Abstract:
Methods and systems for offering and servicing financial instruments create a way for issuers to offer financial instruments with incentives to holders to not voluntarily convert or redeem such instruments so that issuers maintain greater flexibility and control over the maturity date of the instrument and the manner in which it is settled. Additionally, some embodiments of this invention provide issuers of convertible and exchangeable financial instruments with the ability to deduct an amount for tax purposes that approximates the true economic cost of the financial instrument.

Description:
CROSS REFERENCE TO RELATED APPLICATION  
       [0001]    This claims the benefit of U.S. Provisional Patent Application No. 60/311,574, filed Aug. 10, 2001, which is hereby incorporated by reference in its entirety. 
     
    
     
       BACKGROUND OF THE INVENTION  
         [0002]    This invention relates to convertible and exchangeable financial instruments (e.g., debt instruments, preferred instruments, trust preferred instruments, warrants, certain insurance contracts, and suitable derivatives thereof, or any security backed by any of the above) and methods and systems for offering and servicing the same.  
           [0003]    A convertible instrument, which may be converted into something of value (e.g., common stock), may be referenced throughout this application. The scope of this invention may also include exchangeable instruments which may be exchanged for something of value.  
           [0004]    A common financial instrument, for example, is a convertible bond which can be converted by holders into a fixed or formula amount of shares of the issuer. At issuance, the value of the bond is typically greater than the value of the fixed number of shares that the bond is convertible into. For example, a bond may be issued for $1,000 with a right to convert into ten shares of the issuer&#39;s common stock, at a time when the current market value per share is $83. Ordinarily, under these terms, the stock must appreciate to at least $100 per share before it would be economically rational for the holder to exercise its right to convert the bond. A convertible bond of this kind is described as having a roughly 20 percent conversion premium, because the stock must appreciate about 20 percent (i.e., $17) before the conversion right has intrinsic value.  
           [0005]    In the example of the convertible bond, because the conversion right provides an investor with a possible appreciation in value that the fixed rate debt instrument of the issuer does not provide, the interest rate on a convertible bond may be lower than the interest rate on a fixed rate debt instrument. Economically, the conversion right is an option to acquire issuer stock, and the lower rate of interest compensates the issuer for providing this option. Convertible bonds have historically provided issuers with the ability to deduct for tax purposes only this lower stated amount of interest, which is often considerably below the true economic cost of the financial instrument.  
           [0006]    Convertible instruments generally also provide that the issuer may optionally redeem the instrument prior to its stated maturity, subject to the holder&#39;s conversion rights. If at the time of the optional redemption the value of the stock has risen above the value of the debt, the holder generally will exercise its conversion right so that it receives the stock rather than the call redemption amount. A holder may also have the right to require an issuer to redeem the bond under specified circumstances.  
           [0007]    Issuers prefer to have flexibility and control over their capital structure, including, for example, the time and manner in which a convertible financial instrument is settled. That flexibility and control is diminished when a holder exercises its conversion or redemption right before maturity and unrelated to an issuer&#39;s call of the financial instrument. Convertible financial instruments, and methods and systems for offering and servicing the same, which provide incentives to holders to not voluntarily convert such instruments, absent an issuer call, allow issuers to maintain greater flexibility and control over the maturity date of the instrument and the manner in which it is settled, have been used before.  
           [0008]    Issuers also prefer to deduct an amount for tax purposes that approximates the true economic cost of the financial instrument. The tax law can limit an issuer&#39;s ability to deduct the true economic cost of a financial instrument under certain circumstances. It would be desirable, therefore, to provide convertible financial instruments, and methods and systems for offering and servicing the same, that provide issuers with the ability to deduct an amount for tax purposes that more closely approximates the true economic cost of the financial instrument.  
         SUMMARY OF THE INVENTION  
         [0009]    It is therefore, in some embodiments, an object of this invention to provide convertible financial instruments, and methods and systems for offering and servicing the same, which provide an incentive to holders to keep the instruments outstanding so that issuers maintain flexibility and control over the maturity date of the instrument and the manner in which it is settled.  
           [0010]    In some embodiments, an object of this invention is to provide convertible financial instruments, and methods and systems for offering and servicing the same, which provide issuers with the ability to deduct an amount for tax purposes that approximate the true economic cost of the financial instrument.  
           [0011]    Such financial instruments may be based on, for example, long-term zero coupon notes (e.g., Liquid Yield Option™ Notes (“LYONs™”)), cash pay or partial cash pay convertible bonds issued at a discount, debt instruments, preferred instruments, trust preferred instruments, warrants, certain insurance contracts, suitable derivatives thereof, or any security backed by any of the above). The issuer of the financial instrument may make contingent payments (which may include, for example, contingent interest, preferred distributions, contingent principal, dividends, and other pay-outs) to the holder in some circumstances, which may be based on formulae calculations, beginning after a predetermined time period since issuance. For example, this may occur when the trading value of the convertible instrument exceeds a predetermined value such as, for example, a certain percentage of the accreted value of the convertible instrument, or, for example, another circumstance that may trigger a contingent payment may be when the price of another financial instrument (e.g., the underlying security, the reference security, etc.) is below, higher or equal to a predetermined value. There may be restraints on the value of such contingent payments imposed at the time the convertible instrument was issued. For example, the payments may be capped at a maximum value or yield. In another example, the payments may be guaranteed to exceed a minimum value or yield. 
