The information in this prospectus supplement and the accompanying prospectus is
not complete and may be changed. This prospectus supplement and the accompanying
prospectus are not an offer to sell these securities and are not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
Subject to Completion
Preliminary Prospectus Supplement dated June 17, 2004
PROSPECTUS SUPPLEMENT
(To Prospectus dated October 24, 2002)
Merrill Lynch Depositor, Inc.
Depositor
_______ PPLUS FLOATING RATE CALLABLE TRUST CERTIFICATES
PPLUS TRUST SERIES GSC-2
(Underlying Securities Will Be 6.345% Notes due 2034
Issued by Goldman Sachs Capital I and Guaranteed to the extent set forth herein
by Goldman Sachs Group, Inc.)
Underwriting Discount Number of Certificates(1) Initial Distribution Rate Price to Public
- --------------------- ------------------------- ------------------------- ---------------
$___ _______ ___% $25
(1) Either prior to the closing date or from time to time, the depositor may,
without the consent of the trust certificateholders, increase the amount of
the underlying securities in the trust and issue a corresponding amount of
additional trust certificates.
The Trust
o PPLUS Trust Series GSC-2 will be a trust formed under the laws of the State
of New York.
o The trust will issue PPLUS ___% Floating Rate Callable Trust Certificates
Series GSC-2 (representing undivided beneficial interests in the trust) to
Merrill Lynch Depositor, Inc., the depositor. The depositor has agreed to
sell the trust certificates to Merrill Lynch, Pierce, Fenner & Smith
Incorporated, the underwriter.
o The underwriter proposes to offer the trust certificates at the offering
price set forth above and will initially offer the trust certificates in
minimum lots of 40 trust certificates and subsequent increments of 40 trust
certificates.
o Each trust certificate will evidence the right to receive quarterly
interest payments on its outstanding principal balance at a floating
interest rate based on three-month USD LIBOR plus ___%; provided that such
rate will always be equal to or greater than ___% but will not exceed ___%,
and the right to receive a payment of principal on the final distribution
date, to the extent such amounts are received by the trust on the
underlying securities.
o The trust certificates represent an interest in the assets of the trust,
which consist principally of the underlying securities and an interest rate
swap agreement (the "swap agreement") between the depositor and Merrill
Lynch Capital Services, Inc. the swap counterparty. All payment obligations
of the swap counterparty will be fully and unconditionally guaranteed by
Merrill Lynch & Co., the swap guarantor.
o Call warrants may be issued to third parties from time to time,
representing the rights of call warrant holders to purchase outstanding
trust certificates in whole or in part. Holders of trust certificates
cannot cause call warrant holders to exercise their call rights. The call
price will be the stated amount of each trust certificate called plus
accrued and unpaid distributions thereon and, in certain cases, a premium.
The call warrants are not being offered pursuant to this prospectus
supplement.
o Although the trust intends to apply to have the trust certificates listed
on the New York Stock Exchange, the trust certificates currently have no
trading market and are not insured or guaranteed by any governmental
agency.
The Underlying Securities and Swap Agreement
o The underlying securities and the swap agreement, each of which the
depositor will deposit into the trust for your benefit, will be the
principal assets of the trust. The underlying securities will consist of of
$_____ 6.345% Capital Securities due 2034 issued by Goldman Sachs Capital
I, a Delaware statutory trust and guaranteed by Goldman Sachs Group, Inc.,
a Delaware corporation ("GS Group") to the extent described under
"Description of the Underlying Securities". The swap agreement will be
entered into by the depositor and the swap counterparty, with all payment
obligations of the swap counterparty to be fully and unconditionally
guaranteed by the swap guarantor.
o Upon an early termination of the swap agreement, you may suffer losses as a
result of an early termination payment, if any, payable to the swap
counterparty.
Investing in the trust certificates involves certain risks, which are
described in the "Risk Factors" sections beginning on page S-14 of this
prospectus supplement and on page 6 of the accompanying prospectus.
The trust certificates represent interests in the trust only and do not
represent obligations of or interests in the depositor or any of its affiliates.
The trust certificates do not represent a direct obligation of the underlying
securities issuer or any of its affiliates.
----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus to which it relates is
truthful or complete. Any representation to the contrary is a criminal offense.
The trust certificates will be ready for delivery in book-entry form only
through The Depository Trust Company on or about _______, 2004.
-------------------
Merrill Lynch & Co.
-------------------
The date of this prospectus supplement is _______, 2004.
TABLE OF CONTENTS
Prospectus Supplement
Page
----
The Trust......................................................................1
The Underlying Securities and Swap Agreement...................................1
Summary of Economic Terms......................................................3
Summary Information Q&A.......................................................13
Risk Factors..................................................................19
The Trust.....................................................................26
Description of the Trust Certificates.........................................26
The Depositor.................................................................33
Description of the Trust Agreement............................................33
Description of the Swap Agreement.............................................50
U.S. Federal Income Tax Consequences..........................................55
Erisa Considerations..........................................................65
Underwriting..................................................................65
Validity of the Trust Certificates............................................66
Ratings.......................................................................66
Prospectus
Summary Information Q&A........................................................3
Risk Factors...................................................................6
Incorporation of Certain Documents by Reference...............................13
Reports to Certificateholders.................................................15
The Depositor.................................................................16
Use of Proceeds...............................................................16
Establishment of the Trust....................................................17
Maturity and Yield Considerations.............................................18
Description of the Trust Certificates.........................................19
Description of the Trust Agreement............................................32
Description of Underlying Securities and Other Assets Deposited in the Trust..44
Currency Risks................................................................53
U.S. Federal Income Tax Consequences..........................................53
ERISA Considerations..........................................................58
Underwriting..................................................................61
Legal Matters.................................................................62
--------
You should rely only on the information contained in this prospectus
supplement and the accompanying prospectus. The depositor has not, and the
underwriter has not, 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. The depositor is not, and the underwriter is not,
making an offer to sell these securities in any jurisdiction where the offer or
sale is not permitted. You should not assume that the information appearing in
this prospectus supplement and the accompanying prospectus is accurate as of any
date other than the respective dates of such documents. Our business, financial
condition, results of operations and prospects may have changed since such
dates.
S-2
SUMMARY OF ECONOMIC TERMS
This summary highlights the principal economic terms of the underlying
securities, the swap agreement and the trust certificates being issued 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 trust certificates, you should read carefully this prospectus supplement
and the accompanying prospectus.
The Trust Certificates
The trust....................................PPLUS Trust Series GSC-2, formed by
Merrill Lynch Depositor, Inc. and
the trustee.
Securities offered...........................PPLUS Floating Rate Callable Trust
Certificates Series GSC-2.
Initial number of trust certificates........._______.
Aggregate stated amount......................$_______.
Final scheduled distribution date............February 15, 2034.
Distributions
General..................................All distributions of payments or
underlying securities will be made
on a pro rata basis to the holders
of the trust certificates.
Rate of interest distribution amounts....For the first distribution period,
from and including the closing date
to, but excluding, the first
distribution date, the interest
distribution amount will be payable
at the rate of ___% per annum
(___%, three-month USD LIBOR as of
____, 2004 plus ___%). Thereafter,
the rate of the interest
distribution amount will be reset
quarterly on each distribution
reset date and will be payable on
each distribution date at a
floating rate equal to or greater
than the minimum certificate rate
but not to exceed the maximum
certificate rate.
Following the occurrence of a swap
agreement termination event that is
not a trust termination event,
interest will be payable at a fixed
rate equal to 6.345%.
During the continuance of an
Extension Period (as defined
herein) with respect to the
underlying securities, an interest
distribution amount will accrue on
the principal balance of the trust
certificates (and on any interest
distribution amount that is due)
referred to herein as "deferred
interest", but such deferred
interest will not be distributed to
holders of the trust certificates
until the Extension Period ends.
USD LIBOR................................LIBOR Telerate, as defined in the
accompanying prospectus.
Maximum certificate rate................._____%
S-3
Minimum certificate rate................._____%
Distribution reset date..................The second London banking day
preceding the commencement of the
applicable distribution period.
Distribution period......................With respect to the first
distribution date, the period from
and including the closing date to
but excluding the first
distribution date and, thereafter,
with respect to each distribution
date, the period from and including
the preceding distribution date to
but excluding the current
distribution date.
GS Group may defer the payment of
interest on the junior subordinated
debentures (as defined below) at
any time and in each case for up to
10 semi-annual consecutive interest
distribution periods, provided that
(i) no Extension Period may extend
beyond the stated maturity date of
the junior subordinated debentures;
and (ii) GS Group is not in default
under the subordinated debt
indenture governing the junior
subordinated debentures. If there
is a deferral, the underlying
securities issuer also will defer
distributions on the underlying
securities. Before any Extension
Period ends, GS Group may elect to
extend the period further. At the
end of any Extension Period and
upon payment of all interest then
accrued and unpaid, GS Group may
elect to begin a new Extension
Period. There is no limitation on
the number of Extension Periods. If
GS Group does this, then payments
of interest distribution amounts on
the trust certificates will stop
being made until GS Group pays
interest on the junior subordinated
debentures and the underlying
securities issuer pays interest on
the underlying securities again.
Principal distribution...................Unless their trust certificates are
earlier purchased pursuant to the
exercise of a call warrant, the
holders of the trust certificates
will receive a distribution of the
principal amount of the underlying
securities on the final scheduled
distribution date.
Deposited assets ............................The deposited assets will consist
of the underlying securities and
the swap agreement. See "- The
Underlying Securities", "- The Swap
Agreement", "Description of the
Underlying Securities" and
"Description of the Swap Agreement"
below.
Original issue date; closing date............____, 2004.
Cut-off date.................................____, 2004.
Distribution dates...........................The fifteenth day of each February,
May, August and November, or if any
such date is not a business day,
then the next succeeding business
day, to the persons in whose names
the trust certificates are
registered on the record date
S-4
immediately preceding such
distribution date, commencing
August 15, 2004.
Record date..................................The business day immediately
preceding each distribution date.
Call warrant.................................On any business day on or after
_____ , 2009 that any call warrant
holders designate as a "Call Date,"
the call warrant holders may, upon
notice of not less than 30 days (or
in the case of the announcement of
any redemption or other unscheduled
payment of the underlying
securities or after receipt of
notice of termination of the trust,
not less than three days notice, or
when a tender offer for the
underlying securities is pending,
not less than five days notice
prior to the expiration of the
tender offer acceptance period) but
not more than 60 days prior to that
Call Date, purchase your trust
certificates in whole or in part at
their stated amount plus any
accrued and unpaid distributions to
the Call Date.
On any business day before _____ ,
2009 and after the announcement of
any redemption or other unscheduled
payment of the underlying
securities or receipt of notice of
termination of the trust or when a
tender offer for the underlying
securities is pending, that any
call warrant holders designate as a
"Call Date," the call warrant
holders may, in the case of receipt
of notice of any redemption or
other unscheduled payment of the
underlying securities or of
termination of the trust, upon
notice of not less than three days
or when a tender offer for the
underlying securities is pending,
upon notice of not less than five
days prior to the expiration of the
tender offer acceptance period, but
not more than 60 days prior to that
Call Date, purchase your trust
certificates in whole or in part at
their stated amount plus any
accrued and unpaid distributions to
the Call Date, provided that if the
warrants are to be exercised after
the announcement of any redemption
or other unscheduled payment of the
underlying securities and prior to
such redemption or other
unscheduled payment, then the call
date designated by the call warrant
holder must be the second business
day prior to such redemption or
other unscheduled payment.
In addition, at any time upon an
acceleration of the underlying
securities and payment in full by
the underlying securities issuer of
all amounts when due where the
acceleration payment exceeds the
sum of (i) the early termination
amount, if any, payable by the
trust to the swap counterparty and
(ii) the aggregate stated amount of
outstanding trust certificates plus
any accrued and unpaid
distributions to the date of
payment, all outstanding call
warrants will be exercised
automatically. The trust
certificates will be purchased at
their stated amount plus any
accrued and unpaid distributions to
the exercise date. However, in the
event that such acceleration
payment is less
S-5
than the sum of (i) the early
termination amount, if any, payable
by the trust to the swap
counterparty and (ii) the aggregate
stated amount of the outstanding
trust certificates plus any accrued
and unpaid distributions to the
date of payment, you may not
recover the whole of the stated
amount of your trust certificates.
Mandatory redemption.........................The trust certificates will be
redeemable on an optional
redemption of the underlying
securities. See "Description of the
Underlying Securities - Optional
Redemption" below.
Denominations; specified currency............The trust certificates will each
have a stated amount of $25 and
will be denominated and payable in
U.S. dollars. The underwriter will
initially offer the trust
certificates in minimum lots of 40
trust certificates and subsequent
increments of 40 trust
certificates.
Collection periods...........................Semi-annual periods (or, in the
case of the first collection
period, from and including the
original issue date to, and
including, the first distribution
date). Any income to the trust,
including interest payments on
underlying securities, collected
during a collection period will be
used to pay the trust's obligations
to the swap counterparty, the
certificateholders, the trustee and
others as set out in the Series
Supplement.
Form of trust certificate....................Book-entry certificates with The
Depository Trust Company, or DTC.
See "Description of the Trust
Certificates - Definitive Trust
Certificates" on page S-19.
Distributions will be settled in
immediately available (same-day)
funds.
Trustee......................................The Bank of New York, as successor
to United States Trust Company of
New York.
Ratings......................................"___" by Standard & Poor's Ratings
Services, a division of The McGraw
Hill Companies, Inc. See "Ratings"
on page S-49.
Trust certificate's CUSIP number............._____
The Underlying Securities
Underlying securities........................6.345% Capital Securities due 2034
issued by the underlying securities
issuer. Each underlying security
represents an undivided preferred
beneficial interest in the assets
of the underlying securities
issuer. The underlying securities
issuer used the proceeds from the
sale of its capital securities and
its common securities to purchase
6.345% junior subordinated
debentures due February 15, 2034,
or the junior subordinated
debentures issued by GS Group. The
underlying securities issuer will
pass through
S-6
to the holders of the underlying
securities as distributions the
interest payments it receives from
GS Group on the junior subordinated
debentures.
Underlying securities issuer.................Goldman Sachs Capital I.
Underlying securities guarantor..............Goldman Sachs Group, Inc. has fully
and unconditionally guaranteed the
underlying securities issuer's
obligation on the underlying
securities to the extent described
below under "Description of the
Underlying Securities--Description
of the Guarantee".
Underlying securities trustee ..............The Bank of New York.
Underlying securities original issue date....February 20, 2004.
Underlying securities final payment date.....February 15, 2034.
Denominations; specified currency............The underlying securities are
denominated and payable in U.S.
dollars and are available in
minimum denominations of $1,000 and
multiples thereof.
Underlying securities payment dates..........February 15 and August 15, or if
any such date is not a business
day, then the next succeeding
business day to the persons in
whose names the underlying
securities are registered at the
close of business on the February 1
or August 1, respectively,
immediately prior to the relevant
interest payment date, subject to
certain exceptions.
Underlying securities rate...................6.345% per annum. GS Group may
defer the payment of interest on
the junior subordinated debentures
at any time and in each case for up
to 10 semi-annual consecutive
distribution periods, or an
Extension Period, provided that (i)
no Extension Period may extend
beyond the stated maturity date of
the junior subordinated debentures;
and (ii) GS Group is not in default
under the subordinated debt
indenture governing the junior
subordinated debentures.
If there is a deferral, the
underlying securities issuer also
will defer distributions on the
underlying securities. Before any
Extension Period ends, GS Group may
elect to extend the period further.
At the end of any Extension Period
and the payment of all interest
then accrued and unpaid, GS Group
may elect to begin a new Extension
Period. There is no limitation on
the number of Extension Periods.
Underlying securities distribution periods...Semi-annual periods
Optional redemption..........................The underlying securities have no
stated maturity but must be
redeemed upon the maturity of the
junior subordinated debentures or
their earlier redemption.
If the underlying securities
guarantor repays or redeems the
junior subordinated debentures at
any time, the underlying
S-7
securities issuer will be obligated
to redeem a Like Amount of
underlying securities. The
redemption of the underlying
securities will occur on the
redemption date, which means the
date on which payment of the
principal of those junior
subordinated debentures becomes due
under the subordinated debt
indenture. The redemption price for
the underlying securities will be
the total liquidation amount of the
underlying securities being
redeemed, plus (i) accumulated but
unpaid distributions up to and
including the redemption date; and
(ii) the related amount of the
make-whole amount, if any, in
excess of the total liquidation
amount of the underlying securities
being redeemed, paid to the
underlying securities guarantor or
the concurrent redemption on the
junior subordinated debentures.
The underlying securities guarantor
may redeem the junior subordinated
debentures before their stated
maturity (a) in whole at any time
or in part from time to time,
provided that no partial redemption
may occur during an Extension
Period or (b) in whole at any time
within 90 days after the occurrence
of a Special Event. See
"Description of the Underlying
Securities--Redemption" below.
Form of security.............................Book-entry securities with DTC.
Ratings......................................"A-" by Standard & Poor's Ratings
Services, a division of The McGraw
Hill Companies, Inc., and "A1" by
Moody's Investors Service, Inc.
Underlying securities' CUSIP number..........38143VAA7
The Swap Agreement
Swap Agreement...............................On the date of this prospectus
supplement, the depositor will
enter into an ISDA Master Agreement
(including the schedule thereto and
a confirmation thereunder) with the
swap counterparty, pursuant to
which the depositor will agree to
exchange interest payments received
on the underlying securities for
payments of the interest
distribution amount from the swap
counterparty that will be passed
through to the holders of the trust
certificates.
The swap counterparty, under the
swap agreement, will also agree to
make a one-time payment to the
depositor immediately upon the
execution of the swap agreement.
The depositor will retain the one
time payment, but on the closing
date the depositor will assign all
its other rights and obligations
under the swap agreement to the
trust.
For purposes of this prospectus
supplement, any rights and
obligations the trust has under the
swap agreement assumes
S-8
that the depositor has assigned the
swap agreement to the trust.
Swap counterparty............................Merrill Lynch Capital Services,
Inc. will serve as the swap
counterparty. The payment
obligations of the swap
counterparty will be fully and
unconditionally guaranteed by the
swap guarantor.
Swap guarantor...............................Merrill Lynch & Co.
Swap guarantor's rating......................The swap guarantor currently has a
long-term debt rating of "Aa3" from
Moody's and "A+" from Standard &
Poor's.
Swap payments by the trust...................Provided no swap agreement
termination event shall have
occurred, on each underlying
securities payment date, the trust
will pay to the swap counterparty
the interest payment, including any
deferred interest, received by the
trust in respect of such underlying
securities payment date; provided,
however, that any accrued interest
on the underlying securities from
and including , 2004 to but
excluding the closing date will be
payable to the depositor.
Swap payments by the swap counterparty.......Provided no swap agreement
termination event shall have
occurred, on each distribution date
and on the final distribution date,
an amount equal to the interest
distribution amount and upon
termination of any Extension Period
an amount equal to the deferred
interest will be paid by the swap
counterparty to the trust;
provided, however, that the swap
counterparty will not be obligated
to make any payments to the trust
during the continuance of an
Extension Period with respect to
the underlying securities.
Payment currency.............................United States Dollars
Calculation Agent............................Merrill Lynch Capital Services,
Inc.
Early termination of the swap agreement......The occurrence of any of the
following constitutes a termination
event under the swap agreement
(each, a "swap agreement
termination event") in respect of
which the swap counterparty, on the
one hand, or the trust, on the
other hand, is a "defaulting party"
or an "affected party:"
(i) the swap counterparty
fails to make any payment
under the swap agreement,
and such failure is not
remedied by the fifth
business day after notice
of such failure is given
to it, in which case the
swap counterparty is the
defaulting party;
(ii) the trust fails to make
any payment under the
swap agreement, and such
failure is not remedied
by the fifth business day
after notice of such
failure is given to it,
in which case the
S-9
trust is the defaulting
party (a "trust swap
payment default");
(iii) certain events of
bankruptcy, insolvency or
reorganization in respect
of the swap counterparty,
in which case the swap
counterparty is the
defaulting party;
(iv) the occurrence of an
underlying securities
event of default relating
to (x) the payment of any
distribution on the
underlying securities or
any redemption price of
the underlying securities
or the payment of
principal of or any
make-whole amount, if
any, on the underlying
securities when due (an
"underlying securities
payment default") or (y)
a bankruptcy, insolvency
of reorganization of the
underlying securities
issuer or any of its
affiliates (an
"underlying securities
bankruptcy event"), upon
the occurrence of any of
the events in (x) or (y),
the trust is the affected
party;
(v) as a result of certain
legislative, regulatory
or judicial action, it
becomes unlawful for the
swap counterparty to
comply with any material
provision of the swap
agreement, including any
payment obligation, in
which case the swap
counterparty is the
affected party (a
"counterparty regulatory
event");
(vi) as a result of certain
legislative, regulatory
or judicial action, it
becomes unlawful for the
trust to comply with any
material provision of the
swap agreement, including
any payment obligation,
in which case the trust
is the affected party (a
"trust regulatory event"
and, together with a
counterparty regulatory
event, a "regulatory
event");
(vii) the underlying securities
issuer ceases to file
Exchange Act reports, in
which case the trust is
the affected party;
(viii) the swap guarantor ceases
to file Exchange Act
reports, in which case
the swap counterparty is
the affected party; and
(ix) an optional redemption or
repurchase of or other
unscheduled payment by
the underlying securities
issuer on 100% the
underlying securities
prior to the final
distribution date, in
which case the trust is
the affected party.
S-10
The swap agreement termination
events specified in paragraphs
(ii), (iv), (v), (vi), (vii) and
(ix) above are each also a "trust
termination event. Following any
swap agreement termination event
that is not a trust termination
event, (i) there will be no early
termination payment payable by
either party to the swap agreement
and (ii) the obligations of the
swap counterparty and the trust
under the swap agreement will
terminate.
Following any swap agreement
termination event that is also a
trust termination event, an early
termination payment will be payable
under the swap agreement.
Additionally, following a partial
swap termination event, an early
termination payment will be payable
under the swap agreement based on
the percentage of the swap notional
amount being terminated, but the
trust will only be obligated to
make such early termination payment
that it owes to the swap
counterparty to the extent it has
funds available therefor on the
related distribution date.
In the event the underlying
securities are liquidated as a
result of a default by the
underlying securities issuer on its
obligations, the underlying
securities issuer ceases to file
Exchange Act reports, or an
underlying securities bankruptcy
event, trust swap payment default
or regulatory event occurs, any
early termination payment payable
by the trust to the swap
counterparty will be deducted from
the liquidation proceeds payable to
the holders of the trust
certificates. If any early
termination payment is payable by
the swap counterparty to the trust,
the amount of such payment will be
added to the proceeds payable to
the holders of the trust
certificates.
In the event the underlying
securities are redeemed,
repurchased or repaid, in whole or
in part, prior to their maturity,
the redemption proceeds will be
used to pay holders of the trust
certificates an amount equal to (i)
the principal balance of the trust
certificates being redeemed and
(ii) accrued and unpaid interest
thereon. Any make-whole amount or
other additional proceeds will be
used to satisfy any early
termination payment payable to the
swap counterparty and, thereafter,
will be paid to the holders of the
trust certificates. If any early
termination payment is payable by
the swap counterparty to the trust,
the amount of such payment will be
added to the redemption proceeds
payable to the holders of the trust
certificates. See "Description of
the Swap Agreement--Events of
Default and Termination Events" and
"--Payments Upon Early Termination"
below.
U.S. federal income tax consequences.........Shearman & Sterling LLP, special
U.S. federal tax counsel to the
depositor, has provided its opinion
of counsel to the effect that the
trust will be classified under
current U.S.
S-11
federal income tax law as a grantor
trust, and not as an association
(or publicly traded partnership)
taxable as a corporation.
Accordingly, each trust
certificateholder generally will be
treated for U.S. federal income tax
purposes as if the trust
certificateholder (i) owned
directly a pro rata undivided
interest in the underlying
securities and swap agreement held
by the trust, (ii) wrote directly a
call warrant on such interest in
the underlying securities and swap
agreement and (iii) paid directly
its share of reasonable expenses
paid by the trust. The terms of the
trust certificates require an
initial trust certficateholder to
make an "integration election" (as
defined herein) with respect to the
trust certificates in accordance
with applicable Treasury
regulations. See "U.S. Federal
Income Tax Consequences" below.
S-12
SUMMARY INFORMATION Q&A
The following information supplements, and should be read together
with, the information contained in other parts of this prospectus supplement and
in the accompanying prospectus. This summary highlights selected information
from this prospectus supplement and the accompanying prospectus to help you
understand the trust certificates. You should carefully read this prospectus
supplement and the accompanying prospectus to understand fully the terms of the
trust certificates, as well as the tax and other considerations that are
important to you in making a decision about whether to invest in the trust
certificates. You should pay special attention to the "Risk Factors" sections
beginning on page S-14 of this prospectus supplement and on page 6 of the
accompanying prospectus to determine whether an investment in the trust
certificates is appropriate for you.
For your convenience, we make reference to specific page numbers in
this prospectus supplement and the accompanying prospectus for more detailed
information on some of the terms and concepts used throughout this prospectus
supplement.
What Are the Trust Certificates?
Each trust certificate represents a proportionate, undivided beneficial
interest in certain distributions to be made by the trust. Each trust
certificate will entitle the holder to receive semiannual cash distributions as
described in this prospectus supplement. The underwriter is offering PPLUS
Floating Rate Callable Trust Certificates Series GSC-2 with a stated amount of
$25 per trust certificate. The trust certificates will be issued pursuant to the
Standard Terms for Trust Agreements, dated as of February 20, 1998, between
Merrill Lynch Depositor, Inc. and The Bank of New York, as successor to United
States Trust Company of New York, as trustee and securities intermediary, as
amended and supplemented by the Series GSC-2 Supplement, between Merrill Lynch
Depositor, Inc., as depositor, and the trustee and securities intermediary, to
be dated the date set forth in this prospectus supplement (collectively, the
"trust agreement"). All payments on the trust certificates will come from the
underlying securities.
On or after the closing date set forth in this prospectus supplement,
call warrants may be issued that represent the right of the holders of the call
warrants to purchase outstanding trust certificates in whole or in part as
discussed under "Description of the Trust Certificates - Call Warrants" on page
S-21 of this prospectus supplement. The call warrants are not being offered
pursuant to this prospectus supplement.
Who Is the Trust?
PPLUS Trust Series GSC-2 will be a trust formed under the laws of the
State of New York. The trust certificates issued by the trust will be sold to
the public. The trust will be formed pursuant to the Standard Terms for Trust
Agreements, as amended and supplemented by the Series Supplement described
above. The Bank of New York is the trustee under the trust agreement and will
receive compensation as set forth in an agreement between the depositor and the
trustee.
Who Is the Depositor?
Merrill Lynch Depositor, Inc., incorporated in the State of Delaware as
an indirect, wholly owned, limited purpose subsidiary of Merrill Lynch & Co.,
Inc., is the depositor and will deposit the underlying securities into the
trust. See "The Depositor" on page 16 of the accompanying prospectus. The
depositor is an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated,
the underwriter of this offering.
What Are the Important Dates to Remember?
Delivery of the trust certificates will be made on the closing date, as
set forth in this prospectus supplement. This prospectus supplement describes
the underlying securities held by the trust as of the cut-off date, as set forth
in this prospectus supplement.
S-13
What Are the Trust's Assets?
The initial assets of the trust will be the underlying securities and
the swap agreement. The underlying securities consist of $_______ 6.345% Capital
Securities due February 15, 2034 issued by Goldman Sachs Capital I, a Delaware
statutory trust, and guaranteed by Goldman Sachs Group, Inc., a Delaware
corporation, to the extent set forth under "Description of the Underlying
Securities--Description of the Guarantee". The underlying securities held by the
trust will represent approximately _____% of the total issuance of the 6.345%
Capital Securities due February 15, 2034. The underlying securities were issued
pursuant to an amended and restated trust agreement dated as of January 20,
2004, among the underlying securities guarantor, as depositor, the underlying
securities issuer and the underlying securities trustee. Pursuant to a
registration statement filed by the underlying securities issuer on Form S-3
(No. 333-112367), as supplemented by a prospectus supplement dated February 12,
2004, the underlying securities were originally issued in the form of book-entry
securities deposited with The Depository Trust Company, New York, New York, or
DTC. The underlying securities have a CUSIP number of 38143VAA7.
The underlying securities do not have a stated maturity date but will
be redeemed on February 15, 2034, the maturity date of the 6.345% junior
subordinated debentures issued by the underlying securities guarantor (the
"junior subordinated debentures"), unless redeemed earlier as described under
"Description of the Underlying Securities--Redemption" below. The junior
subordinated debentures along with the underlying securities (as described
below) are the assets of the underlying securities issuer. The entire
liquidation amount of the underlying securities will be payable to the trust on
February 15, 2034. Either prior to the closing date of the offering of the trust
certificates or from time to time, the depositor may, without the consent of the
trust certificateholders, increase the amount of the initial assets of the trust
and issue a corresponding amount of additional trust certificates.
In addition, on the date of this prospectus supplement the depositor
will enter into an ISDA Master Agreement (including the schedule thereto and a
confirmation thereunder) with the swap counterparty, pursuant to which the
depositor will agree to exchange interest payments (including any accrued and
unpaid interest and any additional interest thereon) due on the underlying
securities for payments of the interest distribution amount from the swap
counterparty that will be passed through to the holders of the trust
certificates.
The swap counterparty, under the swap agreement, will also agree to
make a one-time payment to the depositor immediately upon the execution of the
swap agreement. The depositor will retain the one time payment but, on the
closing date, the depositor will assign all its other rights and obligations
under the swap agreement to the trust. For purposes of this prospectus
supplement, any rights and obligations the trust has under the swap agreement
assumes that the depositor has assigned the swap agreement to the trust.
When Will You Receive Distributions?
If you purchase the trust certificates, you will be entitled to receive
cash distributions on a quarterly basis at a floating rate of ___%, as described
under "Description of the Swap Agreement". For the first distribution period,
from and including the closing date to but excluding the first distribution
date, interest will be payable at the rate of ___% per annum ( ___%, three-month
USD LIBOR as of ____, 2004 plus ___%). Thereafter, interest will be reset
quarterly on each distribution reset date and will be payable on each
distribution date at a floating rate equal to or greater than the minimum
certificate rate but not to exceed the maximum certificate rate.
Each quarterly distribution on the trust certificates represents the
interest received on the underlying securities from the corresponding collection
period. Such interest is paid to the trust in accordance with the terms of the
underlying securities.
When Can Payment of Your Distributions Be Deferred?
The Goldman Sachs Group, Inc., as issuer of the junior subordinated
debentures, can, on one or more occasions, defer interest payments on the junior
subordinated debentures for up to 10 consecutive semiannual interest periods
unless an event of default under the junior subordinated debentures has occurred
or if the junior
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subordinated debentures are redeemed. A deferral cannot extend beyond the
maturity date of the junior subordinated debentures, which is February 15, 2034.
If the junior subordinated debentures issuer does defer interest
payments on the junior subordinated debentures, the underlying securities issuer
will defer payments on the underlying securities. If the underlying securities
issuer defers payments on the underlying securities, the trust and the swap
counterparty will defer their respective payments on the swap agreement, and the
trust will defer payments of interest distribution amounts on the trust
certificates. During this deferral period, interest distribution amounts will
continue to accrue on the trust certificates at an annual rate of 6.345% of the
stated amount of $25 per trust certificate. Also, the deferred distributions
will themselves accrue distributions at an annual rate of 6.345%. Once the
junior subordinated debentures issuer makes all interest payments on the junior
subordinated debentures, with accrued interest, it can again postpone interest
payments on the junior subordinated debentures if no event of default under the
junior subordinated debentures has occurred and is continuing.
Should the junior subordinated debentures issuer exercise its right to
defer payments of interest on the junior subordinated debentures, you will be
required to accrue interest income for United States federal income tax purposes
before you receive cash distributions. See "Federal Income Tax Consequences" on
page S-40 and "Risk Factors--If the junior subordinated debentures issuer
exercises its option to defer interest payments on the junior subordinated
debentures, the trust certificateholders may face adverse tax consequences" on
page S-17.
When Can the Trust Redeem the Trust Certificates?
The trust certificates will be redeemed in accordance with the
redemption of the underlying securities. The trust will redeem all of the
outstanding trust certificates when the underlying securities are paid at
maturity on _____ (the "stated maturity date") or on their earlier redemption.
The underlying securities issuer may redeem all or some of the underlying
securities before the stated maturity date at its option. If the underlying
securities issuer redeems less than all of the underlying securities then the
trustee will select by lot a stated amount of trust certificates proportional to
the amount of underlying securities being redeemed and redeem those trust
certificates for a pro rata portion of the redemption price. See "Description of
the Trust Certificates - Redemption," "Description of the Underlying Securities
- - Optional Redemption" below and the definition of allocation ratio on page
S-24. Upon redemption of the underlying securities, the call warrant holders
will have the right to exercise their call warrants. See "When Will the Trust
Certificates Be Subject to Call Warrants?" below. Upon exercise of any call
warrants, the trustee will select by lot a stated amount of trust certificates
to be surrendered to the trustee in exchange for a pro rata portion of the call
exercise price. Following its receipt of the trust certificates called, the
trustee will surrender the called trust certificates to the exercising call
warrant holders.
When Will the Trust Certificates Be Subject to Call Warrants?
On any business day on or after ____, 2009 that any call warrant
holders designate as a "Call Date," the call warrant holders may, upon notice of
not less than 30 days (or in the case of the announcement of any redemption or
other unscheduled payment of the underlying securities or after receipt of
notice of termination of the trust, not less than three days notice, or when a
tender offer for the underlying securities is pending, not less than five days
notice prior to the expiration of the tender offer acceptance period) but not
more than 60 days prior to that Call Date, purchase your trust certificates in
whole or in part at their stated amount plus any accrued and unpaid
distributions to the Call Date. On any business day before ____, 2009 and after
the announcement of any redemption or other unscheduled payment of the
underlying securities or receipt of notice of termination of the trust or when a
tender offer for the underlying securities is pending, that any call warrant
holders designate as a "Call Date," the call warrant holders may, after receipt
of notice of any redemption or other unscheduled payment of the underlying
securities or of termination of the trust, upon notice of not less than three
days, or when a tender offer for the underlying securities is pending upon
notice of not less than five days prior to the expiration of the tender offer
acceptance period, but not more than 60 days prior to that Call Date, purchase
your trust certificates in whole or in part at their stated amount plus any
accrued and unpaid distributions to the Call Date and, on a pro rata basis, any
early termination amount payable to the swap counterparty. In addition, at any
time upon an acceleration of the underlying securities and payment in full by
the underlying securities issuer of all amounts when due and where the
S-15
acceleration payment exceeds the sum of (i) the early termination amount, if
any, payable by the trust to the swap counterparty and (ii) the aggregate stated
amount of the outstanding trust certificates plus any accrued and unpaid
distributions to the date of payment, all outstanding call warrants will be
exercised automatically. The trust certificates will be purchased at their
stated amount plus any accrued and unpaid distributions to the exercise date.
However, in the event that such acceleration payment is less than the sum of (i)
the early termination amount, if any, payable by the trust to the swap
counterparty and (ii) the aggregate stated amount of the outstanding trust
certificates plus any accrued and unpaid distributions to the date of payment,
you may not recover the whole of the stated amount of your trust certificates.
Upon notice of exercise of any call warrants, the trustee will select
by lot a stated amount of the trust certificates to be surrendered to the
trustee in exchange for a pro rata portion of the call exercise price. Following
its receipt of the trust certificates upon such exercise of any call warrants,
the trustee will surrender the trust certificates to the exercising call warrant
holders.
The call warrant holders are not required to exercise their call
warrants with respect to the trust certificates prior to their stated maturity
date. We cannot assure you that the call warrant holders will purchase your
trust certificates prior to _____. For additional information on the exercise of
call warrants, see "Description of the Trust Certificates - Call Warrants" on
page S-21.
What Happens If There Is a Payment Default on the Underlying Securities?
If there is a payment default on the underlying securities, the
trustee, on or immediately after the 30th day after that default, will terminate
the swap agreement and sell the underlying securities. The trustee will
distribute the proceeds, less the early termination payment payable by the trust
to the swap counterparty (if any is then payable), pro rata to the
certificateholders. Upon such sale, the call warrants will expire and have no
value.
If, after any default and prior to the trustee selling the underlying
securities, there is an acceleration of the maturity of the underlying
securities and the underlying securities are declared to be immediately due and
payable and the underlying securities issuer
(1) pays all amounts when due, then, on or after _____,
2009, the trustee will distribute such amounts (less any
early termination amount payable by the trust to the swap
counterparty) pro rata to the trust certificateholders and,
prior to _____, 2009, the trustee will follow the procedure
set forth in the second paragraph below,
(2) fails to pay such amount when due, then the trustee will
sell all or a portion of the underlying securities necessary
to satisfy any early termination amount payable to the swap
counterparty. Thereafter the trust will distribute any
remaining underlying securities pro rata to the trust
certificateholders, or
(3) pays only a portion of such amount when due, then the
trustee will distribute any amounts received (less any early
termination amount payable by the trust to the swap
counterparty) and the underlying securities pro rata to the
trust certificateholders.
In addition, if the underlying securities issuer ceases to file Exchange Act
reports, the call warrant holders will have an opportunity to exercise their
call rights. Thereafter the trust will sell all or a portion of the underlying
securities necessary to satisfy any early termination amount payable to the swap
counterparty and then distribute any remaining underlying securities pro rata to
the trust certificateholders.
If the events set forth in clause (1) above occur on any business day
before ____, 2009, and if such payment exceeds the sum of the aggregate stated
amount of the outstanding trust plus any accrued and unpaid distributions to the
date of payment and, on a pro rata basis, any early termination amount payable
to the swap counterparty, all call warrant holders will be deemed to have
automatically exercised their rights pursuant to all outstanding call warrants.
From the acceleration payment, first, the early termination payment payable by
the trust,
S-16
if any, will be paid to the swap counterparty, second, the trust certificates
will be purchased at their stated amount plus any accrued and unpaid
distributions to the exercise date, third, any remaining proceeds will be paid
to the call warrant holders.
If the events set forth in clause (2) above occur, the call warrants
will expire and have no value. If the events set forth in clause (3) occur, the
call warrant holders will have an opportunity to exercise call rights before the
trustee distributes any amounts received or any underlying securities to the
trust certificateholders.
In What Form Will the Trust Certificates Be Issued?
Except in limited circumstances, the trust certificates will be
represented by one or more global securities that will be deposited with and
registered in the name of DTC or its nominee. This means that you will not
receive a certificate for your trust certificates. The trust certificates will
be ready for delivery through DTC on or about the date set forth in this
prospectus supplement. The trust certificates will have the CUSIP number set
forth in this prospectus supplement.
How Will the Trust Be Treated for U.S. Federal Income Tax Purposes?
Shearman & Sterling LLP, special U.S. federal income tax counsel to the
depositor, has provided its opinion of counsel to the effect that the trust will
be classified under current U.S. federal income tax law as a grantor trust, and
not as an association (or publicly traded partnership) taxable as a corporation.
Accordingly, each trust certificateholder generally will be treated for U.S.
federal income tax purposes as if the trust certificateholder (i) owned directly
a pro rata undivided interest in the underlying securities and swap agreement
held by the trust, (ii) wrote directly the call warrant related to such interest
in the underlying securities and swap agreement and (iii) paid directly its
share of reasonable expenses paid by the trust. The terms of the trust
certificates require an initial trust certficateholder to make an "integration
election" (as defined herein) with respect to the trust certificates in
accordance with applicable Treasury regulations. See "U.S. Federal Income Tax
Consequences" on page S-42.
Will the Trust Certificates Be Listed on a Stock Exchange?
The trust intends to apply to have the trust certificates listed on the
New York Stock Exchange, or the NYSE, under the symbol "___." If approved for
listing, trading of the trust certificates is expected to commence within 30
days after they are first issued. You should be aware that the listing of the
trust certificates will not necessarily ensure that a liquid trading market will
be available for the trust certificates.
Will the Trust Certificates Be Rated?
It is a condition to the issuance of the trust certificates that the
trust certificates have ratings assigned by Moody's Investors Service, Inc. or
by Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc. (each, a "rating agency" and collectively, the "rating agencies"),
equivalent to the ratings of the underlying securities. As of the date of this
prospectus supplement, the underlying securities were rated _____ by Moody's and
_____ by S&P. The trust certificates will not be rated by Moody's.
The rating of the trust certificates by S&P addresses the likelihood of
timely payment of distributions on the trust certificates or any underlying
securities distributed in respect of the trust certificates. We cannot assure
you that any such rating will continue for any period of time or that it will
not be revised or withdrawn entirely by the related rating agency if, in its
judgment, circumstances (including, without limitation, the rating of the
underlying securities) so warrant. A revision or withdrawal of such rating may
have an adverse effect on the market price of the trust certificates. A security
rating is not a recommendation to buy, sell or hold securities. The rating on
the trust certificates does not constitute a statement regarding the occurrence
or frequency of redemption of the underlying securities and the corresponding
effect on yield to investors.
S-17
Can an Employee Benefit Plan Purchase the Trust Certificates?
An employee benefit plan subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and an individual retirement account
(each, a "plan") are each permitted to purchase trust certificates. However,
each plan should take into consideration certain potential issues under ERISA
and, by purchasing a trust certificate, will be deemed to represent that the
purchase and holding of the trust certificate will not result in a non-exempt
prohibited transaction under ERISA.
Where Can You Find More Information About the Underlying Securities Issuer and
the Swap Guarantor?
The underlying securities issuer and the swap guarantor are subject to
the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which means that it files periodic reports,
including reports on Forms 10-K and 10-Q, and other information with the
Securities and Exchange Commission. You can read and copy these reports and
other information at the public reference facilities maintained by the SEC at
Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549. You may obtain copies
of this material for a fee by writing to the SEC's Public Reference Section of
the SEC at 450 Fifth Street, NW, Washington, D.C. 20549. You may obtain
information about the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. You can also access some of this information electronically
by means of the SEC's website on the Internet at http://www.sec.gov, which
contains reports, proxy and information statements and other information that
the underlying securities issuer have filed electronically with the SEC.
The underlying securities issuer filed with the SEC a registration
statement on Form S-3, the "registration statement," which term shall include
all amendments, exhibits, annexes and schedules thereto) pursuant to the
Securities Act of 1933, as amended, and a prospectus supplement, as amended with
respect to the underlying securities. The prospectus and the prospectus
supplement relating to the underlying securities do not contain all the
information set forth in the registration statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. For further
information with respect to the underlying securities and the underlying
securities issuer you should refer to the prospectus supplement, the
registration statement and its exhibits, and the indenture, as supplemented.
Statements contained in this prospectus supplement as to the contents of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or document filed with the SEC,
each such statement being qualified in all respects by such reference.
You should not rely on this prospectus supplement for information with
respect to the underlying securities issuer. This prospectus supplement sets
forth certain relevant terms with respect to the underlying securities but does
not provide detailed information with respect to the underlying securities or
the underlying securities issuer. This prospectus supplement relates only to the
trust certificates offered hereby and does not relate to the underlying
securities or an offer therefor. All disclosure contained herein with respect to
the underlying securities issuer and the swap guarantor is derived from publicly
available documents.
No investigation with respect to the underlying securities issuer or
the swap guarantor (including, without limitation, no investigation as to their
respective financial condition or creditworthiness) or the underlying securities
has been made. You should obtain and evaluate the same information concerning
the underlying securities issuer as you would obtain and evaluate if you were
investing directly in the underlying securities or in other securities issued by
the underlying securities issuer. None of the depositor, the trustee, the swap
counterparty, the swap guarantor, the underwriter, or any of their affiliates,
assumes any responsibility for the accuracy or completeness of any publicly
available information of the underlying securities issuer filed with the SEC or
otherwise made publicly available or considered by you in making your investment
decision in connection therewith.
S-18
RISK FACTORS
Your investment in the trust certificates will involve certain risks.
You should carefully consider the following discussion of risks, and the other
information included or incorporated by reference in this prospectus supplement
and the accompanying prospectus, before deciding whether an investment in the
trust certificates is suitable for you.
