EXHIBIT 4.01
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER
REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN CERTIFICATED
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TRUST
COMPANY, A NEW YORK CORPORATION ("DTC"), TO A NOMINEE OF DTC OR BY DTC OR ANY
SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR
DEPOSITARY. UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF DTC
TO CITIGROUP GLOBAL MARKETS HOLDINGS INC. OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS
THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
No. R-1 INITIAL PRINCIPAL AMOUNT
CUSIP 173075 88 8 REPRESENTED $405,000,000
representing 40,500,000 Notes
($10 per Note)
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
Enhanced Income Strategy(SM)
Principal-Protected Notes with Income and Appreciation Potential
Linked to the 2004-1 Dynamic Portfolio Index(SM) due February 26, 2009
Citigroup Global Markets Holdings Inc., a New York corporation
(hereinafter referred to as the "Company," which term includes any successor
corporation under the Indenture herein referred to), for value received and on
condition that this Note is not redeemed by the Company prior to February 26,
2009 (the "Stated Maturity Date"), hereby promises to pay to CEDE & CO., or its
registered assigns, the Maturity Payment (as defined below), on the Stated
Maturity Date. This Note will bear quarterly payments of interest (which may be
zero), is not subject to any sinking fund, is not subject to redemption at the
option of the holder thereof prior to the Stated Maturity Date, and is not
subject to the defeasance provisions of the Indenture.
Payment of the Maturity Payment with respect to this Note shall be made
upon presentation and surrender of this Note at the corporate trust office of
the Trustee in the Borough of Manhattan, The City and State of New York, in such
coin or currency of the United States as at the time of payment is legal tender
for payment of public and private debts.
This Note is one of the series of Enhanced Income Strategy(SM)
Principal-Protected Notes with Income and Appreciation Potential Linked to the
2004-1 Dynamic Portfolio Index(SM) due February 26, 2009 (the "Notes").
INTEREST
The interest payable on the Notes will vary and may be zero. Interest, if
any, will be paid in cash quarterly on each 26th day of each February, May,
August and November, commencing on May 26, 2004 (each such date, an "Interest
Payment Date"). The interest on the Notes for any quarter will depend on the
allocation of the 2004-1 Dynamic Portfolio Index to the 2004-1 Income 10
Buy-Write Index Portfolio and on the notional income on the 2004-1 Income 10
Buy-Write Index.
The interest payment ("IP") on the Notes, if any, for any quarterly
calculation period will be calculated as follows:
IP = BWU * BWNIU
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10
"BWU" is the number of 2004-1 Income 10 Buy-Write Index units included in
the 2004-1 Dynamic Portfolio Index on the last day of the quarterly calculation
period.
"BWNIU" is the notional income per unit of the 2004-1 Income 10 Buy-Write
Index for that quarterly calculation period.
If an Interest Payment Date falls on a day that is not a Business Day, the
interest payment to be made on such Interest Payment Date will be made on the
next succeeding Business Day with the same force and effect as if made on such
Interest Payment Date and no additional interest will accrue as a result of such
delayed payment. Interest will be computed on the basis of a 360-day year of
twelve 30-day months.
"Business Day" means any day that is not a Saturday, a Sunday or a day on
which the securities exchanges or banking institutions or trust companies in the
City of New York are authorized or obligated by law or executive order to close.
The commencement dates for the quarterly calculation periods will be the
20th day of each February, May, August and November. Interest will be calculated
from, and including, one commencement date to, but excluding, the next
commencement date, provided that the initial quarterly calculation period will
commence on, and include, February 20, 2004 and the final quarterly calculation
period will extend to, and include, the fifth Index Business Day prior to the
Stated Maturity Date. No interest will accrue on the Notes after the fifth Index
Business Day before the Stated Maturity Date through the Stated Maturity Date.
The Interest Payment Date related to any quarterly calculation period with
respect to which interest is paid will be the Interest Payment Date following
the last day of the applicable quarterly calculation period or, with respect to
the final quarterly calculation period, the Stated Maturity Date. The
calculation agent will notify the trustee of the amount of interest payable on
or before the second Business Day immediately following the last day of the
applicable quarterly calculation period. Interest will be payable to the persons
in whose names the Notes are registered at the close of business on the Business
Day succeeding the last day of the applicable quarterly calculation period.
2
If at the close of business on the last day of any quarterly calculation
period (except the last quarterly calculation period before the Stated Maturity
Date), the calculation agent determines that the value of the 2004-1 Dynamic
Portfolio Index (less any notional income on the 2004-1 Income 10 Buy-Write
Index) is less than or equal to 105% of the Bond Floor (as defined below), the
calculation agent will notionally reinvest the value of any notional income on
the 2004-1 Income 10 Buy-Write Index relating to that quarterly calculation
period in the 2004-1 Income 10 Buy-Write Index Portfolio at the close of
business on the first Index Business Day of the next quarterly calculation
period and no interest will be paid on the Notes on the Interest Payment Date
relating to that quarterly calculation period.
PAYMENT AT MATURITY
On the Stated Maturity Date, holders of the Notes will receive for each
Note the final quarterly interest payment, if any, and the Maturity Payment
described below.
DETERMINATION OF THE MATURITY PAYMENT
The Maturity Payment for each Note equals the sum of the principal amount
of $10 per Note plus the Index Return Amount, which may be positive or zero but
which will not be negative.
The Index Return Amount will be based on the closing value of the 2004-1
Dynamic Portfolio Index on the fifth Index Business Day before the Stated
Maturity Date.
The "Index Return Amount" equals:
$10 * Index Return
The "Index Return" equals:
Ending Value - Starting Value
-----------------------------
Starting Value
provided that the Index Return will not in any circumstances be less than
zero.
The "Starting Value" will be 100.00, the initial value of the 2004-1
Dynamic Portfolio Index.
The "Ending Value" will be the closing value of the 2004-1 Dynamic
Portfolio Index on the fifth Index Business Day before the Stated Maturity Date.
The determination of the value (including a closing value) of any
component of the 2004-1 Dynamic Portfolio Index or of a Reallocation Event (as
described below) by the calculation agent in the event any such value is
unavailable may be deferred by the calculation agent for up to two consecutive
Index Business Days on which a Market Disruption Event is occurring. No
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reallocation of the value of the 2004-1 Dynamic Portfolio Index will occur on
any day the determination of any of the above values is so deferred.
An "Index Business Day" means a day, as determined by the calculation
agent, on which the 2004-1 Dynamic Portfolio Index or any successor index is
calculated and published and on which securities comprising more than 80% of the
value of the 2004-1 Income 10 Portfolio on such day are capable of being traded
on their relevant exchanges during the one-half hour before the determination of
the closing value of the 2004-1 Dynamic Portfolio Index. 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 the Company and the
beneficial owners of the Notes, absent manifest error.
A "Market Disruption Event" means, as determined by the calculation agent
in its sole discretion (A) the occurrence or existence of any suspension of or
limitation imposed on trading (by reason of movements in price exceeding limits
permitted by any exchange or market or otherwise) of, or the unavailability,
through a recognized system of public dissemination of transaction information,
for a period longer than two hours, or during the one-half hour period preceding
the close of trading, on the applicable exchange, of accurate price, volume or
related information in respect of, (1) stocks which then comprise 20% or more of
the value of the 2004-1 Income 10 Portfolio, or (2) any options contracts or
futures contracts relating to stocks which then comprise 20% or more of the
value of the 2004-1 Income 10 Portfolio, or any options on such futures
contracts, or (B) the cancellation or repudiation of any options contracts or
futures contracts relating to stocks which then comprise 20% or more of the
value of the 2004-1 Income 10 Portfolio on any exchange or market if, in each
case, in the determination of the calculation agent, any such suspension,
limitation, unavailability, cancellation or repudiation is material. For the
purpose of determining whether a Market Disruption Event exists at any time, if
trading in a security included in the 2004-1 Income 10 Portfolio is materially
suspended or materially limited at that time, then the relevant percentage
contribution of that security to the value of the 2004-1 Income 10 Portfolio
will be based on a comparison of the portion of the value of the 2004-1 Income
10 Portfolio attributable to that security relative to the overall value of the
2004-1 Income 10 Portfolio, in each case immediately before that suspension or
limitation.
