As filed with the Securities and Exchange Commission on August 8, 2000
Securities Act File No. 333-_____
Investment Company Act File No. 811-_____
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE [X]
INVESTMENT COMPANY ACT OF 1940
Amendment No. [ ]
(check appropriate box or boxes)
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XYZ MEDS Trust
(Exact Name of Registrant as Specified in Charter)
-----------------------
c/o PUGLISI & ASSOCIATES
850 Library Avenue
Newark, Delaware 19715
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (302) 738-6680
-----------------------
Donald J. Puglisi
Puglisi & Associates
850 Library Avenue
Newark, Delaware 19715
(Name and Address of Agent for Service)
-----------------------
Copies to:
Deanna L. Kirkpatrick, Esq.
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
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Approximate date of proposed public offering: As soon as practicable after
the effective date of this Registration Statement.
-----------------------
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, as
amended, other than securities offered in connection with a dividend
reinvestment plan, check the following box. o
<TABLE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
------------------------------------------------------------------------------------------------------
Proposed
Maximum
Aggregate Amount of
Title of Securities Amount Being Offering Registration
Being Registered Registered Price (1) Fee
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<S> <C> <C> <C>
MEDS representing shares of beneficial interest $10,000,000 $10,000,000 $2,640
------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
-----------------------
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
===============================================================================
<PAGE>
XYZ MANDATORY ENHANCED DIVIDEND SECURITIES
CROSS-REFERENCE SHEET
(Pursuant to Rule 404(C) under the Securities Act of 1933)
Parts A & B of Prospectus*
Item
Number Caption Location in Prospectus
------ ------- ----------------------
1. Outside Front Cover................. Front Cover Page
2. Inside Front and Outside Back
Cover Page........................ Front Cover Page; Inside Front Cover
Page; Outside Back Cover Page
3. Fee Table and Synopsis.............. Prospectus Summary; Fee Table
4. Financial Highlights................ Not Applicable
5. Plan of Distribution................ Front Cover Page; Prospectus
Summary; Underwriting
6. Selling Shareholders................ Not Applicable
7. Use of Proceeds..................... Use of Proceeds; Investment
Objectives and Policies
8. General Description of the
Registrant........................ Front Cover Page; Prospectus
Summary; The Trust; Investment
Objectives and Policies; Risk
Factors
9. Management.......................... Management Arrangements
10. Capital Stock, Long-Term Debt
and Other Securities.............. Investment Objectives and Policies;
Description of the MEDS; Certain
Federal Income Tax Considerations
11. Defaults and Arrears on
Senior Securities................. Not Applicable
12. Legal Proceedings................... Not Applicable
13. Table of Contents of the Statement
of Additional Information......... Not Applicable
14. Cover Page.......................... Not Applicable
15. Table of Contents................... Not Applicable
16. General Information and History..... The Trust
17. Investment Objectives and Policies.. Investment Objectives and Policies
18. Management.......................... Management Arrangements
19. Control Persons and Principal
Holders of Securities............. Management Arrangements
20. Investment Advisory and Other
Services.......................... Management Arrangements
21. Brokerage Allocation and Other
Practices......................... Investment Objectives and Policies
22. Tax Status.......................... Certain Tax Considerations
23. Financial Statements................ Statement of Assets, Liabilities and
Capital
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* Pursuant to the General Instructions to Form N-2, all information required
to be set forth in Part B; Statement of Additional Information has been
included in Part A; The Prospectus. Information required to be included in
Part C is set forth under the appropriate item so numbered in Part C of
this Registration Statement.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, dated August __, 2000
Prospectus
[XYZ Company logo]
MEDS(sm)
XYZ MEDS Trust
$ Mandatory Enhanced Dividend Securities(sm) (MEDS(sm))
(Subject to Exchange for Common Stock of XYZ Company or Cash)
-----------------------
The Trust
We are a newly created Delaware business trust. We will enter into a prepaid
forward purchase contract with ABC, one of the stockholders of XYZ Company, for
the purchase of XYZ common stock. We will purchase U.S. Treasury securities to
fund quarterly payments on the MEDS. The contract and the U.S. Treasury
securities will be primarily our only assets.
The MEDS
Each MEDS represents a proportionate share of undivided beneficial interest in
our assets. We will make payments of $o per MEDS on o, o, o and o of each year,
beginning on o, until o, from funds we receive from our Treasury securities.
Number of Shares of XYZ Common Stock or Amount of Cash You Will Receive for
Each MEDS:
On o, 2003, ABC will deliver shares of XYZ common stock, and/or other reference
property distributed in respect of those shares by that date, or cash, to us,
and we will distribute to you your proportionate share of that property. If the
average of the closing prices of XYZ common stock on the 20 trading days
immediately prior to o, 2003, is:
o greater than $o , you will receive 0. o of a share per MEDS.
o greater than $o but less than or equal to $o, you will receive shares
worth $o, valued at the average closing prices of the shares on the
20 trading days immediately prior to o, 2003 per MEDS.
o less than or equal to $o, you will receive one share per MEDS.
Early or Delayed Settlement of MEDS
The contract may be accelerated in whole, but not in part, and our trust may
dissolve, if the reference property to be received under the contract no longer
includes any marketable equity securities, or there is a default under, or
insufficient collateral securing, the contract. In addition, if following any
dilution and/or reorganization event, 30% or more of the reference property
will consist of cash and property other than marketable equity securities, then
the contract will be accelerated in part with respect to the reference property
other than the marketable equity securities. The seller will have the right to
extend the maturity of the contract by three months in connection with an
offering of new securities similar to the MEDS.
Trading of the MEDS
The MEDS have no history of public trading. We will apply to the Nasdaq
National Market to list the MEDS for trading under the symbol "o." XYZ common
stock is listed on the Nasdaq National Market under the symbol "XYZ." On o,
2000, the last sale price of XYZ common stock on the Nasdaq National Market was
$o per share. XYZ Company is not affiliated with us or the seller. Closed-end
fund shares frequently trade at a discount from the net asset value of the
fund. This risk may be greater for you if you anticipate selling your MEDS soon
after this public offering.
The prospectus sets forth concisely the information about XYZ MEDS Trust that
you should know before investing and should be retained for future reference.
Additional information about XYZ MEDS Trust has been filed with the Securities
and Exchange Commission and is available upon written or oral request and
without charge. See "Where You Can Find More Information" on page 38 of this
prospectus.
Investing in the MEDS involves risks.
See "Risk Factors" beginning on page 24.
-------------------------------------------------------------------------------
Proceeds to the Trust
Public Offering Price Sales Load Before Expenses
-------------------------------------------------------------------------------
Per MEDS $ $ $
-------------------------------------------------------------------------------
Total $ $ $
-------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
We have granted the underwriters the right to purchase up to an additional o
MEDS to cover over-allotments. The underwriters are offering the MEDS subject
to various conditions. J.P. Morgan Securities Inc. expects to deliver the MEDS
to purchasers on o, 2000.
J.P. Morgan & Co
, 2000
<PAGE>
Table of Contents
Page
Prospectus Summary...........................................................3
Fee Table...................................................................10
The Trust...................................................................10
Use of Proceeds.............................................................11
Investment Objectives and Policies..........................................11
Investment Restrictions.....................................................23
Risk Factors................................................................24
Description of the MEDS.....................................................29
Management Arrangements.....................................................30
Dividends and Distributions.................................................32
Net Asset Value.............................................................32
Certain Tax Considerations..................................................33
Underwriting................................................................36
Legal Matters...............................................................38
Experts.....................................................................38
Where You Can Find More Information.........................................38
Independent Auditors' Report...............................................F-1
Statement of Assets, Liabilities and Capital...............................F-2
No person has been authorized to give any information or to make any
representations other than those contained in this prospectus, and, if given or
made, such information or representations must not be relied upon as having
been authorized. This prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or any offer to sell or the solicitation of any offer to buy
such securities in any jurisdiction in which such offer or solicitation is
unlawful. Neither the delivery of this prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of XYZ MEDS Trust since the date hereof or that the
information contained herein is correct as of any time subsequent to the date
of such information.
Until o, 2000 all dealers that buy, sell or trade MEDS, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
"MEDS" is a service mark of J.P. Morgan Securities Inc. J.P. Morgan Securities
Inc. has filed an application to register "Mandatory Enhanced Dividend
Securities" as its service mark and the application is pending.
2
<PAGE>
Prospectus Summary
This summary highlights certain information contained elsewhere in this
prospectus. This summary is not complete and does not contain all of the
information that you should consider before investing in the MEDS. You should
read the entire prospectus carefully, especially the risks of investing in the
MEDS discussed under "Risk Factors." In this prospectus, "XYZ MEDS Trust," the
"Trust", "we," "us" and "our" each refers to XYZ MEDS Trust.
The Trust
We are a recently created Delaware business trust and will be registered
as a non-diversified closed-end management investment company under the
Investment Company Act of 1940. Our trust will dissolve on or shortly after o,
2003, which we refer to as the "exchange date" because that is when a certain
number of the shares of XYZ common stock or their value in cash is expected to
be delivered to us under the prepaid forward contract (the "contract") we have
with ABC (the "seller"). In some limited circumstances, the shares or their
value in cash may be delivered and our trust dissolved sooner than that date.
In other limited circumstances, the seller may extend the exchange date to o,
and may subsequently accelerate the extended exchange date, and our trust will
dissolve on or shortly after the extended or accelerated exchange date. See
"The Trust" and "Investment Objectives and Policies."
The MEDS
The MEDS are securities that represent on a pro rata basis an undivided
beneficial interest in the U.S. Treasury securities (the "treasury securities")
and the contract with the seller that we hold. The underwriters named in this
prospectus are offering the MEDS for sale at a price of $o per MEDS, which is
the last sale price of a share of XYZ common stock on the Nasdaq National
Market on the date on which we priced the offering of MEDS. The underwriters
also may purchase from us at the public offering price within 30 days of the
date of this prospectus up to o additional MEDS to cover over-allotments. See
"Underwriting."
XYZ Company
[Description of XYZ Company to come]
A prospectus that describes XYZ Company and its common stock that you may
receive is attached to this prospectus. XYZ Company is not affiliated with us
or the seller, will not receive any of the proceeds from the sale of the MEDS
by us and will not have any obligation under the MEDS or the contract between
us and the seller. The seller did not prepare, and is not responsible for, the
XYZ prospectus. The XYZ prospectus is attached to this prospectus only for your
convenience. The XYZ prospectus is not part of this prospectus and is not
incorporated by reference into this prospectus.
Purpose of the Trust
Our trust was created to issue the MEDS and to carry out the transactions
described in this prospectus. The terms of the MEDS are designed to give you a
higher yield than the current dividend yield on XYZ common stock, while also
giving you the chance to share in the increased value of XYZ common stock if
its price goes up. XYZ Company does not currently pay dividends on its common
stock and has stated that it does not anticipate doing so, but in the future
XYZ Company might pay dividends that are higher than the distributions that you
will receive from us. Also, you will receive less as a return on your MEDS than
you paid for the MEDS if the price of XYZ common stock goes down, but you will
receive only part of the increased value if the price of the stock goes up, and
then only if the price is above $o per share of XYZ common stock shortly before
the exchange date.
Assets of the Trust; Investment Objectives and Policies
Our assets will consist of the treasury securities with face amounts and
maturities that exactly correspond to the amounts and payment dates of the
quarterly cash distributions you will receive on your MEDS through the exchange
3
<PAGE>
date, comprising approximately o% of our initial assets, and the contract with
the seller for the purchase of XYZ common stock, comprising approximately o% of
our initial assets.
Our investment objective is to pay to you a quarterly cash distribution of
$o per MEDS on each o, o, o and o, beginning on o, and to distribute to you
promptly any property delivered to us by the seller under the contract as
described below.
At the closing of the sale of the MEDS, we will enter into the contract
with the seller. The contract will require the seller to deliver to us on the
business day before the exchange date, that number or amount of each type of
reference property equal to the exchange amount determined in the manner
described below or the equivalent thereof in cash. The total purchase price for
XYZ common stock under the contract will be $o. We will pay the seller the
purchase price for XYZ common stock on the date the MEDS are issued. See
"Investment Objectives and Policies."
Quarterly Distributions
For each MEDS that you buy, you will receive a cash distribution of $o on
each o, o, o and o, starting on o, 2000 and ending on o, 2003, if you are a
holder of record as of the preceding o, o, o or o, respectively. Those payments
will be made from the proceeds generated by the treasury securities that we
acquire when we issue the MEDS. See "Investment Objectives and Policies."
Distribution on the Exchange Date
For each MEDS you own, you will receive a number of shares of XYZ common
stock (or an amount of other reference property (as defined below)) on the
exchange date based on the following formula (the "exchange amount"), or the
equivalent thereof in cash. If the average of the closing prices of XYZ common
stock on the 20 trading days immediately prior to o, 2003, which is the second
scheduled trading day prior to the exchange date, is:
o greater than $o, which we refer to as the "threshold appreciation
price," you will receive 0.o of a share of XYZ common stock per MEDS.
o greater than $o, which we refer to as the "initial price," but less
than or equal to the threshold appreciation price, you will receive
XYZ common stock worth $o (the initial price) per MEDS.
o less than or equal to the initial price, you will receive one share
of XYZ common stock per MEDS.
You will receive cash for any fractional shares or other interests to
which you may be entitled.
This distribution will be made from the property delivered by the seller
under the contract. The contract requires the seller to deliver to us on the
business day before the exchange date the number of shares of XYZ common stock
(or other reference property) required to exchange all of the MEDS on the
exchange date, or the equivalent thereof in cash.
The seller has the option to deliver cash instead of shares of XYZ common
stock or other reference property. In order to exercise the cash settlement
option, the seller will have to deliver to us a written notice of that exercise
and pledge to us additional cash collateral. If the seller elects the cash
settlement option, it will deliver to us cash in an amount equal to the value
of the shares of XYZ common stock or other reference property the seller would
otherwise have delivered to us on the exchange date, and you will receive a
proportionate share of that cash on or shortly after the exchange date. See
"Investment Objectives and Policies".
Collateral Arrangements
The seller has secured its obligations under the contract by pledging to
o, our collateral agent, the maximum number of shares of XYZ common stock
required to be delivered under the contract. The seller may choose to
substitute U.S. government obligations as collateral. In addition, the seller
will be required to pledge additional
4
<PAGE>
collateral if it exercises its option to settle the contract in cash or if it
extends the exchange date. See "Investment Objectives and Policies-- The
Contract."
