EXHIBIT (4)
THIS PROCEEDS IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A
NOMINEE THEREOF. UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR
PROCEEDS IN CERTIFICATED FORM, THIS PROCEEDS MAY NOT BE TRANSFERRED EXCEPT AS
A WHOLE BY THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO A
NOMINEE OF DTC OR BY DTC OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITORY OR A
NOMINEE OF SUCH SUCCESSOR DEPOSITORY. UNLESS THIS PROCEEDS IS PRESENTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC TO ▇▇▇▇▇▇▇ ▇▇▇▇▇ & CO., INC. OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY PROCEEDS ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO
SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY
PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.
No. R-1 4,010,000 Units
CUSIP: ▇▇▇▇▇▇▇▇▇ (each Unit representing $10 principal
amount of PROtected Covered Call
EnhancED Income NoteS(SM))
▇▇▇▇▇▇▇ ▇▇▇▇▇ & CO., INC.
PROtected Covered Call EnhancED Income NoteS(SM)
Linked to the Energy Select Sector/Dow ▇▇▇▇▇-AIG Energy PROCEEDS Index
due December 7, 2010
(the "PROCEEDS")
▇▇▇▇▇▇▇ ▇▇▇▇▇ & Co., Inc., a Delaware corporation (hereinafter referred
to as the "Company", which term includes any successor corporation under the
Indenture herein referred to), for value received, hereby promises to pay to
CEDE & CO., or its registered assigns, for each Unit the Interest Amount (as
defined below) on each Interest Payment Date (as defined below). On December
7, 2010 (the "Stated Maturity"), the Company hereby promises to pay to CEDE &
CO., or its registered assigns, a sum for each Unit equal to the sum of the
principal amount of the PROCEEDS and the Supplemental Redemption Amount (as
defined below), if any.
Payment or delivery per Unit of the above-referenced principal amount of
the PROCEEDS and the Supplemental Redemption Amount, if any, and any interest
on any overdue amount thereof with respect to this PROCEEDS and the Interest
Amount, if any, shall be made at the office or agency of the Company
maintained for that purpose in the Borough of Manhattan, The City of New York,
in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts.
This PROCEEDS is one of the series of PROtected Covered Call EnhancED
Income NoteS(SM) Linked to the Energy Select Sector/Dow ▇▇▇▇▇-AIG Energy
PROCEEDS Index due December 7, 2010.
Interest
The Company shall pay interest, if any, on each Unit of the PROCEEDS
equal to the Interest Amount on the third Banking Business Day (as defined
below) following each Commencement Date (as defined below) (each, an "Interest
Payment Date") and on the Stated Maturity. A "Commencement Date" shall mean
the next Global Business Day (as defined below) following the Interest
Determination Date (as defined below) for each quarter. The Company shall pay
interest to the persons in whose names the PROCEEDS are registered at the
close of business on a "Regular Record Date", which shall be the Banking
Business Day succeeding the last day of the applicable Quarterly Calculation
Period (as defined below).
The "Interest Amount" shall be the amount determined by the Calculation
Agent (as defined below) as described in the definition of "Basket Unit
Income" and related definitions in Annex A in a notice provided to the Trustee
(as defined below) on or before the second Banking Business Day immediately
following the Interest Determination Date of the applicable Quarterly
Calculation Period.
"Quarterly Calculation Period" means the period from and including a
Commencement Date to, but excluding, the next Commencement Date, provided that
the initial Quarterly Calculation Period shall commence on, and include,
December 7, 2005 and the final Quarterly Calculation Period shall extend to,
and include, the Valuation Date (as defined below).
A "Banking Business Day" means any day other than a Saturday or Sunday
that is not a day on which banking institutions in The City of New York are
authorized or required by law, regulation or executive order to close.
"Business Day" shall be any day on which the New York Stock Exchange (the
"NYSE"), the American Stock Exchange, The Nasdaq Stock Market and the Chicago
Board of Trade are open for trading.
"Global Business Day" means any day which is an Index Business Day (as
defined below) for both Basket Indices (as defined below).
"Index Business Day" means, for each Basket Index, a day on which that
Basket Index or any successor index is calculated and published.
An "Interest Determination Date" means the second Friday of February,
May, August and November of each year, beginning February 10, 2006; provided
however, if that day is not a Global Business Day, than the Interest
Determination Date will be the next succeeding Global Business Day.
"Basket Indices" means the Energy Select Sector Index (the "Equity
Index") and the Dow ▇▇▇▇▇-AIG Energy Index (the "Commodity Index").
Payment on the Maturity Date
On the maturity date, a Holder shall receive a cash payment with respect
to each Unit of the PROCEEDS equal to the sum of:
2
(i) the principal amount of $10;
and
(ii) the Supplemental Redemption Amount, if any.
The "Supplemental Redemption Amount" with respect to each Unit of this
PROCEEDS shall be determined by the Calculation Agent and shall equal:
(Ending Value - Threshold Value)
$10 X (------------------------------)
( Threshold Value )
provided, however, that in no event shall the Supplemental
Redemption Amount be less than zero.
The "Ending Value" shall be determined by the Calculation Agent and shall
equal the closing level of the Reference Index (as defined in Annex A)
determined on the Valuation Date.
The "Threshold Value" equals 100.
The "Reference Index" has the meaning set forth in Annex A.
The "Valuation Date" shall be the seventh scheduled Global Business Day
before the Stated Maturity, or if that day is not a Global Business Day, the
next Global Business Day; provided, however, that if no Global Business Days
occur between the seventh scheduled Global Business Day before the Stated
Maturity and the second scheduled Global Business Day before the Stated
Maturity, the Valuation Date shall be the second scheduled Global Business Day
before the Stated Maturity, regardless of the occurrence of a Market
Disruption Event (as defined below).
"Calculation Agent" means ▇▇▇▇▇▇▇ ▇▇▇▇▇ International.
All determinations made by the Calculation Agent shall be made in good
faith and in a commercially reasonable manner by the Calculation Agent and,
absent a determination of a manifest error, shall be conclusive for all
purposes and binding on the Company, the Holders and the beneficial owners of
this PROCEEDS.
"Market Disruption Event" means either of the following events as
determined by the Calculation Agent:
(A) the suspension of or material limitation on trading for more than
two hours of trading, or during the one-half hour period preceding
the close of trading, on the applicable exchange (without taking
into account any extended or after-hours trading session), in 20% or
more of the stocks which then comprise the Equity Index, or any
successor index;
(B) the termination or suspension of, or material limitation or
disruption in, the trading of any exchange traded futures contract
used in the calculation of the Commodity Index;
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(C) the settlement price of any exchange traded futures contract used in
the calculation of the Commodity Index has increased or decreased by
an amount equal to the maximum permitted price change from the
previous day's settlement price; or
(D) the failure of an exchange to publish official settlement prices for
any exchange traded futures contract used in the calculation of the
Commodity Index.
