<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. This prospectus shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be any sale
of these securities in any State in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws of
any such State.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Filed Pursuant to Rule 424(B)(3)
Registration No. 333-9883
Subject to Completion Dated May 2, 1997
Prospectus Supplement
(To Prospectus Dated November 15, 1996)
$_____________
FHLB Security-Backed Certificates, Series 1997-1
$____________ _____% Certificates due April 25, 2007
Southpoint Structured Assets, Inc.
Depositor
The FHLB Security-Backed Certificates, Series 1997-1 offered hereby (the
"Certificates") will be issued by the FHLB Security-Backed Trust, Series 1997-1
(the "Trust") to be formed pursuant to the Trust Agreement, dated as of
November 1, 1996, between Southpoint Structured Assets, Inc. (the "Depositor")
and Bank One, West Virginia, N.A., as trustee (the "Trustee"), as supplemented
by the Series 1997-1 Supplement, dated as of May __, 1997 (collectively, the
"Trust Agreement"). The Certificates will represent a fractional undivided
interest in the Trust and the principal asset of the Trust will consist of
$________ in aggregate principal amount of Fixed Rate Bonds issued by the
Federal Home Loan Banks having a coupon of 7.15% and a maturity of April 23,
2007 (the "FHLB Security" or the "Underlying Security"). See "Description of
the Deposited Assets" herein. The FHLB Security will be acquired by an
affiliate of the Depositor in the secondary market before being deposited by the
Depositor into the Trust, subject to the Call Warrant (as defined herein) and
exclusive of the Retained Interest (as defined herein), for the benefit of the
Certificateholders. The FHLB Security constitutes a joint and several unsecured
general obligation of the Federal Home Loan Banks. Terms used but not otherwise
defined herein are defined in the Prospectus attached hereto (the "Prospectus").
Distributions of interest on the Certificates will be made semi-annually on
April 25 and October 25 of each year, commencing October 25, 1997 (each, a
"Distribution Date"). The last day on which distributions are scheduled to be
made on the Certificates, by which date the holders of the Certificates will
receive a distribution of all amounts allocable to principal on such
Certificates, is April 25, 2007 (the "Final Distribution Date"). See
"Description of the Certificates--Distributions" herein.
The Certificates may be paid in full on any date on or after April 25, 1999
(the "Early Termination Date") in an amount equal to par plus accrued interest
to the Early Termination Date (the "Early Termination Price"), upon the purchase
of the FHLB Security by the holder of the Call Warrant. See "Risk Factors--
Maturity and Yield Considerations" and "Description of the Certificates--Early
Termination" herein.
The Certificates have been authorized for listing, upon official notice of
issuance, with the New York Stock Exchange ("NYSE").
See "Risk Factors" herein on page S-7 and in the Prospectus on pages 6 to
8.
(Cover continued on next page)
------------------------------
The Certificates Represent Interests In The Trust Only And Do Not Represent
An Obligation of or Interest In The Depositor or Any of Its Respective
Affiliates. The Certificates Do Not Represent A Direct Obligation of The United
States of America or the Federal Home Loan Banks And Will Not Be Guaranteed or
Insured By Any Governmental Agency or Instrumentality, or By The Depositor.
These Securities Have Not Been Approved or Disapproved By The Securities
And Exchange Commission or Any State Securities Commission Nor Has The
Commission or Any State Securities Commission Passed Upon The Accuracy or
Adequacy of This Prospectus Supplement or The Prospectus. Any Representation To
The Contrary Is A Criminal Offense.
------------------------------
Morgan Keegan & Company, Inc. (the "Underwriter") has agreed to purchase
from the Depositor the Certificates at ___% of the Certificate Principal Balance
thereof ($_________ aggregate proceeds to the Depositor, before deducting
expenses), subject to the terms and conditions set forth in the Underwriting
Agreement referred to herein under "Plan of Distribution."
The Underwriter proposes to offer the Certificates from time to time for
sale in negotiated transactions, at prices determined at the time of sale. For
further information with respect to the plan of distribution and any discounts,
commissions or profits that may be deemed underwriting discounts or commissions,
see "Plan of Distribution."
The Certificates are offered subject to receipt and acceptance by the
Underwriter, to prior sale and to the Underwriter's right to reject any order in
whole or in part and to withdraw, cancel or modify the offer without notice. It
is expected that delivery of the Certificates will be made in book-entry form
through the facilities of The Depository Trust Company on or about May__, 1997
(the "Closing Date").
Morgan Keegan & Company, Inc.
May__, 1997
<PAGE>
(Cover page continued.)
As and to the extent described herein, collections received by the Trustee
with respect to the FHLB Security will be distributed to the Certificateholders
in the manner and priority described herein. Neither the Federal Home Loan
Banks nor any agency or instrumentality of the United States of America is
participating in or will receive any proceeds in connection with this offering.
There is currently no secondary market for the Certificates, and there can
be no assurance that a secondary market for the Certificates will develop or, if
it does develop, that it will continue. See "RISK FACTORS" in the Prospectus.
If and to the extent required by applicable law or regulation, this
Prospectus Supplement and the Prospectus will also be used by the Underwriter
after the completion of the offering in connection with offers and sales related
to market-making transactions in the Certificates in which the Underwriter acts
as principal. The Underwriter may also act as agent in such transactions.
Sales will be made at negotiated prices determined at the time of sale.
The Certificates initially will be represented by a global certificate
registered in the name of CEDE & Co., as nominee of The Depository Trust Company
("DTC") and will be available for purchase in denominations of $1,000 and any
integral multiple thereof. The interests of beneficial owners of such
Certificates will be represented by book entries on the records of participating
members of DTC ("Participants"). Definitive certificates will be available for
such Certificates only under the limited circumstances described herein. See
"DESCRIPTION OF THE CERTIFICATES--DEFINITIVE CERTIFICATES."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT WILL CONSTITUTE A
SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE DEPOSITOR PURSUANT TO ITS
PROSPECTUS DATED NOVEMBER 15, 1996, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A
PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. IN PARTICULAR, INVESTORS SHOULD CONSIDER CAREFULLY THE
FACTORS SET FORTH UNDER "RISK FACTORS" IN THE PROSPECTUS AND IN THIS PROSPECTUS
SUPPLEMENT.
S-2
<PAGE>
Summary
The following summary of principal economic terms does not purport to be
complete and is qualified in its entirety by reference to the detailed
information appearing elsewhere herein and in the Prospectus, including under
the headings "Description of the Certificates" and "Description of the Deposited
Assets." Certain capitalized terms used herein are defined elsewhere in this
Prospectus Supplement on the pages indicated in the "Index of Terms" or, to the
extent not defined herein, have the meanings assigned to such terms in the
Prospectus.
The Certificates
The Trust.....................FHLB Security-Backed Trust, Series 1997-1 (the
"Trust"). The Trust will be formed pursuant to the
Trust Agreement, dated as of November 1, 1996 (the
"Base Trust Agreement"), between the Depositor and
the Trustee, as supplemented by the Series 1997-1
Supplement, dated as of the Closing Date (the
"Series Supplement" and, together with the Base
Trust Agreement, the "Trust Agreement").
Certificates Offered..........FHLB Security-Backed Certificates, Series 1997-1
(the "Certificates").
Initial Certificate
Principal Balance.............$___________
Distribution Dates............Distributions on the Certificates will be made
semi-annually on April 25 and October 25 of each
year, commencing October 25, 1997 (each, a
"Distribution Date"). The last day on which
distributions are scheduled to be made on the
Certificates, by which date the holders of the
Certificates will receive a distribution of all
amounts allocable to principal on such
Certificates, is April 25, 2007 (the "Final
Distribution Date").
Final Distribution Date.......April 25, 2007
The actual maturity may be shorter than the Final
Distribution Date.
Pass-Through Rate.............____% per annum.
Required Interest.............Interest on the Certificates will be distributed
each Distribution Date, commencing October 25,
1997, in an amount equal to the accrued and unpaid
interest on
S-3
<PAGE>
the outstanding Certificate Principal Balance,
computed at the Pass-Through Rate ("Required
Interest"). Required Interest distributable on a
Distribution Date will accrue from and including
the preceding Distribution Date (or, in the case
of the first Distribution Date, from and including
the Cut-off Date) to but excluding the current
Distribution Date and will be calculated on the
basis of a 360-day year consisting of twelve
30-day months. Required Interest distributions
with respect to the Certificates will be made only
from Available Funds. See "Description of
Certificates--Distributions."
Cut-off Date..................__________, 1997.
Record Date...................The day immediately preceding a Distribution Date.
Denominations.................The Certificates will be available for purchase in
minimum denominations of $1,000 and integral
multiples thereof.
