You should read this pricing supplement together with the product supplement dated May 1, 2017, the prospectus supplement dated April 27, 2017 and the prospectus dated April 27, 2017.
This pricing supplement, together with the documents listed below, contains the terms of each of the notes and supersedes all other prior or contemporaneous oral statements as well as any other written materials including preliminary or indicative pricing terms, correspondence, trade ideas, structures for implementation, sample structures, fact sheets, brochures or other educational materials of ours or the agent.
You should carefully consider, among other things, the matters set forth in “Additional Risk Factors Relating to the Notes” in the product supplement, as the notes involve risks not associated with conventional debt securities. We urge you to consult your investment, legal, tax, accounting and other advisers before you invest in the notes.
Our Central Index Key, or CIK, on the SEC website is 927971. As used in this pricing supplement, “we,” “us” or “our” refers to Bank of Montreal.
An investment in the notes involves significant risks. Investing in the notes is not equivalent to investing directly in the applicable Reference Stock. These risks are explained in more detail in the “Additional Risk Factors Relating to the Notes” section of the product supplement.
Neither the offering of the notes nor any views which our affiliates from time to time may express in the ordinary course of their businesses constitutes a recommendation as to the merits of an investment in the notes.
The Internal Revenue Service has released a notice that may affect the taxation of holders of “prepaid forward contracts” and similar instruments. According to the notice, the Internal Revenue Service and the U.S. Treasury are actively considering whether the holder of such instruments should be required to accrue ordinary income on a current basis. While it is not clear whether the notes would be viewed as similar to such instruments, it is possible that any future guidance could materially and adversely affect the tax consequences of an investment in the notes, possibly with retroactive effect.
Please read carefully the section entitled “U.S. Federal Tax Information” in this pricing supplement, the section entitled “Supplemental Tax Considerations—Supplemental U.S. Federal Income Tax Considerations” in the accompanying product supplement, the section “United States Federal Income Taxation” in the accompanying prospectus and the section entitled “Certain Income Tax Consequences” in the accompanying prospectus supplement. You should consult your tax advisor about your own tax situation.
In addition, these companies are highly dependent on the price of gold or silver, as applicable. These prices fluctuate widely and may be affected by numerous factors. Factors affecting gold prices include economic factors, including, among other things, the structure of and confidence in the global monetary system, expectations of the future rate of inflation, the relative strength of, and confidence in, the U.S. dollar (the currency in which the price of gold is generally quoted), interest rates and gold borrowing and lending rates, and global or regional economic, financial, political, regulatory, judicial or other events. Gold prices may also be affected by industry factors such as industrial and jewelry demand, lending, sales and purchases of gold by the official sector, including central banks and other governmental agencies and multilateral institutions which hold gold, levels of gold production and production costs, and short-term changes in supply and demand because of trading activities in the gold market. Factors affecting silver prices include general economic trends, technical developments, substitution issues and regulation, as well as specific factors including industrial and jewelry demand, expectations with respect to the rate of inflation, the relative strength of the U.S. dollar (the currency in which the price of silver is generally quoted) and other currencies, interest rates, central bank sales, forward sales by producers, global or regional political or economic events, and production costs and disruptions in major silver producing countries such as Mexico and Peru. The supply of silver consists of a combination of new mine production and existing stocks of bullion and fabricated silver held by governments, public and private financial institutions, industrial organizations and private individuals. In addition, the price of silver has on occasion been subject to very rapid short-term changes due to speculative activities. From time to time, above-ground inventories of silver may also influence the market.
Examples of the Hypothetical Payment at Maturity for a $1,000 Investment in the Notes
The hypothetical examples shown below are intended to help you understand the terms of the notes. If the notes are not automatically called, the actual cash amount that you will receive at maturity will depend upon the Final Stock Price of the applicable Reference Stock, and whether its closing price is below the Trigger Price on any trading day during the Monitoring Period. If the notes are automatically called prior to maturity, the hypothetical examples below will not be relevant, and you will receive on the applicable Call Settlement Date, for each $1,000 principal amount, the principal amount plus the applicable interest payment.
Please see the discussion (including the opinion of our counsel Morrison & Foerster LLP) in the product supplement dated May 1, 2017 under “Supplemental U.S. Federal Income Tax Considerations,” which applies to the notes.
Additional Information Relating to the Estimated Initial Value of the Notes
Our estimated initial value of each of the notes that is set forth on the cover page of this pricing supplement equals the sum of the values of the following hypothetical components:
|
·
|
a fixed-income debt component with the same tenor as the notes, valued using our internal funding rate for structured notes; and
|
|
·
|
one or more derivative transactions relating to the economic terms of the notes.
|
The internal funding rate used in the determination of the initial estimated value generally represents a discount from the credit spreads for our conventional fixed-rate debt. The value of these derivative transactions are derived from our internal pricing models. These models are based on factors such as the traded market prices of comparable derivative instruments and on other inputs, which include volatility, dividend rates, interest rates and other factors. As a result, the estimated initial value of each of the notes on the Pricing Date was determined based on market conditions on the Pricing Date.
