PROSPECTUS SUPPLEMENT
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(To prospectus dated June 15, 2000)
[LOGO]
Merrill Lynch & Co., Inc.
1,600,000 Euro Currency Warrants,
Expiring February 28, 2002
U.S. Dollar denominated warrants based on the
USD/EUR Foreign Exchange Spot Rate
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The Euro Currency Warrants:
o Unsecured contractual obligations of ML&Co.
o The initial purchase price per warrant is $3.875 per warrant.
o You must purchase a minimum of 100 warrants.
o You must have an options-approved account in order to purchase warrants.
o Your return, if any, will be linked to the exchange rate between the U.S.
Dollar and the Euro.
o The warrants have been approved for listing on the American Stock
Exchange under the trading symbol "EUN.WS", subject to issuance.
o Expected initial settlement date: December 6, 2000.
Exercise and payment upon exercise:
o The warrants will be automatically exercised on the fourth scheduled
Business Day prior to the Expiration Date unless early exercise occurs
because of certain events as described in this prospectus supplement.
o You do not have the right to exercise your warrants.
o Upon automatic exercise, we will pay you, for each warrant that you own,
an amount in U.S. Dollars equal to the greater of (i) zero or (ii) the
product, if positive, of U.S.$50 and the percentage increase in the U.S.
Dollar/Euro Exchange Rate, i.e. the appreciation of the Euro, as
described in this prospectus supplement.
o The purchase price you pay for the warrants will be in U.S. Dollars, and
any Cash Settlement Amount we pay you will be in U.S. Dollars.
Investing in the warrants involves a high degree of risk, including the risk
that the warrants will expire worthless and you may sustain a total loss
of the purchase price.
See "Risk Factors" beginning on page S-7 of this prospectus supplement.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
Per warrant Total
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Public offering price............ $3.875 $6,200,000
Underwriting discount............ $.25 $400,000
Proceeds, before expenses,
to Merrill Lynch & Co., Inc..... $3.625 $5,800,000
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Merrill Lynch & Co.
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The date of this prospectus supplement is November 30, 2000.
TABLE OF CONTENTS
Prospectus Supplement
Page
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SUMMARY INFORMATION-- Q&A...................................................S-4
What are the warrants?...................................................S-4
When are my warrants subject to automatic exercise?......................S-4
What will I receive upon automatic exercise of my warrants?..............S-4
Who can buy the warrants?................................................S-5
What is the Euro?........................................................S-6
What does the USD/EUR Rate reflect?......................................S-6
How has the USD/EUR Rate performed historically?.........................S-6
Will the warrants be listed on a stock exchange?.........................S-6
What is the role of MLPF&S?..............................................S-6
Who is ML&Co.?...........................................................S-6
Are there any risks associated with my investment?.......................S-6
RISK FACTORS................................................................S-7
The warrants are long-term options and may expire worthless..............S-7
The initial public offering price of the warrants may be higher
than the price a commercial user might pay in certain circumstances...S-7
The value of the warrants is closely related to changes in
the USD/EUR Rate......................................................S-7
Even though currency trades around-the-clock, your
warrants will trade on the AMEX only during regular trading hours.....S-8
The warrants are suitable only for investors with
options-approved accounts.............................................S-8
The warrants will be automatically exercised if they are delisted........S-9
The warrants are not standardized options issued by
the Options Clearing Corporation......................................S-9
There may be an uncertain trading market for the warrants................S-9
Many factors affect the trading value of the warrants;
these factors interrelate in complex ways and the
effect of one factor may offset or magnify the
effect of another factor..............................................S-9
Potential conflicts of interest.........................................S-10
Tax consequences........................................................S-10
DESCRIPTION OF THE WARRANTS................................................S-11
Exercise of warrants....................................................S-11
Cash Settlement Amount..................................................S-11
Automatic exercise prior to the Expiration Date.........................S-12
Modification............................................................S-13
Merger and Consolidation................................................S-13
Depositary..............................................................S-13
THE USD/EUR RATE AND CASH SETTLEMENT AMOUNTS...............................S-17
UNITED STATES FEDERAL INCOME TAXATION......................................S-19
U.S. Holders............................................................S-19
Non-U.S. Holders........................................................S-20
Backup withholding......................................................S-20
New withholding regulations.............................................S-21
ERISA CONSIDERATIONS.......................................................S-21
USE OF PROCEEDS AND HEDGING................................................S-21
WHERE YOU CAN FIND MORE INFORMATION........................................S-21
UNDERWRITING...............................................................S-22
VALIDITY OF THE WARRANTS...................................................S-22
Prospectus
Page
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MERRILL LYNCH & CO., INC......................................................2
USE OF PROCEEDS...............................................................2
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS...............................3
THE SECURITIES................................................................3
DESCRIPTION OF DEBT SECURITIES................................................4
DESCRIPTION OF DEBT WARRANTS.................................................10
DESCRIPTION OF CURRENCY WARRANTS.............................................12
DESCRIPTION OF INDEX WARRANTS................................................14
DESCRIPTION OF PREFERRED STOCK...............................................19
DESCRIPTION OF DEPOSITARY SHARES.............................................24
DESCRIPTION OF PREFERRED STOCK WARRANTS......................................28
DESCRIPTION OF COMMON STOCK..................................................30
DESCRIPTION OF COMMON STOCK WARRANTS.........................................34
PLAN OF DISTRIBUTION.........................................................36
WHERE YOU CAN FIND MORE INFORMATION..........................................37
INCORPORATION OF INFORMATION WE FILE WITH THE SEC............................37
EXPERTS......................................................................38
SUMMARY INFORMATION -- Q&A
This summary includes questions and answers that highlight selected
information from this prospectus supplement and the accompanying prospectus to
help you understand the Euro Currency Warrants, Expiring February 28, 2002
(the "warrants"). You should carefully read this prospectus supplement and the
accompanying prospectus to understand fully the terms of the warrants as well
as the tax and other considerations that should be important to you in making
a decision about whether to invest in the warrants. You should carefully
review the "Risk Factors" section, which highlights certain risks associated
with an investment in the warrants, to determine whether an investment in the
warrants 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.
In this prospectus supplement and the accompanying prospectus, unless
otherwise specified or unless the context otherwise requires, references to
"Euro" or "EUR" are to the lawful currency of the member states of the
European Union that adopt the single currency in accordance with the treaty
establishing the European Community (the "EC") as amended by the Treaty on
European Union, and references to "Dollars", "$", "U.S.$" or "USD" are to the
lawful currency of the United States.
What are the warrants?
The warrants are contractual obligations of ML&Co. and are not secured by
collateral. The warrants will rank equally with all other unsecured
contractual obligations of ML&Co. and ML&Co.'s unsecured unsubordinated debt.
The warrants will entitle you to receive a cash settlement upon automatic
exercise. The warrants will expire on February 28, 2002.
You will not have the right to receive physical certificates evidencing
your ownership except under limited circumstances. Instead, we will issue the
warrants in the form of a global certificate, which will be held by The
Depository Trust Company, also known as DTC, or its nominee. Direct and
indirect participants in DTC will record beneficial ownership of the warrants
by individual investors. Direct and indirect participants in DTC will include
participants in the Euroclear and Clearstream Banking, societe anonyme
("Clearstream, Luxembourg") clearing systems. You should refer to the section
"Description of the warrants--Depositary" in this prospectus supplement.
When are my warrants subject to automatic exercise?
Your warrants will be automatically exercised on the earlier of:
(i) the fourth scheduled Business Day prior to the Expiration Date (the
"Exercise Date") or,
(ii) the Business Day immediately prior to the warrants' delisting, the
imposition of a permanent trading suspension on trading of the
warrants, or if certain events in bankruptcy, insolvency or
reorganization involving ML&Co. occur.