       
    
    
     BRIEF DESCRIPTION OF THE DRAWINGS  
       [0012]    The above and other objects and advantages of the invention will be apparent upon consideration of the following detailed description, taken in conjunction with the accompanying drawings, in which like reference characters refer to like parts throughout, and in which:  
         [0013]    FIGS.  1 - 3  are generalized flowcharts of illustrative steps involved in providing a company with capital in accordance with some embodiments of the present invention;  
         [0014]    [0014]FIG. 4 illustrates the information flow that occurs in issuing and servicing financial instruments, in accordance with some embodiments of the present invention;  
         [0015]    [0015]FIG. 5 is illustrative of an exemplary system for implementing the method in accordance with some embodiments of the present invention;  
         [0016]    [0016]FIG. 6 is a flowchart of illustrative steps involved in providing a company with capital in accordance with some embodiments of the present invention;  
         [0017]    [0017]FIG. 7 is a cross-sectional view of a magnetic data storage medium encoded with a set of machine-executable instructions for performing the methods in accordance with some embodiments of the present invention; and  
         [0018]    [0018]FIG. 8 is a cross-sectional view of an optically readable data storage medium encoded with a set of machine executable instructions for performing the methods in accordance with some embodiments of the present invention. 
     
    
     DETAILED DESCRIPTION OF THE INVENTION  
       [0019]    The present invention is a convertible or exchangeable contingent payment financial instrument (e.g., short or long-term zero coupon notes (including, for example, Liquid Yield Option™ Notes(“LYONs™”)), cash pay or partial cash pay convertible bonds, debt instruments, preferred instruments, trust preferred instruments, warrants, certain insurance contracts, and suitable derivatives thereof, or any securities backed by any of the above), and systems and methods for offering and servicing the same. The issuer of a financial instrument may make contingent payments to the holder under certain circumstances or according to predetermined formulae, such as, if the trading value of the financial instrument or any underlying security or index amount is equal to, greater than, or less than, a predetermined value such as, for example, a percentage of the accreted value.  
         [0020]    In some embodiments, the issuer may make contingent payments after a predetermined period of delay since issuance. In some embodiments, for example, the predetermined period of delay since issuance may be greater than one financial quarter since issuance. The period of time such circumstances and formulae are monitored may, in some embodiments, be less than the predetermined period of delay after which contingent payments are made. In some embodiments where the predetermined period of delay is greater than one financial quarter, for example, the period of time such circumstances and formulae are monitored may be one month.  
         [0021]    In some embodiments, an issuer may make contingent payments to holders equal to the value of dividends paid out by the issuer on the underlying security under certain circumstances. “Contingent payment” is inclusive of any additional value to a holder whether paid at the present time or over time, (e.g., contingent interest, contingent principal, accretion of interest, contingent servicing rights, or other contingent rights). In some embodiments, the contingent payment may tend to provide some holders with incentives that may tend to make such holder more likely to keep the instrument outstanding.  
         [0022]    Moreover, some embodiments may provide some issuers with an increased amount of flexibility and control over the period of time the instrument remains outstanding. In some embodiments, the contingent payments may be based on, or equal to, (1) the dividends a holder of the underlying security would normally receive, (2) an index amount, (3) a reference security or index, (4) a predetermined fixed amount, or (5) a pool of securities or indices, or other market calculations or determinations, or any combination thereof. Increases or decreases in dividends (as compared to the announced dividend policy of the underlying security at the time of issue) may be reflected in the contingent payments to holders. In some embodiments, the timing and amount of contingent payment may be dependent on the trading price or yield of the financial instrument, the trading price or yield of a liability of the issuer, or any underlying security or index, or derivative thereof. For example, in some embodiments, the amount of the contingent payment may depend on the value of, e.g., a specified class of the issuer&#39;s capital stock or of, e.g., a specified debt security of the issuer. In some embodiments, the timing and amount of contingent payment may depend on the trading price or yield of a selected security issued by a disinterested party unaffiliated with the issuers of the financial instrument or underlying reference. The issuer of a contingent payment financial instrument may be, for example, a publicly-traded, widely-held company sometimes referred to herein as the issuer.  
         [0023]    In some embodiments, the contingent payment financial instrument may be, for example, an instrument convertible into a number of shares of the issuer&#39;s stock (e.g., common or preferred) (the “conversion shares”), with an initial conversion premium of, for example, approximately 20 percent. The instrument may be callable by the issuer at its “accreted value” (the issue price plus an accrued “discount”), after a predetermined period of time and subject to a holder&#39;s conversion right.  
         [0024]    In some embodiments, the contingent payment financial instrument is, for example, a convertible debt instrument. If the instrument is callable at any time after the first five years, holders may have the right to require the issuer to redeem the instrument at its accreted value on each fifth anniversary of the issue date, and upon a change in control of the issuer. The difference between the issue price and principal amount of the contingent payment debt instrument will accrue by a specified percentage. A three percent yield, for example, may be a reasonable rate under some market conditions. Beginning at a predetermined period of delay (e.g., five years) after issuance of the contingent payment instruments, or at the end of a non- call period, and for each period (e.g., semi-annual, annual, etc.) thereafter, or under circumstances or formulae calculations, the issuer may pay contingent interest if the trading value of the instrument exceeds a specified percentage of the accreted value of each instrument for some predetermined number of consecutive days (or any other specified period) immediately preceding the first day of the contingency monitoring period. In some embodiments, the specified percentage of the accreted value may change, for example, by a predetermined percentage on a periodic basis. Also, in some embodiments, the amount of the contingent payment may change based upon a contingency with multiple triggers that may be triggered at specified predetermined times. Other embodiments may have a contingency with multiple triggers that may be triggered at any time. In some embodiments, contingent payments may be triggered by only one trigger or by more than one trigger. In some embodiments, a contingency may be any event and may be associated with the financial instrument paying such contingent payments. In some embodiments, contingent payments may be based on several contingencies, each with their own triggers.  
