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DEFINED
ASSET FUNDSSM
MUNICIPAL INVESTMENT
TRUST FUND
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MONTHLY PAYMENT SERIES--278
(A UNIT INVESTMENT TRUST)
PROSPECTUS, PART A
DATED MARCH 3, 1995
SPONSORS:
Merrill Lynch,
Pierce, Fenner & Smith Incorporated
Smith Barney Inc.
Prudential Securities Incorporated
Dean Witter Reynolds Inc.
MONTHLY INCOME - TAX-FREE
This Defined Fund is a portfolio of preselected securities formed for the
purpose of providing interest income which in the opinion of counsel is, with
certain exceptions, exempt from regular Federal income taxes under existing law
through investment in a fixed portfolio consisting primarily of long-term Debt
Obligations issued by states, municipalities, public authorities and similar
entities thereof, and on the initial Date of Deposit rated investment grade by
at least one national rating agency (or having, in the opinion of Defined Asset
Funds research analysts, comparable credit characteristics). There is no
assurance that this objective will be met because it is subject to the
continuing ability of issuers of the Debt Obligations to meet their principal
and interest requirements. Furthermore, the market value of the underlying Debt
Obligations, and therefore the value of the Units, will fluctuate with changes
in interest rates and other factors.
Minimum Purchase: One Unit
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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NOTE: PART A OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED
UNLESS ACCOMPANIED BY DEFINED ASSET FUNDS--MUNICIPAL INVESTMENT TRUST FUND
PROSPECTUS, PART B.
This Prospectus consists of two parts. The first includes an Investment Summary
and certified financial statements of the Fund, including the related securities
portfolio; the second contains a general summary of the Fund.
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Read and retain both parts of this Prospectus for future reference.
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DEFINED ASSET FUNDSSM is America's oldest and largest family of unit investment
trusts with over $90 billion sponsored since 1970. Each Defined 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.
With Defined Asset Funds you know in advance what you are investing in and that
changes in the portfolio are limited. Most defined bond funds pay interest
monthly and repay principal as bonds are called, redeemed, sold or as they
mature. Defined equity funds offer preselected stock portfolios with defined
termination dates.
Your financial advisor can help you select a Defined Fund to meet your personal
investment objectives. Our size and market presence enable us to offer a wide
variety of investments. Defined Funds are available in the following types of
securities: municipal bonds, corporate bonds, government bonds, utility stocks,
growth stocks, even international securities denominated in foreign currencies.
Termination dates are as short as one year or as long as 30 years. Special funds
are available for investors seeking extra features: insured funds, double and
triple tax-free funds, and funds with 'laddered maturities' to help protect
against rising interest rates. Defined Funds are offered by prospectus only.
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CONTENTS
Investment Summary.......................................... A-3
Accountants' Opinion Relating to the Fund................... D-1
Statement of Condition...................................... D-2
Portfolio................................................... D-6
A-2
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DEFINED ASSET FUNDS--MUNICIPAL INVESTMENT TRUST FUND, MONTHLY PAYMENT
SERIES--278
INVESTMENT SUMMARY
AS OF NOVEMBER 30, 1994, THE EVALUATION DATE
FACE AMOUNT OF SECURITIES $ 8,470,000(a)
NUMBER OF UNITS.......................................... 33,596
FACE AMOUNT OF SECURITIES PER UNIT.......................$ 252.11
FRACTIONAL UNDIVIDED INTEREST IN FUND REPRESENTED BY EACH
UNIT................................................... 1/33,596th
PUBLIC OFFERING PRICE
Aggregate bid side evaluation of underlying Se-
curities..........................................$ 9,210,093
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Divided by Number of Units..........................$ 274.14
Plus sales charge of 5.322% of Public Offering Price
(5.622% of net amount invested in
Securities)(b).................................... 15.41
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Public Offering Price per Unit......................$ 289.55
(plus cash
adjustments and
accrued
interest)(c)
SPONSORS' REPURCHASE PRICE AND REDEMPTION PRICE PER
UNIT...................................................$ 274.14
(based on bid side evaluation of Securities) ($15.41 (plus cash
less than Public Offering Price per Unit) adjustments and
accrued
interest)(c)
PREMIUM AND DISCOUNT ISSUES IN PORTFOLIO
Face amount of Debt Obligations with bid side
evaluation:
Over par.......................................... 88%
At a discount from par............................ 12%
CALCULATION OF ESTIMATED NET ANNUAL INTEREST RATE PER
UNIT (based on Face Amount per Unit)
Annual interest rate per Unit....................... 8.983%
Less estimated annual expenses per Unit ($0.66)
expressed as a percentage......................... .261%
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Estimated net annual interest rate per Unit......... 8.722%
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DAILY RATE AT WHICH ESTIMATED NET INTEREST ACCRUES PER
UNIT................................................... .0242%
MONTHLY INCOME DISTRIBUTIONS
Estimated net annual interest rate per Unit times
the Face Amount per Unit..........................$ 21.99
Divided by 12.......................................$ 1.83
RECORD DAY
The 10th day of each month.
DISTRIBUTION DAY
The 25th day of each month.
MINIMUM CAPITAL DISTRIBUTION
No distribution need be made from Capital Account if balance in Account is
less than $5.00 per Unit.
TRUSTEE'S ANNUAL FEE AND EXPENSES(d)
$0.66 per Unit (see Expenses and Charges in Part B).
PORTFOLIO SUPERVISION FEE(e)
Maximum of $0.35 per $1,000 face amount of underlying Debt Obligations (see
Expenses and Charges in Part B).
EVALUATOR'S FEE FOR EACH EVALUATION
Maximum of $13 (see Expenses and Charges in Part B).
EVALUATION TIME
3:30 P.M. New York Time
MINIMUM VALUE OF FUND
Trust may be terminated if value of Fund is less than 40% of the Face Amount
of Securities on the date of their deposit. As of the Evaluation Date, the
value of the Fund was 19% of the Face Amount of Securities on the date of
their deposit.
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(a)On the Initial Date of Deposit (May 4, 1983) the Face Amount of
Securities was $47,000,000. Cost of Securities is set forth under
Portfolio.
(b)This is the maximum Effective Sales Charge on the date stated. The
sales charge will vary depending on the maturities of the underlying
Securities and will be reduced on a graduated scale for purchases of
250 or more Units (see Public Sale of Units--Public Offering Price in
Part B). Any resulting reduction in the Public Offering Price will
increase the effective current and long term returns on a Unit.
(c)For Units purchased or redeemed on the Evaluation Date, accrued
interest is approximately equal to the undistributed net investment
income of the Fund (see Statement of Condition on p. D-2) divided by
the number of outstanding Units, plus accrued interest per Unit to the
expected date of settlement (5 business days after purchase or
redemption). The amount of the cash adjustment which is added is equal
to the cash per Unit held in the Capital Account (see Public Sale of
Units--Public Offering Price and Redemption in Part B).
(d)Of this figure, the Trustee receives annually for its service as
Trustee, $0.70 per $1,000 face amount of Debt Obligations. The
Trustee's Annual Fee and Expenses also includes the Portfolio
Supervision Fee and Evaluator's Fee set forth herein.
(e)The Sponsors also may be reimbursed for their costs of bookkeeping and
administrative services to the Fund. Portfolio supervision fees
deducted in excess of portfolio supervision expenses may be used for
this reimbursement. Additional deductions for this purpose are
currently estimated not to exceed an annual rate of $0.10 per Unit.