Early Termination Dates.......The Certificates may be paid in full on any date
on or after April 25, 1999 (the "Early Termination
Date") in an amount equal to par plus accrued
interest (the "Early Termination Price"), upon the
purchase of the FHLB Security by the holder of the
Call Warrant.
Early Termination Price.......Par plus accrued interest.
The Call Warrant..............The Call Warrant (as defined herein) represents
the right to purchase the FHLB Security at a price
of par plus accrued interest to the Early
Termination Date (the "Liquidation Price"). The
initial holder of the Call Warrant will be the
Depositor or an affiliate thereof. The Call
Warrant is not being offered hereby.
Early Termination
Provisions....................The holder of the Call Warrant (a "Warrantholder")
may provide notice to the Trustee (a "Purchase
Request") no less than 35 days prior to an Early
Termination Date that it will purchase the FHLB
Security. The Trustee will notify the
Certificateholders of the Early Termination Date
no less than 30 days prior to such Early
Termination Date.
S-4
<PAGE>
On, or before, the Early Termination Date, the
Warrantholder will deliver the Liquidation Price
for such FHLB Security and the Trustee will
deliver the FHLB Security to the Warrantholder.
In the event that the Warrantholder fails to
deliver the Liquidation Price on the Early
Termination Date, the early termination will be
deemed not effective with respect to such Early
Termination Date. In such case, the Certificates
shall continue to remain outstanding and the
Warrantholder's rights with respect to that Call
Warrant shall be deemed surrendered to the
Depositor.
Form of Security..............Book-entry Certificates to be deposited with The
Depository Trust Company ("DTC"), except in
certain limited circumstances. See "Description
of the Certificates--Definitive Certificates."
Distributions thereon will be settled in
immediately available (same-day) funds.
CUSIP Number.................._____________________________
Retained Interest.............Under the Trust Agreement, the holder of the
Retained Interest will retain the right to receive
on each Distribution Date, from payments received
on the FHLB Security, a distribution equal to ___%
per annum multiplied by the principal amount of
the FHLB Security (the "Interest Strip"). The
Interest Strip represents the difference between
the 7.15% coupon on the FHLB Security and the
____% Pass-Through Rate for the Certificates. The
rights of the holder of the Retained Interest to
the Interest Strip from payments received on the
FHLB Security is of equal priority with the rights
of the Certificateholders. The initial holder of
Retained Interest will be the Depositor or an
affiliate thereof. The Retained Interest is not
being offered hereby. See "The Description of the
Deposited Assets--General."
Trustee.......................Bank One, West Virginia, N.A., as trustee. The
Trustee's fee, in an amount not to exceed $______,
will be paid by the Depositor.
Federal Income
Tax Consequences..............In the opinion of tax counsel to the Depositor,
the Trust will be classified for Federal income
tax
S-5
<PAGE>
purposes as a grantor trust and not as an
association taxable as a corporation. See "Federal
Income Tax Consequences."
ERISA Considerations.........An employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), and an individual retirement account
(each, a "Plan") may purchase Certificates if
either (i) the Depositor is able to confirm the
existence of at least 100 independent purchasers of
the Certificates or (ii) the Plan can represent
that its purchase of the Certificates would not be
prohibited under ERISA or the Code. See "ERISA
Considerations."
Rating.......................It is a condition to the issuance of the
Certificates that they be rated "AAA" by Standard &
Poor's Ratings Services. A security rating is not a
recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any
time by the assigning rating agency. A security
rating does not address the likelihood of the
exercise of the Call Warrant, or the corresponding
effect on yield to investors. See "Ratings."
The FHLB Security
Underlying Security or
FHLB Security................$_________ in aggregate principal amount of a Fixed
Rate Bond issued by the Federal Home Loan Banks
(the "FHLB Security"). The FHLB Security
constitutes a joint and several unsecured general
obligation of the Federal Home Loan Banks.
Denominations................The FHLB Securities are available in minimum
denominations of $10,000 and integral multiples of
$5,000.
FHLB Security Original
Issue Date...................April 23, 1997
FHLB Security Maturity
Date.........................April 23, 2007
FHLB Security
Payment Dates................April 23 and October 23, commencing October 23,
1997
S-6
<PAGE>
FHLB Security Interest Rate...7.15% per annum (30/360 payment basis)
Form of Underlying Security...Book-entry, maintained in the book-entry system
operated by the Federal Reserve Bank.
Rating of the FHLB
Security......................The FHLB Security is not rated by S&P.
Risk Factors
Prospective purchasers should consider, among other things, the following
factors (as well as the factors set forth under "Risk Factors" in the
Prospectus) in connection with an investment in the Certificates.
Limited Liquidity. There is currently no secondary market for the
Certificates. The Underwriter is under no obligation to make a market in the
Certificates. It is unlikely that a secondary market will develop and, if a
secondary market does develop, it is unlikely that it will provide
Certificateholders with liquidity of investment or will continue for the life of
the Certificates.
Maturity and Yield Considerations. If a Warrantholder exercises the right
to purchase the FHLB Security, and thereby causes an early termination of the
Certificates, the Certificates will have a shorter average maturity and may have
a lower yield than if such right were not exercised. Additionally, such right
is likely to be exercised, if at all, at a time when the interest rates on
potential reinvestments are lower than the return that would have been earned
over the remaining life of the Certificates if they had not been called.
Limited Assets. The Trust has no significant assets other than the FHLB
Security. If the FHLB Security is insufficient to make payments or
distributions on the Certificates, no other assets will be available for payment
of the deficiency.
Litigation Affecting the Federal Home Loan Banks. A complaint has been
filed against the twelve Federal Home Loan Banks and the Office of Finance by
Orange County, California ("Orange County"). The case is pending in U.S.
District Court for the Central District of California and is one of a number of
complaints filed against a broad array of parties arising out of the December
1994 municipal bankruptcy of Orange County. The complaint alleges that the
Federal Home Loan Banks and Office of Finance (and securities dealers allegedly
acting as agents for the Federal Home Loan Banks and Office of Finance) made
oral and written misrepresentations and omitted to state other facts in
connection with the sale of structured notes which were the joint and several
obligations of the Federal Home Loan Banks ("Consolidated Bonds"). The
complaint does not specify the amount of damages claimed. It alleges that
Orange County suffered approximately $1.8 billion in principal losses from
various securities, including Consolidated Bonds, purchased by Orange County
between July 1, 1991 and December 6, 1994, but does not specify the amount of
principal losses from the Consolidated Bonds. The Office of Finance of the
Federal Home Loan Banks has stated that it is the intention of management of the
twelve FHLBanks and the Office of
S-7
<PAGE>
Finance to defend this matter vigorously; however, the litigation is in its
early stages and its financial impact, if any, cannot be ascertained at this
time.
Formation of the Trust
The Trust will be formed pursuant to the Trust Agreement (including the
related Series Supplement) between the Depositor and the Trustee. Concurrently
with the execution and delivery of the Series Supplement, the Depositor will
deposit the FHLB Security into the Trust subject to the Call Warrant and
exclusive of the Retained Interest. The Trustee, on behalf of the Trust, will
accept such FHLB Security and will deliver the Certificates to or upon the order
of the Depositor. The Trustee will hold the FHLB Security, when purchased, for
the benefit of the Certificateholders, subject to the rights of the
Warrantholder and the holder of the Retained Interest. See "Description of the
Certificates--General," "--Early Termination" and "--Call Warrants."
The FHLB Security will be purchased by the Depositor in the secondary
market (either directly or through an affiliate of the Depositor). The FHLB
Security will not be acquired from the Federal Home Loan Banks as part of any
distribution by or pursuant to any agreement with the Federal Home Loan Banks.
The Federal Home Loan Banks are not participating in this offering and will not
receive any of the proceeds of the sale of the FHLB Security to the Depositor or
the issuance of the Certificates. Neither the Depositor nor any of its
affiliates participated in the initial sale of the FHLB Security.
Description of the FHLB Security
General
The only asset of the Trust will consist of $__________ in aggregate
principal amount of a Fixed Rate Bond issued by the Federal Home Loan Banks,
with a coupon of 7.15% payable on April 23 and October 23 of each year and a
maturity of April 23, 2007 and which is subject to the Call Warrant and
exclusive of the Retained Interest (the "FHLB Security"). The FHLB Security is
not subject to redemption by the Federal Home Loan Banks prior to the stated
maturity thereof. The FHLB Security constitutes a joint and several unsecured
general obligation of the Federal Home Loan Banks. This Prospectus Supplement
sets forth certain relevant terms with respect to the FHLB Security, but does
not provide detailed information with respect thereto. This Prospectus
Supplement relates only to the Certificates offered hereby and does not relate
to the FHLB Security. An investment in the Certificates is different from, and
should not be considered a substitute for, an investment in any Security Issued
by the Federal Home Loan Banks.
