Subject to Completion
Preliminary Pricing Supplement Dated September 17, 2002
PRICING SUPPLEMENT DATED OCTOBER , 2002 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
Dow Jones Industrial Average/SM/ Floor Notes due April , 2006
(the "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 the Notes. The Notes will pay interest semi-annually at a rate of
1.50% per annum on the principal amount of the Notes. The Notes will pay a
Supplemental Return Amount (as defined below) at maturity based upon a
predetermined maximum percentage minus the sum of the monthly percentage
declines of the Dow Jones Industrial Average/SM/ over the term of the Notes.
The Supplemental Return Amount will not exceed an amount, to be determined on
the Pricing Date, of between $650 and $700 per $1,000 principal amount of the
Notes and will not be less than zero. The Notes will be part of a series of
senior debt securities entitled "Medium-Term Notes, Series B" as more fully
described in the attached Prospectus Supplement. This pricing supplement
supplements the attached Prospectus Supplement and Prospectus and supercedes
information in such Prospectus Supplement and Prospectus to the extent it
contains information that is different from the information in the attached
Prospectus Supplement and Prospectus.
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......................... April , 2006
Issue Price.................................. $1,000 per Note
Original Issue Date.......................... October , 2002
Interest Payments............................ 1.50% per annum on the principal amount of each Note payable
semi-annually
Interest Payment Dates....................... Each April and October , commencing on April , 2003 and
ending on the Stated Maturity Date. If such day is not a Business
Day, any payment due on such Interest Payment Date will be made on
the immediately succeeding Business Day and no additional interest
will accrue as a result of the delayed payment.
The Index.................................... The Dow Jones Industrial Average/SM/ (the "Index"), which is
published by Dow Jones & Company, Inc. ("Dow Jones"), is a
price-weighted index. This means that a component stock's weight
in the Index is based on its price per share rather than the total
market capitalization of the issuer of that component stock. The
Index is designed to provide an indication of the composite price
performance of 30 common stocks of corporations representing a
broad cross-section of U.S. industry. The component stocks of the
Index are selected by the editors of The Wall Street Journal (the
"WSJ"). The corporations represented in the Index tend to be
market leaders in their respective industries and their stocks are
typically widely held by individuals and institutional investors.
The corporations currently represented in the Index are
incorporated in
"Dow Jones", "Dow Jones Industrial Average/SM/" and "DJIA/SM/" are service
marks of Dow Jones & Company, Inc. and have been licensed for use for certain
purposes by Merrill Lynch, Pierce, Fenner & Smith Incorporated. The Notes are
not sponsored, endorsed, sold or promoted by Dow Jones.
the U.S. and its territories and their stocks are
traded on the New York Stock Exchange and The Nasdaq National
Market. As of September 16, 2002, the market capitalization of
the stocks in the Index ranged from approximately $8.3 billion to
$269.1 billion, with the average market capitalization being $87.7
billion.
The value of the Index is the sum of the primary exchange prices of each of
the 30 common stocks included in the Index, divided by a divisor that is
designed to provide a meaningful continuity in the value of the Index.
Because the Index is price-weighted, stock splits or changes in the component
stocks could result in distortions in the Index value. In order to prevent
these distortions related to extrinsic factors, the divisor may be changed in
accordance with a mathematical formula that reflects adjusted proportions
within the Index. The current divisor of the Index is published daily in the
WSJ and other publications. In addition, other statistics based on the Index
may be found in a variety of publicly available sources.
An investment in the Notes does not entitle you to any ownership interest in
the stocks of the companies included in the Index.
Amount payable at maturity................... On the Stated Maturity Date, for each Note you will receive:
(i) the principal amount of $1,000;
(ii) accrued but unpaid interest; and
(iii) the Supplemental Return Amount, if any.
The "Supplemental Return Amount" per Note will equal the greater of:
(a) $1,000 x Supplemental Return Percentage; and
(b) zero.
Supplemental Return Percentage and Maximum
Percentage................................... The "Supplemental Return Percentage" will equal the Maximum
Percentage, which is expected to be between 65% to 70% (the
"Maximum Percentage"), less the sum of all negative price returns
on the Index as described herein for each monthly calculation
period in respect of which the Index experiences a negative price
return (the "Negative Returns"). The Maximum Percentage will be
determined on the date we price the Notes for initial sale to the
public (the "Pricing Date") and will appear in the final Pricing
Supplement.
Negative Returns............................. The Negative Returns will equal the sum of all negative price
returns on the Index for each monthly calculation period during
the term of the Notes (each monthly return for such period being a
"Monthly Return"). The Calculation Agent shall determine each
Monthly Return on the of each month or, if such day is not an
Index Business Day, the next succeeding day that is an Index
Business Day except as described below under the definition of
Index Business Day (a "Monthly Return Calculation Date") by
determining the percentage change in the closing value of the
Index on such Monthly Return Calculation Date relative to the
closing value of the Index on the immediately preceding Monthly
Return Calculation Date, or, in the case of the first Monthly
Return Calculation Date, , the value of the Index on the
Pricing Date. Each such negative Monthly Return (i.e., percentage
decrease) will
P-2
be subtracted from the Maximum Percentage.
You should understand that for you to receive the maximum value of the
Supplemental Return Amount, the Negative Returns must equal zero. This will
occur only if there are no negative Monthly Returns as of any of the 42
Monthly Return Calculation Dates, which we consider very unlikely to happen.
Any negative Monthly Returns will reduce the Supplemental Return Percentage
and therefore the value of the Supplemental Return Amount. The Supplemental
Return Percentage will not be increased by positive Monthly Returns. The
Supplemental Return Amount could equal zero.
Minimum amount payable at
maturity.................................... Issue Price of $1,000 per Note, plus accrued and unpaid interest.
Maximum amount payable at
maturity..................................... Between $1,650 and $1,700 per Note, to be determined on the
Pricing Date, plus accrued and unpaid interest.
Business Day................................. "Business Day" means any day, other than a Saturday or Sunday,
that is neither a legal holiday nor a day on which commercial
banks are authorized or required by law, regulation or executive
order to close in The City of New York.
Index Business Day........................... "Index Business Day" means a day on which the New York Stock
Exchange, the AMEX and the Nasdaq Stock Market are open for
trading, a Market Disruption Event has not occurred and the Index
or any successor index is calculated and published.