A-3
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DEFINED ASSET FUNDS--MUNICIPAL INVESTMENT TRUST FUND, MONTHLY PAYMENT
SERIES--278
INVESTMENT SUMMARY AS OF THE EVALUATION DATE (CONTINUED)
NUMBER OF ISSUES IN PORTFOLIO............................... 5
NUMBER OF ISSUES RATED BY:(a)
Standard & Poor's Corporation/
rating ............................................. AAA-- 3
AA-- 1
A-- 1
RANGE OF MATURITIES.................................................2006-2017
NUMBER OF ISSUES BY SOURCE OF
REVENUE:
Housing................................................ 1
Refunded Bonds......................................... 4
CONCENTRATIONS(b) EXPRESSED AS PERCENTAGE OF AGGREGATE FACE
AMOUNT OF DEBT OBLIGATIONS:
Refunded Bonds......................................... 93%
Issuers located in Florida (48%), Ohio (45%) and Utah
(7%)................................................. 100%
RISK FACTORS--The Fund is concentrated in FLORIDA and OHIO obligations. The
Sponsors and their counsel have not independently verified the following
information but the Sponsors have no reason to believe that such information is
incorrect in any material respect.
FLORIDA RISK FACTORS--
State Economy. In 1980 Florida ranked seventh among the fifty states with a
population of 9.7 million people. The State has grown dramatically since then
and, as of April 1, 1993, ranked fourth with an estimated population of 13.6
million, an increase of approximately 44.7% since 1980. Since the beginning of
the eighties, Florida has surpassed Ohio, Illinois and Pennsylvania in total
population. Florida's attraction, as both a growth and retirement state, has
kept net migration fairly steady with an average of 292,988 new residents each
year, from 1982 through 1993. Since 1983 the prime working age population
(18-44) has grown at an average annual rate of 2.6%. The share of Florida's
total working age population (18-59) to total State population is approximately
54%. Non-farm employment has grown by approximately 64.4% since 1980. The
service sector is Florida's largest employment sector, presently accounting for
32.1% of total non-farm employment. Manufacturing jobs in Florida are
concentrated in the area of high-tech and value-added sectors, such as
electrical and electronic equipment, as well as printing and publishing. Job
gains in Florida's manufacturing sector have exceeded national averages
increasing by 11.7% between 1980 and 1993. Foreign Trade has contributed
significantly to Florida's employment growth. Florida's dependence on highly
cyclical construction and construction related manufacturing has declined. Total
contract construction employment as a share of total non-farm employment has
fallen from 10% in 1973, to 7% in 1980 to 5% in 1993. Although the job creation
rate for the State of Florida since 1980 is over two times the rate for the
nation as a whole, since 1989 the unemployment rate for the State has risen
faster than the national average. The average rate of unemployment for Florida
since 1980 is 6.5%, while the national average is 7.1%. Because Florida has a
proportionately greater retirement age population, property income (dividends,
interest and rent) and transfer payments (Social Security and pension benefits)
are a relatively more important source of income. In 1993, Florida employment
income represented 62% of total personal income while nationally, employment
income represented 72% of total personal income.
The ability of the State and its local units of government to satisfy the
Debt Obligations may be affected by numerous factors which impact on the
economic vitality of the State in general and the particular region of the State
in which the issuer of the Debt Obligation is located. South Florida is
particularly susceptible to international trade and currency imbalances and to
economic dislocations in Central and South America, due to its geographical
location and its involvement with foreign trade, tourism and investment capital.
The central and northern portions of the State are impacted by problems in the
agricultural sector, particularly with regard to the citrus and sugar
industries. Short-term adverse economic conditions may be created in these
areas, and in the State as a whole, due to crop failures, severe weather
conditions or other agriculture-related problems. The State economy also has
historically been somewhat dependent on the tourism and construction industries
and is sensitive to trends in those sectors.
The State Budget. The State operates under a biennial budget which is
formulated in even numbered years and presented for approval to the Legislature
in odd numbered years. A supplemental budget request process is utilized in the
even numbered years for refining and modifying the primary budget. Under
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(a) The ratings assigned by the bond rating agencies may change from time
to time. Certain of the ratings may be provisional or conditional. See
Description of Ratings in Part B.
(b) A Fund is considered to be 'concentrated' in a category when the
Securities in that category constitute 25% or more of the aggregate face amount
of the Portfolio. See Risk Factors in Part B for a description of certain
investment risks relating to these types of obligations.
A-4
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DEFINED ASSET FUNDS--MUNICIPAL INVESTMENT TRUST FUND, MONTHLY PAYMENT
SERIES--278
the State Constitution and applicable statutes, the State budget as a whole, and
each separate fund within the State budget, must be kept in balance from
currently available revenues during each State fiscal year. (The State's fiscal
year runs from July 1 through June 30). The Governor and the Comptroller of the
State are charged with the responsibility of ensuring that sufficient revenues
are collected to meet appropriations and that no deficit occurs in any State
fund.
The financial operations of the State covering all receipts and
expenditures are maintained through the use of three types of funds: the General
Revenue Fund, Trust Funds and Working Capital Fund. The majority of the State's
tax revenues are deposited in the General Revenue Fund and moneys in the General
Revenue Fund are expended pursuant to appropriations acts. In fiscal year
1992-93, expenditures for education, health and welfare and public safety
represented approximately 49%, 30% and 11%, respectively, of expenditures from
the General Revenue Fund. The Trust Funds consist of moneys received by the
State which under law or trust agreement are segregated for a purpose authorized
by law. Revenues in the General Revenue Fund which are in excess of the amount
needed to meet appropriations may be transferred to the Working Capital Fund.
State Revenues. Estimated General Revenue and Working Capital Fund revenues
of $13,582.7 million for 1993-94 (excluding Hurricane Andrew related revenues
and expenses) represent an increase of 8.4% over revenues for 1992-93. This
amount reflects a transfer of $190 million, out of an estimated $220 million in
non-recurring revenue due to Hurricane Andrew, to a hurricane relief trust fund.
Estimated Revenue for 1994-95 of $14,293.5 million (excluding Hurricane Andrew
impacts) represent an increase of 5.2% over 1993-1994. This amount reflects a
transfer of $159 million in non-recurring revenue due to Hurricane Andrew, to a
hurricane relief trust fund.
In fiscal year 1992-1993, the State derived approximately 62% of its total
direct revenues for deposit in the General Revenue Fund, Trust Funds and Working
Capital Fund from State taxes. Federal funds and other special revenues
accounted for the remaining revenues. The greatest single source of tax receipts
in the State is the 6% sales and use tax. For the fiscal year ended June 30,
1993, receipts from the sales and use tax totalled $9,426 million, an increase
of approximately 12.5% over fiscal year 1991-92. This amount includes
non-recurring increases attributable to the rebuilding and reconstruction
following the hurricane. The second largest source of State tax receipts is the
tax on motor fuels including the tax receipts distributed to local governments.
Receipts from the taxes on motor fuels are almost entirely dedicated to trust
funds for specific purposes or transferred to local governments and are not
included in the General Revenue Fund. For the fiscal year ended June 30, 1992,
collections of this tax totalled $1,475.5 million.