Available Information
The Federal Home Loan Banks do not file reports or other information with
the U.S. Securities and Exchange Commission.
S-8
<PAGE>
Copies of the Federal Home Loan Bank System's most recent combined annual
Financial Report and any combined quarterly Financial Report, or supplement,
issued subsequent thereto and other information concerning the Federal Home Loan
Banks may be obtained without charge from the Marketing and Debt Services
Division, Office of Finance, Federal Home Loan Banks, 11921 Freedom Drive, Suite
1000, Reston, VA 20190; telephone number (703) 487-9500.
The Office of Finance has prepared an Offering Notice and Offering Circular
that contains the terms of the FHLB Securities and other information as the
Office of Finance considers necessary or appropriate. Copies of Offering
Notices are available from the Office of Finance.
The Federal Home Loan Bank System
The Federal Home Loan Bank system is comprised of the twelve Federal Home
Loan Banks and the Office of Finance under the supervision of the Finance Board
(the "Federal Home Loan Bank System"). The 12 Federal Home Loan Banks are
instrumentalities of the United States organized under the authority of the
Federal Home Loan Bank Act. The "Finance Board" is the Federal Housing Finance
Board, an independent agency in the executive branch of the U.S. government, and
its successor and assigns. The "Office of Finance" means the joint office of the
Federal Home Loan Bank System established by the Finance Board pursuant to the
Federal Home Loan Bank Act, as amended, and its regulations promulgated
thereunder to facilitate the issuance of the consolidated obligations of the
Federal Home Loan Banks, and its successors and assigns.
The primary function of the Federal Home Loan Bank System is to serve the
public purpose of enhancing the availability of residential mortgage credit by
providing a readily available, low-cost source of funds to its member
institutions. The capital stock of each Federal Home Loan Bank is owned by its
member institutions, and each Federal Home Loan Bank has its own management,
employees and board of directors. All of the Federal Home Loan Banks are
subject to the rules, regulations and orders of, and are supervised by, the
Finance Board. Although the Finance Board is an independent federal agency in
the executive branch of the United States government, the obligations of the
Federal Home Loan Banks are not obligations of the United States government.
Events of Default and Remedies
Holders of FHLB Securities generally have the right upon default to
proceed individually in whatever manner is deemed to be appropriate. In such
event, any particular holder is not required to act in concert with other
holders. These remedies are generally exercisable by the Trustee on behalf of
the Certificateholders, not by Certificateholders directly. See "Description of
the Trust Agreement--Events of Default."
The FHLB Security deposited in the Trust represents the sole assets of the
Trust that are available to make distributions in respect of the
S-9
<PAGE>
Certificates. Consequently, the ability of Certificateholders to receive
distributions in respect of the Certificates will depend on the Trust's receipt
of payments on, or in respect of, the FHLB Security. This Prospectus Supplement
relates only to the Certificates being offered hereby and does not relate to the
FHLB Securities.
Description of the Certificates
General
The Certificates represent in the aggregate the entire beneficial ownership
interest in the Trust. The Certificates have in the aggregate an initial
Certificate Principal Balance of $__________ and a Pass-Through Rate of ____%.
The Certificates will be issued, maintained and transferred on the book-
entry records of DTC and its Participants in minimum denominations of $1,000 and
integral multiples thereof. See "--DTC Book-Entry System" below and
"Description of Certificates--Global Securities" in the Prospectus.
Listing on the New York Stock Exchange
The Certificates have been authorized for listing, upon official notice of
issuance, with the New York Stock Exchange (the "NYSE"). There can be no
assurance that the Certificates, once listed, will continue to be eligible for
trading on the NYSE.
Interest
Interest on the Certificates will be distributed each Distribution Date,
commencing October 25, 1997, in an amount equal to the accrued and unpaid
interest on the outstanding Certificate Principal Balance, computed at the Pass-
Through Rate ("Required Interest"). Required Interest distributable on a
Distribution Date will accrue from and including the preceding Distribution Date
(or, in the case of the first Distribution Date, from and including the Cut-off
Date) to but excluding the current Distribution Date and will be calculated on
the basis of a 360-day year consisting of twelve 30-day months. Required
Interest distributions with respect to the Certificates will be made only from
Available Funds. See "--Distributions."
Principal
Principal on the Certificates will be distributed at maturity or upon the
Early Termination Date. Principal distributions with respect to the
Certificates will be made from Available Funds. See "Description of
Certificates--Distributions."
S-10
<PAGE>
Distributions
Collections on the FHLB Security that are received by the Trustee for a
given Collection Period pursuant to the collection procedures described herein
and in the Prospectus and deposited from time to time into the Certificate
Account will be applied by the Trustee on each Distribution Date to the
following distributions in the following order of priority, solely to the extent
of Available Funds (as defined below) on such Distribution Date:
(i) to the Certificateholders, the Required Interest, to the holder of
the Retained Interest, the Interest Strip and to the Depositor, the Initial
Accrued Interest; and
(ii) to the Certificateholders, the Required Principal (if any).
If the Trustee has not received payment on the FHLB Security on or prior to
a Distribution Date, such distribution will be made upon receipt of payment on
the FHLB Security. No additional amounts will accrue on the Certificates or be
owed to Certificateholders as a result of any such delay. In the event of a
payment default on the FHLB Security, approved Extraordinary Expenses (see
"Description of the Trust Agreement -- The Trustee" herein) of the Trustee may
be reimbursed to the Trustee out of Available Funds before any distributions to
Certificateholders are made.
All amounts received on or with respect to the FHLB Security, including
amounts received in connection with the purchase by a Warrantholder of an FHLB
Security, which are not distributed to Certificateholders on the date of
receipt, shall be invested by the Trustee in Eligible Investments.
There can be no assurance that collections received from the FHLB Security
over a specified period will be sufficient to make all required distributions to
the Certificateholders. To the extent Available Funds are insufficient to make
any such distributions due, any shortfall will be carried over and will be
distributable on the next Distribution Date on which sufficient funds exist to
pay such shortfalls.
For purposes hereof, the following terms have the following meanings:
"Available Funds" for any Distribution Date means the sum of all amounts
received on or with respect to the FHLB Security (including investment income on
Eligible Investments) received during the preceding Collection Period.
"Eligible Investments" means, with respect to the Certificates, [United
States Treasury bills], provided that any investments must be acceptable to the
Rating Agency as being consistent with the rating of such 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 succeeding Distribution Date.
S-11
<PAGE>
"Interest Strip" allocable to the Retained Interest for any Distribution
Date means accrued but unpaid interest on the outstanding principal balance of
the FHLB Security, computed at an annual rate of ____%. The Interest Strip
represents the difference between the 7.15% coupon on the FHLB Security and the
___% Pass Through Rate on the Certificates.
"Initial Accrued Interest" means, with respect to the FHLB Security, the
amount of interest that accrued thereon to, but excluding, the Cut-off Date.
"Required Interest" for the Certificates on any given Distribution Date
means the accrued and unpaid interest on the outstanding Certificate Principal
Balance, computed at the Pass-Through Rate.
"Required Principal" for the Certificates for any Distribution Date means
the amount received on the FHLB Security attributable to principal payments
thereon during the Collection Period. No principal payments are scheduled to be
made on the FHLB Security until April 23, 2007.
Early Termination
The Certificates may be paid in full on any date on or after the April 25,
1999 (the "Early Termination Date") upon the purchase of the FHLB Security by
the holder of the Call Warrant. On the Early Termination Date, the Certificates
will be paid in full in the amount of par plus accrued interest (the "Early
Termination Price").
The holder of the Call Warrant (the "Warrantholder") (see below) may
provide notice to the Trustee (a "Purchase Request") no less than 35 days prior
to the Early Termination Date that it will purchase the FHLB Security. The
Trustee will notify Certificateholders of the Early Termination Date not less
than 30 days prior to such Early Termination Date.
On, or before, the Early Termination Date, the Warrantholder shall provide
the Trustee with the Liquidation Price for such FHLB Security. Upon receiving
such Liquidation Price, the Trustee will immediately deliver the FHLB Security
to the Warrantholder.
Deliveries of the FHLB Security by the Trust to the Warrantholder will only
be made against payment by the Warrantholder in immediately available funds.
Such payment must occur no later than 10:00 a.m. New York City time on the Early
Termination Date. In the event that the Warrantholder fails to make payment by
such time (a "Purchase Default"), the sale of the FHLB Security will be voided
and the early termination will be deemed to not be effective with respect to
such Early Termination Date. In the event of a Purchase Default, the
Certificates shall continue to remain outstanding and the Warrantholder's rights
with respect to the Call Warrant shall be deemed surrendered to the Depositor.
S-12
<PAGE>
Retained Interest
The FHLB Security will be deposited into the Trust subject to the right of
the holder of the Retained Interest to receive on each Distribution Date from
payments received on the FHLB Security, a distribution equal to ___% per annum
multiplied by the principal amount of the FHLB Security (the "Interest Strip").
