<PAGE>
RULE NO. 424(b)(5)
REGISTRATION NO. 333-59997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JULY 30, 1998)
[LOGO]
6,600,000 UNITS
MERRILL LYNCH & CO., INC.
5 3/4% STOCK RETURN INCOME DEBT SECURITIES SM
DUE JUNE 1, 2000
"STRIDES SM SECURITIES"
PAYABLE WITH COMMON STOCK OF LUCENT TECHNOLOGIES INC.
(OR CASH WITH AN EQUAL VALUE)
($10 PRINCIPAL AMOUNT PER UNIT)
---------------
. The STRIDES Securities will bear interest at a rate of 5 3/4% per year.
Interest on the STRIDES Securities is payable on June 1 and December 1 of
each year, beginning June 1, 1999. We will not redeem the STRIDES
Securities before maturity.
PAYMENT ON MATURITY:
. At maturity, for each unit of the STRIDES Securities that you own, we
will pay you the Redemption Amount which is equal to the lesser of:
. $13.00 (the "Capped Value"); and
( Ending Value )
. $10 X (--------------)
(Starting Value)
. At maturity, you will receive a number of shares of the common stock
("Lucent Common Stock") of Lucent Technologies Inc. ("Lucent") equal to
the Redemption Amount divided by the Ending Value (the average Closing
Price per share of Lucent Common Stock on five Trading Days shortly prior
to maturity).
. If we choose to pay you cash at maturity instead of the shares of Lucent
Common Stock that you would otherwise be entitled to receive, we will pay
you an amount of cash equal to the Redemption Amount.
. The Starting Value is $90.3125 which was the Closing Price of Lucent
Common Stock on November 24, 1998.
. IF THE REDEMPTION AMOUNT IS LESS THAN $10.00, YOU WILL RECEIVE LESS AT
MATURITY THAN THE INITIAL ISSUE PRICE OF EACH UNIT, WHICH MAY RESULT IN A
LOSS TO YOU. THE REDEMPTION AMOUNT WILL NOT EXCEED THE CAPPED VALUE.
Lucent Common Stock presently trades on the New York Stock Exchange under the
trading symbol "LU". The STRIDES Securities have been approved for listing on
the American Stock Exchange under the trading symbol "LTS", subject to
official notice of issuance.
INVESTING IN THE STRIDES SECURITIES INVOLVES CERTAIN RISKS WHICH ARE DESCRIBED
IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE S-7 OF THIS PROSPECTUS
SUPPLEMENT.
---------------
<TABLE>
<CAPTION>
PROCEEDS, BEFORE
PUBLIC OFFERING UNDERWRITING EXPENSES, TO
PRICE(1)(2) DISCOUNT(2) COMPANY(1)
--------------- ------------ ----------------
<S> <C> <C> <C>
Per Unit..................... $10.00 $.125 $9.875
Total........................ $66,000,000 $825,000 $65,175,000
</TABLE>
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(1) Purchasers will also be required to pay accrued interest from
December 1, 1998, if settlement occurs after that date.
(2) The Public Offering Price and the Underwriting Discount for any
single transaction to purchase (a) between 100,000 Units and 249,999
Units will be $9.98 per Unit and $.105 per Unit, respectively, (b)
between 250,000 Units and 499,999 Units will be $9.97 per Unit and
$.095 per Unit, respectively and (c) 500,000 Units or more will be
$9.95 per Unit and $.075 per Unit, respectively.
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.
We expect that the STRIDES Securities will be ready for delivery in book-entry
form only through The Depository Trust Company on or about December 1, 1998.
---------------
MERRILL LYNCH & CO.
---------------
The date of this prospectus supplement is November 24, 1998.
"STock Return Income DEbt Securities" and "STRIDES" are service marks owned by
Merrill Lynch & Co., Inc.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary Information -- Q&A............................................... S-3
Where You Can Find More Information...................................... S-6
Ratio of Earnings to Fixed Charges....................................... S-6
Risk Factors............................................................. S-7
Description of the STRIDES Securities.................................... S-10
Lucent Common Stock...................................................... S-19
Use of Proceeds and Hedging.............................................. S-20
United States Federal Income Taxation.................................... S-21
Underwriting............................................................. S-25
Validity of the STRIDES Securities....................................... S-25
PROSPECTUS
Available Information.................................................... 2
Incorporation of Certain Documents by Reference.......................... 2
Merrill Lynch & Co., Inc................................................. 3
Use of Proceeds.......................................................... 3
Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends............................. 4
Description of Debt Securities........................................... 4
Description of Debt Warrants............................................. 9
Description of Currency Warrants......................................... 11
Description of Index Warrants............................................ 12
Description of Preferred Stock........................................... 17
Description of Depositary Shares......................................... 21
Description of Preferred Stock Warrants.................................. 25
Description of Common Stock.............................................. 27
Description of Common Stock Warrants..................................... 30
Plan of Distribution..................................................... 32
Experts.................................................................. 33
</TABLE>
----------------
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, results of operations and prospects may have changed since that
date.
S-2
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SUMMARY INFORMATION--Q&A
This summary includes questions and answers that highlight selected
information from the prospectus and prospectus supplement to help you
understand the STock Return Income DEbt Securities SM or STRIDES SM Securities
due June 1, 2000 (the "STRIDES SECURITIES"). You should carefully read the
prospectus and prospectus supplement to fully understand the terms of the
STRIDES Securities, as well as the tax and other considerations that are
important to you in making a decision about whether to invest in the STRIDES
Securities. You should, in particular, carefully review the "Risk Factors"
section, which highlights certain risks, to determine whether an investment in
the STRIDES Securities is appropriate for you.
WHAT ARE THE STRIDES SECURITIES?
The STRIDES Securities are a series of senior debt securities issued by
Merrill Lynch & Co., Inc. ("WE" or the "COMPANY") and are not secured by
collateral. The STRIDES Securities will rank equally with all other unsecured
and unsubordinated debt of the Company. The STRIDES Securities will mature on
June 1, 2000 (the "MATURITY DATE") and cannot be redeemed at any earlier date.
Each "Unit" of the STRIDES Securities represents $10 principal amount (the
"PRINCIPAL AMOUNT") of the STRIDES Securities. You may transfer the STRIDES
Securities 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 STRIDES Securities in the form of a
global certificate, which will be held by The Depository Trust Company
("DTC"), or its nominee. Direct and indirect participants in DTC will record
beneficial ownership of the STRIDES Securities by individual investors. You
should refer to the section "Description of the STRIDES Securities--
Depositary" in this prospectus supplement.
WHEN WILL YOU RECEIVE INTEREST?
You will receive interest payments on the STRIDES Securities at a rate of
5 3/4% per year of the Principal Amount of each Unit, on June 1 and December 1
of each year (each, an "INTEREST PAYMENT DATE"), beginning June 1, 1999. If any
Interest Payment Date is not a Business Day, you will be paid on the following
Business Day. "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 that is a Trading Day on the New
York Stock Exchange (the "NYSE").
WHAT WILL YOU RECEIVE ON THE MATURITY DATE?
We have designed the STRIDES Securities for investors who want a current
yield and the opportunity to participate in the possible appreciation (subject
to the Capped Value) in the price of the common stock (the "LUCENT COMMON
STOCK") of Lucent Technologies Inc. ("LUCENT") over the term of the STRIDES
Securities. On the Maturity Date, for each Unit of the STRIDES Securities that
you own, we will pay you an amount equal to the "REDEMPTION AMOUNT" which will
equal the lesser of:
. $13.00 (the "CAPPED VALUE"); and
( Ending Value )
. $10 X (--------------)
(Starting Value)
"ENDING VALUE" means the average Closing Price of one share of Lucent Common
Stock on five selected days shortly prior to the Maturity Date of the STRIDES
Securities, subject to adjustment for certain events described under
"Description of the STRIDES Securities--Dilution and Reorganization
Adjustments". If, during this period prior to the Maturity Date, there is a
disruption in the trading of Lucent Common Stock, we may calculate the Closing
Price of Lucent Common Stock over fewer than five days or even a single day.
"STARTING VALUE" means $90.3125 which was the Closing Price of one share of
Lucent Common Stock on November 24, 1998.
On the Maturity Date, based on the number of Units of the STRIDES Securities
you own, you will receive a number of shares of Lucent Common Stock equal to
the Redemption Amount divided by the Ending Value.
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You should understand that the opportunity to participate in the possible
increases in the price of Lucent Common Stock through an investment in the
STRIDES Securities is limited because the amount that you receive, if any, on
the Maturity Date will never exceed the Capped Value (which represents an
appreciation of 30% over the initial price of the STRIDES Securities).
However, in the event that the price of Lucent Common Stock declines over the
term of the STRIDES Securities, you will realize the entire decline in value
of the STRIDES Securities and may lose all or part of your investment in the
STRIDES Securities. For more information about risks associated with the
STRIDES Securities, please see "Risk Factors" in this prospectus supplement.
For more specific information about the determination of the Closing Prices
of Lucent Common Stock and the Redemption Amount, please see the section
entitled "Description of the STRIDES Securities--Payment at Maturity" and "--
Examples of Redemption Amount Calculations" in this prospectus supplement.
WHEN WILL YOU RECEIVE CASH INSTEAD OF SHARES OF LUCENT COMMON STOCK?
