PRICING SUPPLEMENT
------------------
(To prospectus supplement and prospectus
dated June 16, 2000 and June 15, 2000, respectively)
$23,800,000
Merrill Lynch & Co., Inc.
Medium-Term Notes, Series B
0.25% Callable and Exchangeable Stock-Linked Notes due
January 7, 2008 (Linked to the performance of the common
stock of Wells Fargo & Company)
----------------------
The notes:
o The issue price for each note equals its principal amount, plus accrued
interest, if any, from January 12, 2001.
o We will pay you interest on the notes semi-annually at a rate per year
equal to 0.25%.
o At maturity, for each $1,000 principal amount of the notes you own, we
will pay you an amount in cash based on the payment formula described in
this pricing supplement.
o We may redeem all of the notes, at our option, before their maturity for
an amount in cash based on the payment formula described in this pricing
supplement.
o You may exchange any number of notes you own, at your option, before
maturity for an amount in cash based on the payment formula described in
this pricing supplement.
o The notes have been approved for listing on the American Stock Exchange
under the trading symbol "MWF.A".
Payment formula:
o For each $1,000 principal amount of the notes you own, the cash amount
you will receive at maturity or upon our redemption will equal the
greater of:
o the product of the exchange ratio and the market price of the common
stock of Wells Fargo & Company determined as described in this
pricing supplement; provided, however, that if the amount you
receive at maturity or early redemption 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 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 17.4533 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 January 5, 2001.
<PAGE>
Terms of the notes:
Notes ............................. 0.25% Callable and Exchangeable
Stock-Linked Notes due January 7, 2008
(Linked to the performance of the common
stock of Wells Fargo & Company).
Aggregate principal amount ........ $23,800,000.
Issuer ............................ Merrill Lynch & Co., Inc.
References to "ML&Co.", "we", "us" and
"our" are to Merrill Lynch & Co., Inc.
Maturity date ..................... January 7, 2008.
Interest rate ..................... 0.25% 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 7 and July 7, commencing July 7,
2001. The period from the original issue
date, January 12, 2001, to June 7, 2001
is less than six months, the period
between the other interest payment
dates.
Issue price ....................... $1,000 per note.
Original issue date ............... January 12, 2001.
CUSIP number ...................... 59018Y DJ7.
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 ........ Provided that the notes previously have
been neither redeemed nor exchanged, 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 in cash
equal to the greater of:
(i) the product of the exchange ratio
and the market price of the Wells
Fargo common stock on the sixth
scheduled Trading Day immediately
prior to the maturity date;
provided, however:
o that if a Market Disruption Event
occurs on the sixth scheduled
Trading Day prior to the maturity
date, then the date of
determination for the amount
payable at maturity shall be the
fifth scheduled Trading Day prior
to the maturity date unless a
Market Disruption Event occurs on
such fifth Trading Day, in which
case the date of determination
shall be the fourth scheduled
Trading Day prior to the maturity
date regardless of the occurrence
of a Market Disruption Event on
such day; and
o that if the amount payable at
maturity is based on this formula,
you will not receive accrued
interest from and including July 7,
2007 through the maturity date or,
in the case of acceleration, from
and including the immediately
preceding interest payment date
through the date of early
repayment; or
(ii) $1,000 plus accrued and unpaid
interest through but excluding the
maturity date.
In the event of certain reorganization
events, the market price of the shares
of Wells Fargo common stock may be
adjusted to include certain cash and/or
the market price of securities in
addition to, or in lieu of, the market
price of shares of Wells Fargo 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 Wells
Fargo common stock multiplied by
the exchange ratio in effect on the
date all of the holders of shares
of the Wells Fargo common stock
irrevocably receive such cash.
o For any property or securities
other than cash received in a
Reorganization Event, any amount
payable upon maturity will include
an amount equal to the market value
or market price, as the case may
be, as determined by the
calculation agent, of the property
or securities received for each
share of the Wells Fargo common
stock at the date of the receipt of
the property or, in the case of
securities, on the date of
determination for any amounts
payable multiplied by the
then-current exchange ratio.
ML&Co. redemption.................. We may redeem all of the notes
outstanding at any time, on any Business
Day after January 6, 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 redemption
notice date.
