CALCULATION
OF REGISTRATION FEE
Title of Each Class of
Securities Offered
|
|
Proposed Maximum
Aggregate
Offering Price
|
|
Amount of
Registration
Fee(1)
|
|
Adagio
3 AMPS, due February 26, 2010
|
|
|
$14,000,000
|
|
|
$429.80
|
|
|
|
|
|
|
|
|
|
(1)
Calculated in accordance with Rule 457(r) of the Securities Act of
1933, as amended.
Filed
pursuant to Rule 424(b)(2)
Registration
No. 333-136666
February
23, 2007
PRICING
SUPPLEMENT
(To
Prospectus Dated August 16, 2006 and
Prospectus
Supplement Dated August 16, 2006)
The
Bear Stearns Companies Inc.
$14,000,000
Medium-Term Notes, Accelerated Market Participation Securities Linked to
the
Performance of the U.S. Adagio Strategy Index Due February 26,
2010
·
|
The
Notes are Accelerated Market Participation Securities linked to
the
performance of the U.S. Adagio Strategy Index (the “Index”). The
Notes are not principal protected.
When we refer to Notes in this pricing supplement, we mean Notes
with a
principal amount of $1,000.
|
·
|
The
Index replicates a strategy based on the relative weighting of
the three
U.S. asset classes (equities, real estate and investment-grade
debt
securities) that are represented by the S&P 500®
Index, the iShares®
Dow Jones U.S. Real Estate Index Fund and the iShares®
Lehman Aggregate Bond Fund (collectively, the “Components”).
|
·
|
Each
Component in the Index is re-weighted on a monthly basis.
The percentage weightings of the Real Estate Component and the
Equity
Component in a given month are determined by a formula which utilizes
the
monthly returns of the Real Estate Component and the Equity Component
for
each of the trailing 12 months subject to a minimum weighting of
0% and a
maximum weighting of 50% each. The Bond Component is the residual
Component. Its weighting is the percentage, if any, required to
make the
sum of all Components equal 100%.
|
·
|
On
the Maturity Date you will receive the Cash Settlement Value, an
amount in
cash that depends upon the relation of the Final Index Level to
the
Initial Index Level.
|
·
|
The
Notes are not principal protected. Therefore investors
may receive less, and possibly significantly less, than the principal
you
invested.
|
·
|
If
the Final Index Level is greater than or equal to the Initial Index
Level,
then, on the Maturity Date, the Cash Settlement Value will be equal
to (in
cash), per Note:
|
·
|
If
the Final Index Level is less than the Initial Index Level, you
will
receive less at maturity, and possibly significantly less, than
the
principal you invested.
In
this case, the Cash Settlement Value will be equal to (in cash),
per
Note:
|
·
|
The
CUSIP number for the Notes is
073928T60
|
INVESTMENT
IN THE NOTES INVOLVES CERTAIN RISKS. THERE MAY NOT BE AN ACTIVE SECONDARY
MARKET
IN THE NOTES, AND IF THERE WERE TO BE AN ACTIVE SECONDARY MARKET, IT MAY
NOT BE
LIQUID. YOU SHOULD REFER TO “RISK FACTORS” BEGINNING ON PAGE PS-12.
The
U.S.
Adagio Index is the exclusive property of Bear Stearns International Limited,
one of our affiliates, which has contracted with Standard & Poor’s, a
division of the McGraw-Hill Companies (“S&P”, or the “Strategy Sponsor”), to
maintain and calculate the Index. The Equity Component is a service mark
or
trademark of S&P and, if required, has been licensed for use by The Bear
Stearns Companies Inc. S&P shall have no liability for any errors or
omissions in calculating the Index or the Equity Component. The Notes are
not
sponsored, endorsed, sold or promoted by S&P; and S&P makes no
representations regarding the advisability of investing in the
Notes.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of the Notes or determined that this pricing supplement,
or the accompanying prospectus supplement and prospectus, is truthful or
complete. Any representation to the contrary is a criminal
offense.
|
Per
Note
|
Total
|
Initial
public offering price1
|
100.00%
2
|
$14,000,000
|
Agent’s
discount
|
2.25%
|
$315,000
|
Proceeds,
before expenses, to us
|
97.75%
|
$13,685,000
|
1
Investors
who purchase an aggregate amount of at least $1,000,000 of Notes will be
entitled to purchase such Notes for 99.00% of the principal amount.
2
Any
additional reissuances will be offered at a price to be determined at the
time
of pricing of each offering of Notes, which price will be a function of the
prevailing market conditions and level of the Index at the time of the relevant
sale.
We
may
grant Bear, Stearns & Co. Inc. a 30-day option from the date of this pricing
supplement to purchase from us up to an additional $2,100,000 at the public
offering price to cover any over-allotments. We expect that the Notes will
be
ready for delivery in book-entry form only through the book-entry facilities
of
The Depository Trust Company in New York, New York, on or about February
28,
2007, against payment in immediately available funds. The distribution of
the
Notes will conform to the requirements set forth in Rule 2720 of the Conduct
Rules of the National Association of Securities Dealers, Inc.
Bear,
Stearns & Co. Inc.
February
23, 2007
SUMMARY
This
summary highlights selected information from the accompanying prospectus
and
prospectus supplement and this pricing supplement to help you understand
the
Notes linked to the Index. You should carefully read this entire pricing
supplement and the accompanying prospectus supplement and prospectus to fully
understand the terms of the Notes, as well as certain tax and other
considerations that are important to you in making a decision about whether
to
invest in the Notes. You should carefully review the section “Risk Factors” in
this pricing supplement and “Risk Factors” in the accompanying prospectus
supplement which highlight a number of significant risks, to determine whether
an investment in the Notes is appropriate for you. All of the information
set
forth below is qualified in its entirety by the more detailed explanation
set
forth elsewhere in this pricing supplement and the accompanying prospectus
supplement and prospectus. If information in this pricing supplement is
inconsistent with the prospectus or prospectus supplement, this pricing
supplement will supersede those documents. In this pricing supplement, the
terms
“Company,” “we,” “us” and “our” refer only to The Bear Stearns Companies Inc.
excluding its consolidated subsidiaries.
The
Bear
Stearns Companies Inc. Medium-Term Notes, Series B, Accelerated Participation
Market Securities Linked to the Performance of the U.S. Adagio Strategy Index,
due February 26, 2010 (the “Notes”), are Notes whose return is tied or “linked”
to the performance of the U.S. Adagio Strategy Index. The Notes are not
principal protected, therefore
investors may receive less, and possibly significantly less, than the principal
you invested.
When we
refer to Note or Notes in this pricing supplement, we mean $1,000 principal
amount of Notes. The Index replicates a strategy that selects dynamically
from
three U.S. asset classes (equities, real estate and investment-grade debt
securities) according to the previous 12 monthly returns of the S&P
500®
Index,
the iShares®
Dow
Jones U.S. Real Estate Index Fund and the iShares®
Lehman
Aggregate Bond Fund.
On
the
Maturity Date you will receive the Cash Settlement Value, an amount in cash
that
depends upon the relation of the Final Index Level to the Initial Index Level.
If the Final Index Level is greater than or equal to the Initial Index Level,
then, on the Maturity Date, we will pay you the principal amount of the Notes,
plus $1,000 multiplied by 150.00% of the percentage increase in the Index
Level.
If the Final Index Level is less than the Initial Index Level, you will receive
less, and possibly significantly less, at maturity, than the principal you
invested. In this case, we will pay you, per Note, $1,000 multiplied by the
quotient of the Final Index Level divided by the Initial Index
Level.
Selected
Investment Considerations
|
·
|
Growth
potential—The Notes offer the possibility to participate in the potential
appreciation in the Index. The return, if any, on the Notes is
based upon
the extent to which the Final Index Level is greater than the Initial
Index Level.
|
|
·
|
Potential
leverage in the increase, if any, in the Index Level—The Notes may be an
attractive investment for investors who have a bullish view of
the Index
in the medium term. If held to maturity, the Notes allow you to
participate in 150.00% of the potential increase in the Index
Level.
|
|
·
|
Diversification—The
Index is dynamically weighted and comprised of the following three
components: (1) the S&P 500®
Index; (2) the iShares®
Dow Jones U.S. Real Estate Index Fund; and (3) the iShares®
Lehman Aggregate Bond Fund, each as further described herein. Therefore,
the Notes may allow you to diversify an existing portfolio or
investment.
|
|
·
|
No
coupon—The Notes do not pay a coupon.
|
|
·
|
Minimum
investment—The minimum purchase is $1,000, with increments of $1,000
thereafter.
|
Selected
Risk Considerations
|
·
|
Possible
loss of principal—The Notes are not principal protected, therefore
investors may receive less, and possibly significantly less, than
the
principal you invested.. If the Final Index Level is less than
the Initial
Index Level, the Cash Settlement Value you will receive at maturity
will
be less than the initial offering price in proportion to the percentage
decline in the Index Level. In that case, you will receive less,
and
possibly significantly less, than the initial offering price of
$1,000.
|
|
·
|
The
level of the Index cannot be predicted—We and our affiliates developed the
Index. Neither the Notes nor the Index have a trading history.
The future
performance of the Index is impossible to predict and, therefore,
no
future performance of the Notes or the Index may be inferred from
any of
the historical simulations or any other information set forth herein.
Because it is impossible to predict the Index, it is possible that
the
Index Level will decline and you will lose all or part of your
initial
investment.
|
|
·
|
Not
exchange-listed—The Notes will not be listed on any securities exchange,
and we do not expect a trading market to develop, which may affect
the
price that you receive for your Notes upon any sale prior to
maturity.
|
|
·
|
Liquidity—If
a trading market were to develop in the Notes, it may not be liquid.
Our
subsidiary, Bear, Stearns & Co. Inc. has advised us that they intend
under ordinary market conditions to indicate prices for the Notes
on
request. However, we cannot guarantee that bids for outstanding
Notes will
be made and we cannot predict the price at which any such bids
will be
made.
|
|
·
|
Possible
loss of value in the secondary market—If you sell your Notes prior to
maturity, you may receive less than the amount you originally
invested.
|
|
·
|
No
interest or other payments and no current income—During the term of the
Notes, you will not receive any interest or other periodic distributions
and such payments will not be included in the calculation of the
Cash
Settlement Value you will receive at maturity. The yield on the
Notes
therefore may be less than the overall return you would earn if
you
purchased a conventional debt security at the same time and with
the same
maturity.
|
|
·
|
Taxes—The
U.S. federal income tax consequences of an investment in the Notes
are
uncertain. We intend to treat the Notes for federal income tax
purposes as
pre-paid cash-settled forward contracts linked to the value of
the Index
and, where required, to file information returns with the Internal
Revenue
Service in accordance with such treatment. Assuming the Notes are
treated
as pre-paid cash-settled forward contracts, you should be required
to
recognize capital gain or loss to the extent that the cash you
receive on
the Maturity Date or upon a sale or exchange of the Notes prior
to the
Maturity Date differs from your tax basis on the Notes (which will
generally be the amount you paid for the Notes). However, other
treatments
are possible. Prospective investors are urged to consult their
tax
advisors regarding the U.S. federal income tax consequences of
an
investment in the Notes.
|
KEY
TERMS
Issuer:
|
The
Bear Stearns Companies Inc.
|
Index:
|
The
U.S. Adagio Strategy Index (the “Index”) is published by the Strategy
Sponsor or its designee and displayed on Bloomberg Financial
Service
(under the symbol ADAGUS
<Index>).
|
The
Index
replicates a strategy based on the relative weightings of the three U.S.
asset
classes (equities, real estate and government bonds) that are represented
by the
Components. Each Component in the Index is re-weighted on a monthly basis.
The
percentage weightings of the Real Estate Component and the Equity Component
in a
given month are determined by a formula which utilizes the monthly returns
of
the Real Estate Component and the Equity Component for each of the trailing
12
months. The percentage weightings of the Real Estate Component and the
Equity
Component are each subject to a minimum weighting of 0% and a maximum weighting
of 50% each. The Bond Component is the residual Component. Its weighting
is the
percentage, if any, required to make the sum of all Component weightings
equal
100%.
Face
amount:
|
The
Notes will be denominated in U.S. dollars. Each Note will be
issued in
minimum denominations of $1,000 with amounts in excess thereof
in integral
multiples of $1,000; provided, however, that the minimum purchase
for any
purchaser domiciled in a Member state of the European Economic
Area shall
be $100,000. The aggregate principal amount of the Notes being
offered is
$14,000,000. When we refer to Note or Notes in this pricing supplement,
we
mean Notes with a principal amount of
$1,000.
|
Further
Issuances:
|
Under
certain limited circumstances, and at our sole discretion, we
may offer
further issuances of the Notes. These further issuances, if any,
will be
consolidated to form a single series with the Notes and will
have the same
CUSIP number and will trade interchangeably with the Notes immediately
upon settlement.
|
Strategy
Sponsor:
|
Standard
& Poor’s, a division of The McGraw-Hill Companies, Inc.
(“S&P”)
|
Cash
Settlement Value:
|
If
the Final Index Level is greater than or equal to the Initial
Index Level,
then, on the Maturity Date, you will receive, an amount per Note
in cash
equal to:
|
If
the
Final Index Level is less than the Initial Index Level, you will receive
less at
maturity, and possibly significantly less, than the principal you invested.
In
this case, we will pay you, per Note:
Index
Level:
|
As
of any date of determination, the closing level of the Index for
such date
as determined by the Strategy Sponsor or its designee and displayed
on
Bloomberg Financial Service (under the symbol ADAGUS
<Index>).
|
|
The
Index Level will be calculated on each day the Closing Level of
the Equity
Component is published by its Component Sponsor and the Closing
Level of
each of the Real Estate Component and the Bond Component is available
on
its respective primary exchanges. The Index Level will equal the
sum
of (a) the Index Level last published and
(b) the product of (x) the Index Level last published multiplied by
(y) the sum of the product for each Component of (i) the daily
percentage change in the Closing Level of each Component multiplied
by
(ii) its respective Component weighting in the Index as of such date.
In addition, the Index Level will be adjusted downwards by a monthly
amount equal to 0.225% applied pro rata on a daily basis, as described
in
“Description of the Notes—Index
Level.”
|
Closing
Level:
|
With
respect to the Equity Component, as of any date of determination,
the
official closing level as published by its Component Sponsor; with
respect
to the Real Estate Component, as of any date of determination,
the
official closing price on its primary exchange as reported in the
official
price determination mechanism for such primary exchange; and with
respect
to the Bond Component, as of any date of determination, the sum
of (i) the
official closing price on its primary exchange as reported in the
official
price determination mechanism for such primary exchange and (ii)
the
reinvestment of any distributions or dividends received in respect
of such
investment. With respect to any other security on any date, Closing
Level
means the last reported sales price regular way on such date or,
if no
such reported sale takes place on such date, the average of the
reported
closing bid and asked price regular way on such date, in either
case on
the primary organized exchange or trading system on which such
security is
then listed or admitted to trading.
|
Pricing
Date:
|
February
23, 2007
|
Initial
Index Level:
|
269.1932,
representing the Index Level, as determined by the Strategy Sponsor
on the
Pricing Date.
|
Final
Index Level:
|
Will
be determined by the Calculation Agent and will equal the Closing
Level of
the Index, as determined by the Strategy Sponsor, on the Calculation
Date.
|
Calculation
Date:
|
February
23, 2010. The Calculation Date is subject to adjustment as described
under
“Description of the Notes - Market Disruption
Events”.
|
Upside
Participation Rate:
|
150.00%.
|
Maturity
Date:
|
The
Notes are expected to mature on February 26, 2010; provided
that,
if the Calculation Date is adjusted due to the occurrence of a
Market
Disruption Event, the Maturity Date will be three Trading Days
following
the adjusted Calculation Date.
|
Exchange
listing:
|
The
Notes will not be listed on any securities
exchange.
|
Components:
|
• The
S&P 500®
Index (the “Equity Component”) (Bloomberg Ticker: SPX
<Index>):
|
-
Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks.
The index is designed to measure the performance of the broad domestic U.S.
economy through changes in the aggregate market value of 500 stocks representing
all major industries.
|
• The
iShares®
Dow Jones U.S. Real Estate Index Fund (the “Real Estate Component”)
(Bloomberg Ticker: IYR
<Index>):
|
-
iShares®
Dow
Jones U.S. Real Estate Index Fund is an exchange-traded fund of the iShares
Trust, a Delaware statutory trust. The fund’s objective is to achieve investment
results that correspond generally to the price and yield performance, before
fees and expenses, of the Dow Jones U.S. Real Estate Index. The fund is traded
on the New York Stock Exchange.
|
• The
iShares®
Lehman
Aggregate Bond Fund (the “Bond Component”) (Bloomberg Ticker: AGG US
<Equity>):
|
-
iShares®
Lehman
Aggregate Bond Fund is an exchange-traded fund of the iShares Trust, a Delaware
statutory trust. The fund’s objective is to achieve investment results that
correspond generally to the price and yield performance, before fees and
expenses, of the total United States investment grade bond market as defined
by
the Lehman Brothers U.S. Aggregate Index. The fund is traded on the American
Stock Exchange.
Component
Sponsor:
|
The
Component Sponsor for each Component is as indicated
below:
|
|
With
respect to the S&P 500®
Index, Standard & Poor’s, a division of The McGraw-Hill Companies,
Inc.
|
|
With
respect to the iShares®
Dow Jones U.S. Real Estate Index Fund, Barclays Global Fund
Advisors.
|
|
With
respect to iShares®
Lehman
Aggregate Bond Fund, Barclays Global Fund
Advisors.
|
Calculation
Agent:
|
Bear,
Stearns & Co. Inc. All determinations made by the Calculation Agent
will be at the sole discretion of the Calculation Agent and will
be
conclusive for all purposes and binding on us and the beneficial
owners of
the Notes, absent manifest
error.
|
Offers
and sales of the Notes are subject to restrictions in certain jurisdictions.
The
distribution of this pricing supplement, the accompanying prospectus supplement
and prospectus and the offer or sale of the Notes in certain other jurisdictions
may be restricted by law. Persons who come into possession of this pricing
supplement, and the accompanying prospectus supplement and prospectus or
any
Notes must inform themselves about and observe any applicable restrictions
on
the distribution of this pricing supplement, the accompanying prospectus
supplement and prospectus and the offer and sale of the Notes. Notwithstanding
the minimum denomination of $1,000, the minimum purchase for any purchaser
domiciled in a member state of the European Economic Area shall be
$100,000.
QUESTIONS
AND ANSWERS
What
are the Notes?
The
Notes
are a series of our senior debt securities, the value of which is linked
to the
performance of the Index. The Notes will not bear interest and no other payments
will be made prior to maturity. See the section “Risk Factors.”
The
Notes
will mature on the Maturity Date. The Notes do not provide for earlier
redemption. When we refer to Notes in this pricing supplement, we mean Notes
with a principal amount of $1,000. You should refer to the section “Description
of the Notes.”
Are
the Notes
equity or debt securities?
The
Notes
are our unsecured debt securities. However, the Notes differ from traditional
debt securities in that the Notes are not principal protected and offer the
opportunity to participate in 150.00% of the positive performance of the
Index
Level, if any. If, at maturity, the Final Index Level is less than the Initial
Index Level, you will receive less, and possibly significantly less, than
the
initial offering price per Note.
Are
the Notes principal protected?
The
Notes are not principal protected, therefore you may lose up to 100% of the
principal amount of their Notes. If, at maturity, the Final Index Level is
less
than the Initial Index Level, you will receive less, and possibly significantly
less, than the initial offering price of $1,000 per each $1,000 principal
amount
of Notes. You should understand that the future performance of the Index
is
impossible to predict and therefore no future performance of the Notes and
the
Index may be inferred from the past historical performance of the Index.
What
will I receive at maturity on the Notes?
Your
investment may result in a loss because the Notes are not principal protected.
On the Maturity Date you will receive the Cash Settlement Value, an amount
in
cash that depends upon the relation of the Final Index Level to the Initial
Index Level. The Notes are not principal protected. Therefore
investors may receive less, and possibly significantly less, than the principal
you invested..
If
the
Final Index Level is greater than or equal to the Initial Index Level, then,
on
the Maturity Date, the Cash Settlement Value will be equal to (in cash),
per
Note:
If
the
Final Index Level is less than the Initial Index Level, the Cash Settlement
Value will be equal to (in cash), per Note:
The
“Index Level” equals the Closing Level of the Index, as determined by the
Strategy Sponsor, on each day of determination.
The
“Initial
Index Level”
equals
269.1932, representing the Index Level, as determined by the Strategy Sponsor
on
the Pricing Date.
The
“Final
Index Level”
will
be
determined by the Calculation Agent and will equal the Closing Level of the
Index, as determined by the Strategy Sponsor, on the “Calculation Date”, subject
to adjustment as described in “Description of the Notes—Market Disruption
Events.”
The
“Upside Participation Rate” will be 150.00%.
The
“Maturity Date” of the Notes is expected to be February 26, 2010; provided
that,
if the
Calculation Date is adjusted due to the occurrence of a Market Disruption
Event,
the Maturity Date will be three Index Business Days following the adjusted
Calculation Date.
For
more
specific information about the Cash Settlement Value and for illustrative
examples, you should refer to “Description of the Notes.”