If any Monthly Return Calculation Date is not an Index Business Day, the
Monthly Return will be determined on the immediately succeeding Index
Business Day; provided, however, that if the final Monthly Return Calculation
Date of April , 2006 is not an Index Business Day, then the Monthly Return
will be determined as if the immediately preceding Index Business Day were
the final Monthly Return Calculation Date.
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, Pierce, Fenner & Smith Incorporated
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........................ $
P-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, and the risks
described in the accompanying Prospectus Supplement, before you decide that an
investment in the Notes is suitable for you.
Your return will be reduced by monthly decreases in the Index over the term of
the Notes
At maturity you will receive for each $1,000 principal amount of
Notes, $1,000, accrued and unpaid interest and the Supplemental Return Amount,
if any. The Supplemental Return Amount will depend on the sum of the monthly
decreases in the value of the Index during the term of the Notes, or the
Negative Returns. Because the Supplemental Redemption Amount will be reduced by
monthly decreases and will not be increased by any monthly increases in the
value of the Index, your return will not correspond to the change in the value
of the Index from the Pricing Date to the final Monthly Return Calculation
Date.
You should understand that for you to receive the maximum value of
the Supplemental Return Amount, the Negative Returns must equal zero. This will
occur only if there are no monthly decreases in the value of the Index as of
any of the 42 Monthly Return Calculation Dates, which we consider very unlikely
to happen. The Supplemental Return Amount could equal zero.
Any negative Monthly Returns will reduce the value of the
Supplemental Return Percentage and therefore the Supplemental Return Amount.
The Supplemental Return Percentage will not be increased by positive Monthly
Returns.
You should expect that the value of the Notes will be affected by the
volatility of the Index. Volatility is the term used to describe the size and
frequency of price and/or market fluctuations. A high volatility of the Index
during the term of the Notes would be expected to increase the size and
probability of occurrence of Negative Returns and thus reduce the Supplemental
Return Amount. In recent periods, the Index has experienced significant
volatility. We cannot predict the future volatility of the Index.
Your yield may be lower than the yield on a standard debt security of
comparable maturity
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 interest may not reflect the full opportunity cost to you
when you take into account factors that affect the time value of money.
A trading market for the Notes is not expected to develop
The Notes will not be listed on any securities exchange; and we do
not expect a trading market for the Notes to develop. Although our affiliate
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") has indicated
that it expects to bid for Notes offered for sale to it by Note holders, it is
not required to do so and may cease making such bids at any time. The limited
trading market for your Notes may affect the price that you receive for your
Notes if you do not wish to hold your investment until maturity.
Many factors affect the 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 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 value of the Notes caused by another
factor and that the effect of one factor may exacerbate the decrease in the
value of the Notes caused by another factor. For example, an increase in U.S.
interest rates may offset some or all of any increase in the value of the Notes
attributable to another factor, such as a sustained period with no negative
Monthly Returns. 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.
P-4
The value of the Index is expected to affect the value of the Notes.
We expect that the Supplemental Return Amount, and therefore the value of the
Notes, will depend substantially on the direction and, if negative, magnitude
of changes in the monthly market values of the Index. Since the Supplemental
Return Amount can only decrease but not increase, we would expect the Notes to
be valued by secondary market participants at a level that discounts, and
perhaps discounts significantly, the then-current maximum possible Supplemental
Return Amount. For example, if early in the term of the Notes, the Negative
Returns exceed the Maximum Percentage (i.e., the Supplemental Return Amount
equals zero), then no value will be given to the Supplemental Return Amount for
the remainder of the term of the Notes. You should be aware that, depending on
the timing of increases and decreases in the value of the Index during the term
of the Notes, it is possible for the Index to increase over the term of the
Notes and for the Supplemental Return Amount to equal zero.
Changes in the levels of interest rates are expected to affect the
value of the Notes. In general, if U.S. interest rates increase, we expect that
the value of the Notes will decrease due to the fixed coupon and return of
principal and, conversely, if U.S. interest rates decrease, we expect the value
of the Notes will increase. Furthermore, the affect of interest rates on the
Index may affect the value of the Notes. In general, rising U.S. interest rates
may lower the value of the Index and, thus, may lower the value of the Notes.
Falling U.S. interest rates may increase the value of the Index and, thus, may
increase the value of the Notes.
Changes in the volatility of the Index are expected to affect the
value of the Notes. If the volatility of the Index increases, the value of the
Notes may be adversely affected. Increased volatility increases the probability
of negative changes in the Index, and the magnitude of such negative changes,
on any particular Monthly Return Calculation Date, thereby increasing the
probability of larger Negative Returns, which would reduce the value of the
Notes.
Changes in dividend yields of the stocks included in the Index are
expected to affect the value of the Notes. In general, if dividend yields on
the stocks included in the Index increase, we expect that the value of the
Notes will decrease and, conversely, if dividend yields on the stocks included
in the Index decrease, we expect that the value of the Notes will increase.
Changes in our credit ratings may affect the 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
value of the Notes. However, because the return on your Notes is dependent upon
factors in addition to our ability to pay our obligations under the Notes, such
as the extent of the Negative Returns, an improvement in our credit ratings
will not reduce the other investment risks related to the Notes.
Purchases and sales by us and our affiliates may affect your return
We and our affiliates may from time to time buy or sell the stocks
included in the Index or futures or options contracts on the Index or engage in
other transactions for our own accounts for business reasons or in connection
with hedging our obligations under the Notes. These transactions could affect
the price of these stocks and, in turn, the value of the Index in a manner that
would be adverse to your investment in the Notes.
Potential conflicts
MLPF&S, our subsidiary, is the underwriter for the offering and sale
of the Notes. After the initial offering, MLPF&S may buy and sell Notes and may
stabilize or maintain the market price of the Notes during initial
distribution. However, MLPF&S will not be obligated to engage in any of these
market activities or to continue them once it has started.
MLPF&S is also the calculation agent for the Notes. MLPF&S is
required to carry out its duties as calculation agent in good faith and using
its reasonable judgment. However, you should be aware that because we control
MLPF&S, potential conflicts of interest could arise. These conflicts could
occur under certain circumstances, for instance, in connection with the
determination as to whether the value of the Index can be calculated on a
trading day, or in connection with its judgments that it would be required to
make in the event of a
P-5
discontinuance of the Index. See the sections entitled "The Index
- --Adjustments to the Index; Market Disruption Events" and "--Discontinuance of
the Index" in this pricing supplement.