Extension of Exchange Date
The seller will have the right under the contract to extend the exchange
date by three months to o. In order to be able to so extend the exchange date,
the seller will have to deliver to us a written notice of that extension, and
pledge to us as additional cash collateral treasury securities sufficient to
fund one additional quarterly cash distribution on the MEDS. If the seller
elects to extend the exchange date and prices an offering (the "rollover
offering"), of securities exchangeable into XYZ common stock which are
substantially similar to the MEDS and in which all or a portion of the proceeds
are ultimately received by the seller, the seller will then have the right to
accelerate the exchange date from the extended exchange date to the second
business day following the closing date of the rollover offering. By so
accelerating the exchange date, the seller will commit to settle the contract
in cash as described below.
If the seller elects to extend but does not accelerate the exchange date,
then the exchange amount will be calculated as of the extended exchange date.
If the seller elects to extend and then accelerate the exchange date, it will
deliver to us on the business day before the accelerated exchange date cash in
lieu of XYZ common stock provided that the exchange amount will be calculated
based on the closing price per share of XYZ common stock on the date of pricing
of the rollover offering. The amount of the additional cash distribution on the
MEDS will be equal to the regular quarterly cash distribution on the MEDS of
$o, prorated to reflect the number of days by which the exchange date is
ultimately extended beyond o, 2003. See "Investment Objectives and Policies --
The Contract."
Reference Property Adjustments; Special Acceleration
The amount of shares of XYZ common stock determined under the formula
described above is subject to adjustment under the antidilution provisions
contained in the contract to protect you against some but not all of the
dilution and/or reorganization events that could affect XYZ common stock. Those
adjustments may result in your receiving securities or property other than XYZ
common stock instead of or in addition to shares of XYZ common stock. We refer
to the property that the seller is required to deliver under the contract, and
that you will receive, as "reference property". If following any of those
adjustments, 30% or more of the reference property will consist of cash and/or
property other than marketable equity securities, then the time of delivery of
the reference property (other than the marketable equity securities) by the
seller to us, and by us to you, will be accelerated. In any event, the value of
the securities, other property or cash you will receive will be as determined
under the formula described above, but that formula may be applied as of an
accelerated measuring date.
In addition to a special acceleration in part described above, the
contract may be accelerated in whole to a date prior to the exchange date if:
o the reference property to be delivered under the contract no longer
includes any marketable equity securities;
o seller is declared bankrupt or insolvent, dissolves or otherwise
defaults under the contract; or
o the collateral supporting the contract is insufficient.
If the contract is accelerated in whole, our assets, other than the
contract, will be liquidated and our trust dissolved. Upon dissolution, our
assets will include proceeds received from the liquidation of the treasury
securities that we hold and any assets received under the contract, less any
expenses, which will be distributed proportionately to you, and our term will
immediately expire. See "Investment Objectives and Policies -- The Contract."
5
<PAGE>
Voting Rights
You will not have the right to vote any XYZ common stock unless and until
it is delivered to us by the seller and distributed to you by us. You will have
the right to vote your MEDS on matters that affect the trust.
Certain Material U.S. Federal Income Tax Consequences
We will be treated as a grantor trust for United States federal income tax
purposes. You will be treated for U.S. federal income tax purposes as the owner
of your pro rata portion of the U.S. Treasury securities and the contract held
by the Trust. Any income, including original issue discount, realized by the
Trust that is attributable to the MEDS you own will generally be treated as
your income.
You will generally be required to accrue income with respect to the U.S.
Treasury securities over the term of the U.S. Treasury securities. We
anticipate that a substantial portion of each quarterly cash distribution to
you will be treated as a tax-free return of your costs of the U.S. Treasury
securities and therefore will not be considered current income for federal
income tax purposes. However, whether you are on the cash or accrual method of
tax accounting, you must recognize currently as income the discount on the U.S.
Treasury securities as it accrues. We expect that a portion of each quarterly
cash distribution representing a tax-free return of capital will increase as a
percentage of the total distribution during the term of the Trust.
Under existing law, you will not recognize income, gain or loss upon the
execution of the contract. Although the issue is not free from doubt, you will
not recognize income on the contract before its settlement. Upon settlement of
the contract, you will recognize taxable gain or loss if cash is delivered, but
you will not recognize gain or loss in respect of any XYZ common stock or other
securities received by you. Instead, you will have a basis in the XYZ common
stock or other securities received equal to your proportionate share of the
adjusted basis in the contract allocable to that property.
You should be aware that the Trust's assets could be characterized
differently by the Internal Revenue Service. Some alternative characterizations
could require you to include more income than would be included under the
analysis set forth below. See "Certain Tax Considerations" for further detail.
Accordingly, you should consult your tax advisers with respect to the tax
consequences of the purchase, ownership and disposition of the MEDS in light of
your particular circumstances, including the tax risks associated with possible
alternative characterizations of the MEDS.
Management and Administration of the Trust
Our internal operations will be managed by three individual trustees; we
will not have an investment advisor. Our portfolio will not be actively
managed. o (or its successor) will act as our administrator to carry out our
day-to- day administration, and will also be the custodian for our assets, our
paying agent, registrar and transfer agent for the MEDS and the collateral
agent for the seller's pledges of XYZ common stock or U.S. Treasury securities
or other cash equivalents to us. o will not have any other affiliation with us.
The seller will pay $o at the closing of the offering of the MEDS as a one
time, up-front fee for all the operating expenses of the trust. See "Management
Arrangements".
Risk Factors
o We will not actively manage our portfolio. We have adopted a
fundamental policy that we may not dispose of the contract during our
term and that, unless we dissolve earlier than the exchange date, we
will not dispose of the treasury securities before their maturity
dates. We will continue to hold the contract despite any significant
decline in the value of XYZ common stock or other reference property
or adverse changes in the financial condition of XYZ Company.
o We are classified as a "non-diversified," closed-end, management
investment company under the Investment Company Act. Consequently, we
are not limited by the Investment Company Act in the proportion of
our assets that may be invested in the securities of a single issuer.
Since almost all of the
6
<PAGE>
assets we hold will be the treasury securities and the contract, we
may be subject to greater risk than would be the case for an
investment company with more diversified investments.
o You will bear the entire risk of declines in the value of XYZ common
stock between the date of this offering and the exchange date. The
aggregate value of XYZ common stock, or other reference property that
you will receive when you exchange your MEDS is not fixed, but
depends on the market value of XYZ common stock, or other reference
property, shortly before the exchange date. If the price of XYZ
common stock decreases, then the value of the shares of XYZ common
stock or cash that you will receive in exchange for your MEDS will be
less than what you paid to purchase your MEDS and you will lose
money. If XYZ Company becomes bankrupt or insolvent, you could lose
the entire value of your investment in MEDS (other than your interest
in the treasury securities).
o Because we will determine the value of XYZ common stock based on its
average closing price for 20 trading days before the exchange date,
the actual value of the stock or cash that you receive on the
exchange date may be more or less than the price of the stock on the
exchange date.
o An investment in MEDS offers you less of an opportunity to realize
any appreciation in the value of XYZ common stock over its current
value than does a direct investment in XYZ common stock. The amount
you receive when you exchange your MEDS will be greater than the
price you paid to purchase your MEDS only if the reference property
value per MEDS is greater than the threshold appreciation price of $o
representing o% of the initial price. In addition, even if it does
appreciate by more than o%, you are entitled to receive only o% of
the additional appreciation.
o The trading prices of the MEDS in the secondary market will be
affected by the trading prices of XYZ common stock. It is impossible
to predict whether the price of XYZ common stock will rise or fall.
Trading prices of XYZ common stock and the MEDS will be influenced
by, among other things, XYZ Company's operating results and future
prospects and by economic, financial and other factors beyond our
control. See "Risk Factors" in the accompanying prospectus of XYZ
Company.
o The market for XYZ common stock may be adversely impacted by the
issuance of the MEDS, sales of XYZ common stock by investors who
prefer to purchase MEDS, short sales of XYZ common stock by holders
of MEDS, or arbitrage trading activity between the MEDS and XYZ
common stock.
o If the seller exercises the cash settlement option, the amount of
cash you will receive will be based on the average of the closing
prices per share of XYZ common stock or unit of other reference
security for the 20 trading day period ending immediately before the
second trading day prior to the exchange date (except in the case of
a rollover offering). The price of XYZ common stock or any other
reference security will be subject to market fluctuations during that
period.
o The contract will be collateralized by a pledge of the maximum number
or amount of each type of reference property that the seller may be
required to deliver under the contract or, at the seller's option, by
U.S. government obligations. In addition, as a condition to its
election of the cash settlement option, the seller will be required
to pledge as additional collateral an amount of cash equal to 20% of
the reference property value per MEDS multiplied by the number of
MEDS outstanding. However, if the market price of the reference
property is sharply falling during the averaging period so that the
value of the reference property and that additional collateral
pledged to us is less than the amount of cash that the seller is
obligated to deliver to us under the contract, then you bear the risk
that the seller's obligation to deliver cash to us will not be fully
collateralized.
o The extension or acceleration of the exchange date by the seller,
each as described in this prospectus, could adversely affect the
timing of the exchange of the MEDS for XYZ common stock and the
exchange amount you will receive. In addition, if the seller
exercises its right to accelerate the maturity of the contract in
connection with a rollover offering, the amount of cash you will
receive for your MEDS will be based on a single closing price of XYZ
common stock on the date on which the rollover offering is priced,
7
<PAGE>
rather than an average of closing prices, and you will only receive
notice of the date on which the single closing price will be
determined on or after the determination date.
o If the contract does not constitute a "securities contract" for
purposes of Title 11 of the United States Code (the "Bankruptcy
Code") and if the seller becomes bankrupt, the contract could become
subject to the automatic stay provisions of the Bankruptcy Code,
which could adversely affect the timing and amount you receive in
exchange for your MEDS. In addition, if the seller becomes bankrupt
after electing to extend the exchange date but before the extended or
accelerated exchange date, your receipt of the additional cash
distribution from the treasury securities may be substantially
delayed.
o If you invest in MEDS, you will have no rights with respect to XYZ
common stock or any other reference security, including voting rights
and rights to receive any ordinary cash dividends or regular interest
payments on it. In addition, the contract is a commercial transaction
and does not create any rights in any third party and is not for the
benefit of any third party, including you.
o Although the amount of reference property you receive will be
adjusted to protect you from certain dilution and reorganization
events, it will not be adjusted if XYZ Company offers its common
stock for cash or as consideration to make an acquisition, if XYZ
Company issues non-transferable rights or warrants that require
payment as a condition to their exercise or if a stockholder of XYZ
Company sells shares of XYZ common stock. Any of these issuances,
sales or offers could lead to declines in the value of XYZ common
stock and in the value of your MEDS.
o Our term, which is scheduled to expire on or shortly after the
exchange date, may be accelerated, and our assets, other than the
contract, liquidated. In addition, if following any of the dilution
and/or reorganization event adjustments, 30% or more of the reference
property will consist of cash and other reference property (other
than the marketable equity securities), then the time of delivery of
that cash and/or other reference property (other than the marketable
equity securities) by the seller to us, and by us to you, will be
accelerated. On acceleration, the value of the proceeds and assets
you receive could be substantially less than the value you would have
received had our term expired on the exchange date.
o There may be little or no secondary market for the MEDS. If there is
a secondary market for the MEDS, it may not provide significant
liquidity or it may not continue for the life of the MEDS. In
addition, although we will apply to the Nasdaq National Market to
list the MEDS for trading, we do not know whether active trading will
develop and continue. If the MEDS are delisted or if trading is
suspended, you may find it more difficult to obtain pricing
information for the MEDS, and the price and liquidity of the MEDS may
be adversely affected.
o Because we are a newly organized closed-end investment company with
no previous operating history, our net asset value may decrease. In
addition, shares of closed-end investment companies frequently trade
at a discount from their net asset value. It is impossible to predict
whether the MEDS will trade at, below or above our net asset value.
Since the MEDS are not redeemable, if you wish to dispose of them
prior to the exchange date, you must bear the risk that if they do
trade at a discount at the time you sell them, you would realize a
loss on your investment in the MEDS, regardless of our performance.
o We are not affiliated with XYZ Company and we have no knowledge of or
ability to control any event that would have a material adverse
effect on XYZ Company or on the price of its common stock. In
addition, XYZ Company has no obligations with respect to the MEDS or
the contract, including any obligation to consider our needs or your
needs for any reason. XYZ Company will not receive any of the
proceeds from the offering. XYZ Company is not responsible for and
has not participated in preparing this prospectus or in determining
the number, amount or type of reference property you will receive for
your MEDS. XYZ Company is not involved with the administration or
trading of the MEDS.
o There is no statutory, judicial or administrative authority directly
addressing the proper U.S. federal income tax treatment of an
investment in the MEDS. Although we believe that you will not
recognize taxable income with respect to your proportionate share of
the contract prior to partial or full settlement of
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the contract, the Internal Revenue Service is not required to agree
with our characterization. Some alternative characterizations could
require you to include more income than would be included under the
analysis set forth under "Certain Tax Considerations."
o You should carefully consider the information in the XYZ prospectus,
including the risk factors relating to XYZ beginning on page o of the
XYZ prospectus.
For a more complete description of these and other risk factors that
should be considered prior to investing in the MEDS, see "Risk Factors"
beginning on p. 24.
Listing
We will apply to list the MEDS on the Nasdaq National Market under the
symbol "o." XYZ common stock is quoted on the Nasdaq National Market under the
symbol "XYZ." The last reported sale price of XYZ common stock on o, 2000 was
$o per share.
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Fee Table
Regulations of the SEC require the presentation of trust expenses in the
following format to help you understand the various costs you will bear in our
trust, either directly or indirectly. Because we will not bear any ongoing fees
or expenses, you will not have any direct expenses. We will be internally
managed, so we will not pay a separate investment advisory fee. The seller will
pay the underwriters a sales load of $o per MEDS (or 3%). The seller will also
pay our organizational costs in the amount of $o, the costs associated with the
initial registration and offering of the MEDS estimated to be approximately $o,
and approximately $o for anticipated ongoing expenses over our term. Any
unanticipated expenses will be paid by J.P. Morgan Securities Inc., which the
seller will reimburse. See "Management Arrangements--Estimated Expenses." The
only expenses that you might be considered to bear indirectly are (1) the sales
load payable by the seller with respect to your MEDS and (2) our ongoing
expenses, which the seller will pay as described below in the footnote to the
table.
INVESTOR TRANSACTION EXPENSES
Maximum Sales Load (as a percentage of offering price)........... 3%
Automatic Dividend Reinvestment Plan Fees........................ None
ANNUAL EXPENSES (as a percentage of net assets)
Management Fees.................................................. 0%
Other Expenses (after payment of costs and expenses by
the seller, as described above)*............................... 0%
----
TOTAL ANNUAL EXPENSES 0%
====
---------
* If we did not have these arrangements, our "Other Expenses" and "Total
Annual Expenses" would be approximately o% of our net assets.
