PRICING SUPPLEMENT
(To prospectus supplement and prospectus
dated June 16, 2000 and June 15, 2000, respectively)
$70,000,000
Merrill Lynch & Co., Inc.
Medium-Term Notes, Series B
2% Callable and Exchangeable Stock-Linked Notes due July 26, 2005
(Linked to the performance of the common stock of Johnson & Johnson)
----------------------
The notes:
o The issue price for each note equals its principal amount, plus accrued
interest, if any, from July 26, 2000.
o We will pay you interest on the notes semi-annually at a rate per year
equal to 2%.
o At maturity, for each $1,000 principal amount of the notes you own, we
will deliver to you either cash or a number of shares of Johnson &
Johnson common stock and in certain circumstances, other securities or
cash, based on the formula described in this pricing supplement.
o We may redeem all of the notes, at our option, before their maturity for
either cash or a number of shares of Johnson & Johnson common stock and
in certain circumstances, other securities or cash, based on the formula
described in this pricing supplement.
o You may exchange any number of notes you own, at your option, before
maturity for a number of shares of Johnson & Johnson common stock, and in
certain circumstances other securities or cash, equal to the applicable
exchange ratio.
o The notes have been approved for listing on the American Stock Exchange
under the trading symbol "MJJ.A ".
Payment formula:
o For each $1,000 principal amount of the notes you own, the amount you
will receive at maturity or upon our redemption will equal the greater
of:
o the product of the exchange ratio and the average market price of the
common stock of Johnson & Johnson determined as described in this
pricing supplement; provided, however, that if the amount you receive
at maturity is based on this formula, you will not receive accrued
interest from and including the immediately preceding interest payment
date through the maturity date or date of early redemption, as the
case may be, or
o $1,000 in cash plus accrued and unpaid interest through but excluding
the maturity date or date of early redemption, as the case may be.
o The exchange ratio initially equals 8.6395 and is subject to adjustment
from time to time as described in this pricing supplement.
Investing in the notes involves risks.
See "Risk Factors" beginning on page PS-9 of this pricing supplement.
Neither the Securities and Exchange Commission nor any state
securities commission has approved these securities or passed upon the
adequacy or accuracy of this pricing supplement or the accompanying prospectus
supplement and prospectus. Any representation to the contrary is a criminal
offense.
----------------------
Merrill Lynch & Co.
----------------------
The date of this pricing supplement is July 19, 2000.
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Terms of the notes:
Notes ............................................ 2% Callable and Exchangeable Stock-Linked Notes due July 26,
2005 (Linked to the performance of the common stock of Johnson
& Johnson).
Aggregate principal amount ....................... $70,000,000.
Issuer ........................................... Merrill Lynch & Co., Inc.
References to "ML&Co.", "we", "us" and "our" are to Merrill
Lynch & Co., Inc.
Maturity date .................................... July 26, 2005.
Interest rate .................................... 2% per year. Interest on the note will be computed on the
basis of a 360-day year of twelve 30-day months.
Interest payment dates ........................... January 26 and July 26, commencing January 26, 2001.
Issue price ...................................... $1,000 per note.
Original issue date .............................. July 26, 2000.
CUSIP number ..................................... 590188 A40.
Form of notes .................................... Book-entry only.
Denominations .................................... We will issue and sell the notes in denominations of $1,000 and
integral multiples of $1,000 in excess thereof.
Trustee .......................................... The Chase Manhattan Bank.
Amount payable at maturity ....................... At maturity, whether as a result of acceleration or otherwise,
you will receive for each $1,000 principal amount of the notes
you own, an amount equal to the greater of:
(i) the product of the exchange ratio and the average
market price of the Johnson & Johnson common
stock during the first five Calculation Days during the
Calculation Period; provided, however:
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o that if there are fewer than five Calculation Days in
the Calculation Period with respect to the Johnson &
Johnson common stock, then the amount payable at
maturity shall be calculated using the average,
arithmetic mean, of the market prices of Johnson &
Johnson common stock on those Calculation Days, and
if there is only one Calculation Day, then the amount
payable at maturity shall be calculated using the
market price of Johnson & Johnson common stock on
such Calculation Day. If no Calculation Days occur
during the Calculation Period with respect to Johnson
& Johnson common stock, then the amount payable at
maturity shall be calculated using the market price
of Johnson & Johnson common stock determined on the
last scheduled Calculation Day in the Calculation
Period, regardless of the occurrence of a Market
Disruption Event on that day. "Calculation Period"
means the period from and including the seventh
scheduled Calculation Day immediately prior to the
maturity date to and including the third scheduled
Calculation Day prior to the maturity date.
"Calculation Day" means, with respect to Johnson &
Johnson common stock, any Trading Day during the
Calculation Period on which a Market Disruption Event
has not occurred.
o that if the delivery at maturity is based on this
formula, you will not receive accrued interest from
and including January 26, 2005 through the maturity
date; or
(ii) $1,000 in cash plus accrued and unpaid interest
through but excluding the maturity date.
If the value of (i) above is greater than (ii) above, we will
deliver to you at maturity the number of shares of Johnson &
Johnson common stock equal to the exchange ratio for Johnson &
Johnson common stock, and, if certain reorganization events
described herein have occurred, other securities and/or cash,
as applicable, received as a result of such reorganization
events; provided, however, that we will pay you cash in lieu
of delivering fractional shares, in an amount as determined by
the calculation agent, and provided, further, that if in the
opinion of the calculation agent there occurs no Calculation
Days during the Calculation Period, then at maturity we will
have the option, but not the obligation, to pay you the U.S.
dollar equivalent of the amount deliverable at maturity as
determined by the calculation agent according to the formula
set forth above.
Alternatively, if the value of (ii) above is greater than (i)
above, we will pay you the value of (ii) in U.S. dollars.
In the event of certain reorganization events, the shares of
Johnson & Johnson common stock may be adjusted to include
certain cash and/or securities in addition to, or in lieu of,
the shares of Johnson & Johnson common stock.
o For any cash received in a Reorganization Event (as
defined in the section entitled "Dilution and
Reorganization Adjustments-Reorganization Events"),
any amount payable upon maturity will include an
amount equal to the amount of cash received per share
of the Johnson & Johnson common stock multiplied by
the exchange ratio in effect on the date all of the
holders of shares of the Johnson & Johnson common
stock irrevocably receive such cash.
o For any property other than cash or securities received
in a Reorganization Event, any amount payable upon
maturity will include an amount equal to the market
value, as determined by the calculation agent, of the
property received for each share of the Johnson &
Johnson common stock at the date of the receipt of
the property multiplied by the then current exchange
ratio.
ML&Co. redemption................................. We may redeem all of the notes at any time, on any Business Day
after July 26, 2003, upon not more than 30 nor fewer than 15
calendar days notice to you. Any date on which we give you
notice that we are redeeming the notes is referred to as the
notice redemption date. Unless you have exchanged your notes
prior to July 26, 2003, you will receive interest through and
including July 26, 2003 regardless of whether we redeem all of
the notes after July 26, 2003.