See "Description of the warrants--Exercise of the warrants and --Automatic
exercise prior to the Expiration Date".
What will I receive upon automatic exercise of my warrants?
When the warrants are automatically exercised, we will pay you a Cash
Settlement Amount in U.S. Dollars which will be the greater of
(i) zero, or
Spot Value - Strike Value
(ii) U.S.$50 X -------------------------
Strike Value
You will receive no payment if the Cash Settlement Amount is equal to
zero. The Cash Settlement Amount cannot be less than zero.
The "Strike Value " equals 0.8695, the offer rate of the U.S. Dollar per
Euro in the interbank market as reported by Reuters Group PLC ("Reuters") on
page FXFX at approximately 3:00 p.m. London time on November 30, 2000, the
date the warrants were priced for initial sale to the public.
The "Spot Value" will be determined by MLPF&S, the calculation agent, and
will equal the bid rate of the U.S. Dollar per Euro in the interbank market as
reported by Reuters on page FXFX at approximately 3:00 p.m. London time on the
Exercise Date. If Reuters is not providing the exchange rate for U.S. Dollar
per Euro, then MLPF&S will determine such exchange rate using other sources as
described in "Description of the Warrants--Cash Settlement Amount".
We will pay you a Cash Settlement Amount only if the Spot Value is
greater than the Strike Value. If the Spot Value is less than or equal to the
Strike Value upon exercise, the Cash Settlement Amount will be zero. If the
Cash Settlement Amount is zero, you will sustain a total loss of the purchase
price.
For more specific information about the amount you will receive upon
exercise of your warrants, please see the section "Description of the
warrants--Cash Settlement Amount" in this prospectus supplement.
Who can buy the warrants?
The AMEX requires that you have an options-approved account in order to
purchase the warrants. We recommend that you, as an investor in the warrants,
have experience with respect to options and options transactions. If you are
solely dependent upon fixed income, or if you intend to purchase the warrants
for your individual retirement plan account or for accounts under the Uniform
Transfers/Gifts to Minors Act, then the warrants are not a suitable investment
for you. Please see "Risk Factors" in this prospectus supplement.
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Examples
Here are three examples of Cash Settlement Amount calculations using the
initial offering price of $3.875 per warrant:
Example 1--Spot Value is less than the Strike Value on the Exercise Date:
Strike Value: 0.8695 U.S.$/Euro
Hypothetical Spot Value: 0.8000 U.S.$/Euro
Cash Settlement Amount per warrant = $50 x (0.8000-0.8695)
(-------------) = $0.00
( 0.8695 )
Total Cash Settlement Amount per warrant = $0 and the exercise of the
warrant is worthless.
Example 2-- Spot Value is greater than the Strike Value on the Exercise Date,
however, the Cash Settlement Amount is less than the offering price:
Strike Value: 0.8695 U.S.$/Euro
Hypothetical Spot Value: 0.9000 U.S.$/Euro
Cash Settlement Amount per warrant = $50 x (0.9000-0.8695)
(-------------) = $1.75
( 0.8695 )
Total Cash Settlement Amount per warrant = $1.75 and the exercise of the
warrant results in a payment that is less than the initial offering price.
Example 3--Spot Value is greater than the Strike Value on the Exercise Date:
Strike Value: 0.8695 U.S.$/Euro
Hypothetical Spot Value: 1.0000 U.S.$/Euro
Cash Settlement Amount per warrant = $50 x (1.0000-0.8695)
(-------------) = $7.50
( 0.8695 )
Total Cash Settlement Amount per warrant = $7.50.
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What is the Euro?
The Euro is the official currency of the member states of the European
Economic and Monetary Union.
It was introduced in January 1999 and replaced the national currencies of
the 11 participating countries. The Euro is the official currency of the
member states of the European Economic and Monetary Union that adopted the
single currency in accordance with the treaty establishing the EC, as amended
by the Treaty on European Union. The following 11 countries use the Euro as
their official currency: Germany, Belgium, Luxembourg, Spain, France, Ireland,
Italy, the Netherlands, Austria, Portugal and Finland. There is a possibility
that in the future other EC countries may adopt the Euro as their official
currency.
What does the USD/EUR Rate reflect?
The "USD/EUR Rate" is a foreign exchange spot rate that measures the
relative value of two currencies, the Euro and the U.S. Dollar. The USD/EUR
Rate increases when the Euro appreciates relative to the U.S. Dollar and
decreases when the Euro depreciates relative to the U.S. Dollar.
How has the USD/EUR Rate performed historically?
We have provided a table showing the monthly high, low and month-end
mid-market levels of the USD/EUR Rate for each month from January 1999 to
November 2000, as published by Bloomberg L.P.
You can find this table in the section "USD/EUR Rate and Cash Settlement
Amounts" in this prospectus supplement. We have provided this historical
information to help you evaluate the behavior of the USD/EUR Rate in various
economic environments; however, past performance of the USD/EUR Rate is not
necessarily indicative of how the USD/EUR Rate will perform in the future.
Will the warrants be listed on a stock exchange?
The warrants have been approved for listing on the AMEX under the trading
symbol "EUN.WS", subject to official notice of issuance. You should be aware
that the listing of the warrants on the AMEX will not necessarily ensure that
a liquid trading market will be available for the warrants or, if a market
does develop, that it will remain available throughout the term of the
warrants. You should review the section entitled "Risk Factors--There may be
an uncertain trading market for the warrants" in this prospectus supplement.
What is the role of MLPF&S?
Our subsidiary, MLPF&S, is the underwriter for the offering and sale of
the warrants. After the initial offering, MLPF&S intends to buy and sell
warrants to create a secondary market for holders of the warrants, and may
stabilize or maintain the market price of the warrants during the initial
distribution of the warrants. However, MLPF&S will not be obligated to engage
in any of these market activities, or continue them once it has started.
MLPF&S will also be our agent for purposes of calculating the Spot Value
and the Cash Settlement Amount. Under certain circumstances, these duties
could result in a conflict of interest between MLPF&S' status as our
subsidiary and its responsibilities as calculation agent. Please see the
section entitled "Risk Factors--Potential conflicts of interest" in this
prospectus supplement.
Who is ML&Co.?
Merrill Lynch & Co., Inc. is a holding company with various subsidiaries
and affiliated companies that provide investment, financing, insurance and
related services on a global basis. For information about ML&Co., see the
section entitled "Merrill Lynch & Co., Inc." in the accompanying prospectus of
ML&Co. You should also read the other documents we have filed with the SEC,
which you can find by referring to the section entitled "Where You Can Find
More Information" in this prospectus supplement.
Are there any risks associated with my investment?
Yes, an investment in the warrants is subject to risks, including the
risk that you will lose your entire purchase price. Please refer to the
section "Risk Factors" in this prospectus supplement.
RISK FACTORS
Your investment in the warrants will involve a high degree of risk. For
example, there is foreign exchange risk, the risk that you might not earn a
return on your investment and the risk that the warrants will expire
worthless. You should be prepared to sustain a total loss of the purchase
price of your warrants. We suggest that you, as a potential purchaser of
warrants, be experienced with respect to options and option transactions and
understand the risks of foreign currency transactions. You should carefully
consider the following discussion of risks before deciding whether an
investment in the warrants is suitable for you.
The warrants are long-term options and may expire worthless
Your warrants will be automatically exercised on the earlier of either
the Exercise Date, Delisting Date or Early Expiration Date and are not
exercisable at your option. You will receive a cash payment upon automatic
exercise only if the warrants have a Cash Settlement Amount greater than zero
on the date of exercise. On November 30, 2000 the Cash Settlement Amount of
the warrants will equal zero. The warrants will be "in-the-money", i.e., their
Cash Settlement Amount will exceed zero, only if as of the date of automatic
exercise, the Spot Value is greater than the Strike Value.
