AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 1996
REGISTRATION NO. 33-62265
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-6
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FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
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A. EXACT NAME OF TRUST:
EQUITY INCOME FUND
CONCEPT SERIES
TELE-GLOBAL TRUST 2
(FORMERLY CONCEPT SERIES 22)
DEFINED ASSET FUNDS
B. NAMES OF DEPOSITORS:
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
DEAN WITTER REYNOLDS INC.
C. COMPLETE ADDRESSES OF DEPOSITORS' PRINCIPAL EXECUTIVE OFFICES:
MERRILL LYNCH, PIERCE, SMITH BARNEY INC.
FENNER & SMITH 388 GREENWICH ST.
INCORPORATED 23RD FLOOR
DEFINED ASSET FUNDS NEW YORK, N.Y. 10013
P.O. BOX 9051
PRINCETON, N.J.
08543-9051
PAINEWEBBER INCORPORATED PRUDENTIAL SECURITIES DEAN WITTER REYNOLDS INC.
1285 AVENUE OF THE INCORPORATED TWO WORLD TRADE
AMERICAS ONE SEAPORT PLAZA CENTER--59TH FLOOR
NEW YORK, N.Y. 10019 199 WATER STREET NEW YORK, N.Y. 10048
NEW YORK, N.Y. 10292
D. NAMES AND COMPLETE ADDRESSES OF AGENTS FOR SERVICE:
TERESA KONCICK, ESQ. LAURIE A. HESSLEIN ROBERT E. HOLLEY
P.O. BOX 9051 388 GREENWICH ST. 1285 AVENUE OF THE
PRINCETON, N.J. NEW YORK, N.Y. 10013 AMERICAS
08543-9051 NEW YORK, N.Y. 10019
COPIES TO:
LEE B. SPENCER, JR. DOUGLAS LOWE, ESQ. PIERRE DE SAINT PHALLE,
ONE SEAPORT PLAZA 130 LIBERTY STREET--29TH ESQ.
199 WATER STREET FLOOR 450 LEXINGTON AVENUE
NEW YORK, N.Y. 10292 NEW YORK, N.Y. 10006 NEW YORK, N.Y. 10017
E. TITLE AND AMOUNT OF SECURITIES BEING REGISTERED:
An indefinite number of Units of Beneficial Interest pursuant to Rule 24f-2
promulgated under the Investment Company Act of 1940, as amended.
F. PROPOSED MAXIMUM OFFERING PRICE TO THE PUBLIC OF THE SECURITIES BEING
REGISTERED: Indefinite
G. AMOUNT OF FILING FEE: $500 (as required by Rule 24f-2)
H. APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of the Registration Statement.
/ x / Check box if it is proposed that this filing will become effective at 9:30
a.m. on February 14, 1996 pursuant to Rule 487.
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<PAGE>
DEFINED ASSET FUNDSSM
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EQUITY INCOME FUND The objective of this Defined Fund is total return
CONCEPT SERIES through a combination of capital appreciation and,
TELE-GLOBAL TRUST 2 to a lesser extent, current income by investing
(A UNIT INVESTMENT for a period of about four years in a diversified
TRUST) portfolio of publicly traded common stocks issued
- ------------------------------by domestic and international companies engaged in
- -- PROFESSIONAL SELECTION a wide range of telecommunications activities.
- -- DIVERSIFICATION These issuers provide local, long distance and
- -- REINVESTMENT OPTION cellular telecommunications services as well as
telecommunications equipment and networking. The
telecommunications industry is expected to
continue to expand, stimulated by competition,
globalization and introduction of new products.
There is no assurance that the Fund's objective
will be met.
The value of units will fluctuate with the value
of the common stocks in the Portfolio and no
assurance can be given that the underlying common
stocks will continue to pay dividends or that the
underlying common stocks or the units will
appreciate in value.
Minimum purchase: $250.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
SPONSORS: HAS THE COMMISSION OR ANY STATE SECURITIES
Merrill Lynch, COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
Pierce, Fenner & Smith OF THIS DOCUMENT. ANY REPRESENTATION TO THE
Incorporated CONTRARY IS A CRIMINAL OFFENSE.
Smith Barney Inc. Inquiries should be directed to the Trustee at
PaineWebber Incorporated 1-800-323-1508.
Prudential Securities Prospectus dated February 14, 1996.
Incorporated INVESTORS SHOULD READ THIS PROSPECTUS CAREFULLY
Dean Witter Reynolds Inc. AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
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Defined Asset FundsSM
Defined Asset Funds is America's oldest and largest family of unit investment
trusts, with over $100 billion sponsored in the last 25 years. Each Defined
Asset Fund is a portfolio of preselected securities. The portfolio is divided
into 'units' representing equal shares of the underlying assets. Each unit
receives an equal share of income and principal distributions.
Defined Asset Funds offer several defined 'distinctives'. You know in advance
what you are investing in and that changes in the portfolio are limited - a
defined portfolio. Most defined bond funds pay interest monthly - defined
income. The portfolio offers a convenient and simple way to invest - simplicity
defined.
Your financial professional can help you select a Defined Asset Fund to meet
your personal investment objectives. Our size and market presence enable us to
offer a wide variety of investments. The Defined Asset Funds family offers:
o Municipal portfolios
o Corporate portfolios
o Government portfolios
o Equity portfolios
o International portfolios
The terms of Defined Funds are as short as one year or as long as 30 years.
Special defined bond funds are available including: insured funds, double and
triple tax-free funds and funds with 'laddered maturities' to help protect
against changing interest rates. Defined Asset Funds are offered by prospectus
only.
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Defining Your Portfolio
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The 34 stocks represented in the Fund are issued by companies that are expected
to benefit from new telecommunications legislation and a perceived trend toward
globalization of the telecommunications industry. Investing in the Portfolio,
rather than in only one or two of the underlying common stocks, is a way to
diversify your investment. Based upon the principal business of each issuer and
current market values, the following types of telecommunications companies are
represented in the Portfolio:
PORTFOLIO
PERCENTAGE
/ / Telecommunications Services
Regional Bells 19.36%
Independents 10.32%
Long Distance 5.64%
Wireless 2.80%
/ / Telecommunications Equipment 24.27%
/ / Telecommunications Networking 20.00%
/ / International 17.61%
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Defining Your Risks
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Unit price fluctuates with the value of the Portfolio, and the value of the
Portfolio could be affected by changes in the financial condition of the
issuers, changes in the telecommunications industry, movements in stock prices
generally, the impact of the Sponsors' purchase and sale of the securities
(especially during the primary offering period of units) and other factors.
Therefore, there is no guarantee that the objective of the Portfolio will be
achieved.
Unlike a mutual fund, the Portfolio is not actively managed and the Sponsors
receive no management fee. Therefore, the adverse financial condition of an
issuer or any market movement in the price of a security will not necessarily
require the sale of securities from the Portfolio or mean that the Sponsors will
not continue to purchase the security in order to create additional Units.
Although the Portfolio is regularly reviewed and evaluated and Sponsors may
instruct the Trustee to sell securities under certain limited circumstances,
securities will not be sold to take advantage of market fluctuations or changes
in anticipated rates of appreciation.
In addition, the Fund is concentrated in common stocks of domestic
telecommunications companies and therefore is dependent to a significant extent
on revenues generated from those particular activities (see Risk Factors--The
Telecommunications Industry in Part B).
A-2
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Defining Your Investment
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PUBLIC OFFERING PRICE PER 1,000 UNITS $1,000.00
The Public Offering Price as of February 13, 1996, the business day prior to the
initial date of deposit, is based on the aggregate value of the underlying
securities ($356,987.50) and any cash held to purchase securities, divided by
the number of units outstanding (367,082) times 1,000, plus the initial sales
charge. The Public Offering Price on any subsequent date will vary. The
underlying securities are valued by the Trustee on the basis of their closing
sale prices at 4:00 p.m. Eastern time on every business day.
SALES CHARGES
The total sales charge for this investment combines an initial up-front sales
charge and a deferred sales charge that will be deducted from the net asset
value of the Portfolio quarterly on the 10th of each February, May, August and
November beginning May 10, 1996.
QUARTERLY INCOME DISTRIBUTIONS
Distributions of income, if any, will be paid on the 25th day of March, June,
September and December of each year commencing on the 25th day of June 1996 to
Holders of record on the 10th day of March, June, September and December,
respectively. In order to meet certain tax requirements, a special distribution
of income including capital gains, may be paid to holders of record as of a date
in December. Any capital gain net income will generally be distributed after the
end of the year.
REINVESTMENT OPTION
You can elect to automatically reinvest your distributions into additional units
of the Portfolio subject only to the deferred sales charge remaining at the time
of reinvestment. Reinvesting helps to compound your income for a greater total
return.
TAXES
Distributions which are taxable as ordinary income to Holders will constitute
dividends for Federal income tax purposes and may, subject to certain
limitations, be eligible for the dividends-received deduction for certain
corporations (see Taxes in Part B). Foreign holders should be aware that
distributions from the Fund will generally be subject to information reporting
and withholding taxes.
TAX BASIS REPORTING
The proceeds received when you sell this investment will reflect the deduction
of the deferred sales charge. In addition, the annual statement and the relevant
tax reporting forms you receive at year-end will be based on the amount paid to
you (not including the deferred sales charge). Accordingly, you should not
increase your basis in your units by the deferred sales charge.
TERMINATION DATE
The Portfolio will terminate by February 28, 2000. The final distribution will
be made within a reasonable time afterward. The Portfolio may be terminated
earlier if its value is less than 40% of the value of the securities when
deposited.
SPONSORS' PROFIT OR LOSS
The Sponsors' profit or loss from the Portfolio will include the receipt of
applicable sales charges, fluctuations in the Public Offering Price or secondary
market price of units, a loss of $220.00 on the initial deposit of the
securities and a gain or loss on subsequent deposits of securities (see
Sponsors' and Underwriters' Profits in Part B).
A-3
<PAGE>
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Defining Your Costs
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SALES CHARGE
First-time investors pay a 2.75% sales charge when they buy. For example, on a
$1,000 investment, $972.50 is invested in the Portfolio. In addition, a deferred
sales charge of $1.625 per 1,000 units will be deducted from the Portfolio's net
asset value each quarter ($26.00 total). This deferred method of payment keeps
more of your money invested over a longer period of time. Although this is a
unit investment trust rather than a mutual fund, the following information is
presented to permit a comparison of fees and an understanding of the direct or
indirect costs and expenses that you pay.
As a %
of Initial Public Amount per
Offering Price 1,000 Units
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Maximum Initial Sales Charge 2.75% $ 27.500
Maximum Deferred Sales Charge 2.60% 26.000
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5.35% $ 53.500
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Maximum Sales Charge Imposed on
Reinvested Dividends 2.44% $ 24.375
ESTIMATED ANNUAL FUND OPERATING EXPENSES
As a % Amount per
of Net Assets 1,000 Units
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Trustee's Fee .087% $ 0.84
Maximum Portfolio Supervision,
Bookkeeping and Administrative
Fees .046% $ 0.45
Organizational Expenses .064% $ 0.62
Other Operating Expenses .044% $ 0.43
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TOTAL .241% $ 2.34
This Portfolio (and therefore the investors) will bear all or a portion of its
organizational costs--including costs of preparing the registration statement,
the trust indenture and other closing documents, registering units with the SEC
and the states and the initial audit of the Portfolio--as is common for mutual
funds.
COSTS OVER TIME
You would pay the following cumulative expenses on a $1,000 investment, assuming
5% annual return on the investment throughout the indicated periods and
redemption at the end of the period:
1 Year 2 Years 3 Years 4 Years
$36 $47 $56 $64
The example assumes reinvestment of all dividends and distributions and uses a
5% annual rate of return as mandated by SEC regulations applicable to mutual
funds. For purposes of the example, the deferred sales charge imposed on
reinvestment of dividends is not reflected until the year following payment of
the dividend; the cumulative expenses would be higher if sales charges on
reinvested dividends were reflected in the year of reinvestment.
The example should not be considered a representation of past or future expenses
or annual rates of return; the actual expenses and annual rates of return may be
more or less than the example.
SELLING YOUR INVESTMENT
You may sell or redeem your units at any time prior to the termination of the
Portfolio. Your price will be based on the then current net asset value. The
redemption and secondary market repurchase price as of February 13, 1996 was
$972.50 per 1,000 units. This price reflects deductions of the deferred sales
charge which declines over the life of the Portfolio ($26.00 initially). If you
sell your units before the termination of the Portfolio, no further deferred
sales charges will be deducted.
A-4
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<TABLE><CAPTION>
Defined Portfolio
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Equity Income Fund
Concept Series
Tele-Global Trust 2 February 14, 1996
PRICE CURRENT
TICKER PERCENTAGE PER SHARE COST DIVIDEND
NAME OF ISSUER SYMBOL OF FUND (1) TO FUND TO FUND (2) YIELD (3)
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<S> <C> <C> <C> <C> <C>
1. 3Com Corporation COMS 4.11% $ 48.875 $ 14,662.50 0.00%
2. ADC Telecommunications Inc. ADCT 3.40 40.500 12,150.00 0.00
3. Airtouch Communications, Inc. ATI 1.81 32.250 6,450.00 0.00
4. Alltel Corporation AT 1.94 34.625 6,925.00 3.00
5. Ameritech Corporation AIT 3.64 64.875 12,975.00 3.27
6. AT&T Corporation T 3.81 68.000 13,600.00 1.94
7. Bay Networks Inc. BNET 3.91 46.500 13,950.00 0.00
8. Bell Atlantic Corporation BEL 4.12 73.625 14,725.00 3.80
9. BellSouth Corporation BLS 2.49 44.500 8,900.00 3.24
10. Cabletron Systems, Inc. CS 4.40 78.625 15,725.00 0.00
11. Century Telephone Enterprises CTL 1.95 34.875 6,975.00 0.95
12. Cisco Systems, Inc. CSCO 7.58 90.250 27,075.00 0.00
13. DSC Communications Corporation DIGI 2.85 33.875 10,162.50 0.00
14. Frontier Corporation FRO 1.83 32.750 6,550.00 2.60
15. GTE Corporation GTE 4.08 48.500 14,550.00 3.88
16. Lincoln Telecommunications
Company LTEC 1.13 20.125 4,025.00 2.98
17. Motorola, Inc. MOT 1.57 55.875 5,587.50 0.72
18. Nokia Corporation* NOKA 3.11 37.000 11,100.00 1.34
19. NYNEX Corporation NYN 3.10 55.250 11,050.00 4.27
20. Picturetel Corporation PCTL 3.29 39.125 11,737.50 0.00
21. QUALCOMM, Inc. QCOM 3.89 46.250 13,875.00 0.00
22. Royal PTT Nederland NV* KPN 1.10 39.375 3,937.50 3.21
23. SBC Communications, Inc. SBC 5.01 59.625 17,887.50 2.77
24. Southern New England
Telecommunications Corporation SNG 1.22 43.375 4,337.50 4.06
25. Stet Societa' Finanziaria
Telefonica S.p.A.* STE 1.76 31.500 6,300.00 0.00
26. Stratacom, Inc. STRM 6.64 79.000 23,700.00 0.00
27. Tele Danmark A/S* TLD 1.64 29.250 5,850.00 3.81
28. Telecom Corporation of New
Zealand Limited* NZT 3.80 67.875 13,575.00 5.20
29. Telefonaktiebolaget LM
Ericsson* ERICY 1.73 20.625 6,187.50 0.73
30. Telefonica de Espana* TEF 2.47 44.000 8,800.00 3.32
31. Tellabs, Inc. TLAB 2.63 47.000 9,400.00 0.00
32. U.S. West Communications Group USW 1.00 35.750 3,575.00 5.99
33. United States Cellular
Corporation USM 0.99 35.375 3,537.50 0.00
34. Vodafone Group PLC* VOD 2.00 35.750 7,150.00 1.78
-------------------- -----------------
100.00% $ 356,987.50
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</TABLE>
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* Indicates an American Depositary Receipt ('ADR') (see Risk Factors--Foreign
Issuers in Part B).
(1) Based on Cost to Fund.
(2) Valuation by the Trustee made on the basis of closing sale prices at the
evaluation time on February 13, 1996.
(3) Except for ADRs, calculated by annualizing the latest quarterly or
semi-annual dividend declared; for ADRs, calculated on the basis of all
dividends declared or paid in the last year.
------------------------------------
The securities were acquired on February 13, 1996 and are represented entirely
by contracts to purchase the securities. Any of the Sponsors may have acted as
underwriters, managers or comanagers of a public offering of the securities in
this Fund during the last three years. Affiliates of the Sponsors may serve as
specialists in the securities in this Fund on one or more stock exchanges and
may have a long or short position in any of these securities or in options on
any of them, and may be on the opposite side of public orders executed on the
floor of an exchange where the securities are listed. An officer, director or
employee of any of the Sponsors may be an officer or director of one or more of
the issuers of the securities in the Fund. A Sponsor may trade for its own
account as an odd-lot dealer, market maker, block positioner and/or arbitrageur
in any of the securities or in options on them. Any Sponsor, its affiliates,
directors, elected officers and employee benefits programs may have either a
long or short position in any securities or in options on them.
A-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Sponsors, Trustee and Holders of Equity Income Fund Concept Series,
Tele-Global Trust 2, Defined Asset Funds (the 'Fund'):
We have audited the accompanying statement of condition and the defined
portfolio included in the prospectus of the Fund as of February 14, 1996. This
financial statement is the responsibility of the Trustee. 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 financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. Our procedures included
confirmation of an irrevocable letter of credit deposited for the purchase of
securities, as described in the statement of condition, with the Trustee. An
audit also includes assessing the accounting principles used and significant
estimates made by the Trustee, as well as evaluating the overall financial
statement presentation. We believe that our audit 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 the Fund as of February 14,
1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, N.Y.
February 14, 1996
STATEMENT OF CONDITION AS OF FEBRUARY 14, 1996
TRUST PROPERTY
Investments--Contracts to purchase Securities(1).........$ 356,987.50
Organizational Costs(2).................................. 124,130.00
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Total.........................................$ 481,117.50
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LIABILITY AND INTEREST OF HOLDERS
Accrued Liability(2)...................................$ 124,130.00
Interest of Holders of 367,082 Units of fractional
undivided interest outstanding:(3)
Cost to investors(4)...................................$ 367,082.00
Gross underwriting commissions(5)...................... (10,094.50)
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Subtotal...............................................$ 356,987.50
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Total.........................................$ 481,117.50
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(1) Aggregate cost to the Fund of the securities listed under Defined
Portfolio determined by the Trustee at 4:00 p.m., Eastern time on February 13,
1996. The contracts to purchase securities are collateralized by an irrevocable
letter of credit which has been issued by Banca Nazionale Dell' Agricoltura, New
York Branch, in the amount of $357,207.50 and deposited with the Trustee. The
amount of the letter of credit includes $356,987.50 for the purchase of
securities.
(2) This represents a portion of the Fund's organizational costs,
which will be deferred and amortized over the life of the Fund. Organizational
costs have been estimated based on projected total assets of $50 million. To the
extent the Fund is larger or smaller, the estimate may vary.
(3) Because the value of securities at the evaluation time on the
Initial Date of Deposit may differ from the amounts shown in this statement of
condition, the number of Units offered on the Initial Date of Deposit will be
adjusted from the initial number of Units to maintain the $1,000 per 1,000 Units
offering price.
(4) Aggregate public offering price computed on the basis of the
value of the underlying securities at 4:00 p.m., Eastern time on February 13,
1996, plus an initial sales charge at a rate of 2.75% of the Public Offering
Price (2.828% of the aggregate value of Securities). In addition, Units are
subject to deferred sales charges of $1.625 per 1,000 Units payable quarterly
($6.50 per year). After an investor sells or redeems Units, all future
deductions of deferred sales charges with respect to that investor will be
waived.
(5) Assumes the maximum sales charge per 1,000 units of 2.75% of the
Public Offering Price.
A-6
<PAGE>
DEFINED ASSET FUNDSSM
PROSPECTUS--PART B
EQUITY INCOME FUND
CONCEPT SERIES TELE-GLOBAL TRUST 2
FURTHER INFORMATION REGARDING THE FUND MAY BE OBTAINED
WITHIN FIVE DAYS BY WRITING OR CALLING THE TRUSTEE AT THE ADDRESS AND
TELEPHONE NUMBER SET FORTH ON THE BACK COVER OF THIS PROSPECTUS.
INDEX
PAGE
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FUND DESCRIPTION................................................. 1
RISK FACTORS..................................................... 2
HOW TO BUY UNITS................................................. 4
HOW TO SELL UNITS................................................ 5
INCOME, DISTRIBUTIONS AND REINVESTMENT........................... 6
FUND EXPENSES.................................................... 7
TAXES............................................................ 8
RECORDS AND REPORTS.............................................. 10
TRUST INDENTURE.................................................. 10
MISCELLANEOUS.................................................... 10
SUPPLEMENTAL INFORMATION......................................... 12
FUND DESCRIPTION
PORTFOLIO SELECTION
Professional buyers and research analysts for Defined Asset Funds, with
access to extensive research, selected the Securities for the Portfolio after
considering the Fund's investment objective as well as the quality of the common
stocks, the earning and dividend payment records of the issuers, the
capitalization of the issuers and the prices of the common stocks. The screening
process included (1) identifying companies with 4-year growth potential, (2)
performing a thorough fundamental financial analysis, and (3) evaluating
liquidity, market share and timeliness of purchase. This Fund is invested in
telecommunications stocks (both domestic and foreign) believed to be well
positioned to take advantage over the next four years of advances in
telecommunications technology, increasing demand for telecommunications
products, recent legislative changes which should increase flexibility to
combine telephone and wireless services, and global expansion of
telecommunications services (particularly from privitization of government-owned
facilities). Advertising and sales literature may contain brief descriptions of
the businesses of each of the companies in the Portfolio and Defined Asset Funds
research analysis of why they were selected.
The deposit of the Securities in the Portfolio on the initial date of
deposit established a proportionate relationship among the number of shares of
each Security. Following the initial date of deposit the Sponsors may deposit
additional Securities in order to create new Units, maintaining to the extent
possible that original proportionate relationship. The ability to acquire each
Security at the same time will generally depend upon the Security's availability
and any restrictions on the purchase of that Security under the federal
securities laws or otherwise.
