONs.
Amounts treated as interest under the CPDI regulations are treated as
original issue discount for all purposes of the Code.
Adjustments to Interest Accruals on the LYONs
If, during any taxable year, a U.S. Holder receives actual payments with
respect to the LYONs for that taxable year that in the aggregate exceed the
total amount of projected payments for that taxable year, the U.S. Holder will
incur a "net positive adjustment" under the CPDI regulations equal to the
amount of such excess. The U.S. Holder will treat a "net positive adjustment"
as additional interest income for the taxable year. For this purpose, the
payments in a taxable year include the fair market value of property received
in that year.
If a U.S. Holder receives in a taxable year actual payments with respect
to the LYONs for that taxable year that in the aggregate were less than the
amount of projected payments for that taxable year, the U.S. Holder will incur
a "net negative adjustment" under the CPDI regulations equal to the amount of
such deficit. This adjustment will (a) reduce the U.S. Holder's interest income
on the LYONs for that taxable year, and (b) to the extent of any excess after
the application of (a), give rise to an ordinary loss to the extent of the U.S.
Holder's interest income on the LYONs during prior taxable years, reduced to
the extent such interest was offset by prior net negative adjustments.
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If a U.S. Holder purchases LYONs at a discount or premium to the adjusted
issue price, the discount will be treated as a positive adjustment and the
premium will be treated as a negative adjustment. The U.S. Holder must
reasonably allocate the adjustment over the remaining term of the LYONs by
reference to the accruals of original issue discount at the comparable yield or
to the projected payments. It may be reasonable to allocate the adjustment over
the remaining term of the LYONs pro rata with the accruals of original issue
discount at the comparable yield. You should consult your tax advisor regarding
these allocations.
Sale, Exchange, Conversion or Redemption
Generally, the sale or exchange of a LYON, or the redemption of a LYON
for cash, will result in taxable gain or loss to a U.S. Holder. As described
above, our calculation of the comparable yield and the schedule of projected
payments for the LYONs includes the receipt of stock upon conversion as a
contingent payment with respect to the LYONs. Accordingly, we intend to treat
the receipt of our common stock by a U.S. Holder upon the conversion of a LYON,
or upon a U.S. Holder's exercise of a put right where we elect to pay in common
stock, as a contingent payment under the CPDI regulations. As described above,
holders are generally bound by our determination of the comparable yield and
the schedule of projected payments. Under this treatment, a conversion or such
an exercise of the U.S. Holder's put right will also result in taxable gain or
loss to a U.S. Holder. The amount of gain or loss on a taxable sale, exchange,
conversion or redemption will be equal to the difference between (a) the amount
of cash plus the fair market value of any other property received by the U.S.
Holder, including the fair market value of any of our common stock received,
and (b) the U.S. Holder's adjusted tax basis in the LYON. A U.S. Holder's
adjusted tax basis in a LYON on any date will generally be equal to the U.S.
Holder's original purchase price for the LYON, increased by any interest income
previously accrued by the U.S. Holder (determined without regard to any
adjustments to interest accruals described above, other than adjustments to
reflect discount or premium to the adjusted issue price, if any), and decreased
by the amount of any projected payments, as defined above, projected to have
been made through such date. Gain recognized upon a sale, exchange, conversion
or redemption of a LYON will generally be treated as ordinary interest income;
any loss will be ordinary loss to the extent of interest previously included in
income, and thereafter, capital loss (which will be long-term if the LYON is
held for more than one year). The deductibility of net capital losses by
individuals and corporations is subject to limitations.
A U.S. Holder's tax basis in our common stock received upon a conversion
of a LYON or upon a U.S. Holder's exercise of a put right that we elect to pay
in common stock will equal the then current fair market value of such common
stock. The U.S. Holder's holding period for the common stock received will
commence on the day immediately following the date of conversion or redemption.
Constructive Dividends
If at any time we make a distribution of property to our stockholders
that would be taxable to the stockholders as a dividend for Federal income tax
purposes and, in accordance with the anti-dilution provisions of the LYONs, the
conversion rate of the LYONs is increased, such increase may be deemed to be
the payment of a taxable dividend to holders of the LYONs.