If we choose to pay you the Redemption Amount in cash instead of in shares
of Lucent Common Stock which you would otherwise be entitled to receive, we
will pay you an amount of cash equal to the Redemption Amount. Please see the
section entitled "Description of the STRIDES Securities--Payment at Maturity"
in this prospectus supplement.
In addition, in the event that we choose to deliver shares of Lucent Common
Stock on the Maturity Date, we will not distribute any fractional shares of
such Lucent Common Stock to you. We will aggregate all amounts due to you in
respect of the total number of Units you hold on the Maturity Date, and in
lieu of delivering to you any fractional share of Lucent Common Stock to which
you would otherwise be entitled, we will pay you the cash value of such
fractional share based on the Ending Value.
ARE INTEREST PAYMENTS ON THE STRIDES SECURITIES THE EQUIVALENT OF DIVIDENDS ON
THE LUCENT COMMON STOCK?
No. Although the interest rate on the STRIDES Securities exceeds the most
recent dividend yield on the Lucent Common Stock, there is no assurance that
the interest rate on the STRIDES Securities will be higher than the dividend
yield on the Lucent Common Stock over the term of the STRIDES Securities. The
dividends that a holder of Lucent Common Stock receives may be increased or
decreased at the discretion of Lucent's Board of Directors and is expected to
depend upon factors such as Lucent's operating results, financial condition
and capital requirements, contractual restrictions and general business
conditions. As a holder of the STRIDES Securities, you will not be entitled to
receive any future dividends on the Lucent Common Stock until you become a
holder of Lucent Common Stock, which may occur if we deliver Lucent Common
Stock to you on the Maturity Date. Even if you do become a holder of Lucent
Common Stock, you will not receive a future dividend unless you become a
holder on or before the record date for determining whether stockholders of
Lucent are entitled to receive such dividends. You should refer to "Risk
Factors--No Stockholder Rights" in this prospectus supplement.
WHO IS LUCENT?
Lucent is a designer, developer and manufacturer of communications systems,
software and products. We are not affiliated with Lucent, and Lucent will not
receive any of the proceeds from the sale of, or have any obligations under,
the STRIDES Securities. You should independently investigate Lucent and decide
whether an investment in the STRIDES Securities and the Lucent Common Stock is
appropriate for you.
Because Lucent Common Stock is registered under the Securities and Exchange
Act of 1934, as amended (the "EXCHANGE ACT"), Lucent is required to file
periodically certain financial and other information specified by the
Securities and Exchange Commission (the "SEC"). For more information about
Lucent and the Lucent Common Stock that you may receive on the Maturity Date,
information provided to or filed with the SEC by Lucent with respect to its
registered securities can be located by reference to SEC file number 1-11639
and inspected at the SEC's public reference facilities or accessed over the
Internet through a web site maintained by the SEC at http://www.sec.gov. In
addition, information regarding Lucent may 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
S-4
<PAGE>
as to the accuracy or completeness of any such information. Please see "Lucent
Common Stock--Lucent Technologies Inc." in this prospectus supplement.
HOW HAS LUCENT COMMON STOCK PERFORMED HISTORICALLY?
You can find a table with the split-adjusted high and low closing prices and
dividends paid per share of the Lucent Common Stock during each quarter since
its initial public offering in the section "Lucent Common Stock--Historical
Data" in this prospectus supplement. Such information concerning the prior
performance of Lucent Common Stock is not necessarily indicative of how the
Lucent Common Stock will perform in the future or what the Ending Value will
be in the future.
WHAT ABOUT TAXES?
The U.S. Federal income tax consequences of an investment in the STRIDES
Securities is complex and uncertain. Pursuant to the terms of the STRIDES
Securities, the Company and you agree (in the absence of an administrative or
judicial ruling to the contrary) to characterize a STRIDES Security for all
tax purposes as an investment unit consisting of a debt instrument of the
Company and a forward contract to acquire Lucent Common Stock at maturity or
cash instead of shares of Lucent Common Stock. Under this characterization of
the STRIDES Securities, for U.S. Federal income tax purposes, you will include
payments of interest on the STRIDES Securities in income in accordance with
your regular method of tax accounting. If you receive Lucent Common Stock on
the Maturity Date, you should not recognize any gain or loss upon receipt of
the Lucent Common Stock. However, you should be required to recognize gain or
loss to the extent that you receive cash on the Maturity Date. You should
review the discussion under the section entitled "United States Federal Income
Taxation" in this prospectus supplement.
WILL THE STRIDES SECURITIES BE LISTED ON A STOCK EXCHANGE?
The STRIDES Securities have been approved for listing on the American Stock
Exchange ("AMEX") under the trading symbol "LTS", subject to official notice
of issuance. You should be aware that listing of the STRIDES Securities on the
AMEX will not necessarily ensure that a liquid trading market will be
available for the STRIDES Securities. It is unlikely that the secondary market
price of the STRIDES Securities will correlate exactly with the value of the
Lucent Common Stock. You should review "Risk Factors--Uncertain Trading
Market" in this prospectus supplement.
WHAT IS THE ROLE OF OUR SUBSIDIARY, MLPF&S?
Our subsidiary, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S"), is the underwriter for the offering and sale of the STRIDES
Securities. After the initial offering, MLPF&S intends to buy and sell STRIDES
Securities to create a secondary market for beneficial owners of the STRIDES
Securities, and may stabilize or maintain the market price of the STRIDES
Securities during the initial distribution of the STRIDES Securities. However,
MLPF&S will not be obligated to engage in any of these market activities, or
continue them once it has started. For a more complete description of these
activities, please see the section "Underwriting" in this prospectus
supplement.
MLPF&S also will be our agent (the "CALCULATION AGENT") for purposes of
calculating, among other things, the Ending Value and the Redemption Amount.
Under certain circumstances, these duties could result in a conflict of
interest between MLPF&S's status as a subsidiary of the Company and its
responsibilities as Calculation Agent.
WHO IS THE COMPANY?
Merrill Lynch & Co., Inc. is a holding company with various subsidiary and
affiliated companies that provide investment, financing, insurance and related
services on a global basis. For information about the Company, please see the
section "Merrill Lynch & Co., Inc." in the accompanying prospectus. You should
also read the other documents the Company has filed with the SEC, which you
can find by referring to the section "Where You Can Find More Information" in
this prospectus supplement.
ARE THERE ANY RISKS ASSOCIATED WITH AN INVESTMENT IN THE STRIDES SECURITIES?
Yes, an investment in the STRIDES Securities is subject to certain risks.
Please refer to the section "Risk Factors" in this prospectus supplement.
S-5
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
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. You may also read and copy any document we file at 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 more information
on the public reference rooms and their copying 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 will send you copies of our SEC filings, excluding exhibits, at no cost
upon request. Please address your request to Lawrence M. Egan, Jr., Corporate
Secretary's Office, Merrill Lynch & Co., Inc., 100 Church Street, 12th Floor,
New York, New York 10080-6512; telephone number (212) 602-8439.
RATIO OF EARNINGS TO FIXED CHARGES
The following table contains our ratios of earnings to fixed charges for the
periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED LAST FRIDAY IN DECEMBER ENDED
-------------------------------------- SEPTEMBER 25,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges.......... 1.4 1.2 1.2 1.2 1.2 1.1
</TABLE>
For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consist of earnings from continuing operations before income taxes
and fixed charges. "Fixed charges" consist of interest costs, amortization of
debt expense, preferred stock dividend requirements of majority-owned
subsidiaries, and that portion of rentals estimated to be representative of
the interest factor.
S-6
<PAGE>
RISK FACTORS
Your investment in the STRIDES Securities will involve certain risks.
STRIDES SECURITIES ARE NOT PRINCIPAL-PROTECTED. IF THE ENDING VALUE IS LESS
THAN THE STARTING VALUE, THE REDEMPTION AMOUNT WILL BE LESS THAN THE AMOUNT
THAT YOU INITIALLY PAID FOR YOUR STRIDES SECURITY, IN WHICH CASE YOUR
INVESTMENT IN THE STRIDES SECURITIES WILL RESULT IN A LOSS TO YOU. In
addition, your investment in the STRIDES Securities entails risks not
associated with similar investments in a conventional debt security. You
should consider carefully the following discussion of risks before you decide
that an investment in the STRIDES Securities is suitable for you.
GENERAL
The STRIDES Securities combine features of equity and debt instruments. For
example, as a holder of the STRIDES Securities, unlike a holder of Lucent
Common Stock, you will not be entitled to receive dividends, if any, that may
be payable on Lucent Common Stock. In addition, the terms of the STRIDES
Securities differ from the terms of ordinary debt securities in that the
Redemption Amount payable on the Maturity Date is not a fixed amount, but is
based on the price of the Lucent Common Stock on five (or, under certain
circumstances, fewer than five) Trading Days shortly prior to the Maturity
Date, subject to the Capped Value. Because the price of the Lucent Common
Stock is subject to market fluctuations, the amount of cash or the value of
the Lucent Common Stock paid to you on the Maturity Date, determined as
described herein, may be more or less than the Principal Amount of the STRIDES
Securities.
