Preliminary Pricing Supplement
Subject to Completion Dated October 23, 2002
PRELIMINARY PRICING SUPPLEMENT Rule 424(b)(3)
(To Prospectus Supplement and Prospectus dated September 25, 2002) File No. 333-97937
Pricing Supplement Number:
Merrill Lynch & Co., Inc.
Medium-Term Notes, Series B
Due Nine Months or More from Date of Issue
Japanese Yen/U.S. Dollar Notes due November , 2003
(the "Notes")
____________
The Notes have a one year term and are a U.S. Dollar denominated
investment linked to movements in the Japanese Yen/U.S. Dollar exchange rate.
The Notes are 100% principal protected, meaning that at maturity you will
receive the Issue Price of $1,000 per $1,000 principal amount of Notes. An
additional amount will be payable at maturity in the event that the Japanese
Yen/U.S. Dollar exchange rate increases by more than 2.00 Japanese Yen per
U.S. Dollar between the Pricing Date and Valuation Date, each as defined
below. (An increase in the exchange rate signifies a decrease in value of the
Japanese Yen against the U.S. Dollar.) However, if the exchange rate increases
by more than 13.00 Japanese Yen per U.S. Dollar at any time on any day during
the term of the Notes to and including the Valuation Date, then no additional
amount will be payable at maturity.
Investing in the Notes involves risks that are described in the "Risk
Factors" section of this pricing supplement and the accompanying Prospectus
Supplement.
Aggregate principal amount.......................$
Stated Maturity Date.............................November , 2003.
Pricing Date.....................................November , 2002.
Issue Price......................................$1,000 per Note.
Original Issue Date..............................November , 2002.
Payment at maturity..............................100% of the principal amount, plus the Additional Payment, if any,
as described below.
Additional Payment...............................If the JPY/USD Rate is not greater than the Barrier Rate during the
Reference Period, then the Additional Payment will equal:
(Ending Rate - Starting Rate)
principal amount x (---------------------------) x 1.50
( Ending Rate )
provided, the Additional Payment shall not be less than zero.
If the JPY/USD Rate is greater than the Barrier Rate at any time on
any day during the Reference Period, then the Additional Payment
will be zero.
JPY/USD Rate.....................................The JPY/USD Rate expresses the number of Japanese Yen for which one
U.S. Dollar can be exchanged.
Starting Rate....................................The JPY/USD Rate on the Pricing Date, plus 2.00, as reported by
Reuters Group PLC ("Reuters") on page 1FED, or any substitute page
thereto, at 10:00 a.m. New York City time.
Ending Rate......................................The JPY/USD Rate on the Valuation Date, as reported by Reuters on
page 1FED, or any substitute page thereto, at 10:00 a.m. New York
City time. However, if the JPY/USD Rate is not so quoted by
Reuters on page 1FED, or any substitute page thereto, then the
JPY/USD Rate will be the midpoint 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 Valuation Date for the purchase or sale by the Reference
Dealers of the Reference Amount for settlement one Business Day
later. If fewer than two Reference Dealers provide such spot
quotations, then the JPY/USD Rate will be the midmarket rate
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 Valuation Date from three
leading commercial banks in New York (selected at the sole
discretion of the Calculation Agent), for the sale by such banks of
the Reference Amount for settlement one Business Day later. If
these spot quotations are available from fewer than three banks,
then the Calculation Agent, in its sole discretion, shall determine
which spot rate is available and reasonable to be used. If no such
spot quotation is available, then the JPY/USD Rate 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 Valuation Date.
Barrier Rate.....................................The Starting Rate plus 11.00. For purposes of determining whether
the JPY/USD Rate is greater than the Barrier Rate, the JPY/USD
exchange rate shall be equal to the number of Japanese Yen that can
be purchased for one U.S. Dollar as reported by EBS Dealing
Resources, Inc. or any successor service thereto.
Reference Period.................................From 10 a.m. New York City time on the Pricing Date to and
including 10 a.m. New York City time on the Valuation Date.
Valuation Date...................................The seventh scheduled Business Day prior to the Stated Maturity
Date. If such day is not a Business Day then the Valuation Date
will be the immediately preceding Business Day.
Reference Amount.................................100,000,000 Japanese Yen.
Reference Dealers................................Citibank, N.A., Deutsche Bank A.G. and JPMorgan Chase Bank, or
their successors.
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 and such banks are open for dealing in a foreign exchange and
foreign currency deposits.
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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.
Trustee..........................................JPMorgan Chase Bank.
