The information in this preliminary prospectus supplement is not complete and may be changed. A registration statement relating to these securities has been filed with the securities and exchange commission and declared effective. This preliminary prospectus supplement and the accompanying prospectus are not an offer to sell these securities and are not a solicitation to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED JUNE 4, 2004
PROSPECTUS SUPPLEMENT
(To Prospectus dated November 17, 2003)
$[ ] Select Notes Trust LT 2004-1 Issuer |
The Certificates, which will be issued in book-entry form only, will represent beneficial ownership interests in Select Notes Trust LT 2004-1. The assets of the Trust will include ten publicly issued investment grade rated long term corporate debt securities, each as described herein, in an initial aggregate principal amount of $[ ] and $[ ] maturity amount of [ ] STRIPS due [ ]. The Certificates will evidence the right of the holder thereof to receive (i) monthly distributions of interest on the distribution dates described herein (except as otherwise provided herein) and (ii) distributions of principal from principal payments on the corporate debt securities and [[ ] STRIPS] held by the Trust on the dates such payments are received by the Trustee. Except as otherwise provided herein, Certificateholders will receive the return of their certificate principal balance from principal payments on the corporate debt securities on their maturity dates, which occur from [ ] to [ ] as described herein and from the payment on the [[ ] STRIPS] on [ ]. The Certificates currently have no trading market and are not insured or guaranteed by any governmental agency. The Certificates will represent beneficial ownership interests in the Trust only and do not represent an interest in or an obligation of the Trustor, the U.S. Bank Trust National Association or any of their respective affiliates.
Distributions of interest on the Certificates are expected to be made at an initial pass-through rate of [ ]% per annum. The pass-through rate on the Certificates is subject to adjustment as described herein.
You should review the information in “Risk Factors” on page S-7 of this prospectus supplement and on page 5 in the accompanying prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the Certificates or passed upon the adequacy or accuracy of this prospectus supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense.
Price to Public | Underwriting Discount | Proceeds to Trust (before expenses) | |||||||||||
Per Certificate | $ 1,000 | $[ ] | $[ ] | ||||||||||
Total | $[ ] | $[ ] | $[ ] | ||||||||||
Application has been made to list the Certificates on the American Stock Exchange (“AMEX”) under the symbol “SXN.F.” There can be no assurance that the Certificates, once listed, will continue to be eligible for trading on the AMEX. It is a condition to the issuance of the Certificates that the Certificates are rated at least “[ ]” by Standard & Poor’s Ratings Services.
Subject to the satisfaction of certain conditions, the underwriters will purchase the Certificates from the Trust at the direction of Structured Obligations Corporation. See “Underwriting” herein. The Certificates will be issued in book-entry form only on or about [ ], 2004.
Edward D. Jones & Co., L.P. | ABN AMRO Financial Services, Inc. |
[ ], 2004
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the Certificates in two separate documents that progressively provide more detail: (a) the accompanying prospectus, which provides general information, some of which may not apply to your series of Certificates and (b) this prospectus supplement, which describes the specific terms of your series of Certificates.
For complete information about the Certificates, read both this prospectus supplement and the prospectus. If the description of the terms of your Certificates vary between this prospectus supplement and the accompanying prospectus, you should rely on the information contained in this prospectus supplement. This prospectus supplement must be accompanied by the prospectus if it is being used to offer and sell the Certificates.
The Trustor has filed with the Securities and Exchange Commission a registration statement (of which this prospectus supplement and the accompanying prospectus form a part) under the Securities Act of 1933 (the “Securities Act”), with respect to your series of Certificates. This prospectus supplement and the accompanying prospectus do not contain all of the information contained in the registration statement. For further information regarding the documents referred to in this prospectus supplement and the accompanying prospectus, you should refer to the registration statement and the exhibits to such registration statement. The registration statement and such exhibits can be inspected and copied at prescribed rates at the public reference facilities maintained by the Securities and Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 (information on the operation of the public reference facilities may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330). Copies of such materials can also be obtained electronically through the Securities and Exchange Commission’s internet web site (http://www.sec.gov).
With respect to information about the Certificates, you should rely only on the information contained in this prospectus supplement or the accompanying prospectus. Neither the Trustor nor the underwriters have authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. Neither the Trustor nor the underwriters are making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus supplement or the accompanying prospectus is accurate as of the date on their respective front covers only.
We include cross-references in this prospectus supplement and the accompanying prospectus to captions in these materials where you can find further related discussions. The following table of contents and the table of contents included in the accompanying prospectus provide the pages on which these captions are located.
For 90 days following the date of this prospectus supplement, all dealers selling the Certificates will deliver a prospectus supplement and prospectus. This is in addition to any dealer’s obligation to deliver a prospectus supplement and accompanying prospectus when acting as an underwriter of the Certificates and with respect to their unsold allotments or subscriptions.
Notwithstanding any other express or implied agreement to the contrary, the Trustee, the Trustor, the Underwriters, the Advancing Party and the Calculation Agent, and each recipient hereof and each of their employees, representatives, and other agents may disclose, immediately upon commencement of discussions, to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transaction and all materials of any kind (including opinions or other tax analyses) that are provided to any of them relating to such tax treatment and tax structure, except where confidentiality is reasonably necessary to comply with U.S. federal or state securities laws. For purposes of this paragraph, the terms “tax”, “tax treatment”, “tax structure”, and “tax benefit” are defined under Treasury Regulation § 1.6011-4(c).
ii
SUMMARY
This summary highlights the principal economic terms of the certificates being issued by the Trust and offered by this prospectus supplement and of the securities held by the Trust. It does not contain all of the information that you need to consider in making your investment decision. To understand all of the terms of the offering of the Certificates, you should read carefully this prospectus supplement and the accompanying prospectus in full. Certain capitalized terms used in this prospectus supplement are defined on the pages indicated in the “Index of Terms for Prospectus Supplement.”
Trustor | Structured Obligations Corporation, a wholly-owned subsidiary of J.P. Morgan Securities Holdings Inc. See “Structured Obligations Corporation” in the accompanying prospectus. | |
Trust | The Trustor and U.S. Bank Trust National Association, as Trustee, will form the Select Notes Trust LT 2004-1 pursuant to a base trust agreement and series supplement thereto. The assets of the Trust will consist solely of (i) the Underlying Securities, (ii) the [[ ] Securities], (iii) all payments on or collections in respect of the Underlying Securities and the [[ ] Securities] made on or after the Closing Date and (iv) the rights of the Trustee under the Advancing Agreement, together with any proceeds thereof. However, with respect to each Underlying Security, the Trustee will pay to JPMSI the interest accrued on such Underlying Security up to, but excluding, the Closing Date on the first semi-annual interest payment date of such Underlying Security occurring after the Closing Date. | |
The objective of the Trust is to provide income and conservation of capital by investing in a portfolio primarily consisting of investment grade rated long term corporate debt securities. The Trust may be an appropriate investment vehicle for investors who desire to participate in a portfolio of fixed income bonds with greater diversification than they would otherwise be able to acquire individually. There is no guarantee that the Trust will achieve these objectives. See “Risk Factors.” | ||
Underlying Securities | The Underlying Issuers and the Underlying Securities are as follows: [ ] | |
[[ ] Securities] | $[ ] maturity amount of [[ ] STRIPS] due [ ], CUSIP No. [ �� ]. For information regarding [ ] STRIPS, see [ ]. | |
Advancing Agreement | The Trustee is scheduled to make monthly distributions of interest to Certificateholders, but will receive payments on the Underlying Securities on various semi-annual payment dates. Accordingly, the Trustee will enter into an Advancing Agreement, dated as of the Closing Date, with JPMorgan Chase Bank, as advancing party, and J.P. Morgan Securities Inc., as calculation agent, pursuant to which the Advancing Party will make advances to the Trust which will allow the | |
S-1 | ||
Trustee to make monthly distributions of interest to Certificateholders. As long as certain conditions described herein are met, the Advancing Party will make advances to the Trustee on the Interest Distribution Dates and in the amounts set forth in the Advancing Agreement. The Advancing Party will be repaid for each advance it makes from amounts received by the Trustee on the Underlying Securities on the interest payment dates and maturity dates of the Underlying Securities or from the proceeds of the sale or redemption of the applicable Underlying Security prior to the distribution of such payments or proceeds to Certificateholders. In no event will the Advancing Party be required to make advances to support distributions by the Trustee to Certificateholders if either the shortfall in the funds available to the Trustee to make such distribution is the result of delinquent or defaulted payments on one or more of the Underlying Securities or the Advancing Party has determined, in its sole discretion, that su ch advance will not be fully recoverable from the Trustee on behalf of the Trust. If certain credit events occur with respect to the Advancing Party as described herein, the Trustee may replace the Advancing Party with a successor advancing party. See “Description of Advancing Agreement.” | ||
Advancing Party | JPMorgan Chase Bank. | |
Calculation Agent | J.P. Morgan Securities Inc., an affiliate of the Trustor. | |
Removal of Underlying Securities | If (a) an Underlying Security is rated “D” by Standard & Poor’s Rating Services, (b) an Underlying Securities Issuer or the guarantor of Underlying Securities, in each case that represent 10% or more of the assets of the Trust makes a public announcement in writing that it intends to discontinue filing periodic reports with the Securities and Exchange Commission under the Exchange Act (c) one of certain adverse credit related events described herein have occurred with respect to an Underlying Issuer and the related Underlying Security, then a “Removal Event” with respect to such Underlying Security shall have occurred. No later than 30 days following the Trustee’s actual knowledge that a Removal Event has occurred, the Trustee on behalf of the Trust will instruct J.P. Morgan Securities Inc. to sell the applicable Underlying Securities. The net proceeds from the sale of an Underlying Security will be distributed to the holders of the Certificates (less a ny amounts payable to the Advancing Party for the outstanding advances applicable to such Underlying Security) on a pro rata basis. See “Description of the Certificates—Removal of Underlying Securities” and “—Sale Procedures.” | |
Certificates | $[ ] Select Notes TrustSM, Long Term Certificates Series 2004-1. The Certificates will be issued, maintained and transferred on the book-entry records of The Depository Trust Company and its participants in minimum denominations of $1,000 (except as described herein) pursuant to the terms of | |
S-2 | ||
the Trust Agreement. The Certificates will consist of a single class of Certificates, all of which are being offered by this prospectus supplement. | ||
Interest Distribution Dates | [ ] day of each month (or if such day is not a business day, the following business day), commencing [ ], 2004. | |
Pass-Through Rate | The “Pass-Through Rate” is the rate at which interest will accrue on your Certificates. The Pass-Through Rate will initially be equal to [ ]% per annum. The Pass-Through Rate will be subject to adjustment in the event that (i) principal payments are made by any Underlying Issuer on its Underlying Securities, (ii) any Underlying Securities are sold from the Trust, (iii) the net proceeds from the sale of an Underlying Security are insufficient to repay the Advancing Party amounts owed to it for the advances made in respect of such Underlying Security, (iv) the Trustee on behalf of the Trust incurs certain expenses described herein or (v) a successor Advancing Party is appointed by the Trustee, in each case, as described herein. See “Description of the Certificates—Distribution of Interest” and “—Adjustment of Pass-Through Rate.” | |