For the purpose of determining whether a Market Disruption Event has
occurred:
(1) a limitation on the hours in a trading day and/or number of days of
trading shall not constitute a Market Disruption Event if it results
from an announced change in the regular business hours of the
applicable exchange;
(2) a limitation on trading imposed during the course of a day by reason
of movements in price otherwise exceeding levels permitted by the
applicable exchange shall constitute a Market Disruption Event;
(3) a decision to permanently discontinue trading in the relevant
futures or option contracts related to the Equity Index, or any
successor index, shall not constitute a Market Disruption Event;
(4) a suspension in trading in a futures or option contract on the
applicable Basket Index, or any successor index, by a major
securities market by reason of (a) a price change violating limits
set by that securities market, (b) an imbalance of orders relating
to those contracts or (c) a disparity in bid and ask quotes relating
to those contracts shall constitute a suspension or material
limitation of trading in futures or option contracts related to that
Basket Index;
(5) an absence of trading on the applicable exchange will not include
any time when that exchange is closed for trading under ordinary
circumstances; and
(6) for the purpose of clause (A) above, any limitations on trading
during significant market fluctuations under NYSE Rule 80B, or any
applicable rule or regulation enacted or promulgated by the NYSE or
any other self regulatory organization or the Securities and
Exchange Commission of similar scope as determined by the
Calculation Agent, will be considered "material".
General
This PROCEEDS is one of a duly authorized issue of Securities of the
Company, issued and to be issued under an Indenture, dated as of April 1,
1983, as amended and restated (herein referred to as the "Indenture"), between
the Company and JPMorgan Chase Bank, N.A., as Trustee (herein referred to as
the "Trustee", which term includes any successor Trustee under the Indenture),
to which Indenture and all indentures supplemental thereto reference is hereby
made for a statement of the respective rights thereunder of the Company, the
Trustee and the Holders of this PROCEEDS, and the terms upon which this
PROCEEDS are to be authenticated and delivered.
4
The Company hereby covenants for the benefit of the Holders of this
PROCEEDS, to the extent permitted by applicable law, not to claim voluntarily
the benefits of any laws concerning usurious rates of interest against a
Holder of this PROCEEDS.
This PROCEEDS is not subject to redemption by the Company or at the
option of the Holder prior to the Stated Maturity.
In case an Event of Default with respect to this PROCEEDS shall have
occurred and be continuing, the amount payable to a Holder of a PROCEEDS upon
any acceleration permitted by this PROCEEDS, with respect to each Unit hereof,
shall be equal to the amount payable on the Stated Maturity with respect to
such Unit, calculated as though the date of acceleration were the Stated
Maturity of this PROCEEDS, provided, however, the Index Adjustment Factor (as
defined in Annex A) shall be applied to the values used to calculate the
Supplemental Redemption Amount as if the PROCEEDS had not been accelerated and
had remained outstanding to the Stated Maturity.
In case of default in payment of this PROCEEDS, whether at any Interest
Payment Date, Stated Maturity or upon acceleration, from and after such date
this PROCEEDS shall bear interest, payable upon demand of the Holders of this
PROCEEDS, at the rate of 4.00% per annum on the unpaid amount due and payable
on such date in accordance with the terms of this PROCEEDS to the date payment
of such amount has been made or duly provided for.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series to be
affected under the Indenture at any time by the Company and the Trustee with
the consent of the Holders of not less than 66 2/3% in aggregate principal
amount of the Securities at the time Outstanding of each series affected
thereby. Holders of specified percentages in aggregate principal amount of the
Securities of each series at the time Outstanding, on behalf of the Holders of
all Securities of each series, are permitted to waive compliance by the
Company with certain provisions of the Indenture and certain past defaults
under the Indenture and their consequences. Any such consent or waiver by the
Holder of this PROCEEDS shall be conclusive and binding upon such Holder and
upon all future Holders of this PROCEEDS and of any PROCEEDS issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof
whether or not notation of such consent or waiver is made upon this PROCEEDS.
No reference herein to the Indenture and no provision of this PROCEEDS or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay any amount payable with respect to this
PROCEEDS and any interest on any overdue amount thereof at the time, place and
rate, and in the coin or currency herein prescribed.
As provided in the Indenture and subject to certain limitations set forth
therein and on the first page hereof, the transfer of this PROCEEDS may be
registered on the Security Register of the Company, upon surrender of this
PROCEEDS for registration of transfer at the office or agency of the Company
in the Borough of Manhattan, The City of New York, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company duly
5
executed by, the Holder hereof or by his attorney duly authorized in writing,
and thereupon one or more new PROCEEDS, of authorized denominations and for
the same aggregate principal amount, shall be issued to the designated
transferee or transferees.
The PROCEEDS are issuable only in registered form without coupons in
denominations of a single Unit and integral multiples thereof. This PROCEEDS
shall remain in the form of a global security held by a Depository.
Notwithstanding the foregoing, if (x) any Depository is at any time unwilling
or unable to continue as Depository and a successor depository 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 this PROCEEDS shall be
exchangeable or (z) an Event of Default has occurred and is continuing with
respect to this PROCEEDS, this PROCEEDS shall be exchangeable for PROCEEDS in
definitive form of like tenor and of an equal aggregate principal amount, in
denominations of a single Unit and integral multiples thereof. Such definitive
PROCEEDS shall be registered in such name or names as the Depository shall
instruct the Trustee. If definitive PROCEEDS are so delivered, the Company may
make such changes to the form of this PROCEEDS as are necessary or appropriate
to allow for the issuance of such definitive PROCEEDS.
No service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
tax or governmental charge payable in connection therewith.
The Company and each Holder or beneficial owner of this PROCEEDS, by
acceptance hereof, hereby agree to characterize and treat this PROCEEDS for
all tax purposes as a debt instrument that is subject to U.S. Treasury
Regulation section 1.1275-4(b) governing contingent payment debt instruments,
and, where required, the Company shall file information returns with the
Internal Revenue Service in accordance with this treatment, in the absence of
any change or clarification in the law, by regulation or otherwise, requiring
a different characterization or treatment of the PROCEEDS.
Prior to due presentment of this PROCEEDS for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name this PROCEEDS is registered as the owner hereof for
all purposes, whether or not this PROCEEDS be overdue, and neither the
Company, the Trustee nor any such agent shall be affected by notice to the
contrary.
All terms used in this PROCEEDS which are defined in the Indenture but
not in this PROCEEDS shall have the meanings assigned to them in the
Indenture.
Unless the certificate of authentication hereon has been executed by
JPMorgan Chase Bank, N.A., the Trustee under the Indenture, or its successor
thereunder, by the manual signature of one of its authorized officers, this
PROCEEDS shall not be entitled to any benefits under the Indenture or be valid
or obligatory for any purpose.