         [0025]    Some embodiments may have a contingency based upon a security issued by a non-interested party unaffiliated with the issuer of the instrument or the underlying reference. Some embodiments may have a contingency based upon the trading price or yield of a liability of the issuer of the instrument. For example, in some embodiments, such a liability may include bonds, fees, notes, loans, or debentures of the issuer of the instrument. In some embodiments, the trigger level may be set at a predetermined percentage, for example greater than 100%, of the contingent payment debt instrument&#39;s trading value. In some embodiments, the trigger level may be set based upon a multiple of a yield of a security. Another example of a trigger, in some embodiments, is the value of the prevailing market rate for another financial instrument, whether or not issued by the same issuer, by market price, by yield, by formula, or at the discretion of a calculation agent. Another example of a trigger level, in some embodiments, is the amount of the prevailing market price or yield of a class of the issuer&#39;s capital stock or the value of a financial market index (e.g., Standard &amp; Poor&#39;s 500). Some embodiments may have a trigger level set below, at, or above a predetermined value of the underlying security. Some embodiments may have a trigger level set below, at, or above a formula or reference amount, such as a predetermined percentage of accreted value.  
         [0026]    In some embodiments, the amount of a contingent payment with respect to a contingent payment financial instrument, for example, may be an amount equal to the cash dividends payable from time to time on the conversion shares, for example, of a convertible bond during the applicable interest period, if any. In some embodiments, there may be minimum guaranteed amounts. In some embodiments, these minimum guaranteed amounts may be fixed values or minimum yields. For example, in some embodiments, the amount of contingent interest payable may be no less than 25 basis points multiplied by the trading value of the contingent payment financial instrument (the “Base Amount”) or any other base amount formula or index. In some embodiments, the amount of the contingent payments may be capped at a fixed value or yield. For example, in some embodiments, the amount of contingent payment may be required to be less than a predetermined percentage of the trading value of the contingent payment financial instrument.  
         [0027]    In some embodiments, investors may receive any contingent payments without reduction to the accreted value (including principal liquidation preference, par, or other amounts) of the contingent payment financial instrument, or other offset. In some embodiments, the accreted value may be reduced by some portion of the contingent payment paid. In some embodiments, a holder may not receive contingent payments currently but instead may receive those contingent payment on a later date. In some embodiments, for example, the contingent payment may be made in cash, shares of the underlying financial instrument, shares of other financial instruments, or a combination thereof.  
         [0028]    In some embodiments, a projected payment schedule is calculated which may project the timing and amount of contingent payments for various purposes, including but not limited to, tax purposes. Based upon the terms of the issuance of the financial instrument such as, for example, in the case of a contingent payment convertible debt instrument, the issue price, maturity date, conversion premium, stated yield, and comparable yield, the projected payment schedule determines the stock price growth rate or dividend yield (or other formulae determining the contingent payment) and the timing of such payments that is necessary to produce a comparable yield equal to the non-contingent debt rate of the issuer. (See Table 1 which illustrates a projected payment schedule.)  
         [0029]    The following terms are the underlying terms for the example analyses of Tables 1, 2, and  3 :  
                                                       Issue Price   $638.00           Par Value   $1000.00           Yield   1.50%           Maturity   30           Conversion Premium   30.00%           Conversion Ratio   16.3769           Call Protection (in Years)   5           Contingent Intrest Trigger   120.00%           Comparable Yield   7.00%                      
 
         [0030]    [0030]                                                                                   TABLE 1                           ACME Company-Example 1       Projected Contingent Payments Schedule       Projected Payments Schedule       Deriving the Projected Payment Schedule: Stock Price CAGR (to Create) A Contingent Interest IRR =       Comparable Yield                        Stock Price CAGR:   7.633%   LYONs Stated Yield:   1.50%           Stock Price at Issue:   $30.00   Issue Price Per LYON:   $638.70           Quaterly Dividend Per Share:   $0.075   Contingent Payment   120.00%                   Trigger:           Assumed Dividend Growth:   5.00%   Comparable Yield:   7.00%                                    Beg.       End                                   Semi-   Period   Plus:   Period               Projected               annual   Accr.   Interest   Accr.   