Distributions of Interest | Each Certificate evidences the right of the holder thereof to receive its pro rata portion of the Monthly Interest Distribution Amount on the [ ] day of each month or if any such day is not a Business Day, the next succeeding Business Day, commencing [ ], 2004 (each such date, an “Interest Distribution Date”) to the extent such amounts are received by the Trustee from (x) payments of interest on the Underlying Securities by the Underlying Issuers and (y) advances made by the Advancing Party pursuant to the Advancing Agreement. However, if certain credit related events occur with respect to the Advancing Party as described herein and the Trustee fails to appoint a successor pursuant to the terms of the Advancing Agreement, the Certificateholders will receive their pro rata share of interest payments on the Underlying Securities on the dates that such payments are received by the Trustee. With respect to any Interest Distribution Date, a delinquency or default in the payment of interest on an Underlying Security by the applicable Underlying Issuer that exists on such Interest Distribution Date (unless the Advancing Party elects, in its sole discretion, to make an advance with respect to such delinquency or default) or the failure of the Advancing Party to make an advance scheduled for such Interest Distribution Date pursuant to the terms of the Advancing Agreement will result in a reductio n of the Monthly Interest Distribution Amount payable to Certificateholders on such Interest Distribution Date by the amount of such delinquent or defaulted interest payment or the amount of such advance which the Advancing Party has failed to make. If the Monthly Interest Distribution Amount for any Interest Distribution Date is reduced as a result of a delinquency or default in the payment of interest on an Underlying Security or the failure to make an advance by the Advancing Party with respect to an Underlying Security and the Trustee receives payments of | |
S-3 | ||
interest with respect to such Underlying Security after such Interest Distribution Date, such amounts will be distributed to Certificateholders upon receipt to the extent of the related prior reduction of the Monthly Interest Distribution Amount. Also, with respect to the [ ], any interest payable on such Underlying Securities on their respective maturity dates will be distributed to Certificateholders (less any amounts owed to the Advancing Party in respect thereof) upon receipt by the Trustee and will not be included in any Monthly Interest Distribution Amount. | ||
Monthly Interest Distribution Amount | “Monthly Interest Distribution Amount” means an amount equal to one twelfth of the Pass-Through Rate on the Record Date related to such Interest Distribution Date multiplied by the Certificate Principal Balance on the Record Date related to such Interest Distribution Date, except with respect to the Interest Distribution Date occurring on [ ], 2004, interest payable on such date will be an amount equal to the product of [ ] multiplied by the Pass-Through Rate on the related Record Date multiplied by the Certificate Principal Balance on such Record Date. See “Description of the Certificates—Distributions of Interest.” | |
Distributions of Principal | You will have the right to receive as a distribution of principal, in reduction of your Certificate Principal Balance, a pro rata distribution of any principal received by the Trustee on the Underlying Securities and any maturity amounts received by the Trustee on the [[ ] Securities] on the date of receipt of such principal or maturity amounts by the Trustee, and such date shall be a “Principal Distribution Date.” | |
Absent an early redemption of or the occurrence of a Removal Event with respect to an Underlying Security, it is expected that you will receive your pro rata portion of the following principal amounts on the Underlying Securities and maturity amounts on the [[ ] Securities] on the following Principal Distribution Dates: | ||
[ ] | ||
Certain of the Underlying Securities are subject to early redemption by their respective Underlying Issuers in accordance with the terms of the related Underlying Securities indentures. If any of the Underlying Securities are redeemed in whole or in part prior to their maturity, you will receive your pro rata amount of any redemption proceeds (less any amounts owed to the Advancing Party for advances made in respect of such Underlying Securities) as soon as practicable after such proceeds as received by the Trustee and not on the applicable expected Principal Distribution Date. See “Description of Underlying Securities—Summary of Terms of the Underlying Securities” for a description of the redemption provisions of the Underlying Securities, if any. Any return of principal (other than from payments made on the [[ ] Securities]) will likely result in an adjustment to the Pass-Through Rate. See “ 1;Adjustment of the Pass-Through Rate.” | ||
S-4 | ||
Certificate Principal Balance | Initially, $[ ] in aggregate. On any date after the Closing Date the Certificate Principal Balance will be equal to the initial Certificate Principal Balance less the aggregate amount of any reductions in the principal amount of the Underlying Securities and maturity amount of the [[ ] Securities] occurring on or prior to such date. For purposes of calculating the Certificate Principal Balance, the principal amount of any Underlying Security with respect to which a Removal Event has occurred shall be deemed to be zero. The Certificate Principal Balance will be made available in reports sent to Certificateholders upon any reduction thereof. The Certificate Principal Balance for any individual Certificateholder will be such Certificateholder’s pro rata portion of the outstanding Certificate Principal Balance. | |
Optional Purchase | The Trustor has the right to purchase all of the Underlying Securities in the Trust on or after the date on which the aggregate principal amount of the Underlying Securities and [[ ] Securities] has declined to 10% or less than the aggregate principal amount of the Underlying Securities and [[ ] Securities] held by the Trustee on the Closing Date ($[ ]) by depositing into the Trust an amount equal to the aggregate par amount of the Underlying Securities and [[ ] Securities] on the date of purchase plus (i) any accrued and unpaid interest on the Underlying Securities and (ii) any amounts owed and unpaid to the Advancing Party. If the Trustor exercises its right to make an optional purchase, the Certificates will be redeemed at a redemption price equal to the Certificate Principal Balance plus accrued and unpaid interest thereon, at the time of redemption and the Trust will be terminated. | |
Record Date | The business day immediately preceding each Interest Distribution Date and each Principal Distribution Date. | |
Denominations | The Certificates will be available for purchase in minimum denominations of $1,000. Under certain circumstances Certificates may be issued in less than $1,000 denominations as described under “Description of the Certificates—Additional Underlying Securities and Certificates.” | |
Book-entry Registration | As a Certificateholder, you will not receive Certificates in physical form. Instead, your Certificates will be held in book-entry form and registered in the name of Cede & Co., as the nominee of The Depository Trust Company. See “Description of the Certificates - Definitive Certificates.” | |
Trustee | U.S. Bank Trust National Association. | |
Ratings | It is a condition to the issuance of the Certificates that the Certificates are rated at least “[ ]” by Standard & Poor’s Rating Services (“S&P” or “Standard & Poor’s”). A rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by a rating agency. S&P’s rating does not address the occurrence or frequency of redemptions or prepayments on, or extensions of | |
S-5 | ||
the maturity of, the Underlying Securities, or the corresponding effect on the yield to investors. | ||
Certain Federal Income Tax Consequences | With respect to interest on the Underlying Securities, for information reporting purposes, interest will be reported to you (and to the Internal Revenue Service) on Form 1099, as interest, and will be included in your income as interest—not as it is paid on the Interest Distribution Dates—but rather, as it is paid on the Underlying Securities (or, if you are an accrual method taxpayer, as it is accrued). Thus, each holder that holds a Certificate on an Interest Distribution Date will not take into income any amounts distributed to it that were advanced to the Trustee by the Advancing Party. Rather, such amounts will not be taxable to a Certificateholder until the Underlying Security pays such amount (which will then be repaid to the Advancing Party) or the Certificateholder sells or exchanges its Certificate (or, in general, otherwise disposes of its Certificate in a taxable transaction). | |
See “Certain Federal Income Tax Considerations” in this Prospectus Supplement. | ||
ERISA Considerations | “Employee benefit plans” subject to the Employee Retirement Income Security Act of 1974, as amended, “plans” subject to Section 4975 of the Code, as amended, and certain employee benefit plans not subject to ERISA contemplating the purchase, holding or disposition of Certificates should consult with their counsel before doing so. The fiduciary of any such plan and its counsel should consider whether the Certificates will satisfy all of the requirements of the “publicly-offered securities” exception described herein or the possible application of other “prohibited transaction exemptions” described herein. See “ERISA Considerations” herein. | |
Listing | Application has been made to list the Certificates on the American Stock Exchange under the symbol “SXN.F.” There can be no assurance that the Certificates, once listed, will continue to be eligible for trading on the American Stock Exchange. The Trustor may delist the Certificates in order to maintain compliance with federal, state or agency laws, rules or regulations. |
S-6
RISK FACTORS
You should consider the following factors in deciding whether to purchase the Certificates:
1. | No Due Diligence Investigation of the Underlying Securities or the Underlying Issuers has been made by the Trustor, the Advancing Party, the Underwriters, the Trustee or any of their Affiliates. None of the Trustor, the Advancing Party, the Underwriters, the Trustee or any of their affiliates have made, or will make, any due diligence investigation of the business, operations or condition, financial or otherwise, or creditworthiness of the Underlying Issuers or has verified, or will verify, any reports or information filed by the Underlying Issuers with the Securities and Exchange Commission (including any Underlying Securities Prospectus) or otherwise made available to the public. It is strongly recommended that prospective investors in the Certificates consider publicly available financial and other information regarding the Underlying Issuers and the Underlying Securities. The issuance of the Certificates should not be construed as an endorsement b y the Trustor, the Advancing Party, the Underwriters, the Trustee or any of their affiliates of the financial condition or business prospects of the Underlying Issuers. See “The Underlying Issuers” and “Description of the Underlying Securities” herein. | |
2. | The Assets of the Trust are the Only Payment Source. The Certificates do not represent an interest in, or obligations of, the Trustor, the Advancing Party, the Trustee, the Underlying Issuers or any of their affiliates. The Underlying Issuers are subject to laws permitting bankruptcy, moratorium, reorganization or other actions. If the Underlying Issuers experience financial difficulties, there may be delays in payment, partial payment or non-payment of your Certificates. In the event of non-payment on an Underlying Security by an Underlying Issuer, you will bear the risk of such non-payment. See “Description of the Certificates—Recovery on Underlying Securities Following Payment Default or Acceleration” herein. | |
3. | The Market Value of the Certificates may not Equal the Aggregate Market Value of the Underlying Securities and [[ ] Securities]. The market value of the Certificates will be derived from the market value of the Underlying Securities and the [[ ] Securities], however, the market value of the Certificates will also be affected by such factors as the relative demand for and supply of the Certificates in the market, general market and economic conditions and other factors beyond the control of the Trustor, J.P. Morgan Securities Inc. (“JPMSI”) or the Underwriters. None of the Trustor, JPMSI or the Underwriter can predict whether the Certificates will trade at, below or above the aggregate market value of the Underlying Securities and the [[ & nbsp;] Securities] or at, below or above the Certificate Principal Balance of the Certificates. This risk may be greater for Certificateholders expecting to sell their Certificates soon after the Closing Date. The Certificates are designed for long term investors, and Certificateholders should not view the Certificates as a vehicle for trading purposes. | |
4. | Certificateholders may Suffer a Loss upon the Occurrence of a Removal Event. Should a Removal Event occur with respect to an Underlying Security, the Trustee on behalf of the Trust will instruct JPMSI to sell such Underlying Security and distribute the net proceeds of the sale of such Underlying Security to Certificateholders (less any amounts payable to the Advancing Party for the outstanding advances applicable to such Underlying Security). In such case, the Certificate Principal Balance will be reduced by the principal amount of the Underlying Security subject to such Removal Event. If the amount distributable to Certificateholders from the proceeds of the sale of the Underlying Securities subject to the Removal Event is less than the principal amount of such Underlying Securities plus any accrued and unpaid interest thereof Certificateholders will suffer a loss. Additionally, if less than all of such Underlying Securities are sold and the applicab le Underlying Issuer defaults on payments due on such unsold Underlying Securities Certificateholders will suffer a loss. Certificateholders will also bear the risk of reinvestment resulting from the reduction in the Certificate Principal Balance of the Certificates. | |
