SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 4, 2006
Merrill Lynch & Co., Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 1-7182 13-2740599
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(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
4 World Financial Center, New York, New York 10080
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 449-1000
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(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of
the following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 8.01. Other Events
Exhibits are filed herewith in connection with the Registration Statement
on Form S-3 (File No. 333-122639) filed by Merrill Lynch & Co., Inc. (the
"Company") with the Securities and Exchange Commission covering Senior Debt
Securities issuable under an indenture dated as of April 1, 1983, as amended
through the date hereof, between the Company and JPMorgan Chase Bank, N.A. (as
so amended, the "Indenture"). The Company shall issue $52,000,000 aggregate
principal amount of PROtected Covered Call EnhancED Income NoteSSM Linked to
the Value Line 30 PROCEEDS Index, Series 2, due January 4, 2011 under the
Indenture. The exhibits consist of the form of Securities and an opinion of
counsel relating thereto.
Item 9.01. Financial Statements, Pro Forma Financial Information and Exhibits
EXHIBITS
(4) Instruments defining the rights of
security holders, including
indentures.
Form of Merrill Lynch & Co.,
Inc.'s PROtected Covered Call
EnhancED Income NoteSSM Linked to
the Value Line 30 PROCEEDS Index,
Series 2, due January 4, 2011.
(5) & (23) Opinion re: legality; consent of counsel.
Opinion of Sidley Austin LLP
relating to the PROtected Covered
Call EnhancED Income NoteSSM
Linked to the Value Line 30
PROCEEDS Index, Series 2, due
January 4, 2011 (including consent
for inclusion of such opinion in
this report and in Merrill Lynch &
Co., Inc.'s Registration Statement
relating to such Securities).
2
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
MERRILL LYNCH & CO., INC.
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(Registrant)
By: /s/ John Laws
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John Laws
Assistant Treasurer
Date: January 4, 2006
3
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
MERRILL LYNCH & CO., INC.
EXHIBITS TO CURRENT REPORT ON
FORM 8-K DATED JANUARY 4, 2006
Commission File Number 1-7182
Exhibit Index
Exhibit No. Description Page
(4) Instruments defining the rights of security holders,
including indentures.
Form of Merrill Lynch & Co., Inc.'s
PROtected Covered Call EnhancED Income
NoteSSM Linked to the Value Line 30
PROCEEDS Index, Series 2, due January 4,
2011.
(5) & (23) Opinion re: legality; consent of counsel.
Opinion of Sidley Austin LLP relating to
the PROtected Covered Call EnhancED Income
NoteSSM Linked to the Value Line 30
PROCEEDS Index, Series 2, due January 4,
2011 (including consent for inclusion of
such opinion in this report and in Merrill
Lynch & Co., Inc.'s Registration Statement
relating to such Securities).
2
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 MERRILL LYNCH & 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 5,200,000 Units
CUSIP: 59021V748 (each Unit representing $10 principal
amount of PROtected Covered Call
EnhancED Income NoteSSM)
MERRILL LYNCH & CO., INC.
PROtected Covered Call EnhancED Income NoteSSM
Linked to the Value Line 30 PROCEEDS Index, Series 2
due January 4, 2011
(the "PROCEEDS")
Merrill Lynch & 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
January 4, 2011 (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 NoteSSM Linked to the Value Line 30 PROCEEDS Index, Series 2, due
January 4, 2011.
Interest
The Company shall pay interest, if any, on each Unit of the PROCEEDS
equal to the Interest Amount on the third scheduled Banking Business Day (as
defined below) following each Commencement Date (as defined below) (each, an
"Interest Payment Date"). A "Commencement Date" shall mean the third Friday of
each February, May, August and November, beginning February 17, 2006. 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 immediately succeeding the last day of the applicable
Quarterly Calculation Period (as defined below). If an Interest Payment Date
falls on a day that is not a Banking Business Day, the Interest Amount
payment, if any, to be made on such day shall be made on the next succeeding
Banking Business Day with the same force and effect as if made on such
Interest Payment Date, and no additional interest shall be paid as a result of
such delayed payment.
The "Interest Amount" shall be the amount determined by the
Calculation Agent (as defined below) in a notice provided to the Trustee (as
defined below) on or before the second Banking Business Day immediately
following the last day 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,
January 4, 2006 and the final Quarterly Calculation Period shall extend to,
and include, the Valuation Date (as defined below).
Payment at Maturity
At maturity, a Holder shall receive a cash payment with respect to
each Unit of the PROCEEDS equal to the sum of:
(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.
2
The "Threshold Value" equals 100.
The "Valuation Date" shall be the seventh scheduled Index Business
Day (as defined below) before the Stated Maturity, or if that day is not an
Index Business Day, the next Index Business Day; provided, however, that if no
Index Business Days occur between the seventh scheduled Index Business Day
before the Stated Maturity and the second scheduled Index Business Day before
the Stated Maturity, the Valuation Date shall be the second scheduled Index
Business Day prior to the Stated Maturity, regardless of the occurrence of a
Market Disruption Event (as defined below).