Although the Redemption Amount that you are entitled to receive on the
Maturity Date is subject to adjustment for certain corporate events relating
to Lucent and Lucent Common Stock, such adjustments do not cover all events
that could affect the market price of the Lucent Common Stock, including,
without limitation, the occurrence of a partial tender or exchange offer for
the Lucent Common Stock by Lucent or any third party. Such other events may
adversely affect the market value of the STRIDES Securities or any Lucent
Common Stock allocated during the Calculation Period (as defined herein) (but
not received by you until the Maturity Date).
COMPARISON TO OTHER DEBT SECURITIES; RELATIONSHIP TO LUCENT COMMON STOCK
The terms of the STRIDES Securities differ from those of ordinary debt
securities in that the value of the Lucent Common Stock (or the amount of
cash) that you may receive on the Maturity Date is not fixed, but is based on
the Ending Value of the Lucent Common Stock. You should understand that the
opportunity to participate in the possible increases in the price of Lucent
Common Stock through an investment in the STRIDES Securities is limited
because the amount that you receive, if any, on the Maturity Date will never
exceed the Capped Value (which represents an appreciation of 30% over the
initial price of the STRIDES Securities). However, in the event that the price
of Lucent Common Stock declines over the term of the STRIDES Securities, you
will realize the entire decline in value of the STRIDES Securities, and may
lose all or part of your investment in the STRIDES Securities. There is no
assurance that the amount that you receive on the Maturity Date will be equal
to or greater than the initial issue price of the STRIDES Securities.
Accordingly, the market value of the Lucent Common Stock may decline and that
decline could be substantial.
RETURN ON THE STRIDES SECURITIES WILL NOT REFLECT THE PAYMENT OF DIVIDENDS
The calculation of the Starting Value and the Ending Value does not take
into consideration the value of cash dividends paid on the Lucent Common Stock
(other than an Extraordinary Dividend (as defined herein)). Therefore, your
return on the STRIDES Securities, if any, will not be the same as the return
that could be earned by owning Lucent Common Stock directly and receiving the
dividends paid on that stock.
UNCERTAIN TRADING MARKET
The STRIDES Securities have been approved for listing on the AMEX under the
trading symbol "LTS", subject to official notice of issuance. There is no
historical information to indicate how the STRIDES Securities will trade in
the secondary market. Listing the STRIDES Securities on the AMEX does not
necessarily ensure
S-7
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that a liquid trading market will develop for the STRIDES Securities. The
development of a liquid trading market for the STRIDES Securities will depend
on the financial performance of the Company and other factors such as the
appreciation, if any, in the price of the Lucent Common Stock. In addition, it
is unlikely that the secondary market price of the STRIDES Securities will
correlate exactly with the value of Lucent Common Stock.
If the trading market for the STRIDES Securities is limited, there may be a
limited number of buyers when you decide to sell your STRIDES Securities if
you do not wish to hold your investment until the Maturity Date. This may
affect the price you receive upon such sale.
FACTORS AFFECTING THE TRADING VALUE OF THE STRIDES SECURITIES
The market value of the STRIDES Securities will be affected by the value of
the Lucent Common Stock and by a number of other factors. Some of these
factors are interrelated in complex ways; as a result, the effect of any one
factor may be magnified or mitigated by the effect of another factor. The
following paragraphs describe the expected effect on the market value of the
STRIDES Securities given a change in a specific factor, assuming all other
conditions remain constant.
. VALUE OF LUCENT COMMON STOCK. The market value of the STRIDES Securities
will depend substantially on the value of the Lucent Common Stock. In
general, the value of the STRIDES Securities will decrease as the value
of the Lucent Common Stock decreases and the value of the STRIDES
Securities will increase as the value of the Lucent Common Stock
increases. However, as the value of the Common Stock increases or
decreases, the value of the STRIDES Securities is not expected to
increase or decrease at the same rate as the change in value of the
Lucent Common Stock. The value of the STRIDES Securities on the Maturity
Date cannot be greater than the Capped Value, and therefore, the STRIDES
Securities will generally not trade in the secondary market
significantly above the Capped Value. Additionally, political, economic
and other developments that can affect the capital markets generally and
the market segment of which Lucent is a part (and over which we have no
control) that affect the value of the Lucent Common Stock will also
affect the value of the STRIDES Securities.
. INTEREST RATES. In general, we anticipate that if U.S. interest rates
increase, the trading value of the STRIDES Securities will decrease, and
conversely, if U.S. interest rates decrease, the trading value of the
STRIDES Securities will increase. Generally, fluctuations in interest
rates will affect the U.S. economy and, in turn, the value of the Lucent
Common Stock. Rising interest rates may lower the value of the Lucent
Common Stock and, as a result, the value of the STRIDES Securities.
Falling interest rates may increase the value of the Lucent Common Stock
and, as a result, may increase the value of the STRIDES Securities.
. VOLATILITY OF THE LUCENT COMMON STOCK. Volatility is the term used to
describe the size and frequency of market fluctuations. Generally, if
the volatility of the Lucent Common Stock increases, we expect that the
trading value of the STRIDES Securities will decrease and if the
volatility of the Lucent Common Stock decreases, we expect that the
trading value of the STRIDES Securities will increase.
. TIME REMAINING TO MATURITY. We believe that before the Maturity Date the
STRIDES Securities will trade at a value above or below that which would
be expected based on the value of the Lucent Common Stock. Generally, as
the time remaining to maturity decreases, the value of the STRIDES
Securities will approach the Redemption Amount that would be payable at
maturity based on the then current value of the Common Stock. As a
result, as the time remaining to maturity decreases, any discount or
premium attributed to the trading value of the STRIDES Securities will
diminish, increasing or decreasing the trading value of the STRIDES
Securities, as applicable.
. DIVIDEND YIELDS. Generally, if the dividend yield on the Lucent Common
Stock increases, we expect that the value of the STRIDES Securities will
decrease, and conversely, if the dividend yield on the Lucent Common
Stock decreases, we expect that the value of the STRIDES Securities will
increase.
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. COMPANY CREDIT RATINGS. Real or anticipated changes in our credit
ratings may affect the market value of the STRIDES Securities.
It is important for you to understand that a decrease in the trading value
of the STRIDES Securities resulting from the effect of one of the factors
specified above, such as an increase in interest rates, may offset some or all
of any increase in the trading value of the STRIDES Securities attributable to
another factor, such as an increase in the value of the Lucent Common Stock.
In general, assuming all relevant factors are held constant, we expect that
the effect on the trading value of the STRIDES Securities of a given change in
most of the factors listed above will be less if it occurs later in the term
of the STRIDES Securities than if it occurs earlier in the term of the STRIDES
Securities. However, so long as the value of the Lucent Common Stock is less
than 30% above the Starting Value, we expect that the effect on the trading
value of the STRIDES Securities of a given increase or decrease in the value
of the Lucent Common Stock will be greater if it occurs later in the term of
the STRIDES Securities than if it occurs earlier in the term of the STRIDES
Securities.
NO AFFILIATION BETWEEN THE COMPANY AND LUCENT TECHNOLOGIES INC.
We are not affiliated with Lucent, and Lucent has no obligations with
respect to the STRIDES Securities or amounts to be paid to you, including any
obligation to take the needs of the Company or of beneficial owners of the
STRIDES Securities into consideration for any reason. Lucent will not receive
any of the proceeds of the offering of the STRIDES Securities made hereby and
is not responsible for, and has not participated in, the determination or
calculation of the amount receivable by beneficial owners of the STRIDES
Securities on the Maturity Date. In addition, Lucent is not involved with the
administration or trading of the STRIDES Securities and has no obligations
with respect to the amount receivable by beneficial owners of the STRIDES
Securities.
NO STOCKHOLDER RIGHTS
You will not be entitled to any rights with respect to the Lucent Common
Stock including, without limitation, the right to receive dividends or other
distributions, voting rights and the right to tender or exchange Lucent Common
Stock in any tender or exchange offer by Lucent or any third party.
PURCHASES AND SALES OF LUCENT COMMON STOCK
We have entered into hedging arrangements related to the Lucent Common Stock
with one of our affiliates in connection with our obligations under the
STRIDES Securities. In connection therewith, such affiliate will purchase
shares of Lucent Common Stock in the secondary market on or before the Pricing
Date and will purchase and sell shares of Lucent Common Stock in the secondary
market during the term of the STRIDES Securities. We or any of our affiliates,
including MLPF&S, may from time to time buy or sell the Lucent Common Stock
for our own accounts for business reasons or in connection with hedging our
obligations under the STRIDES Securities. These transactions could affect the
price of the Lucent Common Stock, including during the period when the Ending
Value is determined.
STATE LAW LIMITS ON INTEREST PAID
New York State laws govern the 1983 Indenture, as hereinafter defined. New
York has certain usury laws that limit the amount of interest that can be
charged and paid on loans, which includes debt securities like the STRIDES
Securities. 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 will promise, for your benefit, to the extent permitted by law,
not to voluntarily claim the benefits of any laws concerning usurious rates of
interest.