SEC regulations also require that closed-end investment companies present
an illustration of cumulative expenses (both direct and indirect) that you
would bear. The example is required to factor in the applicable Sales Load. Our
term is three years; we have therefore not provided such information on a 5- or
10-year basis.
EXAMPLE 1 YEAR 3 YEARS
------ -------
You would pay the following expenses on a $1,000 investment,
assuming (1) no annual expenses and (2) a 5% annual
return throughout the periods:........................... $30.15 $30.47
According to SEC regulations, our example assumes reinvestment of all
dividends and other distributions and uses a 5% annual rate of return, as the
SEC mandates. You should note that the assumption of a 5% annual return does
not accurately reflect the financial terms of the trust. In addition, we do not
permit the reinvestment of distributions.
The Trust
We are a newly created Delaware business trust and will be registering as
a non-diversified closed-end management investment company under the Investment
Company Act of 1940, as amended. We were created on August 1, 2000 pursuant to
a Trust Agreement dated as of the same date, and amended and restated as of o,
2000. Our term will expire on or shortly after the exchange date, or earlier if
the contract that we hold is accelerated as described in this prospectus. We
will be treated as a grantor trust for United States federal income tax
purposes. See "Certain Tax Considerations." Our principal office is located at
850 Library Avenue, Suite 204, Newark, Delaware 19715 and our telephone number
is (302) 738-6680.
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Use of Proceeds
We will receive approximately $o, or approximately $ o if the underwriters
exercise their over-allotment option in full, from the offering of MEDS. We
will use the proceeds immediately upon the closing of this offering of MEDS to
purchase a series of zero-coupon U.S. Treasury securities, with face amounts
and maturities that exactly correspond to the quarterly distributions to be
made to you, and to pay the purchase price payable under the contract to the
seller.
Investment Objectives and Policies
General
We will purchase and hold the treasury securities and the contract. Our
investment objective is to pay to you the quarterly cash distribution of $ o
per MEDS and to distribute to you promptly any reference property or cash
delivered to us by the seller under the contract as described below.
Our assets will consist primarily of the treasury securities and the
contract. We may also make temporary investments. See "--Temporary
Investments." We have adopted a fundamental policy to invest at least 65% of
our initial total assets in the contract. The contract will comprise
approximately o% of our initial assets. We have also adopted a fundamental
policy that the contract may not be disposed of during our term and that,
unless we dissolve earlier than the exchange date, we will not dispose of the
treasury securities before their maturity dates. We cannot change these
fundamental policies without the consent of all MEDS holders.
The Contract
General.
The contract requires the seller to deliver to us, on the business day
before the exchange date, that number or amount of each type of reference
property that is equal to the exchange amount determined in the manner
described below for all MEDS outstanding on the exchange date. The seller's
delivery obligation may be accelerated under certain circumstances, in whole or
in part, as described below under "--Rollover Offering", "--Special
Acceleration" and "--Collateral Arrangements; Acceleration."
We use the following terms to describe the contract and the exchange
provisions of the MEDS:
o "business day" means any day that is not a Saturday, a Sunday or a
day on which the Nasdaq National Market or banking institutions or
trust companies in The City of New York are authorized or obligated
by law or executive order to close.
o the "closing price" of any reference security on the date of
determination means:
(a) the closing sale price of the reference security on the exchange
for that reference security at the close of regular session
trading on that exchange (without regard to extended trading
hours on that exchange, if any) on that date;
(b) if the closing price of the reference security cannot be
determined in the manner specified above, the last reported sale
price of the reference security on the exchange for that
reference security on that date (without regard to extended
trading hours on that exchange, if any);
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(c) if the closing price of the reference security cannot be
determined in the manner specified above, the last quoted bid
price for the reference security in the over-the-counter market
on that date as reported by the National Quotation Bureau; and
(d) if the closing price of the reference security cannot be
determined in the manner specified above, the market value of
the reference security on that date as determined by a
nationally recognized independent investment banking firm we
retain for this purpose.
o "exchange" means, for any reference security, the principal national
securities exchange or automated quotation system on which that
reference security is listed or quoted at that time.
o "exchange date" means o, 2003, except that if the seller exercises
its rights to extend or accelerate the exchange date as described
under "--Rollover Offering" below, the "exchange date" will be the
extended or accelerated exchange date, and except that, if the
non-equity percentage for any special acceleration is equal to 100%,
the exchange date will be the special acceleration date for that
special acceleration, as described below under "--Special
Acceleration".
o "initial price" means $o, which is the closing price per share of XYZ
common stock on the date we priced the offering of MEDS for sale to
the public.
o "marketable equity securities" means shares of common equity
securities listed on a U.S. national securities exchange or quoted on
the Nasdaq National Market.
o "non-accelerated percentage" means, following any special
acceleration:
(a) the non-accelerated percentage determined with respect to the
immediately preceding special acceleration (or, if there is no
preceding special acceleration, then one);
multiplied by
(b) 100% minus the non-equity percentage for such special
acceleration.
o "reference property" initially means o shares of XYZ common stock.
What constitutes "reference property" as of any date shall be
adjusted to add or substitute cash, securities and/or any other
property as a result of a dilution event or reorganization event
described below under "--Reference Property Adjustments," as of and
following the applicable reference property adjustment date. Also,
"reference property" as of any date will be reduced by the amount of
any non-equity reference property the accelerated portion of which
has been previously delivered to us by the seller as described below
under "--Special Acceleration". As a result, the reference property
that we are entitled to receive under the contract, and that you will
receive on or shortly after the exchange date in exchange for your
MEDS (and promptly after the special acceleration date, if any, as a
distribution on your MEDS), may include a combination of XYZ common
stock, other securities of XYZ Company (including rights or
warrants),
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cash, securities of another entity and/or other property, depending
on the cause and nature of the change or the adjustment.
o "reference property per MEDS" means the number or amount of each type
of reference property relating to one MEDS, which is initially one
share of XYZ common stock, subject to change or adjustment in the
manner described below under "--Reference Property Adjustments" and,
in addition, subject to reduction by the amount of any non-equity
reference property attributable to the MEDS the accelerated portion of
which has been previously delivered to us by the seller as described
below under "--Special Acceleration."
o "reference property value per MEDS" means for any date the aggregate
then-current value of the reference property per MEDS as of that
date.
o "reference security" means any security that is part of the reference
property.
o "rollover offering" is an offering of securities exchangeable for
shares of XYZ common stock (or other marketable equity securities
comprising reference property) which are substantially similar to the
MEDS and in which all or a portion of the proceeds are ultimately
received by the seller.
o "then-current value" means, for any item of reference property as of
any date:
(a) if the item consists of cash, the amount of cash;
(b) if the item consists of a reference security, the average
closing price per unit of the reference security for the 20
trading days immediately prior to, but not including, the second
trading day preceding that date. However, if the seller elects
to finance the cash settlement of the contract with the proceeds
of a rollover offering and the rollover offering is successfully
priced, then the then-current value of a reference security will
be equal to the closing price per unit of that reference
security on the date on which the rollover offering is priced,
as described below under "--Rollover Offering"; and
(c) if the item consists of property other than cash or reference
securities, the fair market value of that property as of 10:00
A.M., New York City time, on the third business day preceding
that date. The fair market value will be determined by a
nationally recognized independent investment banking firm we
retain for this purpose.
o "trading day" means, in relation to any reference security, a day on
which the reference security (a) is not suspended from trading on the
exchange for that reference security at the close of regular session
trading on that exchange (without regard to extended trading hours on
that exchange, if any) and (b) has traded at least once on that
exchange.
o "threshold appreciation price" means $o, which represents a o%
appreciation over the initial price.
Unless a special acceleration occurs, in which case the provisions
described below under "--Special Acceleration" will apply, the "exchange
amount" will be determined as of the exchange date as follows:
(i) if the reference property value per MEDS is greater than the
threshold appreciation price, then we, and therefore you, will
receive in respect of each MEDS o% of the reference property per
MEDS,
(ii) if the reference property value per MEDS is greater than the initial
price, but less than or equal to the threshold appreciation price,
then we, and therefore you, will receive in respect of each MEDS a
percentage of the reference property per MEDS, allocated as
proportionately as practicable, so that the aggregate then-current
value of your distribution equals the initial price, and
(iii) if the reference property value per MEDS is less than or equal to
the initial price, then we, and therefore you, will receive in
respect of each MEDS 100% of the reference property per MEDS.
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If the seller delivers to us reference property other than cash, you will
be responsible for the payment of any and all brokerage costs upon your sale of
the reference property. You will receive cash instead of fractional units or
interests in any reference property. See "--Fractional Interests Under the
Contract" and "--Fractional Interests Upon Dissolution."
As an illustration only, the following table shows the number of shares of
XYZ common stock that you would receive for each MEDS at various reference
property values per MEDS as of the exchange date. The table assumes that there
will be no changes, adjustments or reductions to the reference property so that
on the exchange date the reference property per MEDS will consist of one share
of XYZ common stock. There can be no assurance that the reference property
value per MEDS as of the exchange date will be within the range set forth
below. Given the initial price of $o and the threshold appreciation price of
$o, you would receive on or shortly after the exchange date the following
number of shares of XYZ common stock or, if the seller elects the cash
settlement option, as described below, the following amount of cash per MEDS:
Reference Property Number of Shares of XYZ
Value per MEDS Common Stock per MEDS OR Amount of Cash per MEDS
------------------ ----------------------- -----------------------
$ $
$ $
$ $
$ $
$ $
$ $
$ $
The table above illustrates potential outcomes on the exchange date with
respect to your investment in MEDS. If the reference property value per MEDS as
of the exchange date is greater than $o (the threshold appreciation price), you
will receive in exchange for each MEDS o% of the reference property per MEDS,
resulting in your receiving only o % of the appreciation in value of the
reference property above $o. If the reference property value per MEDS as of the
exchange date is greater than $o (the initial price) but less than or equal to
$o (the threshold appreciation price), you will receive in exchange for each
MEDS only reference property with an aggregate then-current value as of the
exchange date equal to $o (the initial price), resulting in your receiving none
of the appreciation in value of the reference property. If the reference
property value per MEDS as of the exchange date is less than or equal to $o
(the initial price), you will receive in exchange for each MEDS 100% of the
reference property per MEDS, regardless of the value of the reference property,
resulting in your bearing the entire decline in value of the reference
property.
The seller has the option to deliver to us on the business day before the
exchange date cash instead of that number or amount of each type of reference
property that is required to exchange all of the MEDS outstanding on the
exchange date. We refer to this option as the "cash settlement option." In
order to exercise the cash settlement option, the contract will require the
seller to (i) deliver to us a written notice of that exercise on or prior to
the cash settlement notice date, and (ii) pledge to us as additional cash
collateral on or prior to the second business day following the cash settlement
notice date, in a manner described below under "--Collateral Arrangements;
Acceleration," an amount of cash equal to 20% of the reference property value
per MEDS as of the cash settlement notice date multiplied by the number of MEDS
outstanding on the cash settlement notice date. We refer to the 30th business
day prior to the exchange date as the "cash settlement notice date." If the
seller elects the cash settlement option, it will deliver to us, on the
business day before the exchange date, cash in an amount equal to the aggregate
then-current value as of the exchange date of the reference property the seller
would otherwise have been obligated to deliver to us on the business day before
the exchange date. If the seller elects the cash settlement option, you will
receive a proportionate share of the cash delivered in lieu of reference
property on or shortly after the exchange date.
On or prior to the twenty-sixth business day before the originally
scheduled exchange date or, if the seller elects to extend the exchange date,
the extended exchange date, we will issue a press release to Reuters Economic
and Bloomberg Business News and, if the MEDS are then held in book-entry form,
notify The Depository Trust
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Company as to whether you will receive reference property or cash in exchange
for your MEDS. At the time the press release is issued, we will not have
determined the reference property value per MEDS as of the exchange date. If
the seller elects to extend the exchange date, on or prior to the twenty-sixth
business day before the originally scheduled exchange date, we will issue a
press release to Reuters Economic and Bloomberg Business News providing notice
of this fact, and of the fact that you will receive cash in exchange for your
MEDS, if the rollover offering is successfully priced, on the date that is two
business days following the closing date for the rollover offering.
Rollover Offering.
The seller will have the right under the contract to extend the exchange
date by three months to o. In order to be able to extend the exchange date by
three months, the seller will be required under the contract to (i) deliver to
us a written notice of that extension on or prior to the extension notice date,
and (ii) pledge to us as additional cash collateral on the extension notice
date additional treasury securities sufficient to fund one additional quarterly
cash distribution on the extended exchange date on all the MEDS outstanding on
the extension notice date, as described below under "--Collateral Arrangements;
Acceleration." We refer to the 30th business day prior to the originally
scheduled exchange date as the "extension notice date."
If the seller has elected to extend the exchange date, the seller will
then have the right, by notice to us by 10:00 A.M., New York City time, on the
business day next following the date on which a rollover offering has been
priced (provided that such pricing date is at least 30 business days prior to
the extended exchange date), to accelerate the exchange date from the extended
exchange date to the second business day following the closing date of the
rollover offering. By so accelerating the exchange date, the seller will commit
to settle the contract in cash as described below.
If the seller elects to extend but does not accelerate the exchange date,
then the exchange amount will be calculated as of the extended exchange date.
If the seller elects to extend and then accelerate the exchange date, then the
exchange amount will be calculated based on the then-current value of any
reference security included in the reference property on the date of pricing of
the rollover offering. This means that the then-current value will be based on
the closing price of any reference security on one trading day rather than on
20 consecutive trading days as would be the case in the absence of such
acceleration. In either case, your receipt of reference property or cash will
be delayed until following the extended or accelerated exchange date, and you
will receive an additional partial cash distribution on your MEDS on the
extended or accelerated exchange date in an amount calculated as set forth
below.
The amount of the additional cash distribution on the MEDS will be equal
to the regular quarterly cash distribution on the MEDS of $o, prorated to
reflect the number of days by which the exchange date is ultimately extended
beyond o, 2003. For example, if the exchange date were extended to o and then
accelerated to o (i.e., two-thirds of the time between o, 2003, the originally
scheduled exchange date, and o, the extended exchange date), the additional
distribution would be equal to $o, or two-thirds of the regular quarterly
distribution. The additional cash distribution will be funded from additional
treasury securities pledged by the seller to us on the extension notice date.
Reference Property Adjustments.
The amount and type of reference property that we are entitled to receive
under the contract, and therefore that you will receive on or shortly after the
exchange date (and/or after the special acceleration date, if any), is subject
to change and adjustment under the antidilution provisions in the contract,
which are designed to protect the seller and you against certain dilutive or
concentrative effects on any reference security of the following corporate
events (to each of which we refer as a "dilution event") as well as of certain
"reorganization events" described below, if such events occur prior to the
business day before the exchange date.