An "Index Business Day" shall be any day, as determined by the
Calculation Agent, on which securities comprising 80% of the value of the
Value Line 30 Basket (as defined in Annex A) on that day are capable of being
traded on their relevant exchanges during the one-half hour before the
determination of the closing level of the Reference Index for that day.
"Business Day" shall be any day on which the New York Stock Exchange
(the "NYSE"), the American Stock Exchange (the "AMEX") and The Nasdaq Stock
Market are open for trading.
"Banking Business Day" shall be 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.
"Calculation Agent" means Merrill Lynch 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 Value Line 30 Basket; or
(B) the suspension of or material limitation on trading, in each
case, for more than two hours of trading, or during the
one-half hour period preceding the close of trading, on the
applicable exchange (without taking into account any
extended or after-hours trading session), whether by reason
of movements in price otherwise exceeding levels permitted
by the relevant exchange or otherwise, in option contracts
or futures contracts related to 20% or more of the stocks
which are then included in the Value Line 30 Basket.
For the purpose of the above definition:
3
(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 exchnage shall constitute a
Market Disruption Event;
(3) a decision to permanently discontinue trading in the
relevant futures, or option contracts related to the
Reference Index, or any successor index, shall not
constitute a Market Disruption Event;
(4) a suspension in trading in a futures or option contract on a
stock which is then included in the Value Line 30 Basket 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
stock;
(5) an absence of trading on the applicable exchange shall 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, shall
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 is, and is to be, authenticated and delivered.
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
4
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 2.25% 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 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
5
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 (and beneficial owner) by acceptance
hereof hereby agree to 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
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: January 4, 2006
CERTIFICATE OF AUTHENTICATION Merrill Lynch & Co., Inc.
This is one of the Securities of the series
designated therein referred to in the [Copy of Seal]
within-mentioned Indenture.
JPMorgan Chase Bank, N.A., as Trustee By:
Treasurer
By: Attest:
Authorized Officer Secretary
7
ANNEX A
The "Reference Index" means the Value Line 30 PROCEEDS Index, Series
2, 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 MEREDUS15 (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 4:00 p.m. (New York City time) on each
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 29, 2005 (the "Pricing
Date"), with 94.27% of the hypothetical funds allocated to the Basket Units,
5.73% 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 the
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.
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
first Index Business Day of the next Quarterly Calculation Period.
The level of the Reference Index on any day that is not an Index
Business Day will equal the level of the Reference Index on the previous day
minus the Index Adjustment Factor and the Daily Leverage Charge for that day
regardless of any changes in the values of the Value Line 30 Basket 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 Stated Maturity) 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 first Index Business Day 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 annum
reduction (the "Index Adjustment Factor") that will be applied and accrue
daily on the daily closing level of the Reference Index to the benefit of the
Calculation Agent on the basis of a 365-day year from the the Pricing Date
through the Valuation Date. The Index Adjustment Factor will remain at 1.15%
per annum for as long as any hypothetical funds are allocated to Basket Units.
If at any time the allocation of hypothetical funds to the Basket Units 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
borrowed funds (the "Daily Leverage Charge"). The Daily Leverage Charge will
equal the number of Leverage Units outstanding on the applicable day
multiplied by the Federal Funds rate (as defined below) 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.
8
The Calculation Agent will deduct the "Basket Adjustment Factor" from
the closing value of the Value Line 30 Basket, 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 1.15% per annum of the daily value of the Value Line 30
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, of which .15% will be paid to Value
Line, as the sponsor of the Value Line Timeliness rankings.
If the value (including a closing value) of any component of the
Reference Index is unavailable on any date 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 value of any Value Line 30 Stock (as defined below) for
which no value is available will be the arithmetic mean, as
determined by the Calculation Agent, of the value of that stock
obtained from as many dealers in equity securities (which may
include Merrill Lynch, Pierce, Fenner & Smith ("MLPF&S") or any
of the Company's other subsidiaries or affiliates), but not
exceeding three of those dealers, as will make that value
available to the Calculation Agent;
o the value of any hypothetical call option related to a Value
Line 30 Stock 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 the Company's other
subsidiaries or affiliates), but not exceeding three of those
dealers, as will make that value available to the Calculation
Agent;
o the value of the Zero Coupon Bond Units will be the arithmetic
mean, as determined by the Calculation Agent, 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 the Company's 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, if any, of the Leverage Units will be calculated as
described in this Annex A.
The Calculation Agent will use the value of the Value Line 30 Stocks
(as defined below) and the related 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 (as defined below) 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 Value Line 30 Basket. The "Value Line 30
Basket" is a hypothetical investment in a "covered call" strategy in which (i)
the Value Line 30 Stocks are deemed to be purchased, and (ii) call options are
deemed to be sold, on a quarterly basis for a three month term, with respect
to the Value Line 30 Stocks. The "Value Line 30 Stocks", 30 stocks selected
from the 100 highest ranking stocks in the Value Line Timeliness ranking, will
be determined and reconstituted quarterly by the Calculation Agent. The
hypothetical income on each Basket Unit will equal a pro rata share of the
Basket Unit Income on the Value Line 30 Basket.
