Filed Pursuant to Rule 424(b)(5)
Registration No. 333-52822
PROSPECTUS SUPPLEMENT
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(To prospectus dated January 24, 2001)
[LOGO]
3,500,000 Units
Merrill Lynch & Co., Inc.
8% Callable STock Return Income DEbt Securities/SM/
due March 15, 2004
"Callable STRIDES/SM/"
Payable at maturity with Corning Incorporated common stock
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The Callable STRIDES: Payment at maturity:
. Principal amount per unit and . If we have not called the Callable
original issue price per unit of the STRIDES prior to or on the stated
Callable STRIDES is $8.90, which was maturity date, for each Callable
the closing market price of one share STRIDES you own at maturity, in
of Corning Incorporated common stock addition to accrued and unpaid
on March 11, 2002, the date the interest, we will deliver to you one
Callable STRIDES were priced for share of Corning Incorporated common
initial sale to the public. stock, subject to adjustment for
. We will pay interest on the principal certain corporate events relating to
amount of the Callable STRIDES Corning Incorporated as described in
quarterly, at the rate of 8% per this prospectus supplement.
year, beginning June 15, 2002. . At maturity, if the price of Corning
. Callable at the option of Merrill Incorporated common stock has
Lynch & Co., Inc. beginning March 17, decreased, the value of the Corning
2003. Incorporated common stock that you
. Senior unsecured debt securities of will receive will be less than the
Merrill Lynch & Co., Inc. principal amount of your Callable
. Linked to the price of Corning STRIDES.
Incorporated common stock (trading
symbol "GLW"). Corning Incorporated Payment if called by Merrill Lynch &
has no obligations relating to, and Co., Inc.:
does not sponsor or endorse, the . If we call the Callable STRIDES on or
Callable STRIDES. after March 17, 2003, we will pay you
. The Callable STRIDES have been a cash amount that, together with all
approved for listing on the American other payments made on the Callable
Stock Exchange under the trading STRIDES from the original issue date
symbol "CGS", subject to official to and including the call date, will
notice of issuance. provide a yield to call of 36% per
. Expected settlement date: March 15, year on the principal amount of the
2002. Callable STRIDES from the original
issue date until the call date.
Investing in the Callable STRIDES involves risks that are described in
the "Risk Factors" section beginning on page S-8 of this prospectus supplement.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
Per unit Total
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Public offering price (1).................................. $8.90 $31,150,000
Underwriting discount...................................... $.1780 $623,000
Proceeds, before expenses, to Merrill Lynch & Co., Inc..... $8.722 $30,527,000
(1) Plus accrued interest from March 15, 2002, if settlement occurs after
that date
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Merrill Lynch & Co.
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The date of this prospectus supplement is March 11, 2002.
"STock Return Income DEbt Securities" and "STRIDES" are service marks of
Merrill Lynch & Co., Inc.
TABLE OF CONTENTS
Prospectus Supplement
Page
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SUMMARY INFORMATION--Q&A............................................................................... S-4
What are the Callable STRIDES?...................................................................... S-4
When will I receive interest?....................................................................... S-4
What will I receive on the stated maturity date of the Callable STRIDES?............................ S-4
How does the call feature work?..................................................................... S-5
Who is Corning?..................................................................................... S-5
What is Corning's role in the Callable STRIDES?..................................................... S-6
How has Corning common stock performed historically?................................................ S-6
When will I receive cash instead of shares of Corning common stock?................................. S-6
What about taxes?................................................................................... S-6
Will the Callable STRIDES be listed on a stock exchange?............................................ S-6
What is the role of MLPF&S?......................................................................... S-7
Who is ML&Co.?...................................................................................... S-7
Are there any risks associated with an investment in the Callable STRIDES?.......................... S-7
RISK FACTORS........................................................................................... S-8
Your investment may result in a loss................................................................ S-8
The Callable STRIDES are subject to being called at our option...................................... S-8
Your yield may be lower than the yield on other standard debt securities of comparable maturity..... S-8
Your return may be limited and will not be identical to the return of owning Corning common stock... S-8
There may be an uncertain trading market for the Callable STRIDES................................... S-8
Many factors affect the trading value of the Callable STRIDES; these factors interrelate in complex
ways and the effect of any one factor may offset or magnify the effect of another factor.......... S-9
Amounts payable on the Callable STRIDES may be limited by state law................................. S-10
No Affiliation Between ML&Co. and Corning........................................................... S-10
No stockholder's rights............................................................................. S-10
Purchases and sales of Corning common stock by us and our affiliates may affect your return......... S-10
Potential conflicts................................................................................. S-11
Uncertain tax consequences.......................................................................... S-11
DESCRIPTION OF THE CALLABLE STRIDES.................................................................... S-12
Interest............................................................................................ S-12
Payment at maturity................................................................................. S-12
Fractional Shares................................................................................... S-13
Call at the option of ML&Co......................................................................... S-13
Call Prices......................................................................................... S-14
Hypothetical returns at maturity.................................................................... S-15
Redemption Event.................................................................................... S-16
Events of Default and Acceleration.................................................................. S-16
Share Multiplier Adjustments........................................................................ S-16
Reorganization Events............................................................................... S-20
Alternative Dilution and Reorganization Adjustments................................................. S-21
Depositary.......................................................................................... S-22
Same-Day Settlement and Payment..................................................................... S-24
CORNING COMMON STOCK................................................................................... S-25
Corning............................................................................................. S-25
Historical data..................................................................................... S-26
UNITED STATES FEDERAL INCOME TAXATION.................................................................. S-27
General............................................................................................. S-27
Tax Treatment of a Callable STRIDES................................................................. S-28
Sale, Exchange or Redemption of the Callable STRIDES................................................ S-28
Premium............................................................................................. S-29
Possible Alternative Tax Treatments of an Investment in a Callable STRIDES.......................... S-29
S-2
Page
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Constructive Ownership Law............................................. S-29
Non-U.S. Holders....................................................... S-30
Backup Withholding and Information Reporting........................... S-30
ERISA CONSIDERATIONS...................................................... S-30
USE OF PROCEEDS AND HEDGING............................................... S-30
WHERE YOU CAN FIND MORE INFORMATION....................................... S-31
ML&Co.................................................................. S-31
Corning................................................................ S-31
UNDERWRITING.............................................................. S-31
VALIDITY OF THE CALLABLE STRIDES.......................................... S-32
EXPERTS................................................................... S-32
INDEX OF DEFINED TERMS.................................................... S-33
ANNEX A................................................................... A-1
Prospectus
Page
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MERRILL LYNCH & CO., INC.................................................. 2
USE OF PROCEEDS........................................................... 2
RATIO OF EARNINGS TO FIXED CHARGES AND RATIOS OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS............................. 3
THE SECURITIES............................................................ 3
DESCRIPTION OF DEBT SECURITIES............................................ 4
DESCRIPTION OF DEBT WARRANTS.............................................. 10
DESCRIPTION OF CURRENCY WARRANTS.......................................... 12
DESCRIPTION OF INDEX WARRANTS............................................. 14
DESCRIPTION OF PREFERRED STOCK............................................ 19
DESCRIPTION OF DEPOSITARY SHARES.......................................... 24
DESCRIPTION OF PREFERRED STOCK WARRANTS................................... 28
DESCRIPTION OF COMMON STOCK............................................... 30
DESCRIPTION OF COMMON STOCK WARRANTS...................................... 34
PLAN OF DISTRIBUTION...................................................... 36
WHERE YOU CAN FIND MORE INFORMATION....................................... 37
INCORPORATION OF INFORMATION WE FILE WITH THE SEC......................... 37
EXPERTS................................................................... 38
S-3
SUMMARY INFORMATION--Q&A
This summary includes questions and answers that highlight selected
information from this prospectus supplement and the accompanying prospectus to
help you understand the Callable STock Return Income DEbt Securities/SM/ due
March 15, 2004 (the "Callable STRIDES/SM/") payable at maturity with Corning
Incorporated ("Corning") common stock. You should carefully read this
prospectus supplement and the accompanying prospectus to fully understand the
terms of the Callable STRIDES, as well as the tax and other considerations that
are important to you in making a decision about whether to invest in the
Callable STRIDES. You should carefully review the "Risk Factors" section, which
highlights certain risks, to determine whether an investment in the Callable
STRIDES is appropriate for you.
References in this prospectus supplement to "ML&Co.", "we", "us" and
"our" are to Merrill Lynch & Co., Inc., and references to "MLPF&S" are to
Merrill Lynch, Pierce, Fenner & Smith Incorporated.
What are the Callable STRIDES?
The Callable STRIDES will be a series of senior debt securities issued by
ML&Co. and will not be secured by collateral. The Callable STRIDES will rank
equally with all of our other unsecured and unsubordinated debt. The Callable
STRIDES will mature on March 15, 2004, if not called by us on or prior to that
date. We have designed the Callable STRIDES for investors who want to receive
interest payments on their investment and who also want to participate in the
change in the price of Corning common stock over the term of the Callable
STRIDES, subject to ML&Co.'s right to call the Callable STRIDES.
Each unit of Callable STRIDES represents $8.90 principal amount of
Callable STRIDES, which was the closing market price of one share of Corning
common stock on March 11, 2002, the date the Callable STRIDES were priced for
initial sale to the public (the "Pricing Date"). For a detailed explanation of
the closing market price, please see the section entitled "Description of the
Callable STRIDES--Share Multiplier Adjustments".
You may transfer the Callable STRIDES only in whole units. You will not
have the right to receive physical certificates evidencing your ownership
except under limited circumstances. Instead, we will issue the Callable STRIDES
in the form of a global certificate, which will be held by The Depository Trust
Company, also known as DTC, or its nominee. Direct and indirect participants in
DTC will record your ownership of the Callable STRIDES. You should refer to the
section entitled "Description of the Callable STRIDES--Depositary" in this
prospectus supplement.
When will I receive interest?
Interest on the Callable STRIDES will accrue at the rate of 8% per year
on the principal amount of each unit from March 15, 2002 to but excluding the
maturity date or the date we call the Callable STRIDES. You will receive
quarterly interest payments on March 15, June 15, September 15 and December 15,
of each year, beginning June 15, 2002. If any interest payment date is not a
Business Day, you will receive payment on the following Business Day.
What will I receive on the stated maturity date of the Callable STRIDES?
If we have not called the Callable STRIDES on or prior to the stated
maturity date, for each unit of the Callable STRIDES that you own at maturity,
in addition to accrued and unpaid interest, we will deliver to you one share of
Corning common stock, subject to adjustment to account for certain corporate
events relating to Corning described in this prospectus supplement.
For more specific information regarding the corporate events referred to
above, please see the section entitled "Description of the Callable
STRIDES--Share Multiplier Adjustment" and "--Reorganization Events" in this
prospectus supplement.
You should understand that the opportunity to participate in possible
increases in the price of Corning common stock through an investment in the
Callable STRIDES is limited because if we call
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the Callable STRIDES the total yield on your investment will never exceed 36%
per year. However, in the event that the price of Corning common stock declines
over the term of the Callable STRIDES, you will realize the entire decline in
the value of the Callable STRIDES and may lose a part or all of your initial
investment. For more information about risks associated with the Callable
STRIDES, please see the section entitled "Risk Factors" in this prospectus
supplement.
How does the call feature work?