If the underlying securities are redeemed prior to their maturity date or if any
call warrants are exercised prior to the stated maturity date, you may not be
able to reinvest your redemption or call proceeds at a yield comparable to the
yield you would have received on your trust certificates
The yield you will realize on your trust certificates depends upon
several factors, including
o whether an early termination payment is payable by the trust to
the swap counterparty,
o the purchase price of the trust certificates,
o when you acquire your trust certificates,
o whether the underlying securities issuer exercises its option to
redeem the underlying securities, and
o whether the call warrant holders exercise their optional rights
to purchase outstanding trust certificates.
The underlying securities issuer has the right to redeem the underlying
securities in whole or in part at its option. Because the underlying securities
issuer has the right to redeem the underlying securities early, we cannot assure
you that the trust will be able to hold the underlying securities until their
maturity date.
Although the call warrant holders are not obligated to exercise the
call warrants, the yield you will realize on your trust certificates depends on
whether the call warrant holders exercise their call warrants to purchase the
trust certificates. On any business day on or after ___, 2009 that any call
warrant holders designate as a "Call Date," the call warrant holders may, upon
notice of not less than 30 days (or in the case of announcement of any
redemption or other unscheduled payment of the underlying securities or after
receipt of notice of termination of the trust, not less than three days notice,
or when a tender offer for the underlying securities is pending, not less than
five days notice prior to the expiration of the tender offer acceptance period)
but not more than 60 days prior to that Call Date, purchase your trust
certificates in whole or in part at their stated amount plus any accrued and
unpaid distributions to the Call Date. On any business day before ___, 2009 and
after the announcement of any redemption or other unscheduled payment of the
underlying securities or receipt of notice of termination of the trust or when a
tender offer for the underlying securities is pending, that any call warrant
holders designate as a "Call Date," the call warrant holders may, after receipt
of notice of any redemption or other unscheduled payment of the underlying
securities or of termination of the trust, upon notice of not less than three
days, or when a tender offer for the underlying securities is pending upon
notice of not less than five days prior to the expiration of the tender offer
acceptance period, but not more than 60 days prior to that Call Date, purchase
your trust certificates in whole or in part at their stated amount plus any
accrued and unpaid distributions to the Call Date and, on a pro rata basis, any
early termination amount payable to the swap counterparty. In addition, at any
time upon an acceleration of the underlying securities and payment in full by
the underlying securities issuer of all amounts when due and where the
acceleration payment exceeds the sum of (i) the early termination amount, if
any, payable by the trust to the swap counterparty and (ii) the aggregate stated
amount of the outstanding trust certificates plus any accrued and unpaid
distributions to the date of payment, all outstanding call warrants will be
exercised automatically. The trust certificates will be purchased at their
stated amount plus any accrued and unpaid distributions to the exercise date.
However, in the event that such acceleration payment is less than the sum of (i)
the early termination amount, if any, payable by the trust to the swap
counterparty and (ii) the aggregate stated amount of the outstanding trust
certificates
S-19
plus any accrued and unpaid distributions to the date of payment, you may not
recover the whole of the stated amount of your trust certificates.
If the call warrant holders exercise their call warrants for trust
certificates, the trust will redeem the trust certificates or select by lot
trust certificates to be surrendered to the call warrant holders. Prevailing
interest rates at the time of an early redemption or a call exercise may be
lower than the yield on your trust certificates. Therefore, you may be unable to
realize a comparable yield upon reinvesting the funds you receive from an early
redemption or exercise of any call warrants. In addition, if the prevailing
market value of the trust certificates exceeds the redemption price or call
exercise price paid to you upon a redemption of the underlying securities or the
exercise of a call, you will not be able to realize such excess.
See "Description of the Trust Certificates - Call Warrants" on page
S-21 and see "Description of the Underlying Securities - Optional Redemption" on
page S-31.
You may suffer losses as a result of any swap early termination payment upon the
liquidation of the underlying securities
In the event the underlying securities are liquidated as a result of a
default by the underlying securities issuer on its obligations or the underlying
securities issuer ceases to file Exchange Act report, or upon an underlying
securities bankruptcy event, trust swap payment default or a trust regulatory
event, you will not receive any distributions payable to you until after the
payment of the early termination payment (if any is then payable) to the swap
counterparty. Unless the proceeds received from the liquidation of the
underlying securities are sufficient to pay any early termination payment plus
the certificate principal balance and accrued and unpaid interest then due on
the trust certificates, you will suffer a loss as a result of such early
termination payment and such liquidation. This loss could be quite substantial
in relation to the total value of your trust certificates. See "Description of
the Certificates--The Certificates--Interest Distributions" and "--Principal
Distribution" below.
An inactive public market may limit your ability to sell your trust certificates
We cannot assure you that an active public market for the trust
certificates will develop or, if a public market develops, that you will be able
to sell your trust certificates. Merrill Lynch, Pierce, Fenner & Smith
Incorporated has advised the depositor that it intends to make a market in the
trust certificates, as permitted by applicable laws and regulations. Merrill
Lynch, Pierce, Fenner & Smith Incorporated is not obligated, however, to make a
market in any series of the trust certificates. At its sole discretion, Merrill
Lynch, Pierce, Fenner & Smith Incorporated may discontinue its market-making
activities at any time without notice to you. In addition, the underlying
securities are not listed on a securities exchange. Upon certain events
described on page S-22 of this prospectus supplement, the underlying securities
may be distributed to you. We cannot assure you that an active public market for
the underlying securities will exist at the time any underlying securities are
distributed to you, or if a public market exists, that you will be able to sell
the underlying securities that you may hold. If an active public market for the
trust certificates or the underlying securities does not exist or continue, the
market prices and liquidity of your trust certificates or the underlying
securities that you may hold may be adversely affected. We expect to apply for
listing of the trust certificates on the NYSE.
You may not be paid if the assets of the trust are insufficient
Currently, the trust has no significant assets other than the
underlying securities and the swap agreement. If the underlying securities or
payments made under the swap agreement are insufficient to make distributions on
the trust certificates, no other assets will be available for payment of the
deficiency.
The underlying securities issuer conducts its business through
subsidiaries. Accordingly, its ability to meet its obligations under the
underlying securities is dependent on the earnings and cash flows of those
subsidiaries and the ability of those subsidiaries to pay dividends or to
advance or repay funds to the underlying securities issuer. In addition, the
rights that the underlying securities issuer and its creditors would have to
participate in the assets of any such subsidiary upon the subsidiary's
liquidation or recapitalization will be subject to the prior claims of the
S-20
subsidiary's creditors. Certain subsidiaries of the underlying securities issuer
have incurred substantial amounts of debt in the expansion of their businesses,
and the underlying securities issuer anticipates that certain of its
subsidiaries will do so in the future.
You may not recover the whole of the stated amount of your trust certificates if
the trust disposes of the underlying securities on a default by the underlying
securities issuer or in the event the underlying securities issuer ceases filing
Exchange Act reports
If the underlying securities issuer defaults on its obligations under
the underlying securities or the underlying securities issuer ceases to file
Exchange Act reports, then the trust will either distribute the underlying
securities to the trust certificateholders or dispose of them and distribute the
proceeds to the trust certificateholders. Your recovery in either of those
events may be limited by three factors:
o if a default occurs, the market value of the underlying
securities may be adversely affected and the proceeds of their
disposition may be lower than the aggregate stated amount of the
trust certificates;
o in either event, any funds or underlying securities distributed
by the trust to may be less than the stated amount of your trust
certificates; and
o any such distribution of funds will be subject to the payment by
the trust to the swap counterparty of any early termination
payment.
The trustee will not manage the underlying securities
Except as described below, the trust will not dispose of any underlying
securities, even if an event occurs that adversely affects the value of the
underlying securities or that adversely affects the underlying securities
issuer. As provided in the trust agreement, the trust will dispose of the
underlying securities only if
o there is a payment default on any underlying securities,
o there is another type of default that accelerates the maturity
of the underlying securities, or
o the underlying securities issuer ceases to file Exchange Act
reports.
Under the first circumstance listed above, the trustee must sell the underlying
securities on behalf of the trust, even if adverse market conditions exist. The
trustee has no discretion to do otherwise. If adverse market conditions do exist
at the time of the trustee's sale of the underlying securities, you may incur
greater losses than if the trust continued to hold the underlying securities.
The depositor, the underwriter, the swap counterparty, the swap guarantor and
the trustee have not investigated the underlying securities
The depositor, the underwriter, the swap counterparty, the swap
guarantor and the trustee have not
o investigated the business condition, financial or otherwise, of
the underlying securities issuer, or
o verified any reports or information that the underlying
securities issuer has filed with the SEC.
We encourage you to consider publicly available information concerning the
underlying securities issuer. You should not construe the trust's issuance of
the trust certificates as an endorsement by the depositor, the underwriter or
the trustee of the financial condition or business prospects of the underlying
securities issuer.
S-21
The trust certificates are subject to the creditworthiness of the underlying
securities issuer
The trust certificates represent interests in obligations of the
underlying securities issuer. In particular, the trust certificates will be
subject to all the risks associated with directly investing in the underlying
securities issuer's unsecured unsubordinated debt obligations. Neither the
indenture nor the underlying securities place a limitation on the amount of
indebtedness that may be incurred by the underlying securities issuer.
The payments owed to the trust certificateholders are unsecured obligations
In a liquidation, holders of the underlying securities, including the
trust, will be paid only after holders of secured obligations of the underlying
securities issuer. According to the underlying securities prospectus, the
underlying securities are unsecured and rank equally with all other unsecured
and unsubordinated indebtedness of the underlying securities issuer.
If the swap agreement is terminated as a result of a swap agreement termination
event which is not a trust termination event, then the yield on the trust
certificates will be converted from a floating rate to a fixed rate and
distributions to you will be made semi-annually instead of quarterly
The ability of the trust to make quarterly payments on interest rate
distributions on the trust certificates will be dependent on the performance by
the swap counterparty of its payment obligations under the swap agreement. If
the swap agreement were to be terminated as a result of a swap agreement
termination event that is not also a trust termination event, then (i) the trust
will remain in existence without any rights or obligations under the swap
agreement and (ii) you will receive a pro rata share of the fixed rate interest
payments received by the trust in respect of the underlying securities on a
semi-annual basis, instead of a pro rata share of the floating rate payments
under the swap agreement received by the trust on a quarterly basis.
You will not receive timely distributions on the trust certificates if the trust
does not receive timely distributions on the underlying securities
GS Group may defer the payment of interest on the junior subordinated
debentures at any time and in each case for up to 10 semi-annual consecutive
interest periods, provided that (i) no Extension Period may extend beyond the
stated maturity date of the junior subordinated debentures; and (ii) GS Group is
not in default under the subordinated debt indenture governing the junior
subordinated debentures. If there is a deferral, the underlying securities
issuer also will defer distributions on the underlying securities and the swap
counterparty will not be obligated to make any payments to the trust pursuant to
the swap agreement. Before any Extension Period ends, GS Group may elect to
extend the period further. At the end of any Extension Period and the payment of
all interest then accrued and unpaid, GS Group may elect to begin a new
Extension Period. There is no limitation on the number of Extension Periods. If
the underlying securities Issuer does not pay any amounts due under the
underlying securities, as a result of a deferral, the swap counterparty is not
obligated to make payments to the trust, and the trust will not make any
corresponding payments on the trust certificates.
Should GS Group elect to exercise its right to defer payments of
interest on the junior subordinated debentures in the future, the market price
of the underlying securities is likely to be adversely affected. In addition,
merely as a result of the existence of GS Group's right to defer payments of
interest on the junior subordinated debentures, the market price of the
underlying securities may be more volatile than the market prices of other
securities that are not subject to such deferrals.
Distributions and other payments with respect to your trust certificates and
your expected investment yield may be affected by factors such as the
performance of the trust assets, the redemption of the underlying securities and
the early termination of the swap agreement
A number of factors may affect the timing of distributions with respect
to your trust certificates and the yield that you realize on your trust
certificates, including:
S-22
o the purchase price you pay for your trust certificates;
o the interest rate on the trust certificates, which will be greater than
or equal to __% and will not exceed __%;
o the performance of the underlying securities;
o whether the underlying securities issuer redeems, repurchases or repays
the underlying securities before their maturity;
o whether GS Group elects to defer interest payments on the junior
subordinated debentures;
o whether the underlying securities issuer defaults under the underlying
securities;
o the possibility that if there is a swap termination event that is not a
trust termination event a fixed rate of 6.345% per annum will be payable on
the trust certificates, instead of the floating rate distribution amount
payable under the swap agreement;
o the possibility that the swap agreement may be terminated early in
certain circumstances, resulting in the termination of the trust prior to
its scheduled termination date; and
o whether the holder of the call options exercises its call options on your
trust certificates.
None of the depositor, the trustee, the swap counterparty or the
underwriter can predict whether or when the call options will be exercised,
whether the underlying securities will be redeemed, repaid, repurchased or
accelerated or whether interest on the junior subordinated debentures will be
deferred. If the trust certificates are prepaid or if the holder of the call
options exercises its call options prior to the final distribution date, then
the principal of your trust certificates or the call price will be paid to the
extent funds are received on the underlying securities or the holder of the call
options pays the call price and your investment in the trust certificates will
have a shorter average maturity.
Upon a swap termination event whereby the swap counterparty is the defaulting
party or affected party, you are not likely to receive from the swap
counterparty any interest that has accrued
Upon a swap termination event that is not a trust termination event
whereby the swap counterparty is the defaulting party (especially upon the
bankruptcy, insolvency or reorganization of the swap counterparty), it is
unlikely that you will receive from the swap counterparty any interest that has
accrued since the last quarterly payment of the interest distribution amount.
The business activities of the swap counterparty and its affiliates may create
conflicts of interest between you and the swap counterparty and its affiliates
The swap counterparty and certain of its affiliates are acting in a
number of capacities in connection with this offering. The swap counterparty and
each of its affiliates acting in such capacities in connection with this
offering will have only the duties and responsibilities expressly agreed to by
such entity in the relevant capacity and will not by virtue of its or any of its
affiliates' acting in any other capacity, be deemed to have other duties or
responsibilities or be deemed to be held to a standard of care other than as
expressly provided with respect to each such capacity.
S-23
If the trust certificates are prepaid when prevailing market interest rates for
securities of a comparable credit rating are lower than the yield on your trust
certificates, you may be unable to realize a comparable yield when you reinvest
the funds that you receive from the prepayment of your trust certificates.
If the trust certificates are prepaid when prevailing market interest
rates for securities of a comparable credit rating are lower than the yield on
your trust certificates, you may be unable to realize a comparable yield when
you reinvest the funds that you receive from the prepayment of your trust
certificates.
The interest rate cap on the trust certificates may limit your interest payments
and may negatively impact the market value of your trust certificates
The interest paid on the trust certificates is based on a floating rate
that will not exceed ___%. If interest rates exceed ___%, your trust
certificates will not receive interest based on the higher interest rate but
rather will be capped ___%. The market value of your trust certificates will
also be negatively affected as interest rates rise.
The trust owes certain payments to an affiliate of the underwriter
On _______, as payment of the balance of the purchase price for the
underlying securities, the trustee will pay to an affiliate of the underwriter
the amount of the distributions accrued on the underlying securities from
_______ to but not including the closing date set forth in this prospectus
supplement. In the event an optional redemption, a payment default or
acceleration on the underlying securities occurs on or prior to _______ and the
affiliate of the underwriter is not paid such accrued distributions on such
date, the affiliate of the underwriter will have a claim for such accrued
distributions, and will share pro rata with holders of the trust certificates to
the extent of such claim in the proceeds from the recovery on the underlying
securities.
The ratings of the trust certificates may change
At the time of issuance, S&P will have assigned ratings to the trust
certificates equivalent to the ratings of the underlying securities, which, as
of the date of this prospectus supplement were rated "___" by S&P. The trust
certificates will not be rated by Moody's.
Any rating issued with respect to the trust certificates is not a
recommendation to purchase, sell or hold a security. Ratings do not comment on
the market price of the trust certificates or their suitability for a particular
investor. The depositor cannot assure you that initial ratings will remain for
any given period of time or that a ratings agency would not revise or withdraw
entirely the ratings if, in its judgment, circumstances (including, without
limitation, the rating of the underlying securities) merit. A revision or
withdrawal of a rating may adversely affect the market price of the trust
certificates.
An affiliate of the depositor may recognize a gain or loss upon selling the
underlying securities to the depositor for deposit into the trust
An affiliate of the depositor will purchase, in the secondary market,
the underlying securities that will be deposited into the trust. The depositor's
affiliate may make these purchases before deposit into the trust, or it may
borrow securities for the deposit and subsequently purchase the securities to
repay to the lenders the securities previously borrowed. In either event, the
purchases of underlying securities may be made at various prices, and the
affiliate of the depositor may recognize a gain or loss on its purchases upon
selling the underlying securities to the depositor for deposit into the trust.
The price to the public of the trust certificates therefore may differ from the
prevailing market price of a comparable principal amount of underlying
securities.
No rulings will be obtained from the Internal Revenue Service, or IRS, with
respect to the trust or issuance or trust certificates, and the IRS may disagree
with the depositor's special U.S. federal tax counsel.
Shearman & Sterling LLP, special U.S. federal tax counsel to the
depositor, has provided its opinion of counsel regarding the classification of
the trust under current U.S. federal income tax law. However, an opinion of
S-24
counsel is not binding on the IRS or the courts. In addition, you should be
aware that no rulings will be sought from the IRS with respect to the trust or
the issuance of the trust certificates, and no assurance can be given that the
IRS will not take positions contrary to those described in this prospectus
supplement concerning the U.S. federal income tax consequences of the purchase,
ownership or disposition of trust certificates. Accordingly, you should consult
your own tax advisor in order to determine the U.S. federal, state, local and
other tax consequences of the purchase, ownership and disposition of the trust
certificates based upon your particular circumstances. See "U.S. Federal Income
Tax Consequences" below.
S-25
THE TRUST
The trust under which the trust certificates are issued will be formed
pursuant to the Series Supplement, to be dated the date set forth in this
prospectus supplement, between the depositor, the trustee and the securities
intermediary. Concurrently with the execution and delivery of the Series
Supplement, the depositor will deposit the underlying securities into the trust.
The trustee, on behalf of the trust, will accept the underlying securities and
will deliver the trust certificates to or upon an order of the depositor.
The depositor did not purchase the underlying securities from the
underlying securities issuer as part of any distribution by or pursuant to any
agreement with the underlying securities issuer. The underlying securities
issuer is not participating in this offering and will not receive any of the
proceeds of the sale of the underlying securities to the depositor or the
issuance of the trust certificates.
DESCRIPTION OF THE TRUST CERTIFICATES
General
The trust certificates will be denominated and their distributions will
be payable in U.S. dollars. The trust certificates each have a stated amount of
$25.
Distributions on the trust certificates will be calculated on a 360-day
year of twelve 30-day months and will accrue from, but not including the prior
distribution date (as defined on page S-4) or, in the case of the first
collection period, from and including the original issue date, to and including
the first distribution date. Each interest distribution amount on the trust
certificates represents a portion of the interest accrued on the underlying
securities from the cut-off date or the previous distribution date, as
applicable, to, but not including, the following distribution date and such
interest is paid to the trust on each underlying securities payment date, in
accordance with the terms of the underlying securities.
For the first distribution period, from and including the closing date
to but excluding the first distribution date, interest distribution amounts will
be payable at the rate of ___% per annum ( ___%, three-month USD LIBOR as of
____, 2004 plus ___%). Thereafter, the rate of the interest distribution amounts
will be reset quarterly on each distribution reset date and will be payable on
each distribution date at a floating rate equal to or greater than the minimum
certificate rate but not to exceed the maximum certificate rate. The holders of
the trust certificates will receive a distribution of the principal amount of
the underlying securities on _____.
During the continuance of an Extension Period with respect to the
underlying securities, interest will continue to accrue on the principal balance
of the trust certificates (and on any interest that is due), but such interest
will not be distributed to holders of the trust certificates until the Extension
Period ends. Following the occurrence of any swap agreement termination event
that is not also a trust termination event, distributions will be made on the
distribution dates in February and August. The last scheduled distribution date,
or the final distribution date, will be February 15, 2034
The trust certificates will be delivered in registered form. The trust
certificates will be maintained and transferred on the book-entry records of DTC
and its participants in minimum stated amounts of and integral multiples of $25.
The underwriter will initially offer the trust certificates in minimum lots of
40 trust certificates and subsequent increments of 40 trust certificates. The
trust certificates will each 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 depositor), except as provided below.
DTC has informed the depositor that DTC's nominee will be Cede & Co. No holder
of any trust certificate will be entitled to receive a certificate representing
that person's interest, except as set forth below under "Definitive Trust
Certificates." Unless and until definitive trust certificates are issued under
the limited circumstances described below, all references to actions by trust
certificateholders with respect to any trust certificates shall refer to actions
taken by DTC upon instructions from its participants. See "- Definitive Trust
Certificates" below and "Description of the Trust Certificates - Global
Securities" on page 29 of the accompanying prospectus.
S-26
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC will take action permitted to be taken by a trust
certificateholder under the trust agreement only at the direction of one or more
participants having trust certificates credited to their DTC accounts.
Additionally, DTC will take actions with respect to specified voting rights only
at the direction and on behalf of participants whose holdings of trust
certificates evidence specified voting rights. DTC may take inconsistent
positions in its exercise of voting rights, to the extent that participants
authorize such divergent action.
Definitive Trust Certificates
Definitive trust certificates will be issued to trust
certificateholders or their nominees only if
o the depositor 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 trust
certificates and the depositor is unable to locate a qualified
successor, or
o at the depositor's option, it elects to terminate the book-entry
system of the trust certificates through DTC.
Upon the occurrence of either of these events, the trustee is required
to notify all participants of the availability through DTC of definitive trust
certificates. Upon surrender by DTC of the global certificates representing the
trust certificates and receipt of instructions for re-registration, the trustee
will reissue the trust certificates as definitive trust certificates issued in
the stated amounts owned by the individual trust certificateholders. Then, the
trustee will recognize the holders of definitive trust certificates as trust
certificateholders under the trust agreement.
Redemption
Upon the redemption of the underlying securities, the redemption
proceeds will be distributed pro rata to the underlying securities holders,
including the trust, upon not less than 30 nor more than 60 days' notice of a
date of an optional redemption. The trust will then distribute these redemption
proceeds pro rata to trust certificateholders, including call holders who may
have exercised their calls and acquired trust certificates prior to the
redemption date, as described below. Any remaining proceeds will be used to
satisfy any early swap termination payment payable by the trust to the swap
counterparty.
In the event of an optional redemption, at any time in whole or from
time to time in part, at the option of the underlying securities issuer, the
redemption price will be equal to the sum of 100% of the principal amount of the
underlying securities to be redeemed, accrued interest thereon to the redemption
date and the Make-Whole Amount, if any, with respect to such underlying
securities. See "Description of Underlying Securities - Optional Redemption" on
page S-31. The trust will then distribute these redemption pro rata to the trust
certificateholders until each shall have received the stated amount of each
trust certificate they hold plus accrued and unpaid distributions on the trust
certificates to the redemption date. Any remaining proceeds will be used to
satisfy any early swap termination payment payable by the trust to the swap
counterparty.
If the underlying securities issuer redeems less than all of the
underlying securities then the trustee will select by lot a stated amount of
trust certificates and will redeem those trust certificates by distributing the
redemption proceeds as described in the preceding paragraph. In the case of such
redemption call warrant holders will have the opportunity to exercise their call
warrants and call the certificates to be redeemed. Listing on the New York Stock
Exchange
The depositor intends to list the trust certificates on the NYSE. If
approved for listing, trading is expected to commence within 30 days after the
trust certificates are first issued. The depositor cannot assure you that the
trust certificates, once listed, will continue to be eligible for trading on the
NYSE.
S-27
Collections and Distributions
Prior to the occurrence of a swap termination event that is not a trust
termination event, to the extent of available funds, the trust will make the
following distributions in the following order of priority
o to the trustee, reimbursement for any approved extraordinary
trust expenses incurred by the trustee and approved by not less
than 100% of the certificateholders,
o pro rata to the holders of the trust certificates, distributions
at the then-applicable floating rate on the trust certificates
until the final scheduled distribution date,
o pro rata to the holders of the trust certificate, any additional
payments paid by the underlying securities issuer as a result of
a delay in the receipt by the trustee of any interest payment on
the underlying securities,
o pro rata to the trust certificateholders, any distribution of
the principal amount of the underlying securities, in whole or
in part, held by the trust,
o to the swap counterparty in satisfaction of the trust's payment
obligations under the swap agreement,
o pro rata to the certificateholders, any make-whole amount not
otherwise paid to the swap counterparty pursuant the preceding
clause,
o to the extent there are available funds in the certificate
account, to any creditors of the trust in satisfaction of the
trust's liabilities, and
o if any funds remain in the certificate account after all of the
trust's liabilities are satisfied then such funds will be
distributed to an affiliate of the depositor.
Following the occurrence of a swap termination event that is not a
trust termination event, to the extent of available funds, the trust will make
the following distributions in the following order of priority
o to the trustee, reimbursement for any approved extraordinary
trust expenses incurred by the trustee and approved by not less
than 100% of the certificateholders,
o pro rata to the holders of the trust certificates, distributions
at the rate of 6.345% per year on the stated amount of the trust
certificates,
o pro rata, if available, to the holders of the trust certificates
of any additional payments paid by the underlying securities
issuer as a result of a delay in the receipt by the trustee of
any interest payment on the underlying securities,
o to the trust certificateholders, a distribution of the principal
amount, in whole or in part, of the underlying securities held
by the trust on the final scheduled distribution date,
o to the extent there are available funds in the certificate
account, to any creditors of the trust in satisfaction of the
trust's liabilities, and
o if any funds remain in the certificate account after all of the
trust's liabilities are satisfied then such funds will be
distributed to an affiliate of the depositor.
S-28
"Available funds" for any distribution date means the sum of all
amounts received on or with respect to the underlying securities during the
preceding collection period except for eligible investments described below. If
not less than 100% of the trust certificateholders and the call warrant holders
agree, the trustee may sell a portion of the underlying securities such that the
proceeds of the sale would be sufficient to reimburse the trustee for any
approved extraordinary expenses. In the event of a payment default on the
underlying securities, the trustee's approved extraordinary expenses (see
"Description of the Trust Agreement - The Trustee" on page S-25) may be
reimbursed to the trustee out of available funds before any distributions to
trust certificateholders are made.
If the trustee has not received payment from the swap counterparty on
or prior to a distribution date, the distribution will be made upon receipt of
such payment. No additional amounts will accrue on the trust certificates or be
owed to trust certificateholders as a result of any delay, but any additional
distributions paid by the swap counterparty as a result of the delay will be
paid to the trust certificateholders.
The trustee shall invest all amounts received on or with respect to the
underlying securities that are not paid to the swap counterparty or distributed
to trust certificateholders on the date of receipt, including any funds
deposited with the trustee in its capacity as escrow agent upon the exercise of
a call warrant, in eligible investments. "Eligible investments" means, with
respect to the trust certificates, those investments consistent with the trust's
status as a grantor trust under the Internal Revenue Code of 1986, as amended
(the "Code"), and acceptable to the rating agencies as being consistent with the
rating of the trust certificates, as specified in the trust agreement.
Generally, eligible investments must be limited to obligations or securities
that mature not later than the business day prior to the next distribution date.
Income on these investments will constitute trust property.
The depositor cannot assure you that collections received from the
underlying securities over a specified period will be sufficient to make all
required distributions to the trust certificateholders. To the extent available
funds are insufficient to make the distributions due to trust
certificateholders, any shortfall will be carried over and will be distributable
on the next distribution date on which sufficient funds exist to pay the
shortfalls. The depositor will pay the trustee's ordinary expenses.
Call Warrants
The initial call warrant holder may be the depositor or an affiliate of
the depositor, and such person may transfer its call warrants, in whole or in
part, in privately negotiated transactions. On any business day on or after
____, 2009 that any call warrant holders designate as a "Call Date," the call
warrant holders may, upon notice of not less than 30 days (or in the case of the
announcement of any redemption or other unscheduled payment of the underlying
securities or after receipt of notice of termination of the trust, not less than
three days notice, or when a tender offer for the underlying securities is
pending, not less than five days notice prior to the expiration of the tender
offer acceptance period) but not more than 60 days prior to that Call Date,
purchase your trust certificates in whole or in part at their stated amount
(plus any early termination payment payable by the trust to the swap
counterparty) plus any accrued and unpaid distributions to the Call Date.
On any business day before ___, 2009 and after the announcement of any
redemption or other unscheduled payment of the underlying securities or receipt
of notice of termination of the trust or when a tender offer for the underlying
securities is pending, that any call warrant holder designates as a "Call Date,"
the call warrant holders may, after receipt of notice of any redemption or other
unscheduled payment of the underlying securities or of termination of the trust,
upon notice of not less than three days, or when a tender offer for the
underlying securities is pending, upon notice of not less than five days prior
to the termination of the tender offer acceptance period, but not more than 60
days prior to that Call Date, purchase your trust certificates in whole or in
part at their stated amount plus any accrued and unpaid distributions to the
Call Date and, on a pro rata basis, any early termination amount payable to the
swap counterparty.
In addition, at any time upon an acceleration of the underlying
securities and payment in full by the underlying securities issuer of all
amounts when due and where the acceleration payment exceeds the sum of (i) the
S-29
early termination payment amount, if any, payable by the trust to the swap
counterparty and (ii) the aggregate stated amount of the outstanding trust
certificates plus any accrued and unpaid distributions to the date of payment,
all outstanding call warrants will be exercised automatically. The trust
certificates will be purchased at their stated amount (plus any early
termination payment payable by the trust to the swap counterparty) plus any
accrued and unpaid distributions to the exercise date. However, in the event
that such acceleration payment is less than the sum of (i) the early termination
amount, if any, payable by the trust to the swap counterparty and (ii) the
aggregate stated amount of the outstanding trust certificates plus any accrued
and unpaid distributions to the date of payment, you may not recover the whole
of the stated amount of your trust certificates.
If a call warrant holder has met the exercise requirements set forth
above, the holder may, on the Call Date, purchase a principal of trust
certificates proportionate to such holder's call warrant at the exercise price.
In order to exercise its call warrants, the call warrant holder must, not less
than 30 days (or not less than three days in the case of the announcement of any
redemption or other unscheduled payment of the underlying securities or after
receipt of notice of termination of the trust or, when a tender offer for the
underlying securities is pending, not less than five days prior to the
expiration of the tender offer acceptance period) but not more than 60 days
prior to such Call Date,
o notify the trustee in writing of its intention to exercise its
call warrants (which notice is irrevocable),
o deposit the call exercise price (or, if all of the outstanding
trust certificates are to be purchased and the warrant holder
holds certificates that are subject to call rights, the warrant
holder may deposit such certificates in lieu of the portion of
the call exercise price that would relate thereto) with The Bank
of New York, as escrow agent, to be held in escrow pursuant to
an escrow agreement in form reasonably satisfactory to the
trustee, and
o provide the trustee with certain other documents customary for a
transaction of this nature.
The call warrant holders need not comply with the foregoing conditions
if call warrants are exercised automatically upon an acceleration of the
underlying securities and payment in full by the underlying securities issuer of
all amounts due upon such acceleration. Upon exercise of any call warrants on
trust certificates, the trustee will select by lot a stated amount of trust
certificates to be surrendered to the trustee in exchange for a pro rata portion
of the call exercise price. Following its receipt of trust certificates upon the
exercise of any call warrants, the trustee will surrender the trust certificates
to the exercising call warrant holders.
Exchange of Trust Certificates
Either:
o Merrill Lynch & Co. or any of its affiliates, other than the
depositor, or
o any other person (or group of affiliated persons, where each
member of the group holds no less than $500,000 in stated amount
of trust certificates and is not the depositor) holding trust
certificates with an aggregate stated amount of $5 million or
more acquired pursuant to the exercise of call warrants,
may notify the trustee, not less than 30 days but not more than 60 days prior to
a given distribution date, that it (or they) intends to tender its or their
trust certificates to the trustee on that distribution date, plus an amount
equal to any early termination amount payable by the trust to the swap
counterparty, in exchange for a principal amount of underlying securities equal
to the aggregate stated amount of the trust certificates being tendered for
exchange; provided that, if any such person has received notice of a tender
offer for the underlying securities, such person (or group of affiliated
persons, as described above) may notify the trustee, not less than 5 days but
not more than 60 days prior to a given date, that it (or they) intends to tender
trust certificates with an aggregate stated amount of $5 million or more to the
trustee on that date in exchange for a proportional amount of underlying
securities.
S-30
Such optional exchange may only be made with respect to trust certificates that
are not subject to outstanding call warrants held by persons other than the
person or persons exercising the optional exchange. In addition, in the case of
a person other than Merrill Lynch & Co. or any of its affiliates, such exchange
may only be made with respect to an aggregate stated amount of trust
certificates equal to the aggregate stated amount of trust certificates acquired
by such person pursuant to the exercise of call warrants. Such optional exchange
will not be made if
o the exchange would cause the trust or the depositor to fail to
satisfy the applicable requirements for exemption under Rule
3a-7 under the Investment Company Act of 1940, as amended (the
"Investment Company Act"),
o the exchange would affect the characterization of the trust as a
"grantor trust" under the Code, or
o in the case of an exchange of less than all outstanding trust
certificates, the exchange would cause the trust to fail to
satisfy the minimum requirements to remain listed on the New
York Stock Exchange, unless the party exercising the optional
exchange will hold all remaining outstanding trust certificates
upon such optional exchange.
See "Description of the Certificates - Optional Exchange" on page 27 of the
accompanying prospectus. Upon such tender of trust certificates, the trustee
will deliver to the persons exercising such exchange rights, a principal amount
of the underlying securities equal to the aggregate stated amount of the trust
certificates that were tendered.
Default on Underlying Securities and Occurrence of Trust Termination Event
Upon the occurrence of a payment default on the underlying securities
or a trust termination event, the trustee will, on or immediately after the 30th
day after that default, sell the underlying securities and distribute the
proceeds (less any early termination payment payable by the trust to the swap
counterparty) pro rata to the holders of the trust certificates. Upon such sale,
the call warrants will expire and have no value. If, after any default and prior
to the trustee selling the underlying securities, there is an acceleration of
the maturity of the underlying securities and the underlying securities are
declared to be immediately due and payable and the underlying securities issuer
(1) pays all amounts when due, then, on or after _____, 2009,
the trustee will distribute such amounts (less any early
termination amount payable by the trust to the swap counterparty)
pro rata to the trust certificateholders and, prior to _____,
2009, the trustee will follow the procedure set forth in the
second paragraph below,
(2) fails to pay such amount when due, then the trustee will
sell all or a portion of the underlying securities necessary to
satisfy any early termination amount payable to the swap
counterparty. Thereafter the trust will distribute any remaining
underlying securities pro rata to the trust certificateholders,
or
(3) pays only a portion of such amount when due, then the
trustee will distribute any amounts received (less any early
termination amount payable by the trust to the swap counterparty)
and the underlying securities pro rata to the trust
certificateholders.
In addition, if the underlying securities issuer ceases to file Exchange Act
reports, the call warrant holders will have an opportunity to exercise their
call rights. Thereafter the trust will sell all or a portion of the underlying
securities necessary to satisfy any early termination amount payable to the swap
counterparty and then distribute any remaining underlying securities pro rata to
the trust certificateholders.
If the events set forth in clause (1) above occur on any business day
before ___, 2009, and if such payment exceeds the sum of the aggregate stated
amount of the outstanding trust certificates plus any accrued and unpaid
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distributions to the date of payment and, on a pro rata basis, any early
termination amount payable to the swap counterparty, all call warrant holders
will be deemed to have automatically exercised their rights pursuant to all
outstanding call warrants. From the acceleration payment, first, the early
termination payment payable by the trust, if any, will be paid to the swap
counterparty, second, the trust certificates will be purchased at their stated
amount plus any accrued and unpaid distributions to the exercise date, third,
any remaining proceeds will be paid to the call warrant holders.
If the events set forth in clause (2) above occur, the call warrants
will expire and have no value. If the events set forth in clause (3) occur, the
call warrant holders will have an opportunity to exercise call rights before the
trustee distributes any amounts received or any underlying securities to the
trust certificateholders.
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THE DEPOSITOR
The depositor, Merrill Lynch Depositor, Inc., a Delaware corporation,
is an indirect, wholly owned, limited-purpose subsidiary of Merrill Lynch & Co.,
Inc. The depositor has not guaranteed and is not otherwise obligated under the
trust certificates.
The principal office of the depositor is located at c/o Merrill Lynch &
Co., World Financial Center, New York, New York 10281 (Telephone: (212)
449-1000). See "The Depositor" on page 16 of the accompanying prospectus.
DESCRIPTION OF THE TRUST AGREEMENT
General
The trust certificates will be issued pursuant to the trust agreement,
a form of which is filed as an exhibit to the registration statement of the
depositor on Form S-3 (Registration No. 333-29015). The depositor will file with
the SEC, following the issuance and sale of the trust certificates, a Current
Report on Form 8-K relating to the trust certificates containing a copy of the
Series Supplement as executed. The trust created under the Series Supplement
will consist of
o the deposited assets, and
o all payments on or collections in respect of the deposited
assets except with respect to periods prior to the cut-off date.
Reference is made to the prospectus for important information in addition to
that set forth herein regarding the trust, the terms and conditions of the trust
agreement and the trust 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 agreement. You should refer to the
trust agreement for a full description of these provisions, including the
definition of certain terms used in this prospectus supplement.
The discussions in the accompanying prospectus under "Description of
the Trust Agreement - Advances in Respect of Delinquencies" on page 33,
"Description of the Trust Agreement - Certain Matters Regarding the Trustee,
Administrative Agent and the Depositor" (to the extent the discussion relates to
the Administrative Agent) on page 34 and "Description of the Trust Agreement -
Administrative Agent Termination Events; Rights upon Administrative Agent
Termination Event" on page 35 are not applicable to the trust certificates.
The Trustee
The Bank of New York, as successor to United States Trust Company of
New York, will be the trustee for the trust certificates and the trust pursuant
to the trust agreement. The trustee's offices are located at 101 Barclay Street,
Floor 8E, New York, New York 10286, Attn: Corporate Trust Division and its
telephone number is (212) 815-2915.
The trustee shall receive compensation as set forth in an agreement
between the depositor and the trust.
The trust agreement will provide that the trustee may not take any
action that, in the trustee's opinion, would or might cause it to incur
extraordinary expenses, unless
o the trustee is satisfied that it will have adequate security or
indemnity in respect of the costs, expenses and liabilities,
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o the trustee has been instructed to do so by trust
certificateholders representing at least the required
percentage-remedies (as defined below) of the aggregate voting
rights, and
o the trust certificateholders have agreed that these costs will
be paid by the trustee from the trust (in the case of an
affirmative vote of 100% of the trust certificateholders) or out
of the trustee's own funds (in which case the trustee can
receive reimbursement from the trust certificateholders voting
in favor of the proposal).
Extraordinary expenses that may be reimbursed to the trustee from the trust may
be reimbursed out of available funds on any distribution date before any
distributions to trust certificateholders on the distribution date are made.
Events of Default
An event of default with respect to the trust certificates under the
trust agreement will consist of
o a failure to pay any distributions on any underlying securities
and such failure is not remedied by the fifth business day after
notice of such failure is given to the underlying securities
issuer;
o a default in the payment of the liquidation amount of or any
installment of the liquidation amount of any underlying security
when it becomes due and payable; and
o any other event specified as an event of default in the
indenture.
The trust agreement will provide that, within 10 days after the
occurrence of an event of default in respect of the trust certificates, the
trustee will give notice to the trust certificateholders, transmitted by mail,
of all uncured or unwaived events of default known to it. However, the trustee
will be protected in withholding such notice if in good faith it determines that
the withholding of the notice is in the interest of the trust
certificateholders, except for an event of default relating to the payment of
the liquidation amount or distributions other than permitted deferred
distributions on any of the underlying securities.
No trust certificateholder will have the right to institute any
proceeding with respect to the trust agreement, unless
o such trust certificateholder previously has given to the trustee
written notice of a continuing breach,
o trust certificateholders evidencing at least the required
percentage-remedies of the aggregate voting rights have
requested in writing that the trustee institute a proceeding in
its own name as trustee,
o the trust certificateholder or trust certificateholders have
offered the trustee reasonable indemnity,
o the trustee has for 15 days failed to institute a proceeding,
and
o no direction inconsistent with a written request has been given
to the trustee during such 15-day period by trust
certificateholders evidencing at least the required
percentage-remedies of the aggregate voting rights.
"Required percentage-remedies" shall mean 66 2/3% of the voting rights.
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Voting Rights
Voting rights will be allocated pro rata among the trust
certificateholders. The "required percentage-amendment" of voting rights
necessary to consent to a modification or amendment is 66 2/3%. Despite the
foregoing, in addition to the other restrictions on modification and amendment,
the trustee will not enter into any amendment or modification of the trust
agreement that would adversely affect in any material respect the interests of
the trust certificateholders or the call warrant holders without the consent of
100% of the trust certificateholders or the call warrant holders, as the case
may be. No amendment or modification will be permitted which would alter the
status of the trust as a grantor trust under the Code. See "Description of the
Trust Agreement - Modification and Waiver" on page 39 of the accompanying
prospectus.
Voting of Underlying Securities, Modification of Indenture
The trustee, as holder of the underlying securities, has the right to
vote and give consents and waivers in respect of the underlying securities as
permitted by DTC and except as otherwise limited by the trust agreement. If the
trustee receives a request from DTC, the underlying securities trustee or the
underlying securities issuer for its consent to any amendment, modification or
waiver of the underlying securities, the indenture or any other document
relating to the underlying securities or receives any other solicitation for any
action with respect to the underlying securities, the trustee shall mail a
notice of the proposed amendment, modification, waiver or solicitation to each
trust certificateholder of record as of that date. The trustee shall request
instructions from the trust certificateholders as to whether or not to consent
to or vote to accept the amendment, modification, waiver or solicitation. The
trustee shall consent or vote, or refrain from consenting or voting, in the same
proportion as the trust certificates were actually voted or not voted by the
trust certificateholders as of a date determined by the trustee prior to the
date on which the consent or vote is required. Despite anything to the contrary,
the trustee shall at no time vote or consent to any matter
o unless such vote or consent would not (based on an opinion of
counsel) alter the status of the trust as a grantor trust under
the Code,
o which would alter the timing or amount of any payment on the
underlying securities, including, without limitation, any demand
to accelerate the underlying securities, except in the event of
an underlying security event of default or an event which with
the passage of time would become an underlying security event of
default and with the unanimous consent of the trust
certificateholders and the call warrant holders, or
o except as provided in the second paragraph below, which would
result in the exchange or substitution of any of the outstanding
underlying securities pursuant to a plan for the refunding or
refinancing of the underlying securities except in the event of
a default under the indenture and only with the unanimous
consent of the trust certificateholders and the call warrant
holders.
The trustee shall have no liability for any failure to act resulting
from trust certificateholders' late return of, or failure to return, directions
requested by the trustee from the trust certificateholders.
If an offer is made by the underlying securities issuer to issue new
obligations in exchange and substitution for any of the underlying securities,
pursuant to a plan for the refunding or refinancing of the outstanding
underlying securities or any other offer is made for the underlying securities,
the trustee shall notify the trust certificateholders and the call warrant
holders of the offer as promptly as practicable. Subject to the provisions of
the trust agreement permitting an optional exchange in connection with a tender
offer, the trustee must reject any offer unless the trustee is directed by the
affirmative vote of all of the trust certificateholders and the call warrant
holders to accept the offer and the trustee has received the tax opinion
described above.
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If an event of default under the indenture occurs and is continuing and
if directed by all of the outstanding trust certificateholders, the trustee
shall vote the underlying securities in favor of directing, or take such other
action as may be appropriate to direct, the underlying securities trustee to
declare the unpaid liquidation amount of the underlying securities and any
accrued and unpaid distributions to be due and payable. In connection with a
vote concerning whether to declare the acceleration of the underlying
securities, the trust certificateholder's interests may differ from each other.
Termination of the Trust
The trust shall terminate upon the earliest to occur of
o the payment in full or sale of the underlying securities by the
trust after a payment default on or an acceleration of the
underlying securities,
o the exchange of all outstanding trust certificates for
underlying securities pursuant to one or more optional exchanges
or otherwise,
o the distribution in full of all amounts due to the trust
certificateholders and
o the final scheduled distribution date.
See "Description of the Trust Agreement - Termination" on page 42 of
the accompanying prospectus.