Additional Units may also be created by the deposit of cash (including a
letter of credit) with instructions to purchase additional Securities. This
1
<PAGE>
practice could cause both existing and new investors to experience a dilution of
their investments and a reduction in their anticipated income because of price
fluctuations in the Securities between the time of the cash deposit and the
actual purchase of the additional Securities and because the associated
brokerage fees will be an expense of the Fund. To minimize these effects, the
Fund will try to purchase Securities as close to the Evaluation Time or at
prices as close to the evaluated prices as possible.
Because each Defined Asset Fund is a preselected portfolio, you know the
securities before you invest. Of course, the Portfolio will change somewhat over
time, as Securities are purchased upon creation of additional Units, as
securities are sold to meet Unit redemptions or in other limited circumstances.
PORTFOLIO SUPERVISION
The Fund follows a buy and hold investment strategy in contrast to the
frequent portfolio changes of a managed fund based on economic, financial and
market analyses. In the event a public tender offer is made for a Security or a
merger or acquisition is announced affecting a Security, the Sponsors may
instruct the Trustee to tender or sell the Security in the open market when in
its opinion it is in the best interests of investors to do so. Although the
Portfolio is not actively managed, it is regularly reviewed and evaluated and
Securities can be sold in case of certain adverse developments concerning a
Security including the adverse financial condition of the issuer, the
institution of legal proceedings against the issuer, a decline in the price or
the occurrence of other market or credit factors that might otherwise make
retention of the Security detrimental to the interest of investors or if the
disposition of these Securities is necessary in order to enable the Fund to make
distributions of the Fund's capital gain net income or desirable in order to
maintain the qualification of the Fund as a regulated investment company under
the Internal Revenue Code. Securities can also be sold to meet redemption of
Units. The Sponsors are also authorized to direct the reinvestment of the
proceeds of the sale of Securities, as well as moneys held to cover the purchase
of Securities pursuant to contracts which have failed, in Replacement Securities
which satisfy certain conditions specified in the Indenture.
RISK FACTORS
An investment in the Fund entails certain risks, including the risk that
the value of your investment will decline if the financial condition of the
issuers of the Securities becomes impaired or if the general condition of the
stock market worsens and the risk that holders of common stocks have generally
inferior rights to receive payments from the issuer in comparison with the
rights of creditors of, or holders of debt obligations or preferred stocks
issued by, the issuer. Moreover, common stocks do not represent an obligation of
the issuer and therefore do not offer any assurance of income or provide the
degree of protection of capital provided by debt securities. Common stocks in
general may be especially susceptible to general stock market movements and to
volatile increases and decreases in value as market confidence in and
perceptions of the issuers change. These perceptions are based on unpredictable
factors including expectations regarding government, economic, monetary and
fiscal policies, inflation and interest rates, economic expansion or
contraction, and global or regional political, economic or banking crises. The
Sponsors cannot predict the direction or scope of any of these factors.
THE TELECOMMUNICATIONS INDUSTRY
The companies whose securities are included in the Portfolio are engaged in
providing local, long-distance and wireless services, in the manufacture of
telecommunications products and in a wide range of other activities including
directory publishing, information systems and the operation of voice, data and
video telecommunications networks.
General. Payment on common stocks of companies in the telecommunications
industry, including local, long-distance and cellular service, the manufacture
of telecommunications equipment, and other ancillary services, is generally
dependent upon the amount and growth of customer demand, the level of rates
permitted to be charged by regulatory authorities and the effects of inflation
on the cost of providing services and the rate of technological innovation. The
domestic telecommunications industry is characterized by increasing competition
in all sectors and regulation by the Federal Communications Commission and
various state regulatory authorities. To meet increasing competition, companies
may have to commit substantial capital, particularly in the formulation of new
products and services using new technology. Telecommunications companies in both
developed and emerging countries are undergoing significant change due to
varying and evolving levels of governmental regulation or deregulation and other
factors. As a result, competitive pressures are intense and the securities of
2
<PAGE>
such companies may be subject to significant price volatility. In addition, all
telecommunications companies in both developed and emerging countries are
subject to the additional risk that technological innovations will make their
products and services obsolete.
The Telecommunications Act of 1996. The Telecommunications Act of 1996;
Communication Decency Act of 1996 (the 'Communications Act'), which became law
on February 8, 1996, permits greater competition in the local and long distance
telephone and equipment manufacturing markets. In addition, it changes the
regulatory structure governing the Regional Bell Holding Companies ('RBOCs')
from one based on rate of return to one based on price. The overall impact of
the Communications Act on the Portfolio is uncertain.
Regional Bell Holding Companies. The Portfolio contains securities of six
of the seven RBOCs. These corporations were spun off from AT&T in 1984. Many of
the RBOCs are seeking to increase profits through the development and sale of
new high-margined products, such as caller ID, voicemail, call return, call
waiting and interactive multimedia, to their existing customer base. To the
extent that the demand for such products is less than anticipated, the price of
securities of RBOCs could be adversely affected. Many of the RBOCs are also
aggressively looking to expand into overseas markets through both direct and
indirect investment. The impact of this expansion on the price of securities of
the RBOCs is uncertain.
Wireless Telephone Companies. Wireless telephone companies provide wireless
services including paging, dispatch, cellular and Personal Communication Systems
('PCS') services throughout the United States. Most of the RBOCs as well as long
distance companies are seeking to increase their share of the cellular market in
view of perceived future growth prospects. It is unclear what effect, if any,
increased competition between wireless and traditional services will have on the
Portfolio.
Telecommunications Equipment Manufacturers. While the worldwide market for
telecommunications equipment is expected to grow, the overall effect on the
Portfolio of factors such as competing technologies, increasing capital
requirements, protectionist actions by foreign governments and demand for new
technologies, is impossible to predict.
International Companies. The international companies in the Portfolio
consist predominantly of former government owned telecommunications systems that
have been privatized in stages. The Sponsors cannot predict whether such
privatization will continue in the future or what, if any, effect this will have
on the Portfolio.
FOREIGN ISSUERS
Certain of the Securities in a Portfolio may consist of securities of
foreign issuers. An investment in such a Fund involves some investment risks
that are different in some respects from an investment in a fund that invests
entirely in securities of domestic issuers. Those investment risks include
future political and economic developments and the adoption of withholding
taxes, exchange controls or other restrictions which might adversely affect the
payment or receipt of payment of dividends on the relevant Securities. In
addition, there may be less publicly available information than is available
from a domestic issuer and foreign issuers are not necessarily subject to
uniform accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic issuers. In addition,
earnings and dividends for foreign companies are in non-U.S. currencies.
Therefore, the U.S. dollar value of the stock and dividends for these issuers
will vary with fluctuations in the U.S. dollar foreign exchange rates for the
relevant currencies. Most foreign currencies have fluctuated widely in value
against the U.S. dollar for many reasons, including supply and demand for the
respective currency, the soundness of the world economy and the strength of the
respective economy as compared to the economies of the United States and other
countries.
American Depositary Shares and Receipts. Securities of foreign issuers may
be purchased in ADR form in the United States. ADRs evidence American Depositary
Shares which represent common stock deposited with a custodian in a depositary.
American Depositary Shares (ADSs) and receipts therefor (ADRs) are issued by an
American bank or trust company to evidence ownership of underlying securities
issued by a foreign corporation. These instruments may not necessarily be
denominated in the same currency as the securities into which they may be
converted. Generally, ADSs and ADRs are designed for use in the United States
securities markets. For purposes of this Prospectus, the term ADR generally
includes ADSs.
The terms and conditions of depositary facilities may result in less
liquidity or lower market prices for ADRs than for the underlying shares. For
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those Securities that are ADRs, currency fluctuations will also affect the U.S.
dollar equivalent of the local currency price of the underlying domestic share
and, as a result, are likely to affect the value of the ADRs and consequently
the value of the Securities.
LIQUIDITY
Whether or not the Securities are listed on a national securities exchange,
the principal trading market for the Securities may be in the over-the-counter
market. As a result, the existence of a liquid trading market for the Securities
may depend on whether dealers will make a market in the Securities. There can be
no assurance that a market will be made for any of the Securities, that any
market for the Securities will be maintained or of the liquidity of the
Securities in any markets made. In addition, the Fund may be restricted under
the Investment Company Act of 1940 from selling Securities to the Sponsors. The
price at which the Securities may be sold to meet redemptions and the value of
the Fund will be adversely affected if trading markets for the Securities are
limited or absent.
LITIGATION AND LEGISLATION
The Sponsors do not know of any pending litigation as of the initial date
of deposit that might reasonably be expected to have a material adverse effect
on the Fund, although pending litigation may have a material adverse effect on
the value of Securities in the Fund. In addition, at any time after the initial
date of deposit, litigation may be initiated on a variety of grounds, or
legislation may be enacted, affecting the Securities in the Portfolio or the
issuers of the Securities. Changing approaches to regulation may have a negative
impact on certain companies represented in the Portfolio. There can be no
assurance that future litigation, legislation, regulation or deregulation will
not have a material adverse effect on the Portfolio or will not impair the
ability of the issuers of the Securities to achieve their business goals. From
time to time Congress considers proposals to reduce the rate of the
dividends-received deduction. This type of legislation, if enacted into law,
would adversely affect the after-tax return to investors who can take advantage
of the deduction. See Taxes.
LIFE OF THE FUND; FUND TERMINATION
The size and composition of the Portfolio will be affected by the level of
redemptions of Units that may occur from time to time. Principally, this will
depend upon the number of investors seeking to sell or redeem their Units. The
Portfolio will be terminated no later than the mandatory termination date
specified in Part A of the Prospectus. It will terminate earlier upon the
disposition of the last Security or upon the consent of investors holding 51% of
the Units. The Portfolio may also be terminated earlier by the Sponsors once its
total assets have fallen below the minimum value specified in Part A of the
Prospectus. A decision by the Sponsors to terminate the Portfolio early will be
based on factors such as the size of the Portfolio relative to its original
size, the ratio of Portfolio expenses to income, and the cost of maintaining a
current prospectus.
Notice of impending termination will be provided to investors and
thereafter units will no longer be redeemable. On or shortly before termination,
the Trustee will seek to dispose of any Securities remaining in the Portfolio
although any Security unable to be sold at a reasonable price may continue to be
held by the Trustee in a liquidating trust pending its final disposition. A
proportional share of the expenses associated with termination, including
brokerage costs in disposing of Securities, will be borne by investors remaining
at that time. This may have the effect of reducing the amount of proceeds those
investors are to receive in any final distribution.
HOW TO BUY UNITS
Units are available from any of the Sponsors, Underwriters and other
broker-dealers at the Public Offering Price. The Public Offering Price varies
each Business Day with changes in the value of the Portfolio and other assets
and liabilities of the Fund.
PUBLIC OFFERING PRICE
Units are charged a combination of Initial and Deferred Sales Charges
equal, in the aggregate, to a maximum charge of 5.35% of the public offering
price or 5.501% of the net asset value of the Fund over its expected four-year
life. The initial portion of the sales charge is equal to 2.75% of the Public
Offering Price (2.828%) of the net amount invested in the Securities) and the
deferred portion of the sales charge is $1.625 per 1,000 Units ($6.50 per year)
payable by the Fund on behalf of the investors out of net asset value of the
Fund quarterly until the Fund terminates. If an investor sells or redeems Units
before a quarterly payment date, all future deductions of deferred sales charges
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with respect to that investor will be waived; this will have the effect of
reducing the rate of sales charge as to that investor.
The initial portion of the sales charge is reduced on a graduated scale for
sales to any purchaser of at least $250,000 of Units and will be applied on
whichever basis is more favorable to the purchaser. To qualify for the reduced
initial sales charge and concession applicable to quantity purchasers, the
dealer must confirm that the sale is to a single purchaser as defined below or
is purchased for its own account and not for distribution. The initial portion
of the sales charge will be reduced as follows:
<TABLE><CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT)
--------------------------------
AS PERCENT OF AS PERCENT OF MAXIMUM DEALER CONCESSION CONCESSION TO
PUBLIC OFFERING NET AMOUNT DOLLAR AMOUNT DEFERRED AS PERCENT OF INTRODUCING
AMOUNT PURCHASED PRICE INVESTED PER 1,000 UNITS PUBLIC OFFERING PRICE DEALERS
- ---------------------------------- ----------------- ------------- ---------------------- --------------------- -------------
<S> <C> <C> <C> <C> <C>
Less than $250,000................ 2.75% 2.828% $ 26.00 1.788% $ 19.80
$250,000 - $499,999............... 2.25 2.302 26.00 1.463 16.20
$500,000 - $749,999............... 1.75 1.781 26.00 1.138 12.60
$750,000 - $999,999............... 1.25 1.266 26.00 0.813 9.00
$1,000,000 and more............... 1.00 1.010 26.00 0.650 7.20
</TABLE>
The above graduated sales charges will apply on all purchases on any one
day by the same purchaser of Units in this Fund only in the amounts stated. For
this purpose purchases during the primary offering period will not be aggregated
with concurrent purchases of any other unit trusts sponsored by the Sponsors.
Purchases in the secondary market of one or more Series sponsored by the
Sponsors which have the same rates of sales charge will be aggregated. Units
held in the name of the spouse of the purchaser or in the name of a child of the
purchaser under 21 years of age are deemed to be registered in the name of the
purchaser. The graduated sales charges are also applicable to a trustee or other
fiduciary purchasing securities for a single trust estate or single fiduciary
account.
Employees of certain Sponsors and Sponsor affiliates and non-employee
directors of Merrill Lynch & Co. Inc. may purchase Units at a reduced initial
sales charge of not less than $5.00 per 1,000 Units.
EVALUATIONS
Evaluations are determined by the Trustee on each Business Day. This
excludes Saturdays, Sundays and the following holidays as observed by the New
York Stock Exchange: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. If the Securities are
listed on a national securities exchange or the NASDAQ national market system,
evaluations are generally based on closing sales prices on that exchange or that
system (unless the Trustee deems these prices inappropriate) or, if closing
sales prices are not available, at the mean between the closing bid and offer
prices. If the Securities are not listed or if listed but the principal market
is elsewhere, the evaluation is generally determined based on sales prices of
the Securities on the over-the-counter market or, if sales prices in that market
are not available, on the basis of the mean between current bid and offer prices
for the Securities or for comparable securities or by appraisal or by any
combination of these methods. Neither the Sponsors nor the Trustee guarantee the
enforceability, marketability or price of any Securities.
CERTIFICATES
Certificates for Units are issued upon request and may be transferred by
paying any taxes or governmental charges and by complying with the requirements
for redeeming Certificates (see How To Sell Units--Trustee's Redemption of
Units). Certain Sponsors collect additional charges for registering and shipping
Certificates to purchasers. Lost or mutilated Certificates can be replaced upon
delivery of satisfactory indemnity and payment of costs.
HOW TO SELL UNITS
SPONSORS' MARKET FOR UNITS
You can sell your Units at any time without a fee (other than the deduction
after the initial offering period for the costs of liquidating Securities). The
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<PAGE>
Sponsors (although not obligated to do so) will normally buy any Units offered
for sale at the repurchase price next computed after receipt of the order. The
Sponsors have maintained secondary markets in Defined Asset Funds for over 20
years. Primarily because of the sales charge and fluctuations in the market
value of the Securities, the sale price may be less than the cost of your Units.
You should consult your financial professional for current market prices to
determine if other broker-dealers or banks are offering higher prices for Units.
The Sponsors may discontinue this market without prior notice if the supply
of Units exceeds demand or for other business reasons. The Sponsors may reoffer
or redeem Units repurchased.
TRUSTEE'S REDEMPTION OF UNITS
You may redeem your Units by sending the Trustee a redemption request.
Signatures must be guaranteed by an eligible institution. In certain instances,
additional documents may be required such as a certificate of death, trust
instrument, certificate of corporate authority or appointment as executor,
administrator or guardian. If the Sponsors are maintaining a market for Units,
they will purchase any Units tendered at the repurchase price described above.
If they do not purchase Units tendered, the Trustee is authorized in its
discretion to sell Units in the over-the-counter market if it believes it will
obtain a higher net price for the redeeming investor.
By the seventh calendar day after tender you will be mailed an amount equal
to the Redemption Price per Unit. Because of market movements or changes in the
Portfolio, this price may be more or less than the cost of your Units. The
Redemption Price per Unit is computed each Business Day by adding the value of
the Securities, declared but unpaid dividends on the Securities, cash and the
value of any other Fund assets; deducting unpaid taxes or other governmental
charges, accrued but unpaid Fund expenses and accrued but unpaid Deferred Sales
Charges, unreimbursed Trustee advances, cash held to redeem Units, for purchase
of Securities or for distribution to investors and the value of any other Fund
liabilities; and dividing the result by the number of outstanding Units.
Any investor owning Units with a value of at least $500,000 who redeems
those Units may, in lieu of cash redemption, request distribution in kind of an
amount and value of Securities per Unit equal to the otherwise applicable
Redemption Price per Unit. Whole shares of each Security together with cash from
the Capital Account equal to any fractional shares to which the investor would
be entitled will be paid over to a distribution agent and either held for the
account of the investor or disposed of in accordance with instructions of the
investor. Any brokerage commissions on sales of Securities in connection with
in-kind redemptions will be borne by the redeeming investors. The in-kind
redemption option may be terminated by the Sponsors at any time upon prior
notice to investors.
If cash is not available in the Fund's Income and Capital Accounts to pay
redemptions, the Trustee may sell Securities selected by the Agent for the
Sponsors in a manner designed to maintain, to the extent practicable, the
proportionate relationship among the number of shares of each Security. These
sales are often made at times when the Securities would not otherwise be sold
and may result in lower prices than might be realized otherwise and will also
reduce the size and diversity of the Fund.
Redemptions may be suspended or payment postponed if the New York Stock
Exchange is closed other than for customary weekend and holiday closings, if the
SEC determines that trading on that Exchange is restricted or that an emergency
exists making disposal or evaluation of the Securities not reasonably
practicable, or for any other period permitted by the SEC.
INCOME, DISTRIBUTIONS AND REINVESTMENT
INCOME AND DISTRIBUTIONS
The net annual income per Unit will depend primarily upon the amount of
dividends declared and paid by the issuers of the Securities and changes in the
expenses of the Fund and, to a lesser degree, upon the level of purchases of
additional Securities and sales of Securities. There is no assurance that
dividends on the Securities will continue at their current levels or be declared
or paid.
Each Unit receives an equal share of quarterly distributions of dividend
income. Because dividends on the Securities are not received at a constant rate
throughout the year, any income distribution may be more or less than the amount
then credited to the Income Account. Dividends payable to the Fund are credited
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<PAGE>
to an Income Account, as of the date on which the Fund is entitled to receive
the dividends, and other receipts are credited to a Capital Account. A Reserve
Account may be created by withdrawing from the Income and Capital Accounts
amounts considered appropriate by the Trustee to reserve for any material amount
that may be payable out of the Fund. Funds held by the Trustee in the various
accounts do not bear interest. Dividend income per Unit received by the Fund and
available for distribution and the distributable balance in the Capital Account
per Unit (other than capital gains) as of any particular record day will be
distributed on or shortly after the related distribution day to the holders of
record on that record day, provided that no distribution from the Capital
Account is required unless the distributable balance therein (excluding capital
gains) is at least $5.00 per 1,000 Units. There is no assurance that actual
distributions will be made since all dividends received may be used to pay
expenses.
An amount equal to any capital gain net income (i.e. the excess of capital
gains over capital losses recognized by the Fund in any taxable year) will be
distributed shortly after the end of the year. In order to meet certain tax
requirements the Fund may make a special distribution of income, including
capital gains, to holders of record as of a date in December. Proceeds received
from the disposition of any of the Securities which are not used to make the
distribution of capital gain net income, for redemption of Units or reinvested
in additional Securities will be held in the Capital Account to be distributed
on the next succeeding distribution day.
REINVESTMENT
Income and principal distributions on Units may be reinvested by
participating in the Fund's reinvestment plan. Under the plan, the Units
acquired for investors will be either Units already held in inventory by the
Sponsors or new Units created by the Sponsors' deposit of additional Securities,
contracts to purchase additional Securities or cash (or a bank letter of credit
in lieu of cash) with instructions to purchase additional Securities. Purchases
made pursuant to the Reinvestment Plan will be made without initial sales charge
at the net asset value for Units of the Fund (but will be subject to
subsequently deducted deferred sales charges). Under the Reinvestment
Plan, the Fund will pay the distributions to the Trustee which in turn will
purchase for the investor full and fractional Units of the Fund at the price
determined as of the close of business on the distribution day and will add the
Units to the investor's account and send the investor an account statement
reflecting the reinvestment. The Sponsors reserve the right to amend, modify or
terminate the reinvestment plan at any time without prior notice. Investors
holding Units in 'street name' should contact their broker, dealer or financial
institution if they wish to participate in the reinvestment plan.
FUND EXPENSES
Estimated annual Fund expenses are listed in Part A of the Prospectus; if
actual expenses exceed the estimate, the excess will be borne by the Fund. The
Trustee's annual fee is payable in monthly installments. The Trustee also
benefits when it holds cash for the Fund in non-interest bearing accounts.
Possible additional charges include Trustee fees and expenses for extraordinary
services, costs of indemnifying the Trustee and the Sponsors, costs of action
taken to protect the Fund and other legal fees and expenses, Fund termination
expenses and any governmental charges. The Trustee has a lien on Fund assets to
secure reimbursement of these amounts and may sell Securities for this purpose
if cash is not available. The Sponsors receive an annual fee of a maximum of
$0.35 per 1,000 Units to reimburse them for the cost of providing Portfolio
supervisory services to the Fund. While the fee may exceed their costs of
providing these services to the Fund, the total supervision fees from all Series
of Equity Income Fund will not exceed their costs for these services to all of
those Series during any calendar year. The Sponsors may also be reimbursed for
their costs of providing bookkeeping and administrative services to the Fund,
currently estimated at $0.10 per 1,000 Units. The Trustee's and Sponsors' fees
may be adjusted for inflation without investors' approval.