We have entered into an arrangement with one of our subsidiaries to
hedge the market risks associated with our obligations in connection with the
Notes. This subsidiary expects to make a profit in connection with this
arrangement. We did not seek competitive bids for this arrangement from
unaffiliated parties.
Tax consequences
You should consider the tax consequences of investing in the Notes.
See the section entitled "United States Federal Income Taxation" in this
pricing supplement.
HYPOTHETICAL EXAMPLES OF MONTHLY PERCENTAGE CHANGES IN THE INDEX
The following table provides hypothetical percentage changes in the
Index from the closing value in the prior calendar month for the specified
Index Value for each example. Each negative value would represent a negative
Monthly Return, which in aggregate equals the Negative Returns. For purposes of
these hypothetical examples, we have assumed the Maximum Percentage equals
67.5% (the midpoint of the expected range of 65% to 70%). The examples are
based on the following criteria:
o two hypothetical examples, each assuming the Index increases 15%
over the term of the Notes, but with differing Monthly Returns;
and
o two hypothetical examples, each assuming the Index decreases 15%
over the term of the Notes, but with differing Monthly
Returns.
These figures are for purposes of illustration only. The actual
Supplemental Return Amount received by you will depend on the actual values of
the Index on each of the Monthly Return Calculation Dates (i.e., Monthly
Returns) as described herein.
You should understand that for you to receive the maximum value of
the Supplemental Return Amount, the Negative Returns must equal zero. This will
occur only if there are no negative Monthly Returns as of any of the 42 Monthly
Return Calculation Dates, which we consider very unlikely to happen. The
Supplemental Return Amount could equal zero.
Any negative Monthly Returns will reduce the Supplemental Return
Percentage and therefore the value of the Supplemental Return Amount. The
Supplemental Return Percentage will not be increased by positive Monthly
Returns. A high volatility of the Index during the term of the Notes would be
expected to increase the Negative Returns and thus reduce the Supplemental
Return Amount. In recent periods, the Index has experienced significant
volatility. We cannot predict the future volatility of the Index.
P-6
Hypothetical Calculations of the Supplemental Return Amount
EXAMPLE 1 EXAMPLE 2 EXAMPLE 3 EXAMPLE 4
Hypothetical 15% Hypothetical 15% Hypothetical 15% Hypothetical 15%
Increase in the Index - Increase in the Index - Decrease in the Index - Decrease in the Index -
Assumed Maximum Positive Supplemental Zero Supplemental Zero Supplemental Positive Supplemental
Percentage: 67.5% Return Amount Return Amount Return Amount Return Amount
Negative Negative Negative Negative
Monthly Return Index Monthly Index Monthly Index Monthly Index Monthly
Calculation Date Value Return Value Return Value Return Value Return
---------------- ----- -------- ----- -------- ----- -------- ----- --------
Year 1
October 1 8308.05 8308.05 8308.05 8308.05
November 1 8557.74 0.00% 8555.07 0.00% 7697.41 -7.35% 8320.51 0.00%
December 1 8505.57 -0.61% 8811.30 0.00% 7188.61 -6.61% 8269.79 -0.61%
January 1 8454.42 -0.60% 8652.43 -1.80% 7145.38 -0.60% 8220.06 -0.60%
February 1 8327.57 -1.50% 8703.05 0.00% 7038.17 -1.50% 8096.72 -1.50%
March 1 8161.08 -2.00% 8636.23 -0.77% 6088.02 -13.50% 8198.74 0.00%
April 1 7588.73 -7.01% 7329.57 -15.13% 5478.61 -10.01% 7910.97 -3.51%
May 1 7276.38 -4.12% 7624.50 0.00% 5253.11 -4.12% 7664.14 -3.12%
June 1 7333.33 0.00% 8353.14 0.00% 5452.73 0.00% 7724.12 0.00%
July 1 7578.33 0.00% 8863.00 0.00% 5634.90 0.00% 7827.63 0.00%
August 1 7459.16 -1.57% 8926.08 0.00% 5264.69 -6.57% 7704.53 -1.57%
September 1 7425.82 -0.45% 9098.55 0.00% 5241.16 -0.45% 7670.10 -0.45%
Year 2
October 1 7027.72 -5.36% 9047.75 -0.56% 4698.18 -10.36% 7266.66 -5.26%
November 1 7013.91 -0.20% 9513.99 0.00% 4688.95 -0.20% 7252.38 -0.20%
December 1 7232.06 0.00% 10488.98 0.00% 4834.78 0.00% 7477.94 0.00%
January 1 6986.46 -3.40% 10266.06 -2.13% 4421.41 -8.55% 7251.36 -3.03%
February 1 6921.58 -0.93% 10665.68 0.00% 4515.59 0.00% 7184.03 -0.93%
March 1 6893.03 -0.41% 10358.81 -2.88% 4387.34 -2.84% 7154.39 -0.41%
April 1 7683.44 0.00% 10528.10 0.00% 4676.91 0.00% 7386.90 0.00%
May 1 7640.31 -0.56% 10049.46 -4.55% 4510.41 -3.56% 7271.67 -1.56%
June 1 8454.16 0.00% 10431.45 0.00% 4808.10 0.00% 7489.82 0.00%
July 1 8859.60 0.00% 10575.28 0.00% 5203.80 0.00% 7651.60 0.00%
August 1 8921.58 0.00% 11177.37 0.00% 5491.57 0.00% 7705.12 0.00%
September 1 9170.07 0.00% 10636.26 -4.84% 5644.53 0.00% 7950.15 0.00%
Year 3
October 1 9484.81 0.00% 9846.63 -7.42% 5838.26 0.00% 8048.73 0.00%
November 1 9633.22 0.00% 10618.16 0.00% 6155.28 0.00% 8174.67 0.00%
December 1 10453.05 0.00% 10435.38 -1.72% 6465.51 0.00% 8379.86 0.00%
January 1 10229.53 -2.14% 10229.69 -1.97% 6262.49 -3.14% 8116.73 -3.14%
February 1 10416.82 0.00% 10157.32 -0.71% 6377.15 0.00% 8265.26 0.00%
March 1 10223.05 -1.86% 10229.35 0.00% 6258.52 -1.86% 8037.14 -2.76%
April 1 10367.46 0.00% 10903.19 0.00% 6659.70 0.00% 8150.68 0.00%
May 1 10512.04 0.00% 10354.70 -5.03% 6885.46 0.00% 8264.34 0.00%
June 1 10444.52 -0.64% 10666.02 0.00% 6691.98 -2.81% 8211.26 -0.64%
July 1 10578.45 0.00% 10124.85 -5.07% 6777.79 0.00% 8316.55 0.00%
August 1 11017.23 0.00% 10486.85 0.00% 7149.21 0.00% 8522.80 0.00%
September 1 10867.17 -1.36% 10584.57 0.00% 6972.62 -2.47% 8236.43 -3.36%
Year 4