The Interest Strip represents the difference between the 7.15% coupon on the
FHLB Security and the ___% Pass Through Rate on the Certificates. The right of
the holder of the Retained Interest to receive the Interest Strip is of equal
priority with the rights of the Certificateholders to receive distributions of
interest on the Certificates.
Call Warrant
The Call Warrant represents the right to purchase the FHLB Security from
the Trustee for the price of par plus accrued interest to the Early Termination
Date (the "Liquidation Price").
Under the terms of the Call Warrant and the Trust Agreement,
Certificateholders will not be entitled to terminate the Trust or cause the sale
or other disposition of the FHLB Security without the consent of the holder of
the Call Warrant. In addition, amendment of the Trust Agreement may require,
and amendment of the Call Warrant generally will require, consent of the
Warrantholder. See "Description of the Trust Agreement--Voting Rights." No
Call Warrants are being offered hereby.
DTC Book-Entry System
The 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, the "Clearing Agency"),
except as provided below. The Depositor has been informed by DTC that DTC's
nominee will be CEDE & Co. ("CEDE"). No beneficial owner of any such
Certificate will be entitled to receive a certificate representing such person's
interest, except as set forth below under "--Definitive Certificates." Unless
and until Definitive Certificates are issued under the limited circumstances
described herein, all references to actions by Certificateholders with respect
to any such Certificates shall refer to actions taken by DTC upon instructions
from its Participants. See "--Definitive Certificates" below and "Description
of Certificates--Global Securities" in the Prospectus.
Under the rules, regulations and procedures creating and effecting DTC and
its operations, DTC will take action permitted to be taken by a
Certificateholder under the Trust Agreement only at the direction of one or more
Participants to whose DTC account such Certificates are credited. Additionally,
DTC will take such actions with respect to specified Voting Rights only at the
direction and on behalf of Participants whose holdings of such Certificates
evidence such specified Voting Rights. DTC may take conflicting actions
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with respect to Voting Rights, to the extent that Participants whose holdings of
Certificates evidence such Voting Rights, authorize divergent action.
Definitive Certificates
Definitive Certificates will be issued to beneficial owners or their
nominees, respectively, rather than to DTC or its nominee, only if (i) 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 Certificates and the Depositor is unable to locate a qualified successor or
(ii) the Depositor, at its option, elects to terminate the book-entry system
through DTC.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee is required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the global certificate representing the Certificates and receipt of instructions
for re-registration, the Trustee will reissue such Certificates as Definitive
Certificates issued in the respective principal amounts owned by the individual
owners of such Certificates, and thereafter the Trustee will recognize the
holders of such Definitive Certificates as Certificateholders under the Trust
Agreement.
Description of the Trust Agreement
General
The Certificates will be issued pursuant to the Trust Agreement, a form of
which is filed as an exhibit to the Registration Statement. A Current Report on
Form 8-K relating to the Certificates containing a copy of the Trust Agreement
as executed will be filed by the Depositor with the Commission following the
issuance and sale of the Certificates. The Trust created under the Trust
Agreement (including the Series Supplement) will consist of the FHLB Security
(upon the purchase thereof and subject to the Call Warrant and exclusive of the
Retained Interest) and (ii) all payments on or collections in respect of the
FHLB Security due after the Cut-off Date (exclusive of the Interest Strip).
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 Certificates. The following summaries of certain provisions
of the Trust Agreement do not purport to be complete and are subject to the
detailed provisions contained in the form of Trust Agreement, to which reference
is hereby made for a full description of such provisions, including the
definition of certain terms used herein.
The discussions in the Prospectus under "Description of the Trust Agreement
- --Advances in Respect of Delinquencies," "--Certain Matters Regarding the
Administrative Agent and the Depositor" (to the extent the discussion relates to
the Administrative Agent), "--Administrative Agent Termination Events; Rights
Upon Administrative Agent Termination Event," and "--Evidence as to Compliance"
are not applicable to the Certificates.
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The Trustee
Bank One, West Virginia, N.A., a national banking association, will act as
trustee for the Certificates and the Trust pursuant to the Trust Agreement. The
Trustee's offices are located at 707 Virginia Street East, 2nd Floor,
Charleston, West Virginia 25301, Attn: Corporate Trust Department and its
telephone number is (304) 348-4416.
Pursuant to the Trust Agreement, the Depositor shall pay the Ordinary
Expenses of the Trustee.
"Ordinary Expenses" are defined in the Trust Agreement and are generally
described as the Trustee's customary fee for its services as Trustee, including
(i) the costs and expenses of preparing, sending and receiving all reports,
statements, notices, returns, filings, solicitation of consent or instructions,
or other communications required by the Trust Agreement, (ii) 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 interest or principal, (iii)
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 (iv) 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.
The Trust Agreement provides that the Trustee may not take any action
which, in the Trustee's opinion, would or might cause it to incur Extraordinary
Expenses with respect to a particular Trust, unless (i) the Trustee is satisfied
that it will have adequate security or indemnity in respect of such costs,
expenses and liabilities and (ii) the Trustee has been instructed to do so by
the Certificateholders representing not less than 100% of the aggregate voting
rights of the Certificates then outstanding; provided, however, that for
purposes of clause (ii) of this sentence, in the event of a payment default on
the Underlying Security, a vote of not less than 66-2/3% of the aggregate voting
rights of the Certificates then outstanding shall suffice to instruct the
Trustee to incur such Extraordinary Expenses. Extraordinary Expenses so
incurred may be reimbursed to the Trustee out of Available Funds on any
Distribution Date before any distributions to Certificateholders on such
Distribution Date are made, unless the Certificateholders voting to incur such
Extraordinary Expenses shall have agreed to bear the entire amount of such
Extraordinary Expenses. "Extraordinary Expenses" are defined in the Trust
Agreement as any and all costs, expenses or liabilities arising out of the
establishment, existence or administration of the Trust, other than (i) Ordinary
Expenses and (ii) costs and expenses payable by a particular Certificateholder,
the Trustee or the Depositor pursuant to the Trust Agreement.
The Trust Agreement will provide that the Trustee and any director,
officer, employee or agent of the Trustee will be indemnified by the Depositor
and will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Trust Agreement or the
Certificates or the performance of the Trustee's duties under the Trust
Agreement, other than any loss, liability or expense (i) that constitutes a
specific liability of the Trustee under the Trust Agreement or (ii) incurred by
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reason of willful misfeasance, bad faith or negligence in the performance of the
Trustee's duties under the Trust Agreement or as a result of a breach, or by
reason of reckless disregard, of the Trustee's obligations and duties under the
Trust Agreement.
EVENTS OF DEFAULT
An event of default with respect to the Certificates under the Trust
Agreement (an "Event of Default") will consist of (i) a default in the payment
of any interest on the FHLB Security after the same becomes due and payable
(subject to any applicable grace period) or (ii) a default in the payment of the
principal of or any installment of principal of the FHLB Security when the same
becomes due and payable.
In the event of a default in the payment of any amount on the FHLB Security
the Trustee is required to proceed on behalf of the Certificateholders to
enforce its rights under the FHLB Security or otherwise protect the interests of
such Certificateholders. See "Description of the Trust Agreement--Collection
and Other Administrative Procedures" in the Prospectus.
The Trust Agreement will provide that, within 30 days after the occurrence
of an Event of Default in respect of the Certificates, the Trustee will give
notice to the holders of such Certificates, the Warrantholder and the holder of
the Retained Interest, transmitted by mail, of all such uncured or unwaived
Events of Default known to it. However, except in the case of an Event of
Default relating to the payment of principal of or interest on any of the FHLB
Security, the Trustee will be protected in withholding such notice if in good
faith it determines that the withholding of such notice is in the interest of
the holders of the Certificates, the Warrantholder and the holder of the
Retained Interest.
No holder of any Certificate will have the right to institute any
proceeding with respect to the Trust Agreement, unless (i) such holder
previously has given to the Trustee written notice of a continuing breach,
(ii) the holders of Certificates evidencing not less than the "Required
Percentage--Remedies" specified in the Series Supplement of the aggregate Voting
Rights have requested in writing that the Trustee institute such proceeding in
its own name as Trustee, (iii) such holder or holders have offered the Trustee
reasonable indemnity, (iv) the Trustee has for 15 days failed to institute such
proceeding and (v) no direction inconsistent with such written request has been
given to the Trustee during such 15-day period by the holders of Certificates
evidencing not less than the Required Percentage--Remedies of the aggregate
Voting Rights of such Series.
VOTING RIGHTS
At all times, 100% of all voting rights ("Voting Rights") will be allocated
among all holders of the Certificates in proportion to the then outstanding
Certificate Principal Balances of their respective Certificates.