Will
there be additional offerings of the Notes?
Under
certain limited circumstances, and at our sole discretion, we may offer further
issuances of the Notes. These further issuances, if any, will be consolidated
to
form a single series with the Notes and will have the same CUSIP number and
will
trade interchangeably with the Notes immediately upon settlement. Any additional
issuance will increase the aggregate principal amount of the outstanding
Notes
of this series to include the aggregate principal amount of any Notes bearing
the same CUSIP number that are issued pursuant to (i) any 30-day option we
grant
to Bear Stearns, and (ii) any future issuances of Notes bearing the same
CUSIP
number. The price of any additional offerings will be determined at the time
of
pricing of each offering, which price will be a function of the prevailing
market conditions and Index Level at the time of the relevant sale.
Will
I receive
interest on the Notes?
You
will
not receive any interest payments on the Notes.
What
is the Index and who publishes it?
The
Strategy Sponsor, S&P, computes and publishes the Index. The Index is the
exclusive property of Bear Stearns International Limited, one of our affiliates,
which has contracted with the Strategy Sponsor to maintain and calculate
the
Index. The Strategy Sponsor shall have no liability for any errors or omissions
in calculating the Index. The Notes, which are linked to the performance
of the
Index, are not sponsored, endorsed, sold or promoted by the Strategy Sponsor;
and the Strategy Sponsor makes no representations regarding the advisability
of
investing in the Notes.
The
Index
replicates a strategy based on the relative weighting of the three U.S. asset
classes (equities, real estate and investment-grade debt securities) that
are
represented by the Components. Each Component in the Index is re-weighted
on a
monthly basis. The percentage weightings of the Real Estate Component and
the
Equity Component in a given month are determined by a formula which utilizes
the
monthly returns of the Real Estate Component and the Equity Component for
each
of the trailing 12 months. The percentage weightings of the Real Estate
Component and the Equity Component are each subject to a minimum weighting
of 0%
and a maximum weighting of 50% each. The Bond Component is the residual
Component. Its weighting is the percentage, if any, required to make the
sum of
all Component weightings equal 100%.
The
Index
Level will be adjusted downwards by a monthly amount equal to 0.225% applied
pro
rata on a daily basis.
For
more
specific information about the Index, please see the sections “Description of
the Notes” and “Hypothetical Historical Performance Data.”
Who
publishes information regarding the Components and where can I obtain further
information?
Unless
otherwise stated, all information regarding the Components that is provided
in
this pricing supplement is derived from the Component Sponsors or other publicly
available sources.
S&P
500®
Index.
The
S&P 500®
Index is
a free-float weighted stock index published by Standard & Poor’s and is
intended to track the price movements of the common stocks comprising the
S&P 500®
Index.
As of January 17, 2007, the common stocks of 423 companies, or 84.60% of
the
market capitalization of the S&P 500®
Index as
of such date, were traded on the New York Stock Exchange and the common stocks
of 77 companies, or 15.40% of the market capitalization of the S&P
500®
Index as
of such date, were traded on The Nasdaq Stock Market. The S&P
500®
Index is
quoted in U.S. dollars. You can obtain the level of the S&P 500®
Index
from the Bloomberg Financial Service under the symbol SPX <Index> or from
the S&P website at http://www.spglobal.com.
iShares®
Dow Jones U.S. Real Estate Index Fund.
The
objective of the iShares®
Dow
Jones U.S. Real Estate Index Fund is to achieve investment results that
correspond generally to the price and yield performance, before fees and
expenses, of the Dow Jones U.S. Real Estate Index.
The
Dow
Jones U.S. Real Estate Index measures the performance of the real estate
sector
of the U.S. equity market and includes companies in the following sub-sectors:
real estate holding and development and real estate investment trusts. The
iShares®
Dow
Jones U.S. Real Estate Index Fund uses a “Representative Sampling” strategy to
try to track the Dow Jones U.S. Real Estate Index and, according to the
Component Sponsor, will concentrate its investments in a particular industry
or
group of industries to approximately the same extent as the Dow Jones U.S.
Real
Estate Index is so concentrated. As of January 17, 2007, the iShares®
Dow
Jones U.S. Real Estate Index was concentrated in the real estate sector,
which
comprised 99.54% of the market capitalization of the iShares®
Dow
Jones U.S. Real Estate Index as of such date. You can obtain the Closing
Level
of the iShares®
Dow
Jones Real Estate Index Fund from the Bloomberg Financial Service under the
symbol IYR <Index> or from the iShares®
website
at
http://www.ishares.com/fund_info/detail.jhtml?symbol=IYR&qt=IYR.
iShares®
Lehman Aggregate Bond Fund.
The
objective of the iShares®
Lehman
Aggregate Bond Fund is to achieve investment results that correspond generally
to the price and yield performance, before fees and expenses, of the total
United States investment grade bond market as defined by the Lehman Brothers
U.S. Aggregate Index. The iShares®
Lehman
Aggregate Bond Fund uses a “Representative Sampling” strategy in seeking to
track the Lehman Brothers U.S. Aggregate Index.
The
Lehman Brothers U.S. Aggregate Index measures the performance of the U.S.
investment grade bond market, which includes investment grade U.S. Treasury
bonds, government-related bonds, investment grade corporate bonds, mortgage
pass-through securities, commercial mortgage-backed securities and asset-backed
securities that are publicly offered for sale in the United States. The
securities in the Lehman Brothers U.S. Aggregate Index must have $250 million
or
more of outstanding face value and must have at least one year remaining
to
maturity. In addition, the securities must be denominated in U.S. dollars
and
must be fixed rate and non-convertible. Certain types of securities, such
as
state and local government series bonds, structured notes with embedded swaps
or
other special features, private placements, floating rate securities and
Eurobonds are excluded from the Lehman Brothers U.S. Aggregate Index. The
Lehman
Brothers U.S. Aggregate Index is market capitalization weighted and the
securities in the Index are updated on the last calendar day of each month.
You
can obtain the Closing Level of the iShares®
Lehman
Aggregate Bond Fund from the Bloomberg Financial Service under the symbol
AGG US
<Equity> or from the iShares®
website
at http://
www.ishares.com/fund_info/detail.jhtml?symbol=AGG&qt=AGG.
How
have
the Index and Components performed historically?
We
have
provided hypothetical historical performance data which represents the returns
of hypothetical investments issued at set intervals in the past, the performance
of which is linked to the Index (including the minimum and maximum weighting
constraints with respect to the Components and the daily deduction of the
Index
Adjustment Factor). See generally, “Hypothetical Historical Performance Data”.
For comparison purposes, we have also provided the hypothetical performance
of a
static equally-weighted basket of the Components issued at the same set
intervals.
The
hypothetical historical performance data should not be taken as an indication
of
either the future performance of the Index over the term of the Notes or
the
Cash Settlement Value payable at maturity. In addition, you should understand
that this hypothetical historical performance data is based on hypothetical
returns for periods of time which in some cases are different than the term
of
the Notes and, therefore, may not fully account for the longer-term market
trends that are more likely to be captured in a note with this
term.
You
should note that although the hypothetical historical performance data set
forth
herein shows the hypothetical performance of a series of investments linked
to
the Index and compares that hypothetical performance to the actual performance
of a static equally-weighted basket of the Components without the application
of
re-weighting. Due to the effects of re-weighting, the weighting of the
Components in the examples differs from the weighting in the Index during
the
same period of time.
You
should refer to the sections “Hypothetical Historical Performance Data” and
“Risk Factors— The pro forma U.S. Adagio Strategy performance may not represent
actual performance.”
We
have
also provided tables depicting the highest and lowest daily closing levels
or
closing prices, as applicable, and the end-of-quarter closing levels or closing
prices, as applicable, for the Equity Component and the Real Estate Component
for each quarter beginning with April 1, 2001 and for the Bond Component
for
each quarter beginning at its date of inception, September 26, 2003. You
can
find these tables in the section “Description of the Components.” In each case,
the displayed levels were obtained from Bloomberg Financial Service, without
independent verification by the Issuer. We have provided this historical
information to help you evaluate the behavior of the Components in various
economic environments; however, the time period depicted is relatively limited
and past performance is not indicative of the manner in which the Components
will perform in the future. You should refer to the section “Description of the
Components.”
Most
importantly, investors should understand that historical performance is not
indicative of future results.
Will
the Notes
be listed on a securities exchange?
The
Notes
will not be listed on any securities exchange, and we do not expect a trading
market to develop, which may affect the price that you receive for your Notes
upon any sale prior to maturity. If a trading market were to develop in the
Notes, it may not be liquid. Our subsidiary, Bear, Stearns & Co. Inc. has
advised us that they intend under ordinary market conditions to indicate
prices
for the Notes on request. However, we cannot guarantee that bids for outstanding
Notes will be made; nor can we predict the price at which any such bids will
be
made. Your principal investment in the Notes is protected only if you hold
your
Notes to maturity. If you sell your Notes prior to maturity, you may receive
less than the amount you originally invested. You should refer to the section
“Risk Factors.”
What
is the role of Bear Stearns?
Bear,
Stearns & Co. Inc. will be our agent for the offering and sale of the Notes.
After the initial offering, Bear, Stearns & Co. Inc. intends to buy and sell
the Notes to create a secondary market for holders of the Notes, and may
stabilize or maintain the market price of the Notes during the initial
distribution of the Notes. However, Bear, Stearns & Co. Inc. will not be
obligated to engage in any of these market activities or to continue them
once
they are begun.
Bear,
Stearns & Co. Inc. also will be our Calculation Agent for purposes of
calculating the Cash Settlement Value hereunder. Under certain circumstances,
these duties could result in a conflict of interest between Bear, Stearns
&
Co. Inc.’s status as our subsidiary and its responsibilities as Calculation
Agent. You should refer to “Risk Factors—The Calculation Agent is one of our
affiliates, which could result in a conflict of interest.”
Can
you tell me more about The Bear Stearns Companies Inc.?
We
are a
holding company that, through our broker-dealer and international bank
subsidiaries, principally Bear, Stearns & Co. Inc., Bear, Stearns Securities
Corp., Bear, Stearns International Limited (“BSIL”) and Bear Stearns Bank plc,
is a leading investment banking, securities and derivatives trading, clearance
and brokerage firm serving corporations, governments, institutional and
individual investors worldwide. For more information about us, please refer
to
the section “The Bear Stearns Companies Inc.” in the accompanying prospectus.
You should also read the other documents we have filed with the SEC, which
you
can find by referring to the section “Where You Can Find More Information” in
the accompanying prospectus.
Who
should consider purchasing the Notes?
Because
the Notes are tied to the Index Level, they may be appropriate for investors
with specific investment horizons who seek to participate in the potential
appreciation of the Index. In particular, the Notes may be an attractive
investment for you if you:
|
·
|
want
exposure to a strategy that selects dynamically from three U.S.
asset
classes represented by the Components according to the previous
12 monthly
returns of each of the Components;
|
|
·
|
want
potential upside exposure to the Index Level and believe that the
Index
Level will increase over the term of the Notes and wish to participate
in
the potential appreciation of the Index;
and
|
|
·
|
are
willing to risk the possible loss of the principal amount of the
Notes in
exchange for the opportunity to participate in 150.00% of the
appreciation, if any, in the Index Level;
and
|
|
·
|
are
willing to forgo interest payments.
|
The
Notes
may not be a suitable investment for you if:
|
·
|
seek
full principal protection under all market
conditions;
|
|
·
|
believe
that the Index Level will decrease or will not increase over the
term of
the Notes;
|
|
·
|
seek
an investment with an active secondary market;
or
|
|
·
|
seek
an investment with a fixed return or that pays
interest.
|
What
are the U.S. federal income tax consequences of investing in the
Notes?
The
U.S.
federal income tax consequences of an investment in the Notes are uncertain.
We
intend to treat the Notes for all tax purposes as pre-paid cash-settled forward
contracts linked to the value of the Index and, where required, to file
information returns with the Internal Revenue Service in accordance with
such
treatment. Assuming the Notes are treated as pre-paid cash-settled forward
contracts, you should be required to recognize capital gain or loss to the
extent that the cash you receive on the Maturity Date or upon a sale or exchange
of the Notes prior to the Maturity Date differs from your tax basis on the
Notes
(which will generally be the amount you paid for the Notes). However, other
treatments are possible. You should review the discussion under the section
“Certain U.S. Federal Income Tax Considerations,” and consult with your tax
advisor regarding the U.S. federal income tax consequences of an investment
in
the Notes.
Does
ERISA impose any limitations on purchases of the Notes?
An
employee benefit plan subject to the fiduciary responsibility provisions
of the
Employee Retirement Income Security Act of 1974 (“ERISA”), a plan that is
subject to Section 4975 of the Internal Revenue Code of 1986, as amended
(the
“Code”), including individual retirement accounts, individual retirement
annuities or Keogh plans, a governmental plan subject to any similar law
or any
entity the assets of which are deemed to be “plan assets” under ERISA
regulations, will be permitted to purchase, hold and dispose of the Notes,
subject to certain conditions. Such investors should carefully review the
discussion under “Certain ERISA Considerations” in this pricing supplement
before investing in the Notes.
Are
there any risks associated with my investment?
Yes.
The
Notes are subject to a number of risks. You should refer to “Risk Factors” in
this pricing supplement and “Risk Factors” in the accompanying prospectus
supplement.
RISK
FACTORS
Your
investment in the Notes will be subject to risks not associated with
conventional fixed-rate or floating-rate debt securities. Prospective purchasers
should recognize the possibility of a loss with respect to their investment
in
the Notes. Prospective purchasers of the Notes should understand the risks
of
investing in the Notes and should reach an investment decision only after
careful consideration, with their advisers, of the suitability of the Notes
in
light of their particular financial circumstances, the following risk factors
and the other information set forth in this pricing supplement and the
accompanying prospectus supplement and prospectus. These risks include the
possibility that the Components will fluctuate. We have no control over a
number
of matters, including economic, financial, regulatory, geographic, judicial
and
political events, that are important in determining the existence, magnitude,
and longevity of these risks and their influence on the value of, or the
payment
made on, the Notes.
The
Notes are not principal protected. At
maturity, the Notes may pay less than the principal
amount.
The
Notes
are not principal protected. If the Final Index Level is less than the Initial
Index Level, the Cash Settlement Value you will receive will be less than
the
initial offering price, in proportion to the percentage decline in the Index
Level. You may receive less, and possibly significantly less, than the initial
offering price of $1,000 per Note. You should understand that the future
performance of the Index is impossible to predict and therefore no future
performance of the Notes and the Index may be inferred from the past historical
performance of the Index.
The
Notes do not pay a coupon and, at maturity, the Notes may pay less than the
principal amount.
Movement
in the Index Level cannot be predicted. We and our affiliates developed the
Index. We designed the Index to replicate a strategy that selects dynamically
from the Components according to the previous 12 monthly returns of the
Components. The strategy underlying the Index is based on the proposition
that
the asset allocation among the three asset classes is optimized by accounting
for different timing effects of the return of each of the assets relative
to the
others. However, neither the Notes nor the Index have a trading history.
You
should understand that the future performance of the Index is impossible
to
predict and therefore no future performance of the Notes and the Index may
be
inferred from any of the historical simulations set forth herein. Because
it is
impossible to predict the Index, the Notes could, in some situations make
no
coupon payment, or a coupon payment that is less than prevailing interest
rates.
There
is risk relating to the Index based on the timing effects of
correlation.
Investors
should realize that the Index contemplates that the three Components have
certain correlations, the timing effects of which can be quantified by a
fixed
set of monthly coefficients and captured in positive returns by the re-weighting
according to such coefficients. Investors are cautioned that, to the extent
that
this assumption is incorrect and the timing and correlation effects do not
occur
as contemplated, the Index returns may underperform one or more of the
Components. Further, the coefficients were determined based on the historical
correlations between the movements of the Components. Although the analysis
of
the data indicated such correlations were consistent in the past and consistent
over different durations of time, it is possible that the correlation between
the movement of the Components in the past was a function of specific conditions
existing in the past yielding a specific set of data, and that those conditions
and the relationships from which the correlations were derived may not exist
in
the future. As a result, the Index Level may not increase to the extent
suggested by the correlation analysis of the historical data.
You
will not receive any interest payments on the Notes.
Your yield may be lower than the yield on a conventional debt security of
comparable maturity.
You
will
not receive any periodic payments of interest or any other periodic payments
on
the Notes. On the Maturity Date, you will receive a payment per Note equal
to
the Cash Settlement Value. Thus, the overall return you earn on your Notes
may
be less than that you would have earned by investing in a non-indexed debt
security of comparable maturity that bears interest at a prevailing market
rate.
In addition, any return may not fully compensate you for any opportunity
cost to
you when you take into account inflation and other factors relating to the
time
value of money. For more specific information about the Cash Settlement Value
and for illustrative examples, you should refer to the section “Description of
the Notes.”
Owning
the Notes is not the same as having rights in the Index or the
Components.
You
will
not have any ownership or other rights in the Index or any of the Components
comprising the Index. Even if the Index and the Components increase above
the
initial levels during the term of the Notes, the trading value of the Notes
may
not increase by the same amount. It is also possible for the Components to
increase while the trading value of the Notes declines.
Your
yield will not reflect dividends or other distributions on the securities
underlying the Equity
Component and the Real Estate Component.
The
Index
does not reflect the payment of dividends or other distributions on the
securities underlying the S&P 500®
Index or
the iShares®
Dow
Jones U.S. Real Estate Index Fund. Therefore, the yield you will receive
by
holding the Notes to maturity will not be the same as if you had purchased
such
Components and held them for a similar period.
You
must rely on your own evaluation of the merits of an investment linked to
the
Index.
In
the
ordinary course of our business, we may from time to time express views on
expected movements in the Index, in the Components and in the securities
underlying the Components. These views may vary over differing time horizons
and
are subject to change without notice. Moreover, other professionals who deal
in
the equity markets may at any time have views that differ significantly from
ours. In connection with your purchase of the Notes, you should investigate
the
Index, the Components and the securities underlying the Components and not
rely
on our views with respect to future movements in these Components and
securities. You should make such investigation as you deem appropriate as
to the
merits of an investment linked to the Index.
The
U.S. federal income tax consequences of an investment in the Notes are
uncertain.
Although
we intend to treat the Notes for all tax purposes as pre-paid cash-settled
forward contracts linked to the Index, there is no direct legal authority
as to
the proper tax treatment of the Notes, and therefore significant aspects
of the
tax treatment of the Notes are uncertain. In particular, it is possible that
you
will be required to recognize income for U.S. federal tax purposes with respect
to the Notes prior to the sale, exchange or maturity of the Notes, and it
is
possible that any gain or income recognized with respect to the Notes will
be
treated as ordinary income rather than capital gain. You should review the
discussion under the section “Certain U.S. Federal Income Tax Considerations,”
and consult with your tax advisor regarding the U.S. federal income tax
consequences of an investment in the Notes.
Equity
market risks, real estate market risks and bond market risks may affect the
trading value of the Notes and the amount you will receive at
maturity.
We
expect
that the value of the Index will fluctuate in accordance with changes in
the
equity sector, real estate sector and bond sector generally, with the financial
conditions of the companies or entities issuing the securities underlying
the
Components and other factors. The financial conditions of the issuers of
the
securities underlying the Components may become impaired or the general
condition of the global equity markets, real estate markets and/or bond markets
may deteriorate, any of which may cause a decrease in the value of the Index
and
thus in the value of the Notes.
Equity
securities are susceptible to general equity market fluctuations and to volatile
increases and decreases in value, as market confidence in and perceptions
regarding the securities underlying the Components change. Investor perceptions
regarding the companies issuing the securities comprising the Components
are
based on various and unpredictable factors, including expectations regarding
government, economic, monetary and fiscal policies, inflation and interest
rates, economic expansion or contraction, and global or regional political,
economic, and banking crises. The value of the Index may be expected to
fluctuate until the final Calculation Date.
The
Real
Estate Component, because it is concentrated in a particular industry sector,
may be adversely affected by the performance of real estate securities and
may
be subject to price volatility. In addition, the Real Estate Component may
be
more susceptible to any single economic, market, political or regulatory
occurrence affecting that industry sector. Investment in the real estate
sector
is subject to many of the same risks associated with the direct ownership
of
real estate such as:
|
·
|
adverse
changes in national, state or local real estate conditions (such
as
oversupply of, or reduced demand for, space and changes in market
rental
rates);
|
|
·
|
obsolescence
of properties;
|
|
·
|
changes
in the availability, cost and terms of mortgage funds;
and
|
|
·
|
the
impact of environmental laws.
|
The
Real
Estate Component is classified as "non-diversified." A non-diversified fund
generally may invest a larger percentage of its assets in the securities
of a
smaller number of issuers. As a result, the Real Estate Component may be
more
susceptible to the risks associated with these particular companies, or to
a
single economic, political or regulatory occurrence affecting these
companies.