The Reference Stocks
We have derived the following information from publicly available documents. We have not independently verified the accuracy or completeness of the following information. We are not affiliated with the applicable Reference Stock Issuer and the applicable Reference Stock Issuer will have no obligations with respect to the notes. This pricing supplement relates only to the notes and does not relate to the shares of the applicable Reference Stock or any securities included in the applicable Underlying Index. Neither we nor any of our affiliates participates in the preparation of the publicly available documents described below. Neither we nor any of our affiliates has made any due diligence inquiry with respect to the applicable Reference Stock in connection with the offering of the notes. There can be no assurance that all events occurring prior to the date of this pricing supplement, including events that would affect the accuracy or completeness of the publicly available documents described below and that would affect the trading price of the shares of the applicable Reference Stock, have been or will be publicly disclosed. Subsequent disclosure of any events or the disclosure of or failure to disclose material future events concerning the applicable Reference Stock could affect the price of the shares of the applicable Reference Stock during the Monitoring Period and on the Valuation Date, and therefore could affect the payments on the notes.
The selection of the applicable Reference Stock is not a recommendation to buy or sell the shares of the applicable Reference Stock. Neither we nor any of our affiliates make any representation to you as to the performance of the shares of the applicable Reference Stock. Information provided to or filed with the SEC under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 relating to the applicable Reference Stock may be obtained through the SEC’s website at http://www.sec.gov.
SPDR
®
S&P
®
Oil & Gas Exploration & Production ETF
In this section, Reference Stock Issuer refers to the SPDR
®
S&P
®
Oil & Gas Exploration & Production ETF (the “XOP”), Reference Stock refers to the shares of the XOP, and Underlying Index refers to the S&P
®
Oil & Gas Exploration & Production Select Industry
®
Index.
The Reference Stock is an investment portfolio maintained and managed by SSFM. The Reference Stock trades on the NYSE Arca under the ticker symbol “XOP.” The inception date of the Reference Stock is June 19, 2006. Prior to January 8, 2007, the Reference Stock was known as the SPDR
®
Oil & Gas Exploration & Production ETF.
Information provided to or filed with the SEC by the SPDR
®
Series Trust (“SPDR”) under the Securities Exchange Act of 1934 can be located by reference to its Central Index Key, or CIK, 1064642 through the SEC’s website at http://www.sec.gov. Additional information about SSFM and the Reference Stock may be obtained from other sources including, but not limited to, press releases, newspaper articles and other publicly disseminated documents. We have not made any independent investigation as to the accuracy or completeness of such information.
The Reference Stock seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Underlying Index. The Underlying Index represents the oil and gas exploration and production sub-industry portion of the S&P Total Market Index (“S&P TMI”), an index that measures the performance of the U.S. equity market. The Reference Stock is composed of companies that are in the oil and gas sector exploration and production.
The Reference Stock utilizes a sampling strategy, which means that it is not required to purchase all of the securities represented in its Underlying Index. Instead, it may purchase a subset of the securities in the Underlying Index in an effort to hold a portfolio of securities with generally the same risk and return characteristics of the Underlying Index. Under normal market conditions, the Reference Stock will invest at least 80% of its total assets in common stocks that comprise the Underlying Index.
The information above was compiled from the SPDR
®
website. We have not independently investigated the accuracy of that information. Information contained in the SPDR
®
website is not incorporated by reference in, and should not be considered a part of, this document.
The Underlying Index: S&P
®
Oil & Gas Exploration & Production Select Industry
®
Index
We have derived all information contained in this document regarding the Underlying Index, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information. Such information reflects the policies of, and is subject to change by, S&P.
The Underlying Index is an equal-weighted index that is designed to measure the performance of the oil and gas exploration and production sub-industry portion of the S&P TMI. The S&P TMI includes all U.S. common equities listed on the NYSE (including NYSE Arca), the NYSE MKT, the NASDAQ Global Select Market, and the NASDAQ Capital Market. Each of the component stocks in the Underlying Index is a constituent company within the oil and gas exploration and production sub-industry portion of the S&P TMI.