If we redeem the notes, for each $1,000 principal amount of the
notes you own, we will deliver or pay to you an amount equal to
the greater of:
(i) the product of the exchange ratio and the average
market price of the Johnson & Johnson common stock
during the first five scheduled Trading Days
following the applicable redemption notice date;
provided, however:
o that if a Market Disruption Event occurs on any
one of the five Trading Days following the
applicable redemption notice date, then the
amount payable upon early redemption shall be
calculated using the average, arithmetic mean, of
the market prices of Johnson & Johnson common
stock on those Trading Days, and if there is only
one Trading Day, then the amount payable upon
early redemption shall be calculated using the
market price of Johnson & Johnson common stock on
such Trading Day. If there is a Market Disruption
Event on each of the five Trading Days following
the applicable redemption notice date, then the
amount payable upon early redemption shall be
calculated using the market price of Johnson &
Johnson common stock determined on the fifth
Trading Day following the applicable redemption
notice date, regardless of the occurrence of a
Market Disruption Event on that date; and
o that if the amount you receive is based
on this formula, you will not receive accrued
interest from and including the immediately
preceding interest payment date through the date
of early redemption; or
(ii) $1,000 in cash plus accrued and unpaid interest on
your notes through but excluding the date of early
redemption.
If the value of (i) above is greater than (ii) above, we
will deliver to you on the applicable settlement date the
number of shares of Johnson & Johnson common stock equal
to the exchange ratio for Johnson & Johnson common stock,
and, if certain reorganization events described herein
have occurred, other securities and/or cash, as
applicable, received as a result of such reorganization
events, provided, however, that we will pay you cash in
lieu of delivering fractional shares, in an amount as
determined by the calculation agent, and provided,
further, that if in the opinion of the calculation agent
there occurs a Market Disruption Event on each of the
first five scheduled Trading Days following the applicable
redemption notice date, then upon early redemption, we
will have the option, but not the obligation, to pay you
the U.S. dollar equivalent of the of the amount
deliverable as determined by the calculation agent
according to the formula set forth above.
Alternatively, if the value of (ii) above is greater than
(i) above, we will pay you the value of (ii) in U.S.
dollars. In the event of certain reorganization events,
the amount payable to you may be adjusted to include
certain cash and/or securities in addition to, or in lieu
of, the shares of Johnson & Johnson common stock.
Once we have given notice that we are going to redeem the
notes, you are precluded from exercising the holder
exchange right.
Holder exchange right............................. On any Trading Day after July 26, 2000 and ending the earlier
of (i) 15 scheduled Trading Days before the maturity date or
(ii) the redemption notice date, upon written notice to the
calculation agent and the trustee, you may exchange your notes
for a number of shares of Johnson & Johnson common stock equal
to the exchange ratio for Johnson & Johnson common stock, and,
if certain reorganization events described herein have
occurred, other securities and/or cash, as applicable, received
as a result of such reorganization events, subject to certain
adjustments as described below in "Exchange Amount". Any date
on which you give us notice to cause us to exchange your notes
is referred to as the exchange notice date. If the calculation
agent receives your notice after 3:00 p.m. on any Trading Day,
the calculation agent will consider your notice as received on
the following Trading Day. The date the calculation agent is
deemed to have received your notice is referred to as the
exchange receipt date.
If you choose to exercise your holder exchange right,
ML&Co. may no longer redeem your notes as of the
applicable exchange notice date. If you choose to exercise
your holder exchange right prior to the maturity date, you
will receive the Exchange Amount, which could be less than
the amount to which you would otherwise have been entitled
had you held the notes until maturity. Therefore, you
should carefully consider this risk before exercising the
holder exchange right option.
Exchange Amount................................... For each $1,000 principal amount of the notes you
exchange, the Exchange Amount will be the number of shares
of Johnson & Johnson common stock equal to the exchange
ratio for Johnson & Johnson common stock, and, if certain
reorganization events described herein have occurred,
other securities and/or cash, as applicable, received as a
result of such reorganization events on the first Trading
Day following the exchange receipt date; provided,
however, that you will not receive accrued interest from
and including the immediately preceding interest payment
date through the date of exchange. We will deliver these
shares, other securities and/or cash to you no more than
15 calendar days after the exchange receipt date;
provided, however, that we will pay you cash in lieu of
delivering fractional shares, in an amount as determined
by the calculation agent. However, if a Market Disruption
Event occurs on the first Trading Day following the
applicable exchange receipt date, the date of
determination for the Exchange Amount will be the second
Trading Day following the applicable exchange receipt date
unless a Market Disruption Event occurs on such second
Trading Day, in which case the date of determination for
the Exchange Amount shall be the third Trading Day
following the applicable exchange receipt date regardless
of whether a Market Disruption Event occurs on such date;
provided, further, that if in the opinion of the
calculation agent there occurs a Market Disruption Event
on the third Trading Day following the applicable exchange
receipt date, then upon exchange, we will have the option,
but not the obligation, to pay you the U.S. dollar
equivalent of the Exchange Amount as determined by the
calculation agent. In the event of certain reorganization
events, the amount payable to you may be adjusted to
include certain cash and/or securities in addition to, or
in lieu of, the shares of Johnson & Johnson common stock.
Exchange ratio.................................... The exchange ratio is equal to the product of 8.6395 and the
share multiplier.
Share multiplier.................................. The share multiplier initially will be set at 1.0, but will be
subject to adjustment upon the occurrence of certain
corporate events described in the section entitled
"Dilution and Reorganization Adjustments".
Market price...................................... The market price for any date of determination on any Trading Day
means the official closing price, in the afternoon
session, as applicable, of one share of Johnson & Johnson
common stock as reported by the principal exchange on
which Johnson & Johnson common stock is traded on that
date. If certain reorganization events described in the
section entitled "Dilution and Reorganization Adjustments"
occur, the market price may be adjusted to include an
additional amount.
If the official closing price is not available for any
reason, including, without limitation, the occurrence of a
Market Disruption Event, the market price for the Johnson
& Johnson common stock for any date will be the arithmetic
mean, as determined by the calculation agent, of the bid
prices for the Johnson & Johnson common stock obtained
from as many dealers in Johnson & Johnson common stock,
but not exceeding three, as have made the bid prices
available to the calculation agent after 3:00 p.m., local
time in the principal market, on that date.
Trading Day....................................... A day on which the NYSE, the AMEX and the Nasdaq
Stock Market are open for trading as determined by the
calculation agent.
Business Day...................................... Any day other than a Saturday or Sunday that is neither a
legal holiday nor a day on which banking institutions are
authorized or required by law or regulation to close in
The City of New York.
Calculation agent................................. Merrill Lynch, Pierce, Fenner & Smith Incorporated.
References to "MLPF&S" are to Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
All determinations made by the calculation agent shall be
at the sole discretion of the calculation agent and,
absent manifest error, shall be conclusive for all
purposes and binding on ML&Co. and beneficial owners of
the notes.
All percentages resulting from any calculation on the
notes will be rounded to the nearest one
hundred-thousandth of a percentage point, with five
one-millionths of a percentage point rounded upwards,
e.g., 9.876545% (or .09876545) would be rounded to
9.87655% (or .0987655), and all dollar amounts used in or
resulting from this calculation will be rounded to the
nearest cent with one-half cent being rounded upwards.
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RISK FACTORS
Your investment in the notes will involve certain risks, including
risks not associated with similar investments in a conventional debt security.
You should consider carefully the following discussion of risks before you
decide that an investment in the notes is suitable for you.
The notes are subject to redemption before their maturity
We may elect to redeem all of the notes on any Business Day beginning
after July 26, 2003, upon not more than 30 nor fewer than 15 calendar days
notice to you. In the event that we elect to redeem the notes, you may receive
an amount that is less than the amount to which you would otherwise have been
entitled had you held the notes until maturity.