In addition, the holders of all, but not less than all, outstanding
trust certificates may elect to terminate the trust at any time; provided that
such holders satisfy, on a pro rata basis, the payment of any resulting early
termination amount owing to the swap counterparty and; provided, further, that
the exercise of such termination right would not cause the trust or the
depositor to fail to satisfy the applicable requirements for exemption under
Rule 3a-7 under the Investment Company Act. Under the terms of the Trust
Agreement and the call warrants, the trust certificateholders will not be
entitled to terminate the trust or cause the sale or other disposition of the
underlying securities if and for so long as the call warrants remain
outstanding, without the consent of the call warrant holders.
S-36
DESCRIPTION OF THE UNDERLYING SECURITIES
General
The underlying securities represent the sole assets of the trust that
are available to make distributions in respect of the trust certificates. The
primary economic terms of the underlying securities are described in "Summary of
Economic Terms" beginning on page S-3 and "Summary Information Q&A" beginning on
page S-8 in this prospectus supplement.
This prospectus supplement sets forth certain relevant terms with
respect to the underlying securities and the junior subordinated debentures, but
does not provide detailed information with respect thereto or with respect to
the underlying securities issuer or the underlying securities guarantor. This
prospectus supplement relates only to the trust certificates offered hereby and
does not relate to the underlying securities. All disclosure contained herein
with respect to the underlying securities issuer, the underlying securities
guarantor, the junior subordinated debentures and the underlying securities is
derived from publicly available documents.
The underlying securities convert into cash in a finite time period and
the underlying securities guarantor is (a) subject to the periodic reporting
requirements of the Exchange Act; and (b) eligible to use a Registration
Statement on Form S-3 for a primary offering of non-convertible investment grade
securities. As such, the trust will not be providing you with periodic financial
information with respect to the underlying securities and we refer you to the
periodic reports filed by the underlying securities guarantor with the SEC.
Those reports should be reviewed by any prospective certificateholder of the
trust. For further information, see "Risk Factors-If public information
concerning the underlying securities issuer is not available, your ability to
make an informed decision to act in regard to the trust certificates may be
impaired" in the accompanying prospectus. The rating on the underlying
securities will allow at least one investment-grade rating of the trust
certificates by a rating agency.
The underlying securities issuer is a statutory business trust formed
under Delaware law pursuant to the Amended and Restated Trust Agreement dated
January 20, 2004 and the filing of a certificate of trust with the Delaware
Secretary of State on January 21, 2004. The underlying securities issuer exists
for the exclusive purposes of (i) issuing and selling the 6.345% Capital
Securities and the trust common securities (the "Trust Securities"), which
represent undivided beneficial interests in the assets of the underlying
securities issuer, (ii) investing the gross proceeds from the sale of the
underlying securities in the junior subordinated debentures and (iii) engaging
in only those other activities necessary, advisable or incidental thereto. The
underlying securities issuer's business and affairs are conducted by its
trustee, appointed by the underlying securities guarantor as holder of the
underlying securities issuer's Common Securities. The underlying securities
guarantor pays all fees, expenses, debts and obligations (other than the
underlying securities or Common Securities) related to the underlying securities
issuer and will pay, directly or indirectly, all ongoing costs, expenses and
liabilities of the underlying securities issuer. The principal place of business
of the underlying securities issuer is c/o Goldman Sachs Group, Inc., 85 Broad
Street, New York, NY 10004.
According to the underlying securities guarantor's publicly available
documents, it is a leading global investment banking, securities and investment
management firm, incorporated in Delaware, that provides a wide range of
services worldwide to a substantial and diversified client base. Its activities
are divided into three business segments: Investment Banking, Trading and
Principal Investments and Asset Management and Securities Services. Its
principal executive offices are located at 85 Broad Street, New York, NY 10004
and its telephone number is (212) 902-0300. The underlying securities guarantor
is subject to the informational requirements of the Exchange Act and files
periodic reports and other information with the SEC. You may inspect and copy
these reports and other information at the SEC's public reference facilities
located at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain copies
of these materials for a fee by writing to the SEC's Public Reference Section at
450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information about
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
You can also access this information electronically by means of the SEC's
website on the Internet at http://www.sec.gov, which contains reports, proxy and
information statements and other information that the underlying securities
guarantor has filed electronically with the SEC. In addition, you
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may inspect reports and other information concerning the underlying securities
guarantor at the New York Stock Exchange Inc., 20 Broad Street, New York, New
York 10005.
Although we have no reason to believe the information concerning the
underlying securities, the junior subordinated debentures, the underlying
securities issuer, or the underlying securities guarantor contained in the
prospectus related to the underlying securities or in the underlying securities
guarantor's Exchange Act reports is not reliable, we have not participated in
the preparation of such documents, or made any due diligence inquiry with
respect to the information provided therein. There can be no assurance that
events affecting the underlying securities, the junior subordinated debentures,
the underlying securities issuer, or the underlying securities guarantor have
not occurred or have not yet been publicly disclosed which would affect the
accuracy or completeness of the publicly available documents described above.
The trust will have no assets other than underlying securities and the
underlying guarantee from which to make distributions of amounts due in respect
of the trust certificates. Consequently, the ability of trust certificateholders
to receive distributions in respect of the trust certificates will depend
entirely on the trust's receipt of payments on the underlying securities and the
underlying guarantee. You should consider carefully the financial condition of
the underlying securities issuer and the underlying securities guarantor and
their ability to make payments in respect of such underlying securities and
underlying guarantee. This prospectus supplement relates only to the trust
certificates being offered hereby and does not relate to the underlying
securities issuer, the underlying securities guarantor, the underlying
securities or the underlying securities issuer. All information contained in
this prospectus supplement regarding the underlying securities issuer, the
underlying securities guarantor, the underlying securities and the underlying
guarantee is derived from publicly available documents. None of the depositor,
the underwriter or the trustee participated in the preparation of such documents
or takes any responsibility for the accuracy or completeness of the information
provided therein.
You should refer to the underlying securities prospectus for
definitions of capitalized terms not defined in this section.
The Amended and Restated Trust Agreement
The Amended and Restated Trust Agreement authorizes the trustee of the
underlying securities issuer to issue on its behalf the underlying securities,
which represent undivided beneficial interests in the assets of the underlying
securities issuer. The underlying securities were issued pursuant to the terms
of the Amended and Restated Trust Agreement, dated as of January 21, 2004,
executed by the underlying securities guarantor, as depositor of the underlying
securities issuer, and the trustee of the underlying securities issuer. Unless
redeemed earlier under certain circumstances following the occurrence of a
Special Event, the underlying securities will be redeemed on February 15, 2034,
the maturity date of the junior subordinated debentures. All of the Common
Securities of the underlying securities issuer are owned, directly or
indirectly, by the underlying securities guarantor or a permitted successor. The
underlying securities rank on a parity, and payments will be made thereon pro
rata, with the Common Securities except as described under "--Subordination of
Common Securities".
The following summaries of certain provisions of the underlying
securities, the underlying securities guarantee, the junior subordinated
debentures, the Amended and Restated Trust Agreement and the Indenture contained
herein do not purport to be complete and are based upon the underlying
securities prospectus dated February 6, 2004, relating to the underlying
securities and are subject to, and are qualified in their entirety by reference
to, all provisions of the underlying securities, the underlying securities
guarantee, the junior subordinated debentures, the Amended and Restated Trust
Agreement and the Indenture, including the definitions therein of certain terms.
Wherever particular sections or defined terms of the Amended and Restated Trust
Agreement and the Indenture are referred to, it is intended that such sections
or defined terms shall be incorporated herein by reference. Investors should
refer to the Amended and Restated Trust Agreement and the Indenture for all
terms governing the underlying securities, the underlying securities guarantee
and the junior subordinated debentures.
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Trust and Debenture Events of Default
The Amended and Restated Trust Agreement limits the underlying
securities issuer's ability to engage in certain activities and transactions and
requires that the underlying securities issuer perform certain obligations with
respect to the underlying securities. Certain events of default contained in the
Amended and Restated Trust Agreement are as follows:
Trust Events of Default
Events of default with respect to the underlying securities are defined
in the Amended and Restated Trust Agreement as being:
(i) any event of default with respect to the junior subordinated
debentures ("Debentures Event of Default");
(ii) default for 30 days by the underlying securities issuer in
the payment of any distribution on any underlying security or Common
Security of the underlying securities issuer;
(iii) default by the underlying securities issuer in the payment
of the redemption price of any underlying security or Common Security
of the underlying securities issuer;
(iv) failure by the underlying securities trustee to perform any
other covenant or warranty in the Amended and Restated Trust Agreement
for 60 days after the holders of at least 25% in aggregate liquidation
amount of the outstanding underlying security give written notice of
the default to the underlying securities guarantor and the underlying
securities trustee; or
(v) bankruptcy, insolvency or reorganization of the property
trustee and the failure to appoint a successor property trustee within
90 days.
Debenture Events of Default
The Amended and Restated Trust Agreement provides that any one or more
of the following described events with respect to the junior subordinated
debentures constitutes a "Debenture Event of Default" with respect to the junior
subordinated debentures:
(vi) failure for 30 days to pay any interest on the junior
subordinated debentures when due; or
(vii) failure to pay any principal or premium, if any, on the
junior subordinated debentures when due; or
(viii) failure to observe or perform in any material respect
certain other covenants contained in the subordinated indenture for
the benefit of the junior subordinated debentures for 60 days after
written notice to the underlying securities guarantor from the
subordinated debt trustee or the holders of at least 10% in aggregate
outstanding principal amount of junior subordinated debentures; or
(ix) certain events in bankruptcy, insolvency or reorganization
of the underlying securities guarantor.
The underlying securities issuer will not be obligated to pay any
amount on the underlying securities unless it has received payment of the
corresponding amount on the junior subordinated debentures. Consequently, any
failure of the underlying securities issuer to make payment on the underlying
securities on a payment date will not result in a Trust Event of Default unless
(1) the underlying securities issuer has received the corresponding payment from
the underlying securities guarantor (and, in the case of an overdue
distribution, a 30-day grace period has
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ended) or (2) the underlying securities guarantor has failed to make the
corresponding payment when due under the subordinated debt indenture.
Liquidation of the Trust and Distribution of Junior Subordinated Debentures
The underlying securities guarantor will have the right at any time to
terminate the underlying securities issuer and cause the junior subordinated
debentures to be distributed to the holders of the underlying securities and the
Common Securities in liquidation of the underlying securities issuer. The
underlying securities issuer shall automatically terminate upon the first to
occur of: (i) certain events of bankruptcy, dissolution or liquidation of the
underlying securities issuer; (ii) the distribution of a Like Amount of the
junior subordinated debentures to the holders of the underlying securities and
the Common Securities, if the underlying securities guarantor, as Depositor, has
given written direction to the Property Trustee to terminate the underlying
securities issuer (which direction is optional and, except as described above,
wholly within the discretion of the underlying securities guarantor, as
Depositor); (iii) redemption of all of the underlying securities as described
under "-Redemption" above; (iv) expiration of the term of the underlying
securities issuer; or (v) the entry of an order for the dissolution of the
underlying securities issuer by a court of competent jurisdiction.
If a termination occurs as described in the preceding paragraph, the
holders of underlying securities will be entitled to receive out of the
underlying securities issuer's assets, distributions in an amount equal to the
aggregate of the liquidation amount of $1,000 per underlying security; plus
accumulated and unpaid distributors thereon to the payment date. However, such
holders will not receive this distribution if the underlying securities issuer
instead distributes on a ratable basis to the holders of the underlying
securities junior subordinated debentures in an aggregate principal amount equal
to the aggregate liquidation amount of such underlying securities. If the
liquidation distribution can be paid only in part because the underlying
securities issuer has insufficient assets available to pay in full the aggregate
distribution, then the amounts payable directly by the underlying securities
issuer on the underlying securities shall be paid on a ratable basis, except
that if a Debenture Event of Default has occurred and is continuing, the
underlying securities shall have a priority over the Common Securities. See
"-Subordination of Common Securities" below.
"Like Amount" means (i) with respect to a redemption of the Trust
Securities, Trust Securities having a liquidation amount equal to the principal
amount of junior subordinated debentures to be contemporaneously redeemed in
accordance with their terms, the proceeds of which will be used to pay the
redemption price of the Trust Securities.
Enforcement Of Certain Rights By Holders Of Underlying Securities
Pursuant to the Amended and Restated Trust Agreement, if a Debenture
Event of Default shall have occurred and be continuing and shall be attributable
to the failure of the underlying securities guarantor to pay interest or
premium, if any, on or principal of the junior subordinated debentures on the
due date, a holder of underlying securities may institute a legal proceeding
against the underlying securities guarantor directly to enforce the payment to
the extent of the holder's underlying securities. The underlying securities
guarantor shall be subrogated to the rights of the holder of such underlying
securities with respect to payments on the underlying securities to the extent
of any payments made by the underlying securities guarantor to such holder in
respect of any unpaid distribution that resulted in the bringing of a direct
action.
The holders of the underlying securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the junior subordinated debentures. See "Trust and
Indenture Events of Default--Trust Events of Default".
Deferral of Underlying Securities Distributions
Distributions on the underlying securities will accumulate from
February 20, 2004 and will be payable semi-annually in arrears on August 15 and
February 15 of each year, commencing August 15, 2004, and at the
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annual rate of 6.345% of the liquidation amount of each underlying security to
the holders of the underlying securities on the relevant record dates.
So long as no Debenture Event of Default shall have occurred and be
continuing, the underlying securities guarantor will have the right under the
Indenture to elect to defer the payment of interest on the junior subordinated
debentures at any time and from time to time for a period not exceeding 10
consecutive semi-annual periods (an "Extension Period") provided that no
Extension Period may extend beyond the stated maturity date. Upon any such
election, semi-annual distributions on the underlying securities will be
deferred by the underlying securities issuer during any such Extension Period.
Distributions to which holders of the underlying securities are entitled during
any such Extension Period will accumulate additional distributions thereon at
the rate per annum of 6.345% thereof, compounded semi-annually to the extent
permitted by law from the relevant Distribution Date. The term "Distributions"
as used herein shall include any such additional Distributions.
During any such Extension Period, the underlying securities guarantor
may not (i) declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to, any of the
underlying securities guarantor's capital stock, (ii) make any payment of
principal or premium, if any, on or repay, repurchase or redeem any debt
securities of the underlying securities guarantor that rank an a parity with or
junior in interest in all respects to the junior subordinated debentures or
(iii) make any guarantee payments with respect to any guarantee by the
underlying securities guarantor of securities of any subsidiary of the
underlying securities guarantor if such guarantee ranks on a parity in all
respects with or junior in interest in all respects to the junior subordinated
debentures (other than (a) dividends in the form of stock, options, warrants or
other rights where the dividend stock or the stock issuable upon exercise of the
warrants, options or other rights is the same stock as that on which the
dividend is being paid or ranks on a parity with or junior to such stock, (b)
any declaration of a dividend in connection with any stockholder's rights plan,
or the issuance of rights, stock or other property under any such plan, or the
redemption or repurchase of any such rights pursuant there to, (c) payments
under the underlying securities guarantee, (d) as a result of any exchange or
conversion of any class or series of the underlying securities guarantor's (or
any subsidiary's) capital stock for another class or series of the underlying
securities guarantor's capital stock, or (e) the purchase of fractional
interests in shares of the underlying securities guarantor's capital stock
pursuant to the conversion or exchange provisions of such capital stock or the
security being converted or exchanged or (f) purchases, redemptions or other
acquisitions of shares of capital stock of the underlying securities guarantor
under any employment agreement or benefit plan or other similar arrangement with
the benefit plan of the underlying securities guarantor's directors, officers,
or employees, in connection with a dividend reinvestment or stock purchase plan
or in connection with the issuance of the capital stock of the underlying
securities guarantor.
Prior to the termination of any such Extension Period, the underlying
securities guarantor may further extend the payment of interest, provided that
such Extension Period does not exceed 10 consecutive semi-annual periods or
extend beyond the stated maturity date. Upon the termination of any such
Extension Period and the payment of all amounts then due, the underlying
security guarantor may elect to begin a new Extension Period, subject to the
above requirements. There is no limitation on the number of times that the
underlying securities guarantor may elect to defer interest payments and begin
an Extension Period. No interest shall be due and payable during an Extension
Period, except at the end thereof.
Voting Rights; Amendment of the Amended and Restated Trust Agreement
Except as provided below and as otherwise required by law and the
Amended and Restated Trust Agreement, the holders of the underlying securities
have no voting rights.
The Amended and Restated Trust Agreement may be amended from time to
time by the underlying securities guarantor without the consent of the holders
of the underlying securities (i) to cure any ambiguity, correct or supplement
any provision in the Amended and Restated Trust Agreement that may be
inconsistent with any other provision or to make any other provisions with
respect to matters or questions arising under the Amended and Restated Trust
Agreement which shall not be inconsistent with the other provisions of the
Amended and Restated Trust Agreement or (ii) to modify, eliminate or add to any
provision of the Amended and Restated Trust Agreement
S-41
to such extent as shall be necessary to ensure that the underlying securities
issuer will be classified for United States federal income tax purposes as a
grantor trust at all times that any underlying securities are outstanding or to
ensure that the underlying securities issuer will not be required to register as
an "investment company" under the Investment Company Act, provided, however,
that such action shall not adversely affect in any material respect the
interests of the holders of the underlying securities and such amendment will
become effective when notice thereof is given to the holders of the Trust
Securities.
The Amended and Restated Trust Agreement may be amended by the
underlying securities guarantor (i) with the consent of holders representing a
majority (based upon liquidation amount) of the outstanding Trust Securities,
and (ii) upon receipt by the underlying securities trustee of an opinion of
counsel to the effect that such amendment or the exercise of any power granted
to the underlying securities trustee in accordance with such amendment will not
affect the underlying securities issuer's status as a grantor trust for United
States federal income tax purposes or the underlying securities issuer's
exemption from status as an "investment company" under the Investment Company
Act, provided that, without the consent of each holder of Trust Securities, the
Amended and Restated Trust Agreement may not be amended to (i) change the amount
or timing of any distribution on the underlying securities or otherwise
adversely affect the amount of any distribution required to be made in respect
of the Trust Securities when due and payable or (ii) restrict the right of a
holder of underlying securities to institute suit for the enforcement of any
such payment on or after such date.
So long as any junior subordinated debentures are held by the
underlying securities issuer, the property trustee shall not (i) direct the
time, method and place of conducting any proceeding for any remedy available to
the subordinated debt trustee, or executing any trust or power conferred on the
subordinated debt trustee with respect to the junior subordinated debentures,
(ii) waive certain past defaults with respect to the junior subordinated
debentures that is waivable under its subordinated debt indenture, (iii)
exercise any right to rescind or annul a declaration of acceleration of the
maturity of the principal of the junior subordinated debentures or (iv) consent
to any amendment, modification or termination of the subordinated debt indenture
or the junior subordinated debentures, where such consent shall be required
without, in each case, obtaining the prior approval of the holders of a majority
in liquidation amount of all outstanding underlying securities; provided,
however, that where a consent under the subordinated debt indenture would
require the consent of each holder of junior subordinated debentures affected
thereby, no such consent shall be given by the property trustee without the
prior approval of each holder of underlying securities. The underlying
securities trustee shall not revoke any action previously authorized or approved
by a vote of the holders of the underlying securities except by subsequent vote
of such holders. In addition to obtaining the foregoing approvals of such
holders of the underlying securities, prior to taking any of the foregoing
actions, the underlying securities trustee shall obtain an opinion of counsel to
the effect that the underlying securities issuer will not be classified as an
association taxable as a corporation for United States federal income tax
purposes on account of such action and the action would not cause the underlying
securities issuer to be classified as other than a grantor trust for U.S.
federal income tax purposes. The property trustee shall in general notify each
holder of underlying securities of any notice of default actually known to the
property trustee with respect to the junior subordinated debentures.
Any required approval of holders of underlying securities may be given
at a meeting of such holders convened for such purpose or pursuant to written
consent. An administrative trustee will cause a notice of any meeting at which
holders of underlying securities are entitled to vote, or of any matter upon
which action by written consent of such holders is to be taken, to be given to
each holder of record of underlying securities in the manner set forth in the
Amended and Restated Trust Agreement.
No vote or consent of the holders of underlying securities will be
required for the underlying securities issuer to redeem and cancel its
underlying securities in accordance with the Amended and Restated Trust
Agreement.
Notwithstanding that holders of underlying securities are entitled to
vote or consent under any of the circumstances described above, any of the
underlying securities that are owned by the underlying securities guarantor, or
any affiliate of the underlying securities guarantor shall, for purposes of such
vote or consent, be treated as if they were not outstanding.
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Mergers, Consolidations, Amalgamations or Replacements of the Underlying
Securities Issuer
The underlying securities issuer may not merge, consolidate,
amalgamate, or be replaced by, or convey, transfer or lease its properties and
assets as an entirety or substantially as an entirety to any corporation or
other Person, except as described below. The underlying securities issuer may,
at the request of the underlying securities guarantor, with the consent of the
holders of the underlying securities, merge with or into, consolidate,
amalgamate, or be replaced by or convey, transfer or lease its properties and
assets as an entirety substantially as an entirety to a trust organized as such
under the laws of any State, provided that:
(i) such successor entity either (a) expressly assumes all of
the obligations of the underlying securities issuer with respect to the
underlying securities or (b) substitutes for the underlying securities
other securities having substantially the same terms as the underlying
securities (the "Successor Securities") so long as the Successor
Securities rank in priority the same as the underlying securities with
respect to distributions and payments upon liquidation, redemption and
otherwise;
(ii) the underlying securities guarantor expressly appoints a
trustee of such successor entity possessing the same powers and duties
as the Property Trustee with respect to the junior subordinated
debentures;
(iii) such merger, conversion, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not cause the
underlying securities (including any Successor Securities) to be
downgraded by any nationally recognized statistical rating
organization;
(iv) such merger, conversion, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect
the rights, preferences and privileges of the holders of the underlying
securities (including any Successor Securities) in any material respect
(other than in connection with any distribution of such holders'
interests in the new entity);
(v) such successor entity has a purpose identical to that
of the underlying securities issuer;
(vi) prior to such merger, conversion, consolidation,
amalgamation, replacement, conveyance, transfer, or lease, the
underlying securities guarantor has received an opinion from
independent counsel to the underlying securities issuer experienced in
such matters to the effect that (a) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the holders
of the underlying securities (including any Successor Securities) in
any material respect (other than any dilution of the holders' interest
in the new entity) and (b) following such merger, conversion,
consolidation, amalgamation, replacement, conveyance, transfer or
lease, neither the underlying securities issuer nor such successor
entity will be required to register as an "investment company" under
the Investment Company Act; and
(vii) the underlying securities guarantor or any permitted
successor or assignee owns all of the Common Securities of such
successor entity and guarantees the obligations of such successor
entity under the Successor Securities at least to the extent provided
by the underlying securities guarantee.
Notwithstanding the foregoing, the underlying securities issuer shall
not, except with the consent of holders of 100% in Liquidation Amount of the
underlying securities, consolidate, amalgamate, merge with or into, be replaced
by or convey, transfer or lease its properties and assets substantially as an
entirety to any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it if such consolidation,
amalgamation, merger, replacement, conveyance, transfer or lease would cause the
underlying securities issuer or the successor entity to be classified as an
association taxable as a corporation or as other than a grantor trust for United
States federal income tax purposes.
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Redemption
The underlying securities have no stated maturity but must be redeemed
upon the maturity of the junior subordinated debentures or their earlier
redemption.
If the underlying securities guarantor repays or redeems the junior
subordinated debentures at any time, the underlying securities issuer will be
obligated to redeem a Like Amount of underlying securities. The redemption of
the underlying securities will occur on the redemption date, which means the
date on which payment of the principal of those junior subordinated debentures
becomes due under the subordinated debt indenture. The redemption price for the
underlying securities will be the total liquidation amount of the underlying
securities being redeemed, plus (i) accumulated but unpaid distributions up to
and including the redemption date; and (ii) the related amount of the make-whole
amount, if any, in excess of the total liquidation amount of the underlying
securities being redeemed, paid to the underlying securities guarantor or the
concurrent redemption on the junior subordinated debentures.
The underlying securities guarantor may redeem the junior subordinated
debentures before their stated maturity (a) in whole at any time or in part from
time to time, provided that no partial redemption may occur during an Extension
Period or (b) in whole at any time within 90 days after the occurrence of a
Special Event.
If the underlying securities guarantor elects to redeem the junior
subordinated debentures, it will do so at the relevant redemption price. The
redemption price for the junior subordinated debentures will equal the greater
of:
(i) 100% of the principal amount of the junior subordinated
debentures being redeemed, and
(ii) the make-whole amount, if any, as determined by the
quotation agent, equal to the sum of the present values of scheduled
payments of principal and interest from the redemption date to February
15, 2034 on the junior subordinated debentures being redeemed,
discounted to the redemption date on a semi-annual basis at a discount
rate equal to the Treasury Rate (as described below) plus a spread of
0.05%, in the case of a redemption after the occurrence of a Tax Event
or Investment Company Event, or plus a spread of 0.20%, in the case of
any other redemption,
plus, in either case, accrued and unpaid in on the junior subordinated
debentures being redeemed.
Because the spread percentage will be higher for a redemption after a
Tax Event or Investment Company Event than for a redemption in other
circumstances, the make-whole amount (and thus the redemption price) we will pay
to redeem your capital securities will be lower if the redemption is due to an
event of this kind than if it is not.
The "quotation agent" will initially be Goldman, Sachs & Co. However,
if Goldman, Sachs & Co. ceases to be a primary U.S. Government securities dealer
in New York City, we will replace them with another primary U.S. Government
securities dealer.
If less than all of the junior subordinated debentures are redeemed or
repaid, then the aggregate liquidation amount of the trust securities to be
redeemed will be allocated approximately 3% to the Common Securities and 97% to
the underlying securities, except in the case of an event of default as a result
of any failure by the underlying securities guarantor to make any payments on
the junior subordinated debentures when due after any applicable grace period
(in which case 100% will be allocated to the capital securities).
The underlying securities issuer cannot redeem less than all of the
capital securities unless all accrued and unpaid distributions on the underlying
securities and Common Securities have been paid on or before the redemption
date.
A "Special Event" means a Tax Event or an Investment Company Event (as
defined below), as the case may be.
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A "Tax Event" means that the underlying securities issuer shall have
received an opinion of tax counsel experienced in such matters to the effect
that, as a result of (a) any amendment to, or change including any announced
prospective change in, the laws or any regulations thereunder of the United
States or any political subdivision or taxing authority thereof or therein, or
(b) any official administrative pronouncement or judicial decision interpreting
or applying such laws or regulations, which amendment or change is effective or
such pronouncement or decision is announced on or after January 29, 1997, there
is more than an insubstantial risk that (i) the underlying securities issuer is,
or as a result of the issuance of the Exchange Securities would be or will be
within 90 days of the date of such opinion, subject to United States federal
income tax with respect to income received or accrued on the junior subordinated
debentures, (ii) interest payable by the underlying securities guarantor on the
junior subordinated debentures is not, or within 90 days of the date of such
opinion will not be, deductible by the underlying securities guarantor, in whole
or in part, for United States federal income tax purposes, or (iii) the
underlying securities issuer is, or will be within 90 days of the date of such
opinion, subject to more than a de minimis amount of other taxes, duties or
other governmental charges.
An "Investment Company Event" means that the underlying securities
issuer shall have received an opinion of counsel experienced in such matters to
the effect that, as a result of the occurrence of any amendment to, or change
(including any announced prospective change) in, the laws or any regulations
under the laws of the United States or of any political subdivision or
governmental agency or regulatory authority of or in the United States, or as a
result of any official administrative pronouncement, including any
interpretation, release, no-action letter, regulatory procedure, notice or
announcement (including any notice or announcement of an intent to adopt any
interpretation, procedures or regulations) or action or any judicial decision
interpreting or applying such laws or regulations, whether or not the
pronouncement, action or decision is issued to or in connection with a
proceeding involving the underlying securities guarantor or the underlying
securities issuer or is subject to review or appeal, which amendment or change
is effective, or which pronouncement, action or decision is announced or occurs,
on or after the date of the issuance of the capital securities, there is more
than an insubstantial risk that the underlying securities issuer is or will be
considered an "investment company" that is required to be registered under the
Investment Company Act of 1940.
"Treasury Rate" for purposes of determining the make-whole amount,
means the yield, under the heading which represents the average for the
immediately prior week, appearing in the most recently published statistical
release designated "H.15 (519)" or any successor publication which is published
weekly by the Federal Reserve Board and which establishes yields on actively
traded United States Treasury securities adjusted to constant maturity under the
caption "Treasury Constant Maturities," for the maturity corresponding to the
Stated Maturity Date (if no maturity is within three months before or after the
Stated Maturity Date, yields for the two published maturities most closely
corresponding to the Stated Maturity Date shall be interpolated and the Treasury
Rate shall be interpolated or extrapolated from such yields on a straight-line
basis, rounding to the nearest month) or (ii) if such release or any successor
release is not published during the week preceding the calculation date or does
not contain such yields, the rate per annum equal to the semi-annual equivalent
yield to maturity of the Comparable Treasury Issue, calculated using a price for
the Comparable Treasury Issue (expressed as a percentage of its principal
amount) equal to the Comparable Treasury Price for the redemption calculated on
the third Business Day preceding the redemption.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the time
period from the redemption date to February 15, 2034 that would be utilized, at
the time of selection and in accordance with customary financial practice, in
pricing new issues of corporate debt securities of comparable maturity. If no
United States Treasury security has a maturity which is within a period from
three months before to three months after February 15, 2034, the two most
closely corresponding United States Treasury securities shall be used as the
Comparable Treasury Issue, and the Treasury Rate shall be interpolated or
extrapolated on a straight-line basis, rounding to the nearest month using such
securities.
"Comparable Treasury Price" means, with respect to any redemption date,
will be (a) the average of the five Reference Treasury Dealer Quotations for
such redemption date, after excluding the highest and lowest such Reference
Treasury Dealer Quotations, or (b) if the subordinated debt trustee obtains
fewer than three such Reference Treasury Dealer Quotations, the average of all
such Quotations.
S-45
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the subordinated debt trustee, of the bid and asked prices for the Comparable
Treasury Issue expressed in each case as a percentage of its principal amount
quoted in writing to the subordinated debt trustee by such Reference Treasury
Dealer at 5:00 p.m., New York City time, on the third Business Day preceding
such prepayment date.
The "Reference Treasury Dealer" will be (1) the Quotation Agent or (2)
any other primary U.S. Government securities dealer selected by the Quotation
Agent after consulting with us.
Holders will receive at least 30 days', but not more than 60 days',
written notice before any redemption of underlying securities. If there are
accumulated and unpaid distributions on the capital securities that have not
been paid on or before the redemption date, the underlying securities issuer
cannot redeem less than all of the capital securities.
Subordination Of Common Securities
Payment of distributions on, and the redemption price of, the
underlying securities and the Common Securities, as applicable, shall be made
pro rata based on the liquidation amount of the underlying securities and Common
Securities; provided, however, that if any Debenture Event of Default shall have
occurred and be continuing, no payments in respect of any distribution on, or
payments upon liquidation, redemption, repurchase or otherwise with respect to,
the Common Securities, shall be made until the holders of the underlying
securities shall be paid in full in cash all accumulated and unpaid
distributions on all of the outstanding underlying securities for all
distribution periods terminating on or prior thereto or, in the case of
underlying securities called for redemption on a redemption date on or prior
thereto, the full amount of the redemption price therefore, or in the case of a
liquidation, the liquidation distribution shall have been made or provided for,
and all funds available to the Property Trustee shall first be applied to the
payment in full of all distributions on, redemption price of, or liquidation
distribution for the underlying securities then due and payable.
In the case of any Event of Default, the underlying securities
guarantor as holder of the Common Securities will be deemed to have waived any
right to act with respect to such Event of Default until the effect of such
Event of Default shall have been cured, waived or otherwise eliminated. Until
any such Event of Default has been so cured, waived or otherwise eliminated, the
Property Trustee shall act solely on behalf of the holders of the underlying
securities and not on behalf of the underlying securities guarantor as holder of
the Common Securities, and only the holders of the underlying securities will
have the right to direct the Property Trustee to act on their behalf.
DESCRIPTION OF THE GUARANTEE
The guarantee was executed and delivered by the underlying securities
guarantor concurrently with the issuance by the underlying securities issuer of
the underlying securities for the benefit of the holders from time to time of
such underlying securities. The Bank of New York acts as the guarantee Trustee
under the guarantee. This summary of material provisions of the guarantee does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, all of the provisions of the guarantee, including the definitions
therein of certain terms and the provisions of the Trust Indenture Act made a
part thereof. The trustee under the guarantee will hold the guarantee for the
benefit of the holders of the underlying securities.
The following payments with respect to the underlying securities, to
the extent not paid by or on behalf of the underlying securities issuer (the
"Guarantee Payments"), will be subject to the guarantee: (i) any accumulated and
unpaid Distributions required to be paid on underlying securities, to the extent
the underlying securities issuer has funds available therefor, (ii) the
Redemption Price with respect to any underlying securities called for
redemption, to the extent that the underlying securities issuer has funds
available therefor, or (iii) upon a voluntary or involuntary termination and
liquidation of the underlying securities issuer (unless the junior subordinated
debentures are distributed to holders of the underlying securities), the lesser
of (a) the aggregate of the $1,000 liquidation amount and all accumulated and
unpaid distributions on the underlying securities to the date of payment,
S-46
to the extent that the underlying securities issuer has funds available
therefor, and (b) the amount of assets of the underlying securities issuer
remaining available for distribution to holders of underlying securities upon
liquidation of the underlying securities issuer. The underlying securities
guarantor's obligation to make a guarantee payment may be satisfied by direct
payment of the required amounts by the underlying securities guarantor to the
holders of the underlying securities or by causing the underlying securities
issuer to pay such amounts to such holders.
If the underlying securities guarantor does not make a required payment
on the junior subordinated debentures, the underlying securities issuer will not
have sufficient funds to make the related payment on the underlying securities.
The underlying securities guarantee does not cover payments on the underlying
securities when the underlying securities issuer does not have sufficient funds
to make those payments. If the underlying securities guarantor does not pay any
amounts on the junior subordinated debentures when due, holders of the
underlying securities will have to rely on the enforcement by the property
trustee of the underlying securities trustee's rights as registered holder of
the junior subordinated debentures, or proceed directly against the underlying
securities guarantor for payment of any amounts due on the underlying
securities. The underlying securities guarantor's obligations under the
underlying securities guarantee are unsecured and are subordinated and junior in
right of payment to all of the underlying securities guarantor's secured and
senior debt, and rank on a parity with all other similar guarantees issued by
the underlying securities guarantor.
The underlying securities guarantee will be governed by New York law.
Relationship among the Underlying Securities, the Junior Subordinated Debentures
and the underlying securities Guarantee
The underlying securities guarantor will guarantee payments of
distribution and redemption and liquidation payments due on the capital
securities to the extent the underlying securities issuer has funds available
for such payment, as described under "Description of Underlying Securities
Guarantee" above. No single document executed by the underlying securities
guarantor will provide for the full, irrevocable and unconditional guarantee of
the underlying securities. It is only the combined operation of the underlying
securities guarantee, the Amended and Restated Trust Agreement and the
subordinated debt indenture, together with the expense agreement, that has the
effect of providing a full, irrevocable and unconditional guarantee of the
underlying securities issuer's obligations under the underlying securities.
As long as the underlying securities guarantor pays interest and other
payments when due on the junior subordinated debentures, those payments will be
sufficient to cover distributions and redemption and licks payments due on the
capital securities, primarily because:
o the aggregate principal amount of the junior subordinated
debentures will be equal to the sum of the aggregate liquidation
amount of the underlying securities and the Common Securities;
o the interest rate and the interest and other payment dates on
junior subordinated debentures will match the distribution rate
and distribution and other payment dates for the underlying
securities;
o the underlying securities guarantor will pay, under the expense
agreement, for any and all costs, expenses and liabilities of the
underlying securities issuer, except withholding taxes and the
underlying security issuer's obligations to the holders of the
underlying securities and the Common Securities; and
o the Amended and Restated Trust Agreement provides that the
underlying security issuer will not engage in any activity that
is not consistent with the limited purposes of the underlying
security issuer.
A default of event of default under any senior indebtedness of the
underlying securities guarantor would not necessarily constitute a default or
event of default under the underlying securities. However, if certain defaults
under senior indebtedness or certain events of bankruptcy, insolvency or
reorganization occur, or if the junior subordinated debentures are declared due
before their stated maturity, the subordinated debt indenture provides that no
payments may be made on the junior subordinated debentures until the senior
indebtedness has been paid in full.
S-47
Form, Denomination, Book-Entry Procedures and Transfer
The description of book-entry procedures in this prospectus supplement
includes summaries of certain rules and operating procedures of DTC that affect
transfers of interests in the Global Certificate or Certificates issued in
connection with sales of underlying securities. Except as described in the next
paragraph, the underlying securities will be issued only as fully registered
securities (the "Global Underlying Securities") registered in the name of Cede &
Co. (as nominee for DTC). One or more fully registered Global Certificates were
issued, representing, in the aggregate, the underlying securities, and were
deposited with DTC.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the Global Underlying
Securities as represented by a Global Certificate.
DTC has advised the underlying securities issuer that it is a
limited-purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking Law, a member
of the Federal Reserve System, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code and a "clearing agency" registered pursuant
to the provisions of Section 17A of the Exchange Act. DTC holds securities that
its participants ("Participants") deposit with DTC. DTC also facilitates the
settlement among Participants of securities transactions, such as transfers and
pledges, in deposited securities through electronic computerized book-entry
changes in Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Participants in DTC include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations ("Direct Participants"). DTC is owned by a number of its
Direct Participants and by the New York Stock Exchange Inc., the American Stock
Exchange, Inc., and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others, such as securities brokers and
dealers, banks and trust companies that clear transactions through or maintain a
direct or indirect custodial relationship with a Direct Participant, either
directly or indirectly ("Indirect Participants"). The rules applicable to DTC
and its Participants are on file with the Commission.
Purchases of underlying securities within the DTC system must be made
by or through Direct Participants, which will receive a credit of the underlying
securities on DTC's records. The ownership interest of each actual purchaser of
each underlying security ("Beneficial Owner") is in turn to be recorded on the
Direct Participants' and Indirect Participants' records. Beneficial Owners will
not receive written confirmation from DTC of their purchases, but Beneficial
Owners are expected to receive written confirmations providing details of the
transactions, as well as periodic statements of their holdings, from the Direct
or Indirect Participants through which the Beneficial Owners purchased
underlying securities. Transfers of ownership interests in the underlying
securities are to be accomplished by entries made on the books of Participants
acting on behalf of Beneficial Owners. Beneficial Owners will not receive
certificates representing their ownership interests in the underlying
securities, except in the event that use of the book-entry system for the
underlying securities is discontinued.
To facilitate subsequent transfers, all the underlying securities
deposited by Participants with DTC were registered in the name of DTC's nominee,
Cede & Co. The deposit of underlying securities with DTC and their registration
in the name of Cede & Co. will effect no change in beneficial ownership. DTC
will have no knowledge of the actual Beneficial Owners of the underlying
securities. DTC's records will reflect only the identity of the Direct
Participants to whose accounts such underlying securities are credited, which
may or may not be the Beneficial Owners. The Direct Participants and Indirect
Participants will remain responsible for keeping account of their holdings on
behalf of their customers.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Certificate in respect of the underlying securities, DTC or such nominee,
as the case may be, will be considered the sole owner or holder of the
underlying securities represented thereby for all purposes under the indenture
and such underlying securities. No Beneficial Owner of an interest in a Global
Certificate will be able to transfer that interest except in accordance with
DTC's applicable procedures.
S-48
DTC has advised the underlying securities issuer that it will take any
action permitted to be taken by a holder of underlying securities (including the
presentation of underlying securities for exchange as described below) only at
the direction of one or more Participants to whose accounts the DTC interests in
the Global Certificates are credited and only in respect of such portion of the
aggregate liquidation amount of underlying securities as to which such
Participant or Participants has or have given such direction. However, if there
is an indenture Event of Default with respect to the underlying securities, DTC
will, upon notice, exchange the Global Certificates in respect of such
underlying securities for certificated securities, which it will distribute to
its Participants.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Although voting with respect to the underlying securities is limited,
in those cases where a vote is required, neither DTC nor Cede & Co. will itself
consent or vote with respect to the underlying securities. Under its usual
procedures, DTC would mail an omnibus proxy to the underlying securities issuer
as soon as possible after the record date. The omnibus proxy assigns Cede &
Co.'s consenting or voting rights to those Direct Participants to whose accounts
the underlying securities are credited on the record date (identified in a
listing attached to the omnibus proxy).
Distributions on the underlying securities held in book-entry form will
be made to DTC in immediately available funds. DTC's practice is to credit
Direct Participants' accounts on the relevant payment date in accordance with
their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payments on such payment date. Payments by
Direct Participants and Indirect Participants to Beneficial Owners will be
governed by standing instructions and customary practices and will be the
responsibility of such Direct Participants and Indirect Participants and not of
DTC or the underlying securities issuer subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of distributions to
DTC is the responsibility of the underlying securities issuer, disbursement of
such payments to Direct Participants is the responsibility of DTC, and
disbursement of such payments to the Beneficial Owners is the responsibility of
Direct Participants and Indirect Participants.
Except as provided herein, a Beneficial Owner of an interest in a
Global Certificate will not be entitled to receive physical delivery of
underlying securities. Accordingly, each Beneficial Owner must rely on the
procedures of DTC, the Direct Participants and the Indirect Participants to
exercise any rights under the underlying securities.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Certificates among the
Participants of DTC, DTC is under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time.
Neither the underlying securities issuer nor the underlying securities trustee
will have any responsibility for the performance by DTC or its Direct
Participants or Indirect Participants under the rules and procedures governing
DTC. DTC may discontinue providing its services as a securities depositary with
respect to the underlying securities at any time by giving notice to the
underlying securities issuer. Under such circumstances, in the event that a
successor securities depositary is not obtained, underlying security
certificates will be required to be printed and delivered. Additionally, the
underlying securities issuer may decide to discontinue use of the system of
book-entry transfers through DTC (or a successor depositary) with respect to the
underlying securities of the underlying securities issuer. In that event,
certificates for such underlying securities will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that we believe to be reliable, but none
of ourselves, the underlying securities issuer or DTC takes responsibility for
the accuracy thereof.
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DESCRIPTION OF THE SWAP AGREEMENT
General
On the date of this prospectus supplement, the depositor will enter
into the swap agreement with the swap counterparty pursuant to which the
depositor will agree to exchange interest payments due on the underlying
securities for payments of the interest distribution amount from the swap
counterparty that will be passed through to the holders of the trust
certificates.
The swap counterparty, under the swap agreement, will also agree to
make a one-time payment to the depositor immediately upon the execution of the
swap agreement. The depositor will retain the one time payment but, on the
closing date, the depositor will assign all its other rights and obligations
under the swap agreement to the trust. For purposes of this prospectus
supplement, any rights and obligations the trust has under the swap agreement
assumes that the depositor has assigned the swap agreement to the trust.
Under the terms of the swap agreement, the swap counterparty will be
obligated to pay to the trust on each distribution date, including the final
distribution date, an amount equal to the related interest distribution amount;
provided, however, that the swap counterparty will not be obligated to pay an
interest distribution amount to the trust in respect of any distribution period
occurring during the continuance of an Extension Period. In exchange, on each
underlying securities payment date, the trust will pay to the swap counterparty
the interest payment received by the trust in respect of such underlying
securities payment date; provided, however, that any accrued interest on the
underlying securities from and including , 2004 to but excluding the closing
date will be payable to the depositor. At the conclusion of any Extension
Period, (i) the trustee will be obligated to pay the swap counterparty all
amounts received by the trust in respect of any accrued and unpaid interest and
any interest on such accrued and unpaid interest on the underlying securities
during such Extension Period and (ii) the swap counterparty will be obligated to
pay all deferred interest with respect to such Extension Period to the trust.
Unless it is sooner terminated in accordance with its terms, the swap
agreement is scheduled to terminate on the earlier of (i) , 2034 or (ii) the
date the call warrant holders exercise their warrants with respect to all the
trust certificates outstanding.
Swap Counterparty
Merrill Lynch Capital Services, Inc. will act as the swap counterparty.
The swap counterparty is also an affiliate of Merrill Lynch & Co., which is
acting as an underwriter and swap guarantor.