(1) If the "issuer" of any reference security subdivides or splits
the outstanding units of the reference security into a greater number
of units, combines the outstanding units of the reference security
into a
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smaller number of units or reclassifies the outstanding units of the
reference security into units of another of the issuer's securities,
then the reference property per MEDS will be adjusted to include the
number of units of the reference security or other security of the
issuer that a holder of the reference security would have been
entitled to receive as a result of the dilution event had the holder
held, immediately prior to that dilution event, the number of units
of the reference security that were then part of the reference
property per MEDS. Every adjustment of the type described in this
paragraph (1) will be made successively.
(2) If the issuer grants rights or warrants to all holders of any
reference security entitling them to subscribe for or purchase any of
its securities or other property for a period ending before the
fifteenth calendar day following the exchange date (other than rights
to purchase reference security units pursuant to a plan for the
reinvestment of dividends or interest), then the reference property
per MEDS will be adjusted to include cash as follows. The amount of
cash will equal the fair market value of each right or warrant on the
fifth business day after the date the holders of the reference
security receive their rights or warrants (the "receipt date")
multiplied by the product of (A) the number of rights or warrants
issued for each unit of the reference security and (B) the number of
units of the reference security that are part of the reference
property per MEDS immediately before the issuance takes place,
without any interest. To determine this fair market value, we will
select the bid of the recognized securities dealer in The City of New
York that provides the highest net bid as of approximately 10:00 A.M.
(New York City time) on the fifth business day after the receipt
date, for settlement three business days later, from among the bids
of three such dealers (or less than three if three such dealers are
not providing bids) for the purchase by that dealer of the number
(the "aggregate number") of rights or warrants that a holder of the
reference security would have received if the holder held, on the
record date for determination of holders entitled to receive the
rights or warrants (the "record date"), a number of units of the
reference security equal to the product of (1) the aggregate number
of outstanding MEDS as of the record date and (2) the number of units
of the reference security that were part of the reference property
per MEDS on the record date. The fair market value of each right or
warrant will be the quotient of (x) such highest net bid divided by
(y) the aggregate number. Each adjustment of the type described in
this paragraph (2) will become effective on the fifth business day
after the receipt date. If for any reason we are unable to obtain the
required bid on the fifth business day after the receipt date, the
fair market value for that right or warrant will be determined
promptly after the fifth business day after the receipt date by a
nationally recognized independent investment banking firm we retain
for this purpose. From the date of issuance of rights or warrants
until the required bid is obtained or the fair market value is
otherwise determined, the reference property per MEDS will include
the number of those rights or warrants issued for each unit of the
reference security multiplied by the number of units of the reference
security that are part of the reference property per MEDS immediately
before the issuance of those rights or warrants, and those rights or
warrants constituting part of the reference property per MEDS will be
deemed for all purposes to have a fair market value of zero.
(3) If the issuer pays a dividend, makes a distribution to all
holders of any reference security of cash, its securities or
securities issued by any other entity, or other property, or issues
rights or warrants to subscribe for or purchase any of its securities
or securities issued by any other entity, or other property (other
than those referred to in paragraph (2) above) (each, a "distributed
asset"), then the reference property per MEDS will be adjusted to
include the number and amount of each type of distributed asset
received for each unit of the reference security multiplied by the
number of units of the reference security that are part of the
reference property per MEDS immediately before that dividend,
distribution or issuance. However, no adjustment of the type
described in this paragraph (3) shall be made for (a) any cash
dividend on any reference security that is capital stock, which
dividend is required by the terms of that reference security or is
not an extraordinary cash dividend (as defined below), (b) any
payment of interest on any reference security that is an evidence of
indebtedness or (c) any dividend or distribution referred to in
paragraph (1) or (2) above.
An "extraordinary cash dividend" means, with respect to any reference
security, any cash dividend on the reference security that, together with all
cash dividends paid on the same reference security during the preceding
12-month period (or, if the reference security was not outstanding at the
commencement of that 12-month period, the shorter period during which the
reference security was outstanding) exceeds on a per unit basis 10% of the
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then-current value of the reference security as of the date that cash dividend
was declared by the issuer. For the purposes of that calculation, the amount of
cash dividends paid on a per unit basis will be appropriately adjusted to
reflect the occurrence during that 12-month period (or the shorter period
during which that reference security was outstanding) of any dilution event
with respect to that reference security.
If any of the following events, which we refer to as a "reorganization
event," shall occur prior to the business day before the exchange date:
(A) any consolidation, merger or amalgamation of an issuer with or
into another entity (other than a consolidation, merger or
amalgamation in which the issuer is the continuing corporation and in
which the units of each reference security of that issuer outstanding
before the consolidation, merger or amalgamation are not exchanged
for cash, securities or other property of the issuer or another
entity),
(B) any sale, transfer, lease or conveyance to another entity of the
property of the issuer as an entirety or substantially as an
entirety,
(C) (i) any statutory exchange of securities of the issuer with
another entity or (ii) a public offer for equity securities of the
issuer that results in a transfer of, or an irrevocable commitment to
transfer, substantially all then outstanding equity securities of the
issuer (other than those owned or controlled by the offeror) (in each
case, other than a reorganization event referred to in clause (A)
above) or
(D) any liquidation, dissolution, winding up, bankruptcy or
insolvency of the issuer,
then the reference property per MEDS will be adjusted to include, in lieu of
the number of units of each reference security of the issuer that were part of
the reference property per MEDS immediately before the effective date of the
reorganization event, the amount or number of any cash, securities and/or other
property that a holder of the reference security would have been entitled to
receive as a result of the reorganization event had the holder held,
immediately prior to that reorganization event, the number of units of the
reference security that were part of the reference property per MEDS
immediately before the effective date of the reorganization event.
If a reorganization event or a dilution event permits holders of a
reference security to elect to own or receive either marketable equity
securities or cash and/or other securities or property, or a combination of any
or all of the foregoing, for purposes of determining the reference property
adjustment, we will assume that each holder of a reference security has elected
to own or receive the maximum possible number of marketable equity securities.
Within ten business days after the event that requires a reference
property adjustment (the distribution date for the property distributed in such
event is referred to as the "reference property adjustment date"; provided that
if such distribution date occurs on or after the business day before the
exchange date, then the "reference property adjustment date" shall be the
record date for such distribution), we will provide to you written notice of
the event and a statement in reasonable detail setting forth the amount or
number of each type of reference property per MEDS, after giving effect to that
reference property adjustment.
We will not adjust the reference property per MEDS for events other than
those defined as dilution events or reorganization events, including any
offerings by the issuer of its equity securities for cash or in connection with
acquisitions, any self-tenders or repurchases by the issuer of its equity
securities or any issuances of non-transferrable rights or warrants that
require payment as a condition to their exercise. Likewise, we will not adjust
the reference property per MEDS for any sales of XYZ common stock or other
reference securities by the seller or any other stockholder of XYZ Company or
any third party partial tender offers for XYZ common stock or other reference
securities.
Special Acceleration.
Notwithstanding the foregoing, if, on any reference property adjustment
date occurring prior to the sixth business day before the exchange date, after
giving effect to the reference property adjustment required as of such date,
the percentage ("non-equity percentage") obtained by dividing (1) the
then-current value of the items of
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reference property per MEDS other than marketable equity securities
("non-equity reference property per MEDS") by (2) the then-current value of all
the items of reference property per MEDS, each determined as of the reference
property adjustment date, equals or exceeds 30% and, in the case of such a
determination being made following one or more previous special accelerations,
the then-current value of the non-equity reference property per MEDS also
equals or exceeds 30% of the initial price, then delivery of the non-equity
reference property per MEDS by the seller under the contract will be
accelerated as follows ("special acceleration"). We refer to the product of
non- equity reference property per MEDS for any special acceleration and the
number of MEDS then outstanding as the "non-equity reference property" for such
special acceleration.
If the non-equity percentage for such special acceleration is equal to
100%, then the exchange date will be accelerated to the fifth business day
following the reference property adjustment date and the exchange amount will
be determined as described above under "--General" (unless such special
acceleration follows one or more previous special accelerations, in which case
the exchange amount will be determined as described below). If the non-equity
percentage for such special acceleration is less than 100%, the seller will be
required under the contract:
(i) on the fifth business day following the reference property adjustment
date or, if later, on the fifth business day after the seller
receives non-equity reference property for such special acceleration
("special acceleration date"), to deliver to us the portion of the
non-equity reference property per MEDS for such special acceleration
("accelerated portion") calculated as described below, multiplied by
the number of MEDS then outstanding (the seller will have an option
to deliver the then-current value of the accelerated portion in cash)
and we will promptly distribute this property and/or cash to you; and
(ii) on the exchange date, to deliver to us the number or amount of
reference property calculated as described below (the seller will
have an option to deliver the then-current value of that reference
property in cash by complying with the conditions to cash settlement
option described above under "--General").
The accelerated portion will be determined as of the reference property
adjustment date applicable to the special acceleration, after giving effect to
the reference property adjustment required as of such date, as follows:
(i) if the reference property value per MEDS as of such reference
property adjustment date is greater than the threshold appreciation
price (or, if such special acceleration follows one or more previous
special accelerations, then the threshold appreciation price
multiplied by the non-accelerated percentage determined following
the immediately preceding special acceleration), then the accelerated
portion, in respect of each MEDS shall equal o% of the non-equity
reference property per MEDS as of such reference property adjustment
date,
(ii) if the reference property value per MEDS as of such reference
property adjustment date is greater than the initial price (or, if
such special acceleration follows one or more previous special
accelerations, then the initial price multiplied by the
non-accelerated percentage determined following the immediately
preceding special acceleration), but less than or equal to the
threshold appreciation price (or, if such special acceleration
follows one or more previous special accelerations, then the
threshold appreciation price multiplied by the non-accelerated
percentage determined following the immediately preceding special
acceleration), then the accelerated portion in respect of each MEDS
shall equal a percentage of the non-equity reference property per
MEDS as of such reference property adjustment date so that the
aggregate then-current value of your distribution as of such
reference property adjustment date equals non-equity percentage
applicable to such special acceleration of the initial price (or, if
such special acceleration follows one or more previous special
accelerations, then the initial price multiplied by the
non-accelerated percentage determined following the immediately
preceding special acceleration),
(iii) if the reference property value per MEDS as of such reference
property adjustment date is less than or equal to the initial price
(or, if such special acceleration follows one or more previous
special accelerations, then the initial price multiplied by the
non-accelerated percentage determined following the immediately
preceding special acceleration), then the accelerated portion in
respect of each MEDS shall equal 100% of the non- equity reference
property per MEDS as of such reference property adjustment date
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<PAGE>
and shall include any distributions on such non-equity reference property made
subsequent to such reference property adjustment date for which a reference
property adjustment would otherwise have been made.
If one or more special accelerations occur, then the exchange amount as of
the exchange date will be determined as follows:
(i) if the reference property value per MEDS as of the exchange date is
greater than the non-accelerated percentage determined following the
last special acceleration to occur multiplied by the threshold
appreciation price, then the exchange amount in respect of each MEDS
shall equal o% of the reference property per MEDS,
(ii) if the reference property value per MEDS as of the exchange date is
greater than the non-accelerated percentage determined following the
last special acceleration to occur multiplied by the initial price,
but less than or equal to the non-accelerated percentage determined
following the last special acceleration to occur multiplied by the
threshold appreciation price, then the exchange amount in respect of
each MEDS shall equal a percentage of the reference property per
MEDS, allocated as proportionately as practicable, so that the
aggregate then-current value of your distribution as of the exchange
date equals the non-accelerated percentage determined following the
last special acceleration to occur multiplied by the initial price,
and
(iii) if the reference property value per MEDS as of the exchange date is
less than or equal to the non-accelerated percentage determined
following the last special acceleration to occur multiplied by the
initial price, then the exchange amount in respect of each MEDS shall
equal 100% of the reference property per MEDS.
Collateral Arrangements; Acceleration.
We have entered into a Security and Pledge Agreement with the seller and
o, as collateral agent, pursuant to which the seller will secure its
obligations under the contract by pledging to us the maximum number or amount
of each type of reference property that the seller may be required to deliver
under the contract (initially o shares of XYZ common stock). In addition, if
the seller elects the cash settlement option, then pursuant to the Security and
Pledge Agreement the seller will pledge to us as additional collateral, on or
prior to the second business day following the cash settlement notice date,
cash in an amount equal to 20% of the reference property value per MEDS as of
the cash settlement notice date multiplied by the number of MEDS outstanding on
the cash settlement notice date. Furthermore, if the seller elects to extend
the exchange date in the manner described above under "--Rollover Offering,"
then pursuant to the Security and Pledge Agreement the seller will pledge to us
as additional collateral, on or prior to the extension notice date, U.S.
government obligations that will be sufficient to fund the payment of an
additional quarterly cash distribution on the MEDS on the extended exchange
date.
Unless the seller is in default of its obligations under the contract or
the Security and Pledge Agreement, the seller will be permitted to substitute
short-term, direct obligations of the U.S. government for the pledged reference
property. Any U.S. government obligations pledged as substitute collateral will
be required to have an aggregate market value at the time of substitution and
at daily mark-to-market valuations thereafter of not less than 150% of the
aggregate then-current value of each type of reference property that would
otherwise be pledged. From and after any insufficiency determination (as
defined below), the seller must cure the deficiency by 4:00 P.M., New York City
time, on the third business day following the day on which notice thereof is
given.
The collateral agent will promptly pay over to the seller any dividends,
interest, principal or other payments it receives on any collateral pledged by
the seller, including any substitute collateral, unless the seller is in
default of its obligations under the contract or the Security and Pledge
Agreement or unless the payment would cause the collateral to become
insufficient. The seller will have the right to vote any pledged units of any
reference security for so long as those units are owned by it, unless the
seller is in default of its obligations under the contract or the Security and
Pledge Agreement.
If the collateral agent makes an "insufficiency determination" that the
U.S. government obligations pledged as substitute collateral fail to meet the
valuation requirements described above or that the seller has failed to pledge
additional collateral that may be required as a result of an adjustment to the
reference property or otherwise, and the
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<PAGE>
failure is not cured by 4:00 P.M., New York City time, on the third business
day following the day on which the collateral agent gives notice of the
insufficiency determination, then the collateral agent will, if practicable,
sell the U.S. government obligations and use the proceeds to purchase each type
of reference property in the numbers or amounts necessary to cause the
collateral pledged to meet the requirements of the Security and Pledge
Agreement. The collateral agent will discontinue these sales and purchases if
at any time a collateral event of default has occurred and is continuing.