If the Spot Value is less than or equal to the Strike Value on the date
of automatic exercise, the warrant will expire worthless and you will have
sustained a total loss of the purchase price of the warrant. You should
therefore be prepared to sustain a total loss of the purchase price of your
warrants.
The initial public offering price of the warrants may be higher than the price
a commercial user might pay in certain circumstances
The initial public offering price of the warrants may be greater than the
price a commercial user of, or dealer in options on, U.S. Dollars or Euro
might pay for a comparable option involving significantly larger amounts of
U.S. Dollars and Euro.
The value of the warrants is closely related to changes in the USD/EUR Rate
The warrants provide opportunities for investment but also pose risks to
you as a result of fluctuations in the value of the currency underlying the
warrants. In general, certain risks associated with the warrants are similar
to those generally applicable to other options or warrants of private
corporate issuers. However, unlike options or warrants on equity or debt
securities, which are traded and priced primarily on the basis of the value of
a single underlying security, the trading value of the warrants being offered
by this prospectus and prospectus supplement is likely to reflect the current
and anticipated USD/EUR Rate on the Exercise Date.
You may lose your entire investment. This risk reflects the nature of a
warrant as an asset which tends to decline in value over time and which may,
depending on the relative value of the Euro as compared with the U.S. Dollar,
be worthless when it expires. A warrant is "out-of-the-money" when the Spot
Value is less than the Strike Value. Assuming all other factors are held
constant, the more a warrant is out-of-the-money and the shorter its remaining
term to expiration, the greater the risk that you will lose all of your
investment. This means that if you do not sell your warrants in the secondary
market, you will lose your entire investment in the warrant if it expires when
the Spot Value is less than or equal to the Strike Value.
Since warrants may become worthless upon expiration, you must generally
be correct about the direction, timing and magnitude of anticipated exchange
rate changes affecting the Euro and the U.S. Dollar in order to recover and
realize a return upon your investment. If the value of the Euro as compared
with the U.S. Dollar does not increase to an extent sufficient to cover the
cost of your warrants, i.e., the purchase price, before the warrants expire,
you will lose all or a part of your investment in the warrants upon
expiration. You will bear the foreign exchange risks of the value of the U.S.
Dollar in terms of the Euro.
Currency Exchange Markets. The value of any currency, including the Euro
and the U.S. Dollar, may be affected by complex political and economic
factors. The spot exchange rate of the Euro in terms of the U.S. Dollar is at
any moment a result of the supply and demand for the two currencies, and
changes in the exchange rate result over time from the interaction of many
factors directly or indirectly affecting economic and political conditions in
the European Union and the United States, including economic and political
developments in other countries. Of particular importance are the relative
rates of inflation, interest rate levels, the balance of payments and the
extent of governmental surpluses or deficits in the European Union and in the
United States, all of which are in turn sensitive to the monetary, fiscal and
trade policies pursued by the European Union, the governments of the European
Union, the United States and other countries important to international trade
and finance.
Foreign exchange rates can either be fixed by sovereign governments or
floating. Exchange rates of most economically developed nations, including the
European Union, are permitted to fluctuate in value relative to the U.S.
Dollar. However, governments sometimes do not allow their currencies to float
freely in response to economic forces. Governments, including the European
Union, use a variety of techniques, such as intervention by their central bank
or imposition of regulatory controls or taxes, to affect the exchange rates of
their respective currencies. They may also issue a new currency to replace an
existing currency or alter the exchange rate or relative exchange
characteristics by devaluation or revaluation of a currency. Thus, a special
risk in purchasing the warrants is that their liquidity, trading value and
Cash Settlement Amount could be affected by the actions of sovereign
governments or the European Union which could change or interfere with
theretofore freely determined currency valuation, fluctuations in response to
other market forces and the movement of currencies across borders. There will
be no adjustment or change in the terms of the warrants in the event that
exchange rates should become fixed, or in the event of any devaluation or
revaluation or imposition of exchange or other regulatory controls or taxes,
or in the event of other developments affecting the Euro, the U.S. Dollar or
any other currency.
Even though currency trades around-the-clock, your warrants will trade on the
AMEX only during regular trading hours
The interbank market in foreign currencies is a global, around-the-clock
market. Therefore, the hours of trading for the warrants will not conform to
the hours during which the Euro and U.S. Dollar are traded. To the extent that
the AMEX is closed while the markets for the Euro remain open, significant
price and rate movements may take place in the underlying foreign exchange
markets that will not be reflected immediately in the price of a warrant on
such exchange. The possibility of these movements should be taken into account
in relating closing prices on the AMEX for the warrants to those in the
underlying foreign exchange markets.
There is no systematic reporting of last-sale information for foreign
currencies. Reasonably current bid and offer information is available in
certain brokers' offices, in bank foreign currency trading offices, and to
others who wish to subscribe for this information, but this information will
not necessarily reflect the EUR bid rate used to calculate the Spot Value.
There is no regulatory requirement that those quotations be firm or revised on
a timely basis. The absence of last-sale information and the limited
availability of quotations to individual investors may make it difficult for
many investors to obtain timely, accurate data about the state of the
underlying foreign exchange markets.
The warrants are suitable only for investors with options-approved accounts
The AMEX requires that warrants be sold only to investors with
options-approved accounts and that its members and member organizations and
their registered employees make certain suitability determinations before
recommending transactions in warrants. We suggest that investors considering
purchasing warrants be experienced with respect to options and option
transactions and understand the risks of foreign currency transactions and
reach an investment decision only after carefully considering, with their
advisers, the suitability of the warrants in light of their particular
circumstances. Warrants are not suitable for persons solely dependent upon a
fixed income, for individual retirement plan accounts or for accounts under
the Uniform Transfers/Gifts to Minors Act. You should be prepared to sustain a
total loss of the purchase price of your warrants.
The warrants will be automatically exercised if they are delisted
In the event that the warrants are delisted from, or permanently
suspended from trading on, the AMEX and the warrants are not simultaneously
accepted for trading pursuant to the rules of another regulated trading
organization that files with the SEC under U.S. securities laws, the warrants
will expire on the date of the delisting or trading suspension becomes
effective and will be deemed automatically exercised on the Delisting Date. At
the time of the automatic exercise, the warrants may be out-of-the-money so
that the Cash Settlement Amount would equal zero.
The warrants are not standardized options issued by the
Options Clearing Corporation
The warrants are not standardized foreign currency options of the type
issued by the Options Clearing Corporation (the "OCC"), a clearing agency
regulated by the SEC. For example, unlike purchasers of OCC standardized
options who have the credit benefits of guarantees and margin and collateral
deposits by OCC clearing members to protect the OCC from a clearing member's
failure, purchasers of warrants must look solely to ML&Co. for performance of
its obligations to pay the Cash Settlement Amount on the exercise of warrants.
In addition, OCC standardized options provide for physical delivery of the
underlying foreign currency (rather than cash settlement in U.S. Dollars), and
permit immediate determination of value upon exercise. Further, the market for
the warrants is not expected to be generally as liquid as the market for some
OCC standardized options.
The warrants are unsecured contractual obligations of ML&Co. and will
rank equally with ML&Co.'s other unsecured contractual obligations and with
ML&Co.'s unsecured and unsubordinated debt. However, given that ML&Co. is a
holding company, the right of ML&Co., and hence the right of creditors of
ML&Co., including beneficial owners of the warrants, to participate in any
distribution of the assets of any subsidiary upon its liquidation or
reorganization or otherwise is necessarily subject to the prior claims of
creditors of the subsidiary, except to the extent that claims of ML&Co. itself
as a creditor of the subsidiary may be recognized. In addition, dividends,
loans and advances from certain subsidiaries, including MLPF&S, to ML&Co. are
restricted by net capital requirements under the Exchange Act, and under rules
of certain exchanges and other regulatory bodies.