THE 2004-1 DYNAMIC PORTFOLIO INDEX
The starting value of the 2004-1 Dynamic Portfolio Index was set to equal
100.00 on February 19, 2004, with 50.00% allocated to notional investments in
the 2004-1 Income 10 Buy-Write Index Portfolio, representing 50.00 2004-1 Income
10 Buy-Write units with a value of 1.00 each on that day, and 50.00% allocated
to notional investments in the Notional Bond Portfolio, representing 58.479532
bond units with a value of 0.85500 each on that day. The value of the 2004-1
Dynamic Portfolio Index ("DPIV"), on any Index Business Day was and will
continue to be calculated according to the following formula:
DPIV = BWP + NBP - NPF
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"BWP" is the value of the 2004-1 Income 10 Buy-Write Index Portfolio, net
of the portion of the 2004-1 Dynamic Portfolio Adjustment Factor allocated to
the 2004-1 Income 10 Buy-Write Index Portfolio.
"NBP" is the value of the Notional Bond Portfolio, net of the portion of
the Dynamic Portfolio Adjustment Factor allocated to the Notional Bond
Portfolio.
"NPF" is the value of notional borrowed funds outstanding under the
Notional Participation Facility.
The value of the 2004-1 Dynamic Portfolio Index will include the value of
the notional income, if any, removed from the value of the 2004-1 Income 10
Buy-Write Index Portfolio on the last day of a quarterly calculation period only
if that notional income is to be notionally reinvested in additional 2004-1
Income 10 Buy-Write Index units at the close of business on the first Index
Business Day of the next quarterly calculation period.
The value of the 2004-1 Dynamic Portfolio Index on any day that is not an
Index Business Day will equal the value of the 2004-1 Dynamic Portfolio Index on
the previous day minus the Dynamic Portfolio Adjustment Factor and the Notional
Participation Facility Fee for that day.
The "2004-1 Income 10 Buy-Write Index Portfolio" will represent notional
investments in the 2004-1 Income 10 Buy-Write Index. The value of the 2004-1
Income 10 Buy-Write Index Portfolio will equal the product of (i) the number of
2004-1 Income 10 Buy-Write Index units in the 2004-1 Income 10 Buy-Write Index
Portfolio; and (ii) the value of one 2004-1 Income 10 Buy-Write Index unit at
that time. The value of one 2004-1 Income 10 Buy-Write Index unit will equal one
percent of the value of the 2004-1 Income 10 Buy-Write Index at that time.
The "Notional Bond Portfolio" will represent notional investments in
Notional U.S. Treasury Strips or Notional Discount Bonds. The value of the
Notional Bond Portfolio at any time will equal the product of (i) the number of
bond units in the Notional Bond Portfolio at that time; and (ii) the value of
one bond unit at that time.
If the amount allocated to the 2004-1 Income 10 Buy-Write Index Portfolio
is greater than zero, each bond unit will comprise one "Notional U.S. Treasury
Strip" that: (i) is denominated in U.S. dollars; (ii) has a redemption amount
equal to $1.00; (iii) does not pay interest; (iv) matures on the fifth Index
Business Day prior to the Stated Maturity Date; and (v) had an initial price of
$0.85500 on February 19, 2004. If the Notional Bond Portfolio comprises Notional
U.S. Treasury Strips, the value of one bond unit will equal the value of one
Notional U.S. Treasury Strip. The value of a Notional U.S. Treasury Strip will
be determined by the calculation agent by discounting the notional redemption
amount of the strip from the strip's maturity date by the interpolated U.S.
Treasury strip yield for the Notional U.S. Treasury Strips. The interpolated
yield will be calculated by performing an interpolation between the yield for
the U.S. Treasury strip with a shorter term nearest to the term of the Notional
U.S. Treasury Strip and the yield for the U.S. Treasury strip with a longer term
nearest to the term of the Notional
5
U.S. Treasury Strip. As a result, the value of a bond unit will change as the
value of the Notional U.S. Treasury Strips changes in response to changes in
interest rates.
If the amount allocated to the 2004-1 Income 10 Buy-Write Index Portfolio
is zero, each bond unit will comprise one "Notional Discount Bond" that: (i) is
denominated in U.S. dollars; (ii) has a redemption amount equal to $1.00; (iii)
matures on the fifth Index Business Day prior to the Stated Maturity Date; and
(iv) pays a coupon at a rate equal to 1.50% per annum daily, calculated on the
basis of a 365-day year.
If the Notional Bond Portfolio comprises Notional Discount Bonds, the
value of one bond unit will equal the value of one Notional Discount Bond. The
value of a Notional Discount Bond will be determined by the calculation agent by
discounting the notional redemption amount of the bond from the date of
redemption and any remaining notional coupons on the bond until its maturity
date from the expected payment dates of the remaining coupons using discount
rates equal to the sum of (i) interpolated yields derived from the U.S. dollar
swap rate (or U.S. dollar LIBOR rates for maturities of one year or shorter)
interpolated to the maturity date of the bond and the payment dates for each of
the remaining coupons; and (ii) 0.11%. The U.S. dollar swap rate is based upon
the U.S. Treasury rate plus a credit spread as provided by Bloomberg Financial
Markets or another recognized source selected by the calculation agent on that
date. The notional coupons on the Notional Discount Bonds will be reinvested in
the Notional Bond Portfolio through the notional purchase of additional bond
units at the close of business on each Index Business Day.
If no value of the Notional Bond Portfolio is available on any date
because of a Market Disruption Event or otherwise, unless as deferred by the
calculation agent as described above, the value of the Notional Bond Portfolio
will be the arithmetic mean, as determined by the calculation agent, of the
value of the Notional Bond Portfolio obtained from as many dealers in
fixed-income securities (which may include Citigroup Global Markets Inc. or any
of the Company's other subsidiaries or affiliates), but not exceeding three such
dealers, as will make such value available to the calculation agent.
The "Dynamic Portfolio Adjustment Factor" will accrue daily on the basis
of a 365-day year and on any day will equal the product of (1/365) and the sum
of (i) 0.75; and (ii) 0.75% of the greater of 100 and the value of the 2004-1
Dynamic Portfolio Index at the end of the previous day, after effecting any
required reallocation. The Dynamic Portfolio Adjustment Factor will be
calculated and subtracted from the 2004-1 Income 10 Buy-Write Index Portfolio
and the Notional Bond Portfolio on a pro rata basis at the end of each day after
effecting any reallocation on that day, commencing as of February 19, 2004.
Subtraction of the Dynamic Portfolio Adjustment Factor will be effected by
reducing the number of units in each of the 2004-1 Income 10 Buy-Write Index
Portfolio and the Notional Bond Portfolio by the number of 2004-1 Income 10
Buy-Write units and bond units, respectively, of each portfolio with an
aggregate value as of the close of business on the previous day equal to each
portfolio's pro rata portion of the Dynamic Portfolio Adjustment Factor.
6
The "Notional Participation Facility Fee" on any day will equal the
product of (i) (1/365); (ii) the Notional Participation Facility Amount at the
end of the previous day after any reallocations effected on that day, including
any outstanding Notional Participation Facility Fees; and (iii) the effective
Federal Funds Rate for that day plus 1.00%. The Notional Participation Facility
Fee will accrue daily and will be computed on the basis of a 365-day year. The
"Federal Funds Rate" on any day will be the rate for Federal Funds as published
in H.15(519) under the heading "Federal Funds (Effective)" and if that day is
not an Index Business Day, the rate for Federal Funds as published on the
previous Index Business Day.
The "Notional Participation Facility Amount" will be calculated at the end
of each day prior to any reallocation to the 2004-1 Income 10 Buy-Write Index
Portfolio and will equal the sum of (i) notional borrowed funds outstanding
under the Notional Participation Facility plus any outstanding Notional
Participation Facility Fees and (ii) the Notional Participation Facility Fee for
that day.
After February 19, 2004, the allocation of the notional investment
represented by the 2004-1 Dynamic Portfolio Index to the 2004-1 Income 10
Buy-Write Index Portfolio and the Notional Bond Portfolio will be modified if a
Reallocation Event occurs. Reallocations of the 2004-1 Dynamic Portfolio Index
will be effected through the notional purchase and sale of 2004-1 Income 10
Buy-Write Index units and bond units. Reallocations of the 2004-1 Dynamic
Portfolio Index may involve the notional purchase and sale of fractional 2004-1
Income 10 Buy-Write Index units and fractional bond units.