October 1 10537.87 -3.03% 10203.39 -3.60% 6761.33 -3.03% 7986.85 -3.03%
November 1 10074.39 -4.40% 9604.04 -5.87% 7019.62 0.00% 7715.30 -3.40%
December 1 10092.35 0.00% 10436.41 0.00% 7286.36 0.00% 7891.20 0.00%
January 1 10108.32 0.00% 10608.46 0.00% 7297.90 0.00% 7903.69 0.00%
February 1 9539.25 -5.63% 10210.31 -3.75% 7032.98 -3.63% 7458.74 -5.63%
March 1 9634.64 0.00% 10230.15 0.00% 7103.31 0.00% 7533.32 0.00%
April 1 9554.25 -0.83% 9554.25 -6.61% 7061.84 -0.58% 7061.84 -6.26%
Total Return
on the Index: 15.00% 15.00% -15.00% -15.00%
Total Negative Returns: -48.61% -74.41% -93.74% -50.97%
Supplemental Return
Percentage: 18.89% 0.00% 0.00% 16.53%
------------------------------------
As you can see from the foregoing hypothetical examples, it is not
the overall change in the value of the Index from the Pricing Date to maturity,
but rather the percentage changes in the Index on each of the Monthly Return
Calculation Dates, that will determine the Supplemental Return Amount.
P-7
Hypothetical Historical Examples
The following graph sets forth on the left axis the annualized rates
of return for hypothetical notes issued in various series which mature each
month from January 1983 to August 2002. The calculation of these hypothetical
annualized rates of return used historical values of the Index and assumed that
each series of notes had:
o an original maturity of 3 1/2 years (i.e., was issued
3 1/2 years prior to its hypothetical maturity date);
o an annual interest rate of 1.5% per annum;
o a Maximum Percentage equal to 67.5% (the midpoint of
the expected range of 65% to 70%); and
o a Monthly Return Calculation Date of the 15th of each month
or, if such day was not an Index Business Day, the next
succeeding day that was an Index Business Day.
The annualized rates of return are calculated using actual/actual daycount
convention. The graph also sets on the right axis the value of the Index on
the 15th of each month or, if such day was not an Index Business Day, the next
succeeding day that was an Index Business Day.
[THE GRAPH APPEARING HERE SETS FORTH ANNUALIZED RETURNS BASED ON
HISTORICAL INDEX VALUES FROM JANUARY 1983 TO JANUARY 2002. THE VERTICAL
AXIS ON THE LEFT HAS A RANGE OF PERCENTAGES FROM 0.00% TO 14.00% AND THE
VERTICAL AXIS ON THE RIGHT HAS A RANGE OF NUMBERS FROM 0 TO 12000. THE
HORIZONTAL AXIS HAS MONTHLY DATA POINTS FROM JANUARY 1983 THROUGH AUGUST
2002 IN INCREMENTS OF ONE YEAR BEGINNING WITH JANUARY 1983.]
The above graph is for purposes of illustration only. The returns
would vary if a Monthly Return Calculation Date other than those on the 15th of
each month were used. Past movements of the Index are not necessarily
indicative of the future Index values. The Index values in recent periods on
the graph depict high volatility relative to prior periods. This high
volatility explains in part the lower rates of return for the corresponding
periods also seen on the graph. The actual Supplemental Return Amount received
by you and the annualized rate of return on the Notes will depend on the actual
Maximum Percentage and the actual Monthly Returns determined by the calculation
agent as described in this prospectus supplement.
P-8
Historical Closing Values of the Index
The following table sets forth the actual closing level of the Index
on the 15th of each month, in the period from January 1997 through August 2002,
and the percentage change in the Index from the closing level of the Index on
the 15th or, if such day was not an Index Business Day, the next succeeding day
that was an Index Business Day, in the immediately preceding month. This
historical data for the Index is 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 closing 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 decline at any time during the term of the Notes. Monthly
historical information for the same period, but using different monthly dates
(e.g., using closing levels as of the 1st of each month rather than as of the
15th of each month) would result in different monthly increases or decreases.
Historical Values of the Index and Percentage Change
1997 % Chg 1998 % Chg 1999 % Chg
---- ----- ---- ----- ---- -----
Jan...... 6726.88 7.32% 7691.77 -2.91% 9340.55 5.86%
Feb...... 7067.46 5.06% 8398.50 9.19% 9297.03 -0.47%
Mar...... 6955.48 -1.58% 8718.85 3.81% 9958.77 7.12%
Apr...... 6587.16 -5.30% 9162.27 5.09% 10462.72 5.06%
May...... 7333.55 11.33% 9096.00 -0.72% 10853.47 3.73%
Jun...... 7772.09 5.98% 8627.93 -5.15% 10594.99 -2.38%
Jul...... 7975.71 2.62% 9234.47 7.03% 11186.41 5.58%
Aug...... 7694.66 -3.52% 8574.85 -7.14% 11046.79 -1.25%
Sep...... 7721.14 0.34% 8024.39 -6.42% 10801.42 -2.22%
Oct...... 8057.98 4.36% 8299.36 3.43% 10019.71 -7.24%
Nov...... 7698.22 -4.46% 9011.25 8.58% 10760.75 7.40%
Dec...... 7922.59 2.91% 8823.30 -2.09% 11225.32 4.32%
[table continued below]
2000 % Chg 2001 % Chg 2002 % Chg
---- ----- ---- ----- ---- -----
Jan...... 11560.72 2.99% 10652.66 2.09% 9924.15 0.33%
Feb...... 10718.09 -7.29% 10891.02 2.24% 9903.04 -0.21%
Mar...... 10131.41 -5.47% 10031.28 -7.89% 10607.23 7.11%
Apr...... 10582.51 4.45% 10158.56 1.27% 10093.67 -4.84%
May...... 10807.78 2.13% 10872.97 7.03% 10243.68 1.49%
Jun...... 10714.82 -0.86% 10623.64 -2.29% 9687.42 -5.43%
Jul...... 10804.27 0.83% 10472.12 -1.43% 8639.19 -10.82%
Aug...... 11067.00 2.43% 10345.95 -1.20% 8818.14 2.07%
Sep...... 10927.00 -1.27% 8920.70 -13.78%
Oct...... 10238.80 -6.30% 9347.62 4.79%
Nov...... 10707.60 4.58% 9872.39 5.61%
Dec...... 10434.96 -2.55% 9891.97 0.20%
The closing value of the Index on September 16, 2002 was 8,380.18.