To be eligible for inclusion in the Underlying Index, companies must be in the S&P TMI and must be included in the relevant Global Industry Classification Standard (GICS) sub-industry. The GICS was developed to establish a global standard for categorizing companies into sectors and industries. In addition to the above, companies must satisfy one of the two following combined size and liquidity criteria:
|
·
|
float-adjusted market capitalization above US$500 million and float-adjusted liquidity ratio above 90%; or
|
|
·
|
float-adjusted market capitalization above US$400 million and float-adjusted liquidity ratio above 150%.
|
All U.S. companies satisfying these requirements are included in the Underlying Index. The total number of companies in the Underlying Index should be at least 35. If there are fewer than 35 stocks, stocks from a supplementary list of highly correlated sub-industries that meet the market capitalization and liquidity thresholds above are included in order of their float-adjusted market capitalization to reach 35 constituents. Minimum market capitalization requirements may be relaxed to ensure there are at least 22 companies in the Underlying Index as of each rebalancing effective date.
Eligibility factors include:
|
·
|
Market Capitalization: Float-adjusted market capitalization should be at least US$400 million for inclusion in the Underlying Index. Existing index components must have a float-adjusted market capitalization of US$300 million to remain in the Underlying Index at each rebalancing.
|
|
·
|
Liquidity: The liquidity measurement used is a liquidity ratio, defined as dollar value traded over the previous 12-months divided by the float-adjusted market capitalization as of the Underlying Index rebalancing reference date. Stocks having a float-adjusted market capitalization above US$500 million must have a liquidity ratio greater than 90% to be eligible for addition to the Underlying Index. Stocks having a float-adjusted market capitalization between US$400 and US$500 million must have a liquidity ratio greater than 150% to be eligible for addition to the Underlying Index. Existing index constituents must have a liquidity ratio greater than 50% to remain in the Underlying Index at the quarterly rebalancing. The length of time to evaluate liquidity is reduced to the available trading period for IPOs or spin-offs that do not have 12 months of trading history.
|
|
·
|
Takeover Restrictions: At the discretion of S&P, constituents with shareholder ownership restrictions defined in company bylaws may be deemed ineligible for inclusion in the Underlying Index. Ownership restrictions preventing entities from replicating the index weight of a company may be excluded from the eligible universe or removed from the Underlying Index.
|
|
·
|
Turnover: S&P believes turnover in index membership should be avoided when possible. At times, a company may appear to temporarily violate one or more of the addition criteria. However, the addition criteria are for addition to the Underlying Index, not for continued membership. As a result, an index constituent that appears to violate the criteria for addition to the Underlying Index will not be deleted unless ongoing conditions warrant a change in the composition of the Underlying Index.
|
Historical Information of the
SPDR
®
S&P
®
Oil & Gas Exploration & Production ETF
The following table sets forth the high and low closing prices of the Reference Stock from the first quarter of 2008 through the Pricing Date.
|
|
High (in $)
|
|
Low (in $)
|
2008
|
First Quarter
|
55.79
|
|
45.14
|
|
Second Quarter
|
71.38
|
|
54.47
|
|
Third Quarter
|
71.06
|
|
42.70
|
|
Fourth Quarter
|
43.38
|
|
23.01
|
|
|
|
|
|
2009
|
First Quarter
|
33.47
|
|
23.41
|
|
Second Quarter
|
38.25
|
|
27.58
|
|
Third Quarter
|
39.61
|
|
28.51
|
|
Fourth Quarter
|
43.37
|
|
36.91
|
|
|
|
|
|
2010
|
First Quarter
|
44.07
|
|
39.22
|
|
Second Quarter
|
45.83
|
|
38.57
|
|
Third Quarter
|
42.85
|
|
38.03
|
|
Fourth Quarter
|
52.71
|
|
42.17
|
|
|
|
|
|
2011
|
First Quarter
|
64.44
|
|
52.75
|
|
Second Quarter
|
64.97
|
|
54.71
|
|
Third Quarter
|
65.21
|
|
42.86
|
|
Fourth Quarter
|
57.56
|
|
39.99
|
|
|
|
|
|
2012
|
First Quarter
|
61.34
|
|
52.67
|
|
Second Quarter
|
57.85
|
|
45.20
|
|
Third Quarter
|
59.35
|
|
48.73
|
|
Fourth Quarter
|
57.38
|
|
50.69
|
|
|
|
|
|
2013
|
First Quarter
|
62.10
|
|
55.10
|
|
Second Quarter
|
62.61
|
|
54.71
|
|
Third Quarter
|
66.47
|
|
58.62
|
|
Fourth Quarter
|
72.74
|
|
65.02
|
|
|
|
|
|
2014
|
First Quarter
|
71.83
|
|
64.04
|
|
Second Quarter
|
83.45
|
|
71.19
|
|
Third Quarter
|
82.08
|
|
68.83
|
|
Fourth Quarter
|
66.84
|
|
42.75
|
|
|
|
|
|
2015
|
First Quarter
|
53.94
|
|
42.55
|
|
Second Quarter
|
55.63
|
|
46.43
|
|
Third Quarter
|
45.22
|
|
31.71
|
|
Fourth Quarter
|
40.53
|
|
28.64
|
|
|
|
|
|
2016
|
First Quarter
|
30.96
|
|
23.60
|
|
Second Quarter
|
37.50
|
|
29.23
|
|
Third Quarter
|
39.12
|
|
32.75
|
|
Fourth Quarter
|
43.42
|
|
34.73
|
|
|
|
|
|
2017
|
First Quarter
|
42.21
|
|
35.17
|
|
Second Quarter (through the Pricing Date)
|
37.89
|
|
33.85
|
The VanEck Vectors
TM
Gold Miners ETF
In this section, Reference Stock Issuer refers to the VanEck Vectors
TM
Gold Miners ETF (the “GDX”), Reference Stock refers to the shares of the GDX, and the Underlying Index refers to the NYSE Arca Gold Miners Index.