A "Reallocation Event" will occur when the ratio (the "Gap Ratio") of (x)
the difference between the value of the 2004-1 Dynamic Portfolio Index and the
Bond Floor to (y) the value of the 2004-1 Dynamic Portfolio Index allocated to
the 2004-1 Income 10 Buy-Write Index Portfolio is less than or greater than
certain predetermined ratios. The calculation agent will determine whether a
Reallocation Event has occurred at the beginning of each Index Business Day up
to and including the fifth Index Business Day prior to the Stated Maturity Date.
A Reallocation Event will be deemed to have occurred if the Gap Ratio is below
15% or above 25% at the close of business on the previous Index Business Day.
For purposes of determining a Reallocation Event, the value of notional call
options in the 2004-1 Income 10 Buy-Write Index will be determined using
mid-market implied volatility.
If the calculation agent determines that a Reallocation Event has
occurred, the calculation agent will determine the Reallocation Percentage (as
described below), or the percentage of the 2004-1 Dynamic Portfolio Index's
value that must be allocated to the 2004-1 Income 10 Buy-Write Index Portfolio
pursuant to the reallocation methodology. The Reallocation Percentage will be
determined on the basis of values at the close of business on the previous Index
Business Day. At the close of business on the Index Business Day on which a
Reallocation Event has occurred, the calculation agent will reallocate the value
of the 2004-1 Dynamic Portfolio Index. Reallocations will involve notional sales
and purchases of 2004-1 Income 10 Buy-Write Index units and bond units. The
number of 2004-1 Income 10 Buy-Write Index units to be notionally sold or
purchased will be determined by the calculation agent at the beginning of each
Index Business Day. However, those notional sales or purchases will be effected
at the values (as determined by the calculation agent) of 2004-1 Income 10
Buy-Write Index units and bond units
7
at the close of business on the date of reallocation. Any reallocation on the
last day of any quarterly calculation period will be effected through the
notional purchase or sale of 2004-1 Income 10 Buy-Write Index units at a price
that includes the notional income on the 2004-1 Income 10 Buy-Write Index for
that quarterly calculation period. Notional purchases of 2004-1 Income 10
Buy-Write Index units will be made at prices that reflect the value of notional
call options determined using bid-side implied volatility and notional sales of
2004-1 Income 10 Buy-Write Index units will be made at prices that reflect the
value of notional call options determined using offered-side implied volatility.
If the reallocation results in an increased percentage of the value of the
2004-1 Dynamic Portfolio Index allocated to the 2004-1 Income 10 Buy-Write Index
Portfolio, the reallocation will involve the notional sale of bond units and the
notional purchase of 2004-1 Income 10 Buy-Write Index units with the notional
proceeds of the sale. Any purchase of 2004-1 Income 10 Buy-Write Index units
that cannot be effected through the sale of bond units will be effected using
the Notional Participation Facility. The Notional Participation Facility Amount
will be increased by the amount necessary to purchase the 2004-1 Income 10
Buy-Write Index units, subject to the cap on the Notional Participation Facility
Amount described above. If the reallocation results in a decreased percentage of
the value of the 2004-1 Dynamic Portfolio Index allocated to the 2004-1 Income
10 Buy-Write Index Portfolio, the reallocation will involve the notional sale of
2004-1 Income 10 Buy-Write Index units. The notional proceeds of this sale will
be used first to reduce the Notional Participation Facility Amount to zero and
then to make notional purchases of bond units. The number of 2004-1 Income 10
Buy-Write Index units and bond units in the 2004-1 Income 10 Buy-Write Index
Portfolio and the Notional Bond Portfolio, respectively, will then be adjusted
to reflect the units notionally sold or purchased as a result of the
reallocation.
If at any point during an Index Business Day the value of the Dow Xxxxx
Industrial Average ("DJIA") declines from its closing value on the previous
Index Business Day by 10% or more, the calculation agent, as soon as reasonably
practicable, will determine the Reallocation Percentage and reallocate the value
of the 2004-1 Dynamic Portfolio Index so that the percentage of the 2004-1
Dynamic Portfolio Index notionally invested in the 2004-1 Income 10 Buy-Write
Index Portfolio is as close as is reasonably practicable to the Reallocation
Percentage, as described above. This reallocation will be effected even if the
Gap Ratio has not fallen below 15% and therefore no Reallocation Event has
occurred. If the value of the DJIA declines from its closing value on the
previous Index Business Day by 10% or more, the calculation agent (unless at the
beginning of that index business day the value of the 2004-1 Dynamic Portfolio
Index is less than 101% of the Bond Floor) will disregard any Reallocation Event
that was determined to have occurred at the beginning of that Index Business Day
and will not make any reallocations with respect to that earlier determination.
In addition, in determining the Reallocation Percentage and in effecting any
necessary reallocation, the values of the 2004-1 Dynamic Portfolio Index, the
2004-1 Income 10 Buy-Write Index, the 2004-1 Income 10 Buy-Write Index Portfolio
and the Bond Floor will be their values at the time the calculation agent
calculates the Reallocation Percentage.
If the value of the 2004-1 Dynamic Portfolio Index is less than 101% of
the Bond Floor at the close of business on any Index Business Day, the entire
value of the 2004-1 Dynamic
8
Portfolio Index at the close of business on the following Index Business Day
will be reallocated to the Notional Bond Portfolio until the Stated Maturity
Date, even if at the close of business on that day the value of the 2004-1
Dynamic Portfolio Index is greater than 101% of the Bond Floor. This allocation
will be effected through a notional sale of all 2004-1 Income 10 Buy-Write Index
units at their value at the close of business on the Index Business Day the
reallocation is effected. The notional proceeds from the sale of the 2004-1
Income 10 Buy-Write Index units will be first applied toward reduction of the
Notional Participation Facility Amount to zero. All remaining notional proceeds,
if any, will be used to purchase notional bond units at their value at the close
of business on the Index Business Day on which the reallocation is effected.
The "Gap Ratio" is the ratio of the difference between the value of the
2004-1 Dynamic Portfolio Index and the Bond Floor and the amount of the 2004-1
Dynamic Portfolio Index allocated to the 2004-1 Income 10 Buy-Write Index
Portfolio. The Gap Ratio on any Index Business Day will equal:
DPIV - BF
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DPIV * BWP
"BF" is the Bond Floor (as described below) as determined by the
calculation agent at the close of business on the previous Index Business Day.
"BWP" is the percentage of the value of the 2004-1 Dynamic Portfolio Index
allocated to the 2004-1 Income 10 Buy- Write Index portfolio at the close of
business on the previous Index Business Day, net of the 2004-1 Dynamic Portfolio
Adjustment Factor for that day.
The Gap Ratio will change in response to changes in the value of the
2004-1 Dynamic Portfolio Index and to changes in interest rates (which affect
the level of the Bond Floor and the value of the Notional Bond Portfolio). If
the Gap Ratio is below 15%, the calculation agent will decrease the allocation
of the 2004-1 Dynamic Portfolio Index to the 2004-1 Income 10 Buy-Write Index
Portfolio. If the Gap Ratio is above 25%, the calculation agent will increase
the allocation of the 2004-1 Dynamic Portfolio Index to the 2004-1 Income 10
Buy-Write Index Portfolio.
The "Reallocation Percentage" is the percentage of the 2004-1 Dynamic
Portfolio Index's value that must be allocated to the 2004-1 Income 10 Buy-Write
Index Portfolio upon the occurrence of a Reallocation Event or after a decline
of 10% or more in the value of the DJIA at any point during an Index Business
Day from its closing value on the previous Index Business Day. The Reallocation
Percentage will equal:
5.00 * [ PDPIV - BF ]
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PDPIV
"PDPIV" is the value of the 2004-1 Dynamic Portfolio Index at the close of
business on the previous Index Business Day, net of the Dynamic Portfolio
Adjustment Factor for that day.
9
The Reallocation Percentage cannot be greater than 150% or less than 0%.
If the Reallocation Percentage is greater than 100%, the notional borrowed funds
necessary to make the notional investment in the 2004-1 Income 10 Buy-Write
Index portfolio in excess of 100% of the value of the 2004-1 Dynamic Portfolio
Index will be obtained from the Notional Participation Facility.