We may call the Callable STRIDES on any scheduled Business Day beginning
on March 17, 2003, through and including the maturity date (the day on which
the call occurs, if any, being the "Call Date") by giving notice to the trustee
of the Callable STRIDES at least ten Business Days prior to the Call Date as
described in this prospectus supplement and specifying the Call Date, Call
Price and amount of accrued and unpaid interest payable on the Call Date. The
"Call Price" will be determined based upon the applicable Call Date. The Call
Price will equal $11.3174 if we call the Callable STRIDES on March 17, 2003,
the first date the Callable STRIDES may be called, and $14.5688 if we call the
Callable STRIDES on March 15, 2004, the last date the Callable STRIDES may be
called. For a list of month-end, midmonth, first and last Call Prices from
March 17, 2003 through the maturity date, please see the section entitled
"Description of the Callable STRIDES--Call Prices" in this prospectus
supplement; and for an example of the Call Price calculation, please see Annex
A to this prospectus supplement. If we elect to exercise our call option, the
Call Price will be disclosed to DTC, or its nominee, while the Callable STRIDES
are held by DTC as depositary. So long as DTC, or its nominee, is the
registered holder of the Callable STRIDES, notice of our election to exercise
the call option will be forwarded as described in the section entitled
"Description of the Callable STRIDES--Depositary" in this prospectus
supplement. The Call Price does not include the amount of unpaid interest
accrued to but excluding the Call Date; however, on the Call Date you will
receive an amount equal to the Call Price plus any accrued and unpaid interest
to but excluding the Call Date (the "Final Amount").
The Call Price on any Call Date is the amount of cash, per Callable
STRIDES, that when discounted from the Call Date to the original issue date by
a discount factor based on an annual yield to call of 36% and added to the
present value of all interest payments made through and including the
applicable Call Date discounted to the original issue date by that same
discount factor, will equal the original issue price. The yield to call
represents the interest rate per year used in determining the present values,
discounted to the original issue date, of all payments made or to be made on
the Callable STRIDES, including the Call Price and all interest payments, such
that the sum of these present values is equal to the original issue price. The
present values of the interest payments made on the Callable STRIDES will be
calculated assuming each payment is made on the calendar day scheduled for that
payment, without regard to whether that day is a Business Day.
If we elect to call your Callable STRIDES, you will receive only the
Final Amount, and you will not be entitled to receive Corning common stock at
maturity.
Who is Corning?
Corning has disclosed that it manufacturers optical fiber, cable and
photonic products for the telecommunications industry; and high-performance
displays and components for television and other communications-related
industries. Corning also uses advanced materials to manufacture products for
scientific, semiconductor and environmental markets. You should independently
investigate Corning and decide whether an investment in the Callable STRIDES
linked to Corning common stock is appropriate for you.
Because Corning common stock is registered under the Securities and
Exchange Act of 1934, Corning is required to file periodically certain
financial and other information specified by the Securities and Exchange
Commission. Information provided to or filed with the SEC by Corning can be
located by reference to SEC file number 1-3247 and inspected at the SEC's
public reference facilities or accessed over the Internet through the SEC's web
site. In addition, information regarding Corning may
S-5
be obtained from other sources including, but not limited to, press releases,
newspaper articles and other publicly disseminated information. We make no
representation or warranty as to the accuracy or completeness of any such
information. For further information, please see the sections entitled "Corning
Common Stock--Corning " and "Where You Can Find More Information" in this
prospectus supplement.
What is Corning's role in the Callable STRIDES?
Corning has no obligations relating to the Callable STRIDES or amounts to
be paid to you, including any obligation to take the needs of ML&Co. or of
beneficial owners of the Callable STRIDES into consideration for any reason.
Corning will not receive any of the proceeds of the offering of the Callable
STRIDES and is not responsible for, and has not participated in, the offering
of the Callable STRIDES and is not responsible for, and will not participate
in, the determination or calculation of the amount receivable by beneficial
owners of the Callable STRIDES. ML&Co. is not affiliated with Corning.
How has Corning common stock performed historically?
You can find a table with the high and low closing prices per share of
Corning common stock during each quarter from 1998 to the present in the
section entitled "Corning Common Stock--Historical Data" in this prospectus
supplement. We have provided this historical information to help you evaluate
the behavior of Corning common stock in various economic environments; however,
past performance of Corning common stock is not necessarily indicative of how
it will perform in the future.
When will I receive cash instead of shares of Corning common stock?
If we call the Callable STRIDES, you will receive the Call Price in cash.
Please see the section entitled "Description of the Callable STRIDES--Call at
the option of ML&Co." in this prospectus supplement.
Also, we will not distribute fractional shares of Corning. In the event
that the number of shares of Corning common stock to be delivered for each unit
of Callable STRIDES is adjusted to account for certain corporate events
described in this prospectus supplement and the number of shares to be
delivered on the maturity date is not divisible by a whole number, we will
aggregate all share amounts due on the maturity date, and in lieu of delivering
a fractional share of Corning common stock, we will pay the cash value of the
fractional share as more fully described in the section entitled "Description
of the Callable STRIDES--Fractional Shares in this prospectus supplement."
What about taxes?
The U.S. Federal income tax consequences of an investment in the Callable
STRIDES are complex and uncertain. Pursuant to the terms of the Callable
STRIDES, ML&Co. and you agree, in the absence of an administrative or judicial
ruling to the contrary, to characterize a Callable STRIDES for all tax purposes
as an investment unit consisting of a debt instrument of ML&Co. and a forward
contract to acquire Corning common stock. Under this characterization of the
Callable STRIDES, for U.S. Federal income tax purposes, you will generally
include payments of interest on the Callable STRIDES in income in accordance
with your regular method of tax accounting. You should review the discussion
under the section entitled "United States Federal Income Taxation" in this
prospectus supplement.
Will the Callable STRIDES be listed on a stock exchange?
The Callable STRIDES have been approved for listing on the AMEX under the
trading symbol "CGS", subject to official notice of issuance. You should be
aware that listing of the Callable STRIDES on the AMEX will not necessarily
ensure that a liquid trading market will be available for the Callable STRIDES.
You should review the section entitled "Risk Factors--There may be an uncertain
trading market for the Callable STRIDES" in this prospectus supplement.
S-6
What is the role of MLPF&S?
MLPF&S, our subsidiary, is the underwriter for the offering and sale of
the Callable STRIDES. After the initial offering, MLPF&S intends to buy and
sell Callable STRIDES to create a secondary market for holders of the Callable
STRIDES, and may stabilize or maintain the closing market price of the Callable
STRIDES during the 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 also will be our agent for purposes of calculating, among other
things, the Call Price and the number of shares of Corning common stock
deliverable to you at maturity. Under certain circumstances, these duties could
result in a conflict of interest between MLPF&S's status as our subsidiary and
its responsibilities as calculation agent.
Who is ML&Co.?
Merrill Lynch & Co., Inc. is a holding company with various subsidiaries
and affiliated companies that provide investment, financing, insurance and
related services on a global basis. For information about ML&Co., please see
the section entitled "Merrill Lynch & Co., Inc." in the accompanying
prospectus. You should also read the other documents we have filed with the
SEC, which you can find by referring to the section entitled "Where You Can
Find More Information" in this prospectus supplement.
Are there any risks associated with an investment in the Callable STRIDES?
Yes, an investment in the Callable STRIDES is subject to certain risks.
Please refer to the section entitled "Risk Factors" in this prospectus
supplement.
S-7
RISK FACTORS
Your investment in the Callable STRIDES will involve certain risks. You
should consider carefully the following discussion of risks before you decide
that an investment in the Callable STRIDES is suitable for you.
Your investment may result in a loss
The Callable STRIDES do not provide for a minimum repayment amount at
maturity. If we do not elect to exercise our call option on or prior to the
maturity date, you will receive one share of Corning common stock at maturity,
subject to adjustment as described in this prospectus supplement. Because the
price of Corning common stock is subject to market fluctuations, the value of
the Corning common stock that we will deliver to you at maturity may be more or
less than the principal amount of your Callable STRIDES. The value of the
Callable STRIDES may decline, and that decline could be substantial. If you
purchase your Callable STRIDES in the initial distribution, and if, at
maturity, the closing market price of Corning common stock is less than the
initial issue price of each Callable STRIDES, your investment in the Callable
STRIDES will result in a loss to you of part or all of your initial investment.
The Callable STRIDES are subject to being called at our option
We may call all of the Callable STRIDES on any scheduled Business Day
beginning March 17, 2003 to and including the maturity date. In the event that
we elect to call the Callable STRIDES, you will receive only the Call Price and
any accrued and unpaid interest to but excluding the Call Date, and you will
not be entitled to receive shares of Corning common stock at maturity. You
should not expect to obtain a total annualized yield of more than 36% on the
original issue price.
Your yield may be lower than the yield on other standard debt securities of
comparable maturity
The interest payments and the value of the Corning common stock that we
deliver to you at maturity may together be less than the return you could earn
on other investments. Your yield may be less than the yield you would earn if
you bought a standard senior non-callable debt security of ML&Co. with the same
stated maturity date. Your investment may not reflect the full opportunity cost
to you when you take into account factors that affect the time value of money.
Unlike standard senior non-callable debt securities, the Callable STRIDES do
not guarantee the return of a principal amount at maturity.
Your return may be limited and will not be identical to the return of owning
Corning common stock
You should understand that the opportunity to participate in the possible
increases in the price of Corning common stock through an investment in the
Callable STRIDES is limited because the amount you receive if we call the
Callable STRIDES will never exceed a total annualized yield of 36% on the
original issue price. However, if we choose not to exercise our call option and
the value of Corning common stock declines over the term of the Callable
STRIDES, you will realize the entire decline in value of the Callable STRIDES,
and will lose a part or all of your initial investment.
In addition, your return on the Callable STRIDES will not reflect the
return you would realize if you actually owned Corning common stock and
received the dividends, if any, paid on Corning common stock. You will not be
entitled to receive dividends, if any, paid on the Corning common stock unless
and until you actually hold Corning common stock on the applicable record date
for the payment of a dividend.
There may be an uncertain trading market for the Callable STRIDES
The Callable STRIDES have been approved for listing on the AMEX under the
trading symbol "CGS", subject to official notice of issuance. Listing the
Callable STRIDES on the AMEX does not necessarily ensure
S-8
that a trading market will develop for the Callable STRIDES. If a trading
market does develop, there can be no assurance that there will be liquidity in
the trading market. The development of a trading market for the Callable
STRIDES will depend on our financial performance and other factors such as the
appreciation, if any, in the price of Corning common stock. In addition, it is
unlikely that the secondary market price of the Callable STRIDES will correlate
exactly with the price of Corning common stock.
If the trading market for the Callable STRIDES is limited, there may be a
limited number of buyers if you decide to sell your Callable STRIDES rather
than hold your investment until the maturity date. This may affect the price
you receive.
Many factors affect the trading value of the Callable STRIDES; these factors
interrelate in complex ways and the effect of any one factor may offset or
magnify the effect of another factor
The trading value of the Callable STRIDES will be affected by factors
that interrelate in complex ways. It is important for you to understand that
the effect of one factor may offset the increase in the trading value of the
Callable STRIDES caused by another factor, and that the effect of one factor
may exacerbate the decrease in the trading value of the Callable STRIDES caused
by another factor. For example, an increase in U.S. interest rates may offset
some or all of any increase in the trading value of the Callable STRIDES
attributable to another factor, such as an increase in the price of Corning
common stock. The following paragraphs describe the expected impact on the
market value of the Callable STRIDES given a change in a specific factor,
assuming all other conditions remain constant.
The price of Corning common stock is expected to affect the trading value
of the Callable STRIDES. We expect that the market value of the Callable
STRIDES will depend substantially on the price of Corning common stock, as
adjusted for certain dilution and reorganization events described in this
prospectus supplement. However, you generally should not expect the market
value of your Callable STRIDES to be identical to the market value of the
Corning common stock. For example, if you choose to sell your Callable STRIDES
when the price of Corning common stock, as adjusted, exceeds the principal
amount, you may receive substantially less than the current market value of the
Corning common stock because of the expectation that the price of Corning
common stock will continue to fluctuate until the maturity date.