9
"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 based on the cash dividends in respect of the Value Line 30 Stocks and the
value of premiums in respect of call options on those stocks. The Zero Coupon
Bond Units and the Leverage Units will not produce hypothetical income for
purposes of the interest payments on the PROCEEDS.
The interest payment on the PROCEEDS, if any, for any Quarterly
Calculation Period will be based on figures determined on the last Index
Business Day of the Quarterly Calculation Period 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 last day of any Quarterly Calculation Period,
except the last Quarterly Calculation Period before the Stated Maturity, 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, January 4, 2006
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 last day of the applicable Quarterly Calculation Period or, with
respect to the final Quarterly Calculation Period, the Stated Maturity.
If at the close of business on the last day of any Quarterly
Calculation Period (except the last Quarterly Calculation Period before the
Stated Maturity), 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 Calculation Agent will be deemed to reinvest the value of any
Basket Unit Income relating to that Quarterly Calculation Period in the Basket
Units at the close of business on the first Index Business Day of the next
Quarterly Calculation Period (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 an 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 value of the Value Line 30 Basket will also include the value of
dividends on the Value Line 30 Stocks. The "dividend yield" for each common
stock is determined by annualizing the last quarterly or semi-annual ordinary
dividend as published by Bloomberg Financial Markets ("Bloomberg"), and
dividing the result by the last available sale price for each stock on its
primary exchange on the date that dividend yield is to be determined.
The Share Multipliers (as defined below) are recalculated by the
Calculation Agent on the third Friday in February, May, August and November of
each year, or in certain circumstances on a day shortly thereafter as
described below, which is the anniversary of the Pricing Date. The "Share
Multiplier" is set to equal the number of shares of that stock, or portion
thereof, based upon the closing market price of that stock on the Quarterly
Reconstitution Date (as defined below), so that each stock represents
approximately an equal percentage of the Value Line 30 Basket as of the
Quarterly Reconstitution Date, subject to certain limits as described below.
Each Share Multiplier remains constant until adjusted for certain corporate
events, option exercises and quarterly reconstitutions as described below.
The Value Line 30 Stocks are the stocks that have been determined by
the Calculation Agent as follows:
First, the Calculation Agent will identify the 100 stocks with the
highest Value Line Timeliness ranking on the second Friday of the month in
which the applicable reconstitution date falls (as described in this Annex A)
by
10
inquiry to Value Line or through other publicly available sources. Even if
included in the Value Line Timeliness ranking, the Company's common stock will
be ineligible for inclusion in the Value Line 30 Stocks. In addition, stocks
included in the Value Line Timeliness ranking which are issued by an entity
domiciled outside of the United States (as designated by Bloomberg) will be
ineligible for inclusion in the Value Line Select 30 Stocks.
Second, the Calculation Agent will determine the 60 most liquid
stocks from the 100 stocks identified above based on the median notional stock
volume of each stock. The "median notional stock volume" will be the median of
the daily dollar volume of each stock over the 63 Index Business Day period
prior to and including the applicable reconstitution date. The daily dollar
volume is the product of the last price for the stock as reported on Bloomberg
each day, multiplied by the Consolidated Volume of that stock for that day.
The "Consolidated Volume" means the total volume in shares of a stock traded
on a particular day, as reported on Bloomberg. If the last price or volume of
any stock is not available on Bloomberg for more than two of the 63 Index
Business Days in the period, that stock will be ineligible for inclusion in
the Select 30 Stocks.
Third, the Calculation Agent will determine the highest dividend
yield for each of the stocks. The dividend yield will be based on the most
recent gross annualized dividend for each stock divided by the current market
price for the applicable stock on the applicable Quarterly Reconstitution
Date, as published on Bloomberg.
Fourth, the Calculation Agent will then classify each of those stocks
identified above by its Global Industry Classification Standard classification
(the "GICS Classification"). Any stock that is not assigned to a GICS
Classification will be ineligible for inclusion in the Value Line 30 Stocks.
Once those stocks have been classified, those stocks will be ranked based upon
their dividend yield, from highest to lowest within each GICS Classification.
Finally, the Calculation Agent will then determine the Value Line 30
Stocks by identifying the stocks with the highest dividend yield from each
GICS Classification in the following alphabetical order: Consumer
Discretionary, Consumer Staples, Energy, Financials, Healthy Care,
Industrials, Information Technology, Materials, Telecommunication Services,
and Utilities. Once the Calculation Agent has identified a stock from a GICS
Classification, the Calculation Agent will identify another stock from the
next GICS Classification in the alphabetical order above, beginning again at
the top of the alphabetical order when necessary. The Calculation Agent will
repeat this identification process until 30 stocks are identified for
inclusion in the Value Line 30 Stocks, provided, however, that if three or
more GICS Classifications comprise the Value Line 30 Basket, no one GICS
Classification may comprise more than 35% of the Value Line 30 Basket (as
described below).