The
Bond
Component is susceptible to general U.S. bond market fluctuations. Debt
securities generally are susceptible to:
|
·
|
interest
rate risk, which is the chance that bond prices overall will decline
because of rising interest rates;
|
|
·
|
credit
risk, which is the risk that a bond issuer fails to pay interest
and
principal in a timely manner, or that negative perceptions of an
issuer’s
ability to make such payments cause the price of that bond to decline;
and
|
|
·
|
call
risk, which is the risk that during periods of falling interest
rates,
issuers of callable bonds may repay securities with higher coupons
or
interest rates before their maturity dates. The Bond Component
would then
reflect the loss of potential price appreciation as issuers are
forced to
reinvest unanticipated proceeds at lower interest rates, resulting
in a
decline in the income to the
issuers.
|
The
historical performance of the Components is not an indication of the future
performance.
The
historical performance of the Components should not be taken as an indication
of
their future performance. While the trading prices of the securities comprising
the Components will determine the value of the Components, it is impossible
to
predict whether the value of the Components will fall or rise during the
term of
the Notes. Trading prices of the securities comprising the Components will
be
influenced by complex and interrelated economic, financial, regulatory,
geographic, judicial, political and other factors that can affect the capital
markets generally and the equity, real estate and bond trading markets, in
particular, and by various circumstances that can influence the values of
the
underlying securities in a specific market segment or the value of a particular
underlying security.
The
hypothetical Index performance does not represent actual
performance.
The
hypothetical historical performance data set forth in the “Hypothetical
Historical Performance Data” section should not be taken as an indication of
either the future performance of the Index over the term of the Notes or
the
Cash Settlement Value that will be payable to you at maturity. Neither the
Notes
nor the Index have a trading history. As a consequence, investors should
understand that the historical simulations set forth herein are based on
the
application of the strategy of the Index to the actual historical performance
of
the Components, subject to the constraints set forth in “Hypothetical Historical
Performance Data.”
Any
pro
forma analysis inherently involves assumptions and discretion. You should
understand that the future performance of the Index is impossible to predict
and
therefore no future performance of the Notes and the Index may be inferred
from
any of the historical simulations. You are cautioned that the hypothetical
performance data set forth herein is not indicative of, and has no bearing
on,
any trading results or the performance that may be obtained by the Index
or the
Notes.
The
formula for determining the Cash Settlement Value does not take into account
changes in the levels of the Index between the Pricing Date and the Calculation
Date.
Changes
in the levels of the Index during the term of the Notes after the Pricing
Date
and before the Calculation Date will not be reflected in the calculation
of the
amount of the Cash Settlement Value. The Calculation Agent will calculate
the
amount of the Cash Settlement Value based upon the Index Level as of the
Calculation Date. As a result, you may not receive more than the initial
public
offering price of $1,000 per each $1,000 principal amount of Notes even if
the
value of the Index has greatly increased early during the term of the Notes
before declining by the time of the Calculation Date.
The
price at which you will be able to sell your Notes prior to maturity will
depend
on a number of factors, and may be substantially less than the amount you
had
originally invested.
If
you
wish to liquidate your investment in the Notes prior to maturity, your only
alternative would be to sell them. At that time, there may be an illiquid
market
for Notes or no market at all. Even if you were able to sell your Notes,
there
are many factors outside of our control that may affect their trading value.
We
believe that the value of your Notes will be affected by the value and
volatility of the Index, whether the closing level of the Index is greater
than
or equal to its initial level, changes in U.S. interest rates, the supply
of and
demand for the Notes and a number of other factors. Some of these factors
are
interrelated in complex ways; as a result, the effect of any one factor may
be
offset or magnified by the effect of another factor. The price, if any, at
which
you will be able to sell your Notes prior to maturity may be substantially
less
than the amount you originally invested if, at such time, the closing level
of
the Index is less than, equal to or not sufficiently above its initial level.
The following paragraphs describe the manner in which we expect the trading
value of the Notes will be affected in the event of a change in a specific
factor, assuming all other conditions remain constant.
|
·
|
Index
performance.
We expect that the value of the Notes prior to maturity will depend
substantially on whether the Index Level is greater than the Initial
Index
Level. If you decide to sell your Notes when the Index Level exceeds
the
Initial Index Level, you may nonetheless receive substantially
less than
the amount that would be payable at maturity based on that Index
Level
because of expectations that the Index Level will continue to fluctuate
until the Final Index Level is determined. Economic, financial,
regulatory, geographic, judicial, political and other developments
that
affect the commodities underlying the Index may also affect the
Index
Level and, thus, the value of the
Notes.
|
|
·
|
Volatility
of the Index.
Volatility is the term used to describe the size and frequency
of market
fluctuations. If the volatility of the Index Level increases or
decreases,
the trading value of the Notes may be adversely affected. This
volatility
may increase the risk that the Index Level will decline, which
could
negatively affect the trading value of Notes. The effect of the
volatility
of the Index Level on the trading value of the Notes may not necessarily
decrease over time during the term of the
Notes.
|
|
·
|
Interest
rates.
We expect that the trading value of the Notes will be affected
by changes
in interest rates. In general, if interest rates increase, the
value of
outstanding debt securities tends to decrease; conversely, if interest
rates decrease, the value of outstanding debt securities tends
to
increase. Interest rates may also affect the economy and, in turn,
the
value of the Index, which may affect the value of the Notes. Rising
interest rates may lower the value of the Index and, thus, the
value of
the Notes.
|
|
·
|
Our
credit ratings, financial condition and results of
operations.
Actual or anticipated changes in our current credit ratings, A1
by Moody’s
Investor Service, Inc. and A+ by Standard & Poor’s Rating Services, as
well as our financial condition or results of operations may significantly
affect the trading value of the Notes. However, because the return
on the
Notes is dependent upon factors in addition to our ability to pay
our
obligations under the Notes, such as the level of the Index, an
improvement in our credit ratings, financial condition or results
of
operations is not expected to have a positive effect on the trading
value
of the Notes.
|
|
·
|
Time
remaining to maturity.
A
“time premium” results from expectations concerning the Index Level during
the period prior to the maturity of the Notes. As the time remaining
to
the maturity of the Notes decreases, this time premium will likely
decrease, potentially adversely affecting the trading value of
the
Notes.
|
|
·
|
Dividend
yield.
The value of the Notes may also be affected by the dividend yields
on the
securities underlying the Components of the Index. In general,
because the
Index does not incorporate the value of dividend payments on the
Equity
Component and the Real Estate Component, higher dividend yields
will
likely reduce the value of the Notes and, conversely, lower dividend
yields will likely increase the value of the
Notes.
|
|
·
|
Events
involving the companies issuing the securities comprising the
Components.
General economic conditions and earnings results of the companies
whose
securities comprise the Components, and real or anticipated changes
in
those conditions or results, may affect the trading value of the
Notes.
Some of the securities underlying the Components may be affected
by
mergers and acquisitions, which can contribute to volatility of
the Index.
As a result of a merger or acquisition, one or more securities
in the
Components may be replaced with a surviving or acquiring entity’s
securities. The surviving or acquiring entity’s securities may not have
the same characteristics as the stock originally included in the
Index.
|
|
·
|
Size
and liquidity of the trading market.
The Notes will not be listed on any securities exchange, and we
do not
expect a trading market to develop, which may affect the price
that you
receive for your Notes upon any sale prior to maturity. If a trading
market were to develop in the Notes, it may not be liquid. Our
subsidiary,
Bear, Stearns & Co. Inc. has advised us that they intend under
ordinary market conditions to indicate prices for the Notes on
request.
However, we cannot guarantee that bids for outstanding Notes will
be made;
nor can we predict the price at which any such bids will be made.
Your
principal investment in the Notes is protected only if you hold
your Notes
to maturity. If you sell your Notes prior to maturity, you may
receive
less than the amount you originally
invested.
|
|
·
|
Inclusion
of commission.
The inclusion of commissions and projected profit from hedging
in the
initial public offering price of the Notes is likely to adversely
affect
secondary market prices. Assuming no change in the market conditions
or
any other relevant factors, the price, if any, at which Bear, Stearns
& Co. Inc. may be willing to purchase the Notes in secondary market
transactions may be lower than the original price of the Notes,
because
the original price included, and secondary market prices are likely
to
exclude, commissions paid with respect to the Notes, as well as
the
projected profit included in the cost of hedging our obligations
under the
Notes. In addition, any such prices may differ from values determined
by
pricing models used by Bear, Stearns & Co. Inc. as a result of dealer
discounts, mark-ups or other transaction
costs.
|
We
want
you to understand that the effect of one of the factors specified above,
such as
an increase in interest rates, may offset some or all of any change in the
value
of the Notes attributable to another factor, such as an increase in the value
of
the Index.
Reported
Component levels may be based on non-current information.
If
trading is interrupted in the securities underlying certain of the Components,
publicly available information regarding the Index Level may be based on
the
last reported prices or levels. As a result, publicly available information
regarding reported Component levels may at times be based on non-current
information.
Suspensions
or disruptions of market trading in the securities markets may adversely
affect
the Cash Settlement Value and/or the market value of the
Notes.
The
securities markets are subject to temporary distortions or other disruptions
due
to various factors, including a lack of liquidity in the markets, the
participation of speculators and potential government regulation and
intervention. Suspension or other disruptions of market trading in the
securities underlying certain of the Components could adversely affect the
value
of those Components and, therefore, the amount of the Cash Settlement Value
and/or the trading value of the Notes.
Adjustments
to the Components could adversely affect the value of the
Notes.
The
policies of a Component Sponsor concerning additions, deletions and
substitutions of the securities underlying the applicable Component and the
manner in which such Component Sponsor takes account of certain changes
affecting such underlying securities may affect the price or level of the
Component and thus the Index Level. You should realize that changes in the
companies included in any Component may affect the Component, as a newly-added
company may perform significantly better or worse than the company or companies
it replaces. The Component Sponsor for the Equity Component also may discontinue
or suspend calculation or dissemination of the Equity Component or materially
alter the methodology by which it calculates the Equity Component, and the
Real
Estate Component and the Bond Component may be subject to certain corporate
events. Any such actions or events could affect the value of the
Notes.
The
Calculation Agent is one of our affiliates, which could result in a conflict
of
interest.
Bear,
Stearns & Co. Inc. will act as the Calculation Agent. The Calculation Agent
will make certain determinations and judgments in connection with calculating
the Cash
Settlement Value.
Because
Bear, Stearns & Co. Inc. is our affiliate, conflicts of interest may arise
in connection with Bear, Stearns & Co. Inc. performing its role as
Calculation Agent. Bear, Stearns & Co. Inc. is obligated to carry out its
duties and functions as Calculation Agent in good faith, and using its
reasonable judgment.
Our
affiliates, including Bear, Stearns & Co. Inc., may, at various times,
engage in transactions involving the securities and Components underlying
the
Index for their proprietary accounts, and for other accounts under their
management. These transactions may influence the value of such securities
and
components, and therefore the value of the Index. Bear Stearns International
Limited, or another affiliate of ours will also be the counterparty to the
hedge
of our obligations under the Notes. You should refer to “Use of Proceeds and
Hedging.” Accordingly, under certain circumstances, conflicts of interest may
arise between Bear, Stearns & Co. Inc.’s responsibilities as Calculation
Agent with respect to the Notes and Bear Stearns International Limited’s or
another affiliates obligations under our hedge.
Changes
that affect the calculation of a Component and/or certain corporate events
will
affect the Index, which will in turn affect the trading value of the Notes
and
the amount of the Cash Settlement Value.
The
Component Sponsor for the Equity Component is responsible for maintaining
and
calculating the level of the Equity Component. The policies of such Component
Sponsor concerning the calculation of the Equity Component will affect the
level
of the Equity Component and, therefore, the level of the Index, the trading
value of the Notes and the amount of the Cash Settlement Value.
If
the
relevant Component Sponsor discontinues or suspends calculation or publication
of the Equity Component, or if certain corporate events occur with respect
to
the Real Estate Component or the Bond Component, it may become difficult
to
determine the level of the Index, the trading value of the Notes or the amount
of the Cash Settlement Value.
If
the
relevant Component Sponsor discontinues or suspends calculation of the Equity
Component at any time prior to and including the Calculation Date and a
successor component is not available or is not acceptable to the Calculation
Agent, then the Calculation Agent will determine the amount payable on the
Maturity Date using the Closing Level (as defined below) of the Equity Component
calculated in accordance with the formula for and method of calculating such
Component last in effect prior to such discontinuance, based on the Closing
Level (or, if trading in the relevant securities has been materially suspended
or materially limited, its good faith estimate of the Closing Level that
would
have prevailed but for such suspension or limitation) at the close of the
principal trading session on such date of each security most recently comprising
the Equity Component on the primary organized exchange or trading system
on
which such securities trade. See “Description of the Notes—Discontinuance of the
Index or the Equity Component”.
If
certain corporate events occur with respect to the Real Estate Component
or the
Bond Component at any time prior to and including the Calculation Date and
a
successor component is not available or is not acceptable to the Calculation
Agent, then the Calculation Agent will determine the amount payable on the
Maturity Date by calculating the Closing Level of the relevant Component
based
on the Closing Levels at the close of the principal trading session on such
date
of each security most recently comprising such Component on the primary
organized exchange or trading system on which such securities trade, (or,
if
trading in the relevant securities has been materially suspended or materially
limited, its good faith estimate of the Closing Level that would have prevailed
but for such suspension or limitation). See “Description of the Notes—Corporate
Events Effecting the Real Estate Component or the Bond
Component”.
In
addition, if the method of calculating the Equity Component is changed in
a
material respect, if certain corporate events occur with respect to the Real
Estate Component or the Bond Component or if a Component is in any other
way
modified so that such Component does not, in the opinion of the Calculation
Agent, fairly represent the level of the Component had such changes or
modifications not been made, the Calculation Agent will make such calculations
and adjustments as may be necessary to arrive at a level of a security index
comparable to the Component as if such changes or modifications had not been
made. In each such event, the Calculation Agent’s determination of the value of
the Notes will affect the amount you receive on the Maturity Date. See
“Description of the Notes—Discontinuance of the Index or the Equity Component”
and “Description of the Notes—Corporate Events Effecting the Real Estate
Component or the Bond Component”.
We
cannot control actions by the other
companies whose securities are included in each Component.
The
common stock of The Bear Stearns Companies Inc. is an underlying stock of
the
S&P 500®
Index.
We may currently, or in the future, engage in business with the other companies
underlying the S&P 500®
Index.
Actions by any company whose security is part of a Component may have an
adverse
effect on the price of the company’s securities, the trading price of and the
Closing Level of the Component and the Index, and the trading value of the
Notes. No such other company is involved in this offering or has any obligations
with respect to the Notes, including any obligation to take our or your
interests into consideration for any reason. These other companies will not
receive any of the proceeds of this offering and are not responsible for,
and
have not participated in, the determination of the timing of, prices for,
or
quantities of, the Notes to be issued. These other companies are not involved
with the administration, marketing or trading of the Notes and have no
obligations with respect to the amount to be paid to you on the Maturity
Date.
Neither
we nor any of our affiliates, including Bear, Stearns & Co. Inc., assumes
any responsibility for the adequacy or accuracy of any publicly available
information about any of the securities of the other companies underlying
the
Components or the Components (other than ourselves). You should make your
own
investigation into the other companies underlying each Component.
We
and our affiliates have no affiliation with any Component Sponsor or the
Strategy Sponsor and are not responsible for any Component Sponsor’s public
disclosure of information.
We
and
our affiliates are not affiliated in any way with any Component Sponsor (except
for the licensing arrangements discussed in the section “Description of the
Index—License Agreements”) and have no ability to control or predict any
Component Sponsor’s actions, including any errors in or discontinuation of
disclosure regarding its methods or policies relating to the management or
calculation of the applicable Component, as the case may be. Neither we nor
any
of our affiliates assumes any responsibility for the adequacy or accuracy
of the
information about the Components or the Component Sponsors contained in this
pricing supplement. You, as an investor in the Notes, should make your own
investigation into the Components and the Component Sponsors. The Component
Sponsors are not involved in any way in the offering of the Notes and have
no
obligation to consider your interests as an owner of Notes when they take
any
actions that might affect the value of the Notes.
We
and
our affiliates are not affiliated in any way with the Strategy Sponsor and
have
no ability to control or predict the Strategy Sponsor’s actions. The Index is
the exclusive property of Bear Stearns International Limited, one of our
affiliates, which has contracted with the Strategy Sponsor to maintain and
calculate the Index. The Strategy Sponsor shall have no liability for any
errors
or omissions in calculating the Index or the Equity Component. The Notes,
which
are linked to the performance of the Index, are not sponsored, endorsed,
sold or
promoted by the Strategy Sponsor; and the Strategy Sponsor makes no
representations regarding the advisability of investing in the
Notes.
Trading
and other transactions by us or our affiliates could affect the prices of
the
securities underlying a Component, the level of a Component, the level of
the
Index, the trading value of the Notes or the Cash Settlement
Value
We
and
our affiliates may hedge some or all of our anticipated exposure in connection
with the Notes by the purchase and sale of exchange-traded or over-the-counter
options on the Index, the Components or individual securities included in
the
Components, or futures contracts on the Index or the Components and options
on
such futures contracts or by taking positions in any other instruments that
it
may wish to use in connection with such hedging. We and our affiliates are
likely to modify our hedge position throughout the life of the Notes by
purchasing and selling the securities and instruments listed above and other
available securities and instruments. We and our affiliates may also from
time
to time buy or sell shares of the securities underlying a Component or
derivative instruments related to those securities or such Component for
our own
accounts in connection with our normal business practices. These trading
activities may present a conflict of interest between your interest in the
Notes
and the interests we and our affiliates may have in our proprietary accounts,
in
facilitating transactions, including block trades, for our other customers
and
in accounts under our management. The transactions could affect the prices
of
those securities or the level of the Component, and therefore the level of
the
Index, in a manner that would be adverse to your investment in the Notes.
See
the section “Use of Proceeds and Hedging.”
Hedging
activities that we or our affiliates may engage in may affect the prices
of
those securities or the level of a Component, and therefore the level of
the
Index and, accordingly, increase or decrease the trading value of the Notes
prior to maturity and the amount of the Cash Settlement Value. To the extent
that we or any of our affiliates has a hedge position in any of the securities
that underlie a Component, or derivative or synthetic instruments related
to
those securities or such Component, we or any of our affiliates may liquidate
a
portion of such holdings at any time before, during or after the term of
the
Notes or at or about the time of a change in the securities that underlie
the
Component. Depending on, among other things, future market conditions, the
aggregate amount and the composition of such hedge positions are likely to
vary
over time. Profits or losses from any of those positions cannot be ascertained
until the position is closed out and any offsetting position or positions
are
taken into account. Although we have no reason to believe that any of those
activities will have a material effect on the level of the Index, we cannot
assure you that these activities will not affect such level and the trading
value of the Notes prior to maturity or the amount of the Cash Settlement
Value.
In
addition, we or any of our affiliates may purchase or otherwise acquire a
long
or short position in the Notes or derivative instruments related to the Index.
We or any of our affiliates may hold or resell the Notes.
Research
reports and other transactions may create conflicts of interest between you
and
us.
We
or one
or more of our affiliates may have published, and may in the future publish,
research reports relating to the Index, the Components or companies issuing
the
securities underlying any of the Components. This research may be modified
from
time to time without notice and may express opinions or provide recommendations
that are inconsistent with purchasing or holding the Notes. Any of these
activities may affect the market prices of securities included in any Component
and, therefore, the Index Level and the value of the Notes. Similarly, we
may in
the past have issued or may in the future issue Notes that permit a purchaser
to
take a different view with respect to the movements of the Components or
the
Index than do the Notes (e.g.,
to take
a bearish rather than a bullish view).
We
or any
of our affiliates may also issue, underwrite or assist unaffiliated entities
in
the issuance or underwriting of other securities or financial instruments
with
returns indexed to the Index or a Component thereof. By introducing competing
products into the marketplace in this manner, we or our affiliates could
adversely affect the value of the Notes.
We
and
our affiliates, at present or in the future, may engage in business with
the
companies issuing the securities included in any of the Components, including
making loans to, equity investments in, or providing investment banking,
asset
management or other advisory services to those companies. In connection with
these activities, we may receive information about those companies that we
will
not divulge to you or other third parties.
The
payment you receive on the Notes at maturity may be delayed or reduced upon
the
occurrence of a Market Disruption Event, or an Event of
Default.
If
the
Calculation Agent determines that, on the Calculation Date, a Market Disruption
Event has occurred or is continuing, the determination of the value of the
Index
by the Calculation Agent may be deferred. You should refer to the section
“Description of the Notes—Market Disruption Events.”
If
the
Calculation Agent determines that an Event of Default (as defined below)
has
occurred, a holder of the Notes will only receive an amount equal to the
trading
value of the Notes on the date of such Event of Default, adjusted by an amount
equal to any losses, expenses and costs to us of unwinding any underlying
hedging or funding arrangements, all as determined by the Calculation Agent
in
its sole and absolute discretion. You should refer to the section “Description
of the Notes—Event of Default and Acceleration.”
You
should decide to purchase the Notes only after carefully considering the
suitability of the Notes in light of your particular financial circumstances.
You should also carefully consider the tax consequences of investing in the
Notes. You should refer to the section “Certain U.S. Federal Income Tax
Considerations” and discuss the tax implications with your own tax
advisor.