Your yield may be lower than the yield on a standard debt security of
comparable maturity
The amount we deliver or pay to you at maturity or upon early
redemption may be less than the return you could earn on other investments.
The terms of the notes differ from the terms of ordinary debt securities
because the amount deliverable at maturity in excess of the principal amount
is based substantially on the appreciation in price, if any, of the Johnson &
Johnson common stock during the Calculation Period immediately before the
stated maturity date. Your yield may be less than the yield you would earn if
you bought a standard senior non-callable debt security of ML&Co. with the
same stated maturity date. Your investment may not reflect the full
opportunity cost to you when you consider the effect of factors that affect
the time value of money.
Your return on the notes will not reflect the payment of dividends
The calculation of the market price of the Johnson & Johnson common
stock, and in certain circumstances, other securities and/or cash, and any
amounts deliverable or payable to you at maturity or upon any redemption or
exchange, as the case may be, does not take into consideration the value of
cash dividends, if any, paid on Johnson & Johnson common stock, other than as
described in the section entitled "Dilution and Reorganization Adjustments".
Your return will not be the same as the return you could earn by owning
Johnson & Johnson common stock directly and receiving the dividends, if any,
paid on those securities.
There may be an uncertain trading market for the notes
The notes have been approved for listing on the AMEX under the symbol
"MJJ.A", subject to official notice of issuance. There is no historical
information to indicate how the notes will trade in the secondary market.
Listing the notes on the AMEX does not necessarily ensure that a liquid
trading market will develop for the notes. The development of a liquid trading
market for the notes will depend on our financial performance and other
factors such as the appreciation, if any, in the price of Johnson & Johnson
common stock. In addition, it is unlikely that the secondary market price of
the notes will correlate exactly with the value of Johnson & Johnson common
stock.
If the trading market for the notes is limited, there may be a
limited number of buyers when you decide to sell your notes if you do not wish
to hold your investment until the maturity date. This may affect the price you
receive.
Many factors affect the trading value of the notes; these factors interrelate
in complex ways and the effect of any one factor may offset or magnify the
effect of another factor
The trading value of the notes will be affected by factors that
interrelate in complex ways. It is important for you to understand that the
effect of one factor may offset the increase in the trading value of the notes
caused by another factor and that the effect of one factor may exacerbate the
decrease in the trading value of the notes caused by another factor. For
example, an increase in interest rates may offset some or all of any increase
in the trading value of the notes attributable to another factor, such as an
increase in the value of Johnson & Johnson common stock. The following
paragraphs describe the expected impact on the market value of the notes given
a change in a specific factor, assuming all other conditions remain constant.
The value of Johnson & Johnson common stock is expected to affect the
trading value of the notes. The market value of the notes will depend
substantially on the value of Johnson & Johnson common stock. In general, the
value of the notes will decrease as the value of Johnson & Johnson common
stock decreases and the value of the notes will increase as the value of
Johnson & Johnson common stock increases. However, as the value of Johnson &
Johnson common stock increases or decreases, the value of the notes is not
expected to increase or decrease at the same rate as the change in value of
Johnson & Johnson common stock. You should understand that for each $1,000
principal amount of the notes that you own, you will not receive more than
$1,000 on the maturity date unless the market price of Johnson & Johnson
common stock has appreciated by more than approximately 22% from the original
pricing date to the period in which the calculation agent calculates the
amount payable at maturity on the notes. Additionally, political, economic and
other developments that can affect the capital markets generally and the
market segment of which Johnson & Johnson common stock is a part, and over
which we have no control, may affect the value of Johnson & Johnson common
stock and, consequently, may also affect the value of the notes.
Changes in the levels of interest rates are expected to affect the
trading value of the notes. In general, we anticipate that if U.S. interest
rates increase, the trading value of the notes will decrease, and conversely,
if U.S. interest rates decrease, the trading value of the notes will increase.
In general, fluctuations in interest rates will affect the U.S. economy and,
in turn, the value of Johnson & Johnson common stock Johnson & Johnson common
stock. Rising interest rates may lower the value of Johnson & Johnson common
stock and, as a result, the value of the notes. Falling interest rates may
increase the value of Johnson & Johnson common stock and, as a result, may
increase the value of the notes.
Changes in the volatility of Johnson & Johnson common stock is
expected to affect the trading value of the notes. Volatility is the term used
to describe the size and frequency of market price fluctuations. In general,
if the volatility of Johnson & Johnson common stock increases, we expect that
the trading value of the notes will increase and if the volatility of Johnson
& Johnson common stock decreases, we expect that the trading value of the
notes will decrease.
As the time remaining to maturity of the notes decreases, the "time
premium" associated with the notes will decrease. We believe that before the
maturity date the notes will trade at a value above that which would be
expected based on the value of Johnson & Johnson common stock. In general, as
the time remaining to maturity decreases, including because of early
redemption at our option, the value of the notes will approach the amount that
would be payable at maturity or early redemption, as the case may be, based on
the then-current value of Johnson & Johnson common stock. As a result, as the
time remaining to maturity, or early redemption, decreases, any premium
attributed to the trading value of the notes will diminish, decreasing the
trading value of the notes, as applicable.
Changes in dividend yield on Johnson & Johnson common stock is
expected to affect the trading value of the notes. In general, if the dividend
yield, if any, on Johnson & Johnson common stock increases, we expect that the
value of the notes will decrease, and conversely, if the dividend yield, if
any, on Johnson & Johnson common stock decreases, we expect that the value of
the notes will increase.
Changes in our credit ratings may affect the trading value of the
notes. Our credit ratings are an assessment of our ability to pay our
obligations. Consequently, real or anticipated changes in our credit ratings
may affect the trading value of the notes. However, because your return on
your notes is dependent upon factors in addition to our ability to pay our
obligations under the notes, such as the percentage increase in the value of
Johnson & Johnson common stock Johnson & Johnson common stock, an improvement
in our credit ratings will not reduce the investment risks related to the
notes.
In general, assuming all relevant factors are held constant, we
expect that the effect on the trading value of the notes of a given change in
most of the factors listed above will be less if it occurs later in the term
of the notes than if it occurs earlier in the term of the notes.
The amount payable at maturity is not subject to adjustment for all corporate
events
The amount that you are entitled to receive on the maturity date or
upon early redemption or exchange of the notes is subject to adjustment for
the specified corporate events affecting Johnson & Johnson common stock
described in the section entitled "Dilution and Reorganization Adjustments".
However, these adjustments do not cover all corporate events that could affect
the market price of Johnson & Johnson common stock Johnson & Johnson common
stock Johnson & Johnson common stock. The occurrence of any other event not
described under "Dilution and Reorganization Adjustments" may adversely affect
the determination of the market price and the trading value of the notes.
No affiliation between ML&Co. and Johnson & Johnson
We are not affiliated with Johnson & Johnson, and Johnson & Johnson
has no obligations with respect to the notes or amounts to be paid to you,
including any obligation to take the needs of ML&Co. or of beneficial owners
of the notes into consideration for any reason. Johnson & Johnson will not
receive any of the proceeds of the offering of the notes made hereby and are
not responsible for, and has not participated in, the determination or
calculation of the amount receivable by beneficial owners of the notes on the
maturity date. In addition, Johnson & Johnson is not involved with the
administration or trading of the notes and have no obligations with respect to
the amount receivable by beneficial owners of the notes.