There may be an uncertain trading market for the warrants
The warrants have been approved for listing on the AMEX under the trading
symbol "EUN.WS", subject to official notice of issuance. While there have been
a number of issuances of different warrants, trading volumes have varied
historically from one series to another, and it is therefore impossible to
predict how the warrants will trade. You cannot assume that a trading market
will develop for the warrants. If a trading market does develop, there can be
no assurance that there will be liquidity in the trading market.
Many factors affect the trading value of the warrants; these factors
interrelate in complex ways and the effect of one factor may offset or magnify
the effect of another factor
The market value of the warrants will be affected by factors that
interelate 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
warrants caused by another factor and that the effect of one factor may
exacerbate the decrease in the trading value of the warrants caused by another
factor. For example, an increase in the level of Euro interest rates may
offset some or all of any increase in the trading value of the warrants
attributable to another factor, such as an increase in the value of the
USD/EUR Rate. The following paragraphs describe the expected impact on the
market value of the warrants given a change in a specific factor, assuming all
other conditions remain constant.
The value of the USD/EUR Rate is expected to affect the trading value of
the warrants. We expect that the trading value of the warrants will depend
primarily on the current and anticipated USD/EUR Rate on the Exercise Date. It
is possible that the trading value of a warrant may decline even if there is a
increase in the value of the Euro as compared to the U.S. Dollar prior to the
Exercise Date.
Changes in the levels of interest rates are expected to affect the
trading value of the warrants. We expect that interest rates will affect the
trading value of the warrants. In general, if U.S. interest rates increase, we
expect that the trading value of the warrants will increase and, conversely,
if U.S. interest rates decrease, we expect that the trading value of the
warrants will decrease. In general, if Euro interest rates increase, we expect
that the trading value of the warrants will decrease and, conversely, if Euro
interest rates decrease, we expect that the trading value of the warrants will
increase. Interest rates may also affect the economies of the member countries
of the European Union or the United States, and, in turn, the USD/EUR Rate.
Changes in volatility of the USD/EUR Rate are expected to affect the
trading value of the warrants. Volatility is the term used to describe the
size and frequency of price and/or market fluctuations. Generally, if the
volatility of the USD/EUR Rate increases, we expect that the trading value of
the warrants will increase and, conversely, if the volatility of the USD/EUR
Rate decreases, we expect that the trading value of the warrants will
decrease.
As the time remaining to the expiration date of the warrants decreases,
the "time premium" associated with the warrants will decrease. We anticipate
that the warrants may trade at a value above that which would be expected
based on the level of the USD/EUR Rate due to a "time premium" resulting from
expectations concerning the value of the USD/EUR Rate prior to the expiration
of the warrants. Generally, as the time remaining to the expiration date of
the warrants decreases, we expect that this time premium will decrease,
lowering the trading value of the warrants.
Changes in our credit ratings may affect the trading value of the
warrants. 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 warrants. However, because the return on
your warrants is dependent upon factors in addition to our ability to pay our
obligations under the warrants, such as any increase in the USD/EUR Rate, an
improvement in our credit ratings will not reduce other investment risks
related to warrants.
It is important for you to understand that the impact of one of the
factors specified above, such as a decrease in USD/EUR Rate volatility, may
offset some or all of any increase in the trading value of the warrants
attributable to another factor, such as any increase in the USD/EUR Rate.
Before selling warrants, beneficial owners should carefully consider the
trading value of the warrants, the value of the U.S. Dollar and the Euro, and
the probable range of Cash Settlement Amounts.
Potential conflicts of interests
Our subsidiary, MLPF&S, is the calculation agent for the warrants. Under
certain circumstances, MLPF&S' role as our subsidiary and its responsibilities
as calculation agent for the warrants could give rise to conflicts of
interests between the calculation agent and the holders of the warrants.
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 anticipate entering into an arrangement with one of our subsidiaries
to hedge the market risks associated with our obligation to pay amounts due
under the warrants. This subsidiary expects to make a profit in connection
with the arrangement. We did not seek competitive bids for this arrangement
from unaffiliated parties.
Tax consequences
You should also consider the tax consequences of investing in the
warrants. See "United States Federal Income Taxation" below.
DESCRIPTION OF THE WARRANTS
An aggregate of 1,600,000 warrants will be issued. The warrants are
contractual obligations controlled by a Warrant Agreement (the "Warrant
Agreement") dated December 6, 2000, between ML&Co. and Citibank, N.A., as
Warrant Agent (the "Warrant Agent"). The warrants will expire on February 28,
2002. The following statements about the warrants summarize the detailed
provisions of the Warrant Agreement, the form of which was filed as an exhibit
to the registration statement relating to the warrants. Wherever we refer to
particular provisions of the Warrant Agreement or its terms, those provisions
or definitions are incorporated by reference as a part of the statements made,
and the statements are qualified in their entirety by those references.
A warrant will not require, or entitle, a beneficial owner to sell or
purchase Euro to or from ML&Co. ML&Co. will make only a U.S. Dollar cash
settlement, if any, upon automatic exercise of the warrants.
The warrants will expire on February 28, 2002 (the "Expiration Date") or
on an earlier date as described under "-- Automatic exercise prior to the
Expiration Date". The warrants will be automatically exercised on the Exercise
Date, as set forth under "-- Exercise of warrants".
The warrants are unsecured contractual obligations of ML&Co. and will
rank equally with its other unsecured contractual obligations and with its
unsecured and unsubordinated debt. Because ML&Co. is a holding company, the
right of ML&Co. and its creditors, including the currency warrant holders, to
participate in any distribution of the assets of any subsidiary upon its
liquidation or reorganization or otherwise is necessarily subject to the prior
claims of creditors of the subsidiary, except to the extent that a bankruptcy
court may recognize claims of ML&Co. itself as a creditor of the subsidiary.
In addition, dividends, loans and advances from certain subsidiaries,
including MLPF&S, to ML&Co. are restricted by net capital requirements under
the Securities Exchange Act of 1934, as amended, and under rules of certain
exchanges and other regulatory bodies.
Exercise of warrants
The warrants will expire on the Expiration Date. The warrants are not
exercisable at the option of the holder. The warrants will be automatically
exercised on the earlier of (i) the fourth scheduled Business Day prior to the
Expiration Date (the "Exercise Date") or, (ii) on the Delisting Date in the
case of delisting or a trading suspension or on the Early Expiration Date in
the case of certain events in bankruptcy, insolvency or reorganization.
The Warrant Agent will obtain the Cash Settlement Amount on the Exercise
Date from the calculation agent and will pay the Cash Settlement Amount of the
warrants to the depository on the Expiration Date and, if February 28, 2002 is
not a Business Day, on the next succeeding Business Day. If the warrants are
delisted or there is a trading suspension and the warrants are not
simultaneously accepted for listing on another national securities exchange,
as described below under "Automatic exercise prior to the Expiration Date",
the Warrant Agent will pay the Cash Settlement Amount of the warrants to the
depository on the fifth Business Day following the Delisting Date or Early
Expiration Date, as applicable. See "Description of the warrants--DTC
Procedures".
Cash Settlement Amount
The Cash Settlement Amount for each warrant you own will be determined on
the Exercise Date as an amount in U.S. Dollars equal to the greater of:
(i) zero, or
Spot Value - Strike Value
(ii) U.S. $50 x -------------------------
Strike Value
The Cash Settlement Amount cannot be less than zero. You will never owe
us any money on the warrants you own.
The "Spot Value" will be determined by MLPF&S or any successor thereto,
as the calculation agent (the "calculation agent"), and will equal the bid
rate of the U.S. Dollar per Euro in the interbank market as reported by
Reuters on page FXFX at approximately 3:00 p.m. London time on the Exercise
Date.