The Reference Stock is an investment portfolio maintained, managed and advised by Van Eck. The VanEck Vectors
TM
ETF Trust is a registered open-end investment company that consists of numerous separate investment portfolios, including the Reference Stock.
The Reference Stock is an exchange traded fund that trades on NYSE Arca under the ticker symbol “GDX.”
The Reference Stock seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Underlying Index. The Underlying Index was developed by the NYSE Amex and is calculated, maintained and published by NYSE Arca. The Underlying Index is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in mining for gold or silver.
The Reference Stock utilizes a “passive” or “indexing” investment approach in attempting to track the performance of the Underlying Index. The Reference Stock will invest in all of the securities which comprise the Underlying Index. The Reference Stock will normally invest at least 95% of its total assets in common stocks that comprise the Underlying Index.
The notes are not sponsored, endorsed, sold or promoted by Van Eck. Van Eck makes no representations or warranties to the owners of the notes or any member of the public regarding the advisability of investing in the notes. Van Eck has no obligation or liability in connection with the operation, marketing, trading or sale of the notes.
The Underlying Index
We have derived all information contained in this pricing supplement regarding the Underlying Index, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information and information supplied by NYSE Arca. Such information reflects the policies of, and is subject to change by, NYSE Arca. The Underlying Index was developed by the NYSE Amex (formerly the American Stock Exchange) and is calculated, maintained and published by the NYSE Arca. The NYSE Arca has no obligation to continue to publish, and may discontinue the publication of, the Underlying Index.
The Underlying Index includes common stocks, ADRs and GDRs of selected companies that are involved primarily in mining for gold or silver and that are listed for trading and electronically quoted on a major stock market that is accessible by foreign investors. Generally, this will include exchanges in most developed markets and major emerging markets, and will include companies that are cross-listed, e.g., both U.S. and Canadian listings. NYSE Arca will use its discretion to avoid exchanges and markets that are considered “frontier” in nature or have major restrictions to foreign ownership. The Underlying Index includes companies that derive at least 50% of their revenues from gold mining and related activities (40% for companies that were included in the Underlying Index prior to September 23, 2013). Also, the Underlying Index maintains exposure to companies with a significant revenue exposure to silver mining in addition to gold mining, which will not exceed 20% of the Underlying Index weight at each rebalance.
Only companies with market capitalizations greater than $750 million that have an average daily volume of at least 50,000 shares over the past three months and an average daily value traded of at least $1 million over the past three months are eligible for inclusion in the Underlying Index. Starting in December 2013, for companies that were included in the Underlying Index prior to September 23, 2013, the market capitalization requirement at each rebalance became $450 million, the average daily volume requirement will be at least 30,000 shares over the past three months and the average daily value traded requirement will be at least $600,000 over the past three months. NYSE Arca has the discretion to not include all companies that meet the minimum criteria for inclusion. The Underlying Index’s benchmark value was 500.00 at the close of trading on December 20, 2002.
Calculation of the Underlying Index
. The Underlying Index is calculated by NYSE Arca on a price return basis. The calculation is based on the current modified market capitalization divided by a divisor. The divisor was determined on the initial capitalization base of the Underlying Index and the base level and may be adjusted as a result of corporate actions and composition changes, as described below.
Index Maintenance
. The Underlying Index is reviewed quarterly to ensure that at least 90% of the index weight is accounted for by index components that continue to meet the initial eligibility requirements. NYSE Arca may at any time and from time to time change the number of securities comprising the group by adding or deleting one or more securities, or replacing one or more securities contained in the group with one or more substitute securities of its choice, if in NYSE Arca’s discretion such addition, deletion or substitution is necessary or appropriate to maintain the quality and/or character of the Underlying Index. Components will be removed from the Underlying Index during the quarterly review if (1) the market capitalization falls below $450 million, or (2) the traded average daily
shares for the previous three months is lower than 30,000 shares and the traded average daily value for the previous three months is less than $600,000.