LYONs Mkt   Trigger   Dividend   Contingent   IRR       Date   Quarter   Period   Value   Accretion   Value   Price/Sh   Price   Per Share   Interest   Calculation               Jun. 30, 2001       0   638.70       638.70   39.00   46.80           638.70       Jul. 30, 2001   1                           $0.0750       —       Oct. 30, 2001   2                           $0.0750       —       Dec. 30, 2001       1   638.70   4.79   643.49   39.29   47.15           —       Jan. 30, 2002   3                           $0.0750   —   —       Apr. 30, 2002   4                           $0.0750   —   —       Jun. 30, 2002       2   643.49   4.83   648.32   39.59   47.50       —   —       Jul. 30, 2002   5                           $0.0788   —   —       Oct. 30, 2002   6                           $0.0788   —   —       Dec. 30, 2002       3   648.32   4.86   653.18   39.88   47.86       —   —       Jan. 30, 2003   7                           $0.0788   —   —       Apr. 30, 2003   8                           $0.0788   —   —       Jun. 30, 2003       4   653.18   4.90   658.08   40.18   48.22       —   —       Jul. 30, 2003   9                           $0.0827   —   —       Oct. 30, 2003   10                           $0.0827   —   —       Dec. 30, 2003       5   658.08   4.94   663.01   40.48   48.58       —   —       Jan. 30, 2004   11                           $0.0827   —   —       Apr. 30, 2004   12                           $0.0827   —   —       Jun. 30, 2004       6   663.01   4.97   667.99   40.79   48.95       —   —       Jul. 30, 2004   13                           $0.0868   —   —       Oct. 30, 2004   14                           $0.0868   —   —       Dec. 30, 2004       7   667.99   5.01   673.00   41.09   49.31       —   —       Jan. 30, 2005   15                           $0.0868   —   —       Apr. 30, 2005   16                           $0.0868   —   —       Jun. 30, 2005       8   673.00   5.05   678.04   41.40   49.68       —   —       Jul. 30, 2005   17                           $0.0912   —   —       Oct. 30, 2005   18                           $0.0912   —   —       Dec. 30, 2005       9   678.04   5.09   683.13   41.77   50.06       —   —       Jan. 30, 2006   19                           $0.0912   —   —       Apr. 30, 2006   20                           $0.0912   —   —       Jun. 30, 2006       10   683.13   5.12   688.25   43.34   50.43       —   —       Jul. 30, 2006   21                           $0.0957   —   —       Oct. 30, 2006   22                           $0.0957   —   —       Dec. 30, 2006       11   688.25   5.16   693.41   44.96   50.81       —   —       Jan. 30, 2007   23                           $0.0957   —   —       Apr. 30, 2007   24                           $0.0957   —   —       Jun. 30, 2007       12   693.41   5.20   698.91   46.64   51.19       —   —       Jul. 30, 2007   25                           $0.1005   —   —       Oct. 30, 2007   26                           $0.1005   —   —       Dec. 30, 2007       13   698.61   5.24   703.85   48.39   51.57       —   —       Jan. 30, 2008   27                           $0.1005   —   —       Apr. 30, 2008   28                           $0.1005   —   —       Jun. 30, 2008       14   703.85   5.28   709.13   50.20   51.96       —   —       Jul. 30, 2008   29                           $0.1005   —   —       Oct. 30, 2008   30                           $0.1005   —   —       Dec. 30, 2008       15   709.13   5.32   714.45   52.08   52.35       —   —       Jan. 30, 2009   31                           $0.1055   —   —       Apr. 30, 2009   32                           $0.1005   —   —       Jun. 30, 2009       16   714.45   5.36   719.81   54.04   52.74       —   —       Jul. 30, 2009   33                           $0.1108   —   (1.81)       Oct. 30, 2009   34                           $0.1108   —   (1.81)       Dec. 30, 2009       17   719.81   5.40   725.21   56.06   53.14       —   —       Jan. 30, 2010   35                           $0.1108   —   (1.81)       Apr. 30, 2010   36                           $0.1108   1.81   (1.81)       Jun. 30, 2010       18   725.21   5.44   730.65   58.16   53.54           —       Jul. 30, 2010   37                           $0.1163   1.91   (1.91)       Oct. 30, 2010   38                           $0.1163   1.91   (1.91)       Dec. 30, 2010       19   730.65   5.48   736.13   60.34   53.94           —       Jan. 30, 2011   39                           $0.1163   1.91   (1.91)       Apr. 30, 2011   40                           $0.1163   1.91   (1.91)       Jun. 30, 2011       20   736.13   5.52   741.65   62.60   54.34           —       Jul. 30, 2011   41                           $0.1222   2.00   (2.00)       Oct. 30, 2011   42                           $0.1222   2.00   (2.00)       Dec. 30, 2011       21   741.65   5.56   747.21   64.95   54.75           —       Jan. 30, 2012   43                           $0.1222   2.00   (2.00)       Apr. 30, 2012   44                           $0.1222   2.00   (2.00)       Jun. 30, 2012       22   747.21   5.60   752.81   67.38   55.16           —       Jul. 30, 2012   45                           $0.1283   2.10   (2.10)       Oct. 30, 2012   46                           $0.1283   2.10   (2.10)       Dec. 30, 2012       23   752.81   5.65   758.46   69.90   55.58           —       Jan. 30, 2013   47                           $0.1283   2.10   (2.10)       Apr. 30, 2013   48                           $0.1283   2.10   (2.10)       Jun. 30, 2013       24   758.46   5.69   764.15   72.52   55.99           —       Jul. 30, 2013   49                           $0.1347   2.21   (2.21)       Oct. 30, 2013   50                           $0.1347   2.21   (2.21)       Dec. 30, 2013       25   764.15   5.73   769.88   75.24   56.41           —       Jan. 30, 2014   51                           $0.1347   2.21   (2.21)       Apr. 30, 2014   52                           $0.1347   2.21   (2.21)       Jun. 30, 2014       26   769.88   5.77   775.65   78.06   56.84           —       Jul. 30, 2014   53                           $0.1414   2.32   (2.32)       Oct. 30, 2014   54                           $0.1414   2.32   (2.32)       Dec. 30, 2014       27   775.65   5.82   781.47   80.98   57.26           —       Jan. 30, 2015   55                           $0.1414   2.32   (2.32)       Apr. 30, 2015   56                           $0.1414   2.32   (2.32)       Jun. 30, 2015       28   781.47   5.86   787.33   84.02   57.69           —       Jul. 30, 2015   57                           $0.1485   2.43   (2.43)       Oct. 30, 2015   58                           $0.1485   2.43   (2.43)       Dec. 30, 2015       29   787.33   5.90   793.24   87.16   58.12           —       Jan. 30, 20156   59                           $0.1485   2.43   (2.43)       Apr. 30, 2016   60                           $0.1485   2.43   (2.43)       Jun. 30, 2016       30   793.24   5.95   799.19   90.43   58.56           —       Jul. 30, 2016   61                           $0.1559   2.55   (2.55)       Oct. 30, 2016   62                           $0.1559   2.55   (2.55)       Dec. 30, 2016       31   799.19   5.99   805.18   93.82   59.00           —       Jan. 30, 2017   63                           $0.1559   2.55   (2.55)       Apr. 30, 2017   64                           $0.1559   2.55   (2.55)       Jun. 30, 2017       32   805.18   6.04   811.22   97.33   59.44           —       Jul. 30, 2017   65                           $0.1637   2.68   (2.68)       Oct. 30, 2017   66                           $0.1637   2.68   (2.68)       Dec. 30, 2017       33   811.22   6.08   817.30   100.98   59.89           —       Jan. 30, 2018   67                           $0.1637   2.68   (2.68)       Apr. 30, 2018   68                           $0.1637   2.68   (2.68)       Jun. 30, 2018       34   817.30   6.13   823.43   104.76   60.34           —       Jul. 30, 2018   69                           $0.1719   2.82   (2.82)       Oct. 30, 2018   70                           $0.1719   2.82   (2.82)       Dec. 30, 2018       35   823.43   6.18   829.61   108.68   60.79           —       Jan. 30, 2019   71                           $0.1719   2.82   (2.82)       Apr. 30, 2019   72                           $0.1719   2.82   (2.82)       Jun. 30, 2019       36   829.61   6.22   835.83   112.76   61.24           —       Jul. 30, 2019   73                           %0.1805   2.96   (2.96)       Oct. 30, 2019   74                           $0.1805   2.96   (2.96)       Dec. 30, 2019       37   835.83   6.27   842.10   116.98   61.70           —       Jan. 30, 2020   75                           $0.1805   2.96   (2.96)       Apr. 30, 2020   76                           $0.1805   2.96   (2.96)       Jun. 30, 2020       38   842.10   6.32   848.42   121.36   62.17           —       Jul. 30, 2020   77                           $0.1895   3.10   (3.10)       Oct. 30, 2020   78                           $0.1895   3.10   (3.10)       Dec. 30, 2020       39   848.42   6.36   854.78   125.91   62.63           —       Jan. 30, 2021   79                           $0.1895   3.10   (3.10)       Apr. 30, 2021   80                           $0.1895   3.10   (3.10)       Jun. 30, 2021       40   854.78   6.41   861.19   130.63   63.10           —       Jul. 30, 2021   81                           $0.1990   3.26   (3.26)       Oct. 30, 2021   82                           $0.1990   3.26   (3.26)       Dec. 30, 2021       41   861.19   6.46   867.65   135.52   63.58           —       Jan. 30, 2022   83                           $0.1990   3.26   (3.26)       Apr. 30, 2022   84                           $0.1990   3.26   (3.26)       Jun. 30, 2022       42   867.65   6.51   874.16   140.60   64.05           —       Jul. 30, 2022   85                           $0.2089   3.42   (3.42)       Oct. 30, 2022   86                           $0.2089   3.42   (3.42)       Dec. 30, 2022       43   874.16   6.56   880.71   145.86   64.53           —       Jan. 30, 2023   87                           $0.2089   3.42   (3.42)       Apr. 30, 2023   88                           $0.2089   3.42   (3.42)       Jun. 30, 2023       44   880.71   6.61   887.32   151.33   65.02           —       Jul. 30, 2023   89                           $0.2194   3.59   (3.59)       Oct. 30, 2023   90                           $0.2194   3.59   (3.59)       Dec. 30, 2023       45   887.32   6.65   893.97   157.00   65.50           —       Jan. 30, 2024   91                           $0.2194   3.59   (3.59)       Apr. 30, 2024   92                           $0.2194   3.59   (3.59)       Jun. 30, 2024       46   893.97   6.70   900.68   162.88   66.00           —       Jul. 30, 2024   93                           $0.2304   3.77   (3.77)       Oct. 30, 2024   94                           $0.2304   3.77   (3.77)       Dec. 30, 2024       47   900.68   6.76   907.43   168.98   66.49           —       Jan. 30, 2025   95                           $0.2304   3.77   (3.77)       Apr. 30, 2025   96                           $0.2304   3.77   (3.77)       Jun. 30, 2025       48   907.43   6.81   914.24   175.31   66.99           —       Jul. 30, 2025   97                           $0.2419   3.96   (3.96)       Oct. 30, 2025   98                           $0.2419   3.96   (3.96)       Dec. 30, 2025       49   914.24   6.86   921.10   181.88   67.49           —       Jan. 30, 2026   99                           $0.2419   3.96   (3.96)       Apr. 30, 2026   100                           $0.2419   3.96   (3.96)       Jun. 30, 2026       50   921.10   6.91   928.00   188.69   68.00           —       Jul. 30, 2026   101                           $0.2540   4.16   (4.16)       Oct. 30, 2026   102                           $0.2540   4.16   (4.16)       Dec. 30, 2026       51   928.00   6.96   934.96   195.76   68.51           —       Jan. 30, 2027   103                           $0.2540   4.16   (4.16)       Apr. 30, 2027   104                           $0.2540   4.16   (4.16)       Jun. 30, 2027       52   934.96   7.01   941.88   203.10   69.02           —       Jul. 30, 2027   105                           $0.2667   4.37   (4.37)       Oct. 30, 2027   106                           $0.2667   4.37   (4.37)       Dec. 30, 2027       