A "collateral event of default" means, at any time:
(A) if no U.S. government obligations are pledged as substitute
collateral, the collateral pledged does not consist of at least the
maximum number or amount of each type of reference property that the
seller may be required to deliver under the contract (as adjusted as
a result of any dilution event or reorganization event); and
(B) if any U.S. government obligations are pledged as substitute
collateral, the U.S. government obligations do not have a market
value at that time of at least 105% of the excess of (x) the
aggregate then-current value of the maximum number or amount of each
type of reference property that the seller may be required to deliver
under the contract (as adjusted as a result of any dilution event or
reorganization event) over (y) the aggregate then-current value of
the number or amount of each type of reference property then pledged
as collateral.
A "default," which means a collateral event of default or the bankruptcy,
insolvency, liquidation, dissolution or winding up of the seller, will
automatically accelerate the seller's obligations under the contract. If there
is a default, the seller will be required to deliver a number or amount of each
type of reference property, allocated as proportionately as practicable, with
an aggregate then-current value as of the acceleration date equal to the
aggregate acceleration value, and the seller will not have the option to
deliver cash in lieu of reference property. The "aggregate acceleration value"
will be based on an "acceleration value" derived from quotations we receive
from independent dealers. Each independent dealer will quote an amount that it
would require to be paid to enter into an agreement with us that would have the
effect of preserving our rights to receive the number or amount of each type of
reference property under a portion of the contract that corresponds to 1,000
MEDS. We will request quotations from four nationally recognized independent
dealers on or as soon as reasonably practicable following the acceleration
date. If we receive four quotations, the acceleration value will be the
arithmetic mean of the two quotations remaining after disregarding the highest
and the lowest quotations. If we receive only two or three quotations, the
acceleration value will be the arithmetic mean of all of the quotations. If we
receive only one quotation, the acceleration value will be that quotation. The
aggregate acceleration value will be computed by dividing the acceleration
value by 1,000 and multiplying the quotient by the number of outstanding MEDS.
If no quotations are provided, the aggregate acceleration value will be the
aggregate then-current value on the acceleration date of the aggregate number
or amount of each type of reference property that would be required to be
delivered if the exchange date were the acceleration date. If there is a
default, the number or amount of each type of reference property delivered to
you will be based solely on the aggregate acceleration value.
If there is a default, the collateral agent will distribute to us, and we
will distribute to you as proportionately as practicable, reference property
then pledged, or cash generated from the liquidation of the U.S. government
obligations then pledged, or a combination of the foregoing, so that the
aggregate then-current value of that reference property or cash distributed
equals the aggregate acceleration value. In addition, if by the exchange date
any substitute collateral has not been replaced by sufficient reference
property, the collateral agent will distribute to us, and we will distribute to
you as proportionately as practicable, the reference property then pledged plus
cash generated from the liquidation of U.S. government obligations then pledged
with an aggregate then-current value equal to the aggregate then-current value
of the reference property required to be delivered by the seller under the
contract. See "--Trust Dissolution."
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Fractional Interests Under the Contract.
The seller will not be required to deliver any fractional units of any
reference security. Instead of any fractional unit that would otherwise be
delivered to fulfill the seller's obligations under the contract, we will
receive an amount in cash equal to the then-current value of that fractional
unit as of the exchange date (or the special acceleration date, if any). To the
extent it is practical to do so, the seller will deliver fractional interests
of any reference property other than cash or a reference security. To the
extent that it is not practical to do so, in lieu of delivering any fractional
interest that would otherwise be delivered, the seller will deliver an amount
in cash equal to the then-current value of that fractional unit as of the
exchange date (or the special acceleration date, if any). See "--Fractional
Interests."
The Seller.
Specific information about the seller's holdings of XYZ common stock and
other relationships with XYZ Company is included or incorporated by reference
in the accompanying XYZ Company prospectus.
Purchase Price.
The purchase price under the contract is equal to $o or $o if the
underwriters exercise their over-allotment option in full. We will pay the
purchase price to the seller on or about o and we are not required to pay the
seller anything other than the purchase price. The purchase price was arrived
at by arm's length negotiations between ourselves and the seller, taking into
consideration various factors including the price, expected dividend level and
volatility of XYZ common stock, current interest rates, the term of the
contract, current market conditions generally, the collateral pledged by the
seller, the value of other similar instruments and the costs and anticipated
proceeds of the offering of MEDS.
XYZ Company
[XYZ Company description to come]
We are not affiliated with XYZ Company. XYZ Company will not receive any
of the proceeds from the offering, and has no obligations with respect to the
MEDS. This prospectus relates only to the MEDS being offered, and does not
relate to XYZ Company or its common stock. XYZ Company has filed a registration
statement with the SEC to register the shares of its common stock that you may
receive when you exchange your MEDS. The registration statement contains XYZ
Company prospectus that includes information relating to XYZ Company and its
common stock, including risk factors relevant to an investment in XYZ common
stock. The XYZ Company prospectus is attached to this prospectus and is being
delivered to you only as a convenience. The XYZ Company prospectus is not part
of this prospectus, and it is not incorporated by reference into this
prospectus. See "Risk Factors--No Affiliation Between the Trust and XYZ
Company."
Enhanced Yield; Less Potential for Equity Appreciation than XYZ Common Stock;
No Depreciation Protection
Owning a MEDS is not the same as owning a share of XYZ common stock. Cash
distributions on the MEDS will be treated as a return of your basis in your
treasury securities and will not result in a separate income inclusion in
addition to the recognition of original issue discount on your treasury
securities. The MEDS will provide you with a current distribution yield that is
higher than the current dividend yield on XYZ common stock, which currently
does not pay any dividends. However, there can be no assurance that the yield
on the MEDS will be higher than the dividend yield on XYZ common stock in the
future. In addition, your opportunity to benefit from appreciation in the price
of XYZ common stock by investing in MEDS is less than the opportunity you would
have if you invested directly in XYZ common stock, because the value of the
reference property you receive when you exchange your MEDS will be greater than
the issue price you paid to purchase your MEDS only if the reference property
value per MEDS is greater than the threshold appreciation price of $o. Even if
the reference property
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value per MEDS is greater than the threshold appreciation price, because each
MEDS will in that case entitle you to receive only o% of the reference property
per MEDS, you will receive only o% (the percentage equal to the initial price
divided by the threshold appreciation price) of any appreciation in the value
of the reference property above the threshold appreciation price. However, if
the reference property value per MEDS is less than the initial price, you will
bear the entire decline in value of the reference property. See "Risk
Factors--MEDS Give You Less Opportunity for Equity Appreciation than XYZ common
stock." Additionally, because the reference property value per MEDS is
determined based on a 20 trading day average, the actual market value of a
share of XYZ common stock or other reference property distributed in exchange
for your MEDS may be more or less than the reference property value per MEDS
used to determine the number or amount of reference property you will receive.
The U.S. Treasury Securities and Quarterly Distributions
We will purchase and hold the treasury securities, which will have face
amounts and maturities that exactly correspond to the amounts and payment dates
of the quarterly cash distributions you will receive on your MEDS. Up to 35% of
our total assets may be invested in these treasury securities. If the contract
is accelerated in whole as described under "--The Contract--Special
Acceleration" or "--Collateral Arrangements; Acceleration," we will liquidate
the treasury securities and distribute the proceeds to you proportionately,
together with other amounts distributed upon acceleration.
If you acquired MEDS from the underwriters at the initial public offering
price on the date the MEDS were first offered for sale, the following table
contains information regarding your quarterly distributions, the portion of
each year's distributions that will constitute a return of capital for U.S.
federal income tax purposes and the amount of discount accruing on the treasury
securities, assuming a constant yield election for short-term treasury
securities. "Certain Tax Considerations."
<TABLE>
Annual Gross
Annual Gross Distributions from Annual Inclusion of
Distributions from Treasury Securities per Annual Return of Original Issue Discount
Year Treasury Securities MEDS Capital per MEDS in Income per MEDS
---- ------------------- ----------------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
$ $ $ $
</TABLE>
We will make quarterly distributions of $o per MEDS on each o, o, o and o,
or on the next business day if that date is not a business day, beginning o, if
you are the holder of record as of the preceding o, o, o, and o . Our quarterly
distributions will consist solely of the cash we receive from the proceeds of
the treasury securities as they mature.
Temporary Investments
For cash management purposes, we may invest the proceeds of the treasury
securities and any other cash we hold in short-term obligations of the U.S.
government maturing no later than the business day before the next distribution
date.
Trust Dissolution
Our trust will dissolve on or shortly after the exchange date, or earlier
if the contract is accelerated in whole as described above. We have adopted a
fundamental policy that we will not dispose of the contract during our term.
Under the circumstances described above, however, the contract may terminate
before the exchange date. If (i) a default occurs under the contract with
respect to the seller, (ii) the collateral supporting the contract is
insufficient or (iii) the reference property to be delivered under the contract
no longer includes any marketable equity securities, then our assets other than
the contract will be liquidated and our trust dissolved. Upon dissolution, our
assets will include proceeds received from the liquidation and any assets
received under the contract, less any expenses, which will be distributed as
proportionately as practicable to you, and our term will immediately expire.
See "--The Contract--Special Acceleration" and "--Collateral Arrangements;
Acceleration."
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Fractional Interests
We will not distribute to you on the exchange date any fractional units of
any reference security, or fractional interests in any reference property. The
seller will not deliver to us any fractional units of any reference security.
To the extent that the seller delivers to us fractional units of any reference
property other than cash or reference securities, all such fractional units or
interests will be aggregated and liquidated and, in lieu of the fractional
units or interests to which you would otherwise have been entitled, you will
receive a proportionate share of the proceeds from the liquidation, net of any
brokerage or related expenses. See "--The Contract --Fractional Interests under
the Contract."
Investment Restrictions
We have adopted a fundamental policy that we will not:
o purchase any securities or instruments other than the treasury
securities, the contract and any reference security received under
the contract and, for cash management purposes, short-term
obligations of the U.S. government;
o issue any securities or instruments except for the MEDS;
o make short sales or purchase securities on margin;
o write put or call options;
o borrow money;
o underwrite securities of other issuers;
o purchase or sell real estate and real estate mortgage loans,
commodities or commodities contracts;
o make loans;
o invest less than 65% of our portfolio in the contract;
o dispose of the contract during our term; and
o unless we dissolve earlier than the originally scheduled exchange
date, dispose of the treasury securities before their maturity dates.
We cannot change these fundamental policies without the consent of all
holders of the outstanding MEDS. Unless expressly designated as fundamental,
all other policies of the Trust may be changed by our trustees without your
approval.
Because of the foregoing fundamental policies, our investments will be
concentrated initially in the o industry, which is the industry in which XYZ
Company currently operates. However, if in the future XYZ Company diversifies
its operations into one or more other industries, or if the reference property
includes a reference security of an issuer that operates in another industry,
our investments will be less concentrated in the o industry. See "Risk
Factors--Our Portfolio Is not Diversified."
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Risk Factors
You should carefully consider each of the following risks and all of the
other information set forth in this prospectus and the accompanying XYZ Company
prospectus before deciding to invest in the MEDS.
We Will not Actively Manage our Portfolio
Unlike a typical closed-end investment company, we will not have an
investment advisor to manage our portfolio. Instead, we will be internally
managed by our trustees. See "Management Arrangements." We have adopted a
fundamental policy that we may not dispose of the contract before our term
expires. Similarly, unless we dissolve earlier than the exchange date, we will
not dispose of the treasury securities before their maturity dates. As a
result, we will continue to hold the contract despite any significant decline
in the value of XYZ common stock, or any other reference property, or any
adverse change in the financial condition of XYZ Company or any other issuer.
See "Investment Objectives and Policies."
Our Portfolio Is not Diversified
We are classified as a "non-diversified," closed-end, management
investment company under the Investment Company Act. Consequently, we are not
limited by the Investment Company Act in the proportion of our assets that may
be invested in the securities of a single issuer. Our assets will consist
almost entirely of the contract and the treasury securities. As a result, we
may be subject to greater risk than would be the case for an investment company
with more diversified investments.
You Bear the Risk of Any Loss in the Value of XYZ Common Stock
The MEDS are similar to ordinary equity securities in that the aggregate
value of XYZ common stock, or other reference property, or cash, that you will
receive on or shortly after the exchange date is not fixed, but is based on the
value of XYZ common stock, or other reference property, which may be more or
less than the initial price. See "Investment Objectives and Policies--The
Contract." If the reference property value per MEDS is less than the initial
price, then you will receive assets with a value of less than the issue price
you paid to purchase the MEDS, in which case your investment in MEDS will
result in a loss, and you will bear the entire decline in value. Accordingly,
you are assuming the risk that the market value of XYZ common stock may
decline, and that such decline may be substantial. If XYZ Company is insolvent
or bankrupt when you receive its common stock, you may lose your entire
investment.
In addition, because the then-current value of any reference security is
determined over a 20 trading day averaging period, except in the case of a
rollover offering, the actual market price of XYZ common stock or other
reference security that you receive on or shortly after the exchange date may
be less than the reference property value per MEDS. For example, if the value
of XYZ common stock is continuously falling during the averaging period, the
actual market price on the exchange date of XYZ common stock that you receive
may be less than the reference property value per MEDS.
MEDS Give You Less Opportunity for Equity Appreciation than XYZ Common Stock
Owning a MEDS is economically different from owning a share of XYZ common
stock. An investment in MEDS offers you less opportunity to realize any
appreciation in the value of XYZ common stock over its current value than does
a direct investment in XYZ common stock. The amount you receive when you
exchange your MEDS will be greater than the issue price you paid to purchase
the MEDS only if the reference property value per MEDS is greater than the
threshold appreciation price. The threshold appreciation price of $o represents
an appreciation of o% over the initial price. In addition, you are entitled to
receive only o% (the percentage equal to the initial price divided by the
threshold appreciation price) of any appreciation in the reference property
value per MEDS above the threshold appreciation price. See "Investment
Objectives and Policies--The Contract."
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Trading Prices of the MEDS May Be Influenced by Many Unpredictable Factors
Many factors, all of which are beyond our control, will influence the
value of the MEDS. We expect that the market value of XYZ common stock will
affect the value of the MEDS more than any other factor. The trading price of
XYZ common stock may fluctuate significantly and experience significant
volatility. Factors that may affect the trading prices of XYZ common stock and
the MEDS include:
o the operating results and future prospects of XYZ Company;
o the health of the industry in which XYZ Company operates;
o economic, financial and political events that affect the capital
markets generally;
o sales of substantial amounts of XYZ common stock after the offering
of the MEDS (which could occur, among other reasons, in connection
with hedging or arbitrage of investors' positions in the MEDS--see
"--The Issuance of the MEDS May Adversely Impact the Market for XYZ
Common Stock") or the perception that these sales could occur;
o the volatility (frequency and magnitude of changes in price) of XYZ
common stock;
o the dividend rate on XYZ common stock, if any;
o interest and yield rates in the capital markets generally; and
o the time remaining until the exchange date.