The Calculation Agent may at its discretion make adjustments to the
identification criteria above for the purpose of maintaining the Value Line 30
Stocks if certain actions by or affecting Value Line, such as the
discontinuance of the publication of the Value Line 30 Index, the Value Line
Timeliness ranking system or the GICS Classifications, occurs. These
adjustments may include the selection of a successor or substitute compilation
of common stocks intended to be a model for the composition of the total
market, a successor or substitute ranking system or successor or substitute
industry classification system for the Value Line 30 Index, the Value Line
Timeliness ranking system and the GICS Classifications.
The Value Line 30 Basket will be reconstituted to include the 30
stocks from the Value Line Timeliness ranking (as published on the second
Friday of each February, May, August and November) that meet the criteria
described above for the determination of the Value Line 30 Stocks (the "New
Stocks") on the second scheduled Business Day prior to the applicable
Anniversary Date (as defined below), or if that day is not a Business Day, the
next Business Day (the "Quarterly Reconstitution Date"). At anytime during a
calculation period the Value Line 30 Stocks may include stocks which are no
longer among the 100 highest ranking stocks in the Value Line Timeliness
ranking. "Anniversary Date" will mean the third Friday in February, May,
August and November of each year, or if that day is not a Business Day or the
scheduled Business Day prior to that day is not a Business Day, the Business
Day immediately succeeding the applicable Quarterly Reconstitution Date.
The Share Multiplier for each New Stock will be determined by the
Calculation Agent and will equal the number of shares of each New Stock, based
upon the closing market price of that New Stock on the Anniversary Date, so
that each New Stock represents approximately an equal percentage of a value
equal to the Value Line 30 Basket in effect at the close of business on the
applicable Anniversary Date; provided that, if three or more GICS
Classifications comprise the Value Line 30 Basket, no one GICS Classification
may comprise more than 35% of the
11
Value Line 30 Basket on that Quarterly Reconstitution Date; provided, further,
that, if the Calculation Agent holds more than 8% of the outstanding shares of
any New Stock, the Share Multiplier for that New Stock will be adjusted to
reflect a holding in the Value Line 30 Basket of no more than 7.5% of the
outstanding shares of the applicable New Stock.
In addition to the adjustments to the Share Multiplier related to
hypothetical call option exercise, the Share Multiplier for any Value Line 30
Stock and the Value Line 30 Basket will be adjusted as follows:
1. If a Value Line 30 Stock is subject to a stock split or
reverse stock split, then once the split has become effective, the
Share Multiplier for that Value Line 30 Stock will be adjusted to
equal the product of the number of shares of that Value Line 30 Stock
issued with respect to one such share of that Value Line 30 Stock in
the split and the prior multiplier.
2. If a Value Line 30 Stock is subject to a stock dividend,
issuance of additional shares of the Value Line 30 Stock, that is
given equally to all holders of shares of the issuer of that Value
Line 30 Stock, then once the dividend has become effective and that
Value Line 30 Stock is trading ex-dividend, the Share Multiplier will
be adjusted so that the new Share Multiplier shall equal the former
Share Multiplier plus the product of the number of shares of that
Value Line 30 Stock issued with respect to one such share of that
Value Line 30 Stock and the prior multiplier.
3. If a Value Line 30 Company is being liquidated or is
subject to a proceeding under any applicable bankruptcy, insolvency
or other similar law, that Value Line 30 Stock will continue to be
included in the Value Line 30 Basket so long as a market price for
that Value Line 30 Stock is available. If a market price is no longer
available for a Value Line 30 Stock for whatever reason, including
the liquidation of the issuer of the Value Line 30 Stock or the
subjection of the issuer of the Value Line 30 Stock to a proceeding
under any applicable bankruptcy, insolvency or other similar law,
then the value of that Value Line 30 Stock will equal zero in
connection with calculating the value of the Value Line 30 Basket for
so long as no market price is available, and no attempt will be made
to immediately find a replacement stock or increase the value of the
Value Line 30 Basket to compensate for the deletion of that Value
Line 30 Stock. If a market price is no longer available for a Value
Line 30 Stock as described above, the value of the Value Line 30
Basket will be computed based on the remaining Value Line 30 Stocks
for which market prices are available and no New Stock will be added
to the Value Line 30 Basket until the quarterly reconstitution of the
Value Line 30 Basket. As a result, there may be periods during which
the Value Line 30 Basket contains fewer than thirty Value Line 30
Stocks.