53   941.88   7.06   949.04   210.71   69.54           —       Jan. 30, 2028   107                           $0.2667   4.37   (4.37)       Apr. 30, 2028   108                           $0.2667   4.37   (4.37)       Jun. 30, 2028       54   949.04   7.12   956.16   218.60   70.06           —       Jul. 30, 2028   109                           $0.2800   4.59   (4.59)       Oct. 30, 2028   110                           $0.2800   4.59   (4.59)       Dec. 30, 2028       55   956.16   7.17   963.33   226.79   70.59           —       Jan. 30, 2029   111                           $0.2800   4.59   (4.59)       Apr. 30, 2029   112                           $0.2800   4.59   (4.59)       Jun. 30, 2029       56   963.33   7.22   970.55   235.28   71.12           —       Jul. 30, 2029   113                           $0.2940   4.81   (4.81)       Oct. 30, 2029   114                           $0.2940   4.81   (4.81)       Dec. 30, 2029       57   970.55   7.28   977.83   244.10   71.65           —       Jan. 30, 2030   115                           $0.2940   4.81   (4.81)       Apr. 30, 2030   116                           $0.2940   4.81   (4.81)       Jun. 30, 2030       58   977.83   7.33   985.17   253.24   72.19           —       Jul. 30, 2030   117                           $0.3087   5.06   (5.06)       Oct. 30, 2030   118                           $0.3087   5.06   (5.06)       Dec. 30, 2030       59   985.17   7.39   992.56   262.73   72.73           —       Jan. 30, 2031   119                           $0.2087   5.06   (5.06)       Apr, 30, 2031   120                           $0.2087   5.06   (5.06)       Jun. 30, 2031       60   992.56   7.44   1,000.00   272.57   73.27                                               (4,463.93)                                           Effective   7.00%                                           Yield                    
         [0031]    In some embodiments, amounts are calculated to determine whether the contingent payments are incidental (“incidental analysis”). For example, in the case of a contingent payment convertible debt instrument, an incidental analysis calculates the amount of contingent payments that may be made given different stock price growth rates (or other measure that would influence the amount of contingent payments to be made) in comparison to the issue price of the debt instrument (or other amount). The comparison may be calculated using varying assumptions as to the discount rate, if any. (See Table 2 which illustrates the results of an incidental analysis)  
                                 TABLE 2                       Incidental Analysis                                After-tax discount rate of 8.00%                   Stock Price CAGR   5.0%   10.0%   15.0%       NPV of Contingent Intrest Per Bond   $42.05   $69.15   $73.24       As % of Bond Issue Price ($638.70)   6.58%   10.83%   11.47%       After-tax discount rate of 10.00%       Stock Price CAGR   5.0%   10.0%   15.0%       NPV of Contingent Interest Per Bond   $28.23   $50.81   $54.50       As % of Bond Issue Price ($638.70)   4.42%   7.96%   8.53%       After-tax discount rate of 12.00%       Stock Price CAGR   5.0%   10.0%   15.0%       NPV of Contingent Interest Per Bond   $19.17   $38.06   $41.38       As % of Bond Issue Price ($638.70)   3.00%   5.96%   6.48%                  
 
         [0032]    In some embodiments, a probability analysis is conducted which determines the likelihood that a contingent payment or payments will be made (“remoteness test”). For example, in the case of a contingent payment convertible debt instrument, the remoteness test may measure the likelihood that one or more contingent payments will be made after a predetermined period of delay greater than the contingency monitoring period, given different stock price growth rates (or other measure that would influence the amount of contingent payments to be made) and stock price volatilities (or other measure that would influence the amount of contingent payments to be made). (See Table 3 which illustrates the results of an remoteness test)  
                             TABLE 3                       Remote Analysis       Assumptions                                    Convertible Instrument Premium    30.0%           Convertible Instrument Yield    1.5%           Dividend Yield    1.0%           Contingent Interest Trigger (as % of Accreted)   120%                      
 
         [0033]    Probability that Convertible Instrument Trading Price will Exceed Convertible Instrument Trigger between Year 5 and 30  
                                                             Stock Price CAGR                Volatility   7%   10%   13%   16%   19%                       20%   33%   46%   59%   70%   80%           22%   33%   44%   56%   67%   77%           24%   32%   43%   53%   64%   73%           26%   32%   41%   51%   61%   70%           28%   31%   40%   49%   58%   67%           30%   31%   47%   56%   64%                      
 
         [0034]    Systems and methods for offering and servicing financial instruments in accordance with the present invention may be described in conjunction with FIGS.  1 - 8 .  
         [0035]    [0035]FIG. 1 shows a generalized flowchart of illustrative steps involved in providing a company with capital by issuing, in this example, contingent payment debt instruments. The method starts at step  101  where a company, or other entity, issues the instrument. Furthermore, at step  101 , the original principal amount of the instrument may equal an amount based on predetermined terms.  
         [0036]    The method then proceeds to step  102 , where interest payments are calculated. At step  103 , contingent payments may be calculated if a predetermined contingency is met after a predetermined period of delay since issuance of the instrument in step  101 .  