The "Bond Floor" equals the sum of the discounted present values of (i)
100; and (ii) the Dynamic Portfolio Adjustment Factor for each day through and
including the fifth Index Business Day before the Stated Maturity Date on a
2004-1 Dynamic Portfolio Index with a value of 100. The component of the Bond
Floor equal to 100 will be discounted from the Stated Maturity Date. The
component of the Bond Floor equal to the value of the Dynamic Portfolio
Adjustment Factor for each day through and including the fifth Index Business
Day before the Stated Maturity Date will be discounted from the day that Dynamic
Portfolio Adjustment Factor will be calculated and deducted from the value of
the 2004-1 Dynamic Portfolio Index. The calculation agent will calculate the
discount rate:
- in respect of the component of the Bond Floor equal to 100, using
the interpolated yield derived from the U.S. dollar swap rate curve
(or U.S. dollar LIBOR rates for maturities of one year or shorter)
interpolated to the Stated Maturity Date; and
- in respect of the component of the Bond Floor equal to the value of
the Dynamic Portfolio Adjustment Factor on a 2004-1 Dynamic
Portfolio Index with a value of 100, using the interpolated yields
derived from the U.S. dollar swap rate curve (or U.S. dollar LIBOR
rates for maturities of one year or shorter) interpolated based upon
the expected timing of the calculation of the Dynamic Portfolio
Adjustment Factor
plus a credit spread of 0.11%, with such discount rate as provided by Bloomberg
Financial Markets or another recognized source selected by the calculation agent
on that date.
If no value of the Bond Floor is available on any date because of a Market
Disruption Event or otherwise, unless deferred by the calculation agent as
described above, the value of the Bond Floor will be the arithmetic mean, as
determined by the calculation agent, of the value of the Bond Floor obtained
from as many dealers in fixed-income securities (which may include Citigroup
Global Markets Inc. or any of the Company's other subsidiaries or affiliates),
but not exceeding three such dealers, as will make such value available to the
calculation agent.
THE 2004-1 INCOME 10 BUY-WRITE INDEX
The value of the 2004-1 Income 10 Buy-Write Index will be calculated at
the close of business on each day by Citigroup Global Markets Inc. as
calculation agent. The value of the 2004-1 Income 10 Buy-Write Index was set to
equal 100.00 on February 19, 2004. The value of the 2004-1 Income 10 Buy-Write
Index ("BWIV"), on each Index Business Day was determined and will continue to
be determined according to the following formula:
BWIV = ITPV - NCOAV + BWNI
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"ITPV" is the value of the 2004-1 Income 10 Portfolio.
"NCOAV" is the sum of the values of the notional call options relating to
the Underlying Stocks (as defined below).
"BWNI" is the notional income on the 2004-1 Income 10 Buy-Write Index for
that quarterly calculation period, which will be calculated according to the
following formula:
BWNI = ITNI - BWAF
"ITNI" is the total notional income for all of the Underlying Stocks.
"BWAF" is the Income 10 Buy-Write Adjustment Factor.
The notional income ("NI") for an Underlying Stock will generally be
calculated in accordance with the following formula:
NI = PCR * [ AD + CP * (AATY - HADY) ]
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4
"PCR" is the Portfolio Composition Ratio (as defined below) for that
Underlying Stock.
"AD" is the cash dividends per share in respect of that Underlying Stock
during that quarterly calculation period.
"CP" is the Closing Price (as defined below) of that Underlying Stock on
the day the notional call option is priced.
"AATY" is the adjusted annual target yield, obtained by increasing the
annual target yield ("ATY") of 10% on the 2004-1 Income 10 Buy-Write Index on
the first day of each quarterly calculation period by an amount intended to, but
which may or may not, offset the value of the Income 10 Buy-Write Index
Adjustment Factor. The adjusted annual target yield will be calculated as
follows:
AATY = (1 + ATY) - 1
---------
(1 - BWAFP)
"BWAFP" is the Income 10 Buy-Write Adjustment Factor Percentage, which
equals 1.65%.
"HADY" is the historical dividend yield on that Underlying Stock on the
first day of that quarterly calculation period. The historical dividend yield
(as determined by the calculation agent) for each Underlying Stock is calculated
by annualizing the last quarterly or semi-annual
11
ordinary dividend (as described below) for which the "ex-dividend" date has
occurred (or if the issuer of the Underlying Stock has publicly disclosed that
any dividend payable during that quarterly calculation period will be a
different amount than such last dividend, the amount publicly disclosed by the
issuer), and dividing the result by the Closing Price of that Underlying Stock
on the principal U.S. exchange or market at the close of business on the last
Index Business Day of the preceding quarterly calculation period.
If the highest strike price bid for any option is less than 105% of the
Closing Price of the related Underlying Stock on the day the notional call
option is priced, the notional income for that Underlying Stock will be
calculated as follows:
NI = PCR * [ AD + CP * (AATY - HADY) ATQP - ]
------------------
4
"ATQP" is the difference between the Target Quarterly Premium (as defined
below) on the notional call option relating to that Underlying Stock and the
actual quarterly premium ("NCOP"), in respect of that notional call option. ATQP
will be calculated as follows:
ATQP = CP * (AATY - HADY) - NCOP
-----------------
4
The value of the 2004-1 Income 10 Buy-Write Index on any day that is not
an Index Business Day will equal the value of the 2004-1 Income 10 Buy-Write
Index on the previous day minus the Income 10 Buy-Write Adjustment Factor for
that day.
The value of a cash dividend or distribution will be included in the
notional income on the 2004-1 Income 10 Buy-Write Index (and thus the value of
the 2004-1 Income 10 Buy-Write Index) at the close of business on the
"ex-dividend" date for that dividend or distribution. The value of premiums in
respect of notional call options will be included in the notional income on the
2004-1 Income 10 Buy-Write Index (and thus the value of the 2004-1 Income 10
Buy-Write Index) at the close of business on the day on which the notional call
option is priced.
The notional income on the 2004-1 Income 10 Buy-Write Index will be
removed from the value of the 2004-1 Income 10 Buy-Write Index at the close of
business on the last day of the related quarterly calculation period.
The "Income 10 Buy-Write Adjustment Factor" will be calculated and
subtracted from the notional income on the 2004-1 Income 10 Buy-Write Index at
the end of each day prior to effecting any reallocation that day and will equal:
PBWV * BWAFP * (1/365)
"PBWV" is the value of the 2004-1 Income 10 Buy-Write Index at the end of
the preceding day.
12
"BWAFP" is the Income 10 Buy-Write Adjustment Factor Percentage, which
equals 1.65%.
The value of the Income 10 Buy-Write Adjustment Factor for any quarterly
calculation period will not exceed the value of the notional income on the
2004-1 Income 10 Buy-Write Index for that quarterly calculation period. The
value of the Income 10 Buy-Write Adjustment Factor on any day that is not an
Index Business Day will be calculated based on the value of the 2004-1 Income 10
Buy-Write Index on the previous day and will be deducted from the value of the
notional income on the 2004-1 Income 10 Buy-Write Index on that day.
If no value (including a closing value) of the 2004-1 Income 10 Buy-Write
Index is available on any date because of a Market Disruption Event or
otherwise, unless deferred by the calculation agent as described above, the
calculation agent will determine the values of the components of the 2004-1
Income 10 Buy-Write Index as follows:
- the value of any Underlying Stock for which no value is available
will be the arithmetic mean, as determined by the calculation agent,
of the value of that Underlying Stock obtained from as many dealers
in equity securities (which may include Citigroup Global Markets
Inc. or any of the Company's other subsidiaries or affiliates), but
not exceeding three such dealers, as will make such value available
to the calculation agent; and
- the value of any notional call option related to an Underlying Stock
for which no value is available will be the arithmetic mean, as
determined by the calculation agent, of the value of that option
obtained from as many dealers in options (which may include
Citigroup Global Markets Inc. or any of the Company's other
subsidiaries or affiliates), but not exceeding three such dealers,
as will make such value available to the calculation agent.
CALL OPTIONS
The calculation agent will price notional cash-settled call options
relating to shares of each of the Underlying Stocks on a quarterly basis,
beginning as of February 19, 2004, except in the circumstances described below.