For example, an increase in the conversion rate in the event of
distributions of our evidences of indebtedness or our assets or an increase in
the event of an extraordinary cash dividend will generally result in deemed
dividend treatment to holders of the LYONs, but generally an increase in the
event of stock dividends or the distribution of rights to subscribe for common
stock will not.
Treatment of Non-U.S. Holders
Payments of contingent interest made to Non-U.S. Holders will not be
exempt from United States Federal income or withholding tax and, therefore,
Non-U.S. Holders will be subject to withholding on such payments of contingent
interest at a rate of 30%, subject to reduction by an applicable treaty or upon
the receipt of a Form W-8ECI from a Non-U.S. Holder claiming that the payments
are effectively connected with the
S-30
conduct of a United States trade or business. A Non-U.S. Holder that is subject
to the withholding tax should consult its tax advisors as to whether it can
obtain a refund for all or a portion of the withholding tax, either on the
grounds that all or some portion of the contingent interest represents a return
of principal under the CPDI regulations, or on other grounds.
All other payments on the LYONs made to a Non-U.S. Holder, including a
payment in common stock pursuant to a conversion, and any gain realized on a
sale or exchange of the LYONs (other than income or gain attributable to
accrued contingent interest payments), will be exempt from United States income
or withholding tax, provided that: (i) such Non-U.S. Holder does not own,
actually or constructively, 10 percent or more of the total combined voting
power of all classes of our stock entitled to vote, is not a controlled foreign
corporation related, directly or indirectly, to us through stock ownership, and
is not a bank receiving interest described in section 881(c)(3)(A) of the Code;
(ii) the statement requirement set forth in section 871(h) or section 881(c) of
the Code has been fulfilled with respect to the beneficial owner, as discussed
below; (iii) such payments and gain are not effectively connected with the
conduct by such Non-U.S. Holder of a trade or business in the United States;
and (iv) our common stock continues to be actively traded within the meaning of
section 871(h)(4)(C)(v)(I) of the Code (which, for these purposes and subject
to certain exceptions, includes trading on the NYSE). However, if a Non-U.S.
Holder were deemed to have received a constructive
dividend (see "--Constructive Dividends" above), the Non-U.S. holder will
generally be subject to United States Federal withholding tax at a 30% rate,
subject to reduction by an applicable treaty, on the taxable amount of such
dividend.
The statement requirement referred to in the preceding paragraph will be
fulfilled if the beneficial owner of a LYONs certifies on IRS Form W-8BEN,
under penalties of perjury, that it is not a United States person and provides
its name, address and such other information as the form may require.
If a Non-U.S. Holder of the LYONs is engaged in a trade or business in
the United States, and if interest on the LYONs is effectively connected with
the conduct of such trade or business, the Non-U.S. Holder, although exempt
from the withholding tax discussed in the preceding paragraphs, will generally
be subject to regular United States Federal income tax on interest and on any
gain realized on the sale or exchange of the LYONs in the same manner as if it
were a U.S. Holder. In lieu of the certificate described in the preceding
paragraph, such a Non-U.S. Holder will be required to provide to the
withholding agent a properly executed IRS Form W-8ECI (or successor form) in
order to claim an exemption from withholding tax. In addition, if such a Non-
U.S. Holder is a foreign corporation, such Non-U.S. Holder may be subject to a
branch profits tax equal to 30% (or such lower rate provided by an applicable
treaty) of its effectively connected earnings and profits for the taxable year,
subject to certain adjustments.