The following graph plots the historical monthly percentage change of
the Index from January 1997 through August 2002. Past movements of the Index
are not necessarily indicative of how the Index will perform in the future.
[THE GRAPH APPEARING HERE SETS FORTH THE HISTORICAL MONTHLY PERCENTAGE
CHANGE OF THE INDEX FROM JANUARY 1997 TO AUGUST 2002. THE VERTICAL AXIS
HAS A RANGE OF PERCENTAGES FROM -20.00% TO 15.00%. THE HORIZONTAL AXIS HAS
MONTHLY DATA POINTS FROM JANUARY 1997 THROUGH AUGUST 2002 IN INCREMENTS
OF THREE MONTHS BEGINNING WITH JANUARY 1997.]
P-9
THE INDEX
Unless otherwise stated, all information herein on the Index is
derived from Dow Jones or other publicly available sources. This information
reflects the policies of Dow Jones as stated in the publicly available sources
and the policies are subject to change by Dow Jones. Dow Jones is under no
obligation to continue to publish the Index and may discontinue publication of
the Index at any time.
The Index is a price-weighted index, i.e., the weight of a component
stock in the Index is based on its price per share rather than the total market
capitalization of the issuer of the component stock, comprised of 30 common
stocks chosen by the editors of the WSJ as representative of the broad market
of U.S. industry. The corporations represented in the Index tend to be leaders
within their respective industries and their stocks are typically widely held
by individuals and institutional investors. Changes in the composition of the
Index are made entirely by the editors of the WSJ without consultation with the
corporations represented in the Index, any stock exchange, any official agency
or ML&Co. Changes to the common stocks included in the Index tend to be made
infrequently. Historically, most substitutions have been the result of mergers,
but from time to time, changes may be made to achieve what the editors of the
WSJ deem to be a more accurate representation of the broad market of U.S.
industry. In choosing a new corporation for the Index, the editors of the WSJ
look for leading industrial companies with a successful history of growth and
wide interest among investors. The component stocks of the Index may be changed
at any time for any reason. Dow Jones, publisher of the WSJ, is not affiliated
with ML&Co. and has not participated in any way in the creation of the Notes.
The Index initially consisted of 12 common stocks and was first
published in the WSJ in 1896. The Index was increased to include 20 common
stocks in 1916 and to 30 common stocks in 1928. The number of common stocks in
the Index has remained at 30 since 1928, and, in an effort to maintain
continuity, the constituent corporations represented in the Index have been
changed on a relatively infrequent basis.
The value of the Index is the sum of the primary exchange prices of
each of the 30 common stocks included in the Index, divided by a divisor that
is designed to provide a meaningful continuity in the value of the Index.
Because the Index is price-weighted, stock splits or changes in the component
stocks could result in distortions in the Index value. In order to prevent
these distortions related to extrinsic factors, the divisor is changed in
accordance with a mathematical formula that reflects adjusted proportions
within the Index. The current divisor of the Index is published daily in the
WSJ and other publications. In addition, other statistics based on the Index
may be found in a variety of publicly available sources.
ML&Co. or its affiliates may currently or from time to time in the
future engage in business with one or more of the issuers of the component
stocks of the Index, including extending loans to, or making equity investments
in, the issuers or providing advisory services to the issuers, including merger
and acquisition advisory services. In the course of its business, ML&Co. or its
affiliates may acquire non-public information with respect to the issuers.
ML&Co. does not make any representation to any purchaser of the Notes with
respect to any matters whatsoever relating to the issuers. Any prospective
purchaser of the Notes should undertake an independent investigation of the
issuers of the component stocks of the Index as in its judgment is appropriate
to make an informed decision about an investment in the Notes Securities. The
composition of the Index does not reflect any investment or sell
recommendations of ML&Co. or its affiliates.
The following table presents the listing symbol, industry group,
price per share, total number of shares outstanding and market capitalization
for each of the component stocks in the Index based on publicly available
information as of September 16, 2002.