The State currently does not impose a personal income tax. However, the
State does impose a corporate income tax on the net income of corporations,
organizations, associations and other artificial entities for the privilege of
conducting business, deriving income or existing within the State. For the
fiscal year ended June 30, 1993, receipts from the corporate income tax totalled
$846.6 million, an increase of approximately 5.6% from fiscal year 1991-92. The
Documentary Stamp Tax collections totalled $639 million during fiscal year
1992-93, or approximately 27% over fiscal year 1991-92. The Alcoholic Beverage
Tax, an excise tax on beer, wine and liquor totalled $442.2 million in 1992-93,
an increase of 1.6% from fiscal year 1991-92. The Florida lottery produced sales
of $2.13 billion of which $810.4 million was used for education in fiscal year
1992-93.
While the State does not levy ad valorem taxes on real property or tangible
personal property, counties, municipalities and school districts are authorized
by law, and special districts may be authorized by law, to levy ad valorem
taxes. Under the State Constitution, ad valorem taxes may not be levied by
counties, municipalities, school districts and water management districts in
excess of the following respective millages upon the assessed value of real
estate and tangible personal property; for all county purposes, ten mills; for
all municipal purposes, ten mills; for all school purposes, ten mills; and for
water management purposes, either 0.05 mill or 1.0 mill, depending upon
geographic location. These millage limitations do not apply to taxes levied for
payment of bonds and taxes levied for periods not longer than two years when
authorized by a vote of the electors. (Note: one mill equals one-tenth of one
cent).
The State Constitution and statutes provide for the exemption of homesteads
from certain taxes. The homestead exemption is an exemption from all taxation,
except for assessments for special benefits, up to a specific amount of the
assessed valuation of the homestead. This exemption is available to every person
who has the legal or equitable title to real estate and maintains thereon his or
her permanent home. All permanent residents of the State are currently entitled
to a $25,000 homestead exemption from levies by all taxing authorities, however,
such exemption is subject to change upon voter approval.
On November 3, 1992, the voters of the State of Florida passed an amendment
to the Florida Constitution establishing a limitation on the annual increase in
assessed valuation of homestead property commencing January 1, 1994, of the
lesser of 3% or the increase in the Consumer Price Index during the
A-5
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DEFINED ASSET FUNDS--MUNICIPAL INVESTMENT TRUST FUND, MONTHLY PAYMENT
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relevant year, except in the event of a sale thereof during such year, and
except as to improvements thereto during such year. The amendment did not alter
any of the millage rates described above.
Since municipalities, counties, school districts and other special purpose
units of local governments with power to issue general obligation bonds have
authority to increase the millage levy for voter approved general obligation
debt to the amount necessary to satisfy the related debt service requirements,
the amendment is not expected to adversely affect the ability of these entities
to pay the principal of or interest on such general obligation bonds. However,
in periods of high inflation, those local government units whose operating
millage levies are approaching the constitutional cap and whose tax base
consists largely of residential real estate, may, as a result of the
above-described amendment, need to place greater reliance on non-ad valorem
revenue sources to meet their operating budget needs.
A joint resolution to amend the State Constitution has been adopted by the
Florida Legislature. The amendment, if approved by the voters of the state at
the November 1994 general election, would limit the amount of taxes, fees,
licenses and charges imposed by the Legislature and collected during any fiscal
year to the amount of revenues allowed for the prior fiscal year, plus an
adjustment for growth. Growth is defined as the amount equal to the average
annual rate of growth in Florida personal income over the most recent twenty
quarters times the state revenues allowed for the prior fiscal year. The
revenues allowed for any fiscal year could be increased by a two-thirds vote of
the Legislature, The limit would be effective starting with fiscal year
1995-1996. Any excess revenues generated would be put in the budget
stabilization fund until it is fully funded and then refunded to taxpayers.
Included among the categories of revenues which are exempt from the proposed
revenue limitation, however, are revenues pledged to state bonds.
State General Obligation Bonds and State Revenue Bonds. The State
Constitution does not permit the State to issue debt obligations to fund
governmental operations. Generally, the State Constitution authorizes State
bonds pledging the full faith and credit of the State only to finance or
refinance the cost of State fixed capital outlay projects, upon approval by a
vote of the electors, and provided that the total outstanding principal amount
of such bonds does not exceed 50% of the total tax revenues of the State for the
two preceding fiscal years. Revenue bonds may be issued by the State or its
agencies without a vote of the electors only to finance or refinance the cost of
State fixed capital outlay projects which are payable solely from funds derived
directly from sources other than State tax revenues.
Exceptions to the general provisions regarding the full faith and credit
pledge of the State are contained in specific provisions of the State
Constitution which authorize the pledge of the full faith and credit of the
State, without electorate approval, but subject to specific coverage
requirements, for: certain road projects, county education projects, State
higher education projects, State system of Public Education and construction of
air and water pollution control and abatement facilities, solid waste disposal
facilities and certain other water facilities.
Local Bonds. The State Constitution provides that counties, school
districts, municipalities, special districts and local governmental bodies with
taxing powers may issue debt obligations payable from ad valorem taxation and
maturing more than 12 months after issuance, only (i) to finance or refinance
capital projects authorized by law, provided that electorate approval is
obtained; or (ii) to refund outstanding debt obligations and interest and
redemption premium thereon at a lower net average interest cost rate.
Counties, municipalities and special districts are authorized to issue
revenue bonds to finance a variety of self-liquidating projects pursuant to the
laws of the State, such revenue bonds to be secured by and payable from the
rates, fees, tolls, rentals and other charges for the services and facilities
furnished by the financed projects. Under State law, counties and municipalities
are permitted to issue bonds payable from special tax sources for a variety of
purposes, and municipalities and special districts may issue special assessment
bonds.
Bond Ratings. General obligation bonds of the State are currently rated Aa
by Moody's and AA by Standard & Poor's.
Litigation. Due to its size and its broad range of activities, the State
(and its officers and employees) are involved in numerous routine lawsuits. The
managers of the departments of the State involved in such routine lawsuits
believed that the results of such pending litigation would not materially affect
the State's financial position. In addition to the routine litigation pending
against the State, its officers and employees, the following lawsuits and claims
are also pending:
A. In a suit, plaintiff has sought title to Hugh Taylor Birch State
Recreation Area by virtue of a reverter clause in the deed from Hugh Taylor
Birch to the State. A final judgment at trial was entered in favor of the
State. The case has been appealed to the Fourth District Court of Appeal.
The Department of Natural Resources anticipates the area will remain in
State lands; however, in the event the
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DEFINED ASSET FUNDS--MUNICIPAL INVESTMENT TRUST FUND, MONTHLY PAYMENT
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court should rule in favor of the plaintiff, the State is subject to a loss
of real property valued at approximately $400 million.
B. In a suit, the Florida Supreme Court prospectively invalidated a tax
preference methodology under former Sections 554.06 and 565.12 of the
Florida Statutes (1985). This ruling was appealed to the United States
Supreme Court which reversed the State Supreme Court and remanded the
matter back to the State court. The Supreme Court's opinion suggested that
one of the State's options for correcting the constitutional problems would
be to assess and collect back taxes at the higher rates applicable to those
who were ineligible for the tax preference from all taxpayers who had
benefitted from the tax preference during the contested tax period. The
State chose to seek a recovery of taxes from those who benefitted from the
tax preference by requiring them to pay taxes at the higher rate that
applied to out-of-state manufacturers and distributors. The Florida Supreme
Court remanded the matter to the Circuit Court for the 2nd Judicial Circuit
to hear arguments on the method chosen by the State to provide a clear and
certain remedy. The trial court's decision against the State is on appeal
at the First District Court of Appeal. With the exception of two parties,
all parties have settled their claims with the State. Should an unfavorable
outcome result in this case, approximately $33 million may be refunded.