Changes in the levels of interest rates are expected to affect the
trading value of the Callable STRIDES. We expect that changes in interest rates
will affect the trading value of the Callable STRIDES. In general, if U.S.
interest rates increase, we expect that the trading value of the Callable
STRIDES will decrease and, conversely, if U.S. interest rates decrease, we
expect that the trading value of the Callable STRIDES will increase.
Changes in the volatility of Corning common stock are expected to affect
the trading value of the Callable STRIDES. Volatility is the term used to
describe the size and frequency of price and/or market fluctuations. If the
volatility of Corning common stock increases, we expect the trading value of
the Callable STRIDES will decrease; and, if the volatility of Corning common
stock decreases, we expect that the trading value of the Callable STRIDES will
increase.
As the time remaining to maturity of the Callable STRIDES decreases, the
"time premium or discount" associated with the Callable STRIDES will decrease.
We anticipate that before their maturity, the Callable STRIDES may trade at a
value above or below that which would be expected based on the level of
interest rates and the price of Corning common stock. This difference will
reflect a "time premium or discount" due to expectations concerning the price
of Corning common stock during the period before the stated maturity of the
Callable STRIDES. As the time remaining to maturity decreases, any discount or
premium attributed to the trading value of the Callable STRIDES will diminish,
increasing or decreasing the trading value of the Callable STRIDES.
S-9
Changes in dividend yields of Corning common stock are expected to affect
the trading value of the Callable STRIDES. Currently, Corning does not pay
dividends on its common stock. If the dividend yield on Corning common stock
were to increase, we expect that the value of the Callable STRIDES would
decrease. However, should there be a subsequent decrease in the dividend yield
on Corning common stock, we expect the value of the Callable STRIDES would
increase.
Changes in our credit ratings may affect the trading value of the
Callable STRIDES. Our credit ratings are an assessment of our ability to pay
our obligations. Consequently, real or anticipated changes in our credit
ratings may affect the trading value of the Callable STRIDES. However, because
your return on your Callable STRIDES is dependent upon factors in addition to
our ability to pay our obligations under the Callable STRIDES, such as the
percentage change in the price of Corning common stock at maturity, an
improvement in our credit ratings will not reduce the other investment risks
related to the Callable STRIDES.
In general, assuming all relevant factors are held constant, we expect
that the effect on the trading value of the Callable STRIDES of a given change
in most of the factors listed above will be less if it occurs later in the term
of the Callable STRIDES than if it occurs earlier in the term of the Callable
STRIDES. However, we expect that the effect on the trading value of the
Callable STRIDES of a given change in the price of Corning common stock will be
greater if it occurs later in the term of the Callable STRIDES than if it
occurs earlier in the term of the Callable STRIDES.
Amounts payable on the Callable STRIDES may be limited by state law
New York State law governs the 1983 Indenture under which the Callable
STRIDES will be issued. New York has usury laws that limit the amount of
interest that can be charged and paid on loans, which includes debt securities
like the Callable STRIDES. Under present New York law, the maximum rate of
interest is 25% per annum on a simple interest basis. This limit may not apply
to debt securities in which $2,500,000 or more has been invested.
While we believe that New York law would be given effect by a state or
Federal court sitting outside of New York, many other states also have laws
that regulate the amount of interest that may be charged to and paid by a
borrower. We promise, for the benefit of the holders of the Callable STRIDES,
to the extent permitted by law, not to voluntarily claim the benefits of any
laws concerning usurious rates of interest.
No Affiliation Between ML&Co. and Corning
We are not affiliated with Corning, and Corning has no obligations
relating to the Callable STRIDES or amounts to be paid to you, including any
obligation to take the needs of ML&Co. or of beneficial owners of the Callable
STRIDES into consideration for any reason. Corning will not receive any of the
proceeds of the offering of the Callable STRIDES and is not responsible for,
and has not participated in, the offering of the Callable STRIDES and is not
responsible for, and will not participate in, the determination or calculation
of the amount receivable by beneficial owners of the Callable STRIDES.
No stockholder's rights
Beneficial owners of the Callable STRIDES will not be entitled to any
rights in Corning common stock including, for example, the right to receive
dividends or other distributions, voting rights and the right to tender or
exchange common stock in any tender or exchange offer by Corning or any third
party.
Purchases and sales of Corning common stock by us and our affiliates may affect
your return
We and our affiliates may from time to time buy or sell Corning common
stock or futures or option contracts on Corning common stock for our own
accounts for business reasons. We expect to enter into such
S-10
transactions in connection with hedging our obligations under the Callable
STRIDES. These transactions could affect the price of Corning common stock and,
in turn, the value of the Callable STRIDES in a manner that would be adverse to
your investment in the Callable STRIDES. Any purchases by us, our affiliates or
others on our behalf on or before the Pricing Date may temporarily increase the
price of Corning common stock. Temporary increases in the market price of
Corning common stock may also occur as a result of the purchasing activities of
other market participants in anticipation of this transaction. Consequently,
the price of Corning common stock may decline subsequent to the Pricing Date
reducing the market value of the Callable STRIDES.
Potential conflicts
The calculation agent for the Callable STRIDES is MLPF&S, our subsidiary.
Under certain circumstances, MLPF&S' role as our subsidiary and its
responsibilities as calculation agent for the Callable STRIDES could give rise
to conflicts of interests. 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.
We have entered into an arrangement with one of our subsidiaries to hedge
the market risks associated with our obligations in connection with the
Callable STRIDES. This subsidiary expects to make a profit in connection with
this arrangement. We did not seek competitive bids for this arrangement from
unaffiliated parties.
Uncertain tax consequences
You should consider the tax consequences of investing in the Callable
STRIDES, aspects of which are uncertain. See the section entitled "United
States Federal Income Taxation" in this prospectus supplement.
S-11
DESCRIPTION OF THE CALLABLE STRIDES
ML&Co. will issue the Callable STRIDES as a series of senior debt
securities under the 1983 Indenture which is more fully described in the
accompanying prospectus. The Callable STRIDES will mature on March 15, 2004.
The Callable STRIDES may be called by ML&Co. as described below, but are
not otherwise subject to redemption by us or at the option of any beneficial
owner before maturity except as described under the sections entitled
"--Redemption Event" and "--Reorganization Event". If an Event of Default
occurs with respect to the Callable STRIDES, beneficial owners of the Callable
STRIDES may accelerate the maturity of the Callable STRIDES, as described under
the sections entitled "Events of Default and Acceleration" in this prospectus
supplement and "Description of Debt Securities Events of Default" in the
accompanying prospectus of ML&Co.
ML&Co. will issue the Callable STRIDES in denominations of whole units
with a principal amount per unit of $8.90, the closing market price of one
share of Corning common stock on the Pricing Date.
The Callable STRIDES will not have the benefit of any sinking fund.
Interest
The Callable STRIDES will bear interest at a rate of 8% per year on the
principal amount of each unit from March 15, 2002 or from the most recent
interest payment date for which interest has been paid or provided for, to but
excluding the stated maturity date or the Call Date, as applicable. We will pay
interest on the Callable STRIDES in cash quarterly in arrears on March 15, June
15, September 15 and December 15 of each year and on the maturity date or Call
Date, beginning June 15, 2002. We will pay this interest to the persons in
whose names the Callable STRIDES are registered at the close of business on the
immediately preceding March 1, June 1, September 1 and December 1,
respectively, whether or not a Business Day. Notwithstanding the foregoing, in
the event that the Callable STRIDES are called at the option of ML&Co., the
final payment of interest will be paid to the person to whom the Call Price
shall be paid. Interest on the Callable STRIDES will be computed on the basis
of a 360-day year of twelve 30-day months. If an interest payment date falls on
a day that is not a Business Day, that interest payment will be made on the
next Business Day and no additional interest will accrue as a result of the
delayed payment.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in The City of New York are
authorized or obligated by law to close and with respect to the stated maturity
is also a day that is a Trading Day.
Payment at maturity
If we do not call the Callable STRIDES on or prior to the maturity date,
then at maturity, for each unit of Callable STRIDES you own, you will receive a
cash payment of accrued and unpaid interest and one share of Corning common
stock; provided, however, if the Share Multiplier is more or less than one (1)
due to certain corporate events, you will receive the number of shares equal to
the Share Multiplier.
If the maturity date is not a Business Day, we will deliver the Corning
common stock and make all accrued and unpaid interest payments on the first
Business Day following the maturity date and no additional interest will accrue.
"Share Multiplier" initially means 1.0, but is subject to adjustment for
certain events described under "--Share Multiplier Adjustments" and
"--Alternative Dilution and Reorganization Adjustments".
"Trading Day" means a day on which the New York Stock Exchange, the AMEX
and the Nasdaq Stock Market are open for trading as determined by the
calculation agent.
S-12
All determinations made by the calculation agent shall be at the sole
discretion of the calculation agent and, absent a determination by the
calculation agent of a manifest error, shall be conclusive for all purposes and
binding on ML&Co. and beneficial owners of the Callable STRIDES.
Fractional Shares
We will not distribute any fractional shares of Corning common stock. In
the event that the Share Multiplier is adjusted to account for certain
corporate events described in this prospectus supplement and the number of
shares to be delivered on the maturity date is not divisible by a whole number,
we will aggregate all share amounts due to a registered holder on the maturity
date, and, in lieu of delivering a fractional share of Corning common stock, we
will pay to the registered holder the cash value of the fractional share based
on the closing market price. While the Callable STRIDES are held at the
depositary, the sole registered holder will be the depositary. Depositary
participants have different policies pertaining to fractional shares. You
should consult the participant through which you hold the Callable STRIDES to
ascertain a participant's specific policy.
Call at the option of ML&Co.
ML&Co., in its sole discretion, may call the Callable STRIDES, in whole
but not in part, on any scheduled Business Day beginning on March 17, 2003, to
and including the maturity date (the date on which the call, if any, occurs
being the "Call Date") by giving notice to the trustee on any Business Day at
least ten Business Days prior to the Call Date. The notice to the trustee will
specify the Call Date, Call Price and amount of interest payable on the Call
Date. The trustee will provide notice of the call election to the registered
holders of the Callable STRIDES, specifying the Call Date, Call Price and
amount of interest payable on the Call Date. The depositary, as the registered
holder, will receive the notice of the call. So long as the depositary is the
registered holder of the Callable STRIDES, notice of our election to exercise
the call option will be forwarded as more fully described below under
"--Depositary".
The Call Price on any Call Date will be the amount of cash, per Callable
STRIDES, that when discounted from the Call Date to the original issue date by
a discount factor based on an annual yield to call of 36% and added to the
present value of all interest payments made through and including the
applicable Call Date discounted to the original issue date by that same
discount factor, will equal the original issue price. The present value of each
interest payment on the Callable STRIDES used to determine the Call Price will
be calculated assuming each payment is made on the calendar day scheduled for
that payment. A delay in payment may arise for reasons such as a scheduled
interest payment date falling on a day that is not a Business Day and, as a
result, the payment being delayed until the next succeeding Business Day. Any
delay will not be taken into account when calculating the applicable Call
Price. The Call Price will not include the amount of unpaid interest accrued to
but excluding the Call Date; however, on the Call Date you will receive the
Call Price plus an amount equal to the accrued and unpaid interest (the "Final
Amount"). The yield to call represents the annual interest rate used in
determining the present values, discounted to the original issue date, of all
payments made or to be made on the Callable STRIDES, including the Call Price
and all interest payments, such that the sum of these present values is equal
to the original issue price.
S-13
Call Prices
The following table sets forth the month-end, midmonth, first and last
Call Prices from March 17, 2003 to March 15, 2004. For an example of the Call
Price calculation, see Annex A to this prospectus supplement. If we elect to
exercise our call option, the Call Price will be disclosed in the notice we
deliver to DTC in connection with our call of the Callable STRIDES.