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The "Required Percentage-Amendment" of Voting Rights of those Certificates
that are materially adversely affected by any modification or amendment of the
Trust Agreement necessary to consent to such modification or amendment shall be
66-2/3%. In addition to the other restrictions on modification and amendment,
the Trustee will not enter into any amendment or modification of the Trust
Agreement which would adversely affect in any material respect the interests of
the Warrantholder or the holder of the Retained Interest without the consent of
the Warrantholder or the holder of the Retained Interest, respectively;
provided, however, that no such amendment or modification will be permitted
which would alter the timing or amount of any payment of the Early Termination
Price. See "Description of the Trust Agreement--Modification and Waiver" in the
Prospectus. Further, no amendment to a Call Warrant or a Retained Interest will
be permitted which would adversely affect in any material respect the interests
of the Certificateholders without the consent of Certificateholders representing
66-2/3% of the aggregate Voting Rights of those Certificates that are materially
adversely affected by such modification or amendment and without confirmation by
the Rating Agency that such amendment will not result in a downgrading or
withdrawal of its rating of the Certificates; provided, however, that no such
amendment or modification will be permitted which would alter the timing or
amount of any payment of the Liquidation Price for FHLB Security, without the
consent of Certificateholders representing 100% of the aggregate Voting Rights.
In addition, the Call Warrant may not be amended without the consent of the
Warrantholder and the Retained Interest may not be amended without the consent
of the holder thereof.
VOTING OF UNDERLYING SECURITY, MODIFICATION TRUST AGREEMENT
The Trustee, as holder of the FHLB Security, has the right to vote and give
consents and waivers in respect of such Underlying Security as permitted by the
rules and regulations of the book-entry system of the U.S. Federal Reserve Banks
and except as otherwise limited by the Trust Agreement. In the event that the
Trustee receives a request from a U.S. Federal Reserve Bank for its consent to
any amendment, modification or waiver of the FHLB Security or any other document
thereunder or relating thereto, or receives any other solicitation for any
action with respect to the FHLB Security, the Trustee shall mail a notice of
such proposed amendment, modification, waiver or solicitation to each
Certificateholder of record as of such date. The Trustee shall request
instructions from the Certificateholders as to whether or not to consent to or
vote to accept such amendment, modification, waiver or solicitation. The
Trustee shall consent or vote, or refrain from consenting or voting, in the same
proportion (based on the relative Certificate Principal Balances of the
Certificates) as the Certificates of the Trust were actually voted or not voted
by the Certificateholders thereof as of a date determined by the Trustee prior
to the date on which such consent or vote is required; provided, however, that,
notwithstanding anything to the contrary, the Trustee shall at no time vote or
consent to any matter (i) unless such vote or consent would not (based on an
opinion of counsel) alter the status of the Trust as a grantor trust for Federal
income tax purposes, (ii) which would alter the timing or amount of any payment
on the FHLB Security, including, without limitation, any demand to accelerate
the FHLB Security, except in the event of an event of default with respect to
the FHLB Security or an event which with the passage of time would become an
event of default and with the unanimous consent of all Certificateholders or
(iii) which would result in the exchange or
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substitution of any of the outstanding FHLB Security pursuant to a plan for the
refunding or refinancing of such FHLB Security except in the event of a default
under the FHLB Security and only with the unanimous consent of the
Certificateholders. The Trustee shall have no liability for any failure to act
resulting from Certificateholders' late return of, or failure to return,
directions requested by the Trustee from the Certificateholders.
In the event that an offer is made by the Federal Home Loan Banks to issue
new obligations in exchange and substitution for any of the FHLB Security,
pursuant to a plan for the refunding or refinancing of the FHLB Security or any
other offer is made for the FHLB Security, the Trustee shall notify the
Certificateholders of such offer as promptly as practicable. The Trustee must
reject any such offer unless an event of default under the FHLB Security has
occurred, the Trustee is directed by the affirmative vote of all of the
Certificateholders to accept such offer and the Trustee has received the tax
opinion described above.
If an event of default under an FHLB Security occurs and is continuing and
if directed by all the holders of outstanding Certificates, the Trustee shall
vote the FHLB Security in favor of directing, or take such other action as may
be appropriate to declare the unpaid principal amount of the FHLB Security and
any accrued and unpaid interest thereon to be due and payable. In connection
with a vote concerning whether to declare the acceleration of the FHLB Security,
the Certificateholders, the Warrantholder and the holder of the Retained
Interest may differ from each other and from holders of other securities of the
Federal Home Loan Banks.
TERMINATION OF A TRUST
A Trust shall terminate upon the earliest to occur of the payment in full
at maturity or sale by the Trust in accordance with the Call Warrants of all of
the FHLB Security and the distribution in full of all amounts due to the
Certificateholders, the Warrantholder and the holder of the Retained Interest.
See "Description of the Trust Agreement--Termination" in the Prospectus. Under
the terms of the Trust Agreement, the Certificateholders will not be entitled to
terminate the Trust or cause the sale or other disposition of the FHLB Security,
if and for so long as the Call Warrant remains outstanding, without the consent
of the Warrantholder.
Federal Income Tax Consequences
This summary is based upon laws, regulations, rulings and decisions
currently in effect, all of which are subject to change, possibly on a
retroactive basis. The discussion does not deal with all Federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. In addition, this summary is generally limited to
investors who will hold the Certificates as "capital assets" (generally,
property held for investment) within the meaning of Section 1221 of the Internal
Revenue Code of 1986, as amended (the "Code"), and who do not hold their
Certificates as part of a "straddle," a "hedge" or a "conversion transaction."
Investors should consult their own tax advisors to
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determine the Federal, state, local and other tax consequences of the purchase,
ownership and disposition of the Certificates.
The Trust has been provided with an opinion of Chapman and Cutler, Chicago,
Illinois, special Federal tax counsel to the Depositor ("Federal Tax Counsel")
regarding certain Federal income tax matters discussed below. An opinion of
Federal Tax Counsel, however, is not binding on the Internal Revenue Service
(the "Service") or the courts. Prospective investors should note that no
rulings have been or will be sought from the Service with respect to any of the
Federal income tax consequences discussed below, and no assurance can be given
that the Service will not take contrary positions.
GRANTOR TRUST CERTIFICATES
In the opinion of Federal Tax Counsel, the Trust will be classified as a
grantor trust and not as an association taxable as a corporation for Federal
income tax purposes. Accordingly, each owner of a Certificate (a "Certificate
Owner") will be subject to Federal income taxation as if it owned directly the
portion of the Underlying Security allocable to such Certificate, as if it
issued directly the portion of the Call Warrant allocable to such Certificate
and as if it paid directly its share of reasonable expenses paid by the Trust.
The following discussion assumes that the Underlying Security was not issued
with original issue discount ("OID") and, accordingly, the Certificate Owners
will not realize OID except with respect to a "stripped interest" (as defined
below).
INCOME OF CERTIFICATE OWNERS
In General. A Certificate Owner will allocate the amount it pays for its
Certificate among each Underlying Security and each of the Deposited Assets, if
any, in the Trust in proportion to their relative fair market values on the date
of purchase of the Certificate in order to determine its initial tax basis for
the pro rata portion of each Underlying Security and each Deposited Asset, if
any, held by the Trust. A Certificate Owner would calculate separately its
income, gain, loss or deduction realized with respect to each such asset.
The Federal income tax treatment of a Certificate Owner will depend upon
whether the interest in the Underlying Security represented by a Certificate
will be considered to be a "stripped bond" or "stripped coupon" (together a
"stripped interest") within the meaning of Section 1286 of the Code. A
Certificate will not be considered to represent a stripped interest in the
Underlying Security to the extent the Certificate is entitled to receive a
proportionate amount of all principal of a particular maturity represented by
the Underlying Security and all interest relating thereto. A Certificate will
be considered to represent a stripped interest in the Underlying Security if the
Certificate is entitled to receive less than all of the interest on a particular
maturity represented by the Underlying Security or if the Certificate is
entitled to receive all or part of the interest on a particular maturity
represented by the Underlying Security but no principal on the Underlying
Security. In addition, if a Certificate is entitled to receive interest and
principal on a particular maturity represented by the Underlying Security, but
the interest it is entitled to receive on a
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particular maturity represented by the Underlying Security is disproportionately
more than the principal it is entitled to receive on a particular maturity
represented by the Underlying Security, it could be argued (based on the
preamble to Treas. Reg. Section 1.1286-1 discussed below under "--Tax Treatment
of Certificates to the Extent They Are Stripped Interests") that the
Certificates represents (a) an interest in a particular maturity represented by
the Underlying Security that is not a stripped interest to the extent it
represents a proportional amount of all the principal and interest on a
particular maturity represented by the Underlying Security and (b) a stripped
interest in a particular maturity represented by the Underlying Security to the
extent of any additional interest to which it is entitled on a particular
maturity represented by the Underlying Security. If a Certificate represents in
part a stripped interest and in part not a stripped interest, such interests
will be treated as two separate items for tax purposes and a purchaser of
Certificates will be required to allocate its purchase price among the two items
(as well as any other Deposited Assets) in proportion to their relative fair
market values on the date of purchase.