Form of Notes....................................Book-entry.
CUSIP number.....................................
Proceeds to ML&Co................................$
Underwriting Discount............................$
S-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.
The value of the Notes is related to changes in the value of the U.S. Dollar
relative to the Japanese Yen
The value of any currency, including the Japanese Yen and the U.S.
Dollar, may be affected by complex political and economic factors. The JPY/USD
Rate is at any moment a result of the supply and demand for the two
currencies, and changes in the exchange rate result over time from the
interaction of many factors directly or indirectly affecting economic and
political conditions in Japan 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 Japan and in the United
States, all of which are in turn sensitive to the monetary, fiscal and trade
policies pursued by Japan, the United States and other countries important to
international trade and finance.
Foreign exchange rates can either fluctuate or be fixed by sovereign
governments. 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 amounts payable could be affected by
the actions of sovereign governments as outlined above. 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, or in the
event of the issuance of a replacement currency or in the event of other
developments affecting the Japanese Yen, the U.S. Dollar or any other
currency.
The return on your investment in the Notes is uncertain
Your investment in the Notes is linked to the JPY/USD Rate and is
designed for investors who believe that the JPY/USD Rate will increase (i.e.,
the Japanese Yen will depreciate relative to the U.S. Dollar) over the next
twelve months, that such increase will be large enough to produce their
desired return on the Notes, but not so large as to exceed the Barrier Rate.
The JPY/USD Rate may appreciate as well as depreciate and, although you have
the opportunity to receive a return, you risk a lower return than on
comparable instruments, or no return at all.
You may not earn a return on your investment in the Notes. If the
JPY/USD Rate decreases (i.e., the Japanese Yen appreciates relative to
the U.S. Dollar), or does not increase by more than 2.00 Japanese Yen per
U.S. Dollar as of the Valuation Date from the JPY/USD Rate on the Pricing
Date, or increases by more than 13.00 Japanese Yen per U.S. Dollar from
the JPY/USD Rate on the Pricing Date at any time on any day during the
term of the Notes up to and including the Valuation Date, then, on the
Stated Maturity Date, we will pay you only the Issue Price of $1,000 per
Note. The Starting Rate used to calculate the Additional Payment will be
2.00 greater than the JPY/USD Rate on the Pricing Date. As a result, in
order for you to receive an Additional Payment, the increase, if any, in
the JPY/USD Rate determined on the Valuation Date must be greater than
2.00, regardless of any fluctuations in the JPY/USD Rate during the term
of the Notes (assuming the JPY/USD Rate has not been greater than the
Barrier Rate during the Reference Period).
Your yield may be lower than the yield on other debt securities. If
the JPY/USD Rate has not increased sufficiently above the Starting Rate
as of the Valuation Date, or if it increases above the Barrier Rate on
any day during the Reference Period, the yield on your Notes will be less
than the yield you would earn if you bought other standard senior debt
securities of ML&Co. with the same maturity date.
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The yield on the Notes is limited. Your opportunity to participate
in the possible increase in the value of the Japanese Yen relative to the
U.S. Dollar through an investment in the Notes is limited. As a result of
the effect of the Barrier Rate, the return on your Notes is capped and
you should not expect to receive a return of greater than % per annum on
your investment. This represents the yield on your investment if the
JPY/USD Rate equals but does not exceed the Barrier Rate. If the JPY/USD
Rate rises above the Barrier Rate, the yield on your investment will be
zero.
There may be an uncertain trading market for the Notes
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 depend on our financial performance and other factors, such as the change
in the value of the JPY/USD Rate. 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.
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. The following paragraphs describe
the expected impact on the value of the Notes given a change in a specific
factor, assuming all other conditions remain constant.
The value of the JPY/USD Rate is expected to affect the value of the
Notes. We expect that the value of the Notes will depend substantially on the
amount by which the Japanese Yen depreciates versus the U.S. Dollar over the
term of the Notes. If you choose to sell your Notes when the JPY/USD Rate
exceeds the Starting Rate, you may receive less than the amount that would be
payable at maturity based on that value because of the expectation that the
JPY/USD Rate will continue to fluctuate until the Ending Rate is determined.
We also expect that this dependence will increase if the value of the JPY/USD
Rate approaches the Barrier Rate. If the JPY/USD Rate at any time on any day
through the end of the Reference Period is greater than the Barrier Rate, the
Additional Amount will equal zero and the value of the Notes will be adversely
affected.