One of the Removal Events occurs if an Underlying Securities Issuer or the guarantor of Underlying Securities, in each case that represent 10% or more of the assets of the Trust makes a public announcement in writing that it intends to discontinue filing periodic reports with the Securities and Exchange Commission under the Exchange Act. The decision by an Underlying Securities Issuer or guarantor of Underlying Securities to cease reporting could occur for a number of reasons, including but not limited to a merger, sale or other reorganization of the Underlying Securities Issuer or guarantor of Underlying | ||
S-7 | ||
Securities which results in the Underlying Securities Issuer no longer having publicly issued common stock. None of the Trustor, the Advancing Party, the Calculation Agent, the Trustee or the Underwriter have made any investigation as to the likelihood of the Underlying Securities issuer ceasing to report under the Exchange Act. See “Description of the Certificates—Removal of Underlying Securities” herein. | ||
5. | Possible Reduction of the Pass-Through Rate upon Payment of Principal on or the Occurrence of a Removal Event with respect to Underlying Securities. Because the Pass-Through Rate on your Certificates will be determined in part by the weighted average interest rate of the Underlying Securities as described under “Description of the Certificates—Distributions of Interest,” payments of principal on the Underlying Securities or the occurrence of a Removal Event may cause the Pass-Through Rate to decrease depending upon the interest rate of such Underlying Security. See “Summary—Payments of Principal” for a schedule of the maturity dates for the Underlying Securities and “Description of the Certificates—Removal of Underlying Securities” for a description of the Removal Events. | |
6. | Reduction of the Amount of Your Monthly Interest Distribution Amount as a Result of a Delinquency or Default in the Payment of Interest on an Underlying Security or the Failure by the Advancing Party to make Advances. The ability of the Trustee to make distributions of interest on each Interest Distribution Date in an amount equal to the Monthly Interest Distribution Amount for such Interest Distribution Date will depend on the amount of interest received by the Trustee on the Underlying Securities with respect to such Interest Distribution Date and the amount of advances made by the Advancing Party for such Interest Distribution Date. Any defaults in the payment of interest on an Underlying Security or any failure by the Advancing Party to make advances will have the effect of lowering the amount of the interest payable by the Trust on an Interest Distribution Date. In no event will the Advancing Party be required to make advances to support the dist ribution by the Trustee of the Monthly Interest Distribution Amount if either (a) the shortfall in the funds available to the Trustee to make such distribution is the result of delinquent or defaulted payments on the Underlying Securities or (b) the Advancing Party has determined in its sole discretion that such advance will not be fully recoverable from the Trustee on behalf of the Trust. | |
7. | Early Reduction of the Certificate Principal Balance of the Certificates upon Redemption of an Underlying Security. Certain of the Underlying Securities are subject to redemption by the applicable Underlying Issuer. If any Underlying Security is redeemed in whole or in part, the Certificate Principal Balance of your Certificates will be reduced by the pro rata principal amount of such redemption. | |
8. | The Occurrence of an Advancing Party Credit Event in respect of the Advancing Party will Result in the Reduction of the Pass-Through Rate or Change the Timing of Interest Distributions to Certificateholders. The Trustee is scheduled to make monthly distributions of interest to Certificateholders, but will receive payments on the Underlying Securities on various semi-annual payment dates. Accordingly, the Trustee will enter into an Advancing Agreement, dated as of the Closing Date, with JPMorgan Chase Bank, as Advancing Party, and JPMSI, as Calculation Agent, in order to receive funds required to make monthly distributions of interest to Certificateholders. As long as certain conditions precedent described herein are met, the Advancing Party will make advances to the Trustee on the Interest Distribution Dates and in the amounts set forth in the Advancing Agreement. If certain credit related events occur with respect to the Advancing Party, the Trustee is required to use its reasonable efforts to appoint a successor Advancing Party. The successor Advancing Party will be paid an increased fee of approximately $[ ] per annum. The Calculation Agent will lower the Pass-Through Rate on the Certificates in an amount sufficient to pay such fee. If the Trustee fails to appoint a successor, Certificateholders will receive their pro rata share of interest payments on the Underlying Securities on the dates that such payments are received by the Trustee. | |
9. | The Underlying Securities and therefore the Certificates will be subject to Market Risk and the Underlying Securities will not be Managed. The market value of the Underlying Securities will fluctuate which could cause the market value of your Certificates to fall below your original purchase price of the Certificates. Market value fluctuation may occur in response to various factors. These can include but are not limited to general economic conditions, changes in interest rates, inflation, the financial condition of an | |
S-8 | ||
Underlying Issuer and market place perceptions of an Underlying Issuer. The Underlying Securities will not be managed and the Trustee will not sell an Underlying Security because the market value thereof falls, as would be possible in a managed fund. Further, the Trustee will not sell an Underlying Security as a result of a downgrade or withdrawal or suspension of a rating by a rating agency rating the Underlying Securities (other than a downgrade of an Underlying Security to a rating of “D” by S&P). | ||
10. | Risk of Reduced Diversification. As Underlying Securities mature, Underlying Securities are redeemed or sold, or Removal Events occur, the pool of Underlying Securities held by the Trust will become less diversified. This could increase your risk of loss resulting from the decline in one or more of the economic factors affecting any of the remaining Underlying Securities. | |
11. | There may not be a Liquid Secondary Market for the Certificates. Application has been made to list the Certificates on the American Stock Exchange. There can be no assurance that the Certificates, once listed, will continue to be eligible for trading thereon. Also, the Trustor may delist the Certificates in order to maintain compliance with federal, state or agency laws, rules or regulations. There can also be no assurance as to whether there will be a secondary market in the Certificates or if there were to be such a secondary market, whether such market would be liquid or illiquid. If the secondary market for the Certificates is limited, there may be few buyers if you decide to sell your certificates prior to the final scheduled distribution date. This may affect the price you will receive on the Certificates. There is currently no secondary market for the Certificates. | |
12. | Certain Payments to JPMSI. As payment of the balance of the purchase price for the Underlying Securities and the [ ] Securities, the Trustee will pay to JPMSI the amount of the interest accrued on each such Underlying Security to but excluding the Closing Date, on the first semi-annual payment date of such Underlying Security that occurs after the Closing Date. In the event that a payment default or acceleration on an Underlying Security occurs prior to its first semi-annual payment date after the Closing Date and JPMSI is not paid such accrued interest on such date, JPMSI will have a claim for such accrued interest, and will share on a parity with holders of the Certificates to the extent of such claim in the proceeds from the sale of such Underlying Security. |
See also “Risk Factors” and “Maturity and Yield Considerations” in the accompanying prospectus for additional factors you should consider before investing in the Certificates.
FORMATION OF THE TRUST
Select Notes Trust LT 2004-1 (the “Trust”) will be formed pursuant to a trust agreement, including the related series supplement (collectively, the “Trust Agreement”) each expected to be dated as of [ ], 2004 (the “Closing Date”) and each between Structured Obligations Corporation (the “Trustor”) and U.S. Bank Trust National Association, as trustee (the “Trustee”). On the Closing Date, the Trustor will direct the Trustee, on behalf of the Trust to (i) purchase from JPMSI ten publicly issued investment grade rated long term debt securities (each an “Underlying Security”), which have an aggregate principal amount of $[ ] and are described under “Description of Trust Assets—Underlying Securities” and $[ &nbs p; ] maturity amount of [ ] STRIPS due [ ] (the “[ ] Securities”) as further described under “Description of Trust Assets—[ ] Securities” and (ii) issue the Certificates to Edward D. Jones & Co. and ABN AMRO Financial Services, Inc. (the “Underwriters”). Additionally, with respect to each Underlying Security, the Trustee will pay to JPMSI the interest accrued on such Underlying Security up to, but excluding, the Closing Date on the first semi-annual interest payment date of such Underlying Security occurring after the Closing Date. The property of the Trust will consist solely of (i) the Underlying Securities, (ii) the [ ] Securities, (iii) except for amounts owed to JPMSI as described above, all pa yments on or collections in respect of the Underlying Securities and [[ ] Securities] made on or after the Closing Date and (iv) the rights of the Trustee under the Advancing Agreement, together with any proceeds thereof. The Trustee will hold the Underlying Securities and [[ ] Securities] for the benefit of the holders of the Certificates (the “Certificateholders”).
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The Underlying Securities and [[ ] Securities] will be purchased by the Trustee on behalf of the Trust from JPMSI, which will have previously purchased the Underlying Securities and [[ ] Securities] in the secondary market. None of the Underlying Issuers are participating in this offering and no Underlying Issuer will receive any of the proceeds from the sale of the Underlying Securities and [[ ] Securities] to the Trust or from the issuance of the Certificates by the Trust.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be used to purchase the Underlying Securities and [[ ] Securities] by the Trustee on behalf of the Trust.
THE UNDERLYING ISSUERS
This prospectus supplement does not provide information with respect to any of the Underlying Issuers. No investigation has been made of the financial condition or creditworthiness of any Underlying Issuer in connection with the issuance of the Certificates. Neither the Trustor nor the Underwriters are an affiliate of any of the Underlying Issuers.
Each Underlying Issuer is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the “Commission”). Reports, proxy statements and other information filed by the Underlying Issuers with the Commission pursuant to the informational requirements of the Exchange Act (the “Exchange Act Reports”) can be inspected and copied, at prescribed rates, at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 (information on the operation of the public reference facilities may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330). The Commission maintains a web site at http://www.sec.gov containing reports, proxy statements an d other information regarding registrants that file electronically with the Commission.
The information contained in this prospectus supplement under this heading and the headings “Summary—Underlying Securities,” “Description of the Trust Assets” is qualified in its entirety by, and should be read in conjunction with, (i) each Underlying Securities Prospectus Supplement and each accompanying Prospectus related to each Underlying Security (the Underlying Securities Prospectus Supplement and accompanying Prospectus for each Underlying Security being referred to herein as an “Underlying Securities Prospectus”), (ii) each Underlying Securities Registration Statement (as defined below) and (iii) the Exchange Act Reports.
All of the information contained in this prospectus supplement relating to the Underlying Securities has been derived from the applicable Underlying Securities Prospectus and applicable Underlying Securities Registration Statement. None of the Trustee, the Underwriters, the Advancing Party, the Trustor or the Calculation Agent has participated in the preparation of any Underlying Securities Prospectus or Underlying Securities Registration Statement, or made any due diligence inquiry with respect to the information provided in such documents or the Exchange Act Reports and no representation is made by the Trustee, the Underwriters, the Trustor, the Advancing Party or the Calculation Agent as to the accuracy or completeness of the information contained in the Underlying Securities Prospectus, the Underlying Securities Registration Statement or the Exchange Act Reports. Events affecting the Underlying Secur ities or the Underlying Issuers may have occurred and may not yet have been publicly disclosed, which could affect the accuracy or completeness of the applicable Underlying Securities Prospectus, Underlying Securities Registration Statement or Exchange Act Reports.
Prospective purchasers of the Certificates should consider carefully the financial condition of each Underlying Issuer and their ability to make payments in respect of the Underlying Securities. This prospectus supplement relates only to the Certificates and does not relate to the Underlying Securities or the Underlying Issuers. All information contained in this prospectus supplement regarding the Underlying Issuers and the Underlying Securities is derived solely from publicly available documents.