Tax Treatment of Certificates to the Extent They Are Not Stripped
Interests. To the extent a Certificate does not represent a stripped interest
in a particular maturity represented by the Underlying Security, each
Certificate Owner will be required to report on its Federal income tax return,
in a manner consistent with its method of accounting, its proportional share of
the gross income of the Trust, including interest on and other amounts with
respect to the corresponding Underlying Security, income derived from the other
Deposited Assets held by the Trust, any gain or loss upon collection or
disposition of the corresponding Underlying Security, other Deposited Assets, or
as further described below under "--Purchase and Sale of a Certificate" the sale
or other disposition of a Certificate. In addition, gross income of a Trust may
include any expenses of a Trust paid by the Depositor or other party. The
portion of each monthly payment to a Certificate Owner that is allocable to
principal on the corresponding Underlying Security (other than amounts
representing market discount, as described below) will represent a recovery of
capital, which will reduce the tax basis of such Certificate Owner's undivided
interest in the Underlying Security.
To the extent that the portion of the purchase price of a Certificate
allocated to a Certificate Owner's undivided interest in an Underlying Security,
based on the relative fair market value of an Underlying Security in which an
interest is acquired as well as other Deposited Assets in which an interest is
acquired, is greater than or less than the portion of the principal balance of
the Underlying Security allocable to the Certificate, such interest in the
Underlying Security will have been acquired at a premium or discount, as the
case may be (the "Allocated Purchase Price"). This allocation is required to be
calculated separately for each Underlying Security represented by a Certificate.
To the extent that the allocated Purchase Price is less than the principal
balance of an Underlying Security, the Certificate Owner's interest in such
Underlying Security will be treated as purchased at a "market discount." The
market discount on an Underlying Security will, however, be considered to be
zero if it is less than a statutorily defined de minimis amount. Conversely, to
the extent that the Allocated Purchase Price exceeds the principal balance of an
Underlying Security, the Certificate Owner's interest therein will be treated as
purchased with "bond premium." See the discussion below under "--BOND PREMIUM."
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For example, if the Allocated Purchase Price paid by a Certificate Owner
with respect to an Underlying Security is equal or almost equal to the portion
of the principal balance of the Underlying Security that is allocable to the
Certificate, there would be no significant amount of discount or premium with
respect to its interest in such Underlying Security. Moreover, if the total
purchase price of a Certificate is equal to the principal amount of the
Underlying Security allocable to the Certificate, one or more Underlying
Securities will have been purchased at a discount because a portion of such
purchase price will be allocated to the other Deposited Assets of the Trust.
In general, under the market discount provisions of the Code, all or a
portion of the principal payments received by the Trust and the gain recognized
upon a sale, maturity or disposition of an Underlying Security or upon the sale
or other disposition of a Certificate (as further described below under
"--PURCHASE AND SALE OF A CERTIFICATE") will be taxable as ordinary income to
the extent of accrued market discount. In general, the accrued market discount
on each Underlying Security will equal an amount that bears the same ratio to
the market discount on the Underlying Security as the number of days that the
Trust held the Underlying Security (or a Certificate Owner held a Certificate
related thereto), bears to the number of days after the Trust acquired the
Underlying Security (or a Certificate Owner acquired a Certificate related
thereto) and up and to the date of the maturity of the Underlying Security. At
the election of a Certificate Owner, market discount can be accrued under a
constant yield method as further described in the Code. The ordinary income
treatment on dispositions described above will not apply if a Certificate Owner
elects (or has previously elected) to include market discount in income
currently as it accrues for each taxable year during which it holds the
Certificate. Such election, if made, will also apply to all debt instruments
acquired directly or indirectly, by the Certificate Owner during the year in
which the election is made and all debt instruments acquired thereafter and is
irrevocable without the consent of the Service. If a Certificate Owner does not
elect to annually include accrued market discount in taxable income as it
accrues, deductions for any interest expense incurred by a Certificate Owner
that is incurred to purchase or carry a Certificate will be reduced by such
accrued market discount. In general, the portion of any interest expense that
was not currently deductible would ultimately be deductible when the accrued
market discount is included in income. Certificate Owners should consult their
tax advisors regarding whether an election should be made to include market
discount in income as it accrues and the method of accrual and as to the amount
of interest expense that may not be currently deductible.
Tax Treatment of Certificates to the Extent They Are Stripped Interests. To
the extent a Certificate represents a stripped interest in a particular maturity
represented by the Underlying Security, each such Certificate will be subject to
the OID rules. The amount of OID on a stripped interest is equal to the excess
of the stated redemption price at maturity (or the amount payable on the coupon)
over the portion of the purchase price for the Certificate allocable to the
stripped interest, based on the relative fair market value of all assets
acquired.
The tax treatment of a Certificate Owner will depend upon whether the
amount of OID on the stripped interest represented by the Certificate is less
than a statutorily defined
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de minimis amount. In general, under Treas. Reg. Section 1.1286-1 (the "De
Minimis Regulation"), the amount of OID with respect to the stripped interest
will be de minimis if it is less than 1/4 of one percent multiplied by the
product of the "stated redemption price at maturity" (or in the case of a
stripped coupon, the amount payable on the due date of such coupon) and the
number of full years remaining after the purchase date of either the Underlying
Security by the Trust or a Certificate by a Certificate Owner, as appropriate,
until the maturity of such stripped interest. However, if the stripped interest
provides for amortization of principal, the amount of OID will be de minimis if
it is less than 1/4 of one percent multiplied by the product of the stated
redemption price at maturity (or in the case of a stripped coupon, the amount
payable on the due date of such coupon) and the weighted average maturity. This
calculation of de minimis OID is to be performed separately for each new
purchaser of a Certificate of the stripped interest from the date of purchase of
the Underlying Security by the Trust or a Certificate by a Certificate Owner, as
appropriate.
In the preamble to the De Minimis Regulation, the Service stated that the
final regulations are premised on the assumption that stripped coupons may be
treated as qualified stated interest with respect to the bonds from which they
are stripped and, therefore, may be excluded from stated redemption price at
maturity in appropriate circumstances. According to the Service, without these
assumptions, each stripped bond and stripped coupon would be treated as a
separate (zero coupon) bond, and the OID with respect to each such separate bond
or coupon virtually never would be de minimis. Finally, the Service indicated
that future regulations under section 1286 will provide specific guidance
relating to these assumptions. Certificate Owners are advised to consult their
tax advisers with respect to the use of this assumption in determining the
federal income tax consequences associated with the acquisition, ownership and
disposition of a Certificate, including the determination of whether (i) OID is
de minimis, (ii) a Certificate is subject to the market discount rules discussed
above under "--Tax Treatment of Certificates to the Extent They Are Not Stripped
Interests," and (iii) whether a Certificate represents an interest in an
Underlying Security purchased at a premium and is subject to the discussion
below under "--Bond Premium."
To the extent the amount of OID on the stripped interest represented by the
Certificate is de minimis under the rules discussed above, such OID will be
treated as zero. As a result, as described above under "--Tax Treatment of
Certificates to the Extent They Are Not Stripped Interests," a Certificate Owner
would report its share of the income of the Trust under its usual method of
accounting.
If the OID with respect to the stripped interest in a particular maturity
represented by the Underlying Security represented by a Certificate is not
treated as being de minimis, a Certificate Owner will be required to include in
income any OID on the stripped interest. Whether the Certificate Owner uses the
cash or the accrual method of tax accounting, OID must be included in income as
it accrues on a daily basis, regardless of when cash payments are received,
using a method reflecting a constant yield as described below. Such treatment
could result in the accrual of income by such Certificate Owner prior to the
receipt of cash by such Certificate Owner. The accrual of OID depends upon
whether the Underlying Security with respect to which OID exists matures within
one year of the date purchased. In
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the case of a Certificate that matures within one year, OID accrues daily on a
ratable basis unless the holder elects to accrue such discount under a constant
yield method, compounded daily. In the case of a Certificate that does not
mature within one year of the date purchased, OID generally accrues daily,
computed under a constant yield method, compounded at least annually (with
straight line interpolation between compounding dates). Prospective purchasers
should consult their tax advisors as to the computation of the accrual of OID,
including the impact of the discussion set forth above in the preamble to the De
Minimis Regulation.