If we redeem the notes, for each $1,000
principal amount of the notes you own,
we will pay you an amount in cash equal
to the greater of:
(i) the product of the exchange ratio
and the market price of the Wells
Fargo common stock on the first
scheduled Trading Day following the
redemption notice date; provided,
however:
o that if a Market Disruption Event
occurs on the first Trading Day
following the redemption notice
date, then the date of
determination for any amount
payable upon early redemption shall
be the second Trading Day following
the redemption notice date unless a
Market Disruption Event occurs on
such second Trading Day, in which
case the date of determination
shall be the third Trading Day
following the redemption notice
date regardless of whether a Market
Disruption Event occurs on such
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 plus accrued and unpaid
interest on your notes through but
excluding the date of early
redemption.
In the event of certain reorganization
events, the market price of the shares
of Wells Fargo common stock may be
adjusted to include certain cash and/or
the market price of securities in
addition to, or in lieu of, the market
price of shares of Wells Fargo common
stock.
Once we have given notice that we are
going to redeem the notes, you are
precluded from exercising your holder
exchange right.
Holder exchange right.............. On any Trading Day during the period
beginning January 12, 2001 and ending
the earlier of (i) 7 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
an amount in cash equal to the "Exchange
Amount" as described below. 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 an amount in cash equal to the
product of the exchange ratio and the
market price of Wells Fargo common stock
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 pay you the Exchange Amount no more
than 5 Business Days after the date of
determination. 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
shall 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
shall be the third Trading Day following
the applicable exchange receipt date
regardless of whether a Market
Disruption Event occurs on such date.
In the event of certain reorganization
events, the market price of the shares
of Wells Fargo common stock may be
adjusted to include certain cash and/or
the market price of securities in
addition to, or in lieu of, the market
price of shares of Wells Fargo common
stock.
Exchange ratio..................... The exchange ratio is equal to the
product of 17.4533 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....................... If Wells Fargo common stock (or any
other security for which a market price
must be determined for purposes of the
notes) is listed on a national
securities exchange in the United
States, is a Nasdaq NMS security or is
included in the OTC Bulletin Board
Service operated by the NASD, then the
market price for any date of
determination on any Trading Day means
for one share of Wells Fargo common
stock (or any other security for which a
market price must be determined for
purposes of the notes):
(1) the last reported sale price,
regular way, on that day on the
principal United States securities
exchange registered under the
Securities Exchange Act of 1934 on
which that security is listed or
admitted to trading (without taking
into account any extended or
after-hours trading session), or
(2) if not listed or admitted to
trading on any such securities
exchange or if the last reported
sale price is not obtainable, the
last reported sale price on the
over-the-counter market as reported
on the Nasdaq Stock Market or OTC
Bulletin Board on that day (without
taking into account any extended or
after-hours trading session), or
(3) if the last reported sale price is
not available for any reason,
including, without limitation, the
occurrence of a Market Disruption
Event, pursuant to (1) and (2)
above, the mean of the last
reported bid and offer price of the
principal trading session on the
over-the-counter market as reported
on the Nasdaq Stock Market or OTC
Bulletin Board on that day as
determined by the calculation agent
or from as many dealers in such
security, 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
(without taking into account any
extended or after-hours trading
session).
If Wells Fargo common stock (or any
other security for which a market price
must be determined for purposes of the
notes) is not listed on a national
securities exchange in the United
States, is not a Nasdaq NMS security or
included in the OTC Bulletin Board
Service operated by the NASD, then the
market price for any date of
determination on any Trading Day means
for one share of Wells Fargo common
stock (or any other security for which a
market price must be determined for
purposes of the notes) the last reported
sale price on that day on the securities
exchange on which that security is
listed or admitted to trading with the
greatest volume of trading for the
calendar month preceding such Trading
Day as determined by the calculation
agent; provided that if such last
reported sale price is for a transaction
which occurred more than four hours
prior to the close of that exchange,
then the market price shall mean the
average (mean) of the last available bid
and offer price on that exchange.
If Wells Fargo common stock (or any
other security for which a market price
must be determined for purposes of the
notes) is not listed or admitted to
trading on any such securities exchange
or if such last reported sale price or
bid and offer are not obtainable, then
the market price shall mean the average
(mean) of the last available bid and
offer prices in such market of the three
dealers which have the highest volume of
transactions in that security in the
immediately preceding calendar month as
determined by the calculation agent
based on information that is reasonably
available to it.