Swap guarantor
Merrill Lynch & Co., the "swap guarantor", will fully and
unconditionally guarantee any payment obligations of the swap counterparty. The
swap guarantor currently has a long-term credit rating of "A+" from Standard &
Poor's and Aa3 from Moody's.
We are incorporating by reference in this prospectus supplement the
swap guarantor's Annual Report on Form 10-K for the fiscal year ended December
26, 2003 and Quarterly Report on Form 10-Q for the quarterly period ended March
26, 2004 filed with the SEC on May 4, 2004. In addition, the swap guarantor is
subject to the informational requirements of the Exchange Act and files periodic
reports and other information with the SEC. You may inspect and copy these
reports and other information at the SEC's public reference facilities located
at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain copies of
these materials for a fee by writing to the SEC's Public Reference Section at
450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information about
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
You can also access some of this information electronically by means of the
SEC's website on the Internet at http://www.sec.gov, which contains reports,
proxy and information statements and other information that the underlying
securities issuer has filed electronically with the SEC.
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Amounts payable by the swap counterparty
Under the swap agreement, the swap counterparty will be obligated to
pay to the trust, (i) provided no swap agreement termination event has occurred,
on each distribution date (other than a distribution date occurring during the
continuance of an Extension Period), including the final distribution date, an
amount equal to the interest distribution amount for the immediately preceding
distribution period, (ii) on any distribution date occurring immediately
following the end of any Extension Period, an amount equal to any deferred
interest and (iii) upon the occurrence of a swap agreement termination event
that is also a trust termination event or a partial swap termination event, an
amount equal to any early termination payment owed to the trust under the swap
agreement (See "--Payments Upon Early Termination" below). The swap counterparty
will not be obligated to make any interest payments under the swap agreement on
any distribution date occurring during the continuance of an Extension Period.
The "interest distribution amount" for each distribution period will be
an amount obtained by multiplying (a) the swap notional amount and (b) the
greater of (i) three-month LIBOR plus __% and (ii) __%, but it shall not exceed
__% and (c) the actual number of days in the related distribution period,
divided by 360.
"Deferred interest" means, upon the termination of any Extension
Period, (i) the aggregate of each interest distribution amount that was not paid
on the distribution date that occurred during the relevant Extension Period plus
(ii) interest on each interest distribution amount that was not paid during the
relevant Extension Period at the interest rate used to calculate such interest
distribution amount, from the distribution date immediately following the
interest accrual period with respect to such interest distribution amount until
the end of the Extension Period. For avoidance of doubt, deferred interest does
not include the interest distribution amount due on the distribution date upon
which the Extension Period terminated.
Amounts payable by the trust
The trust will be obligated to pay the swap counterparty, (i) provided
no swap agreement termination event has occurred, on each underlying securities
payment date, the interest payment received by the trust in respect of such
underlying securities payment date and (ii) upon the occurrence of a swap
agreement termination event that is also a trust termination event or a partial
swap termination event, an amount equal to any early termination payment owed to
the swap counterparty under the swap agreement. See "--Payments Upon Early
Termination" below.
Events of default and termination events
The occurrence of any of the following constitutes a termination event under the
swap agreement (each, a "swap agreement termination event") in respect of which
the swap counterparty, on the one hand, or the trust, on the other hand, is a
"defaulting party" or an "affected party:"
(i) the swap counterparty fails to make any payment under the swap
agreement, and such failure is not remedied by the fifth business
day after notice of such failure is given to it, in which case the
swap counterparty is the defaulting party;
(ii) the trust fails to make any payment under the swap agreement, and
such failure is not remedied by the fifth business day after
notice of such failure is given to it, in which case the trust is
the defaulting party (a "trust swap payment default");
(iii) certain events of bankruptcy, insolvency or reorganization in
respect of the swap counterparty, in which case the swap
counterparty is the defaulting party;
(iv) the occurrence of an underlying securities event of default
relating to (x) the payment of any distribution on the underlying
securities or any redemption price of the underlying securities or
the payment of principal of or any make-whole amount, if any, on
the underlying securities when due (an "underlying securities
payment default") or (y) a bankruptcy, insolvency of
reorganization of the
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underlying securities issuer or any of its affiliates (an
"underlying securities bankruptcy event"), upon the occurrence of
any of the events in (x) or (y), the trust is the affected party;
(v) as a result of certain legislative, regulatory or judicial
action, it becomes unlawful for the swap counterparty to comply
with any material provision of the swap agreement, including any
payment obligation, in which case the swap counterparty is the
affected party (a "counterparty regulatory event");
(vi) as a result of certain legislative, regulatory or judicial
action, it becomes unlawful for the trust to comply with any
material provision of the swap agreement, including any payment
obligation, in which case the trust is the affected party (a
"trust regulatory event" and, together with a counterparty
regulatory event, a "regulatory event");
(vii) the underlying securities issuer ceases to file Exchange
Act reports, in which case the trust is the affected party;
(viii) the swap guarantor ceases to file Exchange Act reports, in
which case the swap counterparty is the affected party; and
(ix) an optional redemption or repurchase of or other unscheduled
payment by the underlying securities issuer on 100% of the
underlying securities prior to the final distribution date, in
which case the trust is the affected party.
The swap agreement termination events specified in paragraphs (ii),
(iv), (v), (vi), (vii) and (ix) above are each also a "trust termination event."
The trustee will distribute any proceeds received upon the occurrence of a trust
termination event in the manner described under "Description of the Trust
Certificates--Default on Underlying Securities and Occurrence of Trust
Termination Events". So long as the swap agreement has not been terminated, the
notional amount of the swap agreement (the "swap notional amount") will at all
times equal the outstanding principal amount of the underlying securities held
by the trust. Following any redemption, repurchase, prepayment or liquidation of
or unscheduled payment on the underlying securities, the swap notional amount
will be reduced accordingly. A "partial swap termination event" will occur in
connection with an optional redemption or other prepayment of less than all of
the underlying securities prior to the final distribution date. In this case,
the trust is the affected party.
Early termination date
If a swap agreement termination event occurs in which the swap
counterparty is the "defaulting party" or the only "affected party," the trustee
shall designate as an early termination date the earliest date following the
trustee's receipt of actual knowledge thereof on which the swap agreement can
practicably be terminated (an "early termination date"). Except as provided in
the preceding paragraph, the swap counterparty will be responsible for
designating an early termination date upon the occurrence of a swap agreement
termination event or a partial swap termination event.
Payments upon early termination
Following a swap termination event, an early termination payment is
usually payable from one party to the other party. This means that upon a swap
termination event, either the swap counterparty would make an early termination
payment to the trust or the trust, by liquidating some or all of the underlying
securities, would make an early termination payment to the swap counterparty.
However, the trust and the swap counterparty will not follow these procedures.
Instead, to prevent the trust from having to make an early termination
payment to the swap counterparty, the trust has agreed with the swap
counterparty that following a swap agreement termination event that is not a
trust termination event, (i) there will be no early termination payment payable
by either party to the swap agreement, (ii)
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the obligations of the swap counterparty and the trust under the swap agreement
will terminate and (iii) distributions will be made to the holders of the trust
certificates on a semi-annual basis on the distribution dates in ____ and ____
of each year.
Following any swap agreement termination event that is not a trust
termination event, on each distribution date in _____ and _____, the holders of
the trust certificates will receive a pro rata share of any interest payments
received by the trust in respect of the underlying securities, which will cause
the yield on the trust certificates to be based on the ____% fixed annual rate
payable on the underlying securities, instead of the floating rate interest
distribution amount payable prior to such swap termination event.
Following a swap agreement termination event that is also a trust
termination event, an early termination payment will be payable under the swap
agreement. Additionally, following a partial swap termination event, an early
termination payment will be payable under the swap agreement based on the
percentage of the swap notional amount being terminated, but the trust will only
be obligated to make such early termination payment that it owes to the swap
counterparty to the extent it has funds available therefor on the related
distribution date. Payments upon early termination of the swap agreement will be
determined as described in the next paragraph.
The amount payable upon an early termination of the swap agreement (the
"early termination payment") will be based on an average of market quotations
obtained by the party entitled to make such determination from leading swap
dealers (or if fewer than three quotes are received, based on the actual loss or
gain resulting from such early termination).
If an early termination results from a swap agreement termination event
(that is also a trust termination event) or a partial swap termination event
where there is a defaulting party or one affected party, the non-defaulting or
the party which is not the affected party will determine a market quotation, and
an amount will be payable equal to (a) the market quotation and any unpaid
amounts owed to the party that is not the defaulting party or the affected party
less (b) any unpaid amounts owed to the defaulting party or the affected party.
If that amount is a positive number, the defaulting party or such affected party
will pay it to the other party; if it is a negative number, such other party
will pay the absolute value of that amount to the defaulting party or such
affected party.
If the early termination date results from a swap agreement termination
event (that is also a trust termination event) or a partial swap termination
event and there are two affected parties, the swap counterparty will determine a
market quotation, and an amount will be payable equal to (a) the market
quotation and any unpaid amounts owed to the swap counterparty less (b) any
unpaid amounts owed to the trust. If that amount is a positive number, the trust
will pay it to the swap counterparty; if it is a negative number, the swap
counterparty will pay the absolute value of that amount to the trust.
"market quotation" means, as to the respective party making the
determination, the termination amount based on quotations from leading dealers,
in accordance with the swap agreement.
"termination amount" means the amount, if any, that the party making
the determination would pay (expressed as a positive number) or receive
(expressed as a negative number) in consideration of an agreement that would
have the effect of preserving the economic equivalent of the amounts that would
have been paid by the trust and the swap counterparty pursuant to the swap
agreement after the early termination date, determined as if the swap agreement
had not been terminated, in whole or in part, early.
In the event the underlying securities are liquidated as a result of an
underlying securities payment default, the underlying securities issuer to file
Exchange Act reports, or upon an underlying securities bankruptcy event, trust
swap payment default or a trust regulatory event, the early termination payment
payable by the trust to the swap counterparty (if any is then payable) will be
deducted from the liquidation proceeds payable to the holders of the trust
certificates. If any early termination payment is payable by the swap
counterparty to the trust (if any is then payable), the amount of such payment
will be added to the proceeds payable to the holders of the trust certificates.
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In the event the underlying securities are redeemed, repurchased or
repaid, in whole or in part, prior to their maturity, the early termination
payment payable by the trust (if any is then payable) to the swap counterparty
will be deducted from the redemption proceeds payable to the holders of the
trust certificates. Any remaining redemption proceeds will be used to pay
holders of the trust certificates an amount equal to (i) the principal balance
of the trust certificates being redeemed and (ii) accrued and unpaid interest
thereon. Any make-whole amount or other additional proceeds will be used to
satisfy any early termination payment payable to the swap counterparty and,
thereafter, will be paid to the holders of the trust certificates. If any early
termination payment is payable by the swap counterparty to the trust, the amount
of such payment will be added to the redemption proceeds payable to the holders
of the trust certificates.
Assignment of rights
Under the terms of the trust agreement, the trustee may consent to any
transfer or assignment by the swap counterparty of its rights under the swap
agreement, so long as S&P shall have given its prior written confirmation that
such transfer or assignment will not result in a reduction or withdrawal of the
then current rating of the trust certificates. The trustee shall not be
permitted to transfer or assign its rights under the swap agreement without the
prior consent of the swap counterparty.
Amendment of the swap agreement
The swap agreement may not be amended without the prior written consent
of the swap counterparty, holders of 66 2/3% of the then outstanding trust
certificates and without prior written confirmation from S&P that such amendment
will not result in a reduction or withdrawal of the then current rating of the
trust certificates; provided, however, that each of the swap counterparty and
the trustee may amend the swap agreement without the prior written consent of
holders of the trust certificates to cure any ambiguity in, or to correct or
supplement any provision of the swap agreement which may be inconsistent with
any other provision of the swap agreement, or to otherwise cure any defect in
the swap agreement, provided that any such amendment does not materially
adversely affect the interest of the holders of the trust certificates and that
S&P will have given its prior written confirmation that such amendment will not
result in a reduction or withdrawal of the then current rating of the trust
certificates; provided further, however, that notwithstanding anything to the
contrary, no amendment may alter the timing or amount of any payment on the swap
agreement without the prior consent of 100% of the holders of the trust
certificates and without giving each rating agency prior written notice of any
such amendment.
Replacement of the swap guarantor or swap counterparty
Pursuant to the terms of the swap agreement, if the short-term senior
unsecured debt rating of the swap guarantor is lowered below A-1 by S&P at any
time following the closing date, then the swap counterparty, in a commercially
reasonable manner, will seek, without the consent of the holders of the trust
certificates, to (i) obtain either a guaranty of the swap agreement in form and
substance satisfactory to S&P from an entity with a short-term debt rating that
is at least A-1 or (ii) assign its rights and obligations under the swap
agreement to a replacement swap counterparty rated at least A-1 by S&P and
otherwise acceptable to S&P. All costs and expenses in connection with such
assignment will be paid by the swap counterparty. If a replacement swap
guarantor is not designated within 30 days of the date the swap counterparty's
short-term senior unsecured debt rating is downgraded below A-1, then the swap
counterparty will be obligated to pledge and assign to the trustee collateral
(in the form of cash or U.S. Treasury issued securities) equal to the
replacement value of the swap. The swap counterparty will continue to take
actions to satisfy the conditions in clauses (i) or (ii) above. There can be no
assurance that the failure to find a replacement swap counterparty or to post
any required collateral will not result in a lowering in the rating of the trust
certificates.
S-54
U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material U.S. federal
income tax consequences of the purchase, ownership and disposition of the trust
certificates by an initial investor that will hold the trust certificates as
capital assets (generally, property held for investment). This summary is based
on the U.S. Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed Treasury regulations, administrative pronouncements of the IRS and
judicial decisions, all as currently in effect, and all of which are subject to
change, possibly on a retroactive basis, and to different interpretations. This
summary does not consider any state, local or non-U.S. tax laws, or any aspect
of U.S. federal tax law other than income taxation.
This summary is intended for general information only, and does not
deal with all U.S. federal income tax considerations that may be relevant to
investors in trust certificates based upon their particular circumstances, or to
investors in trust certificates that may be subject to special rules under U.S.
federal income tax law (including, for example, banks and other financial
institutions, insurance companies, tax-exempt organizations, partnerships and
other pass-through entities, dealers in securities or currencies, traders in
securities electing to mark-to-market, persons holding trust certificates as
part of a "straddle," a "hedge" or a "conversion transaction," persons subject
to the alternative minimum tax, regulated investment companies, real estate
investment trusts and U.S. Persons, as defined below, having a functional
currency other than the U.S. dollar). Investors in trust certificates should be
aware that no legal authority directly addresses the U.S. federal income tax
treatment of an investment in the trust certificates, and no ruling has been or
will be sought from the IRS in connection with the issuance of trust
certifications. Accordingly, there can be no assurance that the IRS will not
take positions with respect to the trust certificates that are contrary to the
U.S. federal income tax consequences described below, or that a court will not
agree with the positions of the IRS in the event of litigation.
Investors in trust certificates should consult their own tax advisors
in order to determine the U.S. federal, state, local and non-U.S. income and
other tax consequences of the purchase, ownership and disposition of the trust
certificates based upon their particular circumstances.
As used herein, the term "U.S. Person" means an individual who is a
citizen or resident of the United States, a corporation (including a business
entity taxable as a corporation) created or organized in or under the laws of
the United States or any state thereof or the District of Columbia, an estate
the income of which is subject to U.S. federal income tax regardless of its
source, or a trust if (A) a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more U.S.
Persons have the authority to control all substantial decisions of the trust, or
(B) the trust has a valid election in effect under applicable Treasury
regulations to be treated as a U.S. Person. If a partnership holds trust
certificates, the United States federal income tax treatment of a partner
generally will depend upon the status of the partner and the activities of the
partnership. Partners of a partnership holding trust certificates should consult
their own tax advisors.
U.S. Federal Income Tax Status of Trust
In the opinion of Shearman & Sterling LLP, special U.S. federal tax
counsel to the depositor, the trust will be classified under current U.S.
federal income tax law as a grantor trust, and not as an association (or
publicly traded partnership) taxable as a corporation under the Code.
Accordingly, each trust certificateholder generally will be treated for U.S.
federal income tax purposes as if the trust certificateholder (i) owned directly
a pro rata undivided interest in the underlying securities and swap agreement
held by the trust, (ii) wrote directly the call warrant related to such interest
in the underlying securities and swap agreement and (iii) paid directly its
share of reasonable expenses paid by the trust. Investors in trust certificates
should be aware that an opinion of counsel is not binding on the IRS or the
courts.
The remainder of this discussion assumes that the trust will be
classified as a grantor trust for U.S. federal income tax
purposes.
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Income of Trust Certificateholders That Are U.S. Persons
The following discussion applies to trust certificateholders that are
U.S. Persons.
In General
In accordance with the classification of the trust as a grantor trust
under current U.S. federal income tax law, a trust certificateholder generally
will be required to report on its U.S. federal income tax return a pro rata
share of all of the income derived by the trust from the underlying securities
and the swap agreement. As described further below, the terms of the trust
certificates require an initial trust certficateholder to make an election under
applicable Treasury regulations to integrate its interest in the underlying
securities and its interest in the swap agreement into a "synthetic debt
instrument" for U.S. federal income tax purposes (the "integration election").
Secondary market purchasers should consult with their own tax advisors regarding
the availability and advisability of an integration election in connection with
a purchase of trust certificates. See "Taxation of Trust Assets - Integration
Election" below.
Investors in trust certificates should be aware of a possibility that a
call warrant holder might be viewed as owning, in addition to the call warrant,
an interest in the underlying securities and the swap agreement. In that event,
a trust certificateholder could be treated as owning a "stripped" debt
instrument for U.S. federal income tax purposes. Trust certificateholders should
consult their own tax advisors regarding the potential application of special
U.S. federal income tax rules for stripped debt instruments, including their
effect on a trust certificateholder's computation of its tax basis in, and
interest income with respect to, the underlying securities.
Allocations
A trust certificateholder should be considered to have purchased its
interest in the underlying securities for an amount equal to (i) the cost of its
trust certificates plus the fair market value of the call warrant deemed written
by the trust certficateholder, (ii) multiplied by a fraction, the numerator of
which is the fair market value of such underlying securities and the denominator
of which is the sum of the fair market value of the underlying securities and
the fair market value of the swap agreement (which may be negative, zero or
positive), in each case, at the time of purchase. The trust certificateholder's
initial tax basis in the underlying securities should equal the purchase price
so allocated to the underlying securities. The trust certificateholder also
should be deemed to have received payment of an option premium in respect of the
call warrant equal to its fair market value. A trust certificateholder's tax
basis in its interest in the underlying securities can be greater than the
amount that trust certificateholder directly paid for a trust certificate.
If the fair market value to the trust of the swap agreement is not zero
at the time of a trust certificateholder's purchase of a trust certificate, the
trust certificateholder should be treated as having received or paid a premium
with respect to the swap agreement ("swap premium"). If such fair market value
is negative, a swap premium will be treated as paid to such trust
certificateholder in an amount equal to the excess of (i) the purchase price
allocated to the underlying securities over (ii) the cost of the trust
certficate plus the fair market value of the call warrant deemed written by the
trust certificateholder. If such fair market value is positive, a swap premium
will be treated as paid by such trust certificateholder in an amount equal to
the excess of (i) the cost of the trust certficate plus the fair market value of
the call warrant deemed written by the trust certificateholder, over (ii) the
purchase price allocated to the underlying securities.
When a trust certificateholder sells an interest in a trust
certificate, the trust certificateholder should be considered to have sold its
interest in the underlying securities and the swap agreement (or, if an
integration election is made, the resulting synthetic debt instrument) for an
amount equal to the sales price for its interest in the trust certificate, plus
the fair market value, at the time of the sale, of the call warrant that the
trust certificateholder is deemed to have written. In allocating the amount
realized by the selling trust certificateholder between the underlying
securities and the swap agreement, a trust certificateholder should use a method
similar to that described above (for purposes of determining the purchase price
and tax basis of the underlying securities), but based upon the fair market
value of the underlying securities and the fair market value of the swap
agreement (which may be
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positive, negative or zero) at the time of sale. The amount realized by the
trust certificateholder with respect to its interest in the underlying
securities and the swap agreement can be greater than the amount the trust
certificateholder directly receives for its interest in the trust certificate.
Any amount allocated to the swap agreement likely would be considered a
"termination payment" under applicable Treasury regulations. See "Taxation of
Trust Assets - Taxation of Swap Agreement - No Integration Election" below.
Taxation of Trust Assets
Treatment of Underlying Securities as Indebtedness
--------------------------------------------------
Based on the underlying securities prospectus supplement, this
discussion assumes that the underlying securities constitute indebtedness for
U.S. federal income tax purposes. The underlying securities prospectus
supplement did not disclose that there was a risk that the underlying securities
would be treated as other than indebtedness for U.S. federal income tax
purposes, but no assurances can be given that the IRS will not assert a contrary
position. Generally the determination of whether a financial instrument is
characterized as indebtedness or as equity under U.S. federal income tax
principles is based upon the facts and circumstances applicable at the time of
issuance, and takes into account such factors as an unconditional promise to pay
a sum certain, a fixed maturity date in the reasonably foreseeable future, an
obligation to pay regular interest regardless of the earnings of the issuer, the
extent of subordination of the instrument, and the adequacy of the issuer's
capital. In the event that the underlying securities are not respected as
indebtedness, the U.S. federal income tax consequences to trust
certificateholders could be materially different from those described herein.
For example, in such event, payments on the trust certificates could be treated
as dividends to the extent allocable to the current or accumulated earnings and
profits of the underlying securities issuer and any such dividends would be
subject to U.S. federal withholding tax if paid to a foreign trust
certificateholder (as defined below). Moreover, the integration election would
not be available to trust certificateholders with respect to their interests in
the underlying securities and the swap agreement. The remainder of this
discussion assumes that the underlying securities constitute indebtedness for
U.S. federal income tax purposes.
Integration Election
--------------------
The U.S. federal income tax treatment of the underlying securities and
the swap agreement will depend on whether a valid integration election is made
to integrate the underlying securities and the swap agreement into a single
synthetic debt instrument in accordance with Treasury regulation section
1.1275-6 (the "Integration Regulations"). In general, under the Integration
Regulations, the underlying securities and the swap agreement may be integrated
and treated as a single synthetic debt instrument if the combined cash flows are
substantially equivalent to the cash flows on a fixed rate debt instrument, or
on a variable rate debt instrument that pays interest at a qualified rate or
rates, and certain other requirements are satisfied, including the
identification of the integrated transaction in the books and records of the
trust certificateholder. Assuming a valid integration election is made with
respect to the trust certificates, an initial trust certificateholder will not
separately account for its ratable interest in the underlying securities and the
swap agreement; instead, the underlying securities and the swap agreement will
be treated as a single synthetic debt instrument with payments equal to the
scheduled payments to be made on the trust certificates held by the initial
trust certificateholder (i.e., a combination of the underlying securities and
the swap agreement).
The terms of the trust agreement require an initial trust
certificateholder to make the integration election with respect to its interest
in the underlying securities and the swap agreement, and the trustee intends to
make such an integration election on behalf of initial trust certificateholders.
In connection with such integration election, an initial trust certificateholder
should retain in its books and records certain information that will be sent
along with such trust certificateholder's confirmation of its purchase of the
trust certificates. Investors in trust certificates should consult their own tax
advisors regarding the U.S. federal income tax consequences to them of making
the integration election with respect to the underlying securities and the swap
agreement, and the identification requirements imposed by the Integration
Regulations.
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In the case of secondary purchasers of trust certificates, the trustee
will not make an integration election with respect to their ratable interests in
the underlying securities and the swap agreement. For this reason, in order to
make such an integration election, a trust certificateholder that acquires trust
certificates other than at the time of original issuance would be required to
enter and retain as part of its books and records, as of the date of purchase of
the trust certificates, (i) the purchase date of the trust certificates, (ii) a
description of the trust certificateholder's interest in the underlying
securities and the swap agreement and (iii) a summary of the cash flows and
accruals resulting from treating the trust certificateholder's interest in the
underlying securities and swap agreement as a single synthetic debt instrument.
In the absence of a valid integration election, the trust certificateholder will
be required to account for the underlying securities and the swap agreement as
separate financial instruments for U.S. federal income tax purposes. See
"Taxation of Underlying Securities - No Integration Election" and "Taxation of
Swap Agreement - No Integration Election" below.
The synthetic debt instrument created through integration generally
will be subject to U.S. federal income tax in the same manner as conventional
floating-rate debt instruments, except that all stated interest on the synthetic
debt instrument, as well as any excess of the stated principal amount of the
synthetic debt instrument over its "issue price" as of the "issue date," will be
treated as "original issue discount" for U.S. federal income tax purposes. Under
the Integration Regulations, the "issue price" of the synthetic debt instrument
is equal to the adjusted issue price of the underlying securities as of the
issue date of the synthetic debt instrument, increased by any swap premium
deemed paid by the trust certificateholder, and decreased by any swap premium
deemed received by the trust certificateholder, in respect of the swap
agreement. The "issue date" of the synthetic debt instrument is the date on
which the trust certificateholder purchases its trust certificates.
A trust certificateholder will be required to accrue the original issue
discount on the synthetic debt instrument into gross income on a daily basis
using a constant yield to maturity determined as of its issue date, regardless
of when cash payments attributable to the accrued original issue discount will
be made, and regardless of a trust certificateholder's regular method of tax
accounting. The timing and manner of accrual of original issue discount on a
floating rate debt instrument is governed by special rules set forth in section
1.1275-5 of Treasury regulation section 1.1275-5. In general, under those
regulations, (i) original issue discount would be accrued based upon the
constant yield of an "equivalent fixed rate debt instrument" having terms that
are identical to the synthetic debt instrument but assuming stated interest
payments equal to the floating rate in effect on the issue date, and (ii)
appropriate adjustments would be made to the amount of accrued original issue
discount to reflect differences between the actual amount of interest paid
during each accrual period and the interest assumed under the equivalent fixed
rate debt instrument.
A trust certificateholder may have "market discount" or "bond
premium" if the issue price of the synthetic debt instrument is greater or less
than the trust certificateholder's deemed purchase price for the synethetic debt
instrument. See "Taxation of Underlying Securites - No Integration Election"
below. In this regard, a trust certificateholder generally should be treated as
having purchased the synthetic debt instrument for an amount equal to the
allocated purchase price for the underlying securities (determined in the manner
described above under "Allocations"), increased by any swap premium treated as
paid by the trust certificateholder and decreased by any swap premium deemed
received by the trust certificateholder. If the deemed purchase price of the
synthetic debt instrument is greater than the issue price, but less than the
stated principal amount, of the synthetic debt instrument, then the difference
between such deemed purchase price and the issue price would constitute
"acquisition premium" that reduces the amount of original issue discount that a
trust certificateholder otherwise would accrue over the term of the synthetic
debt instrument.
If the swap agreement is terminated other than in connection with a
trust termination event as described above under "Description of the Swap
Agreement--Events of Default and Termination Events," a trust certificateholder
will be treated as having disposed of the synthetic debt instrument that is
represented by the trust certificates for an amount equal to its fair market
value. Thereafter, the trust certificateholder generally would be subject to
U.S. federal income tax in respect of the underlying securities in the manner
described below under "Taxation of Underlying Securities - No Integraton
Election." However, appropriate adjustments would be made to reflect any
difference between the fair market value and adjusted issue price of the
underlying securities as the time of the deemed disposition.
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The source and character of interest income from the synthetic debt
instrument generally will be determined by reference to the source and character
of income from the underlying securities. Notwithstanding the integration
election, income derived from underlying securities and the swap agreement will
be treated separately for purposes of determining the U.S. federal income and
withholding tax liabilities of trust certificateholders that are not U.S.
Persons. See "Foreign Trust Certificateholders" below.
Taxation of Underlying Securities - No Integration Election
-----------------------------------------------------------
The following discussion assumes that a valid integration election has
not been made under the Integration Regulations to treat the underlying
securities and the swap agreement as a single synthetic debt instrument for U.S.
federal income tax purposes.
Stated Interest. A trust certificateholder will be required to report
on its U.S. federal income tax return its pro rata share of "qualified stated
interest" in respect of the underlying securities, as ordinary interest income,
when such interest is received or accrued in accordance with the trust
certificateholder's regular method of tax accounting. In general, qualified
stated interest is interest that is unconditionally payable in cash or property
(other than debt instruments of the issuer) at least annually over the entire
term of a debt instrument at a single fixed rate or certain variable rates.
Deferral of Interest. The payment of interest on the underlying
securities may be deferred in certain circumstances. At the time of original
issuance of the underlying securities, the underlying securities issuer took the
position that the possibility of the deferral of interest was remote and, thus,
that stated interest on the underlying securities constitutes qualified stated
interest. There can be no assurance that the IRS will agree with the position
taken by the underlying securities issuer. In the event that there is an actual
deferral of interest on the underlying securities, such interest no longer will
be treated as qualified stated interest and instead will be treated as original
issue discount that a trust certficateholder must accrue into gross income on a
constant yield basis, regardless of the trust certificateholder's regular method
of tax accounting.
Market Discount. A trust certificateholder's interest in the underlying
securities will be treated as having been purchased at a "market discount" if
the stated redemption price at maturity of the underlying securities exceeds the
trust certificateholder's initial tax basis in the underlying securities
(determined in the manner described above under "Allocations") by more than a de
minimis amount (generally, 0.25% of the stated redemption price at maturity
multiplied by the number of complete years from the date of purchase to the
maturity date). With respect to underlying securities that are treated as
purchased at a market discount, the trust certificateholder will be required to
treat any principal payments on, or any gain realized upon the disposition or
retirement of, the underlying securities as ordinary income to the extent of the
market discount that accrued (on a ratable basis unless an election is made to
accrue on a constant-yield basis) while the underlying securities are owned by
the trust certificateholder, unless the trust certificateholder elects,
generally with respect to all market discount bonds held by the trust
certificateholder, to include market discount in gross income on a current basis
as the market discount accrues. If underlying securities treated as purchased
with market discount are transferred in a nontaxable transaction (other than a
nonrecognition transaction described in section 1276(d) of the Code), the trust
certificateholder will recognize ordinary income in the amount of the accrued
market discount on the underlying securities, as if the underlying securities
had been sold at their then fair market value. If an election is not made to
include market discount in gross income on a current basis, the deduction of a
portion of any interest expense on indebtedness incurred or continued to
purchase or carry the underlying securities may be deferred until the market
discount income is realized.
Bond Premium. A trust certificateholder's interest in the underlying
securities will be treated as having been purchased with "bond premium" to the
extent that its initial tax basis in the underlying securities exceeds the sum
of all payments to be made on the underlying securities after the date of
purchase, other than payments of stated interest. Such trust certificateholder
may elect under section 171 of the Code to amortize bond premium on a
constant-yield basis over the remaining term of the underlying securities
(subject to special rules that may apply for early puts or calls), in which case
the amount of amortized bond premium allocable to any tax year will reduce the
interest income reportable by the trust certificateholder in respect of the
underlying securities. If the trust
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certificateholder does not so elect, the bond premium will decrease the gain or
increase the loss otherwise recognized by the trust certificateholder upon a
disposition of the underlying securities. In general, the election to amortize
bond premium on a constant-yield basis, once made, applies to all taxable debt
obligations held or subsequently acquired by the trust certificateholder on or
after the first day of the first tax year to which the election applies, and
such election may not be revoked without the consent of the IRS.
Sale of Underlying Securities. Upon the sale or retirement of the
underlying securities, a trust certificateholder will recognize gain or loss for
U.S. federal income tax purposes in an amount equal to the difference between
the amount that the trust certificateholder is deemed to receive in exchange for
its ratable interest in the underlying securities (other than amounts
attributable to accrued but unpaid qualified stated interest, which will be
taxable as such), and the trust certificateholder's adjusted tax basis in the
underlying securities. A trust certificateholder's adjusted tax basis in the
underlying securities will equal its initial tax basis of the underlying
securities (determined in the manner described above under "Allocations"),
increased by any market discount or original issue discount that the trust
certificateholder previously has included in gross income with respect to the
underlying securities and reduced by any bond premium that the trust
certificateholder has amortized with respect to the underlying securities and
the trust certificateholder's share of any prior principal payments made on the
underlying securities. Except to the extent attributable to accrued but unpaid
qualified stated interest, or accrued market discount that has not previously
been included in gross income (and subject to the discussion under "Application
of Straddle Rules" below), any gain or loss recognized by the trust
certificateholder in respect of the sale or retirement of the underlying
securities will be capital gain or loss. Depending on the circumstances, a
modification of the terms of the underlying securities could be a taxable event
to trust certificateholders on which gain or loss would be recognized for U.S.
federal income tax purposes.
Taxation of Swap Agreement - No Integration Election
----------------------------------------------------
The following discussion assumes that a valid integration election has
not been made under the Integration Regulations to treat the underlying
securities and the swap agreement as a single synthetic debt instrument for U.S.
federal income tax purposes.
Notional Principal Contract. The trustee and the swap counterparty will
treat the swap agreement as a "notional principal contract" for U.S. federal
income tax purposes. Under Treasury regulations addressing the timing of income
and deductions with respect to notional principal contracts, income or
deductions with respect to an interest rate swap transaction may be attributable
to periodic payments, nonperiodic payments (including any swap premium) or
termination payments, as discussed below.
Periodic Payments. Payments made or received under a notional principal
contract are "periodic payments" to the extent that such payments are (i)
payable at intervals of one year or less during the entire term of the contract
(including any extension periods), (ii) based on a specified index
(appropriately adjusted for the length of the interval), and (iii) based on a
single notional principal amount or a notional principal amount that varies over
the term of the contract in the same proportion as the notional principal amount
that measures the other party's payments. However, payments to buy or sell an
interest rate cap or floor are never periodic payments. In general, a trust
certificateholder must account for periodic payments under the accrual method of
tax accounting.
Nonperiodic Payments. Payments made or received under a notional
principal contract are "nonperiodic payments" if such payments do not constitute
periodic payments or termination payments. Accordingly, any swap premium that is
deemed paid or received by a trust certificateholder (see discussion under
"Allocations" above) in respect of the swap agreement would constitute a
nonperiodic payment. Nonperiodic payments generally must be recognized over the
term of the notional principal contract in a manner that reflects the economic
substance of the contract. In this regard, the Treasury regulations permit use
of a "level payment" method in most situations. Under such method, nonperiodic
payments are allocated as if they represented principal payments on a level
payment loan that extends over the term of the notional principal contract, and
that bears interest at a rate equal to the rate (or rates) used by the parties
to determine the nonperiodic payments (or if such rate is not readily
ascertainable, a rate that is reasonable under the circumstances). The amount of
any nonperiodic payment that is amortized in any
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taxable year will be treated in the same manner as a periodic payment that
accrues during such year. A notional principal contract that provides for a
"significant" nonperiodic payment can be treated in part as a loan.
Netting of Payments. In general, the periodic payments and nonperiodic
payments attributed to any tax year would be netted, and the net amount should
be ordinary income or ordinary deductions, respectively, for such year. However,
for certain trust certificateholders (including individuals), such deductions
generally would be subject to the 2% floor applicable to miscellaneous itemized
deductions under section 63 of the Code. Although not certain, income or loss
attributable to changes in the value of property may be treated as gains or
losses from the termination of a right or obligation with respect to such
property, and accordingly may be treated as capital gains or losses under
section 1234A of the Code (subject to the discussion under "Application of the
Straddle Rules" below).
Termination Payments. "Termination payments" are payments made or
received under a notional principal contract to extinguish or assign all or a
proportionate part of the remaining rights and obligations of any party under
such notional principal contract. A termination payment will be recognized in
the taxable year in which the notional principal contract is extinguished,
assigned or exchanged, in addition to any other payments (or proportion of such
payments in the event of a proportionate extinguishment, assignment or exchange)
that have been made or received pursuant to the notional principal contract but
that have not been previously recognized. In addition, special rules will apply
to termination payments pursuant to an assignment. In the event of a termination
of the swap agreement, any swap breakage amount should be considered a
termination payment. Any gain or loss recognized upon such a termination
generally will be treated as capital gain or loss (subject to the discussion
under "Application of the Straddle Rules" below).
Dispositions of Trust Certificates
Upon the sale or other taxable disposition of trust certificates
(including upon exercise of a call warrant), a trust certificateholder that made
a valid integration election in connection with its original acquisition of the
trust certificates will be treated as recognizing gain or loss in respect of the
synthetic debt instrument resulting from such integration election, and a trust
certificateholder that has not made such an integration election will be treated
as recognizing gain or loss in respect of its separate ratable interests in the
underlying securities and the swap agreement. Gain or loss in respect of the
synthetic debt instrument or the underlying securities generally will determined
in the manner set forth above under "Taxation of Trust Assets - Taxation of
Underlying Securities - No Integration Election"). In the case of a trust
certificateholder that did not make a valid integration election in connection
with its original acquisition of trust certificates, the total purchase price
received upon the sale or other taxable disposition of the trust certificates
would be allocated between the underlying securities and the swap agreement in
the manner described above under "Allocations." Any amount so allocated to the
swap agreement likely would be considered a "termination payment" under
applicable Treasury regulations. See "Taxation of Trust Assets - Taxation of
Swap Agreement - No Integration Election" above.
Taxation of Call Warrants
A trust certificateholder will not be required to immediately include
in gross income the option premium that is deemed to be received in exchange for
writing the call warrant; instead, such premium will be taken into account when
the call warrant related to the trust certificate lapses, is exercised or is
otherwise terminated with respect to such trust certificateholder. A trust
certificateholder will include the option premium in gross income as short-term
capital gain if the call warrant lapses. If the call warrant is exercised, the
trust certificateholder will treat the option premium as part of the amount
realized from the sale of the trust certificates. If the trust certificateholder
transfers its interest in a trust certificate (other than pursuant to the
exercise of the call warrant), such transfer will be treated as a "closing
transaction" with respect to the call warrant, and the trust certificateholder
will recognize a short-term capital gain or loss equal to the difference between
the amount of the option premium deemed received for writing the call warrant,
and the fair market value of the call warrant at the time of the transfer of the
trust certificate (such fair market value representing the amount that the trust
certificateholder is deemed to pay to be relieved from its obligation under the
call warrant).
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If a trust certificateholder were to acquire an interest in a
corresponding amount of call warrants, the call warrant would be proportionately
extinguished and such trust certificateholder would be treated as holding solely
its proportionate interest in the assets of the trust. An extinguishment of the
call warrant would be a taxable event. Accordingly, the trust certificateholder
would have to recognize gain or loss on such extinguishment equal to the
difference between the option premium received at the time the trust
certificateholder purchased its trust certificate and the amount paid for the
call warrants. Such gain or loss would constitute short-term capital gain or
loss.
With respect to the exercise of a call warrant, the trustee intends to
report assuming that that call warrant is exercised only against the particular
trust certificates that are selected by lot to be tendered to the trustee. No
assurance can be provided, however, that the IRS will not assert an alternative
treatment of the exercise of a call warrant. For example, the IRS may argue that
the exercise of a call warrant is a pro rata call on each trust
certificateholder's interest in the assets of the trust. In that event, all
trust certificateholders would be required to recognize gain or loss computed in
the same manner as if the trust certificateholders had sold a pro rata portion
of their trust certificates pursuant to the exercise of a call warrant. The
non-tendering trust certificateholders then would be treated as having used the
cash deemed received on the exercised call warrant to purchase trust
certificates from the trust certificateholder whose trust certificates actually
were tendered to the trustee. Investors in trust certificates are advised to
consult their tax advisors regarding this potential recharacterization of the
exercise of a call warrant.
Application of the Straddle Rules
A trust certificateholder's pro rata interest in the assets of the
trust and the related call warrant likely would constitute positions in a
straddle. Under the straddle rules, gain or loss arising from the sale, maturity
or other disposition of the trust certificates (or a trust certificateholder's
pro rata interest in the assets of the trust) would be short-term gain or loss,
regardless of the period of time that the trust certificates have been held,
because the trust certificateholder's holding period would be tolled. (As
discussed above, the trust certificateholder's gain or loss with respect to the
option premium deemed to be received in respect of the call warrant always would
be short-term gain or loss under the U.S. federal income tax rules applicable to
options) In addition, the straddle rules require a trust certificateholder to
capitalize, rather than deduct, a portion of any interest and carrying charges
allocable to its trust certificates. Further, if the IRS were to take the
position that a trust certificateholder's pro rata interest in the assets of the
trust and the related call warrant constituted a "conversion transaction" under
section 1258 of the Code, as well as a straddle, then a portion of any gain with
respect to the trust certificates or the call warrant might be characterized as
ordinary income. A trust certificateholder may be able to avoid the application
of these rules by making an election under the Integration Regulations to
integrate the call warrant, the underlying securities and the swap agreement.
Trust certificateholders are advised to consult their tax advisors regarding
these matters, including the availability and advisability of an election under
the Integration Regulation to integrate the call warrant with the underlying
securities and the swap agreement, and a protective netting identification under
Treasury regulation section 1.1258-1.
Deductibility of Trust's Fees and Expenses
In computing its U.S. federal income tax liability, a trust
certificateholder will be entitled to deduct, consistent with its method of tax
accounting, its share of reasonable administrative fees, trustee fees and other
fees and expenses paid or incurred by the trust as provided in Section 162 or
212 of the Code. If a trust certificateholder is an individual, estate or trust,
the deduction for such fees and expenses generally will be considered a
miscellaneous itemized deduction that may be disallowed in whole or in part.
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Foreign Trust Certificateholders
The following discussion applies to trust certificateholders that are
neither U.S. Persons nor partnerships or other pass-through entities ("foreign
trust certificateholders").
Payments on the Trust Certificates
Interest paid to a foreign trust certificateholder in respect of the
underlying securities generally will not be subject to the 30% U.S. federal
withholding tax on interest paid from U.S. sources, provided that (i) the
foreign trust certificateholder does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of the
underlying securities issuer entitled to vote, (ii) the foreign trust
certificateholder is not a controlled foreign corporation for U.S. federal
income tax purposes that is directly or indirectly related to the underlying
securities issuer through stock ownership, (iii) the foreign trust
certificateholder is not a bank described in Section 881(c)(3)(A) of the Code,
(iv) income from the trust certificates is not effectively connected with a
trade or business conducted by the foreign certificateholder in the United
States and (v) either (A) the beneficial owner of the trust certificates
certifies to the applicable payor or its agent, under penalties of perjury, that
it is not a U.S. Person and provides its name and address on IRS Form W-8BEN (or
a suitable substitute form) or (B) a securities clearing organization, bank or
other financial institution, that holds customers securities in the ordinary
course of its trade or business (a "financial institution") and holds the trust
certificates, certifies under penalties of perjury that such an IRS Form W-8BEN
(or a suitable substitute form) has been received from the beneficial owner by
it, or by a financial institution between it and the beneficial owner, and
furnishes the payor with a copy thereof. Otherwise, the 30% U.S. federal
withholding tax may apply to interest received by a foreign trust
certificateholder unless an applicable income tax treaty reduces or eliminates
such tax. Periodic payments received by a foreign trust certificateholder in
respect of the swap agreement generally will not be subject to U.S. federal
income or withholding tax unless income from the trust certificates is
effectively connected with a U.S. trade or business conducted by the foreign
trust certificateholder.
If income from the trust certificates is effectively connected with a
trade or business conducted by a foreign trust certificateholder in the United
States, then payments of interest in respect of the underlying securities will
not be subject to U.S. federal withholding tax if the foreign trust
certificateholder delivers an IRS Form W-8ECI (or a suitable substitute form) to
the payor. Such foreign trust certificateholder, however, will be subject to
U.S. federal income tax with respect to income derived from the trust
certificates at regular rates in the same manner as a U.S. Person, unless an
applicable income tax treaty reduces or eliminates such tax. In addition, if
such foreign trust certificateholder is a corporation, a branch profits tax may
apply to its U.S. effectively connected income, subject to certain adjustments,
at a 30% rate (or, if applicable, a lower treaty rate).