DESCRIPTION
OF THE NOTES
The
following description of the Notes (referred to in the accompanying prospectus
supplement as the “Other Indexed Notes”) supplements the description of the
Notes in the accompanying prospectus supplement and prospectus. This is a
summary and is not complete. You should read the indenture, dated as of May
31,
1991, as amended (the “Indenture”), between us and The Bank of New York as
successor in interest to JPMorgan Chase Bank, N.A., as trustee (the “Trustee”).
A copy of the Indenture is available as set forth under the section of the
prospectus entitled “Where You Can Find More Information.”
General
The
Notes
are part of a single series of debt securities under the Indenture described
in
the accompanying prospectus supplement and prospectus designated as Medium-Term
Notes, Series B. The Notes are unsecured and will rank equally with all of
our
unsecured and unsubordinated debt, including the other debt securities issued
under the Indenture. Because we are a holding company, the Notes will be
effectively subordinated to the claims of creditors of our
subsidiaries.
The
aggregate principal amount of the Notes is specified on the cover. The Notes
will mature on the Maturity Date and do not provide for earlier redemption.
The
Notes will be issued only in fully registered form, and in minimum denominations
of $1,000 and with amounts in excess thereof in integral multiples of $1,000;
provided, however, that the minimum purchase for any purchaser domiciled
in a
member state of the European Union shall be $100,000. Initially, the Notes
will
be issued in the form of one or more global securities registered in the
name of
DTC or its nominee, as described in the accompanying prospectus supplement
and
prospectus. When we refer to Note or Notes in this pricing supplement, we
mean
$1,000 principal amount of Notes. The Notes will not be listed on any securities
exchange.
You
should refer to the section “Certain U.S. Federal Income Tax Considerations,”
for a discussion of certain federal income tax considerations to you as a
holder
of the Notes.
Future
Issuances
Under
certain limited circumstances, and at our sole discretion, we may offer further
issuances of the Notes. These further issuances, if any, will be consolidated
to
form a single series with the Notes and will have the same CUSIP number and
will
trade interchangeably with the Notes immediately upon settlement. Any additional
issuances will increase the aggregate principal amount of the outstanding
Notes
of this series, plus the aggregate principal amount of any Notes bearing
the
same CUSIP number that are issued pursuant to (i) any 30-day option we grant
to
Bear, Stearns & Co. Inc., and (ii) any future issuances of Notes bearing the
same CUSIP number. The prices of any additional offerings will be determined
at
the time of pricing of each offering, which price will be a function of the
prevailing market conditions and level of the Index at the time of the relevant
sale.
Interest
We
will
not make any payments of interest, or any other periodic payments, on the
Notes.
At maturity, you will receive the Cash Settlement Value, calculated as described
below.
Payment
at Maturity
Your
investment may result in a loss because the Notes are not principal protected.
On the Maturity Date you will receive the Cash Settlement Value, an amount
in
cash that depends upon the relation of the Final Index Level to the Initial
Index Level. The Notes are not principal protected. Therefore
investors may receive less, and possibly significantly less, than the principal
you invested..
If
the
Final Index Level is greater than or equal to the Initial Index Level, then,
on
the Maturity Date, the Cash Settlement Value will be equal to (in cash),
per
Note:
If
the
Final Index Level is less than the Initial Index Level, the Cash Settlement
Value will be equal to (in cash), per Note:
The
“Index Level” equals the Closing Level of the Index, as determined by the
Strategy Sponsor, on each day of determination.
The
“Initial
Index Level”
equals
269.1932, representing the Index Level, as determined by the Strategy Sponsor
on
the Pricing Date.
The
“Final
Index Level”
will
be
determined by the Calculation Agent and will equal the Closing Level of the
Index, as determined by the Strategy Sponsor, on the “Calculation Date”, subject
to adjustment as described in “Description of the Notes—Market Disruption
Events.”
The
“Upside Participation Rate” will be 150.00%.
The
“Maturity Date” of the Notes is expected to be February 26, 2010; provided
that,
if the
Calculation Date is adjusted due to the occurrence of a Market Disruption
Event,
the Maturity Date will be three Index Business Days following the adjusted
Calculation Date.
U.S.
Adagio Strategy Index
The
Index
replicates a strategy based on the relative weighting of the three U.S. asset
classes that comprise the Components - equities, real estate and government
bonds. Each month, the Equity Component and the Real Estate Component are
re-weighted and, to the extent their collective weight is less than 100%,
the
Bond Component is re-weighted to an amount equal to such shortfall. The strategy
behind the re-weighting of the Equity Component and the Real Estate Component
is
to generate long-term above-market returns with low volatility by increasing
the
weight of a component that performs well relative to its own past performance
and relative to the current and past performances of the other two components.
The relative weighting formulae and a more-detailed description of the formulae
is set forth in Appendix A.
Index
Level
The
Index
Level, as determined by the Strategy Sponsor, will be displayed on Bloomberg
Financial Service (under the symbol ADAGUS <Index>). The Index Level will
be calculated on each Trading Day and will equal the sum of (a) the Index
Level
last published and (b) the product of (x) the Index Level last published
multiplied by (y) the sum of the product for each Component of (i) the
daily percentage change in the Closing Level of such Component multiplied
by
(ii) its respective weighting in the Index as of such date.
The
Index
Level is adjusted downwards by a monthly Index Adjustment Factor applied
pro
rata on a daily basis. The cumulative “Index Adjustment Factor,” as of any date
of determination, is equal to the product of (x) 0.225% and (y) the quotient
of
(i) the total number of days from and including the Re-weighting Date
immediately preceding such date of determination (the “Prior Re-weighting Date”)
to and excluding such date of determination and (ii) the total number of
days
from and including the Prior Re-weighting Date to and excluding the Re-weighting
Date immediately succeeding such date of determination. “Re-weighting Date”
means the
last
day of each calendar month or, if such day is not a Trading Day, the next
following Trading Day.
In
the
event that any Index Level displayed on the Bloomberg Financial Service in
the
manner described above is subsequently corrected and that correction is
displayed on Bloomberg Financial Service after its original publication,
the
Strategy Sponsor will account for such adjustment and, to the extent necessary,
will adjust any terms of the Index it determines appropriate and will determine
the effective dates of such adjustments.
Illustrative
Examples of Cash Settlement Value
The
examples set forth below and the related table depict the hypothetical Cash
Settlement Value of a Note based on the assumptions below. The examples,
levels
and the related table do not purport to be representative of every possible
scenario concerning increases or decreases in the Index. You should not construe
these examples or the data included in the table as an indication or assurance
of the expected performance of the Notes.
|
·
|
Investor
purchases $1,000 aggregate principal amount of Notes at the initial
public
offering price of $1,000.
|
|
·
|
Investor
holds the Notes to maturity.
|
|
·
|
The
Initial Index Level is equal to
270.00.
|
|
·
|
All
returns are based on a 3-year term; pre-tax
basis.
|
|
·
|
No
Market Disruption Events or Events of Default
occur.
|
Example
1:
The Final Index Level is greater than the Initial Index
Level.
In
this
example, the Index generally rises over the term of the Notes. On the
Calculation Date, the Final Index Level is 324.00, representing a 20.00%
increase from the Initial Index Level. In this example, using the formula
below,
the Cash Settlement Value will equal $1,300.00.
Example
2:
The Final Index Level equals the Initial Index Level.
In
this
example, the Index generally remains consistent over the term of the Notes.
On
the Calculation Date, the Final Index Level equals the Initial Index Level.
In
this example, using the formula below, the Cash Settlement Value will equal
$1,000.00.
Example
3:
The Final Index Level is less than the Initial Index
Level.
In
this
example, the Index generally decreases over the term of the Notes. On the
Calculation Date, the Final Index Level is 216.00, representing a 20.00%
decrease from the Initial Index Level. In this example, using the formula
below,
the Cash Settlement Value will equal $800.00.
Summary
of Examples 1 Through 3
Reflecting
the Cash Settlement Value
|
|
|
|
|
Example
1
|
Example
2
|
Example
3
|
Hypothetical
Initial Index Level
|
270.00
|
270.00
|
270.00
|
Hypothetical
Final Index Level
|
324.00
|
270.00
|
216.00
|
Level
of Final Index Level relative to the Initial Index Level
|
Higher
|
Same
|
Lower
|
Index
Return
|
20.00%
|
0%
|
-20.00%
|
Cash
Settlement Value per Note
|
$1,300.00
|
$1,000.00
|
$800.00
|
Table
of Hypothetical Cash Settlement Values
of
Index
|
Percentage
Change
|
Cash
Settlement
Value
Per
Note
|
Return
if
Held
to
Maturity
|
|
|
|
Cash
Settlement
Value
Per
Note
|
Return
if
Held
to
Maturity
|
540.00
|
100%
|
$2,500
|
150.00%
|
|
256.50
|
-5%
|
$950
|
-5.00%
|
526.50
|
95%
|
$2,425
|
142.50%
|
|
243.00
|
-10%
|
$900
|
-10.00%
|
513.00
|
90%
|
$2,350
|
135.00%
|
|
229.50
|
-15%
|
$850
|
-15.00%
|
499.50
|
85%
|
$2,275
|
127.50%
|
|
216.00
|
-20%
|
$800
|
-20.00%
|
486.00
|
80%
|
$2,200
|
120.00%
|
|
202.50
|
-25%
|
$750
|
-25.00%
|
472.50
|
75%
|
$2,125
|
112.50%
|
|
189.00
|
-30%
|
$700
|
-30.00%
|
459.00
|
70%
|
$2,050
|
105.00%
|
|
175.50
|
-35%
|
$650
|
-35.00%
|
445.50
|
65%
|
$1,975
|
97.50%
|
|
162.00
|
-40%
|
$600
|
-40.00%
|
432.00
|
60%
|
$1,900
|
90.00%
|
|
148.50
|
-45%
|
$550
|
-45.00%
|
418.50
|
55%
|
$1,825
|
82.50%
|
|
135.00
|
-50%
|
$500
|
-50.00%
|
405.00
|
50%
|
$1,750
|
75.00%
|
|
121.50
|
-55%
|
$450
|
-55.00%
|
391.50
|
45%
|
$1,675
|
67.50%
|
|
108.00
|
-60%
|
$400
|
-60.00%
|
378.00
|
40%
|
$1,600
|
60.00%
|
|
94.50
|
-65%
|
$350
|
-65.00%
|
364.50
|
35%
|
$1,525
|
52.50%
|
|
81.00
|
-70%
|
$300
|
-70.00%
|
351.00
|
30%
|
$1,450
|
45.00%
|
|
67.50
|
-75%
|
$250
|
-75.00%
|
337.50
|
25%
|
$1,375
|
37.50%
|
|
54.00
|
-80%
|
$200
|
-80.00%
|
324.00
|
20%
|
$1,300
|
30.00%
|
|
40.50
|
-85%
|
$150
|
-85.00%
|
310.50
|
15%
|
$1,225
|
22.50%
|
|
27.00
|
-90%
|
$100
|
-90.00%
|
297.00
|
10%
|
$1,150
|
15.00%
|
|
13.50
|
-95%
|
$50
|
-95.00%
|
283.50
|
5%
|
$1,075
|
7.50%
|
|
0.00
|
-100%
|
$0
|
-100.00%
|
270.00
|
0%
|
$1,000
|
0.00%
|
|
|
|
|
|
Discontinuance
of the Equity Component
If
the
relevant Component Sponsor discontinues publication of the Equity Component
and
it or another entity publishes a successor or substitute Equity Component
that
the Calculation Agent determines is comparable to the discontinued Equity
Component (such new Equity Component being referred to as a “Successor”), then
the Calculation Agent may determine the amount payable on the Maturity Date
by
reference to the Successor in place of the original Equity
Component.
Upon
any
selection by the Calculation Agent of a Successor, the Calculation Agent
will
notify us and the Trustee, who will provide notice of the selection of the
Successor to the registered holders of the Notes.
If
the
relevant Component Sponsor discontinues publication of the Equity Component
prior to, and such discontinuance is continuing on, the Calculation Date
and the
Calculation Agent determines that no Successor is available at such time,
then,
on such date, the Calculation Agent may calculate the appropriate Closing
Level
(as defined below). In such an event, the Closing Level will be computed
by the
Calculation Agent in accordance with the formula for and method of calculating
the Closing Level of the Equity Component last in effect prior to such
discontinuance, using the Closing Level (or, if trading in the relevant
securities has been materially suspended or materially limited, its good
faith
estimate of the Closing Level that would have prevailed but for such suspension
or limitation) at the close of the principal trading session on such date
of
each security most recently comprising the Equity Component on the primary
organized exchange or trading system on which such securities trade.
“Closing
Level” means, with respect to the Equity Component, as of any date of
determination, the official closing level as published by its Component Sponsor;
with respect to the Real Estate Component, as of any date of determination,
the
official closing price on its primary exchange as reported in the official
price
determination mechanism for such primary exchange; and with respect to the
Bond
Component, as of any date of determination, the sum of (i) the official closing
price on its primary exchange as reported in the official price determination
mechanism for such primary exchange plus (ii) the reinvestment of any
distributions or dividends received in respect of such investment. With respect
to any other security on any date, Closing Level means the last reported
sales
price regular way on such date or, if no such reported sale takes place on
such
date, the average of the reported closing bid and asked price regular way
on
such date, in either case on the primary organized exchange or trading system
on
which such security is then listed or admitted to trading.
Adjustments
to the Components or the Index
If
at any
time (i) the method of calculating any Component is changed in a material
respect, (ii) a Component, is in any other way modified so that such
Component does not, in the opinion of the Calculation Agent, fairly represent
the level of the Component had such changes or modifications not been made,
or
(iii) there is a material change or modification to the Lehman Brothers
U.S. Aggregate Index or the Dow Jones U.S. Real Estate Index then, from and
after such time, the Calculation Agent may make such calculations and
adjustments as may be necessary to arrive at a level of a security or index
comparable to the relevant Component as the case may be, as if such changes
or
modifications had not been made. In such an event, the Calculation Agent
will
calculate the amount payable on the Maturity Date with reference to the
Component as adjusted. If the method of calculating any Component is modified
so
that the level of such Component is a fraction of what it would have been
if it
had not been modified (for example, due to a split in the Component), then
the
Calculation Agent may adjust such Component in order to arrive at a level
of the
Component as if it had not been modified (for example, as if such split had
not
occurred).
If
a
Successor is selected, or the Calculation Agent adjusts the value of any
Component that Successor or its adjusted value will be used as a substitute
for
the Component for all purposes, including for purposes of determining whether
a
Market Disruption Event has occurred or exists. The selection of a Successor
or
the adjustment of the value of a Component may adversely affect the value
of the
Notes.
Corporate
Events Affecting the Real Estate Component or the Bond
Component
If
one of
the events described below occurs and the Calculation Agent determines that
the
event’s effect on the value of the Real Estate Component or the Bond Component,
then, from and after such time, the Calculation Agent may make such calculations
and adjustments as may be necessary to arrive at a value comparable to the
relevant Component as if such changes or modifications had not been made.
The
Calculation Agent will also determine the effective date of any such adjustment.
In such an event, the Calculation Agent will calculate the amount payable
on the
Maturity Date with reference to such Component as adjusted in place of the
original Real Estate Component or Bond Component, as the case may
be.
If
the
Calculation Agent determines that an adjustment will not result in a value
comparable to the Component as if such changes or modifications had not been
made, then the Calculation Agent will substitute another fund in the real
estate
sector or bond sector, as applicable, that is comparable to the relevant
Component as if such changes or modifications had not been made (such entity
a
“Successor”) and determine the amount payable on a the Maturity Date by
reference to the Successor in place of the original Real Estate Component
or
Bond Component, as applicable. In the case of a merger, consolidation or
other
combination of the Real Estate Component or the Bond Component, if the
Calculation Agent determines that the surviving entity is comparable to the
Real
Estate Component or Bond Component, as applicable, before such event, then
the
Calculation Agent may deem the surviving entity a Successor and determine
the
amount payable on the Maturity Date by reference to the Successor in place
of
the original Component.
If
the
Calculation Agent determines that an adjustment will not result in a value
comparable to the Real Estate Component or Bond Component, as applicable,
as if
such changes or modifications had not been made, and further determines that
no
Successor is available at such time, then, on the Calculation Date, the
Calculation Agent may calculate the appropriate Closing Level of such Component.
In such an event, the Closing Level of the relevant Component on any Calculation
Date will be computed by the Calculation Agent based on the Closing Levels
at
the close of the principal trading session on such date of each security
most
recently comprising such Component on the primary organized exchange or trading
system on which such securities trade, (or, if trading in the relevant
securities has been materially suspended or materially limited, its good
faith
estimate of the Closing Level that would have prevailed but for such suspension
or limitation), making such substitutions and adjustments to the securities
used
in such calculation from time to time as the Calculation determines are
necessary in its sole discretion.
The
following events are those that may require an adjustment:
• the
shares of the Real Estate Component or the Bond Component are reclassified
or
changed;
• the
Real
Estate Component or the Bond Component has been subject to a merger,
consolidation or other combination;
• the
Real
Estate Component or the Bond Component sells or otherwise transfers its property
and assets as an entirety or substantially as an entirety to another
entity;
• the
Real
Estate Component or the Bond Component effects an extraordinary dividend
or a
spin-off - that is, issues to all holders of shares of such Component securities
of another issuer; or
• any
other
similar event that may have a diluting or concentrative effect on the
theoretical value of the Real Estate Component or the Bond
Component.
If
more
than one event requiring adjustment occurs, the calculation agent will make
such
an adjustment for each event in the order in which the events occur, and
on a
cumulative basis.
Market
Disruption Events
If
there
is a Market Disruption Event with respect to a Component on the Calculation
Date, the Calculation Date will be the first succeeding Trading Day on which
there is no Market Disruption Event for any Component. In no event, however,
will the Calculation Date be a date that is postponed by more than three
Scheduled Trading Days following the original date that, but for the Market
Disruption Event, would have been the Calculation Date. In that case, the
third
Scheduled Trading Day will be deemed to be the Calculation Date, notwithstanding
the Market Disruption Event. For a Market Disruption Event with respect to
the
Equity Component, the Calculation Agent will determine the Index Level on
that
third Scheduled Trading Day in accordance with the formula for and method
of
calculating the level of the Equity Component in effect prior to the Market
Disruption Event. In such an event, the Calculation Agent will use the Closing
Level of each security in the Equity Component as described above under
“Discontinuance of the Equity Component”. For a Market Disruption Event with
respect to the Real Estate Component or the Bond Component, the Calculation
Agent will determine the Index Level on that third Scheduled Trading Day
based
on the Closing Levels at the close of the principal trading session on such
date
of each security most recently comprising the Real Estate Component or the
Bond
Component, as applicable, as described above under “Corporate Events Affecting
the Real Estate Component and the Bond Component” (or, if trading in any such
security has been materially suspended or materially limited, the Calculation
Agent’s good faith estimate of the Closing Level that would have prevailed but
for such suspension or limitation).
If
there
is a Market Disruption Event with respect to the Index on the Calculation
Date
and such day is a Trading Day, the Calculation Agent will determine the Index
Level on such Trading Day in accordance with the formula for and method of
calculating the Index described above under “Description of the Notes” using the
Closing Level of each Component on such day.
A
“Market
Disruption Event”
means,
with respect to the Equity Component, any Scheduled Trading Day on which
the
Component Sponsor fails to publish the Closing Level, with respect to the
Real
Estate Component and the Bond Component, any Scheduled Trading Day on which
the
primary exchange fails to report a Closing Level and, with respect to the
Index,
any Trading Day on which the Strategy Sponsor fails to publish the Index
Level.
A
“Trading Day” means a day on which the Closing Level of the Equity Component is
published by its Component Sponsor and the Closing Levels of the Real Estate
Component and the Bond Component are available on their respective primary
exchanges.
A
“Scheduled Trading Day” means a day on which, but for the occurrence of a Market
Disruption Event, the Closing Level of the Equity Component would have been
published by its Component Sponsor or the Closing Level of the Real Estate
Component or the Bond Component would have been available on their respective
primary exchanges.
Redemption;
Defeasance
The
Notes
are not subject to redemption before maturity, and are not subject to the
defeasance provisions described in the section “Description of Debt
Securities—Defeasance” in the accompanying prospectus.
Events
of Default and Acceleration
If
an
Event of Default (as defined in the accompanying prospectus) with respect
to any
Notes has occurred and is continuing, then the amount payable to you, as
a
beneficial owner of a Note, upon any acceleration permitted by the Notes
will be
equal to the Cash Settlement Value as if the third Trading Day prior to the
Maturity Date was the Calculation Date of the Notes, adjusted by an amount
equal
to any losses, expenses and costs to us of unwinding any underlying or related
hedging or funding arrangements, all as determined by the Calculation Agent
in
its sole and absolute discretion. If a bankruptcy proceeding is commenced
in
respect of us, the claims of the holder of a Note may be limited under Title
11
of the United States Code.
Same-Day
Settlement and Payment
Settlement
for the Notes will be made by Bear, Stearns & Co. Inc. in immediately
available funds. Payments of the Cash Settlement Value will be made by us
in
immediately available funds, so long as the Notes are maintained in book-entry
form.