If any prices are quoted in a currency
other than in U.S. dollars, the
calculation agent shall translate such
prices into U.S. dollars in order to
calculate the market price by using the
spot rate on the same calendar day as
the date of determination for any price.
The calculation agent will determine the
"spot rate" for any date of calculation
equal to the spot rate of such currency
per U.S. $1.00 on such date at
approximately 3:00 p.m., New York City
time, as reported by a recognized
reporting service for such spot rate,
provided that if the calculation agent
shall determine that such reported rate
is not indicative of actual rates of
exchange that may be obtained in the
currency exchange rate market, then the
spot rate shall equal the spot rate of
such currency per U.S. $1.00 on such
date at approximately 3:00 p.m., New
York City time at which the calculation
agent is able to convert such currency
into U.S. dollars.
References above to the Nasdaq Stock
Market or DTC Bulletin Board shall
include any successors to such systems.
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.
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), all dollar amounts used
in or resulting from this calculation
will be rounded to the nearest cent with
one-half cent being rounded upwards, and
all adjustments to the share multiplier
will be rounded to the nearest one
thousandth with five ten-thousandths
being rounded upward.
<PAGE>
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 January 6, 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 pay 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 payable
at maturity in excess of the principal amount is based substantially on the
appreciation in price, if any, of the Wells Fargo common stock on a single
Trading Day shortly 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 Wells Fargo common stock, and
in certain circumstances, other securities, property and/or cash, and any
amounts 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 Wells Fargo 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 Wells Fargo 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
"MWF.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 Wells Fargo common
stock. In addition, it is unlikely that the secondary market price of the
notes will correlate exactly with the value of Wells Fargo 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 Wells Fargo 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 Wells Fargo 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 Wells Fargo common stock. In general, the value of the notes will
decrease as the value of Wells Fargo common stock decreases and the value of
the notes will increase as the value of Wells Fargo common stock increases.
However, as the value of Wells Fargo 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 Wells Fargo 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 Wells
Fargo common stock has appreciated by more than approximately 9.5% 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 Wells Fargo common stock is a part, and over which we
have no control, may affect the value of Wells Fargo 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 Wells Fargo common stock. Rising interest rates may
lower the value of Wells Fargo common stock and, as a result, the value of the
notes. Falling interest rates may increase the value of Wells Fargo common
stock and, as a result, may increase the value of the notes.
Changes in the volatility of Wells Fargo 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 Wells Fargo common stock increases, we expect that the trading
value of the notes will increase and if the volatility of Wells Fargo 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 Wells Fargo 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 Wells Fargo 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 Wells Fargo common stock is expected to
affect the trading value of the notes. In general, if the dividend yield, if
any, on Wells Fargo common stock increases, we expect that the value of the
notes will decrease, and conversely, if the dividend yield, if any, on Wells
Fargo 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 Wells Fargo 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 Wells Fargo 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 Wells Fargo 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 Wells Fargo
We are not affiliated with Wells Fargo, and Wells Fargo 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. Wells Fargo will not receive any of
the proceeds of the offering of the notes made hereby and is 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, Wells Fargo 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 Wells
Fargo common stock
You will not be entitled to any rights with respect to Wells Fargo common
stock including, without limitation, the right to receive dividends or other
distributions, if any, on, to vote or to tender or exchange Wells Fargo common
stock in any tender or exchange offer by Wells Fargo 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 Wells Fargo common stock or other
securities, cash or property. MLPF&S is required to carry out its duties as
calculation agent in good faith and use 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.