Dispositions of Trust Certificates or Trust Assets
A foreign trust certificateholder generally will not be subject to U.S.
federal income or withholding tax on gain realized on the sale, exchange or
other disposition of a trust certificate, the sale or the retirement of the
underlying securities or the termination of the swap agreement unless:
o the foreign trust certificateholder is an individual present in
the United States for 183 days or more in the taxable year of
such sale, exchange, retirement, termination or other disposition
and either (A) has a "tax home" in the United States and certain
other requirements are met, or (B) the gain is attributable to an
office or other fixed place of business in the United States;
o in the case of an amount which is attributable to accrued
interest, the foreign trust certificateholder does not meet the
conditions for exemption from the 30% U.S. federal withholding
tax, as described above; or
o the gain is effectively connected with the foreign trust
certificateholder's conduct of a trade or business in the United
States.
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Backup Withholding and Information Reporting
Information returns will be filed with the IRS in connection with
payments on the trust certificates and the proceeds from a sale or other
disposition of the trust certificates. If you own trust certificates and are a
U.S. Person, you may be subject to backup withholding tax on these payments
(currently at a 28% rate) unless you are exempt recipient (such as a
corporation), or you provide your taxpayer identification number to the paying
agent and comply with certain certification procedures. If you are a foreign
trust certificateholder, you may have to comply with certification procedures in
order to establish that you are not a U.S. Person and avoid information
reporting and backup withholding tax requirements. The certification on IRS Form
W-8BEN described above, which is required to claim exemption from 30% U.S.
federal withholding on interest payments, will satisfy the certification
requirements necessary to avoid the backup withholding tax.
The amount of any backup withholding imposed on a payment to you will
be allowed as a credit against your U.S. federal income tax liability and may
entitle you to a refund, provided that the required information is furnished to
the IRS.
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ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain requirements on (a) an employee benefit
plan (as defined in Section 3(3) of ERISA), (b) a plan described in Section
4975(e)(i) of the Code or (c) any entity whose underlying assets include Plan
Assets (as defined below) by reason of a plan's investment in the entity (each,
a "Plan").
In accordance with ERISA's general fiduciary standards, before
investing in a trust certificate, a Plan fiduciary should determine whether such
an investment is permitted under the governing Plan instruments and appropriate
for the Plan in view of the Plan's overall investment policy and the composition
and diversification of its portfolio. Other provisions of ERISA and the Code
prohibit certain transactions involving the assets of a Plan and persons who
have certain specified relationships to the Plan ("Parties in Interest" within
the meaning of ERISA or "Disqualified Persons" within the meaning of the Code).
Thus, a Plan fiduciary considering an investment in trust certificates should
also consider whether such an investment might constitute or give rise to a
prohibited transaction under ERISA or the Code.
An investment in trust certificates by a Plan might result in the
assets of the trust being deemed to constitute Plan Assets, which in turn might
mean that certain aspects of such investment, including the operation of the
trust, might be prohibited transactions under ERISA and the Code. Neither ERISA
nor the Code defines the term "Plan Assets." Under Section 2510.3-101 of the
United States Department of Labor regulations (the "Regulation"), "Plan Assets"
may include an interest in the underlying assets of an entity (such as a trust)
for certain purposes, including the prohibited transaction provisions of ERISA
and the Code, if the Plan acquires an "equity interest" in such entity. Thus, if
a Plan acquired a trust certificate, for certain purposes under ERISA and the
Code (including the prohibited transaction provisions) the Plan would be
considered to own its share of the underlying assets of the trust unless (1)
such trust certificate is a "publicly offered security" or (2) equity
participation by "benefit plan investors" is not "significant."
Under the Regulation, a publicly offered security is a security that is
(1) freely transferable, (2) 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 (3) 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 SEC) after the end of the
fiscal year of the issuer during which the offering of such securities to the
public occurred.
Participation by benefit plan investors in the trust certificates would
not be significant if immediately after the most recent acquisition of a trust
certificate, whether or not from the depositor or Merrill Lynch & Co., less than
25% of the value of the trust certificates were held by benefit plan investors,
which are defined as Plans and employee benefit plans not subject to ERISA (for
example, governmental plans).
Although either or both the exceptions described above (relating to
publicly offered securities and participation by benefit plan investors that is
not significant) may apply to a Plan's investment in trust certificates, no
assurance can be provided that such will be the case. However, if the trust
certificates were deemed to be Plan Assets, certain prohibited transaction
exemptions nevertheless could apply to the acquisition and holding of the trust
certificates.
By acquiring and holding a trust certificate, a Plan shall be deemed to
have represented and warranted to the depositor, the trustee and the underwriter
that such acquisition and holding of a trust certificate, including the
activities of the trust, does not involve a non-exempt prohibited transaction
with respect to such Plan.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated as of February 9, 1998, as amended and supplemented by the
terms agreement, dated as of the date set forth in this prospectus supplement,
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the depositor has agreed to sell to Merrill Lynch, Pierce, Fenner & Smith
Incorporated, and Merrill Lynch, Pierce, Fenner & Smith Incorporated has agreed
to purchase, all of the trust certificates. The underwriter proposes to offer
the trust certificates directly to the public at the offering price set forth on
the cover page of this prospectus supplement or to dealers at that offering
price less a concession not in excess of $___ per trust certificate. The
underwriters may allow, and the dealers may reallow, a discount not in excess of
$___ per trust certificate to other dealers. After the initial offering, the
public offering price, concession and discount may be changed.
In connection with the offering, the underwriter is permitted to engage
in transactions that stabilize the market price of the trust certificates. Such
transactions consist of bids or purchases to peg, fix or maintain the price of
the trust certificates. If the underwriter creates a short position in the trust
certificates, i.e., if it sells more trust certificates than are on the cover
page of this prospectus supplement, the underwriter may reduce that short
position by purchasing trust certificates in the open market. Purchases of a
security to stabilize the price 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.
Neither we nor the underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the trust certificates. In addition, neither we
nor the underwriter makes any representation that the underwriter will engage in
these transactions or that these transactions, once commenced, will not be
discontinued without notice.
The underwriter may from time to time provide investment banking and
other financial services to the underlying securities issuer and expects in the
future to provide these services, for which it will receive customary fees and
commissions.
If the size of the trust is increased, the underwriter may participate
in offerings of additional trust certificates, as contemplated on the cover of
this prospectus supplement. Additional trust certificates may be sold for cash
or delivered to cover short positions as more fully described in the
"Underwriting" section on page 61 of the accompanying prospectus.
The underwriting agreement provides that the depositor will indemnify
the underwriter against certain civil liabilities, including liabilities under
the Securities Act, or will contribute to payments the underwriter may be
required to make in respect thereof.
VALIDITY OF THE TRUST CERTIFICATES
Shearman & Sterling LLP, New York, New York, will pass upon the
validity of the trust certificates for the depositor and for the underwriter.
RATINGS
It is a condition to the issuance of the trust certificates that the
trust certificates have ratings assigned by Moody's or by S&P, equivalent to the
ratings of the underlying securities, which, as of the date of this prospectus
supplement, were rated "_____" by S&P. The certificates will not be rated by
Moody's.
S&P's rating of the trust certificates addresses the likelihood of
timely payment of interest on the trust certificates or any underlying
securities distributed in respect of the trust certificates. The ratings address
the likelihood of the payment by the issuer as required under the trust
agreement, and are based primarily on the credit quality of the underlying
securities. The rating on the trust certificates does not, however, constitute a
statement regarding the occurrence or frequency of redemptions or prepayments
on, or extensions of the maturity of, the underlying securities, and the
corresponding effect on yield to investors.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. You should evaluate each security rating independently
of similar ratings on different securities.
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The depositor has not requested a rating on the trust certificates by
any rating agency other than S&P. However, the depositor cannot assure you as to
whether any other rating agency will rate the trust certificates, or, if it
does, what rating would be assigned by any other rating agency. A rating on the
trust certificates by another rating agency, if assigned at all, may be lower
than the ratings assigned to the trust certificates by S&P.
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PROSPECTUS
PREFERREDPLUS AND INDEXPLUS TRUST CERTIFICATES
(ISSUABLE IN SERIES)
Merrill Lynch Depositor, Inc.
Depositor
The Trust:
o will periodically issue trust certificates in one or more series with
one or more classes through this prospectus and by supplements to this
prospectus; and
o will own underlying securities or a pool of underlying securities
that:
- may include debt securities issued by the U.S. government,
senior or subordinated publicly traded debt obligations of
one or more corporations or general or limited partnerships,
asset-backed securities of one or more trusts or other
special purpose legal entities or preferred securities of
trusts organized by such issuers to issue trust-originated
preferred securities; and
- except for U.S. government securities, will be purchased in
the secondary market and will not be acquired directly from
the issuer of the underlying securities.
The Trust Certificates:
o will be offered in amounts, at prices and on terms to be determined at
the time of sale as described in the prospectus supplement
accompanying this prospectus;
o will be denominated, sold and payable in U.S. dollars or one or more
foreign or composite currencies;
o at the time of their issuance, will be rated in one of the investment
grade categories recognized by one or more nationally recognized
rating agencies; and
o unless otherwise specified in the prospectus supplement, will
represent in the aggregate the beneficial ownership interest in an
aggregate amount of principal of and premium, if any, and interest on
underlying securities, together with other assets, if any, described
in this prospectus and the prospectus supplement.
The Certificateholders:
o will be entitled to receive principal, premium, if any, and
distributions from the assets deposited with the trust as specified in
the applicable prospectus supplement; and
o may have the benefit of any credit support specified in the applicable
prospectus supplement for that series of trust certificates.
Investing in trust certificates involves certain risks that are described
in the "Risk Factors" section beginning on page 6 of this prospectus.
------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
The trust certificates may be offered and sold to or through underwriters,
dealers or agents or directly to purchasers, as more fully described under
"Underwriting" and in the applicable prospectus supplement. This prospectus may
not be used to consummate sales of trust certificates offered hereby unless
accompanied by a prospectus supplement.
-------------------
Merrill Lynch & Co.
-------------------
The date of this prospectus is October 24, 2002.
TABLE OF CONTENTS
Summary Information Q&A........................................................3
Risk Factors...................................................................6
Incorporation of Certain Documents by
Reference..................................................................13
Reports to Certificateholders.................................................15
The Depositor.................................................................16
Use of Proceeds...............................................................16
Establishment of the Trust....................................................17
Maturity and Yield Considerations.............................................18
Description of the Trust Certificates.........................................19
Description of the Trust Agreement............................................32
Description of Underlying Securities and
Other Assets Deposited in the Trust.........................................44
Currency Risks................................................................53
Federal Income Tax Consequences...............................................53
ERISA Considerations..........................................................58
Underwriting..................................................................61
Legal Matters.................................................................62
You should rely only on the information contained or incorporated in this
prospectus and the related prospectus supplement. We have not authorized anyone
to provide you with different information. If anyone provides you with different
or inconsistent information, you should not rely on it. We are not offering to
sell the trust certificates in any state where the offer or sale is not
permitted. You should assume that the information appearing in this prospectus,
the related prospectus supplement and the documents incorporated by reference is
accurate only as of their respective dates. Material information may have
changed since those dates.
2
SUMMARY INFORMATION Q&A
The following summary does not purport to be complete. You should read it
together with the information contained in other parts of this prospectus and in
the prospectus supplement related to your trust certificates. This summary
highlights selected information from this prospectus to help you understand the
trust certificates. You should carefully read this prospectus and the prospectus
supplement related to your trust certificates to fully understand the terms of
the trust certificates, as well as the tax and other considerations that are
important to you in making a decision about whether to invest in the trust
certificates. You should pay special attention to the "Risk Factors" section
beginning on page 8 of this prospectus to determine whether an investment in the
trust certificates is appropriate for you.
What Securities Are Being Offered?
Through this prospectus and a related prospectus supplement, the applicable
trust is offering public trust certificates periodically in one or more series
and in one or more classes within each series. The trust certificates may be
described as PREFERREDPLUS or INDEXPLUS trust certificates, or by such other
name as the depositor may from time to time describe in a related prospectus
supplement. The trust certificates will be denominated in U.S. dollars or in one
or more foreign or composite currencies. Trust certificates for each series will
be offered in amounts, at prices and on terms to be determined at the time of
sale as described in the related prospectus supplement. For a description of the
kinds of terms that the applicable prospectus supplement will set forth, see
"Description of the Trust Certificates--General."
What Are the Underlying Securities and What Will They Represent?
Each series of trust certificates will represent in the aggregate the
entire beneficial ownership interest in underlying securities or a pool of
underlying securities that may include:
o debt securities issued by the U.S. government,
o senior or subordinated publicly traded debt obligations of one or more
corporations or general or limited partnerships,
o asset-backed securities of one or more trusts or other special purpose
legal entities, or
o preferred securities of trusts organized by one or more corporations
or general or limited partnerships to issue trust-originated preferred
securities.
As a condition to the deposit into a trust of underlying securities, the
issuer of any underlying securities, other than U.S. government securities, that
constitute 10% or more of the total underlying securities of a particular series
of trust certificates must, as of the date of the issuance of the series of
trust certificates, be subject to the periodic reporting requirements of the
Exchange Act. The underlying securities issuer will, pursuant to the Exchange
Act, file reports and other information with the SEC. Except for U.S. government
securities, the underlying securities will be purchased in the secondary market
and not directly from the issuer. The underlying securities issuer will neither
participate in the offering of the trust certificates nor receive any of the
proceeds from the sale of the underlying securities to the depositor or from the
issuance of the trust certificates. For more detailed information on the
underlying securities, see "Description of Underlying Securities and Other
Assets Deposited in the Trust--General" in this prospectus.
What Other Assets May Be Deposited in the Trust?
Certain other assets may be deposited in the trust for a series of
certificates. These other assets may include:
o cash; o floors;
o cash equivalents; o collars and options;
3
o guarantees; o forward contracts;
o letters of credit; o structured securities; and
o financial insurance; o other instruments and transactions
o interest rate, currency, that credit, enhance, hedge or
equity, commodity and otherwise provide support to the
credit-linked swaps; underlying securities to ensure
o caps; the servicing or timely
distribution of payments to
holders of the trust certificates.
The assets deposited in each trust will be described in the applicable
prospectus supplement. For a more detailed description, see "Description of
Underlying Securities and Other Assets Deposited in the Trust" in this
prospectus.
What Credit Support Will Be Available to My Series of Trust Certificates?
If specified in the applicable prospectus supplement, the trust for a
series of trust certificates may also include, or the certificateholders of the
series may have the benefit of any combination of:
o letters of credit; o other types of rights or assets intended
o limited guarantees; to support or ensure the timely or
o surety bonds; ultimate distribution of amounts due in
o swap agreements; respect of a series of trust certificates
o swap guarantees; and or a class within the series.
For a more detailed description of potential credit support, see "Description of
the Deposited Assets--Credit Support" in this prospectus.
Who Is Merrill Lynch Depositor, Inc.?
Merrill Lynch Depositor, Inc., or the "depositor," is a Delaware
corporation and an indirect, wholly owned, limited-purpose subsidiary of Merrill
Lynch, Pierce, Fenner & Smith Incorporated, or Merrill Lynch. The depositor will
deposit the underlying securities into the trust for each particular series of
certificates. The depositor has its principal office c/o Merrill Lynch & Co.,
Inc., World Financial Center, New York, New York 10281. The certificate of
incorporation of the depositor provides that the depositor may conduct any
lawful activities necessary or incidental to serving as depositor of one or more
trusts that may issue and sell trust certificates.
How Will the Trust Work?
The depositor will assign and deliver the underlying securities, together
with any other assets, for each series of trust certificates to the trustee
named in the applicable prospectus supplement. The deposit of these underlying
securities and any other deposited assets will be for the benefit of the trustee
and you, the certificateholders of the series. The trustee will administer the
underlying securities and other deposited assets pursuant to the trust agreement
and the applicable series supplement to the trust agreement and will receive a
fee for those services. For more detailed information about the trust, see
"Description of the Trust Agreement--Assignment of Deposited Assets" in this
prospectus.
How Will the Trust Be Treated for U.S. Federal Income Tax Purposes?
The method of creating and selling each series of trust certificates and
administering the underlying securities will allow each trust to qualify as a
grantor trust under the Internal Revenue Code of 1986, as amended. You will be
treated as the owner of a pro rata undivided interest in the ordinary income and
corpus of the underlying securities deposited in the related grantor trust. For
a more detailed explanation of the federal tax laws and their effect on you, see
"Federal Income Tax Consequences" in this prospectus.
What Types of Employee Benefit or Other Plans May Purchase the Trust
Certificates?
4
An employee benefit plan subject to the Employee Retirement Income Security
Act of 1974, as amended, or ERISA, an individual retirement account or an entity
whose underlying assets include plan assets by reason of a plan's investment in
the entity may purchase trust certificates, provided that either:
o the structure of the offering is such that participation by "benefit
plan investors" is not "significant" or that there are at least 100
independent purchasers of the class of trust certificates being
offered; or
o the plan can represent that its purchase of trust certificates would
not be prohibited under ERISA or the Internal Revenue Code.
For more information regarding benefit plans and the applicable law, see "ERISA
Considerations" in this prospectus.
Will the Trust Certificates Be Rated?
One or more nationally recognized rating agencies will rate the trust
certificates of each series, or class of that series, at the time of issuance,
in one of the investment grade categories. Any rating issued with respect to a
trust certificate is not a recommendation to buy, sell or hold a certificate. We
cannot assure you that any rating will remain the same for any given period of
time or that any rating agency will not revise or withdraw its rating. For more
information see "Risk Factors--If a rating agency lowers its rating of the trust
certificates, the market price of your certificates and your investment may
suffer" in this prospectus.
Will the Trust Certificates Be Listed on a Stock Exchange?
We may apply to list some of the series of trust certificates on the New
York Stock Exchange, another national securities exchange or the Nasdaq National
Market.
In What Form Will the Trust Certificates Be Issued?
Unless otherwise specified in the applicable prospectus supplement, one or
more global securities registered in the name of Cede as nominee of The
Depository Trust Company, or DTC, will initially represent each series of trust
certificates. Book entries of participating members of DTC will represent the
interests of beneficial owners of trust certificates. Individual definitive
trust certificates will be available only under the limited circumstances
described under the heading "Description of the Trust Certificates--Global
Securities" in this prospectus.
5
RISK FACTORS
Your investment in the trust certificates will involve some risks. You
should carefully consider the following discussion of risks and the other
information included or incorporated by reference in this prospectus or in the
prospectus supplement before deciding whether an investment in the trust
certificates is suitable for you.
An inactive public market may limit your ability to sell your trust
certificates.
We cannot assure you that an active public market for the trust
certificates will develop or, if a public market develops, that you will be able
to sell your trust certificates. Merrill Lynch has advised the depositor that it
intends to make a market in any trust certificates issued, as permitted by
applicable laws and regulations, but it is not obligated to make a market in any
series of trust certificates. At its sole discretion, Merrill Lynch may
discontinue its market-making activities at any time without notice. If an
active public market for your trust certificates does not develop or continue,
the market prices and liquidity of your trust certificates may suffer.
Because the trust certificates will not represent a recourse obligation of the
depositor, your recourse will be limited.
The trust certificates will not represent a recourse obligation of or
interest in the depositor, any administrative agent, Merrill Lynch, the
underlying securities issuer or any of their respective affiliates other than
the trust. None of the depositor, Merrill Lynch or any of their respective
affiliates will insure or guarantee the trust certificates. Any obligation of
the depositor with respect to the trust certificates of any series will only be
pursuant to some limited representations and warranties with respect to the
underlying securities or any other assets deposited in the trust. Recourse with
respect to the satisfaction of these obligations will be limited to any recourse
for a breach of a corresponding representation or warranty that the depositor
may have against the seller of the underlying security or the other assets
deposited in the trust, as described in this prospectus or the related
prospectus supplement. The depositor does not have, and is not expected in the
future to have, any assets with which to satisfy any claims arising from a
breach of any representation or warranty.
Your receipt of principal, premium, if any, and distributions will depend
entirely on the performance of the underlying securities and any other assets
deposited in the trust for a particular series of trust certificates.
The trust for a particular series of trust certificates will have no
significant assets other than the underlying securities and any other assets
deposited in the trust. Accordingly, your receipt of distributions in respect of
the trust certificates will depend entirely on the performance of the trust and
on the trust's receipt of payments on the underlying securities and any other
assets deposited in the trust.
If the underlying securities issuer redeems the underlying securities before
their maturity date, or if your trust certificates are subject to call or
redemption rights of third parties, you may not be able to hold your investment
to maturity.
Several factors may affect the timing of distributions on your trust
certificates and reduce your ability to realize a comparable yield upon
reinvestment of funds. If the underlying securities issuer exercises any right
of redemption in respect to the underlying securities deposited in the trust, it
may affect the yield you will receive on your trust certificates. Provisions in
an underlying securities indenture for optional or mandatory redemption or
repayment before stated maturity, if exercised, will reduce the weighted average
life of the underlying securities and the related series of trust certificates.
Tax, accounting, economic and other factors will influence whether an underlying
securities issuer exercises any right of redemption in respect of underlying
securities. We cannot assure you that any underlying security redeemable at the
option of the underlying security issuer will remain outstanding until its
stated maturity. All else remaining equal, if prevailing interest rates are
below the interest rates on the related underlying securities, we expect the
likelihood of the exercise of any optional redemption right to increase. Upon a
redemption of the underlying securities, the trust will redeem any trust
certificates that are not called prior to redemption by any parties that may
hold call rights on the trust certificates. Prevailing interest rates at the
time of an early redemption may be lower than the yield on your trust
certificates; therefore, you may be unable to realize a comparable yield upon
reinvestment of your funds from an early redemption.
The applicable prospectus supplement will discuss any calls, puts or other
redemption options, and some other terms applicable to the underlying securities
and any other assets deposited in the related trust. For further discussion on
factors that may affect your distributions, see "Description of Underlying
Securities and Other Assets Deposited in the Trust--Underlying Securities
Indenture" in this prospectus.
6
If an underlying securities issuer becomes subject to a bankruptcy or similar
insolvency proceeding, the timing and amount of payments with respect to the
principal of, premium on, if any, and any distributions you receive may be
materially and adversely affected.
Several factors, including the underlying securities issuer's operating and
financial condition, capital structure and other economic, geographic, legal and
social factors, can influence the performance of an underlying securities
issuer. Any of these factors may negatively affect the underlying securities
issuer's ability to satisfy its obligations with respect to the underlying
securities related to your trust certificates.
Because some series of trust certificates may be subject to call or redemption
rights of third parties, we cannot assure you that you will be able to hold your
investment to maturity.
Merrill Lynch, the depositor or others, as specified in the prospectus
supplement, may hold the right to purchase from the certificateholders all or
some of the trust certificates of a given series or class. For further
information regarding rights of third parties, see "Description of the Trust
Certificates--Call Right."
We cannot assure you that you will be able to hold to maturity an
investment in trust certificates subject to call rights. In particular, upon the
exercise of a call right, the investment represented by the trust certificates
will have a shorter maturity than if that right were not exercised. The
likelihood that a call right will be exercised increases as interest rates
generally prevailing in the market for debt securities fall relative to those in
effect on the dates or periods when the series of trust certificates may be
issued. Any reduction in interest rates would increase the value of the
underlying securities and make the exercise of a call right more likely.
However, a reduction in interest rates may also result in a reinvestment risk to
certificateholders. If a reduction of interest rates occurs and a call right is
exercised then the interest rates at which a certificateholder can reinvest the
proceeds received from the exercise of that call right may be lower than the
return that the certificateholders would have earned over the remaining life of
the trust certificates if a call right were not exercised.
Some terms of the underlying securities and other assets deposited in the trust
may affect your effective yield.
Two factors may affect the effective yield to holders of the trust
certificates of a series, namely:
o the terms of any assets deposited with the underlying securities, and
o the manner and priorities of allocations of collections with respect
to deposited assets between classes of a given series.
The applicable prospectus supplement will discuss any calls, puts or other
redemption options and other terms applicable to the underlying securities and
any other deposited assets. For detailed information on factors that may affect
your effective yield, see "Description of Underlying Securities and Other Assets
Deposited in the Trust--Underlying Securities Indenture" in this prospectus.
You may incur additional currency, exchange rate and exchange control risks if
the trust certificates are not denominated in U.S. dollars.
An investment in trust certificates that are denominated in a currency
other than U.S. dollars may entail significant risks that are not associated
with similar investments in U.S. dollar-denominated securities. These risks
include the possibility of significant changes in rates of exchange between the
U.S. dollar and the trust certificates' currency and the possibility of the
imposition or modification of foreign exchange controls with respect to the
foreign currency that could restrict or prohibit distributions of principal,
premium or interest in the specified currency. These risks generally depend on
factors over which we have no control, such as economic and political events and
the supply of and demand for the relevant currencies.
This prospectus does not describe all the risks of an investment in trust
certificates denominated in currencies other than the U.S. dollar. You should
consult your own financial and legal advisors as to the risks entailed by an
investment in trust certificates denominated in a currency other than U.S.
dollars. Such trust certificates are not an appropriate investment for persons
who are unsophisticated with respect to foreign currency transactions. For more
information, see "Currency Risks" in this prospectus.
7
Your investment may be subject to risks associated with the trust's use of
derivative instruments.
A trust may include various derivative instruments, including those listed
under the heading "Description of Certain Derivative Instruments" below. The
relevant prospectus supplement will describe the fluctuations in securities,
currency and commodity rates, prices, yields and returns that may have a
significant effect on the yield to maturity of derivatives or the levels of
support that derivatives can provide to a trust.
In addition, derivatives may cover only some risks. The financial condition
of the counterparties to the derivatives or, in some instances, the related
guarantor, may affect the continuation of payments on derivatives. We cannot
assure you that counterparties to the derivatives will be able to perform their
obligations. Failure by a counterparty or the related guarantor to make required
payments may result in the delay or failure to make payments on the related
securities and risks. The related prospectus supplement will identify the
material terms and risks of any relevant derivatives. The related prospectus
supplement also will identify the material terms, the material risks and the
counterparty for any derivative instrument in a trust.
If public information concerning underlying securities issuers ceases to be
available, your ability to make an informed decision to purchase or sell
certificates may suffer.
You should obtain and evaluate the same information concerning each
underlying securities issuer related to your trust certificates as you would
obtain and evaluate if you were investing directly in the underlying securities
or in other securities issued by the underlying securities issuer. You should
not construe the trust's issuance of the trust certificates as the depositor's
or trustee's endorsement of the financial condition or business prospects of the
underlying securities issuer. The publicly available information concerning an
underlying securities issuer is important in considering whether you should
invest in or sell trust certificates. If that information ceases to be
available, your ability to make an informed decision to purchase or sell trust
certificates could suffer.
The depositor undertakes to provide information about the material terms of
the underlying securities in the applicable prospectus supplement. It also
undertakes to provide, in certain circumstances, financial and other information
regarding the underlying securities issuer. For more information see "Underlying
Securities Issuer" in this prospectus. In circumstances where the depositor is
not required to provide financial and other information regarding the underlying
securities issuer, none of the depositor, the trustee, the securities
intermediary, Merrill Lynch or any of their respective affiliates
o assumes any responsibility for the continued availability, accuracy or
completeness of any information concerning any underlying securities
issuer, or
o has investigated the financial condition or creditworthiness of any
underlying securities issuer, whether or not that information is filed
with the SEC or otherwise would be considered in making a decision to
purchase trust certificates.
The above does not apply to any information concerning any underlying securities
issuer that is expressly set forth in this prospectus, an applicable prospectus
supplement or periodic reports of a trust or the depositor.
The depositor's obligation to provide information to you regarding an
underlying securities issuer and the underlying securities ceases upon the sale,
distribution or repayment of the underlying securities. If an issuer of
concentrated underlying securities, other than U.S. government securities,
constituting 10% or more of the total underlying securities for a particular
series of trust certificates ceases to file periodic reports under the Exchange
Act, then either:
o the trustee will sell all of the concentrated underlying securities
and distribute the proceeds from the sale to you in accordance with
the allocation ratio described in the trust agreement and the related
series supplement (that sale will result in a loss to you if the sale
price is less than the purchase price for the concentrated underlying
securities);
o the trustee will distribute those concentrated underlying securities
in kind to you according to the allocation ratio; or
o The depositor will provide you with the financial and other
information that the SEC requires.
8
The related prospectus supplement will describe the choice of remedies for
a given series. Neither the trustee, the securities intermediary, the depositor
nor you will have discretion in this respect.
If a rating agency lowers its rating of the trust certificates, the value of the
certificates and your investment may suffer.
One or more nationally recognized rating agencies will rate the trust
certificates of each series, or class of that series, at the time of issuance,
in one of the investment grade categories. These rating agencies will be solely
responsible for selecting the criteria for rating the trust certificates. They
may rate a series or class of trust certificates on the basis of several
factors, including:
o the underlying securities and any other assets deposited in the trust;
o any credit support available for the trust certificates; and
o the relative priorities of the certificateholders of that series or
class to receive collections from the trust and to assert claims
against the trust with respect to the underlying securities, any other
assets deposited in the trust and any credit support.
Any rating that a rating agency issues with respect to the trust
certificates is not a recommendation to buy, sell or hold a security. The
ratings do not comment on the market price of the trust certificates or their
suitability for a particular investor. We cannot assure you that the ratings
will remain for any given period of time or that any rating agency will not
lower or withdraw entirely its rating if, in its judgment, circumstances,
including the rating of the underlying securities, so warrant. A revision or
withdrawal of the rating may have an adverse effect on the market price of the
trust certificates.
Because global securities, and not individual, physical certificates, initially
will represent the trust certificates of each series, your ability to pledge
your trust certificates may be limited.
One or more global securities deposited with or on behalf of a depositary
will initially represent the trust certificates of each series. You will not
receive individual, physical trust certificates. Consequently, unless and until
individual, physical trust certificates of a particular series are issued, you
will not be a recognized certificateholder under the trust agreement and the
related series supplement. Until that time, you will only be able to exercise
your rights indirectly through the depositary and its participating
institutions. As a result, your ability to pledge your trust certificates to
persons or entities that do not participate in the depositary's system, or
otherwise to act with respect to your trust certificates, may be limited. For
more details, see "Description of the Trust Certificates--Global Securities" in
this prospectus and any further description contained in the applicable
prospectus supplement.
Your ability to dispose of or take action with respect to any underlying
securities and any other assets deposited in the trust may be limited due to the
passive nature of the trust.
The trustee of a trust relating to a particular series of trust
certificates will hold, for the benefit of certificateholders, the underlying
securities and any other assets deposited in the trust. Each trust generally
will hold the deposited assets to maturity and will not dispose of them,
regardless of adverse events, financial or otherwise, that may affect any
underlying securities issuer or the value of the underlying securities and other
assets deposited in the trust. Except as indicated below, you will not be able
to direct the trustee to dispose of or take other actions with respect to any
underlying securities or other assets deposited in the trust.
Under some circumstances described in the applicable prospectus supplement,
the trustee will, or will at the direction of a specified percentage of
certificateholders of the relevant series, dispose of, or take other actions
with respect to, the underlying securities and other assets deposited in the
trust. In some limited circumstances, such as a mandatory redemption of
underlying securities or a third party's exercise of a right to purchase
underlying securities, which is described below under "Description of Underlying
Securities and Other Assets Deposited in the Trust--Principal Terms of
Underlying Securities," the trustee may dispose of the underlying securities and
other assets deposited in the trust before maturity. The applicable prospectus
supplement will describe the particular circumstances, if any, under which the
underlying securities and other assets deposited in the trust may be disposed of
before maturity and additional risk factors relating to any such disposal.
9
Amendments or modifications to the trust agreement or related series supplement
may adversely affect the interests of minority certificateholders.
The prospectus supplement for a series of trust certificates may provide
for the amendment or modification of the trust agreement and the related series
supplement with less than the unanimous consent of the certificateholders. In no
event, however, will the percentage required for consent be less than a
majority. Any amendment or other modification could have a material adverse
effect on minority certificateholders that oppose the amendment or other
modification.
The exercise of an optional exchange right may decrease the amount of
outstanding trust certificates.
The prospectus supplement for a series of trust certificates may designate
the series as an exchangeable series. An exchangeable series is a series in
which any of the depositor, Merrill Lynch, the trustee for that series or their
respective affiliates and designees or other persons identified in the
prospectus supplement may exchange their trust certificates for a pro rata
portion of the underlying securities and any other assets deposited in the
trust. For more detailed information on the optional exchange right, see
"Description of the Trust Certificates--Optional Exchange" in this prospectus.
The exercise of an optional exchange right will decrease the aggregate amount of
the exchangeable series of trust certificates outstanding.
__________________
The prospectus supplement for each series of trust certificates will set
forth information regarding additional risk factors, if any, applicable to that
series and each class within that series.
Description of Certain Derivative Instruments
o interest rate swaps; o forward contracts;
o currency swaps; o commodity swaps and credit swaps;
o securities swaps; and
o caps; o structured securities having
o floors; embedded derivatives, such as
o collars and options; structured notes.
Swaps involve the exchange with another party of their respective
commitments to pay or receive amounts computed by reference to:
o specified fixed or floating interest rates;
o currency rates;
o securities prices;
o yields or returns, including baskets of securities or securities
indices; or
o commodity prices,
and a notional principal amount. The notional principal amount is the reference
amount with respect to which obligations are determined, although no actual
exchange of principal occurs except in the case of currency swaps. An example of
a swap is an exchange of floating rate payments for fixed rate payments on a
periodic basis. Interim payments are generally netted, with the difference being
paid by one party to the other.
The purchase of a cap entitles the purchaser, to the extent that a
specified rate, price, yield or return exceeds a predetermined level, to receive
payments computed by reference to a specified fixed or floating rate, price,
yield or return and a notional principal amount from the party selling the cap.
The purchase of a floor entitles the purchaser, to the extent that a
specified rate, price, yield or return declines below a predetermined level, to
receive payments computed by reference to a specified fixed or floating rate,
price, yield or return and a notional principal amount from the party selling
that floor.
10
Options work similarly to caps and floors, and exist on various underlying
securities, such as bonds, equities, currencies and commodities. Options can
also be structured as securities, such as warrants, or can be embedded in
securities, such as some commodity or equity-linked bonds with option-like
characteristics.
Forward contracts involve the purchase and sale of a specified security,
commodity, currency or other financial instrument at a specified price and date
in the future, and may be settled by physical delivery or cash payment.
Credit derivatives involve swap and option contracts designed to assume or
lay off credit risk on loans, debt securities or other assets, or in relation to
a particular reference entity or country, in return for either swap payments or
payment of premium. Credit derivatives may also be embedded in other
instruments, such as notes or warrants. Credit derivatives give one party to a
transaction the right to dispose of or acquire an asset or group of assets, or
the right to receive or make a payment from the other party, upon the occurrence
of specified credit events.
11
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE PROSPECTUS SUPPLEMENT
We provide information to you about the trust certificates in two separate
documents: (1) this prospectus, which provides general information, some of
which may not apply to a particular series of trust certificates, including your
series, and (2) the related prospectus supplement, which will describe the
specific terms of your series of trust certificates, including:
o the specific designation and aggregate principal amount of the trust
certificates;
o the currency or currencies in which the trust will distribute
principal, premium, if any, and any distributions to you;
o a description of the material terms of the underlying securities
together with any other assets deposited in the trust and any credit
support;
o the number and designation of the classes of trust certificates we are
issuing and the minimum denomination of the trust certificates;
o the aggregate principal amount of trust certificates we are issuing,
or in case of strip certificates that are entitled to
disproportionate, nominal or no principal distributions, the notional
principal amount on which interest will be paid;
o the relative rights and priorities of each series or class of trust
certificates, including the type, characteristics and specifications
of the underlying securities together with any other assets deposited
in the trust and any credit support for the series or class of trust
certificates being issued;
o the identity of each issuer of underlying securities and each obligor
with respect to any other assets deposited in the trust;
o the name of the trustee and any administrative agent;
o the applicable rate of distributions or, in the case of a variable
rate, the method of calculating the distributions;
o the dates on which you will be entitled to receive principal, premium,
if any, and/or distributions;
o the date of issue of the trust certificates;
o the final scheduled distribution date of the trust certificates, if
applicable;
o the offering price or prices of the trust certificates;
o remedies upon a payment default on the underlying securities;
o voting rights and required voting percentages with regard to certain
actions by the depositor or the trustee under the trust agreement and
the supplement to the trust agreement relating to the trust
certificates, or with regard to the applicable trust; and
o any other material terms of the trust certificates, including terms
relating to the rights of the trust or any third party to call, redeem
or purchase the trust certificates or the underlying securities before
the final scheduled distribution date.
See "Description of the Trust Certificates--General" for a listing of other
terms that the applicable prospectus supplement may specify. If the terms of a
particular series of trust certificates vary between this prospectus and the
prospectus supplement, you should rely on the information in the prospectus
supplement.
12
WHERE YOU CAN FIND MORE INFORMATION
Merrill Lynch Depositor Inc. has filed with the Securities and Exchange
Commission, or SEC, a registration statement on Form S-3 under the Securities
Act of 1933, as amended, relating to the trust certificates. This prospectus
does not contain all the information included in the registration statement,
which has some parts that have been omitted in accordance with the rules and
regulations of the SEC. The depositor is subject to the periodic reporting
requirements of the Securities Exchange Act of 1934, as amended, and therefore
files reports and other information with the SEC. You can read and copy any
reports, statements or other information that the depositor files with the SEC
at the SEC's Public Reference Room at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. You may also obtain copies of the depositor's SEC
filings for a fee by writing to the SEC's Public Reference Room at 450 Fifth
Street NW, Washington, D.C. 20549. You may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
depositor's SEC filings are also available to the public on the SEC Internet
site at http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows the depositor to "incorporate by reference" information it
files with the SEC, which means the depositor can disclose important information
by referring you to those documents. The information incorporated by reference
is considered to be part of this prospectus, and later information the depositor
files with the SEC will automatically update and supersede this information. We
are incorporating by reference the following documents we have filed with the
SEC pursuant to the Exchange Act prior to the date of this Prospectus:
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
Public STEERS(R)Series '98 HLT-1 Trust
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
Public STEERS(R)Series '98 IBM Z-2 Trust
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
Public STEERS(R)Series '98 MCIC-PI Trust
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
Public STEERS(R)Series '98 TRV-CI Trust
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
Public STEERS(R)Series '99 REN-C1 Trust
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
PreferredPLUS Trust Series ALL-1
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
PreferredPLUS Trust Series ATT-1
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
PreferredPLUS Trust Series BLC-1
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
PreferredPLUS Trust Series BLS-1
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
PreferredPLUS Trust Series CCR-1
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
PreferredPLUS Trust Series CTR-1
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
PreferredPLUS Trust Series CZN-1
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
PreferredPLUS Trust Series FRD-1
13
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
PreferredPLUS Trust Series LMG-1
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
PreferredPLUS Trust Series LMG-2
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
PreferredPLUS Trust Series NAI-1
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
PreferredPLUS Trust Series QWS-1
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
PreferredPLUS Trust Series QWS-2
o Annual report on Form 10-K405 for the year ended December 31, 2001 for
PreferredPLUS Trust Series WCM-1
o Current report on Form 8-K for PreferredPLUS Trust Series LMG-2 dated
January 15, 2002
o Current report on Form 8-K for PreferredPLUS Trust Series BLC-2 dated
February 1, 2002
o Current report on Form 8-K for PreferredPLUS Trust Series LMG-1 dated
February 1, 2002
o Current report on Form 8-K for PreferredPLUS Trust Series ALL-1 dated
February 15, 2002
o Current report on Form 8-K for PreferredPLUS Trust Series QWS-1 dated
February 15, 2002
o Current report on Form 8-K for PreferredPLUS Trust Series QWS-2 dated
February 15, 2002
o Current report on Form 8-K for PreferredPLUS Trust Series WCM-1 dated
February 15, 2002
o Current report on Form 8-K for Public STEERS(R)Series '99 REN-C1 Trust
dated March 1, 2002
o Current report on Form 8-K for PreferredPLUS Trust Series ATT-1 dated
March 15, 2002
o Current report on Form 8-K for PreferredPLUS Trust Series BLC-1 dated
March 15, 2002
o Current report on Form 8-K for PreferredPLUS Trust Series BLC-2 dated
March 15, 2002
o Current report on Form 8-K for PreferredPLUS Trust Series ELP-1 dated
March 25, 2002
o Current report on Form 8-K for PreferredPLUS Trust Series CZN-1 dated
April 1, 2002
o Current report on Form 8-K for PreferredPLUS Trust Series ELP-1 dated
April 9, 2002
o Current report on Form 8-K for Public STEERS(R)Series '98 HLT-1 Trust
dated April 15, 2002
o Current report on Form 8-K for PreferredPLUS Trust Series FRD-1 dated
May 1, 2002
o Current report on Form 8-K for PreferredPLUS Trust Series MSD-1 dated
May 29, 2002
o Current report on Form 8-K for PreferredPLUS Trust Series MSD-1 dated
May 29, 2002
In all cases, you should rely on the later information over different
information included in this prospectus or the accompanying prospectus
supplement. We incorporate by reference any future SEC reports filed by or on
behalf of the trust until we terminate our offering of the certificates.
14
You may request a copy of the documents incorporated by reference, except
exhibits to those documents (unless the exhibits are specifically incorporated
by reference in those documents). Documents may be requested orally or in
writing and will be provided at no cost to you. Written requests should be
directed to Merrill Lynch Depositor, Inc., c/o Merrill Lynch & Co., Inc., World
Financial Center, New York, New York 10281, Attention: Secretary. Telephone
requests should be directed to the depositor at 212-449-1000.
REPORTS TO CERTIFICATEHOLDERS
Except as otherwise specified in the applicable prospectus supplement,
unless and until individual definitive trust certificates are issued to you,
unaudited reports containing information concerning each trust will be prepared
annually by the trustee for that trust and sent on behalf of the trust only to
Cede, as nominee of DTC and registered holder of the certificates. If a trust
issues definitive certificates, the reports will be prepared by the trustee for
that trust and sent on behalf of the trust directly to you in accordance with
the trust agreement and the supplement to the trust agreement relating to the
trust certificates. For more information, see "Description of the Trust
Certificates--Global Securities" and "Description of the Trust
Agreement--Reports to Certificateholders; Notices." These reports will not
constitute financial statements prepared in accordance with generally accepted
accounting principles. The depositor, on behalf of each trust, will cause the
filing of periodic reports in accordance with Exchange Act requirements. We do
not intend to send any financial reports to you.
References in this prospectus to U.S. dollars, "US$," "dollar" or "$" are
to the lawful currency of the United States.
15
THE DEPOSITOR
The depositor is a Delaware corporation and an indirect, wholly owned,
limited-purpose subsidiary of Merrill Lynch. The principal office of the
depositor is c/o Merrill Lynch & Co., World Financial Center, New York, New York
10281. The depositor's certificate of incorporation provides that the depositor
may conduct any lawful activities necessary or incidental to serving as
depositor of one or more trusts that may issue and sell trust certificates
offered through this prospectus and the related prospectus supplement.
USE OF PROCEEDS
If the depositor purchases the underlying securities and any other assets
deposited in the trust, the depositor will use the net proceeds from the sale of
each series or class of trust certificates, whether or not offered through this
prospectus, to fund the depositor's purchase of those underlying securities and
other assets, and to arrange any credit support. If specified in the applicable
prospectus supplement, this credit support may include deposits into any reserve
account or the applicable trust certificate account, as described below, for the
benefit of the certificateholders of the series or class. The depositor will use
any remaining net proceeds:
o for purposes related to the deposit of underlying securities and any
other assets in the trust;
o for the preparation, distribution and filing of periodic reports and
other information, including, but not limited to, the fees and
expenses of the depositor incurred in connection with the ongoing
activities of the trusts; and
o for general corporate purposes.
16
ESTABLISHMENT OF THE TRUST
A separate trust will be created for each series of trust certificates. The
depositor will assign and deliver the deposited assets, which will include the
underlying securities and any other assets deposited in the trust, for each
series of trust certificates to the trustee named in the applicable prospectus
supplement. See "Description of the Trust Agreement--Assignment of Deposited
Assets" in this prospectus for more information. The trustee named in the
prospectus supplement will administer the assets deposited in the trust
according to the trust agreement and the related series supplement and will
receive a fee for those services. The trustee or an administrative agent, if
applicable, will either cause the assignment of the assets deposited in the
trust to be recorded on the books and records of DTC or any other depositary
specified in the prospectus supplement or will obtain an opinion of counsel that
no recordation is required to obtain a first priority perfected security
interest in the deposited assets.
The depositor's assignment of the underlying securities and other deposited
assets to the trustee will be without recourse to the depositor, except as to
some limited representations and warranties, if any.