6
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated: December 7, 2005
CERTIFICATE OF AUTHENTICATION ▇▇▇▇▇▇▇ ▇▇▇▇▇ & Co., Inc.
This is one of the Securities
of the series designated therein [Copy of Seal]
referred to in the within-mentioned
Indenture.
JPMorgan Chase Bank, N.A., as Trustee By:
Assistant Treasurer
By: Attest:
Authorized Officer Secretary
7
ANNEX A
Additional Definitions
The "Reference Index" means the Energy Select Sector/Dow ▇▇▇▇▇-AIG Energy
PROCEEDS Index, a composite index that will track the performance of
hypothetical investments in two assets, the Basket Units (as defined below)
and the Zero Coupon Bond Units (as defined below), and one liability, the
Leverage Units (as defined below) (collectively, the "Index Components").
Provided that a Defeasance Event (as defined below) does not occur, the amount
of hypothetical funds allocated to each of the Index Components is expected to
vary over the term of the PROCEEDS. The Calculation Agent will adjust the
allocations systematically using the Reference Index formula described below.
The daily closing values of the Reference Index, the Basket Units and the
Zero Coupon Bond Units will be published on each Business Day on Reuters Page
▇▇▇▇▇▇▇▇▇ (or any successor page for the purpose of displaying those closing
values as identified by the Calculation Agent) and will be the respective
values determined as of approximately 4:00 p.m. (New York City time) on any
Business Day.
The level of the Reference Index and the daily closing values of each of
the Index Components will be calculated by the Calculation Agent. The level of
the Reference Index was set to 97 on December 1, 2005 (the "Pricing Date"),
with 76.80% of the hypothetical funds allocated to the Basket Units, 23.20% of
the hypothetical funds allocated to the Zero Coupon Bond Units and 0% of the
hypothetical funds allocated to the Leverage Units. Thereafter, the level of
the Reference Index on any Business Day will equal the sum of closing value of
the Basket Units in the Reference Index and the value of the Zero Coupon Bond
Units in the Reference Index, less the value of Leverage Units representing
hypothetical borrowed funds outstanding and reduced by a pro rata portion of
the Index Adjustment Factor (as defined below).
In addition, the level of the Reference Index will include the value of
the Basket Unit Income (as defined below), if any, if that income is to be
hypothetically reinvested in the Basket Units at the close of business on the
Commencement Date of the next Quarterly Calculation Period.
The level of the Reference Index on any day that is not a Business Day
will equal the level of the Reference Index on the previous day minus the
Index Adjustment Factor and the Daily Leverage Charge (as defined below) for
that day regardless of any changes in the levels of the Basket Indices on that
day.
At the close of business on the last day of each Quarterly Calculation
Period (except for the last Quarterly Calculation Period before the maturity
date) and after effecting any reallocation for that day, the Calculation Agent
will determine the Basket Unit Income. If, at that time, the level of the
Reference Index (less any Basket Unit Income) is less than 105% of the Floor
Level (as defined below), then the interest payment on the PROCEEDS for that
quarterly period will be zero. Under these circumstances, the Calculation
Agent will be deemed to hypothetically reinvest the Basket Unit Income at the
close of business on the Commencement Date of the next Quarterly Calculation
Period in additional Basket Units at a price per unit that does not include
that Basket Unit Income.
The level of the Reference Index will reflect a 1.15% per year annual
reduction (the "Index Adjustment Factor") that will be applied and accrue
daily against the level of the Reference Index to the benefit of the
Calculation Agent on the basis of a 365-day year from the date the PROCEEDS
are issued to the public through the Valuation Date. The Index Adjustment
Factor will remain at 1.15% per year for so long as any hypothetical funds are
allocated to Basket Units. If at any time that allocation is zero, the Index
Adjustment Factor will not apply.
To the extent that the hypothetical investment in the Basket Units is
leveraged (i.e., increased with hypothetical borrowed funds) through the use
of Leverage Units, the number of Leverage Units will be increased daily by an
amount equal to the interest expense deemed to have been incurred on those
funds (the "Daily Leverage Charge"). The Daily Leverage Charge will equal the
number of Leverage Units outstanding on the applicable day multiplied by the
one-month LIBOR on the applicable day plus 0.5%, divided by 360. This deemed
interest expense will reduce the level of the Reference Index on each day that
the Reference Index includes Leverage Units.
The Calculation Agent will deduct the "Basket Adjustment Factor" from the
closing value of the Index Basket (as defined below), thereby reducing the
value of the Basket Units. Because the level of the Reference Index is based
in part on the value of the Basket Units, the Basket Adjustment Factor will
reduce the level of the Reference Index. The Basket Adjustment Factor will
equal a pro rata amount equal to 1.0% per year of the daily value of the Index
Basket at the end of the previous day accrued daily on the basis of a 365-day
year and will be subtracted from the Basket Unit Income at the end of each day
prior to effecting any reallocation that day; provided, however, the value of
the Basket Adjustment Factor for any Quarterly Calculation period will not
exceed the value of the Basket Unit Income for that Quarterly Calculation
period. The hypothetical value of the Basket Adjustment Factor will accrue to
the benefit of the Calculation Agent. Because the Basket Adjustment Factor
reduces the value of the Index Basket, the return on an investment in the
"covered call" strategy represented by the Index Basket, and therefore the
Reference Index and the PROCEEDS, will be less than a return on a "covered
call" strategy on the Index Basket that did not include the Basket Adjustment
Factor.
If the value (including a closing value) of any component of the
Reference Index is unavailable on any Business Day because of a Market
Disruption Event or otherwise, unless deferred by the Calculation Agent as
described below, the Calculation Agent will determine the value of each Index
Component for which no value is available as follows:
o the level of the Equity Index when no level is available will be the
arithmetic mean, as determined by the Calculation Agent, of the
level of the Equity Index obtained from as many dealers in equity
securities (which may include ▇▇▇▇▇▇▇ Lynch, Pierce, ▇▇▇▇▇▇ & ▇▇▇▇▇
Incorporated ("MLPF&S") or any of our other subsidiaries or
affiliates), but not exceeding three of those dealers, as will make
that level available to the Calculation Agent;
o the level of the Commodity Index when no level is available will be
the arithmetic mean, as determined by the Calculation Agent, of the
level of the Commodity Index obtained from as many dealers in
commodities (which may include MLPF&S or any of our other
subsidiaries or affiliates), but not exceeding three of those
dealers, as will make that level available to the Calculation Agent;
o the value of the Zero Coupon Bond Units will be the arithmetic mean,
as determined by the Calculation Index, of the value of the
hypothetical bond tracked by the Zero Coupon Bond Units obtained
from as many dealers in fixed-income securities (which may include
MLPF&S or any of our other subsidiaries or affiliates), but not
exceeding three of those dealers, as will make that value available
to the Calculation Agent; and
o the value of any hypothetical call option related to a Basket Index
for which no value is available will be the arithmetic mean, as
determined by the Calculation Agent, of the offer prices of that
option obtained from as many dealers in options (which may include
MLPF&S or any of our other subsidiaries or affiliates), but not
exceeding three of those dealers, as will make that value available
to the Calculation Agent.