Wells Fargo & Company
Wells Fargo files reports, proxy statements and other information with
the SEC. Information provided to or filed with the SEC by Wells Fargo 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 1-2979. You may also inspect
Wells Fargo's SEC reports and other information at the NYSE. In addition,
information regarding Wells Fargo 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 Wells Fargo common stock is subject to a stock split or reverse stock
split, then once any split has become effective, the share multiplier relating
to Wells Fargo 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 Wells Fargo 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 Wells Fargo common stock is subject (i) to a stock dividend, i.e.,
issuance of additional shares of Wells Fargo common stock, that is given
ratably to all holders of shares of Wells Fargo common stock or (ii) to a
distribution of such shares of Wells Fargo common stock as a result of the
triggering of any provision of the corporate charter of Wells Fargo, then once
the dividend has become effective and the shares are trading ex-dividend, then
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 Wells Fargo common stock issued with respect
to one share of Wells Fargo common stock and
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 Wells Fargo 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 Wells Fargo common stock, the extent to
which a dividend or other distribution exceeds the immediately preceding
non-Extraordinary Dividend for Wells Fargo common stock (as adjusted for any
subsequent corporate event requiring an adjustment hereunder, such as a stock
split or reverse stock split) by an amount equal to at least 10% of the market
price of Wells Fargo 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 Wells Fargo 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 prior share multiplier and
o a fraction, the numerator of which is the market price per share of
Wells Fargo common stock on the Trading Day preceding the
ex-dividend date, and the denominator of which is the amount by
which the market 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 Wells Fargo 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 for such
shares of Wells Fargo common stock, 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 Wells Fargo common stock
described in clause (e) of the section entitled "--Reorganization Events"
below that also constitutes an Extraordinary Dividend shall only cause an
adjustment to the share multiplier pursuant to clause (e) under the section
entitled "--Reorganization Events".
Issuance of transferable rights or warrants
If Wells Fargo issues transferable rights or warrants to all holders of
Wells Fargo common stock to subscribe for or purchase Wells Fargo common
stock, including new or existing rights to purchase Wells Fargo 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 market price of one share of Wells Fargo 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 of the notes, 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 Wells Fargo common
stock outstanding immediately prior to the issuance of such rights or warrants
plus the number of additional shares of Wells Fargo 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 Wells Fargo common stock
outstanding immediately prior to the issuance of such rights or warrants plus
the number of additional shares of Wells Fargo common stock which the
aggregate offering price of the total number of shares of Wells Fargo common
stock so offered for subscription or purchase pursuant to those rights or
warrants would purchase at the market price of one share of Wells Fargo 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 such
market price.
Reorganization Events
If before the maturity date of the notes,
(a) there occurs any reclassification or change of Wells Fargo common
stock, including, without limitation, as a result of the issuance of
tracking stock by Wells Fargo,
(b) Wells Fargo, or any surviving entity or subsequent surviving entity
of Wells Fargo (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 Wells Fargo or any Successor
Entity with another corporation occurs, other than pursuant to
clause (b) above,
(d) Wells Fargo is liquidated or is subject to a proceeding under any
applicable bankruptcy, insolvency or other similar law,
(e) Wells Fargo issues to all of its shareholders equity securities of
an issuer other than Wells Fargo, other than in a transaction
described in clauses (b), (c) or (d) above (a "Spin-off Event"), or
(f) a tender or exchange offer or going-private transaction is
consummated for all the outstanding shares of Wells Fargo (an event
in clauses (a) through (f) a "Reorganization Event"),
then the market price shall be adjusted to include the Reorganization Event
Amount so long as a market price is available. If a market price is no longer
available for any security, including the liquidation of the issuer of such
security or the subjection of such issuer to a proceeding under any applicable
bankruptcy, insolvency or other similar law, then the value of such security
will equal zero for so long as no market price is available.
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 Wells Fargo common stock
multiplied by the share multiplier in effect on the date all of the
holders of shares of Wells Fargo 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 Wells
Fargo common stock at the date of the receipt of the property
multiplied by the prior share multiplier and payable in cash,
(3) for any security received in a Reorganization Event, an amount in
cash equal to (a) the market price for such security calculated in
the same manner as the market price of the common stock of Wells
Fargo is calculated, multiplied by (b) the number of units of such
security received for each share of common stock of Wells Fargo
multiplied by the prior share multiplier, and
(4) for any security received in the case of a Spin-off Event, in
addition to the shares of Wells Fargo common stock, an amount in
cash equal to (a) the market price for such security calculated in
the same manner as the market price of the common stock of Wells
Fargo is calculated, multiplied by (b) the number of units of such
security received for each share of common stock of Wells Fargo
multiplied by the prior share multiplier.
If a security is received in a Reorganization Event, the market price of such
security shall be included in determining any amounts due pursuant to the
notes in the same manner as shares of common stock of Wells Fargo. The share
multiplier with respect to these securities shall equal the product of the
share multiplier in effect for Wells Fargo 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 Wells Fargo common stock. The
share multiplier of these securities will be subject to the same adjustments
as that of the share multiplier of Wells Fargo common stock. The amount
payable shall be calculated so as to include the market price of any
securities received in the Spin-off Event in addition to the market price of
shares of Wells Fargo common stock already included in the amount payable at
maturity or upon redemption or exchange.