Interest Payable on
Call Price per Call Date per Final Amount per
Call Date Callable STRIDES Callable STRIDES Callable STRIDES
--------- ---------------- ------------------- ----------------
March 17, 2003................ $11.3174 $0.0040 $11.3214
March 31, 2003................ $11.4259 $0.0316 $11.4575
April 15, 2003................ $11.5360 $0.0593 $11.5954
April 30, 2003................ $11.6559 $0.0890 $11.7449
May 15, 2003.................. $11.7777 $0.1187 $11.8963
May 30, 2003.................. $11.9014 $0.1483 $12.0497
June 16, 2003................. $12.0354 $0.0020 $12.0374
June 30, 2003................. $12.1525 $0.0297 $12.1822
July 15, 2003................. $12.2799 $0.0593 $12.3393
July 31, 2003................. $12.4181 $0.0910 $12.5090
August 15, 2003............... $12.5409 $0.1187 $12.6595
August 29, 2003............... $12.6654 $0.1464 $12.8118
September 15, 2003............ $12.8101 $0.1780 $12.9881
September 30, 2003............ $12.9456 $0.0297 $12.9753
October 15, 2003.............. $13.0832 $0.0593 $13.1426
October 31, 2003.............. $13.2324 $0.0910 $13.3234
November 17, 2003............. $13.3841 $0.1226 $13.5067
November 28, 2003............. $13.4899 $0.1444 $13.6342
December 15, 2003............. $13.6557 $0.1780 $13.8337
December 31, 2003............. $13.8119 $0.0316 $13.8436
January 15, 2004.............. $13.9508 $0.0593 $14.0101
January 30, 2004.............. $14.1017 $0.0890 $14.1907
February 17, 2004............. $14.2757 $0.1226 $14.3983
February 27, 2004............. $14.3794 $0.1424 $14.5218
March 15, 2004 (maturity date) $14.5688 $0.1780 $14.7468
S-14
Hypothetical returns at maturity
The following table illustrates, for a range of hypothetical closing
market prices of Corning common stock at maturity:
. the percentage change from the original issue price to the
hypothetical closing market price at maturity,
. the Final Amount payable on the Callable STRIDES, including the
payment of accrued and unpaid interest on the maturity date,
. the total annualized yield on the Callable STRIDES at maturity, and
. the total annualized yield from direct ownership of Corning common
stock.
This table also assumes that the Callable STRIDES have not been called
prior to the maturity date and will be called by ML&Co. on the maturity date if
the total annualized yield on the Callable STRIDES would otherwise be greater
than or equal to 36% at maturity.
Percentage change from Final Total annualized
the original issue price Amount Total annualized yield from
Hypothetical closing to the hypothetical payable on yield on the direct ownership of
market price at closing market price the Callable Callable STRIDES Corning
maturity at maturity STRIDES(1) at maturity(2) common stock(3)
- -------------------- ------------------------ ------------ ---------------- -------------------
1.78 -80% $ 1.9580 -45.21% -55.28%
2.67 -70% $ 2.8480 -35.80% -45.23%
3.56 -60% $ 3.7380 -27.71% -36.75%
4.45 -50% $ 4.6280 -20.50% -29.29%
5.34 -40% $ 5.5180 -13.93% -22.54%
6.23 -30% $ 6.4080 -7.85% -16.33%
7.12 -20% $ 7.2980 -2.18% -10.56%
8.01 -10% $ 8.1880 3.18% -5.13%
8.90(4) 0% $ 9.0780 8.24% 0.00%
9.79 10% $ 9.9680 13.08% 4.88%
10.68 20% $10.8580 17.70% 9.54%
11.57 30% $11.7480 22.14% 14.02%
12.46 40% $12.6380 26.42% 18.32%
13.35 50% $13.5280 30.55% 22.47%
14.24 60% $14.4180 34.55% 26.49%
15.13 70% $14.7468 36.00% 30.38%
16.02 80% $14.7468 36.00% 34.16%
- --------
(1) The Final Amounts specified in this column include payment of accrued and
unpaid interest payable on the maturity date.
(2) The total annualized yield at maturity represents the interest rate per
year used in determining the present values, discounted to the original
issue date (computed on the basis of a 360-day year of twelve 30-day
months), of all payments made or to be made on the Callable STRIDES,
including the Call Price and all interest payments made through and
including the applicable Call Date, the sum of these present values being
equal to the original issue price. This annualized yield assumes:
(a) coupon payments are (i) made quarterly on the 15th of March, June,
September and December of each year beginning June 15, 2002, and (ii)
reinvested for the remainder of the term of the Callable STRIDES at the
applicable yield listed in this column,
(b) an investment term from March 15, 2002 to March 15, 2004, and
(c) computed on the basis of a 360-day year of twelve 30-day months
compounded annually.
(3) Assumes the dividend yield on Corning common stock is zero for the term of
the Callable STRIDES.
(4) This was the closing market price of Corning common stock on March 11,
2002, the Pricing Date.
S-15
Redemption Event
If on any date the product of the closing market price of Corning common
stock and the Share Multiplier is less than $2.00, the Callable STRIDES will be
redeemed on the third Business Day following such date and we will deliver a
number of shares of Corning common stock equal to the then current Share
Multiplier plus accrued and unpaid interest to the redemption date.
Events of Default and Acceleration
In case an Event of Default with respect to any Callable STRIDES has
occurred and is continuing, the amount payable to a beneficial owner of a
Callable STRIDES upon any acceleration permitted by the Callable STRIDES will
be equal to the consideration due at maturity, calculated as though the date of
acceleration were the maturity date. The value of such consideration shall not,
however, be greater than an amount equal to the Final Amount, calculated as
though the date of acceleration were the Call Date (whether or not such date is
before or after March 17, 2003). If a bankruptcy proceeding is commenced in
respect of ML&Co., the claim of the beneficial owner of a Callable STRIDES may
be limited, under Section 502(b)(2) of Title 11 of the United States Code, to
the principal amount of the Callable STRIDES plus an additional amount of
contingent interest calculated as though the date of the commencement of the
proceeding were the maturity date of the Callable STRIDES.
In case of default in payment of the Callable STRIDES, whether at any
interest payment date, the stated maturity date, the Call Date or upon
acceleration, from and after that date the Callable STRIDES will bear interest,
payable upon demand of their beneficial owners, at the rate of 2.2% per year,
to the extent that payment of such interest shall be legally enforceable, on
the unpaid amount due and payable on that date in accordance with the terms of
the Callable STRIDES to the date payment of that amount has been made or duly
provided for.
Share Multiplier Adjustments
The Share Multiplier used to determine the number of shares of Corning
common stock to be delivered at maturity is subject to adjustment by the
calculation agent as described in this section. However, if we elect to call
the Callable STRIDES, you will receive only the Final Amount, and you will not
be entitled to receive Corning common stock.
No adjustments to the Share Multiplier will be required unless the Share
Multiplier adjustment would require a change of at least 0.1% in the Share
Multiplier then in effect. The Share Multiplier resulting from any of the
adjustments specified below will be rounded to the nearest one-thousandth with
five ten-thousandths being rounded upward. The calculation agent will not be
required to make any adjustments to the Share Multiplier after the close of
business on the fourth Business Day immediately prior to the maturity date or
early redemption date, as applicable.
No adjustments to the Share Multiplier will be required other than those
specified below. However, the calculation agent may, at its sole discretion,
make additional adjustments to the Share Multiplier to reflect changes
occurring in relation to Corning common stock or any other security received in
a reorganization event in other circumstances where the calculation agent
determines that it is appropriate to reflect those changes to ensure an
equitable result. The required adjustments specified below do not cover all
events that could affect the closing market price of Corning common stock,
including, without limitation, a partial tender or exchange offer for Corning
common stock.
MLPF&S, as calculation agent, will be solely responsible for the
determination and calculation of any adjustments to the Share Multiplier and of
any related determinations and calculations with respect to any distributions
of stock, other securities or other property or assets, including cash, in
connection with any corporate event described below; and its determinations and
calculations will be conclusive absent manifest error.
S-16
No adjustments will be made for certain other events, such as offerings
of common stock by Corning for cash or in connection with the occurrence of a
partial tender or exchange offer for Corning common stock by Corning.
ML&Co. will, within ten Business Days following the occurrence of an
event that requires an adjustment to the Share Multiplier, or, if later, within
ten Business Days following the date on which ML&Co. becomes aware of this
occurrence, provide written notice to the trustee, which will provide notice to
the holders of the Callable STRIDES of the occurrence of this event and a
statement in reasonable detail setting forth the adjusted Share Multiplier.
Stock splits and reverse stock splits
If Corning common stock is subject to a stock split or reverse stock
split, then once any split has become effective, the Share Multiplier relating
to Corning common stock will be adjusted to equal the product of the prior
Share Multiplier and the number of shares which a holder of one share of
Corning common stock before the effective date of that stock split or reverse
stock split would have owned or been entitled to receive immediately following
the applicable effective date.
Stock dividends
If Corning common stock is subject to a (i) stock dividend, i.e.,
issuance of additional shares of Corning common stock, that is given ratably to
all holders of shares of Corning common stock or (ii) distribution of shares of
Corning common stock as a result of the triggering of any provision of the
corporate charter of Corning, then, once the dividend has become effective and
the shares are trading ex-dividend, the Share Multiplier will be adjusted so
that the new Share Multiplier shall equal the prior Share Multiplier plus the
product of:
. the number of shares of Corning common stock issued with respect to
one share of Corning common stock and
. the prior Share Multiplier.
Extraordinary Dividends
There will be no adjustments to the Share Multiplier to reflect any cash
dividends or cash distributions paid with respect to Corning common stock other
than Extraordinary Dividends, as described below, and distributions described
under the section entitled "--Reorganization Events" below.
An "Extraordinary Dividend" means, with respect to a cash dividend or
other distribution with respect to Corning common stock, a dividend or other
distribution which exceeds the immediately preceding non-Extraordinary Dividend
for Corning common stock (as adjusted for any subsequent corporate event
requiring an adjustment hereunder, such as a stock split or reverse stock
split) by an amount equal to at least 10% of the closing market price of
Corning common stock on the Trading Day preceding the ex-dividend date with
respect to the Extraordinary Dividend (the "ex-dividend date"). If an
Extraordinary Dividend occurs with respect to Corning common stock, the Share
Multiplier will be adjusted on the ex-dividend date with respect to the
Extraordinary Dividend so that the new Share Multiplier will equal the product
of:
. the prior Share Multiplier and
. a fraction, the numerator of which is the closing market price per
share of Corning common stock on the Trading Day preceding the
ex-dividend date, and the denominator of which is the amount by which
the closing market price on the Trading Day preceding the ex-dividend
date exceeds the Extraordinary Dividend Amount.
S-17
The "Extraordinary Dividend Amount" with respect to an Extraordinary
Dividend for Corning common stock will equal:
. in the case of cash dividends or other distributions that constitute
quarterly dividends, the amount per share of that Extraordinary
Dividend minus the amount per share of the immediately preceding
non-Extraordinary Dividend for such shares of Corning common stock, or
. in the case of cash dividends or other distributions that do not
constitute quarterly dividends, the amount per share of that
Extraordinary Dividend.
To the extent an Extraordinary Dividend is not paid in cash, the value of
the non-cash component will be determined by the calculation agent, whose
determination shall be conclusive. A distribution on Corning common stock
described in clause (a), (d) or (e) of the section entitled "--Reorganization
Events" below that also constitutes an Extraordinary Dividend shall only cause
an adjustment pursuant to clause (a), (d) or (e) under the section entitled
"--Reorganization Events". A distribution on Corning common stock described in
the section entitled "--Issuance of transferable rights and warrants" that also
constitutes an Extraordinary Dividend shall only cause an adjustment pursuant
to such section.