Notional call options will be priced on the first Index Business Day of each
quarterly calculation period. The notional call option relating to each
Underlying Stock will correlate to the number of shares of that Underlying Stock
used to calculate the 2004-1 Income 10 Portfolio on the day the options are
priced. Each notional call option will:
- expire on the last day of the quarterly calculation period;
- be automatically settled on the last business day before it expires
if the Closing Price of the Underlying Stock exceeds the strike
price; and
13
- have a strike price greater than or equal to 105% of the Closing
Price of the Underlying Stock on the day the notional call option is
priced.
The strike price of each notional call option will be determined through
the bidding process described below. Before seeking bids on the strike price of
a notional call option, the calculation agent will determine the "Target
Quarterly Premium" for such option, which will equal:
CP * (AATY - HADY)
4
Once the calculation agent has determined the Target Quarterly Premium for
a notional call option, it will seek strike prices for that notional call option
from as many dealers in options (which may include Citigroup Global Markets Inc.
or any of the Company's other subsidiaries or affiliates), but not exceeding
five such dealers, as will make such bid prices available to the calculation
agent. The strike price for the notional call option will equal the highest
strike price quoted by these dealers and the value of this notional call option
and the related Target Quarterly Premium will be included in the value of the
2004-1 Income 10 Buy-Write Index at close of business on the day the notional
call option is priced. If the highest strike price bid is less than 105% of the
Closing Price of the related Underlying Stock on the day the notional call
option is priced, the calculation agent will set the strike price of the
notional call option at 105% of the Closing Price of the related Underlying
Stock on the day the notional call option is priced and will seek quotations for
premiums for the notional call option from as many dealers in options (which may
include Citigroup Global Markets Inc. or any of the Company's other subsidiaries
or affiliates), but not exceeding five such dealers, as will make such bid
prices available to the calculation agent. The premium for the notional call
option will equal the highest premium quoted by these dealers and the value of
this notional call option and the related premium will be included in the value
of the 2004-1 Income 10 Buy-Write Index at the close of business on the day the
notional call option is priced.
In seeking strike prices or premiums from dealers in options in respect of
notional call options relating to any of the Underlying Stocks, the calculation
agent may reject any strike price or premium that does not meet the requirements
for notional call options stated above or that relates to a number of shares of
the related Underlying Stock that is different than the number of shares of that
Underlying Stock used to calculate the Income 10 Portfolio at the close of
business on the Index Business Day prior to the date on which the options are
priced.
The "Closing Price" of any Underlying Stock on any date will be (1) if the
common stock is listed on a national securities exchange on that date of
determination, the last reported sale price, regular way, of the principal
trading session on that date on the principal U.S. exchange on which the common
stock is listed or admitted to trading, (2) if the common stock is not listed on
a national securities exchange on that date of determination, or if the last
reported sale price on such exchange is not obtainable (even if the common stock
is listed or admitted to trading on such exchange), and the common stock is
quoted on the Nasdaq National Market, the last reported sale price of the
principal trading session on that date as reported on the Nasdaq, and (3)
14
if the common stock is not quoted on the Nasdaq on that date of determination,
or if the last reported sale price on the Nasdaq is not obtainable (even if the
common stock is quoted on the Nasdaq), the last reported sale price of the
principal trading session on the over-the-counter market on that date as
reported on the OTC Bulletin Board, the National Quotation Bureau or a similar
organization. If no reported sale price of the principal trading session is
available pursuant to clauses (1), (2) or (3) above or if there is a Market
Disruption Event, the trading price on any date of determination, unless
deferred by the calculation agent as described in the preceding sentence, will
be the arithmetic mean, as determined by the calculation agent, of the bid
prices of the common stock obtained from as many dealers in such stock (which
may include Citigroup Global Markets Inc. or any of the Company's other
subsidiaries or affiliates), but not exceeding three such dealers, as will make
such bid prices available to the calculation agent. A security "quoted on the
Nasdaq National Market" will include a security included for listing or
quotation in any successor to such system and the term "OTC Bulletin Board" will
include any successor to such service.
If during any quarterly calculation period the calculation agent removes
one of the Underlying Stocks, all outstanding notional call options in respect
of that Underlying Stock will be treated as terminated at the close of business
on the day on which the Underlying Stock is removed. At that time, the value of
the shares of the removed Underlying Stock, less the value, if any, of the
notional call options in respect of that Underlying Stock, will be reallocated
to notional investments in shares (or fractional shares) of the remaining
Underlying Stocks. The amount allocated to notional investments in respect of
each remaining Underlying Stock will be in proportion to the percentage of the
value of each remaining Underlying Stock relative to the value of the 2004-1
Income 10 Portfolio (less the value of the removed Underlying Stock) at the
close of business on the Index Business Day on which the Underlying Stock is
removed. The calculation agent will determine the terms of a new notional call
option in respect of each additional share (or fractional share) as described
above. The premium on each additional notional call option will be included in
the value of the 2004-1 Income 10 Buy-Write Index at the close of business on
the day the option is priced and will be included in the notional income on the
2004-1 Income 10 Buy-Write Index for that quarterly calculation period.
The terms of the notional call options will provide for adjustments to
reflect the occurrence of a corporate or other similar event affecting an
Underlying Stock (including, but not limited to a merger or other corporate
combination or a stock split or reverse stock split).
The xxxx-to-market value of each notional call option ("NCOV") will be
determined by the calculation agent at the close of business on each Index
Business Day in accordance with a Black-Scholes option pricing formula:
NCOV = [S * N(d1) * e - (Rd * t)] - [E * N(d2) * e - (Ri * t) ]
"S" is the Closing Price of the related Underlying Stock as of the time
the notional call option is valued.
"N" is the cumulative normal distribution function (a fixed statistical
function), which determines the probability of a variable falling within a given
range under specified conditions.
15
"d[1]" is ln (S / E) + [(R[i] - R[d]) + (o(2) / 2)] * t
---------------------------------------------
o * (the square root of) t
"E" is the strike price of the notional call option.
"d[2]" is d[1] - [o * (the square root of) t].
----
"e" is the constant that is the base of the natural logarithm, which
equals approximately 2.71828.
"R[d]" is the computed continuously compounded annualized current dividend
yield on the related Underlying Stock.
"R[i]" is the U.S. dollar interest rate as of the time the notional call
option is valued, converted into a continuously compounded rate.
"t" is the time until the expiration of the notional call option as a
percentage of one year.
"ln" is the natural logarithm function.
"s" is the implied volatility of the related Underlying Stock (determined
by the calculation agent as described below).
At the time the notional call option is priced, the U.S. dollar interest
rate will equal the U.S. dollar LIBOR rate as calculated and published at that
time by Bloomberg Financial Markets, or another recognized source selected by
the calculation agent at that time, based on the time to maturity of that
notional call option. During the remaining term of the notional call option, the
interest rate will equal the published interest rate for a term identical to the
remaining term of the notional call option. If an interest rate for a term
identical to the remaining term of the notional call option is not published,
the calculation agent will determine the interest rate used to compute the value
of an option by interpolating between the published rate for a shorter term
nearest to the term of the notional call option and the published rate for a
longer term nearest to the term of the notional call option. All interest rates
will be converted by the calculation agent into a rate compounded on a
continuous basis.
The annualized current dividend yield for the Underlying Stock on which
the option is priced will be calculated on any Index Business Day by dividing
the ordinary dividend or dividends historically paid by the issuer of that
Underlying Stock during the most recent period corresponding to the current
quarterly calculation period (or if the issuer of the Underlying Stock has
publicly disclosed that any dividend payable during the quarterly calculation
period in which the notional call option is being priced will be a different
amount than the most recent corresponding historical dividend, the amount
publicly disclosed by the issuer) by the Closing Price of that Underlying Stock
on the principal U.S. exchange or market on that day and annualizing (based on a
365-day year) the result to the end of that quarterly calculation period.
16
The implied volatility of a notional call option on any Index Business Day
is:
- when notionally purchasing 2004-1 Income 10 Buy-Write Index units,
the bid-side implied volatility;
- when notionally selling 2004-1 Income 10 Buy-Write Index units, the
offered-side implied volatility; and
- under all other circumstances, the mid-market implied volatility
(i.e., the arithmetic mean of the bid-side and offered-side implied
volatility)
of the relevant Underlying Stock as determined by the calculation agent by
interpolating from the implied volatility surface for the most comparable call
options listed on the American Stock Exchange (the "AMEX"), the Chicago Board
Options Exchange or the International Securities Exchange on the relevant
Underlying Stock as determined by the calculation agent in accordance with the
Xxx-Xxxx-Xxxxxxxxxx option pricing model, taking into account the nearest strike
price and maturity and using the U.S. dollar interest rate and dividend yield
determined as described above.
