Preliminary Pricing Supplement
Subject to Completion Dated June 20, 2002
PRICING SUPPLEMENT Rule 424(b)(3)
- ------------------ File No. 333-83374
(To Prospectus Supplement and
Prospectus dated April 1, 2002)
Pricing Supplement Number:
Merrill Lynch & Co., Inc.
Medium-Term Notes, Series B
Due Nine Months or More from Date of Issue
Currency Basket Linked Notes due July , 2004
(the "Notes")
------------------
The Notes, as further described below, have a two year term and are a
U.S. Dollar denominated investment linked to an index designed to reflect the
currency exchange rate movements of the currencies of several different
countries relative to the U.S. Dollar. The Notes are designed for investors
who believe these currencies will, in the aggregate, appreciate versus the
U.S. Dollar during the term of Notes. The Notes are 100% principal protected,
meaning that at maturity you will receive no less than the Issue Price of
$1,000 per $1,000 principal amount of Notes. However, you will not receive
more than $1,250 per $1,000 principal amount of Notes at maturity.
Investing in the Notes involves risks that are described in the "Risk
Factors" section of this pricing supplement and the accompanying Prospectus
Supplement.
Aggregate principal amount .................... $
Stated Maturity Date .......................... July , 2004.
Issue Price ................................... $1,000 per Note.
Original Issue Date ........................... July , 2002.
Currency Basket Index.......................... The Currency Basket Index (the "Index") is designed to reflect
the currency exchange rate movements of several different
countries relative to the U.S. Dollar. The value of the Index
will initially be set to 100 on the date the Notes are priced for
initial sale to the public (the "Pricing Date"). On the Pricing
Date, each currency, the Euro, the British Pound, the Canadian
Dollar, the Australian Dollar and the New Zealand Dollar, will be
represented in the Index in an amount equivalent to U.S.$20.00,
using the Exchange Rates (as defined below) applicable to such
currency on the Pricing Date. Each such currency, other than the
U.S. Dollar, is referred to in this pricing supplement as an
"Index Component." The value of each Index Component as
established on the Pricing Date underlying the Index will remain
fixed for the entire term of the Notes. These fixed amounts will
be used to compute future Index Values by converting the Index
Components back into U.S. Dollars given then current Exchange
Rates, as described below.
Amount payable at maturity .................... At the Stated Maturity Date, for each Note that you own, you will
receive a "Redemption Amount" equal to:
( (( Ending Value ) ) )
$1000 x ( 1+ (( -------------- ) -1 ) x 2.5 )
( (( Starting Value ) ) )
provided, however, you will not receive less than the Issue Price of
$1,000 per Note nor more than $1,250 per Note.
Starting Value................................. On the Pricing Date, the Starting Value will be set to a base
value of 100 using the Exchange Rates obtained by the Calculation
Agent as described below on the Pricing Date.
Ending Value................................... The Ending Value will be equal to the Index Value on the seventh
scheduled Business Day prior to the Stated Maturity Date using the
Exchange Rates obtained by the Calculation Agent as described below
on such seventh scheduled Business Day prior to the Stated Maturity Date.
Index Value.................................... The Index Value at any time will equal the sum of the Index
Components, as established on the Pricing Date, converted back
into U.S. Dollars using then current Exchange Rates obtained by
the Calculation Agent as described below.
Minimum amount payable at maturity............. Issue Price of $1,000 per Note.
Maximum amount payable at maturity............. $1,250 per Note.
Exchange Rates................................. For purposes of determining an Index Value, the Exchange Rates
will be those currency exchange rates in the interbank market as
reported by Reuters Group PLC ("Reuters") on page WRDL, or any
substitute page thereto, at approximately 10:00 a.m. New York
City time. If the currency exchange rates are not so quoted on
Reuters page WRDL, or any substitute page thereto, then the
Exchange Rates used to calculate the Index will equal 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, then the Exchange Rates will be
calculated on the basis of the arithmetic mean of the applicable
spot quotations received by the Calculation Agent at
approximately 10:00 a.m. New York City time on the relevant date
for the purchase or sale for deposits in the relevant currencies
by the London offices of four leading banks engaged in the
interbank market (selected in the sole discretion of the
Calculation Agent) (the "Reference Banks"). If fewer than three
Reference Banks provide such spot quotations, then the Exchange
Rates will be calculated on the basis of the arithmetic mean of
the applicable spot quotations received by the Calculation Agent
at approximately 10:00 a.m. New York City time on the relevant
date from three leading commercial banks in New York (selected in
the sole discretion of the Calculation
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Agent), for the purchase or sale for deposits in the relevant currencies.