C. A class action suit brought against the Department of Corrections,
alleging race discrimination in hiring and employment practices, originally
went to trial in 1982 with the Department prevailing on all claims except a
partial summary judgment to a plaintiff sub-class claiming a discriminatory
impact on hiring caused by an examination requirement. Jurisdictional
aspects of the testing issue were appealed to the Eleventh Circuit Court of
Appeals which vacated the trial court's order and was upheld by the United
States Supreme Court. The district court consolidated three successor
lawsuits with this case and entered a final judgment in favor of the State.
The judgment, however, has been appealed to the Eleventh Circuit Court of
Appeals. Should the department fail in future appeals, the liability of the
State for back pay and other monetary relief could exceed $40 million.
D. Complaints were filed in the Second Judicial Circuit seeking a
declaration that Sections 624.509, 624.512 and 624.514, F.S. (1988) violate
various U.S. and Florida Constitutional provisions. Relief was sought in
the form of a tax refund. The Florida Supreme Court reversed the trial
court in favor of the State. Plaintiffs have petitioned for certiorari with
the United States Supreme Court. The State has settled all outstanding
litigation in this area. Similar issues had been raised in the following
cases which were part of the settlement: Ford Motor Company v. Bill Gunter,
Case No. 86-3714, 2nd Judicial Circuit, and General Motors Corporation v.
Tom Gallagher, Case Nos. 90-2045 and 88-2925, 2nd Judicial Circuit, where
the plaintiffs are challenging Section 634.131, F.S., which imposes taxes
on the premiums received for certain motor vehicle service agreements.
Current estimates indicate that the State's potential refund exposure under
the remaining refund application yet to be denied is approximately $150
million. However, the State hopes that refund exposure will be reduced as
these refund requests begin to be denied based upon the Florida Supreme
Court decision in the instant case.
E. In two cases, plaintiffs have sought approximately $25 million in
intangible tax refunds based partly upon claims that Florida's intangible
tax statutes are unconstitutional.
F. A lawsuit was filed against the Department of Health and
Rehabilitative Services (DHRS) and the Comptroller of the State of Florida
involving a number of issues arising out of the implementation of a DHRS
computer system and seeking declaratory relief and money damages. The
estimated potential liability to the State is in excess of $40 million.
G. Plaintiffs in a case have sought a declaration that statutory
assessments on certain hospital net revenues are invalid, unconstitutional,
and unenforceable and request temporary and permanent injunctive relief be
granted prohibiting the enforcement or collection of the assessment and
that all monies paid to the State by the plaintiffs and the class members
within the four years preceding the filing of the action be reimbursed by
the defendants with interest. An unfavorable outcome to this case could
result in the possibility of refunds exceeding $50 million. This case was
voluntarily dismissed but may be refiled.
H. In an inverse condemnation suit claiming that the actions of the
State constitute a taking of certain leases for which compensation is due,
the Circuit judge granted the State's motion for summary judgment finding
that the State had not deprived plaintiff of any royalty rights they might
have. Plaintiff has appealed. Additionally, plaintiff's request for a
drilling permit was rejected after administrative proceedings before the
Department of Environmental Protection. Plaintiff is expected to challenge
the decision.
I. In an inverse condemnation suit alleging the regulatory taking of
property without compensation in the Green Swamp Area of Critical State
Concern, discovery is concluding and a motion for a
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DEFINED ASSET FUNDS--MUNICIPAL INVESTMENT TRUST FUND, MONTHLY PAYMENT
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summary judgment will likely be made. If the judgment should be for the
plaintiff, condemnation procedures would be instituted with costs of $30
million, plus interest from 1975.
J. In two cases, plaintiffs have challenged the constitutionality of the
$295 fee imposed on the issuance of certificates of title for vehicles
previously titled outside the State. The circuit court granted summary
judgment to the plaintiff, finding that the fee violated the Commerce
Clause of the U.S. Constitution. The Court enjoined further collection of
the fee and has ordered refunds to all those who have paid since the
statute came into existence in mid-1991. The State has noticed an appeal
and is entitled to a stay of the lower court ruling's effectiveness, thus
the fee continues to be collected during the appeal. The potential refund
exposure may be in excess of $100 million.
K. Santa Rosa County has filed a complaint for declaratory relief
against the State requesting the Circuit Court to: (1) find that Section
206.60(2)(a), F.S., does not allow the Department to deduct administrative
expenses unrelated to the collection, administration, and distribution of
the county gas tax; and (2) order the department to pay Santa Rosa County
all moneys shown to have been unlawfully deducted from the motor fuel tax
revenues plus interest. Santa Rosa County obtained a prospective
injunction, but was denied the refund it sought. There has been no appeal
by either party. The Legislature changed the statute in accordance with the
Court's decision.
L. Lee Memorial Hospital has contested the calculation of its
disproportionate share payment for the 1992-93 State fiscal year. An
unfavorable outcome to this case could result in a possible settlement of
$20 to $30 million.
M. A lawsuit has challenged the freezing of nursing home reimbursement
rates for the period January 1, 1990 through July 1, 1990. The First
District Court of Appeal ruled against the Agency for Health Care
Administration (AHCA). The AHCA has petitioned the Florida Supreme Court
for review of this declaration. An unfavorable outcome to this case could
result in a potential liability of $40 million.
Summary. Many factors including national, economic, social and
environmental policies and conditions, most of which are not within the control
of the State or its local units of government, could affect or could have an
adverse impact on the financial condition of the State. Additionally, the
limitations placed by the State Constitution on the State and its local units of
government with respect to income taxation, ad valorem taxation, bond
indebtedness and other matters discussed above, as well as other applicable
statutory limitations, may constrain the revenue-generating capacity of the
State and its local units of government and, therefore, the ability of the
issuers of the Debt Obligations to satisfy their obligations thereunder.
The Sponsors believe that the information summarized above describes some
of the more significant matters relating to the Florida Debt Obligations. For a
discussion of the particular risks with each of the Debt Obligations, and other
factors to be considered in connection therewith, reference should be made to
the Official Statement and other offering materials relating to each of the Debt
Obligations included in the portfolio of the Florida Debt Obligations. The
foregoing information regarding the State, its political subdivisions and its
agencies and authorities constitutes only a brief summary, does not purport to
be a complete description of the matters covered and is based solely upon
information drawn from official statements relating to offerings of certain
bonds of the State. The Sponsors and their counsel have not independently
verified this information and the Sponsors have no reason to believe that such
information is incorrect in any material respect. None of the information
presented in this summary is relevant to Puerto Rico or Guam Debt Obligations
which may be included in the Florida Debt Obligations.
OHIO RISK FACTORS--
The following summary is based on publicly available information which has
not been independently verified by the Sponsors or their legal counsel.