4. If a Value Line 30 Company has been subject to a merger
or consolidation and is not the surviving entity or is nationalized,
then a value for that Value Line 30 Stock will be determined at the
time the issuer is merged or consolidated or nationalized and will
equal the last available market price for that Value Line 30 Stock
and that value will be constant until the Value Line 30 Basket is
reconstituted. At that time, no adjustment will be made to the Share
Multiplier of the relevant Value Line 30 Stock.
5. If a Value Line 30 Company issues to all of its
shareholders equity securities that are publicly traded of an issuer
other than the Value Line 30 Company, or a tracking stock is issued
by a Value Line 30 Company to all of its shareholders, then the new
equity securities will be added to the Value Line 30 Basket as a new
Value Line 30 Stock. The Share Multiplier for the new Value Line 30
Stock will equal the product of the original Share Multiplier with
respect to the Value Line 30 Stock for which the new Value Line 30
Stock is being issued (the "Original Value Line 30 Stock") and the
number of shares of the new Value Line 30 Stock issued with respect
to one share of the Original Value Line 30 Stock.
6. If a Market Disruption Event occurs due to a suspension
of or material limitation on trading of a particular Value Line 30
Stock and is continuing for more than 10 consecutive Business Days,
the relevant stock will be immediately removed from the Value Line 30
Basket. A pro rata portion of the value of that stock at the time of
its removal from the Value Line 30 Basket will be reflected in Share
Multiplier adjustments among the remaining Value Line 30 Stocks until
the next Quarterly Reconstitution Date.
13
7. If three or more GICS Classifications comprise the Value
Line 30 Basket and any one GICS Classification comprises more than
35% of the Value Line 30 Basket during the reconstitution, the Share
Multipliers for the Value Line 30 Stocks in that GICS Classification
will be adjusted so that no GICS Classification comprises more than
35% of the Value Line 30 Basket. This restriction applies only upon
the reconstitution of the Value Line 30 Stocks on a Quarterly
Reconstitution Date. A pro rata portion of the value of the number of
shares of the Value Line 30 Stocks in that GICS Classification at the
time of its removal from the Value Line 30 Basket will be reflected
in Share Multiplier adjustments among the remaining Value Line 30
Stocks in the other GICS Classifications until the next Quarterly
Reconstitution Date.
8. If the Calculation Agent holds more than 8% of the
outstanding shares of any Value Line 30 Stock, the Share Multiplier
for that Value Line 30 Stock will be adjusted to reflect a holding in
the Value Line 30 Basket of no more than 7.5% of the outstanding
shares of the applicable Value Line 30 Stock. A pro rata portion of
the value of the number of shares of that Value Line 30 Stock at the
time of its removal from the Value Line 30 Basket will be reflected
in Share Multiplier adjustments among the remaining Value Line 30
Stocks until the next Quarterly Reconstitution Date.
9. In order to preserve the continuity of the value of the
Value Line 30 Basket, if any hypothetical call option has a value
greater than zero at expiration, the Share Multiplier of the related
stock in the Value Line 30 Basket will be reduced by an amount that,
when multiplied by the closing price of the related stock on the last
Index Business Day of the quarterly period, equals the value of the
hypothetical option at expiration.
Except for 9 above, no adjustments of any Share Multiplier of a Value
Line 30 Stock will be required unless the adjustment would require a change of
at least 1% in the Share Multiplier then in effect. The Share Multiplier
resulting from any of the adjustments specified above will be rounded to the
nearest ten-thousandth with five hundred-thousandths being rounded upward.
The Calculation Agent may at its discretion make adjustments to
maintain the value of the Value Line 30 Basket if certain events would
otherwise alter the value of the Value Line 30 Basket despite no change in the
market prices of the Value Line 30 Stocks.
The value of the Value Line 30 Basket will be calculated at the close
of business on each Index Business Day by the Calculation Agent and published
on Reuters Page MEREDUS15. The value of the Value Line 30 Basket was set to
100 on the Pricing Date. The value of the Value Line 30 Basket on each Index
Business Day will equal the sum of the values of the Value Line 30 Stocks and
the Adjusted Quarterly Income, less the Current Option Value (as defined
below). The value of the Value Line 30 Basket on any day that is not an Index
Business Day will equal the value of the Value Line 30 Basket on the previous
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
Value Line 30 Basket at the close of business on the day the option expires.
In order to preserve the continuity of the value of the Value Line 30 Basket
following any removal, the contributing value of the related Value Line 30
Stock to the Value Line 30 Basket will be reduced by an amount equal to the
value of the option at expiration. This reduction will be effected by
decreasing the Share Multiplier of the related stock in the Value Line 30
Basket by an amount that, when multiplied by the closing price of the related
stock on the last Index Business Day of the Quarterly Calculation Period,
equals the value of the hypothetical option at expiration. The reduction of
the Share Multiplier of an underlying stock under these circumstances will
reduce the contributing value of the Value Line 30 Stock to the Value Line 30
Basket. Because these reductions will have the effect of ensuring the
continuity of the value of the Value Line 30 Basket, they will not result in
Allocation Determination Events. The reduced Share Multiplier will be used to
calculate the value of the Value Line 30 Basket, and thus the value of the
Basket Units, on the following Index Business Day.