Calculation
Agent
The
Calculation Agent for the Notes will be Bear, Stearns & Co. Inc. All
determinations made by the Calculation Agent will be at the sole discretion
of
the Calculation Agent and will be conclusive for all purposes and binding
on us
and the beneficial owners of the Notes, absent manifest error and provided
the
Calculation Agent shall be required to act in good faith in making any
determination. Manifest error by the Calculation Agent, or any failure by
it to
act in good faith, in making a determination adversely affecting the payment
of
principal, interest or premium on principal to registered holders of the
Notes
(the “Holders”) would entitle the Holders, or the Trustee acting on behalf of
the Holders, to exercise rights and remedies available under the Indenture.
If
the Calculation Agent uses its discretion to make a determination, the
Calculation Agent will notify us and the Trustee, who will provide notice
to the
Holders.
DESCRIPTION
OF THE COMPONENTS
Neither
we nor any of our affiliates assumes any responsibility for the adequacy
or
accuracy of the information about the Components, including information
regarding each Component’s make-up, method of calculation or changes in its
composition, as applicable, contained in this Pricing Supplement or in any
publicly available filings or other documents made available by the Component
Sponsor or any other person or entity. You
should make your own investigation into each Component.
The
iShares®
U.S.
Real Estate Index Fund and the iShares®
Lehman
Aggregate Bond Fund are each investment portfolios of the iShares Trust,
an
investment company registered under the Investment Company Act of 1940, as
amended (the “1940 Act”) and the Securities Exchange Act of 1934 (the “Exchange
Act”), that consists of over eighty separate investment portfolios. Issuers
registered under the Exchange Act and the 1940 Act are required to file
periodically certain financial and other information specified by the Securities
and Exchange Commission (“the Commission”). Information provided to or filed
with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at its Regional Offices located at Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661 and at
the
Woolworth Building, 233 Broadway, New York, New York 10279, and copies of
such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In
addition, information provided to or filed with the Commission electronically
can be accessed through a website maintained by the Commission. The address
of
the Commission’s website is http://www.sec.gov.
In
addition, information regarding the Components may be obtained from other
sources including, but not limited to, press releases, websites, newspaper
articles and other publicly disseminated documents. We make no representation
or
warranty as to the accuracy or completeness of such reports.
This
Pricing Supplement relates only to the Notes offered hereby and does not
relate
to the Components or other securities of the Component Sponsors, the investment
advisers indicated below or the iShares Trust. We have derived all disclosures
contained in this Pricing Supplement regarding the Components from publicly
available documents. Neither we, nor Bear, Stearns & Co. Inc. have
participated in the preparation of such documents or made any due diligence
inquiry with respect to the Components in connection with the offering of
the
Notes. Neither we nor Bear, Stearns & Co. Inc. make any representation that
such publicly available documents or any other publicly available information
regarding the Components are accurate or complete. Furthermore, we cannot
give
any assurance that all events occurring prior to the date hereof (including
events that would affect the accuracy or completeness of the publicly available
documents described in the preceding paragraph) that would affect the trading
price of Real Estate Component or the Bond Component or the level of the
Equity
Component (and therefore the Initial Index Level) have been publicly disclosed.
Subsequent disclosure of any such events or the disclosure of or failure
to
disclose material future events concerning the Components could affect the
value
received on any date with respect to the Notes and, therefore, the trading
prices of the Notes. Neither we nor Bear, Stearns & Co. Inc. have any
obligation to disclose any information about any Component after the date
of
this Pricing Supplement.
The
information below provides a brief description of each Component and the
high,
low and end-of-period closing prices for the Real Estate Component and the
high,
low and end-of-period closing levels for the Equity Component for each calendar
quarter in the period from 1997 to 2006, and the first calendar quarter of
2007
through January 29, 2007, as well as the high, low and end-of-period closing
prices for the Bond Component for each calendar quarter in the period from
its
inception on September 26, 2003 to 2006, and the first calendar quarter of
2007
through January 29, 2007. With respect to each Component, we obtained the
information in the tables below from Bloomberg Financial Service, without
independent verification by the respective Component Sponsor. The historical
prices of the Real Estate Component and Bond Component and the historical
levels
of the Equity Component should not be taken as an indication of future
performance, and no assurance can be given that the price or level, as
applicable, of each Component will (i) increase sufficiently over the term
of
the Notes to cause the holders of the Notes to receive any return on their
initial investment or (ii) not decrease over the term of the Notes to cause
the
holders of the Notes to lose all or part of their initial
investment.
The
S&P 500®
Index (“SPX”)
The
S&P 500®
Index
(“SPX”) is published by S&P and, according to publicly available
information, is intended to track the price movements of the common stocks
comprising the SPX. The calculation of the value of the SPX (discussed below
in
further detail) is based on the relative value of the aggregate market value
(as
defined below) of the common stocks of 500 companies as of a particular time,
compared to the aggregate average market value of the common stocks of 500
similar companies during the Base Period of the years 1941 through 1943.
S&P
500®
Index Composition
S&P
chooses common stocks for inclusion in the SPX with the aim of achieving
a
distribution by broad industry groupings that approximates the distribution
of
these groupings in the common stock population of the NYSE, which S&P uses
as an assumed model for the composition of the total market. Relevant criteria
employed by S&P include: the viability of the company issuing the particular
common stock, the extent to which that company represents the industry group
to
which it is assigned, the extent to which the market price of that company’s
common stock is generally responsive to changes in the affairs of the relevant
industry, and the market value and trading activity of the common stock of
that
company. For more information concerning the composition of the SPX see
S&P’s website at http://www.spglobal.com. Information contained in S&P’s
website is not incorporated by reference in, and should not be considered
as
part of, this Pricing Supplement.
As
of
January 17, 2007, the common stocks of 423 companies or 84.60% of the market
capitalization of the SPX were traded on the NYSE; the common stocks of 77
companies or 15.40% of the market capitalization of the SPX were traded on
the
Nasdaq as of such date.
None
of
the common stocks included in the SPX were traded on the AMEX. The stocks
of ten
main groups of companies comprise the SPX, with the approximate percentage
of
the market capitalization of the SPX included in each group as of December
31,
2006 indicated in parentheses: Consumer Discretionary (10.60%); Consumer
Staples
(9.30%); Energy (9.80%); Financials (22.30%); Health Care (12.00%); Industrials
(10.80%); Information Technology (15.10%); Materials (3.00%); Telecommunication
Services (3.50%); and Utilities (3.60%). The Component Sponsor may from time
to
time, in its sole discretion, add common stocks to, or delete common stocks
from, the SPX to achieve the objectives stated above.
THE
SPX
DOES NOT REFLECT THE PAYMENT OF DIVIDENDS ON THE STOCKS UNDERLYING IT AND
THEREFORE THE SPX PRICE RETURN AMOUNT ON THE NOTES WILL NOT PRODUCE THE SAME
RETURN YOU WOULD HAVE RECEIVED HAD YOU PURCHASED SUCH UNDERLYING STOCKS AND
HELD
THEM UNTIL THE MATURITY DATE OF THE NOTES.
Computation
of the SPX until March 17, 2005
While
the
S&P employed the following methodology to calculate the SPX, the S&P
announced changes in the methodology which took effect on March 18, 2005
and
certain additional charges took effect on September 16, 2005. See the section
“Computation of the SPX after September 16, 2005.”
Prior
to
March 18, 2005, the S&P computed the SPX as of a particular time, as
follows:
(a) the
product of the market price per share and the number of then outstanding
shares
of each component stock was determined as of such time (such product referred
to
as the “Market Value” of such stock);
(b) the
Market Value of all component stocks as of such time (as determined under
clause
(a) above) were aggregated;
(c) the
mean
average of the Market Values as of each week in the Base Period of the years
1941 through 1943 of the common stock of each company in a group of 500
substantially similar companies was determined;
(d) the
mean
average Market Values of all such common stocks over such Base Period (as
determined under clause (c) above) were aggregated (such aggregate amount
being
referred to as the “base value”);
(e) the
aggregate Market Value of all component stocks as of such time (as determined
under clause (b) above) was divided by the Base Value; and
(f) the
resulting quotient (expressed in decimals) was multiplied by ten.
The
Component Sponsor adjusted the foregoing formula to negate the effects of
changes in the Market Value of a component stock that were determined by
the
S&P to be arbitrary, or not due to true market fluctuations. Such changes
may have resulted from such causes as the issuance of stock dividends, the
granting to shareholders of rights to purchase additional shares of such
stock,
the purchase of shares by employees pursuant to employee benefit plans, certain
consolidations and acquisitions, the granting to shareholders of rights to
purchase other securities of the company, the substitution by the S&P of
particular component stocks in the SPX, and other reasons. In all such cases,
the S&P first recalculated the aggregate Market Value of all component
stocks (after taking account of the new market price per share of the particular
component stock, or the new number of outstanding shares thereof, or both,
as
the case may be) and then determined the new base value in accordance with
the
following formula:
The
result was that the Base Value was adjusted in proportion to any change in
the
aggregate Market Value of all component stocks resulting from the causes
referred to above, to the extent necessary to negate the effects of such
causes
upon the SPX.
Computation
of the SPX after September 16, 2005
Since
March 18, 2005, the S&P has partially adjusted the SPX from a market
capitalization weighted formula to a float-adjusted formula, and on September
16, 2005 the SPX was fully float adjusted. The Component Sponsor’s criteria for
selecting stocks for the SPX have not been changed by the shift to float
adjustment. However, the adjustment affected each company’s weight in the SPX
(i.e., its Market Value). Under float adjustment, the share counts used in
calculating the SPX will reflect only those shares that are available to
investors, not all of a company’s outstanding shares. The Component Sponsor
defines three groups of shareholders whose holdings are subject to float
adjustment:
|
·
|
holdings
by other publicly traded corporations, venture capital firms, private
equity firms, strategic partners, or leveraged buyout
groups;
|
|
·
|
holdings
by government entities, including all levels of government in the
United
States or foreign countries; and
|
|
·
|
holdings
by current or former officers and directors of the company, founders
of
the company, or family trusts of officers, directors, or founders,
as well
as holdings of trusts, foundations, pension funds, employee stock
ownership plans, or other investment vehicles associated with and
controlled by the company.
|
However,
treasury stock, stock options, restricted shares, equity participation units,
warrants, preferred stock, convertible stock, and rights are not part of
the
float. In cases where holdings in a group exceed 10% of the outstanding shares
of a company, the holdings of that group will be excluded from the
float-adjusted count of shares to be used in the SPX calculation.
Mutual
funds, investment advisory firms, pension funds, or foundations not associated
with the company and investment funds in insurance companies, shares of a
United
States company traded in Canada as “exchangeable shares,” shares that trust
beneficiaries may buy or sell without difficulty or significant additional
expense beyond typical brokerage fees, and, if a company has multiple classes
of
stock outstanding, shares in an unlisted or non-traded class if such shares
are
convertible by shareholders without undue delay and cost, are also part of
the
float.
For
each
stock, an investable weight factor (“IWF”) was calculated by dividing the
available float shares, defined as the total shares outstanding less shares
held
in one or more of the three groups listed above where the group holdings
exceed
10% of the outstanding shares, by the total shares outstanding. On March
18,
2005, the SPX moved half way to float adjustment, meaning that if a stock
had an
IWF of 0.80, the IWF used to calculate the SPX between March 18, 2005 and
September 16, 2005 was 0.90. The float-adjusted Index is now calculated by
dividing the sum of the IWF multiplied by both the price and the total shares
outstanding for each stock by the index divisor. For companies with multiple
classes of stock, the S&P calculates the weighted average IWF for each stock
using the proportion of the total company market capitalization of each share
class as weights.
The
SPX
is calculated using a base-weighted aggregate methodology: the level of the
SPX
reflects the total Market Value of all 500 component stocks relative to the
SPX’s Base Period of 1941-43 (the “Base Period”). An indexed number is used to
represent the results of this calculation in order to make the value easier
to
work with and track over time. The actual total Market Value of the component
stocks during the Base Period has been set equal to an indexed value of 10.
This
is often indicated by the notation 1941-43=10. In practice, the daily
calculation of the SPX is computed by dividing the total Market Value of
the
component stocks by a number called the index divisor. By itself, the index
divisor is an arbitrary number. However, in the context of the calculation
of
the SPX, it is the only link to the original Base Period level of the SPX.
The
index divisor keeps the SPX comparable over time and is the manipulation
point
for all adjustments to the SPX (“Index Maintenance”).
Index
Maintenance includes monitoring and completing the adjustments for company
additions and deletions, share changes, stock splits, stock dividends, and
stock
price adjustments due to company restructurings or spinoffs. To prevent the
level of the SPX from changing due to corporate actions, all corporate actions
which affect the total Market Value of the SPX require an index divisor
adjustment. By adjusting the index divisor for the change in total Market
Value,
the level of the SPX remains constant. This helps maintain the level of the
SPX
as an accurate barometer of stock market performance and ensures that the
movement of the SPX does not reflect the corporate actions of individual
companies in the SPX. All index divisor adjustments are made after the close
of
trading and after the calculation of the SPX Closing Level. Some corporate
actions, such as stock splits and stock dividends, require simple changes
in the
common shares outstanding and the stock prices of the companies in the SPX
and
do not require index divisor adjustments.
The
table
below summarizes the types of Index Maintenance adjustments and indicates
whether or not an index divisor adjustment is required.
Type
of Corporate Action Adjustment Factor
Divisor
Adjustment Required
|
|
|
Type
of Corporate Action
|
Adjustment
Factor
|
Divisor
Adjustment Required
|
Stock
split (e.g., 2-for-1)
|
Shares
outstanding multiplied by 2; stock price divided by 2
|
No
|
Share
issuance (i.e., change =5%)
|
Shares
outstanding plus newly issued shares
|
Yes
|
Share
repurchase (i.e., change =5%)
|
Shares
outstanding minus repurchased shares
|
Yes
|
Special
cash dividends
|
Share
price minus special dividend
|
Yes
|
Company
change
|
Add
new company Market Value minus old company Market Value
|
Yes
|
Rights
offering
|
|
Yes
|
Spinoffs
|
|
Yes
|
Stock
splits and stock dividends do not affect the index divisor of the SPX because,
following a split or dividend, both the stock price and number of shares
outstanding are adjusted by the S&P so that there is no change in the Market
Value of the component stock. All stock split and dividend adjustments are
made
after the close of trading on the day before the ex-date.
Each
of
the corporate events exemplified in the table requiring an adjustment to
the
index divisor has the effect of altering the Market Value of the component
stock
and consequently of altering the aggregate Market Value of the component
stocks
(the “Post-Event Aggregate Market Value”). In order that the level of the index
(the “Pre-Event Index Value”) not be affected by the altered Market Value
(whether increase or decrease) of the affected component stock, a new index
divisor (“New Divisor”) is derived as follows:
A
large
part of the SPX Maintenance process involves tracking the changes in the
number
of shares outstanding of each of the SPX companies. Four times a year, on
a
Friday close to the end of each calendar quarter, the share totals of companies
in the SPX are updated as required by any changes in the number of shares
outstanding. After the totals are updated, the index divisor is adjusted
to
compensate for the net change in the total Market Value of the SPX. In addition,
any changes over 5% in the current common shares outstanding for the SPX
companies are carefully reviewed on a weekly basis, and when appropriate,
an
immediate adjustment is made to the index divisor.
iShares®
Dow Jones U.S. Real Estate Index Fund
According
to publicly available information, the iShares®
Dow
Jones U.S. Real Estate Index Fund (“IYR”) is traded on the New York Stock
Exchange. The stated objective of the IYR is to achieve investment results
that
correspond generally to the price and yield performance, before fees and
expenses, of the Dow Jones U.S. Real Estate Index. Dow Jones & Company is
the Strategy Sponsor of the Dow Jones U.S. Real Estate Index and Barclays
Global
Fund Advisors is the investment adviser to the IYR.
The
Dow
Jones U.S. Real Estate Index measures the performance of the real estate
sector
of the U.S. equity market and includes companies in the following sub-sectors:
real estate holding and development and real estate investment trusts. The
Strategy Sponsor determines the relative weightings of the securities in
the Dow
Jones U.S. Real Estate Index and publishes information regarding the market
value of the Dow Jones U.S. Real Estate Index. The IYR uses a “Representative
Sampling” strategy to try to track the Dow Jones U.S. Real Estate Index and will
concentrate its investments in a particular industry or group of industries
to
approximately the same extent as the Dow Jones U.S. Real Estate Index is
so
concentrated. Securities selected have aggregate investment characteristics
(based on market capitalization and industry weightings), fundamental
characteristics (such as return variability, earnings valuation and yield)
and
liquidity measures similar to those of the Dow Jones U.S. Real Estate Index.
It
is possible that the IYR will not hold all of the securities that are included
in the Dow Jones U.S. Real Estate Index. However, the IYR invests at least
90%
of its assets in the securities of the Dow Jones U.S. Real Estate Index.
The IYR
may invest the remainder of its assets in securities not included in the
Dow
Jones U.S. Real Estate Index, but which the investment adviser believes will
help the IYR track the Dow Jones U.S. Real Estate Index. For example, the
IYR
may invest in securities not included in the Dow Jones U.S. Real Estate Index
in
order to reflect various corporate actions (such as mergers) and other changes
in the Dow Jones U.S. Real Estate Index (such as reconstitutions, additions
and
deletions). The IYR also may invest its other assets in futures contracts,
options on futures contracts, options, and swaps related to the Dow Jones
U.S.
Real Estate Index, as well as cash and cash equivalents, including shares
of
money market funds affiliated with the investment adviser.
iShares®
Lehman
Aggregate Bond Fund
According
to publicly available information, the iShares®
Lehman
Aggregate Bond Fund (“AGG”) is traded on the American Stock Exchange. The stated
objective of the AGG is to achieve investment results that correspond generally
to the price and yield performance, before fees and expenses, of the total
United States investment grade bond market as defined by the Lehman Brothers
U.S. Aggregate Index. Lehman Brothers is the Strategy Sponsor of the Lehman
Brothers U.S. Aggregate Index and Barclays Global Fund Advisors is the
investment adviser to the AGG.
The
investment adviser uses a “Representative Sampling” indexing strategy, investing
the assets of the AGG in a representative sample of bonds in the Lehman Brothers
U.S. Aggregate Index, which have an investment profile similar to the Lehman
Brothers U.S. Aggregate Index. Bonds selected have aggregate investment
characteristics (based on market capitalization and industry weightings),
fundamental characteristics (such as return variability, earnings valuation
and
yield) and liquidity measures similar to those of the Lehman Brothers U.S.
Aggregate Index. The AGG tracks the performance of the Lehman Brothers U.S.
Aggregate Index by investing approximately 90% of its assets in the bonds
represented in the Lehman Brothers U.S. Aggregate Index and in securities
that
provide substantially similar exposure to securities in the Lehman Brothers
U.S.
Aggregate Index. The AGG may invest the remainder of its assets in bonds
not
included in the Lehman Brothers U.S. Aggregate Index, but which the investment
adviser believes will help the AGG track the Lehman Brothers U.S. Aggregate
Index, as well as in cash and high-quality, liquid short-term instruments,
including shares of money market funds affiliated with the investment adviser.
For example, the AGG may invest in securities not included in the Lehman
Brothers U.S. Aggregate Index in order to reflect various corporate actions
(such as mergers) and other changes in the Lehman Brothers U.S. Aggregate
Index
(such as reconstitutions, additions and deletions). As of May 31, 2006,
approximately 35% of the bonds represented in the Lehman Brothers U.S. Aggregate
Index were U.S. agency mortgage pass-through securities. U.S. agency mortgage
pass-through securities are securities issued by entities such as the Government
National Mortgage Association and the Federal National Mortgage Association
that
are backed by pools of mortgages. Most transactions in mortgage pass-through
securities occur through standardized contracts for future delivery in which
the
exact mortgage pools to be delivered are not specified until a few days prior
to
settlement. The AGG expects to enter into such contracts on a regular basis.
The
AGG, pending settlement of such contracts, will invest its assets in
high-quality, liquid short-term instruments, including shares of money market
funds affiliated with the investment adviser.