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DESCRIPTION OF THE TRUST ASSETS
The assets of the Trust will consist solely of (i) the Underlying Securities, (ii) the [[ ] Securities], (iii) all payments on or collections made in respect of the Underlying Securities and [[ ] Securities] accruing on or after the Closing Date and (iv) the rights of the Trustee under the Advancing Agreement, together with any proceeds thereof.
Underlying Securities
The composition of the Underlying Securities to be held by the Trust on the Closing Date and the distribution by ratings of the Underlying Securities as of the date of this prospectus supplement are as set forth below:
Composition of the Underlying Securities
Number of Underlying Securities: | |||
Aggregate Principal Balance: | |||
Principal Balance of each Underlying Security: |
Distribution by Standard & Poor’s Ratings
of the Underlying Securities
Standard & Poor’s Rating | Number | Aggregate Principal Balance | Percent of Aggregate Principal Balance | ||||
Total |
Summary of Terms of the Underlying Securities
The following tables provide summary information with respect to the material terms of the Underlying Securities based solely on the descriptions thereof contained in the respective Underlying Securities Prospectuses. Each of the summaries are qualified in their entirety and should be read in conjunction with each applicable Underlying Securities Prospectus and Underlying Securities Registration Statement.
[ ]
[[ ] Securities]
The [[ ] Securities] will consist of $[ ] maturity amount of [ ] STRIPS due [ ], CUSIP No. [ ]. For information regarding [ ] STRIPS, see [ ].
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to the terms of the Trust Agreement. The following summary as well as other pertinent information included elsewhere in this prospectus supplement and in the accompanying prospectus describes material terms of the Certificates and the Trust Agreement, but does not purport to be complete and is subject to, and qualified in its entirety by reference to, all the provisions of the Certificates and the Trust Agreement. The following summary supplements the description of the general terms and provisions of
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the Certificates of any given series and the related Trust Agreement set forth in the accompanying prospectus, to which description reference is hereby made.
The Certificates will be denominated and distributions with respect thereto will be payable in United States Dollars, which will be the “Specified Currency” as such term is defined in the accompanying prospectus. The Certificates represent in the aggregate the entire beneficial ownership interest in the Trust. The property of the Trust will consist solely of (i) the Underlying Securities, (ii) the [[ ] Securities], (iii) all payments on or collections in respect of the Underlying Securities and [[ ] Securities] accruing on or after the Closing Date and (iv) the rights of the Trustee under the Advancing Agreement, together with any proceeds thereof. The property of the Trust will be held for the benefit of the holders of the Certificates by the Trustee, subject to the rights of the Advancing Party.
All distributions to Certificateholders will be made only from the property of the Trust as described herein. The Trust will have no significant assets, other than the Underlying Securities and the [[ ] Securities] and proceeds received pursuant to the Advancing Agreement, from which to make distributions of amounts due in respect of the Certificates. Further, the Advancing Party is not obligated to make an advance with respect to an Underlying Security if, among other conditions, it believes that an advance will not be recoverable from payments made pursuant to such Underlying Security. Consequently, the ability of Certificateholders to receive distributions in respect of the Certificates will depend entirely on the Trust’s receipt of payments on the Underlying Securities. The Certificates do not represent an interest in or obligation of the Trustor, the Underlying Issuer s, the Trustee, the Underwriters, the Calculation Agent, the Advancing Party or any affiliate thereof.
The Certificates will be delivered in registered form. The Certificates will be issued, maintained and transferred on the book-entry records of The Depository Trust Company (“DTC”) and its participants in minimum denominations of $1,000 (except as described under “—Additional Underlying Securities and Certificates”). The Certificates will initially be represented by one or more global Certificates registered in the name of the nominee of DTC (together with any successor clearing agency selected by the Trustor, the “Clearing Agency”), except as provided below. The Trustor has been informed by DTC that DTC’s nominee will be Cede & Co. No holder of any such Certificate will be entitled to receive a Certificate representing such person’s interest, except as set forth below under “—Definitive Certificates.” Unless and until definitive Certificates are issued under the limited c ircumstances described below, all references to actions by Certificateholders with respect to any such Certificates shall refer to actions taken by DTC upon instructions from its participants. See “—Definitive Certificates” below and “Description of Certificates—Global Securities” in the accompanying prospectus.
Under the rules, regulations and procedures creating and affecting DTC and its operations, DTC will take action permitted to be taken by a Certificateholder under the Trust Agreement only at the direction of one or more participants to whose DTC account such Certificates are credited. Additionally, DTC will take such actions with respect to specified Voting Rights only at the direction and on behalf of participants whose holdings of such Certificates evidence such specified Voting Rights. DTC may take conflicting actions with respect to Voting Rights, to the extent that participants whose holdings of Certificates evidence such Voting Rights, authorize divergent action.
Definitive Certificates
Definitive Certificates will be issued to Certificate owners or their nominees, respectively, rather than to DTC or its nominee, only if (i) the Trustor advises the Trustee in writing that DTC is no longer willing or able to discharge properly its responsibilities as Clearing Agency with respect to the Certificates and the Trustor is unable to locate a qualified successor or (ii) the Trustor, at its option, elects to terminate the book-entry system through DTC.
Upon the occurrence of any event described in the immediately preceding paragraph, the Trustee is required to notify all participants of the availability through DTC of definitive Certificates. Upon surrender by DTC of the definitive Certificates representing the Certificates and receipt of instructions for re-registration, the Trustee will reissue such Certificates as definitive Certificates issued in the respective principal amounts owned by the individual owners of the Certificates. Thereafter the Trustee will recognize the holders of the definitive Certificates as Certificateholders under the Trust Agreement.
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Distributions of Interest
Each Certificate evidences the right of the holder thereof to receive its pro rata portion of the Monthly Interest Distribution Amount on the 15th day of each month or if any such day is not a Business Day, the next succeeding Business Day, commencing [ ], 2004, (each such date, an “Interest Distribution Date”) to the extent such amounts are received by the Trustee from (x) payments of interest on the Underlying Securities by the Underlying Issuers and (y) advances made by the Advancing Party pursuant to the Advancing Agreement. However, if an Advancing Party Credit Event (as defined herein) occurs and the Trustee fails to appoint a successor pursuant to the terms of the Advancing Agreement, the Certificateholders will not receive interest distributions on Interest Distribution Dates, but instead will receive their pro rata share of interest payments on the Un derlying Securities (less any amounts payable to the Advancing Party for outstanding advances applicable to such Underlying Securities) on the dates that such payments are received by the Trustee. With respect to any Interest Distribution Date, a delinquency or default in the payment of interest on an Underlying Security by the applicable Underlying Issuer that exists on such Interest Distribution Date (unless the Advancing Party elects, in its sole discretion, to make an advance with respect to such delinquency or default) or the failure of the Advancing Party to make an advance scheduled for such Interest Distribution Date pursuant to the terms of the Advancing Agreement will result in a reduction of the Monthly Interest Distribution Amount payable to Certificateholders on such Interest Distribution Date by the amount of such delinquent or defaulted interest payment or such advance which the Advancing Party has failed to make. If the Monthly Interest Distribution Amount for any Distribution Date is reduced as a result of a delinquency or default in the payment of interest on an Underlying Security or the failure to make an advance by the Advancing Party with respect to an Underlying Security and the Trustee receives payments of interest with respect to such Underlying Security after such Interest Distribution Date, such amounts will be distributed to Certificateholders upon receipt to the extent of the related prior reduction of the Monthly Interest Distribution Amount. Also, with respect to the [ ], any interest payable on such Underlying Securities on their respective maturity dates will be distributed to Certificateholders (less any amounts owed to the Advancing Party in respect thereof) upon receipt by the Trustee and will not be included in any Monthly Interest Distribution Amount.
“Certificate Principal Balance” means on the Closing Date $[ ] and on any date thereafter, an amount equal to the initial Certificate Principal Balance less any reductions in the principal amount of the Underlying Securities and payments on the [ ] Securities. For purposes of calculating the Certificate Principal Balance, the principal amount of any Underlying Securities with respect to which a Removal Event has occurred shall be deemed to be zero. The Certificate Principal Balance will be made available in reports sent to Certificateholders upon any reduction thereof. The Certificate Principal Balance for any individual Certificateholder will be such Certificateholder’s pro rata portion of the outstanding Certificate Principal Balance.
“Monthly Interest Distribution Amount” means an amount equal to one twelfth of the Pass-Through Rate on the Record Date related to such Interest Distribution Date multiplied by the Certificate Principal Balance on the Record Date related to such Interest Distribution Date, except with respect to the Interest Distribution Date occurring on [ ], 2004, interest payable on such date will be an amount equal to the product of [ ] multiplied by the Pass-Through Rate on the related Record Date multiplied by the Certificate Principal Balance on such Record Date. If the Trust has incurred non-reoccurring extraordinary expenses in excess of $25,000 in any one year, then the Monthly Interest Distribution Amount which is payable immediately after the incurrence of such expense shall be reduced by the amount of such expense.
“Pass-Through Rate” means the per annum interest rate on the Certificates applicable during the interest accrual period related to an Interest Distribution Date. The Pass-Through Rate will initially be equal to [ ]%, until a Pass-Through Rate Adjustment Event has occurred, in which case the Pass-Through Rate shall be recalculated by the Calculation Agent so that the adjusted Pass-Through Rate will be equal to:
(i) (a) (1) the principal amount of the Underlying Securities immediately after such Pass-Through Rate Adjustment Event multiplied by (2) the weighted average interest rate of the Underlying Securities immediately after such Pass-Through Rate Adjustment Event reduced by (b) the annual fee payable to the Advancing Party plus any other annual fees payable by the Trustee on behalf of the Trust and further reduced by (c) the sum of each Advance Repayment Shortfall (each such Advance Repayment Shortfall being first divided by (x) the number of months from the Interest Distribution Date occurring immediately after the occurrence of such Advance Repayment Shortfall to [ ], divided by (y) 12), divided by
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(ii) the Certificate Principal Balance immediately after such Pass-Through Rate Adjustment Event.
“Pass-Through Rate Adjustment Event” means (i) a reduction of the principal amount of the Underlying Securities resulting from the occurrence of a Principal Distribution Date, a redemption of Underlying Securities by the related Underlying Issuer, or the occurrence of a Removal Event, (ii) an Advance Repayment Shortfall has occurred, (iii) a distribution to the Advancing Party of any proceeds from the sale of Underlying Securities which are related to any Advance Repayment Shortfall, (iv) the incurrence by the Trust of reoccurring expenses other than expenses incurred in connection with distributions of interest and principal to Certificateholders and the filing of periodic reports with the Commission or (v) the appointment of a successor Advancing Party by the Trustee.
“Business Day” means any other day other than a Saturday, a Sunday or a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to be closed.
Adjustment of Pass-Through Rate
Any reduction in the principal amount of any of the Underlying Securities is likely to result in the adjustment of the Pass-Through Rate. Reductions in the principal amount of the Underlying Securities are expected to occur on each of the expected Principal Distribution Dates set forth below or, if earlier, upon a redemption or removal of any of Underlying Securities as described under “—Redemption of the Underlying Securities” and “—Removal of Underlying Securities.” The Pass-Through Rate will be adjusted by the Calculation Agent in connection with any such reduction using the formula set forth in the definition of “Pass-Through Rate.” Based on the maturity dates of the Underlying Securities and assuming none of the Underlying Securities are redeemed or removed from the Trust prior to their respective maturity dates, the Pass-Through Rate on the Certificates is expected to be as follows w ith respect to the following Interest Distribution Dates:
[ ]
The following sets forth an estimate of the Pass-Through Rate as it would be adjusted following (i) an early redemption in full of each of the Underlying Securities (other than any Underlying Securities which are not redeemable) or (ii) the sale of an Underlying Security following a Removal Event, assuming there are no Advancing Party Repayment Shortfalls and no prior Pass-Through Rate Adjustment Events have occurred. The actual adjusted Pass-Through Rate may vary depending on the amount of any advances made by the Advancing Party with respect to the applicable Underlying Security and the amount of the proceeds of the sale of such Underlying Security.