Expenses incurred in establishing the Fund, including the cost of the
initial preparation of documents relating to the Fund, Federal and State
registration fees, the initial fees and expenses of the Trustee, legal expenses
and any other out-of-pocket expenses will be paid by the Fund and amortized over
the life of the Fund. Advertising and selling expenses will be paid from the
Underwriting Account at no charge to the Fund. Defined Asset Funds can be a
cost-effective way to purchase and hold investments. Annual operating expenses
are generally lower than for managed funds. Because Defined Asset Funds have no
management fees, limited transaction costs and no ongoing marketing expenses,
operating expenses are generally less than 0.25% a year. When compounded
annually, small differences in expense ratios can make a big difference in your
investment results.
7
<PAGE>
TAXES
TAXATION OF THE FUND
The Fund intends to qualify for and elect the special tax treatment
applicable to 'regulated investment companies' under Section 851-855 of the
Internal Revenue Code of 1986, as amended (the 'Code'). Qualification and
election as a 'regulated investment company' involve no supervision of
investment policy or management by any government agency. If the Fund qualifies
as a 'regulated investment company' and distributes to investors 90% or more of
its taxable income without regard to its net capital gain (i.e., the excess of
its net long-term capital gain over its net short-term capital loss), it will
not be subject to Federal income tax on any portion of its taxable income
(including any net capital gain) distributed to investors in a timely manner. In
addition, the Fund will not be subject to the 4% excise tax on certain
undistributed income of 'regulated investment companies' to the extent it
distributes to investors in a timely manner at least 98% of its taxable income
(including any net capital gain). It is anticipated that the Fund will not be
subject to Federal income tax or the excise tax because the Indenture requires
the distribution of the Fund's taxable income (including any net capital gain)
in a timely manner. Although all or a portion of the Fund's taxable income
(including any net capital gain) for a taxable year may be distributed shortly
after the end of the calendar year, such a distribution will be treated for
Federal income tax purposes as having been received by investors during the
calendar year.
DISTRIBUTIONS
Distribution to investors of the Fund's dividend income and net short-term
capital gain in any year will be taxable as ordinary income to investors to the
extent of the Fund's taxable income (without regard to its net capital gain) for
that year. Any excess will be treated as a return of capital and will reduce the
investor's basis in his Units and, to the extent that such distributions exceed
his basis, will be treated as a gain from the sale of his Units as discussed
below. It is anticipated that substantially all of the distributions of the
Fund's dividend income and net short-term capital gain will be taxable as
ordinary income to investors.
Distribution of the Fund's net capital gain (designated as capital gain
dividends by the Fund) will be taxable to investors as long-term capital gain,
regardless of the length of time the Units have been held by an investor. An
investor will recognize a taxable gain or loss if the investor sells or redeems
his Units. Any gain or loss arising from (or treated as arising from) the sale
or redemption of Units will be a capital gain or loss, except in the case of a
dealer in securities. Capital gains are currently taxed at the same rate as
ordinary income, however, the excess of net long-term capital gains over net
short-term capital losses may be taxed at a lower rate than ordinary income for
certain noncorporate taxpayers. A capital gain or loss is long-term if the asset
is held for more than one year and short-term if held for one year or less.
However, any capital loss on the sale or redemption of a Unit that an investor
has held for six months or less will be a long-term capital loss to the extent
of any capital gain dividends previously distributed to the investor by the
Fund. The deduction of capital losses is subject to limitations.
A distribution of Securities to an investor upon redemption of his Units
will be a taxable event to such investor, and that investor will recognize
taxable gain or loss (equal to the difference between such investor's tax basis
in his Units and the fair market value of Securities received in redemption),
which will be capital gain or loss upon such distribution, except in the case
of a dealer in securities. Investors should consult their own tax advisers in
this regard.
Dividends received by the Fund from foreign issuers will generally be
subject to foreign withholding taxes. The Fund will not be eligible for, and
therefore does not intend to make, an election that would enable investors to
credit foreign withholding taxes against their U.S. Federal income tax liability
on distributions from the Fund.
Distributions that are taxable as ordinary income to investors will
constitute dividends for Federal income tax purposes. To the extent that
distributions are appropriately designated by the Fund and are attributable to
dividends received by the Fund from domestic issuers with respect to whose
Securities the Fund satisfies the requirements for the dividends-received
deduction, such distributions will be eligible for the dividends-received
deduction for corporations (other than corporations such as 'S' corporations
which are not eligible for such deduction because of their special
characteristics and other than for purposes of special taxes such as the
accumulated earnings tax and the personal holding company tax). The
dividends-received deduction generally is currently 70%. However, Congress from
time to time considers proposals that would adversely affect the after-tax
return to investors who can take advantage of the deduction. For example, on
December 7, 1995, the Clinton Administration proposed reducing the dividends
8
<PAGE>
received deduction to 50% for dividends paid or accrued after January 31, 1996.
Investors are urged to consult their own tax advisers.
Sections 246 and 246A of the Code contain additional limitations on the
eligibility of dividends for the corporate dividends-received deduction.
Depending upon the corporate investor's circumstances (including whether it has
a 45-day holding period for its Units and whether its Units are debt financed),
these limitations may be applicable to dividends received by an investor from
the Fund which would otherwise qualify for the dividends-received deduction
under the principles discussed above. Accordingly, investors should consult
their own tax advisers in this regard. A corporate investor should be aware that
the receipt of dividend income for which the dividends-received deduction is
available may give rise to an alternative minimum tax liability (or increase an
existing liability) because the dividend income will be included in the
corporation's 'adjusted current earnings' for purposes of the adjustment to
alternative minimum taxable income required by Section 56(g) of the Code.
Investors will be taxed in the manner described above regardless of whether
distributions from the Fund are actually received by the investor or are
reinvested pursuant to the Reinvestment Plan.
The Federal tax status of each year's distributions will be reported to
investors and to the Internal Revenue Service. The foregoing discussion relates
only to the Federal income tax status of the Fund and to the tax treatment of
distributions by the Fund to U.S. investors. Investors that are not United
States citizens or residents should be aware that distributions from the Fund
will generally be subject to a withholding tax of 30%, or a lower treaty rate,
and should consult their own tax advisers to determine whether investment in the
Fund is appropriate. Distributions may also be subject to state and local
taxation and investors should consult their own tax advisers in this regard.
RETIREMENT PLANS
This Series of Equity Income Fund may be well suited for purchase by
Individual Retirement Accounts ('IRAs'), Keogh plans, pension funds and other
qualified retirement plans, certain of which are briefly described below.
Generally, capital gains and income received in each of the foregoing plans are
exempt from Federal taxation. All distributions from such plans are generally
treated as ordinary income but may, in some cases, be eligible for special 5
or 10 year averaging or tax-deferred rollover treatment. Holders of Units in
IRAs, Keogh plans and other tax-deferred retirement plans should consult their
plan custodian as to the appropriate disposition of distributions. Investors
considering participation in any of these plans should review specific tax laws
related thereto and should consult their attorneys or tax advisors with respect
to the establishment and maintenance of any of these plans. These plans are
offered by brokerage firms, including the Sponsor of this Fund, and other
financial institutions. Fees and charges with respect to such plans may vary.
Retirement Plans for the Self-Employed--Keogh Plans. Units of the Fund may
be purchased by retirement plans established for self-employed individuals,
partnerships or unincorporated companies ('Keogh plans'). The assets of a Keogh
plan must be held in a qualified trust or other arrangement which meets the
requirements of the Code. Keogh plan participants may also establish separate
IRAs (see below) to which they may contribute up to an additional $2,000 per
year ($2,250 in a spousal account).
Individual Retirement Account--IRA. Any individual can make use of a
qualified IRA arrangement for the purchase of Units of the Fund. Any individual
(including one covered by an employer retirement plan) can make a contribution
in an IRA equal to the lesser of $2,000 ($2,250 in a spousal account) or 100% of
earned income; such investment must be made in cash. However, the deductible
amount an individual may contribute will be reduced if the individual's adjusted
gross income exceeds $25,000 (in the case of a single individual), $40,000 (in
the case of married individuals filing a joint return) or $200 (in the case of a
married individual filing a separate return). Certain transactions which are
prohibited under Section 408 of the Code will cause all or a portion of the
amount in an IRA to be deemed to the distributed and subject to tax at that
time. Unless nondeductible contributions were made in 1987 or a later year, all
distributions from an IRA will be treated as ordinary income but generally are
eligible for tax-deferred rollover treatment. Taxable distributions made before
attainment of age 59 1/2, except in the case of the participant's death or
disability or where the amount distributed is part of a series of substantially
equal periodic (at least annual) payments that are to be made over the life
expectancies of the participant and his or her beneficiary, are generally
subject to a surtax in an amount equal to 10% of the distribution.
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Corporate Pension and Profit-Sharing Plans. A pension or profit-sharing
plan for employees of a corporation may purchase Units of the Fund.
RECORDS AND REPORTS
The Trustee keeps a register of the names, addresses and holdings of all
investors. The Trustee also keeps records of the transactions of the Fund,
including a current list of the Securities and a copy of the Indenture, which
may be inspected by investors at reasonable times during business hours.
With each distribution, the Trustee includes a statement of the amounts of
income and any other receipts being distributed. Following the termination of
the Fund, the Trustee sends each investor of record a statement summarizing
transactions in the Fund's accounts including amounts distributed from them,
identifying Securities sold and purchased and listing Securities held and the
number of Units outstanding at termination and stating the Redemption Price per
1,000 Units at termination, and the fees and expenses paid by the Fund, among
other matters. Fund accounts may be audited by independent accountants selected
by the Sponsors and any report of the accountants will be available from the
Trustee on request.
TRUST INDENTURE
The Fund is a 'unit investment trust' created under New York law by a Trust
Indenture among the Sponsors and the Trustee. This Prospectus summarizes various
provisions of the Indenture, but each statement is qualified in its entirety by
reference to the Indenture.
The Indenture may be amended by the Sponsors and the Trustee without
consent by investors to cure ambiguities or to correct or supplement any
defective or inconsistent provision, to make any amendment required by the SEC
or other governmental agency or to make any other change not materially adverse
to the interest of investors (as determined in good faith by the Sponsors). The
Indenture may also generally be amended upon consent of investors holding 51% of
the Units. No amendment may reduce the interest of any investor in the Fund
without the investor's consent or reduce the percentage of Units required to
consent to any amendment without unanimous consent of investors. Investors will
be notified of the substance of any amendment.
The Trustee may resign upon notice to the Sponsors. It may be removed by
investors holding 51% of the Units at any time or by the Sponsors without the
consent of investors if it becomes incapable of acting or bankrupt, its affairs
are taken over by public authorities, or if under certain conditions the
Sponsors determine in good faith that its replacement is in the best interest of
the investors. The resignation or removal becomes effective upon acceptance of
appointment by a successor; in this case, the Sponsors will use their best
efforts to appoint a successor promptly; however, if upon resignation no
successor has accepted appointment within 30 days after notification, the
resigning Trustee may apply to a court of competent jurisdiction to appoint a
successor.
Any Sponsor may resign so long as one Sponsor with a net worth of
$2,000,000 remains. A new Sponsor may be appointed by the remaining Sponsors and
the Trustee to assume the duties of the resigning Sponsor. If there is only one
Sponsor and it fails to perform its duties or becomes incapable of acting or
bankrupt or its affairs are taken over by public authorities, the Trustee may
appoint a successor Sponsor at reasonable rates of compensation, terminate the
Indenture and liquidate the Fund or continue to act as Trustee without a
Sponsor. Merrill Lynch, Pierce, Fenner & Smith Incorporated has been appointed
as Agent for the Sponsors by the other Sponsors.
The Sponsors and the Trustee are not liable to investors or any other party
for any act or omission in the conduct of their responsibilities absent bad
faith, willful misfeasance, negligence (gross negligence in the case of a
Sponsor) or reckless disregard of duty. The Indenture contains customary
provisions limitingthe liability of the Trustee.
MISCELLANEOUS
LEGAL OPINION
The legality of the Units has been passed upon by Davis Polk & Wardwell,
450 Lexington Avenue, New York, New York 10017, as special counsel for the
Sponsors.
10
<PAGE>
AUDITORS
The Statement of Condition in Part A of the Prospectus was audited by
Deloitte & Touche LLP, independent accountants, as stated in their opinion. It
is included in reliance upon that opinion given on the authority of that firm as
experts in accounting and auditing.
TRUSTEE
The Trustee and its address are stated on the back cover of the Prospectus.
The Trustee is subject to supervision by the Federal Deposit Insurance
Corporation, the Board of Governors of the Federal Reserve System and either the
Comptroller of the Currency or state banking authorities.
SPONSORS
The Sponsors are listed on the back cover of the Prospectus. They may
include Merrill Lynch, Pierce, Fenner & Smith Incorporated, a wholly-owned
subsidiary of Merrill Lynch Co. Inc.; Smith Barney Inc., an indirect wholly-
owned subsidiary of The Travelers Inc.; Prudential Securities Incorporated, an
indirect wholly-owned subsidiary of the Prudential Insurance Company of America,
PaineWebber Incorporated, a wholly-owned subsidiary of PaineWebber Group Inc.
and Dean Witter Reynolds, Inc., a principal operating subsidiary of Dean Witter
Discover & Co. Each Sponsor, or one of its predecessor corporations, has acted
as Sponsor of a number of series of unit investment trusts. Each Sponsor has
acted as principal underwriter and managing underwriter of other investment
companies. The Sponsors, in addition to participating as members of various
selling groups or as agents of other investment companies, execute orders on
behalf of investment companies for the purchase and sale of securities of these
companies and sell securities to these companies in their capacities as brokers
or dealers in securities.
PUBLIC DISTRIBUTION
During the initial offering period and thereafter to the extent additional
Units continue to be offered for sale to the public by means of this Prospectus,
Units will be distributed directly to the public by this Prospectus at the
Public Offering Price determined in the manner provided above or to selected
dealers who are members of the National Association of Securities Dealers, Inc.
at a concession not in excess of the maximum sales charge. The Sponsors intend
to qualify Units for sale in all states in which qualification is deemed
necessary through the Underwriting Account and by dealers who are members of the
National Association of Securities Dealers, Inc.. The Sponsors do not intend to
qualify Units for sale in any foreign countries and this Prospectus does not
constitute an offer to sell Units in any country where Units cannot lawfully be
sold.
UNDERWRITERS' AND SPONSORS' PROFITS
Upon sale of the Units, the Underwriters will be entitled to receive sales
charges; each Underwriters' interest in the Underwriting Account will depend on
the number of Units acquired through the issuance of additional Units. The
Sponsors also realize a profit or loss on deposit of the Securities equal to the
difference between the cost of the Securities to the Fund (based on the
aggregate value of the Securities on their date of deposit) and the purchase
price of the Securities to the Sponsors plus commissions payable by the
Sponsors. In addition, a Sponsor or Underwriter may realize profits or sustain
losses on Securities it deposits in the Fund which were acquired from
underwriting syndicates of which it was a member. During the initial offering
period, the Underwriting Account also may realize profits or sustain losses as a
result of fluctuations after the initial date of deposit in the Public Offering
Price of the Units. In maintaining a secondary market for Units, the Sponsors
will also realize profits or sustain losses in the amount of any difference
between the prices at which they buy Units and the prices at which they resell
these Units (which include the sales charge) or the prices at which they redeem
the Units. Cash, if any, made available by buyers of Units to the Sponsors prior
to a settlement date for the purchase of Units may be used in the Sponsors'
businesses to the extent permitted by Rule 15c3-3 under the Securities Exchange
Act of 1934 and may be of benefit to the Sponsors.
PERFORMANCE INFORMATION
Information on the performance of the Fund for various periods, on the
basis of changes in Unit price plus the amount of dividends and capital gains
reinvested, may be included from time to time in advertisements, sales
literature, reports and other information furnished to current or prospective
11
<PAGE>
investors. Total return figures are not averaged, and may not reflect deduction
of the sales charge, which would decrease the return. Average annualized return
figures reflect deduction of the maximum sales charge. No provision is made for
any income taxes payable.
Past performance of any series may not be indicative of results of future
series. Fund performance may be compared to the performance of the DJIA, the S&P
500 Composite Price Stock Index, the S&P MidCap 400 Index, or performance data
from publications such as Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, The New York Times, U.S. News and World
Report, Barron's, Business Week, CDA Investment Technology, Inc., Forbes
Magazine or Fortune Magazine. Performance of the Stocks may be compared in sales
literature to performance of the S&P 500 Stock Price Composite Index, to which
may be added by year various national and international political and economic
events, and certain milestones in price and market indicators and in offerings
of Defined Asset Funds. This performance may also be compared for various
periods with an investment in short-term U.S. Treasury securities; however, the
investor should bear in mind that Treasury securities are fixed income
obligations, having the highest credit characterisitics, while the Stocks
involve greater risk because they have no maturities, and income thereon is
subject to the financial condition of, and declaration by, the issuers. Various
sales material may describe particular characteristics about each company which
makes it a leader in its field.
DEFINED ASSET FUNDS
For decades informed investors have purchased unit investment trusts for
dependability and professional selection of investments. Defined Asset Funds'
philosophy is to allow investors to 'buy with knowledge' (because, unlike
managed funds, the portfolio is relatively fixed) and 'hold with confidence'
(because the portfolio is professionally selected and regularly reviewed).
Defined Asset Funds offers an array of simple and convenient investment choices,
suited to fit a wide variety of personal financial goals--a buy and hold
strategy for capital accumulation, such as for children's education or
retirement, or attractive, regular current income consistent with the
preservation of principal. Unit investment trusts are particularly suited for
the many investors who prefer to seek long-term profits by purchasing sound
investments and holding them, rather than through active trading. Few
individuals have the knowledge, resources or capital to buy and hold a
diversified portfolio on their own; it would generally take a considerable sum
of money to obtain the breadth and diversity that Defined Asset Funds offer.
Your investment objectives may call for a combination of Defined Asset Funds.
One of the most important investment decisions you face may be how to
allocate your investments among asset classes. Diversification among different
kinds of investments can balance the risks and rewards of each one. Most
investment experts recommend stocks for long-term capital growth. Long-term
corporate bonds offer relatively high rates of interest income. By purchasing
both defined equity and defined bond funds, investors can receive attractive
current income, as well as growth potential, offering some protection against
inflation. From time to time various advertisements, sales literature, reports
and other information furnished to current or prospective investors may present
the average annual compounded rate of return of selected asset classes over
various periods of time, compared to the rate of inflation over the same
periods.
SUPPLEMENTAL INFORMATION
Upon writing or calling the Trustee shown on the back cover of this
Prospectus, investors will receive without charge supplemental information about
the Fund, which has been filed with the SEC. The supplemental information
includes more detailed risk factor disclosure about the types of securities that
may be part of the Portfolio and general information about the structure and
operation of the Fund.
12
<PAGE>
Defined
Asset FundsSM
SPONSORS: EQUITY INCOME FUND
Merrill Lynch, CONCEPT SERIES
Pierce, Fenner & Smith IncorporatedTELE-GLOBAL TRUST 2
Defined Asset Funds
P.O. Box 9051
Princeton, N.J. 08543-9051 This Prospectus does not contain all of the
(609) 282-8500 information with respect to the investment
Smith Barney Inc. company set forth in its registration
Unit Trust Department statement and exhibits relating thereto which
388 Greenwich Street--23rd Floor have been filed with the Securities and
New York, NY 10013 Exchange Commission, Washington, D.C. under
1-800-223-2532 the Securities Act of 1933 and the Investment
PaineWebber Incorporated Company Act of 1940, and to which reference
1200 Harbor Blvd. is hereby made.
Weehawken, N.J. 07087 ------------------------------
(201) 902-3000 No person is authorized to give any
Prudential Securities Incorporated information or to make any representations
One Seaport Plaza with respect to this investment company not
199 Water Street contained in its registration statement and
New York, N.Y. 10292 exhibits relating thereto; and any
(212) 776-1000 information or representation not contained
Dean Witter Reynolds Inc. therein must not be relied upon as having
Two World Trade Center--59th Floor been authorized.
New York, N.Y. 10048 ------------------------------
(212) 392-2222 When Units of this Fund are no longer
TRUSTEE: available this Prospectus may be used as a
The Chase Manhattan Bank, N.A. preliminary prospectus for a future series,
(a National Banking Association) in which case investors should note the
Unit Trust Department following:
Box 2051 Information contained herein is subject to
New York, NY 10048 amendment. A registration statement relating
1-800-323-1508 to securities of a future series has been
filed with the Securities and Exchange
Commission. These securities may not be sold
nor may offers to buy be accepted prior to
the time the registration statement becomes
effective.
This Prospectus shall not constitute an offer
to sell or the solicitation of an offer to
buy nor shall there be any sale of these
securities in any State in which such offer
solicitation or sale would be unlawful prior
to registration or qualification under the
securities laws of any such State.
15179--2/96
<PAGE>
PART II
ADDITIONAL INFORMATION NOT INCLUDED IN THE PROSPECTUS
A. The following information relating to the Depositors is incorporated by
reference to the SEC filings indicated and made a part of this Registration
Statement.