If these spot quotations are available from fewer than three banks, then
the Calculation Agent, in its sole discretion, shall determine which
quotation is available and reasonable to be used. If no such spot
quotation is available, then the Exchange Rates will be the rate
the Calculation Agent, in its sole discretion, determines to be
fair and reasonable under the circumstances at approximately
10:00 a.m. New York City time, on the relevant date.
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, regulation or executive order to close in The
City of New York that is also a London Banking Day, and such
banks are open for dealing in a foreign exchange and foreign
currency deposits.
CUSIP number ..................................
Form of Notes ................................. Book-entry.
Denominations ................................. We will issue and sell the Notes in denominations of $1,000 and
integral multiples of $1,000 in excess thereof.
Trustee ....................................... JPMorgan Chase Bank.
Calculation Agent.............................. Merrill Lynch Capital Services Inc. All determinations made by the
Calculation Agent will be at the sole discretion of the Calculation
Agent and, absent manifest error, will be conclusive for all purposes
and binding on Merrill Lynch & Co., Inc. ("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.
Proceeds to ML&Co.............................. $
Underwriting Discount.......................... $
3
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, as well as the
risks described in the accompanying Prospectus Supplement, before you decide
that an investment in the Notes is suitable for you.
The value of the Notes is closely related to changes in the value of the
U.S. Dollar relative to the Index Components.
The value of any currency, including the Index Components and the U.S.
Dollar, may be affected by complex political and economic factors. The spot
exchange rate of the Index Components in terms of the U.S. Dollar is at any
moment a result of the supply and demand for the 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
countries of the Index Components 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 countries of the
Index Components and in the United States, all of which are in turn sensitive
to the monetary, fiscal and trade policies pursued by these countries 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 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 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 Notes is that their liquidity, trading
value and the amount payable at maturity, could be affected by the actions of
sovereign governments 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 Notes 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, the issuance of a
replacement currency or in the event of other developments affecting the Index
Components, the U.S. Dollar or any other currency.
You may not earn a return on your investment.
You should be aware that if the Ending Value does not exceed the Starting
Value, will only receive the Issue Price of $1,000 per Note. This will be true
even if the value of the Index was higher than the Starting Value at some time
during the life of the Notes but later falls to or below the Starting Value.
Your return on the Notes is linked to the Index and is designed for investors
who believe that the Index Components will, in the aggregate, appreciate
against the U.S. Dollar during the course of the next 24 months. The Index may
depreciate as well as appreciate and, although the investor has the
opportunity to receive a return, the investor risks a lower return than
comparable instruments, or no return at all. As such, the investment may not
be suitable for persons unfamiliar with the foreign currency markets, or
unwilling or unable to bear the risks of an investment in the Notes. Investors
should consult their advisers if in any doubt as to the nature of the
investment and its suitability for them in the light of their particular
circumstances.
There may be an uncertain trading market for the Notes.
While there have been several issuances of ML&Co.'s Medium-Term Notes,
Series B, upon issuance, your Notes will not have an established trading
market. We cannot assure you that a trading market for your Notes will ever
develop or be maintained if developed. The development of a trading market for
the Notes will
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depend on our financial performance and other factors such as the change in
the value of the Index. If the trading market for the Notes is limited, there
may be a limited number of buyers for your Notes if you do not wish to hold
your investment until maturity. This may affect the price you receive.
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, with respect to each Note, will be equal
to the amount payable on the Stated Maturity Date, calculated as though the
date of early repayment were the Stated Maturity Date of the Notes. 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 Issue Price of the Note plus an additional
amount of contingent interest calculated as though the date of the
commencement of the proceeding was the maturity date of the Notes.
In case of default in payment of the Notes, whether at their Stated
Maturity Date or upon acceleration, from and after that date the Notes will
bear interest, payable upon demand of their beneficial owners, at the rate of
% per annum to the extent that payment of any interest is legally enforceable
on the unpaid amount due and payable on that date in accordance with the terms
of the Notes to the date payment of that amount has been made or duly provided
for.
HYPOTHETICAL RETURNS
The following table illustrates, for a range of hypothetical Ending
Values:
o the total amount per Note payable at maturity, and
o the total rate of return on the Notes at maturity.