"Closing market price" means:
If Corning common stock (or any other security for which a closing
market price must be determined for purposes of the Callable STRIDES) is
listed on a national securities exchange in the United States, is a
Nasdaq National Market System ("Nasdaq NMS") security or is included in
the OTC Bulletin Board Service ("OTC Bulletin Board") operated by the
National Association of Securities Dealers, Inc. (the "NASD"), then the
closing market price for any date of determination on any Trading Day
means for one share of Corning common stock (or any other security for
which a closing market price must be determined for purposes of the
Callable STRIDES):
. the last reported sale price, regular way, on that day on the
principal United States securities exchange registered under
the Exchange Act on which that security is listed or admitted
to trading (without taking into account any extended or
after-hours trading session), or
. if not listed or admitted to trading on any such securities
exchange or if the last reported sale price is not obtainable,
the last reported sale price on the over-the-counter market as
reported on the Nasdaq NMS or OTC Bulletin Board on that day
(without taking into account any extended or after-hours
trading session), or
. if the last reported sale price is not available for any
reason, including, without limitation, the occurrence of a
Market Disruption Event, as described below, the mean of the
last reported bid and offer price of the principal trading
session on the over-the-counter market as reported on the
Nasdaq Stock Market or OTC Bulletin Board on that day as
determined by the calculation agent or from as many dealers in
such security, but not exceeding three, as have made the bid
prices available to the calculation agent after 3:00 p.m.,
local time in the principal market, on that date (without
taking into account any extended or after-hours trading
session).
If Corning common stock (or any other security for which a closing market
price must be determined for purposes of the Callable STRIDES) is not listed on
a national securities exchange in the United States, is not a Nasdaq NMS
security or included in the OTC Bulletin Board, then the closing market price
for any date of determination on any Trading Day means for one share of Corning
common stock (or any other security for which a closing market price must be
determined for purposes of the Callable STRIDES) the last reported sale price
on that day on the securities exchange on which that security is listed or
admitted to trading with the greatest volume of trading for the calendar month
preceding such Trading Day as determined by the calculation agent; provided
that if such last reported sale price is for a transaction which occurred more
than four hours prior
S-18
to the close of that exchange, then the closing market price shall mean the
average (mean) of the last available bid and offer price on that exchange.
If Corning common stock (or any other security for which a closing market
price must be determined for purposes of the Callable STRIDES) is not listed or
admitted to trading on any such securities exchange or if such last reported
sale price or bid and offer are not obtainable, then the closing market price
shall mean the average (mean) of the last available bid and offer prices in
such market of the three dealers which have the highest volume of transactions
in that security in the immediately preceding calendar month as determined by
the calculation agent based on information that is reasonably available to it.
"Market Disruption Event" means:
(1) a suspension of, absence of, including the absence of an official
closing price, or material limitation on, trading of Corning common
stock on the primary market for Corning common stock for more than
two hours of trading or during the one-half hour period preceding the
close of trading, as determined by the calculation agent in its sole
discretion; or the suspension or material limitation on the primary
market for trading in options contracts related to Corning common
stock, if available, during the one-half hour period preceding the
close of trading in the applicable market, in each case as determined
by the calculation agent in its sole discretion; and
(2) a determination by the calculation agent in its sole discretion that
the event described in clause (1) above materially interfered with
the ability of ML&Co., MLPF&S or any of their affiliates to unwind
all or a material portion of the hedge with respect to the Callable
STRIDES.
For purposes of determining whether a Market Disruption Event has
occurred:
(1) a limitation on the hours or number of days of trading will not
constitute a Market Disruption Event if it results from an announced
change in the regular business hours of the relevant exchange,
(2) a decision to permanently discontinue trading in the relevant options
contracts related to Corning common stock will not constitute a
Market Disruption Event,
(3) limitations pursuant to any rule or regulation enacted or promulgated
by the NYSE or the Nasdaq Stock Market or other regulatory
organization with jurisdiction over the NYSE or the Nasdaq Stock
Market on trading during significant market fluctuations will
constitute a suspension or material limitation of trading in Corning
common stock,
(4) a suspension of trading in an options contract on Corning common
stock by the primary securities market trading in the options
contracts related to Corning common stock, if available, by reason of:
. a price change exceeding limits set by the securities exchange or
market,
. an imbalance of orders relating to options contracts on Corning
common stock, or
. a disparity in bid and ask quotes relating to options contracts on
Corning common stock
will constitute a suspension or material limitation of trading in
options contracts related to Corning common stock, and
(5) a suspension of, absence of or material limitation on trading on the
primary securities market on which options contracts related to
Corning common stock are traded will not include any time when that
securities market is itself closed for trading under ordinary
circumstances.
If the Exchange Property includes securities other than Corning common
stock, then the above definition shall be revised to include each such security
in the same manner as Corning common stock is considered in determining whether
a Market Disruption Event exists.
S-19
Issuance of transferable rights or warrants
If Corning issues transferable rights or warrants to all holders of
Corning common stock to subscribe for or purchase Corning common stock,
including new or existing rights to purchase Corning common stock pursuant to a
shareholder's rights plan or arrangement, then the Share Multiplier will be
adjusted on the Business Day immediately following the issuance of such
transferable rights or warrants so that the new Share Multiplier shall equal
the prior Share Multiplier plus the product of:
. the prior Share Multiplier, and
. the number of shares of Corning common stock that can be purchased
with the cash value of such warrants or rights distributed on a
single share of Corning common stock.
The number of shares that can be purchased will be based on the closing market
price (as defined above) of Corning common stock on the date the new Share
Multiplier is determined. The cash value of such warrants or rights, if the
warrants or rights are traded on a national securities exchange, will equal the
closing price of such warrant or right, or, if the warrants or rights are not
traded on a national securities exchange, will be determined by the Calculation
Agent and will equal the average (mean) of the bid prices obtained from three
dealers at 3 p.m. on the date the new Share Multiplier is determined, provided
that if only two such bid prices are available, then the cash value of such
warrants or rights will equal the average (mean) of such bids and if only one
such bid is available, then the cash value of such warrants or rights will
equal such bid.
Reorganization Events
If prior to the maturity date of the Callable STRIDES,
(a) there occurs any reclassification or change of Corning common stock,
including, without limitation, as a result of the issuance of
tracking stock by Corning,
(b) Corning, or any surviving entity or subsequent surviving entity of
Corning (a "Successor Entity"), has been subject to a merger,
combination or consolidation and is not the surviving entity,
(c) any statutory exchange of securities of Corning or any Successor
Entity with another corporation occurs, other than pursuant to clause
(b) above,
(d) Corning is liquidated or is subject to a proceeding under any
applicable bankruptcy, insolvency or other similar law,
(e) Corning issues to all of its shareholders equity securities of an
issuer other than Corning, other than in a transaction described in
clauses (b), (c) or (d) above (a "Spin-off Event"), or
(f) a tender or exchange offer or going-private transaction is
consummated for all the outstanding shares of Corning (an event in
clauses (a) through (f) a "Reorganization Event"),
then the method of determining the amount payable on each Callable STRIDES will
be adjusted as set forth below.
"Exchange Property" will consist of the securities, cash or any other assets
distributed to holders of Corning common stock in or as a result of the
Reorganization Event, and where Corning common stock continues to be held by
the holders receiving such distribution, the Corning common stock . The
Exchange Property will either:
A. be delivered at maturity to the holders of the Callable STRIDES in an
amount per unit equal to the amount of Exchange Property delivered
with respect to the number of shares of Corning common stock equal to
the Share Multiplier at the time of the Reorganization Event, or
B. at the option of the calculation agent, the Exchange Property will be
liquidated and the cash proceeds will be paid to the holders of the
Callable STRIDES as described below.
If the Exchange Property received in a Reorganization Event:
. consists only of cash or if the calculation agent exercises its
option to liquidate the Exchange Property following its
distribution, then, unless we exercise our right to call the
Callable STRIDES,
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the Callable STRIDES will be redeemed: (i) in the case where the
Exchange Property delivered to the holders of Corning common stock
consists of cash only, on the third Business Day succeeding the day
on which that cash is distributed to holders of Corning common
stock, or (ii) in the case where the Exchange Property is
liquidated, on the date specified by ML&Co. as described below, and
holders of the Callable STRIDES will receive, in lieu of any
Corning common stock and in full satisfaction of our obligations
under the Callable STRIDES, the lesser of:
(i) the product of (a) the amount of cash received with respect to
one share of Corning common stock and the then current Share
Multiplier or (b) the value of the Exchange Property liquidated
with respect to one share of Corning common stock and the then
current Share Multiplier, as applicable, plus in either case
accrued and unpaid interest to the early redemption date, and
(ii) the Call Price calculated as though the early redemption date
were the Call Date (regardless of whether the early redemption
date is a day which occurs prior to March 17, 2003) plus
accrued and unpaid interest to the early redemption date,
in each case, no interest will accrue on the Callable STRIDES
following the early redemption date. If the calculation agent
exercises the option to liquidate the Exchange Property, ML&Co.
will give notice to the Trustee under the 1983 Indenture as to the
election to liquidate the Exchange Property, which notice will
specify the method by which the Exchange Property will be sold. The
date of early redemption of the Callable STRIDES will be the fifth
Business Day following the last date on which the Exchange Property
is sold.
. consists of more than one type of property and the calculation
agent has not exercised its option to liquidate the Exchange
Property, then holders of Callable STRIDES will receive at maturity
a pro rata share of each such type of Exchange Property; and
. includes a cash component and the calculation agent has not
exercised its option to liquidate the Exchange Property, then
holders will not receive any interest accrued on such cash
component.
In the event Exchange Property consists of securities, those securities will,
in turn, be subject to the antidilution adjustments set forth in this
prospectus supplement.
In the case of a consummated tender or exchange offer or going-private
transaction involving Exchange Property of a particular type, Exchange Property
shall be deemed to include the amount of cash or other property paid by the
offeror in the tender or exchange offer with respect to such Exchange Property
(in an amount determined on the basis of the rate of exchange in such tender or
exchange offer or going-private transaction). In the event of a tender or
exchange offer or a going-private transaction with respect to Exchange Property
in which an offeree may elect to receive cash or other property, Exchange
Property shall be deemed to include the kind and amount of cash and other
property received by offerees who elect to receive cash.
If we elect to call the Callable STRIDES you will receive only the Final
Amount, and you will not be entitled to receive Corning common stock, any
Exchange Property or any other consideration at maturity.
MLPF&S, as calculation agent, shall be solely responsible for
determination and calculation of the Exchange Property if a Reorganization
Event occurs and the amount due upon early redemption, including the
determination of the cash value of any Exchange Property, if necessary, and its
determinations and calculations shall be conclusive absent manifest error.
Alternative Dilution and Reorganization Adjustments
The calculation agent may elect at its discretion to not make any of the
adjustments to the Share Multiplier or to the method of determining the amount
payable on each Callable STRIDES described above under "Share Multiplier
Adjustments" and "Reorganization Events", but may instead make adjustments in
its
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discretion to the Share Multiplier or the method of determining the amount
payable on each Callable STRIDES that will reflect the adjustments to the
extent practicable made by the Options Clearing Corporation on option contracts
on Corning common stock or any successor common stock. ML&Co. will provide
notice of any such election to the trustee not more than two Business Days
following the date that the Options Clearing Corporation publishes notice of
its adjustments relating to Corning common stock and will detail in such notice
the actual adjustment made to the Share Multiplier or to the method of
determining the amount payable on each Callable STRIDES.