<TABLE><CAPTION>
SEC FILE OR
IDENTIFICATION DATE
NUMBER FILED
----------------------------------------
<S> <C> <C>
I. Bonding Arrangements and Date of Organization of the
Depositors filed pursuant to Items A and B of
Part II of the Registration Statement on Form
S-6 under the Securities Act of 1933:
Merrill Lynch, Pierce, Fenner & Smith
Incorporated 2-52691 1/17/95
Smith Barney Inc. .............................. 33-29106 6/29/89
PaineWebber Incorporated ....................... 2-87965 11/18/83
Prudential Securities Incorporated.............. 2-61418 4/26/78
Dean Witter Reynolds Inc. ...................... 2-60599 1/4/78
II. Information as to Officers and Directors of the
Depositors filed pursuant to Schedules A and D
of Form BD under Rules 15b1-1 and 15b3-1 of the
Securities Exchange Act of 1934:
Merrill Lynch, Pierce, Fenner & Smith
Incorporated 8-7221 5/26/94, 6/29/92
Smith Barney Inc. .............................. 8-8177 8/29/94, 8/2/93
PaineWebber Incorporated ....................... 8-16267 4/20/94, 7/31/86
Prudential Securities Incorporated.............. 8-27154 6/30/94, 6/20/88
Dean Witter Reynolds Inc. ...................... 8-14172 2/23/94, 4/9/91
III. Charter documents of the Depositors filed as
Exhibits to the Registration Statement on Form
S-6 under the Securities Act of 1933 (Charter,
By-Laws):
Merrill Lynch, Pierce, Fenner & Smith
Incorporated 2-73866, 2-77549 9/22/81, 6/15/82
Smith Barney Inc. .............................. 33-20499 3/30/88
PaineWebber Incorporated ....................... 2-87965 11/18/83
Prudential Securities Incorporated.............. 2-52947 3/4/75
Dean Witter Reynolds Inc. ...................... 2-60599 1/4/78
B. The Internal Revenue Service Employer Identification
Numbers of the Sponsors and Trustee are as follows:
Merrill Lynch, Pierce, Fenner & Smith
Incorporated 13-5674085
Smith Barney Inc. .............................. 13-1912900
PaineWebber Incorporated ....................... 13-2638166
Prudential Securities Incorporated.............. 22-2347336
Dean Witter Reynolds Inc. ...................... 94-0899825
The Chase Manhattan Bank, N.A., Trustee......... 13-2633612
</TABLE>
II-1
<PAGE>
SERIES OF EQUITY INCOME FUND
AND DEFINED ASSET FUNDS MUNICIPAL INSURED SERIES
DESIGNATED PURSUANT TO RULE 487 UNDER THE SECURITIES ACT OF 1933
SEC
SERIES NUMBER FILE NUMBER
- --------------------------------------------------------------------------------
Equity Income Fund, Blue Chip Stock Series(1)............... 33-05653
Equity Income Fund, 'Merit' 1987 Series..................... 33-10989
Equity Income Fund, Concept Series Real Estate Income
Fund........................................................ 33-51869
Equity Income Fund, Select Ten Portfolio--1995 Spring
Series...................................................... 33-55807
Defined Asset Funds Municipal Insured Series................ 33-54565
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement on Form S-6 comprises the following papers and
documents:
The facing sheet of Form S-6.
The Cross-Reference Sheet (incorporated by reference from the
Cross-Reference Sheet of the Registration Statement of Defined Asset Funds
Municipal Insured Series, 1933 Act File No. 33-54565).
The Prospectus.
The Signatures.
The following exhibits:
1.1 --Form of Trust Indenture (incorporated by reference to Exhibit 1.1 to
Amendment No. 2 to the Registration Statement on Form S-6 of Equity
Income Fund, Select Growth Portfolio--1995 Series 2, Defined Asset
Funds, Reg. No. 33-58535).
1.1.1 --Form of Standard Terms and Conditions of Trust Effective as of October
21, 1993 (incorporated by reference to Exhibit 1.1.1 to the
Registration Statement of Municipal Investment Trust Fund, Multistate
Series-48, 1933 Act File No. 33-50247).
1.2 --Form of Master Agreement Among Underwriters (incorporated by reference
to Exhibit 1.2 to the Registration Statement under the Securities Act
of 1933 of The Corporate Income Fund, One Hundred Ninety-Fourth
Monthly Payment Series, 1933 Act File No. 2-90925).
3.1 --Opinion of counsel as to the legality of the securities being issued
including its consent to the use of its name under the heading
'Miscellaneous--Legal Opinion' in the Prospectus.
5.1 --Consent of independent accountants.
9.1 --Information Supplement
R-1
<PAGE>
EQUITY INCOME FUND CONCEPT SERIES
TELE-GLOBAL TRUST 2
SIGNATURES
The registrant hereby identifies the series numbers of Equity Income Fund
and Defined Asset Funds Municipal Insured Series listed on page R-1 for the
purposes of the representations required by Rule 487 and represents the
following:
1) That the portfolio securities deposited in the series as to which this
registration statement is being filed do not differ materially in type
or quality from those deposited in such previous series;
2) That, except to the extent necessary to identify the specific portfolio
securities deposited in, and to provide essential financial information
for, the series with respect to which this registration statement is
being filed, this registration statement does not contain disclosures
that differ in any material respect from those contained in the
registration statements for such previous series as to which the
effective date was determined by the Commission or the staff; and
3) That it has complied with Rule 460 under the Securities Act of 1933.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT TO THE REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY
AUTHORIZED IN THE CITY OF NEW YORK AND STATE OF NEW YORK ON THE 14TH DAY OF
FEBRUARY, 1996.
SIGNATURES APPEAR ON PAGE R-3, R-4, R-5, R-6 AND R-7.
A majority of the members of the Board of Directors of Merrill Lynch,
Pierce, Fenner & Smith Incorporated has signed this Registration Statement or
Amendment to the Registration Statement pursuant to Powers of Attorney
authorizing the person signing this Registration Statement or Amendment to the
Registration Statement to do so on behalf of such members.
A majority of the members of the Board of Directors of Smith Barney Inc.
has signed this Registration Statement or Amendment to the Registration
Statement pursuant to Powers of Attorney authorizing the person signing this
Registration Statement or Amendment to the Registration Statement to do so on
behalf of such members.
A majority of the members of the Executive Committee of the Board of
Directors of PaineWebber Incorporated has signed this Registration Statement or
Amendment to the Registration Statement pursuant to Powers of Attorney
authorizing the person signing this Registration Statement or Amendment to the
Registration Statement to do so on behalf of such members.
A majority of the members of the Board of Directors of Prudential
Securities Incorporated has signed this Registration Statement or Amendment to
the Registration Statement pursuant to Powers of Attorney authorizing the person
signing this Registration Statement or Amendment to the Registration Statement
to do so on behalf of such members.
A majority of the members of the Board of Directors of Dean Witter
Reynolds Inc. has signed this Registration Statement or Amendment to the
Registration Statement pursuant to Powers of Attorney authorizing the person
signing this Registration Statement or Amendment to the Registration Statement
to do so on behalf of such members.
R-2
<PAGE>
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
DEPOSITOR
By the following persons, who constitute Powers of Attorney have been filed
a majority of under
the Board of Directors of Merrill Form SE and the following 1933 Act
Lynch, Pierce, File
Fenner & Smith Incorporated: Number: 33-43466
HERBERT M. ALLISON, JR.
BARRY S. FREIDBERG
EDWARD L. GOLDBERG
STEPHEN L. HAMMERMAN
JEROME P. KENNEY
DAVID H. KOMANSKY
DANIEL T. NAPOLI
THOMAS H. PATRICK
JOHN L. STEFFENS
DANIEL P. TULLY
ROGER M. VASEY
ARTHUR H. ZEIKEL
By
ERNEST V. FABIO
(As authorized signatory for Merrill Lynch, Pierce,
Fenner & Smith Incorporated and
Attorney-in-fact for the persons listed above)
R-3
<PAGE>
SMITH BARNEY INC.
DEPOSITOR
By the following persons, who constitute a majority of Powers of Attorney
the Board of Directors of Smith Barney Inc.: have been filed
under the 1933 Act
File Number:
33-49753 and
33-55073
STEVEN D. BLACK
JAMES BOSHART III
ROBERT A. CASE
JAMES DIMON
ROBERT DRUSKIN
JEFFREY LANE
ROBERT H. LESSIN
By MICHAEL J. BROPHY
(As authorized signatory for
Smith Barney Inc. and
Attorney-in-fact for the persons listed above)
R-4
<PAGE>
PAINEWEBBER INCORPORATED
DEPOSITOR
By the following persons, who constitute Powers of Attorney have been filed
a majority of under
the Executive Committee of the Board the following 1933 Act File
of Directors of PaineWebber Number: 33-55073
Incorporated:
DONALD B. MARRON
JOSEPH J. GRANO, JR.
By
ROBERT E. HOLLEY
(As authorized signatory for
PaineWebber Incorporated
and Attorney-in-fact for the persons listed above)
R-5
<PAGE>
PRUDENTIAL SECURITIES INCORPORATED
DEPOSITOR
By the following persons, who constitute a majority of Powers of Attorney
the Board of Directors of Prudential Securities have been filed
Incorporated: under Form SE and
the following 1933
Act File Number:
33-41631
ALAN D. HOGAN
GEORGE A. MURRAY
LELAND B. PATON
HARDWICK SIMMONS
By
WILLIAM W. HUESTIS
(As authorized signatory for Prudential Securities
Incorporated and Attorney-in-fact for the persons
listed above)
R-6
<PAGE>
DEAN WITTER REYNOLDS INC.
DEPOSITOR
By the following persons, who constitute Powers of Attorney have been filed
a majority of under Form
the Board of Directors of Dean Witter SE and the following 1933 Act File
Reynolds Inc.: Number:
33-17085
NANCY DONOVAN
CHARLES A. FIUMEFREDDO
JAMES F. HIGGINS
STEPHEN R. MILLER
PHILIP J. PURCELL
THOMAS C. SCHNEIDER
WILLIAM B. SMITH
By
MICHAEL D. BROWNE
(As authorized signatory for Dean Witter Reynolds Inc.
and Attorney-in-fact for the persons listed above)
R-7
EXHIBIT 3.1
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 450-4000
FEBRUARY 14, 1996
EQUITY INCOME FUND,
CONCEPT SERIES
TELE-GLOBAL TRUST 2
DEFINED ASSET FUNDS
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
DEAN WITTER REYNOLDS, INC.
C/O MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
DEFINED ASSET FUNDS
P.O. BOX 9051
PRINCETON, N.J. 08543-9051
(609) 282-8500
Dear Sirs:
We have acted as special counsel for you, as sponsors (the 'Sponsors') of
Equity Income Fund, Concept Series, Tele-Global Trust 2, Defined Asset Funds
(the 'Fund'), in connection with the issuance of units of fractional undivided
interest in the Fund (the 'Units') in accordance with the Trust Indenture
relating to the Fund (the 'Indenture').
We have examined and are familiar with originals or copies, certified or
otherwise identified to our satisfaction, of such documents and instruments as
we have deemed necessary or advisable for the purpose of this opinion.
Based upon the foregoing, we are of the opinion that (i) the execution and
delivery of the Indenture and the issuance of the Units have been duly
authorized by the Sponsors and (ii) the Units, when duly issued and delivered by
the Sponsors and the Trustee in accordance with the Indenture, will be legally
issued, fully paid and non-assessable.
We hereby consent to the use of this opinion as Exhibit 3.1 to the
Registration Statement relating to the Units filed under the Securities Act of
1933 and to the use of our name in such Registration Statement and in the
related prospectus under the heading 'Miscellaneous--Legal Opinion.'
Very truly yours,
DAVIS POLK & WARDWELL
EXHIBIT 5.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Sponsors and Trustee of Equity Income Fund,
Concept Series, Tele-Global Trust 2, Defined Asset Funds:
We consent to the use in this Registration Statement No. 33-62265 of our opinion
dated February 14, 1996, relating to the Statement of Condition of Equity Income
Fund, Concept Series, Tele-Global Trust 2, Defined Asset Funds and to the
reference to us under the heading 'Miscellaneous--Auditors' in the Prospectus
which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
New York, N.Y.
February 14, 1996
Exhibit 9.1
DEFINED ASSET FUNDS
-------------------
INFORMATION SUPPLEMENT
EQUITY INCOME FUND
This Information Supplement provides additional information concerning the
structure, operations and risks of trusts (each, a "Portfolio") of Equity Income
Fund-Defined Asset Funds not found in the prospectuses for the Portfolios. This
Information Supplement is not a prospectus and does not include all of the
information that a prospective investor should consider before investing in a
Portfolio. This Information Supplement should be read in conjunction with the
prospectus for the Portfolio in which an investor is considering investing
("Prospectus".) Copies of the Prospectus can be obtained by calling or writing
the Trustee at the telephone number and address indicated on the back cover of
the Prospectus.
This Information Supplement is dated February 12, 1996. Capitalized terms
have been defined in the Prospectus.
TABLE OF CONTENTS
-----------------
Description of Portfolio Investments . . . . . . . . . . . . . . 2
Portfolio Supervision . . . . . . . . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . 2
Equity Securities . . . . . . . . . . . . . . . . . . . . . . 2
International Risk Factors . . . . . . . . . . . . . . . . . 3
Additional Hong Kong Risk Factors
(Select Ten International Series -Hong
Kong Portfolio) . . . . . . . . . . . . . . . . . . . . . . . 6
Additional Japan Risk Factors
(Select Ten International Series -Japan Portfolio) . . . 7
Concentration . . . . . . . . . . . . . . . . . . . . . . . 8
The Food and Beverage Industry . . . . . . . . . . . . . . . . 8
Consumer Products Companies . . . . . . . . . . . . . . . . . 8
The Health Care Industry . . . . . . . . . . . . . . . . . . . 9
Manufacturing Companies . . . . . . . . . . . . . . . . . . . 12
Natural Gas Companies . . . . . . . . . . . . . . . . . . . . 13
Petroleum Refining Companies . . . . . . . . . . . . . . . . . 15
Semiconductor, Computer and Electronics
Equipment Companies . . . . . . . . . . . . . . . . . . . . . 16
Utilities . . . . . . . . . . . . . . . . . . . . . . . 17
The Telecommunications Industry . . . . . . . . . . . . . . . 21
The Real Estate Industry . . . . . . . . . . . . . . . . . . . 25
Standard & Poor's Indexes . . . . . . . . . . . . . . . . . . 27
Rollover (Income Growth Fund, Select Ten Series
and Select Growth Portfolios) . . . . . . . . . . . . . . . . . . 30
<PAGE>
DESCRIPTION OF PORTFOLIO INVESTMENTS
Portfolio Supervision
Each Portfolio is a unit investment trust which normally follows a buy and
hold investment strategy. Traditional methods of investment management for
mutual funds typically involve frequent changes in portfolio holdings based on
economic, financial and market analyses. Because a Portfolio is not actively
managed the adverse financial condition of an issuer or its failure to maintain
its current dividend rate will not necessarily require the sale of its
securities from a Portfolio. In the event a public tender offer is made for a
security or a merger or acquisition is announced affecting a security, the
Sponsors may instruct the Trustee to tender or sell the security on the open
market when in its opinion it is in the best interest of investors to do so.
The Sponsors may also instruct a Trustee to sell a security in the following
circumstances: (i) failure to declare or pay a regular dividend on a security
or anticipated dividends generally; (ii) institution of certain legal
proceedings; (iii) other legal questions or impediments affecting the security
or payments on that security; (iv) default under certain documents adversely
affecting the declaration or payment of anticipated dividends on the security,
the issuer's general credit standing or the sound investment character of the
security, or a default on other outstanding securities of the same issuer; (v)
if a security becomes inconsistent with a Portfolio's investment objectives;
(vi) if the sale is necessary or advisable to maintain the qualification of the
Portfolio as a Regulated Investment Company under the Internal Revenue Code or
to provide funds to make any distribution for a taxable year as required by the
Internal Revenue Code; or (vii) decline in security price or other market or
credit factors that, in the opinion of Defined Asset Funds research, makes
retention of the security detrimental to the interests of investors. If there
is a failure to declare or pay a regular dividend on a security or anticipated
dividends generally on that security and the Agent for the Sponsors fails to
instruct the Trustee within 30 days after notice of the failure, the Trustee
will sell the security.
Voting rights with respect to the securities will be exercised by the Trustee
in accordance with directions given by the Sponsors.
RISK FACTORS
Equity Securities
An investment in Units of a Portfolio should be made with an understanding of
the risks inherent in an investment in equity securities, including the risk
that the financial condition of the issuers of the securities may become
impaired or that the general condition of the relevant stock market may worsen
(both of which may contribute directly to a decrease in the value of the
securities and thus in the value of the Units) or the risk that holders of
common stocks have a right to receive payments from the issuers of those stocks
that is generally inferior to that of creditors of, or holders of debt
obligations issued by, the issuers and that the rights of holders of common
stocks generally rank inferior to the rights of holders of preferred stock.
Common stocks may be especially susceptible to general stock market movements
and to volatile increases and decreases in value as market confidence in and
perceptions of the issuers change. These perceptions are based on unpredictable
factors including expectations regarding government, economic, monetary and
fiscal policies, inflation and interest rates, economic expansion or
contraction, and global or regional political, economic or banking crises.
Holders of common stocks incur more risk than holders of preferred stocks and
debt obligations because common stockholders, as owners of the entity, have
generally inferior rights to receive payments from the issuer in comparison with
the rights of creditors of, or holders of debt obligations or preferred
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stocks issued by the issuer. Holders of common stocks of the type held by a
Portfolio have a right to receive dividends only when and if, and in the
amounts, declared by the issuer's board of directors and to participate in
amounts available for distribution by the issuer only after all other claims on
the issuer have been paid or provided for. By contrast, holders of preferred
stocks have the right to receive dividends at a fixed rate when and as declared
by the issuer's board of directors, normally on a cumulative basis, but do not
participate in other amounts available for distribution by the issuing
corporation. Cumulative preferred stock dividends must be paid before common
stock dividends and any cumulative preferred stock dividend omitted is added to
future dividends payable to the holders of cumulative preferred stock.
Preferred stocks are also entitled to rights on liquidation which are senior to
those of common stocks. Moreover, common stocks do not represent an obligation
of the issuer and therefore do not offer any assurance of income or provide the
degree of protection of capital provided by debt securities. Indeed, the
issuance of debt securities or even preferred stock will create prior claims for
payment of principal, interest, liquidation preferences and dividends which
could adversely affect the ability and inclination of the issuer to declare or
pay dividends on its common stock or the rights of holders of common stock with
respect to assets of the issuer upon liquidation or bankruptcy. Further, unlike
debt securities which typically have a stated principal amount payable at
maturity (whose value, however, will be subject to market fluctuations prior
thereto), common stocks have neither a fixed principal amount nor a maturity and
have values which are subject to market fluctuations for as long as the stocks
remain outstanding. The value of the securities in a Portfolio thus may be
expected to fluctuate over the entire life of the Portfolio to values higher or
lower than those prevailing on the Portfolio's initial date of deposit. Any
monies allocated to the purchase of a security will generally be held for the
purchase of the security. However, a Portfolio may not be able to buy each
security at the same time, because of unavailability of the security or because
of any restrictions applicable to the Portfolio relating to the purchase of the
security by reason of the federal securities laws or otherwise.
International Risk Factors
Foreign Issuers. Investments in Portfolios consisting partially or entirely
of securities of foreign issuers involve investment risks that are different in
some respects from an investment in a Portfolio that invests partially or
entirely in securities of domestic issuers. Those investment risks include
future political and economic developments and the possible establishment of
exchange controls or other governmental restrictions which might adversely
affect the payment or receipt of payment of dividends on the relevant
securities. In addition, for foreign issuers that are not subject to the
reporting requirements of the Securities Exchange Act of 1934, there may be less
publicly available information than is available from a domestic issuer. Also,
foreign issuers are not necessarily subject to uniform accounting, auditing and
financial reporting standards, practices and requirements such as those
applicable to domestic issuers.
Securities issued by non-U.S. issuers generally pay dividends in foreign
currencies, and even if purchased by a Fund in American Depositary Receipt
("ADR") form in the United States, are principally traded in foreign currencies.
Therefore, there is a risk that the United States dollar value of these
securities will vary with fluctuations in the United States dollar foreign
exchange rates for the relevant currencies. Moreover, for those Securities that
are ADRs, currency fluctuations will affect the U.S. dollar equivalent of the
local currency price of the underlying domestic shares and, as a result, are
likely to affect the value of the ADRs and consequently the value of the
Securities. In addition, the rights of holders of ADRs may be different than
those of holders of the underlying shares, and the market for ADRs may be less
liquid than that for the underlying shares.
ADRs evidence American Depositary Shares which, in turn, represent common
stock deposited with a custodian in a depositary. ADRs may be sponsored or
unsponsored. In an unsponsored facility, the depositary initiates and arranges
the facility at the request of market makers and acts as agent for the ADR
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holder, while the company itself is not involved in the transaction. In a
sponsored facility, the issuing company initiates the facility and agrees to pay
certain administrative and shareholder-related expenses. Sponsored facilities
use a single depositary and entail a contractual relationship between the
issuer, the shareholder and the depositary; unsponsored facilities involve
several depositaries with no contractual relationship to the company. ADRs are
registered securities pursuant to the Securities Act of 1933 and may be subject
to the reporting requirements of the Securities Exchange Act of 1934.
Foreign Exchange Rates. A Portfolio of securities that are principally
traded in foreign currencies involves investment risks that are substantially
different from an investment in a fund which invests in securities that are
principally traded in United States dollars. This is because the United States
dollar value of a Portfolio (and hence of the Units) and of the distributions
from the Portfolio will vary with fluctuations in the United States dollar
foreign exchange rates for the relevant currencies. Most foreign currencies
have fluctuated widely in value against the United States dollar for many
reasons, including supply and demand of the respective currency, the soundness
of the world economy and the strength of the respective economy as compared to
the economies of the United States and other countries.
The post-World War II international monetary system was, until 1973,
dominated by the Bretton Woods Treaty, which established a system of fixed
exchange rates and the convertibility of the United States dollar into gold
through foreign central banks. Starting in 1971, growing volatility in the
foreign exchange markets caused the United States to abandon gold convertibility
and to effect a small devaluation of the United States dollar. In 1973, the
system of fixed exchange rates between a number of the most important industrial
countries of the world, among them the United States and most Western European
countries, was completely abandoned. Subsequently, major industrialized
countries have adopted "floating" exchange rates, under which daily currency
valuations depend on supply and demand in a freely fluctuating international
market. Many smaller or developing countries have continued to "peg" their
currencies to the United States dollar although there has been some interest in
recent years in "pegging" currencies to "baskets" of other currencies or to a
Special Drawing Right administered by the International Monetary Fund. Since
1983, the Hong Kong dollar has been pegged to the U.S. dollar although there is
no guarantee that the Hong Kong dollar will continue to be "pegged" to the U.S.
dollar in the future. In Europe a European Currency Unit ("ECU") has been
developed. Currencies are generally traded by leading international commercial
banks and institutional investors (including corporate treasurers, money
managers, pension funds and insurance companies.) From time to time, central
banks in a number of countries also are major buyers and sellers of foreign
currencies, mostly for the purpose of preventing or reducing substantial
exchange rate fluctuations.