The Calculation Agent will use the levels of the Basket Indices and the
three-month generic U.S. government obligation yield, the divided yield and
the value of the hypothetical call options to determine the value of the
Basket Units. The Calculation Agent will then calculate the level of the
Reference Index and, if earlier than the Valuation Date, will determine
whether an Allocation Determination Event has occurred.
The determination of any of the above values or of an Allocation
Determination Event by the Calculation Agent in the event any of those values
is unavailable may be deferred by the Calculation Agent for up to ten
consecutive Business Days on which Market Disruption Events are occurring.
Following this period, the Calculation Agent will determine the relevant
values in consultation with the Company. No reallocation of the level of the
Reference Index will occur on any day the determination of any of the above
values is so deferred.
Each "Basket Unit" will track the value of an initial US$100 hypothetical
investment in the Index Basket.
2
"Basket Unit Income" means the hypothetical income, if any, deemed to be
derived from the Basket Units held in the Reference Index over each Quarterly
Calculation Period, and the level of the Reference Index at the end of that
period as described in the next paragraph. The Basket Unit Income will be
determined on the Interest Determination Date for that Quarterly Calculation
Period and will be based on (a) the yield on the hypothetical investment in
three-month U.S. government obligations, (b) the cash dividends in respect of
the stocks included in the Equity Index and (c) the value of premiums in
respect of call options on the Basket Indices. The Zero Coupon Bond Units and
the Leverage Units will not produce hypothetical income for purposes of the
interest payments on the PROCEEDS.
Interest
The interest payment on the PROCEEDS, if any, for any Quarterly
Calculation Period will be based on figures determined on the respective
Interest Determination Date and will equal:
Number of Basket Units x Adjusted Quarterly Income
provided the Calculation Agent determines that the level of the Reference
Index (less any Basket Unit Income) is greater than 105% of the Floor Level at
the close of business on the Interest Determination Date for any Quarterly
Calculation Period, except the last Quarterly Calculation Period before the
maturity date, for which any interest payment will be paid in addition to the
Supplemental Redemption Amount.
Interest will be calculated from, and including, each Commencement Date
to, but excluding, the next Commencement Date, provided that the initial
Quarterly Calculation Period will commence on, and include, December 7, 2005
and the final Quarterly Calculation Period will extend to, and include, the
Valuation Date. No interest will accrue on the PROCEEDS after the Valuation
Date. The interest payment date related to any Quarterly Calculation Period
with respect to which interest is paid will be the interest payment date
following the Interest Determination Date of the applicable Quarterly
Calculation Period or, with respect to the final Quarterly Calculation Period,
the stated maturity date. The Calculation Agent will notify the Trustee of the
amount of interest payable on or before the second Banking Business Day
immediately following the Interest Determination Date of the applicable
Quarterly Calculation Period. Interest will be payable to the persons in whose
names the PROCEEDS are registered at the close of business on the Banking
Business Day succeeding the last day of the applicable Quarterly Calculation
period.
If at the close of business on the Interest Determination Date of any
Quarterly Calculation period (except the last Quarterly Calculation period
before the maturity date) the Calculation Agent determines that the level of
the Reference Index (less any Basket Unit Income) is less than 105% of the
Floor Level, the Basket Unit Income relating to that Quarterly Calculation
period will be deemed invested in the Basket Units at the close of business on
the next Commencement Date (by increasing the number of Basket Units included
in the Reference Index) and no interest will be payable on the PROCEEDS on the
interest payment date relating to that Quarterly Calculation period.
If the amount allocated to the Basket Units is zero at any time during
the term of the PROCEEDS (either following a Allocation Determination Event or
a Defeasance Event), it will remain zero for the remaining term of the
PROCEEDS and no interest will be paid for the remaining term of the PROCEEDS.
The "Index Basket" is a hypothetical investment which employs a "covered
call" strategy in which (i) a hypothetical investment in each of the indices
in the Index Basket is purchased, (ii) the hypothetical investment in the
Commodity Index is fully collateralized with hypothetical three-month U.S.
government obligations and (iii) hypothetical call options on the Basket
Indices are sold on a quarterly basis for a three month term. The Basket
Indices will be initially equally weighted based upon their respective levels
and will be rebalanced annually. Full collateralization of the hypothetical
investment in the Commodity Index means full collateralization of the futures
contracts comprising the Commodity Index, which is achieved when hypothetical
assets equal to the notional values of such futures contracts at the time that
the Reference Index is rebalanced are posted as collateral.
3
The value of the Index Basket will also include the value of dividends on
the stocks included in the Equity Index, as well as the yield on the
hypothetical U.S. government obligations collateralizing the Commodity Index.
The "dividend yield" for the Equity Index is determined by annualizing, for
each stock included in the Equity Index, the last quarterly, semiannual or
annual ordinary cash dividend for which the ex-dividend date has occurred,
excluding any extraordinary dividend, summing the result and then dividing
that result by the last available level of that Basket Index on the date that
dividend yield is to be determined. The yield of the hypothetical three-month
U.S. government obligations will be based upon the three-month generic U.S.
government obligation yield (symbol: USGG3M) as published by Bloomberg.
The Index Multipliers will be recalculated by the Calculation Agent on
the Interest Determination Date for the Quarterly Calculation period of each
year during which the anniversary of the Pricing Date occurs (the "Annual
Rebalancing Date"). The "Index Multiplier" is set so that each Basket Index
represents approximately an equal percentage of the Index Basket as of the
Annual Rebalancing Date.
The hypothetical three-month U.S. government obligations are intended to
represent a full collateralization of the hypothetical investment in the
Commodity Index, and as such, the notional value of the hypothetical
three-month U.S. government obligations will adjust quarterly during the
rollover periods for the futures contracts underlying the hypothetical
investment in the Commodity Index to match their new notional values.
In order to preserve the continuity of the value of the Index Basket, if
any hypothetical call option has a value greater than zero at expiration, the
Index Multiplier of the related Basket Index will be reduced by an amount
that, when multiplied by the closing level of the related Basket Index on the
last Index Business Day of the quarterly period, equals the value of the
hypothetical option at expiration.