Backup Withholding Tax and Information Reporting
Payments of contingent principal amount, premium, if any, and interest
(including original issue discount and a payment in common stock pursuant to a
conversion of the LYONs) on, and the proceeds from a disposition of, the LYONs
may be subject to information reporting and United States Federal backup
withholding tax at the applicable statutory rate if the U.S. Holder thereof
fails to supply an accurate taxpayer identification number or otherwise fails
to comply with applicable United States information reporting or certification
requirements. A Non-U.S. Holder may be subject to United States backup
withholding tax on payments on the LYONs and the proceeds from a sale or other
disposition of the LYONs unless the Non-U.S. Holder complies with certification
procedures to establish that it is not a United States person. Any amounts so
withheld will be allowed as a credit against such holder's United States
Federal income tax liability and may entitle a holder to a refund, provided the
required information is timely 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, as amended (the
"Code"), prohibit various transactions between certain parties and the assets
of employee benefit plans, unless an exemption is available; governmental plans
may be subject to similar prohibitions. Because transactions between a plan and
ML&Co. may be prohibited absent an exemption, each fiduciary, by its purchase
of any LYONs on behalf of any plan, represents on behalf of itself and the plan,
S-31
that the acquisition, holding and any subsequent disposition of the LYONs will
not result in a violation of ERISA, the Code or any other applicable law or
regulation.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC. Our
SEC filings are available over the Internet at the SEC's website 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 LYONs and other securities. For further information on us and the LYONs,
you should refer to our registration statement and its exhibits. The prospectus
accompanying this prospectus supplement summarizes material provisions of
contracts and other documents that we refer you to. Because the prospectus may
not contain all the information that you may find important, you should review
the full text of these documents. We have included copies of these documents as
exhibits to our registration statement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not, and the underwriter has not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus
supplement and the accompanying prospectus is accurate as of the date on the
front cover of this prospectus supplement only. Our business, financial
condition and results of operations may have changed since that date.
S-32
UNDERWRITING
Subject to the terms and conditions set forth in the purchase agreement,
dated March 7, 2002, between ML&Co. and MLPF&S, the underwriter, we have agreed
to sell to MLPF&S, and MLPF&S has agreed to purchase from us, $1,000,000,000
aggregate original principal amount of the LYONs at a purchase price equal to
the initial public offering price set forth on the front cover of this
prospectus supplement, less a discount of $ per $1,000 original principal
amount of LYONs.
In the purchase agreement, the underwriter has agreed, subject to the
terms and conditions set forth in the purchase agreement, to purchase all of
the LYONs being sold under the terms of the purchase agreement if any of the
LYONs are purchased.
We have agreed to indemnify the underwriter against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
the underwriter may be required to make in connection with those liabilities.
The LYONs are being offered by the underwriter, subject to prior sale,
when, as and if issued to and accepted by it, subject to approval of certain
legal matters by counsel for the underwriter and other conditions. The
underwriter reserves the right to withdraw, cancel or modify its offer and to
reject orders in whole or in part.
The underwriter has advised us that it proposes initially to offer the
LYONs to the public at the public offering price set forth on the cover page of
this prospectus supplement. After the initial offering, the public offering
price may change.
The following table shows the per share and total public offering price,
the underwriting discount to be paid by us to MLPF&S and the proceeds before
expenses to us. The information is presented assuming either no exercise or
full exercise by MLPF&S of the over-allotment option.
Per LYON Without Option With Option
-------- -------------- --------------
Public offering price.......... $1,000 $1,000,000,000 $1,150,000,000
Underwriting discount.......... $ $ $
Proceeds, before expenses,
to ML&Co..................... $ $ $
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $ and are payable by us. MLPF&S has agreed to pay certain of
our legal expenses incurred in connection with the offering.
The underwriter has previously marketed (and anticipates continuing to
market) securities of issuers under the trademark "LYONs". The LYONs we are
offering hereby contain certain terms and provisions that are different from
such other previously marketed LYONs, the terms and provisions of which also
vary. See "Description of LYONs".
Over-Allotment Option
We have granted an option to the underwriter, exercisable for 30 days
after the date of this prospectus supplement, to purchase up to an additional
$150,000,000 aggregate original principal amount of LYONs at the public
offering price set forth on the cover page of this prospectus supplement, less
the underwriting discount. The underwriter may exercise this option solely to
cover over-allotments, if any, made on the sale of the LYONs offered hereby.
S-33
No Sales of Similar Securities
We and certain of our executive officers have agreed, with some
exceptions, not to directly or indirectly, without the prior written consent of
MLPF&S, for a period of 90 days after the date of this prospectus supplement:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, lend or otherwise dispose of or
transfer any shares of our common stock or securities convertible
into or exchangeable or exercisable for or repayable with shares of
our common stock, or file a registration statement under the
Securities Act relating to any offerings of shares of our common
stock for cash (other than a universal shelf registration statement
not relating primarily to our common stock); or
. enter into any swap or other agreement or any other transaction that
transfers from us or our executive officers, in whole or in part,
directly or indirectly, the economic consequence of ownership of
shares of our common stock whether any such swap or transaction is to
be settled by delivery of shares of our common stock or other
securities, in cash or otherwise.