Changes in the levels of interest rates are expected to affect the value
of the Notes. We expect that interest rates will affect the value of the
Notes. In general, if U.S. interest rates increase, we expect that the value
of the Notes will decrease and, conversely, if U.S. interest rates decrease,
we expect that the value of the Notes will increase. In general, if Japanese
interest rates increase, we expect that the value of the Notes will increase
and, conversely, if U.S. interest rates decrease, we expect that the value of
the Notes will decrease. Interest rates may also affect the economy of Japan
or the United States, and, in turn, the JPY/USD Rate.
Changes in volatility of the JPY/USD Rate are expected to affect the
value of the Notes. Volatility is the term used to describe the size and
frequency of price and/or market fluctuations. If the volatility of the
JPY/USD Rate increases, the value of the Notes may be adversely affected.
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 any fluctuations in the JPY/USD Rate, an improvement in our
credit ratings will not reduce other investment risks related to the Notes.
Uncertain tax consequences
You should consider the tax consequences of investing in the Notes,
aspects of which are uncertain. See the section entitled "United States
Federal Income Taxation" in this pricing supplement.
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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 was the Stated Maturity Date and the seventh scheduled
Business Day prior to such day was the Valuation Date. If such seventh
scheduled Business Day is not a Business Day, then the determination will be
made on the immediately succeeding Business Day. 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 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 the hypothetical rate of return on the
Notes for a range of hypothetical Ending Rates.
Hypothetical Rate of Return on Hypothetical Rate of Return on
the Notes assuming the JPY/USD the Notes assuming the JPY/USD
Rate did not exceed the Rate was greater than the
Barrier Rate for the entire Barrier Rate at some point
Hypothetical hypothetical during the
Ending Rate Referenced Period (1) Reference Period (1)
- ----------- --------------------- --------------------
121.22 0.00% 0.00%
122.22 0.00% 0.00%
123.22 0.00% 0.00%
124.22(2) 0.00% 0.00%
125.22 0.00% 0.00%
126.22(3) 0.00% 0.00%
127.22 1.18% 0.00%
128.22 2.34% 0.00%
129.22 3.48% 0.00%
130.22 4.61% 0.00%
131.22 5.72% 0.00%
132.22 6.81% 0.00%
133.22 7.88% 0.00%
134.22 8.94% 0.00%
135.22 9.98% 0.00%
136.22 11.01% 0.00%
137.22(4) 12.02% 0.00%
138.22 N/A(5) 0.00%
139.22 N/A 0.00%
140.22 N/A 0.00%
141.22 N/A 0.00%
142.22 N/A 0.00%
143.22 N/A 0.00%
144.22 N/A 0.00%
____________
(1) These rates represent an annualized rate of return.
(2) This was the JPY/USD Rate on the hypothetical Pricing Date.
(3) This is the hypothetical Starting Rate used to calculate this table. The
actual Starting Rate will be calculated on the Pricing Date using the JPY/USD
Rate on that day.
(4) This is the hypothetical Barrier Rate used to calculate this table. The
actual Barrier Rate will be calculated on the Pricing Date.
(5) Not applicable because this column assumes the JPY/USD Rate never exceeds
the Barrier Rate.
S-6
THE JPY/USD RATE
The JPY/USD Rate is a foreign exchange spot rate that measures the
relative values of two currencies, the Japanese Yen and the U.S. Dollar. The
JPY/USD Rate decreases when the Japanese Yen appreciates relative to the U.S.
Dollar and increases when the Japanese Yen depreciates relative to the U.S.
Dollar. The JPY/USD Rate is expressed as a rate that reflects the amount of
Japanese Yen that can be purchased for one U.S. Dollar. The October 23, 2002
JPY/USD Rate of 124.22 thus indicates that 124.22 Japanese Yen can be
purchased for one U.S. Dollar.
The following table sets forth the monthly high, low and month-end
mid-market levels in the interbank market for the JPY/USD Rate from January
1999 through September 2002. The historical experience of JPY/USD Rates should
not be taken as an indication of future performance. Any historical upward or
downward trend in the JPY/USD Rate during any period set forth below is not
any indication that the JPY/USD Rate is more or less likely to increase or
decrease at any time during the term of the Notes.