The value of the Index Basket will be calculated at the close of business
on each Business Day by the Calculation Agent and published on Reuters Page
▇▇▇▇▇▇▇▇▇ (or any successor page for the purpose of displaying that value as
identified by the Calculation Agent). The value of the Index Basket will be
equal to 100 on the Pricing Date. The value of the Index Basket on each
Business Day will equal the sum of the closing levels of the Basket Indices
and the Adjusted Quarterly Income, less the Current Option Value. The value of
the Index Basket on any day that is not a Business Day will equal the value of
the Index Basket on the previous Business Day as reduced by the pro rata
portion of the Basket Adjustment Factor for that day.
If any hypothetical call option has a value greater than zero at
expiration, the value of that option will be removed from the value of the
Index Basket at the close of business on the day the option expires. In order
to preserve the continuity of the value of the Index Basket following any
removal, the contributing value of the related Basket Index to the Index
Basket will be reduced by an amount equal to the value of the option at
expiration. This reduction will be effected by decreasing the Index Multiplier
of the related Basket Index by an amount that, when multiplied by the
equivalent of the closing level of the related Basket Index on the Interest
Determination Date of the Quarterly Calculation Period, equals the value of
the hypothetical option at expiration. The reduction of the Index Multiplier
of a Basket Index under these circumstances will reduce the contributing value
of the Basket Index to the Index Basket. Because these reductions will have
the effect of ensuring the continuity of the value of the Index Basket, they
will not result in Allocation Determination Events. The reduced Index
Multiplier will be used to calculate the value of the Index Basket, and thus
the value of the Basket Units, through the following. Quarterly Calculation
Period.
The value of a cash dividend or distribution will be included in the
Basket Unit Income at the close of business on the ex-dividend date for that
dividend or distribution. The value of interest in respect of hypothetical
three-month U.S. government obligations will be included in the Basket Unit
Income at the close of business on the date on which it is accrued. The value
of premiums in respect of hypothetical call options will be included in the
Basket Unit Income at the close of business on the day on which the
hypothetical call option is priced.
The Basket Unit Income will be removed from the value of the Index Basket
at the close of business on the Interest Determination Date of the related
Quarterly Calculation Period. The Basket Unit Income will be zero until
hypothetical call options are priced during the following Quarterly
Calculation Period, any interest is accrued or until the next ex-dividend date
for a stock included in a Basket Index. The removal of Basket Unit Income will
4
reduce the value of the Index Basket and may therefore cause an Allocation
Determination Event in which the allocation to the Basket Units is reduced,
even if the levels of the Basket Indices have not fallen.
If at any time the publisher of a Basket Index (each an "Index
Publisher") makes a material change in the formula for or the method of
calculating its respective Basket Index or any successor index or in any other
way materially modifies that index so that the index does not, in the opinion
of the Calculation Agent, fairly represent the level of that index had those
changes or modifications not been made, then, from and after that time, the
Calculation Agent will, at the close of business in New York, New York, on
each date that the closing level of that index is to be calculated, make any
adjustments as, in the good faith judgment of the Calculation Agent, may be
necessary in order to arrive at a calculation of a level of a stock index
comparable to that index as if those changes or modifications had not been
made, and calculate the closing level with reference to that index, as so
adjusted. Accordingly, if the method of calculating a Basket Index or
successor index is modified so that the level of that index is a fraction or a
multiple of what it would have been if it had not been modified, e.g., due to
a split, then the Calculation Agent will make appropriate adjustments to that
index in order to arrive at a level of that index as if it had not been
modified, e.g., as if a split had not occurred.
If an Index Publisher discontinues publication of its respective Basket
Index and the Index Publisher or another entity publishes a successor or
substitute index that the Calculation Agent determines, in its sole
discretion, to be comparable to that Basket Index (a "successor index"), then,
upon the Calculation Agent's notification of that determination to the Trustee
and the Company, the Calculation Agent will substitute the successor index as
calculated by the relevant Index Publisher or any other entity for that Basket
Index and calculate the Ending Value. Upon any selection by the Calculation
Agent of a successor index, the Company will cause notice to be given to
holders of the PROCEEDS.
In the event that an Index Publisher discontinues publication of its
respective Basket Index and:
o the Calculation Agent does not select a successor index; or
o the successor index is not published on the Valuation Date,
the Calculation Agent will compute a substitute level for that Basket Index in
accordance with the procedures last used to calculate that Basket Index before
any discontinuance. If a successor index is selected or the Calculation Agent
calculates a level as a substitute for that Basket Index as described below,
the successor index or level will be used as a substitute for that Basket
Index for all purposes, including the purpose of determining whether a Market
Disruption Event exists.
If an Index Publisher discontinues publication of its respective Basket
Index before the Valuation Date and the Calculation Agent determines that no
successor index is available at that time, then on each Business Day until the
earlier to occur of:
o the determination of the Ending Value; or
o a determination by the Calculation Agent that a successor index is
available,
the Calculation Agent will determine the value that would be used in computing
the Supplemental Redemption Amount as described in the preceding paragraph as
if that day were the Valuation Date. The Calculation Agent will cause notice
of each value to be published not less often than once each Quarterly
Calculation period in The Wall Street Journal or another newspaper of general
circulation and arrange for information with respect to these values to be
made available by telephone.
Notwithstanding these alternative arrangements, discontinuance of the
publication of a Basket Index may adversely affect trading in, or the trading
value of, the PROCEEDS.
Each "Zero Coupon Bond Unit" will track the value of a $100 face value
hypothetical investment in a hypothetical zero coupon bond maturing on the
scheduled Valuation Date with a yield equal to the applicable zero
5
coupon yield based upon USD swap rates as published on Bloomberg Page EDS. The
applicable zero coupon yield will be estimated from the USD swap rate yields
corresponding to the published maturities closest in time to the scheduled
Valuation Date. The Calculation Agent may, when necessary, estimate the
applicable zero coupon yield by interpolating the appropriate USD swap rate
yields based on those published maturities. The Zero Coupon Bond Units will
bear no interest after the scheduled Valuation Date.
Each "Leverage Unit" will track the value of US$1 of hypothetical
borrowings used to increase the exposure to the Basket Units. To the extent
that exposure to the Basket Units is leveraged (i.e., increased with borrowed
funds) through the use of Leverage Units, the number of Leverage Units will be
increased daily by an amount equal to the Daily Leverage Charge. The Daily
Leverage Charge will reduce the level of the Reference Index.
A "Defeasance Event" will have been deemed to have occurred if the
Cushion (as defined below) is less than 1% on any Business Day. Upon the
occurrence of a Defeasance Event, no hypothetical funds will be allocated to
the Basket Units for the remaining term of the PROCEEDS, even if at the close
of business on that Business Day the value of the Cushion is greater than 1%.