P-10
Components of the Index
Price Per Total Shares Market
Issuer of Component Stock(1) Symbol Industry Share(2) Outstanding(2) Capitalization(2)
- ---------------------------- ------ -------- --------- -------------- -----------------
Alcoa Inc.................... AA Basic Resources $ 22.29 847,581,800 $ 18,568,949,580
American Express Company..... AXP Financial Services $ 34.84 1,331,000,000 $ 45,435,807,866
AT&T Corp.................... T Telecommunications $ 12.32 3,542,406,000 $ 48,914,938,039
Industrial Goods &
The Boeing Company........... BA Services $ 37.23 797,888,900 $ 28,438,276,324
Industrial Goods &
Caterpillar Inc.............. CAT Services $ 40.68 343,376,000 $ 13,986,378,325
Citigroup Inc................ C Financial Services $ 29.88 5,148,688,000 $ 148,690,353,848
The Coca-Cola Company........ KO Food & Beverage $ 50.68 2,486,227,000 $ 123,247,534,586
E.I. du Pont de Nemours and
Company..................... DD Chemicals $ 39.76 1,001,952,900 $ 39,811,384,602
Cyclical Goods &
Eastman Kodak Company........ EK Services $ 28.21 290,930,000 $ 8,274,030,178
Exxon Mobil Corporation...... XOM Energy $ 34.40 6,809,000,000 $ 230,293,598,858
Industrial Goods &
General Electric Company..... GE Services $ 27.90 9,925,938,000 $ 269,133,174,929
General Motors Corporation... GM Automobiles $ 44.61 559,043,900 $ 24,699,568,795
Hewlett-Packard Company...... HPQ Technology $ 13.65 1,939,000,000 $ 41,387,542,603
The Home Depot, Inc.......... HD Retail $ 34.02 2,345,888,000 $ 78,813,085,367
Industrial Goods &
Honeywell International Inc.. HON Services $ 24.65 814,965,800 $ 19,302,471,445
Intel Corporation............ INTC Technology $ 15.70 6,690,000,000 $ 106,839,954,576
International Business
Machines Corp............... IBM Technology $ 72.32 1,723,194,000 $ 122,838,417,358
International Paper Co....... IP Basic Resources $ 35.81 481,600,000 $ 17,845,094,294
Johnson & Johnson............ JNJ Healthcare $ 54.90 3,047,215,000 $ 161,084,910,542
JPMorgan Chase & Co.......... JPM Banks $ 21.71 1,973,383,000 $ 43,943,023,979
Cyclical Goods &
McDonald's Corporation....... MCD Services $ 21.69 1,280,700,000 $ 26,181,274,328
Merck & Co., Inc............. MRK Healthcare $ 48.81 2,272,729,000 $ 110,836,510,759
Microsoft Corporation........ MSFT Technology $ 47.78 5,359,000,000 $ 257,695,771,318
Industrial Goods &
3M Company................... MMM Services $ 119.06 391,304,000 $ 46,735,499,919
Noncyclical Goods &
Philip Morris Companies Inc.. MO Services $ 47.41 2,152,503,000 $ 97,871,529,198
Noncyclical Goods &
The Procter & Gamble Company. PG Services $ 93.00 1,300,770,000 $ 119,621,708,496
SBC Communications Inc....... SBC Telecommunications $ 24.58 3,354,216,000 $ 81,630,809,280
United Technologies Industrial Goods &
Corporation................. UTX Services $ 59.80 472,158,900 $ 27,359,933,533
Wal-Mart Stores, Inc......... WMT Retail $ 54.75 4,453,000,000 $ 240,591,895,811
The Walt Disney Company...... DIS Media $ 15.82 2,010,000,000 $ 31,634,306,091
Total Market Capitalization: $2,631,707,734,826
Average Market Capitalization: $ 87,723,591,161
______________
(1) The inclusion of a component stock in the portfolio should not be
considered a recommendation to buy or sell that stock, and neither ML&Co.
nor any of its affiliates make any representation to any purchaser of the
Notes as to the performance of the portfolio or any component stock.
Beneficial owners of the Notes will not have any right to the component
stocks or any dividends paid on the component stocks.
(2) Information obtained from Factset Research Systems.
License Agreement
"Dow Jones", "Dow Jones Industrial Average/SM/", and "DJIA/SM/" are
service marks of Dow Jones & Company, Inc. Dow Jones has no relationship to
MLPF&S or ML&Co., other than the licensing of the Dow Jones Industrial
Average/SM/ and its service marks for use in connection with the Notes.
Dow Jones does not:
o Sponsor, endorse, sell or promote the Notes.
o Recommend that any person invest in the Notes or any other
securities.
o Have any responsibility or liability for or make any decisions
about the timing, amount or pricing of the Notes.
o Have any responsibility or liability for the administration,
management or marketing of the Notes.
o Consider the needs of the Notes or the owners of the
Notes in determining, composing or calculating the Dow
Jones Industrial Average/SM/ or have any obligation to do so.
P-11
Dow Jones will not have any liability in connection with the Notes.
Specifically,
o Dow Jones does not make any warranty, express or implied, and
Dow Jones disclaims any warranty about:
o The results to be obtained by the Notes, the owner
of the Notes or any other person in connection with
the use of the Dow Jones Industrial Average/SM/ and
the data included in the Dow Jones Industrial
Average/SM/;
o The accuracy or completeness of the Dow Jones Industrial
Average/SM/ and its data;
o The merchantability and the fitness for a particular purpose or
use of the Dow Jones Industrial Average/SM/ and its data;
o Dow Jones will have no liability for any errors, omissions or
interruptions in the Dow Jones Industrial Average/SM/ or its
data;
o Under no circumstances will Dow Jones be liable for any
lost profits or indirect, punitive, special or
consequential damages or losses, even if Dow Jones knows
that they might occur.
The licensing agreement between MLPF&S and Dow Jones is solely for
their benefit and not for the benefit of the owners of the Notes or any other
third parties.
Adjustments to the Index; Market Disruption Events
If at any time Dow Jones changes its method of calculating the Index,
or the value of the Index changes, in any material respect, or if the Index is
in any other way modified so that the Index does not, in the opinion of the
calculation agent, fairly represent the value of the Index had those changes or
modifications not been made, then, from and after that time, the calculation
agent shall, at the close of business in New York, New York, on each date that
the closing value of the Index is to be calculated, make those adjustments as,
in the good faith judgment of the calculation agent, may be necessary in order
to arrive at a calculation of a value of a stock index comparable to the Index
as if those changes or modifications had not been made, and calculate the
closing value with reference to the Index, as so adjusted. Accordingly, if the
method of calculating the Index is modified so that the value of the Index is a
fraction or a multiple of what it would have been if it had not been modified,
e.g., due to a split, then the calculation agent shall adjust the Index in
order to arrive at a value of the Index as if it had not been modified, e.g.,
as if a split had not occurred.
"Market Disruption Event" means either of the following events as
determined by the calculation agent:
(A) the suspension of or material limitation on trading for
more than two hours of trading, or during the one-half
hour period preceding the close of trading, on the
applicable exchange, in 20% or more of the stocks which
then comprise the Index or any successor index; or
(B) the suspension of or material limitation on trading, in
each case, for more than two hours of trading, or during
the one-half hour period preceding the close of trading,
on the applicable exchange, whether by reason of
movements in price otherwise exceeding levels permitted
by the relevant exchange or otherwise, in option
contracts or futures contracts related to the Index, or
any successor index, which are traded on any major U.S.
exchange.
For the purpose of the above definition:
(1) a limitation on the hours in a trading day and/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,
and
(2) for the purpose of clause (A) above, any limitations on
trading during significant market fluctuations under
NYSE Rule 80A, or any applicable rule or regulation
enacted or
P-12
promulgated by the NYSE or any other self regulatory
organization or the SEC of similar scope as determined by
the calculation agent, will be considered "material".