As a holder of the notes, you have no stockholder rights with respect to
Johnson & Johnson common stock
You will not be entitled to any rights with respect to Johnson &
Johnson common stock including, without limitation, the right to receive
dividends or other distributions, if any, on, to vote or to tender or exchange
Johnson & Johnson common stock in any tender or exchange offer by Johnson &
Johnson or any third party.
Amounts payable on the notes may be limited by state law
New York State law governs the 1993 Indenture under which ML&Co. will
issue the notes. New York has certain usury laws that limit the amount of
interest that can be charged and paid on loans, which includes Notes like the
notes. Under present New York law, the maximum rate of interest is 25% per
annum on a simple interest basis. This limit may not apply to Notes in which
$2,500,000 or more has been invested.
While we believe that New York law would be given effect by a state
or Federal court sitting outside of New York, many other states also have laws
that regulate the amount of interest that may be charged to and paid by a
borrower. We will promise, for your benefit, to the extent permitted by law,
not to voluntarily claim the benefits of any laws concerning usurious rates of
interest.
Potential conflicts
The calculation agent for the notes is one of our subsidiaries. Under
certain circumstances, MLPF&S' role as our subsidiary and its responsibilities
as calculation agent for the notes could give rise to conflicts of interests
between the calculation agent and the holders of the notes. These conflicts
could occur, for instance, in connection with the calculation agent's
determination as to whether a Market Disruption Event (as defined herein) has
occurred or in connection with judgments that the calculation agent would be
required to make with respect to certain anti-dilution and reorganization
adjustments to the market price of Johnson & Johnson common stock or other
securities, cash or property. MLPF&S is required to carry out its duties as
calculation agent in good faith and using its reasonable judgment. However,
you should be aware that because we control MLPF&S, potential conflicts of
interest could arise.
We have entered into an arrangement with one of our subsidiaries to
hedge the market risks associated with our obligation to pay the amounts due
under the notes. Our subsidiary expects to make a profit in connection with
this arrangement. We did not seek competitive bids for this arrangement from
unaffiliated parties.
Uncertain tax consequences
You should also consider the tax consequences of investing in the
notes, certain aspects of which are uncertain. See "United States Federal
Income Taxation" below.
WHERE YOU CAN FIND MORE INFORMATION
ML&Co.
We file reports, proxy statements and other information with the SEC.
Our SEC filings are also available over the Internet at the SEC's website at
http://www.sec.gov. The address of the SEC's Internet site is provided solely
for information of prospective investors and is not intended to be an active
link. You may also read and copy any document we file by visiting the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information about
the public reference rooms. 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 will send you copies of our SEC filings, excluding exhibits, at no
cost upon request. Please address your request to Lawrence M. Egan, Jr.,
Corporate Secretary's Office, Merrill Lynch & Co., Inc., 222 Broadway, 17th
Floor, New York, New York 10038; telephone number (212) 670-0425.
Johnson & Johnson
Johnson & Johnson files reports, proxy statements and other
information with the SEC. Information provided to or filed with the SEC by
Johnson & Johnson pursuant to the Exchange Act can be located at the SEC's
facilities or accessed through the SEC's website by reference to SEC file
number 1-3215. You may also inspect Johnson & Johnson's SEC reports and other
information at the NYSE. In addition, information regarding Johnson & Johnson
may be obtained from other sources including, but not limited to, press
releases, newspaper articles and other publicly disseminated documents. We
make no representation or warranty as to the accuracy or completeness of the
information or reports.
DILUTION AND REORGANIZATION ADJUSTMENTS
The share multiplier used to calculate the exchange ratio on any date
of determination is subject to adjustment by the calculation agent as a result
of the dilution and reorganization adjustments described in this section.
Stock splits and reverse stock splits
If Johnson & Johnson common stock is subject to a stock split or
reverse stock split, then once any split has become effective, the share
multiplier relating to Johnson & Johnson common stock will be adjusted to
equal the product of the prior share multiplier and the number of shares which
a holder of one share of common stock of Johnson & Johnson before the
effective date of that stock split or reverse stock split would have owned or
been entitled to receive immediately following the applicable effective date.
Stock dividends
If Johnson & Johnson common stock is subject to a stock dividend,
i.e., issuance of additional shares of Johnson & Johnson common stock, that is
given ratably to all holders of shares of Johnson & Johnson common stock, then
once the shares are trading ex-dividend, the share multiplier will be adjusted
so that the new share multiplier shall equal the prior share multiplier plus
the product of:
o the number of shares of Johnson & Johnson common stock issued
with respect to one share of Johnson & Johnson common stock,
multiplied by
o the prior share multiplier.
Extraordinary Dividends
There will be no adjustments to the share multiplier to reflect cash
dividends or distributions paid, if any, with respect to Johnson & Johnson
common stock other than distributions described under clause (e) of the
section entitled "--Reorganization Events" below and Extraordinary Dividends
as described below.
An "Extraordinary Dividend" means, with respect to a cash dividend or
other distribution with respect to Johnson & Johnson common stock, the extent
to which a dividend or other distribution exceeds the immediately preceding
non-Extraordinary Dividend for Johnson & Johnson common stock by an amount
equal to at least 10% of the market price of Johnson & Johnson common stock on
the Trading Day preceding the ex-dividend date with respect to the
Extraordinary Dividend (the "ex-dividend date"). If an Extraordinary Dividend
occurs with respect to Johnson & Johnson common stock, the share multiplier
will be adjusted on the ex-dividend date with respect to the Extraordinary
Dividend so that the new share multiplier will equal the product of:
o the then-current share multiplier, multiplied by
o a fraction, the numerator of which is the closing price per
share of Johnson & Johnson common stock on the Trading Day
preceding the ex-dividend date, and the denominator of which is
the amount by which the closing price on the Trading Day
preceding the ex-dividend date exceeds the Extraordinary
Dividend Amount.
The "Extraordinary Dividend Amount" with respect to an Extraordinary
Dividend for Johnson & Johnson common stock will equal:
o in the case of cash dividends or other distributions that
constitute quarterly dividends, the amount per share of that
Extraordinary Dividend minus the amount per share of the
immediately preceding non-Extraordinary Dividend, or
o in the case of cash dividends or other distributions that do
not constitute quarterly dividends, the amount per share of
that Extraordinary Dividend.
To the extent an Extraordinary Dividend is not paid in cash, the
value of the non-cash component will be determined by the calculation agent,
whose determination shall be conclusive. A distribution on Johnson & Johnson
common stock described in clause (e) of the section entitled "--Reorganization
Events" below that also constitutes an Extraordinary Dividend shall cause an
adjustment to the share multiplier pursuant only to clause (e) under the
section entitled "--Reorganization Events".
Issuance of transferable rights or warrants
If Johnson & Johnson issues transferable rights or warrants to all
holders of Johnson & Johnson common stock to subscribe for or purchase Johnson
& Johnson common stock, including new or existing rights to purchase Johnson &
Johnson common stock pursuant to a shareholder's rights plan or arrangement,
once a triggering event shall have occurred thereunder, at an exercise price
per share less than the closing price of one share of Johnson & Johnson common
stock on:
o the date the exercise price of those rights or warrants is
determined and
o the expiration date of those rights or warrants,
then, in each case, if the expiration date of those rights or warrants
precedes the maturity date, then the share multiplier will be adjusted to
equal the product of the prior share multiplier and a fraction, the numerator
of which shall be the number of shares of Johnson & Johnson common stock
outstanding immediately prior to the issuance plus the number of additional
shares of Johnson & Johnson common stock offered for subscription or purchase
pursuant to those rights or warrants and the denominator of which shall be the
number of shares of Johnson & Johnson common stock outstanding immediately
prior to the issuance plus the number of additional shares of Johnson &
Johnson common stock which the aggregate offering price of the total number of
shares of Johnson & Johnson common stock so offered for subscription or
purchase pursuant to those rights or warrants would purchase at the closing
price of one share of Johnson & Johnson common stock on the expiration date of
those rights or warrants, which shall be determined by multiplying the total
number of shares offered by the exercise price of those rights or warrants and
dividing the product so obtained by the closing price.