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 premiums in respect of hypothetical
13
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 Value
Line 30 Basket at the close of business on the last day 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 or until the next ex-dividend date for an underlying stock.
The removal of Basket Unit Income will reduce the value of the Value Line 30
Basket and may therefore cause an Allocation Determination Event in which the
allocation to the Basket Units is reduced, even if the prices of the Value
Line 30 Stocks have not fallen.
If no value (including a closing value) of the Value Line 30 Basket
is available on any date because of a Market Disruption Event or otherwise,
unless deferred by the Calculation Agent as described in this Annex A, the
Calculation Agent will determine the values of the components of the Value
Line 30 Basket as follows:
o the value of any Value Line 30 Stock for which no value is
available will be the arithmetic mean, as determined by the
Calculation Agent, of the value of that stock obtained from as
many dealers in equity securities (which may include MLPF&S or
any of the Company's 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 Value
Line 30 Stock for which no value is available 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 the Company's other
subsidiaries or affiliates), but not exceeding three of those
dealers, as will make that value available to the Calculation
Agent.
Each "Zero Coupon Bond Unit" will track the value of a US$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 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
not yield any return 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 Index 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. This means that,
while a holder of Basket Units would benefit from a subsequent increase in the
value of the Basket Units, a holder of PROCEEDS would not.
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 (as defined
below), 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
14
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
any payments on the Stated Maturity will be limited to the $10 principal
amount per unit (except as described in the first sentence of the immediately
preceding paragraph).
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 Index Business Day the value of the
Cushion is greater than 1%.
"Federal Funds rate" means:
(1) the rate on any day for United States dollar federal
funds as published in H.15(519) under the caption
"Federal Funds (Effective)" and displayed on Bloomberg
or any successor service on page FEDL or any other page
as may replace page FEDL on that service ("Bloomberg
Page FEDL"); or
(2) if the rate referred to in clause (1) does not appear on
Bloomberg Page FEDL or is not published by 3:00 P.M.,
New York City time, on the relevant date, the rate on
that date for United States dollar federal funds as
published in H.15 Daily Update, or other recognized
electronic source used for the purpose of displaying the
applicable rate, under the caption "Federal Funds
(Effective)"; or
(3) if the rate referred to in clause (2) is not published
by 3:00 P.M., New York City time, on the relevant date,
the rate on that date calculated by the Calculation
Agent as the arithmetic mean of the rates for the last
transaction in overnight United States dollar federal
funds arranged by three leading brokers of United States
dollar federal funds transactions in The City of New
York, which may include MLPF&S or its affiliates,
selected by the Calculation Agent as of 9:00 A.M., New
York City time, on that date; or
(4) if the brokers selected by the Calculation Agent are not
quoting as mentioned in clause (3), the Federal Funds
rate in effect on that date.
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 Index Business Day and (ii) the Targeted
Exposure (as defined below) 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 Value Line 30 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 Index 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
Value Line 30 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
15
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
Index Business Day. At the close of business on the Index Business Day on
which an Allocation Determination Event has occurred, the Calculation Agent
will reallocate the hypothetical funds.
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 Index 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 last
day 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 Index Business Day and any necessary
reallocation will be effected at the close of business on the Index 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 Value Line 30 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 to
losses on the Basket Units between the determination of the
occurrence of an Allocation Determination Event and the
resulting reallocation than would be the case if a reallocation
were effected immediately following determination of the
Targeted Exposure;
o the Reference Index may 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
16
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 Index Business Day.
If at any time during any Business Day the value of the S&P 500 Index
or the Nasdaq-100 Index has declined from its closing value on the previous
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 the
following Index Business Day 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 Index 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 will not exceed 150%.
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 (as defined below), if any.
The "Trading Multiple" is set at 5.
The "Fee Protection Factor" will increase the Floor Level when the
then current value of the Zero Coupon Bond Units ("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 Stated Maturity x Zero Coupon
Bond Unit Contribution
where the number of years to the Stated Maturity allows for fractional years
and the "Zero Coupon Bond Unit Contribution" equals:
( ( Last Value - ZCBU Value ) )
(10% - (------------------------- ) ) + 9%
( ( Last Value ) )
provided, however, that in no instance will the Zero Coupon Bond Unit
Contribution be less than zero or greater than one. IC OMITTED]
The effect of the Fee Protection Factor is to decrease the Targeted
Exposure when the level of the Reference Index is equal to or less than 10%
greater than the value of the Zero Coupon Bond Units upon the occurrence of an
Allocation Determination Event. This, in turn, will increase the allocation of
hypothetical funds to the Zero Coupon Bond Units so that the level of the
Reference Index should equal at least 100 on the scheduled Valuation Date,
inclusive of all fees, deductions and charges.