BOND PREMIUM
In the event that a Certificate represents an interest in an Underlying
Security purchased (either initially upon the formation of the Trust or upon the
purchase of a Certificate) at a premium, such premium will be amortizable by the
Certificate Owner as an offset to interest income (with a corresponding
reduction in the Certificate Owner's basis) under a constant yield method over
the term of the Underlying Security if an election under Section 171 of the Code
is made or was previously in effect. Any such election will also apply to all
debt instruments held by the Certificate Owner during the year in which the
election is made and all debt instruments acquired thereafter and the election
is irrevocable without the consent of the Service.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT
Under Treas. Reg. Section 1.1272-3 and with the limits set forth therein,
any Certificate Owner may elect to include in gross income all interest
(including stated interest, OID, de minimis OID, market discount and de minimis
market discount, as adjusted by any bond premium or acquisition premium) that
accrues on an unstripped or stripped interest using the constant yield method
described above. Such an election with respect to an unstripped or stripped
interest having amortizable bond premium or market discount, to the extent
permitted, would constitute, respectively, an election to apply the market
discount rules or bond premium rules with respect to all other debt instruments
with market discount or amortizable bond premium, as the case may be, of such
Certificate Owner. A Certificate Owner should consult its tax advisor as to
whether to make such an election.
MODIFICATION OR EXCHANGE OF UNDERLYING SECURITY
Depending upon the circumstances, it is possible that a modification of the
terms of one or more of the Underlying Securities, or a substitution of other
assets for the Underlying Security, would be a taxable event to Certificate
Owners on which they would recognize gain or loss.
DEDUCTIBILITY OF TRUST'S FEES AND EXPENSES
In computing its Federal income tax liability, a Certificate Owner will be
entitled to deduct, consistent with its method of accounting, its share of
reasonable administrative fees,
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trustee fees and other fees paid or incurred by the Trust and any allowable
amortization deductions with respect to certain other assets of the Trust, but
not amortizable bond premium. If a Certificate Owner is an individual, estate or
trust, the deduction for his share of fees will be a miscellaneous itemized
deduction and will only be allowable to the extent that they exceed 2% of the
Certificate Owner's adjusted gross income.
Purchase and Sale of a Certificate
A Certificate Owner's tax basis in a Certificate generally will equal the
cost of such Certificate (A) increased by the sum of (i) the fair market value
of the Call Warrant allocable to such Certificate and (ii) any amounts of
undistributed taxable income (e.g., OID or market discount) and (B) reduced by
any (i) amortized premium (each as described above) and (ii) payments other than
payments of qualified stated interest, if any (subject to the application of the
discussion set forth above in the preamble to the De Minimis Regulation), on an
Underlying Security represented by the Certificate. In addition a Certificate
Owner's tax basis in a Certificate may be reduced by expenses of the Trust paid
by the Depositor or other party.
If a Certificate Owner sells its Certificate, gain, if any, will constitute
ordinary income to the extent of the aggregate of the accrued market discount
(which has not previously been included in such Certificate Owner's taxable
income) with respect to the Certificate Owner's pro rata portion of each
Underlying Security held by the Trust. Any other gains (or losses) will be
capital gains (or losses) except in the case of a dealer or a financial
institution, and will be long-term if the Certificate Owner has held its
Certificates for more than one year. A Certificate Owner will recognize taxable
gains (or losses) (a) upon redemption or sale of its Certificate, (b) if the
Trustee disposes of an asset of the Trust or (c) upon receipt by the Trustee of
payments of principal on the Underlying Security. The amount of any such gain
(or loss) is measured by comparing the Certificate Owner's pro rata share of the
total proceeds from the transaction with its adjusted tax basis in its
certificate or its pro rata interest in the asset as the case may be, and then
reducing such gain, if any, to the extent characterized as ordinary income
resulting from accrued market discount as discussed above. A Certificate
Owner's tax basis in its Certificate and its pro rata portion of the Underlying
Security of the Trust may be adjusted to reflect the accrual of market discount
(if the Certificate Owner has elected to include such discount in income as it
accrues), original issue discount and amortized bond premium, if any. The tax
cost reduction requirements of the Code relating to amortization of bond premium
may, under some circumstances, result in the Certificate Owner realizing a
taxable gain when its Certificates are sold or redeemed for an amount equal to
its original cost. In addition, Certificate Owners must reduce the tax basis of
its Certificates and their pro rata portion of the Underlying Security of Trust
for their share of accrued interest received by the Trust, if any, on the
Underlying Security delivered after the Certificate Owner pays for its
certificates to the extent that such interest accrued on such Underlying
Security during the period from the Certificate Owner's settlement date to the
date such Underlying Security is delivered to the Trust and, consequently, such
Certificate Owner may have an increase in taxable gain or reduction in capital
loss upon the disposition of its Certificates or such Underlying Security.
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<PAGE>
For taxable years beginning after December 31, 1986 and before January 1,
1996, certain corporations may be subject to the environmental tax (the
"Superfund Tax") imposed by Section 59A of the Code. Interest received from,
and gains recognized from the disposition of, an Underlying Security by the
Trust or the sale of Certificates by a Certificate Owner will be included by
such corporations in the computation of the Superfund Tax. Under current Code
provisions, the Superfund Tax does not apply to tax years beginning on or after
January 1, 1996. However, the Superfund Tax could be extended retroactively.
The Revenue Reconciliation Act of 1993 (the "Act") raised tax rates on
ordinary income while capital gains remain subject to a 28% maximum stated rate
for taxpayers other than corporations. Because some or all capital gains are
taxed at a comparatively lower rate under the Act, the Act includes a provision
that recharacterizes capital gains as ordinary income in the case of certain
financial transactions that are "conversion transactions" effective for
transactions entered into after April 30, 1993. Certificate Owners and
prospective investors should consult with their tax advisors regarding the
potential effect of this provision on their investment in the Certificates.
Call Premium; Exercise of Call Warrant
As described above, each Certificateholder should be deemed to have
received at the time of its purchase of its Certificate a call premium in an
amount equal to the fair market value of the portion of the Call Warrant
allocable to its Certificate. The receipt of such call premium should not be a
taxable event to the Certificateholder until such time as the Call Warrant so
allocable to its Certificate is exercised or lapses. If the Call Warrant lapses
unexercised, the Certificateholder will be required to include the call premium
in income for the taxable year the Call Warrant terminated as short-term capital
gain. If the Call Warrant is exercised, the proceeds of sale of the Certificate
will be increased by the amount of the call premium. The gain from such sale
will be long-term or short-term capital gain, depending upon whether the
Certificate was then held for the requisite holding period.
Backup Withholding
Payments made on the Certificates and proceeds from the sale of the
Certificates will not be subject to a "backup" withholding tax of 31% unless, in
general, the Certificate Owner fails to comply with certain reporting procedures
and is not an exempt recipient under applicable provisions of the Code.
Foreign Certificate Owners
To the extent that amounts paid to Certificate Owners that are not United
States persons ("Foreign Certificate Owners") are treated as interest with
respect to Underlying Security issued after July 18, 1984, such amounts
generally will not be subject to the annual 30% withholding tax, provided that
such Foreign Certificate Owner fulfills certain certification requirements.
Under such requirements, the holder must certify, under penalties of perjury,
that it is not a "United States person" and provide its name and address.
S-25
<PAGE>
A "United States person" means a citizen or resident of the U.S., a
corporation, partnership or other entity created or organized in or under the
laws of the U.S. or any political subdivision thereof, or an estate or trust the
income of which is includible in gross income for U.S. Federal income tax
purposes, regardless of its source.
State and Other Tax Consequences
Under Federal legislation, interest on FHLB Securities is generally exempt
from state and local income taxes on individual investors. This exemption
should apply to an individual Certificateholder's share of interest on the FHLB
Security. The exemption does not extend to gain on sale or other disposition of
a Certificate or on exercise or expiration of the Call Warrant (including any
such gain arising under an alternate tax position described above). Prospective
purchasers should consult their tax advisors concerning state, local, foreign
and other tax consequences of the acquisition and holding of Certificates.
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 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 Certificate, a Plan fiduciary should determine whether such an investment is
permitted under the governing Plan instruments and is appropriate for the Plan
in view of its 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 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 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 ("DOL") regulations (the "Regulation"), a Plan's 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 Certificate of a particular class, for certain purposes
(including the prohibited transaction provisions) the Plan would be considered
to own its share of the underlying
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<PAGE>
assets of the Trust unless (1) such Certificate is a "publicly-offered security"
or (2) equity participation in such class by benefit plan investors is not
"significant."
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 a part of
an offering of securities to the public pursuant to an effective registration
statement under the Security Act and the class of securities of which such
security is a part is registered under the Exchange Act within 120 days (or such
later time as may be allowed by the Commission) after the end of the fiscal year
of the issuer during which the offering of such securities to the public
occurred. The Depositor makes no representation as to whether the Certificates
of any class will be considered publicly-offered securities within the meaning
of the Regulation.
