Subject to Completion
Preliminary Pricing Supplement Dated November 8, 2002
PRICING SUPPLEMENT DATED NOVEMBER , 2002 Rule 424(b)(3)
- ------------------------------------------ File No. 333-97937
(To Prospectus Supplement and Prospectus
dated September 25, 2002)
Pricing Supplement Number:
Merrill Lynch & Co., Inc.
Medium-Term Notes, Series B
Due Nine Months or More from Date of Issue
S&P 500(R) Index Floor Notes
Due 42 to 48 Months from Date of Issue
(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 a Supplemental Return Amount (as
defined below) at maturity based upon a maximum percentage of 70% minus the
sum of the monthly percentage declines of the S&P 500(R) Index over the term
of the Notes. The Supplemental Return Amount will not exceed $700 per $1,000
principal amount of the Notes and will not be less than zero.
The Notes will pay interest semi-annually at a rate of 1.50% per annum
on the principal amount of the Notes. The amount payable at maturity of the
Notes will include, in addition to the amounts described in the above
paragraph, accrued but unpaid interest. The actual maturity date will be
determined on the day the Notes are priced for initial sale to the public and
disclosed in the final pricing supplement delivered in connection with sales
of the Notes.
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........... Expected to be between 42 and 48 months from
the Original Issue Date. The actual Stated
Maturity Date will be determined on the date
the Notes are priced for initial sale to the
public (the "Pricing Date") and will appear
in the final pricing supplement.
Issue Price.................... $1,000 per Note
Original Issue Date............ December , 2002
Interest Rate.................. 1.50% per annum on the principal amount of
each Note, payable semi-annually.
Interest Payment Dates......... We will pay interest on the Notes
semi-annually at the rate of 1.50% per annum
beginning in 2003 and ending on the maturity
date. The actual Interest Payment Dates will
be determined on the Pricing Date and will
appear in the final pricing supplement. If
any Interest Payment Date 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. Interest will be paid to
the persons in whose names the Notes are
registered at the close of business on the
fifteenth calendar day preceding the related
Interest Payment Date, whether or not such
fifteenth calendar day is a Business Day.
"Standard & Poor's(R)", "Standard & Poor's 500(R)", "S&P 500(R)", "S&P(R)" and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use for certain purposes by Merrill Lynch Capital Services, and Merrill
Lynch & Co., Inc. is an authorized sublicensee. The Notes are not sponsored,
endorsed, sold or promoted by Standard & Poor's.
The Index...................... The S&P 500(R)Index (the "Index") is published
by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("Standard &
Poor's" or "S&P") and is intended to provide
an indication of the pattern of common stock
price movement. The value of the Index is
based on the relative value of the aggregate
market value of the common stocks of 500
companies as of a particular time compared to
the aggregate average market value of the
common stocks of 500 similar companies during
the base period of the years 1941 through
1943. The market value for the common stock
of a company is the product of the market
price per share of the common stock and the
number of outstanding shares of common stock.
As of October 31, 2002, 423 companies or
86.0% of the Index traded on the New York
Stock Exchange; 75 companies or 13.8% of the
Index traded on the Nasdaq Stock Market; and
2 companies or 0.2% of the Index traded on
the American Stock Exchange. As of October
31, 2002, the aggregate market value of the
500 companies included in the Index
represented approximately 81% of the
aggregate market value of stocks included in
the Standard & Poor's Stock Guide Database of
domestic common stocks traded in the U.S.,
excluding American depositary receipts,
limited partnerships and mutual funds.
Standard & Poor's chooses companies for
inclusion in the Index with the aim of
achieving a distribution by broad industry
groupings that approximates the distribution
of these groupings in the common stock
population of the Standard & Poor's Stock
Guide Database, which Standard & Poor's uses
as an assumed model for the composition of
the total market.
Please note that 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 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").
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
P-2
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,
by determining the percentage change in the
closing value of the Index on such first
Monthly Return Calculation Date relative to
the value of the Index on the Pricing Date.
Each such negative Monthly Return (i.e.,
percentage decrease) will 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 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....................... $1,700 per Note, 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 American Stock
Exchange 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 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.
P-3
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-4
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 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-5
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 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 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.