S&P
500®
Index
The
following table sets forth the highest and lowest closing levels during each
of
the relevant quarters, as well as the end-of-quarter closing levels, of the
S&P 500®
Index
for each quarter beginning with April 1, 2001.
|
|
|
|
|
|
|
High
|
|
Low
|
|
Period
End
|
2001
|
|
|
|
|
|
Second
Quarter
|
1,315.93
|
|
1,091.99
|
|
1,224.42
|
Third
Quarter
|
1,239.78
|
|
944.75
|
|
1,040.94
|
Fourth
Quarter
|
1,173.62
|
|
1,026.76
|
|
1,148.08
|
2002
|
|
|
|
|
|
First
Quarter
|
1,176.97
|
|
1,074.36
|
|
1,147.39
|
Second
Quarter
|
1,147.84
|
|
952.92
|
|
989.82
|
Third
Quarter
|
994.46
|
|
775.68
|
|
815.28
|
Fourth
Quarter
|
954.28
|
|
768.63
|
|
879.82
|
2003
|
|
|
|
|
|
First
Quarter
|
935.05
|
|
788.90
|
|
848.18
|
Second
Quarter
|
1,015.33
|
|
847.85
|
|
974.50
|
Third
Quarter
|
1,040.29
|
|
960.84
|
|
995.97
|
Fourth
Quarter
|
1,112.56
|
|
995.97
|
|
1,111.92
|
2004
|
|
|
|
|
|
First
Quarter
|
1163.23
|
|
1,087.06
|
|
1,126.21
|
Second
Quarter
|
1,150.57
|
|
1,076.32
|
|
1,140.84
|
Third
Quarter
|
1,140.84
|
|
1,060.72
|
|
1,114.58
|
Fourth
Quarter
|
1,217.33
|
|
1,090.19
|
|
1,211.92
|
2005
|
|
|
|
|
|
First
Quarter
|
1,229.11
|
|
1,163.69
|
|
1,180.59
|
Second
Quarter
|
1,219.59
|
|
1,136.15
|
|
1,191.33
|
Third
Quarter
|
1,245.86
|
|
1,183.55
|
|
1,228.81
|
Fourth
Quarter
|
1,275.80
|
|
1,168.20
|
|
1,248.29
|
2006
|
|
|
|
|
|
First
Quarter
|
1,310.88
|
|
1,245.74
|
|
1,294.83
|
Second
Quarter
|
1,326.70
|
|
1,219.29
|
|
1,270.20
|
Third
Quarter
|
1,339.15
|
|
1,234.49
|
|
1,335.85
|
Fourth
Quarter
|
1,431.81
|
|
1,327.10
|
|
1,418.30
|
2007
|
|
|
|
|
|
First
Quarter (through January 29, 2007)
|
1,440.69
|
|
1,403.97
|
|
1,420.62
|
iShares®
Dow Jones U.S. Real Estate Index Fund
The
following table sets forth the highest and lowest closing prices during each
of
the relevant quarters, as well as the end-of-quarter closing prices, of the
iShares®
Dow
Jones U.S. Real Estate Index Fund for each quarter beginning with April 1,
2001.
|
|
|
|
|
|
|
High
|
|
Low
|
|
Period
End
|
2001
|
|
|
|
|
|
Second
Quarter
|
41.52
|
|
36.85
|
|
41.17
|
Third
Quarter
|
43.08
|
|
36.98
|
|
39.63
|
Fourth
Quarter
|
40.45
|
|
36.70
|
|
39.90
|
2002
|
|
|
|
|
|
First
Quarter
|
42.83
|
|
39.31
|
|
42.60
|
Second
Quarter
|
44.70
|
|
41.81
|
|
43.60
|
Third
Quarter
|
43.68
|
|
34.88
|
|
39.08
|
Fourth
Quarter
|
39.57
|
|
34.73
|
|
38.65
|
2003
|
|
|
|
|
|
First
Quarter
|
39.50
|
|
36.12
|
|
38.33
|
Second
Quarter
|
44.15
|
|
38.49
|
|
42.30
|
Third
Quarter
|
46.18
|
|
42.14
|
|
45.71
|
Fourth
Quarter
|
50.25
|
|
45.63
|
|
49.64
|
2004
|
|
|
|
|
|
First
Quarter
|
54.94
|
|
49.24
|
|
54.73
|
Second
Quarter
|
55.45
|
|
43.75
|
|
50.52
|
Third
Quarter
|
55.93
|
|
49.34
|
|
5..98
|
Fourth
Quarter
|
62.39
|
|
54.10
|
|
61.60
|
2005
|
|
|
|
|
|
First
Quarter
|
61.97
|
|
55.40
|
|
56.10
|
Second
Quarter
|
56.07
|
|
55.35
|
|
63.60
|
Third
Quarter
|
68.46
|
|
62.05
|
|
64.27
|
Fourth
Quarter
|
66.64
|
|
58.50
|
|
64.15
|
2006
|
|
|
|
|
|
First
Quarter
|
75.02
|
|
63.96
|
|
73.50
|
Second
Quarter
|
73.68
|
|
66.58
|
|
71.25
|
Third
Quarter
|
78.25
|
|
71.29
|
|
77.15
|
Fourth
Quarter
|
87.30
|
|
76.54
|
|
83.35
|
2007
|
|
|
|
|
|
First
Quarter (through January 29, 2007)
|
90.27
|
|
82.01
|
|
90.06
|
iShares®
Lehman
Aggregate Bond Fund
The
following table sets forth the highest and lowest closing prices during each
of
the relevant quarters, as well as the end-of-quarter closing prices, of the
iShares®
Lehman
Aggregate Bond Fund for each quarter beginning with September 26, 2003, the
date
of inception.
|
|
|
|
|
|
|
High
|
|
Low
|
|
Period
End
|
2003
|
|
|
|
|
|
September
26 to September 30
|
102.74
|
|
102.00
|
|
102.70
|
Fourth
Quarter
|
102.80
|
|
100.55
|
|
102.15
|
2004
|
|
|
|
|
|
First
Quarter
|
104.58
|
|
101.30
|
|
103.95
|
Second
Quarter
|
103.78
|
|
98.85
|
|
100.54
|
Third
Quarter
|
103.25
|
|
100.02
|
|
102.67
|
Fourth
Quarter
|
103.44
|
|
101.50
|
|
102.40
|
2005
|
|
|
|
|
|
First
Quarter
|
103.50
|
|
100.25
|
|
100.93
|
Second
Quarter
|
103.47
|
|
100.72
|
|
103.38
|
Third
Quarter
|
102.96
|
|
100.97
|
|
101.55
|
Fourth
Quarter
|
101.24
|
|
99.34
|
|
100.59
|
2006
|
|
|
|
|
|
First
Quarter
|
101.35
|
|
98.70
|
|
99.08
|
Second
Quarter
|
98.96
|
|
96.00
|
|
97.44
|
Third
Quarter
|
100.26
|
|
96.91
|
|
100.16
|
Fourth
Quarter
|
101.13
|
|
99.06
|
|
99.70
|
2007
|
|
|
|
|
|
First
Quarter (through January 29, 2007)
|
100.17
|
|
99.35
|
|
99.40
|
License
Agreements
We
have
entered or expect to enter into non-exclusive license agreements with Standard
& Poor’s and Lehman Brothers Inc., whereby we and our affiliates, in
exchange for a fee, will be permitted to use the S&P 500®
Index
and Lehman Brothers U.S. Aggregate Index in connection with the offer and
sale
of the Notes.
All
disclosures contained in this pricing supplement regarding the Components,
including their make-up, methods of calculation and changes in their
composition, as applicable, are derived from publicly available information.
None of us, Bear, Stearns & Co. Inc. or the Trustee assumes any
responsibility for the accuracy or completeness of such
information.
S&P
500®
Index
We
have
entered into a non-exclusive license agreement with Standard & Poor’s
(“S&P”) providing for the license to us, in exchange for a fee, of the right
to use the S&P 500®
Index
(“SPX”), which is owned and published by S&P, in connection with certain
securities, including the Notes. The
license agreement between S&P and us provides that the following language
must be set forth in this pricing supplement.
The
Notes
are not sponsored, endorsed, sold or promoted by S&P. S&P makes no
representation or warranty, express or implied, to the owners of the Notes
or
any member of the public regarding the advisability of investing in securities
generally or in the Notes particularly. S&P’s only relationship to us is the
licensing of certain trademarks, trade names and service marks of S&P and of
the SPX, which is determined, composed and calculated by S&P without regard
to us or the Notes. S&P has no obligation to take our needs or the needs of
holders of the Notes into consideration in determining, composing, or
calculating the SPX. S&P is not responsible for and has not participated in
the determination of the timing of, prices at which Notes are sold, or
quantities of the Notes to be issued or in the determination or calculation
of
the amount payable at maturity. S&P has no obligation or liability in
connection with the administration, marketing, or trading of the
Notes.
S&P
does not guarantee the accuracy and/or the completeness of the SPX or any
data
included therein and S&P shall have no liability for any errors, omissions,
or interruptions therein. S&P makes no warranty, express or implied, as to
results to be obtained by us, owners of the Notes, or any other person or
entity
from the use of the SPX or any data included therein. S&P makes no express
or implied warranties, and expressly disclaims all warranties of merchantability
or fitness for a particular purpose or use with respect to the Index or any
data
included therein. Without limiting any of the foregoing, in no event shall
S&P have any liability for any lost profits or indirect, punitive, special,
or consequential damages or losses, even if notified of the possibility thereof.
There are no third party beneficiaries or any agreements or arrangements
between
S&P and us.
“Standard
& Poor’s®,”
“S&P®,”
“S&P 500®,”
“Standard & Poor’s 500” and “500” are trademarks of The McGraw-Hill
Companies, Inc. and have been licensed for use by us. The Notes are not
sponsored, endorsed, sold or promoted by S&P and S&P makes no
representation regarding the advisability of investing in the
Notes.
Lehman
Brothers U.S. Aggregate Index
We
have
entered into a non-exclusive license agreement with Lehman Brothers Inc.
(“Lehman”) providing for the license to us, in exchange for a fee, of the right
use the Lehman Brothers U.S. Aggregate Index, which is owed and published
by
Lehman, in connection with certain securities, including the Notes. The license
agreement between Lehman and us provides that the following language must
be set
for in this pricing supplement.
The
Product(s) is not sponsored, endorsed, sold or promoted by Lehman. Lehman
makes
no representation or warranty, express or implied, to the owners of the
Products(s) or any member of the public regarding the advisability of investing
in securities generally or in the Product(s) particularly or the ability
of the
Lehman Indices, including without limitation, the Approved Indices, to track
general bond market performance. Lehman’s only relationship to the Licensee is
the licensing of the Approved Indices which is determined, composed and
calculated by Lehman without regard to the Licensee or the Product(s). Lehman
has no obligation to take the needs of the Licensee or the owners of the
Product(s) into consideration in determining, composing or calculating the
Approved Indices. Lehman is not responsible for and has not participated
in the
determination of the timing of, prices at, or quantities of the Product(s)
to be
issued or in the determination or calculation of the equation by which the
Product(s) is to be converted into cash. Lehman has no obligation or liability
in connection with the administration, marketing or trading of the
Product(s).
LEHMAN
BROTHERS DOES NOT GUARANTEE THE QUALITY, ACCURACY AND/OR THE COMPLETENESS
OF THE
LEHMAN INDICES, OR ANY DATA INCLUDED THEREIN, OR OTHERWISE OBTAINED BY THE
BEAR
STEARNS COMPANIES INC., OWNERS OF THE PRODUCTS(S), OR ANY OTHER PERSON OR
ENTITY
FROM THE USE OF THE LEHMAN INDICES, INCLUDING WITHOUT LIMITATION, THE APPROVED
INDICES, IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER
USE.
LEHMAN MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OF FITNESS FOR A PARTICULAR PURPOSE OR
USE
WITH RESPECT TO THE INDICES, INCLUDING WITHOUT LIMITATION, THE APPROVED INDICES,
OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO
EVENT
SHALL LEHMAN HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
HYPOTHETICAL
PERFORMANCE DATA
The
following hypothetical historical information should not be taken as an
indication of the future performance of the Index over the term of the Notes
or
the Cash Settlement Value thereunder.
Neither
the Notes nor the Index have a trading history. As a consequence, the following
hypothetical historical performance data is based on the application of the
Index to the actual historical performance of the Components and to hypothetical
investments in the Index having varying maturities. No
future performance of the Notes or the Index may be inferred from any of
the
historical simulations set forth herein.
For
the
period of time from and including September 26, 2003 to and including December
31, 2006, the hypothetical historical performance data set forth below was
derived from data provided on the Bloomberg Financial Service with respect
to
each Component, in each case, without independent verification from the Issuer.
For
the
period of time from and including August 31, 1996 to and including September
25,
2003, the hypothetical historical performance data set forth below was derived
from data provided on the Bloomberg Financial Service with respect to the
Equity
Component and the Real Estate Component, and Lehman Brothers Inc. with respect
to the Bond Component, in each case without independent verification from
the
Issuer. Because the Bond Component commenced trading on September 26, 2003,
all
of the hypothetical historical performance data set forth with respect to
the
Bond Component prior to that date reflects the performance of the Lehman
Brothers U.S. Aggregate Index and not the performance of the iShares®
Lehman
Aggregate Bond Fund. The iShares®
Lehman
Aggregate Bond Fund was created specifically to seek investment results that
correspond to the price and yield performance of the total U.S. investment-grade
bond market as defined by the Lehman Brothers U.S. Aggregate Index, and the
returns of the iShares®
Lehman
Aggregate Bond Fund have been highly correlated to the returns of the Lehman
Brothers U.S. Aggregate Index since the time of its inception. Nevertheless,
discrepancies may exist from time to time between the performance of the
Bond
Component and the level of the Lehman Brothers U.S. Aggregate
Index.
The
hypothetical historical performance data presented in Figures 1 and 2 below
represent reconstructions of a series of hypothetical investments on every
trading day during the relevant periods described below. The
information presented in Figures 1 and 2 below does not include a 150% upside
participation in the return on the Index and therefore does not reflect the
method of calculation of returns on the actual Notes.
The
performance of hypothetical investments is linked to a historical reconstruction
of the Index performance based on the actual historical performance of the
Components as described in the paragraph above. This historical reconstruction
of the Index performance uses a methodology identical to the methodology
that
the Index will use for calculation of the Index Level under the Notes. This
means we used the same coefficients and Component minimum and maximum weighting
constraints and effected the same daily deduction of the Index Adjustment
Factor.
Figures
3
and 4 below each present the hypothetical performance of an equally-weighted
basket of the Components. In each case, the calculations reconstruct a series
of
hypothetical investments created on every trading day during the periods
corresponding to those applicable in Figures 1 and 2 respectively. Figures
3 and
4 each represent a benchmark designed to provide investors with a representative
sample of the performance of a basket of the Components without the effects
of
the monthly coefficients and the monthly re-weighting pursuant to the Adagio
strategy.
Taken
as
a whole, the performance data set forth below are meant to illustrate the
hypothetical performance of the Components re-weighted in the manner of the
U.S.
Adagio Strategy Index (Figures 1 and 2) compared to the actual performance
of an
equally-weighted basket of each of the Components without the application
of the
Adagio strategy (Figures 3 and 4).
Investors
should note that the hypothetical historical performance data compares the
returns of hypothetical investments to the actual performance of an
equally-weighted basket of each of the Components. Due to the dynamic
re-weighting feature of the Index, the Components included in the Index at
any
time will have a different weighting during the same period of time. See
“Risk
Factors—The hypothetical historical performance data does not represent future
performance.”
Investors
should understand that historical performance is not indicative of future
results.
Figure
1
- Hypothetical 1-Year Investments in the U.S. Adagio Strategy
Index
The
chart
and returns described below relate to a series of hypothetical investments
each
with a 1-year maturity created according to the parameters of the U.S. Adagio
Strategy Index on every Trading Day during the period beginning on August
31,
1996 and ending on December 31, 2005. These hypothetical investments matured
on
every Trading Day during the period beginning on August 31, 1997 and ending
on
December 31, 2006.
The
arithmetic average of the returns of each hypothetical investment was 10.34%
with the greatest return of these hypothetical investments returning 17.90%
and
the smallest return of these hypothetical investments returning
1.68%.
The
information presented here does not include a 150% upside participation in
the
return on the Index and therefore does not reflect the method of calculation
of
returns on the actual Notes.
Hypothetical
1-Year Investments in the U.S. Adagio Strategy Index
|
|
|
|
High: 17.90%
Low:
1.68%
Average:
10.34%
|
|
Figure
2
- 3 Year Total Returns on Hypothetical 3-Year Investments in the U.S. Adagio
Strategy Index
The
chart
and returns described below relate to a series of hypothetical investments
each
with a 3-year maturity created according to the parameters of the U.S. Adagio
Strategy Index on every Trading Day during the period beginning on August
31,
1996 and ending on December 31, 2003. These hypothetical investments matured
on
every Trading Day during the period beginning on August 31, 1999 and ending
on
December 31, 2006.
The
arithmetic average of the 3-year total returns of each hypothetical investment
was 34.80% with the greatest 3-year total return of these hypothetical
investments returning 47.50% and the smallest 3-year total return of these
hypothetical investments returning 23.34%.
The
information presented here does not include a 150% upside participation in
the
return on the Index and therefore does not reflect the method of calculation
of
returns on the actual Notes.
3
Year Total Returns on Hypothetical 3-Year Investments in the U.S. Adagio
Strategy Index
|
|
|
|
High:
47.50%
Low:
23.34%
Average:
34.80%%
|
|
Figure
3
- Hypothetical 1-Year Investments With Equally-Weighted Basket Comprised
of the
Components
The
returns described below relate to a series of hypothetical investments each
with
a 1-year maturity created on every Trading Day during the period beginning
on
August 31, 1996 and ending on December 31, 2005. These hypothetical investments
matured on every Trading Day during the period beginning on August 31, 1997
and
ending on December 31, 2006. Each hypothetical investment is based upon a
basket
that initially is an equal-weighted basket of each of the Components and
that is
not re-weighted or adjusted over the term of such investments.
The
arithmetic average of the returns of each hypothetical investment was 7.11%
with
the greatest return of these hypothetical investments returning 29.54% and
the
smallest return of these hypothetical investments returning
-12.57%.
Hypothetical
1-Year Investments With Equally-Weighted Basket Comprised of the
Components
|
|
|
|
High:
29.54%
Low:
-12.57%
Average:
7.11%
|
|
Figure
4
- 3-Year Total Returns on Hypothetical 3-Year Investments With Equally-Weighted
Basket Comprised of the Components
The
returns described below relate to a series of hypothetical investments each
with
a 3-year maturity created on every Trading Day during the period beginning
on
August 31, 1996 and ending on December 31, 2003. These hypothetical investments
matured on every Trading Day during the period beginning on August 31, 1999
and
ending on December 31, 2006. Each hypothetical investment is based upon a
basket
that initially is an equal-weighted basket of each of the Components and
that is
not re-weighted or adjusted over the term of such investments.
The
arithmetic average of the 3-year total returns of each hypothetical investment
was 18.97% with the greatest 3-year total return of these hypothetical
investments returning 52.47% and the smallest 3-year total return of these
hypothetical investments returning -5.24%.
3-Year
Hypothetical Total Returns on Hypothetical 3-Year Investments With
Equally-Weighted Basket Comprised of the Components
|
|
|
|
High:
52.47%
Low:
-5.24%
Average:
18.97%
|
|
Figure
5
- Hypothetical Historical Index Statistics and Historical Component
Statistics
The
statistics in the column titled “Index” below relate to a hypothetical
investment in a basket of the Components from August 31, 1997 to December
31,
2006, had the basket been weighted in accordance with the formula for
calculating the Index on August 31, 1997. The statistics in the column for
each
Component relate to a separate hypothetical investment in each of the respective
Components from August 31, 1997 to December 31, 2006. The statistics in the
column titled “Static Basket” below relate to a hypothetical investment on
August 31, 1997 in a static equally-weighted basket of each of the Components,
which was not thereafter re-weighted or adjusted, through December 31,
2006.
The
below statistics relate to an investment in the Index from 31 August 1997
to 31
December 2006
|
|
|
|
|
|
|
Index
|
Equity
Component1
|
Real
Estate Component1
|
Bond
Component2
|
Static
Basket
|
|
|
|
|
|
|
Annualized
Return3
|
10.41%
|
5.00%
|
6.84%
|
6.62%
|
6.69%
|
|
|
|
|
|
|
Volatility4
|
6.54%
|
18.32%
|
14.44%
|
4.17%
|
9.30%
|
|
|
|
|
|
|
Maximum
Drawdown5
|
-3.90%
|
-39.80%
|
-39.27%
|
-4.84%
|
-10.73%
|
|
|
|
|
|
|
Sharpe
Ratio
(with
Risk Free Rate of 0%)6
|
1.59
|
0.27
|
0.47
|
1.59
|
0.72
|
|
|
|
|
|
|
Best
Month Performance
|
3.92%
|
9.67%
|
10.86%
|
3.46%
|
5.40%
|
|
|
|
|
|
|
Worst
Month Performance
|
-3.03%
|
-14.58%
|
-14.50%
|
-4.33%
|
-7.85%
|
|
|
|
|
|
|
%
of Profitable Months
|
74.11%
|
58.93%
|
61.61%
|
70.54%
|
64.29%
|
|
|
|
|
|
|
%
of Non-Profitable Months
|
25.89%
|
41.07%
|
38.39%
|
29.46%
|
35.71%
|
|
|
|
|
|
|
Correlation
with Equity Component
|
16.99%
|
100.00%
|
38.58%
|
-34.09%
|
78.90%
|
|
|
|
|
|
|
Correlation
with Real Estate Component
|
39.78%
|
38.58%
|
100.00%
|
-7.44%
|
84.48%
|
|
|
|
|
|
|
Correlation
with Bond Component
|
54.89%
|
-34.09%
|
-7.44%
|
100.00%
|
-5.95%
|
1
Price
Return Performance.
2
Total
Return Performance.
3
The return
on
an investment over a period of time from August 31, 1997 to December 31,
2006
calculated to give the compounded annual growth rate.
4The
relative rate at which the price of a security changes in value, found by
calculating the annualized standard deviation of daily changes in
price.
5The
worst
performance an investor would have experienced given any starting
point.
6A
measure
of a portfolio's or asset's excess return relative to the total variability
of
the portfolio.
Figure
6
- Historical Component Weightings
The
Component weightings in the charts below relate to a hypothetical investment
in
a basket of the Components from August 31, 1997 to December 31, 2006, had
the
basket been weighted in accordance with the formula for calculating the Index
on
August 31, 1997 and adjusted on each Re-weighting Date thereafter according
to
the process described above under “Description of the Notes” and in Appendix A.