Underlying Security Redeemed or Removed | Adjusted Pass- Through Rate |
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Distributions of Principal
Each Certificate evidences the right to receive a pro rata distribution of principal on any date (each a “Principal Distribution Date”) on which the Trustee receives a payment of principal on the Underlying Securities or a payment of a maturity amount on the [[ ] Securities]. It is expected that the following principal amounts will be paid on the following Principal Distribution Dates (which are the respective maturity dates of the Underlying Securities and Treasury [[ ] Securities]):
[ ]
If any of the Underlying Securities are redeemed in whole or in part prior to their maturity, Certificateholders will receive their pro rata amount of any redemption proceeds on the date of such redemption (less any amounts payable to the Advancing Party for the outstanding advances applicable to such Underlying Security) and not on an the applicable expected Principal Distribution Date. See “—Redemption of the Underlying Securities” and “Description of the Trust Assets—Summary of Terms of the Underlying Securities” for a description of the redemption provisions of the Underlying Securities, if any. Also if there is an event of default with respect to any Underlying Security in accordance with the terms of the indenture related to such Underlying Security, such Underlying Security will be sold from the Trust. The Certificate Principal Balance will be reduced by the full principal amount of such Underlying Security sold and Certificateholders will receive the proceeds from the sale of such Underlying Security less amounts due to the Advancing Party, which will likely be less than the principal amount of the Underlying Securities sold and could be zero. See “—Removal of Underlying Securities.”
Additional Underlying Securities and Certificates
From time to time hereafter and with the consent of the Advancing Party, the Trust may issue additional Certificates. In connection with any such issuance the Trust will purchase additional Underlying Securities and [[ ] Securities] in an aggregate principal amount and maturity amount equal to the Certificate Principal Balance of the additional Certificates issued and in the same proportion as the Underlying Securities and [[ ] Securities] were held by the Trust on the Closing Date. Any such additional Certificates issued will rank pari passu with the Certificates issued on the date hereof, have all the rights of the Certificates and may be issued in denominations of less than $1,000.
Redemption of the Underlying Securities
Upon receipt by the Trustee of a notice that all or a portion of any of the Underlying Securities are to be redeemed, the Trustee shall deliver notice of such redemption to the registered Certificateholders not less than fifteen (15) days prior to the redemption date of such Redeemable Securities by mail to each registered Certificateholder at such registered Certificateholder’s last address on the register maintained by the Trustee; provided, however, that the Trustee shall not be required to give any notice of redemption prior to the third Business Day after the date it receives notice of such redemption. The Trustee will distribute any redemption proceeds it receives from Underlying Issuers pro rata to Certificateholders (less any amounts owed to the Advancing Party for unreimbursed advances with respect to such Underlying Securities). Notice of such redemption will be given by the Trustee to the registered Certificateholders at such registered Certificateholder’s last address on the register maintained by the Trustee.
For a description of the redemption provisions of each Underlying Security, if any, see “Description of Trust Assets—Summary of Terms of the Underlying Securities.”
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Removal of Underlying Securities
If (a) an Underlying Security is rated “D” by Standard & Poor’s, (b) an Underlying Securities Issuer or the guarantor of Underlying Securities, in each case that represent 10% or more of the assets of the Trust makes a public announcement in writing that it intends to discontinue filing periodic reports with the Securities and Exchange Commission under the Exchange Act or (c) a Credit Event occurs, then a “Removal Event” with respect to such Underlying Security shall have occurred. No later than 30 days following the Trustee’s actual knowledge or the receipt of written notice from the Trustor or the applicable Underlying Security indenture trustee that a Removal Event has occurred, the Trustee on behalf of the Trust will instruct JPMSI to sell the applicable Underlying Securities. The net proceeds from the sale of an Underlying Security will be distributed to the holders of the Certificates (les s any amounts payable to the Advancing Party for the outstanding advances applicable to such Underlying Security) on a pro rata basis.
The occurrence of a Removal Event will result in a reduction of each Certificateholder’s Certificate Principal Balance by an amount equal to such Certificateholder’s pro rata share of the principal amount of the Underlying Securities that are the subject of such Removal Event and will result in an adjustment of the Pass-Through Rate. Any payments received by the Trustee from Underlying Issuers on Underlying Securities, with respect to which a Removal Event has occurred, prior to the sale of such Underlying Securities will be distributed to Certificateholders (less any amounts owed to the Advancing Party with respect to such Underlying Securities) upon receipt by the Trustee.
“Credit Event” means (i) a payment default with respect to an Underlying Security has occurred and any applicable grace period set forth in the indenture related to such Underlying Security has expired, (ii) an Underlying Issuer has become the subject of bankruptcy, insolvency or similar proceedings, (iii) the maturity date of an Underlying Security has been extended, (iv) the interest rate on any Underlying Security has been reduced.
Sale Procedures
In connection with the sale of any Underlying Securities following a Removal Event, JPMSI will use its reasonable efforts to sell such Underlying Securities to the highest of not less than three solicited bidders (which bidders may include JPMSI or one of its affiliates or the Underwriters, provided, however, that none of JPMSI, none of its affiliates nor the Underwriters are obligated to bid for such Underlying Securities; and provided, further, that JPMSI will use its reasonable efforts to solicit at least three bids from financial institutions with invested assets or assets under management of at least $50 million that are not affiliates of JPMSI). If after seven Business Days following the receipt by JPMSI of instructions from the Trustee to sell Underlying Securities, JPMSI has received less than three bids, JPMSI will sell such Underlying Securities to the highest bidder of the bids received. In the sole judgment of JPMSI, bids may be evaluated on the basis of bids for all or a portion of the Underlying Securities to be sold or any other basis selected in good faith by JPMSI.
If, however, JPMSI has not received any bids for or bids for less than all of the Underlying Securities for which a Removal Event has occurred within seven Business Days after receipt from the Trustee of instructions to sell such Underlying Securities (such seven Business Day period being, the “First Auction Period”), bids will no longer be solicited for such remaining Underlying Securities for a period of thirty days. Thirty days after the end of the First Auction Period, JPMSI will solicit bids again for the Underlying Securities which were offered for sale but remained unsold during the First Auction Period for seven Business Days (such seven Business Day period being, the “Second Auction Period”). Thirty days after the end of the Second Auction Period, JPMSI will solicit bids again for the Underlying Securities which were offered for sale but remained unsold during the Second Auction Period for seven Business Da ys (such seven Business Day period being, the “Third Auction Period”). If the Underlying Securities offered for sale during the Third Auction Period remain unsold at the end of such period, such Underlying Securities will remain in the Trust unless subsequent bids are received by JPMSI, but JPMSI shall have no obligation to solicit any such bids. The outstanding balance of the advance owed to the Advancing Party shall not be reduced as a result of such transfer of ownership of such Underlying Securities. Underlying Securities sold during the Second Auction Period or Third Auction Period will be sold and the proceeds distributed in the same manner as Underlying Securities sold during the First Auction Period.
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Amounts distributed to Certificateholders after a sale of an Underlying Security will be reduced by (i) any expenses incurred by the Trustee, JPMSI and the Advancing Party in connection with the sale of such Underlying Security and (ii) the outstanding amount of any interest advanced to Certificateholders against such Underlying Security as set forth in the Advancing Agreement. The amount by which the proceeds from such sale (or if bids are not received during the First Auction Period, such sale proceeds will be deemed to be zero) are insufficient to repay the outstanding advances made with respect to such Underlying Security shall be referred to herein as an “Advance Repayment Shortfall.” Advance Repayment Shortfalls shall be decreased by the amount of proceeds distributed to the Advancing Party from any sale of the applicable Underlying Securities during a Second Auction Period or Third Auction Period.
No assurance can be given as to whether JPMSI will be successful in soliciting any bids to purchase the Underlying Securities following a Removal Event or as to the price of any such bid relative to the principal amount of those Underlying Securities.
Optional Purchase
The Trustor has the right to purchase all of the Underlying Securities in the Trust on or after the date on which the aggregate principal amount of the Underlying Securities and [[ ] Securities] has declined to 10% or less than the aggregate principal amount of the Underlying Securities and [[ ] Securities] held by the Trustee on the Closing Date ($[ ]) by depositing into the Trust an amount equal to the aggregate par amount of the Underlying Securities and [[ ] Securities] on the date of purchase plus (i) any accrued and unpaid interest on the Underlying Securities and (ii) any amounts owed and unpaid to the Advancing Party. If the Trustor exercises its right to make an optional purchase, the Certificates will be redeemed at a redemption price equal to the Certificate Principal Balance plus accrued and unpaid interest thereon, at the time of redemption and the Trust will be terminated.
Listing on the American Stock Exchange
Application has been made to list the Certificates on the American Stock Exchange (the “AMEX”) under the symbol “SXN.F.” There can be no assurance that the Certificates, once listed, will continue to be eligible for trading on the AMEX. The Trustor may delist the Certificates in order to maintain compliance with federal, state or agency laws, rules or regulations.
Reports to Certificateholders
In the event that the Certificate Principal Balance has been reduced during any interest accrual period related to a Interest Distribution Date, a statement will be delivered to the Certificateholders on such Interest Distribution Date which sets forth the adjusted Certificate Principal Balance and Pass-Through Rate.
Annual Review
The payments received by the Trustee on the Underlying Securities and the distributions made by the Trustee to Certificateholders will be reviewed on an annual basis by Rubin, Brown, Gornstein & Co. LLP. A copy of Rubin, Brown, Gornstein & Co. LLP’s review will be kept on file with the Trustee and may be obtained by Certificateholders from the Trustee upon request. The review by Rubin, Brown, Gornstein & Co. LLP will not constitute an audit.