If no value of a notional call option is available on any date because of
a Market Disruption Event, because the calculation agent determines that the
market for the listed options described above is not sufficiently liquid (based
upon factors including, but not limited to, the time elapsed since the last
trade in options relating to that Underlying Stock, the size of the open
interest in call options with related strike prices and maturities relating to
that Underlying Stock and the size of the bid-offer relative to the number of
notional options related to that Underlying Stock to be priced on that day in
respect of the Notes then outstanding) for the purpose of calculating the
implied volatility of any notional call option or otherwise, or if the reported
prices for the listed options described above contain or are the result of
manifest error, unless deferred by the calculation agent as described below, the
value of such notional call option will be the arithmetic mean, as determined by
the calculation agent, of the value of such option obtained from as many dealers
in options (which may include Citigroup Global Markets Inc. or any of the
Company's other subsidiaries or affiliates), but not exceeding three such
dealers, as will make such value available to the calculation agent.
THE 2004-1 INCOME 10 PORTFOLIO
The "Underlying Stocks" (each an "Underlying Stock") are the common stocks
included in the 2004-1 Income 10 Portfolio from time to time. The "Underlying
Issuers" (each an "Underlying Issuer") are the issuers of the Underlying Stocks.
The Underlying Stocks as of February 19, 2004 are: Altria Group, Inc.;
AT&T Corp.; E.I. du Pont de Nemours and Company; Exxon Mobil Corporation;
General Electric Company; General Motors Corporation; International Paper
Company; X.X. Xxxxxx Chase & Co.; Merck & Co. Inc.; and SBC Communications Inc.
17
The 2004-1 Income 10 Portfolio will be calculated by Citigroup Global
Markets Inc. as calculation agent using an equal dollar-weighting methodology
designed to ensure that each of the Underlying Stocks is represented in an
approximately equal dollar amount in the 2004-1 Income 10 Portfolio as of
February 19, 2004 and as of each annual reconstitution of the 2004-1 Income 10
Portfolio.
To create the 2004-1 Income 10 Portfolio, the calculation agent has
calculated a notional portfolio of the Underlying Stocks representing an
investment of $10 in each Underlying Stock at their volume weighted average
prices, or VWAP, on February 19, 2004.
The VWAP of a common stock for any day is the total value of the shares of
that stock traded on that stock's relevant exchange that day divided by the
total number of shares of that stock traded on that stock's relevant exchange
that day. The VWAP of each Underlying Stock for any day will be the price as
calculated by Bloomberg Financial Markets using the function "VAP," or any
successor function, and taking into account all trades of that stock between
9:30 a.m. and 4:00 p.m. New York time on that date or if such price is not so
calculated by Bloomberg Financial Markets, then as reported by another
recognized source selected by the calculation agent on that date.
The value of the 2004-1 Income 10 Portfolio at any time equals the sum of
the products of the current trading price for each Underlying Stock and the
Portfolio Composition Ratio (as defined below), of that Underlying Stock. The
initial value of the 2004-1 Income 10 Portfolio will equal 100.00. The value of
the 2004-1 Income 10 Portfolio used to calculate the ending value of the 2004-1
Dynamic Portfolio Index will be based on the VWAP of each Underlying Stock on
the fifth Index Business Day prior to the Stated Maturity Date.
The "Portfolio Composition Ratio" for each Underlying Stock is the number
of shares of that Underlying Stock used to calculate the 2004-1 Income 10
Portfolio.
On each February 19, beginning in 2005, or, if that day is not a Trading
Day, on the immediately succeeding Trading Day, the calculation agent will
reconstitute the 2004-1 Income 10 Portfolio to include the ten common stocks in
the DJIA with the highest annualized dividend yields (calculated as described
above) as of the third Trading Day prior to that date. These stocks will be the
Underlying Stocks until the next annual rebalancing. If two common stocks in the
DJIA have the same annualized dividend yield as of the third Trading Day prior
to the reconstitution date, the common stock with the higher free-float market
capitalization will be given the higher ranking. If Citigroup Inc. (or any of
its affiliates) or any entity organized as a real estate investment trust is one
of the ten common stocks in the DJIA with the highest annualized dividend yields
as of the third Trading Day prior to the reconstitution date, that common stock
will not be included in the 2004-1 Income 10 Portfolio and the calculation agent
will instead include the common stock in the DJIA with the highest annualized
dividend yield of those stocks not already included in the 2004-1 Income 10
Portfolio.
The calculation agent will include in the 2004-1 Income 10 Portfolio only
stocks that meet the following criteria: (1) each Underlying Stock must have a
minimum market value of at
18
least $75 million, except that up to 10% of the Underlying Stocks may have a
market value of $50 million; (2) each Underlying Stock must have an average
monthly trading volume in the preceding six months of not less than 1,000,000
shares, except that up to 10% of the Underlying Stocks may have an average
monthly trading volume of 500,000 shares or more in the last six months; (3) 90%
of the 2004-1 Income 10 Portfolio's numerical index value and at least 80% of
the total number of Underlying Stocks will meet the then current criteria for
standardized option trading set forth in the rules of the AMEX; and (4) all
Underlying Stocks will either be listed on the AMEX, the New York Stock Exchange
(the "NYSE"), or traded through the facilities of the Nasdaq National Market and
reported as National Market System Securities.
After reconstituting the 2004-1 Income 10 Portfolio for the next year, the
calculation agent will rebalance the 2004-1 Income 10 Portfolio and set
Portfolio Composition Ratios so that each Underlying Stock represents
approximately 10% of the value of the 2004-1 Income 10 Portfolio based on the
Closing Prices of the Underlying Stocks as of the reconstitution date. This
reconstituted and rebalanced portfolio will become the basis for the value of
the Income 10 Portfolio on the following Trading Day.
A "Trading Day" means a day, as determined by the calculation agent, on
which trading is generally conducted (or was scheduled to have been generally
conducted, but for the occurrence of a Market Disruption Event) on the NYSE, the
AMEX, the Nasdaq National Market, the Chicago Mercantile Exchange and the
Chicago Board Options Exchange, and in the over-the-counter market for equity
securities in the United States.
An Underlying Stock will be removed from the 2004-1 Income 10 Portfolio
if, at any time, it:
(1) has a market value of less than $50 million;
(2) has an average monthly trading volume in the preceding six months of
less than 500,000 shares; or
(3) is not listed on the AMEX, the NYSE, or is not traded through the
facilities of the National Association of Securities Dealers Automated Quotation
System and is not reported among National Market System Securities.
An Underlying Stock will also be removed if at any time the issuer of that
Underlying Stock:
(1) commences a voluntary case under any applicable bankruptcy, insolvency
or other similar law, or consents to the entry of an order for relief in an
involuntary case under any such law;
(2) has entered against it by a court having jurisdiction in the premises
(x) an order for relief in an involuntary case or proceeding under any
applicable bankruptcy, insolvency or other similar law or (y) an order adjudging
it bankrupt or insolvent under such law; or
19
(3) commences a voluntarily winding up, liquidation, dissolution or other
discontinuance of its corporate existence (except in the context of a merger or
other acquisition) or consents to the entry of an order for relief in an
involuntary case requiring any such action.
If the calculation agent determines that an Underlying Stock must be
removed from the 2004-1 Income 10 Portfolio pursuant to the above criteria, the
removal of that Underlying Stock will be effected at the close of business on
the Index Business Day on which that determination is made.
ADJUSTMENTS TO THE PORTFOLIO COMPOSITION RATIOS
If any notional call option included in the 2004-1 Income 10 Buy-Write
Index has a value greater than zero at expiration, the value of that option will
be removed from the value of the 2004-1 Income 10 Buy-Write Index at the close
of business on the day the option expires. In order to preserve the continuity
of the value of the 2004-1 Income 10 Buy-Write Index following any such removal,
the value of the related Underlying Stock in the 2004-1 Income 10 Portfolio will
at the same time be reduced by an amount equal to the value of the option at
expiration. This reduction will be effected by decreasing the Portfolio
Composition Ratio of the related Underlying Stock by an amount that, when
multiplied by the Closing Price of the related Underlying Stock on the last
Index Business Day of the quarterly calculation period, equals the value of the
option at expiration. The Portfolio Composition Ratio for the related Underlying
Stock will be reduced by an amount calculated as follows:
PCR * ( 1 - NCOSP )
-------------
EP
"NCOSP" is the strike price of the notional call option relating to that
Underlying Stock.