POTENTIAL CONFLICTS
The Calculation Agent is one of our subsidiaries. Under certain
circumstances, MLPF&S's role as our subsidiary and its responsibilities as
Calculation Agent for the STRIDES Securities could give rise to conflicts
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of interests between the Calculation Agent and the holders of the STRIDES
Securities. Such conflicts could occur, for instance, in connection with the
Calculation Agent's determination as to whether a Market Disruption Event (as
defined herein) has occurred or in connection with judgments that the
Calculation Agent would be required to make with respect to certain
antidilution and reorganization adjustments to the Closing Price. See
"Description of the STRIDES Securities--Dilution and Reorganization
Adjustments" in this prospectus supplement. 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 the Calculation
Agent, 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 obligation to pay the Redemption Amount.
Such subsidiary expects to make a profit in connection with such arrangement.
We did not seek competitive bids for such an arrangement from unaffiliated
parties.
UNCERTAIN TAX CONSEQUENCES
You should also consider the tax consequences of investing in the STRIDES
Securities, certain aspects of which are uncertain. See "United States Federal
Income Taxation" below.
DESCRIPTION OF THE STRIDES SECURITIES
GENERAL
The STRIDES Securities are to be issued as a series of Senior Debt
Securities under the Senior Indenture, referred to as the "1983 Indenture,"
which is more fully described in the accompanying Prospectus.
Upon the occurrence of an Event of Default with respect to the STRIDES
Securities, beneficial owners of the STRIDES Securities may accelerate the
maturity of the STRIDES Securities, as described under "Description of the
STRIDES Securities--Events of Default and Acceleration" in this prospectus
supplement and "Description of Debt Securities--General--Events of Default" in
the accompanying prospectus.
The STRIDES Securities are to be issued in denominations of whole Units.
The STRIDES Securities do not have the benefit of any sinking fund.
INTEREST
The STRIDES Securities will bear interest at a rate of 5 3/4% per annum of
the Principal Amount of each Unit from December 1, 1998, or from the most
recent Interest Payment Date (as defined herein) to which interest has been
paid or provided for, until the Maturity Date. Interest on the STRIDES
Securities will be payable in cash semi-annually in arrears on June 1 and
December 1 of each year (each, an "Interest Payment Date"), commencing June 1,
1999, to the persons in whose names the STRIDES Securities are registered at
the close of business on the May 15 and November 15 (whether or not a Business
Day) immediately preceding such Interest Payment Date. Interest on the STRIDES
Securities 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,
the interest payment to be made on such Interest Payment Date will be made on
the next succeeding Business Day with the same force and effect as if made on
such Interest Payment Date, and no additional interest will accrue as a result
of such delayed payment.
PAYMENT AT MATURITY
The STRIDES Securities will mature on June 1, 2000. On the Maturity Date,
the beneficial owner of each STRIDES Security will receive an amount equal to
the value of the Redemption Amount of such STRIDES Security.
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The "Redemption Amount" will be determined by the Calculation Agent and for
each Unit will equal the lesser of:
. $13.00 (the "Capped Value"); and
( Ending Value )
. $10 per Unit X (--------------)
(Starting Value)
On the Maturity Date, holders of the STRIDES Securities will receive, for
each Unit of the STRIDES Securities then held, a number of shares of Lucent
Common Stock equal to the Redemption Amount divided by the Ending Value and
accrued interest from the last Interest Payment Date for which interest was
paid.
If the Company elects to pay the Redemption Amount in cash instead of in
shares of Lucent Common Stock to which a holder of the STRIDES Securities
would otherwise be entitled to receive, the Company will pay such holder an
amount of cash equal to the Redemption Amount.
The "Starting Value" means $90.3125 which was the Closing Price (as defined
herein) of one share of Lucent Common Stock on November 24, 1998. The Ending
Value will be determined by the Calculation Agent and will equal the average
(arithmetic mean) of the Closing Prices of Lucent Common Stock determined on
each of the first five Calculation Days during the Calculation Period, subject
to adjustment for certain events described under "Description of the STRIDES
Securities--Dilution and Reorganization Adjustments". If there are fewer than
five Calculation Days in the Calculation Period, then the Closing Prices used
to determine the Ending Value will equal the average (arithmetic mean) of the
Closing Prices of Lucent Common Stock on such Calculation Days, and if there
is only one Calculation Day, then the Ending Value will be equal to the
Closing Price of Lucent Common Stock on such Calculation Day. If no
Calculation Days occur during the Calculation Period, then the Ending Value
will be equal to the Closing Price of Lucent Common Stock determined on the
last scheduled Calculation Day in the Calculation Period, regardless of the
occurrence of a Market Disruption Event on such day.
The "Calculation Period" means the period from and including the seventh
scheduled Calculation Day prior to the Maturity Date to and including the
second scheduled Calculation Day prior to the Maturity Date.
"Calculation Day" means any Trading Day on which a Market Disruption Event
has not occurred.
"Trading Day" is a day on which the Lucent Common Stock (A) is not suspended
from trading on any national or regional securities exchange or association or
over-the-counter market at the close of business and (B) has traded at least
once on a national or regional securities exchange or association or over-the-
counter market that is the primary market for the trading of the Lucent Common
Stock.
"Market Disruption Event" means the occurrence or existence on any Trading
Day during the one-half hour period that ends when the Closing Price is
determined of any suspension of, or limitation imposed on, trading in the
Lucent Common Stock on the NYSE (or other market or exchange, if applicable).
"Closing Price" means the product of (i) the Share Ratio and (ii) the last
sales price of one share of Lucent Common Stock as reported by the NYSE or, if
such security is not trading on the NYSE on any such date, as reported in the
composite transactions for the principal United States securities exchange on
which such security is so listed, or if such security is not so listed on a
United States national or regional securities exchange, the last quoted bid
price for such security in the over-the-counter market as reported by the
National Quotation Bureau
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or similar organization, or, if such bid price is not available, the market
value of such security on such date as determined by a nationally recognized
independent investment banking firm retained for this purpose by the
Calculation Agent.
"Share Ratio" means, initially 1.0, but will be subject to adjustment for
certain events described under "Description of the STRIDES Securities--
Dilution and Reorganization Adjustments."
"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 that is a Trading Day on the NYSE.
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 the Company and beneficial owners of the STRIDES Securities.
FRACTIONAL SHARES
No fractional shares of Lucent Common Stock will be distributed by the
Company on the Maturity Date. In the event the Company elects to pay the
Redemption Amount in shares of Lucent Common Stock, all amounts due to any
holder of the STRIDES Securities in respect of the total number of Units held
by such holder will be aggregated, and in lieu of delivering any fractional
share to such holder, such holder will receive the cash value of such
fractional share based on the Ending Value.
EXAMPLES OF REDEMPTION AMOUNT CALCULATIONS
Set forth below are three examples of Redemption Amount calculations:
"Example One--Ending Value is 50% less than Starting Value"
Starting Value: $90.31
Hypothetical Ending Value: $45.16
(45.16)
Redemption Amount (per Unit) = $10.00 X (-----) = $5.00.
(90.31)
TOTAL PAYMENT ON THE MATURITY DATE (PER UNIT) = $5.00.
"Example Two--Ending Value is 20% greater than Starting Value"
Starting Value: $90.31
Hypothetical Ending Value: $108.38
(108.38)
Redemption Amount (per Unit) = $10.00 X (------) = $12.00.
( 90.31)
TOTAL PAYMENT ON THE MATURITY DATE (PER UNIT) = $12.00.
"Example Three--Ending Value is 50% greater than Starting Value"
Starting Value: $90.31
Hypothetical Ending Value: $135.47
(135.47) (Redemption Amount
Redemption Amount (per Unit) = $10.00 X (------) = $13.00.cannot be
( 90.31) greater than
Capped Value).
TOTAL PAYMENT ON THE MATURITY DATE (PER UNIT) = $13.00
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HYPOTHETICAL RETURNS
The following table illustrates, for a range of hypothetical Ending Values,
(i) the percentage change over the Starting Value; (ii) the total amount
payable on the Maturity Date for each $10 Principal Amount of STRIDES
Securities; (iii) the total rate of return to beneficial owners of the STRIDES
Securities; (iv) the pretax annualized rate of return to beneficial owners of
STRIDES Securities; and (v) the pretax annualized rate of return of the Lucent
Common Stock.
<TABLE>
<CAPTION>
TOTAL AMOUNT PRETAX PRETAX ANNUALIZED RATE
PERCENTAGE CHANGE PAYABLE ON THE TOTAL RATE ANNUALIZED OF RETURN OF THE
HYPOTHETICAL OVER THE STARTING MATURITY DATE OF RATE OF LUCENT COMMON
ENDING VALUE VALUE PER UNIT RETURN(1) RETURN(2)(3) STOCK(3)(4)
- ------------ ----------------- -------------- ---------- ------------ ----------------------
<S> <C> <C> <C> <C> <C>
45.16 -50.00% $ 5.00 -41.375% -33.94% -41.11%
54.19 -40.00% $ 6.00 -31.375% -24.46% -31.16%
63.22 -30.00% $ 7.00 -21.375% -15.93% -22.26%
72.25 -20.00% $ 8.00 -11.375% -8.14% -14.17%
81.28 -10.00% $ 9.00 -1.375% -0.95% -6.73%
90.31(5) 0.00% $10.00 8.625% 5.75% 0.18%
99.34 10.00% $11.00 18.625% 12.03% 6.64%
108.38 20.00% $12.00 28.625% 17.95% 12.72%
117.41 30.00% $13.00 38.625% 23.57% 18.48%
126.44 40.00% $13.00 38.625% 23.57% 23.94%
135.47 50.00% $13.00 38.625% 23.57% 29.15%
144.50 60.00% $13.00 38.625% 23.57% 34.14%
153.53 70.00% $13.00 38.625% 23.57% 38.92%
162.56 80.00% $13.00 38.625% 23.57% 43.51%
171.59 90.00% $13.00 38.625% 23.57% 47.94%
180.63 100.00% $13.00 38.625% 23.57% 52.22%
</TABLE>
- --------
(1) The rates of return specified in this column assume a coupon yield of
5 3/4% per annum.