17
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 Index Business Day using accepted option
valuation methods. The valuation methods take into account variables such as:
o the closing price of the related stock 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 the computed continuously compounded annualized current
dividend yield on the related stock 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 stock (determined by the
Calculation Agent as described below).
At the time the hypothetical call option is priced, the U.S. dollar
interest rate will equal the U.S. dollar LIBOR rate 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 stock on which the
option is priced will be calculated on any Index Business Day by dividing the
ordinary dividend or dividends historically paid by the issuer of that stock
during the most recent period corresponding to the current Quarterly
Calculation Period (or if the issuer of the 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 the issuer) by the closing price of that stock on the principal U.S.
exchange or market on that day and annualizing (based on a 365-day year) the
result to the end of that Quarterly Calculation Period. The annualized current
dividend yield for any stock 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 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 the issuer.
The implied volatility of a hypothetical call option on any Index
Business Day is:
o when hypothetically purchasing Basket Units, the bid-side
implied volatility;
18
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 stock 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 or the International
Securities Exchange on the relevant stock 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 U.S. dollar 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 that stock, the size of the open
interest in call options with related exercise prices and maturities relating
to that stock and the size of the bid-offer relative to the number of
hypothetical options related to that stock to be priced on that day in respect
of the notes 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 below,
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 the Company's
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 Index Business Days on
which a Market Disruption Event is 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 Value
Line 30 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 shares of each of the Value Line 30 Stocks on a quarterly
basis for a three month term, beginning on December 27, 2005. Hypothetical
call options will be priced on the first Index Business Day of each Quarterly
Calculation Period. The hypothetical call options relating to each underlying
stock will correlate to the number of shares of that underlying stock used to
calculate the value of the Value Line 30 Basket on the day the options are
priced.
Each hypothetical call option will:
o expire on the last quarterly third Friday in the last
month of the relevant Quarterly Calculation Period (i.e.,
the third Friday in February, May, August and November);
o be automatically settled on the third Friday in the last
month of the Quarterly Calculation Period if the closing
price of the underlying stock on that day exceeds the
exercise price; and
o have an exercise price greater than or equal to 105% of
the closing price of the underlying stock 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 Target Quarterly Premium. Once the Calculation Agent
has determined the Target 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 the Company's 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 absolute discretion, such higher
exercise price as the Calculation Agent determines to be quoted by another
19
principal market participant, and the value of this hypothetical call option
and the related Target Quarterly Premium will be included in the value of the
Value Line 30 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
price of the related stock 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 price of the related stock 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 the Company's 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, such 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 Value Line 30 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 price of the related
stock on the day the hypothetical call option was priced, except to the extent
that dividends on the Value Line 30 Stocks are higher than historical
dividends 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
Target Quarterly Premium.
In seeking exercise prices or premiums from dealers in options in
respect of hypothetical call options relating to any of the underlying stocks,
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 number of shares of the related underlying stock that is
different than the number of shares of that stock used to calculate the value
of the Value Line 30 Basket with respect to the outstanding number of PROCEEDS
at the close of business on the Index Business Day prior to the date on which
the options are priced.
The closing price of any Value Line 30 Stock on any date will be (i)
if the common stock is listed on a national securities exchange on that date
of determination, the last reported sale price, regular way, of the principal
trading session on that date on the principal U.S. exchange on which the
common stock is listed or admitted to trading, (ii) if the common stock is not
listed on a national securities exchange on that date of determination, or if
the last reported sale price on that exchange is not obtainable (even if the
common stock is listed or admitted to trading on that exchange), and the
common stock is quoted on The Nasdaq National Market, the last reported sale
price of the principal trading session on that date as reported on The Nasdaq
National Market and (iii) if the common stock is not quoted on The Nasdaq
National Market on that date of determination, or if the last reported sale
price on the Nasdaq is not obtainable (even if the common stock is quoted on
The Nasdaq National Market), the last reported sale price of the principal
trading session on the over-the-counter market on that date as reported on the
OTC Bulletin Board, the National Quotation Bureau or a similar organization.
If no reported sale price of the principal trading session is available
pursuant to clauses (i), (ii) or (iii) above or if there is a Market
Disruption Event, the trading price on any date of determination, unless
deferred by the Calculation Agent as described in the preceding sentence, will
be the arithmetic mean, as determined by the Calculation Agent, of the bid
prices of the common stock obtained from as many dealers in that stock (which
may include MLPF&S or any of the Company's other subsidiaries or affiliates),
but not exceeding three of those dealers, as will make bid prices available to
the Calculation Agent. A security "quoted on The Nasdaq National Market" will
include a security included for listing or quotation in any successor to that
system and the term "OTC Bulletin Board" will include any successor to that
service.