Reorganization Events
If before the maturity date of the notes,
(a) there occurs any reclassification or change of Johnson & Johnson
common stock,
(b) Johnson & Johnson, or any surviving entity or subsequent
surviving entity of Johnson & Johnson (a "Successor Entity"),
has been subject to a merger, combination or consolidation and
is not the surviving entity,
(c) any statutory exchange of securities of Johnson & Johnson or any
Successor Entity with another corporation occurs, other than
pursuant to clause (b) above,
(d) Johnson & Johnson is liquidated,
(e) Johnson & Johnson issues to all of its shareholders equity
securities of an issuer other than Johnson & Johnson, other than
in a transaction described in clauses (b), (c) or (d) above (a
"Spin-off Event"), or
(f) a tender or exchange offer is consummated for all the outstanding
shares of Johnson & Johnson (an event in clauses (a) through
(f) a "Reorganization Event"),
then the Market Price shall be adjusted to include the Reorganization Event
Amount.
The "Reorganization Event Amount" shall be determined by the
calculation agent and shall equal for each $1,000 principal amount of notes
the sum of the following:
(1) for any cash received in a Reorganization Event, an amount
equal to the amount of cash received per share of Johnson &
Johnson common stock multiplied by the share multiplier in
effect on the date all of the holders of shares of Johnson
& Johnson common stock irrevocably receive such cash,
(2) for any property other than cash or securities received in
a Reorganization Event, the market value, as determined by
the calculation agent, of the property received for each
share of Johnson & Johnson common stock at the date of the
receipt of the property multiplied by the then current
share multiplier and payable in cash,
(3) for any security received in a Reorganization Event, an
amount equal to (a) the average market price for such
security calculated in the same manner as the average
market price of the common stock of Johnson & Johnson is
calculated, multiplied by (b) the number of units of such
security received for each share of common stock of Johnson
& Johnson multiplied by the then current share multiplier,
and
(4) for any security received in the case of a Spin-off Event,
in addition to the shares of Johnson & Johnson common
stock, an amount equal to (a) the average market price for
such security calculated in the same manner as the average
market price of the common stock of Johnson & Johnson is
calculated, multiplied by (b) the number of units of such
security received for each share of common stock of Johnson
& Johnson multiplied by the their current share multiplier.
If a security is received in a Reorganization Event, such security shall be
included in determining any amounts due or deliverable pursuant to the notes
in the same manner as shares of common stock of Johnson & Johnson. The share
multiplier with respect to these securities shall equal the product of the
share multiplier in effect for Johnson & Johnson common stock at the time of
the issuance of these securities multiplied by the number of shares of these
securities issued with respect to one share of Johnson & Johnson common stock.
The share multiplier of these securities will be subject to the same
adjustments as that of the share multiplier of Johnson & Johnson common stock.
The amount to be delivered shall be calculated so as to include any securities
received in the Spin-off Event in addition to the shares of Johnson & Johnson
common stock already included in the amount due at maturity or upon redemption
or exchange.
If we are required to deliver shares of common stock of Johnson &
Johnson to you, in addition to such shares, we will also deliver for each
$1,000 principal amount of the notes, the following:
(a) cash equal to the values calculated in (1) and (2) of the
Reorganization Event Amount above multiplied by the exchange
ratio in effect on the date such cash is paid or property
valued, and
(b) for each security received in a Reorganization Event that is
still outstanding, a number of such securities equal to the
share multiplier applicable to such security multiplied by
the exchange ratio in effect on the date such security is
received.
In the event of a tender or exchange offer with respect to Johnson &
Johnson common stock or any security received in a reorganization event in
which an offeree may elect to receive cash or other property, Johnson &
Johnson common stock or any such security received in a reorganization event
shall be deemed to include the kind and amount of cash and other property
received by offerees who elect to receive cash.
If Johnson & Johnson, or any Successor Entity, has been subject to a
merger, combination or consolidation and is not the surviving entity, or a
tender or exchange offer is consummated for all the outstanding shares of
Johnson & Johnson, then the amount to be delivered shall be calculated to
include securities, if any, received in that event instead of Johnson &
Johnson common stock. The share multiplier for these securities shall equal
the product of the share multiplier in effect for Johnson & Johnson common
stock at the time of the issuance of the securities multiplied by the number
of shares of the securities issued with respect to one share of Johnson &
Johnson common stock. The respective share multiplier for each of these
securities will be subject to the same adjustments as that of the share
multiplier of Johnson & Johnson common stock.
Adjustments to the share multiplier
No adjustments to the share multiplier will be required unless the
share multiplier adjustment would require a change of at least 0.1% in the
share multiplier then in effect. The share multiplier resulting from any of
the adjustments specified above will be rounded to the nearest one thousandth
with five ten-thousandths being rounded upward.
No adjustments to the share multiplier will be required other than
those specified above. However, ML&Co. may, at its sole discretion, cause the
calculation agent to make additional adjustments to the share multiplier to
reflect changes occurring in relation to Johnson & Johnson common stock or any
other Exchange Property in other circumstances where ML&Co. determines that it
is appropriate to reflect those changes. The required adjustments specified
above do not cover all events that could affect the closing price of Johnson &
Johnson common stock, including, without limitation, a partial tender or
exchange offer for Johnson & Johnson common stock.
MLPF&S, as calculation agent, shall be solely responsible for the
determination and calculation of any adjustments to the share multiplier and
of any related determinations and calculations with respect to any
distributions of stock, other securities or other property or assets,
including cash, in connection with any corporate event described above, and
its determinations and calculations shall be conclusive absent manifest error.
No adjustments will be made for certain other events, such as
offerings of common stock by Johnson & Johnson for cash or in connection with
acquisitions or the occurrence of a partial tender or exchange offer for the
common stock of Johnson & Johnson by Johnson & Johnson or any third party.
ML&Co. will, within ten Business Days following the occurrence of an
event that requires an adjustment to the share multiplier, or if ML&Co. is not
aware of this occurrence, as soon as practicable after becoming so aware,
provide written notice to the trustee, which shall provide notice to the
holders of the notes of the occurrence of this event and, if applicable, a
statement in reasonable detail setting forth the adjusted share multiplier.
MARKET DISRUPTION EVENT
"Market Disruption Event" means:
(1) a suspension, absence, including the absence of an official
closing price, or material limitation of trading of Johnson
& Johnson common stock on the NYSE or the Nasdaq Stock
Market for more than two hours of trading or during the
one-half hour period preceding or at the close of trading,
as determined by the calculation agent in its sole
discretion; or the suspension or material limitation on the
primary market for trading in options contracts related to
Johnson & Johnson common stock, if available, during the
one-half hour period preceding or at the close of trading
in the applicable market, in each case as determined by the
calculation agent in its sole discretion; and
(2) a determination by the calculation agent in its sole
discretion that the event described in clause (1) above
materially interfered with the ability of ML&Co. or any of
its affiliates or MLPF&S to unwind all or a material
portion of the hedge with respect to the notes or to
purchase shares of Johnson & Johnson common stock for the
purpose of delivering either the Exchange Amount, an amount
due upon early redemption or an amount at maturity.