At the time of the quarterly rebalance, the component security quantities will be modified to conform to the following asset diversification requirements:
|
(1)
|
the weight of any single component security may not account for more than 20% of the total value of the Underlying Index;
|
|
(2)
|
the component securities are split into two subgroups–large and small, which are ranked by market capitalization weight in the Underlying Index. Large securities are defined as having a starting index weight greater than or equal to 5%. Small securities are defined as having a starting index weight below 5%; and
|
|
(3)
|
the final aggregate weight of those component securities which individually represent more than 4.5% of the total value of the Underlying Index may not account for more than 45% of the total index value.
|
The weights of the components securities (taking into account expected component changes and share adjustments) are modified in accordance with the Underlying Index’s diversification rules.
Changes to the index composition and/or the component security weights in the Underlying Index are determined and announced prior to taking effect, which typically occurs after the close of trading on the third Friday of each calendar quarter month in connection with the quarterly index rebalance. The share quantities of each component security in the index portfolio remains fixed between quarterly reviews except in the event of certain types of corporate actions such as stock splits, reverse stock splits, stock dividends, or similar events. The share quantities used in the index calculation are not typically adjusted for shares issued or repurchased between quarterly reviews. However, in the event of a merger between two components, the share quantity of the surviving entity may be adjusted to account for any stock issued in the acquisition. NYSE Arca may substitute securities or change the number of securities included in the Underlying Index, based on changing conditions in the industry or in the event of certain types of corporate actions, including mergers, acquisitions, spin-offs, and reorganizations. In the event of component or share quantity changes to the index portfolio, the payment of dividends other than ordinary cash dividends, spin-offs, rights offerings, re-capitalization, or other corporate actions affecting a component security of the Underlying Index, the index divisor may be adjusted to ensure that there are
no changes to the index level as a result of nonmarket forces.
Historical Information of the
VanEck Vectors
TM
Gold Miners ETF
The following table sets forth the high and low closing prices of the Reference Stock from the first quarter of 2008 through the Pricing Date.
|
|
High (in $)
|
|
Low (in $)
|
|
|
|
|
|
2008
|
First Quarter
|
56.42
|
|
46.75
|
|
Second Quarter
|
51.43
|
|
42.53
|
|
Third Quarter
|
50.84
|
|
28.10
|
|
Fourth Quarter
|
33.77
|
|
16.37
|
|
|
|
|
|
2009
|
First Quarter
|
38.57
|
|
28.20
|
|
Second Quarter
|
44.55
|
|
30.97
|
|
Third Quarter
|
48.00
|
|
35.14
|
|
Fourth Quarter
|
54.78
|
|
41.87
|
|
|
|
|
|
2010
|
First Quarter
|
50.17
|
|
40.24
|
|
Second Quarter
|
54.06
|
|
46.40
|
|
Third Quarter
|
56.66
|
|
47.09
|
|
Fourth Quarter
|
63.80
|
|
54.28
|
|
|
|
|
|
2011
|
First Quarter
|
60.80
|
|
53.12
|
|
Second Quarter
|
63.95
|
|
51.78
|
|
Third Quarter
|
66.63
|
|
53.74
|
|
Fourth Quarter
|
63.30
|
|
50.06
|
|
|
|
|
|
2012
|
First Quarter
|
57.47
|
|
48.75
|
|
Second Quarter
|
50.37
|
|
39.34
|
|
Third Quarter
|
54.81
|
|
40.70
|
|
Fourth Quarter
|
54.25
|
|
44.85
|
|
|
|
|
|
2013
|
First Quarter
|
47.09
|
|
35.91
|
|
Second Quarter
|
37.45
|
|
22.22
|
|
Third Quarter
|
30.43
|
|
22.90
|
|
Fourth Quarter
|
26.52
|
|
20.39
|
|
|
|
|
|
2014
|
First Quarter
|
27.73
|
|
21.27
|
|
Second Quarter
|
26.45
|
|
22.04
|
|
Third Quarter
|
27.43
|
|
21.36
|
|
Fourth Quarter
|
21.94
|
|
16.59
|
|
|
|
|
|
2015
|
First Quarter
|
22.94
|
|
17.67
|
|
Second Quarter
|
20.82
|
|
17.76
|
|
Third Quarter
|
17.85
|
|
13.04
|
|
Fourth Quarter
|
16.90
|
|
13.08
|
|
|
|
|
|
2016
|
First Quarter
|
20.86
|
|
12.47
|
|
Second Quarter
|
27.70
|
|
19.53
|
|
Third Quarter
|
31.32
|
|
25.45
|
|
Fourth Quarter
|
25.96
|
|
18.99
|
|
|
|
|
|
2017
|
First Quarter
|
25.57
|
|
21.14
|
|
Second Quarter (through the Pricing Date)
|
24.57
|
|
21.10
|
The iShares
®
Nasdaq Biotechnology ETF
In this section, Reference Stock Issuer refers to iShares
®
Nasdaq Biotechnology ETF (the “IBB”), Reference Stock refers to the shares of the IBB, and the Underlying Index refers to the NASDAQ Biotechnology Index
®
.