Total
Hypothetical Amount Annual
Ending Payable at Rate of
Value of the Maturity Return on
Index Per Note(1) the Notes(2)
----------------------------------------------------
85 100.00% 0.00%
90 100.00% 0.00%
95 100.00% 0.00%
100(3) 100.00% 0.00%
105 112.50% 5.98%
110 125.00% 11.47%
115 125.00% 11.47%
120 125.00% 11.47%
125 125.00% 11.47%
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(1) This column represents the percentage of the Issue Price payable at
maturity.
(2) The annualized rates of return are calculated on a semiannual bond
equivalent basis.
(3) This will be the Starting Value of the Index.
As of June 20, 2002 the value of the Index Components relative to the U.S.
Dollar were as follows: U.S.$0.9600 to 1 Euro, U.S.$1.4985 to 1 British
Pound, U.S.$0.5685 to 1 Australian Dollar, U.S.$0.4880 to 1 New Zealand
Dollar and U.S.$1 to 1.5350 Canadian Dollars.
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CURRENCY BASKET INDEX
Hypothetical Historical Data on the Index
The Index is designed to reflect the changes over time of the currency
exchange rates of several different countries relative to the U.S. Dollar. The
following table sets forth the hypothetical level of the Index at the end of
each month (the "Historical Month-End Closing Level"), in the period from
January 1999 through June 2002 calculated as if the Index had existed during
that period. The closing levels have been calculated hypothetically on the
same basis that the Index will be calculated in the future. The Historical
Month-End Closing Level was set to 100 on January 31, 1999 to provide an
illustration of past movements of the Historical Month-End Closing Level only.
We have provided this hypothetical historical information to help you evaluate
the behavior of the Index in various economic environments; however, these
historical data on the Index are not necessarily indicative of the future
performance of the Index or what the value of the Notes may be. Any historical
upward or downward trend in the level of the Index during any period set forth
below is not any indication that the Index is more or less likely to increase
or decrease at any time during the term of the Notes.
1999 2000 2001 2002
------ ----- ----- -----
January.............. 100.00 96.27 88.45 82.86
February............. 98.08 94.82 86.21 83.51
March................ 98.63 94.75 82.21 84.91
April................ 100.69 91.90 84.35 86.56
May.................. 98.78 90.13 83.06 89.78
June................. 99.13 91.97 83.51
July................. 99.02 90.20 84.02
August............... 97.96 87.91 86.37
September............ 99.42 85.97 83.81
October.............. 98.30 83.47 83.78
November............. 96.79 84.42 84.37
December............. 98.56 89.13 83.97
UNITED STATES FEDERAL INCOME TAXATION
Set forth in full below is the opinion of Sidley Austin Brown & Wood LLP,
counsel to ML&Co., as to certain United States Federal income tax consequences
of the purchase, ownership and disposition of the Notes. 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 Notes
held as capital assets and does not purport to deal with persons in special
tax situations, such as financial institutions, insurance companies, regulated
investment companies, dealers in securities or currencies, traders in
securities that elect to mark to market, tax-exempt entities, persons holding
Notes in a tax-deferred or tax-advantaged account, or persons holding Notes as
a hedge against currency risks, as a position in a "straddle" or as part of a
"hedging" or "conversion" transaction for tax purposes. It also does not deal
with holders other than original purchasers (except where otherwise
specifically noted in this pricing supplement) or with holders that have a
functional currency other than the U.S. dollar. The following discussion also
assumes that the issue price of the Notes, as determined for United States
Federal income tax purposes, equals the principal amount thereof. Persons
considering the purchase of the Notes 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 Notes arising under the laws of any other
taxing jurisdiction.
6
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 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 U.S. Holders. As used herein, the term "non-U.S. Holder" means a
beneficial owner of a Note that is not a U.S. Holder.
General
There are no statutory provisions, regulations, published rulings or
judicial decisions addressing or involving the characterization, for United
States Federal income tax purposes, of the 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 (the "IRS") in
accordance with this treatment, in the absence of any change or clarification
in the law, by regulation or otherwise, requiring a different characterization
of the 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.