The "Strike Value" equals 0.8695, the offer rate of the U.S. Dollar per
Euro in the interbank market as reported by Reuters on page FXFX at
approximately 3:00 p.m. London time on November 30, 2000, the date the
warrants were priced for initial sale to the public.
However, if the USD/EUR Rate is not so quoted on the date of automatic
exercise, then the Spot Value will be the exchange rate between Euro and U.S.
Dollars, based upon the noon buying rate in New York for cable transfers in
foreign currencies as announced by the Federal Reserve Bank of New York for
customs purposes (the "Noon Buying Rate"). If the Noon Buying Rate is not
announced on such date of automatic exercise, then the Spot Value will be
calculated on the basis of the arithmetic mean of the applicable spot
quotations received by the calculation agent at approximately 3:00 p.m. London
time on the relevant date for the purchase or sale by the Reference Dealers of
the Reference Amount for settlement two Business Days later. If fewer than two
Reference Dealers provide such spot quotations, then the Spot Value will be
calculated on the basis of the arithmetic mean of the applicable spot
quotations received by the calculation agent at approximately 3:00 p.m. London
time on the relevant date from three leading commercial banks in New York
(selected in the sole discretion of the calculation agent), for the sale by
such banks of the Reference Amount for settlement two Business Days later. If
these spot quotations are available from fewer than three banks, then the
calculation agent, in its sole discretion, shall determine which spot rate is
available and reasonable to be used. If no such spot quotation is available,
then the Spot Value will be the rate the calculation agent, in its sole
discretion, determines to be fair and reasonable under the circumstances at
approximately 3:00 p.m., London time, on the relevant date.
"Business Day", as used herein, means any day other than a Saturday or a
Sunday or a day on which commercial banks in The City of New York are required
or authorized by law or executive order to be closed.
"Reference Amount" is U.S.$869,500, which was equal to approximately EUR
1,000,000 on November 30, 2000.
"Reference Dealers", as used herein, means Citibank, N.A., Deutsche Bank
Securities, Inc. and The Chase Manhattan Bank, or their successors.
We will round the Cash Settlement Amount, if necessary, to the nearest
cent, with one-half cent being rounded upwards.
All determinations made by the calculation agent shall be at the sole
discretion of the calculation agent and, absent a determination by the
calculation agent of a manifest error, shall be conclusive for all purposes
and binding on ML&Co. and the beneficial owners of the warrants.
Automatic exercise prior to the Expiration Date
In the event that the warrants are delisted from, or permanently
suspended from trading on, the AMEX and the warrants are not simultaneously
accepted for trading pursuant to the rules of another national securities
exchange, the warrants will expire on the Business Day immediately prior to
the date on which such delisting or trading suspension becomes effective (the
"Delisting Date"), and the warrants will be automatically exercised at the
close of business on such Delisting Date. The Cash Settlement Amount, if any,
shall be determined by the calculation agent as provided under "--Cash
Settlement Amount" as if the Delisting Date were the Exercise Date, and the
Cash Settlement Amount will be paid on the fifth Business Day following such
Delisting Date. Settlement shall otherwise occur as described under "--DTC
Procedures". We will notify you as soon as practicable of such delisting or
trading suspension. We have agreed in the Warrant Agreement that we will not
seek delisting of the warrants or suspension of their trading on the AMEX.
The warrants may also expire on the date of occurrence of certain events
in bankruptcy, insolvency or reorganization involving ML&Co. and the warrants
will be automatically exercised as of the Business Day immediately preceding
such date (the "Early Expiration Date"). The Cash Settlement Amount, if any
(determined as provided under "--Cash Settlement Amount" as if the Early
Expiration Date were the Exercise Date), of such automatically exercised
warrants will be due and payable on the fifth Business Day following such
Early Expiration Date. Settlement will otherwise occur as described under
"--DTC Procedures".
Modification
The Warrant Agreement and the terms of the warrants may be amended by
ML&Co. and the Warrant Agent without the consent of the beneficial owners of
any warrants for the purpose of curing any ambiguity, or of curing, correcting
or supplementing any defective or inconsistent provision contained in the
Warrant Agreement or the terms of the warrants, or in any other manner which
ML&Co. may deem necessary or desirable and which will not materially and
adversely affect the interests of the beneficial owners of the warrants.
ML&Co. and the Warrant Agent also may modify or amend the Warrant
Agreement and the terms of the warrants, with the consent of the beneficial
owners of not less than a majority of the then outstanding warrants affected,
provided that no modification or amendment that changes the Strike Value so as
to adversely affect the beneficial owner, shortens the period of time during
which the warrants will be automatically exercised or otherwise materially and
adversely affects the exercise rights of the beneficial owners of the warrants
or reduces the number of outstanding warrants the consent of whose beneficial
owners is required for modification or amendment of the Warrant Agreement or
the terms of the warrants may be made without the consent of the beneficial
owners of warrants affected by these changes.
Merger and Consolidation
ML&Co. may consolidate or merge with or into any other corporation and
ML&Co. may sell, lease or convey all or substantially all of its assets to any
corporation, provided that:
o the resulting corporation, if other than ML&Co., is a corporation
organized and existing under the laws of the United States of America or
any U.S. state and assumes all of ML&Co.'s obligations to:
o pay or deliver the Cash Settlement Amount or any consideration
payable or deliverable upon exercise, if applicable with respect to
all the Warrants; and
o perform and observe all of the obligations and conditions of the
warrant agreement to be performed or observed by ML&Co.; and
o ML&Co. or the successor corporation, as the case may be, is not,
immediately after any merger or consolidation, in default under the
warrant agreement.
Depositary
Description of the Global Warrants
Upon issuance, all of the warrants will be represented by one or more
fully registered global warrants. Each global warrant will be deposited with,
or on behalf of, The Depository Trust Company, otherwise known as DTC, or any
successor to it (the "depositary"), as depositary, and registered in the name
of Cede & Co., DTC's partnership nominee. Unless and until it is exchanged in
whole or in part for warrants in definitive form, no global warrant may be
transferred except as a whole by the depositary to a nominee of the depositary
or by a nominee of the depositary to the depositary or another nominee of the
depositary or by the depositary or any nominee to a successor of the
depositary or a nominee of its successor. Investors may elect to hold
interests in the global warrants through either the depositary, in the United
States, or Clearstream, Luxembourg, or Morgan Guaranty Trust Company of New
York, Brussels Office, as operator of the Euroclear System ("Euroclear"), if
they are participants in these systems, or indirectly through organizations
which are participants in these systems. Clearstream, Luxembourg and Euroclear
will hold interests on behalf of their participants through customers'
securities accounts in Clearstream, Luxembourg's and Euroclear's names on the
books of their respective depositaries, which in turn will hold interests in
customers' securities accounts in the depositaries' names on the books of the
depositary. The Chase Manhattan Bank will act as depositary for Euroclear and
Citibank, N.A, not in its capacity as Warrant Agent under the Warrant
Agreement, will act as depositary for Clearstream, Luxembourg (in these
capacities, the "U.S. Depositaries").
So long as DTC, or its nominee, is a registered owner of a global
warrant, DTC or its nominee, as the case may be, will be considered the sole
owner or holder of the warrants represented by the global warrant for all
purposes under the Warrant Agreement. Except as provided below, the beneficial
owners of the warrants represented by a global warrant will not be entitled to
have the warrants represented by the global warrant registered in their names,
will not receive or be entitled to receive physical delivery of the warrants
in definitive form and will not be considered the owners or holders of the
warrants under the Warrant Agreement, including for purposes of receiving any
reports delivered by ML&Co. or the Warrant Agent pursuant to the Warrant
Agreement. Accordingly, each person owning a beneficial interest in a global
warrant 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 Warrant
Agreement. ML&Co. understands that under existing industry practices, in the
event that ML&Co. requests any action of holders or that an owner of a
beneficial interest which a holder is entitled to give or take under the
Warrant Agreement, DTC would authorize the participants holding the relevant
beneficial interests to give or take any action, and these participants would
authorize beneficial owners owning through these participants to give or take
any action or would otherwise act upon the instructions of beneficial owners.