The applicable prospectus supplement will describe the property of each
trust, which may consist of:
o underlying securities and any other assets deposited in the trust, or
interests in those underlying securities and other assets, excluding
any interest that the depositor, or any previous owner or any other
person or entity has retained or acquired, as may be specified in the
trust agreement and the related series supplement;
o assets that may be identified as deposited in the related certificate
account, as described below;
o rights under the agreement or agreements pursuant to which the trustee
has acquired the underlying securities and other assets deposited in
the trust;
o those elements of credit support, if any, for any series or class
within that series that are specified as being part of the related
trust in the applicable prospectus supplement; for further details,
see the applicable prospectus supplement and "Description of
Underlying Securities and Other Assets Deposited in the Trust--Credit
Support" in this prospectus; and
o any cash or other property received upon the sale, exchange,
collection or other disposition of any of the items described above.
17
MATURITY AND YIELD CONSIDERATIONS
Each prospectus supplement will, to the extent applicable, contain
information regarding the types and maturities of the underlying securities and
the terms, if any, upon which they may be subject to early redemption or
repayment. The exercise of any provisions for the redemption or repayment of
underlying securities before their stated maturity will reduce the weighted
average life of the underlying securities and the related series of trust
certificates or class of certificates within that series.
Some terms of the underlying securities, and any other assets deposited in
the trust, may affect the effective yield of the trust certificates of any
series and any class of certificates within that series. In addition, the manner
and priorities of allocations of collections with respect to those underlying
securities and other assets between classes of a particular series can also
affect the effective yield of the trust certificates of any series and any class
of certificates in that series. With respect to any series of trust
certificates, a variety of tax, accounting, economic, and other factors will
influence whether an underlying securities issuer exercises any right of
redemption in respect of its securities. All else remaining equal, if prevailing
interest rates are below the interest rates on the related underlying
securities, we would expect the likelihood of redemption to increase.
As specified in the applicable prospectus supplement, each of the
underlying securities may be subject to acceleration upon the occurrence of some
events of default under the terms of the underlying securities. Any early
repayment of the underlying securities as a result of an acceleration will
affect the maturity and yield on the trust certificates. For further
information, see "Description of Underlying Securities and Other Assets
Deposited in the Trust--Underlying Securities Indenture" in this prospectus. If
an underlying securities issuer becomes subject to a bankruptcy proceeding, that
proceeding may materially and adversely affect the timing and amount of payments
of principal, premium, if any, or distributions on the certificates. Several
factors, including an underlying securities issuer's operating and financial
condition and leverage, and economic, geographic, legal and social factors, may
affect the underlying securities issuer's ability to satisfy its obligations
under the underlying securities.
The extent to which the yield to maturity of trust certificates may vary
from the anticipated yield due to the rate and timing of payments on the
underlying securities and any other assets deposited in the trust will depend
upon:
o the degree to which the trust certificates are purchased at a
discount or premium; and
o the degree to which the timing of payments on the trust
certificates is sensitive to the rate and timing of payments on
the underlying securities and other assets deposited in the
trust.
If the interest rate of any series of trust certificates, or class within
that series, is based on variable or adjustable interest rates, variations in
the interest rates applicable to, and corresponding payments in respect of, the
trust certificates will also affect the yield to maturity of the certificates.
In the case of any series of trust certificates representing an interest in a
pool of debt or other eligible securities, disproportionate principal payments,
if any, applicable to those certificates may affect the yield on those
certificates which have distribution rates higher or lower than the applicable
reference interest rate. These disproportionate principal payments may result
from differences in amortization schedules, payments due on scheduled maturity
or upon early redemption.
The prospectus supplement for each series of trust certificates will set
forth additional information regarding yield and maturity considerations
applicable to that series and each class within that series and the related
underlying securities and other assets deposited in the trust.
18
DESCRIPTION OF THE TRUST CERTIFICATES
The related trust will issue each series of trust certificates, or classes
within that series, pursuant to the trust agreement and the series supplement
relating to that series among the depositor, the trustee and any intermediaries
named in the applicable prospectus supplement. We have filed a form of the trust
agreement as an exhibit to our registration statement on Form S-3 (Registration
No. 333-29015). The provisions of the applicable series supplement may vary
depending upon the terms of the trust certificates being issued, the underlying
assets and any other assets deposited in the trust, the credit support, if any,
and the related trust. The following summary describes material provisions of
the trust agreement and the related series supplement that may be applicable to
each series of trust certificates. The applicable prospectus supplement will
describe any material provision of the trust agreement and the related series
supplement that is not described or materially differs from the description in
this prospectus.
The following summary does not purport to be complete and is subject to the
detailed provisions of the trust agreement and related series supplement. You
should carefully read the form of trust agreement and the related series
supplement for a full description of the provisions, including the definition of
some terms used, and for other information regarding the trust certificates.
Whenever this prospectus refers to the defined terms of the trust agreement and
the related series supplement, those defined terms are incorporated by reference
in this prospectus as part of the statement made, and the statement is qualified
in its entirety by that reference. The term "trust certificate," with respect to
any series, refers to all the trust certificates of that series, and each class
within that series, whether or not offered in this prospectus and by the
applicable prospectus supplement, unless the context otherwise requires.
Following the issuance of a series of trust certificates, the applicable
trust will file with the SEC a copy of the series supplement relating to that
series as an exhibit to a current report on Form 8-K.
General
The amount of trust certificates that may be issued under the trust
agreement and the related series supplement is unlimited. The trust agreement
and series supplement for a particular series of trust certificates will provide
that trust certificates of that series may be issued in multiple classes. The
series of trust certificates, or classes within that series, to be issued under
the trust agreement and the related series supplement will represent in the
aggregate the beneficial ownership interest in an aggregate amount of principal
of and premium, if any, and interest on underlying securities, together with
other assets, if any, as described in this prospectus and the prospectus
supplement.
Each of the classes, if any, will be allocated relative priorities to
receive specified collections from and a percentage ownership interest of the
assets deposited in the trust as identified and described in the applicable
prospectus supplement. For further information, see "Description of Underlying
Securities and Other Assets Deposited in the Trust--Collections" in this
prospectus. The applicable prospectus supplement will also contain a description
of the following terms applicable to the series of trust certificates in respect
of which this prospectus and the related prospectus supplement are being
delivered:
(A) the title of the trust certificates;
(B) the series of the trust certificates and, if applicable, the
number and designation of classes of that series;
(C) material information concerning the type, characteristics
and specifications of the underlying securities, any credit
support, and any other assets that the depositor deposits in
the related trust, including, with respect to any underlying
securities which at the time of deposit represent a
significant portion of the assets in the trust and any
related credit support:
o information concerning the material terms of each
underlying security;
o the identity of the issuer; and
o where publicly available information regarding the
issuer may be obtained;
19
(D) the original issue dates, which are the dates on which, or
periods during which, the series of trust certificates may
be issued;
(E) the offering price of the series of trust certificates;
(F) the limit, if any, upon the aggregate principal amount or
notional amount, as applicable, of each class of the series
of trust certificates;
(G) if applicable, the relative rights and priorities of each
class, including the method for allocating to the
certificateholders of that class any collections from and
defaults or losses on assets deposited in the trust;
(H) whether the trust certificates of that series are fixed rate
certificates or floating rate certificates, as described
below, and:
o the applicable interest rate for the fixed rate
certificates and the method of calculating the interest
rate that is applicable to the series of floating rate
certificates;
o the date or dates from which interest will accrue;
o the applicable distribution dates on which principal of
and premium, if any, and interest on, in each case as
applicable, the series or class will be distributable;
and
o the related record dates, if any, for determining the
amounts of those distributions;
(I) the circumstances and conditions under which any of the
depositor, Merrill Lynch or the trustee, or their respective
affiliates and designees, or any other person identified in
the prospectus supplement may exercise an optional exchange
right and the periods within which or the dates on which,
and the terms and conditions upon which any of those parties
may exercise any optional exchange, in whole or in part and
will state that the exchange right will be exercisable only
to the extent that the exercise of the right:
o would not affect the trust's ability to be exempt under
Rule 3a-7 under the Investment Company Act of 1940, as
amended, and all applicable rules, regulations and
interpretations; and
o would not affect the treatment of the trust as a
"grantor trust" under the Internal Revenue Code;
(J) the option, if any, of any specified third parties, which
may include the depositor, Merrill Lynch or their respective
affiliates, to purchase trust certificates held by a
certificateholder and the periods within which or the dates
on which, and the terms and conditions upon which that
option may be exercised, in whole or in part;
(K) the rating of each series or each class within the series
offered by this prospectus and the related prospectus
supplement;
(L) the denominations in which the depositor can issue the
series or each class within the series;
(M) whether the trust certificates of any class within a given
series will be (a) entitled to principal distributions with
disproportionate, nominal or no interest distributions, or
(b) "strip certificates" that are entitled to interest
distributions with disproportionate, nominal or no principal
distributions, and the terms applicable to each;
(N) the identity of the depositary, if other than DTC, for the
trust certificates;
(O) the specified currency applicable to the trust certificates
of the series or class for purposes of denominations of and
distributions on that series or each class and any
applicable circumstances and conditions when the specified
currency may be changed, at the
20
election of the depositor or a certificateholder, and the
currency or currencies in which any principal of or any
premium or any interest on the series or class are to be
distributed pursuant to that election;
(P) all applicable required percentages and voting rights
relating to the manner and percentage of votes of
certificateholders of the series and each class within that
series required with respect to specified actions by the
depositor or the trustee under the trust agreement and the
related series supplement or with respect to the applicable
trust;
(Q) remedies available upon a payment default on the underlying
securities or an acceleration of the underlying securities;
and
(R) all other material terms of the series or class within that
series of trust certificates.
The applicable prospectus supplement will describe the United States
federal income tax consequences and ERISA consequences relating to the related
series of trust certificates, or any class within the series. In addition, the
applicable prospectus supplement will describe any special considerations, the
specific terms and other information with respect to the issuance of any series
of trust certificates or class within that series of trust certificates, on
which the principal of and any premium and interest are distributable in a
specified currency other than U.S. dollars. The U.S. dollar equivalent of the
public offering price or purchase price of a trust certificate in a specified
currency other than U.S. dollars will be determined on the basis of the noon
buying rate in New York City for cable transfers in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York for that
specified currency on the applicable issue date. As specified in the applicable
prospectus supplement, the depositor, the trustee, the administrative agent, if
any, or its agent as exchange rate agent for each series of trust certificates,
will make that determination. If a noon buying rate is not published for the
specified currency, the applicable prospectus supplement will set forth another
source for all exchange rate calculations.
Transfers of beneficial ownership interests in any global certificate will
be effected in accordance with the normal procedures of DTC or any other
specified depositary. If definitive certificates are issued in the limited
circumstances described in this prospectus, they may be transferred or exchanged
for like certificates of the same series at the corporate trust office or agency
of the applicable trustee in the City and State of New York, subject to the
limitations set forth in the trust agreement and the related series supplement,
without the payment of any service charge, other than any tax or governmental
charge.
Distributions
Distributions allocable to principal, premium, if any, and interest on the
trust certificates of each series and each class within the series will be made
by or on behalf of the trustee on each distribution date as specified in the
applicable prospectus supplement. The amount of each distribution will be
determined as of the record date, which refers to the close of business on the
date specified in the applicable prospectus supplement.
Except as provided in the succeeding paragraph, the trustee will make
distributions with respect to trust certificates at its corporate trust office
or agency specified in the applicable prospectus supplement in The City of New
York; provided that the trustee will distribute any amounts distributable on the
final scheduled distribution date of a trust certificate only upon surrender of
the trust certificate at the applicable location stated above.
The trustee will make distributions on trust certificates, except as
provided below, by check mailed to the certificateholders listed on the relevant
record date in the ownership register maintained for that purpose under the
trust agreement and the related series supplement, which, in the case of global
securities, will be a nominee of the depositary. A certificateholder of
$10,000,000 or more in aggregate principal amount of trust certificates of a
given series, and any holder of a global security, shall be entitled to receive
distributions by wire transfer of immediately available funds, but only if the
trustee receives appropriate wire transfer instructions in writing for the
series not later than 10 calendar days before the applicable distribution date.
A "business day" with respect to any trust certificate means (1) any day
other than a Saturday, a Sunday or a legal holiday or a day on which banking
institutions or trust companies in The City of New York are authorized or
obligated by law, regulation or executive order to close; or (2) a business day,
as the term is used in the indenture, or other governing document, for the
underlying securities.
21
Distributions on the Trust Certificates
Each class of trust certificates of a given series, other than some classes
of strip certificates, which are trust certificates with nominal,
disproportionate or no interest distributions, may have a different applicable
distribution rates, which may be fixed or floating, as described below. In the
case of strip certificates that entitle their holders to receive either nominal
or no certificate principal balance, the distributions will be in an amount
described in the applicable prospectus supplement. In this prospectus,
"certificate principal balance" means amounts in respect of principal out of the
future cash flows of the assets deposited in the trust. In addition, in this
prospectus "notional amount" means the notional principal amount specified in
the applicable prospectus supplement on which interest on strip certificates
with a nominal or no certificate principal balance will be made on each
distribution date. Reference to the notional amount of a class of strip
certificates in this prospectus or in a prospectus supplement does not indicate
that those certificates represent the right to receive any distribution in
respect of principal in that amount, but rather we use the term "notional
amount" solely as a basis for calculating the amount of required distributions
and determining some relative voting rights, all as specified in the applicable
prospectus supplement. The applicable distribution rate will be described in the
prospectus supplement and will be based upon the rate of interest received on
the underlying securities, credit support, if any, and any payments in respect
of any retained interest. For a detailed description of "retained interest," see
"Description of the Trust Agreement--Retained Interest" below. The applicable
distribution rate may be either a fixed rate or a floating rate.
Fixed Rate Certificates. Each series of trust certificates with a fixed
distribution rate will pay distributions on the outstanding principal balance of
that series, from its original issue date or from the last date to which
distributions have been paid, at the fixed distribution rate stated on its face
and in the applicable prospectus supplement until the principal amount of that
series is distributed or made available for repayment. In the case of a series
of fixed rate certificates with a nominal or no principal amount, that series
will pay distributions until the notional amount of that series is reduced to
zero, except that, if so specified in the applicable prospectus supplement, the
distribution rate for that series or any class or classes may be subject to
periodic adjustment in response to designated changes in the rating assigned to
the trust certificates by one or more rating agencies, in accordance with a
schedule or otherwise, all as described in the related prospectus supplement.
Unless otherwise stated in the prospectus supplement, interest on each series or
class of fixed rate certificates will be distributable in arrears on each
distribution date as specified in the prospectus supplement. Each distribution
of interest payments shall include interest accrued on the underlying securities
through the day specified in the prospectus supplement and the related series
supplement. Unless otherwise specified in the applicable prospectus supplement,
interest on fixed rate certificates will be computed on the basis of a 360-day
year of twelve 30-day months.
Floating Rate Certificates. Each series of trust certificates with a
variable distribution rate will pay distributions on the outstanding principal
balance of that series at the initial applicable distribution rate set forth on
its face and in the applicable prospectus supplement from its original issue
date to but excluding the first distribution reset date for that series. The
distribution reset date is the first day of each daily, weekly, monthly,
quarterly, semiannual or annual distribution reset period, specified in the
applicable prospectus supplement for the series.
Thereafter, the applicable distribution rate on the series for each
distribution reset date will be determined by reference to an interest rate
basis, or "base rate," plus or minus the spread, if any, or multiplied by the
spread multiplier. The "base rate" for any series of trust certificates will, as
described in greater detail below, be a fluctuating rate of interest that is
publicly available and is established by reference to quotations provided by
third parties of the interest rate prevailing on loans or other extensions of
credit in a specified credit market. The "spread" is the number of basis points,
where one basis point equals one one-hundredth of a percentage point, that may
be specified in the applicable prospectus supplement as being applicable to that
series. The "spread multiplier" is the percentage that may be specified in the
applicable prospectus supplement as being applicable to that series. The
applicable prospectus supplement may specify, however, that the spread or spread
multiplier on that series of floating rate certificates may be subject to
adjustment from time to time in response to designated changes in the rating
assigned to those trust certificates by one or more rating agencies, in
accordance with a schedule or otherwise, all as described in the prospectus
supplement.
The applicable prospectus supplement, unless it otherwise specifies, will
designate one of the following base rates as applicable to a floating rate
certificate:
o the CD rate for a "CD rate o the Prime Rate for a "prime rate
certificate"; certificate";
o the commercial paper rate o the treasury rate for a "treasury
for a "commercial paper rate rate certificate"; or
certificate"; o another base rate, as set forth in
22
o the federal funds rate for a the applicable prospectus
"federal funds certificate"; supplement.
o LIBOR rate for a "LIBOR
certificate";
Distributions will be payable only from cash that the trustee receives from
the underlying securities and any other assets deposited in the trust that are
available for application to that payment, notwithstanding the accrual of
distributions on the principal balance of the certificates at a higher rate.
As specified in the applicable prospectus supplement, floating rate
certificates of a particular series may also have either or both of the
following:
(A) a "maximum certificate rate," which is a maximum limitation,
or ceiling, on the rate at which distributions may accrue
during any distribution accrual period specified in the
applicable prospectus supplement; and
(B) a "minimum certificate rate," which is a minimum limitation,
or floor, on the rate at which distributions may accrue
during any distribution accrual period specified in the
prospectus supplement.
In each case, these distribution rates will be expressed as a rate per
annum on a simple interest basis. In addition to any maximum certificate rate,
the distribution rate applicable to any series of floating rate certificates
will in no event be higher than the maximum rate of interest permitted by
applicable New York and United States federal law. Under applicable New York and
United States federal law as of the date of this prospectus, the maximum rate of
interest, with some exceptions, is 25% per annum on a simple interest basis.
The depositor will appoint, and enter into agreements with, calculation
agents who will calculate floating distribution rates on each series of floating
rate certificates. The applicable prospectus supplement will set forth the
identity of the calculation agent for each series of floating rate certificates.
All determinations of distributions by the calculation agent will, if made on a
commercially reasonable basis and in good faith, be conclusive for all purposes
and binding on the holders of floating rate certificates of a given series.
The applicable floating distribution rate will be reset for a "distribution
reset period" that will be reset daily, weekly, monthly, quarterly, semiannually
or annually. The first day of each distribution reset period is called a
"distribution reset date" and, with respect to each series, will be specified in
the applicable prospectus supplement; provided that, unless otherwise specified
in the prospectus supplement, the distribution rate in effect for the 10 days
immediately before the final scheduled distribution date for a particular series
of certificates will be that in effect on the tenth day preceding that final
scheduled distribution date. If a distribution reset date for any series of
floating rate certificates would otherwise be a day that is not a business day,
that distribution reset date will occur on the next business day, except that,
in the case of a LIBOR certificate described above, if that business day would
fall in the next calendar month, the distribution reset date will be the
immediately preceding business day.
Unless the applicable prospectus supplement provides otherwise,
distributions payable in respect of floating rate certificates will be the
accrued distributions from and including the original issue date of the series
or the last distribution reset date to which distributions have accrued and been
distributed, as the case may be, to but excluding the immediately following
distribution date. With respect to a floating rate certificate, accrued
distributions will be calculated by multiplying the certificate's principal
balance by an accrued distribution factor. The accrued distribution factor will
be computed by adding the distribution factors calculated for each day in the
period for which accrued distributions are being calculated. Unless the
applicable prospectus supplement provides otherwise, the distribution factor,
which is expressed as a decimal calculated to seven decimal places without
rounding, for each day is computed by dividing the applicable distribution rate
in effect on that day by 360, in the case of LIBOR certificates, commercial
paper rate certificates, federal funds rate certificates, prime rate
certificates, and CD rate certificates, or by the actual number of days in the
year, in the case of treasury rate certificates. For purposes of making the
foregoing calculation, the variable distribution rate in effect on any
distribution reset date will be the applicable rate as reset on that date.
Unless the applicable prospectus supplement provides otherwise, all
percentages resulting from any calculation of the distribution rate on a
floating rate certificate will be rounded, if necessary, to the nearest
1/100,000 of 1% (.0000001), with five one-millionths of a percentage point
rounded upward, and all currency amounts used in or resulting from that
calculation on floating rate certificates will be rounded to the nearest
one-hundredth of a unit, with .005 of a unit being rounded upward.
23
Distributions on any series of floating rate certificates will be
distributable on the distribution dates and for the distribution accrual periods
as and to the extent set forth in the applicable prospectus supplement.
The "calculation date" pertaining to a record date will be the earlier of
(1) the tenth calendar day after the record date or, if that day is not a
business day, the next succeeding business day or (2) the business day preceding
the applicable distribution date.
Upon the request of the holder of any floating rate certificate of a
particular series, the calculation agent for that series will provide the
applicable distribution rate then in effect and, if determined, the distribution
rate that will become effective on the next distribution reset date with respect
to the floating rate certificate.
In the descriptions below:
o The "index maturity" for any series of floating rate certificates is
the period of maturity of the instrument or obligation from which the
base rate is calculated.
o "H.15(519)" means the publication entitled "Statistical Release
H.15(519), Selected Interest Rates," or any successor publication of
the Board of Governors of the Federal Reserve System.
o "Composite Quotations" means the daily statistical release entitled
"Composite 3:30 p.m. Quotations for U.S. Government Securities," or
any successor publication, published by the Federal Reserve Bank of
New York.
CD Rate Certificates. CD rate certificates will pay distributions at rates
specified in the applicable prospectus supplement and will be calculated with
reference to the CD rate and the spread and/or the spread multiplier, if any.
The "CD rate" means, with respect to any record date, the rate on that date
for negotiable certificates of deposit having the applicable index maturity, as
published by the Board of Governors of the Federal Reserve System in H.15(519)
under the heading "CDs (Secondary Market)." If that rate is not published by
9:00 a.m., New York City time, on the calculation date pertaining to the record
date, the CD rate will be the rate on that record date for negotiable
certificates of deposit of the applicable index maturity, as published by the
Federal Reserve Bank of New York in Composite Quotations under the heading
"Certificates of Deposit." If that rate is not published in Composite Quotations
by 3:00 p.m., New York City time, on the calculation date pertaining to that
record date, then the CD rate for that record date will be the arithmetic mean
of the secondary market offered rates for negotiable certificates of deposit as
of 10:00 a.m., New York City time, on that record date. Those rates will be from
three leading nonbank dealers in negotiable U.S. dollar certificates of deposit
in The City of New York selected by the calculation agent after consultation
with the depositor. The negotiable certificates of deposit will be issued by
major U.S. money center banks of the highest credit standing in the market for
negotiable certificates of deposit and will have a remaining maturity closest to
the applicable index maturity in a denomination of $5,000,000. However, if the
dealers that the calculation agent selects are not quoting those rates, the
distribution rate for the period commencing on the distribution reset date
following the record date will be the distribution rate borne by the CD rate
certificates on the record date. If the CD rate must be calculated then that
calculation will be performed by the calculation agent.
CD rate certificates, like other trust certificates, are not deposit
obligations of a bank and are not insured by the Federal Deposit Insurance
Corporation.
Commercial Paper Rate Certificates. Commercial paper rate certificates will
pay distributions at the rates that the applicable prospectus supplement
specifies, calculated with reference to the commercial paper rate, as described
below, and the spread and/or the spread multiplier, if any.
The "commercial paper rate" means, with respect to any record date, the
money market yield, as described below, on the record date of the rate for
commercial paper having the applicable index maturity, as published in H.15(519)
under the heading "Commercial Paper." If that rate is not published before 9:00
a.m., New York City time, on the calculation date pertaining to that record
date, the commercial paper rate will be the money market yield on that record
date of the rate for commercial paper of the applicable index maturity, as
published by the Federal Reserve Bank of New York in Composite Quotations under
the heading "Commercial Paper." If that rate is not published in Composite
Quotations by 3:00 p.m., New York City time, on the calculation date pertaining
to the record date, then the commercial paper rate for that record date will be
the money market yield of the arithmetic
24
mean of the offered rates for commercial paper of the applicable index maturity
as of 11:00 a.m., New York City time, on that record date. Those rates will be
from three leading dealers of commercial paper in The City of New York selected
by the calculation agent after consultation with the depositor. The commercial
paper will have been placed for industrial issuers whose bond rating, as
determined by a nationally recognized rating agency, is "AA" or the equivalent.
However, if the dealers that the calculation agent selects are not quoting those
rates, the distribution rate for the period commencing on the distribution reset
date following the record date will be the distribution rate borne by the
commercial paper rate certificates on the record date. If the commercial paper
rate must be calculated then that calculation will be performed by the
calculation agent.
The term "money market yield" means a yield calculated in accordance with
the following formula:
Money Market Yield = D x 360 x 100
-------------
360 - (D x M)
where "D" refers to the applicable annual rate for commercial paper quoted on a
bank discount basis and expressed as a decimal, and "M" refers to the actual
number of days in the applicable period for which interest is being calculated.
Federal Funds Rate Certificates. Federal funds rate certificates will bear
interest at the interest rates that the applicable prospectus supplement
specifies, calculated with reference to the federal funds rate, as described
below, and the spread and/or the spread multiplier, if any.
The "federal funds rate" means, with respect to any record date, the rate
on that date for federal funds, as published in H.15(519) under the heading
"Federal Funds (Effective)." If that rate is not published by 9:00 a.m., New
York City time, on the calculation date pertaining to the record date, the
federal funds rate will be the rate on that record date as published by the
Federal Reserve Bank of New York in Composite Quotations under the heading
"Federal Funds/Effective Rate." If that rate is not published in Composite
Quotations by 3:00 p.m., New York City time, on the calculation date pertaining
to that record date, then the federal funds rate for that record date will be
the arithmetic mean of the rates for the last transaction in overnight federal
funds arranged by three leading brokers of federal funds transactions in The
City of New York as of 9:00 a.m., New York City time, on that record date. Those
dealers will be selected by the calculation agent after consultation with the
depositor. However, if the dealers that the calculation agent selects are not
quoting those rates, the distribution rate for the period commencing on the
distribution reset date following the record date will be the distribution rate
borne by the federal funds certificates on the record date. If the federal funds
rate must be calculated then that calculation will be performed by the
calculation agent.
LIBOR Certificates. LIBOR certificates will pay distributions at the rates
that the applicable prospectus supplement specifies, calculated with reference
to LIBOR and the spread and/or the spread multiplier, if any.
"LIBOR" means, with respect to any record date, the rate that the
calculation agent determines in accordance with either clause (A) or clause (B)
below, as specified in the applicable prospectus supplement:
(A) LIBOR Telerate, which is the rate for deposits in U.S.
dollars of the index maturity specified in the applicable
prospectus supplement, commencing on the second London
Banking Day immediately following the record date, that
appears on Telerate Page 3750 as of 11:00 a.m., London time,
on that record date. "Telerate Page 3750" means the display
designated as page "3750" on the Telerate service, or any
other page that may replace page 3750 on that service or any
other service or services that may be designated by the
British Bankers' Association for the purpose of displaying
London interbank offered rates for U.S. dollar deposits.
(B) LIBOR Reuters, which is the arithmetic mean of the offered
rates for deposits in U.S. dollars having the index maturity
specified in the applicable prospectus supplement,
commencing on the second London Banking Day immediately
following the record date, that appear on the Reuters Screen
LIBO Page as of 11:00 a.m., London time, on that record
date, if at least two of those offered rates appear on the
Reuters Screen LIBO Page. "Reuters Screen LIBO Page" means
the display designated as Page "LIBO" on the Reuters Monitor
Money Rate Service, or any other page that may replace the
LIBO page on that service for the purpose of displaying
London interbank offered rates of major banks.
25
If neither LIBOR Telerate nor LIBOR Reuters is specified in the applicable
prospectus supplement, LIBOR will be determined as if LIBOR Telerate had been
specified.
If, in the case where clause (A) above applies, no rate appears on Telerate
Page 3750 or, in the case where clause (B) above applies, fewer than two offered
rates appear on the Reuters Screen LIBO Page, the calculation agent will
determine LIBOR in respect of the relevant record date on the basis of the rates
at which deposits in U.S. dollars of the index maturity specified in the
applicable prospectus supplement are offered to prime banks in the London
interbank market at approximately 11:00 a.m., London time, on that record date
by four major banks, or "reference banks," in the London interbank market,
selected by the calculation agent, commencing on the second London Banking Day
immediately following the record date in a principal amount of not less than
$1,000,000 that is representative for a single transaction in the market at the
time. The calculation agent will request the principal London office of each of
the reference banks to provide a quotation of its rate. If at least two
quotations are provided, LIBOR for the record date will be the arithmetic mean
of those quotations. If fewer than two quotations are provided, LIBOR for the
record date will be the arithmetic mean of the rates that three major commercial
or investment banks, which may include Merrill Lynch or any of its affiliates,
in The City of New York quote at approximately 11:00 a.m., New York City time,
on the record date for U.S. dollar loans of the applicable index maturity to
leading European banks, commencing on the second London Banking Day immediately
following the record date, in a principal amount of not less than $1,000,000
that is representative for a single transaction in that market at that time.
Those investment banks will be selected by the calculation agent after
consultation with the depositor. However, if the banks that the calculation
agent selects are not quoting those rates, the distribution rate for the period
commencing on the distribution reset date following the record date will be the
distribution rate borne by the LIBOR certificates on the record date. If LIBOR
must be calculated then that calculation will be performed by the calculation
agent.
If any LIBOR certificate is indexed to the offered rates for deposits in a
specified currency other than U.S. dollars, the applicable prospectus supplement
will describe the method for determining the rates.
Prime Rate Certificates. Prime rate certificates will pay distributions at
the interest rates, calculated with reference to the prime rate and the spread
and/or the spread multiplier, if any, specified in the applicable prospectus
supplement.
The "prime rate" means, with respect to any record date, that rate on that
date, as published in H.15(519) under the heading "Bank Prime Loan." If that
rate is not published by 9:00 a.m., New York City time, on the calculation date
pertaining to that record date the prime rate will be the arithmetic mean of the
rates of interest publicly announced by each bank named on the "Reuters Screen
NYMF Page" as that bank's prime rate or base lending rate as in effect for that
record date. "Reuters Screen NYMF Page" means the display designated as page
"NYMF" on the Reuters Monitor Money Rates Service, or any other page that may
replace the NYMF page on that service for the purpose of displaying prime rates
or base lending rates of major U.S. banks. If fewer than four but more than one
rate appears on the Reuters Screen NYMF Page for that record date the prime rate
will be the arithmetic mean of the prime rates, quoted on the basis of the
actual number of days in the year divided by 360, as of the close of business on
that record date by four major money center banks in The City of New York. If
fewer than two rates appear on the Reuters Screen NYMF Page, the prime rate will
be the arithmetic mean of the prime rates in effect for the record date as
furnished in The City of New York by at least three substitute banks or trust
companies organized and doing business under the laws of the United States, or
any U.S. state, in each case having total equity capital of at least
$500,000,000 and subject to supervision or examination by federal or state
authority. The banks and trust companies referred to above will be selected by
the calculation agent after consultation with the depositor. However, if the
banks or trust companies that the calculation agent selects are not quoting
those rates, the distribution rate for the period commencing on the distribution
reset date following the record date will be the distribution rate borne by the
prime rate certificates on the record date. If the prime rate must be calculated
then that calculation will be performed by the calculation agent.
Treasury Rate Certificates. Treasury rate certificates will pay
distributions at the rates, calculated with reference to the treasury rate and
the spread and/or the spread multiplier, if any, specified in the applicable
prospectus supplement.
The "treasury rate" means, with respect to any record date, the rate for
the auction held on that record date of treasury bills of the index maturity
specified in the applicable prospectus supplement, as published in H.15(519)
under the heading "U.S. Government Securities--Treasury bills-auction average
(investment)." If that rate is not published by 9:00 a.m., New York City time,
on the calculation date pertaining to that record date, the prime rate will be
the auction average rate for the record date, expressed as a bond equivalent,
rounded to the nearest 1/100 of 1%, with 5/1,000 of 1% rounded upward, on the
basis of a year of 365 or 366 days, as applicable, and applied on a daily basis,
as otherwise announced by the U.S. Department of the Treasury. If the results of
the auction of treasury bills having the applicable index maturity are not
published or reported as provided above by 3:00 p.m., New York City time, on the
calculation date, or if no auction is held on the record date, then the treasury
rate will be a yield to maturity, expressed as a bond equivalent on the basis of
a year of 365 or 366 days, as applicable, and applied on a
26
daily basis, of the arithmetic mean of the secondary market bid rates, as of
approximately 3:30 p.m., New York City time, on the record date, of three
leading primary U.S. government securities dealers for the issue of Treasury
bills with a remaining maturity closest to the applicable index maturity. Those
dealers will be selected by the calculation agent after consultation with the
depositor. However, if the dealers that the calculation agent selects are not
quoting those rates, the distribution rate for the period commencing on the
distribution reset date following the record date will be the distribution rate
borne by the treasury rate certificates on the record date. If the treasury rate
must be calculated then that calculation will be performed by the calculation
agent.
Principal of the Trust Certificates
Each trust certificate, other than some classes of strip certificates, will
have a "certificate principal balance," which, at any time, will equal the
maximum amount that the holder of the certificate will be entitled to receive in
respect of principal out of the future cash flows on the underlying securities
and any other assets deposited in the trust. The applicable prospectus
supplement will include a section entitled "Description of the Trust
Certificates--Collections and Distributions," which will describe the priority
of distributions on each class of trust certificates in a particular series. The
outstanding certificate principal balance of a trust certificate will be reduced
to the extent of distributions of principal on the certificate. In addition, if
applicable pursuant to the terms of the related series, the outstanding
certificate principal balance will be reduced by the amount of any realized
losses, which are the net losses realized on any underlying securities or other
assets deposited in the trust that are allocated to the certificates. The
applicable prospectus supplement will specify the initial aggregate certificate
principal balance of a series.
Optional Exchange
The applicable prospectus supplement may provide that any of the depositor,
Merrill Lynch, the trustee or their respective affiliates and designees, or any
other person identified in the prospectus supplement, may have an "optional
exchange right." A person with an optional exchange right may, when permitted by
the terms described in the prospectus supplement, exchange trust certificates of
any particular series for a pro rata portion of the underlying securities and
any other assets deposited in the related trust.
The prospectus supplement will specify the terms upon which an optional
exchange right may be exercised; provided that:
(1) any optional exchange right shall be exercisable only to the extent
that the exercise of that right:
(A) would not affect the trust's ability to be exempt under Rule 3a-7
under the Investment Company Act of 1940, as amended, and all
applicable rules, regulations and interpretations under the act;
and
(B) would not affect the characterization of the trust as a "grantor
trust" under the Internal Revenue Code;
(2) any optional exchange right shall be exercisable only to the extent
that the exercise of that right would not result in an
under-collateralization of the related trust; and
(3) if the assets deposited in the trust constitute a pool of underlying
securities then an optional exchange right can not result in the
exercising party receiving a disproportionate amount of any underlying
securities in that pool. Any exercise of the optional exchange right
will be effected so that, with respect to each series or issue of
underlying securities included in that pool, the proportion that the
principal amount of that series or issue of underlying securities
bears to the aggregate principal amount of trust certificates
immediately before the exercise will be equal to the proportion that
the principal amount of the series or issue of underlying securities
bears to the aggregate principal amount of trust certificates
immediately after the exercise. Any related assets that credit enhance
or otherwise support a series or issue of underlying securities will
be distributed in the same proportions as the related underlying
securities.
The exercise of an optional exchange right will decrease the aggregate
amount of trust certificates of the applicable exchangeable series outstanding.
For more details, see "Risk Factors--The exercise of an optional
27
exchange right may decrease the amount of outstanding trust certificates." While
the exercise of an optional exchange will decrease the aggregate amount of trust
certificates of the applicable exchangeable series outstanding, the availability
of the optional exchange right may increase liquidity for the
certificateholders. The ability to exchange trust certificates for underlying
securities enables holders of optional exchange rights to sell underlying
securities, which may be part of a more liquid issue than the trust
certificates, at a better price for the holder than the sale of any such less
liquid trust certificates.
The trustee will provide certificateholders with semi-annual reports
describing, among other things, the aggregate principal amount, or notional
amount, if applicable, of the underlying securities remaining in the related
trust. See "Description of the Trust Agreement--Reports to Certificateholders;
Notices" for more details.
Any series with certificates that may be exchanged pursuant to an optional
exchange right is referred to as an "exchangeable series."
Default and Remedies
If there is a payment default on or acceleration of the underlying
securities or if an underlying securities issuer of concentrated underlying
securities ceases to file Exchange Act reports, then:
(A) the trustee will sell all of the underlying securities and a pro
rata portion of the related assets and distribute the proceeds
from that sale to the certificateholders in accordance with the
allocation ratio described below; or
(B) the trustee will distribute the underlying securities and a pro
rata portion of the related assets in kind to the
certificateholders in accordance with that allocation ratio.
In each of those circumstances, the related prospectus supplement will specify
whether (A) or (B) above will occur or whether and how the trust
certificateholders will be given the opportunity to vote on which of (A) or (B)
will occur. The certificateholders of the relevant series may experience a loss
on any sale described in (A) above if the sale price is less than the purchase
price for the underlying securities. The prospectus supplement will set forth
the choice of remedies for a particular series, and the trustee, the depositor
and certificateholders will have no discretion in this respect.
The "allocation ratio" referred to above is the allocation between classes
of a given series of the total expected cash flows from the underlying
securities and any other assets deposited in the trust of that series. The
prospectus supplement for any series with more than one class will set forth the
allocation ratio for that series. In addition to default or acceleration on
underlying securities, the allocation ratio relates to voting rights held by
owners of underlying securities because those voting rights will be allocated
among certificate holders of different classes of a particular series in
accordance with their economic interests. Further, the allocation ratio applies
in the event of a sale or distribution of underlying securities once an issuer
of concentrated underlying securities ceases to file periodic reports under the
Exchange Act, as discussed below under "Description of Underlying Securities and
Other Assets Deposited in the Trust--Principal Terms of Underlying Securities."
Call Right
The trust certificates or the underlying securities may be subject to a
"call right." A call right may initially be held by the depositor or an
affiliate of the depositor. Also, if so specified in the relevant prospectus
supplement, the depositor or an affiliate of the depositor may have the ability
to transfer the call right.
A call right on trust certificates is the right to purchase all or some of
the trust certificates of a particular series or class from the holders of those
certificates. A call right on underlying securities is the right to purchase all
or some of the underlying securities of a given series from the trust.
The likelihood that a party will exercise its call right increases as
interest rates generally prevailing in the market for debt securities fall
relative to those in effect on the dates on which, or periods during which, the
series of trust certificates may be issued. Any reduction in interest rates
would increase the value of the underlying securities, making the exercise of a
call right more likely. If one or more specified persons hold a call right with
respect to a particular series of certificates, the applicable prospectus
supplement will designate that series as a "callable series."
The terms upon which the persons or entities specified above may exercise a
call right will be described in the applicable prospectus supplement. Those
terms may include the following:
28
o the initial holder of the call right;
o whether the trust certificate principal balance or notional amount of
each trust certificate being purchased pursuant to the call right must
be an authorized denomination;
o the call date or dates; and
o the call price.
After receiving notice of the exercise of a call right, the trustee will
disseminate that notice as specified in the trust agreement. Upon the
satisfaction of any applicable conditions to the exercise of a call right, each
certificateholder will be entitled to receive payment of a pro rata share of the
call price paid in connection with that exercise. In the case of a purchase of
less than all of the trust certificates, only certificateholders from whom trust
certificates are called will be entitled to receive payment of a pro rata share
of the call price. In addition, in conjunction with the exercise of a call on
underlying securities in respect of all or a portion of the underlying
securities, the trust certificates will be redeemed in whole or in part, pro
rata or in accordance with the allocation ratio, as applicable and as specified
in the related prospectus supplement.
Put Right
Some or all of the underlying securities deposited in a trust may give the
holders of those underlying securities a put option. A put option permits the
holders of underlying securities to require the underlying securities issuer to
repurchase or otherwise repay the underlying securities on or after a fixed
date.
If underlying securities for a particular series of certificates are
subject to a put option, the trustee for that series of trust certificates will,
if the criteria specified in the applicable prospectus supplement are met,
exercise the put option on the "put date." The "put date" is the first date that
the option is available to be exercised. If the trustee exercises the put
option, the trustee will tender the underlying securities to the underlying
securities issuer on the put date in exchange for repurchase or repayment
proceeds. The proceeds received by the trust from the exercise of the put option
will be distributed as described in the applicable prospectus supplement.
Holders of callable trust certificates should note that if the holder of a call
right has exercised that right before the put date then any holders of trust
certificates that are called prior to the put date will not receive put
proceeds. Instead, those persons will receive a pro rata share of the call
proceeds as described above under "--Call Right".
The depositor will not issue a series of trust certificates with underlying
securities that are subject to a put option if doing so would either (1) cause
the trust or the depositor to fail to satisfy the applicable requirements for
exemption under Rule 3a-7 under the Investment Company Act of 1940, as amended,
or (2) affect the characterization of the trust as a "grantor trust" under the
Internal Revenue Code.
Global Securities
Unless otherwise specified in the applicable prospectus supplement, all
trust certificates of a given series will, upon issuance, be represented by one
or more global securities that will be deposited with, or on behalf of, DTC, and
registered in the name of Cede, as nominee of DTC. Unless and until a global
security is exchanged in whole or in part for definitive certificates, which are
the individual trust certificates that the global security represents, a global
security may not be transferred except:
o as a whole by the depositary for that global security to a nominee of
that depositary; or
o by a nominee of that depositary to the depositary or another nominee
of the depositary; or
o by that depositary or any nominee of the depositary to a successor of
the depositary or a nominee of the successor.
DTC has advised the depositor as follows:
o DTC is a limited-purpose trust company organized under the laws of the
State of New York;
29
o DTC is a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act;
o DTC was created to hold securities of the institutions that have
accounts with DTC and to facilitate the clearance and settlement of
securities transactions among those institutions in those securities
through electronic computerized book-entry changes in accounts of the
participating institutions, thereby eliminating the need for physical
movement of trust certificates; and
o DTC's participating institutions include securities brokers and
dealers, including Merrill Lynch, banks, trust companies, clearing
corporations and other organizations, some of which, and/or their
representatives, own DTC. Access to the DTC system is also available
to others, such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with
a participating institution, either directly or indirectly. DTC has
confirmed to the depositor that it intends to follow these procedures.
Upon the issuance of a global security, the depositary for the global
security will credit, on its book-entry registration and transfer system, the
respective principal amounts of the individual trust certificates that the
global security represents to the accounts of its participating institutions.
The underwriters of the trust certificates will designate the accounts to be
credited, or, if the trust certificates are offered and sold directly through
one or more agents, the depositor or its agent or agents will designate the
accounts to be credited. Only institutions that have accounts with the
depositary or persons or entities that may hold beneficial interests through
these institutions can own beneficial interests in a global security. Ownership
of beneficial interests in a global security will be shown on, and the transfer
of that ownership will be effected only through, records maintained by the
depositary for that global security or by institutions that have accounts with
the depositary or persons or entities that hold securities through these
institutions. The laws of some states require that some purchasers of securities
take physical delivery of those securities. Those limits and laws may limit the
market for beneficial interests in a global security.
So long as the depositary for a global security, or its nominee, is the
owner of the global security, the depositary or the nominee, as the case may be,
will be considered the sole certificateholder of the individual trust
certificates that the global security represents for all purposes under the
trust agreement and the related series supplement governing the trust
certificates. Except as set forth below, owners of beneficial interests in a
global security will not be entitled to have the individual trust certificates
that the global security represents registered in their names, will not receive
or be entitled to receive physical delivery of any of those trust certificates
and will not be considered the certificateholders under the trust agreement and
the related series supplement governing the trust certificates. Because the
depositary can act only on behalf of the institutions that have accounts with
it, the ability of a holder of any trust certificate to pledge that trust
certificate to persons or entities that do not participate in the depositary's
system, or to otherwise act with respect to that trust certificate, may be
limited due to the lack of a physical trust certificate.
Payments of principal of and premium, if any, and any distributions on
individual trust certificates represented by a global security will be made to
the depositary or its nominee, as the case may be, as the certificateholder of
the global security. None of the depositor, the trustee or securities
intermediary for the trust certificates, any paying agent or the trust
certificate registrar for the trust certificates will have responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial interests in the global security or for maintaining, supervising
or reviewing any records relating to the beneficial interests.