Employment and Economy. Economic activity in Ohio, as in many other
industrially developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Ohio ranked third in the nation in 1991
personal income derived from manufacturing. Although manufacturing (including
auto-related manufacturing) remains an important part of Ohio's economy, the
greatest growth in employment in Ohio in recent years, consistent with national
trends, has been in the non-manufacturing area. Payroll employment in Ohio
showed a steady upward trend until 1979, then decreased until 1982. It peaked in
the summer of 1993 after a slight decrease in 1992, and then decreased slightly
but, as of May 1994, it has approached a new high. Growth in recent years has
been concentrated among non-manufacturing industries, with manufacturing
tapering off since its 1969 peak. Over three-fourths of the payroll workers in
Ohio are employed by non-manufacturing industries.
The average monthly unemployment rate in Ohio was 5.7% in July, 1994.
A-8
<PAGE>
DEFINED ASSET FUNDS--MUNICIPAL INVESTMENT TRUST FUND, MONTHLY PAYMENT
SERIES--278
With 15.7 million acres in farm land, agriculture is a very important
segment of the economy in Ohio, providing an estimated 750,000 jobs or
approximately 15% of total Ohio employment. By many measures, agriculture is
Ohio's leading industry contributing nearly $4.1 billion to the state's economy
each year.
Ohio continues to be a major 'headquarters' state. Of the top 500
industrial corporations (based on 1993 sales) as reported in 1994 by Fortune
magazine, 42 had headquarters in Ohio, placing Ohio fourth as a 'headquarters'
state for industrial corporations. Ohio places sixth as a 'headquarters' state
for service corporations (24 of the top 500).
The State Budget, Revenues and Expenditures and Cash Flow. Ohio law
effectively precludes the State from ending a fiscal year or a biennium with a
deficit. The State Constitution provides that no appropriation may be made for
more than two years and consistent with that provision the State operates on a
fiscal biennium basis. The current fiscal biennium runs from July 1, 1993
through June 30, 1995.
Under Ohio law, if the Governor ascertains that the available revenue
receipts and balances for the general revenue fund or other funds for the then
current fiscal year will probably be less than the appropriations for the year,
he must issue orders to the State agencies to prevent their expenditures and
obligations from exceeding the anticipated receipts and balances. The Governor
implemented this directive in some prior years, including fiscal years 1992 and
1993.
Consistent with national economic conditions, in the 1990-91 biennium, Ohio
experienced an economic slowdown producing some significant changes in certain
general revenue fund revenue and expenditure levels for the fiscal year 1991.
Examples on the revenue side included lower than previously forecasted revenues
from sales and use taxes (including auto) and corporate franchise and personal
income taxes. Increased human services expenditure requirements developed, such
as for Medicaid, Aid to Dependent Children and general assistance. Several
executive and legislative measures were taken to address the anticipated
shortfall in revenues and increase in expenditures. As a result, the Ohio Office
of Budget and Management (the 'OBM') reported a positive general revenue fund
balance of approximately $135.4 million at the end of fiscal year 1991.
State and national fiscal uncertainties during the 1992-93 biennium
required several actions to achieve the ultimate positive general revenue fund
ending balances. OBM projected a fiscal year 1992 imbalance--a receipts
shortfall resulting primarily from lower collection of certain taxes,
particularly sales, use and personal income taxing and higher expenditure levels
in certain areas, particularly human services including Medicaid. As an initial
action, the Governor ordered most state agencies to reduce general revenue fund
appropriation spending in the final six months of fiscal year 1992 by a total of
approximately $184 million. Debt service obligations were not affected by this
order. The General Assembly authorized, and the OBM made in June 1992, a $100.4
million transfer to the general revenue fund from the budget stabilization fund
and certain other funds. Other revenue and spending actions, legislative and
administrative, resolved the remaining general revenue fund imbalance for fiscal
year 1992.
As a first step toward addressing a $520 million general revenue fund
shortfall for fiscal year 1993 then estimated by OBM, the Governor ordered,
effective July 1, 1992, selected general revenue fund appropriations reductions
totalling $300 million (but such reductions did not include debt service).
Subsequent executive and legislative actions provided for positive
biennium-ending general revenue fund balances for the current biennium. The
general revenue fund ended the 1992-93 biennium with a fund balance of
approximately $111 million and a cash balance of approximately $394 million. The
general revenue fund appropriations bill for the current biennium was passed on
June 30, 1993. The first year of the current biennium, fiscal year 1994, ended
with a general revenue fund of over $560,000,000.
Because the schedule of general revenue fund cash receipts and
disbursements do not precisely coincide, temporary general revenue fund cash
flow deficiencies often occur in some months of a fiscal year, particularly in
the middle months. Statutory provisions provide for effective management of
these temporary cash flow deficiencies by permitting adjustment of payment
schedules and the use of total operating funds. A general revenue fund cash flow
deficiency occurred in two months of fiscal year 1990, with the highest being
approximately $252.4 million. In fiscal year 1991, there were general revenue
fund cash flow deficiencies in nine months, with the highest being $582.5
million; in fiscal year 1992 there were general revenue fund cash flow
deficiencies in ten months, with the highest being approximately $743.1 million.
In fiscal year 1993, general revenue fund cash flow deficiencies occurred in
August 1992 through May 1993, with the highest being approximately $768.6
million in December. General revenue fund cash flow deficiencies occurred in six
months of fiscal year 1994, with the highest being approximately $500.6 million.
OBM currently projects cash flow deficiencies in certain months of the current
fiscal year.
State and State Agency Debt. The Ohio Constitution prohibits the incurrence
or assumption of debt by the State without a popular vote except for the
incurrence of debt to cover causal deficits or failures in
A-9
<PAGE>
DEFINED ASSET FUNDS--MUNICIPAL INVESTMENT TRUST FUND, MONTHLY PAYMENT
SERIES--278
revenue or to meet expenses not otherwise provided for which are limited to
$750,000 and to repel invasions, suppress insurrection or defend the State in
war. Under interpretations by Ohio courts, revenue bonds of the State and State
agencies that are payable from net revenues of or related to revenue producing
facilities or categories of such facilities are not considered 'debt' within the
meaning of these constitutional provisions.
At various times since 1921, Ohio voters, by thirteen specific
constitutional amendments (the last adopted in 1993), authorized the incurrence
of up to $4.664 billion in State debt to which taxes or excises were pledged for
payment. Of that amount, $715 million was for veterans' bonuses. As of August
16, 1994, of the total amount authorized by the voters, excluding highway
obligations and general obligation park bonds discussed below, approximately
$3.235 billion has been issued, of which approximately $2.564 billion has been
retired and approximately $671.4 million remains outstanding. The only such
State debt still authorized to be incurred are portions of the Highway
Obligation Bonds, the Coal Development Bonds, and the State general obligation
bonds for local government infrastructure projects and parks.
No more than $500 million in highway obligations may be outstanding at any
time. As of August 16, 1994, approximately $446.3 million of highway obligations
were outstanding. No more than $100 million in State obligations for coal
development may be outstanding at any one time. As of August 16, 1994,
approximately $38.9 million of such bonds were outstanding. Not more than $1.2
billion of State general obligation bonds to finance local capital
infrastructure improvements may be issued at any one time, and no more than $120
million can be issued in a calendar year. As of August 16, 1994, approximately
$625.3 million of those bonds were outstanding.