If, at the time of a Defeasance Event, the amount resulting from the
hypothetical sale of the Basket Units added to the value of the Zero Coupon
Bond Units in the Reference Index is greater than the Floor Level, then that
excess amount will be allocated in Zero Coupon Bond Units and the Reference
Index will track the value of one Zero Coupon Bond Unit plus this additional
excess amount for the remaining term of the PROCEEDS. If the amount resulting
from the hypothetical sale of the Basket Units added to the value of the Zero
Coupon Bond Units in the Reference Index is equal to or less than the Floor
Level, then the Reference Index will track the value of one Zero Coupon Bond
Unit for the remaining term of the PROCEEDS.
Because the amount of the interest payments on the PROCEEDS will depend
on the performance of the Basket Units in the Reference Index, no interest
will be paid for the remaining term of the PROCEEDS after the occurrence of a
Defeasance Event. In addition, the Reference Index will not participate in any
subsequent increase in the value of the Basket Units and your payment on the
maturity date will be limited to the $10 principal amount per unit (except as
described in the first sentence of the immediately preceding paragraph).
An "Allocation Determination Event" will occur and a reallocation will be
effected if the absolute value of the difference in (i) the closing value of
the Basket Units in the Reference Index divided by the closing level of the
Reference Index on any Business Day and (ii) the Targeted Exposure is greater
than 5% of the Targeted Exposure. In general, the Targeted Exposure may
increase following increases in the value of the Basket Units or decreases in
the Floor Level (due to interest rate increases). Using Leverage Units, the
Targeted Exposure may equal up to 150% (the "Maximum Leverage"). In general,
the Targeted Exposure may decrease following decreases in the value of the
Index Basket or increases in the Floor Level (due to interest rate decreases).
The Calculation Agent will determine whether an Allocation Determination
Event has occurred at the beginning of each Business Day up to and including
the Valuation Date. For purposes of determining an Allocation Determination
Event, the value of hypothetical call options in the Index Basket will be
determined using mid-market implied volatility (or the arithmetic mean of
bid-side and offered-side implied volatility).
The Calculation Agent may defer the determination of the values of the
Basket Units and the Zero Coupon Bond Units for up to ten consecutive Business
Days on which Market Disruption Events are occurring. Following this deferral
period, the Calculation Agent will determine the values of the Basket Units
and the Zero Coupon Bond Units. No reallocation of the hypothetical funds
tracked by the Reference Index will occur on any day the determination of the
value of the Basket Units and the Zero Coupon Bond Units is deferred by the
Calculation Agent.
If the Calculation Agent determines that an Allocation Determination
Event has occurred, the Calculation Agent will determine the Targeted
Exposure, or the percentage of the hypothetical funds that must be allocated
to the Basket Units pursuant to the formula. The Targeted Exposure will be
determined on the basis of values at the close of business on the previous
Business Day. At the close of business on the Business Day on which an
Allocation Determination Event has occurred, the Calculation Agent will
reallocate the hypothetical funds.
6
Reallocations may involve hypothetical sales and purchases of Basket
Units and Zero Coupon Bond Units. The number of Basket Units to be
hypothetically sold or purchased will be determined by the Calculation Agent
at the beginning of each Business Day on which the Calculation Agent has
determined that an Allocation Determination Event has occurred. However, those
hypothetical sales or purchases will be effected at the values (as determined
by the Calculation Agent) of Basket Units and Zero Coupon Bond Units at the
close of business on the date of reallocation. Any reallocation on the
Interest Determination Date of any Quarterly Calculation Period will be
effected through the hypothetical purchase or sale of Basket Units at a price
that includes the Basket Unit Income for that Quarterly Calculation Period.
Hypothetical purchases of Basket Units will be made at prices that reflect the
value of call options determined using bid-side implied volatility and
hypothetical sales of Basket Units will be made at prices that reflect the
value of call options determined using offered-side implied volatility.
If the reallocation results in an increased percentage of hypothetical
funds tracked by the Reference Index allocated to the Basket Units, the
reallocation will involve the hypothetical sale of Zero Coupon Bond Units and
the hypothetical purchase of Basket Units with the hypothetical proceeds of
the sale. Any purchase of Basket Units that cannot be effected through the
sale of Zero Coupon Bond Units will be effected using the Leverage Units. The
Leverage Units will be increased by the amount necessary to purchase the
Basket Units, subject to the Maximum Leverage.
The hypothetical sale of Zero Coupon Bond Units will be made at prices
that reflect the value of zero coupon bonds determined using relevant
offered-side swap rates. The hypothetical purchase of Zero Coupon Bond Units
will be made at prices that reflect the value of zero coupon bonds determined
using relevant bid-side swap rates.
If the reallocation results in a decreased percentage of hypothetical
funds tracked by the Reference Index allocated to the Basket Units, the
reallocation will involve the hypothetical sale of Basket Units. The
hypothetical proceeds of this sale will be used first to reduce any allocation
to the Leverage Units to zero and then to make hypothetical purchases of Zero
Coupon Bond Units.
The number of Basket Units and Zero Coupon Bond Units in the Reference
Index will then be adjusted to reflect the units hypothetically sold or
purchased as a result of the reallocation.
The Calculation Agent will determine whether an Allocation Determination
Event has occurred and, if so, the Targeted Exposure based on the values of
the Reference Index, the Basket Units and the Floor Level at the close of
business on the previous Business Day and any necessary reallocation will be
effected at the close of business on the Business Day on which the occurrence
of the Allocation Determination Event is determined. As a result:
o the Calculation Agent may determine that an Allocation Determination
Event has occurred even if the values of the Reference Index, the
Index Basket and the Floor Level at the time the reallocation is
effected would not result in an Allocation Determination Event;
o the Reference Index will be exposed to a greater extent of the
losses on the Basket Units between the determination of the
occurrence of an Allocation Determination Event and the resulting
reallocation as it would if a reallocation were effected immediately
following determination of the Targeted Exposure;
o the Reference Index will not participate as fully in any
appreciation of the Basket Units that occurs between the
determination of the occurrence of an Allocation Determination Event
and the resulting reallocation as it would if the reallocation were
effected immediately following determination of the Targeted
Exposure; and
o the Calculation Agent may effect a greater or lesser allocation to
the Basket Units than otherwise would be required if the occurrence
of an Allocation Determination Event were determined by the
Calculation Agent at the end of that Business Day.
7
If the amount allocated to the Basket Units falls to zero at any time, it
will remain zero for the remaining term of the PROCEEDS and the reallocation
procedures described in this section will no longer apply. If the value of the
Basket Units subsequently increases, the Reference Index will not participate
in that increase.