Participation by benefit plan investors in any class of Certificates would
not be significant if immediately after the most recent acquisition of
Certificates of such class, whether or not from the Depositor or an Agent or
Underwriter, less than 25 percent of the value of such class were held by
benefit plan investors, which are defined as Plans and employee benefit plans
not subject to ERISA (for example, governmental plans). There can be no
assurance that less than 25 percent of the value of any given class of
Certificates will be held by benefit plan investors.
If assets of a Trust were deemed to be Plan assets, certain transactions
involving such Trust, including the acquisition of the Certificates themselves
by a Plan, could be prohibited transactions. If, for example, any holder of a
Call Warrant were a party in interest or disqualified person with respect to a
Plan investor, the exercise of the Call Warrant could be construed as a
prohibited indirect sale from the Plan to the holder of the Call Warrant. Any
such prohibited transaction could be treated as exempt under ERISA and the Code
if the Certificates were acquired pursuant to and in accordance with one or more
"class exemptions" issued by the DOL, such as Prohibited Transaction Class
Exemption ("PTCE") 84-14 (an exemption for certain transactions determined by an
independent qualified professional asset manager), PTCE 91-38 (an exemption for
certain transactions involving bank collective investment funds), PTCE 90-1 (an
exemption for certain transactions involving insurance company pooled separate
accounts) or PTCE 95-60 (an exemption for certain transactions involving
insurance company general accounts).
Certificates will not be sold to any Plan unless such Plan represents that
the acquisition of a Certificate would not be prohibited under ERISA and the
Code because an exemption is applicable to the acquisition and holding of the
Certificates and the activities of the Trust. Alternatively, if the Depositor
is able to confirm the existence of at least 100 independent purchasers of a
class, the foregoing representation will not be a condition to acquisition of
Certificates of such class.
Any Plan proposing to acquire Certificates should consult with its counsel.
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<PAGE>
Plan of Distribution
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated as of May __, 1997 (the "Underwriting Agreement"), the
Depositor has agreed to sell and Morgan Keegan & Company, Inc. (an affiliate of
the Depositor) (the "Underwriter") has agreed to purchase, all of the
Certificates at a price of ___%.
The Depositor has been advised by the Underwriter that it proposes to offer
the Certificates from time to time in negotiated transactions at varying prices
to be determined at the time of sale. The Underwriter may effect such
transactions by selling Certificates to or through dealers and such dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriter and any purchasers of Certificates for whom
they may act as agents. Concession to dealers may vary but will not exceed
____%. The Underwriter and any dealers that participate with the Underwriter in
the distribution of Certificates may be deemed to be underwriters, and any
profit on the resale of Certificates by them may be deemed to be underwriting
discounts or commissions under the Security Act. The sale by the Depositor of
the FHLB Security subject to the Call Warrant and exclusive of the Retained
Interest at a discount to its value may be deemed to represent underwriting
compensation.
If and to the extent required by applicable law or regulation, this
Prospectus Supplement and the Prospectus will also be used by the Underwriter
after the completion of the offering in connection with offers and sales related
to market-making transactions in the Offered Certificates in which the
Underwriter acts as principal. The Underwriter may also act as agent in such
transactions. Sales will be made at negotiated prices determined at the time of
sale.
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.
Morgan Keegan & Company, Inc. is an affiliate of the Depositor, and the
participation by Morgan Keegan & Company, Inc. in the offering of the
Certificates complies with Schedule E of the By-Laws of the National Association
of Security Dealers, Inc. regarding underwriting securities of an affiliate.
Ratings
It is a condition to the issuance of the Certificates that the Certificates
be rated not lower than "AAA" by Standard & Poor's Ratings Services ("Standard &
Poor's" or the "Rating Agency"). The ratings address the likelihood of the
receipt by the Certificateholders of payments required under the Trust
Agreement, and are based primarily on the credit quality of the FHLB Security.
The rating on the Certificates does not, however, constitute a statement
regarding the occurrence or frequency of redemptions or prepayments on, or
extensions of the maturity of, the Certificates, or the corresponding effect on
yield to investors.
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<PAGE>
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. Each security rating should be evaluated independently of similar
ratings on different securities. A security rating does not address the
likelihood of the exercise of a Call Warrant, or the corresponding effect on
yield to investors.
The Depositor has not requested a rating on the Certificates by any rating
agency other than Standard & Poor's. However, there can be no assurance as to
whether any other rating agency will rate the Certificates, or, if it does, what
rating would be assigned by any such other rating agency. A rating on the
Certificates by another rating agency, if assigned at all, may be lower than the
ratings assigned to the Certificates by Standard & Poor's.
Legal Opinions
Certain legal matters relating to the Certificates will be passed upon for
the Depositor and the Underwriter by Chapman and Cutler, Chicago, Illinois.
S-29
<PAGE>
Index of Terms
Term Page
Act...........................................................................25
Allocated Purchase Price......................................................20
Available Funds...............................................................11
Base Trust Agreement...........................................................3
CEDE..........................................................................13
Certificate Owner.............................................................19
Certificates................................................................1, 3
Clearing Agency...............................................................13
Closing Date...................................................................1
Code..........................................................................18
Cut-off Date...................................................................1
De Minimis Regulation.........................................................22
Depositor......................................................................1
Distribution Date...........................................................1, 3
DOL...........................................................................26
DTC.........................................................................2, 5
Early Termination Date..................................................1, 4, 12
Early Termination Price.................................................1, 4, 12
Eligible Investments..........................................................11
ERISA......................................................................6, 26
Event of Default..............................................................16
Extraordinary Expenses........................................................15
Federal Home Loan Bank System..................................................9
Federal Tax Counsel...........................................................19
FHLB Security............................................................1, 6, 8
Final Distribution Date.....................................................1, 3
Finance Board..................................................................9
Foreign Certificate Owners....................................................25
Initial Accrued Interest......................................................12
Interest Strip.........................................................5, 12, 13
Liquidation Price..............................................................4
NYSE.......................................................................1, 10
Office of Finance..............................................................9
OID...........................................................................19
Ordinary Expenses.............................................................15
Participants...................................................................2
Plan.......................................................................6, 26
Prospectus.....................................................................1
PTCE..........................................................................27
Purchase Default..............................................................12
Purchase Request...........................................................4, 12
Rating Agency.................................................................28
Regulation....................................................................26
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<PAGE>
Required Interest......................................................4, 10, 12
Required Principal............................................................12
Series Supplement..............................................................3
Service.......................................................................19
Standard & Poor's.............................................................28
stripped interest.............................................................19
Superfund Tax.................................................................25
Trust.......................................................................1, 3
Trust Agreement.............................................................1, 3
Trustee........................................................................1
Underlying Security............................................................1
Underwriter................................................................1, 28
Underwriting Agreement........................................................28
United States person..........................................................26
Voting Rights.................................................................16
Warrantholder..............................................................4, 12
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<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Depositor or by the Underwriter. This Prospectus Supplement and the Prospectus
do not constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement.
_________________
Table of Contents
Prospectus Supplement
Page
Summary..................................................................... 3
Risk Factors................................................................ 7
Formation of the Trust...................................................... 8
Description of the FHLB Security............................................ 8
Description of the Certificates............................................. 10
Description of the Trust Agreement.......................................... 14
Federal Income Tax Consequences............................................. 18
State and Other Tax Consequences............................................ 26
ERISA Considerations........................................................ 26
Plan of Distribution........................................................ 28
Ratings..................................................................... 28
Legal Opinions.............................................................. 29
Index of Terms.............................................................. 30
Prospectus
Prospectus Supplement....................................................... 2
Available Information....................................................... 2
Incorporation of Certain Information by Reference........................... 3
Reports to Certificateholders............................................... 3
Risk Factors................................................................ 6
The Depositor............................................................... 8
Use of Proceeds............................................................. 9
Formation of the Trust...................................................... 9
Maturity and Yield Considerations........................................... 10
Description of Certificates................................................. 12
Description of Deposited Assets and Credit Support.......................... 26
Description of the Trust Agreement.......................................... 33
Plan of Distribution........................................................ 45
Legal Opinions.............................................................. 46
Index of Terms.............................................................. 47
Until 25 days after the date of the Prospectus Supplement, all dealers
effecting transactions in the related Certificates, whether or not participating
in the distribution thereof, may be required to deliver this Prospectus and the
related Prospectus Supplement. This delivery requirement is in addition to the
obligation of dealers to deliver a Prospectus Supplement and Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
$__________
Southpoint Structured
Assets, Inc.
___%
FHLB Security-Backed Certificates,
Series 1997-1
____________________
Prospectus Supplement
____________________
Morgan Keegan & Company, Inc.
May __, 1997