DESCRIPTION OF THE ADVANCING AGREEMENT
The Trustee is scheduled to make monthly distributions of interest to Certificateholders, but will receive payments on the Underlying Securities on various semi-annual payment dates. Accordingly, the Trustee will enter into an Advancing Agreement, dated as of the Closing Date (the “Advancing Agreement”) with JPMorgan Chase Bank, as Advancing Party (the “Advancing Party”), and JPMSI, as Calculation Agent (the “Calculation Agent”), in order to receive funds required to make monthly distributions of interest to Certificateholders. The Advancing Party will make advances on the Interest Distribution Dates and in the amounts set forth in the Advancing Agreement as long as (i) the representations and warranties of the Trustee and the Calculation Agent in the Advancing Agreement are true and correct, (ii) at the time of and after giving effect to such advance, no event of
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default has occurred under the Advancing Agreement, (iii) the market value, as determined by the Calculation Agent, of the Underlying Securities is at least 250% of the aggregate amount of the unreimbursed advances under the Advancing Agreement after giving effect to such advance and (iv) the Advancing Party has determined in its sole discretion that the full amount of such advance is recoverable by the Advancing Party. The Advancing Party will have a first priority security interest in the Underlying Securities in order to secure the Advancing Party’s right to reimbursement for all amounts advanced pursuant to the Advancing Agreement. The Advancing Party will be repaid for each advance it makes from amounts received by the Trustee on the Underlying Securities on the interest payment dates and maturity dates of the Underlying Securities or from the proceeds of the sale or redemption of the applicable Underlying Security prior to the distribution of such amounts to C ertificateholders. In no event will the Advancing Party be required to make advances to support the distribution by the Trustee of the Monthly Interest Distribution Amount if either the shortfall in the funds available to the Trustee to make such distribution is the result of delinquent or defaulted payments on one or more of the Underlying Securities or the Advancing Party has determined, in its sole discretion, that such advance will not be fully recoverable from the Trustee on behalf of the Trust. To the extent the Advancing Party has made an advance for which it has not been repaid and the Underlying Security attributable to such advance (as determined by the Advancing Agreement) is subsequently sold as a result of a Removal Event, any proceeds from the sale of such Underlying Security will be paid to the Advancing Party, in amount equal to the lesser of (x) the Capped Amount and (y) the amount of such unpaid advance attributable to such Underlying Security (as determined by the Advancing Agreement), pri or to any amounts related to such sale being distributed to Certificateholders; provided, further that if the market value, as determined by the Calculation Agent, of the Underlying Securities is less than 250% of the outstanding amount of the unreimbursed advances under the Advancing Agreement, the Advancing Party will receive the lesser of (x) 100% of the proceeds from such sale and (y) the aggregate outstanding amount of all unreimbursed advances. To the extent that bids received by JPMSI on Underlying Securities as described under “Description of the Certificates—Removal of the Underlying Securities” and “—Sale Procedures” are insufficient to repay the Advancing Party for unreimbursed advances made with respect to such Underlying Securities, the Advancing Party may, but is not obligated to, take possession of such Underlying Securities and the amount of outstanding Advances shall be reduced by the amount of the highest such bid. A sale of Underlying Securities as a result of a Removal Event will result in a reduction of each Certificateholder’s Certificate Principal Balance by an amount equal to such Certificateholder’s pro rata share of the principal amount of the Underlying Securities that are the subject of the Removal Event.
Upon the occurrence of a Pass-Through Rate Adjustment Event, the Advancing Agreement will be amended to reflect a revised schedule of advances by the Advancing Party and a revised schedule of repayment of such advances.
“Capped Amount” means with respect to any sale of Underlying Securities resulting from a Removal Event, 0.75% of the initial Certificate Principal Balance.
The Trust will pay the Advancing Party as interest on its advances and compensation for its obligation to make advances approximately $[ ] annually.
In the event that an Advancing Party Credit Event occurs, the Trustee shall use reasonable efforts to promptly appoint a successor advancing party having a long term debt rating of at least A- from S&P. The successor advancing party will be paid as interest on its advances and compensation for its obligation to make advances approximately $[ ] annually. The increase in the interest and compensation payable to the successor advancing party will result in a decrease in the then current Pass-Through Rate.
If the Trustee fails to appoint a successor within 15 Business Days after the occurrence of an Advancing Party Credit Event, the Certificateholders will no longer receive distributions of interest at the Pass-Through Rate, and instead will receive interest distributions in the amounts and on the dates that interest payments are received on the Underlying Securities by the Trustee less amounts owed to the Advancing Party for advances made in respect of such Underlying Securities.
“Advancing Party Credit Event” means the Advancing Party has (i) become the subject of insolvency or similar proceedings or (ii) the Advancing Party has defaulted on a payment with respect to a debt obligation for borrowed money with an initial principal amount equal to or greater than $1,000,000,000 and any applicable grace period has expired, in each case as more specifically set forth in the Trust Agreement.
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DESCRIPTION OF THE ADVANCING PARTY
The Advancing Party is JPMorgan Chase Bank. The Advancing Party is a wholly owned bank subsidiary of J.P. Morgan Chase & Co., a Delaware corporation whose principal office is located in New York, New York. The Advancing Party is a commercial bank offering a wide range of banking services to its customers both domestically and internationally. Its business is subject to examination and regulation by Federal and New York State banking authorities. Its business is subject to examination and regulation by Federal and New York State banking authorities. As of December 31, 2003, the Advancing Party had total assets of $628.7 billion, total net loans of $181.1 billion, total deposits of $326.7 billion, and total stockholder’s equity of $37.5 billion. As of December 31, 2002, JPMorgan Chase Bank had total assets of $622.4 billion, total net loans of $180.6 billion, total deposits of $300.6 billion, and total stockholder’s equity of $35.5 billion.
On January 14, 2004, J.P. Morgan Chase & Co. and Bank One Corporation announced that they have agreed to merge. The merger is subject to the approval of the shareholders of both institutions as well as U.S. federal and state and foreign regulatory authorities. Completion of the transaction is expected to occur in mid-2004.
Additional information, including the most recent Form 10-K for the year ended December 31, 2003 of J.P. Morgan Chase & Co. and additional annual, quarterly and current reports filed with the Securities and Exchange Commission by J.P. Morgan Chase & Co., as they become available, may be obtained from the Securities and Exchange Commission’s Internet site (http://www.sec.gov), or without charge by each person to whom this Official Statement is delivered upon the written request of any such person to the Office of the Secretary, J.P. Morgan Chase & Co., 270 Park Avenue, New York, New York 10017.
The information contained in this Prospectus Supplement Under “Description of the Advancing Party” relates to and has been obtained from the Advancing Party. This data has been taken from the Consolidated Reports of Condition and Income filed with the Board of Governors of the U.S. Federal Reserve System compiled in accordance with regulatory accounting principles. The delivery of this Prospectus Supplement shall not create any implication that there has been no change in the affairs of the Advancing Party since the date hereof, or that the information contained or referred to is correct as of any time subsequent to its date.
JPMorgan Chase Bank and its affiliates (collectively, “Morgan”) comprise a full service securities firm and a commercial bank engaged in securities trading and brokerage activities, as well as providing investment banking, asset management, financing, and financial advisory services and other commercial and investment banking products and services to a wide range of corporations and individuals. In the ordinary course of its trading, brokerage, asset management, and financial activities, Morgan may at any time hold long or short positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or senior loans of the Underlying Issuers.
In addition, Morgan may have and may in the future have investment and commercial banking, trust and other relationships with parties, including the Underlying Issuers, which parties may have interests with respect to the Trustor or other parties to this Offering. Morgan may have fiduciary or other relationships whereby Morgan may exercise voting power over securities of various persons, which securities may from time to time include securities of the Underlying Issuers or other parties to this Offering, and Morgan may exercise such powers and otherwise perform its functions in connection with such fiduciary or other relationships separate from its obligations as Advancing Party.
DESCRIPTION OF THE TRUST AGREEMENT
General
The Certificates will be issued pursuant to the Trust Agreement, a form of which is filed as an exhibit to the registration statement. A Registration of Certain Classes of Securities on Form 8-A relating to the Certificates containing a copy of the Series Supplement to the Trust Agreement as executed will be filed by the Trustor with the SEC following the issuance and sale of the Certificates. The assets of the Trust created under the Trust Agreement will consist solely of (i) the Underlying Securities, (ii) the [[ ] Securities], (iii) all
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payments on or collections in respect of the Underlying Securities and [[ ] Securities] accruing on or after the Closing Date and (iv) the rights of the Trustee under the Advancing Agreement, together with any proceeds.
Reference is made to the accompanying prospectus for important information in addition to that set forth herein regarding the Trust, the terms and conditions of the Trust Agreement and the Certificates. The following summaries of certain provisions of the Trust Agreement do not purport to be complete and are subject to the detailed provisions contained in the form of Trust Agreement. Certificateholders should review the form of Trust Agreement for a full description of its provisions, including the definition of certain terms used in this prospectus supplement.
The Trustee
U.S. Bank Trust National Association, a national banking association, will act as trustee for the Certificates and the Trust as required by the Trust Agreement. The Trustee’s offices are located at 100 Wall Street, Suite 1600, New York, New York 10005 and its telephone number is (212) 361-2510.
The Trust Agreement will provide that the Trustee and any director, officer, employee or agent of the Trustee will be indemnified by the Trustor and will be held harmless against any loss, liability or reasonable expense incurred in connection with any legal action relating to the Trust Agreement or the Certificates or the performance of the Trustee’s duties under the Trust Agreement, other than any loss, liability or expense (i) that constitutes a specific liability of the Trustee under the Trust Agreement or (ii) incurred by reason of willful misconduct, bad faith or negligence in the performance of the Trustee’s duties under the Trust Agreement.
The Trustee may at any time resign and be discharged from its obligations as Trustee by giving written notice thereof to the Trustor, the Rating Agency and to all Certificateholders. Upon receiving such notice of resignation, the Trustor shall promptly appoint a successor trustee by written instrument, in duplicate, which instrument shall be delivered to the resigning Trustee and to the successor trustee. A copy of such instrument shall be delivered to such Certificateholders, if any, by the Trustor. If no such successor trustee shall have been so appointed and have accepted appointment within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee.
Certain Payments to JPMSI
On the first semi-annual payment date of each Underlying Security that occurs after the Closing Date, as payment of the balance of the purchase price for the Underlying Securities and [[ ] Securities], the Trustee will pay to JPMSI the amount of the interest accrued on such Underlying Security up to, but excluding, the Closing Date. In the event a payment default or acceleration on an Underlying Security occurs prior to its first semiannual payment date after the Closing Date and JPMSI is not paid such accrued interest on such date, JPMSI will have a claim for such accrued interest, and will share on a parity with holders of the Certificates to the extent of such claim in the proceeds from the sale of such Underlying Security.
Events of Default
There are no events of default under the Trust Agreement.
Voting Rights
At all times, 100% of the voting rights with respect to the Trust (“Voting Rights”) will be allocated among all holders of the Certificates in proportion to the then outstanding Certificate Principal Balances of their respective Certificates.
Voting of Underlying Securities
The Trustee, as holder of the Underlying Securities, has the right to vote and give consents and waivers in respect of such Underlying Securities as permitted by DTC and except as otherwise limited by the Trust Agreement. In the event that the Trustee receives a request from DTC or the Underlying Issuer for the Trustee’s consent to any amendment, modification or waiver of the Underlying Securities, or any other document thereunder
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or relating to the Underlying Securities, or receives any other solicitation for any action with respect to the Underlying Securities, the Trustee shall mail within two Business Days a notice of such proposed amendment, modification, waiver or solicitation to each Certificateholder of record as of such date. The Trustee shall request instructions from the Certificateholders as to whether or not to consent to or vote to accept such amendment, modification, waiver or solicitation and shall be protected in taking no action if no direction is received. The Trustee shall consent or vote, or refrain from consenting or voting, in the same proportion (based on the relative Certificate Principal Balances) as the Certificates of the Trust were actually voted or not voted by the Certificateholders of the Trust as of a date determined by the Trustee prior to the date on which such consent or vote is required; provided, however, that, notwithstanding anything to the contrary in the T rust Agreement, the Trustee shall at no time vote or consent to any matter which would defer the timing or reduce the amount of any then scheduled payment on the Underlying Securities, including, without limitation, any demand to accelerate the Underlying Securities, or which would result in the exchange or substitution of any of the outstanding Underlying Securities whether or not in accordance with a plan for the refunding or refinancing of such Underlying Securities, except with the consent of Certificateholders representing 100% of the aggregate Voting Rights of the Certificates and subject to the requirement that such vote or consent would not, based on an opinion of counsel, materially increase the risk that the Trust would fail to qualify as a grantor trust for federal income tax purposes. The Trustee will not be liable for any failure to act resulting from Certificateholders’ late return of, or failure to return, directions requested by the Trustee from the Certificateholders.