As a result of the terrorist attacks the financial markets were
closed from September 11, 2001 through September 14, 2001 and values of the
Index are not available for such dates. Such market closures would have
constituted Market Disruption Events.
Discontinuance of the Index
If Dow Jones discontinues publication of the Index and Dow Jones or
another entity publishes a successor or substitute index that the calculation
agent determines, in its sole discretion, to be comparable to the Index (a
"successor index"), then, upon the calculation agent's notification of its
determination to the trustee and ML&Co., the calculation agent will substitute
the successor index as calculated by Dow Jones or any other entity for the
Index and calculate the Supplemental Return Amount as described above under
"Amount payable at maturity". Upon any selection by the calculation agent of a
successor index, ML&Co. shall cause notice to be given to holders of the Notes.
In the event that Dow Jones discontinues publication of the Index
and:
o the calculation agent does not select a successor index, or
o the successor index is no longer published,
the calculation agent will compute a substitute value for the Index in
accordance with the procedures last used to calculate the Index before any
discontinuance. If a successor index is selected or the calculation agent
calculates a value as a substitute for the Index as described below, the
successor index or value will be used as a substitute for the Index for all
purposes, including for purposes of determining whether a Market Disruption
Event exists.
If Dow Jones discontinues publication of the Index before a Monthly
Return Calculation Date and the calculation agent determines that no successor
index is available at that time, then on each Business Day until the earlier to
occur of:
o the determination of the Supplemental Return Percentage, and
o a determination by the calculation agent that a successor index
is available,
the calculation agent will determine the value that would be used in computing
a Negative Monthly Return as described in the preceding paragraph as if that
day were a Monthly Return Calculation Date. The calculation agent will cause
notice of each value to be published not less often than once each month in
WSJ or another newspaper of general circulation, and arrange for information
with respect to these values to be made available by telephone.
Notwithstanding these alternative arrangements, discontinuance of the
publication of the Index may adversely affect trading in the Notes.
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 Note upon any
acceleration permitted by the Notes, with respect to principal and accrued and
unpaid interest on each Note, will be equal to the amount payable on the Stated
Maturity Date, calculated as though the date of early repayment was the Stated
Maturity Date. The Supplemental Return Amount payable on each Note will be
determined as follows:
o The fourth Business Day prior to such day of early repayment
will be the final Monthly Return Calculation Date for the
determination of the final Negative Returns.
P-13
o The Maximum Percentage will be pro-rated over the period from
October , 2002 through the date of early repayment on a
straight-line basis.
o The Supplemental Return Percentage will be the pro-rated
Maximum Percentage minus the final Negative Returns.
o The Supplemental Return Amount will be $1,000 times the
Supplemental Return Percentage, calculated as described above,
payable on the date of early redemption. The Supplemental Return
Amount will not be less than zero.
See "Amount payable at maturity" in this pricing supplement. If a bankruptcy
proceeding is commenced in respect of ML&Co., the claim of the holder of Note
may be limited, under Section 502(b)(2) of Title 11 of the United States Code,
to the original public offering price of the Notes 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.
In case of default in payment of the Notes, whether at the Stated
Maturity Date, an Interest Payment Date or upon acceleration, from and after
that date the Notes will bear interest, payable upon demand of their holders,
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.
UNITED STATES FEDERAL INCOME TAXATION
Set forth in full below is the opinion of Sidley Austin Brown & Wood
LLP, tax 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 the 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
the Notes in a tax-deferred or tax-advantaged account, or persons holding the
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 prospectus supplement). 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.
As used in this preliminary 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.
P-14
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 "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 that
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 semi-annual interest payments on the Notes and
a payment on the maturity date of the principal amount thereof (i.e., $1,000
per Note) and a projected Supplemental Return Amount equal to $
per Note (the "Projected Supplemental Return Amount"). This represents an
estimated yield on the Notes equal to % 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 as ordinary interest an amount equal to 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 the 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 (as defined below) 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 (i.e., $1,000), increased by the interest previously
accrued on the Note and reduced by interest payments received on the Note. As
a result of the foregoing rules, a U.S. Holder will not be required to
separately include in income the stated semi-annual interest payments received
on a Note. At maturity of a Note, in the event that the actual Supplemental
Return Amount, if any, exceeds $ per Note (i.e., the Projected
Supplemental Return Amount), a U.S. Holder will be required to include the
excess of the actual Supplemental Return Amount over $ per Note (i.e.,
the Projected Supplemental Return Amount) in income as
P-15
ordinary interest on the Stated Maturity Date. Alternatively, in the
event that the actual Supplemental Return Amount, if any, is less than $
per Note (i.e., the Projected Supplemental Return Amount), the amount by which
the Projected Supplemental Return Amount (i.e., $ per Note) exceeds
the actual Supplemental Return 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 Stated Maturity Date occurs to the
extent of the amount of that includible interest. Further, 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 Projected Supplemental Return Amount (i.e., $
per Note) in excess of the actual Supplemental Return Amount that is not
treated as an interest offset pursuant to the foregoing rules. 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 purchasers) will
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.
Notwithstanding the foregoing, if the actual Supplemental Return
Amount becomes fixed at zero more than 6 months before the Stated Maturity
Date, a U.S. Holder will have a negative adjustment. Under the Final
Regulations, a U.S. Holder would be required to take into account such negative
adjustment (generally as an offset to either previously accrued interest on the
Notes or future interest accruals on the Notes) in a reasonable manner over the
period to which it relates. In addition, under the Final Regulations, if the
Supplemental Return Amount becomes fixed at zero more than 6 months before the
Stated Maturity Date, the Supplemental Return Amount will no longer be treated
as a contingent payment after the date the Supplemental Return Amount becomes
fixed at zero. Moreover, on the date the Supplemental Return Amount becomes
fixed at zero, the projected payment schedule for the Notes will be modified
prospectively to reflect the fixed amount of the payment (i.e., $0 per Note).
Therefore, at maturity of a Note, a U.S. Holder will not be permitted to treat
the excess of the Projected Supplemental Return Amount (i.e., $ per
Note) over the actual Supplemental Return Amount (i.e., $0 per Note) as an
interest offset or as an ordinary loss on the Stated Maturity Date. In
addition to the foregoing, for purposes of accruing original issue discount
under the Final Regulations, if the actual Supplemental Return Amount becomes
fixed at zero during an accrual period (i.e., generally each six-month period
during which the Notes are outstanding), a new accrual period will begin on
the day after the day on which the actual Supplemental Return Amount becomes
fixed at zero. U.S. Holders should consult their own tax advisors regarding
the application of these special rules.