P-6
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 a maturity date 45 months from
the Original Issue Date (which is the midpoint of the expected term of 42 to
48 months). 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 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-7
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 term of the Positive Supplemental Zero Supplemental Zero Supplemental Positive Supplemental
Notes: 45 months 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
December 15 902.65 902.65 902.65 902.65
January 15 868.89 -3.74% 845.23 -6.36% 958.26 0.00% 896.86 0.00%
February 15 842.35 -3.05% 826.53 -2.21% 945.62 -1.32% 875.56 -0.61%
March 15 865.96 0.00% 815.26 -1.36% 902.26 -4.59% 845.21 -0.60%
April 15 866.89 0.00% 805.29 -1.22% 947.74 0.00% 892.32 -1.50%
May 15 872.56 0.00% 819.69 0.00% 956.89 0.00% 845.62 0.00%
June 15 822.89 -5.69% 889.52 0.00% 925.29 -3.30% 889.26 -3.51%
July 15 802.54 -2.47% 942.63 0.00% 902.26 -2.49% 870.23 -3.12%
August 15 865.29 0.00% 925.36 -1.83% 926.29 0.00% 826.23 0.00%
September 15 874.74 0.00% 905.59 -2.14% 978.76 0.00% 854.75 0.00%
October 15 825.00 -5.69% 918.19 0.00% 929.59 -5.02% 869.23 -1.57%
November 15 905.96 0.00% 880.26 -4.13% 902.26 -2.94% 846.12 -0.45%
Year 2
December 15 911.42 0.00% 950.26 0.00% 908.89 0.00% 878.26 -5.26%
January 15 870.56 -4.48% 1056.59 0.00% 950.48 0.00% 915.63 -0.20%
February 15 907.63 0.00% 959.36 -9.20% 919.56 -3.25% 942.63 0.00%
March 15 913.59 0.00% 905.26 -5.64% 967.23 0.00% 925.86 -3.03%
April 15 917.65 0.00% 982.36 0.00% 912.56 -5.65% 901.23 -0.93%
May 15 923.61 0.00% 917.23 -6.63% 945.98 0.00% 862.32 -0.41%
June 15 931.52 0.00% 912.26 -0.54% 958.36 0.00% 890.23 0.00%
July 15 882.13 -5.30% 917.89 0.00% 914.63 -4.56% 841.13 -1.56%
August 15 927.89 0.00% 938.89 0.00% 919.26 0.00% 878.89 0.00%
September 15 921.89 -0.65% 974.56 0.00% 944.86 0.00% 861.43 0.00%
October 15 923.59 0.00% 956.39 -1.86% 928.65 -1.72% 845.00 0.00%
November 15 902.26 -2.31% 1041.91 0.00% 935.86 0.00% 861.78 0.00%
Year 3
December 15 945.29 0.00% 942.03 -9.59% 906.78 -3.11% 895.86 0.00%
January 15 901.59 -4.62% 978.89 0.00% 857.23 -5.46% 847.41 0.00%
February 15 958.76 0.00% 1052.68 0.00% 890.26 0.00% 896.23 0.00%
March 15 949.25 -0.99% 1098.23 0.00% 917.78 0.00% 815.48 -3.14%
April 15 975.88 0.00% 1053.26 -4.09% 912.58 -0.57% 841.26 0.00%
May 15 980.26 0.00% 1056.59 0.00% 942.69 0.00% 863.46 -2.76%
June 15 1002.36 0.00% 1043.89 -1.20% 929.59 -1.39% 835.48 0.00%
July 15 1005.89 0.00% 1026.69 -1.65% 912.89 -1.80% 847.69 0.00%
August 15 961.29 -4.43% 1045.62 0.00% 956.89 0.00% 819.89 -0.64%
September 15 992.48 0.00% 1005.26 -3.86% 917.89 -4.08% 849.84 0.00%
October 15 998.89 0.00% 1049.23 0.00% 903.48 -1.57% 823.74 0.00%
November 15 1005.98 0.00% 1045.98 -0.31% 862.89 -4.49% 842.94 -3.36%
Year 4
December 15 1014.59 0.00% 1026.87 -1.83% 805.73 -6.62% 812.59 -3.03%
January 15 970.26 -4.37% 1015.89 -1.07% 815.45 0.00% 786.89 -3.40%
February 15 1017.11 0.00% 1039.56 0.00% 826.81 0.00% 815.74 0.00%
March 15 1034.59 0.00% 1078.69 0.00% 847.41 0.00% 811.82 0.00%
April 15 986.38 -4.66% 1051.74 -2.50% 879.85 0.00% 810.72 -5.63%
May 15 1006.38 0.00% 1046.12 -0.53% 812.69 -7.63% 805.73 0.00%
June 15 1058.15 0.00% 1022.29 -2.28% 817.89 0.00% 812.83 0.00%
July 15 1042.29 -1.50% 1015.59 -0.66% 809.45 -1.03% 823.89 0.00%