Exchange rate fluctuations are partly dependent on a number of economic
factors including economic conditions within countries, the impact of actual and
proposed government policies on the value of currencies, interest rate
differentials between the currencies and the balance of imports and exports of
goods and services and transfers of income and capital from one country to
another. These economic factors are influenced primarily by a particular
country's monetary and fiscal policies (although the perceived political
situation in a particular country may have an influence as well--particularly
with respect to transfers of capital.) Investor psychology may also be an
important determinant of currency fluctuations in the short run. Moreover,
institutional investors trying to anticipate the future relative strength or
weakness of a particular currency may sometimes exercise considerable
speculative influence on currency exchange rates by purchasing or selling large
amounts of the same currency or currencies. However, over the long term, the
currency of a country with a low rate of inflation and a favorable balance of
trade should increase in value relative to the currency of a country with a high
rate of inflation and deficits in the balance of trade.
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The Trustee will estimate current exchange rates for the relevant currencies
based on activity in the various currency exchange markets. However, since
these markets are volatile and are constantly changing, depending on the
activity at any particular time of the large international commercial banks,
various central banks, large multi-national corporations, speculators and other
buyers and sellers of foreign currencies, and since actual foreign currency
transactions may not be instantly reported, the exchange rates estimated by the
Trustee may not be indicative of the amount in United States dollars a Portfolio
would receive had the Trustee sold any particular currency in the market.
The foreign exchange transactions of a Portfolio may be concluded by the
Trustee with foreign exchange dealers acting as principals either on a spot
(i.e., cash) buying basis or on a forward foreign exchange basis on the date a
Portfolio is entitled to receive the applicable foreign currency. These forward
foreign exchange transactions will generally be of as short a duration as
practicable and will generally settle on the date of receipt of the applicable
foreign currency involving specific receivables or payables of the Portfolio
accruing in connection with the purchase and sale of its securities and income
received on the securities or the sale and redemption of Units. These
transactions are accomplished by contracting to purchase or sell a specific
currency at a future date and price set at the time of the contract. The cost
to a Portfolio of engaging in these foreign currency transactions varies with
such factors as the currency involved, the length of the contract period and the
market conditions then prevailing. Since transactions in foreign currency
exchange are usually conducted on a principal basis, fees or commissions are not
normally involved. Although foreign exchange dealers trade on a net basis they
do realize a profit based upon the difference between the price at which they
are willing to buy a particular currency (bid price) and the price at which they
are willing to sell the currency (offer price.) The relevant exchange rate used
for evaluations of securities will include the cost of buying or selling, as the
case may be, of any forward foreign exchange contract in the relevant currency
to correspond to the requirement that Units when purchased settle on a regular
basis and that the Trustee settle redemption requests in United States dollars
within seven days.
Exchange Controls. On the basis of the best information available to the
Sponsors at the present time none of the securities, except as otherwise
indicated in a Portfolio's prospectus, is subject to exchange control
restrictions under existing law which would materially interfere with payment to
a Portfolio of amounts due on securities either because the particular
jurisdictions have not adopted any currency regulations of this type or because
the issues qualify for an exemption or the Portfolio, as an extraterritorial
investor, has qualified its purchase of securities as exempt by following
applicable "validation" or similar regulatory or exemptive procedures. However,
there can be no assurance that exchange control regulations might not be adopted
in the future which might adversely affect payments to a Portfolio.
In addition, the adoption of exchange control regulations and other legal
restrictions could have an adverse impact on the marketability of international
securities in a Portfolio and on the ability of a Portfolio to satisfy its
obligation to redeem Units tendered to the Trustee for redemption.
Liquidity. Foreign securities generally have not been registered under the
Securities Act of 1933 and may not be exempt from the registration requirements
of the Act. Sales of non-exempt securities by a Portfolio in United States
securities markets are subject to severe restrictions and may not be
practicable. Accordingly, sales of these securities by a Portfolio will
generally be effected only in foreign securities markets. Although the Sponsors
do not believe that a Portfolio will encounter obstacles in disposing of the
securities, investors should realize that the securities may be traded in
foreign countries where the securities markets are not as developed or efficient
and may not be as liquid as those in the United States. To the extent the
liquidity of these markets becomes impaired, however, the value of a Portfolio
when responding to a substantial volume of requests for redemption of Units
(should redemptions be necessary despite the market making activities of the
Sponsors) received at or about the same time could be adversely
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affected. This might occur, for example, as a result of economic or political
turmoil in a country in whose currency a Portfolio had a substantial portion of
its assets invested, or should relations between the United States and a foreign
country deteriorate markedly. Even though the securities are listed, the
principal trading market for the securities may be in the over-the-counter
market. As a result, the existence of a liquid trading market for the
securities may depend on whether dealers will make a market in the securities.
There can be no assurance that a market will be made for any of the securities,
that any market for the securities will be maintained or of the liquidity of the
securities in any markets made. In addition, a Portfolio may be restricted
under the Investment Company Act of 1940 from selling securities to any Sponsor.
The price at which the securities may be sold to meet redemptions and the value
of a Portfolio will be adversely affected if trading markets for the securities
are limited or absent.
Additional Hong Kong Risk Factors (Select Ten International Series-Hong Kong
Portfolio)
The information set forth below has been extracted from various governmental
and private publications, but no representation can be made as to its accuracy;
furthermore, no representation is made that any correlation exists between the
state of the economy of Hong Kong and the value of any securities held by a Hong
Kong Portfolio.
Hong Kong's Reversion to Chinese Sovereignty. Hong Kong will revert to
Chinese sovereignty effective July 1, 1997 with Hong Kong becoming a Special
Administrative Region ("SAR") of China. Although China has committed by treaty
to preserve for 50 years the economic and social freedoms currently enjoyed in
Hong Kong, the continuation of the economic system in Hong Kong after the
reversion will be dependent on the Chinese government and there can be no
assurances that the commitment made by China regarding Hong Kong will be
maintained. Legislation has recently been enacted in Hong Kong that will extend
democratic voting procedures for Hong Kong's legislature. China has expressed
disagreement with this legislation which it states is in contravention of the
principles evinced in the Basic Law of the Hong Kong SAR. The National People's
Congress of China has passed a resolution to the effect that the Legislative
Council and certain other councils and boards of the Hong Kong Government will
be terminated on June 30, 1997. It is expected that such bodies will be
subsequently reconstituted in accordance with China's interpretation of the
Basic Law. China and Great Britain have also yet to resolve their differences
on other issues relating to the reversion to sovereignty including the financing
of and construction of a new international airport on Lantau Island. Any
increase in uncertainty as to the future economic and political status of Hong
Kong could have a materially adverse effect on the value of a Hong Kong
Portfolio.
Most Favored Nation Status. China (like most other nations) currently enjoys
a most favored nation status ("MFN Status") from the United States, which is
subject to annual review by the President of the United States. On June 3,
1995, President Clinton signed an executive order which renewed China's MFN
Status for another year. Congress, which has to review China's standing every
year, renewed the MFN Status on July 20, 1995. Revocation of the MFN Status
would have a severe effect on China's trade and thus could have a materially
adverse effect on the value of a Hong Kong Portfolio.
Other Economic Factors. The performance of certain companies listed on the
Hong Kong Exchange is linked to the economic climate of China. For example,
between 1985 and 1990, Hong Kong businesses invested US$20 billion in the nearby
Chinese province of Guangdong to take advantage of the lower property and labor
costs than were available in Hong Kong. Recently, however, high economic growth
in this area (industrial production grew at an annual rate of about 20% in 1991,
24% in 1992 and 36.5% in 1993) has been associated with rising inflation and
concerns about the devaluation of the Chinese currency. Any downturn in
economic growth or increase in the rate of inflation in China could have a
materially adverse effect on the value of a Hong Kong Portfolio.
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Additional Japan Risk Factors (Select Ten International Series - Japan Portfolio
The information set forth below has been extracted from various governmental
and private publications, but no representation can be made as to its accuracy;
further, no representation is made that any correlation exists between the state
of the economy of Japan and the value of any securities held by a Japan
Portfolio.
Cross-Shareholding structure. Investing in Japanese stocks involves certain
risks and considerations not associated with investing in securities of
established U.S. companies. Japanese corporate (keiretsu) groups involve a
relatively high level of cross-shareholding among the companies in the groups.
This cross-shareholding is a characteristic of the Japanese equities market.
Consequently, Japanese equities markets may be affected by market developments
in different ways than U.S. securities markets and may be more volatile than
U.S. securities markets.
Export-Led Economy. The Japanese economy is focused on exports, the major
source of Japan's wealth. Natural disasters like the earthquake at Kobe may have
a negative impact on Japan's export-led economy. Trade disputes between Japan
and other countries such as the United States and between Japan and trading
blocs such as the European Community may also have a negative impact on Japan's
export-led economy.
Japanese Government Regulation. In general, the acquisition of shares in a
Japanese company listed on any stock exchange in Japan from a resident of Japan
(including a corporation) by a non-resident of Japan (including a corporation)
requires prior notification to the Minister of Finance of Japan (the "Minister
of Finance") of the proposed transaction. If the acquisition is made from or
through a securities company designated by the Minister of Finance (as will
generally be the case with the Fund), such prior notification is not required,
subject to the quantity restrictions referred to below. The Foreign Exchange and
Foreign Trade Control Law of Japan, as amended, and cabinet orders and
minsterial ordinances thereunder currently in effect (the "Foreign Exchange
Controls"), give the Minister of Finance the power, in certain limited and
exceptional circumstances, to require prior approval for any such acquisition.
If a foreign investor intends to acquire shares of a Japanese corporation and
as a result of such acquisition the foreign investor would directly or
indirectly hold 10% or more of the total outstanding shares of that corporation,
such foreign investor must file a report after such acquisition with the
Minister of Finance and any other Minister with proper jurisdiction. In
instances where such acquisition concerns national security or meets certain
other conditions specified in the Foreign Exchange Controls, such foreign
investor must file a prior notification in respect of the proposed acquisition
with the Minister of Finance and any other Minister with proper jurisdiction.
Such Ministers may make a recommendation to modify or prohibit the proposed
acquisition if they consider that such acquisition falls under certain limited
conditions specified in the Foreign Exchange Controls. If the foreign investor
does not accept the recommendation, such Ministers may issue an order modifying
or prohibiting the acquisition. The Fund will be considered a foreign investor
for this purpose.
The acquisition of shares by non-resident shareholders by way of stock
splits, as well as the acquisition of shares of a Japanese company that are
listed on a Japanese stock exchange by non-residents upon exercise of warrants
or conversion of convertible bonds issued outside Japan, are not subject to any
of the foregoing notification or reporting requirements. Under the Foreign
Exchange Controls, dividends paid on shares held by non-residents of Japan and
the proceeds of any sales of shares within Japan may, in general, be converted
into any foreign currency and remitted abroad. The Fund will be considered a
non-resident of Japan for this purpose.
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There can be no assurance that under the Foreign Exchange Controls the
Minister of Finance will not require prior approval for an acquisition by the
Fund of shares listed on the First Section of the Tokyo Stock Exchange, or that
the Minister of Finance or any other Minister will not recommend modification or
prohibition of the direct or indirect acquisition by the Fund of greater than
10% of the shares of a Japanese corporation.
Concentration
A Portfolio may contain or be concentrated in securities of issuers engaged
in the categories discussed below. An investment in a Portfolio should be made
with an understanding of the risks that these securities may entail, certain of
which are described below.
The Food and Beverage Industry
The Portfolio may be concentrated in stocks of the food and beverage
industry, including manufacturers of packaged foods, processors of agricultural
products, beverage companies and food distributors. There are many factors that
may have an adverse impact on the value of the stocks of these companies and
their ability to pay dividends. These factors include the sensitivity of
revenues, earnings, and financial condition to economic conditions, changing
consumer demands or preferences, fluctuations in the prices of agricultural
commodities, fluctuations in the cost of other raw materials such as packaging,
and the effects of inflation on pricing flexibility. The revenues and earnings
of these companies can also be affected by extensive competition that can result
in lost sales or in lower margins resulting from efforts to maintain market
share. Food and beverage companies are also subject to regulation under various
federal laws--such as the Food, Drug, and Cosmetic Act--as well as state, local
and foreign law and regulations. Costs associated with changing regulatory
restrictions, such as food labeling requirements, could adversely affect
earnings. Food and beverage companies are also becoming increasingly exposed to
risk associated with international operation, including foreign currency
fluctuations and future political and economic developments in other countries.
Other risk factors include potential deterioration in financial condition
resulting from litigation related to product liability, accidents, or trademark
or patent disputes; unfunded pension liability; changing accounting standards,
such as Statement of Financial Accounting Standard No. 106, which requires
accrual accounting for postretirement benefits other than pensions; and
leveraged buyouts, takeovers, or recapitalizations.
Consumer Products Companies
Investment in securities issued by consumer products companies should be made
with an understanding of the many factors which may have an adverse impact on
the credit quality of the particular company or industry. These include
cyclicality of revenues and earnings, changing consumer demands, regulatory
restrictions, products liability litigation and other litigation resulting from
accidents, extensive competition (including that of low-cost foreign companies),
unfunded pension fund liabilities and employee and retiree benefit costs and
financial deterioration resulting from leveraged buy-outs, takeovers or
acquisitions. In general, expenditures on consumer products will be affected by
the economic health of consumers. A continuing weak economy with its consequent
effect on consumer spending would have an adverse effect on the industry. Other
factors of particular relevance to the profitability of the industry are the
effects of increasing environmental regulation on packaging and on waste
disposal, the continuing need to conform with foreign regulations governing
packaging and the environment, the outcome of trade negotiations and their
effect on foreign subsidies and tariffs, foreign exchange rates, the price of
oil and its effect on energy costs, inventory cutbacks by retailers,
transportation and distribution costs, health concerns relating to the
consumption of certain products, the effect of demographics on consumer demand,
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the availability and cost of raw materials and the ongoing need to develop new
products and to improve productivity.
The Health Care Industry
Companies in the health care industry face numerous risks. Most health care
companies are extensively regulated. All are subject to extreme cost-containment
pressures and as a result they cannot readily raise prices for their products or
services, or may experience price declines. Most are subject to intensive
competition and are required to spend vast amounts of capital to keep pace with
technological innovation. These constraints affect the various health care
sectors in the Portfolio in specific ways. Strategic alliances are being formed
by drug companies, hospital supply companies, HMOs, hospitals, and to a lesser
extent other health care companies to reduce costs and benefit from economies of
scale. The inability to form such alliances on favorable terms or to compete
with other alliances could adversely affect a company's profits and the price of
its securities.
Many problems faced by drug companies, hospital supply companies and medical
devices companies typify those faced by health care industry in general. These
companies are regulated by the federal Food and Drug Administration (the "FDA".)
The FDA regulates the development, manufacture and marketing of all drugs and
medical products. Before a product can be sold it must receive FDA approval, a
long and very costly process. Governments and large, private health care
consumers are exerting strenuous efforts to contain health care costs. The
federal government and increasing numbers of insurance companies reimburse
health care providers on a "prospective payment basis". This means the physician
or hospital is only paid a predetermined amount depending upon the patient's
diagnosis. If the cost of treatment exceeds the predetermined amount, the
physician or hospital will lose money, if it is less, money will be made. This
creates an incentive to prescribe cheaper, generic substitutes for brand-name
drugs and causes significant profit erosion for drug companies. Some states have
laws requiring pharmacists to dispense generic drugs unless precluded by the
prescribing physician. Other states set up auctions among drug companies to
determine which company will agree to meet their needs at the lowest
price.Therefore, the cost of marketing a drug is increasing while at the same
time it is becoming increasingly difficult to recoup that cost. Future trends in
drug pricing remain unclear. HMOs and other third-party payors are gaining power
and demanding larger discounts. The United States account for 35% of the global
drug market, so demand for drugs from foreign countries, particularly developed
countries is important, and cannot be predicted. Foreign countries are demanding
discounts as well.
Drug companies must devote large amounts of risk capital to research and
development in order to develop new and unique drugs with patent protection from
generic substitutes and other competitors. Drug companies also face the risk of
large product liability suits and consequently expensive liability insurance.
Finally, technological change is becoming increasingly rapid and products tend
to become obsolete more quickly than before.
Hospital supply companies face the risk that hospitals will delay purchases
because they fear health care reform. (See Health Care Reform below.) Hospitals
are also increasingly demanding discounts and that pressure may continue to grow
as hospitals consolidate.
The facilities served by hospital management companies are subject to
extensive regulation on federal, state and local levels. Many states require
hospital management companies to submit their financial statements for review
and some even regulate the rates they charge. When treatment costs are
reimbursed by third parties such as Medicare or Medicaid, hospitals have to work
within the discipline of the prospective payment system and also face more
specific cost-containment measures. The effort to reduce costs has resulted in a
movement away from more expensive inpatient treatment to treatment on an out-
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patient basis or in specialized facilities. This has reduced bed-occupancy rates
in the large general hospitals and affected revenues adversely. Furthermore, the
revenues and expenses of hospitals and other health care facilities will be
affected by future events and conditions including, among other things, the
demand for health care services at the particular type of facility, increasing
costs of medical technology, utilization practices of physicians and physicians'
confidence in the facilities, the ability of the facilities to provide the
services required by patients, greater longevity and the higher medical expenses
of treating the elderly, medical and other scientific advances resulting in
decreased usage of health care facilities, increased costs associated with
attracting and maintaining qualified physicians, nurses and other technical
staff, employee strikes and other adverse labor actions, economic developments
in the service area, demographic changes, the occurrence of natural disasters,
and increased competition from other similar facilities or alternative health
care providers. Hospital management and medical devices companies may be
adversely affected by proposed health care reforms, including various insurance
market reforms, significant reductions in Medicare and Medicaid payments to
providers, and stringent government cost controls that would directly control
insurance premiums and indirectly affect the fees of hospitals, physicians and
other health care providers. Other proposals, uncompensated care provided by
hospitals. It is not possible at this time to predict what, if any, reforms will
be adopted in the future. (See Health Care Reform below.)
Hospitals may be adversely affected by competitive pressure to consolidate.
There can be no assurance that hospitals will be able to make profitable
acquisitions. Hospitals may be subject to federal, state or insurer inquiries or
investigations, which may lead to sanctions. Hospitals also face the risk of
large liability suits and must carry expensive liability insurance and maintain
loss reserves, which may not be sufficient to cover claims. To the extent
hospital management companies are adversely impacted by any of the foregoing,
services companies and medical devices companies would also be affected
adversely.
While the biotechnology companies in the Portfolio are among the more
established in their field, the biotechnology industry in general is an emerging
growth industry. They are regulated by the FDA to the same extent as traditional
drug companies. As emerging growth companies, they may be thinly capitalized and
more susceptible to general market fluctuations than companies with greater
capitalization. Also, the stocks of emerging growth companies trade at higher
price-to-earnings multiples than the stock of more established companies because
the price is more influenced by investor confidence in future earnings than
recorded historic earnings. Therefore, the stock prices can be extremely
volatile as investor confidence rises or ebbs or as the issuer or its
competitors announce new products. In addition, the liquidity of the stocks of
young companies can be limited and therefore subject to greater price
fluctuations when large numbers of shares are bought and sold. These companies
often have a limited operating history with inexperienced but highly motivated
management, who may retain effective control over the voting stock of the
company. Earnings are generally retained to finance the company's expansion and
thus no dividends may be paid and additional capital may be required to market
new products on a commercial basis. The biotechnology companies may also be
dependent for their revenues upon only a few products and upon larger drug
companies (who may be their competitors) to produce and market their products.
This dependence upon a limited range or products increases the damage that would
be caused by product obsolescence, a risk that is greater in a rapidly
developing area like biotechnology. There exists doubt as to the extent of
patent protection that will be afforded products developed through
biotechnology. At its simplest, biotechnology involves the identification of
genes that produce proteins useful in the combat of disease. Once identified,
the gene can be separated and used to produce commercial quantities of the
protein. As the protein production processes are broadly similar, patent
protection has generally been extended only to the identified gene. This allows
the identified gene to be used offshore to produce the drug for sale in the
United States, without any infringement of U.S. patent law. If this practice
were to become widespread it would significantly affect the revenues of
biotechnology companies. The application of patent law to biotechnology
companies. The application of patent law to biotechnology in general is the
subject of much academic and legislative attention which may result in changes
in the law.
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HMOs are subject to federal and state regulation. Most states require HMOs to
provide periodic financial reports and some even require HMOs to maintain
minimum reserve requirements. HMOs are paid a fixed membership fee. HMOs are
turning to "capitation," where they contract to provide services for a certain
population for a set price, regardless of whether or not the service is
provided. Depending on the negotiated provisions of the contract, costs in
excess of set fees may be borne either by the HMO or the health care provider.
HMOs run the risk that inflation, epidemics, lack of financial discipline among
professional staff and the need to acquire new technology will increase
treatment costs and erode profits. In addition, HMOs face the risk of saturation
in some markets. Where that occurs, they will be forced to incur the expense of
marketing in new geographic areas and developing new products and services. They
are expected to face extreme pressure to increase premiums, while they face the
risk that regulators may seek to limit their profits. In addition, up to half of
an HMO's enrollees may be Medicare beneficiaries whose membership fees are paid
by the HCFA under so-called "Senior Plans". Thus, for a fixed fee, HMOs are
exposed to higher and more expensive health care utilization by the elderly. The
HCFA also regulates the profit an HMO can make on a Senior Plan and the quality
of care provided by a Senior Plan. Finally, HMOs may be adversely affected by
the proposed Medicare and Medicaid reforms, which would significantly reduce
Medicare and Medicaid payments to providers. It is not possible to predict what,
if any, reforms will be adopted in the future. (See Health Care Reform below.)