The Ohio Constitution authorizes State bonds for certain housing purposes,
but tax moneys may not be obligated or pledged to those bonds. In addition, the
Ohio Constitution authorizes the issuance of obligations of the State for
certain purposes, the owners or holders of which are not given the right to have
excises or taxes levied by the State legislature to pay principal and interest.
Such debt obligations include the bonds and notes issued by the Ohio Public
Facilities Commission and the Ohio Building Authority.
Under recent legislation, the State has been authorized to issue bonds to
finance approximately $140 million of capital improvements for local elementary
and secondary public school facilities, and the State building authority has
been authorized to issue $100 million of bonds to provide computer technology
and security systems for local school districts. Debt service on the obligations
is payable from State resources.
A statewide economic development program assists with loans and loan
guarantees, the financing of facilities for industry, commerce, research and
distribution. The law authorizes the issuance of State bonds and loan guarantees
secured by a pledge of portions of the State profits from liquor sales. The
General Assembly has authorized the issuance of these bonds by the State
Treasurer, with a maximum amount of $300 million, subject to certain
adjustments, currently authorized to be outstanding at any one time. Of an
approximate $148.0 million issue in 1989, approximately $89.9 million is
outstanding. The highest future year annual debt service on those 1989 bonds,
which are payable through 2000, is approximately $18.3 million.
An amendment to the Ohio Constitution authorizes revenue bond financing for
certain single and multifamily housing. No State resources are to be used for
the financing. As of August 17, 1994, the Ohio Housing Financing Agency,
pursuant to that constitutional amendment and implementing legislation, had sold
revenue bonds in the aggregate principal amount of approximately $234.32 million
for multifamily housing and approximately $3.866 billion for single family
housing.
A constitutional amendment adopted in 1990 authorizes greater State and
political subdivision participation in the provision of housing for individuals
and families in order to supplement existing State housing assistance programs.
The General Assembly could authorize State borrowing for the new programs and
the issuance of State obligations secured by a pledge of all or a portion of
State revenues or receipts, although the obligations may not be supported by the
State's full faith and credit.
A 1986 act, amended in 1994 (the 'Rail Act'), authorizes the Ohio Rail
Development Commission (the 'Rail Commission') to issue obligations to finance
the costs of rail service projects within the State either directly or by loans
to other entities. The Rail Commission has considered financing plan options and
the possibility of issuing bonds or notes. The Rail Act prohibits, without
express approval by joint resolution of the General Assembly, the collapse of
any escrow of financing proceeds for any purpose other than payment of the
original financing, the substitution of any other security, and the application
of any proceeds to loans or grants. The Rail Act authorizes the Rail Commission,
but only with subsequent General Assembly action, to pledge the faith and credit
of the State but not the State's power to levy and collect taxes (except ad
valorem property taxes if subsequently authorized by the General Assembly) to
secure debt service on any post-escrow obligations and, provided it obtains the
annual consent of the State Controlling Board, to pledge to and use for the
payment of debt service on any such obligations, all excises,
A-10
<PAGE>
DEFINED ASSET FUNDS--MUNICIPAL INVESTMENT TRUST FUND, MONTHLY PAYMENT
SERIES--278
fees, fines and forfeitures and other revenues (except highway receipts) of the
State after provision for the payment of certain other obligations of the State.
Schools and Municipalities. The 612 public school districts and 49 joint
vocational school districts in the State receive a major portion (approximately
46%) of their operating funds from State subsidy appropriations, the primary
portion known as the Foundation Program. They must also rely heavily upon
receipts from locally-voted taxes. Some school districts in recent years have
experienced varying degrees of difficulty in meeting mandatory and discretionary
increased costs. Current law prohibits school closings for financial reasons.
Original State appropriations for the 1992-93 biennium provided for an
increase in school funding over funding for the preceding biennium. The
reduction in appropriations spending for fiscal year 1992 included a 2.5%
overall reduction in the annual Foundation Program appropriations and a 6%
reduction in other primary and secondary education programs. The reductions were
in varying amounts, and had varying effects, with respect to individual school
districts. State appropriations for the current biennium provide for an increase
in State school funding appropriations over those in the preceding biennium. The
$8.9 billion appropriated for primary and secondary education is intended to
provide for 2.4% and 4.6% increases in basic aid for the two fiscal years of the
biennium.
In previous years school districts facing deficits at year end had to apply
to the State for a loan from the Emergency School Advancement Fund. This Fund
met all the needs of the school districts with potential deficits in fiscal
years 1979 through 1989. New legislation replaced the Fund with enhanced
provisions for individual district local borrowing, including direct application
of Foundation Program distributions to repayment if needed. As of fiscal year
1993, there were 27 loans made for an approximate aggregate amount of $94.5
million. Twenty-eight school districts have received approval for loans
totalling approximately $15.6 million in fiscal year 1994.
Litigation contesting the Ohio system of school funding is pending with
defendants being the State and several State agencies and officials. The
complaints essentially request a declaratory judgment that the State's statutory
system of funding public elementary and secondary education violates various
provisions of the Ohio Constitution and request the State to devise a
constitutionally acceptable system of school funding. On July 1, 1994, the trial
court concluded that certain provisions of current law violated provisions of
the Ohio constitution. The trial court directed the State to provide for and
fund a system of funding public elementary and secondary education in compliance
with the Ohio Constitution. Defendants have appealed this ruling, and have
applied for a stay until the case is resolved on appeal. It is not possible at
this time to state whether the suit will be successful or, if plaintiffs should
prevail, the effect on the State's present school funding system, including the
amount of and criteria for State basic aid allocations to school districts.
Various Ohio municipalities have experienced fiscal difficulties. Due to
these difficulties, the State established an act in 1979 to identify and assist
cities and villages experiencing defined 'fiscal emergencies'. A commission
appointed by the Governor monitors the fiscal affairs of municipalities facing
substantial financial problems. To date, this act has been applied to eleven
cities and twelve villages. The situations in nine of the cities and nine of the
villages have been resolved and their commissions terminated.
State Employees and Retirement Systems. The State has established five
public retirement systems, three of which cover both State and local government
employees, one covers State government employees only, and one covers local
government employees only. Those systems provide retirement, disability
retirement and survivor benefits. Federal law requires newly-hired State
employees to participate in the federal Medicare program, requiring matching
employer and employee contributions, each now 1.45% of the wage base. Otherwise,
State employees covered by a State retirement system are not currently covered
under the federal Social Security Act. The actuarial evaluations reported by
these five systems showed aggregate unfunded accrued liabilities of
approximately $17,143 billion covering both State and local employees.
The State engages in employee collective bargaining and currently operates
under staggered two-year agreements with all of its 21 bargaining units. The
State has a new agreement, expiring March 31, 1997, with its largest bargaining
unit representing approximately 37,000 employees. The remaining bargaining units
have entered into new agreements with the State which expire at various times in
1997.
Health Care Facilities Debt. Revenue bonds are issued by Ohio counties and
other agencies to finance hospitals and other health care facilities. The
revenues of such facilities consist, in varying but typically material amounts,
of payment from insurers and third-party reimbursement programs, such as
Medicaid, Medicare and Blue Cross. Consistent with the national trend,
third-party reimbursement programs in Ohio have begun new programs, and modified
benefits, with a goal of reducing usage of health care facilities. In addition,
the number of alternative health care delivery systems in Ohio has increased
over the
A-11
<PAGE>
DEFINED ASSET FUNDS--MUNICIPAL INVESTMENT TRUST FUND, MONTHLY PAYMENT
SERIES--278
past several years. For example, the number of health maintenance organizations
licensed by the Ohio Department of Insurance increased from 12 on February 14,
1983 to 33 as of August 17, 1994. Due in part to changes in the third-party
reimbursement programs and an increase in alternative delivery systems, the
health care industry in Ohio has become more competitive. This increased
competition may adversely affect the ability of health care facilities in Ohio
to make timely payments of interest and principal on the indebtedness.