This Reference Stock is an investment portfolio maintained and managed by BFA. The Reference Stock trades on the NASDAQ Stock Market
®
(“NASDAQ”) under the ticker symbol “IBB.”
“iShares
®
” and BlackRock
®
are registered trademarks of BlackRock
®
, Inc. and its affiliates (“BlackRock
®
”). BlackRock
®
has licensed certain trademarks and trade names of BlackRock
®
for our use. The Notes are not sponsored, endorsed, sold, or promoted by BlackRock
®
, or by any of the iShares
®
funds. Neither BlackRock
®
nor the iShares
®
funds make any representations or warranties to the owners of the Notes or any member of the public regarding the advisability of investing in the Notes. Neither BlackRock
®
nor the iShares
®
funds shall have any obligation or liability in connection with the registration, operation, marketing, trading, or sale of the Notes or in connection with our use of information about the iShares
®
funds.
iShares consists of numerous separate investment portfolios, including the Reference Stock. The Reference Stock seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Underlying Index. The Reference Stock typically earns income from dividends from securities held by the Reference Stock. These amounts, net of expenses and taxes (if applicable), are passed along to the Reference Stock’s shareholders as “ordinary income.” In addition, the Reference Stock realizes capital gains or losses whenever it sells securities. Net long-term capital gains are distributed to shareholders as “capital gain distributions.” However, because the component return of the Reference Stock will be calculated based only on the share price of the Reference Stock, you will not receive any benefit from or be entitled to receive income, dividend, or capital gain distributions from the Reference Stock or any equivalent payments.
The Underlying Index: The NASDAQ Biotechnology Index
®
The NASDAQ Biotechnology Index
®
is calculated, published and disseminated by NASDAQ OMX, and is designed to measure the performance of NASDAQ-listed companies that are classified according to the Industry Classification Benchmark as either biotechnology or pharmaceuticals which also meet other eligibility criteria determined by NASDAQ OMX. We have derived all information relating to the NASDAQ Biotechnology Index
®
, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information. Such information reflects the policies of and is subject to change by, NASDAQ OMX. Neither we nor any of our affiliates has undertaken any independent review or due diligence of such information. NASDAQ OMX has no obligation to continue to publish, and may discontinue or suspend the publication of the NASDAQ Biotechnology Index
®
at any time.
The NASDAQ Biotechnology Index
®
is calculated under a modified capitalization-weighted methodology. On November 1, 1993, the NASDAQ Biotechnology Index
®
began with a base of 200.00. To be eligible for inclusion in the NASDAQ Biotechnology Index
®
, a security must be listed on The NASDAQ Stock Market. Eligibility for the NASDAQ Biotechnology Index
®
is limited to specific security types only. The security types eligible for the NASDAQ Biotechnology Index
®
include common stocks, ordinary shares, American Depositary Receipts, and shares of beneficial interest or limited partnership interests. Securities must meet the following criteria:
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the security’s U.S. listing must be exclusively on the NASDAQ Global Select Market or the NASDAQ Global Market (unless the security was dually listed on another U.S. market prior to January 1, 2004 and has continuously maintained such listing);
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the issuer of the security must be classified according to the Industry Classification Benchmark as either Biotechnology or Pharmaceuticals;
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the security may not be issued by an issuer currently in bankruptcy proceedings;
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the security must have a market capitalization of at least $200 million;
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the security must have an average daily trading volume of at least 100,000 shares;
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the issuer of the security may not have entered into a definitive agreement or other arrangement which would likely result in the security no longer being eligible for inclusion in the NASDAQ Biotechnology Index
®
;
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the issuer of the security may not have annual financial statements with an audit opinion that is currently withdrawn; and
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the issuer of the security must have “seasoned” on NASDAQ, the New York Stock Exchange or NYSE MKT (generally, a company is considered to be seasoned if it has been listed on a market for at least three full months, excluding the first month of initial listing).
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Annual Evaluation
The securities composing the NASDAQ Biotechnology Index
®
are evaluated annually in December. Securities currently within the NASDAQ Biotechnology Index
®
must continue to meet the above eligibility criteria. The securities included in the NASDAQ Biotechnology Index
®
not meeting the maintenance criteria are removed. Index-eligible securities not currently in the NASDAQ Biotechnology Index
®
are added. Generally, the list of additions and deletions is publicly announced with a press release in early December. If at any time during the year other than at the review a security in the NASDAQ Biotechnology Index
®
no longer meets the criteria or is otherwise determined to have become ineligible, the security is removed from the NASDAQ Biotechnology Index
®
and will not be replaced.