Services companies face each of the risks confronted by HMOs. They also face
the pressures of increased competition. To diversify or expand the level of
products or services, some companies have been aggressive in acquiring related
corporations. Often unforeseen costs of an acquisition can negatively affect
profits particularly in the periods immediately subsequent to an acquisition.
Nursing home companies have historically grown through acquisitions, and
there is no assurance that suitable acquisitions can be identified or completed
in the future. Acquisitions are dependent on financing and on personnel, which
may not be available. Even if they are successfully completed, acquisitions may
entail unanticipated business risks or legal liabilities. Nursing homes face
federal, state and local governmental regulation. Failure to comply with
applicable laws and regulations could result, in extreme circumstances, in the
revocation of a facility's license. There can be no assurance that future
regulatory changes will not have an adverse impact. (See Regulation, Litigation
and Other Legislation.) At the same time, nursing home companies face tough
competition from new facilities with greater financing, whether from tax
exemptions, government support, endowments or charitable contributions that are
not available to profit-seeking corporations. Other competitors include
companies providing rehabilitation therapy, home care services, respiratory
treatment and clinical labs. Additional competitive factors may arise in the
future.
Nursing homes may also be affected by the proposed health care reforms.
Proposals include various insurance market reforms, significant reductions in
Medicare and Medicaid payments to providers, and stringent government cost
controls that would directly control insurance premiums and indirectly affect
the fees of hospitals, physicians and other health care providers, particularly
home oxygen respiratory services. It is not possible to predict what, if any,
reforms will be adopted in the future. (See Health Care Reform.) States may also
act to reduce Medicare and Medicaid reimbursement for long-term care.
Home care companies face uncertain payment structures. Presently, some
clients are charged more than others, and regulatory authorities have been
reviewing billing practices for fairness. Home care companies may also be
affected by proposed health care reforms, specifically those which may limit the
fees of health care providers, particularly home oxygen respiratory services. It
is not possible to predict what, if any, reforms will be adopted in the future.
(See Health Care Reform below.) Home care companies are expected to face the
same severe cost containment pressures facing other companies in the health care
industry.
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Health Care Reform. In late 1993, President Clinton submitted to Congress
proposed comprehensive health care reform legislation. Key elements in the
President's proposal included various insurance market reforms, the requirement
that business provide health insurance coverage for their full-time and part-
time employees, significant reductions in future Medicare and Medicaid payments
to providers, and stringent government costs controls that would directly
control insurance premiums and indirectly affect the fees of hospitals,
physicians and other healthcare providers. Several other comprehensive reform
proposals were introduced in the Congress, including alternatives introduced by
the House and Senate majority leaders in 1994. The proposals covered cost
controls on hospitals, insurance market reform to increase the availability of
group health insurance to small businesses, requirements that all businesses
offer health insurance coverage to their employees and the creation of a single
government health insurance plan that would cover all citizens. Health care
reform legislation is also pending in a number of states.
Certain aspects of the proposals offered in 1994, such as reductions in
Medicare/Medicaid payments and increased reliance on managed competition, if
adopted, could adversely affect the issuers in the Portfolio. Other aspects of
the proposals, such as universal health insurance coverage, could have a
positive impact on certain issuers in the Portfolio, for example by reducing the
amount of uncompensated care provided by hospitals. Congress is currently
debating major health care reform proposals. It is not possible at this time to
predict what, if any, reforms will be adopted by the Congress or various state
legislatures, or when such reforms will be adopted or implemented. No assurance
can be given that any such reforms will not have a material adverse impact on
the revenues and earnings of the issuers in the Portfolio.
Regulation, Litigation and Other Legislation. Companies in the health care
industry are subject to extensive federal, state and local governmental
regulation relating to licensing, conduct of operations, billing and
reimbursement, relationships with physicians, construction of new facilities,
expansion or acquisition of existing facilities and the offering of new
services. Failure to comply with applicable laws and regulations could result
in, among other things, the imposition of fines, temporary suspension of
admission of new patients to the facility or, in extreme circumstances,
exclusion from participation in government health care reimbursement programs
such as Medicare and Medicaid or the revocation of facility licenses. There can
be no assurance that future regulatory changes will not have an adverse impact
on any of the issuers in the Portfolio.
Companies in the health care industry continue to derive a substantial
portion of their revenue from the Medicare and Medicaid programs. Funds received
from these programs are subject to audit, which can result in retroactive
adjustments to such payments. These programs are highly regulated and subject to
frequent and, in certain cases, substantial changes. Recent changes designed to
control health care costs have resulted both in pressure on hospitals and other
health care providers to reduce their costs and in reduced levels of
reimbursement for a substantial portion of hospital procedures and costs.
Tax law changes have discouraged private contributions to hospitals and
health care facilities and have limited somewhat the use of tax-exempt bonds to
finance health care facilities, all of which could adversely affect the ability
of these facilities to finance their future capital needs and could have other
adverse effects which cannot be predicted. The Internal Revenue Service has
become more aggressive in penalizing hospitals for violating tax codes.
Manufacturing Companies
Growth in the manufacturing industry is closely linked to expansion in the
domestic and global economies. The ongoing global recession with its consequent
effect on industrial growth, employment and
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consumer spending in addition to any increase in oil prices or in interest rates
may lead to a decrease in demand for the products of companies engaged in
manufacturing industrial and automotive products. Also, since the federal
government and many state, local and foreign governments now have a budget
deficit, financial expenditures by these entities on capital improvements may be
extremely limited. The lack of funds allocated by public entities to capital
improvement projects may adversely affect manufacturers engaged in the
production of industrial materials used for capital improvements or for the
upgrade of the infrastructure. Indeed, government contracts with certain
issuers may contain unfavorable provisions, including provisions allowing the
government to terminate these contracts without prior notice, or to audit and
redetermine amounts payable to the issuer pursuant to these contracts or to
require the issuer to pay for cost overruns. Additionally, legislation to limit
excess profits on government contracts is introduced in the United States
Congress from time to time. Cutbacks in defense spending by the federal and
foreign governments has adversely impacted many of the companies engaged in the
aerospace and arms/defense sectors of the manufacturing industry.
Environmental and safety issues increasingly affect the manufacturing
industry. Issuers may experience decreases in profitability as legislative
mandates impose costs associated with compliance with environmental regulations
and manufacturing more environmentally sound and safer equipment. Furthermore,
the cost of product liability insurance and the inability of some manufacturing
companies to obtain this insurance may have an adverse impact on the industry.
Financial Accounting Standard Board regulations with regard to accounting for,
among other things, post retirement benefits may lead to changes in accounting
which could have significant negative effects on reported earnings and reported
long term liabilities and book value of some manufacturing companies. The lack
of demand for new home and office construction will affect the demand for
certain tools and industrial machinery products. Inflation, slow growth in
personal disposable income, tighter loan qualification standards, higher
downpayments, the lower rate of job creation, increased cost of vehicle
ownership and operation and oil prices will also affect companies engaged in
manufacturing, particularly in the automotive industry. Shortages of skilled
labor, particularly in the machine tools industry, may become a major problem in
the future.
The long-term outlook is largely dependent upon the growth and
competitiveness of the U.S. manufacturing base. Increased consolidation and
merger activity increases competitiveness in general but individual companies
may experience severe financial problems due to this increased competitiveness.
Strong competition from foreign nations, particularly Latin American and Pacific
Rim countries which have lower labor costs, will severely impact the
profitability of the U.S. manufacturing business. The continuing establishment
of manufacturing and sales facilities abroad to take advantage of international
marketing operations is crucial and the success of these foreign operations
could be affected by a strengthening of the dollar which could lead to a
decrease in demand for U.S. products, the outcome of trade negotiations which
will affect foreign tariffs on U.S. exports abroad and U.S. taxes on foreign
imports to the U.S. and the ability to provide attractive financing packages to
customers in the current tight credit market.
U.S. manufacturers may also experience increased outlays of capital in their
efforts to manufacture products which comply with foreign standards for certain
manufacturing products. Also, since contracts may often be concluded with
entities or governments of unstable foreign nations in, for example, Eastern
Europe, South America or the Middle East, completion of and payment for certain
products and services will be subject to the risks associated with political
instability such as the risk of insurrection, hostilities from the local
population, government policies against businesses owned by non-nationals and
the possibility of expropriation. Certain of these nations may not honor
obligations under contracts when payments are due. Furthermore, it may be more
difficult to enforce a judgment against a foreign contracting party.
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Natural Gas Companies
Stocks of companies engaged in the exploration and production, transmission
or distribution of natural gas may include integrated natural gas companies that
explore for and produce natural gas and transport and deliver it to customers;
natural gas transmission companies, commonly called pipelines, that sell at
wholesale to other pipelines and to distribution companies; natural gas
distribution companies that service residential, commercial and industrial
customers; natural gas exploration and production companies; and drilling
companies that service natural gas exploration and production companies. These
companies derive or are expected to derive at least 25% of their sales and
operating income from the natural gas industry. Factors which the Sponsors
believe may increase demand for natural gas include the encouragement of the use
of natural gas by the recent amendments to the Clean Air Act, the cleanliness of
natural gas as a fuel coupled with the increased concern about the environment,
use by electric utilities of natural gas as a primary fuel source as a result of
the repeal of the Fuel Use Act in 1987 and the increased use of natural gas in
co-generation of electricity. The profitability of natural gas operations could
be enhanced by the 1990 amendments to the Clean Air Act, which should increase
demand for natural gas products by electric utilities and other energy
consumers. The Commerce Department predicts that natural gas will be a growing
source of energy during the 1990s, because of projected higher costs for oil and
because natural gas is a cleaner burning fuel. The transportation industry may
make increased use of natural gas in order to meet more stringent mileage and
emissions requirements. There are significant constraints on increased use of
natural gas however, including a potential need for additional pipelines.
Additionally, companies involved in natural gas processing may experience
difficulties in the long term if product prices do not keep pace with potential
increases in gas costs.
Natural gas utilities are generally subject to extensive regulation by state
utility commissions or by the Federal Energy Regulatory Commission ("FERC"), in
the case of pipeline companies, which, for example, establish the rates that may
be charged and the appropriate rate of return on an approved asset base. FERC,
through Order 636, unbundles natural gas services and allows for additional
competition. Certain natural gas utilities have had difficulty from time to time
in persuading regulators, who are subject to political pressures, to grant rate
increases necessary to maintain an adequate return on investment and voters in
many states have the ability to influence limits on rate adjustments (for
example, through election of utilities commissioners, by initiative or by
referendum.) Any unexpected limitations could negatively affect the
profitability of natural gas utilities. In addition, gas pipeline and
distribution companies have had difficulties in adjusting to short and surplus
energy supplies, enforcing or being required to comply with long-term contracts
and avoiding litigation from their customers, on the one hand, or suppliers, on
the other.
General problems of the natural gas utility industry include difficulty in
obtaining timely and adequate rate increases, recovery of take-or-pay costs, the
uncertainty of transmission service costs for both interstate and intrastate
transactions, changes in tax laws which adversely affect a natural gas utility's
ability to operate profitably, reduced demand for natural gas in certain areas
of the country, competition from electricity and oil in the residential and
commercial markets, restrictions on operations and increased insurance premiums
and other costs and delays attributable to environmental considerations,
uncertain availability and increased cost of capital and availability and cost
of natural gas for resale. Pipeline companies may be subject to increased
competition because of approval by FERC of the construction of new pipelines and
delays because of the need to obtain FERC approval of new gas contracts. The
natural gas utility business is highly seasonal and weather sensitive. In
addition, natural gas competes directly with oil for industrial uses and large
industries have retained the flexibility to switch from natural gas to oil;
consequently, a fall in oil prices could prevent natural gas prices from rising
or result in a loss of customers because of conversions to oil. Natural gas
competes with coal in the utility market as a boiler fuel. Exploration and
production companies could be impacted in a period of declining natural gas
prices.
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Further, any future scientific advances concerning new sources of energy and
fuels or legislative changes with respect to the energy industry or the
environment could have a negative impact on the natural gas industry. And, while
legislation has recently been enacted to deregulate certain aspects of the
natural gas industry, no assurances can be given that new or additional
regulations will not be adopted. Each of the problems referred to could
adversely affect the financial stability of the issuers of any natural gas
stocks in a Fund.
Petroleum Refining Companies
According to the U.S. Department of Commerce, the factors which will most
likely shape the petroleum refining and marketing industry to 1996 and beyond
include the price and availability of oil, general global economic conditions,
changes in United States regulatory policies, international events and the
continued decline in U.S. production of crude oil. Possible effects of these
factors may be increased U.S. and world dependence on oil from both the
Organization of Petroleum Exporting Countries ("OPEC") and non-OPEC sources,
highly uncertain and potentially more volatile oil prices and a higher rate of
growth for natural gas production than for other fuels.
The refining industry is highly competitive with margins sensitive to supply
and demand cycles. Declining U.S. crude oil production will likely lead to
increased dependence on OPEC oil, putting refiners at risk of continued and
unpredictable supply disruption. The existence of surplus crude oil production
capacity and the willingness to adjust production levels are the two principal
requirements for stable crude oil markets. Without excess capacity, supply
disruptions in some countries cannot be compensated for by others.
Although unused capacity can contribute to market stability, it also creates
pressure to overproduce and contributes to market uncertainty. The likely
restoration of a large portion of Kuwait and Iraq's production and export
capacity over the next few years could lead to market disruptions in the absence
of substantial growth in world oil demand. Formerly, OPEC members attempted to
exercise control over production levels in each country through a system of
mandatory production quotas. The mandatory system has since been replaced with
a voluntary system. Production under the new system has had to be curtailed on
at least one occasion as a result of weak prices, even in the absence of
supplies from Iraq. The pressure to deviate from mandatory quotas, if they are
reimposed, is likely to be substantial and could lead to a weakening of prices.
Fluctuations in demand for oil-related products could also effect the
profitability of oil companies. If world oil demand increases additional
capacity and production will be required to compensate for expected sharp drops
in U.S. crude oil production and exports from the former Soviet Union. Only a
few OPEC countries, particularly Saudi Arabia, have the petroleum reserves that
will allow the required increase in production capacity to be attained. Given
the large-scale financing that is required, the prospect that such expansion
will occur soon enough to meet the increased demand is uncertain. However, no
assurance can be given that the demand for or the price of oil will increase or
that if either anticipated increase does take place, it will not be marked by
great volatility. Lower consumer demand due to increases in energy efficiency,
gasoline reformulations that call for less crude oil, warmer winters or a
general slowdown in economic growth in this country and abroad, could negatively
affect the price of oil and the profitability of oil companies. Cheaper oil
could also decrease demand for natural gas.
Refiners are subject to extensive federal, state and local environmental laws
and regulations that will pose serious challenges to the industry over the
coming decade. Refiners are likely to be required to commit considerable
resources to plant additions and make major production adjustments in order to
comply with increasingly stringent environmental legislation, such as the 1990
amendments to the Clean Air Act. If the cost of these changes is substantial
enough to cut deeply into profits, smaller refiners may
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be forced out of the industry entirely. Additionally, refining operations are
hazardous due, in part, to the highly flammable nature of crude oil, natural gas
and refined products. As a result, refining operations are subject to personal
injury and property damage incidents.
Any future scientific advances concerning new sources of energy and fuels or
legislative changes relating to the energy industry or the environment could
have a negative impact on the petroleum product or natural gas industry. While
legislation has been enacted to deregulate certain aspects of the oil industry,
no assurances can be given that new or additional regulations will not be
adopted. Each of the problems referred to above could adversely affect the
financial stability of the issuers of any petroleum industry stocks in a
Portfolio.
Semiconductor, Computer and Electronics Equipment Companies
A Fund may be concentrated in stocks of issuers that manufacture
semiconductors, computers and electronics equipment. These kinds of companies
present certain risks that may not exist to the same degree in other industries.
The industry is rapidly developing and highly competitive, both domestically and
internationally. Technology stocks, in general, tend to be relatively volatile
as compared to other types of investments. While volatility may create
investment opportunities, it does entail risk. Companies throughout the
technology field include many smaller and less seasoned companies. These types
of companies may present greater opportunities for capital appreciation, but
usually involve greater risks. These companies may have limited product lines,
markets or financial resources, or may have limited management or marketing
personnel. In addition, the securities that have wide institutional holding are
more volatile than the securities with lower institutional holding. The
industry is also strongly affected by worldwide scientific and technological
developments and the products of these companies may rapidly fall into
obsolescence. Certain of these companies may offer products or services that
are subject to (or may become subject to) government regulation and may,
therefore, be affected adversely by government policies. Other factors that
characterize the industry include low barriers to entry, short product life
cycles, aggressive pricing and reduced profit margins, dramatic and often
unpredictable changes in growth rates, a high degree of investment needed to
maintain competitiveness, frequent new product introduction, the need to enhance
existing products, intense competition from large established companies, and
potential competition from small start up companies. In addition, these
companies are subject to events that affect manufacturing companies in general,
such as increases in material or labor costs, changes in distribution channels
and the need to manage inventory levels in line with product demand.
The Semiconductor Industry. The semiconductor industry is characterized by
rapid change in both product and manufacturing process technology. As a result,
companies are required to introduce, on an ongoing basis, more advanced process
technologies in order to respond to customer requirements. Shortages of supplies
for raw materials and equipment could occur in the future in various critical
materials and equipment due to interruption of supply or increased industry
demand. Any such shortages could result in higher costs or production delays
which could have a material adverse effect on an issuer's business and financial
condition. The industry is subject to a variety of governmental regulations
related to the use, discharge and disposal of toxic, volatile or otherwise
hazardous materials used in the manufacturing process. Any failure by a company
to use, discharge or dispose of hazardous materials appropriately could subject
it to substantial liability or could require it to suspend or adversely modify
its manufacturing operations. The semiconductor industry historically has been
characterized by wide fluctuations in product supply and demand. From time to
time, the industry also has experienced significant downturns. These downturns
have been characterized by diminished product demand, production overcapacity
and accelerated erosion of average selling prices of semiconductor products. In
some cases, these downturns have lasted for more than a year. No assurance can
be given that any company's business will not be adversely affected in the
future by cyclical conditions in the semiconductor industry. Furthermore, there
can be no
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assurance that changes in environmental regulations in the future will not
require companies to make significant capital expenditures to modify, supplement
or replace equipment or to change methods of disposal or discharge or the manner
in which they manufacture products or operate their business. Fixed costs
represent a substantial portion of the total operating costs of a semiconductor
manufacturing operation. As a result, any failure by a company to operate at
near full capacity, whether due to mechanical failure, lack of orders, fire or
natural disaster, or other causes could result in diminished profitability or
losses. The consequences of a fire, natural disaster or similar occurrence
affecting production could be particularly significant for any company. These
companies are also dependent to a substantial degree upon skilled professional
and technical personnel and there is considerable competition for the services
of qualified personnel in the semiconductor industry.
Utilities
The ability of utilities to pay dividends is dependent on various factors,
including the percentage of earnings paid out in the form of dividends ("pay out
ratio"), the rates they may charge their customers, the demand for a utility's
services and the cost of providing those services. Utilities, in particular
investor-owned utilities, are subject to extensive regulation relating to the
rates which they may charge customers. Utilities can experience regulatory,
political and consumer resistance to rate increases. Utilities engaged in long-
term capital projects are especially sensitive to regulatory lags in granting
rate increases. Any difficulty in obtaining timely and adequate rate increases
could adversely affect a utility's results of operations.
The demand for a utility's services is influenced by, among other factors,
competition, weather conditions and economic conditions. Electric utilities,
for example, have experienced increased competition as a result of the
availability of other energy sources, the effects of conservation on the use of
electricity, self-generation by industrial customers and the generation of
electricity by co-generators and other independent power producers. Also,
increased competition will result from the recent approval by the Federal Energy
Regulatory Commission ("FERC") of a proposal that forces electric utilities to
open their transmission systems to power generated by competitors. Utilities
which distribute natural gas also are subject to competition from alternative
fuels, including fuel oil, propane and coal. In addition, there is the
possibility in the future of a trend toward utilities breaking off assets under
the constraints of competition, for example, spinning off generating plants,
which will no longer be regulated.
The utility industry is an increasing cost business making the cost of
generating electricity more expensive and heightening its sensitivity to
regulation. A utility's costs are influenced by the utility's cost of capital,
the availability and cost of fuel and other factors. In addition, natural gas
pipeline and distribution companies have incurred increased costs as a result of
long-term natural gas purchase contracts containing "take or pay" provisions
which require that they pay for natural gas even if natural gas is not taken by
them. There can be no assurance that a utility will be able to pass on these
increased costs to customers through increased rates. Utilities could in the
future incur substantial capital expenditures for plant and equipment. In the
future they will also incur increasing capital and operating expenses to comply
with environmental legislation such as the Clean Air Act of 1990, and other
energy, licensing and other laws and regulations relating to, among other
things, air emissions, the quality of drinking water, waste water discharge,
solid and hazardous substance handling and disposal, and siting and licensing of
facilities. Environmental legislation and regulations are changing rapidly and
are the subject of current public policy debate and legislative proposals. It
is increasingly likely that some or many utilities will be subject to more
stringent environmental standards in the future that could result in significant
capital expenditures. Future legislation and regulation could include, among
other things, regulation of so-called electromagnetic fields associated with
electric transmission and distribution lines as well as emissions of carbon
dioxide and other so-called greenhouse gases associated with the burning of
fossil fuels. Compliance with these requirements
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may limit a utility's operation, offset by credits having been built up, or
require substantial investments in new equipment and, as a result, may adversely
affect a utility's results of operations.
The electric utility industry in general is subject to various external
factors including (a) the effects of inflation upon the costs of operation and
construction, (b) uncertainties in predicting future load requirements, (c)
increased financing requirements coupled with limited availability of capital,
(d) exposure to cancellation and penalty charges on new generating units under
construction, (e) problems of cost and availability of fuel, (f) compliance with
rapidly changing and complex environmental, safety and licensing requirements,
(g) litigation and proposed legislation designed to delay or prevent
construction of generating and other facilities, (h) the uncertain effects of
conservation on the use of electric energy, (i) uncertainties associated with
the development of a national energy policy, (j) regulatory, political and
consumer resistance to rate increases and (k) increased competition as a result
of the availability of other energy sources. These factors may delay the
construction and increase the cost of new facilities, limit the use of, or
necessitate costly modifications to, existing facilities, impair the access of
electric utilities to credit markets, or substantially increase the cost of
credit for electric generating facilities. The Sponsors cannot predict at this
time the ultimate effect of such factors on the ability of any issuers to meet
their obligations with respect to Debt Obligations.