(2) The annualized rates of return specified in this column assume a constant
coupon yield of 5 3/4% per annum paid semi-annually from December 1, 1998
and applied to the Principal Amount of each STRIDES Security.
(3) The annualized rates of return specified in these columns are calculated
on a semi-annual bond equivalent basis.
(4) The rates of return specified in this column assume (i) a constant
dividend yield of 0.18% per annum, paid quarterly from the date of initial
delivery of STRIDES Securities, applied to the value of the Lucent Common
Stock at the end of each such quarter assuming such value increases or
decreases linearly from the Starting Value to the applicable hypothetical
Ending Value; (ii) no transaction fees or expenses; (iii) a term for the
STRIDES Securities from December 1, 1998 to June 1, 2000; and (iv) a final
value of the Lucent Common Stock equal to the Ending Value. The dividend
yield of the Lucent Common Stock as of November 24, 1998 was approximately
0.18%.
(5) The actual Starting Value, as determined on November 24, 1998, was
$90.3125.
The above figures are for purposes of illustration only. The actual
Redemption Amount received by investors and the total and pretax annualized
rate of return resulting therefrom will depend entirely on the actual Ending
Value determined by the Calculation Agent as provided herein. Historical data
regarding the Lucent Common Stock is included in this prospectus supplement
under "Lucent Common Stock--Historical Data."
DILUTION AND REORGANIZATION ADJUSTMENTS
The Closing Price of the Lucent Common Stock used to determine the Ending
Value is subject to adjustment by the Calculation Agent as follows:
1. If Lucent Common Stock is subject to a stock split or reverse stock
split, then once such split has become effective, the Share Ratio will be
adjusted to equal the product of the prior Share Ratio and the
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number of shares which a holder of one share of Lucent Common Stock prior
to the effective date of such stock split or reverse stock split would have
owned or been entitled to receive immediately following such effective
date.
2. If Lucent Common Stock is subject to a stock dividend (issuance of
additional shares of Lucent Common Stock) that is given ratably to all
holders of shares of Lucent Common Stock, then once such shares are trading
ex-dividend, the Share Ratio will be adjusted so that the new Share Ratio
shall equal the prior Share Ratio plus the product of (i) the number of
shares of Lucent Common Stock issued with respect to one share of Lucent
Common Stock and (ii) the prior Share Ratio.
3. There will be no adjustments to the Share Ratio to reflect cash
dividends or distributions paid with respect to Lucent Common Stock other
than distributions described in clause (v) of paragraph 5 below and
Extraordinary Dividends as described below. An "Extraordinary Dividend"
means, with respect to any consecutive 12-month period, all cash dividends
or other distributions with respect to Lucent Common Stock to the extent
such dividends exceed on a per share basis 10% of the average Closing Price
during such period (less any such dividends for which a prior adjustment
was previously made). If an Extraordinary Dividend occurs with respect to
Lucent Common Stock, the Share Ratio will be adjusted on the Trading Day
preceding the payment of any dividend, the payment of which caused all cash
dividends or other distributions made with respect to Lucent Common Stock
over the past 12-month period to exceed on a per share basis 10% of the
average Closing Price during such period (less any such dividends for which
a prior adjustment was previously made) (the "ex-dividend date"), so that
the new Share Ratio will equal the product of (i) the then current Share
Ratio, and (ii) a fraction, the numerator of which is the Closing Price on
the Trading Day preceding the ex-dividend date, and the denominator of
which is the amount by which the Closing Price on the Trading Day preceding
the ex-dividend date exceeds the Extraordinary Dividend Amount. The
"Extraordinary Dividend Amount" with respect to an Extraordinary Dividend
for Lucent Common Stock will equal (i) in the case of cash dividends or
other distributions that constitute quarterly dividends, the amount per
share of such Extraordinary Dividend minus the amount per share of the
immediately preceding non-Extraordinary Dividend or (ii) in the case of
cash dividends or other distributions that do not constitute quarterly
dividends, the amount per share of such 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 the Lucent Common
Stock described in clause (v) of paragraph 5 below that also constitutes an
Extraordinary Dividend shall cause an adjustment to the Share Ratio
pursuant only to clause (v) of paragraph 5.
4. If Lucent issues transferable rights or warrants to all holders of
Lucent Common Stock to subscribe for or purchase Lucent Common Stock
(including new or existing rights to purchase Lucent Common Stock pursuant
to a shareholders rights plan or arrangement, once a triggering event shall
have occurred thereunder), at an exercise price per share less than the
Closing Price of Lucent Common Stock on (i) the date the exercise price of
such rights or warrants is determined and (ii) the expiration date of such
rights or warrants, and, in each case, if the expiration date of such
rights or warrants precedes the Maturity Date, then the Share Ratio will be
adjusted to equal the product of the prior Share Ratio and a fraction, the
numerator of which shall be the number of shares of Lucent Common Stock
outstanding immediately prior to such issuance plus the number of
additional shares of Lucent Common Stock offered for subscription or
purchase pursuant to such rights or warrants and the denominator of which
shall be the number of shares of Lucent Common Stock outstanding
immediately prior to such issuance plus the number of additional shares of
Lucent Common Stock which the aggregate offering price of the total number
of shares of Lucent Common Stock so offered for subscription or purchase
pursuant to such rights of warrants would purchase at the Closing Price on
the expiration date of such rights or warrants, which shall be determined
by multiplying such total number of shares offered by the exercise price of
such rights or warrants and dividing the product so obtained by such
Closing Price.
5. If (i) there occurs any reclassification or change of Lucent Common
Stock, (ii) Lucent, or any surviving entity or subsequent surviving entity
of Lucent (a "Successor Entity") has been subject to a
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merger, combination or consolidation and is not the surviving entity, (iii)
any statutory exchange of securities of Lucent or any Successor Entity with
another corporation occurs (other than pursuant to clause (ii) above), (iv)
Lucent is liquidated, (v) Lucent issues to all of its shareholders equity
securities of an issuer other than Lucent (other than in a transaction
described in clauses (ii), (iii) or (iv) above) (a "Spin-off Event") or
(vi) a tender or exchange offer is consummated for all the outstanding
shares of Lucent (any such event in clauses (i) through (vi) a
"Reorganization Event"), the Ending Value shall equal to the Reorganization
Event Value (as defined below). The "Reorganization Event Value" shall be
determined by the Calculation Agent and shall equal (i) the Transaction
Value related to the relevant Reorganization Event, plus (ii) interest on
such Transaction Value accruing from the date of the payment or delivery of
the consideration, if any, received in connection with such Reorganization
Event until the stated maturity date at a fixed interest rate determined on
the date of such payment or delivery equal to the interest rate that would
be paid on a standard senior non-callable debt security of the Company with
a term equal to the remaining term of the STRIDES Securities. "Transaction
Value" means (i) for any cash received in any such Reorganization Event, an
amount equal to the amount of cash received per share of Lucent Common
Stock multiplied by the Share Ratio in effect on the date all of the
holders of shares of Lucent Common Stock have agreed or have become
irrevocably obligated to exchange such shares, (ii) for any property other
than cash or securities received in any such Reorganization Event, the
market value (as determined by the Calculation Agent) of such Exchange
Property received for each share of Lucent Common Stock at the date of the
receipt of such Exchange Property multiplied by the then current Share
Ratio and (iii) for any security received in any such Reorganization Event,
an amount equal to the closing price per share of such security on the
fifth Trading Day prior to the Maturity Date multiplied by the quantity of
such security received for each share of Lucent Common Stock multiplied by
the then current Share Ratio. "Exchange Property" means the securities,
cash or any other assets distributed in any such Reorganization Event,
including, in the case of a Spin-off Event, the share of Lucent Common
Stock with respect to which the spun-off security was issued.
For purposes of paragraph 5 above, in the case of a consummated tender or
exchange offer for all 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). In the event of a tender or exchange offer 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.
No adjustments to the Share Ratio will be required unless such Share Ratio
adjustment would require a change of at least 0.1% in the Share Ratio then in
effect. The Share Ratio resulting from any of the adjustments specified above
will be rounded to the nearest one thousandth, with five ten-thousandths being
rounded upward.
No adjustments to the Share Ratio or to the Ending Value will be required
other than those specified above. However, the Company may, at its sole
discretion, cause the Calculation Agent to make additional adjustments to the
Share Ratio or to the Ending Value to reflect changes occurring in relation to
Lucent Common Stock or any other Exchange Property in other circumstances
where the Company determines that it is appropriate to reflect such changes.
MLPF&S, as Calculation Agent, will be solely responsible for the
determination and calculation of any adjustments to the Share Ratio or the
Ending Value 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 in paragraph
5 above, and its determinations and calculations with respect thereto shall be
conclusive.