The capital markets in general have experienced extreme volatility that
often has been unrelated to the operating performance of particular companies.
These broad market and industry fluctuations may cause declines in the value of
XYZ common stock and the MEDS regardless of the actual operating performance of
XYZ Company.
The Issuance of the MEDS May Adversely Impact the Market for XYZ Common Stock
Investors' anticipation that the seller may deliver to us under the
contract XYZ common stock representing approximately o% of the currently
outstanding shares of XYZ common stock could cause the price of XYZ common
stock to be unstable or to fall. In addition, the following events may occur as
a result of the issuance of the MEDS, which events may also adversely affect
the price of XYZ common stock:
o sales of XYZ common stock by investors who prefer to invest in XYZ
Company by purchasing MEDS;
o short sales of XYZ common stock by holders of MEDS who wish to hedge
their investment in XYZ Company; or
o arbitrage trading activity between the MEDS and XYZ common stock.
You Bear Some Market Risk if the Seller Elects the Cash Settlement Option
If the seller decides to exercise the cash settlement option, the amount
of cash we will receive in lieu of any reference security will be based on the
average of the closing prices per unit of that reference security for the 20
trading day period ending immediately before the second trading day prior to
the exchange date (except in the case of a rollover offering). The price of XYZ
common stock or any other reference security that you may receive as a result
of dilution or reorganization event adjustments will be subject to market
fluctuations during that period. The amount of cash you receive on the exchange
date may be less than the value of XYZ common stock or other reference
securities that you would have received on the exchange date had the seller not
exercised the cash settlement option. For example, if the seller elects to
exercise the cash settlement option and the value of XYZ
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<PAGE>
common stock is continuously rising during the averaging period, the average of
the closing prices per share of XYZ common stock over the averaging period may
be lower than the value of XYZ common stock otherwise deliverable on the
exchange date.
The contract will be collateralized by a pledge of the maximum number or
amount of each type of reference property that the seller may be required to
deliver under the contract or, at the seller's option, by U.S. government
obligations. In addition, as a condition to its election of the cash settlement
option, the seller will be required to pledge on the cash settlement notice
date as additional collateral an amount of cash equal to 20% of the reference
property value per MEDS as of the cash settlement notice date multiplied by the
number of MEDS outstanding. However, if the market price of the reference
property is sharply falling during the averaging period so that the value of
the reference property and that additional collateral pledged to us is less
than the amount of cash that the seller is obligated to deliver to us under the
contract, then you bear the risk that the seller's obligation to deliver cash
to us will not be fully collateralized. See "Investment Objectives and
Policies--The Contract."
The Amount You Receive and the Timing of Exchange Will Be Affected If the
Seller Elects to Extend the Exchange Date or Engage in a Rollover Offering
The seller will have the right under the contract, on 30 business days'
notice to us, to extend the exchange date by three months to o. If the seller
elects to extend the exchange date, the seller will then have the right in
connection with a rollover offering, by notice to us by 10:00 A.M., New York
City time, on the business day following the date of pricing of the rollover
offering (provided that such pricing date is 30 business days or more prior to
the extended exchange date), to accelerate the exchange date from o to the
second business day following the date of closing of the rollover offering. If
the seller elects to extend but not accelerate the exchange date, then the
exchange amount will be calculated as of the extended exchange date. If the
seller elects to extend and then accelerate the exchange date, then the
exchange amount will be calculated based on the closing price per share of XYZ
common stock or per unit of other reference security on the date of pricing of
the rollover offering. As a result, the amount of cash you will receive for
your MEDS will be based on a single closing price per unit of any reference
security included in the reference property, rather than an average of closing
prices, which may be less than you would have received if that amount was based
on the average of closing prices, and you will only receive notice of the date
on which the single closing price will be determined on or after the
determination date. In addition, your receipt of the exchange amount will be
delayed until following the extended or accelerated exchange date.
You Bear Some Risk if the Seller Becomes Bankrupt
We believe that the contract constitutes a "securities contract" for
purposes of the Bankruptcy Code. Therefore, we believe that if the seller
becomes bankrupt, the contract will not be subject to the automatic stay
provisions of the Bankruptcy Code. If, however, the contract was found not to
constitute a "securities contract" for this purpose, the contract could become
subject to the automatic stay provisions of the Bankruptcy Code or otherwise
affected by the bankruptcy proceedings. We would be required to file a claim in
bankruptcy court in order to complete the exchange. This would delay the timing
of the exchange and may result in less reference property in the exchange than
you would otherwise be entitled to receive.
In addition, if the seller elects to extend the exchange date, the seller
will be required to deliver to us additional treasury securities sufficient to
fund the additional cash distribution that we will make. If the seller becomes
bankrupt after electing to extend the exchange date but before the extended or
accelerated exchange date, your receipt of the additional cash distribution may
be substantially delayed.
You Will Have No Shareholder Rights With Respect to any Reference Security and
No Rights Under the Contract
If you invest in MEDS, you will have no rights with respect to any
reference security, including voting rights and rights to receive any ordinary
cash dividends or regular interest payments on the reference security. You will
have these rights with respect to any reference securities that you receive in
exchange for your MEDS only if the
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applicable record date for determining holders entitled to those rights occurs
after you have received the reference securities.
The seller is not responsible for determining the amount you will receive
for your MEDS on or shortly after the exchange date. The contract is a
commercial transaction and does not create any rights in any third party and is
not for the benefit of any third party, including you.
The Number of Shares You Receive Will not Be Adjusted for Certain Potentially
Dilutive Events
XYZ Company or any other issuer of reference property is free to issue
additional shares of common stock or other securities during the term of the
MEDS. Similarly, any stockholder of XYZ Company, including the seller may
decide to sell XYZ common stock at any time. Although the amount of reference
property you receive will be adjusted to protect you from certain dilution and
reorganization events specified under "Investment Objectives and Policies--The
Contract--Reference Property Adjustments," it will not be adjusted if XYZ
Company offers its common stock for cash or as consideration to make an
acquisition or if a stockholder sells shares of its common stock or if XYZ
Company or anyone else makes a partial tender offer or partial exchange offer
for its common stock. See "Investment Objectives and Policies--The
Contract--Reference Property Adjustments." Any of these issuances, sales or
offers could lead to declines in the value of XYZ common stock and, because no
adjustment is made to the MEDS, in the value of your MEDS. Neither XYZ Company
nor the seller has any obligation to consider your interests for any reason.
Your Opportunity for Gain May Be Diminished if the MEDS Expire Early
Our term, which is scheduled to expire on or shortly after the exchange
date, may be accelerated, and our assets, other than the contract, liquidated
if: (i) the seller defaults under the contract,(ii) the collateral supporting
the contract is insufficient or (iii) the reference property to be delivered
under the contract no longer includes any marketable equity securities. In
addition, if following any of the dilution and/or reorganization event
adjustments, 30% or more of the reference property will consist of cash and/or
other reference property (other than marketable equity securities), then the
time of delivery of that cash and/or other reference property (other than
marketable equity securities) by the seller to us, and by us to you, will be
accelerated. On acceleration, the value of the proceeds and assets you receive
could be substantially less than the value of what you would have received had
our term expired on the exchange date.
MEDS May Be Difficult to Resell
There may be little or no secondary market for the MEDS. The MEDS are a
new security and there currently is no secondary market for them. We will apply
to the Nasdaq National Market to list the MEDS for trading under the symbol
"o," but we do not know whether active trading in the MEDS will develop and
continue even if they are so listed. If there is a secondary market for the
MEDS, it may not provide significant liquidity or it may not continue for the
life of the MEDS.
The MEDS may later be delisted or trading in the MEDS on the Nasdaq
National Market may later be suspended. If the MEDS are delisted or trading
suspended, we will apply to list the MEDS on another national securities
exchange or for quotation on another trading market. If the MEDS are not listed
or traded on any securities exchange or trading market, or if trading is
suspended, you may find it more difficult to obtain pricing information for the
MEDS, and the price and liquidity of the MEDS may be adversely affected.
The representative for the underwriters has told us that it currently
intends to make a market in the MEDS, although it has no obligation to do so.
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MEDS May Trade at a Discount to Net Asset Value
We are a newly organized closed-end investment company with no previous
operating history. Our net asset value may decrease. In addition, shares of
closed-end investment companies frequently trade at a discount from their net
asset value. It is impossible to predict whether the MEDS will trade at, below
or above our net asset value. Since the MEDS are not redeemable, if you wish to
dispose of them prior to the exchange date, you must bear the risk that if they
do trade at a discount at the time you sell them, you would realize a loss on
your investment in the MEDS, regardless of our performance.
No Affiliation Between the Trust and XYZ Company
We are not affiliated with XYZ Company. We have no knowledge whether any
of the events described under "Investment Objectives and Policies--The
Contract--Reference Property Adjustments" are currently being considered by XYZ
Company unless those events have been publicly disclosed, and we also have no
knowledge of any event that would have a material adverse effect on XYZ Company
or on the price of its common stock. We have no ability to control these events
and these events are difficult to predict.
XYZ Company has no obligations with respect to the MEDS or the contract,
including any obligation to consider our needs or your needs for any reason.
XYZ Company will not receive any of the proceeds from the offering. XYZ Company
is not responsible for and has not participated in preparing this prospectus or
in determining the number, amount or type of reference property you will
receive for your MEDS. XYZ Company is not involved with the administration or
trading of the MEDS.
Uncertain Tax Treatment
There is no statutory, judicial or administrative authority directly
addressing the proper U.S. federal income tax treatment of an investment in the
MEDS or with securities with terms substantially the same as the MEDS. As a
result, the law regarding the treatment of the MEDS for United States federal
income tax purposes is subject to some uncertainty. Additionally, no ruling has
been requested from the Internal Revenue Service (the "IRS") with respect to
the MEDS. Although we believe that you will not recognize taxable income with
respect to your proportionate share of the contract prior to partial or full
settlement of the contract, the issue is not free from doubt and the IRS is not
required to agree with our characterization. Some alternative characterizations
could require you to include more income than would be included under the
analysis set forth under "Certain Tax Considerations." Accordingly, you should
consult your tax advisers with respect to the tax consequences of the purchase,
ownership and disposition of the MEDS in light of your particular
circumstances, including the tax risks associated with possible alternative
characterizations of the MEDS. See "Certain Tax Considerations."
Risks Factors Relating to XYZ Company
You should carefully consider the information in the XYZ Company
prospectus, including the risk factors relating to XYZ Company beginning on
page o of the XYZ Company prospectus.
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Description of the MEDS
Each MEDS represents a proportionate share of undivided beneficial
interest in our assets, and a total of o MEDS will be issued in the offering,
assuming the underwriters do not exercise their over-allotment option. You are
entitled to your proportionate share in our remaining assets available for
distribution if we liquidate. MEDS have no preemptive, redemption or conversion
rights. The MEDS, when issued and delivered to you against payment of the
public offering price, will be fully paid and nonassessable undivided
beneficial interests in our assets.
You are entitled to one vote for each MEDS you hold on all matters to be
voted on by holders of MEDS. You cannot cumulate your votes in the election of
trustees. We intend to hold annual meetings as required by the rules of the
Nasdaq National Market. You have the right, upon the declaration in writing or
vote of more than two-thirds of the outstanding MEDS, to remove any of our
trustees. The trustees will call a meeting for holders to vote on the removal
of a trustee upon the written request of the record holders of 10% of the MEDS,
or to vote on other matters upon the written request of the record holders of
51% of the MEDS, unless substantially the same matter was voted on during the
preceding 12 months.
Book-entry System
The MEDS will be issued in the form of one or more "global securities"
deposited with The Depository Trust Company ("DTC") and registered in the name
of DTC's nominee.
DTC has informed us as follows. DTC is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered pursuant to Section
17A of the Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for people who have accounts with it ("participants") and to
facilitate the clearance and settlement of securities transactions among its
participants through electronic book-entry changes in the participants'
accounts. This book-entry system eliminates the need to physically move
certificates. These participants include securities brokers and dealers, banks,
trust companies and clearing corporations. Indirect access to DTC's book-entry
system is also available to others, such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
After a global security is issued, DTC or its nominee will credit the MEDS
represented by the global security to its participants' accounts. The
underwriters will designate the accounts to be credited. Only participants or
persons that hold interests through participants may beneficially own the
global securities. If you are a participant, DTC or its nominee will maintain
the records that show your beneficial ownership in the global securities and
effect any transfer of those beneficial ownership interests among participants.
If you hold through a participant, the participant will maintain the records
that show your beneficial ownership in the global securities and effect any
transfer of those beneficial interests within the participant. The laws of some
jurisdictions may require that purchasers of securities take physical delivery
of those securities in definitive form. These laws may impair the ability to
transfer beneficial interests in a global security.
So long as DTC or its nominee is the registered owner of a global
security, DTC or its nominee will be considered the sole owner or holder of the
MEDS represented by that global security. Generally, you will not be entitled
to have MEDS registered in your name and will not receive or be entitled to
receive physical delivery of MEDS in definitive form and will not be considered
the owner or holder of the MEDS that you beneficially own.
Because DTC or its nominee is the registered owner or the holder of the
global securities, we will pay the quarterly cash distributions and deliver any
reference property or any other consideration in connection with the MEDS to
DTC or its nominee. We expect that DTC or its nominee, when it receives a
payment or delivery, will immediately credit its participants' account with
amounts proportionate to their respective beneficial interests in the global
securities, according to its records. We also expect that payments by
participants to persons who hold
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through participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers registered in "street name", and will be the responsibility of the
participants. None of us, the underwriters, any of our trustees, the
administrator, the paying agent or the custodian will have any responsibility
or liability for any aspect of the records relating to beneficial ownership
interests in a global security, or payments made on account of beneficial
ownership interests or for maintaining, supervising or reviewing any records
relating to beneficial ownership interests.
A global security may not be transferred except as a whole by DTC to a
nominee or a successor of DTC. If DTC is at any time unwilling or unable to
continue as depositary and we do not appoint a successor depositary within
ninety days, we will issue MEDS in definitive registered form in exchange for
the global securities. In this event, you will be entitled to receive MEDS in
definitive form registered in your name equal in number to your proportionate
interest in the global securities.
Management Arrangements
General
Our trustees consist of three individuals each of which we refer to as a
"trustee." None of the trustees is an "interested person" in us as defined in
the Investment Company Act. The trustees are responsible for the overall
supervision of our operations and perform the various duties imposed on the
trustees of management investment companies by the Investment Company Act.