For purposes of determining whether a Market Disruption Event has
occurred:
(1) a limitation on the hours or number of days of trading will
not constitute a Market Disruption Event if it results from
an announced change in the regular business hours of the
relevant exchange,
(2) a decision to permanently discontinue trading in the
relevant options contract will not constitute a Market
Disruption Event,
(3) limitations pursuant to any rule or regulation enacted or
promulgated by the NYSE or the Nasdaq Stock Market or other
regulatory organization with jurisdiction over the NYSE or
the Nasdaq Stock Market on trading during significant
market fluctuations will constitute a suspension or
material limitation of trading in Johnson & Johnson common
stock,
(4) a suspension of trading in an options contract on Johnson &
Johnson common stock by the primary securities market
trading in the options, if available, by reason of:
o a price change exceeding limits set by the securities
exchange or market
o an imbalance of orders relating to the contracts or
o a disparity in bid and ask quotes relating to the
contracts will constitute a suspension or material
limitation of trading in options contracts related to
Johnson & Johnson common stock, and
(5) a suspension, absence or material limitation of trading on
the primary securities market on which options contracts
related to Johnson & Johnson common stock are traded will
not include any time when that securities market is itself
closed for trading under ordinary circumstances.
If the Reorganization Event Amount includes securities other than
Johnson & Johnson common stock, then the above definition shall be revised to
include each such security in the same manner as Johnson & Johnson common
stock is considered in determining whether a Market Disruption Event exists.
EVENTS OF DEFAULT AND ACCELERATION
In case an Event of Default with respect to any notes has
occurred and is continuing, the amount payable or deliverable to a beneficial
owner of a note upon any acceleration permitted by the notes will be
determined by the calculation agent as if the date of early repayment were the
maturity date. If a bankruptcy proceeding is commenced in respect of ML&Co.,
the claim of the beneficial owner of a note may be limited, under Section
502(b)(2) of Title 11 of the United States Code, to the principal amount of
the note plus an additional amount of contingent interest calculated as though
the date of the commencement of the proceeding were the maturity date of the
notes.
JOHNSON & JOHNSON COMMON STOCK
The following information has been derived from publicly available
documents published by Johnson & Johnson. We make no representation or
warranty as to the accuracy or completeness of the following information.
Johnson & Johnson (together with its subsidiaries, "Johnson & Johnson") is a
worldwide business which manufactures and sells consumer hygienic products,
pharmaceuticals, and medical products used by health care professionals. As of
March 31, 2000, Johnson & Johnson's international business was conducted by
subsidiaries manufacturing in 35 countries outside the United States and
selling in over 175 countries throughout the world.
Information provided to or filed with the SEC by Johnson & Johnson
can be located at the SEC's facilities or through the SEC's website by
reference to SEC file number 1-3215 for Johnson & Johnson. See "Where You Can
Find More Information". ML&Co. makes no representation or warranty as to the
accuracy or completeness of the information or reports.
The selection of Johnson & Johnson common stock is not a
recommendation to buy or sell Johnson & Johnson common stock and neither
ML&Co. nor any of its affiliates make any representation to any purchaser of
notes as to the performance of Johnson & Johnson common stock.
Johnson & Johnson common stock trades on the NYSE under the symbol
"JNJ".
ML&Co. is not affiliated with Johnson & Johnson and Johnson & Johnson
does not have any obligations with respect to the notes. This pricing
supplement relates only to the notes and does not relate to Johnson & Johnson
common stock or other securities of Johnson & Johnson. All disclosures
contained in this pricing supplement regarding Johnson & Johnson are derived
from the publicly available documents described in the preceding paragraph.
Neither ML&Co. nor MLPF&S has participated in the preparation of these
documents or made any due diligence inquiry with respect to Johnson & Johnson
in connection with the offering of the notes. Neither ML&Co. nor MLPF&S makes
any representation that the publicly available documents or any other publicly
available information regarding Johnson & Johnson are accurate or complete.
Furthermore, there can be no assurance that all events occurring prior to the
date hereof, including events that would affect the accuracy or completeness
of the publicly available documents described in the preceding paragraph, that
would affect the trading price of Johnson & Johnson common stock have been
publicly disclosed. Subsequent disclosure of any events or the disclosure of
or failure to disclose material future events concerning Johnson & Johnson
could affect the amount received at maturity with respect to the notes and
therefore the trading prices of the notes. Neither ML&Co. nor any of its
affiliates make any representation to any purchaser of the notes as to the
performance of Johnson & Johnson common stock.
ML&Co. or its affiliates may presently or from time to time engage in
business, directly or indirectly, with Johnson & Johnson including extending
loans to, or making equity investments in, Johnson & Johnson or providing
investment banking or advisory services to Johnson & Johnson, including merger
and acquisition advisory services. In the course of such business, ML&Co. or
its affiliates may acquire non-public information with respect to Johnson &
Johnson and, in addition, one or more affiliates of ML&Co. may publish
research reports with respect to Johnson & Johnson.
Any prospective purchaser of a note should undertake an independent
investigation of Johnson & Johnson as in its judgment is appropriate to make
an informed decision with respect to an investment in the notes.
Historical data
Johnson & Johnson common stock is principally traded on the NYSE. The
following table sets forth the high and low closing prices during 1996, 1997,
1998, 1999 and during 2000 through July 18, 2000. On July 18, 2000, the last
recorded transaction price on Johnson & Johnson common stock was $94.875 per
share. The closing prices and dividends per share listed below were obtained
from Bloomberg Financial Markets. The historical closing prices of Johnson &
Johnson common stock should not be taken as an indication of future
performance, and no assurance can be given that the price of Johnson & Johnson
common stock will not decrease. In addition, no assurance can be given that
the price of Johnson & Johnson common stock will increase above the issue
price so that at maturity the beneficial owners of the notes will receive cash
in an amount in excess of the principal amount of the notes.
<TABLE>
<CAPTION>
Dividends
High Low per Share(1)
------------- ----------- -----------------
<S> <C> <C> <C>
Johnson & Johnson
1996
First Quarter.................................... $49.56 $41.88 $0.165
Second Quarter................................... $50.00 $43.75 $0.19
Third Quarter.................................... $53.13 $46.00 $0.19
Fourth Quarter................................... $53.75 $47.25 $0.19
1997
First Quarter.................................... $62.75 $49.75 $0.19
Second Quarter................................... $66.38 $52.25 $0.22
Third Quarter.................................... $65.50 $56.06 $0.22
Fourth Quarter................................... $66.94 $55.00 $0.22
1998
First Quarter.................................... $76.00 $64.00 $0.22
Second Quarter................................... $77.75 $67.75 $0.25
Third Quarter.................................... $80.00 $69.00 $0.25
</TABLE>
-----------------------
1 ML&Co. makes no representation as to the amount of dividends, if any,
that issuers of Johnson & Johnson common stock will pay in the future.
Holders of the notes will not be entitled to receive dividends, if any,
that may be payable on Johnson & Johnson common stock.