In the event of a tender or exchange offer with respect to Wells Fargo
common stock or any security received in a reorganization event in which an
offeree may elect to receive cash or other property, Wells Fargo 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 Wells Fargo, 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 Wells Fargo,
then the amount to be paid shall be calculated to include the market price of
the securities, if any, received in that event instead of Wells Fargo common
stock. The share multiplier for these securities shall equal the product of
the share multiplier in effect for Wells Fargo 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 Wells Fargo 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 Wells Fargo 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 Wells Fargo common stock or any other
security received in a reorganization event 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 market price of Wells Fargo common stock, including, without limitation, a
partial tender or exchange offer for Wells Fargo 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 Wells Fargo for cash or in connection with acquisitions or
the occurrence of a partial tender or exchange offer for the common stock of
Wells Fargo by Wells Fargo 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 Wells Fargo
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 Wells Fargo 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.
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 Wells Fargo common stock,
(4) a suspension of trading in an options contract on Wells Fargo
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
Wells Fargo common stock, and
(5) a suspension, absence or material limitation of trading on the
primary securities market on which options contracts related to
Wells Fargo 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 the market price of
securities other than Wells Fargo common stock, then the above definition
shall be revised to include each such security in the same manner as Wells
Fargo 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 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.
WELLS FARGO COMMON STOCK
The following information has been derived from publicly available
documents published by Wells Fargo & Company. We make no representation or
warranty as to the accuracy or completeness of the following information.
Wells Fargo & Company (together with its subsidiaries, "Wells Fargo") is a
diversified financial services company organized under the laws of Delaware
and registered under the Bank Holding Company Act (BHC Act) of 1956, as
amended. Based on assets as of December 31, 1999, it was the seventh largest
bank holding company in the United States. As a diversified financial services
organization, Wells Fargo & Company (the "Parent") owns subsidiaries engaged
in banking and a variety of related businesses. Subsidiaries of the Parent
provide retail, commercial and corporate banking services through banks
located in Arizona, California, Colorado, Idaho, Illinois, Indiana, Iowa,
Minnesota, Montana, Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oregon,
South Dakota, Texas, Utah, Washington, Wisconsin, and Wyoming. Additional
financial services are provided to customers by subsidiaries engaged in
various businesses: principally wholesale banking, mortgage banking, consumer
finance, equipment leasing, agricultural finance, commercial finance,
securities brokerage and investment banking, insurance agency services,
computer and data processing services, trust services, mortgage-backed
securities servicing and venture capital investment. As of December 31, 1999,
Wells Fargo's significant subsidiaries, as defined by SEC rules, were (a)
Norwest Bank Minnesota, N.A. and its consolidated subsidiaries, (b) Norwest
Limited, L.L.C., (c) Norwest Venture Partners VI, LP, and (d) WFC Holdings
Corporation and its consolidated subsidiaries, including its principal
subsidiary, Wells Fargo Bank, N.A.
Information provided to or filed with the SEC by Wells Fargo can be
located at the SEC's facilities or through the SEC's website by reference to
SEC file number 1-2979 for Wells Fargo. 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 Wells Fargo common stock is not a recommendation to buy
or sell Wells Fargo common stock and neither ML&Co. nor any of its affiliates
make any representation to any purchaser of notes as to the performance of
Wells Fargo common stock.
Wells Fargo common stock trades on the NYSE under the symbol "WFC".
ML&Co. is not affiliated with Wells Fargo and Wells Fargo does not have
any obligations with respect to the notes. This pricing supplement relates
only to the notes and does not relate to Wells Fargo common stock or other
securities of Wells Fargo. All disclosures contained in this pricing
supplement regarding Wells Fargo 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 Wells Fargo 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
Wells Fargo 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
Wells Fargo common stock have been publicly disclosed. Subsequent disclosure
of any events or the disclosure of or failure to disclose material future
events concerning Wells Fargo 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 Wells Fargo common stock.
ML&Co. or its affiliates may presently or from time to time engage in
business, directly or indirectly, with Wells Fargo including extending loans
to, or making equity investments in, Wells Fargo or providing investment
banking or advisory services to Wells Fargo, 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 Wells Fargo and, in
addition, one or more affiliates of ML&Co. may publish research reports with
respect to Wells Fargo.