Conveyance of notices and other communications by the depositary to
participants, by participants to indirect participants and by participants and
indirect participants to beneficial owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
DTC Procedures
The following is based on information furnished by DTC:
DTC will act as securities depositary for the warrants. The warrants will
be issued as fully registered securities registered in the name of Cede & Co.,
DTC's nominee. One or more fully registered global warrants will be issued for
the warrants and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC holds securities that its participants deposit with DTC. DTC also
facilitates the settlement among participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
of DTC include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. DTC is owned by a
number of its direct participants and by the NYSE, the American Stock
Exchange, Inc., and the NASD. 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 warrants under DTC's system must be made by or through
direct participants, which will receive a credit for the warrants 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 these beneficial owner
entered into the transaction. Transfers of ownership interests in the warrants
are to be accomplished by entries made on the books of participants acting on
behalf of beneficial owners.
To facilitate subsequent transfers, all warrants deposited with DTC are
registered in the name of DTC's partnership nominee, Cede & Co. The deposit of
warrants 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 warrants; DTC's records reflect only the identity of the direct
participants to whose accounts the warrants 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.
Ownership of beneficial interests in the warrants will be limited to
persons that have accounts with the depositary ("participants") or persons
that may hold interests through participants. The depositary has advised
ML&Co. that upon the issuance of the global warrants representing the
warrants, the depositary will credit, on its book-entry registration and
transfer system, the participants' accounts with the respective number of
warrants represented by the global warrant. Ownership of beneficial interests
in the global warrant will be shown on, and the transfer of ownership
interests will be effected only through, records maintained by the depositary,
with respect to interests of participants, and on the records of participants,
with respect to interests of persons held through participants. The laws of
some states may require that certain purchasers of securities take physical
delivery of these securities in definitive form. These limits and laws may
impair the ability to own, transfer or pledge beneficial interests in the
global warrants.
The Cash Settlement Amount payable upon exercise of warrants registered
in the name of the depositary or its nominee will be paid by the Warrant Agent
to the participants or, in the case of automatic exercise, to the depositary.
None of ML&Co., the Warrant Agent or any other agent of ML&Co. or agent of the
Warrant Agent will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests or for supervising or reviewing any records relating to beneficial
ownership interests. ML&Co. expects that the Warrant Agent, upon the receipt
of any payment of the Cash Settlement Amount in respect of any portion of the
global warrant, will pay the relevant participant in an amount proportionate
to its beneficial interest in the global warrant being exercised and that the
participant will credit the accounts of the beneficial owners of the warrants.
ML&Co. expects that the depositary, in the case of automatic exercise, upon
receipt of any payment of the Cash Settlement Amount in respect of all or any
portion of the global warrant, will credit the accounts of the participants
with payment in amounts proportionate to their respective beneficial interests
in the portion of the global warrant so exercised, as shown on the records of
the depositary. ML&Co. also expects that payments by participants to owners of
beneficial interests in the global warrant will be governed by standing
customer instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in
"street name", and will be the responsibility of the participants. It is
suggested that a purchaser of warrants with accounts at more than one
brokerage firm effect transactions in the warrants, including exercises, only
through the brokerage firm or firms which hold that purchaser's warrants.
Exchange for certificated warrants
If:
o the depositary is at any time unwilling or unable to continue
as depositary and a successor depositary is not appointed by
ML&Co. within 60 days,
o ML&Co. executes and delivers to the Warrant Agent a company
order to the effect that the global warrants shall be
exchangeable, or
o ML&Co. is subject to certain events in bankruptcy, insolvency
or reorganization,
the global warrants will be exchangeable for warrants in definitive form of
like tenor. These definitive warrants will be registered in the name or names
as the depositary shall instruct the Warrant Agent. It is expected that the
instructions may be based upon directions received by the depositary from
participants with respect to ownership of beneficial interests in the global
warrants.
DTC may discontinue providing its services as securities depositary with
respect to the warrants at any time by giving reasonable notice to ML&Co. or
the Warrant Agent. Under these circumstances, in the event that a successor
securities depositary is not obtained, warrant certificates are required to be
printed and delivered.
ML&Co. may decide to discontinue use of the system of book-entry
transfers through DTC, or a successor securities depositary. In that event,
warrant certificates will be printed and delivered.
The information in this section concerning DTC and DTC's system has been
obtained from sources that ML&Co. believes to be reliable, but ML&Co. takes no
responsibility for the accuracy of this information.
Clearstream, Luxembourg and Euroclear
Beneficial owners may hold their interests in warrants through
Clearstream, Luxembourg or Euroclear only if they are participants in these
systems, or indirectly through organizations which are participants in these
systems. Clearstream, Luxembourg and Euroclear will hold omnibus positions on
behalf of their participants through the facilities of DTC. All securities in
Clearstream, Luxembourg or Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance
accounts.
Exercises of warrants by persons holding through Clearstream, Luxembourg
or Euroclear participants will be effected through DTC, in accordance with DTC
rules, on behalf of the relevant European international clearing system by its
depositary; however, these transactions will require delivery of exercise
instructions to the relevant European international clearing system by the
participant in that system in accordance with its rules and procedures and
within its established deadlines under European time. The relevant European
international clearing system will, if the exercise meets its requirements,
deliver instructions to its depositary to take action to effect its exercise
of the warrants on its behalf by delivering warrants through DTC and receiving
payment in accordance with its normal procedures for next-day funds
settlement. Payments with respect to the warrants held through Clearstream,
Luxembourg or Euroclear will be credited to the cash accounts of Clearstream,
Luxembourg participants or Euroclear participants in accordance with the
relevant system's rules and procedures, to the extent received by its
depositary. See "--DTC Procedures" in this prospectus supplement.
Clearstream, Luxembourg advises that it is incorporated under the laws of
Luxembourg as a professional depositary. Clearstream, Luxembourg holds
securities for its participating organizations ("Clearstream, Luxembourg
Participants") and facilitates the clearance and settlement of securities
transactions between Clearstream, Luxembourg Participants through electronic
book-entry changes in accounts of Clearstream, Luxembourg Participants,
thereby eliminating the need for physical movement of certificates.
Clearstream, Luxembourg provides to Clearstream, Luxembourg Participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Clearstream, Luxembourg interfaces with domestic markets in several
countries. As a professional depositary, Clearstream, Luxembourg is subject to
regulation by the Luxembourg Monetary Institute. Clearstream, Luxembourg
Participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations and may include the underwriters.
Indirect access to Clearstream, Luxembourg is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a Clearstream, Luxembourg Participant either
directly or indirectly.
Distributions with respect to the warrants held beneficially through
Clearstream, Luxembourg will be credited to cash accounts of Clearstream,
Luxembourg Participants in accordance with its rules and procedures, to the
extent received by the U.S. depositary for Clearstream, Luxembourg.
Euroclear advises that it was created in 1968 to hold securities for
participants of Euroclear ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries. Euroclear is operated by the Brussels, Belgium office of
Morgan Guaranty Trust Company of New York (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). The Euroclear Operator conducts all
operations, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the underwriters. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. It is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System, and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
All information in this prospectus supplement on Clearstream, Luxembourg
and Euroclear is derived from Clearstream, Luxembourg or Euroclear, as the
case may be, and reflects the policies of these organizations; and these
policies are subject to change without notice.