The National Energy Policy Act ("NEPA"), which became law in October, 1992,
makes it mandatory for a utility to permit non-utility generators of electricity
access to its transmission system for wholesale customers, thereby increasing
competition for electric utilities. NEPA also mandated demand-side management
policies to be considered by utilities. NEPA prohibits FERC from mandating
electric utilities to engage in retail wheeling, which is competition among
suppliers of electric generation to provide electricity to retail customers
(particularly industrial retail customers) of a utility. However, under NEPA, a
state can mandate retail wheeling under certain conditions.
There is concern by the public, the scientific community, and the U.S.
Congress regarding environmental damage resulting from the use of fossil fuels.
Congressional support for the increased regulation of air, water, and soil
contaminants is building and there are a number of pending or recently enacted
legislative proposals which may affect the electric utility industry. In
particular, on November 15, 1990, legislation was signed into law that
substantially revises the Clean Air Act (the "1990 Amendments".) The 1990
Amendments seek to improve the ambient air quality throughout the United States
by the year 2000. A main feature of the 1990 Amendments is the reduction of
sulphur dioxide and nitrogen oxide emissions caused by electric utility power
plants, particularly those fueled by coal. Under the 1990 Amendments the U.S.
Environmental Protection Agency ("EPA") must develop limits for nitrogen oxide
emissions by 1993. The sulphur dioxide reduction will be achieved in two
phases. Phase I addresses specific generating units named in the 1990
Amendments. In Phase II the total U.S. emissions will be capped at 8.9 million
tons by the year 2000. The 1990 Amendments contain provisions for allocating
allowances to power plants based on historical or calculated levels. An
allowance is defined as the authorization to emit one ton of sulphur dioxide.
The 1990 Amendments also provide for possible further regulation of toxic air
emissions from electric generating units pending the results of several federal
government studies to be conducted over the next three to four years with
respect to anticipated hazards to public health, available corrective
technologies, and mercury toxicity.
Electric utilities which own or operate nuclear power plants are exposed to
risks inherent in the nuclear industry. These risks include exposure to new
requirements resulting from extensive federal and state regulatory oversight,
public controversy, decommissioning costs, and spent fuel and radioactive waste
disposal issues. While nuclear power construction risks are no longer of
paramount concern, the emerging
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issue is radioactive waste disposal. In addition, nuclear plants typically
require substantial capital additions and modifications throughout their
operating lives to meet safety, environmental, operational and regulatory
requirements and to replace and upgrade various plant systems. The high degree
of regulatory monitoring and controls imposed on nuclear plants could cause a
plant to be out of service or on limited service for long periods. When a
nuclear facility owned by an investor-owned utility or a state or local
municipality is out of service or operating on a limited service basis, the
utility operator or its owners may be liable for the recovery of replacement
power costs. Risks of substantial liability also arise from the operation of
nuclear facilities and from the use, handling, and possible radioactive
emissions associated with nuclear fuel. Insurance may not cover all types or
amounts of loss which may be experienced in connection with the ownership and
operation of a nuclear plant and severe financial consequences could result from
a significant accident or occurrence. The Nuclear Regulatory Commission (the
"NRC") has promulgated regulations mandating the establishment of funded
reserves to assure financial capability for the eventual decommissioning of
licensed nuclear facilities. These funds are to be accrued from revenues in
amounts currently estimated to be sufficient to pay for decommissioning costs.
The Public Utility Holding Company Act of 1935 (the "1935 Act") regulates,
among other things, certain acquisitions of voting securities of electric
utility companies and gas utility companies by anyone who is an "affiliate" of a
public utility company (a person or organized group of persons that directly or
indirectly owns, controls or holds with power to vote 5% or more of the
outstanding voting securities of a public utility company.) In addition, the
1935 Act requires a "holding company" (among other categories, a company which
directly or indirectly owns, controls or hold with power to vote 10% or more of
the outstanding voting securities of a public utility company or a "holding
company") to register as such with the Securities and Exchange Commission and be
otherwise subject to certain restrictions on the acquisition of securities and
other interests in public utility companies. No Fund intends to make any
investment that would result in its becoming subject to the 1935 Act. If a Fund
were considered to be a member of an organized group of persons, the 1935 Act
might limit the Fund's acquisition of the voting securities of public utility
companies by reason of the control by the group of 5% or more of the voting
securities of a public utility company.
New legislation will likely eliminate some of the barriers that prevent
utilities from offering telecommunications services, providing opportunities for
additional revenue and earnings growth. Currently, registered utilities must
obtain Securities and Exchange Commission approval to provide telecommunications
services. The proposed telecommunications bill, adopted by the Senate Commerce
Committee and under consideration in the House of Representatives, would end
restrictions on utilities entering telecommunications markets and repeal SEC
authority under the 1935 Act. Many utilities are considering partnerships with
communications companies. A utility company, in leveraging its network to
provide telecommunications, faces many options with different levels of
investment and risk.
The following illustrates the performance of electric utility stocks compared
to stocks in general and highgrade corporate bonds over the last twenty years:
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COMPARISON OF ANNUAL RETURNS OF UTILITIES, INDUSTRIALS AND
BONDS
Moody's Electric Standard & Poor's Long-Term
Utility Average 500 Index Corporate Bonds
--------------- --------------- ---------------
1974 -24.40% -26.39% -3.06%
1975 47.30% 37.16% 14.64%
1976 28.40% 23.57% 18.65%
1977 11.20% -7.41% 1.71%
1978 -3.90% 6.39% -0.07%
1979 4.80% 18.20% -4.18%
1980 8.10% 32.27% -2.62%
1981 19.70% -5.01% -0.96%
1982 34.90% 21.44% 43.79%
1983 14.50% 22.56% 4.70%
1984 22.70% 6.10% 16.39%
1985 28.10% 31.57% 30.90%
1986 29.90% 18.76% 19.85%
1987 -9.10% 5.10% -0.27%
1988 16.60% 16.33% 10.70%
1989 30.60% 31.47% 16.23%
1990 3.20% -3.27% 6.78%
1991 30.00% 30.41% 19.89%
1992 4.00% 7.67% 9.39%
1993 10.40% 9.97% 13.19%
1994 -16.36% 1.30% -5.76%
1/1/95 to 16.72% 19.98% 16.14%
6/30/95
__________________________
Sources: The Moody's Electric Utility Average represents a market
capitalization weighted average of 24 selected domestic public utility stocks,
published since 1929 by Moody's Investors Service. The S&P 500 Index is
composed of 500 selected common stocks, most of which are listed on the New York
Stock Exchange. It contains a variety of companies with diverse capitalization,
market-value weighted to represent the overall market. Data on long-term
corporate bonds are compiled by Ibbotson Associates, based primarily on the
Salomon Brothers Long-Term High-Grade Corporate Bond Index, which includes
nearly all Aaa- and Aa rated bonds.
20
<PAGE>
The returns shown in the chart above represent changes in security prices
during each year plus income distributed, divided by the price on the first day
of the year. The average annualized returns for 1972 through 6/30/95 were
15.14% for the Moody's Electric Utility Average, 15.10% for the Standard &
Poor's 500 Index and 11.18% for Ibbotson Associates' corporate bond composite.
For example, $1,000 invested on January 1, 1975 in Moody's Electric utility
average would have been worth $17,992.34 by June 30, 1995; $1,000 invested in
the Standard & Poor's 500 Index would have been worth $17,852.36; $1,000 in long
term corporate bonds would have been worth $8,774.50, by the end of this period.
These represent compounded returns, assuming income distributed during each year
was reinvested on the first day of the succeeding year. They do not reflect any
deduction for commissions or taxes. These figures represent past performance,
and are no guarantee of future results. Of course, an investor in a Fund may
experience somewhat lower returns because of sales charges, commissions and Fund
expenses, as well as the fact that any Fund may hold many stocks different from
the Moody's Electric Utility Average and may not be fully invested at all times.
The Telecommunications Industry
The telecommunications industry is subject to varying degrees of competitive
regulatory, political and economic risk which may affect the price of the stocks
of companies involved in such industry. Such risks depend on a number of factors
including the country in which a company is located. Telecommunications
companies in both developed and emerging countries are undergoing significant
change due to varying and evolving levels of governmental regulation or
deregulation and technological advances as well as other factors. As a result,
competitive pressures are intense and the securities of such companies may be
subject to rapid price volatility. In addition, companies offering telephone
services are experiencing increasing competition from each other and alternate
service providers. The cellular telephone industry also faces increased
competition as the Federal Communications Commission ("FCC") has sold additional
spectrum to personal communications service providers, doubling the competitors
in a service area. All telecommunications companies in both developed and
emerging countries are subject to the additional risk that technological
innovations will make their products and services obsolete.
United States. A Portfolio may be concentrated in stocks of companies that
are engaged in providing local, long-distance and cellular services, in the
manufacture of telecommunications products and in a wide range of other
activities including directory publishing, information systems and the operation
of voice, data and video telecommunications networks. Technological innovations
in fiber optics, cellular products and services, voice messaging, call waiting
and automatic dialing offer additional potential for significant expansion.
Advances like formation of a national cellular grid may also contribute to the
growth of this industry. A Fund may contain securities of the Regional Bell
Holding Companies ("RBHCs") which were spun off from AT&T in 1984 pursuant to
approval of the U.S. District Court for the District of Columbia (the "Court"),
implementing a consent decree relating to antitrust proceedings brought by the
U.S. Department of Justice. The RBHCs include Ameritech Corporation, Bell
Atlantic Corporation, BellSouth Corporation, NYNEX Corporation, Pacific Telesis
Group, SBC Communicationsand U.S. West Communications. These companies provide
near monopoly local and intrastate telephone service as well as cellular and
other generally unregulated services. A Fund may contain the securities of
certain independent telephone companies which are subject to regulation by the
FCC and state utility commissions but not subject to the consent decree binding
the RBHCs and AT&T and of certain long-distance telecommunications carriers,
certain telecommunications equipment manufacturers and certain non-U.S.
companies which provide telecommunications services or equipment mainly outside
the United States. International communications facilities in the United States
are also subject to the jurisdiction of the FCC, and the provision of service to
foreign countries is subject to the approval of the FCC and the appropriate
foreign governmental agencies.
21
<PAGE>
Prior to passage of the Communication Act of 1996, the RBHCs provide local
telephone service, including exchange access for long-distance companies,
directory advertising and new customer equipment. Many RBHCs, pursuant to
waivers, could also engage in a broad range of businesses including foreign
consulting, servicing computers and marketing or leasing office equipment. The
Communications Act of 1996, will replace the 1984 Consent Decree. The RBHC's
will be allowed to provide long distance services, video services and
manufacturing. AT&T, which since the Consent Decree of 1984, has provided
interexchange long distance service in competition with numerous other
providers, will be allowed to also provide local telphone service and video
services. AT&T also provides certain other products, services and customer
equipment.
The independent telephone companies, like the RBHCS, provide local
telecommunications service, but operate in more rural areas. These companies
were not subject to the consent decree and therefore could provide the full
range of telecommunications services including local exchange and long distance
services, the installation of business systems, telephone consulting, the
manufacture of telecommunications equipment, operation of voice and data
networks and directory publishing. Cellular service is providing an increasing
component of the revenues of the RBHCs and independent telephone companies. Both
the RBHCs and independents are subject to regulation by the FCC and state
regulatory authorities. Long-distance companies which provide long-distance
telecommunications services are subject to regulation by the FCC. The
long-distance industry is consolidating into larger carriers and will experience
increased competition as local telphone companies and cable television operators
enter the long distance market. Conversely, local exchange carriers, be they
RBHC's or independents will also face competition in their local markets form
long distance providers and cable television operators.
Business conditions of the telecommunications industry may affect the ability
of the issuers of the Securities in the Fund to meet their obligations. The FCC
and certain state utility regulators have introduced certain incentive plans
such as price-cap regulation. Price-cap regulation offers local exchange
carriers an opportunity to share in higher earnings provided they become more
efficient. These new approaches to regulation by the FCC and various state or
other regulatory agencies result in increased competition, and could lead to
greater risks as well as greater rewards for operating telephone companies.
Technology has tended to offset the effects of inflation and is expected to
continue to do so. Under traditional regulation, continuing cost increases, to
the extent not offset by improved productivity and revenues from increased
volume of business, would result in a decreasing rate of return and a continuing
need for rate increases. The long-distance industry has been increasingly opened
to competition over the last number of years. As a result, the major
long-distance companies compete actively for market share. Indeed, to meet
increasing competition, telephone companies will have to commit substantial
capital, technological and marketing resources. Many telecommunications
companies are currently considering partnerships with utilities, positioning
themselves to provide high-speed, two-way video services and high quality
telephony.
Cellular and cable companies provide wireless services including paging,
dispatch and cellular services throughout the U.S. Most of the RBHCS,
independents as well as long distance companies, are seeking to increase their
share of the cellular market in view of perceived future growth prospects. It is
unclear what effect, if any, increased competition between wireless and
traditional services will have on the telecommunications industry. Other
potential competition for local service has also developed. The deregulated
cellular telephone industry has a limited operating history and there is
significant uncertainty regarding its future, particularly with regard to
increased competition, the continued growth in the number of customers, the
usage and pricing of cellular services, and the cost of providing cellular
services, including the cost of attracting new customers, developing new
technology and the ability to obtain licenses to provide cellular services.
Recent industry developments may provide increased competition and reduced
revenues from cellular service for RBHCs and independent telephone companies.
The uncertain outcomes
22
<PAGE>
of future labor agreements and employee and retiree benefit costs may also have
a negative impact on profitability. Telephone usage, and therefore revenues,
could also be adversely affected by any sustained economic recession. Each of
these problems would adversely affect the profitability of the
telecommunications issuers of the Securities in the Fund and their ability to
meet their obligations.
Telecommunications equipment companies design, manufacture, and distribute
telecommunication equipment such as central office switching equipment,
switches, displays, mobile and cellular equipment and systems, network
transmission equipment, PBXS, satellite, microwave, antennas, and digital
communications networks. Growth of these companies may result from telephone
service industry expansion, modernization requirements and possible new
technology such as interactive television. As less developed countries modernize
their telecommunications infrastructure, the demand for these products
increases. This segment of the industry is subject to rapidly changing
technology and the risk of technological obsolescence although it is generally
not subject to regulation as other telecommunications services are.
In addition, the Portfolio may contain securities issued by telephone
companies which provide telecommunications services or equipment outside the
United States; these companies are subject to regulation by foreign governments
or governmental authorities which have broad authority regulating the provision
of telecommunications services and the use of certain telecommunication
equipment. Consequently, certain Securities in the Fund may be affected by the
rules and regulations adopted by regulatory agencies in other countries from
time to time.
Foreign Telecommunications Issues. Many European, Latin American and Asian
telephone systems appear to have significant growth potential. The international
sector in the Portfolio consists predominantly of former government-owned
telecommunications systems that have been privatized in stages. Most are similar
to AT&T before 1984 in their dominance of local, long-distance and international
service within their country. As governments privatize their systems by selling
stock to the public, telephone service is likely to expand and, as a result of
greater efficiency, potentially become more profitable. On the other hand, the
countries are allowing more companies to compete with the recently privatized
companies. Many of these companies have expanded into other countries. The
Sponsors believe there is significant potential for expansion of telephone
services in foreign countries. Of course, there can be no assurance of whether
or when telephone service in these countries will expand or its effects on the
non-U.S. companies represented in any Portfolio.
Foreign Issuers
If certain of the Securities in a Portfolio are Securities of foreign
issuers, an investment in the Fund involves certain risks that are different
from the risks of a fund that invests entirely in securities of domestic
issuers. These investment risks include future foreign political and economic
developments, the possible establishment of exchange controls or other
governmental laws or restrictions which might adversely affect the payment or
receipt of payment of dividends on the relevant Securities and currency risk.
With respect to certain countries, there is the possibility of expropriation of
assets, confiscatory taxation, economic, political or social instability or
diplomatic developments which could affect the value of investments in those
countries. In selecting the non-U.S. Securities in the Portfolio, the Sponsors
have attempted to minimize this country risk. In addition, for the foreign
issuers that are not subject to the reporting requirements of the Securities
Exchange Act of 1934, there may be less publicly available information than is
available from a domestic issuer. Also, foreign issuers are not necessarily
subject to uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those applicable to domestic issuers.
However, the Sponsors anticipate that adequate information will be available to
allow the Sponsors to supervise the Portfolio.
23
<PAGE>
In addition, earnings and dividends for foreign companies are in non-U.S.
currencies. Therefore, the U.S. dollar value of the stock and dividends of these
companies will vary with fluctuations in the U.S. dollar foreign exchange rates
for the relevant currencies. Most foreign currencies have fluctuated widely in
value against the United States dollar for many reasons, including supply and
demand of the respective currency, the soundness of the world economy and the
strength of the respective economy as compared to the economies of the United
States and other countries. Therefore, for any securities of issuers whose
earnings are stated in foreign currencies, or which pay dividends in foreign
currencies or which are traded in foreign currencies, there is a risk that their
United States dollar value will vary with fluctuations in the United States
dollar foreign exchange rates for the relevant currencies.
On the basis of the best information available to the Sponsors at the present
time none of the Securities in subject to exchange control restrictions under
existing law which would materially interfere with payment to the Fund of
dividends due on, or proceeds from the sale of, the Securities either because
the particular jurisdictions have not adopted any currency regulations of this
type or because the issues qualify for an exemption, or the Fund, as an
extraterritorial investor, has qualified its purchase of the Securities as
exempt by following applicable "validation" or similar regulatory or exemptive
procedures. However, there can be no assurance that exchange control
regulations might not be adopted in the future which might adversely affect
payments to the Fund.
In addition, the adoption of exchange control regulations and other legal
restrictions could have an adverse impact on the marketability of international
securities in the Portfolio and on the ability of the Fund to satisfy its
obligation to redeem Units tendered to the Trustee for redemption.
American Depositary Shares and Receipts. Many Securities of foreign issuers
are purchased in ADR form in the United States. ADRs evidence American
Depository Shares which represent common stock deposited with a custodian in a
depositary. American Depositary Shares ("ADSs"), and receipts therefor
("ADRs"), are issued by an American bank or trust company to evidence ownership
of underlying securities issued by a foreign corporation. These instruments may
not necessarily be denominated in the same currency as the securities into which
they may be converted. Generally, ADSs and ADRs are designed for use in the
United States securities markets. For purposes of this Prospectus, the term ADR
generally includes ADSs.
ADRs represent common stock deposited with a custodian in a depositary. ADRs
may be sponsored or unsponsored. In an unsponsored facility, the depositary
initiates and arranges the facility at the request of market makers and acts as
agent for the ADR holder, while the company itself is not involved in the
transaction. In a sponsored facility, the issuing company initiates the
facility and agrees to pay certain administrative and shareholder-related
expenses. Sponsored facilities use a single depositary and entail a contractual
relationship between the issuer, the shareholder and the depositary; unsponsored
facilities involve several depositaries with no contractual relationship to the
company. The terms and conditions of depositary facilities may result in less
liquidity or lower market prices for ADRs then for the underlying shares.
For those Securities that are ADRs, currency fluctuations will also affect
the U.S. dollar equivalent of the local currency price of the underlying
domestic share and, as a result, are likely to affect the value of the ADRs and
consequently the value of the Securities. The depositary bank that issues an ADR
generally charges a fee, based on the price of the ADR, upon issuance and
cancellation of the ADR. This fee would be in addition to the brokerage
commissions paid upon the acquisition or surrender of the security. In
addition, the depositary bank incurs expenses in connection with the conversion
of dividends or other cash distributions paid in local currency into U.S.
dollars and such expenses are deducted from the amount of the dividend or
distribution paid to holders, resulting in a lower payout per underlying share
24
<PAGE>
represented by the ADR than would be the case if the underlying share were held
directly. Furthermore, foreign investment laws in certain countries may
restrict ownership by foreign nationals of certain classes of underlying shares.
Accordingly, the ADR representing a class of securities may not possess voting
rights, if any, equivalent to those in respect of the underlying shares.
Certain tax considerations, including tax rate differentials, arising from
applications of the tax laws of one nation to the nationals of another and from
certain practices in the ADR market may also exist with respect to certain ADRs.
In varying degrees, any or all of these factors may affect the value of the ADR
compared with the value of the underlying shares in the local market. ADRs are
registered securities pursuant to the Securities Act of 1933 and may be subject
to the reporting requirements of the Securities Exchange Act of 1934.
The Real Estate Industry
Certain Portfolios are considered to be concentrated in common stocks of
companies engaged in real estate asset management, development, leasing,
property sales and other related activities. Investment in securities issued by
these real estate companies should be made with an understanding of the many
factors which may have an adverse impact on the credit quality of the particular
company or industry. Generally, these include economic recession, the cyclical
nature of real estate markets, competitive overbuilding, unusually adverse
weather conditions, changing demographics, changes in governmental regulations
(including tax laws and environmental, building, zoning and sales regulations),
increases in real estate taxes or costs of material and labor, the inability to
secure performance guarantees or insurance as required, the unavailability of
investment capital and the inability to obtain construction financing or
mortgage loans at rates acceptable to builders and purchasers of real estate.
Additional risks include an inability to reduce expenditures associated with a
property (such as mortgage payments and property taxes) when rental revenue
declines, and possible loss upon foreclosure of mortgaged properties if mortgage
payments are not paid when due.
Hong Kong. Recently, in the wake of Chinese economic development and
reform, certain Hong Kong real estate companies and other investors began
purchasing and developing real estate in southern China, including Beijing, the
Chinese capital. By 1992, however, southern China began to experience a rise in
real estate prices, increases in construction costs and a tightening of credit
markets. Any worsening of these conditions could affect the profitability and
financial condition of Hong Kong real estate companies and could have a
materially adverse effect on the value of a Hong Kong Portfolio.