No adjustments will be made for certain other events, such as offerings of
Lucent Common Stock by Lucent for cash or in connection with acquisitions or
the occurrence of a partial tender or exchange offer for the Lucent Common
Stock by Lucent or any third party.
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The Company will, within ten Business Days following the occurrence of an
event that requires an adjustment to the Share Radio or the Ending Value (or
if the Company is not aware of such occurrence, as soon as practicable after
becoming so aware), provide written notice to the Trustee, which shall provide
notice to the holders of the STRIDES Securities of the occurrence of such
event and, if applicable, a statement in reasonable detail setting forth the
adjusted Share Ratio or other formula to be used in determining the Ending
Value.
EVENTS OF DEFAULT AND ACCELERATION
In case an Event of Default with respect to any STRIDES Securities shall
have occurred and be continuing, the amount payable to a beneficial owner of a
STRIDES Security upon any acceleration permitted by the STRIDES Securities,
with respect to each $10 Unit thereof, will be equal to the Principal Amount
and any accrued interest due thereon. If a bankruptcy proceeding is commenced
in respect of the Company, the claim of the beneficial owner of a STRIDES
Security may be limited, under Section 502(b)(2) of Title 11 of the United
States Code, to the Principal Amount of the STRIDES Security plus an
additional amount of contingent interest calculated as though the date of the
commencement of the proceeding were the Maturity Date of the STRIDES
Securities.
In case of default in payment of the STRIDES Securities (whether at any
Interest Payment Date, the Maturity Date or upon acceleration), from and after
any such date the STRIDES Securities shall bear interest, payable upon demand
of the beneficial owners thereof, at the rate of 5 3/4% per annum (to the
extent that payment of such interest shall be legally enforceable) on the
unpaid amount due and payable on such date in accordance with the terms of the
STRIDES Securities to the date payment of such amount has been made or duly
provided for.
DEPOSITARY
Upon issuance, all STRIDES Securities will be represented by one or more
fully registered global securities (the "Global Securities"). Each such Global
Security will be deposited with, or on behalf of, The Depository Trust Company
("DTC"; DTC, together with any successor thereto, 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 STRIDES Securities in
definitive form, no Global Security may be transferred except as a whole by
the Depositary to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary or by such
Depositary or any such nominee to a successor of such Depositary or a nominee
of such 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 STRIDES Securities represented by such Global Security for all
purposes under the 1983 Indenture. Except as provided below, the actual owner
of the STRIDES Securities represented by a Global Security (the "Beneficial
Owner") will not be entitled to have the STRIDES Securities represented by
such Global Securities registered in their names, will not receive or be
entitled to receive physical delivery of the STRIDES Securities in definitive
form and will not be considered the owners or holders thereof under the 1983
Indenture, including for purposes of receiving any reports delivered by the
Company or the Trustee pursuant to the 1983 Indenture. Accordingly, each
person owning a beneficial interest in a Global Security must rely on the
procedures of DTC and, if such person is not a participant of DTC (a
"Participant"), on the procedures of the Participant through which such person
owns its interest, to exercise any rights of a holder under the 1983
Indenture. The Company understands that under existing industry practices, in
the event that the Company requests any action of holders or that an owner of
a beneficial interest in such 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 such action, and such Participants would authorize Beneficial
Owners owning through such Participants to give or take such 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, as defined below, 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.
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If (x) the Depositary is at any time unwilling or unable to continue as
Depositary and a successor depositary is not appointed by the Company within
60 days, (y) the Company executes and delivers to the Trustee a Company Order
to the effect that the Global Securities shall be exchangeable or (z) an Event
of Default has occurred and is continuing with respect to the STRIDES
Securities, the Global Securities will be exchangeable for STRIDES Securities
in definitive form of like tenor and of an equal aggregate principal amount,
in denominations of $10 and integral multiples thereof. Such definitive
STRIDES Securities shall be registered in such name or names as the Depositary
shall instruct the Trustee. It is expected that such instructions may be based
upon directions received by the Depositary from Participants with respect to
ownership of beneficial interests in such Global Securities.
The following is based on information furnished by DTC:
DTC will act as securities depositary for the STRIDES Securities. The
STRIDES Securities 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 STRIDES Securities 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 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
("Direct Participants") 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. ("NASD"). Access to the 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
("Indirect Participants"). The rules applicable to DTC and its Participants
are on file with the SEC.
Purchases of STRIDES Securities under the DTC's system must be made by or
through Direct Participants, which will receive a credit for the STRIDES
Securities on the DTC's records. The ownership interest of each Beneficial
Owner is in turn to be recorded on the records of Direct Participants 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 Participants or
Indirect Participants through which such Beneficial Owner entered into the
transaction. Transfers of ownership interests in the STRIDES Securities are to
be accomplished by entries made on the books of Participants acting on behalf
of Beneficial Owners. Beneficial Owners will not receive certificates
representing their ownership interests in STRIDES Securities, except in the
event that use of the book-entry system for the STRIDES Securities is
discontinued.
To facilitate subsequent transfers, all STRIDES Securities deposited with
DTC are registered in the name of DTC's partnership nominee, Cede & Co. The
deposit of STRIDES Securities 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 STRIDES Securities; DTC's records reflect
only the identity of the Direct Participants to whose accounts such STRIDES
Securities 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.
S-17
<PAGE>
Neither DTC nor Cede & Co. will consent or vote with respect to the STRIDES
Securities. Under its usual procedures, DTC mails an Omnibus Proxy to the
Company as soon as possible after the applicable record date. The Omnibus
Proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the STRIDES Securities are credited on the
record date (identified in a listing attached to the Omnibus Proxy).
Principal, premium, if any, and/or interest, if any, payments on the STRIDES
Securities 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 such
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 such Participant and not of DTC, the
Trustee or the Company, 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 the Company or the
Trustee, disbursement of such payments to Direct Participants shall be the
responsibility of DTC, and disbursement of such payments to the Beneficial
Owners shall be the responsibility of Direct Participants and Indirect
Participants.
DTC has advised the Company that management of DTC is aware that some
computer applications, systems, and the like for processing data ("Systems")
that are dependent upon calendar dates, including dates before, on, and after
January 1, 2000, may encounter "Year 2000 problems". DTC has informed Direct
and Indirect Participants and other members of the financial community (the
"Industry") that it has developed and is implementing a program so that its
Systems, as the same relate to the timely payment of distributions (including
principal and interest payments) to securityholders, book-entry deliveries,
and settlement of trades within DTC ("Depositary Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes
a testing phase, which is expected to be completed within appropriate time
frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including, but not limited to, issuers and their agents,
as well as DTC's Direct Participants and Indirect Participants, and third
party vendors from whom DTC licenses software and hardware, and third party
vendors on whom DTC relies for information or the provision of services,
including telecommunication and electrical utility service providers, among
others. DTC has informed the Industry that it is contacting (and will continue
to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being Year 2000 compliant;
and (ii) determine the extent of their efforts for Year 2000 remediation (and,
as appropriate, testing) of their services. In addition, DTC is in the process
of developing such contingency plans as it deems appropriate.
According to DTC, the information in the preceding two paragraphs with
respect to DTC has been provided to the Industry for informational purposes
only and is not intended to serve as a representation, warranty, or contract
modification of any kind.
DTC may discontinue providing its services as securities depositary with
respect to the STRIDES Securities at any time by giving reasonable notice to
the Company or the Trustee. Under such circumstances, in the event that a
successor securities depositary is not obtained, STRIDES Security certificates
are required to be printed and delivered.
The Company may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depositary). In that event,
security certificates will be printed and delivered.
The information in this section concerning DTC and DTC's system has been
obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
S-18
<PAGE>
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the STRIDES Securities will be made by the underwriter in
immediately available funds. All payments of interest and the Redemption
Amount (to the extent that payment of the Redemption Amount is made in cash)
will be made by the Company in immediately available funds so long as the
STRIDES Securities are maintained in book-entry form.
LUCENT COMMON STOCK
LUCENT TECHNOLOGIES INC.
Lucent is a designer, developer and manufacturer of communications systems,
software and products. Lucent is engaged in the sale of public communications
systems, and is a supplier of systems or software to most of the world's
largest network operators. Lucent is also engaged in the sale of business
communications systems and in the sale of microelectronic components for
communications applications to manufacturers of communications systems and
computers. Lucent's research and development activities are conducted through
Bell Laboratories.
Because the Lucent Common Stock is registered under the Exchange Act, Lucent
is required to file periodically certain financial and other information
specified by the SEC. For more information about Lucent and the Lucent Common
Stock that you may receive on the Maturity Date, information provided to or
filed with the SEC by Lucent with respect to its registered securities can be
located by reference to SEC file number 1-11639 and inspected at the SEC's
public reference facilities or accessed over the Internet through a web site
maintained by the SEC at http://www.sec.gov. In addition, information
regarding Lucent may 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.