Termination of Trust
The Trust will terminate upon the latest of (i) the exercise by the Trustor of its right to purchase the Underlying Securities and [[ ] Securities] as described under “Description of the Certificates—Optional Purchase,” (ii) distribution of the proceeds received upon maturity, redemption or sale of the last Underlying Security held by the Trust (after deducting any costs incurred in connection therewith) or (iii) [ ], the maturity date of the [[ ] Securities].
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain of the federal income tax consequences of the ownership of the Certificates as of the date hereof supplements the discussion in “Federal Income Tax Consequences” in the accompanying Prospectus. For ease of presentation, it repeats the relevant portions of that discussion and supersedes it so that prospective Certificateholders may read and rely solely on the discussion herein.
This summary is based on the Internal Revenue Code of 1986 (the “Code”) as well as Treasury regulations and administrative and judicial rulings and practice. Legislative, judicial and administrative changes may occur, possibly with retroactive effect, that could alter or modify the continued validity of the statements and conclusions set forth herein. This summary is intended as a general explanatory discussion of the consequences of holding the Certificates and does not purport to furnish information in the level of detail or with the investor’s specific tax circumstances that would be provided by an investor’s own tax advisor. For example, it generally is addressed only to original purchasers of the Certificates that are “U.S. holders” (as defined below), deals only with Certificates held as capital assets (generally, assets held for investment) within the meaning of the Code and does not address tax con sequences to holders that may be relevant to Certificateholders subject to special rules, such as trusts, estates, tax-exempt investors, foreign investors, dealers in securities, currencies or commodities, banks, thrifts, insurance companies, electing large partnerships, mutual funds, regulated investment companies, real estate investment trusts, FASITs, S corporations, persons that hold Certificates as part of a straddle, hedge, integrated or conversion transaction, and persons whose “functional currency” is not the U.S. dollar. In addition, this summary does not address alternative minimum tax issues or the indirect consequences to a holder of an equity interest in a Certificateholder. Accordingly, it is strongly recommended that each prospective investor consult with its own tax advisor regarding the application of United States federal income tax laws, as well as any state, local, foreign or other tax laws, to their particular situations.
As used herein, a “U.S. Person” is a citizen or resident of the United States for United States federal income tax purposes, a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof (including the District of Columbia), an estate the income of which is subject to United States federal income taxation regardless of its source or a trust for which a United States court is able to exercise primary supervision over the trust’s administration and for which one or more United States
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persons (as defined in the Code) have the authority to control all of the trust’s substantial decisions or a trust that has made a valid election under United States Treasury Regulations to be treated as a domestic trust. If a partnership holds Certificates, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership. A “U.S. holder” is a U.S. Person, other than a partnership or a partner of a partnership, that is a beneficial owner of a Certificate.
Tax Status of the Trust
Upon the issuance of the Certificates, Orrick, Herrington & Sutcliffe LLP, special tax counsel to the Trust (“Special Tax Counsel”), will deliver its opinion generally to the effect that, assuming compliance with the Trust Agreement (and certain other documents), for federal income tax purposes, although the matter is not free from doubt, the Trust will be a grantor trust, but failing that, will be characterized as a partnership, and in any event will not be characterized as an association taxable as a corporation (or publicly traded partnership treated as a corporation). Except as otherwise indicated, the following discussion assumes that the Trust will be treated as a grantor trust.
Consistent with the position that the Trust is a grantor trust, each Certificateholder will be treated for federal income tax purposes as the owner of its pro rata share of the Trust’s assets, which consist of the Underlying Securities, the [[ Securities] and the Advancing Agreement. We understand, based on a review of the offering documents for the Underlying Securities (and market practice generally), that each of the Underlying Issuers believes that the Underlying Securities constitute indebtedness for federal income tax purposes, and the following discussion assumes that the Underlying Securities are so treated.
Trust Expenses
Consistent with the position that the Trust is a grantor trust, each Certificateholder will be treated as if it paid directly its pro rata share of the Trust’s expenses. Accordingly, each Certificateholder will be entitled to deduct its pro rata share of the trust’s expenses (subject to applicable limitations) in accordance with such holder’s normal method of accounting. For example, individual Certificateholders will be allocated their pro rata share of the Trust’s expenses, but certain administrative and other similar fees will only be deductible to the extent they exceed 2% of the Certificateholders adjusted gross income (and will not be deductible at all for alternative minimum tax purposes).
Taxation of the Certificates
Application of Section 1272(a)(6). Section 1272(a)(6) of the Code (“Section 1272(a)(6)”) applies, by its terms, to any pool of debt instruments the yield on which may be affected by reason of prepayments. Since some of the Underlying Securities may be called by the Underlying Issuers at a price in excess of par (and such excess would affect the yield to Certificateholders), the Trust intends to take the position that the Underlying Securities constitutes a pool of debt instruments subject to Section 1272(a)(6). However, the Internal Revenue Service (the “IRS”) has not, since the amendment of Section 1272(a)(6) to apply to pools of debt instruments in 1997, issued any substantive guidance regarding the application of this provision. Further, although such Section appears by its terms to apply to the Trust, it is not clear that Congress intended t hat this Section should apply to trusts holding callable corporate bonds, none of which were issued with original issue discount. Nevertheless, the IRS did indicate in proposed regulations issued in 1998 regarding information reporting for widely held fixed investment trusts (such as the Trust) (and again when such regulations were reproposed in 2002) that it thought Section 1272(a)(6) could, in certain circumstances, apply to certain widely held fixed investment trusts. Thus, for ease of information reporting, the Trust takes the position that Section 1272(a)(6)(C) applies to the Trust. The following discussion assumes that Section 1272(a)(6)(C) applies to the Trust. If it is determined that Section 1272(a)(6) does not apply to the Trust, Certificateholders will be taxed as described below under the subheading “Non-application of Section 1272(a)(6).” Certificateholders are urged to consult their own tax advisors concerning the application of Section 1272(a)(6)(C)(iii) to their Certificates.
As indicated above, the IRS has not issued any substantive guidance concerning the application of Section 1272(a)(6) and, accordingly, certain issues (e.g., relating to the proper method of calculating original issue discount, market discount and premium) remain unresolved. Nevertheless, the Trust intends to take the position that Certificateholders effectively will be treated as if their Certificates represent a portion of the Underlying Securities
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and [[ ] Securities] in the aggregate. Consequently, solely for purposes of determining the amount (if any) of gain or loss, original issue discount, market discount and premium, Certificateholders effectively will be treated as if they purchased a single debt instrument. Thus, for information reporting purposes, the Trust intends to take the position that whether or not there is original issue discount with respect to the Certificates will be determined by reference to the original offering price of the Certificates and the initial Certificate Principal Balance. Under this approach (which is also adopted for administrative convenience) initial holders will not have any original issue discount associated with their Certificates because the original offering price of the Certificates will equal the initial Certificate Principal Balance. To the extent an investor has purchased its Certificates for less than the then current Certificate Principal Balance of such Certificates (which will not apply to the initial Certificateholders) the difference between such Certificate Principal Balance and their cost will constitute market discount, which, to the extent it has accrued, will likely be taken into account as ordinary income to the extent of any principal proceeds passed thru to the Certificateholder. To the extent that an investor pays more for its Certificates than the then current Certificate Principal Balance of such Certificates (which will not apply to the initial Certificateholders), it should be able to amortize such excess over its holding period. Further, to the extent any Underlying Security is called, or otherwise retired, the proceeds allocated to an investor will effectively be treated as a return of capital, although any proceeds in excess of the Underlying Security’s principal amount will, although the matter is not free from doubt, be taken into account as capital gain (although it is conceivable such amount would be ordinary income). However, Certificateholders should consult their own tax advisors concerning whether they can amortize the excess under Section 1272(a)(6) and, if so, the proper method for doing so.
Provided that Section 1272(a)(6) applies to the Certificates, the Certificates cannot be integrated with a related hedge under Treasury Regulation Section 1.1275-6.
Non-application of Section 1272(a)(6). As indicated above, the IRS has not issued (in a context similar to this one) any substantive guidance concerning the application of Section 1272(a)(6). Absent such guidance, the Trust intends to take the position that such Section applies to the Certificates. If it is determined, however, that Section 1272(a)(6) does not apply to the Certificates, Certificateholders will be taxed as if they purchased an interest in each individual Underlying Security and the [[ ] Securities]. Thus, a Certificateholder would be required to accrue original issue discount on a constant yield method with respect to the [[ ] Securities], regardless of the Certificateholder’s method of accounting for federal income tax purposes. Consequently, the Certificateholder would recognize interest income in advance of receipt of cash on such [ ] securities or the Certificates. A Certificateholder’s cost of the Certificate (plus an amount allocated for the assumption of any liabilities, such as pursuant to the Advancing Agreement) will be allocated among the underlying assets of the Trust based on the relative fair market values of such assets.
If the allocated purchase price for any particular Underlying Security is less than (by more than a statutorily defineddeminimis amount) the Certificateholder’s pro rata interest in the principal amount (or with respect to [[ ] Securities], its adjusted issue price) of such security, such security will be treated as having been purchased withmarket discount. In general, absent an election to accrue market discount currently, upon maturity of the particular Underlying Security or the sale or exchange of a Certificate, a portion of any gain will be ordinary income to the extent it represents any accrued market discount. In addition, a portion of the interest paid on any indebtedness incurred or continued to carry a market discount security may be deferred.
If the allocated purchase price is greater than the Certificateholder’s pro rata interest in the principal amount of such security, such security will be treated as having been purchased at apremium. Certificateholders should consult their own tax advisors with respect to whether or not they should elect to amortize such premium against interest income under Section 171 of the Code.
If Section 1272(a)(6) does not apply to the Certificates, a Certificateholder will recognize capital gain or loss (other than with respect to accrued market discount, which will be taxed as ordinary income) with respect to each Underlying Security and [ ] Securities] that is sold, redeemed, or otherwise disposed of, equal to the amount received with respect to such security less its adjusted tax basis in such security. Further, if Section 1272(a)(6) does not apply to the Certificates, Certificateholders may be able to make an election to integrate their interests in the Trust’s assets (or a portion thereof) and treat their Certificate as a synthetic debt instrument under Treasury Regulation 1.1275-6. Among other consequences, all interest earned with respect to their Certificate would constitute original issue discount. Prospective Certificateholders should consult with their own tax advisors concerning whether they could (and, if so, should) make an integration election.
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Information reporting and tax accounting.The Trust intends to take the position that interest will be included in a Certificateholder’s income as it is paid on the Underlying Securities (or, if you are an accrual method taxpayer, as it is accrued), and intends to provide information reports (i.e., Forms 1099) to holders and the IRS on that basis. Thus, a holder that holds a Certificate on an Interest Distribution Date will not take into income any amounts distributed to it that were advanced to the Trust by the Advancing Party. Rather, such amounts will be taxable to a Certificateholder when the Underlying Security pays such amount (which will then be repaid to the Advancing Party) or the Certificateholder sells or exchanges its Certificate (or, in general, otherwise disposes of its Certificate in a taxable transaction).