Depositary
Description of the Global Securities
Upon issuance, all Callable STRIDES will be represented by one or more
fully registered global securities. Each global security will be deposited
with, or on behalf of, DTC (DTC, together with any successor, being a
"depositary"), as depositary, registered in the name of Cede & Co., DTC's
partnership nominee. Unless and until it is exchanged in whole or in part for
Callable STRIDES in definitive form, no global security may be transferred
except as a whole by the depositary to a nominee of the depositary or by a
nominee of the depositary to the depositary or another nominee of the
depositary or by the depositary or any nominee to a successor of the depositary
or a nominee of that successor.
So long as DTC, or its nominee, is a registered owner of a global
security, DTC or its nominee, as the case may be, will be considered the sole
owner or holder of the Callable STRIDES represented by the global security for
all purposes under the 1983 Indenture. Except as provided below, the beneficial
owners of the Callable STRIDES represented by a global security will not be
entitled to have the Callable STRIDES represented by a global security
registered in their names, will not receive or be entitled to receive physical
delivery of the Callable STRIDES in definitive form and will not be considered
the owners or holders of the Callable STRIDES including for purposes of
receiving any reports delivered by ML&Co. or the trustee under the 1983
Indenture. Accordingly, each person owning a beneficial interest in a global
security must rely on the procedures of DTC and, if that person is not a
participant of DTC, on the procedures of the participant through which that
person owns its interest, to exercise any rights of a holder under the 1983
Indenture. ML&Co. understands that under existing industry practices, in the
event that ML&Co. requests any action of holders or that an owner of a
beneficial interest in a global security desires to give or take any action
which a holder is entitled to give or take under the 1983 Indenture, DTC would
authorize the participants holding the relevant beneficial interests to give or
take that action, and those participants would authorize beneficial owners
owning through those participants to give or take that action or would
otherwise act upon the instructions of beneficial owners. Conveyance of notices
and other communications by DTC to participants, by participants to indirect
participants and by participants and indirect participants to beneficial owners
will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
DTC Procedures
The following is based on information furnished by DTC:
DTC will act as securities depositary for the Callable STRIDES. The
Callable STRIDES will be issued as fully registered securities registered in
the name of Cede & Co., DTC's partnership nominee. One or more fully registered
global securities will be issued for the Callable STRIDES in the aggregate
principal amount of such issue, and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC holds securities that its
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participants deposit with DTC. DTC also facilitates the settlement among
participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct participants of DTC include securities brokers
and dealers, banks, trust companies, clearing corporations and certain other
organizations. DTC is owned by a number of its direct participants and by the
NYSE, the AMEX, and the National Association of Securities Dealers, Inc. Access
to DTC's system is also available to others such as securities brokers and
dealers, banks and trust companies that clear through or maintain a custodial
relationship with a direct participant, either directly or indirectly. The
rules applicable to DTC and its participants are on file with the SEC.
Purchases of the Callable STRIDES under DTC's system must be made by or
through direct participants, which will receive a credit for the Callable
STRIDES on DTC's records. The ownership interest of each beneficial owner is in
turn to be recorded on the records of direct and indirect participants.
Beneficial owners will not receive written confirmation from DTC of their
purchase, but beneficial owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the direct or indirect participants through which the beneficial
owner entered into the transaction. Transfers of ownership interests in the
Callable STRIDES are to be made by entries on the books of participants acting
on behalf of beneficial owners.
To facilitate subsequent transfers, all Callable STRIDES deposited with
DTC are registered in the name of DTC's partnership nominee, Cede & Co. The
deposit of Callable STRIDES with DTC and their registration in the name of Cede
& Co. effect no change in beneficial ownership. DTC has no knowledge of the
actual beneficial owners of the Callable STRIDES; DTC's records reflect only
the identity of the direct participants to whose accounts the Callable STRIDES
are credited, which may or may not be the beneficial owners. The participants
will remain responsible for keeping account of their holdings on behalf of
their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the
Callable STRIDES. Under its usual procedures, DTC mails an omnibus proxy to
ML&Co. as soon as possible after the applicable record date. The omnibus proxy
assigns Cede & Co.'s consenting or voting rights to those direct participants
identified in a listing attached to the omnibus proxy to whose accounts the
Callable STRIDES are credited on the record date.
Principal, premium, if any, and/or interest, if any, payments made in
cash on the Callable STRIDES will be made in immediately available funds to
DTC. DTC's practice is to credit direct participants' accounts on the
applicable payment date in accordance with their respective holdings shown on
the depositary's records unless DTC has reason to believe that it will not
receive payment on that date. Payments by participants to beneficial owners
will be governed by standing instructions and customary practices, as is the
case with securities held for the accounts of customers in bearer form or
registered in "street name", and will be the responsibility of that participant
and not of DTC, the trustee or ML&Co., subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of principal,
premium, if any, and/or interest, if any, to DTC is the responsibility of
ML&Co. or the trustee, disbursement of those payments to direct participants
will be the responsibility of DTC, and disbursement of those payments to the
beneficial owners will be the responsibility of direct participants and
indirect participants.
Exchange for Certificated Securities
If:
. the depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by ML&Co.
within 60 days,
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. ML&Co. executes and delivers to the trustee a company order to the
effect that the global securities shall be exchangeable, or
. an Event of Default under the 1983 Indenture has occurred and is
continuing with respect to the Callable STRIDES,
the global securities will be exchangeable for Callable STRIDES in definitive
form of like tenor and of an equal aggregate principal amount, in denominations
of the principal amount per unit and integral multiples of the principal amount
per unit. The definitive Callable STRIDES will be registered in the name or
names as the depositary shall instruct the trustee. It is expected that
instructions may be based upon directions received by the depositary from
participants with respect to ownership of beneficial interests in the global
securities.
DTC may discontinue providing its services as securities depositary with
respect to the Callable STRIDES at any time by giving reasonable notice to
ML&Co. or the trustee. Under these circumstances, in the event that a successor
securities depositary is not obtained, Callable STRIDES certificates are
required to be printed and delivered.
ML&Co. may decide to discontinue use of the system of book-entry
transfers through DTC or a successor securities depositary. In that event,
Callable STRIDES certificates will be printed and delivered.
The information in this section concerning DTC and DTC's system has been
obtained from sources that ML&Co. believes to be reliable, but ML&Co. takes no
responsibility for its accuracy.
Same-Day Settlement and Payment
Settlement for the Callable STRIDES will be made by the underwriter in
immediately available funds. ML&Co. will make all payments in immediately
available funds so long as the Callable STRIDES are maintained in book-entry
form.
S-24
CORNING COMMON STOCK
Corning
The following information has been derived from publicly available
documents published by Corning. We make no representation or warranty as to the
accuracy or completeness of the following information.
Corning has disclosed that it manufacturers optical fiber, cable and
photonic products for the telecommunications industry; and high-performance
displays and components for television and other communications-related
industries. Corning also uses advanced materials to manufacture products for
scientific, semiconductor and environmental markets. Information provided to or
filed with the SEC by Corning can be located at the SEC's facilities or through
the SEC's web site by reference to SEC file number 1-3247. See "Where You Can
Find More Information". ML&Co. makes no representation or warranty as to the
accuracy or completeness of the information or reports.
The selection of Corning common stock is not a recommendation to buy or
sell Corning common stock and neither ML&Co. nor any of its affiliates make any
representation to any purchaser of the Callable STRIDES as to the performance
of Corning common stock.
Corning common stock trades on the NYSE under the symbol "GLW".
ML&Co. is not affiliated with Corning. Corning has no obligations with
respect to the Callable STRIDES. This prospectus supplement relates only to the
Callable STRIDES and does not relate to Corning common stock or other
securities of Corning. All disclosures contained in this prospectus supplement
regarding Corning are derived from the publicly available documents described
above. Neither ML&Co. nor MLPF&S has participated in the preparation of these
documents or made any due diligence inquiry with respect to Corning in
connection with the offering of the Callable STRIDES. Neither ML&Co. nor MLPF&S
makes any representation that the publicly available documents or any other
publicly available information regarding Corning are accurate or complete.
Furthermore, there can be no assurance that all events occurring prior to the
date hereof, including events that would affect the accuracy or completeness of
the publicly available documents described above, that would affect the trading
price of Corning common stock have been publicly disclosed. Subsequent
disclosure of any events or the disclosure of or failure to disclose material
future events concerning Corning could affect the value of the Corning common
stock to be received at maturity of the Callable STRIDES and therefore the
trading prices of the Callable STRIDES. Neither ML&Co. nor any of its
affiliates make any representation to any purchaser of the Callable STRIDES as
to the performance of Corning common stock.
ML&Co. or its affiliates may presently or from time to time engage in
business, directly or indirectly, with Corning including extending loans to, or
making equity investments in, Corning or providing investment banking or
advisory services to Corning, including merger and acquisition advisory
services. In the course of such business, ML&Co. or its affiliates may acquire
non-public information with respect to Corning and, in addition, one or more
affiliates of ML&Co. may publish research reports with respect to Corning.
Any prospective purchaser of the Callable STRIDES should undertake an
independent investigation of Corning as in its judgment is appropriate to make
an informed decision with respect to an investment in the Callable STRIDES.
S-25
Historical data
Corning common stock is principally traded on the NYSE. The following
table sets forth the high and low closing prices for the calendar quarters
during calendar years 1998 through 2002. On March 11, 2002, the closing price
for Corning common stock was $8.90 per share. The closing prices listed below
were obtained from Bloomberg Financial Markets. The historical closing prices
of Corning common stock should not be taken as an indication of future
performance, and no assurance can be given that the price of Corning common
stock will not decrease. In addition, no assurance can be given that the price
of Corning common stock will increase above the original issue price so that
the value of Corning common stock that the beneficial owners of the Callable
STRIDES may receive at maturity, if not previously called by us, will exceed
the principal amount of the Callable STRIDES.
High Low
-------- -------
1998
First Quarter................................. $ 14.750 $10.771
Second Quarter................................ $ 14.500 $11.333
Third Quarter................................. $ 11.750 $ 7.833
Fourth Quarter................................ $ 15.000 $ 9.250
1999
First Quarter................................. $ 20.313 $15.167
Second Quarter................................ $ 23.375 $16.000
Third Quarter................................. $ 25.000 $20.458
Fourth Quarter................................ $ 42.979 $21.875
2000
First Quarter................................. $ 73.333 $34.583
Second Quarter................................ $ 89.958 $48.333
Third Quarter................................. $113.104 $77.583
Fourth Quarter................................ $105.938 $52.813
2001
First Quarter................................. $ 70.250 $19.980
Second Quarter................................ $ 26.700 $13.000
Third Quarter................................. $ 16.820 $ 8.350
Fourth Quarter................................ $ 10.300 $ 7.010
2002
First Quarter (through March 11, 2002)........ $ 10.700 $ 6.250
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UNITED STATES FEDERAL INCOME TAXATION
The following discussion is based upon the opinion of Sidley Austin Brown
& Wood LLP, counsel to ML&Co. ("Tax Counsel"). As the law applicable to the
U.S. Federal income taxation of instruments such as the Callable STRIDES is
technical and complex, the discussion below necessarily represents only a
general summary. The following summary is based upon laws, regulations, rulings
and decisions now in effect, all of which are subject to change (including
changes in effective dates) or possible differing interpretations. It deals
only with Callable STRIDES 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, persons holding Callable STRIDES as a hedge against currency risks,
as a position in a "straddle" or as part of a "hedging" or "conversion"
transaction for tax purposes, or persons whose functional currency is not the
United States dollar. It also does not deal with holders other than original
purchasers (except where otherwise specifically noted). Persons considering the
purchase of the Callable STRIDES should consult their own tax advisors
concerning the application of United States Federal income tax laws to their
particular situations as well as any consequences of the purchase, ownership
and disposition of the Callable STRIDES arising under the laws of any other
taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a
Callable STRIDES that is for United States Federal income tax purposes (i) a
citizen or resident of the United States, (ii) a corporation or a partnership
(including an entity treated as a corporation or a partnership for United
States Federal income tax purposes) created or organized in or under the laws
of the United States, any state thereof or the District of Columbia (unless, in
the case of a partnership, Treasury regulations are adopted that provide
otherwise), (iii) an estate whose income is subject to United States Federal
income tax regardless of its source, (iv) 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 (v) any other person whose income or
gain in respect of a Callable STRIDES is effectively connected with the conduct
of a United States trade or business. Certain trusts not described in clause
(iv) above in existence on August 20, 1996 that elect to be treated as a United
States person will also be a U.S. Holder for purposes of the following
discussion. As used herein, the term "non-U.S. Holder" means a beneficial owner
of a Callable STRIDES that is not a U.S. Holder.