THE COMPANY IS NOT AFFILIATED WITH LUCENT, AND LUCENT HAS NO OBLIGATIONS
WITH RESPECT TO THE STRIDES SECURITIES. THIS PROSPECTUS SUPPLEMENT RELATES
ONLY TO THE STRIDES SECURITIES OFFERED HEREBY AND DOES NOT RELATE TO THE
LUCENT COMMON STOCK OR OTHER SECURITIES OF LUCENT. THE INFORMATION CONTAINED
IN THIS PROSPECTUS SUPPLEMENT REGARDING LUCENT HAS BEEN DERIVED FROM THE
PUBLICLY AVAILABLE DOCUMENTS DESCRIBED IN THE PRECEDING PARAGRAPH. THE COMPANY
HAS NOT PARTICIPATED IN THE PREPARATION OF SUCH DOCUMENTS OR MADE ANY DUE
DILIGENCE INQUIRIES WITH RESPECT TO LUCENT IN CONNECTION WITH THE OFFERING OF
THE STRIDES SECURITIES. THE COMPANY MAKES NO REPRESENTATION THAT SUCH PUBLICLY
AVAILABLE DOCUMENTS OR ANY OTHER PUBLICLY AVAILABLE INFORMATION REGARDING
LUCENT 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 IN THE PRECEDING PARAGRAPH) THAT WOULD AFFECT THE TRADING PRICE OF
THE LUCENT COMMON STOCK (AND THEREFORE THE TRADING PRICE OF THE STRIDES
SECURITIES) HAVE BEEN PUBLICLY DISCLOSED. SUBSEQUENT DISCLOSURE OF ANY SUCH
EVENTS OR THE DISCLOSURE OF OR FAILURE TO DISCLOSE MATERIAL FUTURE EVENTS
CONCERNING LUCENT COULD AFFECT THE REDEMPTION AMOUNT TO BE RECEIVED AT THE
MATURITY DATE AND THEREFORE THE TRADING VALUE OF THE STRIDES SECURITIES.
From time to time, in the ordinary course of business, affiliates of the
Company have engaged in certain investment banking activities on behalf of
Lucent as well as served as counterparty in certain other transactions.
S-19
<PAGE>
HISTORICAL DATA
The Lucent Common Stock is traded on the NYSE under the symbol "LU." The
following table sets forth for the periods indicated, the split-adjusted high
and low closing prices per share of the Lucent Common Stock, as reported on
the NYSE, for each calendar quarter since its initial public offering, and
dividends paid. These historical data on the Lucent Common Stock are not
necessarily indicative of the future performance of the Lucent Common Stock or
what the value of the STRIDES Securities may be. Any historical upward or
downward trend in the level of the Lucent Common Stock during any period set
forth below is not any indication that the Lucent Common Stock is more or less
likely to increase or decrease at any time during the term of the STRIDES
Securities.
<TABLE>
<CAPTION>
DIVIDENDS
CALENDAR PERIOD LOW HIGH PAID
- --------------- -------- --------- ---------
SPLIT-ADJUSTED(1)
<S> <C> <C> <C>
1996
Second Quarter (from April 4, 1996).............. 15 5/16 19 9/16 --
Third Quarter.................................... 16 15/16 22 15/16 $0.0375
Fourth Quarter................................... 21 1/2 26 1/4 0.0375
1997
First Quarter.................................... 22 5/8 29 13/16 0.0375
Second Quarter................................... 25 1/8 36 9/16 0.0375
Third Quarter.................................... 36 23/32 44 11/32 0.0375
Fourth Quarter................................... 36 15/32 44 1/2 0.0375
1998
First Quarter.................................... 37 3/8 63 15/16 0.0375
Second Quarter................................... 66 1/16 83 3/16 0.0400
Third Quarter.................................... 69 1/4 102 1/4 0.0400
Fourth Quarter (through November 24, 1998)....... 57 90 5/16 --
</TABLE>
- --------
(1) The sales prices presented above have been adjusted for stock splits that
have occurred through November 24, 1998.
On November 24, 1998, the Closing Price of Lucent Common Stock, as reported
on the NYSE was $90.3125 per share.
USE OF PROCEEDS AND HEDGING
The net proceeds to be received by the Company from the sale of the STRIDES
Securities will be used for general corporate purposes and, in part, by the
Company or one or more of its affiliates in connection with hedging the
Company's obligations under the STRIDES Securities. See also "Use of Proceeds"
in the accompanying Prospectus.
The Company has entered into hedging arrangements related to the Lucent
Common Stock with an affiliate of the Company, in connection with the
Company's obligations under the STRIDES Securities. In connection therewith,
such affiliate has purchased shares of Lucent Common Stock in secondary market
transactions at or before the time of the pricing of the STRIDES Securities.
The Company, MLPF&S and other affiliates of the Company may from time to time
buy or sell the Lucent Common Stock for their own accounts for business
reasons or in connection with hedging the Company's obligations under the
STRIDES Securities. These transactions could affect the price of the Lucent
Common Stock.
S-20
<PAGE>
UNITED STATES FEDERAL INCOME TAXATION
The following discussion is based upon the opinion of Brown & Wood LLP,
counsel to the Company ("Tax Counsel"). As the law applicable to the U.S.
Federal income taxation of instruments such as the STRIDES Securities 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 STRIDES Securities 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 STRIDES Securities 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 STRIDES
Securities 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 STRIDES
Securities arising under the laws of any other taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a STRIDES
Security 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 STRIDES Security 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 STRIDES Security 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 STRIDES Securities or securities
with terms substantially the same as the STRIDES Securities. Accordingly, the
proper U.S. Federal income tax characterization and treatment of the STRIDES
Securities is uncertain. Pursuant to the terms of the STRIDES Securities, the
Company and every holder of a STRIDES Security agree (in the absence of an
administrative determination or judicial ruling to the contrary) to
characterize a STRIDES Security for all tax purposes as an investment unit
consisting of the following components (the "Components"): (i) a debt
instrument of the Company (the "Debt Instrument") with a fixed principal
amount unconditionally payable on the Maturity Date equal to the Principal
Amount of the STRIDES Securities and bearing stated interest at 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 the Company in exchange for the right to receive cash at maturity
or Lucent Common Stock. In the opinion of Tax Counsel, such characterization
and tax treatment of the STRIDES Securities, 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 the Company's determination of the relative fair market
values of the Components at the time of issuance of the STRIDES Securities,
the Company will allocate the entire issue price of the STRIDES Securities to
the Debt Instrument and none of the issue price to the Forward Contract. The
Company's allocation of the issue price will be binding on a U.S. Holder (as
defined in the accompanying prospectus) of a STRIDES Security, unless such
U.S. Holder timely and explicitly discloses to the IRS that its allocation is
different from the Company's. The treatment of the STRIDES
S-21
<PAGE>
Securities described above and the Company's allocation are not, however,
binding on the IRS or the courts. No statutory, judicial or administrative
authority directly addresses the characterization of the STRIDES Securities or
instruments similar to the STRIDES Securities for U.S. Federal income tax
purposes, and no ruling is being requested from the IRS with respect to the
STRIDES Securities. DUE TO THE ABSENCE OF AUTHORITIES THAT DIRECTLY ADDRESS
INSTRUMENTS THAT ARE SIMILAR TO THE STRIDES SECURITIES, SIGNIFICANT ASPECTS OF
THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE STRIDES
SECURITIES 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 STRIDES SECURITY
(INCLUDING ALTERNATIVE CHARACTERIZATIONS OF A STRIDES SECURITY) 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 STRIDES SECURITY
"Interest on the Debt Instrument." As described above, the Debt Instrument is
treated as bearing interest at a stated rate of 5 3/4% per annum. A U.S.
Holder will include "qualified stated interest" equal to the stated interest
on the STRIDES Securities in income in accordance with the U.S. Holder's
method of accounting for U.S. Federal income tax purposes.
TAX BASIS
Based on the Company's determination set forth above, the U.S. Holder's tax
basis in the Debt Instrument would initially be 100% of the issue price.
"Settlement of the Forward Contract." Upon the final settlement of the Forward
Contract, a U.S. Holder receiving cash would, pursuant to the Forward
Contract, be deemed to have applied an amount (the "Forward Contract Payment
Amount") equal to the principal amount of the Debt Instrument toward the
exchange for the cash payment at maturity, and a U.S. Holder would recognize
gain or loss. The amount of such gain or loss would be the extent to which the
amount of such cash received differs from the Forward Contract Payment Amount.
U.S. Holders should note that it is uncertain whether any gain or loss
recognized upon the final settlement of the Forward Contract for cash would be
capital gain or loss or ordinary income or loss. The distinction between
capital gain or loss and ordinary income or loss is potentially significant in
several respects. For example, limitations apply to a U.S. Holder's ability to
offset capital losses against ordinary income, and certain U.S. Holders may be
subject to lower U.S. Federal income tax rates with respect to long-term
capital gain than with respect to ordinary income. U.S. Holders should consult
their tax advisors with respect to the treatment of gain or loss on a STRIDES
Security.
A U.S. Holder receiving Lucent Common Stock pursuant to the Forward Contract
would be deemed to have applied the Forward Contract Payment Amount toward the
purchase of such Lucent Common Stock, and such U.S. Holder should not
recognize any gain or loss with respect to the Lucent 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 Lucent 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 Lucent
Common Stock so received would be equal to the Forward Contract Payment Amount
less the portion of the Forward Contract Payment
S-22
<PAGE>
Amount that is allocable to any fractional shares. Such U.S. Holder's holding
period for the Lucent Common Stock would start on the day after the Maturity
Date.