The name of each trustee, his position and his principal occupation during
the past five years are set forth below:
Principal Occupation
Name, Age and Address Title During Past Five Years
----------------------------------- ---------------- ----------------------
Donald J. Puglisi, 53.............. Managing Trustee Professor of Finance
Department of Finance University of Delaware
University of Delaware
Newark, DE 19716
William R. Latham, I, 54............ Trustee Professor of Economics
Department of Economics University of Delaware
University of Delaware
Newark, DE 19716
James B. O'Neill, 59............... Trustee Professor of Economics
Center for Economic Education University of Delaware
& Entrepreneurship
University of Delaware
Newark, DE 19716
Compensation of Trustees
Each trustee will be paid a one-time, up-front fee of $o by the seller.
The managing trustee will also receive an additional up-front fee of $o for
serving in that capacity. We will not otherwise compensate the trustees in any
manner, including any pension or retirement benefits. The trustees do not
receive any compensation for serving as a trustee or director of any other
investment company affiliated with us.
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Portfolio Management and Administration
We will be internally managed by our three trustees and we will not have
an investment adviser. Our portfolio will not be actively managed. The trustees
will authorize the purchase of the contract and the treasury securities as
directed by the Trust Agreement. We have a fundamental policy that the contract
may not be disposed of during our term and that, unless we dissolve earlier
than the exchange date, we will not dispose of the treasury securities before
their maturity dates.
The seller and J.P. Morgan Securities Inc. will pay all expenses we incur
in our operations, including, among other things, accounting services, expenses
for legal and auditing services, taxes, costs of printing proxies, listing
fees, if any, stock certificates and shareholder reports, charges of the
administrator, the custodian and the paying agent, expenses of registering the
MEDS under federal and state securities laws, SEC fees, the trustees' fees,
insurance, interest, brokerage costs, litigation and other extraordinary or
non-recurring expenses and mailing expenses. See "Prospectus Summary --Fee
Table" and "--Estimated Expenses."
Administrator
Our day-to-day affairs will be managed by o, as trust administrator
pursuant to an administration agreement dated as of o. Under the administration
agreement, the trustees have delegated most of their operational duties to the
administrator. These include the duties to:
o receive invoices for and pay all of our expenses;
o with the approval of the trustees, engage legal and other professional
advisors (other than our independent public accountants);
o instruct the paying agent to pay any distributions on the MEDS;
o prepare and mail, file or publish all of our notices, proxies, reports,
tax returns and other communications and documents, and keep all of our books
and records;
o at the direction of the trustees, institute and prosecute legal and
other appropriate proceedings to enforce our rights and remedies; and
o make all necessary arrangements with respect to meetings of trustees and
any meetings of holders of MEDS. The administrator will not, however, select
our independent public accountants or sell or otherwise dispose of our assets
except in connection with an acceleration of the contract in whole as described
under "Investment Objectives and Policies--The Contract--Special Acceleration"
and "--Collateral Arrangements; Acceleration" or the settlement of the contract
on the business day before the exchange date.
The Administration Agreement may be terminated by us or the administrator
with 60 days' prior written notice, but the agreement may not be terminated
until a successor administrator has been chosen and has accepted the
administrator's duties.
Except for its roles as our administrator, custodian, paying agent and
registrar and transfer agent and as collateral agent under the Security and
Pledge Agreement, o has no other affiliation with us, and is not engaged in any
other transactions with us.
The address of the administrator is o.
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Custodian
The custodian of our assets is o pursuant to a custodian agreement dated
as of o. Under the custodian agreement, all net cash we receive will be
invested by the custodian in short-term U.S. government securities maturing on
or shortly before the next quarterly distribution date. If we terminate the
custodian agreement or the custodian resigns, we must engage a new custodian to
carry out the duties of the custodian.
The address of the custodian is o.
Transfer Agent, Registrar and Paying Agent
The transfer agent, registrar and paying agent for the MEDS is o pursuant
to a paying agent agreement dated as of o. If we terminate the Paying Agent
Agreement or the paying agent resigns, we must engage a new transfer agent,
registrar and paying agent to carry out the duties of the paying agent.
The address of the paying agent is o.
Indemnification
We will indemnify each trustee, the administrator, the paying agent and
the custodian with respect to any claim, liability, loss or expense including
the costs and expenses of the defense against any claim or liability that they
may incur in acting in that capacity, except in the case of willful
malfeasance, bad faith, gross negligence or reckless disregard of their
respective duties or where applicable law prohibits this indemnification. J.P.
Morgan Securities Inc. has agreed to reimburse us for any amounts we pay as
indemnification to any trustee, the administrator, the paying agent or the
custodian. J.P. Morgan Securities Inc. will in turn be reimbursed by the
seller.
Estimated Expenses
At the closing of the offering, the seller will pay to each of the
administrator, the custodian and the paying agent a one-time, up-front amount
in respect of its fee and, in the case of the administrator, our anticipated
ongoing expenses over our term. Our organizational costs in the amount of $o
and estimated costs in connection with the initial registration and public
offering of the MEDS in the amount of approximately $o will be paid by the
seller. "Fee Table."
The amount payable to the administrator for our anticipated ongoing
expenses was determined based on estimates made in good faith on the basis of
information currently available to us, including estimates furnished by our
agents. Any unanticipated expenses will be paid by J.P. Morgan Securities Inc.
J.P. Morgan Securities Inc. will in turn be reimbursed by the seller.
Dividends and Distributions
We will make quarterly cash distributions from the proceeds of the
treasury securities. You will receive the first distribution of $o per MEDS (in
respect of the period from o until o) on o if you are the holder of record on
o. After that, we will make quarterly cash distributions of $o per MEDS on each
o, o, o and o, or on the next business day if that date is not a business day,
if you are the holder of record as of the preceding o, o, o or o, respectively.
Net Asset Value
We will calculate the net asset value of the MEDS on a quarterly basis by
dividing the value of our net assets, which is the value of our assets less our
liabilities, by the total number of MEDS outstanding. Our net asset value
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will be published semi-annually as part of our semi-annual report to you and at
other times as the trustees may determine. The treasury securities will be
valued at the mean between the last current bid and asked prices or, if
quotations are not available, as we determine in good faith under the direction
of the trustees. Short-term investments having a maturity of 60 days or less
are valued at cost with accrued interest or discount earned included in
interest receivable. The contract will be valued at the mean of the bid prices
we receive from at least three independent broker-dealer firms who are in the
business of making bids on financial instruments similar to the contract and
with comparable terms.
Certain Tax Considerations
The following discussion sets forth the opinion of Davis Polk & Wardwell,
special tax counsel to the Trust, as to certain of the material U.S. federal
income tax consequences that may be relevant to the purchase, ownership and
disposition of the MEDS. This general discussion is addressed to you only if
you purchase the MEDS at the issue price from an underwriter pursuant to the
original offering and you hold the MEDS as capital assets. The discussion set
forth below does not address all of the tax consequences that may be relevant
to you in light of your particular circumstances or if you are a member of a
class of holders subject to special rules such as:
o certain financial institutions,
o insurance companies,
o tax-exempt entities,
o dealers in securities or foreign currencies,
o traders in securities that elect to mark their securities to market for
tax accounting purposes,
o persons who have ceased to be U.S. citizens or to be taxed as resident
aliens,
o holders who hold a MEDS as a part of a hedging transaction, straddle,
"conversion transaction" or "synthetic security" or who have entered into a
"constructive sale" transaction with respect to the MEDS.
This discussion also does not address the tax consequences of the
ownership of the XYZ common stock.
This summary is based on the tax laws of the United States, including the
Internal Revenue Code of 1986, as amended (the "Code"), its legislative
history, administrative pronouncements, published rulings and court decisions
and existing and proposed regulations under the Code, all as of the date
hereof, changes to any of which subsequent to the date hereof may affect the
tax consequences described below, possibly with retroactive effect. No ruling
has been requested from the Internal Revenue Service (the "IRS") with respect
to the U.S. federal income tax consequences of ownership of the MEDS and the
IRS is not required to agree with the opinion of Davis Polk & Wardwell.
Further, the tax treatment of an investment in the MEDS is uncertain as there
is no statutory, judicial or administrative authority directly addressing the
proper U.S. federal income tax treatment of the MEDS or with securities with
terms substantially the same as the MEDS. Accordingly, you are urged to consult
your tax adviser regarding the U.S. federal income tax consequences to you of
the purchase, ownership and disposition of the MEDS, including the effect of
any state, local or foreign tax laws.
As used in this prospectus, the term "U.S. holder" means a holder of MEDS
that is, for U.S. federal income tax purposes,
o a citizen or resident of the U.S.,
o a corporation created or organized in or under the laws of the U.S. or
of any political subdivision thereof, or
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o an estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source.
The term "Non-U.S. holder" means a holder of MEDS that is for U.S. federal
income tax purposes:
o a nonresident alien individual,
o a foreign corporation, or
o a nonresident alien fiduciary of a foreign estate or trust.
Tax Status of the Trust
The Trust will be treated as a grantor trust for U.S. federal income tax
purposes, and income it receives or accrues will be treated as income of the
holders in the manner set forth below. Under the grantor trust rules of the
Code, you will be considered the owner of a pro rata undivided interest in the
stripped Treasury securities and the contract owned by the Trust.
Tax Consequences to U.S. Holders
The following section applies to you if you are a U.S. holder.
Tax Basis of the Treasury Securities and the Contracts. As mentioned
above, you will be considered the owner of a pro rata undivided interest in the
stripped Treasury securities and the contract owned by the Trust. The cost to
you of your MEDS will be allocated between your interests in the Treasury
securities and your interest in the contract, in proportion to the fair market
values thereof on the date on which you acquire your MEDS, in order to
determine your tax bases in each. It is currently anticipated that the Trust
will use o% and o% of the net proceeds of the offering to purchase the Treasury
securities and as payment under the contract, respectively.
Recognition of Original Issue Discount on the Treasury Securities. You
will be required to treat your pro rata portion of the Treasury securities
(other than short-term Treasuries, as described below) owned by the Trust as
bonds that were originally issued on the date you purchased your MEDS at an
original issue discount equal to the excess of your pro rata portion of the
amounts payable on the Treasury securities over your aggregate tax bases
therein as discussed above. You are required (whether you are on the cash or
accrual method of tax accounting) to include original issue discount (other
than on short-term Treasury securities, as described below) in income for
federal income tax purposes as it accrues, in accordance with a constant-yield
method.
Short-Term Treasuries. If in any taxable year, 20% or more of the value of
the MEDS is held for at least 90 days by holders who use the accrual method of
accounting, you will be required to include in income as it accrues the
acquisition discount on any short-term Treasury security the Trust owns (that
is, any Treasury security with a maturity of one year or less from the date you
purchase your MEDS). Unless you elect to include the acquisition discount on a
short-term Treasury security in income according to a constant-yield method
based on daily compounding, you will be required to accrue that discount on a
straight-line basis. Your tax basis in your interests in the Treasury
securities will be increased by the amount of any acquisition discount included
in your income with respect to short-term Treasury securities.
Treatment of the Contract. You will be treated as entering into a pro rata
portion of the contract and, at the exchange date, as receiving a pro rata
portion of the reference property or cash or combination thereof delivered to
the Trust. You will not recognize income, gain or loss upon entry into the
contract. Although the matter is not free from doubt, in the opinion of Davis
Polk & Wardwell you will not recognize income with respect to the contract
prior to its settlement, except as noted below.
Sale or Exchange of MEDS. Upon the sale or exchange of all or some of your
MEDS, you will be treated as having sold a pro rata portion of the Treasury
securities and the contract underlying the MEDS. You will recognize taxable
gain or loss equal to the difference between the amount realized on the sale or
exchange and your aggregate
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adjusted tax bases in your pro rata portion of the Treasury securities and the
contract. Any gain or loss will generally be long-term capital gain or loss, as
the case may be, if at that time you have held the MEDS for more than one year.
Distribution Upon Settlement. You will not recognize any gain or loss upon
the delivery of any reference property other than cash pursuant to the
contract. You will have an adjusted tax basis in the reference property equal
to the portion of your adjusted tax basis in your interest in the contract that
is allocable to the reference property. The allocation of your adjusted tax
basis in your share of the contract between cash received, if any, and other
reference property received will be in proportion to the amount of cash and the
fair market value, as of settlement, of the other reference property. Your
holding period for any reference property received upon settlement will start
on the day after such property is acquired by the Trust.
With respect to any cash received upon settlement, you will recognize gain
or loss, as the case may be, equal to the difference between your pro rata
portion of the cash received by the Trust and your adjusted tax basis in the
contract attributable to the cash received. The character of this gain or loss
will be capital rather than ordinary and long-term (other than gain or loss
with respect to cash received in lieu of fractional shares, the character of
which will be treated as short-term) if you have held the MEDS for more than
one year. For purposes of this and the preceding paragraphs, cash received on
settlement of the contract does not include any amount distributed on account
of any extension of the exchange date. The tax treatment of such distribution
is discussed below under "Extension of the Maturity of the Contract."
Extension of the Maturity of the Contract. If the maturity of the contract
is extended, you will be entitled to receive an additional cash payment upon
settlement. Although the tax treatment of this additional amount is uncertain,
we believe that this additional amount should be taken into account in
determining the amount of capital gain or loss you will realize upon settlement
or other disposition of the MEDS. Accordingly, the Trust does not currently
intend to report this additional amount separately as ordinary income to you.
The IRS may seek to treat this additional amount as giving rise to ordinary
income, however.
You should not be required to include any amounts in income upon the
Trust's receipt, as collateral, of additional Treasury securities as a result
of an extension of the exchange date under the contract or be required to
include original issue discount in respect of such Treasury securities from the
date the Trust receives the additional Treasury securities as collateral until
the extended exchange date.
Possible Alternative Tax Treatments of an Investment in the MEDS. It is
possible that the IRS could seek to impose tax consequences on you different
from those described above. The IRS could contend, for example, that you should
include imputed interest income over the term of the contract. You are urged to
consult your own tax adviser regarding the tax consequences to you of an
investment in the MEDS.
Tax Consequences to Non-U.S. Holders
This section applies to you if you are a Non-U.S. holder. However, the
following section may not apply to you, and you should consult your tax adviser
regarding the tax consequences that will apply, if for U.S. federal income tax
purposes,
o you hold MEDS in connection with the conduct of a trade or business in
the United States,
o you own 10% or more of the capital or profits interest in the seller,
o you are a "controlled foreign corporation" related to seller, or
o you are an individual who may be present in the U.S. for 183 days or
more in any tax year in which you hold MEDS.
Subject as above and to the discussion below concerning backup
withholding:
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o amounts paid or accrued with respect to your pro rata portion of the
stripped Treasury securities and the contract owned by the Trust generally will
not be subject to U.S. federal income or withholding tax, provided that in the
case of interest the statement required by Section 871(h) or Section 881(c) of
the Code regarding your tax status has been furnished as discussed in the next
paragraph. Notwithstanding the foregoing, the IRS may assert that any cash you
receive at maturity of the contract on account of an extension of the contract
is subject to U.S. federal withholding tax. At present, however, we do not
intend to withhold with respect to this payment.
o any gain you realize on the sale of your MEDS will not be subject to
U.S. federal income tax.