If during any Quarterly Calculation Period the Calculation Agent
removes one of the stocks underlying the Value Line 30 Basket, all outstanding
hypothetical call options in respect of that stock will be treated as
terminated at the close of business on the day on which the underlying stock
is removed. At that time, the value of the shares of the removed stock in the
Value Line 30 Basket, less the value, if any, of the hypothetical call options
in respect of that stock, will be reallocated to hypothetical investments in
shares (or fractional shares) of the remaining underlying stocks. The amount
allocated to hypothetical investments in respect of each remaining underlying
stock will be in proportion to the percentage of the value of each remaining
underlying stock relative to the value of the Value Line 30 Basket (less the
value of the removed stock) at the close of business on the Index Business Day
on which the underlying stock is removed. The Calculation Agent will determine
the terms of a new hypothetical call option in
20
respect of each additional share (or fractional share). The premium in respect
of each additional hypothetical call option will be included in the value of
the Value Line 30 Basket at the close of business on the day the option is
priced and will be included in the Basket Unit Income for that Quarterly
Calculation Period.
The terms of the hypothetical call options will provide for
adjustments to reflect the occurrence of a corporate or other similar event
affecting an underlying stock (such as, for example, a merger or other
corporate combination or a stock split or reverse stock split).
The "Adjusted Quarterly Income" will equal the sum of the
hypothetical income related to each of the Value Line 30 Stocks (the
"Quarterly Income"), reduced by the pro rata portion of the Basket Adjustment
Factor. The Quarterly Income for each Value Line 30 Stock will be the sum of
(i) the cash dividends per share in respect of that Value Line 30 Stock during
that Quarterly Calculation Period and Targeted Quarterly Premium, less the
Premium Adjustment, if any, multiplied by the applicable Share Multiplier.
The "Targeted Quarterly Premium" equals the adjusted annual target
yield, less the anticipated dividend yield on that Value Line 30 Stock on the
first day of that Quarterly Calculation Period to be paid during the Quarterly
Calculation Period. The adjusted annual target yield is obtained by increasing
the annual target yield of 10% on the Value Line 30 Basket on the first day of
each Quarterly Calculation Period by an amount intended to, but which may or
may not, offset the value of the Basket Adjustment Factor.
If the highest exercise price bid for any option is less than 105% of
the closing price of the related stock on the day the hypothetical call option
is priced, a premium adjustment will be subtracted from the anticipated cash
dividends and the Targeted Quarterly Premium. A "Premium Adjustment" is the
difference between the Target Quarterly Premium in respect of that Value Line
30 Stock and the actual highest quarterly premium in respect of that
hypothetical call option with an exercise price equal to 105% of the closing
price of that Value Line 30 Stock.
21
EXHIBIT (5) & (23)
January 4, 2006
Merrill Lynch & Co., Inc.
4 World Financial Center
New York, New York 10080
Ladies and Gentlemen:
As your counsel, we have examined a copy of the Restated Certificate
of Incorporation, as amended, of Merrill Lynch & Co., Inc. (hereinafter called
the "Company"), certified by the Secretary of State of the State of Delaware.
We are familiar with the corporate proceedings had in connection with the
proposed issuance and sale by the Company to the Underwriter named in the
Terms Agreement referred to below, pursuant to an Underwriting Agreement dated
August 5, 1998 (the "Underwriting Agreement"), between the Company and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), as
supplemented by the Terms Agreement dated November 23, 2004 (the "Terms
Agreement") between the Company and MLPF&S (the "Underwriter"), of the
Company's PROtected Covered Call EnhancED Income NoteSSM Linked to the Value
Line 30 PROCEEDS Index, Series 2, due January 4, 2011 (the "Securities") in an
amount equal to $52,000,000 aggregate principal amount of the Securities. We
have also examined a copy of the Indenture between the Company and JPMorgan
Chase Bank, N.A. as Trustee, dated as of April 1, 1983, as amended (the
"Indenture"), and the Company's Registration Statement on Form S-3 (File No.
333-122639) relating to the Securities (the "Registration Statement").
Based upon the foregoing and upon such further investigation as we
deemed relevant in the premises, we are of the opinion that:
1. The Company has been duly incorporated under the laws of the State
of Delaware.
2. The Securities have been duly and validly authorized by the
Company and when the Securities have been duly executed and authenticated in
accordance with the terms of the Indenture and delivered against payment
therefor as set forth in the Underwriting Agreement, as supplemented by the
Terms Agreement, the Securities will constitute valid and legally binding
obligations of the Company, enforceable against the Company in accordance with
their terms, except to the extent that enforcement thereof may be limited by
bankruptcy, moratorium, insolvency, reorganization or similar laws relating to
or affecting creditors' rights generally and except as enforcement thereof is
subject to general principles at equity (regardless of whether enforcement is
considered in a proceeding in equity or at law).
We consent to the filing of this opinion as an exhibit to the
Registration Statement and as an exhibit to the Current Report of the Company
on Form 8-K dated January 4, 2006. We also consent to the use of our name
under the caption "United States Federal Income Taxation" in the prospectus
supplement related to the offering of the Securities.
Very truly yours,
/s/ Sidley Austin LLP