SALE OR EXCHANGE OF THE STRIDES SECURITIES
Upon a sale or exchange of a STRIDES Security prior to the maturity of the
STRIDES Securities, a U.S. Holder would recognize taxable gain or loss equal
to the difference between the amount realized on such sale or exchange (as
allocated among the Components in accordance with their relative fair market
values) and such U.S. Holder's tax basis in the Components deemed so sold or
exchanged. Any such gain or loss would generally be capital gain or loss, as
the case may be. 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 "--Interest on the Debt Instrument" above.
POSSIBLE ALTERNATIVE TAX TREATMENTS OF AN INVESTMENT IN A STRIDES SECURITY
Due to the absence of authorities that directly address the proper
characterization of the STRIDES Securities, 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 STRIDES Security under
Treasury regulations governing contingent payment debt instruments (the
"Contingent Payment Regulations").
The Company will take the position that the Contingent Payment Regulations
do not apply to the STRIDES Securities. If the IRS were successful in
asserting that the Contingent Payment Regulations applied to the STRIDES
Securities, the timing and character of income thereon would be significantly
affected. Among other things, a U.S. Holder would be required to accrue as
OID, 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 the Lucent Common Stock at
maturity). Furthermore, any gain realized with respect to a STRIDES Security
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 STRIDES Securities.
Even if the Contingent Payment Regulations do not apply to the STRIDES
Securities, other alternative U.S. Federal income characterizations or
treatments of the STRIDES Securities are also possible, which may also affect
the timing and the character of the income or loss with respect to the STRIDES
Securities. Accordingly, prospective purchasers are urged to consult their tax
advisors regarding the U.S. Federal income tax consequences of an investment
in a STRIDES Security.
PROPOSED LEGISLATION
On February 4, 1998, Representative Barbara Kennelly released H.R. 3170 (the
"Kennelly Bill"), which, if enacted, would treat a taxpayer owning certain
types of derivative positions in property as having "constructive ownership"
of that property, with the result that all or a portion of any long-term
capital gain recognized by such taxpayer with respect to the derivative
position would be recharacterized as short-term capital gain. It is unclear
whether, if enacted in its present form, the Kennelly Bill would apply to a
STRIDES Security. If the Kennelly Bill were to apply to a STRIDES Security,
the effect on a U.S. Holder of a STRIDES Security would be to treat all or a
portion of the long-term capital gain recognized by such U.S. Holder on sale
or maturity of the STRIDES Securities (or the Lucent Common Stock received
thereon) as short-term capital gain, but only to the extent such long-term
capital gain exceeds the long-term capital gain that would have been
recognized by such U.S. Holder if the U.S. Holder had acquired Lucent Common
Stock itself on the issue date of the STRIDES Securities and disposed of the
Lucent Common Stock upon disposition of the STRIDES Securities (or, where
S-23
<PAGE>
the Company elects to deliver the Lucent Common Stock upon maturity, upon
disposition of the Lucent Common Stock). In addition, the Kennelly Bill would
impose an interest charge on the gain that was recharacterized on the sale or
maturity of the STRIDES Securities (or the Lucent Common Stock received
thereon). As proposed, the Kennelly Bill would be effective for gains
recognized after the date of enactment. U.S. Holders should consult their tax
advisors regarding the potential application of the Kennelly Bill to the
purchase, ownership and disposition of a STRIDES Security.
NON-U.S. HOLDERS
Based on the treatment of each STRIDES Security as an investment unit
consisting of the Debt Instrument and the Forward Contract, in the case of a
non-U.S. Holder, payments of interest made with respect to the STRIDES
Securities should not be subject to United States withholding tax, provided
that such non-U.S. Holder complies with applicable certification requirements
and that such payments are not effectively connected with a United States
trade or business of such non-U.S. Holder. Any capital gain realized upon the
sale or other disposition of a STRIDES Security 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, or the gain is not attributable
to a fixed place of business maintained by such individual in the United
States and such individual does not have a "tax home" (as defined for United
States Federal income tax purposes ) in the United States.
As discussed above, alternative characterizations of the STRIDES Securities
for United States Federal income tax purposes are possible. Should an
alternative characterization of the STRIDES Securities, by reason of a change
or clarification of the law, by regulation or otherwise, cause payments with
respect to the STRIDES Securities to become subject to withholding tax, the
Company will withhold tax at the statutory rate. Prospective non-U.S. Holders
of the STRIDES Securities should consult their own tax advisors in this
regard.
BACKUP WITHHOLDING AND INFORMATION REPORTING
A beneficial owner of a STRIDES Security may be subject to information
reporting and to backup withholding at a rate of 31% 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.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the "New
Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1999, subject to certain transitional rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
S-24
<PAGE>
UNDERWRITING
MLPF&S (the "underwriter") has agreed, subject to the terms and conditions
of the Underwriting Agreement and a Terms Agreement, to purchase from the
Company $66,000,000 aggregate Principal Amount of STRIDES Securities. The
Underwriting Agreement provides that the obligations of the underwriter are
subject to certain conditions precedent and that the underwriter will be
obligated to purchase all of the STRIDES Securities if any are purchased.
The underwriter has advised the Company that it proposes initially to offer
all or part of the STRIDES Securities directly to the public at the offering
prices 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 STRIDES Securities subject to receipt and
acceptance and subject to the underwriter's right to reject any order in whole
or in part.
The underwriting of the STRIDES Securities will conform to the requirements
set forth in the applicable sections of Rule 2720 of the Conduct Rules of the
NASD.
In connection with the offering, the underwriter is permitted to engage in
certain transactions that stabilize the market price of the STRIDES
Securities. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the market price of the STRIDES Securities.
If the underwriter creates a short position in the STRIDES Securities in
connection with the offering, i.e., if they sell more Units of the STRIDES
Securities than are set forth on the cover page of this prospectus supplement,
the underwriter may reduce that short position by purchasing the Units of the
STRIDES Securities in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the market price of the security to be
higher than it might be in the absence of such purchases. Neither the Company
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 STRIDES Securities. In addition, neither the Company nor the
underwriter makes any representation that the underwriter will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
The underwriter may use this prospectus supplement and the accompanying
prospectus for offers and sales related to market-making transactions in the
STRIDES Securities. The underwriter 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.
VALIDITY OF THE STRIDES SECURITIES
The validity of the STRIDES Securities will be passed upon for the Company
and for the underwriter by Brown & Wood LLP, New York, New York.
S-25
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AMEX....................................................................... S-5
Beneficial Owner........................................................... S-16
Business Day............................................................... S-3
Calculation Agent.......................................................... S-5
Calculation Day............................................................ S-11
Calculation Period......................................................... S-11
Capped Value............................................................... S-1
Closing Price.............................................................. S-11
Company.................................................................... S-3
Components................................................................. S-21
Contingent Payment Regulations............................................. S-23
Debt Instrument............................................................ S-21
Depositary................................................................. S-16
Depositary Services........................................................ S-18
Direct Participants........................................................ S-17
DTC........................................................................ S-3
Ending Value............................................................... S-3
Exchange Act............................................................... S-4
Exchange Property.......................................................... S-15
ex-dividend date........................................................... S-14
Extraordinary Dividend..................................................... S-14
Extraordinary Dividend Amount.............................................. S-14
Forward Contract........................................................... S-21
Forward Contract Payment Amount............................................ S-22
Global Securities.......................................................... S-16
Indirect Participants...................................................... S-17
Industry................................................................... S-18
Interest Payment Date...................................................... S-3
IRS........................................................................ S-21
Kennelly Bill.............................................................. S-23
Lucent..................................................................... S-1
Lucent Common Stock........................................................ S-1
Market Disruption Event.................................................... S-11
Maturity Date.............................................................. S-3
MLPF&S..................................................................... S-5
NASD....................................................................... S-17
New Regulations............................................................ S-24
1983 Indenture............................................................. S-10
Non-U.S. Holder............................................................ S-21
NYSE....................................................................... S-3
Participant................................................................ S-16
Principal Amount........................................................... S-3
Redemption Amount.......................................................... S-3
Reorganization Event....................................................... S-15
Reorganization Event Value................................................. S-15
SEC........................................................................ S-4
Share Ratio................................................................ S-12
Spin-Off Event............................................................. S-15
Starting Value............................................................. S-3
</TABLE>
S-26
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STRIDES Securities......................................................... S-3
Successor Entity........................................................... S-14
Systems.................................................................... S-18
Tax Counsel................................................................ S-21
Trading Day................................................................ S-11
Transaction Value.......................................................... S-15
underwriter................................................................ S-25
Unit....................................................................... S-3
U.S. Holder................................................................ S-21
</TABLE>
S-27
<PAGE>
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[LOGO]
6,600,000 UNITS
MERRILL LYNCH & CO., INC.
5 3/4% STOCK RETURN INCOME DEBT SECURITIES SM
DUE JUNE 1, 2000
"STRIDES SM SECURITIES"
PAYABLE WITH COMMON STOCK OF LUCENT TECHNOLOGIES INC.
(OR CASH WITH AN EQUAL VALUE)
-----------------------------
PROSPECTUS SUPPLEMENT
-----------------------------
MERRILL LYNCH & CO.
NOVEMBER 24, 1998
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