Any prospective purchaser of a note should undertake an independent
investigation of Wells Fargo as in its judgment is appropriate to make an
informed decision with respect to an investment in the notes.
Historical data
Wells Fargo common stock is principally traded on the NYSE. The following
table sets forth the high and low closing prices during 1996, 1997, 1998,
1999, 2000 and during 2001 through January 5, 2001. On January 5, 2001, the
last recorded transaction price on the NYSE for Wells Fargo common stock was
$52.38 per share. The closing prices and dividends per share listed below were
obtained from Bloomberg Financial Markets. The historical closing prices of
Wells Fargo common stock should not be taken as an indication of future
performance, and no assurance can be given that the price of Wells Fargo
common stock will not decrease. In addition, no assurance can be given that
the price of Wells Fargo 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 per
High Low Share(1)
------------- ------------- -------------
Wells Fargo
1996
<S> <C> <C> <C> <C>
First Quarter.................................... $18 1/2 $15 1/2 $0.12
Second Quarter................................... $23 3/8 $21 $0.135
Third Quarter.................................... $20 3/8 $161/4 $0.135
Fourth Quarter................................... $23 3/8 $21 $0.135
1997
First Quarter.................................... $26 1/2 $21 5/8 $0.15
Second Quarter................................... $29 7/16 $22 3/8 $0.15
Third Quarter.................................... $32 1/8 $28 1/2 $0.15
Fourth Quarter................................... $38 7/8 $31 1/16 $0.165
1998
First Quarter.................................... $43 7/16 $35 9/16 $0.165
Second Quarter................................... $43 1/8 $34 1/4 $0.165
Third Quarter.................................... $39 3/8 $29 3/4 $0.185
Fourth Quarter................................... $40 5/8 $31 5/8 $0.185
1999
First Quarter.................................... $40 3/16 $32 3/4 $0.185
Second Quarter................................... $44 $35 11/16 $0.20
Third Quarter.................................... $45 3/16 $37 3/8 $0.20
Fourth Quarter................................... $49 1/16 $39 $0.20
2000
First Quarter.................................... $41 11/16 $31 7/8 $0.22
Second Quarter................................... $47 3/4 $38 5/16 $0.22
Third Quarter.................................... $46 3/4 $40 11/16 $0.22
Fourth Quarter................................... $55 3/4 $44 11/16 $0.24
2001
First Quarter (through January 5, 2001).......... $53 15/16 $51 7/8 --
</TABLE>
--------
(1) ML&Co. makes no representation as to the amount of dividends, if any,
that issuers of Wells Fargo 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 Wells Fargo 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 Wells Fargo common stock with
MLPF&S. MLPF&S has purchased shares of Wells Fargo 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 Wells Fargo
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 Wells Fargo 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 pricing 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
$1,543.8106 per $1,000 of principal amount of the notes ("Projected Redemption
Amount"). This represents an estimated yield on the notes equal to 6.35% 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, in the event that the
amount payable upon maturity (the "Actual Redemption Amount") exceeds
$1,543.8106 on every $1,000 note, a U.S. Holder will be required to include
the excess of the Actual Redemption Amount over $1,543.8106 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 $1,543.8106 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. 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 6.35% 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>
January 12, 2001 through July 7, 2001............... $31.0444 $31.0444
July 8, 2001 through January 7, 2002................ $32.6969 $63.7413
January 8, 2002 through July 7, 2002................ $33.6953 $97.4366
July 8, 2002 through January 7, 2003................ $34.7254 $132.1620
January 8, 2003 through July 7, 2003................ $35.7883 $167.9503
July 8, 2003 through January 7, 2004................ $36.8849 $204.8352
January 8, 2004 through July 7, 2004................ $38.0163 $242.8515
July 8, 2004 through January 7, 2005................ $39.1836 $282.0351
January 8, 2005 through July 7, 2005................ $40.3880 $322.4231
July 8, 2005 through January 7, 2006................ $41.6306 $364.0537
January 8, 2006 through July 7, 2006................ $42.9127 $406.9664
July 8, 2006 through January 7, 2007................ $44.2355 $451.2019
January 8, 2007 through July 7, 2007................ $45.6003 $496.8022
July 8, 2007 through January 7, 2008................ $47.0084 $543.8106
----------------
Projected Redemption Amount = $1,543.8106 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.