Sections 871(b) and 881(c) of the Code require that in order to obtain the
portfolio interest exemption from withholding tax, either you as the beneficial
owner of the MEDS, or a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business (a "Financial Institution") and that is holding the
MEDS on your behalf, must file a statement with the Trust to the effect that
the beneficial owner of the MEDS is a Non-U.S. holder. This requirement will be
fulfilled if you certify on IRS Form W-8BEN (or any substitute form), under
penalties of perjury, that you are not a U.S. person and provide your name and
address, and any Financial Institution holding the MEDS on your behalf files a
statement with the Trust to the effect that it has received such a statement
from you and furnishes the Trust with a copy of it.
If you are an individual, your pro rata interest in the contract may be
treated as part of your gross estate for U.S. federal estate tax purposes.
Backup Withholding and Information Reporting
If you are a U.S. holder and not a corporation, you may be subject to
information reporting and to backup withholding at a rate of 31% on certain
amounts paid to you, unless you provide proof of an applicable exemption or a
correct taxpayer identification number, and otherwise comply with the
applicable requirements of the backup withholding rules. If you are a Non-U.S.
holder and the required information regarding your tax status is furnished as
discussed above, you will not be subject to backup withholding. Amounts
withheld under the backup withholding rules are not an additional tax and may
be refunded or credited against your U.S. federal income tax liability, if you
provide the required information to the IRS.
After the end of each calendar year, the Trust will furnish to each record
holder of the MEDS an annual statement containing information relating to the
payments on the Treasury securities received by the Trust. The Trust will also
furnish such information to the IRS.
Underwriting
The underwriters named below, for whom J.P. Morgan Securities Inc. is
acting as the representative, have agreed to severally purchase from us,
subject to the terms and conditions set forth in the underwriting agreement
among us, the seller, XYZ Company and the representative acting on behalf of
the underwriters, and we have agreed to sell to the underwriters severally the
respective number of MEDS set forth opposite the names of the underwriters
below:
Name Number of MEDS
---- --------------
J.P. Morgan Securities Inc.......................
Total............................................
=======
The underwriting agreement provides that the obligations of the several
underwriters to purchase the MEDS included in this offering are subject to
approval of certain legal matters by their counsel and to certain other
conditions. The nature of the underwriters' obligations under the underwriting
agreement is such that all of the
36
<PAGE>
MEDS being offered by this prospectus, excluding MEDS covered by the
over-allotment option granted to the underwriters, must be purchased if any are
purchased.
The underwriters have advised us that the underwriters propose to offer
the MEDS to the public initially at the public offering price set forth on the
cover page of this prospectus and may offer the MEDS to selected dealers at
such price less a concession not to exceed $o per MEDS. The underwriters may
allow, and such dealers may reallow, a concession to other dealers not to
exceed $o per MEDS. After the initial public offering of the MEDS, the public
offering price and other selling terms may be varied by the underwriters.
We have granted to the underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to o additional MEDS at the
same public offering price per MEDS as is being paid by the underwriters for
the MEDS offered hereby. The underwriters may exercise the option only to cover
over-allotments, if any, made in connection with the distribution of the MEDS
offered hereby.
Because proceeds from the sale of the MEDS will be used by us to purchase
the contract from the seller, the underwriting agreement provides that the
seller will pay to the underwriters as compensation $o per MEDS. The following
table shows compensation for each MEDS and the total compensation to be paid to
the underwriters by the seller assuming in one case no exercise and in the
other case full exercise of the underwriters' overallotment option.
No Exercise of Full Exercise of
the Over- the Over-
allotment Option allotment Option
---------------- ----------------
For each MEDS...............
Total....................
XYZ Company, its executive officers, the seller and members of the seller
have agreed that, for a period of 90 days from the date of this prospectus,
they will not, without the prior written consent of J.P. Morgan Securities
Inc., directly or indirectly offer, sell, offer to sell, contract to sell, or
otherwise dispose of, any shares of common stock of XYZ Company or any
securities which are substantially similar to XYZ common stock, including but
not limited to any securities convertible into, or exercisable or exchangeable
for, or that represent the right to receive, XYZ common stock or any
substantially similar securities or enter into any swap, option, future,
forward or other agreement that transfers in whole or in part, the economic
consequences of ownership of XYZ common stock or any securities substantially
similar to such stock. J.P. Morgan Securities Inc. in its sole discretion may
release any of the securities subject to these lock-up agreements at any time
without notice.
The MEDS will be a new issue of securities with no established trading
market. We have applied to have the MEDS approved for listing on The Nasdaq
National Market under the symbol "o." The representative intends to make a
market in the MEDS, subject to applicable laws and regulations. However, the
representative is not obligated to do so and any such market-making may be
discontinued at any time at the sole discretion of the representative without
notice. Accordingly, no assurance can be given as to the liquidity of such
market.
In connection with the formation of the trust, J.P. Morgan Securities Inc.
subscribed for and purchased o MEDS for a purchase price of $o. Under the
contract, the seller will be obligated to deliver to us XYZ common stock in
respect of such MEDS on the same terms as the MEDS offered hereby. J.P. Morgan
Securities Inc. sponsored our formation for purposes of this offering,
including selecting our initial trustees.
Pursuant to the contract, we have agreed, subject to the terms and
conditions set forth therein, to purchase from the seller a number of shares of
XYZ common stock equal to the total number of MEDS to be severally purchased by
the underwriters from us pursuant to the underwriting agreement (including any
MEDS to be severally purchased by the underwriters upon exercise of the
over-allotment option) plus the number of MEDS purchased by J.P. Morgan
Securities Inc. in connection with our organization. Pursuant to the terms of
the contract, the seller will deliver to us at the exchange date a number of
shares of XYZ common stock (or, at the option of the seller, the cash
equivalent) and/or such other consideration as is permitted or required by the
terms of the contract, that are expected to have the same value as the shares
of XYZ common stock delivered pursuant to the MEDS. The closing of the offering
of the MEDS is conditioned upon execution of the contract by the seller and us.
37
<PAGE>
We estimate that the total expenses of this offering, excluding
underwriting discounts, will be approximately $o. The seller will be
responsible for these expenses.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the MEDS
or XYZ common stock. Specifically, the underwriters may overallot this
offering, creating a short position. In addition the underwriters may bid for,
and purchase, the MEDS or XYZ common stock in the open market to cover shorts
or to stabilize the price of the MEDS or XYZ common stock. Finally, the
underwriting syndicate may reclaim selling concessions allowed for distributing
MEDS in this offering, if the syndicate repurchases previously distributed MEDS
in covering transactions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the MEDS or XYZ
common stock above independent market levels. The underwriters are not required
to engage in these activities, and may end any of these activities at any time.
In addition, in connection with this offering, the underwriters may engage
in passive market making transactions in the MEDS or XYZ common stock on the
Nasdaq National Market, prior to the pricing and completion of the MEDS
offering. Passive market making consists of displaying bids on the Nasdaq
National Market no higher than the bid prices of independent market makers and
making purchases at prices no higher than those independent bids and effected
in response to order flow. Net purchases by a passive market maker on each day
are limited to a specified percentage of the passive market maker's average
daily trading volume in XYZ common stock during a specified period and must be
discontinued when such limit is reached. Passive market making may cause the
price of XYZ common stock to be higher than the price that otherwise would
exist in the open market in the absence of such transactions. If passive market
making is commenced, it may be discontinued at any time.
XYZ Company and the seller have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, as amended, or to contribute to payments the underwriters may be required
to make in respect of any of those liabilities.
Legal Matters
Davis Polk & Wardwell, New York, New York will pass upon certain legal
matters for us and for the underwriters. Richards, Layton & Finger, P.A.,
Wilmington, Delaware will pass upon certain matters of Delaware law. o will
pass upon certain legal matters for the seller.
Experts
The statement of assets, liabilities and capital included in this
prospectus has been audited by o, independent auditors, as stated in their
opinion, which appears in this prospectus. The statement has been included in
reliance upon the opinion given on the authority of o as experts in auditing
and accounting.
Where You Can Find More Information
We filed a Registration Statement on Form N-2 to register the MEDS with
the SEC. This prospectus is a part of that Registration Statement. As permitted
by SEC rules, this prospectus does not contain all the information you can find
in the Registration Statement or the exhibits to the Registration Statement.
You may read and copy any reports, statements or other information we file at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available
to the public from commercial document retrieval services and at the web site
maintained by the SEC at "http://www.sec.gov."
38
<PAGE>
Independent Auditors' Report
To the Board of Trustees and Shareholders of XYZ MEDS Trust:
We have audited the accompanying statement of assets, liabilities and
capital of XYZ MEDS Trust as of o, 2000. This financial statement is the
responsibility of the Trust's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of assets, liabilities and
capital is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by the Trust's management, as well as evaluating the
overall financial statement presentation. We believe that our audit of the
financial statement provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of XYZ MEDS Trust, as of o,
2000 in conformity with generally accepted accounting principles.
o
New York, New York
o
F-1
<PAGE>
Statement of Assets, Liabilities and Capital
Assets
Cash............................................. $
------
Total Assets.................................. $
======
Liabilities
Total Liabilities............................. $ 0
======
Net Assets.......................................... $
======
Capital $
======
---------
(1) The Trust was created as a Delaware business trust on August 1, 2000 and
has had no operations other than matters relating to its organization and
registration as a non-diversified, closed-end management investment
company under the Investment Company Act. Costs incurred in connection
with the organization of the Trust and ongoing administrative expenses
will be paid by the seller.
(2) Offering expenses will be payable upon completion of the offering and also
will be paid by the seller.
F-2
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
1. Financial Statements
Part A - Independent Auditors' Report
Statement of Assets, Liabilities and Capital as of o
Part B - None
2. Exhibits
(a)(1) Trust Agreement
(2) Certificate of Trust
(b) Not applicable
(c) Not applicable
(d)(1) Form of specimen certificate for MEDS*
(2) Portions of the Trust Agreement of the Registrant defining the
rights of holders of MEDS*
(e) Not applicable
(f) Not applicable
(g) Not applicable
(h) Form of Underwriting Agreement*
(i) Not applicable
(j) Form of Custodian Agreement*
(k)(1) Form of Paying Agent Agreement*
(2) Form of Forward Purchase Contract*
(3) Form of Administration Agreement*
(4) Form of Security and Pledge Agreement*
(5) Form of Fund Expense Agreement*
(6) Form of Fund Indemnity Agreement*
(l) Opinion and Consent of Richards, Layton & Finger, P.A., counsel
to the Trust*
(m) Not applicable
(n)(1) Consent of o, independent auditors for the Trust*
(2) Tax opinion and consent of Davis Polk & Wardwell, counsel to the
Trust*
(o) Not applicable
(p) Not applicable
(q) Not applicable
(r) Financial Data Schedule*
--------
* To be filed by amendment.
Item 25. Marketing Arrangements
See Exhibit (h) to this Registration Statement.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
C-1
<PAGE>
SEC Registration fees $2,640
Listing fee *
Printing (other than certificates) *
Engraving and printing certificates *
Fees and expenses of qualifications under state
securities laws (including fees of counsel) *
Accounting fees and expenses *
Legal fees and expenses *
NASD fees 1,500
Miscellaneous *
------
Total *
---------
* To be furnished by amendment.
Item 27. Person Controlled by or under Common Control with Registrant
The Trust will be internally managed and will not have an investment
adviser. The information in the prospectus under the caption "Management and
Administration of the Trust" is incorporated herein by reference.
Item 28. Number of Holders of Securities
There will be one record holder of the MEDS as of the effective date of
this Registration Statement.
Item 29. Indemnification
The underwriting agreement provides for indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be permitted to trustees,
officers and controlling persons of the registrant, pursuant to the foregoing
provisions or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission (the "Commission") such indemnification
is against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a trustee, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
Item 30. Business and Other Connections of Investment Adviser
The registrant is internally managed and does not have an investment
adviser.
Item 31. Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder are maintained at the offices of the registrant (Puglisi
& Associates, 850 Library Avenue, Suite 204, Newark, Delaware 19716) and its
paying agent (o).
Item 32. Management Services
Not applicable.
C-2
<PAGE>
Item 33. Undertakings
(a) The registrant hereby undertakes to suspend the offering of the MEDS
covered hereby until it amends its prospectuses contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share declines more than 10 percent from its net asset value per
share as of the effective date of the Registration Statement or (2) the net
asset value increases to an amount greater than its net proceeds as stated in
the prospectus.
(b) The registrant hereby undertakes that (i) for purpose of determining
any liability under the 1933 Act, the information omitted from the form of
prospectuses filed as part of this Registration Statement in reliance upon Rule
430A and contained in a form of prospectus filed by the registrant under rule
497(h) under the 1933 Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective, and (ii) for the purpose of
determining any liability under the 1933 Act, each post-effective amendment
that contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering
thereof.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Newark, State of Delaware, on the 8th day of
August, 2000.
XYZ MEDS Trust
By: /s/ Donald J. Puglisi
--------------------------
Name: Donald J. Puglisi
Title: Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in the
capacities and on the date indicated.
Name Title Date
---- ----- ----
Principal Executive Officer,
By: /s/ Donald J. Puglisi Principal Financial Officer, August 8, 2000
-------------------------- Principal Accounting Officer,
Name: Donald J. Puglisi and Trustee
Title: Trustee
C-4
<PAGE>
EXHIBIT INDEX
1.(a)(1) Trust Agreement
(2) Certificate of Trust
1.(b) Not applicable
(c) Not applicable
(d)(1) Form of specimen certificate for MEDS*
(2) Portions of the Trust Agreement of the Registrant defining the
rights of holders of MEDS*
(e) Not applicable
(f) Not applicable
(g) Not applicable
(h) Form of Underwriting Agreement*
(i) Not applicable
(j) Form of Custodian Agreement*
(k)(1) Form of Paying Agent Agreement*
(2) Form of Forward Purchase Contract*
(3) Form of Administration Agreement*
(4) Form of Security and Pledge Agreement*
(5) Form of Fund Expense Agreement*
(6) Form of Fund Indemnity Agreement*
(l) Opinion and Consent of Richards, Layton & Finger, P.A., counsel
to the Trust*
(m) Not applicable
(n)(1) Consent of o, independent auditors for the Trust*
(2) Tax opinion and consent of Davis Polk & Wardwell, counsel to the
Trust*
(o) Not applicable
(p) Not applicable
(q) Not applicable
(r) Financial Data Schedule*
---------
* To be filed by amendment.