<PAGE>
<TABLE>
<CAPTION>
Dividends
High Low per Share(1)
------------- ----------- -----------------
<S> <C> <C> <C>
Fourth Quarter................................... $89.00 $75.81 $0.25
1999
First Quarter.................................... $93.94 $78.06 $0.25
Second Quarter................................... $102.50 $87.81 $0.28
Third Quarter.................................... $105.75 $90.00 $0.28
Fourth Quarter................................... $106.13 $91.00 $0.28
2000
First Quarter.................................... $96.50 $68.50 $0.28
Second Quarter (through July 18, 2000)........... $101.88 $72.25 $0.32
</TABLE>
------------------------
1 ML&Co. makes no representation as to the amount of dividends, if any,
that Johnson & Johnson will pay in the future. Holders of the notes
will not be entitled to receive dividends, if any, that may be payable
on Johnson & Johnson common stock.
USE OF PROCEEDS AND HEDGING
We intend to use the net proceeds from the sale of the notes for
general corporate purposes and, in part, by ML&Co. or one or more of its
affiliates in connection with hedging ML&Co.'s obligations under the notes.
See also "Use of Proceeds" in the accompanying prospectus.
In connection with ML&Co.'s obligations under the notes, ML&Co. has
entered into hedging arrangements related to Johnson & Johnson common stock
with MLPF&S. MLPF&S has purchased shares of Johnson & Johnson common stock in
secondary market transactions at or before the time of the pricing of the
notes. MLPF&S and other affiliates of ML&Co. may from time to time buy or sell
Johnson & Johnson common stock for their own accounts, for business reasons or
in connection with hedging ML&Co.'s obligations under the notes. These
transactions could affect the price of Johnson & Johnson common stock.
UNITED STATES FEDERAL INCOME TAXATION
General
There are no statutory provisions, regulations, published rulings or
judicial decisions addressing or involving the characterization, for United
States federal income tax purposes, of the notes or securities with terms
substantially the same as the notes. However, although the matter is not free
from doubt, under current law, each note should be treated as a debt
instrument of ML&Co. for United States federal income tax purposes. ML&Co.
currently intends to treat each note as a debt instrument of ML&Co. for United
States federal income tax purposes and, where required, intends to file
information returns with the Internal Revenue Service ("IRS") in accordance
with such treatment, in the absence of any change or clarification in the law,
by regulation or otherwise, requiring a different characterization of the
notes. Prospective investors in the notes should be aware, however, that the
IRS is not bound by ML&Co.'s characterization of the notes as indebtedness,
and the IRS could possibly take a different position as to the proper
characterization of the notes for United States federal income tax purposes.
The following discussion of the principal United States federal income tax
consequences of the purchase, ownership and disposition of the notes is based
upon the assumption that each note will be treated as a debt instrument of
ML&Co. for United States federal income tax purposes. If the notes are not in
fact treated as debt instruments of ML&Co. for United States federal income
tax purposes, then the United States federal income tax treatment of the
purchase, ownership and disposition of the notes could differ from the
treatment discussed below with the result that the timing and character of
income, gain or loss recognized in respect of a note could differ from the
timing and character of income, gain or loss recognized in respect of a note
had the notes in fact been treated as debt instruments of ML&Co. for United
States federal income tax purposes.
As used in this prospectus supplement, the term "U.S. Holder" means a
beneficial owner of a note that is for United States Federal income tax
purposes (a) a citizen or resident of the United States, (b) a corporation,
partnership or other entity treated as a corporation or a partnership 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
(other than a partnership that is not treated as a United States person under
any applicable Treasury regulations), (c) an estate the income of which is
subject to United States federal income taxation regardless of its source, (d)
a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust,
or (e) any other person whose income or gain in respect of a note is
effectively connected with the conduct of a United States trade or business.
Notwithstanding clause (d) of the preceding sentence, to the extent provided
in Treasury regulations, certain trusts in existence on August 20, 1996, and
treated as United States persons prior to that date that elect to continue to
be treated as United States persons also will be a U.S. Holder. As used
herein, the term "non-U.S. Holder" means a beneficial owner of a Note that is
not a U.S. Holder.
U.S. Holders
On June 11, 1996, the Treasury Department issued final regulations
(the "Final Regulations") concerning the proper United States federal income
tax treatment of contingent payment debt instruments such as the notes, which
apply to debt instruments issued on or after August 13, 1996 and, accordingly,
will apply to the notes. In general, the Final Regulations cause the timing
and character of income, gain or loss reported on a contingent payment debt
instrument to substantially differ from the timing and character of income,
gain or loss reported on a contingent payment debt instrument under general
principles of prior United States federal income tax law. Specifically, the
Final Regulations generally require a U.S. Holder of such an instrument to
include future contingent and noncontingent interest payments in income as
such interest accrues based upon a projected payment schedule. Moreover, in
general, under the Final Regulations, any gain recognized by a U.S. Holder on
the sale, exchange, or retirement of a contingent payment debt instrument is
treated as ordinary income, and all or a portion of any loss realized could be
treated as ordinary loss as opposed to capital loss, depending upon the
circumstances. The Final Regulations provide no definitive guidance as to
whether or not an instrument is properly characterized as a debt instrument
for United States federal income tax purposes.
In particular, solely for purposes of applying the Final Regulations
to the notes, ML&Co. has determined that the projected payment schedule for
the notes will consist of the stated interest payments on the notes (other
than the final stated interest payment) and a payment at maturity equal to
$1,328.36 per $1,000 of principal amount of the notes ("Projected Redemption
Amount"). This represents an estimated yield on the notes equal to 7.38% per
annum, compounded semiannually. Accordingly, during the term of the notes, a
U.S. Holder of a note will be required to include in income the sum of the
daily portions of interest on the note that are deemed to accrue at this
estimated yield for each day during the taxable year, or portion of the
taxable year, on which the U.S. Holder holds such note. The amount of interest
that will be deemed to accrue in any accrual period, i.e., generally each
six-month period during which the notes are outstanding, will equal the
product of this estimated yield, properly adjusted for the length of the
accrual period, and the note's adjusted issue price at the beginning of the
accrual period. The daily portions of interest will be determined by
allocating to each day in the accrual period the ratable portion of the
interest that is deemed to accrue during the accrual period. In general, for
these purposes a note's adjusted issue price will equal the note's issue
price, increased by the interest previously accrued on the note and reduced by
interest payments received on the notes. As a result of the foregoing rules, a
U.S. Holder will not be required to include in income the stated interest
payments received on its notes. Upon maturity of a note on July 26, 2005, in
the event that the amount payable upon maturity (the "Actual Redemption
Amount") exceeds $1,328.36 on every $1,000 note, a U.S. Holder will be
required to include the excess of the Actual Redemption Amount over $1,328.36
per $1,000 (i.e., the Projected Redemption Amount) in income as ordinary
interest on the maturity date. Alternatively, in the event that the Actual
Redemption Amount is less than $1,328.36 per $1,000 of principal amount of
notes (i.e., the Projected Redemption Amount), the excess of the Projected
Redemption Amount over the Actual Redemption Amount will be treated first as
an offset to any interest otherwise includible in income by the U.S. Holder
with respect to the note for the taxable year in which the maturity date
occurs to the extent of the amount of such includible interest. A U.S. Holder
will be permitted to recognize and deduct, as an ordinary loss that is not
subject to the limitations applicable to miscellaneous itemized deductions,
any remaining portion of the excess of the Projected Redemption Amount over
the Actual Redemption Amount that is not treated as an interest offset
pursuant to the foregoing rules. In general, if a U.S. Holder receives shares
of Johnson & Johnson common stock on the maturity date, such U.S. Holder's
initial aggregate tax basis in the shares of the Johnson & Johnson common
stock received by the U.S. Holder should equal the Actual Redemption Amount
(less any cash received in lieu of fractional shares of the Johnson & Johnson
common stock). This aggregate tax basis should be allocated among the shares
of the Johnson & Johnson common stock received by the U.S. Holder in
accordance with the relative fair market value of the shares of the Johnson &
Johnson common stock. Moreover, such U.S. Holder's holding period for any
shares of the Johnson & Johnson common stock received by the U.S. Holder
should begin on the day immediately following the maturity date. U.S. Holders
purchasing a note at a price that differs from the adjusted issue price of the
note as of the purchase date (e.g., subsequent purchasers) will be subject to
special rules providing for certain adjustments to the foregoing rules, and
such U.S. Holders should consult their own tax advisors concerning these
rules.