Upon a sale or exchange of the Certificate, a holder generally will recognize capital gain or loss equal to the amount received (which includes the amount of any liability treated as assumed by the transferee pursuant to the Advancing Agreement or otherwise) less its adjusted tax basis in the Certificate. Such gain or loss will be long term if the Certificate has been held for more than one year at the time of sale. However, a Certificateholder will recognize ordinary interest income to the extent the amount received represents either accrued market discount or accrued interest in excess of the seller’s basis in such accrued interest. Net long term capital gains of individuals are subject to taxation at a reduced capital gains tax rate, and capital losses of all taxpayers are subject to limited deductibility.
In certain circumstances some or all of the Underlying Securities may be defeased by their underlying issuer if such underlying issuer deposits sufficient cash or securities with the applicable indenture trustee. In the event such underlying issuer exercises this right, such defeasance may be a taxable event to Certificateholders.
In the event that the Trust is characterized by appropriate tax authorities as a partnership for federal income tax purposes, each Certificateholder, by its acceptance of its Certificate, agrees to report its respective share of the items of income, deductions, and credits of the Trust on its respective returns (making such elections as to individual items as may be appropriate) in a manner consistent with the exclusion of the Trust from partnership tax accounting).
CERTAIN ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and Section 4975 of the Code impose certain requirements on (a) any employee benefit plan (as defined in Section 3(3) of ERISA) subject to Title I of ERISA, (b) any plan described in Section 4975(e)(1) and subject to Section 4975 of the Code, including an individual retirement account (“IRA”) or Keogh plan, and (c) any entity whose underlying assets include “plan assets” by reason of any such plan’s investment in the entity (each, a “Plan”).
ERISA and Section 4975 of the Code prohibit a wide range of transactions involving the assets of a Plan and persons who have specified relationships to the Plan, i.e., “parties in interest” within the meaning of ERISA or “disqualified persons” within the meaning of the Code (collectively, “Parties in Interest”). Thus, a Plan fiduciary considering an investment in Certificates should consider whether such an investment might constitute or give rise to a prohibited transaction under ERISA or Section 4975 of the Code. The Underlying Issuers, the Underwriters, the Trustor, the Advancing Party, the Trustee and their respective affiliates may be Parties in Interest with respect to many Plans.
If an investment in Certificates by a Plan were to result in the assets of the Trust being deemed to constitute “plan assets” of such Plan, certain aspects of such investment, including the operation of the Trust and the deemed extension of credit between the Underlying Issuers and the holder of a Certificate (as a result of the Underlying Securities being deemed to be “plan assets”), as well as subsequent transactions involving the Trust or its assets, might constitute or result in prohibited transactions under Section 406 of ERISA and Section 4975 of the Code unless exemptive relief were available under an applicable exemption issued by the U.S. Department of Labor (the “DOL”). Certain statutory or administrative exemptions may be available under ERISA to exempt the purchase, holding and/or disposition of a Certificate by a Plan. Included among the administrative exemptions are
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Prohibited Transaction Class Exemption (“PTCE”) 84-14, regarding transactions effected by a qualified professional asset manager; PTCE 90-1, regarding investments by insurance company pooled separate accounts; PTCE 91-38, regarding investments by bank collective investment funds; PTCE 95-60, regarding investments by insurance company general accounts; and PTCE 96-23, regarding investments by an in-house professional manager. Certain of the exemptions, however, do not afford relief from the self-dealing prohibitions contained in Section 406(b) of ERISA and Section 4975(c)(1)(E)-(F) of the Code. In addition, there can be no assurance that any of these exemptions will be available with respect to any particular transaction involving the Certificates.
Neither ERISA nor the Code defines the term “plan assets.” Under Section 2510.3-101 of the DOL regulations (the “Plan Asset Regulation”), a Plan’s assets may include the assets of an entity if the Plan acquires an “equity interest” in such entity. Thus, if a Plan acquires a Certificate, for certain purposes (including the prohibited transaction provisions of Section 406 of ERISA and Section 4975 of the Code), the Plan would be considered to own an undivided interest in the underlying assets of the Trust, unless an exception applies under the Regulation.
The Underwriters reasonably believe that the Certificates will satisfy the criteria for treatment as publicly-offered securities under the Plan Asset Regulation. A publicly-offered security is a security that is (i) freely transferable, (ii) part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another at the conclusion of the initial offering, and (iii) either is (A) part of a class of securities registered under Section 12(b) or 12(g) of the Exchange Act, or (B) sold to the Plan as part of an offering of securities to the public pursuant to an effective registration statement under the Securities Act and the class of securities of which such security is a part is registered under the Exchange Act within 120 days (or such later time as may be allowed by the Commission) after the end of the fiscal year of the issuer during which the offering of such securities to the public occurred. The Certificates are being offered pursuant to an effective registration statement under the Securities Act and will be registered under the Exchange Act within the time period described above. Although the Certificates are expected to be listed on the AMEX, and the Underwriters have undertaken to sell the Certificates to a minimum of 400 beneficial owners, there is no assurance that the 100 independent investor requirement of the “publicly-offered security” exception will, in fact, be satisfied.
The foregoing discussion is general in nature and is not intended to be all inclusive. Any fiduciary of a Plan or any employee benefit plan not subject to ERISA considering the purchase, holding and disposition of the Certificates should consult with its counsel regarding the consequences of such purchase, holding or disposition. In addition, nothing herein shall be construed as a representation that an investment in the Certificates would meet any or all of the relevant legal requirements with respect to investments by, or is appropriate for, Plans generally or any particular Plan. Any Plan or any other entity the assets of which are deemed to be “plan assets,” such as an insurance company investing assets of its general account, proposing to acquire the Certificates should consult with its counsel.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement (the “Underwriting Agreement”) between the Underwriters named below and the Trustor, the Trustor will direct the Trustee on behalf of the Trust to sell the Certificates to the Underwriters, and each of the Underwriters has agreed to purchase from the Trustee, on behalf of the Trust the respective number of Certificates set forth opposite its name. In the Underwriting Agreement, the Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the Certificates if any Certificates are purchased.
Underwriters | Number of Certificates | ||
Edward D. Jones & Co., L.P. ABN AMRO Financial Services, Inc. | |||
Total |
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The Trust and the Trustor have been advised by the Underwriters that they propose initially to offer the Certificates to the public at the public offering price set forth on the cover page of this prospectus supplement. After the initial public offering, the public offering price may be changed. If the Certificates are sold by the Underwriters at a price at or above their initial aggregate offering price as set forth on the cover of this prospectus supplement, a structuring fee will be paid to JPMSI, which will equal [ ]% of the initial aggregate offering price of the Certificates. If the Certificates are sold by the Underwriters at a price less than their initial aggregate offering price as set forth on the cover of this prospectus supplement, the structuring fee that would otherwise be payable to JPMSI will be reduced (but not below zero) by an amount equal to 50% of the difference between the initial aggregate offering price of the Certificates and the actual aggregate offering price of the Certificates. The amount by which the structuring fee is reduced will be paid to the Underwriters. JPMSI is not an underwriter of the Certificates.
The Certificates are a new issue of securities with no established trading market. Application has been made to list the Certificates on the AMEX under the symbol “SXN.F.” The Underwriters haves advised the Trustor and the Trust that they presently intend to make a market in the Certificates prior to commencement of trading on the AMEX, as permitted by applicable laws and regulations. The Underwriters are not obligated, however, to make a market in the Certificates. Any market making by the Underwriters may be discontinued at any time at the sole discretion of the Underwriters. No assurance can be given as to whether a trading market for the Certificates will develop or as to the liquidity of any trading market.
The Certificates are expected to trade flat. Trading “flat” means that any accrued and unpaid interest on the Certificates will be reflected in the trading price.
Until the distribution of the Certificates is completed, rules of the Commission may limit the ability of the Underwriters to bid for and purchase the Certificates. As an exception to these rules, the Underwriters are permitted to engage in certain transactions that stabilize the price of the Certificates. Possible transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Certificates.
If the Underwriters create a short position in the Certificates in connection with this offering, that is, if they sell a greater aggregate principal amount of Certificates than is set forth on the cover page of this prospectus supplement, the Underwriters may reduce that short position by purchasing Certificates in the open market. The Underwriters may also impose a penalty bid on certain selling group members. This means that if an Underwriter purchases Certificates in the open market to reduce its short position or to stabilize the price of the Certificates, it may reclaim the amount of the selling concession from the selling group members who sold those Certificates as part of the offering.
In general, purchases of a security for the purposes of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a Certificate to the extent that it were to discourage resales of the Certificates.
Neither the Trust, the Trustor nor the Underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above might have on the price of the Certificates. In addition, neither the Trust, the Trustor nor the Underwriters make any representation that the Underwriters will engage in such transactions. Such transactions, once commenced, may be discontinued without notice.
The underwriting agreement provides that the Trustor will indemnify the Underwriters against certain civil liabilities, including liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect of such civil liabilities.
RATINGS
It is a condition to the issuance of the Certificates that the Certificates are rated at least “[ ]” by S&P. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by a rating agency. S&P’s rating does not address the occurrence or frequency of redemptions or
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prepayments on, or extensions of the maturity of, the Underlying Securities, or the corresponding effect on the yield to investors.
The Trustor has not requested a rating on the Certificates by any rating agency other than S&P. However, there can be no assurance as to whether any other rating agency will rate the Certificates, or, if it does, what rating would be assigned by any such other rating agency. A rating on the Certificates by another rating agency, if assigned at all, may be lower than the ratings assigned to the Certificates by S&P.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon for the Trustor by Orrick, Herrington & Sutcliffe LLP, New York, New York.
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INDEX OF TERMS FOR PROSPECTUS SUPPLEMENT
[ ] Securities | 9 | |
Advance Repayment Shortfall | 17 | |
Advancing Agreement | 17 | |
Advancing Party | 17 | |
Advancing Party Credit Event | 18 | |
AMEX | 17 | |
Business Day | 14 | |
Calculation Agent | 17 | |
Capped Amount | 18 | |
Certificate Principal Balance | 13 | |
Certificateholders | 9 | |
Clearing Agency | 12 | |
Closing Date | 9 | |
Code | 21 | |
Commission | 10 | |
Credit Event | 16 | |
DOL | 24 | |
DTC | 12 | |
ERISA | 24 | |
Exchange Act | 10 | |
Exchange Act Reports | 10 | |
First Auction Period | 16 | |
Interest Distribution Date | 3 | |
IRA | 24 | |
Monthly Interest Distribution Amount | 4 | |
Morgan | 19 | |
Parties in Interest | 24 | |
Pass-Through Rate | 3 | |
Pass-Through Rate Adjustment Event | 14 | |
Plan | 24 | |
Plan Asset Regulation | 25 | |
Principal Distribution Date | 15 | |
PTCE | 25 | |
S&P | 5 | |
Second Auction Period | 16 | |
Special Tax Counsel | 22 | |
Specified Currency | 12 | |
Third Auction Period | 16 | |
Trust | 9 | |
Trust Agreement | 9 | |
Trustee | 9 | |
Trustor | 9 | |
U.S. holder | 22 | |
U.S. Person | 21 | |
Underlying Issuers | 7 | |
Underlying Securities Prospectus | 10 | |
Underlying Security | 9 | |
Underwriting Agreement | 25 | |
Voting Rights | 20 |