         [0037]    Next, at step  104 , if the issuer decides to redeem the instrument, the method proceeds to step  105  to calculate the redemption price. In some embodiments, when a company decides to redeem its instrument, it may redeem some or all of the instruments issued under the same offering. Moreover, in some embodiments, if the instruments are redeemed before a pre-selected date, the system may add a premium to the redemption amount.  
         [0038]    The holder, under step  106 , may convert an instrument for the underlying security at some time before maturity. The method may either allow a conversion at any time after issue, or may require that conversions occur during an allocated period of time after issue.  
         [0039]    At step  108 , automatically evaluates whether the holder has put the security. If yes, the method, at step  109 , computes the put value.  
         [0040]    If, however, the method evaluates that the holder has not put the security at step  108 , the method proceeds to step  110 . At step  110 , if the bond has reached maturity, the method then calculates the value of the instrument under step  111 . Otherwise, the method returns to step  102 . Finally, at step  112 , the method may process a conversion or a payment to the holder for the value of the matured instruments and any additional payments due.  
         [0041]    [0041]FIG. 2 is a flowchart of illustrative steps involved in calculating interest at step  102  of FIG. 1. At step  201 , the rate of interest the issuer must pay to the holder is calculated using a predetermined interest rate. The predetermined interest rate may be applied to the original principal amount. Moreover, rather than applying a fixed rate throughout the term of the instrument, other variable or adjustable rates of interest may be used depending on the disclosure in the offering document.  
         [0042]    After determining the issuer&#39;s interest liability in step  201 , the method, at step  202 , determines whether a contingent payment is owed to the holder. If a contingent payment is owed, this method proceeds to step  203  at which the method determines the amount of contingent owed to the holder. The method then proceeds to step  204 . If, however, no contingent payment is owed to the holder at step  202 , the method proceeds to step  204 .  
         [0043]    At step  204 , the issuing company decides whether it wants to defer payments of interest. This may be decided based on predetermined terms as set forth in offering documents. If interest payments are not deferred, this method proceeds to step  210  and may pay some interest payments from at least one of steps  201  and  203  to holders. If, however, payments are to be deferred, at step  205 , it must be determined whether the issuer is qualified to defer interest payments. This determination is made using criteria initially disclosed to the holder. Step  205  evaluates the payment history of the instruments, and if certain payments are not deferred, then the method proceeds to step  210 , and pays the interest to the instrument holder.  
         [0044]    The system handling some embodiments of this invention may not use step  206 - 208 , but may provide notice of deferral at step  209 .  
         [0045]    [0045]FIG. 3 is a flowchart of illustrative steps involved in redeeming the convertible financial instrument, as shown at step  104  of FIG. 1. The method  300  may be used when, for example, the issuer decides to redeem instruments issued under one offering document. At step  301 , the issuer decides that it no longer wishes to keep the instruments outstanding and that it wants to redeem the instruments. Next, at step  302 , the method determines if contingent payments are due and if so, the amount due. At step  303 , the method calculates the current market value of underlying shares at the time of redemption plus any deferred payments. At step  304 , the method pays out the appropriate redemption amount plus contingent payment amount, as calculated at steps  302  and  303 .  
         [0046]    [0046]FIG. 4 illustrates the flow of information in a system  400  for issuing and servicing instruments. A potential holder  401  requests an offering document that describes the terms of the security. Upon receiving the offering document and purchasing an instrument, for example, from the issuer  409  or through a third party, the transfer agent  402  preferably will track the underlying reference security and service the security, for example, using the methods described in FIGS.  1 - 3 . In doing so, the transfer agent may, for example, use a computerized accounting system  403  capable of tracking the underlying reference security via data lines (network (not shown) or modem  407 ), tracking any dividend and pay-out from the underlying security, making calculations as disclosed in the offering document of the instrument, and using a printer  405  to print periodic (e.g., annual) reports and statements reporting the instrument&#39;s value, and gains to the holder for tax reporting purposes.  
         [0047]    In addition, the accounting system  403  may maintain pricing data (i.e., issue date, reference underlying instrument&#39;s price at time of issue, deferred dividends, etc.) in its mass storage system  406 . In addition to the data received through the network or modem  407 , the data may be inputted into the accounting system using keyboards  408 . The system&#39;s modem  407  and network lines may be used to transfer funds to a holder or to a third party intermediary and the printer  405  may also print checks that are delivered directly to the third party or to a third party intermediary. Finally, the transfer agent may view the data from the accounting system using a CRT  404  or reports prepared by the accounting system  403  and printed using the system&#39;s printer  405 .  
         [0048]    [0048]FIG. 5 offers some embodiments of a system  500  for implementing some methods according to the invention. A reference underlying instrument identifying unit  501  is provided to identify (e.g., by user keyboard entry) a reference underlying instrument. An attribution unit  502  is used to attribute a number of the reference underlying instrument&#39;s shares to the issuing instrument. Based on the price of the reference underlying instrument and the attributed number of reference instruments, a pricing unit  503  will establish a price for the issuing instrument.  
         [0049]    A selling unit  504  processes sales of the instrument to interested investors or buyers at the price determined by pricing unit  503 . An interest calculator  505 , throughout the term of the instrument, calculates interest due to holders on a periodic basis. Furthermore, a monitoring unit  506  tracks any dividend or pay-out of the underlying security.  