The foregoing restriction does not apply to (i) our ability to sell the
LYONs to the underwriter pursuant to the purchase agreement, (ii) our ability
to grant options and rights, issue shares of common stock and file registration
statements in connection with employee or non-employee director stock plans or
employee benefit plans and (iii) certain gifts and transfers by our executive
officers.
Secondary Market Activities by MLPF&S
After the distribution of the LYONs is completed, due to certain
regulatory restrictions arising from its affiliation with ML&Co., MLPF&S will
not be able to make a market in the LYONs or, except on a limited, unsolicited
basis, effect any transactions for the account of any customer in the LYONs.
Other broker-dealers unaffiliated with ML&Co. will not be subject to such
prohibitions.
The underwriter may use this prospectus supplement and the accompanying
prospectus for offers and sales related to any transactions in the LYONs
following the completion of the initial offering of the LYONs. The underwriter
may act as principal or agent in these transactions, and the sales will be made
at prices related to prevailing market prices at the time of sale.
Price Stabilization and Short Positions
Until the distribution of the LYONs is completed, rules of the SEC may
limit the ability of the underwriter to bid for and purchase the LYONs. As an
exception to these rules, the underwriter is permitted to engage in particular
types of transactions that stabilize the price of the LYONs. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the LYONs or the shares of common stock.
If the underwriter creates a short position in LYONs in connection with
this offering, e.g., if it sells more LYONs than are set forth on the cover
page of this prospectus supplement, the underwriter may reduce that short
position by purchasing the LYONs in the open market. The underwriter may also
elect to reduce any short position by exercising all or part of the
over-allotment option described above.
In general, purchases of a security to stabilize the price or to reduce a
short position may cause the price of the security to be higher than it might
be in the absence of these purchases.
S-34
Neither we nor the underwriter make 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 LYONs or the shares of common stock. In
addition, neither we nor the underwriter make any representation that the
underwriter will engage in these transactions or that transactions, once
commenced, will not be discontinued without notice.
VALIDITY OF THE LYONs
The validity of the LYONs offered hereby will be passed upon for us by
Sidley Austin Brown & Wood LLP, New York, New York, and for the underwriter by
Shearman & Sterling, New York, New York.
S-35
INDEX OF DEFINED TERMS
Page
----
3-month LIBOR.......................................................... S-11
business day........................................................... S-11
change in control...................................................... S-22
change in control purchase date........................................ S-21
Code................................................................... S-31
comparable yield....................................................... S-29
contingent interest.................................................... S-5
contingent principal amount............................................ S-3
conversion trigger price............................................... S-12
depositary............................................................. S-24
ERISA.................................................................. S-31
Extraordinary cash dividends........................................... S-15
Fitch.................................................................. S-4
London banking day..................................................... S-11
LYONs.................................................................. S-3
market price........................................................... S-18
ML&Co.................................................................. S-3
MLPF&S................................................................. S-3
Moneyline Telerate Page 3750........................................... S-11
Moody's................................................................ S-4
net negative adjustment................................................ S-29
net positive adjustment................................................ S-29
Non-U.S. Holders....................................................... S-28
original principal amount.............................................. S-3
sale price............................................................. S-18
Standard & Poor's...................................................... S-4
TOPrS.................................................................. S-9
Trading day............................................................ S-12
U.S. Holder............................................................ S-27
underwriter............................................................ S-3
yield.................................................................. S-3
S-36
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[LOGO]
$1,000,000,000
Merrill Lynch & Co., Inc.
Liquid Yield Option/TM/ Notes due 2032
(Zero Coupon -- Senior)
-------------------------------
PROSPECTUS SUPPLEMENT
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Merrill Lynch & Co.
March , 2002
/TM/Trademark of Merrill Lynch & Co., Inc.
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