"EP" is the Closing Price of the related Underlying Stock on the last
Index Business Day of that quarterly calculation period.
The reduced Portfolio Composition Ratio will be used to calculate the
value of the 2004-1 Income 10 Portfolio on the following Index Business Day.
If any Underlying Issuer, after the closing date of the offering of the
Notes:
(1) pays a stock dividend or makes a distribution with respect to its
common stock in shares of the stock;
(2) subdivides or splits the outstanding shares of its common stock into a
greater number of shares;
(3) combines the outstanding shares of its common stock into a smaller
number of shares; or
20
(4) issues by reclassification of shares of its common stock any shares of
other common stock of the Underlying Issuer;
then, in each of these cases, the Underlying Stock's Portfolio Composition Ratio
will be multiplied by a dilution adjustment equal to a fraction, the numerator
of which will be the number of shares of common stock outstanding immediately
after the event, plus, in the case of a reclassification referred to in (4)
above, the number of shares of other common stock of the Underlying Issuer, and
the denominator of which will be the number of shares of common stock
outstanding immediately before the event.
If any Underlying Issuer, after the closing date, issues, or declares a
record date in respect of an issuance of, rights or warrants to all holders of
its common stock entitling them to subscribe for or purchase the common stock at
a price per share less than the Then-Current Market Price of the common stock,
other than rights to purchase common stock pursuant to a plan for the
reinvestment of dividends or interest, then, in each case, the Portfolio
Composition Ratio for that Underlying Stock will be multiplied by a dilution
adjustment equal to a fraction, the numerator of which will be the number of
that issuer's common stock outstanding immediately before the adjustment is
effected, plus the number of additional shares of stock of that issuer offered
for subscription or purchase pursuant to the rights or warrants, and the
denominator of which will be the number of that issuer's common stock
outstanding immediately before the adjustment is effected by reason of the
issuance of the rights or warrants, plus the number of additional shares of
common stock of that issuer which the aggregate offering price of the total
number of shares of that issuer's common stock offered for subscription or
purchase pursuant to the rights or warrants would purchase at the Then-Current
Market Price of the common stock, which will be determined by multiplying the
total number of shares so offered for subscription or purchase by the exercise
price of the rights or warrants and dividing the product obtained by the
Then-Current Market Price. To the extent that, after the expiration of the
rights or warrants, the shares of common stock offered thereby have not been
delivered, the Portfolio Composition Ratio for that Underlying Stock will be
further adjusted to equal the Portfolio Composition Ratio which would have been
in effect had the adjustment for the issuance of the rights or warrants been
made upon the basis of delivery of only the number of shares of common stock
actually delivered.
If any Underlying Issuer, after the closing date, declares or pays a
dividend or makes a distribution to all holders of the common stock of any class
of its common stock, evidences of its indebtedness or other non-cash assets,
excluding any dividends or distributions referred to in the above paragraph, or
issues to all holders of its common stock rights or warrants to subscribe for or
purchase any of its securities or one or more of its subsidiaries' securities,
other than rights or warrants referred to in the above paragraph, then, in each
of these cases, the Portfolio Composition Ratio for that Underlying Stock will
be multiplied by a dilution adjustment equal to a fraction, the numerator of
which will be the Then-Current Market Price of one share of the Underlying
Stock, and the denominator of which will be the Then-Current Market Price of one
share of the Underlying Stock, less the fair market value (as determined by a
nationally recognized independent investment banking firm retained for this
purpose by the Company, whose determination will be final) as of the time the
adjustment is effected of the portion of the
21
capital stock, assets, evidences of indebtedness, rights or warrants so
distributed or issued applicable to one share of the Underlying Stock.
Notwithstanding the foregoing, in the event, with respect to any dividend
or distribution to which the above paragraph would otherwise apply, the
denominator in the fraction referred to in the above formula is less than $1.00
or is a negative number, then the Company may, at its option, elect to have the
adjustment provided by the above paragraph not be made and in lieu of this
adjustment, at maturity, each holder of the Notes will be entitled to receive an
additional amount of cash equal to the product of the number of Notes held by
the holder multiplied by the fair market value of the capital stock,
indebtedness, assets, rights or warrants (determined, as of the date this
dividend or distribution is made, by a nationally recognized independent
investment banking firm retained for this purpose by the Company, whose
determination will be final) so distributed or issued applicable to a number of
shares of the Underlying Stock equal to the Portfolio Composition Ratio.
If, after the closing date, any Underlying Issuer makes an Excess Purchase
Payment, then the Portfolio Composition Ratio for the Underlying Stock will be
multiplied by a dilution adjustment equal to a fraction, the numerator of which
will be the Then-Current Market Price of the Underlying Stock, and the
denominator of which will be the Then-Current Market Price of the Underlying
Stock on the record date less the aggregate amount of such Excess Purchase
Payment for which adjustment is being made at the time divided by the number of
shares of common stock outstanding on the record date.
For purposes of these adjustments:
An "Excess Purchase Payment" is the excess, if any, of (x) the cash and
the value (as determined by a nationally recognized independent investment
banking firm retained for this purpose by the Company, whose determination will
be final) of all other consideration paid by the Underlying Issuer with respect
to one share of its common stock acquired in a tender offer or exchange offer by
the Underlying Issuer, over (y) the Then-Current Market Price of the Underlying
Stock.
Notwithstanding the foregoing, in the event, with respect to any Excess
Purchase Payment to which the sixth paragraph in this section would otherwise
apply, the denominator in the fraction referred to in the formula in that
paragraph is less than $1.00 or is a negative number, then the Company may, at
its option, elect to have the adjustment provided by the sixth paragraph in this
section not be made and in lieu of this adjustment, at maturity, the holders of
the Notes will be entitled to receive an additional amount of cash equal to the
product of the number of Notes held by the holder multiplied by the sum of the
amount of cash plus the fair market value of other consideration (determined, as
of the date this dividend or distribution is made, by a nationally recognized
independent investment banking firm retained for this purpose by the Company,
whose determination will be final) so distributed or applied to the acquisition
of the Underlying Stock in the tender offer or exchange offer applicable to a
number of shares of the Underlying Stock equal to the Portfolio Composition
Ratio.
Each dilution adjustment will be effected as follows:
22
- in the case of any dividend, distribution or issuance, at the
opening of business on the Business Day next following the record
date for determination of holders of the applicable Underlying Stock
entitled to receive this dividend, distribution or issuance or, if
the announcement of this dividend, distribution or issuance is after
this record date, at the time this dividend, distribution or
issuance was announced by the Underlying Issuer;
- in the case of any subdivision, split, combination or
reclassification, on the effective date of the transaction;
- in the case of any Excess Purchase Payment for which the Underlying
Issuer announces, at or prior to the time it commences the relevant
share repurchase, the repurchase price per share for shares proposed
to be repurchased, on the date of the announcement; and
- in the case of any other Excess Purchase Payment, on the date that
the holders of the repurchased shares become entitled to payment in
respect thereof.
All dilution adjustments will be rounded upward or downward to the nearest
1/10,000th or, if there is not a nearest 1/10,000th, to the next lower
1/10,000th. No adjustment to any Portfolio Composition Ratio will be required
unless the adjustment would require an increase or decrease of at least one
percent therein, provided, however, that any adjustments which by reason of this
sentence are not required to be made will be carried forward (on a percentage
basis) and taken into account in any subsequent adjustment. If any announcement
or declaration of a record date in respect of a dividend, distribution, issuance
or repurchase requiring an adjustment as described herein is subsequently
canceled by the Underlying Issuer, or this dividend, distribution, issuance or
repurchase fails to receive requisite approvals or fails to occur for any other
reason, then, upon the cancellation, failure of approval or failure to occur,
the Portfolio Composition Ratio will be further adjusted to the Portfolio
Composition Ratio which would then have been in effect had adjustment for the
event not been made. If a Reorganization Event described below occurs after the
occurrence of one or more events requiring an adjustment as described herein,
the dilution adjustments previously applied to the Portfolio Composition Ratio
will not be rescinded but will be applied to the new Portfolio Composition Ratio
provided for below.