Upon the sale, redemption or exchange of a note prior to the maturity
of the note, a U.S. Holder will be required to recognize taxable gain or loss
in an amount equal to the difference, if any, between the amount realized by
the U.S. Holder upon such sale, redemption or exchange and the U.S. Holder's
adjusted tax basis in the note. A U.S. Holder's adjusted tax basis in a note
generally will equal such U.S. Holder's initial investment in the note
increased by any interest previously included in income with respect to the
note by the U.S. Holder and reduced by interest payments received on the note.
Any such taxable gain will be treated as ordinary income. Any such taxable
loss will be treated as ordinary loss to the extent of the U.S. Holder's total
interest inclusions on the note. Any remaining loss generally will be treated
as long-term or short-term capital loss, depending upon the U.S. Holder's
holding period for the note. All amounts includible in income by a U.S. Holder
as ordinary interest pursuant to the Final Regulations will be treated as
original issue discount.
Prospective investors in the notes should consult their own tax
advisors concerning the application of the Final Regulations to their
investment in the notes. Investors in the notes may also obtain the projected
payment schedule, as determined by ML&Co. for purposes of the application of
the Final Regulations to the notes, by submitting a written request for such
information to Merrill Lynch & Co., Inc., Attn: Mona Soliman, Corporate
Secretary's Office, 222 Broadway, 17th Floor, New York, New York, 10038.
The projected payment schedule, including both the Projected
Redemption Amount and the estimated yield on the notes, has been determined
solely for United States federal income tax purposes, i.e., for purposes of
applying the Final Regulations to the notes, and is neither a prediction nor a
guarantee of what the Actual Redemption Amount will be.
The following table sets forth the amount of interest that will be
deemed to have accrued with respect to each $1,000 principal amount of the
notes during each accrual period over the term of the notes based upon the
projected payment schedule for the notes, including both the Projected
Redemption Amount and the estimated yield equal to 7.38% per annum (compounded
semiannually), as determined by ML&Co. for purposes of applying the Final
Regulations to the notes:
<TABLE>
<CAPTION>
Total interest
deemed to
have accrued
Interest deemed on the notes
to accrue during as of the end of
accrual period accrual period
Accrual Period (per $1,000) (per $1,000)
-------------- ----------------- ---------------------
<S> <C> <C>
July 26, 2000 through January 26, 2001..................................... $36.90 $36.90
January 27, 2001 through July 26, 2001..................................... $37.89 $74.79
July 27, 2001 through January 26, 2002..................................... $38.92 $113.71
January 27, 2002 through July 26, 2002..................................... $39.99 $153.70
July 27, 2002 through January 26, 2003..................................... $41.10 $194.80
January 27, 2003 through July 26, 2003..................................... $42.24 $237.04
July 27, 2003 through January 26, 2004..................................... $43.43 $280.47
January 27, 2004 through July 26, 2004..................................... $44.67 $325.14
July 27, 2004 through January 26, 2005..................................... $45.95 $371.09
January 27, 2004 through July 26, 2005..................................... $47.27 $418.36
----------------
Projected Redemption Amount = $1,328.36 per $1,000 principal amount of notes.
</TABLE>
Non-U.S. Holders
A non-U.S. Holder will not be subject to United States Federal income
taxes on payments of principal, premium (if any) or interest (including
original issue discount, if any) on a note, unless such non-U.S. Holder is a
direct or indirect 10% or greater shareholder of ML&Co., a controlled foreign
corporation related to ML&Co. or a bank receiving interest described in
section 881(c)(3)(A) of the Internal Revenue Code of 1986, as amended.
However, income allocable to non-U.S. Holders will generally be subject to
annual tax reporting on IRS Form 1042S. For a non-U.S. Holder to qualify for
the exemption from taxation, the last United States payor in the chain of
payment prior to payment to a non-U.S. Holder (the "Withholding Agent") must
have received in the year in which a payment of interest or principal occurs,
or in either of the two preceding calendar years, a statement that (a) is
signed by the beneficial owner of the note under penalties of perjury, (b)
certifies that such owner is not a U.S. Holder and (c) provides the name and
address of the beneficial owner. The statement may be made on the applicable
IRS Form W-8, Form W-8BEN or a substantially similar form, and the beneficial
owner must inform the Withholding Agent of any change in the information on
the statement within 30 days of such change. If a note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide a signed statement to the Withholding
Agent. However, in such case, the signed statement must be accompanied by a
copy of the applicable IRS Form W-8, form W-8BEN or the substitute form
provided by the beneficial owner to the organization or institution.
Under current law, a note will not be includible in the estate of a
non-U.S. Holder unless the individual is a direct or indirect 10% or greater
shareholder of ML&Co. or, at the time of such individual's death, payments in
respect of such note would have been effectively connected with the conduct by
such individual of a trade or business in the United States.
Backup withholding
Backup withholding of United States Federal income tax at a rate of
31% may apply to payments made in respect of the note to registered owners who
are not "exempt recipients" and who fail to provide certain identifying
information (such as the registered owner's taxpayer identification number) in
the required manner. Generally, individuals are not exempt recipients, whereas
corporations and certain other entities generally are exempt recipients.
Payments made in respect of the note to a U.S. Holder must be reported to the
IRS, unless the U.S. Holder is an exempt recipient or establishes an
exemption. Compliance with the identification procedures described in the
preceding section would establish an exemption from backup withholding for
those non-U.S. Holders who are not exempt recipients.
In addition, upon the sale of a note to (or through) a broker, the
broker must withhold 31% of the entire purchase price, unless either (a) the
broker determines that the seller is a corporation or other exempt recipient
or (b) the seller provides, in the required manner, certain identifying
information and, in the case of a non-U.S. Holder, certifies that such seller
is a non-U.S. Holder (and certain other conditions are met). Such a sale must
also be reported by the broker to the IRS, unless either (a) the broker
determines that the seller is an exempt recipient or (b) the seller certifies
its non-U.S. status (and certain other conditions are met). Certification of
the registered owner's non-U.S. status would be made normally on an IRS Form
W-8 or W-8BEN under penalties of perjury, although in certain cases it may be
possible to submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a
payment to a beneficial owner would be allowed as a refund or a credit against
such beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
New withholding regulations
On October 6, 1997, the Treasury Department issued new regulations
(the "New Regulations") which make certain modifications to the backup
withholding and information reporting rules described above. The New
Regulations will generally be effective for payments made after December 31,
2000, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