The weights represented in the chart below are average annual
weights.
|
|
|
Weights
|
Date
(Year)
|
Equity
Component
|
Real
Estate Component
|
Bond
Component
|
|
|
|
|
|
SPX
|
IYR
|
AGG
|
Aug
'97 - Dec '97
|
14.63%
|
12.50%
|
72.87%
|
1998
|
10.91%
|
0.00%
|
89.09%
|
1999
|
37.65%
|
1.43%
|
60.92%
|
2000
|
20.46%
|
3.31%
|
76.23%
|
2001
|
0.00%
|
16.40%
|
83.60%
|
2002
|
3.37%
|
13.54%
|
83.10%
|
2003
|
16.23%
|
11.76%
|
72.02%
|
2004
|
1.31%
|
29.34%
|
69.35%
|
2005
|
11.83%
|
26.62%
|
61.55%
|
2006
|
3.31%
|
32.11%
|
64.58%
|
Average
|
11.78%
|
14.86%
|
73.36%
|
Figure
7
- Historical Monthly Component Weightings
The
Component weightings in the charts below relate to a hypothetical investment
in
a basket of the Components from August 31, 1997 to December 31, 2006, had
the
basket been weighted in accordance with the formula for calculating the Index
on
August 31, 1997 and adjusted on each Re-weighting Date thereafter according
to
the process described above under “Description of the Notes” and in Appendix A.
The weights presented in the chart below represent the weighting of each
Component in the Index during the month indicated, as calculated on the last
day
of the previous calendar month, or, if such day was not a Trading Day, the
next
following Trading Day.
Months
|
|
Weight
of Equity Component
|
|
Weight
of Real Estate Component
|
|
Weight
of Bond Component
|
1997
|
|
|
|
|
|
|
September
|
|
50.00%
|
|
0.00%
|
|
50.00%
|
October
|
|
0.00%
|
|
0.00%
|
|
100.00%
|
November
|
|
0.00%
|
|
0.00%
|
|
100.00%
|
December
|
|
8.51%
|
|
50.00%
|
|
41.49%
|
Avg
|
|
14.63%
|
|
12.50%
|
|
72.87%
|
1998
|
|
|
|
|
|
|
January
|
|
0.00%
|
|
0.00%
|
|
100.00%
|
February
|
|
0.00%
|
|
0.00%
|
|
100.00%
|
March
|
|
25.26%
|
|
0.00%
|
|
74.74%
|
April
|
|
0.00%
|
|
0.00%
|
|
100.00%
|
May
|
|
9.08%
|
|
0.00%
|
|
90.92%
|
June
|
|
12.26%
|
|
0.00%
|
|
87.74%
|
July
|
|
0.00%
|
|
0.00%
|
|
100.00%
|
August
|
|
8.00%
|
|
0.00%
|
|
92.00%
|
September
|
|
0.00%
|
|
0.00%
|
|
100.00%
|
October
|
|
0.00%
|
|
0.00%
|
|
100.00%
|
November
|
|
50.00%
|
|
0.00%
|
|
50.00%
|
December
|
|
26.28%
|
|
0.00%
|
|
73.72%
|
Avg
|
|
10.91%
|
|
0.00%
|
|
89.09%
|
1999
|
|
|
|
|
|
|
January
|
|
50.00%
|
|
0.00%
|
|
50.00%
|
February
|
|
50.00%
|
|
0.00%
|
|
50.00%
|
March
|
|
50.00%
|
|
0.00%
|
|
50.00%
|
April
|
|
50.00%
|
|
0.00%
|
|
50.00%
|
May
|
|
50.00%
|
|
17.17%
|
|
32.83%
|
June
|
|
50.00%
|
|
0.00%
|
|
50.00%
|
July
|
|
0.00%
|
|
0.00%
|
|
100.00%
|
August
|
|
7.72%
|
|
0.00%
|
|
92.28%
|
September
|
|
0.00%
|
|
0.00%
|
|
100.00%
|
October
|
|
50.00%
|
|
0.00%
|
|
50.00%
|
November
|
|
50.00%
|
|
0.00%
|
|
50.00%
|
December
|
|
44.06%
|
|
0.00%
|
|
55.94%
|
Avg
|
|
37.65%
|
|
1.43%
|
|
60.92%
|
2000
|
|
|
|
|
|
|
January
|
|
8.49%
|
|
0.00%
|
|
91.51%
|
February
|
|
50.00%
|
|
0.00%
|
|
50.00%
|
March
|
|
0.00%
|
|
0.00%
|
|
100.00%
|
April
|
|
50.00%
|
|
22.94%
|
|
27.06%
|
May
|
50.00%
|
16.72%
|
33.28%
|
June
|
12.69%
|
0.00%
|
87.31%
|
July
|
36.02%
|
0.00%
|
63.98%
|
August
|
38.36%
|
0.00%
|
61.64%
|
September
|
0.00%
|
0.00%
|
100.00%
|
October
|
0.00%
|
0.00%
|
100.00%
|
November
|
0.00%
|
0.00%
|
100.00%
|
December
|
0.00%
|
0.00%
|
100.00%
|
Avg
|
20.46%
|
3.31%
|
76.23%
|
2001
|
|
|
|
January
|
0.00%
|
0.00%
|
100.00%
|
February
|
0.00%
|
0.00%
|
100.00%
|
March
|
0.00%
|
26.36%
|
73.64%
|
April
|
0.00%
|
0.00%
|
100.00%
|
May
|
0.00%
|
0.00%
|
100.00%
|
June
|
0.00%
|
50.00%
|
50.00%
|
July
|
0.00%
|
20.40%
|
79.60%
|
August
|
0.00%
|
0.00%
|
100.00%
|
September
|
0.00%
|
0.00%
|
100.00%
|
October
|
0.00%
|
0.00%
|
100.00%
|
November
|
0.00%
|
50.00%
|
50.00%
|
December
|
0.00%
|
50.00%
|
50.00%
|
Avg
|
0.00%
|
16.40%
|
83.60%
|
2002
|
|
|
|
January
|
0.00%
|
0.00%
|
100.00%
|
February
|
13.37%
|
0.00%
|
86.63%
|
March
|
27.07%
|
0.00%
|
72.93%
|
April
|
0.00%
|
12.88%
|
87.12%
|
May
|
0.00%
|
50.00%
|
50.00%
|
June
|
0.00%
|
45.15%
|
54.85%
|
July
|
0.00%
|
0.00%
|
100.00%
|
August
|
0.00%
|
0.00%
|
100.00%
|
September
|
0.00%
|
0.00%
|
100.00%
|
October
|
0.00%
|
0.00%
|
100.00%
|
November
|
0.00%
|
29.31%
|
70.69%
|
December
|
0.00%
|
25.08%
|
74.92%
|
Avg
|
3.37%
|
13.54%
|
83.10%
|
2003
|
|
|
|
January
|
3.92%
|
0.00%
|
96.08%
|
February
|
19.39%
|
0.00%
|
80.61%
|
March
|
4.94%
|
0.00%
|
95.06%
|
April
|
0.00%
|
35.01%
|
64.99%
|
May
|
0.00%
|
50.00%
|
50.00%
|
June
|
46.45%
|
0.00%
|
53.55%
|
July
|
50.00%
|
0.00%
|
50.00%
|
August
|
50.00%
|
0.00%
|
50.00%
|
September
|
17.06%
|
2.50%
|
80.45%
|
October
|
0.00%
|
3.55%
|
96.45%
|
November
|
2.97%
|
50.00%
|
47.03%
|
December
|
0.00%
|
0.00%
|
100.00%
|
Avg
|
16.23%
|
11.76%
|
72.02%
|
2004
|
|
|
|
January
|
0.00%
|
50.00%
|
50.00%
|
February
|
0.00%
|
50.00%
|
50.00%
|
March
|
10.10%
|
0.00%
|
89.90%
|
April
|
0.00%
|
0.00%
|
100.00%
|
May
|
0.00%
|
50.00%
|
50.00%
|
June
|
0.00%
|
50.00%
|
50.00%
|
July
|
0.00%
|
50.00%
|
50.00%
|
August
|
5.58%
|
10.57%
|
83.85%
|
September
|
0.00%
|
0.00%
|
100.00%
|
October
|
0.00%
|
0.00%
|
100.00%
|
November
|
0.00%
|
50.00%
|
50.00%
|
December
|
0.00%
|
41.56%
|
58.44%
|
Avg
|
1.31%
|
29.34%
|
69.35%
|
2005
|
|
|
|
January
|
50.00%
|
0.00%
|
50.00%
|
February
|
50.00%
|
50.00%
|
0.00%
|
March
|
0.00%
|
0.00%
|
100.00%
|
April
|
0.00%
|
14.90%
|
85.10%
|
May
|
0.00%
|
50.00%
|
50.00%
|
June
|
0.00%
|
50.00%
|
50.00%
|
July
|
0.00%
|
47.16%
|
52.84%
|
August
|
0.00%
|
50.00%
|
50.00%
|
September
|
0.00%
|
0.00%
|
100.00%
|
October
|
0.00%
|
0.00%
|
100.00%
|
November
|
42.00%
|
50.00%
|
8.00%
|
December
|
0.00%
|
7.40%
|
92.60%
|
Avg
|
11.83%
|
26.62%
|
61.55%
|
2006
|
|
|
|
January
|
0.00%
|
50.00%
|
50.00%
|
February
|
0.00%
|
36.63%
|
63.37%
|
March
|
0.00%
|
37.09%
|
62.91%
|
April
|
0.00%
|
50.00%
|
50.00%
|
May
|
0.00%
|
50.00%
|
50.00%
|
June
|
0.00%
|
16.46%
|
83.54%
|
July
|
39.76%
|
48.98%
|
11.26%
|
August
|
0.00%
|
11.11%
|
88.89%
|
September
|
0.00%
|
29.30%
|
70.70%
|
October
|
0.00%
|
28.98%
|
71.02%
|
November
|
0.00%
|
15.06%
|
84.94%
|
December
|
0.00%
|
11.67%
|
88.33%
|
Avg
|
3.31%
|
32.11%
|
64.58%
|
CERTAIN
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The
following discussion summarizes certain of the material U.S. federal income
tax
consequences of the purchase, beneficial ownership, and disposition of the
AMPS
Notes. For purposes of this summary, a “U.S. holder” is a beneficial owner of a
Note that is:
an
individual who is a citizen or a resident of the United States, for federal
income tax purposes;
a
corporation (or other entity that is treated as a corporation for federal
tax
purposes) that is created or organized in or under the laws of the United
States
or any State thereof (including the District of Columbia);
an
estate
whose income is subject to federal income taxation regardless of its source;
or
a
trust
if a court within the United States is able to exercise primary supervision
over
its administration, and one or more United States persons (as defined for
federal income tax purposes) have the authority to control all of its
substantial decisions.
For
purposes of this summary, a “non-U.S. holder” is a beneficial owner of a Note
that is:
a
nonresident alien individual for federal income tax purposes;
a
foreign
corporation for federal income tax purposes;
an
estate
whose income is not subject to federal income tax on a net income basis;
or
a
trust
if no court within the United States is able to exercise primary jurisdiction
over its administration or if United States persons (as defined for federal
income tax purposes) do not have the authority to control all of its substantial
decisions.
An
individual may, subject to certain exceptions, be deemed to be a resident
of the
United States for federal income tax purposes by reason of being present
in the
United States for at least 31 days in the calendar year and for an aggregate
of
at least 183 days during a three year period ending in the current calendar
year
(counting for those purposes all of the days present in the current year,
one
third of the days present in the immediately preceding year, and one sixth
of
the days present in the second preceding year).
This
summary is based on interpretations of the Code, regulations issued thereunder,
and rulings and decisions currently in effect (or in some cases proposed),
all
of which are subject to change. Any of those changes may be applied
retroactively and may adversely affect the federal income tax consequences
described herein. This summary addresses only holders that purchase AMPS
Notes
at initial issuance, and own AMPS Notes as capital assets and not as part
of a
“straddle,” “hedge,” “synthetic security,” or “conversion transaction” for
federal income tax purposes or as part of some other integrated investment.
This
summary does not discuss all of the tax consequences that may be relevant
to
particular investors or to investors subject to special treatment under the
federal income tax laws (such as banks, thrifts or other financial institutions;
insurance companies; securities dealers or brokers, or traders in securities
electing mark-to-market treatment; regulated investment companies or real
estate
investment trusts; small business investment companies; S corporations;
investors that hold their AMPS Notes through a partnership or other entity
treated as a partnership for federal tax purposes; investors whose functional
currency is not the U.S. dollar; certain former citizens or residents of
the
United States; persons subject to the alternative minimum tax; retirement
plans
or other tax-exempt entities, or persons holding the AMPS Notes in tax-deferred
or tax-advantaged accounts; or “controlled foreign corporations” or “passive
foreign investment companies” for federal income tax purposes). This summary
also does not address the tax consequences to shareholders, or other equity
holders in, or beneficiaries of, a holder, or any state, local or foreign
tax
consequences of the purchase, ownership or disposition of the AMPS Notes.
Accordingly,
prospective investors are urged to consult their tax advisors with respect
to
the federal, state and local tax consequences of investing in the AMPS Notes,
as
well as any consequences arising under the laws of any other taxing jurisdiction
to which they may be subject.
PROSPECTIVE
PURCHASERS OF NOTES SHOULD CONSULT THEIR TAX ADVISORS AS TO THE FEDERAL,
STATE,
LOCAL, AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF NOTES.
There
are
no statutory provisions, regulations, published rulings or judicial decisions
addressing the characterization for federal income tax purposes of securities
with terms that are substantially the same as those of the AMPS Notes.
Accordingly, the proper U.S. federal income tax treatment of the AMPS Notes
is
uncertain. Under one approach, the AMPS Notes would be treated as pre-paid
cash-settled executory contracts with respect to the Indices. We intend to
treat
the AMPS Notes consistent with this approach, and pursuant to the terms of
the
AMPS Notes, you agree to treat the AMPS Notes consistent with this approach.
Except as otherwise provided in “—Alternative Characterizations and Treatments,”
the balance of this summary assumes that the AMPS Notes are so
treated.
Federal
Income Tax Treatment of U.S. Holders
Upon
the
receipt of cash at maturity of a Note or upon the sale, exchange or other
disposition of a Note in a taxable transaction, a U.S. holder generally will
recognize gain or loss equal to the difference between the amount realized
at
maturity or upon the sale, exchange or other disposition and the U.S. holder’s
tax basis in the Note. A U.S. holder’s tax basis in a Note will generally be
equal to the U.S. holder’s cost for the Note. Any such gain or loss generally
will constitute capital gain or loss, and if held for more than a year at
the
time of maturity, sale, exchange or other disposition, generally should be
long-term capital gain or loss. Long-term capital gains of non-corporate
taxpayers are generally eligible for reduced rates of taxation. The ability
of
U.S. holders to use capital losses to offset ordinary income is
limited.
Alternative
Characterizations and Treatments
Although
we intend to treat each Note as a pre-paid cash-settled executory contract
as
described above, there are no statutory provisions, regulations, published
rulings or judicial decisions addressing the characterization of securities
with
terms that are substantially the same as those of the AMPS Notes, and therefore
the AMPS Notes could be subject to some other characterization or treatment
for
federal income tax purposes. For example, each Note could be treated as a
“contingent payment debt instrument” for federal income tax purposes. In this
event, a U.S. holder would be required to accrue original issue discount
income,
subject to adjustments, at the “comparable yield” of the AMPS Notes and any gain
recognized with respect to the Note generally would be treated as ordinary
income. Prospective investors should consult their tax advisors as to the
federal income tax consequences to them if the AMPS Notes are treated as
debt
instruments for federal income tax purposes.
In
addition, certain proposed Treasury regulations require the accrual of income
on
a current basis for contingent payments made under certain “notional principal
contracts.” The preamble to the proposed regulations states that the “wait and
see” method of accounting does not properly reflect the economic accrual of
income on those contracts and requires current accrual of income for some
contracts already in existence. While the proposed regulations do not apply
to
pre-paid executory contracts, the preamble to the proposed regulations indicates
that similar timing issues exist in the case of pre-paid forward contracts
and
therefore similar timing issues may exist in the case of executory contracts.
If
the IRS or the U.S. Treasury Department publishes future guidance requiring
current economic accrual for contingent payments on pre-paid executory
contracts, it is possible that a U.S. holder could be required to accrue
income
over the term of the AMPS Notes.
Other
alternative federal income tax characterizations or treatments of the AMPS
Notes
are possible, and if applied could also affect the timing and the character
of
the income, gain, or loss with respect to the AMPS Notes.
Prospective
investors in the AMPS Notes should consult their tax advisors as to the tax
consequences to them of purchasing AMPS Notes, including any alternative
characterizations and treatments.
Federal
Income Tax Treatment of Non-U.S. Holders
A
non-U.S. holder that is not subject to U.S. federal income tax as a result
of
any direct or indirect connection to the United States other than its ownership
of a Note should not be subject to U.S. federal income or withholding tax
in
respect of the AMPS Notes so long as (1) the non-U.S. holder provides an
appropriate statement, signed under penalties of perjury, identifying the
non-U.S. holder and stating, among other things, that the non-U.S. holder
is not
a United States person (as defined for federal income tax purposes), (2)
the
non-U.S. holder is not a bank that has purchased the AMPS Notes in the ordinary
course of its trade or business of making loans, as described in section
881(c)(3)(A) of the Code, (3) the non-U.S. holder is not a “10-percent
shareholder” within the meaning of section 871(h)(3)(B) of the Code or a
“related controlled foreign corporation” within the meaning of section
881(c)(3)(C) of the Code with respect to us, and (4) the Index is actively
traded within the meaning of section 871(h)(4)(C)(v) of the Code. We expect
that
the Index will be treated as actively traded within the meaning of section
871(h)(4)(C)(v) of the Code.
If
any of
these conditions are not met, a 30% withholding tax may apply to payments
on the
AMPS Notes, unless an income tax treaty reduces or eliminates such tax or
the
income is effectively connected with the conduct of a trade or business within
the United States by such non-U.S. holder. In the latter case, such non-U.S.
holder should be subject to U.S. federal income tax with respect to all income
from the AMPS Notes at regular rates applicable to U.S. taxpayers, and, for
a
foreign corporation, possibly branch profits tax, unless an applicable treaty
reduces or eliminates such tax.
In
general, the gain realized on the maturity, sale, exchange or other disposition
of the AMPS Notes by a non-U.S. holder should not be subject to U.S. federal
income tax unless (i) the gain is effectively connected with a trade or business
conducted by the non-U.S. holder in the United States, (ii) the non-U.S.
holder
has, at any time during which it has owned an AMPS Note, owned 5% or more
of the
fair market value of the shares of each company that is included in a Component
and is a U.S. real property holding company for U.S. federal income tax purposes
(which will generally include the companies that are included in the iShares®
Dow Jones U.S. Real Estate Index Fund), treating an investment in the AMPS
Notes
as a pro rata investment in the shares of each company that is included in
a
Component for this purpose, or (iii) the non-U.S. holder is an individual
that
is present in the United States for 183 days or more in the taxable year
of the
maturity, sale, exchange or other disposition and certain other conditions
are
satisfied.
If
the
gain is effectively connected with a trade or business conducted by the non-U.S.
holder in the United States or the non-U.S. holder owns 5% or more of the
fair
market value of the shares of any company included in a Component that is
a U.S.
real property holding company, the non-U.S. holder will generally be subject
to
U.S. federal income tax on any income or gain in respect of the Note at the
regular rates applicable to U.S. taxpayers, could be subject to U.S. withholding
tax in respect of the proceeds of the sale, and, for a foreign corporation,
possibly branch profits tax, unless an applicable treaty reduces or eliminates
such tax.
If
the
non-U.S. holder is an individual that is present in the United States for
183
days or more in the taxable year of the maturity, sale, exchange or other
disposition and certain other conditions are satisfied, the non-U.S. holder
will
generally be subject to tax at a rate of 30% on the amount by which the non-U.S.
holder's capital gains derived from the maturity, sale, exchange, retirement
or
other disposition of the AMPS Notes and other assets that are from U.S. sources
exceed capital losses allocable to U.S. sources.
Information
Reporting and Backup Withholding
Distributions
made on the AMPS Notes and proceeds from the sale of AMPS Notes to or through
certain brokers may be subject to a “backup” withholding tax on “reportable
payments” unless, in general, the holder of AMPS Notes complies with certain
procedures or is an exempt recipient. Any amounts so withheld from distributions
on the AMPS Notes generally would be refunded by the IRS or allowed as a
credit
against the holder of AMPS Notes federal income tax, provided the holder
of AMPS
Notes makes a timely filing of an appropriate tax return or refund
claim.
Reports
will be made to the IRS and to holder of AMPS Notes that are not exempt from
the
reporting requirements.