Index Maintenance
In addition to the annual evaluation, the securities in the NASDAQ Biotechnology Index
®
are monitored by NASDAQ OMX with respect to changes in total shares outstanding arising from corporate events such as stock dividends, stock splits, certain spin-offs and rights issuance, or other corporate actions. NASDAQ OMX has adopted the following weight adjustment procedures with respect to such changes. Changes in total shares outstanding arising from stock splits, stock dividends, or spin-offs are generally made to the NASDAQ Biotechnology Index
®
on the evening prior to the effective date of such corporate action. If the change in total shares outstanding arising from other corporate actions is greater than or equal to 10%, the change will be made as soon as practicable. Otherwise, if the change in total shares outstanding is less than 10%, then all such changes are accumulated and made effective at one time on a quarterly basis after the close of trading on the third Friday in each of March, June, September, and December. In either case, the index share weights for such securities are adjusted by the same percentage amount by which the total shares outstanding have changed in such securities.
Index Rebalancing
The NASDAQ Biotechnology Index
®
employs a modified market capitalization weighting methodology. At each quarter, the NASDAQ Biotechnology Index
®
is rebalanced such that the maximum weight of any security in the NASDAQ Biotechnology Index
®
does not exceed 8% and no more than 5 securities are at that cap. The excess weight of any capped security is distributed proportionally across the remaining securities. If after redistribution, any of the 5 highest ranked securities are weighted below 8%, these securities are not capped. Next, any remaining securities in excess of 4% are capped at 4% and the excess weight is redistributed proportionally across the remaining securities. The process is repeated, if necessary, to derive the final weights.
The modified market capitalization weighting methodology is applied to the capitalization of each security in the NASDAQ Biotechnology Index
®
, using the last sale price of the security at the close of trading on the last trading day in February, May, August and November and after applying quarterly changes to the total shares outstanding. The index share weights are then calculated by multiplying the weight of the security derived above by the new market value of the NASDAQ Biotechnology Index
®
and dividing the modified market capitalization for each security in the NASDAQ Biotechnology Index
®
by its corresponding last sale price. The changes are effective after trading on the third Friday in March, June, September and December.
Historical Information of the
iShares
®
Nasdaq Biotechnology ETF
The following table sets forth the high and low closing prices of the Reference Stock from the first quarter of 2008 through the Pricing Date.
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High (in $)
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Low (in $)
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2008
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First Quarter
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83.25
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69.80
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Second Quarter
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80.89
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75.68
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Third Quarter
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90.32
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77.52
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Fourth Quarter
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80.74
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60.64
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2009
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First Quarter
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74.49
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59.05
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Second Quarter
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72.98
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63.11
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Third Quarter
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83.61
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69.30
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Fourth Quarter
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82.55
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73.31
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2010
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First Quarter
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93.38
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81.63
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Second Quarter
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92.70
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77.52
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Third Quarter
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87.02
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75.69
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Fourth Quarter
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94.72
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85.73
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2011
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First Quarter
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100.16
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92.67
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Second Quarter
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109.50
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100.89
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Third Quarter
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109.60
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84.77
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Fourth Quarter
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104.35
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89.12
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2012
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First Quarter
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124.09
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104.87
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Second Quarter
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129.98
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117.74
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Third Quarter
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144.74
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129.47
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Fourth Quarter
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147.18
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128.41
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2013
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First Quarter
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159.93
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141.62
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Second Quarter
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186.18
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159.48
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Third Quarter
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211.33
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178.26
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Fourth Quarter
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227.24
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194.50
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2014
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First Quarter
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273.23
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223.82
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Second Quarter
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257.03
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215.37
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Third Quarter
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279.29
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243.07
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Fourth Quarter
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317.20
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255.27
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2015
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First Quarter
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366.52
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300.81
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Second Quarter
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383.25
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333.66
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Third Quarter
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398.00
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289.48
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Fourth Quarter
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343.11
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298.76
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2016
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First Quarter
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326.96
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244.04
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Second Quarter
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288.52
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241.33
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Third Quarter
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300.08
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260.08
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Fourth Quarter
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292.64
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247.57
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2017
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First Quarter
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302.49
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270.01
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Second Quarter (through the Pricing Date)
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299.38
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287.42
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SPDR
®
S&P
®
Bank ETF
In this section, Reference Stock Issuer refers to the SPDR
®
S&P
®
Bank ETF (the “KBE”), Reference Stock refers to the shares of the KBE, and Underlying Index refers to the S&P Banks Select Industry
TM
Index.
The Reference Stock is an investment portfolio maintained and managed by SSFM. The inception date of the Reference Stock is November 8, 2005. The Reference Stock is an exchange traded fund that trades on NYSE Arca under the ticker symbol “KBE.”