The depositor expects that the depositary for trust certificates of a
particular series, upon receipt of any payment of principal, premium or
distributions in respect of a definitive global security representing any of the
trust certificates, will immediately credit participating institutions' accounts
with payments in amounts proportionate to their respective beneficial interests
in the principal amount of the global security as shown on the records of the
depositary. The depositary also expects that payments by institutions that have
accounts with it to owners of beneficial interests in the global security held
through those institutions will be registered in "street name" and will be the
responsibility of those institutions.
If the depositary for trust certificates of a given series is at any time
unwilling or unable to continue as depositary and the depositor does not appoint
a successor depositary within 90 days, the depositor will issue individual
definitive trust certificates in exchange for the global security or securities
representing those trust certificates. In addition, the depositor may at any
time and in its sole discretion determine not to have any trust certificates of
a particular series represented by one or more global securities and, in that
event, will issue definitive certificates of the series in exchange for the
global security or securities representing the trust certificates. Further,
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if the depositor so specifies with respect to the trust certificates of a
particular series, an owner of a beneficial interest in a global security
representing trust certificates of that series may, on terms acceptable to the
depositor and the depositary for the global security, receive individual
definitive trust certificates in exchange for the beneficial interest. In that
case, an owner of a beneficial interest in a global security will be entitled to
physical delivery of individual definitive trust certificates of the series that
the global security represents equal in principal amount to the beneficial
interest and to have the definitive trust certificates registered in its name.
The applicable prospectus supplement will set forth any specific terms of
the depositary arrangement with respect to any series of trust certificates
being offered to the extent not set forth or different from the description
above.
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DESCRIPTION OF THE TRUST AGREEMENT
General. The following summary of material provisions of the trust
agreement does not purport to be complete and is qualified in its entirety by
reference to the detailed provisions of the form of trust agreement filed as an
exhibit to the registration statement we previously filed on Form S-3
(Registration No. 333-29015). Wherever references to particular sections or
defined terms of the trust agreement appear in this prospectus, those sections
or defined terms are incorporated in this prospectus by reference as part of the
statement made and the statement is qualified in its entirety by such reference.
Assignment of Underlying Securities and Any Other Assets Deposited in the Trust
At the time any series of trust certificates is issued, the depositor will
cause the underlying securities and any other deposited assets specified in the
prospectus supplement to be assigned and delivered to the trustee for deposit in
the related trust, together with all principal, premium, if any, and interest
received by or on behalf of the depositor on or with respect to those underlying
securities and other assets deposited in the trust after the cut-off date
specified in the prospectus supplement, other than principal, premium, if any,
and interest due on or before the cut-off date and other than any retained
interest. Concurrently with that assignment, the depositor will execute, and the
trustee will authenticate and deliver, trust certificates to the depositor in
exchange for the underlying securities and any other assets deposited in the
trust. Each underlying security and other asset deposited in the trust will be
identified in a schedule to the applicable series supplement to the trust
agreement. The schedule will include summary identifying information with
respect to each underlying security and other deposited asset as of the cut-off
date. The schedule will include, to the extent applicable, information regarding
the payment terms, any retained interest, the maturity or term, any rating, and
any other material information with respect to any concentrated underlying
securities.
In addition, the depositor will, with respect to each underlying security
and other deposited asset, deliver or cause to be delivered to the trustee, or
to the custodian, all documents necessary to transfer to the trustee ownership
of the underlying securities and any other assets deposited in the trust. The
trustee or the custodian will hold those documents in trust for the benefit of
the certificateholders.
The depositor will make some representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
trust agreement and the related series supplement. Upon a breach of any
representation of the depositor that materially and adversely affects the
interests of the certificateholders, the depositor will be obligated to cure the
breach in all material respects.
Collection and Other Administrative Procedures
General. With respect to any series of trust certificates, the trustee or
any other person specified in the prospectus supplement, directly or through
administrative agents, will establish and maintain specific accounts for the
benefit of the holders of the relevant trust certificates and will deposit into
those accounts all amounts that it receives in respect of the underlying
securities and any other assets deposited in the trust. The trustee on behalf of
the trust may direct any depository institution maintaining those accounts to
invest the funds in the accounts in one or more "eligible investments," as
defined in the trust agreement, bearing interest or sold at a discount. Any
earnings with respect to those investments will be paid to, and any losses with
respect to the investments will be solely for the account of, the
certificateholders and, if applicable, the holder of the retained interest, in
accordance with the allocation ratio. Further, the trustee or any other person
specified in the prospectus supplement will make reasonable efforts to collect
all scheduled payments under the underlying securities and any other assets
deposited in the trust, and will follow or cause to be followed those collection
procedures, if any, that it would follow with respect to comparable financial
assets that it held for its own account; provided that those procedures are
consistent with the trust agreement and the related series supplement and any
related instrument governing any credit support, and provided further that,
except as otherwise expressly set forth in the applicable prospectus supplement,
the trustee shall not be required to expend or risk its own funds or otherwise
incur personal financial liability.
Realization upon Defaulted Deposited Assets. The trustee, as administrator
with respect to the underlying securities and any other assets deposited in the
trust, on behalf of the certificateholders of a given series, or any class or
classes within the series, will present claims under each applicable credit
support instrument and will take any reasonable steps necessary to receive
payment or to permit recovery under that instrument with respect to defaulted
underlying securities or other assets deposited in the trust. As described
above, all collections by or on behalf of the trustee under any credit support
instrument are to be deposited in the certificate account for the related trust,
subject to withdrawal as described above.
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The trustee will be obligated to follow, or cause to be followed, those
normal practices and procedures it deems necessary or advisable to realize upon
any defaulted underlying securities or other assets deposited in the trust. The
trustee will be required to expend or risk its own funds or otherwise incur
financial liability if and only to the extent specified in the applicable
prospectus supplement. If the proceeds of any liquidation of the defaulted
assets are less than the sum of:
(A) the outstanding principal balance of the assets;
(B) interest accrued but unpaid on those assets at the applicable
interest rate; and
(C) the aggregate amount of expenses incurred by the trustee in
connection with those proceedings to the extent reimbursable from
the assets of the trust under the trust agreement and the related
series supplement,
then the trust for the applicable series will realize a loss in the amount of
the difference. The trustee will be entitled to withdraw or cause to be
withdrawn from the related certificate account out of the net proceeds recovered
on any defaulted assets, as provided in the applicable prospectus supplement,
amounts representing:
o its normal administrative compensation on the underlying securities
and any other assets deposited in the trust;
o unreimbursed administrative expenses incurred with respect to those
assets; and
o any unreimbursed advances of delinquent payments made with respect to
those assets.
Those withdrawals will occur to the extent provided in the applicable prospectus
supplement before the distribution of those proceeds to certificateholders.
Retained Interest
The prospectus supplement for a series of trust certificates will specify
whether there will be any retained interest in the underlying securities and any
other assets deposited in the trust, and, if so, will identify the owner of any
retained interest. If so specified, the retained interest will be established on
an asset-by-asset basis and will be set forth in an exhibit to the applicable
series supplement. A retained interest in underlying securities and any other
assets deposited in the trust represents a specified ownership interest in those
assets and a right to a portion of the payments thereon. Payments in respect of
the retained interest will be deducted from payments on the underlying
securities and any other assets deposited in the trust as received and, in
general, will not be deposited in the applicable certificate account or become a
part of the related trust. After the trustee deducts all applicable fees, as
provided in the trust agreement and the related series supplement, from any
partial recovery on an underlying security, the trustee will allocate any
partial recovery between the holder of the retained interest, if any, and the
certificateholders of the applicable series.
Advances in Respect of Delinquencies
Unless otherwise specified in the applicable prospectus supplement, the
trustee will have no obligation to make any advances with respect to collections
on the underlying securities and any other assets deposited in the trust or in
favor of the certificateholders of the related series of trust certificates.
However, to the extent provided in the applicable prospectus supplement, the
trustee will advance on or before each distribution date its own funds or funds
held in the certificate account for that series that are not part of the funds
available for distribution for that distribution date, in an amount equal to the
aggregate of payments of principal, premium, if any, and interest, net of
related fees and any retained interest, with respect to the underlying
securities and any other assets deposited in the trust that were due during the
related collection period and were delinquent on the related record date,
subject to (1) the trustee's good faith determination that those advances will
be reimbursable from related proceeds, as described below, and (2) other
conditions as may be specified in the prospectus supplement.
Advances are intended to maintain a regular flow of scheduled principal,
premium, if any, and interest payments to holders of the class or classes of
certificates entitled to those payments, rather than to guarantee or insure
against losses. Unless otherwise provided in the applicable prospectus
supplement, advances of the trustee's funds, if any, will be reimbursable only
out of "related proceeds," which are related recoveries on the underlying
securities and any other assets deposited in the trust and amounts received
under any form of credit support for the
33
series with respect to which the advances were made. However, any advance will
be reimbursable from any amounts in the certificate accounts for the series to
the extent that the trustee shall determine, in its sole judgment, that the
advance is not ultimately recoverable from related proceeds. If the trustee has
made advances from excess funds in the certificate account for any series, the
trustee will replace the funds in that certificate account on any future
distribution date to the extent that funds in that certificate account on the
distribution date are less than payments required to be made to
certificateholders on that date. If specified in the applicable prospectus
supplement, the obligations, if any, of the trustee to make advances may be
secured by a cash advance reserve fund or a surety bond. If applicable, the
applicable prospectus supplement will contain information regarding the
characteristics of, and the identity of any obligor on, any surety bond.
Matters Regarding the Trustee, the Administrative Agent, and the Depositor
The trustee may enter into administration agreements with one or more
administrative agents to delegate some of its administrative obligations with
respect to a related series of certificates under the trust agreement and the
related series supplement; provided, however, that:
(A) the delegation shall not release the trustee from the duties,
obligations, responsibilities or liabilities arising under the
trust agreement and the related series supplement;
(B) the administration agreement shall not affect the rating of any
class of trust certificates of the series;
(C) the agreements are consistent with the terms of the trust
agreement and the related series supplement;
(D) the trustee will remain solely liable for all fees and expenses
it may owe to the administrative agent;
(E) the administrative agent shall give representations and
warranties in the administration agreement that are the same in
substance as those required of the trustee; and
(F) the administrative agent shall meet the eligibility requirements
of the trustee pursuant to the trust agreement and the related
series supplement.
Any administrative agent for each series of trust certificates under the trust
agreement and the related series supplement will be named in the applicable
prospectus supplement. The entity serving as administrative agent for any series
may be the trustee, the securities intermediary, the depositor, an affiliate of
any of the foregoing or any third party and may have other business
relationships with the trustee, the securities intermediary, the depositor or
their respective affiliates. The applicable prospectus supplement will specify
the administrative agent's compensation, if any, and the source, manner and
priority of payment of that compensation, with respect to a given series of
trust certificates.
The trust agreement and the related series supplement will provide that an
administrative agent may resign from its obligations and duties under the trust
agreement and the related series supplement with respect to any series of trust
certificates only if:
o the resignation, and the appointment of a successor, will not result
in a rating withdrawal or downgrading of any class of trust
certificates of that series; or
o it is determined that the duties of the administrative agent under the
trust agreement and the related series supplement with respect to that
series are no longer permissible under applicable law.
No resignation will become effective until the trustee or a successor has
assumed the administrative agent's obligations and duties under the trust
agreement and the related series supplement.
The trust agreement and the related series supplement will further provide
that none of the administrative agent, the depositor, the trustee, or any
director, officer, employee or agent of the trustee, the administrative agent or
the depositor will incur any liability to the related trust or
certificateholders for any action taken, or for refraining from taking any
action, in good faith pursuant to the trust agreement and the related series
supplement or for errors
34
in judgment. However, none of the depositor or any director, officer, employee
or agent will be protected against any liability that would otherwise be imposed
by reason of:
o willful misfeasance;
o bad faith or gross negligence in the performance of duties; or
o reckless disregard of obligations and duties.
The trust agreement and the related series supplement will further provide
that the trustee, any administrative agent, the depositor and any director,
officer, employee or agent for any of them will be entitled to indemnification
by the related trust and will be held harmless against any loss, liability or
expense incurred in connection with any legal action relating to the trust
agreement and the related series supplement. However, those persons will not be
indemnified for any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties under
the trust agreement and the related series supplement or by reason of reckless
disregard of obligations and duties thereunder. In addition, the trust agreement
and the related series supplement to the trust agreement will provide that the
trustee, any administrative agent, and the depositor are under no obligation to
appear in, prosecute or defend any legal action which is not incidental to their
respective responsibilities under the trust agreement and the related series
supplement to the trust agreement or which in their respective opinions may
involve them in any expense or liability. Each of the trustee, any
administrative agent, and the depositor may, however, in its discretion
undertake any action which it may deem necessary or desirable with respect to
the trust agreement and the related series supplement to the trust agreement and
the rights and duties of the parties and the interests of the certificateholders
under the trust agreement and the related series supplement to the trust
agreement. The applicable prospectus supplement will describe how legal expenses
and costs of any action and any liability resulting from that action will be
allocated.
Neither the trustee, the depositor, nor any administrative agent shall have
any obligations with respect to the underlying securities. The depositor is not
authorized to proceed against the underlying securities issuer in the event of a
default. Except as expressly provided in the trust agreement and the related
series supplement to the trust agreement, the trustee is not authorized to
proceed against the underlying securities issuer or to assert the rights and
privileges of certificateholders.
Any person into which the trustee, the depositor, or an administrative
agent may be merged or consolidated, or any person resulting from any merger of
consolidation to which the trustee, the depositor, or an administrative agent is
a part, or any person succeeding to the business of the trustee, the depositor,
or an administrative agent, will be the successor of the trustee, the depositor,
or that administrative agent under the trust agreement and the related series
supplement with respect to the trust certificates of a series.
Administrative Agent Termination Events; Rights Upon Administrative Agent
Termination Event
"Administrative agent termination events" under the trust agreement and the
related series supplement to the trust agreement relating to any given series of
trust certificates will consist of the following:
o any failure by an administrative agent to remit to the trustee any
funds in respect of collections on the underlying securities and other
assets deposited in the trust and credit support, if any, as required
under the trust agreement and the related series supplement to the
trust agreement, that continues unremedied for five days after:
(1) the trustee or the depositor gives written notice of the failure
to the administrative agent; or
(2) the holders of the trust certificates evidencing not less than
25% of the voting rights give written notice of the failure to
the administrative agent, the depositor and the trustee;
o any failure by an administrative agent duly to observe or perform in
any material respect any of its other covenants or obligations under
its agreement with the trustee with respect to the series, that
continues unremedied for 30 days after:
35
(1) the trustee or the depositor gives written notice of the failure
to the administrative agent; or
(2) the holders of the trust certificates evidencing not less than
25% of the voting rights give written notice of the failure to
the administrative agent, the depositor and the trustee; and
o events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and actions by or on behalf of an
administrative agent indicating its insolvency or inability to pay its
obligations.
The applicable prospectus supplement will set forth any additional
administrative agent termination events. In addition, the applicable prospectus
supplement and the related trust agreement series supplement will specify, as to
each matter requiring the vote of holders of trust certificates of a class or
group of classes within a given series, the circumstances and manner in which
the required percentage applicable to each matter is calculated. "Required
percentage" means, with respect to any matter requiring a vote of holders of
trust certificates of a given series, the specified percentage of the aggregate
voting rights of the trust certificates of the series applicable to the matter.
"Voting rights" are the portion of the aggregate voting rights of underlying
securities allocated to certificateholders of each class within a given series
and to the holder of the retained interest in direct proportion to the
allocation ratio, as described in the applicable prospectus supplement.
When an administrative agent termination event occurs, the trustee may
terminate the relevant administration agreement and the rights and obligations
of the administrative agent under any administration agreement in accordance
with its terms and conditions. In the event of a termination of the
administration agreement, the trustee shall simultaneously:
o reassume direct responsibility for all obligations it delegated in the
administration agreement without any act or deed on the part of the
applicable administrative agent; and
o administer directly the related underlying securities or enter into an
administration agreement with a successor administrative agent that
complies with the requirements set forth above.
If the trustee is unwilling or unable to act, it may appoint, or petition a
court of competent jurisdiction to appoint, an administrative agent that
complies with the requirements set forth above. Pending the appointment of the
administrative agent, the trustee must act as administrative agent, except if
the trustee is prohibited by law from obligating itself to make advances
regarding delinquent underlying securities and other assets deposited in the
trust.
Trustee Compensation and Payment of Expenses
With respect to a given series of trust certificates, the applicable
prospectus supplement will specify the trustee's compensation, and the source,
manner and priority of payment. The applicable series supplement may provide
that the depositor will pay some prepaid ordinary expenses of the trustee, as
follows:
o If the prepaid ordinary expenses set forth in the series supplement
are greater than zero, the trustee will be deemed to agree that the
payment of that amount constitutes full and final satisfaction of and
payment for all ordinary expenses.
o If the prepaid ordinary expenses set forth in the series supplement
are zero, the series supplement may indicate that the trust will pay
ordinary expenses. In that case, the trustee will be paid on a
periodic basis by the trust or from the retained interest at the rate
or amount and on the terms provided for in the series supplement.
The trustee has agreed, pursuant to the trust agreement and the related
series supplement, that its right to receive those payments from the trust will
constitute full and final satisfaction of and payment for all ordinary expenses
and that the trustee will have no claim on payment of ordinary expenses from any
other source, including the depositor.
Alternatively, if the prepaid ordinary expenses set forth in the series
supplement are zero, the series supplement may provide that the depositor will
periodically pay to the trustee a fee for its services and expenses as trustee.
In that case, the timing and method of payment will be set forth in the series
supplement. The trustee will
36
agree, pursuant to the trust agreement and the related series supplement, that
its right to receive those payments from the depositor will constitute full and
final satisfaction of and payment for all ordinary expenses and that the trustee
will have no claim for payment of ordinary expenses from the trust. The trustee
has further agreed that, notwithstanding any failure by the depositor to make
those periodic payments of ordinary expenses, the trustee will continue to
perform its obligations under the trust agreement and the related series
supplement. Any obligation on the depositor to pay ordinary expenses will be
extinguished and of no further effect upon the payment of ordinary expenses due
and owing on the termination of the trust pursuant to the terms of the trust
agreement and the related series supplement.
Subject to the terms of the trust agreement and the related series
supplement, all extraordinary expenses, to the extent not paid by a third party,
are obligations of the trust, and when due and payable will be satisfied solely
by the trust. "Extraordinary expenses" are any and all costs, expenses or
liabilities arising out of the establishment, existence or administration of the
trust, other than:
(A) ordinary expenses; and
(B) costs and expenses payable by a particular trust
certificateholder, the trustee or the depositor pursuant to the
trust agreement and the related series supplement.
The series supplement will define "ordinary expenses." Ordinary expenses
generally consist of the trustee's ordinary expenses and overhead in connection
with its services as trustee, including:
o the costs and expenses of preparing, sending and receiving all
reports, statements, notices, returns, filings, solicitations of
consent or instructions, or other communications required by the trust
agreement and the related series supplement;
o the costs and expenses of holding and making ordinary collection or
payments on the assets of the trust and of determining and making
payments of principal or distributions;
o the costs and expenses of the trust's or trustee's counsel,
accountants and other experts for ordinary or routine consultation or
advice in connection with the establishment, administration and
termination of the trust; and
o any other costs and expenses that are or reasonably should have been
expected to be incurred in the ordinary course of administration of
the trust.
If specified in the applicable series supplement, the trustee, in addition to
amounts payable to any administrative agent, will pay from its compensation any
expenses incurred in connection with its administration of the underlying
securities and other assets deposited in the trust to the extent specified,
including, without limitation, payment of:
o the fees and disbursements of the trustee, if applicable, and
independent accountants;
o expenses incurred in connection with distributions and reports to
certificateholders; and
o any other expenses described in the applicable prospectus supplement.
The trustee will not take any action, including appearing in, instituting
or conducting any action or suit under the trust agreement and the related
series supplement to the trust agreement or in relation to the trust agreement
and related series supplement which:
o is not indemnifiable under the trust agreement and the related series
supplement to the trust agreement;
o in the trustee's opinion, would or might cause it to incur costs,
expenses or liabilities that are extraordinary expenses unless:
(A) the trustee is satisfied that it will have adequate security
or indemnity in respect of the costs, expenses and
liabilities,
(B) the trustee has been instructed by the certificateholders
representing not less than the required percentage-remedies
to do so, and
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(C) the certificateholders, pursuant to the instructions given
under clause (B) above, have agreed that the costs, expenses
or liabilities will either be:
o paid by the trustee from the trust, in the case of a
vote of 100% of the aggregate principal amount of trust
certificates then outstanding; or
o paid by the trustee.
The payment will be made out of the trustee's own funds and not from monies
on deposit in the trust, in which case the trustee will be entitled to receive,
upon demand, reimbursement from those certificateholders who have agreed to bear
the entire amount of those costs, expenses or liabilities on a pro rata basis
among those certificateholders.
Optional Exchange
The terms and conditions, if any, upon which trust certificates of any
series may be exchanged for a pro rata portion of the underlying securities and
other assets deposited in the related trust will be specified in the related
trust agreement and the related series supplement. However, the optional
exchange right will be exercisable only to the extent that the depositor
provides, upon the trustee's request, an opinion of counsel that (1) the
exchange would not be inconsistent with continued satisfaction of the applicable
requirements under the Investment Company Act of 1940, as amended, and (2) the
exchange would not affect the characterization of the trust as a "grantor trust"
under the Internal Revenue Code. In addition, no trust certificate may be
exchanged unless the trustee has received at least 30 days' but not more than 45
days' notice before an optional exchange date, unless otherwise specified in the
related series supplement.
Any tender of a trust certificate by a holder for exchange will be
irrevocable. Unless otherwise provided in the applicable series supplement, the
optional exchange right may be exercised by the holder of a trust certificate
for less than the aggregate principal amount of the trust certificate as long as
the aggregate principal amount outstanding after the exchange is a multiple of
the minimum denomination of the trust certificate and all other exchange
requirements set forth in the related series supplement are satisfied. Upon that
partial exchange, the trust certificate will be canceled and a new trust
certificate or trust certificates for the remaining principal amount of the
trust certificate will be issued. The new trust certificate, in the case of any
trust certificate issued in registered form, will be in the name of the holder
of the exchanged trust certificate.
Voting Rights with Respect to Underlying Securities
The trustee will, within five business days after receiving notice of any
meeting of holders of any of the underlying securities or other occasion for the
exercise of voting rights or the giving of consents by those holders, give
notice to the certificateholders, setting forth:
(A) the information contained in the notice to holders of the
related underlying securities;
(B) a statement that the certificateholders will be entitled,
subject to any applicable provisions of law and any
applicable provisions of the underlying securities, to
instruct the trustee as to the exercise of voting rights, if
any, pertaining to the underlying securities; and
(C) a statement as to the manner in which instructions may be
given to the trustee to give a discretionary proxy to a
person designated in the notice received by the trustee. The
trustee will give the notice to the certificateholders of
record on the relevant record date.
The trustee will endeavor to vote in accordance with any nondiscretionary
instruction set forth in any written requests received from certificateholders.
Those written requests must be received on or before the date established by the
trustee for that purpose. However, the trustee will only act as practicable and
permitted under any applicable provision of law and any applicable provision
contained in or governing the underlying securities. The trustee will not vote
except as specifically authorized and directed in written instructions from the
applicable certificateholder entitled to give those instructions. If, however,
the trustee determines, using advice furnished by nationally recognized
independent tax counsel, whether at the request of any certificateholder or
otherwise, that the exercise of voting rights with respect to any underlying
securities could result in a "sale or other disposition" of those underlying
securities within the meaning of Section 1001(a) of the Internal Revenue Code of
1986, the trustee
38
will exercise the voting rights in a manner that would not result in any sale or
other disposition. The trustee will have no responsibility to make that
determination.
The certificateholder, by accepting delivery of a trust certificate,
whether upon original issuance or subsequent transfer, exchange or replacement
agrees that for so long as it owns the trust certificate it will not grant any
consent to:
(D) any conversion of the timing of payment of, or the method or
rate of accruing, interest on the underlying securities
underlying the trust certificates held; or
(E) any redemption or prepayment of the securities underlying
the trust certificates held.
The certificateholder's agreement is without regard to whether its ownership of
the trust certificates is beneficial or otherwise.
The trustee will not grant any consent, solicited from it as an owner of
the underlying securities underlying the trust certificates, with respect to the
matters under this section in, "--Voting Rights with Respect to Underlying
Securities." As well, the trustee will not accept or take any action in respect
of any consent, proxy or instructions received from any certificateholder in
contravention of the provisions of this section.
Limitations on Rights of Certificateholders
No certificateholder of a given series will have the right under the trust
agreement or the related series supplement to institute any proceeding with
respect to the trust certificates unless:
o the certificateholder previously gave the trustee written notice of a
continuing breach;
o certificateholders evidencing not less than the percentage of the
aggregate voting rights specified in the trust agreement have
requested in writing that the trustee institute the proceeding in its
own name as trustee;
o that certificateholder or those certificateholders have offered the
trustee reasonable indemnity;
o the trustee for 15 days has failed to institute that proceeding; and
o certificateholders evidencing not less than the percentage of the
aggregate voting rights specified in the related series supplement do
not give the trustee directions inconsistent with the written request
during that 15-day period.
The trustee, however, is under no obligation to:
(A) exercise any of the trusts or powers vested in it by the
trust agreement and the related series supplement; or
(B) make any investigation into the facts of matters arising
under the trust agreement and the related series supplement
or stated in any document believed by it to be genuine,
unless the certificateholders of the "required percentage" of trust
certificates, as defined in the trust agreement and the related series
supplement, request the trustee in writing to do so. In addition, the trustee is
under no obligation to institute, conduct or defend any litigation under or
related to the trust agreement or related series supplement at the request,
order or direction of any of certificateholders affected by those agreements
unless those certificateholders have offered to the trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred.
Modification and Waiver
Unless otherwise specified in the applicable prospectus supplement, the
trust agreement and the related series supplement may be amended from time to
time by the depositor and the trustee without notice to or the consent of any of
the certificateholders for any of the following purposes:
39
(A) to cure any ambiguity;
(B) to correct or supplement any provision of the trust
agreement or the related series supplement that may be
inconsistent with any other provision in those agreements or
in the prospectus supplement;
(C) to appoint a change in trustee for a series of trust
certificates after the closing date for that series, as
described in the related prospectus supplement;
(D) to provide for the administration of separate trusts by more
than one trustee;
(E) to provide for a successor trustee with respect to trust
certificates of one or more series;
(F) to provide for the issuance of a new series of trust
certificates pursuant to a prospectus supplement;
(G) to add or supplement any credit support for the benefit of
any certificateholders; however, if any addition affects any
series or class of certificateholders differently from any
other series or class of certificateholders, then that
addition cannot, as evidenced by an opinion of counsel, have
a material adverse effect on the interests of any affected
series or class of certificateholders;
(H) to add to the covenants, restrictions or obligations of the
depositor, the administrative agent or the trustee for the
benefit of the certificateholders;
(I) to comply with any requirements imposed by the Internal
Revenue Code; or
(J) to add, change or eliminate any other provisions with
respect to matters or questions arising under the trust
agreement and the related series supplement.
However, if any amendment is made, it must satisfy the condition that the
certificates be rated as investment grade by at least one rating agency and it
cannot cause any trust created by that document to fail to qualify as a fixed
investment trust or "grantor trust" under the Internal Revenue Code.
Additionally, unless otherwise specified in the applicable prospectus
supplement, the trust agreement and the related series supplement may also be
modified or amended from time to time by the depositor, the trustee and the
securities intermediary for the purpose of adding any provision to or changing
in any manner or eliminating any provision of the trust agreement and the
related series supplement or modifying in any manner the rights of
certificateholders. These amendments require the consent of all the
certificateholders materially adversely affected by the modification or
amendment. The percentage of aggregate voting rights required to give consent to
these amendments will be specified in the trust agreement and related series
supplement. However, if that modification or amendment would materially
adversely affect the rating of any series or class by each rating agency, the
required percentage specified in the related series supplement shall include an
additional specified percentage of the trust certificates of that series or
class. Also, no amendment will:
(A) reduce in any manner the amount of, or delay the timing of,
payments received on underlying securities and other assets
deposited in the trust which are required to be distributed
on any trust certificate without the consent of the holders
of that trust certificate; or
(B) reduce the percentage of aggregate voting rights required to
take any action specified in the trust agreement and the
related series supplement, without the consent of the
holders of all trust certificates of that series or class
then outstanding.
Unless otherwise specified in the applicable prospectus supplement, holders
of trust certificates evidencing not less than the required percentage to waive
the voting rights of a given series may, on behalf of all certificateholders of
that series:
40
(A) waive, insofar as that series is concerned, compliance by
the depositor or the trustee with some restrictive
provisions, if any, of the trust agreement and the related
series supplement before the time for compliance; and
(B) waive any past default under the trust agreement and the
related series supplement with respect to trust certificates
of that series, except a default in the failure to
distribute amounts received as principal of and premium, if
any, or any distributions on any trust certificate and
except a default in respect of a covenant or provision that
if modified or amended would require the consent of the
holder of each outstanding affected trust certificate.
Reports to Certificateholders; Notices
Reports to Certificateholders. The trustee will, with each distribution to
certificateholders of a series, forward or cause to be forwarded to each
certificateholder, to the depositor and to such other parties as may be
specified in the trust agreement and the related series supplement, a statement
setting forth:
(A) the amounts received by the trustee as of the last statement
in respect of principal, premium, if any, and interest on
the underlying securities and any amounts received by the
trustee with respect to any derivatives transaction entered
into by the trust pursuant to the terms of the trust
agreement and the related series supplement;
(B) any amounts payable by the trust as of the statement date
pursuant to any derivatives transaction the trust entered
pursuant to the terms of the trust agreement and the related
series supplement;
(C) the amount of compensation the administrative agent, if any,
and the trustee received for the period relating to that
distribution date, and other customary information the
administrative agent, if any, or otherwise the trustee deems
necessary or desirable, or that the certificateholders
reasonably request in writing to enable them to prepare tax
returns;
(D) the amount of the payment to certificateholders of each
class of the series on that distribution date allocable to
principal of and premium, if any, and distributions on the
trust certificates of each class, and the amount of
aggregate unpaid distributions accrued as of that
distribution date;
(E) in the case of floating rate certificates, the floating rate
applicable to those certificates on the distribution date,
as calculated in accordance with the method specified in the
trust certificates and the related trust agreement series
supplement;
(F) if the series supplement provides for advances, as defined
in the trust agreement and the related series supplement,
the aggregate amount of advances, if any, included in that
distribution, and the aggregate amount of nonreimbursed
advances, if any, at the close of business on that
distribution date;
(G) the aggregate stated principal amount and, if applicable,
the notional amount of the underlying securities related to
the series, their current interest rate or rates at the
close of business on that distribution date and, if the
rating has changed since the last distribution date, the
current rating assigned by the applicable rating agency;
(H) the aggregate principal amount, or notional amount, if
applicable, of each class of the series at the close of
business on the distribution date, separately identifying
any reduction in the aggregate principal amount, or notional
amount, due to the allocation of realized losses on that
distribution date or otherwise, as provided in the trust
agreement and the related series supplement;
(I) as to any series or class within the series for which credit
support has been obtained, the amount or notional amount of
coverage of each element of credit support and its rating,
if any, included as of the close of business on the
distribution date; and
41
(J) any other information appropriate for a series, as specified
in the applicable prospectus supplement.
The trustee will furnish within a reasonable period of time after the end
of each calendar year, to each person who at any time during the calendar year
was a certificateholder, a statement containing the information set forth in
clause (C) above, aggregated for the calendar year during which that person was
a certificateholder. That obligation of the trustee will be deemed to have been
satisfied to the extent that substantially comparable information is provided by
the trustee pursuant to any requirements of the Internal Revenue Code as are
from time to time in effect.
Notices. Any notice required to be given to a holder of a registered trust
certificate will be mailed to the last address of that holder set forth in the
applicable certificate register. Any notice mailed within the time period
prescribed in the trust agreement or series supplement shall be conclusively
presumed to have been duly given when mailed, whether or not the
certificateholder receives that notice.
Evidence as to Compliance
A firm of independent public accountants will, pursuant to the trust
agreement and the related series supplement and based on agreed-upon procedures
considered appropriate under the circumstances, furnish a statement to the
trustee to the effect that the firm:
o has examined certain documents and records relating to the
administration of the underlying securities and other assets deposited
in the trust during the related 12-month period or, in the case of the
first report, the period ending on or before the date specified in the
prospectus supplement, which date shall not be more than one year
after the related original issue date; and
o is of the opinion that the trustee's administration was conducted in
compliance with the terms of the trust agreement and the related
series supplement to the trust agreement.
That statement will first be furnished on a date specified in the trust
agreement and related series supplement and annually thereafter on or before a
specified date. The independent public accountants will not include items they
believe to be immaterial and will be subject to any other exceptions and
qualifications set forth in their report.
The trust agreement and the related series supplement will also provide for
delivery to the depositor, the administrative agent, if any, and the trustee on
behalf of the certificateholders, on or before a specified date in each year, of
an annual statement signed by two officers of the trustee to the effect that the
trustee has fulfilled its obligations under the trust agreement and the related
series supplement throughout the preceding year with respect to any series of
trust certificates.
Certificateholders can obtain copies of the annual accountants' statement,
if any, and the statement of officers of the trustee without charge upon written
request to either the administrative agent or the trustee, as applicable, at the
address set forth in the related prospectus supplement.
Replacement Certificates
If a mutilated trust certificate is surrendered at the corporate trust
office or agency of the trustee in the City or State of New York or the
depositor or the trustee receives satisfactory evidence that a trust certificate
has been lost, destroyed or stolen, the trustee may replace the certificate. The
holder must pay the expenses of replacement that the trustee may incur in
connection with the replacement. In addition, that holder must furnish any
security or indemnity that the trustee and the depositor may require to hold
each of them and any paying agent harmless. However, neither the depositor nor
the trustee will replace a trust certificate if it has received notice that the
trust certificate was acquired by a bona fide purchaser.
Termination
The obligations created by the trust agreement and the related series
supplement for each series of trust certificates will terminate upon the payment
to certificateholders of that series of all amounts held in the related
certificate account and required to be paid to them pursuant to the trust
agreement and the related series supplement to the trust agreement following
final payment or other liquidation of
42
o any remaining underlying securities and other assets deposited in the
trust,
o credit support subject to the trust agreement and related series
supplement, or
o the disposition of all property acquired upon foreclosure or
liquidation of any of the underlying securities and other assets
deposited in the trust or credit support.
In no event, however, will any trust created by the trust agreement and the
related series supplement continue beyond the date specified in the applicable
prospectus supplement, nor will the trust continue to exist if its existence
would result in a violation of the common-law rule against perpetuities. Written
notice of termination of the obligations with respect to the related series of
trust certificates under the trust agreement and the related series supplement
to the trust agreement will be provided as set forth above under "--Reports to
Certificateholders; Notices." The final distribution will be made only upon
surrender and cancellation of the trust certificates at an office or agency
appointed by the trustee specified in the notice of termination.
If the underlying securities and other assets deposited in the trust and
any credit support are sold or exchanged for other assets, that sale or exchange
shall be made at a price approximately equal to the aggregate fair market value
of all the assets in the trust, as determined by the trustee, the administrative
agent, if any, and, if different from both persons, the person entitled to
effect such sale or exchange. In each case above, any sale or exchange will take
into account accrued interest at the applicable interest rate to the first day
of the month following such purchase or, to the extent specified in the
applicable prospectus supplement, a specified price. A sale of all the deposited
assets will effect an early retirement of the trust certificates of that series,
but no sale will occur if the aggregate principal balance of the assets
deposited in the trust for such series at the time of purchase is less than the
percentage of the aggregate principal balance of the deposited assets at the
cut-off date for that series that may be sold, as set out in the prospectus
supplement and related series supplement.
Duties of the Trustee
The trustee makes no representations as to the validity or sufficiency of
the trust agreement and the related series supplement, the recitals contained in
either, the trust certificates of any series or any underlying securities or the
other assets deposited in the trust or any related document. The trustee is not
accountable for the use or application of any of the trust certificates or the
underlying securities and other assets deposited in the trust, or their proceeds
by the depositor. The trustee is required to perform only those duties
specifically required under the trust agreement and the related series
supplement with respect to each series of trust certificates. However, when the
trustee receives the various trust certificates, reports or other instruments
required to be furnished to it, the trustee is required to examine those
documents and determine whether they conform to the applicable requirements of
the trust agreement and the related series supplement.
The Trustee
The prospectus supplement will name the trustee for any given series of
trust certificates under the trust agreement and the related series supplement.
The commercial bank, national banking association or trust company serving as
trustee will be unaffiliated with, but may have banking relationships with or
provide financial services to, the depositor, any administrative agent and their
respective affiliates.
43
DESCRIPTION OF UNDERLYING SECURITIES
AND OTHER ASSETS DEPOSITED IN THE TRUST
General
Each series of trust certificates, or, if more than one class exists, each
class within that series, will represent in the aggregate the beneficial
ownership interest in an aggregate amount of principal of and premium, if any,
and interest on a designated, publicly issued security or pool of securities.
The underlying securities will consist of any of the following securities,
issued under the laws of either the United States, any U.S. state or any foreign
jurisdiction:
(A) government securities;
(B) senior or subordinated publicly traded debt obligations of
one or more corporations, or general or limited
partnerships;
(C) asset-backed securities of one or more trusts or other
special purpose legal entities; or
(D) preferred securities of Trust Originated Preferred
Securities, or "TOPrSSM," trusts organized by one or more
corporations, or general or limited partnerships, or
securities that are similar to those issued by TOPrSSM
trusts. Trust Originated Preferred Securities and TOPrSSM
are service marks of Merrill Lynch.
The assets deposited in a trust may also include:
o cash and cash equivalents; o caps, floors, collars and options;
o guarantees; o structured securities; and
o letters of credit; o other instruments and transactions
o financial insurance; that credit enhance, hedge or
o interest rate, currency, equity, otherwise provide support to the
commodity and credit-linked swaps; underlying securities to assure
o forward contracts; the servicing or timely
distribution of payments to
holders of the certificates.
For further information on these instruments see "Risk Factors--Your interests
may be subject to risks associated with the trust's use of derivative
instruments."
The applicable prospectus supplement will describe the "deposited assets" a
term that refers to the underlying securities and any other assets deposited in
the trust. Underlying securities will have been issued pursuant to an effective
registration statement filed with the SEC or pursuant to an exemption. If the
underlying securities represent obligations issued by one or more underlying
securities issuers, the underlying securities will satisfy the eligibility
criteria described in the section below under "Underlying Securities Issuer."
Except for U.S. government securities, the underlying securities will be
purchased in the secondary market and will not be acquired from any underlying
securities issuer or an affiliate of an underlying securities issuer, whether as
part of any distribution by or pursuant to any agreement with an underlying
securities issuer, an affiliate of an underlying securities issuer or otherwise.
No underlying securities issuer will participate in the offering of the trust
certificates, nor will an underlying securities issuer receive any of the
proceeds from the sale of underlying securities or from the issuance of the
trust certificates.
Deposited assets for a given series of trust certificates and the related
trust will not constitute deposited assets for any other series of trust
certificates or related trust, and the trust certificates of a given series will
possess an equal and ratable undivided ownership interest in the deposited
assets. The applicable prospectus supplement may, however, specify that assets
constituting a part of the deposited assets relating to any given series may be
beneficially owned solely by or deposited solely for the benefit of one class or
a group of classes within the series. In that event, the other classes of the
series will not possess any beneficial ownership interest in those specified
assets constituting a part of the deposited assets.
This prospectus relates only to the trust certificates offered through it
and does not relate to the underlying securities. The following description of
the underlying securities and the underlying securities issuer is intended
44
only to summarize material characteristics of the underlying securities that the
depositor is permitted to deposit in a trust. It does not purport to be a
complete description of any prospectus or prospectus supplement relating to
underlying securities or of any underlying securities indenture.
The applicable prospectus supplement will describe the material terms of
the deposited assets, including the material terms of any derivative instruments
that are included in the deposited assets.
Underlying Securities Issuer
The underlying securities issuers will be the U.S. government, one or more
corporations, general or limited partnerships, TOPrSSM trusts organized by one
or more corporations, general or limited partnerships, or issuers of preferred
securities that are similar to TOPrSSM. The underlying securities issuer will be
organized under the laws of either the United States, any U.S. state or any
foreign jurisdiction. The applicable prospectus supplement will provide only
limited information about each underlying securities issuer, such as its name,
place of incorporation and the address of its principal offices, unless a trust
consists of "concentrated underlying securities." Concentrated underlying
securities are underlying securities, other than government securities,
constituting 10% or more of the total underlying securities deposited in a
trust. With respect to concentrated underlying securities, the applicable
prospectus supplement will include audited financial statements of the issuer of
the concentrated underlying securities unless:
(1) the underlying securities issuer is eligible to use Form S-3 or F-3
for a primary offering of common stock or for an offering of
non-convertible investment grade securities where such securities are
rated investment grade;
(2) Guaranteed by Parent: the concentrated underlying securities are
guaranteed by a parent company of the issuer of the concentrated
underlying securities and either:
(a) each of the parent company and the issuer meets the criteria in
(1), above; or
(b) (i) the parent company meets the criteria in (1), above, (ii) the
issuer of the concentrated underlying securities meets the
requirements of general instruction I.C.3. of Form S-3 or general
instruction I.A.5(iii) of Form F-3, and (iii) the requirements of
Rule 3-10 of Regulation S-X under the Securities Act are
satisfied;
(3) Guaranteed by Subsidiary: (i) the issuer meets the criteria in (1),
above, (ii) the concentrated underlying securities are guaranteed by a
wholly owned subsidiary of the issuer of the concentrated underlying
securities and (iii) the requirements of Rule 3-10 of Regulation S-X
under the Securities Act are satisfied;
(4) the concentrated underlying securities are asset-backed securities,
the underlying securities issuer has at least $75,000,000 in
outstanding securities held by non-affiliates and at the time of
issuance the entity will be subject to the informational requirements
of the Exchange Act and in accordance with those requirements, files
periodic reports and other information with the SEC
in which case the applicable prospectus supplement will refer only to the
periodic reports filed by the underlying securities issuer, or underlying
securities guarantor, as applicable, with the SEC. Those reports should be
reviewed by any prospective certificateholder of the trust containing the
underlying securities. For further information, see "Risk Factors--If public
information concerning the underlying securities issuer is not available, your
ability to make an informed decision to act in regard to the trust certificates
may be impaired."
The reports and information above may be read and copied at the SEC's
public reference room, located at 450 Fifth Street, N.W., Washington, D.C.
20549. The SEC filings are also available to the public on the SEC's Internet
site at http://www.sec.gov.
A prospective certificateholder should obtain and evaluate the same
information concerning the relevant underlying securities issuer as it would
obtain and evaluate if it were investing directly in the underlying securities
or in the issuer of the underlying securities.
Neither the depositor, the trustee, the securities intermediary, Merrill
Lynch nor any of their respective affiliates assumes any responsibility for the
accuracy or completeness of any publicly available information
45
concerning any underlying securities issuer, including, without limitation, any
investigation as to its financial condition or creditworthiness, or concerning
any underlying securities, whether or not that information is filed with the SEC
or otherwise would be considered in making a decision to purchase the trust
certificates. The above will not apply to any information concerning the
underlying securities and any underlying securities issuer that is expressly
stated in this prospectus or an applicable prospectus supplement. The above will
not apply, for example, to identifying information or to information of the type
described in an applicable prospectus supplement under "Description of the
Underlying Securities."
Underlying Securities Indenture
General. Except for U.S. government securities or TOPrSSM or similar
securities issued pursuant to a trust agreement or unless otherwise specified in
the applicable prospectus supplement, each underlying security will have been
issued pursuant to an underlying securities indenture between the underlying
securities issuer and a trustee. The underlying securities indenture and the
underlying securities trustee will be qualified under the Trust Indenture Act of
1939 and the underlying securities indenture will contain provisions required by
the Trust Indenture Act. Government securities are not issued pursuant to an
indenture and are exempt from the Securities Act under Section 3(a)(2) and from
the Trust Indenture Act under Section 304(a)(4).