Real Estate Investment Trusts. REITs are financial vehicles that have as
their objective the pooling of capital from a number of investors in order to
participate directly in real estate ownership or financing. REIT's are
generally fully integrated operating companies that have interests in income-
producing real estate. REITs are differentiated by the types of real estate
properties held and the actual geographic location of properties and fall into
two major categories: equity REITs emphasize direct property investment, holding
their invested assets primarily in the ownership of real estate or other equity
interests, while mortgage REITs concentrate on real estate financing, holding
their assets primarily in mortgages secured by real estate. REITS obtain
capital funds for investment in underlying real estate assets by selling debt or
equity securities on the public or institutional capital markets or by bank
borrowings. Thus, the returns on common equities of the REITs in which the Fund
invests will be significantly affected by changes in costs of capital and,
particularly in the case of highly "leveraged" REIT's, i.e. those with large
amounts of borrowings outstanding, by changes in the level of interest rates.
The objective of an equity REIT is to purchase income-producing real estate
properties in order to generate high levels of cash flow from rental income and
a gradual asset appreciation, and they typically invest in properties such as
office, retail, industrial, hotel and apartment buildings and health care
facilities.
25
<PAGE>
Overbuilding of commercial real estate projects in the 1980's often resulted
in increased vacancy rates, intense competition for tenants, declining rents and
deteriorating physical conditions. Coupled with the depressed real estate
market, it became more difficult to obtain financing from traditional sources.
Various REITs have acquired substantial established properties at depressed
prices and have renovated existing properties to enhance their potential.
Factory outlets, a new type of retail property, attract shoppers by offering
name-brand merchandise at steep discounts, which can result in higher occupancy
and eventually, higher rents. Expanding store size and diversification, a trend
of the 1990's, has been enhanced by REIT investments, which have supported the
recovering real estate market.
Investment in a Fund consisting of REITs should be made with an understanding
of the many factors that may have an adverse impact on the performance of a
particular REIT, its cash available for distribution, the credit quality of a
particular REIT or the real estate industry generally (described above.)
Additional risks include the financial health of tenants, e.g., consolidation
and increased competition in the retail industry, dependency on the management
skill of both the officers of the REITs and the managers of the underlying
properties, variations in rental income and space availability and vacancy rates
in terms of supply and demand. Potential conflicts of interest often exist with
a founding developer or outside manager.
Performance by individual REIT's is dependent on the types of real estate
investments held. For example, the effect of interest rate fluctuations will be
less on equity REITs than on mortgage REITs and the nature of the underlying
assets of an equity REIT may be considered more tangible than that of a mortgage
REIT. In addition, equity REITs may be affected by changes in the value of the
underlying property it owns.
REIT investment managers may concentrate investments in specific geographic
areas, depending on their proximity to and knowledge of local real estate
conditions; the impact of economic conditions on REITs can also be expected to
vary with geographic location. Investors should also be aware that REITs may not
be diversified and are subject to the risks of financing projects. REITs are
also subject to defaults by borrowers, self-liquidation, the maker's perception
of the REIT industry generally, and the possibility of failing to qualify for
tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended (the "Code"), and to maintain exemption from the Investment Company Act
of 1940. In the event of a default by a borrower or lessee, the REIT may
experience delays in enforcing its rights as a mortgagee or lessor and may incur
substantial costs associated with protecting its investments.
REIT Taxation. Each REIT will generally state its intention to operate in
such manner as to qualify for taxation as a "real estate investment trust" under
Sections 856-860 of the Code, although, of course, no assurance can be given
that each REIT will at all times so qualify.
The REIT provisions of the Code contain three gross income requirements:
1. At least 75% of the REIT gross income must be derived directly or
indirectly from statutorily specified investments in real property or mortgages
on real property.
2. At least 95% of the REIT gross income must be of the type meeting the 75%
requirements or must be derived from dividends, interest, or gains from the sale
or disposition of stock or securities.
3. Short-term gains from the disposition of stock or securities, gains from
the disposition of property where the property was held primarily for sale to
customers in the ordinary course of business, and gains from the disposition of
real property held for less then 4 years must total less than 30% of the REIT's
gross income.
26
<PAGE>
At the close of each quarter of a REIT's taxable year, it also must satisfy
three tests relating to the nature if its assets. First, at least 75% of the
value of its total assets must be represented by real estate assets, cash, cash
items, and government securities. In addition, not more than 25% of this total
assets may be represented by securities (other than those includible in the 75%
asset class.) Also, of the investments included in the 25% asset class, the
value of any one issuer's securities owned may not exceed 5% of the value of its
total assets, nor can it own more than 10% of any one issuer's outstanding
voting securities.
So long as an issuer qualifies as a REIT, it will, in general, be subject to
Federal income tax only on income than is not distributed to stockholders. In
order to qualify as a REIT for any taxable year, a REIT must, among other
things, distribute to its stockholders an amount at least equal to the sum of
95% of its taxable income.
Failure to qualify for taxation as a REIT in any taxable year will subject an
issuer to tax on its taxable income at regulate corporate rates. Distributions
to stockholders in any year in which an issuer fails to qualify as a REIT will
not be deductible by the issuer. Unless entitled to relief under specific
statutory provisions, the issuer would not qualify for taxation as a REIT for
the next four taxable years after failing to qualify in any year.
Each REIT may also be subject to state, local or other taxation in various
state, local or other jurisdictions.
Standard & Poor's Indexes
The S&P 500 Index. The S&P 500 Index is composed of 500 selected common
stocks, most of which are listed in the New York Stock Exchange. This well-known
index, originally consisting of 233 stocks in 1923, was expanded to 500 stocks
in 1957 and was restructured in 1976 to a composite consisting of industrial,
financial and transportation market sectors. It contains a variety of companies
with diverse capitalization, market-value weighted to represent the overall
market. The Index represents approximately 69% of U.S. stock market
capitalization. At present, the mean market capitalization of the companies in
the S&P 500 Index is approximately $3.346 billion.
The following table shows the performance of the S&P 500 Index for 1960
through 1995. Stock prices fluctuated widely during the period and were higher
at the end than at the beginning. The results shown should not be considered as
a representation of the income yield or capital gain or loss which may be
generated by the S&P 500 Index in the future.
27
<PAGE>
Year-End
Index
Value
Year-End Change in Average Dividends
Year-End Index Value Index Yield Reinvested
Year Index Value* 1960=100 For Year For Year* 1960=100**
- ---- ------------ ---------- ---------- --------- -----------
1960 . . . . . 58.11 100.0 --27.25% 3.47% 100.0
1961 . . . . . 71.55 123.13 23.13 2.98 126.79
1962 . . . . . 63.10 108.59 --11.81 3.37 115.71
1963 . . . . . 75.02 129.10 18.89 3.17 141.93
1964 . . . . . 84.75 145.84 12.97 3.01 165.09
1964 . . . . . 92.43 159.06 9.06 3.00 185.48
1966 . . . . . 80.33 138.24 --13.09 3.40 165.11
1967 . . . . . 96.47 166.01 20.09 3.20 204.54
1968 . . . . . 103.86 178.73 7.66 3.07 227.00
1969 . . . . . 92.06 158.42 --11.36 3.24 207.89
1970 . . . . . 92.15 158.58 0.10 3.83 216.06
1971 . . . . . 102.09 175.68 10.79 3.14 247.52
1972 . . . . . 118.05 203.15 15.63 2.84 294.30
1973 . . . . . 97.55 167.87 --17.37 3.06 250.83
1974 . . . . . 68.56 117.98 --29.72 4.47 184.64
1975 . . . . . 90.19 155.21 31.55 4.31 253.25
1976 . . . . . 107.46 184.93 19.15 3.77 312.94
1977 . . . . . 95.10 163.66 --11.50 4.62 289.72
1978 . . . . . 96.11 165.39 1.06 5.28 308.20
1979 . . . . . 107.94 185.75 12.31 5.47 364.29
1980 . . . . . 135.76 233.63 25.77 5.26 481.86
1981 . . . . . 122.55 210.89 --9.73 5.20 457.72
1982 . . . . . 140.64 242.02 14.76 5.81 555.84
1983 . . . . . 164.93 283.82 17.27 4.40 680.24
1984 . . . . . 167.24 287.80 1.40 4.64 721.73
1985 . . . . . 211.28 363.59 26.33 4.25 949.59
1986 . . . . . 242.17 416.75 14.62 3.49 1,125.83
1987 . . . . . 247.08 425.19 2.03 3.08 1,183.25
1988 . . . . . 277.27 477.92 12.40 3.64 1,379.78
1989 . . . . . 353.40 608.15 27.25 3.13 1,617.04
1990 . . . . . 330.22 568.27 --6.56 3.61 1,760.71
1991 . . . . . 417.09 717.78 26.31 3.70 2,297.20
1992 . . . . . 435.71 749.79 4.46 2.97 2,472.25
1993 . . . . . 466.45 802.70 7.06 2.78 2,721.45
1995 . . . . . 459.27 790.53 --1.54 2.42 2,757.25
- --------------------
Source: Standard & Poor's Corporation. Yields are obtained by
dividing the aggregate cash dividends by the aggregate market value of the
stocks in the Index at the beginning of the period, assuming no
reinvestment of dividends.
Assumes that cash distributions on the securities which comprise the S&P
500 Index are treated as reinvested in the S&P 500 Index as of the end of
each month following the payment of the dividend. Because the Fund is sold
to the public at net asset value plus the applicable sales charge and the
expenses of the Fund are deducted before making distributions to Holders,
investment in the Fund would have resulted in investment performance to
Holders somewhat reduced from that reflected in the above table. In addition
certain Holders may not elect to participate in the Reinvestment Plan
and to that extent cash distributions representing dividends on the Index
Stocks may not be reinvested in other Index Stocks.
28
<PAGE>
The S&P MidCap Index. The S&P MidCap Index is composed of 400 selected
common stocks of which, as of the Evaluation Date, 279 were listed on the New
York Stock Exchange, 9 were listed on the American Stock Exchange and 112 were
quoted on the Nasdaq National Market. The MidCap Index Stocks were chosen for
market size, liquidity and industry group representation. As of December 31,
1994, industrial stocks accounted for approximately 69.5% of S&P MidCap Index
market capitalization utilities approximately 14.1%, financial stocks
approximately 14.1%, financial stocks approximately 14.6% and transportation
stocks approximately 1.8%. The capitalizations of individual companies ranged
from about $49 million to over $10,066 million: the mean market capitalization
of the companies in the S&P MidCap Index was approximately $1,156 billion. The
S&P MidCap Index was created June 5, 1991 and would have had a total return,
with monthly reinvested dividends, of 50.10% for the year if the Index had been
in existence for the entire year. The total return for 1994 was--3.57%
The S&P Index Trusts. Since the objective of the Fund is to provide
investment results that duplicate substantially the price and yield performance
(in other words, the total return) of the S&P 500 Index, in the case of the S&P
500 Trust, and the S&P MidCap Index, in the case of the S&P MidCap Trust, the
Portfolio of each Trust will at any time consist of as many of the Index Stocks
as is feasible. Each Trust will at all times be invested in no less than 95% of
the Index Stocks. Although, at any time, a Trust may fail to own certain of the
Index Stocks, each Trust will be substantially totally invested in Index Stocks
and the Sponsors expect to maintain a theoretical correlation of between .97 and
.99 between the investment performance of the relevant Index and that derived
from ownership of Units. Adjustments will be made in accordance with computer
program output to bring the weightings of the Securities more closely into line
with their weightings in the relevant Index as each Trust invests in new
Securities in connection with the creation of new Units, as companies are
dropped from or added to either Index or as Securities are sold to meet
redemptions. These adjustments will be made on the business day following the
relevant transaction in accordance with computer program output showing which
Securities are under- or over-represented in each Portfolio. Adjustments may
also be made at other times to bring either Portfolio into line with the
applicable Index. The proceeds from any such sale will be invested in those
Index Stocks which the computer program output indicates are most under-
represented.
The Sponsors anticipate that the selection of any additional Index Stocks
deposited or purchased in connection with the creation of additional Units of a
Trust will be those stocks which are most under-represented in the Portfolio
based upon the computer program output and the applicable Index as of the date
prior to the date of such subsequent deposit or purchase. Securities sold in
order to meet redemptions will be those stocks which are most over-represented
in the Portfolio based upon the computer program output and the applicable Index
as of the date prior to the date of such sale.
Finally, from time to time adjustments may be made in either Portfolio
because of changes in the composition of the applicable Index. Based on past
history, it is anticipated that most such changes will occur as a result of
merger or acquisition activity. In such cases, the Fund, as shareholder of a
company which is the object of such merger or acquisition activity, will
presumably receive various offers from would-be acquisors of the company. The
Trustees will not be permitted to accept any such offers until such time as the
company has been deleted from the applicable Index. Since, in most cases, a
company is removed from an Index only after the consummation of a merger or
acquisition of the company, it is anticipated that the Fund will generally
acquire, in exchange for the stock of the deleted company, whatever
consideration is being offered to shareholders of that company who have not
tendered their shares prior to such time. Any cash received in such
transactions will be reinvested in the most under-represented Index Stocks. Any
securities received as a part of the consideration which are not included in the
relevant Index will be sold as soon as practicable and reinvested in the most
under-represented Index Stocks.
29
<PAGE>
In attempting to duplicate the proportionate relationships represented by the
S&P 500 Index and the S&P MidCap Index the Sponsors do not anticipate purchasing
or selling shares in quantities of less than round lots. In addition, certain
Index Stocks may at times not be available in the quantities in which the
computer program specifies that they be purchased. For these reasons, among
others, precise duplication of this proportionate relationship may not ever be
possible but nevertheless will continue to be the goal in connection with all
acquisitions or dispositions of Securities. As the holder of the Securities,
the Trustees will have the right to vote all of the voting stocks in the
Portfolio and will vote such stocks in accordance with the instructions of the
Sponsors except that, if the Trustee holds any of the common stocks of Merrill
Lynch & Co., Inc., Prudential Insurance Company of America (the parent of
Prudential Securities Incorporated) or The Travelers Inc. (as long as it remains
the parent of Smith Barney Inc.) or any other common stock of companies which
are affiliates of the Sponsors, the Trustee will vote such stock in the same
proportionate relationship as all other shares of such companies are voted.
ROLLOVER - (Income Growth Fund, Select Ten Series and Select Growth Portfolios)
It is expected that a special redemption and liquidation will be made of all
Units of a Portfolio held by any investor who affirmatively notifies the Trustee
in writing by the applicable notification date specified in the Portfolio's
prospectus that he elects to participate. It should also be noted that rollover
investors may realize taxable capital gains on the rollover but generally will
not be entitled to a deduction for certain capital losses and no cash would be
distributed at that time to pay any taxes.
All Units of rollover investors will be redeemed in kind on the first day of
the rollover period and the underlying securities will be distributed to a
distribution agent on behalf of the rollover investors. During the rollover
period, the distribution agent will be required to sell all of the underlying
securities on behalf of rollover investors. The sale proceeds will be net of
brokerage fees, governmental charges or any expenses involved in the sales.
Rollover investors may purchase units of a new portfolio of the same series,
if available, subject only to the Deferred Sales Charge; provided that rollover
investors who no longer hold their Units in an account maintained with one of
the Sponsors at the time of the rollover may not be eligible to participate in
the direct reinvestment in the new portfolio.
If an investor so specifies by the applicable notification date, his Units
will be redeemed in kind and the securities disposed of during the rollover
period. As long as the investor confirms his interest in purchasing units of a
new portfolio and units are available, the proceeds of the sales (net of
brokerage commissions, stamp taxes, governmental charges and any other selling
expenses or if applicable, costs associated with foreign trading) will be
invested in units of the next portfolio at daily prices over the rollover period
based on the asset value of units of the next portfolio plus the applicable
sales charge. The Sponsors are under no obligation to create a new portfolio,
however, and may modify the terms of the rollover upon notice to investors at
any time.
Depending on the volume of proceeds to be invested in the next portfolio
through the rollover and the volume of other orders for units in the next
portfolio, the Sponsors may purchase large volumes of the securities for the
next portfolio in a short period of time. This concentrated buying may tend to
raise the market prices of these securities. The actual market impact of the
Sponsors' purchases, however, is currently unpredictable because the actual
volume of securities to be purchased and the supply and price of those
securities are unknown. A similar problem may occur in connection with the
Sponsors' sales of securities during the rollover period. Depending on the
volume of sales required, and the prices of and demand for securities, sales by
the Sponsors may tend to depress the market prices and the value of Units, and
thus reduce the proceeds to be credited to rollover investors for investment in
the next portfolio.
30
<PAGE>
The distribution agent will engage the Sponsors as its agents to sell the
distributed securities. The Sponsors will attempt to sell the securities as
quickly as is practicable during the rollover period without in their judgment
materially adversely affecting the market price of the securities, but all of
the securities will in any event be disposed of by the end of the rollover
period. The Sponsors do not anticipate that the period will be longer than 12
business days, although it could be shorter or longer given the varying
liquidity of the Securities. The liquidity of any security depends on the daily
trading volume of the security and the amount that the Sponsors have available
for sale on any particular day.
It is expected (but not required) that the Sponsors will generally follow the
following guidelines in selling the securities: for highly liquid securities,
the Sponsors will generally sell securities on the first day of the rollover
period; for less liquid securities, on each of the first two days of the
rollover period, the Sponsors will generally sell any amount of any underlying
securities at a price no less than 1/2 of one point under the closing sale price
of those securities on the preceding day. Thereafter, the Sponsors intend to
sell without any price restrictions at least a portion of the remaining
underlying securities, the numerator of which is one and the denominator of
which is the total number of days remaining (including that day) in the rollover
period.
Section 17(a) of the Investment Company Act of 1940 restricts purchases and
sales between affiliates of registered investment companies and those companies.
Pursuant to a recent exemptive order, certain Portfolios (and the distribution
agent on behalf of rollover investors) can now sell securities to the next
portfolio if those securities continue to meet the applicable objective or
Strategy. The exemption will enable these portfolios to eliminate commission
costs on these transactions. The price for those securities will be the closing
sale price on the sale date on the exchange where the securities are principally
traded, as certified by the Agent for the Sponsors and confirmed by the Trustee
of a Portfolio.
The Sponsors intend to create new units of Portfolios as quickly as possible,
depending upon the availability and reasonably favorable price of the securities
included in the new Portfolio, and it is intended that rollover investors will
be given first priority to purchase new units of the new Portfolio. There can
be no assurance, however, as to the exact timing of the creation of units of new
Portfolios or the aggregate number of new units of new Portfolios which the
Sponsors will create. The Sponsors may, in their sole discretion, stop creating
units (whether permanently or temporarily) at any time they choose, regardless
of whether all proceeds of the rollover have been invested on behalf of rollover
investors. Cash which has not been invested on behalf of the rollover investors
in new Portfolios will be distributed at the end of the rollover period.
However, since the Sponsors can create units by depositing cash (or bank letter
of credit) with instructions to buy securities, the Sponsors anticipate that
sufficient units can be created, although moneys in the new Portfolio may not be
fully invested on the next business day.
Any rollover investor may thus be redeemed out of a Portfolio and become a
holder of an entirely different trust with a different portfolio of securities.
The rollover investor's Units will be redeemed in kind and the distributed
securities shall be sold during the rollover period. In accordance with the
rollover investors' offers to purchase units of new Portfolios, the proceeds of
the sales (and any other cash distributed upon redemption), less the amount of
any deferred sales charge still unpaid, will be invested in new units of the
next Portfolio, at the Public Offering Price, including the applicable sales
charge per unit.
This process of redemption, liquidation, and investment in a new trust is
intended to allow for the fact that the portfolios selected by the Sponsors are
chosen on the basis of a strategy for a period of one year, at which point a new
portfolio is chosen. It is contemplated that a similar process of redemption,
liquidation and investment in a new fund will be available for each subsequent
Portfolio, approximately a year after the creation of the prior series.
31
<PAGE>
The Sponsors believe that the gradual redemption, liquidation and investment
in the new Portfolio will help mitigate any negative market price consequences
stemming from the trading of large volumes of securities and of the underlying
securities in the new Portfolio in a short, publicized period of time. The
above procedures may, however, be insufficient or unsuccessful in avoiding such
price consequences. There can be no assurance that the procedures will
effectively mitigate any adverse price consequences of heavy volume trading or
that the procedures will produce a better price for investors than might be
obtained on any given day during the rollover period. In fact, market price
trends may make it advantageous to sell or buy more quickly or more slowly than
permitted by these procedures. Rollover investors could then receive a less
favorable average unit price than if they bought all their units of the new
Portfolio on any given day of the period. Historically, the prices of
securities selected by the Sponsors as good investments have generally risen
over the first few days following the announcement.
It should also be noted that rollover investors may realize taxable capital
gains on the rollover but generally will not be entitled to a deduction for
certain capital losses and, due to the procedures for investing in new
Portfolios, no cash would be distributed at that time to pay any taxes.
In addition, during this period an investor will be at risk to the extent
that securities are not sold and will not have the benefit of any stock
appreciation to the extent that monies have not been invested; for this reason,
the Sponsors will be inclined to sell and purchase the securities in as short a
period as they can without materially adversely affecting the price of the
securities.
Investors who do not inform the Trustee that they wish to have their Units so
redeemed and liquidated will continue to hold Units of a Portfolio until that
Portfolio is terminated. These remaining investors will not realize capital
gains or losses due to the rollover and will not be charged any additional sales
charge. If a large percentage of investors become rollover investors, the
aggregate size of a Portfolio will be sharply reduced. As a consequence,
expenses, if any, in excess of the amount to be borne by the Trustee would
constitute a higher percentage amount per Unit than prior to the rollover in the
new Portfolio. Also, because of the lesser number of Units in a Portfolio, and
possibly also due to a value reduction, however temporary, in Units caused by
the Sponsors' sales of securities, a Portfolio might also reduce to the minimum
value that would allow the Sponsors to choose to liquidate that Portfolio
without the consent of the remaining investors. The securities remaining in a
Portfolio after the rollover will be sold by the Sponsors as quickly as possible
without, in their judgment, materially adversely affecting the market price of
the securities.
32
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