Year High Low Month End
- ---- ---- --- ---------
1999:
January................................... 117.05 108.22 116.33
February.................................. 122.53 111.31 119.20
March..................................... 123.75 116.93 118.90
April..................................... 122.00 117.45 119.47
May....................................... 124.75 119.47 121.79
June...................................... 122.55 117.62 121.10
July...................................... 122.90 114.18 114.53
August.................................... 116.20 109.06 109.72
September................................. 111.38 103.20 106.46
October................................... 108.05 103.71 104.10
November.................................. 106.60 101.25 102.15
December.................................. 103.80 101.31 102.51
2000:
January................................... 107.55 101.40 107.32
February.................................. 111.73 107.11 110.32
March..................................... 110.32 102.07 102.78
April..................................... 108.26 102.83 108.18
May....................................... 110.08 106.06 107.65
June...................................... 109.10 103.93 106.12
July...................................... 109.80 105.28 109.43
August.................................... 109.77 105.92 106.67
September................................. 108.43 104.77 108.14
October................................... 109.58 107.34 108.83
November.................................. 111.49 106.87 110.38
December.................................. 115.06 110.16 114.41
2001:
January................................... 119.90 113.54 116.57
February.................................. 117.96 114.36 117.37
March..................................... 126.33 117.04 126.33
April..................................... 126.84 120.90 123.48
May....................................... 124.05 118.53 119.22
June...................................... 124.96 118.28 124.65
July...................................... 126.10 122.73 125.00
August.................................... 125.21 118.49 118.79
September................................. 122.04 115.83 119.56
October................................... 123.35 119.32 122.42
November.................................. 124.56 119.75 123.48
December.................................. 132.08 123.26 131.66
2002:
January................................... 135.14 130.41 134.68
February.................................. 135.04 131.85 133.36
March..................................... 133.88 126.40 132.73
April..................................... 133.84 127.66 128.54
May....................................... 129.07 122.80 124.22
June...................................... 125.90 118.40 119.47
July...................................... 120.73 115.54 119.85
August.................................... 121.33 116.33 118.46
September................................. 124.21 116.87 121.81
S-7
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.
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
S-8
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, both debt instruments
having a term to maturity of one year or less and 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 of the Additional Payment,
if any, that will be paid on the Notes on the Stated Maturity Date will be
determined by reference to the value of the JPY/USD Rate during the Reference
Period, 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 by a combination of both the
general principles contained in the Foreign Currency Rules and general
principles of United States Federal income tax law. In addition, although the
Notes have a term to maturity of one year or less, since the amount of the
Additional Payment, if any, that will be paid on the Notes on the Stated
Maturity Date will be determined by reference to the JPY/USD Rate during the
Reference Period and since you will not receive any Additional Payment on the
Stated Maturity Date if the JPY/USD Rate decreases (i.e., the Japanese Yen
appreciates relative to the U.S. Dollar), if the JPY/USD Rate does not
increase by more than 2.00 Japanese Yen per U.S. Dollar between the Pricing
Date and Valuation Date, or if the JPY/USD Rate is greater than the Barrier
Rate during the Reference Period, the Notes should not be treated as having
been issued with original issue discount for United States Federal income tax
purposes.
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 Additional Payment, if any, payable
on the Stated Maturity Date 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 Additional Payment is accrued (i.e., generally when the
payment of interest becomes fixed in amount and becomes unconditionally
payable) or when such Additional Payment 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 short-term capital gain or loss since the Note will have been held
by the U.S. Holder for one year or less. However, any portion of such gain or
loss that is attributable to changes in the value of the JPY/USD Rate 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
S-9
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
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
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Internal Revenue Code, as amended (the
"Code") prohibit various transactions with certain parties involving the
assets of employee benefit plans, unless an exemption is available;
governmental plans may be subject to similar prohibitions. Because
transactions between a plan and ML&Co. may be prohibited absent an exemption,
and it is not clear that any existing exemption will apply to all transactions
occurring in connection with an investment in a Note, the Notes may not be
purchased by, on behalf of, or with plan assets of an employee benefit plan or
other plan or arrangement that is subject to Title 1 of ERISA, or to Section
4975 of the Code. Each investor, by its purchase of a Note, represents and
warrants that it is not, and is not investing on behalf of or with plan assets
of an employee benefit plan or other plan or arrangement subject to Title 1 of
ERISA or Section 4975 of the Code, or that all of the conditions of an
applicable administrative exemption from the "prohibited transaction" rules
applies. Examples of potentially applicable exemptions include Prohibited
Transaction Exemption ("PTE") 84-14 (transactions by a Plan directed by a
"qualified professional asset manager" or "QPAM"), PTE 91-38 (transactions by
bank-maintained collective trust funds), PTE 90-1 (transactions by insurance
company pooled separate accounts), PTE 95-60 (transactions by insurance
company general accounts), and PTE 96-23 (transactions directed by in-house
asset managers or "INHAMS").