The "Then-Current Market Price" of any Underlying Stock, for the purpose
of applying any dilution adjustment, means the average Closing Price of one
share of that Underlying Stock for the ten Trading Days immediately before this
adjustment is effected or, in the case of an adjustment effected at the opening
of business on the Business Day next following a record date, immediately before
the earlier of the date the adjustment is effected and the related Ex-Date.
The "Ex-Date" with respect to any dividend, distribution or issuance is
the first date on which the Underlying Stock trades in the regular way on its
principal market without the right to receive this dividend, distribution or
issuance.
23
In the event of any of the following "Reorganization Events":
- any consolidation or merger of an Underlying Issuer, or any
surviving entity or subsequent surviving entity of an Underlying
Issuer, with or into another entity, other than a merger or
consolidation in which an Underlying Issuer is the continuing
corporation and in which the common stock outstanding immediately
before the merger or consolidation is not exchanged for cash,
securities or other property of the Underlying Issuer or another
issuer;
- any sale, transfer, lease or conveyance to another corporation of
the property of an Underlying Issuer or any successor as an entirety
or substantially as an entirety;
- any statutory exchange of securities of an Underlying Issuer or any
successor of an Underlying Issuer with another issuer, other than in
connection with a merger or acquisition; or
- any liquidation, dissolution or winding up of an Underlying Issuer
or any successor of an Underlying Issuer;
the value of that Underlying Stock will be calculated by multiplying the
then-existing Portfolio Composition Ratio for that Underlying Stock by the
Transaction Value. If a Reorganization Event occurs, no adjustment will be made
to the Portfolio Composition Ratio of the relevant Underlying Stock.
The "Transaction Value" will be the sum of:
(1) for any cash received in a Reorganization Event, the amount of
cash received per Underlying Stock;
(2) for any property other than cash or Marketable Securities
received in a Reorganization Event, an amount equal to the market value on
the date the Reorganization Event is consummated of that property received
per Underlying Stock, as determined by a nationally recognized independent
investment banking firm retained for this purpose by the Company, whose
determination will be final; and
(3) for any Marketable Securities received in a Reorganization
Event, an amount equal to the Closing Price per share of these Marketable
Securities on the applicable Trading Day multiplied by the number of these
Marketable Securities received for each share of that Underlying Stock.
"Marketable Securities" are any perpetual equity securities or debt
securities with a stated maturity after the Stated Maturity Date, in each case
that are listed on a U.S. national securities exchange or reported by the Nasdaq
Stock Market. The number of shares of any equity securities constituting
Marketable Securities included in the calculation of Transaction Value
24
pursuant to clause (3) above will be adjusted if any event occurs with respect
to the Marketable Securities or the issuer of the Marketable Securities between
the time of the Reorganization Event and maturity that would have required an
adjustment as described above, had it occurred with respect to any Underlying
Stock or to an Underlying Issuer. Adjustment for these subsequent events will be
as nearly equivalent as practicable to the adjustments described above.
If the calculation agent removes an Underlying Stock from the 2004-1
Income 10 Portfolio, at the close of business on the day the Underlying Stock is
removed, the value of the shares of that Underlying Stock in the 2004-1 Income
10 Portfolio, less the value, if any, of any notional call options in respect of
that Underlying Stock, will be reallocated to notional investments in shares (or
fractional shares) of the remaining Underlying Stocks. The amount allocated to
notional investments in respect of each remaining Underlying Stock will be in
proportion to the percentage of the value of each remaining Underlying Stock
relative to the value of the 2004-1 Income 10 Portfolio (less the value of the
removed stock) at the close of business on the Index Business Day on which the
Underlying Stock is removed. The Portfolio Composition Ratio of each remaining
Underlying Stock will be increased to reflect the number of shares (or
fractional shares) that could be purchased at the Closing Price of such
remaining Underlying Stock on that Index Business Day.
If at any time Citigroup Inc., on a consolidated basis, is the beneficial
owner of 8% or more of any Underlying Stock, the calculation agent will, as soon
as practicable, reduce the Portfolio Composition Ratio of that Underlying Stock
by the following percentage:
SH(a) - SH(b)
-------------
SH(a)
"SH(a)" is the number of shares of stock of that Underlying Issuer held by
Citigroup Inc. and its affiliates at the time of the rebalancing.
"SH(b)" is the number of shares representing 7.5% of the outstanding
shares of that class of stock (as determined by the calculation agent).
References to a class of stock for these purposes will be as made in Section
13(d) of the Securities Exchange Act of 1934, as amended, for purposes of
determining beneficial ownership.
The value of the number of shares by which the Underlying Stock's
Portfolio Composition Ratio is reduced will be reallocated equally to notional
investments in the other Underlying Stocks. The Portfolio Composition Ratio of
each of those stocks will increase by the number of shares that notional
investment would purchase at the Underlying Stock's Closing Price on the Trading
Day on which the reallocation is effected.
GENERAL
This Note is one of a duly authorized issue of debt securities of the
Company (the "Debt Securities"), issued and to be issued in one or more series
under a Senior Debt Indenture, dated as of October 27, 1993, as supplemented by
a First Supplemental Indenture, dated as of
25
November 28, 1997, a Second Supplemental Indenture, dated as of July 1, 1999,
and as further supplemented from time to time (the "Indenture"), between the
Company and The Bank of New York, as Trustee (the "Trustee", which term includes
any successor trustee under the Indenture), to which Indenture reference is
hereby made for a statement of the respective rights, limitations of rights,
duties and immunities thereunder of the Company, the Trustee and the holders of
the Notes, and the terms upon which the Notes are, and are to be, authenticated
and delivered.
If an Event of Default with respect to the Notes shall have occurred and
be continuing, the principal of the Notes may be declared due and payable in the
manner and with the effect provided in the Indenture. In such case, the amount
declared due and payable upon any acceleration permitted by the Indenture will
be determined by the calculation agent and will be equal to, with respect to
this Note, the Maturity Payment calculated as though the Stated Maturity Date of
this Note were the date of early repayment. In case of default at Maturity of
this Note, this Note shall bear interest, payable upon demand of the beneficial
owners of this Note in accordance with the terms of the Notes, from and after
Maturity through the date when payment of such amount has been made or duly
provided for, at the rate of 4.25% per annum on the unpaid amount due.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the holders of the Debt Securities of each series to
be affected under the Indenture at any time by the Company and a majority in
aggregate principal amount of the Debt Securities at the time Outstanding of
each series affected thereby. The Indenture also contains provisions permitting
the holders of specified percentages in aggregate principal amount of the Debt
Securities of any series at the time Outstanding, on behalf of the holders of
all Debt Securities of such series, to waive compliance by the Company with
certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the holder of
this Note shall be conclusive and binding upon such holder and upon all future
holders of this Note and of any Note issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Note.
The holder of this Note may not enforce such holder's rights pursuant to
the Indenture or the Notes except as provided in the Indenture. No reference
herein to the Indenture and no provision of this Note or of the Indenture shall
alter or impair the obligation of the Company to pay the Maturity Payment with
respect to this Note, and to pay any interest on any overdue amount thereof at
the time, place and rate, and in the coin or currency, herein prescribed.
All terms used in this Note which are defined in the Indenture but not in
this Note shall have the meanings assigned to them in the Indenture.
Unless the certificate of authentication hereon has been executed by the
Trustee by manual signature, this Note shall not be entitled to any benefit
under the Indenture or be valid or obligatory for any purposes.
26
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
CITIGROUP GLOBAL MARKETS HOLDINGS INC.
By: /s/ Xxxx Xxxxxxxx
----------------------------------
Name: Xxxx X. Xxxxxxxx
Title: Executive Vice President
and Treasurer
Corporate Seal
Attest:
By: /s/ Xxxxxxx X. Xxxxxxxx
---------------------------------------
Name: Xxxxxxx X. Xxxxxxxx
Title: Assistant Secretary
Dated: February 26, 2004
CERTIFICATE OF AUTHENTICATION
This is one of the Notes referred to in
the within-mentioned Indenture.
The Bank of New York,
as Trustee
By: /s/ Xxxxxxxx Xxxxxx
---------------------------------------
Authorized Signatory