August 15 1021.89 -1.96% 1029.26 0.00% 787.00 -2.77% 801.83 -2.68%
September 15 1038.05 0.00% 1038.05 0.00% 767.25 -2.51% 767.25 -4.31%
Total Return
on the Index: 15.00% 15.00% -15.00% -15.00%
Total Negative Returns: -55.92% -72.70% -77.88% -51.70%
Supplemental Return
Percentage: 14.08% 0.00% 0.00% 18.30%
-----------------------------
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-8
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 September 1983 to October 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 45 months (i.e., was issued 3 3/4 years
prior to its hypothetical maturity date), the midpoint of the
expected term of 42 to 48 months;
o an Interest Rate equal to 1.50%;
o an interest payment 3 months after the hypothetical date of
issuance and then interest payments semi-annually from such first
interest payment date for the remainder of the term;
o each interest payment is reinvested for the remainder of the term at
the Interest Rate;
o a Maximum Percentage of 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 a 360-day year of twelve
30-day months compounded semi-annually. 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 THE ANNUALIZED RETURNS OF
HYPOTHETICAL NOTES BASED ON HISTORICAL INDEX VALUES FROM SEPTEMBER 1983
TO SEPTEMBER 2002 AND THE VALUE OF THE INDEX OVER THE SAME PERIOD. THE
VERTICAL AXIS SHOWS THE RATE OF RETURN RANGING FROM 1.00% TO 14.00% IN
INCREMENTS OF 2%. THE HORIZONTAL AXIS SHOWS THE HYPOTHETICAL MATURITY
DATES FROM SEPTEMBER 1983 TO SEPTEMBER 2002 IN INCREMENTS OF ONE YEAR.]
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 Monthly Returns determined by the calculation agent as described in
this pricing supplement.
P-9
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 October
2002, and the percentage change in the Index from the closing level of the
Index on the 15th of the immediately preceding month or, if the closing level
of the Index was not available on such day, the next succeeding day that the
closing level of the Index was available in such 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 2000 % Chg 2001 % Chg 2002 % Chg
---- ---- ---- ----- ---- ---- ---- ---- ---- ----- ---- -----
Jan..... 767.20 6.41% 950.73 -1.31% 1243.26 6.92% 1455.14 2.96% 1326.65 1.11% 1146.19 1.04%
Feb..... 816.29 6.40% 1022.76 7.58% 1241.87 -0.11% 1402.05 -3.65% 1326.61 0.00% 1104.18 -3.67%
Mar..... 795.71 -2.52% 1079.27 5.53% 1307.26 5.27% 1392.14 -0.71% 1173.56 -11.54% 1166.16 5.61%
Apr..... 754.72 -5.15% 1119.32 3.71% 1322.85 1.19% 1401.44 0.67% 1179.68 0.52% 1102.55 -5.45%
May..... 841.88 11.55% 1108.73 -0.95% 1339.49 1.26% 1452.36 3.63% 1249.44 5.91% 1091.07 -1.04%
Jun..... 893.90 6.18% 1077.01 -2.86% 1301.16 -2.86% 1478.73 1.82% 1214.36 -2.81% 1036.17 -5.03%
Jul..... 925.76 3.56% 1174.81 9.08% 1409.62 8.34% 1510.49 2.15% 1202.45 -0.98% 917.93 -11.41%
Aug..... 900.81 -2.70% 1083.67 -7.76% 1330.77 -5.59% 1484.43 -1.73% 1178.02 -2.03% 930.25 1.34%
Sep..... 919.77 2.10% 1037.68 -4.24% 1317.97 -0.96% 1465.81 -1.25% 1038.77 -11.82% 891.10 -4.21%
Oct..... 965.72 5.00% 1047.49 0.95% 1247.41 -5.35% 1374.62 -6.22% 1089.98 4.93% 800.58 -10.16%
Nov..... 946.20 -2.02% 1135.86 8.44% 1394.39 11.78% 1389.81 1.11% 1142.24 4.79%
Dec..... 963.39 1.82% 1162.83 2.37% 1413.33 1.36% 1312.15 -5.59% 1134.36 -0.69%
- -----------------------------------
The closing value of the Index on November 7, 2002 was 902.65.