Information provided to or filed with the SEC by the SPDR
®
Series Trust (“SPDR”) under the Securities Exchange Act of 1934 can be located by reference to its Central Index Key, or CIK, 1064642 through the SEC’s website at http://www.sec.gov. Additional information about SSFM and the Reference Stock may be obtained from other sources including, but not limited to, press releases, newspaper articles and other publicly disseminated documents. We have not made any independent investigation as to the accuracy or completeness of such information.
The Reference Stock seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Underlying Index. The Underlying Index represents the banks industry portion of the S&P TMI. The Reference Stock is composed of companies that are publicly traded money centers and leading regional banks or thrifts.
The Reference Stock utilizes a “sampling” investment approach in attempting to track the performance of the Underlying Index. The Reference Stock typically invests in substantially all of the securities which comprise the Underlying Index in approximately the same proportions as the Underlying Index. The Reference Stock will normally invest at least 80% of its total assets in the common stocks that comprise the Underlying Index.
S&P Banks Select Industry
TM
Index
The Underlying Index is an equal-weighted index that is designed to measure the performance of the banks portion of the S&P TMI. The S&P TMI includes all U.S. common equities listed on the NYSE (including NYSE Arca), the NYSE MKT, the NASDAQ Global Select Market, and the NASDAQ Capital Market. Each of the component stocks in the underlying index is a constituent company within the banks industry portion of the S&P TMI.
To be eligible for inclusion in the underlying index, companies must be in the S&P TMI and must be included in the relevant Global Industry Classification Standard (GICS) industry. The GICS was developed to establish a global standard for categorizing companies into sectors and industries. In addition to the above, companies must satisfy one of the two following combined size and liquidity criteria:
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float-adjusted market capitalization above US$500 million and float-adjusted liquidity ratio above 90%; or
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float-adjusted market capitalization above US$400 million and float-adjusted liquidity ratio above 150%.
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All U.S. companies satisfying these requirements are included in the underlying index. The total number of companies in the underlying index should be at least 35. If there are fewer than 35 stocks, stocks from a supplementary list of highly correlated sub-industries that meet the market capitalization and liquidity thresholds above are included in order of their float-adjusted market capitalization to reach 35 constituents. Minimum market capitalization requirements may be relaxed to ensure there are at least 22 companies in the underlying index as of each rebalancing effective date.
For a description of additional eligibility factors, please see the discussion above in the subsection, “SPDR
®
S&P
®
Oil & Gas Exploration & Production ETF— The Underlying Index: S&P
®
Oil & Gas Exploration & Production Select Industry
®
Index.”
Historical Information of the
SPDR
®
S&P
®
Bank ETF
The following table sets forth the high and low closing prices of the Reference Stock from the first quarter of 2008 through the Pricing Date.
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High (in $)
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Low (in $)
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2008
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First Quarter
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47.34
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37.42
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Second Quarter
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42.66
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28.59
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Third Quarter
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39.75
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23.92
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Fourth Quarter
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35.86
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18.30
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2009
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First Quarter
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22.34
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9.31
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Second Quarter
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21.56
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14.00
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Third Quarter
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24.08
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16.91
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Fourth Quarter
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24.44
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20.68
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2010
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First Quarter
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26.07
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21.71
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Second Quarter
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28.72
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22.89
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Third Quarter
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25.29
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21.39
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Fourth Quarter
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26.10
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22.10
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2011
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First Quarter
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27.64
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25.30
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Second Quarter
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26.43
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22.99
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Third Quarter
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24.44
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17.09
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Fourth Quarter
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20.49
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16.73
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2012
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First Quarter
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24.44
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20.29
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Second Quarter
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24.10
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20.25
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Third Quarter
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24.63
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21.12
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Fourth Quarter
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24.40
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22.29
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2013
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First Quarter
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27.23
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24.57
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Second Quarter
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28.84
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25.47
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Third Quarter
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31.98
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29.09
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Fourth Quarter
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33.18
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29.54
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2014
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First Quarter
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34.67
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30.78
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Second Quarter
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34.50
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31.03
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Third Quarter
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33.87
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31.24
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Fourth Quarter
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33.92
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30.05
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2015
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First Quarter
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34.15
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29.99
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Second Quarter
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37.20
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33.44
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Third Quarter
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37.06
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31.61
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Fourth Quarter
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36.59
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32.93
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2016
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First Quarter
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33.05
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26.52
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Second Quarter
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33.64
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28.19
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Third Quarter
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34.23
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29.27
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Fourth Quarter
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44.16
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33.21
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2017
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First Quarter
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46.56
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41.67
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Second Quarter (through the Pricing Date)
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43.74
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41.01
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