CERTAIN
ERISA
CONSIDERATIONS
Section
4975 of the Code prohibits the borrowing of money, the sale of property and
certain other transactions involving the assets of plans that are qualified
under the Code (“Qualified Plans”) or individual retirement accounts ("IRAs")
and persons who have certain specified relationships to them. Section 406
of the
Employee Retirement Income Security Act of 1974, as amended (“ERISA”), prohibits
similar transactions involving employee benefit plans that are subject to
ERISA
(“ERISA Plans”). Qualified Plans, IRAs and ERISA Plans are referred to as
“Plans.”
Persons
who have such specified relationships are referred to as “parties in interest”
under ERISA and as “disqualified persons” under the Code. “Parties in interest”
and “disqualified persons” encompass a wide range of persons, including any
fiduciary (for example, an investment manager, trustee or custodian) of a
Plan,
any person providing services (for example, a broker) to a Plan, the Plan
sponsor, an employee organization any of whose members are covered by the
Plan,
and certain persons related to or affiliated with any of the
foregoing.
The
purchase and/or holding of Notes by a Plan with respect to which we, Bear
Stearns and/or certain of our affiliates is a fiduciary and/or a service
provider (or otherwise is a “party in interest” or “disqualified person”) would
constitute or result in a prohibited transaction under Section 406 of ERISA
or
Section 4975 of the Code, unless such the Notes are acquired or held pursuant
to
and in accordance with an applicable statutory or administrative exemption.
Each
of us, Bear Stearns and BSSC is considered a “disqualified person” under the
Code or a “party in interest” under ERISA with respect to many Plans, although
neither we nor Bear Stearns can be a “party in interest” to any IRA other than
certain employer-sponsored IRAs, as only employer-sponsored IRAs are covered
by
ERISA.
Applicable
administrative exemptions may include certain prohibited transaction class
exemptions (for example, Prohibited Transaction Class Exemption (“PTCE”) 84−14
relating to qualified professional asset managers, PTCE 96−23 relating to
certain in-house asset managers, PTCE 91−38 relating to bank collective
investment funds, PTCE 90−1 relating to insurance company separate accounts and
PTCE 95−60 relating to insurance company general accounts).
It
should
also be noted that the recently enacted Pension Protection Act of 2006 contains
a new statutory exemption from the prohibited transaction provisions of Section
406 of ERISA and Section 4975 of the Code for transactions involving certain
parties in interest or disqualified persons who are such merely because they
are
a service provider to a Plan, or because they are related to a service provider.
Generally, the new exemption would be applicable if the party to the transaction
with the Plan is a party in interest or a disqualified person to the Plan
but is
not (i) an employer, (ii) a fiduciary who has or exercises any discretionary
authority or control with respect to the investment of the Plan assets involved
in the transaction, (iii) a fiduciary who renders investment advice (within
the
meaning of ERISA and Section 4975 of the Code) with respect to those assets,
or
(iv) an affiliate of (i), (ii) or (iii). Any Plan fiduciary relying on this
new
statutory exemption (Section 408(b)(17) of ERISA and Section 4975(d)(20)
of the
Code) and purchasing Notes on behalf of a Plan will be deemed to represent
that
(x) the fiduciary has made a good faith determination that the Plan is paying
no
more than, and is receiving no less than, adequate consideration in connection
with the transaction and (y) neither we, Bear Stearns, nor any of our affiliates
directly or indirectly exercises any discretionary authority or control or
renders investment advice (as defined above) with respect to the assets of
the
Plan which such fiduciary is using to purchase the Notes, both of which are
necessary preconditions to utilizing this new exemption. Any purchaser that
is a
Plan is encouraged to consult with counsel regarding the application of the
new
exemption.
A
fiduciary who causes a Plan to engage, directly or indirectly, in a non-exempt
prohibited transaction may be subject to a penalty under ERISA, and may be
liable for any losses to the Plan resulting from such transaction. Code Section
4975 generally imposes an excise tax on disqualified persons who engage,
directly or indirectly, in non-exempt transactions with the assets of Plans
subject to such Section. If an IRA engages in a prohibited transaction, the
assets of the IRA are deemed to have been distributed to the IRA
beneficiaries.
In
accordance with ERISA’s general fiduciary requirements, a fiduciary with respect
to any ERISA Plan who is considering the purchase of Notes on behalf of such
plan should consider the foregoing information and the information set forth
in
the applicable prospectus supplement and any applicable pricing supplement,
and
should determine whether such purchase is permitted under the governing plan
document and is prudent and appropriate for the ERISA Plan in view of its
overall investment policy and the composition and diversification of its
portfolio. Fiduciaries of Plans established with, or for which services are
provided by, us, Bear Stearns, and/or certain of our affiliates should consult
with counsel before making any acquisition. Each purchaser of any Notes,
the
assets of which constitute the assets of one or more Plans, and each fiduciary
that directs such purchaser with respect to the purchase or holding of such
Notes, will be deemed to represent that the purchase, holding and disposition
of
the Notes does not and will not constitute a prohibited transaction under
Section 406 of ERISA or Section 4975 of the Code for which an exemption is
not
available.
Certain
employee benefit plans, such as governmental plans (as defined in Section
3(32)
of ERISA) and, if no election has been made under Section 410(d) of the Code,
church plans (as defined in Section 3(33) of ERISA), are not subject to Section
406 of ERISA or Section 4975 of the Code. However, such plans may be subject
to
the provisions of applicable federal, state or local law (“Similar Law”) similar
to the foregoing provisions of ERISA or the Code. Fiduciaries of such plans
(“Similar Law Plans”) should consider applicable Similar Law when investing in
the Notes. Each fiduciary of a Similar Law Plan will be deemed to represent
that
the Similar Law Plan’s acquisition and holding of the Notes will not result in a
non-exempt violation of applicable Similar Law.
The
sale
of any Note to a Plan or a Similar Law Plan is in no respect a representation
by
us or any of our affiliates that such an investment meets all relevant legal
requirements with respect to investments by Plans or Similar Law Plans generally
or any particular Plan or Similar Law Plan, or that such an investment is
appropriate for a Plan or a Similar Law Plan generally or any particular
Plan or
Similar Law Plan.
USE
OF PROCEEDS AND HEDGING
We
will
use the net proceeds from the sale of the Notes for general corporate purposes.
We or one or more of our subsidiaries (including BSIL) may hedge our obligations
under the Notes by the purchase and sale of exchange-traded and over-the-counter
options on, or other derivative or synthetic instruments related to, the
Index,
the Index Components and/or constituents of the Index Components, individual
futures contracts on the Index, the Index Components and/or constituents
of the
Index Components, and/or options on these futures contracts.
At
various times after the initial offering and before the maturity of the Notes,
depending on market conditions (including the value of the Components), in
connection with hedging with respect to the Notes, we expect that we and/or
one
or more of our subsidiaries will increase or decrease those initial hedging
positions using dynamic hedging techniques and may take long or short positions
in these instruments.
In
addition, we and/or one or more of our subsidiaries may periodically purchase
or
otherwise acquire a long or short position in the Notes and may, in our or
its
discretion, hold or resell such Notes. We or one or more of our subsidiaries
may
also take positions in other types of appropriate financial instruments that
may
become available in the future. If we or one or more of our subsidiaries
has a
long hedge position in these instruments, then we or one or more of our
subsidiaries may liquidate a portion of these instruments at or about the
time
of the maturity of the Notes. Depending on, among other things, future market
conditions, the total amount and the composition of such positions are likely
to
vary over time. We will not be able to ascertain our profits or losses from
any
hedging position until such position is closed out and any offsetting position
or positions are taken into account. Although we have no reason to believe
that
such hedging activity will have a material effect on the price of these
instruments or on the levels of the Components, we cannot guarantee that
we and
one or more of our subsidiaries will not affect these levels as a result
of its
hedging activities. You should also refer to “Use of Proceeds” in the
accompanying prospectus.
SUPPLEMENTAL
PLAN OF
DISTRIBUTION
Subject
to the terms and conditions set forth in the Distribution Agreement dated
as of
June 19, 2003, as amended, we have agreed to sell to Bear Stearns & Co. Inc.
as principal, and Bear, Stearns & Co. Inc. has agreed to purchase from us,
the aggregate principal amount of Notes set forth opposite its name
below.
|
|
|
Agent
|
|
Principal
Amount of Notes
|
Bear,
Stearns & Co. Inc.
|
|
$14,000,000
|
Total
|
|
$14,000,000
|
The
Agent
intends to initially offer $14,000,000 of the Notes to the public at the
offering price set forth on the cover page of this pricing supplement, and
to
subsequently resell the remaining face amount of the Notes at prices related
to
the prevailing market prices at the time of resale. Potential investors should
understand that, as described on the cover, investors who purchase an aggregate
amount of at least $1,000,000 of Notes in this initial distribution will
be
entitled to purchase such Notes for 99.00% of the principal amount. In the
future, the Agent may repurchase and resell the Notes in market-making
transactions, with resales being made at prices related to prevailing market
prices at the time of resale or at negotiated prices. We will offer the Notes
to
Bear, Stearns & Co. Inc. at a discount of 97.75% of the price at which the
Notes are offered to the public. Bear, Stearns & Co. Inc. may reallow a
discount to other agents not in excess of 97.75% of the public offering
price.
In
order
to facilitate the offering of the Notes, we may grant the Agent a 30-day
option
from the date of the final pricing supplement, to purchase from us up to
an
additional $2,100,000 at the public offering price, less the agent’s discount,
to cover any over-allotments. The Agent may over-allot or effect transactions
which stabilize or maintain the market price of the Notes at a level higher
than
that which might otherwise prevail in the open market. Specifically, the
Agent
may over-allot or otherwise create a short position in the Notes for its
own
account by selling more Notes than have been sold to it by us. If this option
is
exercised, in whole or in part, subject to certain conditions, the Agent
will
become obligated to purchase from us and we will be obligated to sell to
the
Agent an amount of Notes equal to the amount of the over-allotment exercised.
The Agent may elect to cover any such short position by purchasing Notes
in the
open market. No representation is made as to the magnitude or effect of any
such
stabilization or other transactions. Such stabilizing, if commenced, may
be
discontinued at any time and in any event shall be discontinued within a
limited
period. No other party may engage in stabilization.
Payment
of the purchase price shall be made in funds that are immediately available
in
New York City.
The
agents may be deemed to be “underwriters” within the meaning of the Securities
Act. We have agreed to indemnify the agents against or to make contributions
relating to certain civil liabilities, including liabilities under the
Securities Act. We have agreed to reimburse the agents for certain
expenses.
The
Notes
are a new issue of securities with no established trading market. The Notes
will
be listed on the American Stock Exchange; however, there is no assurance
that a
trading market will develop. Bear, Stearns & Co. Inc. has advised us that,
following completion of the offering of the Notes, it intends under ordinary
market conditions to indicate prices for the Notes on request, although it
is
under no obligation to do so and may discontinue any market-making activities
at
any time without notice. Accordingly, no guarantees can be given as to whether
an active trading market for the Notes will develop or, if such a trading
market
develops, as to the liquidity of such trading market. We cannot guarantee
that
bids for outstanding Notes will be made in the future; nor can we predict
the
price at which any such bids will be made. The Notes will cease trading as
of
the close of business on the Maturity Date.
Because
Bear, Stearns & Co. Inc. is our wholly-owned subsidiary, each distribution
of the Notes will conform to the requirements set forth in Rule 2720 of the
NASD
Conduct Rules.
LEGAL
MATTERS
The
validity of the Notes will be passed upon for us by Cadwalader, Wickersham
&
Taft LLP, New York, New York.
Exhibit
A
U.S.
Adagio Strategy Index
The
Index
replicates a strategy based on the relative weighting of the three U.S. asset
classes (equities, real estate and government bonds) that are represented
by the
Components. Each Component in the Index is re-weighted on a monthly basis.
The
percentage weightings of the Real Estate Component and the Equity Component
in a
given month are determined by a formula which utilizes the monthly returns
of
the Real Estate Component and the Equity Component for each of the trailing
12
months. The percentage weightings of the Real Estate Component and the Equity
Component are each subject to a minimum weighting of 0% and a maximum weighting
of 50% each. The Bond Component is the residual Component. Its weighting
is the
percentage, if any, required to make the sum of all Component weightings
equal
100%.
Component
Weighting
Each
of
the Components in the Index will be re-weighted on Re-weighting Dates. The
re-weighting will be achieved by the following process:
|
·
|
First,
a set of monthly percentage returns will be determined for each
Component
in respect of each of the twelve monthly periods ending on the
month which
relates to the Re-weighting Date.
|
|
·
|
Second,
with respect to the Equity Component and the Real Estate Component,
these
monthly percentage returns will be multiplied by the fixed coefficients
(as specified below) for the corresponding monthly period.
|
|
·
|
Third,
each of the amounts resulting from the product of the monthly percentage
returns by the corresponding fixed coefficient will be summed with
respect
to the Equity Component and the Real Estate Component.
|
|
·
|
Fourth,
subject to a maximum weighting of 50% and a minimum of 0% each,
these sums
of the Equity Component and the Real Estate Component will be the
weighting of these components for the relevant month.
|
|
·
|
Fifth,
the weighting of the Bond Component is
the percentage, if any, required to make the sum of all Component
weightings equal 100%.
|
Fixed
coefficients represent the statistical
relationship (the correlation) between the current monthly return of the
Equity
Component and its preceding monthly returns as well as the statistical
relationship between the current monthly return of the Equity Component and
the
current and preceding monthly returns of each of the other two Components,
in
each case up to the previous 12 monthly periods. This same methodology will
apply to the Real Estate Component. As a result of this process, the weighting
of each Component
in the
Index is a linear combination of the 12 monthly historical returns of each
of
the Components with fixed coefficients. Both positive and negative coefficients
are used in computing the relative weightings of the Components. Positive
returns and positive coefficients will have the effect of increasing the
weighting of a particular Component, while negative returns and negative
coefficients will have the effect of decreasing the weighting of a particular
Component.
As
described above, on each Re-weighting Date, the weightings of each of the
Components in the Index will be computed according to the following
formulae:
Where:
Bondk-j
is, as
of the Re-weighting Date on day tk,
the
Closing Level of the Bond Component on (i) each of the 11 Re-weighting
Dates immediately preceding day tk
and
(ii) tk.
Bondk-j-1
is, as
of the Re-weighting Date on day tk,
the
Closing Level of the Bond Component on each of the 12 Re-weighting Dates
immediately preceding day tk.
Cj1,Equity,
Cj1,RE,
Cj1,Bond,
as of
the Re-weighting Date on day tk,
are the
constant coefficient parameters to be used for the computation of the Equity
Component weightings for the Re-weighting Date on day tk.
These
36 coefficients are fixed and will remain constant.
Cj2,Equity,
Cj2,RE
and
Cj2,Bond
, as of
the Re-weighting Date on day tk,
are the
constant coefficient parameters to be used for the computation of the Real
Estate Component weightings for the Re-weighting Date on day tk.
These
36 coefficients are fixed and will remain constant.
Equityk-j
is, as
of the Re-weighting Date on day tk,
the
Closing Level of the Equity Component on (i) each of the 11 Re-weighting
Dates immediately preceding day tk
and
(ii) tk.
Equityk-j-1
is, as
of the Re-weighting Date on day tk,
the
Closing Level of the Equity Component on each of the 12 Re-weighting Dates
immediately preceding day tk
REk-
j
is, as
of the Re-weighting Date on day tk,
the
Closing Level of the Real Estate Component on (i) each of the 11
Re-weighting Dates immediately preceding day tk.
and
(ii) tk.
REk-j-1
is, as
of the Re-weighting Date on day tk,
the
Closing Level of the Real Estate Component on each of the 12 Re-weighting
Dates
immediately preceding day tk.
tk
is
the
current Re-weighting Date.
is,
in
respect of Re-weighting
Date
tk,
the
weight of the Bond Component in the Index as determined by the Strategy Sponsor
on such day tk.
is,
in
respect of Re-weighting
Date
tk,
the
weight of the Equity Component in the Index as determined by the Strategy
Sponsor on such day tk.
is, in
respect of Re-weighting
Date
tk,
the
weight of the Real Estate Component in the Index as determined by the Strategy
Sponsor on such day tk.
Coefficients
|
|
|
|
|
|
|
|
|
|
|
|
|
|
j
|
|
Cj1,Equity
|
|
Cj1,RE
|
|
Cj1,Bond
|
|
Cj2,Equity
|
|
Cj2,RE
|
|
Cj2,Bond
|
|
12
|
|
|
-2.79
|
|
|
3.46
|
|
|
-3.34
|
|
|
-3.42
|
|
|
6.59
|
|
|
-5.82
|
|
11
|
|
|
2.06
|
|
|
-4.51
|
|
|
5.45
|
|
|
-3.57
|
|
|
5.68
|
|
|
0.15
|
|
10
|
|
|
2.24
|
|
|
-6.72
|
|
|
-2.84
|
|
|
-2.84
|
|
|
-1.67
|
|
|
-2.74
|
|
9
|
|
|
-0.06
|
|
|
-4.18
|
|
|
-7.14
|
|
|
-5.70
|
|
|
7.14
|
|
|
8.51
|
|
8
|
|
|
-0.34
|
|
|
-0.58
|
|
|
-10.75
|
|
|
-4.06
|
|
|
3.90
|
|
|
1.94
|
|
7
|
|
|
-2.19
|
|
|
1.82
|
|
|
-2.35
|
|
|
1.42
|
|
|
2.14
|
|
|
-9.22
|
|
6
|
|
|
-1.56
|
|
|
-0.39
|
|
|
-6.21
|
|
|
2.51
|
|
|
5.71
|
|
|
-11.54
|
|
5
|
|
|
2.67
|
|
|
-3.65
|
|
|
2.19
|
|
|
-0.01
|
|
|
1.03
|
|
|
-3.01
|
|
4
|
|
|
6.80
|
|
|
-4.60
|
|
|
-2.20
|
|
|
-5.20
|
|
|
3.45
|
|
|
-11.08
|
|
3
|
|
|
4.88
|
|
|
-3.68
|
|
|
2.95
|
|
|
-2.23
|
|
|
2.35
|
|
|
-9.01
|
|
2
|
|
|
2.24
|
|
|
1.47
|
|
|
5.72
|
|
|
1.84
|
|
|
2.04
|
|
|
-14.16
|
|
1
|
|
|
1.50
|
|
|
-0.71
|
|
|
-1.85
|
|
|
6.34
|
|
|
1.53
|
|
|
-11.11
|
|
|
|
|
You
should only rely on the information contained in this pricing
supplement
and the accompanying prospectus supplement and prospectus. We
have not
authorized anyone to provide you with information or to make
any
representation to you that is not contained in this pricing supplement
or
the accompanying prospectus supplement and prospectus. If anyone
provides
you with different or inconsistent information, you should not
rely on it.
This pricing supplement and the accompanying prospectus supplement
and
prospectus are not an offer to sell these securities, and these
documents
are not soliciting an offer to buy these securities, in any jurisdiction
where the offer or sale is not permitted. You should not under
any
circumstances assume that the information in this pricing supplement
and
the accompanying prospectus supplement and prospectus is correct
on any
date after their respective dates.
|
|
The
Bear Stearns
Companies
Inc.
$14,000,000
Medium-Term
Notes, Series B
3-Year
Note
Accelerated
Market Participation Securities
Linked
to the Performance of the U.S.
Adagio
Strategy Index
Due
February 26, 2010
PRICING
SUPPLEMENT
Bear,
Stearns & Co. Inc.
February
23, 2007
|
|
|
TABLE
OF CONTENTS
|
|
|
|
|
Pricing
Supplement
|
|
|
Page
|
|
Summary
|
PS-2
|
|
Key
Terms
|
PS-4
|
|
Questions
and Answers
|
PS-7
|
|
Risk
Factors
|
PS-12
|
|
Description
of the Notes
|
PS-21
|
|
Description
of the Components
|
PS-29
|
|
Hypothetical
Performance Data
|
PS-38
|
|
Certain
U.S. Federal Income Tax Considerations
|
PS-49
|
|
Certain
ERISA Considerations
|
PS-52
|
|
Use
of Proceeds and Hedging
|
PS-53
|
|
Supplemental
Plan of Distribution
|
PS-53
|
|
Legal
Matters
|
PS-54
|
|
Prospectus
Supplement
|
|
Risk
Factors
|
S-3
|
|
Pricing
Supplement
|
S-8
|
|
Description
of the Notes
|
S-8
|
|
Certain
U.S. Federal Income Tax Considerations
|
S-32
|
|
Supplemental
Plan of Distribution
|
S-46
|
|
Listing
|
S-47
|
|
Validity
of the Notes
|
S-47
|
|
Glossary
|
S-47
|
|
Prospectus
|
|
Where
You Can Find More Information
|
1
|
|
The
Bear Stearns Companies Inc.
|
2
|
|
Use
of Proceeds
|
4
|
|
Description
of Debt Securities
|
4
|
|
Description
of Warrants
|
16
|
|
Description
of Preferred Stock
|
21
|
|
Description
of Depositary Shares
|
25
|
|
Description
of Purchase Contracts
|
28
|
|
Description
of Units
|
31
|
|
Book-Entry
Procedures and Settlement
|
33
|
|
Limitations
on Issuance of Bearer Debt
Securities
and Bearer Warrants
|
43
|
|
Plan
of Distribution
|
44
|
|
ERISA
Considerations
|
48
|
|
Legal
Matters
|
49
|
|
Experts
|
49
|
|
|
|
|
|