         [0050]    If during the term of the instrument, a holder decides to convert the instrument into the underlying security, a conversion value calculator  508  calculates the conversion value of the instrument. The value calculator  509  calculates the value of the instrument at the time of redemption (if the instrument is redeemed early by the issuer), and may also be used at maturity (if the instrument remains outstanding until maturity).  
         [0051]    A deferral unit  510  processes the results of interest calculator  505 , and additional interest calculator  507 , to determine if the calculated amount will be paid or deferred. If the payment amount is not deferred, payment is made by payment unit  511 . Furthermore, payment unit  511  processes and makes payment based on the results of conversion value calculator  508 , monitoring unit  506 , and value calculator  509 . Payment may be made by check printed by a printer  512  as commanded by payment unit  511 . Alternatively payment may be made via electronic transfer by modem  514 . Reports listing payments of interest, and other financial data relevant to the holder for tax reporting purposes or other reportable data are printed using printer  512 . Any such reports meant for holders preferably are printed and sent to holders periodically, and at least annually. Other reports may be required by regulatory agencies and are printed when required by the relevant regulations. Storage  513 , modems  514 , keyboards  515 , and CRT  516  are used by the separate units of system  500 , in a manner similar to that described in connection with FIG. 4.  
         [0052]    A contingent payment monitoring unit  517  may be used to monitor for satisfaction of a contingency and a contingent payment calculating unit  522  may calculate payments due holders based on predetermined criteria as set forth in the offering documents. Such predetermined criteria may include, for example, a maximum payment cap or a minimum payment guarantee. A financial debt instrument may utilize the contingent payment monitoring unit  517  to determine that a contingency was satisfied within a contingency monitoring period. The payment monitoring unit  517 , may determine that a contingency was satisfied based on a trigger, such as, for example, trading price of a financial instrument (e.g., the underlying security, the financial instrument itself, a security issued by an unaffiliated party, a liability of the issuer, a class of capital stock, etc.). The financial debt instrument then may utilize the contingent payment calculating unit  522  to determine the contingent payment amount based on, for example, trading price of a financial instrument (e.g., the underlying security, the financial instrument itself, a security issued by an unaffiliated party, a liability of the issuer, a class of capital stock, etc.).  
         [0053]    A projected payment scheduler  518  utilizes data from the reference underlying instrument identifying unit  501  and criteria used by the contingent payment monitoring unit  517 , the contingent payment calculating unit  522 , and the contingency defining unit  521  to prepare a projected payment schedule. An incidental analysis unit  519  and probability analysis unit  520  are used to determine the probability of payments and whether payments may be incidental.  
         [0054]    A contingency defining unit  521  defines a contingency that must be satisfied before a contingent payment will be paid.  
         [0055]    [0055]FIG. 6 is a flowchart of illustrative steps involved in determining whether to convert a contingent payment debt instrument in accordance with some embodiment of this invention. The method  600 , at step  601  determines whether the instrument is convertible. If not, the method ends. If it is, the method, at step  602 , computes the value of the instrument if converted. At step  603 , the method computes any contingent payments. At step  604 , the method computes the value of the debt instrument if not converted. At  605 , the method determines whether the continuation value (including contingent payments) is less than the conversion value. If so, a signal to convert is generated at step  606 . If not, the method ends.  
         [0056]    [0056]FIG. 7 presents a cross section of a magnetic data storage medium  700  which can be encoded with a machine executable program that can be carried out by a system such as system  400  of FIG. 4 or system  500  of FIG. 5. Medium  700  can be floppy diskette or hard disk, having a suitable substrate  701 , which may be conventional, and a suitable coating  702 , which may be conventional, on one or both sides, containing magnetic domains (not visible) whose polarity or orientation can be altered magnetically. Medium  700  may also have an opening (not shown) for receiving the spindle of a disk drive or other data storage device.  
         [0057]    The magnetic domains of coating  702  of medium  700  are polarized or oriented so as to encode, in manner which may be conventional, a machine-executable program such as that described above in connection with FIGS.  1 - 3  and FIG. 6, for execution by a system such as system  400  of FIG. 4 or system  500  of FIG. 5.  
         [0058]    [0058]FIG. 8 shows a cross section of an optically- readable data storage medium  800  which also can be encoded with such a machine-executable program, which can be carried out by a system such as system  400  of FIG. 4 or system  500  of FIG. 5. Medium  800  can be a conventional compact disk read only memory (CD-ROM) or a rewritable medium such as a CD-R or CD-RW disk or a magneto-optical disk which is optically readable and magneto-optically writeable. Medium  800  preferably has a suitable substrate  801 , which may be conventional, and a suitable coating  802 , which may be conventional, usually on one side of substrate  801 .  
         [0059]    In the case of a CD-ROM, as is well known, coating  802  is reflective and is impressed with a plurality of pits  803  to encode the machine-executable program. The arrangement of pits is read by reflecting laser light off the surface of coating  802 . A protective coating  804 , which preferably is substantially transparent, is provided on top of coating  802 .  
         [0060]    In the case of magneto-optical disk, as is well known, coating  802  has no pits  803 , but has a plurality of magnetic domains whose polarity or orientation can be changed magnetically when heated above a certain temperature, as by a laser (not shown). The orientation of the domains can be read by measuring the polarization of laser light reflected from coating  802 . The arrangement of the domains encodes the program as described above.  
         [0061]    Thus, a convertible financial instrument with contingent payments, and systems and methods for offering and servicing the same are provided. One skilled in the art will appreciate that the present invention can be practiced by other than the described embodiments, which are presented for purposes of illustration and not of limitation.