The following graph plots the historical monthly percentage change of
the Index from January 1997 through October 2002. Past movements of the Index
are not necessarily indicative of how the Index will perform in the future.
[THE GRAPHIC APPEARING HERE SETS FORTH THE HISTORICAL MONTHLY PERCENTAGE
CHANGE OF THE INDEX FROM JANUARY 1997 TO SEPTEMBER 2002. THE VERTICAL
AXIS SHOWS THE PERCENTAGE CHANGE FROM -15.00% TO 15.00%. THE HORIZONTAL
AXIS SHOWS DATES FROM JANUARY 1997 TO SEPTEMBER 2002 IN INCREMENTS OF ONE
MONTH.]
P-10
THE INDEX
Standard & Poor's publishes the S&P 500 Index. The Index is intended
to provide an indication of the pattern of common stock price movement. The
calculation of the value of the Index, discussed below in further detail, is
based on the relative value of the aggregate market value of the common stocks
of 500 companies as of a particular time compared to the aggregate average
market value of the common stocks of 500 similar companies during the base
period of the years 1941 through 1943. As of October 31, 2002, 423 companies
or 86.0% of the Index traded on the NYSE; 75 companies or 13.8% of the Index
traded on the Nasdaq Stock Market; and 2 companies or 0.2% of the Index traded
on the AMEX. As of October 31, 2002, the aggregate market value of the 500
companies included in the Index represented approximately 81% of the aggregate
market value of stocks included in the Standard & Poor's Stock Guide Database
of domestic common stocks traded in the U.S., excluding American depositary
receipts, limited partnerships and mutual funds. Standard & Poor's chooses
companies for inclusion in the Index with the aim of achieving a distribution
by broad industry groupings that approximates the distribution of these
groupings in the common stock population of the Standard & Poor's Stock Guide
Database, which Standard & Poor's uses as an assumed model for the composition
of the total market. Relevant criteria employed by Standard & Poor's include
the viability of the particular company, the extent to which that company
represents the industry group to which it is assigned, the extent to which the
market price of that company's common stock is generally responsive to changes
in the affairs of the respective industry and the market value and trading
activity of the common stock of that company. Ten main groups of companies
comprise the Index with the percentage weight of the companies currently
included in each group indicated in parentheses: Consumer Discretionary
(13.6%), Consumer Staples (9.8%), Energy (5.8%), Financials (20.7%), Health
Care (14.9%), Industrials (11.3%), Information Technology (14.3%), Materials
(2.6%), Telecommunication Services (4.4%) and Utilities (2.6%). Standard &
Poor's may from time to time, in its sole discretion, add companies to, or
delete companies from, the Index to achieve the objectives stated above.
The return on the Notes will not be the same as the return you would
receive if you were to purchase these stocks and hold them for a period equal
to the term of the Notes.
Computation of the S&P 500 Index
Standard & Poor's currently computes the Index as of a particular time
as follows:
1. the product of the market price per share and the number of then
outstanding shares of each component stock is determined as of that
time (referred to as the "market value" of that stock);
2. the market values of all component stocks as of that time are
aggregated;
3. the mean average of the market values as of each week in the base
period of the years 1941 through 1943 of the common stock of each
company in a group of 500 substantially similar companies is
determined;
4. the mean average market values of all these common stocks over the
base period are aggregated (the aggregate amount being referred to
as the "base value");
5. the current aggregate market value of all component stocks is
divided by the Base Value; and
6. the resulting quotient, expressed in decimals, is multiplied by
ten.
While Standard & Poor's currently employs the above methodology to
calculate the Index, no assurance can be given that Standard & Poor's will not
modify or change this methodology in a manner that may affect the Supplemental
Return Amount, if any, payable to beneficial owners of Notes upon maturity or
otherwise.
Standard & Poor's adjusts the foregoing formula to offset the effects
of changes in the market value of a component stock that are determined by
Standard & Poor's to be arbitrary or not due to true market fluctuations.