General
There are no statutory provisions, regulations, published rulings or
judicial decisions addressing or involving the characterization and treatment,
for U.S. Federal income tax purposes, of the Callable STRIDES or securities
with terms substantially the same as the Callable STRIDES. Accordingly, the
proper U.S. Federal income tax characterization and treatment of the Callable
STRIDES is uncertain. Pursuant to the terms of the Callable STRIDES, ML&Co. and
every holder of a Callable STRIDES agree (in the absence of an administrative
determination or judicial ruling to the contrary) to characterize a Callable
STRIDES for all tax purposes as an investment unit consisting of the following
components (the "Components"): (i) a debt instrument of ML&Co. (the "Debt
Instrument") with a fixed principal amount unconditionally payable on the
maturity date equal to the principal amount of the Callable STRIDES and bearing
stated interest at the stated interest rate for the Callable STRIDES (the
"Interest Rate") and (ii) a contract (the "Forward Contract") pursuant to which
the holder agrees to use the principal payment due on the Debt Instrument to
make a payment to ML&Co. in exchange for the right to receive one share of
Corning common stock at maturity, subject to adjustment as described in this
prospectus supplement. In the opinion of Tax Counsel, such characterization and
tax treatment of the Callable STRIDES, although not the only reasonable
characterization and tax treatment, is based on reasonable interpretations of
law currently in effect and, even if successfully challenged by the Internal
Revenue Service (the "IRS"), will not result in the imposition of penalties.
Furthermore, based on ML&Co.'s determination of the relative fair market values
of the Components at the time of issuance of the Callable STRIDES, ML&Co. will
assign $9.56 (i.e., 107.36%) of the initial issue price of the Callable STRIDES
to the Debt Instrument and will assign $0.66 (i.e., 7.36%) of the initial issue
price of the Callable STRIDES to the Forward Contract. Based upon the
foregoing, a U.S. Holder who
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acquires a Callable STRIDES in connection with the original issuance thereof
will be treated as having purchased the Debt Instrument for $9.56 and as having
received an initial payment (the "Initial Forward Contract Payment") with
respect to the Forward Contract in an amount equal to $0.66. The initial
payment deemed to have been received by a U.S. Holder with respect to the
Forward Contract (i.e., the Initial Forward Contract Payment) should only be
taken into account by the U.S. Holder as an additional amount realized with
respect to the Forward Contract on the earlier of the sale or other disposition
of the Callable STRIDES by the U.S. Holder (including a redemption of the
Callable STRIDES if we call the Callable STRIDES prior to maturity) or at
maturity (which would reduce the U.S. Holder's tax basis in any Corning common
stock received thereby at maturity). ML&Co.'s allocation of the issue price
will be binding on a U.S. Holder of a Callable STRIDES, unless such U.S. Holder
timely and explicitly discloses to the IRS that its allocation is different
from ML&Co.'s. The treatment of the Callable STRIDES described above and
ML&Co.'s allocation are not, however, binding on the IRS or the courts. No
statutory, judicial or administrative authority directly addresses the
characterization of the Callable STRIDES or instruments similar to the Callable
STRIDES for U.S. Federal income tax purposes, and no ruling is being requested
from the IRS with respect to the Callable STRIDES.
Due to the absence of authorities that directly address instruments that
are similar to the Callable STRIDES, significant aspects of the U.S. Federal
income tax consequences of an investment in the Callable STRIDES are not
certain, and no assurance can be given that the IRS or the courts will agree
with the characterization described above. Accordingly, prospective purchasers
are urged to consult their tax advisors regarding the U.S. Federal income tax
consequences of an investment in a Callable STRIDES (including alternative
characterizations of a Callable STRIDES) and with respect to any tax
consequences arising under the laws of any state, local or foreign taxing
jurisdiction. Unless otherwise stated, the following discussions are based on
the assumption that the treatment and the allocation described above are
accepted for U.S. Federal income tax purposes.
Tax Treatment of a Callable STRIDES
Interest on the Debt Instrument. As described above, the Debt Instrument
is treated as bearing interest at a stated rate of 8% per annum (i.e., the
Interest Rate). A U.S. Holder will include "qualified stated interest" equal to
the stated interest on the Callable STRIDES in income in accordance with the
U.S. Holder's method of accounting for U.S. Federal income tax purposes
(subject to the bond premium rules). Based on ML&Co.'s determination set forth
above, the U.S. Holder's tax basis in the Debt Instrument will initially be
107.36% of the issue price.
Settlement of the Forward Contract. Upon the final settlement of the
Forward Contract on the maturity date, a U.S. Holder would be deemed to have
applied an amount (the "Forward Contract Payment Amount") equal to the
principal amount of the Debt Instrument less the Initial Forward Contract
Payment toward the purchase of Corning common stock, and such U.S. Holder
should not recognize any gain or loss with respect to the Corning common stock
received upon the final settlement of the Forward Contract. However, a U.S.
Holder would be required to recognize gain or loss with respect to any cash
received in lieu of fractional shares of Corning common stock. The amount of
such gain or loss would be equal to the difference, if any, between the amount
of cash received and the portion of the Forward Contract Payment Amount that is
allocable to such fractional shares. Any such gain or loss would be treated as
short-term capital gain or loss. A U.S. Holder's tax basis in the Corning
common stock so received would be equal to the Forward Contract Payment Amount
less the portion of the Forward Contract Payment Amount that is allocable to
any fractional shares. Such U.S. Holder's holding period for the Corning common
stock would begin on the day immediately following the maturity date.
Sale, Exchange or Redemption of the Callable STRIDES
Upon a sale, exchange or redemption of a Callable STRIDES prior to the
maturity of the Callable STRIDES, a U.S. Holder would recognize taxable gain or
loss equal to the difference between the amount realized on such sale, exchange
or redemption (as allocated among the Components in accordance with their
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relative fair market values) and such U.S. Holder's tax basis in the Components
deemed so sold, exchanged or redeemed. 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 Callable STRIDES). For these purposes, the amount
realized does not include any amount attributable to accrued interest on the
Debt Instrument, which would be taxed as described under "Tax Treatment of a
Callable STRIDES--Interest on the Debt Instrument" above.
Premium
If a U.S. Holder purchases the Debt Instrument for an amount that is
greater than the sum of all amounts payable on the Debt Instrument after the
purchase date other than payments of qualified stated interest (i.e., the
principal amount), such U.S. Holder will be considered to have purchased the
Debt Instrument with "amortizable bond premium" equal in amount to such excess.
A U.S. Holder may elect to amortize such premium using a constant yield method
over the remaining term of the Debt Instrument and may offset interest
otherwise required to be included in respect of the Debt Instrument during any
taxable year by the amortized amount of such excess for the taxable year.
However, since the Callable STRIDES may be optionally called by ML&Co. on or
after March 17, 2003, special rules would apply which could possibly result in
a deferral of the amortization of some bond premium until later in the term of
the Debt Instrument. U.S. Holders are urged to consult their own tax advisors
regarding the application of these special rules. Any election to amortize bond
premium applies to all taxable debt instruments acquired by the U.S. Holder on
or after the first day of the first taxable year to which such election applies
and may be revoked only with the consent of the IRS.
Possible Alternative Tax Treatments of an Investment in a Callable STRIDES
Due to the absence of authorities that directly address the proper
characterization of the Callable STRIDES, no assurance can be given that the
IRS will accept, or that a court will uphold, the characterization and tax
treatment described above. In particular, the IRS could seek to analyze the
U.S. Federal income tax consequences of owning a Callable STRIDES under
Treasury regulations governing contingent payment debt instruments (the
"Contingent Payment Regulations").
ML&Co. will take the position that the Contingent Payment Regulations do
not apply to the Callable STRIDES. If the IRS were successful in asserting that
the Contingent Payment Regulations applied to the Callable STRIDES, the timing
and character of income thereon would be significantly affected. Among other
things, a U.S. Holder would be required to accrue as original issue discount,
subject to the adjustments described below, income at a "comparable yield" on
the issue price, regardless of the U.S. Holder's usual method of accounting for
U.S. Federal income tax purposes. In addition, the Contingent Payment
Regulations require that a projected payment schedule, which results in such a
"comparable yield," be determined, and that adjustments to income accruals be
made to account for differences between actual payments and projected amounts
(including upon receipt of Corning common stock at maturity). Furthermore, any
gain realized with respect to a Callable STRIDES would generally be treated as
ordinary income, and any loss realized would generally be treated as ordinary
loss to the extent of the U.S. Holder's prior ordinary income inclusions (which
were not previously reversed) with respect to the Callable STRIDES.
Even if the Contingent Payment Regulations do not apply to the Callable
STRIDES, other alternative U.S. Federal income tax characterizations or
treatments of the Callable STRIDES are also possible, which may also affect the
timing and the character of the income or loss with respect to the Callable
STRIDES. Accordingly, prospective purchasers are urged to consult their tax
advisors regarding the U.S. Federal income tax consequences of an investment in
a Callable STRIDES.
Constructive Ownership Law
Section 1260 of the Internal Revenue Code of 1986, as amended (the
"Code") treats a taxpayer owning certain types of derivative positions in
property as having "constructive ownership" of that property, with the
S-29
result that all or a portion of any long-term capital gain recognized by such
taxpayer with respect to the derivative position will be recharacterized as
ordinary income. In its current form, Section 1260 of the Code does not apply
to a Callable STRIDES. If Section 1260 of the Code were to apply to a Callable
STRIDES in the future, however, the effect on a U.S. Holder of a Callable
STRIDES would be to treat all or a portion of any long-term capital gain
recognized by such U.S. Holder on the sale, exchange, redemption or maturity of
a Callable STRIDES (or upon the sale of any Corning common stock received
thereon) as ordinary income. In addition, Section 1260 of the Code would impose
an interest charge on any such gain that was recharacterized. U.S. Holders
should consult their tax advisors regarding the potential application of
Section 1260 of the Code, if any, to the purchase, ownership and disposition of
a Callable STRIDES.
Non-U.S. Holders
In the case of a non-U.S. Holder, ML&Co. intends to withhold applicable
United States withholding taxes at a rate of 30% on payments of interest made
with respect to the Callable STRIDES subject to reduction by applicable treaty
or upon the receipt of a Form W-8ECI from a non-U.S. Holder claiming that the
payments are effectively connected with the conduct of a United States trade or
business. Any capital gain realized upon the sale or other disposition of a
Callable STRIDES by a non-U.S. Holder will generally not be subject to
United States Federal income tax if (i) such gain is not effectively connected
with a United States trade or business of such non-U.S. Holder and (ii) in the
case of an individual non-U.S. Holder, such individual is not present in the
United States for 183 days or more in the taxable year of the sale or other
disposition and such individual does not have a "tax home" (as defined for
United States Federal income tax purposes) in the United States.