If at any time during any Index Business Day the level of either Basket
Index has declined from its closing level on the previous Index Business Day
by 10% or more, the Calculation Agent, as soon as reasonably practicable, will
determine the Targeted Exposure and reallocate the hypothetical funds tracked
by the Reference Index at the close of business on the Business Day that
decline is determined so that the percentage of hypothetical funds invested in
the Basket Units is as close as is reasonably practicable to the Targeted
Exposure. This reallocation will be effected even if an Allocation
Determination Event has not occurred and, if an Allocation Determination Event
was determined to have occurred at the beginning of that Business Day, the
reallocation of hypothetical funds determined in connection with that
Allocation Determination Event will be disregarded.
The target allocation of hypothetical funds tracked by the Reference
Index to the Basket Units (the "Targeted Exposure") upon the occurrence of an
Allocation Determination Event will depend on the last available closing level
of the Reference Index (the "Last Value"), the Floor Level and the Trading
Multiple, and is subject to the Maximum Leverage.
The Targeted Exposure will equal:
Cushion x Trading Multiple,
provided, the Targeted Exposure cannot be greater than 150% or less than 0%.
If the Targeted Exposure is greater than 100%, the hypothetical borrowed
funds necessary to make the hypothetical investment in the Basket Units in
excess of 100% of the level of the Reference Index will be obtained through
the allocation to the Leverage Units.
The "Cushion" equals: (Last Value minus the Floor Level)/Last Value;
provided, however, that in no instance will the Cushion be less than zero.
The "Floor Level" for any date will equal the value of a hypothetical
zero coupon bond maturing on the scheduled Valuation Date with a yield equal
to the applicable zero coupon yield based upon USD swap rates, plus the Fee
Protection Factor, if any.
The "Trading Multiple" is set at 4.0.
"ZCBU Value" means the then current value of the Zero Coupon Bond Units.
The "Zero Coupon Bond Unit Contribution" equals:
(10% - ((Last Value - ZCBU Value) / Last Value)) / 9%
provided, however, that in no instance will the Zero Coupon Bond Unit
Contribution be less than zero or greater than one. Upon the occurrence of a
Defeasance Event where the amount resulting from the hypothetical sale of the
Basket Units added to the value of the Zero Coupon Bond Units in the Reference
Index is greater than the Floor Level, the Zero Coupon Bond Unit Contribution
will equal one.
The "Fee Protection Factor" will increase the Floor Level when the then
current ZCBU Value equals 90% or more of the Last Value. In that case, the
Floor Level will be increased upon the occurrence of an Allocation
Determination Event by an amount equal to:
.20 x the number of years to the maturity date x Zero Coupon Bond
Unit Contribution
where the number of years to the maturity date allows for fractional years.
8
The "Current Option Value" is the sum of the mark-to-market value of each
hypothetical call option and will be determined by the Calculation Agent at
the close of business on each Business Day using accepted option valuation
methods. The valuation methods take into account variables such as:
o the closing level of the related Basket Index as of the time the
hypothetical call option is valued;
o the cumulative normal distribution function (a fixed statistical
function), which determines the probability of a variable falling
within a given range under specified conditions;
o the exercise price of the hypothetical call option;
o in the case of the Equity Index, the computed continuously
compounded annualized current dividend yield on the Equity Index
based on expected dividends;
o the U.S. dollar interest rate as of the time the hypothetical call
option is valued, converted into a continuously compounded rate; and
o the implied volatility of the related Basket Index (determined by
the Calculation Agent as described below).
At the time the hypothetical call option is priced, the interest rate
will equal LIBOR as calculated and published at that time by Bloomberg
Financial Markets, or another recognized source selected by the Calculation
Agent at that time, based on the time to maturity of that hypothetical call
option. During the remaining term of the hypothetical call option, the
interest rate will equal the published interest rate for a term identical to
the remaining term of the hypothetical call option. If an interest rate for a
term identical to the remaining term of the hypothetical call option is not
published, the Calculation Agent will determine the interest rate used to
compute the value of an option by interpolating between the published rate for
a shorter term nearest to the term of the hypothetical call option and the
published rate for a longer term nearest to the term of the hypothetical call
option. All interest rates will be converted by the Calculation Agent into a
rate compounded on a continuous basis.
The annualized current dividend yield for the Equity Index on which an
option is priced will be calculated on any Business Day by annualizing (based
on a 365-day year) to the end of that Quarterly Calculation Period the result
obtained by summing the ordinary dividend or dividends historically paid by
each issuer of a stock included in that Basket Index during the most recent
period corresponding to the current Quarterly Calculation Period (or if the
issuer of that stock has publicly disclosed that any dividend payable during
the Quarterly Calculation Period in which the hypothetical call option is
being priced will be a different amount than the most recent corresponding
historical dividend, the amount publicly disclosed by that issuer) and then
dividing that result by the closing level of the Equity Index on that day. The
annualized current dividend yield for any stock included in the Equity Index
on which an option is priced will be zero:
o for the remainder of each Quarterly Calculation Period following the
ex-dividend date for that stock corresponding to the final
ex-dividend date in the most recent period corresponding to the
current Quarterly Calculation Period; and
o in each Quarterly Calculation Period in which an ordinary dividend
has not been payable historically (because the dividend is payable
annually, semiannually, quarterly or otherwise),
in either case, unless and until the issuer of that stock publicly discloses a
dividend payable during the remainder of that Quarterly Calculation Period, in
which case the annualized current dividend yield will be calculated using the
amount publicly disclosed by that issuer.
The implied volatility of a hypothetical call option on any Business Day
is:
o when hypothetically purchasing Basket Units, the bid-side implied
volatility;
9
o when hypothetically selling Basket Units, the offered-side implied
volatility; and
o under all other circumstances, the mid-market implied volatility
(i.e., the arithmetic mean of the bid-side and offered-side implied
volatility)
of the relevant Basket Index as determined by the Calculation Agent by
interpolating from the implied volatility surface for the most comparable call
options listed on the AMEX, the Chicago Board Options Exchange, the
International Securities Exchange or other applicable exchanges on the
relevant Basket Index as determined by the Calculation Agent in accordance
with option pricing methodologies selected by the Calculation Agent, taking
into account the nearest exercise price and maturity and using the interest
rate and dividend yield determined as described above.
If no value of a hypothetical call option is available on any date
because of a Market Disruption Event, because the Calculation Agent determines
that the market for the listed options described above is not sufficiently
liquid (based upon factors including, but not limited to, the time elapsed
since the last trade in options relating to the relevant Basket Index, the
size of the open interest in call options with related exercise prices and
maturities relating to that Basket Index and the size of the bid-offer
relative to the number of hypothetical options related to that Basket Index to
be priced on that day in respect of the PROCEEDS then outstanding) for the
purpose of calculating the implied volatility of any hypothetical call option
or otherwise, or if the reported prices for the listed options described above
contain or are the result of manifest error, unless deferred by the
Calculation Agent as described in the next paragraph, the value of that
hypothetical call option will be the arithmetic mean, as determined by the
Calculation Agent, of the value of that option obtained from as many dealers
in options (which may include MLPF&S or any of our other subsidiaries or
affiliates), but not exceeding three of these dealers, as will make that value
available to the Calculation Agent.