Covenants. Indentures generally contain covenants intended to protect
securityholders against the occurrence or effects of some specified events,
including restrictions limiting the issuer's, and in some cases one or more of
the issuer's subsidiaries', ability to:
o consolidate, merge, transfer or lease assets;
o incur or suffer to exist any lien, charge or encumbrance upon all or
some specified portion of its property or assets;
o incur, assume, guarantee or suffer to exist any indebtedness for
borrowed money if the payment of the indebtedness is secured by the
grant of a lien; or
o declare or pay any cash dividends, or make any distributions on or in
respect of, or purchase, redeem, exchange or otherwise acquire or
retire for value, any capital stock or subordinated indebtedness of
the issuer or its subsidiaries, if any.
An indenture may also contain financial covenants that, among other things,
require the maintenance of financial ratios or the creation or maintenance of
reserves or permit some actions to be taken only if compliance with the
covenants can be demonstrated at the time the actions are to be taken. Subject
to some exceptions, indentures typically may be amended or supplemented and past
defaults may be waived with the consent of the indenture trustee, the consent of
the holders of not less than a specified percentage of the outstanding
securities, or both.
The underlying securities indenture for one or more underlying securities
included in a trust may include some, all, none of or variations from the above
provisions, together with additional covenants not discussed in this prospectus.
The depositor cannot assure you that any type of underlying securities will be
subject to similar covenants or that any of the covenants will protect the trust
as a holder of the underlying securities against losses. The prospectus
supplement used to offer any series of trust certificates will describe material
covenants concerning any concentrated underlying securities and, as applicable,
will describe material covenants that are common to any pool of underlying
securities. The applicable prospectus supplement will include any material risk
factors associated with non investment-grade underlying securities deposited
into a trust.
Events of Default. Indentures generally provide that any one of a number of
specified events will constitute an event of default with respect to the
securities issued. The events of default typically include the following or
variations of the following:
o failure by the issuer to pay an installment of interest or principal
on the securities at the time required, subject to any specified grace
period, or to redeem any of the securities when required, subject to
any specified grace period;
o failure by the issuer to observe or perform any covenant, agreement or
condition contained in the securities or the indenture if that failure
is materially adverse to securityholders and continues for a
46
specified period after notice is given to the issuer by the indenture
trustee or the holders of not less than a specified percentage of the
outstanding securities;
o failure by the issuer and/or one or more of its subsidiaries to make
any required payment of principal and premium, if any, or interest
with respect to other material outstanding debt obligations or the
acceleration by or on behalf of the holders of those securities; and
o events of bankruptcy or insolvency with respect to the issuer and/or
one or more of its subsidiaries.
Remedies. Indentures generally provide that upon the occurrence of an event
of default, the indenture trustee may, and upon the written request of the
holders of not less than a specified percentage of the outstanding securities,
the indenture trustee must, take action as it may deem appropriate to protect
and enforce the rights of the securityholders. Some indentures provide that the
indenture trustee or a specified percentage of the holders of the outstanding
securities have the right to declare all or a portion of the principal and
accrued interest on the outstanding securities immediately due and payable upon
the occurrence of some events of default, subject to any applicable right of the
issuer to cure. Generally, an indenture will contain a provision entitling the
trustee under the indenture to be indemnified by the securityholders before
proceeding to exercise any right or power under the indenture with respect to
the securities at the request of the securityholders. An indenture is also
likely to limit a securityholder's right to institute some actions or
proceedings to pursue any remedy under the indenture unless certain conditions
are satisfied. These conditions may include:
o obtaining the consent of the indenture trustee;
o that the proceeding be brought for the ratable benefit of all holders
of the security; and/or
o that the indenture trustee, after being requested to institute a
proceeding by the owners of at least a specified minimum percentage of
the securities, shall have refused or neglected to comply with that
request within a reasonable time.
Each underlying securities indenture may include some, none or variations
of the above provisions, together with additional events of default and/or
remedies not discussed here. The prospectus supplement for any series of
certificates will describe the events of default under the underlying securities
indenture for any concentrated underlying security and the applicable remedies.
The prospectus supplement for any trust consisting of a pool of underlying
securities will describe some common underlying security events of default with
respect to the pool. The depositor cannot assure you that the provision will
protect the trust, as a holder of the underlying securities, against losses.
Furthermore, a certificateholder will have no independent legal right to
exercise any remedies with respect to the underlying securities and will be
required to rely on the trustee of the applicable trust to pursue any available
remedies on behalf of the relevant certificateholders in accordance with the
terms of the trust agreement and the related series supplement to the trust
agreement. If an underlying security event of default occurs and the trustee as
a holder of the underlying securities is entitled to vote or take other action
to declare the principal amount of an underlying security and any accrued and
unpaid interest on the underlying security to be due and payable, the
certificateholders' objectives may differ from those of holders of other
securities of the same series and class as any underlying security in
determining whether to require the acceleration of the underlying securities.
For more information, see "Risk Factors--Your ability to dispose of or take
action with respect to any underlying securities and any other assets deposited
in the trust may be limited due to the passive nature of the trust".
Subordination. If specified in the applicable prospectus supplement, some
of the underlying securities with respect to any trust may be either senior or
subordinated in right of payment to other existing or future indebtedness of the
underlying securities issuer. With respect to subordinated underlying
securities, to the extent of the subordination provisions of the securities, and
after the occurrence of specified events, securityholders and direct creditors
whose claims are senior to subordinated underlying securities, if any, may be
entitled to receive payment of the full amount due thereon before the holders of
any subordinated debt securities are entitled to receive payment on account of
the principal and premium, if any, or any interest on the securities. The trust,
as a holder of subordinated debt, may consequently suffer a greater loss than if
it held unsubordinated debt of the underlying securities issuer. We cannot
assure you, however, that in the event of a bankruptcy or similar insolvency
proceeding, the trust as a holder of senior underlying securities would receive
all payments in respect of those securities even if holders of subordinated
securities receive no amounts in respect of the securities. The prospectus
supplement relating to any series of trust certificates will contain a
description of any subordination provisions with respect to any concentrated
underlying securities and the percentage of senior underlying securities and
subordinated underlying securities, if any, in a trust comprised of a pool of
securities.
47
Secured Obligations. Some of the underlying securities with respect to any
trust may be "secured underlying securities," which means that they represent
secured obligations of the underlying securities issuer. Generally, unless an
event of default occurred, or with respect to some types of collateral or as
otherwise set forth in the related indenture, an issuer of secured obligations
has the right to remain in possession and retain exclusive control of the
collateral and to collect, invest and dispose of any income related to the
collateral. The secured indebtedness issued pursuant to the indenture:
o may also contain provisions for release, substitution or disposition
of collateral under some circumstances with or without the consent of
the indenture trustee or upon the direction of not less than a
specified percentage of the securityholders; and
o will also provide for the disposition of the collateral upon the
occurrence of some events of default.
In the event of a default of any secured obligation, securityholders may
experience a delay in payments on account of principal and premium, if any, or
any interest on those securities pending the sale of any collateral and before
or during the period the related collateral may decline in value.
If proceeds from the sale of collateral following an indenture event of
default are insufficient to repay all amounts due in respect of any secured
obligations, the holders of those securities, to the extent not repaid from the
proceeds of the sale of the collateral, would have only an unsecured claim
ranking equally to the claims of all other general unsecured creditors.
The underlying securities indenture with respect to secured underlying
securities may include some, all or none of or variations on those provisions.
The prospectus supplement relating to any series of trust certificates that
includes concentrated underlying securities that are secured will describe the
material security provisions of those underlying securities and the related
collateral. With respect to any trust comprised of a pool of securities with a
substantial portion being comprised of secured underlying securities, the
applicable prospectus supplement will disclose some material information with
respect to those security provisions and the collateral.
Principal Terms of Underlying Securities
The applicable prospectus supplement for each series of trust certificates
will contain a description of the following terms, as applicable, of any
concentrated underlying security:
(A) the title and series of the underlying securities, their
aggregate principal amount, denomination and form;
(B) whether the securities are senior or subordinated to any
other existing or future obligations of the underlying
securities issuer;
(C) whether any of the obligations are secured and the nature of
any collateral;
(D) the limit, if any, upon the aggregate principal amount of
the securities;
(E) the dates on which, or the range of dates within which, the
principal of and premium, if any, on the securities will be
payable;
(F) the rate or rates, or the method of determining the rates,
at which the underlying securities will bear interest, if
any, the date or dates from which the interest will accrue
and the dates on which the interest will be payable;
(G) the obligation, if any, of the underlying securities issuer
to redeem the underlying securities and other securities of
the same class or series at the holder's option or pursuant
to any sinking fund or similar provisions and the timing,
price and the terms and conditions that would govern any
redemption or repurchase of the securities, in whole or in
part, pursuant to that obligation;
(H) if applicable, the timing, price and the terms and
conditions that would govern any redemption, in whole or in
part, of the securities at the option of the underlying
securities issuer;
48
(I) if applicable, the timing, price and the terms and
conditions that would govern the ability of a holder of
underlying securities subject to a put option to require the
issuer of the underlying securities to repurchase or
otherwise repay those underlying securities;
(J) whether the underlying securities were issued at a price
lower than the principal amount of the underlying
securities;
(K) if other than U.S. dollars, the currency in which the
securities are denominated, or in which the payment of the
principal of and premium, if any, or any interest on the
underlying securities will be made, and the circumstances,
if any, when the currency of payment may be changed;
(L) material events of default or restrictive covenants provided
for with respect to the underlying securities;
(M) the rating, if any, of the underlying securities;
(N) the principal U.S. market on which the underlying securities
are traded, if any; and
(O) any other material terms of the underlying securities.
With respect to a trust comprised of a pool of underlying securities, the
applicable prospectus supplement will describe:
o the composition of the underlying securities pool as of the cut-off
date;
o some material events of default or restrictive covenants common to the
underlying securities; and
o on an aggregate, percentage or weighted average basis, as applicable,
the characteristics of the pool with respect to the terms set forth in
clauses (B), (C), (E), (F), (G), (H), (I), (J) and (K) of the
preceding paragraph and any other material terms regarding the pool of
securities.
Other than publicly traded debt securities that satisfy the necessary
requirements set forth in this prospectus for underlying securities, the
underlying securities may consist of, or be similar in structure to, TOPrSSM.
If an issuer of concentrated underlying securities ceases to file periodic
reports under the Exchange Act, the depositor will continue to be subject to the
reporting requirements of the Exchange Act but some information with respect to
the issuer may be unavailable. Also, if an issuer ceases to file those reports,
the actions described in this prospectus under "Description of the Trust
Certificates - Default and Remedies" will be carried out by the trustee and the
depositor.
Asset-Backed Securities. The applicable prospectus supplement may specify
that a trust may include one or more asset-backed securities. Asset-backed
securities may be asset-backed notes or pass-through certificates issued by a
trust or a special purpose entity. Asset-backed notes are secured by, and
pass-through certificates represent an interest in, a fixed or revolving pool of
financial assets. Those financial assets may consist of secured or unsecured
corporate bonds, corporate loans, consumer or other receivables, such as
automobile loans or contracts, automobile leases, credit card receivables, home
equity or other mortgage loans, trade receivables, floor plan (inventory) loans,
equipment leases and other assets that produce streams of payments. Asset-backed
notes generally are issued pursuant to indentures and pass-through certificates
are generally issued pursuant to pooling and servicing agreements. A separate
servicing agreement typically is executed in connection with asset-backed notes.
Those servicing agreements, indentures and pooling and servicing agreements are
collectively referred to as "asset-backed agreements".
Asset-backed agreements provide for the appointment of a trustee and the
segregation of the transferred pool of assets from the other assets of the
transferor. That segregation generally is only required to the extent necessary
to perfect the interest of the trustee in the assets against claims of unsecured
creditors of the transferor of the assets. Where required by the Uniform
Commercial Code (UCC), as in the case of home equity loan notes, documents
evidencing the underlying receivables are delivered to the possession of the
trustee or other custodian for the holders of the asset-backed securities. In
the case of most assets, either no documents evidence the receivables (for
example, credit card receivables) or documents exist, but the UCC does not
require their possession to perfect a
49
transfer (for instance, automobile installment sales contracts). In these cases,
the transferor segregates the assets only on its own books and records, such as
by marking its computer files, and perfects the trustee's interest by filing a
financing statement under the UCC. This method of segregation and perfection
presents the risk that the trustee's interest in the assets could be lost as a
result of negligence or fraud, which would result in the trustee and the
asset-backed security holders becoming unsecured creditors of the transferor of
the assets.
Credit Support
As specified in the applicable prospectus supplement for a given series of
trust certificates, the trust for any series of trust certificates may include,
or the certificateholders of such series or any class or group of classes within
such series may have the benefit of, credit support for any class or group of
classes within such series. Credit support directly benefits the relevant trust
and, consequently, benefits certificateholders. Credit support may be provided
by any combination of the following means described below or any other means
described in the applicable prospectus supplement. The applicable prospectus
supplement will set forth:
o whether the trust for any class or classes of trust certificates
contains, or the certificateholders of such trust certificates have
the benefit of, credit support and, if so, the amount, type and other
relevant terms of each element of credit support with respect to the
class or classes; and
o information with respect to the obligors of each element, including
financial information with respect to any obligor providing credit
support for 20% or more of the aggregate principal amount of the class
or classes.
Subordination. As discussed below under "--Collections," the rights of the
certificateholders of any given class within a series of trust certificates to
receive collections from the trust for the series and any credit support
obtained for the benefit of the certificateholders of the series or classes
within the series may be subordinated to the rights of the certificateholders of
one or more other classes of the series to the extent described in the
applicable prospectus supplement. The subordination accordingly provides some
additional credit support to those certificateholders of those other classes.
For example, if losses are realized during a given period on the deposited
assets relating to a series of trust certificates such that the collections
received on the deposited assets are insufficient to make all distributions on
the trust certificates of the series, those realized losses would be allocated
to the certificateholders of any class of the series that is subordinated to
another class, to the extent and in the manner provided in the applicable
prospectus supplement. In addition, if applicable, the prospectus supplement may
provide that some amounts otherwise payable to certificateholders of any class
that is subordinated to another class may be required to be deposited into a
reserve account. For more information regarding the reserve accounts, see
"--Reserve Accounts" below.
If the applicable prospectus supplement so provides, the credit support for
any series or class of trust certificates may also include the other forms of
credit support that are described below. Any other forms of credit support that
are solely for the benefit of a given class will be limited to the extent
necessary to make required distributions to those certificateholders or as
otherwise specified in the applicable prospectus supplement. In addition, if the
applicable prospectus supplement so provides, the obligor of any other forms of
credit support may be reimbursed for amounts paid pursuant to the credit support
out of amounts otherwise payable to one or more of the classes of the trust
certificates of such series. Further, payments to be made in respect of any
forms of credit support arranged for or on behalf of the certificateholders may
be required to be paid before any distributions that must be made to
certificateholders.
Letter of Credit; Surety Bond. The certificateholders of any series or
class or group of classes of trust certificates within that series may, if
specified in the applicable prospectus supplement, have the benefit of a letter
or letters of credit issued by a bank or a surety bond or bonds issued by a
surety company. In either case, the trustee or any other person specified in the
applicable prospectus supplement will use its reasonable efforts to:
o cause the letter of credit or the surety bond to be obtained and to be
kept in full force and effect, unless coverage under the letter of
credit has been exhausted through payment of claims; and
o timely pay the fees or premiums on the letter of credit or surety
bond, unless, as described in the applicable prospectus supplement,
the payment of fees or premiums is otherwise provided for.
The trustee or the other person specified in the applicable prospectus
supplement will make or cause to be made draws under the letter of credit or the
surety bond, as the case may be, under the circumstances and to cover
50
the amounts specified in the applicable prospectus supplement. Any amounts
otherwise available under the letter of credit or the surety bond will be
reduced to the extent of any prior unreimbursed draws. The applicable prospectus
supplement will provide the manner, priority and source of funds by which any
draws are to be repaid.
Unless the applicable prospectus supplement otherwise specifies, if the
bank issuing the letter of credit or the surety company, as applicable, ceases
to satisfy any credit rating or other applicable requirements specified in the
applicable prospectus supplement, the trustee or the other person specified in
the applicable prospectus supplement will use its reasonable efforts to obtain
or cause to be obtained a substitute letter of credit or surety bond, as
applicable, or other form of credit enhancement providing similar protection,
that meets the requirements and provides the same coverage to the extent
available for the same cost. We cannot assure you that any bank issuing the
letter of credit or any surety, as applicable, will continue to satisfy the
requirements or that any substitute letter of credit, surety bond or similar
credit enhancement will be available providing equivalent coverage for the same
cost. To the extent similar credit support is not available, the credit support
otherwise provided by the letter of credit or the surety bond or similar credit
enhancement may be reduced to the level otherwise available for the same cost as
the original letter of credit or surety bond.
Reserve Accounts. If the applicable prospectus supplement so provides, the
trustee or another person specified in the prospectus supplement will deposit or
cause to be deposited into a reserve account maintained with an eligible
institution, which may be the trustee, any combination of cash or permitted
investments in specified amounts. These amounts will be applied and maintained
in the manner and under the conditions specified in the prospectus supplement.
In the alternative or in addition to the deposit, a reserve account may be
funded through application of a portion of collections received on the deposited
assets for a given series of trust certificates, in the manner and priority
specified in the applicable prospectus supplement. Amounts may be distributed to
certificateholders of the class or group of classes within the series, or may be
used for other purposes, in the manner and to the extent provided in the
applicable prospectus supplement. Amounts deposited in any reserve account will
be invested in permitted investments by, or at the direction of, the trustee,
the depositor or any other person as may be specified in the applicable
prospectus supplement.
Collections
The trust agreement and the related series supplement will establish
procedures by which the trustee, or any other person that may be specified in
the prospectus supplement, is obligated, for the benefit of the
certificateholders of each series of trust certificates, to administer the
related deposited assets. Administering the deposited assets will include making
collections of all payments made on those assets and depositing those
collections from time to time before any applicable distribution date into a
"certificate account," which will be a segregated trust account maintained or
controlled by the applicable trustee for the benefit of the series. If an
administrative agent is appointed, it will direct the trustee, and otherwise the
trustee will make all determinations, as to:
(A) the appropriate application of the collections, and other
amounts available for distribution, to the payment of any
administrative or collection expenses, such as the
administrative fee and some credit support-related ongoing
fees, such as insurance premiums, letter of credit fees or
any required account deposit; and
(B) the payment of amounts then due and owing on the trust
certificates of the trust series and classes within the
series, all in the manner and priorities described in the
applicable prospectus supplement.
The applicable prospectus supplement will specify the collection periods,
if applicable, and distribution dates for a given series of trust certificates
and the particular requirements relating to the segregation and investment of
collections received on the deposited assets during a given collection period or
on or by specified dates. We cannot assure you that amounts received from the
deposited assets and any credit support obtained for the benefit of
certificateholders for a particular series or class of trust certificates over a
specified period will be sufficient, after payment of all prior expenses and
fees for that period, to pay amounts then due and owing to holders of the trust
certificates. The applicable prospectus supplement will also set forth the
manner and priority by which any realized loss will be allocated among the
classes of any series of trust certificates, if applicable.
The applicable prospectus supplement will identify the circumstances that
may permanently or temporarily change over time the relative priorities of
distributions with respect to collections from the assets of the trust assigned
to classes of a given series of trust certificates. Moreover, the applicable
prospectus supplement may specify that the allocation ratio in respect of each
class of a given series for purposes of payments of some amounts,
51
such as principal, may be different from the allocation ratio assigned to each
class for payments of other amounts, such as interest or premium.
52
CURRENCY RISKS
An investment in a trust certificate having a specified currency other than
U.S. dollars entails significant risks that are not associated with similar
investments in U.S. dollar-denominated securities. The risks include, without
limitation:
o economic and political events and the supply of and demand for the
relevant currencies;
o the possibility of significant changes in rates of exchange between
the U.S. dollar and the trust certificates' currency;
o volatility of the exchange market;
o depreciation of the specified currency for a trust certificate against
the U.S. dollar, which would decrease the effective yield of your
trust certificate below its applicable interest rate and, in some
circumstances, could result in a loss to you on a U.S. dollar basis;
and
o the possibility that a foreign government will impose or modify
foreign exchange controls with respect to the foreign currency, which
could restrict or prohibit distributions of principal, premium or
interest in the specified currency.
Those risks generally depend on factors over which the depositor has no
control, such as economic and political events and the supply of and demand for
the relevant currencies. In recent years, rates of exchange between the U.S.
dollar and some currencies have been highly volatile and you should expect that
this volatility will continue in the future. Past fluctuations in any particular
exchange rate do not necessarily indicate, however, that fluctuations in the
rate may occur during the term of any trust certificate. Depreciation of the
specified currency for a trust certificate against the U.S. dollar would
decrease the effective yield of the trust certificate below its applicable
interest rate and, in some circumstances, could result in a loss to the investor
on a U.S. dollar basis.
Governments have from time to time imposed, and may in the future impose,
exchange controls that could affect exchange rates and the availability of a
specified currency for making distributions in respect of trust certificates
denominated in that currency. At present, the depositor has identified the
following currencies in which distributions of principal, premium and interest
on trust certificates may be made: Australian dollars, Canadian dollars, Danish
kroner, Italian lire, Japanese yen, New Zealand dollars, U.S. dollars and the
Euro. However, trust certificates distributable in another currency may be
issued at any time, based upon investor demand for trust certificates
denominated in these currencies. We cannot assure you that exchange controls
that restrict or prohibit distributions of principal, premium or interest in any
specified currency will not be imposed. Even if there are no actual exchange
controls, it is possible that, on a distribution date with respect to any
particular trust certificate, the currency in which the amounts are due in
respect of each trust certificate will not be available.
Any prospectus supplement relating to trust certificates having a specified
currency other than U.S. dollars will contain historical exchange rates for that
currency against the U.S. dollar, a description of the currency, any exchange
controls affecting that currency and any other required information concerning
that currency. The prospectus supplement will also discuss risk factors relating
to that specified currency.
U.S. FEDERAL INCOME TAX CONSEQUENCES
This summary is based on the Internal Revenue Code of 1986, as amended to
the date of this prospectus, revenue rulings, judicial decisions and existing
and proposed Treasury regulations, including final regulations concerning the
tax treatment of debt instruments issued with original issue discount, the "OID
Regulations." Changes to any of the rules or regulations stated above after the
date of this prospectus may affect the tax consequences described in this
prospectus.
This summary only discusses the U.S. federal income tax consequences to you
if you hold the trust certificates as capital assets within the meaning of
Section 1221 of the Internal Revenue Code. It does not discuss all of the tax
consequences that may be relevant to you in light of your particular
circumstances or if you are subject to special rules because, for example you
are a financial institution, an insurance company, a foreign partnership or
other flow through entity, a dealer or you hold the trust certificates as part
of a hedging transaction or straddle. Further, the tax consequences arising from
the ownership of any series of trust certificates with special characteristics
will be set forth in the applicable prospectus supplement and a legal opinion of
tax counsel will be
53
filed with the SEC in connection with each series of trust certificates. In its
opinion, tax counsel will opine as to the tax disclosure regarding the trust
certificates set forth in this prospectus and the applicable prospectus
supplement.
In all cases, you are advised to consult your own tax advisor regarding the
U.S. federal tax consequences to you of holding, owning and disposing of trust
certificates, including the advisability of making any of the elections
described below, as well as any tax consequences arising under the law of any
state or other taxing jurisdiction.
For purposes of this discussion, "U.S. Person" means an individual who, for
U.S. federal income tax purposes, is:
o A citizen or resident of the United States;
o a corporation, partnership or other entity created or
organized in or under the laws of the United States or any
state;
o an estate that is subject to U.S. federal income tax
regardless of the source of its income; or
o a trust if a court within the United States is able to
exercise primary supervision of the administration of the
trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust.
Tax Status of Trust
The arrangement under which the trust certificates will be created and sold
and the underlying securities will be administered will be treated as a grantor
trust under subpart E, part I of subchapter J of the Internal Revenue Code. You
will be treated as the owner of a pro rata undivided interest in the ordinary
income and corpus of the underlying securities in the grantor trust.
Income of Trust Certificateholders
In General. If you are a U.S. Person, you will be required to report on
your U.S. federal income tax return your pro rata share of the entire income
from the underlying securities, including gross interest income at the interest
rate on the underlying securities, in accordance with your method of accounting.
Original Issue Discount. The underlying securities may have originally been
sold at a discount below their principal amount. As provided in the Internal
Revenue Code and the OID Regulations, the excess of the "stated redemption
price," as described below, of each of the underlying securities over its "issue
price," defined as the initial offering price to the public, excluding bond
houses and brokers, at which a substantial amount of the underlying securities
has been sold, will be original issue discount if the excess equals or exceeds a
de minimis amount, i.e., 1/4 of 1% of the underlying security's stated
redemption price multiplied by the number of complete years to its maturity. If
you own an underlying security with a de minimis amount of original issue
discount you must include any de minimis original issue discount in income, as
capital gain, on a pro rata basis as principal payments are made on the
underlying security. The "stated redemption price" of an underlying security is
equal to the sum of all payments on the underlying security other than interest
based on a fixed rate or a variable rate, unless stated by the applicable
prospectus supplement, and payable unconditionally at least annually.
You are required to include original issue discount in income as it
accrues, which may be before the receipt of the cash attributable to the income,
based on a compounding of interest at a constant rate, using the yield to
maturity of the underlying security as originally issued. Under these rules, you
generally must include in income increasingly greater amounts of original issue
discount in successive accrual periods, unless payments that are part of the
stated redemption price at maturity of an underlying security are made before
its final maturity. The OID Regulations permit you to use accrual periods of any
length up to one year, including daily accrual periods, to compute accruals of
original issue discount, provided that each scheduled payment of principal or
interest occurs either on the first or the last day of an accrual period.
Acquisition Premium and Market Discount. If you purchase an underlying
security with original issue discount at an acquisition premium (i.e., at a
price in excess of its "adjusted issue price" but less than its stated
redemption price), the amount includible in income in each taxable year as
original issue discount is reduced by that portion of the excess properly
allocable to the year. The adjusted issue price is defined as the sum of the
issue price
54
of the underlying security and the aggregate amount of previously accrued
original issue discount, less any prior payments of amounts included in its
stated redemption price. Unless you make the accrual method election described
below, acquisition premium is allocated on a pro rata basis to each accrual of
original issue discount so that you are allowed to reduce each accrual of
original issue discount by a constant fraction.
If you purchase at a "market discount," for example, at a price less than
the stated redemption price or, in the case of an underlying security with
original issue discount, the adjusted issue price, you will be required, unless
the difference is less than a de minimis amount, to treat any principal payments
on, or any gain realized upon the disposition or retirement of, the underlying
security as interest income to the extent of the market discount that accrued
while you held the underlying security, unless you elect to include the market
discount in income on a current basis. Market discount is considered to be de
minimis if it is less than 1/4 of 1% of the underlying security's stated
redemption price multiplied by the number of complete years to maturity after
you acquired the trust certificate. If an underlying security with more than a
de minimis amount of market discount is disposed of in a nontaxable transaction,
other than a nonrecognition transaction described in Section 1276(d) of the
Internal Revenue Code, accrued market discount will be includible as ordinary
income to you as if you had sold the trust certificate at its then fair market
value. If you acquired at a market discount and do not elect to include market
discount in income on a current basis you may also may be required to defer the
deduction for a portion of the interest expense on any indebtedness incurred or
continued to purchase or carry the trust certificate until the deferred income
is realized.
Premium. Except as noted below, if you purchase for an amount in excess of
the principal amount, or in the case of an underlying security with original
discount, the remaining stated redemption price, you will be treated as having
premium with respect to the underlying security in the amount of the excess. If
you purchase an underlying security with original issue discount at a premium,
you are not required to include in income any original issue discount with
respect to the underlying security. If you make an election under Section
171(c)(2) of the Internal Revenue Code to treat the premium as "amortizable bond
premium," the amount of interest that must be included in your income for the
accrual period, where the underlying security is not optionally redeemable
before its maturity date, will be reduced by the portion of the premium
allocable to the period based on the underlying security's yield to maturity. If
the underlying security may be called before maturity after you have acquired
it, you generally may not assume that the call will be exercised and must
amortize premium to the maturity date. If the underlying security is in fact
called, any unamortized premium may be deducted in the year of the call. If you
make the election under Section 171(c)(2), the election also shall apply to all
bonds the interest on which is not excludible from gross income ("Fully Taxable
Bonds") held by you at the beginning of the first taxable year to which the
election applies and to all Fully Taxable Bonds thereafter acquired by you, and
is irrevocable without the consent of the IRS. If such an election is not made,
you must include the full amount of each interest payment in income in
accordance with your regular method of accounting and will receive a tax benefit
from the premium only in computing your gain or loss upon the sale or other
disposition or retirement of the underlying security.
Accrual Method Election
Under the OID Regulations, you are permitted to elect to include in gross
income your entire return on an underlying security, i.e., the excess of all
remaining payments to be received on the underlying security over the amount you
paid for the trust certificate, based on the compounding of interest at a
constant rate. Such an election for an underlying security with amortizable bond
premium or market discount will result in a deemed election for all of your debt
instruments with amortizable bond premium or market discount and may be revoked
only with permission of the IRS.
Disposition or Retirement of Certificates
Upon the sale, exchange or other disposition of a trust certificate, or
upon the retirement of a trust certificate, you will recognize gain or loss
equal to the difference, if any, between the amount realized upon the
disposition or retirement and your tax basis in the trust certificate. Your tax
basis for determining gain or loss on the disposition or retirement of a trust
certificate will be your cost of the trust certificate, increased by the amount
of original issue discount and any market discount includible in your gross
income with respect to the underlying security, and decreased by the amount of
any payments under the underlying security that are part of its stated
redemption price and by the portion of any premium applied to reduce interest
payments as described above.
If you dispose of or retire a trust certificate any gain or loss will be
capital, gain or loss, except to the extent the gain represents accrued stated
interest, original issue or market discount on the trust certificate not
previously included in your gross income, to which extent the gain or loss would
be treated as ordinary income. Any capital
55
gain or loss will be long-term capital gain or loss if at the time of
disposition or retirement you have held the trust certificate for more than one
year.
Deductibility of Trust's Fees and Expenses
In computing its U.S. federal income tax liability, a trust
certificateholder generally will be entitled to deduct its pro rata share of
reasonable administrative fees, trustee fees and other fees and expenses paid or
incurred by the trust, as provided in Section 162 or 212 of the Internal Revenue
Code. However, if a trust certificateholder is an individual, estate or trust,
the deduction of such fees will be a miscellaneous itemized deduction that may
be disallowed in whole or in part.
Foreign Trust Certificateholders
Withholding Tax on Payments of Principal and Interest on Trust Certificates
If you are not a U.S. Person, interest paid to you on the trust
certificates generally will not be subject to the 30% withholding tax, provided
that:
(1) you do not actually or constructively own 10% or more of the total
combined voting power of all classes of stock entitled to vote of the
issuer of the underlying securities;
(2) you are not a controlled foreign corporation for U.S. tax purposes
that is directly or indirectly related to the issuer of the underlying
securities through stock ownership;
(3) you are not a bank described in Section 881(c)(3)(A) of the Internal
Revenue Code; and
(4) either:
(A) the beneficial owner of the trust certificates certifies to the
applicable payor or its agent, under penalties of perjury, that
it is not a U.S. person and provides its name and address on U.S.
Treasury Form W-8BEN (or a suitable substitute form); or
(B) a securities clearing organization, bank or other financial
institution, that holds customers' securities in the ordinary
course of its trade or business and holds the trust certificates,
certifies under penalties of perjury that such a Form W-8BEN (or
a suitable substitute form) has been received from the beneficial
owner by it or by a financial institution between it and the
beneficial owner and furnishes the payor with a copy thereof.
Otherwise, the 30% withholding tax may apply to interest paid unless an income
tax treaty reduces or eliminates such tax.
If you hold the trust certificates in connection with the conduct of a
trade or business within the U.S., payments of interest on the trust
certificates will not be subject to withholding tax if you deliver a Form W-8ECI
(or suitable substitute form) to the payor. You will be subject to U.S. federal
income tax at regular rates, unless an income tax treaty reduces or eliminates
such tax. You may also be subject to an additional branch profits tax at a 30%
rate or, if applicable, a lower treaty rate.
Gains on Disposition of Trust Certificates
You generally will not be subject to U.S. federal income tax on gain
realized on the sale, exchange or other disposition of a trust certificate
unless:
o You are an individual present in the U.S. for 183 days or
more in the year of such sale, exchange or redemption and
either (A) have a "tax home" in the U.S. and certain other
requirements are met, or (B) the gain from the disposition
is attributable to an office or other fixed place of
business in the U.S.;
o In the case of an amount which is attributable to accrued
interest, you do not meet the conditions for exemption from
the 30% withholding tax, as described above; or
56
o The gain is effectively connected with your conduct of a
U.S. trade or business.
Backup Withholding and Information Reporting
Information returns will be filed with the IRS in connection with payments
on the trust certificates and the proceeds from a sale or other disposition of
the trust certificates. If you own trust certificates and are a U.S. Person, you
will be subject to United States backup withholding tax at a 30% rate (subject
to periodic reductions through 2006) on these payments unless you provide your
taxpayer identification number to the paying agent and comply with certification
procedures to establish that you are not a U.S. Person in order to avoid
information reporting and backup withholding tax requirements. The certification
on Form W-8BEN, required to claim exemption from 30% U.S. federal withholding on
interest payments as described above, will satisfy the certification
requirements necessary to avoid the backup withholding tax as well.
The amount of any backup withholding from a payment to you will be allowed
as a credit against your U.S. federal income tax liability and may entitle you
to a refund, provided that the required information is furnished to the IRS.
The U.S. federal income tax discussion set forth above may not be
applicable depending upon your particular situation. You should consult your own
tax advisor with respect to the tax consequences to you of the ownership and
disposition of the trust certificates, including the tax consequences under the
tax laws of the United States, states, localities, countries other than the
United States and any other taxing jurisdictions and the possible effects of
changes in the tax laws.
57
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended, which we
refer to as "ERISA", and the Internal Revenue Code impose certain requirements
on:
(1) employee benefit plans, as defined in Section 3(3) of ERISA;
(2) plans described in Section 4975(e)(i) of the Internal Revenue Code; or
(3) entities whose underlying assets include plan assets, as defined
below, by reason of a plan's investment in the entity.
Each of these are referred to as a "plan" in this section of the prospectus.
ERISA's general fiduciary standards provide that a plan fiduciary, before
investing in a trust certificate, should determine whether the investment is
permitted under the governing plan instruments. As well, those standards require
a fiduciary to determine if the investment is appropriate for the plan in view
of the plan's overall investment policy and the composition and diversification
of its portfolio. Other provisions of ERISA and the Internal Revenue Code
prohibit certain transactions that involve both the assets of a plan and persons
who have certain specified relationships to the plan. Those persons are "parties
in interest" within the meaning of ERISA and "disqualified persons" within the
meaning of the Internal Revenue Code. A plan fiduciary considering an investment
in trust certificates should consider whether the investment might constitute or
give rise to a prohibited transaction under ERISA or the Internal Revenue Code.
An investment in trust certificates by a plan might result in the assets of
the trust being deemed to constitute plan assets. In turn, if the trust assets
are deemed to be plan assets, certain aspects of the investment, including the
operation of the trust that holds the assets, might be prohibited transactions
under ERISA and the Internal Revenue Code. Neither ERISA nor the Internal
Revenue Code defines the term "plan assets." Under Section 2510.3-101 of the
United States Department of Labor regulations, if a plan acquires an "equity
interest" in an entity, such as a trust, the underlying assets of the entity may
be plan assets for certain purposes. Those purposes include the prohibited
transaction provisions of ERISA and the Internal Revenue Code. As a result, if a
plan acquired a trust certificate, for certain purposes under ERISA and the
Internal Revenue Code, including the prohibited transaction provisions, the plan
would be considered to own its share of the underlying assets of the trust
unless:
o the trust certificate is a "publicly-offered security"; or
o equity participation by "benefit plan investors" is not "significant".
Under that same regulation, a "publicly offered security" is a security that is:
(1) freely transferable;
(2) 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
(3) either is:
o part of a class of securities registered under Section 12(b) or
12(g) of the Exchange Act; or
o 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 the security is a part is registered under
the Exchange Act within 120 days, or later if allowed by the SEC, after the end
of the fiscal year of the issuer during which the offering of the securities to
the public occurred.
Participation by benefit plan investors in the trust certificates would not
be significant if immediately after the most recent acquisition of a trust
certificate, whether or not from the depositor or Merrill Lynch, less than 25%
of:
58
(1) the value of the class of trust certificates; and
(2) the value of any other class of trust certificates that is not a
security under the Regulation,
were held by benefit plan investors, which are defined as employee benefit plans
not subject to ERISA, such as governmental plans, and plans, as defined above.
We anticipate that some offerings of trust certificates will be structured
so that assets of the trust will not be deemed to constitute plan assets. In
these cases, the relevant prospectus supplement will indicate either that the
trust certificates will be considered publicly offered securities under Section
2510.3-101 of the United States Department of Labor regulations or that
participation by benefit plan investors will not be significant for purposes of
that regulation.
In other instances, however, the offering of trust certificates may not be
so structured. In those cases, the assets of the trust may be deemed to be plan
assets and transactions involving:
o the depositor,
o an underwriter,
o the trustee,
o any trustee with respect to underlying securities,
o any obligors with respect to underlying securities, or
o affiliates of the obligors
might constitute prohibited transactions with respect to a plan holding a trust
certificate unless:
(1) one or more prohibited transaction exemptions, which are generally
referred to as "PTEs", apply; or
(2) in the case of an issuer of underlying securities, that issuer is not
a disqualified person or party in interest with respect to the plan.
Plans maintained or contributed to by the depositor, an underwriter, the
trustee, a trustee with respect to underlying securities, any issuer of
underlying securities, or any of their affiliates, should not acquire or hold
any trust certificates.
If the trust is deemed to hold plan assets, the underlying securities would
appear to be an indirect loan between the issuer of the underlying securities
and any plan owning trust certificates. However, the loan, by itself, would not
constitute a prohibited transaction unless the issuer is a party in interest or
a disqualified person with respect to that plan.
If the underwriter with respect to an offering of trust certificates is a
broker-dealer registered under the Exchange Act and customarily purchases and
sells securities for its own account in the ordinary course of its business as a
broker-dealer, an exemption may exist. Sales of trust certificates by those
underwriters to plans may be exempt under PTE 75-1 if all of the following
conditions are satisfied:
(1) the underwriter is not a fiduciary with respect to the plan and is a
party in interest or disqualified person solely by reason of Section
3(14)(B) of ERISA, Section 4975(e)(2)(B) of the Internal Revenue Code
or as a result of a relationship to a person described in those
sections;
(2) the transaction is at least as favorable to the plan as an
arm's-length transaction with an unrelated party and is not a
prohibited transaction within the meaning of Section 503(b) of the
Internal Revenue Code; and
(3) the plan maintains for at least six years those records necessary to
determine whether the conditions of PTE 75-1 have been met.
59
Custodial services and any other services tendered by the trustee or any
trustee with respect to underlying securities might be exempt transactions
pursuant to Section 408(b)(2) of ERISA and Section 4975(d)(2) of the Internal
Revenue Code. Those sections exempt services that are necessary for the
establishment or operation of a plan, that are provided under a reasonable
contract or arrangement and for which no more than reasonable compensation is
paid. An arrangement would not be treated as reasonable unless it can be
terminated without penalty upon reasonably short notice under the circumstances.
However, those statutory exemptions do not provide exemptive relief for
prohibited transactions described in Section 406(b) of ERISA or Section
4975(c)(1)(E) or (F) of the Internal Revenue Code.
Other prohibited transaction exemptions could apply to the acquisition and
holding of trust certificates by plans and the operation of the trust,
including, but not limited to:
o PTE 84-14, an exemption for certain transactions determined by an
independent qualified professional asset manager;
o PTE 91-38, an exemption for certain transactions involving bank
collective investment funds;
o PTE 90-1, an exemption for certain transactions involving insurance
company pooled separate accounts; and
o PTE 95-60, an exemption for certain transactions involving insurance
company pooled general accounts.
If an offering of trust certificates will result in the trust assets being
deemed to constitute plan assets the applicable prospectus supplement will
provide that a plan, by acquiring and holding a trust certificate, will be
deemed to have represented and warranted to the depositor, trustee, and
underwriter that the plan's acquisition and holding of a trust certificate does
not involve a non-exempt prohibited transaction. That representation and
warranty will extend to include the activities of the trust.
Any plan or insurance company investing assets of its general account and
proposing to acquire trust certificates should consult with its counsel.
60
UNDERWRITING
Trust certificates may be offered in any of three ways: (1) through
underwriters or dealers, (2) directly to one or more purchasers or (3) through
agents. The applicable prospectus supplement will set forth the material terms
of the offering of any series of trust certificates, which may include:
o the names of any underwriters or initial purchasers;
o the purchase price of the trust certificates and the proceeds to the
depositor from the sale;
o whether the trust certificates are being offered by the applicable
prospectus supplement in connection with trading activities that may
create a short position or are being issued to cover that short
position;
o any underwriting discounts and other items constituting underwriters'
compensation;
o any initial public offering price;
o any discounts or concessions allowed or reallowed or paid to dealers;
o any securities exchanges on which the trust certificates may be
listed; and
o the place and time of delivery of the trust certificates to be offered
through the applicable supplement.
If underwriters are used in the sale, they will acquire the trust
certificates at a fixed price for their own account and they may resell them
from time to time in one or more transactions, including:
o negotiated transactions;
o at a fixed public offering price; or
o at varying prices determined at the time of sale.
The trust certificates may be offered to the public either through
underwriting syndicates represented by managing underwriters or by underwriters
without a syndicate. The managing underwriters or underwriters in the U.S. will
include Merrill Lynch. The obligations of those underwriters to purchase trust
certificates will be subject to some conditions precedent and the underwriters
will be obligated to purchase all trust certificates if any trust certificates
are purchased. Any initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers may be changed from time to
time.
Agents designated by the depositor may from time to time sell trust
certificates. The applicable prospectus supplement will set forth the name of
any agent involved in the offer or sale of trust certificates and any
commissions that the depositor has to pay that agent. Unless otherwise indicated
in the applicable prospectus supplement, the agent will act on a best-efforts
basis for the period of its appointment.
If the applicable prospectus supplement so indicates, the depositor will
authorize agents, underwriters or dealers to solicit offers by specified
institutions to purchase trust certificates at the public offering price
described in the prospectus supplement pursuant to delayed delivery contracts
providing for payment and delivery on a future date specified in that prospectus
supplement. The contracts will be subject only to those conditions set forth in
the applicable prospectus supplement. The prospectus supplement will also set
forth the commissions payable for solicitation of those contracts. Any
underwriters, dealers or agents participating in the distribution of trust
certificates may be deemed to be underwriters and any discounts or commissions
received by them on the sale or resale of trust certificates may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933, as
amended. Agents and underwriters may be entitled under agreements entered into
with the depositor to indemnification by the depositor against some civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments that the agents or underwriters or their affiliates may
be required to make in respect thereof. Agents and underwriters and their
affiliates may be customers of, engage in transactions with, or perform services
for, the depositor or its affiliates in the ordinary course of business.
Only trust certificates rated in one of the investment grade rating
categories by a rating agency will be offered by this prospectus. Affiliates of
the underwriters may act as agents or underwriters in connection with the
61
sale of the trust certificates. The applicable prospectus supplement will name
any affiliate of the underwriters acting as agents and will describe its
affiliation with the underwriters. The underwriters or their affiliates may act
as principals or agents in connection with market-making transactions relating
to the trust certificates or trading activities that create a short position.
The prospectus supplement related to the trust certificates for which a market
is being made or a short position is being either created or covered will be
delivered by the underwriters or affiliates.
The depositor is an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
LEGAL MATTERS
Shearman & Sterling, New York, or other counsel identified in the
applicable prospectus supplement, will pass on the validity of the trust
certificates for the depositor and the underwriters.
62
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_______ Trust Certificates
($25 Stated Amount)
PPLUS
FLOATING RATE CALLABLE TRUST CERTIFICATES
SERIES _____
-------------------------------------------------
PROSPECTUS SUPPLEMENT
-------------------------------------------------
Merrill Lynch & Co.
_______, 2004
Until 25 days after the date of this prospectus, all dealers effecting
transactions in the offered trust certificates, whether or not participating in
the distribution, may be required to deliver a prospectus supplement and the
prospectus to which it relates. This requirement is in addition to the
obligations of dealers to deliver a prospectus supplement and prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
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