Backup Withholding and Information Reporting
A beneficial owner of a Callable STRIDES may be subject to information
reporting with respect to certain amounts paid to the beneficial owner. A
beneficial owner of a Callable STRIDES may also be subject to backup
withholding of certain amounts paid to the beneficial owner unless such
beneficial owner provides proof of an applicable exemption or a correct
taxpayer identification number, and otherwise complies with applicable
requirements of the backup withholding rules.
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 between certain parties and 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, each fiduciary, by its purchase
of any Callable STRIDES on behalf of any plan, represents on behalf of itself
and the plan, that the acquisition, holding and any subsequent disposition of
the Callable STRIDES will not result in a violation of ERISA, the Code or any
other applicable law or regulation.
USE OF PROCEEDS AND HEDGING
The net proceeds from the sale of the Callable STRIDES will be used as
described under "Use of Proceeds" in the accompanying prospectus and to hedge
market risks of ML&Co. associated with its obligations in connection with the
Callable STRIDES.
S-30
WHERE YOU CAN FIND MORE INFORMATION
ML&Co.
We file reports, proxy statements and other information with the SEC. Our
SEC filings are also available over the Internet at the SEC's web site at
http://www.sec.gov. The address of the SEC's Internet site is provided solely
for the information of prospective investors and is not intended to be an
active link. You may also read and copy any document we file by visiting the
SEC's public reference rooms in Washington, D.C., New York, New York, and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information about the public reference rooms and their copy charges. You may
also inspect our SEC reports and other information at the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
We have filed a registration statement on Form S-3 with the SEC covering
the Callable STRIDES and other securities. For further information on ML&Co.
and the Callable STRIDES, you should refer to our registration statement and
its exhibits. The prospectus accompanying this prospectus supplement summarizes
material provisions of contracts and other documents that we refer you to.
Because the prospectus may not contain all the information that you may find
important, you should review the full text of these documents. We have included
copies of these documents as exhibits to our registration statement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not, and the underwriter has not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus
supplement and the accompanying prospectus is accurate as of the date on the
front cover of this prospectus supplement only. Our business, financial
condition and results of operations may have changed since that date.
Corning
Corning files reports, proxy statements and other information with the
SEC. Information provided to or filed with the SEC by Corning pursuant to the
Securities Exchange Act of 1934 can be located at the SEC's facilities or
accessed through the SEC's web site by reference to SEC file number 1-3247. You
may also inspect Corning's SEC reports and other information at the NYSE. In
addition, information regarding Corning may be obtained from other sources
including, but not limited to, press releases, newspaper articles and other
publicly disseminated documents. We make no representation or warranty as to
the accuracy or completeness of the information or reports.
UNDERWRITING
MLPF&S has agreed, subject to the terms and conditions of the
underwriting agreement and a terms agreement, to purchase from ML&Co.
$31,150,000 aggregate principal amount of Callable STRIDES. The underwriting
agreement provides that the obligations of the underwriter are subject to
certain conditions and that the underwriter will be obligated to purchase all
of the Callable STRIDES if any are purchased.
The underwriter has advised ML&Co. that it proposes initially to offer
the Callable STRIDES directly to the public at the offering price set forth on
the cover page of this prospectus supplement. After the initial public
offering, the public offering price may be changed. The underwriter is offering
the Callable STRIDES subject to receipt and acceptance and subject to the
underwriter's right to reject any order in whole or in part. Proceeds to be
received by ML&Co. will be net of the underwriting discount and expenses
payable by ML&Co.
The underwriting of the Callable STRIDES will conform to the requirements
set forth in the applicable sections of Rule 2720 of the Conduct Rules of the
NASD.
S-31
The underwriter is permitted to engage in certain transactions that
stabilize the price of the Callable STRIDES. These transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Callable STRIDES.
If the underwriter creates a short position in the Callable STRIDES in
connection with the offering, i.e., if it sells more units of the Callable
STRIDES than are set forth on the cover page of this prospectus supplement, the
underwriter may reduce that short position by purchasing units of the Callable
STRIDES in the open market. In general, purchases of a security for the purpose
of stabilization or to reduce a short position could cause the price of the
security to be higher than it might be in the absence of these purchases.
"Naked" short sales are sales in excess of the underwriter's overallotment
option or, where no overallotment option exists, sales in excess of the number
of units an underwriter has agreed to purchase from the issuer. Because MLPF&S,
as underwriter for the Callable STRIDES, has no overallotment option, it would
be required to close out a short position in the Callable STRIDES by purchasing
Callable STRIDES in the open market. Neither ML&Co. nor the underwriter makes
any representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the Callable
STRIDES. In addition, neither ML&Co. nor the underwriter makes any
representation that the underwriter will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
MLPF&S may use this prospectus supplement and the accompanying prospectus
for offers and sales related to market-making transactions in the Callable
STRIDES. MLPF&S may act as principal or agent in these transactions, and the
sales will be made at prices related to prevailing market prices at the time of
sale.
ML&Co. has previously marketed and anticipates continuing to market
series of securities under the servicemark "STRIDES". The Callable STRIDES we
are offering hereby contain certain terms and provisions which are different
from the other previously marketed STRIDES, the terms and conditions of which
also vary. Please see the section entitled "Description of the Callable
STRIDES" in this prospectus supplement.
VALIDITY OF THE CALLABLE STRIDES
The validity of the Callable STRIDES will be passed upon for ML&Co. and
for the underwriter by Sidley Austin Brown & Wood LLP, New York, New York.
EXPERTS
The consolidated financial statements and the related financial statement
schedule incorporated in this prospectus supplement by reference from the
Annual Report on Form 10-K of Merrill Lynch & Co., Inc. and subsidiaries for
the year ended December 29, 2000 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports, which are incorporated herein
by reference, and have been so incorporated in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
With respect to unaudited interim financial information for the periods
included in the Quarterly Reports on Form 10-Q which are incorporated herein by
reference, Deloitte & Touche LLP have applied limited procedures in accordance
with professional standards for a review of such information. However, as
stated in their reports included in each of the Quarterly Reports on Form 10-Q
and incorporated by reference herein, they did not audit and they do not
express an opinion on that interim financial information. Accordingly, the
degree of reliance on their reports on such information should be restricted in
light of the limited nature of the review procedures applied. Deloitte & Touche
LLP are not subject to the liability provisions of Section 11 of the Securities
Act of 1933, as amended, for their reports on the unaudited interim financial
information because those reports are not "reports" or a "part" of the
Registration Statement prepared or certified by an accountant within the
meaning of Sections 7 and 11 of the Securities Act of 1933, as amended.
S-32
INDEX OF DEFINED TERMS
Page
----
Business Day.............................................................. S-12
Call Date................................................................. S-5
Call Price................................................................ S-5
Callable STRIDES.......................................................... S-1
closing market price...................................................... S-18
Code...................................................................... S-29
Components................................................................ S-27
Contingent Payment Regulations............................................ S-29
Corning................................................................... S-4
Debt Instrument........................................................... S-27
depositary................................................................ S-22
DTC....................................................................... S-4
ERISA..................................................................... S-30
Exchange Property......................................................... S-21
ex-dividend date.......................................................... S-18
Extraordinary Dividend.................................................... S-18
Extraordinary Dividend Amount............................................. S-18
Final Amount.............................................................. S-5
Forward Contract.......................................................... S-27
Forward Contract Payment Amount........................................... S-28
Initial Forward Contract Payment.......................................... S-28
Interest Rate............................................................. S-27
IRS....................................................................... S-27
Market Disruption Event................................................... S-19
ML&Co..................................................................... S-4
MLPF&S.................................................................... S-4
NASD...................................................................... S-18
Nasdaq NMS................................................................ S-18
non-U.S. Holder........................................................... S-27
OTC Bulletin Board........................................................ S-18
Pricing Date.............................................................. S-4
Reorganization Event...................................................... S-20
Share Multiplier.......................................................... S-12
Spin-off Event............................................................ S-20
Successor Entity.......................................................... S-20
Tax Counsel............................................................... S-27
Trading Day............................................................... S-12
U.S. Holder............................................................... S-27
S-33
ANNEX A
Call Price Calculation Methodology
The Call Price is the amount of cash, per Callable STRIDES, that when
discounted from the Call Date to the original issue date by a discount factor
based on an annual yield to call of 36% and added to the present value of all
interest payments made through and including the applicable Call Date
discounted to the original issue date by that same discount factor, will equal
the original issue price.
As an example, the following steps describe the calculation of the Call
Price for September 30, 2003:
. First, the sum of the present values on the original issue date of
all interest payments made (assuming a discount factor based on an
annual yield to call of 36% per year), on the Callable STRIDES
through and including the applicable Call Date is calculated. For a
more detailed description of this calculation, please see the table
below.
The following table illustrates, for the scheduled interest payment dates
and the scheduled Call Date listed, the:
(a) amount of interest payable (computed on the basis of a 360-day
year of twelve 30-day months) on the applicable date;
(b) years from the original issue date to the applicable interest
payment date (computed on the basis of a 360-day year of twelve
30-day months);
(c) discount factor/(1)/ based upon an annual yield to call of 36%;
(d) present value at the original issue date of the interest payments;
and
(e) the sum of the present values of all interest payments discounted
to the original issue date.
Discount
Years Factor/(1)/
From Based Present Value at
Interest Original on the Original Issue
Amount Issue Yield to Date of Interest
Date/(2)/ Payable Date Call Payments/(3)/
--------- -------- -------- ---------- ----------------
March 15, 2002 -- 0.000000 1.000000 --
June 15, 2002 $0.178000 0.250000 0.926009 $0.164830
September 15, 2002 $0.178000 0.500000 0.857493 $0.152634
December 15, 2002 $0.178000 0.750000 0.794046 $0.141340
March 15, 2003 $0.178000 1.000000 0.735294 $0.130882
June 15, 2003 $0.178000 1.250000 0.680889 $0.121198
September 15, 2003 $0.178000 1.500000 0.630510 $0.112231
September 30, 2003 $0.029667 1.541667 0.622483 $0.018467
---------
Sum of the present values of all interest payments: $0.841582
=========
. Next, the sum of the present values of the interest payments is
subtracted from the original issue price to produce the present value
of the Call Price on the original issue date:
$8.90 - $0.841582 = $8.058418 (the present value of the Call Price).
. Finally, the present value of the Call Price is divided by the
applicable discount factor/(1)/ and rounded to the fourth decimal
place, the quotient being the present value of the Call Price payable
on the applicable Call Date:
$8.058418
--------- = $12.9456 (the Call Price)
0.622483
( 1 )x
(1) The discount factor is equal to ( ---- ), where X is the number of years from the original issue date
( 1.36 )
(computed on the basis of a 360-day year of twelve 30-day months compounded annually).
(2) The dates in this column reflect the original issue date, the scheduled interest payment dates and
September 30, 2003, the Call Date used in calculating this example. If a scheduled interest payment
date falls on a day that is not a Business Day, payment will be made on the following Business Day,
however, the present values of the interest payments will be calculated assuming each payment is made
on the calendar day scheduled for that payment.
(3) The present values in this column represent the product of the applicable interest payment amount and
the corresponding discount factor. Due to rounding, the numbers in this column may not equal the sum
of the present values of all interest payments.
A-1
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[LOGO]
3,500,000 Units
Merrill Lynch & Co., Inc.
8% Callable STock Return Income DEbt Securities/SM/
due March 15, 2004
"Callable STRIDES/SM/"
Payable at maturity with Corning Incorporated common stock
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
Merrill Lynch & Co.
March 11, 2002
"STock Return Income DEbt Securities" and "STRIDES" are service marks of
Merrill Lynch & Co., Inc.
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