P-11
These changes may result from causes such as:
o the issuance of stock dividends,
o the granting to shareholders of rights to purchase additional
shares of stock,
o the purchase of shares by employees pursuant to employee
benefit plans,
o consolidations and acquisitions,
o the granting to shareholders of rights to purchase other
securities of the issuer,
o the substitution by Standard & Poor's of particular component
stocks in the Index, and
o other reasons
In these cases, Standard & Poor's first recalculates the aggregate
market value of all component stocks, after taking account of the new market
price per share of the particular component stock or the new number of
outstanding shares of that stock or both, as the case may be, and then
determines the new base value in accordance with the following formula:
( New Market Value )
Old Base Value x ( ---------------- ) = New Base Value
( Old Market Value )
The result is that the base value is adjusted in proportion to any
change in the aggregate market value of all component stocks resulting from
the causes referred to above to the extent necessary to negate the effects of
these causes upon the Index.
License Agreement
Standard & Poor's does not guarantee the accuracy and/or the
completeness of the Index or any data included in the Index. S&P makes no
warranty, express or implied, as to results to be obtained by ML&Co., MLPF&S,
holders of the Notes, or any other person or entity from the use of the Index
or any data included in the Index in connection with the rights licensed under
the license agreement described in this pricing supplement or for any other
use. S&P makes no express or implied warranties, and hereby expressly
disclaims all warranties of merchantability or fitness for a particular
purpose with respect to the Index or any data included in the Index. Without
limiting any of the above information, in no event shall S&P have any
liability for any special, punitive, indirect or consequential damage;
including lost profits, even if notified of the possibility of these damages.
S&P and Merrill Lynch Capital Services, Inc. have entered into a
non-exclusive license agreement providing for the license to Merrill Lynch
Capital Services, Inc., in exchange for a fee, of the right to use indices
owned and published by S&P in connection with some securities, including the
Notes, and ML&Co. is an authorized sublicensee of Merrill Lynch Capital
Services, Inc.
The license agreement between S&P and Merrill Lynch Capital Services,
Inc. provides that the following language must be stated in this pricing
supplement:
"The Notes are not sponsored, endorsed, sold or promoted by S&P. S&P
makes no representation or warranty, express or implied, to the holders of the
Notes or any member of the public regarding the advisability of investing in
securities generally or in the Notes particularly or the ability of the Index
to track general stock market performance. S&P's only relationship to Merrill
Lynch Capital Services, Inc. and ML&Co. (other than transactions entered into
in the ordinary course of business) is the licensing of certain servicemarks
and trade names of S&P and of the Index which is determined, composed and
calculated by S&P without regard to ML&Co. or the Notes. S&P has no obligation
to take the needs of ML&Co. or the holders of the Notes into consideration in
determining, composing or calculating the Index. S&P is not responsible for
and has not participated in the determination of the timing of the sale of the
Notes, prices at which the Notes are to initially be sold, or quantities of
the Notes to be issued or in the determination or calculation of the equation
by which the Notes are to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing or trading of the
Notes."
P-12
Adjustments to the Index; Market Disruption Events
If at any time S&P 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
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 S&P discontinues publication of the Index and S&P 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 S&P 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 S&P 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
P-13
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 S&P 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 a 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.
o The Maximum Percentage will be pro-rated over the period from
December , 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 a
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
P-14
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 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 "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,
P-15
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 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
P-16
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.
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:
Total interest deemed
to have accrued on
Interest deemed to Notes as of end of
Accrual accrue during accrual accrual period (per
Period period (per Note) Note)
------ --------------------- ---------------------
December , 2002 through June , 2003.................... $ $
June , 2003 through December , 2003.................... $ $
December , 2003 through June , 2004.................... $ $
June , 2004 through December , 2004.................... $ $
December , 2004 through June , 2005.................... $ $
June , 2005 through December , 2005.................... $ $
December , 2005 through June , 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
P-17
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
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").
P-18
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;
(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.
PLAN OF DISTRIBUTION
As described in the "The Plan of Distribution" in the attached
Prospectus Supplement, MLPF&S is purchasing the Notes, as principal, from
ML&Co., for resale to investors and other purchasers at the Issue Price set
forth on the cover of this pricing supplement. MLPF&S has advised ML&Co. that
it proposes initially to offer all or part of the Notes directly to the public
at the Issue Price set forth on the cover page of this pricing supplement and
that it may offer a part of the Notes to certain dealers at a price that
represents a concession not in excess of % of the Issue Price of the Notes.
MLPF&S may allow, and any such dealer may reallow, a concession not in excess
of % of the Issue Price of the Notes to certain other dealers. After the
initial public offering, the Issue Price and concessions may be changed.
P-19