PUBLIC SALE OF UNITS--
The quantity discount to sales charges applies to all purchases of
Municipal Investment Trust Fund units in the secondary market on the same day,
irrespective of any differences in their rates of Effective Sales Charge. The
limitation to a range of 0.5%, described under Public Sale of Units--Volume
Purchase Discounts, has been eliminated.
A-12
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL INVESTMENT TRUST FUND,
MONTHLY PAYMENT SERIES - 278
REPORT OF INDEPENDENT ACCOUNTANTS
The Sponsors, Trustee and Holders
of Defined Asset Funds - Municipal Investment Trust Fund,
Monthly Payment Series - 278:
We have audited the accompanying statement of condition of
Defined Asset Funds - Municipal Investment Trust Fund,
Monthly Payment Series - 278, including the portfolio, as
of November 30, 1994 and the related statements of
operations and of changes in net assets for the years ended
November 30, 1994, 1993 and 1992. These financial
statements are the responsibility of the Trustee. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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 statements are free
of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures
in the financial statements. Securities owned at November
30, 1994, as shown in such portfolio, were confirmed to us
by The Chase Manhattan Bank (National Association), 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 audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
financial position of Defined Asset Funds - Municipal
Investment Trust Fund, Monthly Payment Series - 278 at
November 30, 1994 and the results of its operations and
changes in its net assets for the above-stated years in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, N.Y.
January 16, 1995
D - 1.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL INVESTMENT TRUST FUND,
MONTHLY PAYMENT SERIES - 278
STATEMENT OF CONDITION
As of November 30, 1994
<TABLE>
<S> <C> <C>
TRUST PROPERTY:
Investment in marketable securities -
at value (cost $ 8,157,107 )(Note 1)......... $ 9,210,093
Securities called for redemption -
at value (cost $ 110,275 )(Note 5)........... 110,000
Accrued interest ............................... 287,456
Cash - principal ............................... 60,006
-----------
Total trust property ......................... 9,667,555
LESS LIABILITIES:
Income advance from Trustee..................... $ 87,421
Accrued Sponsors' fees ......................... 4,076 91,497
----------- -----------
NET ASSETS, REPRESENTED BY:
33,596 units of fractional undivided
interest outstanding (Note 3)................ 9,380,099
Undistributed net investment income ............ 195,959 $ 9,576,058
----------- ===========
UNIT VALUE ($ 9,576,058 / 33,596 units ).......... $ 285.04
===========
</TABLE>
See Notes to Financial Statements.
D - 2.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL INVESTMENT TRUST FUND,
MONTHLY PAYMENT SERIES - 278
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended November 30,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest income ........................ $ 818,577 $ 1,746,757 $ 2,723,164
Trustee's fees and expenses ............ (18,287) (25,943) (34,175)
Sponsors' fees ......................... (4,662) (6,395) (5,569)
------------------------------------------------
Net investment income .................. 795,628 1,714,419 2,683,420
------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain on
securities sold or redeemed .......... 15,321 141,499 18,667
Unrealized depreciation
of investments ....................... (1,183,063) (283,608) (405,244)
------------------------------------------------
Net realized and unrealized
loss on investments ................. (1,167,742) (142,109) (386,577)
------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS .............. $ (372,114) $ 1,572,310 $ 2,296,843
================================================
</TABLE>
See Notes to Financial Statements.
D - 3.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL INVESTMENT TRUST FUND,
MONTHLY PAYMENT SERIES - 278
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Years Ended November 30,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
OPERATIONS:
Net investment income .................. $ 795,628 $ 1,714,419 $ 2,683,420
Realized gain on
securities sold or redeemed .......... 15,321 141,499 18,667
Unrealized depreciation
of investments ....................... (1,183,063) (283,608) (405,244)
------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ............ (372,114) 1,572,310 2,296,843
------------------------------------------------
DISTRIBUTIONS TO HOLDERS (Note 2):
Income ................................ (953,790) (2,018,448) (2,689,571)
Principal .............................. (4,069,148) (16,042,090) (1,184,083)
------------------------------------------------
Total distributions .................... (5,022,938) (18,060,538) (3,873,654)
------------------------------------------------
SHARE TRANSACTIONS:
Redemption amounts - income ............ (7,620)
Redemption amounts - principal ......... (384,419)
------------------------------------------------
Total share transactions ............... (392,039)
------------------------------------------------
NET DECREASE IN NET ASSETS ............... (5,395,052) (16,488,228) (1,968,850)
NET ASSETS AT BEGINNING OF YEAR .......... 14,971,110 31,459,338 33,428,188
------------------------------------------------
NET ASSETS AT END OF YEAR ................ $ 9,576,058 $14,971,110 $31,459,338
================================================
PER UNIT:
Income distributions during
year ................................. $ 28.39 $ 60.08 $ 79.61
================================================
Principal distributions during
year ................................. $ 121.12 $ 477.50 $ 35.20
================================================
Net asset value at end of
year ................................. $ 285.04 $ 445.62 $ 936.40
================================================
TRUST UNITS:
Redeemed during year ................... 401
Outstanding at end of year ............. 33,596 33,596 33,596
================================================
</TABLE>
See Notes to Financial Statements.
D - 4.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL INVESTMENT TRUST FUND,
MONTHLY PAYMENT SERIES - 278
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
<TABLE>
<S> <C>
The Fund is registered under the Investment Company Act of 1940 as a Unit
Investment Trust. The following is a summary of significant accounting
policies consistently followed by the Fund in the preparation of its
financial statements. The policies are in conformity with generally accepted
accounting principles.
(A) Securities are stated at value as determined by the
Evaluator based on bid side evaluations for the securities.
See "Redemption - Computation of Redemption Price Per Unit"
in this Prospectus, Part B.
(B) The Fund is not subject to income taxes. Accordingly, no
provision for such taxes is required.
(C) Interest income is recorded as earned.
2. DISTRIBUTIONS
A distribution of net investment income is made to Holders each month.
Receipts other than interest, after deductions for redemptions and applicable
expenses, are distributed as explained in "Administration of the Fund -
Accounts and Distributions" in this Prospectus, Part B.
</TABLE>
3. NET CAPITAL
<TABLE>
<S> <C>
Cost of 33,596 units at Date of Deposit .................... $34,204,750
Less sales charge .......................................... 1,333,761
-----------
Net amount applicable to Holders ........................... 32,870,989
Redemptions of units - net cost of 13,404 units redeemed
less redemption amounts (principal)....................... (970,116)
Realized gain on securities sold or redeemed ............... 975,428
Principal distributions .................................... (24,548,913)
Net unrealized appreciation of investments ................. 1,052,711
-----------
Net capital applicable to Holders .......................... $ 9,380,099
===========
</TABLE>
4. INCOME TAXES
<TABLE>
<S> <C>
As of November 30, 1994, net unrealized appreciation of investments (including
securities called for redemption), based on cost for Federal income tax
purposes, aggregated $1,052,711, of which $275 related to
depreciated securities and $1,052,986 related to appreciated securities.