Upon the sale or exchange of a Note prior to the Stated Maturity
Date, 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 or exchange and the U.S. Holder's adjusted tax basis in
the Note as of the date of disposition. 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 any interest payments received on the
Note. Any taxable gain will be treated as ordinary income. Any 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). Notwithstanding the foregoing, if the actual
Supplemental Return Amount becomes fixed at zero more than 6 months before the
Stated Maturity Date, any gain or loss recognized by a U.S. Holder upon the
sale or exchange of a Note prior to the Stated Maturity Date generally will be
treated as capital gain or loss. Any such gain or loss would generally be
long-term or short-term capital gain or loss (depending on 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.
All 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 applying the Final
Regulations to the Notes, by submitting a written request for such information
to Merrill Lynch & Co., Inc., Corporate Secretary's Office, 222 Broadway, 17th
Floor, New York, New York 10038, (212) 670-0432,
corporatesecretary@exchange.ml.com.
The projected payment schedule (including both the Projected
Supplemental Return 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 Supplemental Return Amount will
be, or that the actual Supplemental Return Amount will even exceed zero.
P-16
The following table sets forth the amount of interest that will be
deemed to have accrued with respect to each Note during each accrual period
over the term of the Notes based upon the projected payment schedule for the
Notes (including both the Projected Supplemental Return Amount and an estimated
yield equal to % per annum (compounded semiannually)) as determined by ML&Co.
for purposes of applying the Final Regulations to the Notes:
Interest deemed to Total interest deemed to
accrue have accrued on Notes as
during accrual period of end of accrual period
Accrual Period (per Note) (per Note)
------------------- --------------------- -------------------------
October , 2002 through April , 2003 ..... $ $
April , 2003 through October , 2003 ..... $ $
October , 2003 through April , 2004 ..... $ $
April , 2004 through October , 2004 ..... $ $
October , 2004 through April , 2005 ..... $ $
April , 2005 through October , 2005 ..... $ $
October , 2005 through April , 2006 ..... $ $
- -------------------------------
Projected Supplemental Return Amount = $ per Note.
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 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
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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.
ERISA CONSIDERATIONS
Each fiduciary of a pension, profit-sharing or other employee benefit
plan (a "plan") subject to the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), should consider the fiduciary standards of ERISA in the
context of the plan's particular circumstances before authorizing an investment
in the Notes. Accordingly, among other factors, the fiduciary should consider
whether the investment would satisfy the prudence and diversification
requirements of ERISA and would be consistent with the documents and
instruments governing the plan, and whether the investment would involve a
prohibited transaction under Section 406 of ERISA or Section 4975 of the
Internal Revenue Code (the "Code").
Section 406 of ERISA and Section 4975 of the Code prohibit plans, as
well as individual retirement accounts and Keogh plans subject to Section 4975
of the Internal Revenue Code (also "plans") from engaging in certain
transactions involving "plan assets" with persons who are "parties in interest"
under ERISA or "disqualified persons" under the Code ("parties in interest")
with respect to the plan or account. A violation of these prohibited
transaction rules may result in civil penalties or other liabilities under
ERISA and/or an excise tax under Section 4975 of the Code for those persons,
unless exemptive relief is available under an applicable statutory, regulatory
or administrative exemption. Certain employee benefit plans and arrangements
including those that are governmental plans (as defined in section 3(32) of
ERISA), certain church plans (as defined in Section 3(33) of ERISA) and foreign
plans (as described in Section 4(b)(4) of ERISA) ("non-ERISA arrangements") are
not subject to the requirements of ERISA or Section 4975 of the Code but may be
subject to similar provisions under applicable federal, state, local, foreign
or other regulations, rules or laws ("similar laws").
The acquisition of the Notes by a plan with respect to which we,
MLPF&S, or certain of our affiliates is or becomes a party in interest may
constitute or result in prohibited transaction under ERISA or Section 4975 of
the Code, unless those Notes are acquired pursuant to and in accordance with an
applicable exemption. The U.S. Department of Labor has issued five prohibited
transaction class exemptions, or "PTCEs", that may provide exemptive relief if
required for direct or indirect prohibited transactions that may arise from the
purchase or holding of the Notes. These exemptions are:
(1) PTCE 84-14, an exemption for certain transactions determined or
effected by independent qualified professional asset managers;
(2) PTCE 90-1, an exemption for certain transactions involving
insurance company pooled separate accounts;
(3) PTCE 91-38, an exemption for certain transactions involving bank
collective investment funds;
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(4) PTCE 95-60, an exemption for transactions involving certain
insurance company general accounts; and
(5) PTCE 96-23, an exemption for plan asset transactions managed by
in-house asset managers.
The Notes may not be purchased or held by (1) any plan, (2) any
entity whose underlying assets include "plan assets" by reason of any plan's
investment in the entity (a "plan asset entity") or (3) any person investing
"plan assets" of any plan, unless in each case the purchaser or holder is
eligible for the exemptive relief available under one or more of the PTCEs
listed above or another applicable similar exemption. Any purchaser or holder
of the Notes or any interest in the Notes will be deemed to have represented
by its purchase and holding of the Notes that it either (1) is not a plan or a
plan asset entity and is not purchasing those Notes on behalf of or with "plan
assets" of any plan or plan asset entity or (2) with respect to the purchase
or holding, is eligible for the exemptive relief available under any of the
PTCEs listed above or another applicable exemption. In addition, any purchaser
or holder of the Notes or any interest in the Notes which is a non-ERISA
arrangement will be deemed to have represented by its purchase and holding of
the Notes that its purchase and holding will not violate the provisions of any
similar law.
Due to the complexity of these rules and the penalties that may be
imposed upon persons involved in non-exempt prohibited transactions, it is
important that fiduciaries or other persons considering purchasing the Notes
on behalf of or with "plan assets" of any plan, plan asset entity or non-ERISA
arrangement consult with their counsel regarding the availability of exemptive
relief under any of the PTCEs listed above or any other applicable exemption,
or the potential consequences of any purchase or holding under similar laws,
as applicable.
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