U.S. Holders
On June 11, 1996, the Treasury Department issued final regulations (the
"CPDI Regulations") concerning the proper United States Federal income tax
treatment of contingent payment debt instruments, which apply to debt
instruments issued on or after August 13, 1996. In general, the CPDI
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. However, debt instruments that are subject to the rules regarding foreign
currency gain or loss (the "Foreign Currency Rules") are generally exempt from
the timing and character rules provided by the CPDI Regulations. Since the
amount payable at maturity will be determined by reference to the value of the
Index, the Notes generally should be subject to the Foreign Currency Rules and
should not be subject to the CPDI Regulations. However, the Foreign Currency
Rules do not set forth specific rules for determining the amount of income,
gain or loss realized by a taxpayer from holding a debt instrument that
provides for one or more contingent payments, similar to the Notes. In the
absence of any specific provision in the Foreign Currency Rules, the United
States Federal income tax consequences of the purchase, ownership and
disposition of the Notes should be governed
7
by a combination of both the general principles contained in the Foreign
Currency Rules and general principles of United States Federal income tax law.
Under general principles of United States Federal income tax law,
payments of interest on a debt instrument generally will be taxable to a U.S.
Holder as ordinary interest income at the time such payments are accrued or
are received (in accordance with the U.S. Holder's regular method of tax
accounting). Under these principles, the amount payable at maturity with
respect to a Note in excess of the principal amount thereof (the "Supplemental
Amount Payable at Maturity"), if any, would be treated as contingent interest
and generally would be includible in income by a U.S. Holder as ordinary
interest on the date that the Supplemental Amount Payable at Maturity is
accrued (i.e., generally when the Supplemental Amount Payable at Maturity
becomes fixed in amount and becomes unconditionally payable) or when such
amount is received, in accordance with the U.S. Holder's regular method of tax
accounting.
Upon the sale or exchange of a Note prior to maturity, a U.S. Holder
generally would recognize taxable gain or loss in an amount equal to the
difference, if any, between the amount realized on the sale or exchange and
such 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. Such gain or loss generally should be capital gain or loss and
should be long-term capital gain or loss if the Note has been held by the U.S.
Holder for more than one year. However, any portion of such gain or loss that
is attributable to changes in the value of the currencies comprising the Index
should constitute exchange gain or loss which will be characterized as
ordinary income or loss. It is possible, however, that the IRS could assert
that all or any portion of the amounts realized upon the sale or exchange of a
Note prior to its maturity in excess of the principal amount thereof
constitutes ordinary interest income. In addition, 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 purchases) may be subject to rules
providing for certain adjustments to the foregoing rules and these U.S.
Holders should consult their own tax advisors concerning these rules.
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 1042-S. For a non-U.S. Holder to qualify for
the exemption from taxation, any person, U.S. or foreign, that has control,
receipt, or custody of an amount subject to withholding, or who can disburse
or make payments of an amount subject to withholding (the "Withholding Agent")
must have received a statement that (a) is signed by the beneficial owner of
the Note under penalties of perjury, (b) certifies that such owner is a
non-U.S. Holder and (c) provides the name and address of the beneficial owner.
The statement may generally be made on IRS Form W-8BEN (or other applicable
form) or a substantially similar form, and the beneficial owner must inform
the Withholding Agent of any change in the information on the statement within
30 days of that change by filing a new IRS Form W-8BEN (or other applicable
form). Generally, a Form W-8BEN provided without a U.S. taxpayer
identification number will remain in effect for a period starting on the date
the form is signed and ending on the last day of the third succeeding calendar
year, unless a change in circumstances makes any information on the form
incorrect. If a 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. Under certain
circumstances, the signed statement must be accompanied by a copy of the
applicable IRS Form W-8BEN (or other applicable form) or the substitute form
provided by the beneficial owner to the organization or institution.
Under current law, a 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
8
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 at the applicable statutory rate of United States
Federal income tax may apply to payments made in respect of the Notes 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 Notes 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 on the entire purchase price, unless either (a) the broker
determines that the seller is a corporation or other exempt recipient or (b)
the seller provides, in the required manner, certain identifying information
(e.g., an IRS Form W-9) and, in the case of a non-U.S. Holder, certifies that
such seller is a non-U.S. Holder (and certain other conditions are met). Such
a sale must also be reported by the broker to the IRS, unless either (a) the
broker determines that the seller is an exempt recipient or (b) the seller
certifies its non-U.S. status (and certain other conditions are met).
Certification of the registered owner's non-U.S. status would be made normally
on an IRS Form W-8BEN (or other applicable form) under penalties of perjury,
although in certain cases it may be possible to submit other documentary
evidence.
Any amounts withheld under the backup withholding rules from a payment to
a beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
9