The Calculation Agent may defer the determination of the values of the
hypothetical call options for up to ten consecutive Business Days on which
Market Disruption Events are occurring. Following this period, the Calculation
Agent will determine the values of the hypothetical call options in
consultation with the Company. No determination of the value of the Index
Basket or reallocation of hypothetical funds in the Reference Index will occur
on any day the determination of the values of the hypothetical call options is
deferred by the Calculation Agent.
The Calculation Agent will price hypothetical cash-settled call options
relating to each of the Basket Indices on a quarterly basis for a three month
term, beginning on the Pricing Date. Hypothetical call options on each Basket
Index will be priced on the Commencement Date of each Quarterly Calculation
Period. The value of the hypothetical call options relating to a Basket Index
will correlate to the value of the notional amount of that Basket Index used
to calculate the value of the Index Basket on the day the options are priced.
Each hypothetical call option will:
o expire on the Interest Determination Date of the Quarterly
Calculation Period;
o be automatically settled on the Interest Determination Date of the
Quarterly Calculation Period if the closing level of that Basket
Index on that day exceeds the exercise price; and
o have an exercise price greater than or equal to 105% of the closing
level of the related Basket Index on the day the hypothetical call
option is priced.
The exercise price of each hypothetical call option will be determined
through the bidding process described below. Before seeking bids on the
exercise price of a hypothetical call option, the Calculation Agent will
determine the option's Targeted Quarterly Premium. Once the Calculation Agent
has determined the Targeted Quarterly Premium for a hypothetical call option,
it will seek exercise prices for that hypothetical call option from as many
dealers in options (which may include MLPF&S or any of our other subsidiaries
or affiliates), but not exceeding five of those dealers, as will make bid
prices available to the Calculation Agent. The exercise price for the
hypothetical call option will equal the highest exercise price quoted by these
dealers or, in the Calculation Agent's
10
absolute discretion, any higher exercise price as the Calculation Agent
determines to be quoted by another principal market participant, and the value
of this hypothetical call option and the related Targeted Quarterly Premium
will be included in the value of the Index Basket at close of business on the
day the hypothetical call option is priced.
If the highest exercise price bid is less than 105% of the closing level
of the related Basket Index on the day the hypothetical call option is priced,
the Calculation Agent will set the exercise price of the hypothetical call
option at 105% of the closing level of the related Basket Index on the day the
hypothetical call option is priced and will seek quotations for premiums for
the hypothetical call option from as many dealers in options (which may
include MLPF&S or any of our other subsidiaries or affiliates), but not
exceeding five of those dealers, as will make bid prices available to the
Calculation Agent. The premium for the hypothetical call option will equal the
highest premium quoted by these dealers or, in the Calculation Agent's
absolute discretion, any higher exercise price as the Calculation Agent
determines to be quoted by another principal market participant, and the value
of this hypothetical call option and the related premium will be included in
the value of the Index Basket at the close of business on the day the
hypothetical call option is priced. Under these circumstances, the Basket Unit
Income will be less than it would have been if the highest exercise price bid
had been greater than or equal to 105% of the closing level of the related
Basket Index on the day the hypothetical call option was priced, except, in
the case of the Equity Basket Unit, to the extent that the value of the
dividends on the stocks included in the Basket Indices are higher than the
value of the historical dividends on those stocks by an amount sufficient to
offset the difference between the actual Basket Unit Income and the Basket
Unit Income that would have resulted if the premium in respect of each
hypothetical call option had been equal to its Targeted Quarterly Premium.
In seeking exercise prices or premiums from dealers in options in respect
of hypothetical call options relating to either of the Basket Indices, the
Calculation Agent may reject any exercise price or premium that does not meet
the requirements for hypothetical call options stated above or that relates to
a notional amount of the related Basket Index that is different than the
notional amount of that Basket Index used to calculate the value of the Index
Basket with respect to the outstanding number of PROCEEDS at the close of
business on the Index Business Day for the related Basket Index prior to the
date on which the options are priced.
The level of any Basket Index on any Index Business Day for that Basket
Index will be the level as published by the applicable Index Publisher. The
level of any Basket Index on any day that is not an Index Business Day for
that Basket Index where a Market Disruption Event has not occurred will equal
the level of that Basket Index on the previous Index Business Day.
The terms of the hypothetical call options will provide for adjustments
to reflect the occurrence of a modification affecting a Basket Index (such as,
for example, a split).
The "Adjusted Quarterly Income" will equal the sum of the hypothetical
income related to each of the Basket Indices (the "Quarterly Income"), reduced
by the pro rata portion of the Basket Adjustment Factor. The Quarterly Income
for the Equity Index will be the sum of (i) the cash dividends per share in
respect of the stocks included in the Equity Index during that Quarterly
Calculation Period and the Targeted Quarterly Premium, less the Premium
Adjustment, if any, multiplied by the applicable Index Multiplier and (ii) the
value of premiums in respect of hypothetical call options. The Quarterly
Income for the Commodity Index will be the sum of (i) the interest accrued
daily from and including the Commencement Date of the relevant period to, but
excluding, the Commencement Date of the next period on the notional amount of
hypothetical three-month U.S. government obligations hypothetically held as
collateral based on the three-month generic U.S. government obligation yield
(symbol: USGG3M) as published by Bloomberg and the Targeted Quarterly Premium,
less the Premium Adjustment, if any, multiplied by the applicable Index
Multiplier and (ii) the value of premiums in respect of hypothetical call
options.
The "Targeted Quarterly Premium" equals the adjusted annual target yield
less the dividend yield or the Treasury yield, as the case may be, as
determined by the Calculation Agent on that Basket Index on the Commencement
Date of that Quarterly Calculation Period, multiplied by the closing level of
that Basket Index on the day the hypothetical call option is priced, divided
by 4. The adjusted annual target yield is obtained by increasing the annual
target yield of 10% on the Index Basket on the Commencement Date of each
Quarterly Calculation Period by an amount intended to, but which may or may
not, offset the value of the Basket Adjustment Factor. The
11
annual target yield has the rate described above, and does not represent a
guarantee, representation or estimate of the actual annual yield of the
PROCEEDS.
If the highest exercise price bid for any option is less than 105% of the
closing level of the related Basket Index on the day the hypothetical call
option is priced, a premium adjustment will be subtracted from the cash
dividends and the Targeted Quarterly Premium. A "Premium Adjustment" is the
difference between the Targeted Quarterly Premium in respect of that Basket
Index and the actual highest quarterly premium in respect of that hypothetical
call option with an exercise price equal to 105% of the closing level of that
Basket Index.
12