THE USD/EUR RATE AND CASH SETTLEMENT AMOUNTS
The USD/EUR Rate is a foreign exchange spot rate that measures the
relative values of two currencies, the Euro and the U.S. Dollar. The USD/EUR
Rate increases when the Euro appreciates relative to the U.S. Dollar and
decreases when the Euro depreciates relative to the U.S. Dollar. The USD/EUR
Rate is expressed as a rate that reflects the amount of U.S. Dollar that can
be purchased for one Euro. A USD/EUR Rate equal to 0.8695 USD/EUR thus
indicates that $0.8695 can be purchased for 1 Euro. The foreign exchange spot
rate of the U.S. Dollar per Euro on the Exercise Date will determine the Cash
Settlement Amount. Appreciation of the Euro relative to the U.S. Dollar, i.e.,
depreciation of the U.S. Dollar relative to the Euro, will result in a greater
Cash Settlement Amount. Conversely, depreciation of the Euro relative to the
U.S. Dollar, i.e., appreciation of the U.S. Dollar relative to the Euro, will
result in a lesser Cash Settlement Amount. In no event will the Cash
Settlement Amount be less than zero.
The following table sets forth the monthly high and low; and month-end
mid-market levels in the interbank market for U.S. Dollar per Euro from the
inception of the Euro in January 1999 through November 2000. The historical
experience of USD/EUR Rates should not be taken as an indication of future
performance. No assurance can be given that the value of the Euro will not
decrease relative to the U.S. Dollar and cause the Cash Settlement Amount of
the warrants to equal zero. Any historical upward or downward trend in the
USD/EUR Rate during any period set forth below is not any indication that the
USD/EUR Rate is more or less likely to increase or decrease at any time during
the term of the warrants.
Year High Low Month End
---- ---- --- ---------
1999:
----
January ........ 1.1837 1.1362 1.1362
February ....... 1.1351 1.1007 1.1028
March .......... 1.1042 1.0732 1.0762
April .......... 1.0830 1.0570 1.0570
May ............ 1.0792 1.0420 1.0420
June ........... 1.0519 1.0308 1.0351
July ........... 1.0725 1.0136 1.0712
August ......... 1.0776 1.0424 1.0566
September ...... 1.0689 1.0355 1.0684
October ........ 1.0894 1.0511 1.0549
November ....... 1.0527 1.0093 1.0093
December ....... 1.0278 1.0013 1.0062
2000:
----
January ........ 1.0336 0.9707 0.9707
February ....... 1.0038 0.9642 0.9642
March .......... 0.9779 0.9514 0.9553
April .......... 0.9627 0.9099 0.9119
May ............ 0.9380 0.8895 0.9379
June ........... 0.9650 0.9312 0.9525
July ........... 0.9553 0.9230 0.9267
August ......... 0.9162 0.8878 0.8878
September ...... 0.8997 0.8493 0.8827
October ........ 0.8772 0.8272 0.8489
November........ 0.8729 0.8380 0.8729
The following graph sets forth the monthly high and low levels in the
interbank market for U.S. Dollar per Euro from January 1999 through November
2000. The historical experience of USD/EUR Rates should not be taken as
indications of future performance and no assurance can be given that the value
of the Euro will not decrease relative to the U.S. dollar and thereby cause
the Cash Settlement Amount with respect to the warrants to equal zero.
[THE GRAPH APPEARING HERE SETS FORTH THE MONTHLY HIGH AND LOW LEVELS AS WELL
AS THE MONTH-END MID-MARKET LEVELS IN THE INTERBANK MARKET FOR THE USD/EUR
RATE FROM JANUARY 1999 THROUGH NOVEMBER 2000, AS SET FORTH IN THE TABLE ABOVE.
THE VERTICAL AXIS HAS A RANGE OF NUMBERS FROM 0.8000 TO 1.2000 IN INCREMENTS
OF 0.0500. THE HORIZONTAL AXIS HAS A RANGE OF DATES FROM JANUARY 1999 THROUGH
NOVEMBER 2000 IN INCREMENTS OF ONE MONTH.]
On November 30, 2000 the offer rate of the U.S. Dollar per Euro in the
interbank market as reported by Reuters on page FXFX at approximately 3:00 pm
London time was 0.8695.
The information presented in this prospectus supplement relating to the
exchange rates of the U.S. Dollar relative to the Euro is furnished as a
matter of information only. The fluctuations in the USD/EUR Rate that have
occurred in the past are not necessarily indicative of fluctuations in that
rate which may occur over the term of the warrants.
Set forth below is an illustration of the Cash Settlement Amount of
warrants at exercise based on various hypothetical USD/EUR Rates. This table
assumes a dollar multiplier of U.S.$50. The Percentage Change column indicates
the percentage increase or decrease in the value of the Spot Value as compared
to the Strike Value at the time of exercise. The actual Cash Settlement Amount
of a warrant will depend entirely on the actual USD/EUR Rate on the Exercise
Date. The illustrative Cash Settlement Amounts in the table do not reflect any
"time value" for a warrant, which may be reflected in trading value, and are
not necessarily indicative of potential profit or loss, which are also
affected by purchase price.
Hypothetical Cash Settlement Amount
USD/EUR Based on
Spot Values Percentage Change(1) USD/EUR Spot Values(1)
----------- -------------------- ----------------------
1.2000 38.0% $19.01
1.1500 32.3% $16.13
1.1000 26.5% $13.25
1.0500 20.8% $10.38
1.0000 15.0% $7.50
0.9500 9.3% $4.63
0.9000 3.5% $1.75
0.8695 0.0% $0.00
0.8500 -2.2% $0.00
0.8000 -8.0% $0.00
0.7500 -13.7% $0.00
-------------
(1) Based upon a USD/EUR Strike Value of 0.8695.
UNITED STATES FEDERAL INCOME TAXATION
Set forth in full below is the opinion of Brown & Wood LLP, counsel to
ML&Co., as to certain United States Federal income tax consequences of the
purchase, ownership and disposition of a warrant. 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
warrants 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 warrants in a tax-deferred or
tax-advantaged account, or persons holding warrants as a hedge against
currency risks, as a position in a "straddle" or as part of a "hedging" or
"conversion" transaction for tax purposes. It also does not deal with holders
other than original purchasers (except where otherwise specifically noted
herein). Persons considering the purchase of a warrant 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 warrants arising under the laws
of any other taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a
warrant that is for United States Federal income tax purposes (a) a citizen or
resident of the United States, (b) a corporation or partnership (including an
entity treated as a corporation or partnership) created or organized in or
under the laws of the United States, any state of the United States 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 warrant is effectively connected with the conduct of a United
States trade or business. Notwithstanding clause (d) in 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
such date that elect to continue to be treated as United States persons will
also be a U.S. Holder. As used herein, the term "non-U.S. Holder" means a
beneficial owner of a warrant that is not a U.S. Holder.
U.S. Holders
Although there is no authority directly addressing the United States
Federal income taxation of instruments such as the warrants, each warrant
should be treated as a "non-equity" option for purposes of Section 1256 of the
Internal Revenue Code of 1986, as amended (the "Code"), which must be
"marked-to-market". Accordingly, a U.S. Holder of a warrant should be required
to treat a warrant as if sold for its fair market value on the last business
day of each of the U.S. Holder's taxable years (assuming that the U.S. Holder
has not previously disposed of the warrant) and should be required to
recognize taxable gain or loss for each taxable year in an amount equal to the
difference between the fair market value of the warrant on the last business
day of each such taxable year and such U.S. Holder's adjusted tax basis in the
warrant. Thus, a U.S. Holder of a warrant may incur United States Federal
income tax liability on an annual basis in respect of any increase in the
value of a warrant without a corresponding receipt of cash. In addition, a
U.S. Holder should be required to recognize taxable gain or loss upon the
sale, exchange, exercise or expiration of the warrant in an amount equal to
the difference between the amount realized upon such sale, exchange, exercise
or expiration and the U.S. Holder's adjusted tax basis in such warrant. In
general, for purposes of applying the preceding rules, a U.S. Holder's
adjusted tax basis in a warrant would effectively equal such U.S. Holder's
initial investment in the warrant, increased or decreased by any net gain or
loss recognized by the U.S. Holder in respect of the warrant in prior taxable
years. Any gain or loss recognized by a U.S. Holder in accordance with the
preceding rules would generally be treated as 60 percent long-term capital
gain or loss and 40 percent short-term capital gain or loss.
Despite the foregoing, assuming that the U.S. Holder's functional
currency (as defined in Section 985 of the Code) is the U.S. Dollar, any gain
or loss recognized by a U.S. Holder in respect of a warrant (as described
above) will be treated entirely as ordinary income or loss if the U.S. Holder
elects, or has previously elected, under Section 988 of the Code, to treat its
acquisition of the warrant as a "Section 988 Transaction" giving rise to
foreign currency gain or loss. This election would extend to certain other
contracts which are subject to Section 1256 of the Code and which are required
to be marked-to-market, including certain regulated futures contracts and
nonequity options, entered into by the U.S. Holder in the current or
subsequent taxable years, and would be irrevocable without the consent of the
Internal Revenue Service ("IRS"). A U.S. Holder of warrants should consult its
own tax advisor concerning the consequences and mechanics of making this
election prior to making such election.
Non-U.S. Holders
In general, gains realized on the sale, exchange or exercise of a warrant
by a non-U.S. Holder will not be subject to United States Federal income or
withholding tax in respect of such amounts, assuming the income is not
effectively connected with a United States trade or business of the non-U.S.
Holder. Certain other exceptions may be applicable, and a non-U.S. Holder
should consult its own tax advisor in this regard.
Under current law, the fair market value of a warrant may be includible
in the estate of an individual non-U.S. Holder for United States Federal
estate tax purposes, unless an applicable estate tax treaty provides
otherwise. Individual non-U.S. Holders should consult their own tax advisors
concerning the United States Federal estate tax consequences, if any, of
investing in the warrants.
Backup withholding
Backup withholding of United States Federal income tax at a rate of 31%
may apply to payments made in respect of the warrants 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 a warrant 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 warrant 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 BEN (or substantially similar form) under penalties of perjury, although
in certain cases it may be possible to submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to
a beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
New withholding regulations
Recently, 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.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of 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 warrant on behalf
of any plan, represents on behalf of itself and the plan that the acquisition,
holding and any subsequent disposition of the warrant will not result in a
violation of ERISA, the Code or any other applicable law or regulation.
USE OF PROCEEDS AND HEDGING
A substantial portion of the net proceeds from the sale of the warrants
may be used to hedge market risks of ML&Co. associated with its obligation to
pay the Cash Settlement Amount.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC. Our
SEC filings are also available over the Internet at the SEC's web site at
http://www.sec.gov. The address of the SEC's Internet site is provided solely
for the information of prospective investors and is not intended to be an
active link. You may also read and copy any document we file at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for more information on the
public reference rooms and their copy charges. You may also inspect our SEC
reports and other information at the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.
We have filed a registration statement on Form S-3 with the SEC covering
the warrants and other securities. For further information on ML&Co. and the
warrants, you should refer to our registration statement and its exhibits. The
prospectus accompanying this prospectus supplement summarizes material
provisions of contracts and other documents that we refer you to. Because the
prospectus may not contain all the information that you may find important,
you should review the full text of these documents. We have included copies of
these documents as exhibits to our registration statement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not, and the underwriter has not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus
supplement and the accompanying prospectus is accurate as of the date on the
front cover of this prospectus supplement only. Our business, financial
condition and results of operations may have changed since that date.
UNDERWRITING
MLPF&S, the underwriter of the offering, has agreed, subject to the terms
and conditions of the underwriting agreement and a terms agreement, to
purchase from ML&Co. 1,600,000 warrants. The underwriting agreement provides
that the obligations of the underwriter are subject to certain conditions
precedent and that the underwriter will be obligated to purchase all of the
warrants if any are purchased.
The underwriter has advised ML&Co. that it proposes initially to offer
all or part of the warrants directly to the public at the offering price set
forth on the cover page of this prospectus supplement. After the initial
public offering, the public offering price may be changed. The underwriter is
offering the warrants subject to receipt and acceptance and subject to the
underwriter's right to reject any order in whole or in part. Proceeds to be
received by ML&Co. will be net of the underwriting discount and expenses by
ML&Co.
The underwriting of the warrants will conform to the requirements set
forth in the applicable sections of Rule 2720 of the Conduct Rules of the
NASD.
The underwriter is permitted to engage in certain transactions that
stabilize the price of the warrants. These transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
warrants.
If the underwriter creates a short position in the warrants in connection
with the offering, i.e., if it sells more warrants than are set forth on the
cover page of this prospectus supplement, the underwriter may reduce that
short position by purchasing warrants in the open market. In general,
purchases of a security for the purpose of stabilization or to reduce a short
position could have the effect of raising or maintaining the market price of
the security or preventing or retarding a decline in the market price of the
security. "Naked" short sales are sales in excess of the underwriter's
overallotment option. Because the underwriter has no overallotment option with
respect to the warrants, it would be required to close out a short position in
the warrants by purchasing warrants in the open market. Neither ML&Co. nor the
underwriter makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the warrants. In addition, neither ML&Co. nor the underwriter makes
any representation that the underwriter will engage in these transactions or
that these transactions, once commenced, will not be discontinued without
notice.
MLPF&S may use this prospectus supplement and, the accompanying
prospectus for offers and sales related to market-making transactions in the
warrants. MLPF&S may act as principal or agent in these transactions, and the
sales will be made at prices related to prevailing market prices at the time
of sale.
VALIDITY OF THE WARRANTS
The validity of the warrants will be passed upon for ML&Co. and for the
underwriter by Brown & Wood LLP, New York, New York.
INDEX OF DEFINED TERMS
Page
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Business Day...............................................................S-12
calculation agent..........................................................S-11
Cash Settlement Amount.....................................................S-11
Clearstream, Luxembourg.....................................................S-4
Clearstream, Luxembourg Participants.......................................S-16
Code.......................................................................S-19
Cooperative................................................................S-16
Dollars.....................................................................S-4
Delisting Date.............................................................S-12
depositary.................................................................S-13
DTC.........................................................................S-4
Early Expiration Date......................................................S-12
EC..........................................................................S-4
ERISA......................................................................S-21
EUR.........................................................................S-4
Euro........................................................................S-4
Expiration Date............................................................S-11
Euroclear..................................................................S-13
Euroclear Operator.........................................................S-16
Euroclear Participants.....................................................S-16
Exercise Date...............................................................S-4
IRS........................................................................S-20
ML&Co.......................................................................S-4
MLPF&S......................................................................S-4
New Regulations............................................................S-21
non-U.S. Holder............................................................S-19
Noon Buying Rate...........................................................S-12
OCC.........................................................................S-9
participants...............................................................S-14
Reference Amount...........................................................S-12
Reference Dealers..........................................................S-12
Reuters.....................................................................S-4
Spot Value..................................................................S-4
Strike Value................................................................S-4
Terms and Conditions.......................................................S-16
U.S.$.......................................................................S-4
USD.........................................................................S-4
USD/EUR Rate................................................................S-6
U.S. Depositaries..........................................................S-13
U.S. Holder................................................................S-19
warrants....................................................................S-4
Warrant Agent..............................................................S-11
Warrant Agreement..........................................................S-11
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[LOGO]
Merrill Lynch & Co., Inc.
1,600,000 Euro Currency Warrants
Expiring February 28, 2002
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PROSPECTUS SUPPLEMENT
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Merrill Lynch & Co.
November 30, 2000
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