The cost of investment securities for Federal income tax purposes was
$8,267,382 at November 30, 1994.
5. SECURITIES CALLED FOR REDEMPTION
$ 110,000 face amount of State of Ohio, W. Dev. Auth., W. Dev. Rev. Bonds,
(Safe W. Ser. II) were redeemed on December 1, 1994. Such securities are
valued at the amount of proceeds subsequently received.
</TABLE>
D - 5.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL INVESTMENT TRUST FUND,
MONTHLY PAYMENT SERIES - 278
PORTFOLIO
As of November 30, 1994
<TABLE>
<CAPTION>
Rating Optional
Portfolio No. and Title of of Face Redemption
Securities Issues(1) Amount Coupon Maturities(3) Provisions(3) Cost Value(2)
---------- --------- ----------- ----------- ------------ ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Florida Municipal Power Agency, St. A- $ 1,000,000 5.000 % 2017 None $ 595,000 $ 768,880
Lucie Project Rev. Bonds, Ser. 1983
2 Palm Beach Cnty. Hlth. Fac. Auth., FL, AAA 3,060,000 9.500 2013 None 3,090,600 3,310,033
Rev. Bonds, Ser. C (John F. Kennedy
Mem. Hosp., Inc. Proj.)
3 Ohio Bldg. Auth., State Fac. Bonds, AAA 845,000 10.125 2006(4) 04/01/03 894,644 1,043,921
1982 Ser. A @ 100.000
4 State of Ohio, W. Dev. Auth., W. Dev. AAA 2,975,000 9.375 2010 None 2,982,438 3,483,636
Rev. Bonds, (Safe W. Ser. II)
5 Utah Hsg. Fin. Agy., Single Family Mtge. AA 590,000 9.500 2009 Currently 594,425 603,623
Bonds, 1983 Ser. A (Privately Ins. Mtge.
Loans)
----------- --------- ---------
TOTAL $ 8,470,000 $ 8,157,107 $ 9,210,093
=========== ========= =========
See Notes to Portfolio.
</TABLE>
D - 6.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL INVESTMENT TRUST FUND,
MONTHLY PAYMENT SERIES - 278
NOTES TO PORTFOLIO
As of November 30, 1994
<TABLE>
<S> <C>
(1) A description of the rating symbols and their meanings appears under
"Description of Ratings" in this Prospectus, Part B. Ratings, which have been
provided by the Evaluator, are by Standard & Poor's (when available) or by
Moody's Investors Service (as indicated by "m") when Standard & Poor's
ratings are not available. "NR", if applicable, indicates that this security
is not currently rated by either rating service.
(2) See Notes to Financial Statements.
(3) Optional redemption provisions, which may be exercised in whole or in part,
are initially at prices of par plus a premium, then subsequently at prices
declining to par. Certain securities may provide for redemption at par prior
or in addition to any optional or mandatory redemption dates or maturity, for
example, through the operation of a maintenance and replacement fund, if
proceeds are not able to be used as contemplated, the project is condemned or
sold or the project is destroyed and insurance proceeds are used to redeem
the securities. Many of the securities are also subject to mandatory sinking
fund redemption commencing on dates which may be prior to the date on which
securities may be optionally redeemed. Sinking fund redemptions are at par
and redeem only part of the issue. Some of the securities have mandatory
sinking funds which contain optional provisions permitting the issuer to
increase the principal amount of securities called on a mandatory redemption
date. The sinking fund redemptions with optional provisions may, and optional
refunding redemptions generally will, occur at times when the redeemed
securities have an offering side evaluation which represents a premium over
par. To the extent that the securities were acquired at a price higher than
the redemption price, this will represent a loss of capital when compared
with the Public Offering Price of the Units when acquired. Distributions will
generally be reduced by the amount of the income which would otherwise have
been paid with respect to redeemed securities and there will be distributed
to Holders any principal amount and premium received on such redemption after
satisfying any redemption requests for Units received by the Fund. The
estimated current return may be affected by redemptions. The tax effect on
Holders of redemptions and related distributions is described under "Taxes"
in this Prospectus, Part B.
(4) Bonds with an aggregate face amount of $ 845,000 have been
pre-refunded and are expected to be called for redemption on the optional
redemption provision dates shown.
</TABLE>
D - 7.
<PAGE>
DEFINED ASSET FUNDSSM
PROSPECTUS--PART B
DEFINED ASSET FUNDS MUNICIPAL SERIES
MUNICIPAL INVESTMENT TRUST FUND
THIS PART B OF THE PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED OR
PRECEDED BY PART A. FURTHER DETAIL REGARDING ANY OF THE INFORMATION
PROVIDED IN THE PROSPECTUS MAY BE OBTAINED WITHIN FIVE DAYS OF WRITTEN
OR TELEPHONIC REQUEST TO THE TRUSTEE, THE ADDRESS AND
TELEPHONE NUMBER OF WHICH ARE SET FORTH IN PART A OF THIS PROSPECTUS.
Index
PAGE
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Fund Description...................................... 1
Risk Factors.......................................... 2
How to Buy Units...................................... 7
How to Sell Units..................................... 9
Income, Distributions and Reinvestment................ 9
Fund Expenses......................................... 10
Taxes................................................. 11
Records and Reports................................... 12
PAGE
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Trust Indenture....................................... 12
Miscellaneous......................................... 13
Exchange Option....................................... 14
Supplemental Information.............................. 15
Appendix A--Description of Ratings.................... a-1
Appendix B--Sales Charge Schedules for Defined Asset
Funds Municipal Series................................ b-1
Appendix C--Sales Charge Schedules for Municipal
Investment Trust Fund................................. c-1
FUND DESCRIPTION
BOND PORTFOLIO SELECTION
Professional buyers and research analysts for Defined Asset Funds, with
access to extensive research, selected the Bonds for the Portfolio after
considering the Fund's investment objective as well as the quality of the Bonds
(all Bonds in the Portfolio are initially rated in the category A or better by
at least one nationally recognized rating organization or have comparable credit
characteristics), the yield and price of the Bonds compared to similar
securities, the maturities of the Bonds and the diversification of the
Portfolio. Only issues meeting these stringent criteria of the Defined Asset
Funds team of dedicated research analysts are included in the Portfolio. No
leverage or borrowing is used nor does the Portfolio contain other kinds of
securities to enhance yield. A summary of the Bonds in the Portfolio appears in
Part A of the Prospectus.
The deposit of the Bonds in the Fund on the initial date of deposit
established a proportionate relationship among the face amounts of the Bonds.
During the 90-day period following the initial date of deposit the Sponsors may
deposit additional Bonds in order to create new Units, maintaining to the extent
possible that original proportionate relationship. Deposits of additional Bonds
subsequent to the 90-day period must generally replicate exactly the
proportionate relationship among the face amounts of the Bonds at the end of the
initial 90-day period.
Yields on bonds depend on many factors including general conditions of the
bond markets, the size of a particular offering and the maturity and quality
rating of the particular issues. Yields can vary among bonds with similar
maturities, coupons and ratings. Ratings represent opinions of the rating
organizations as to the quality of the bonds rated, based on the credit of the
issuer or any guarantor, insurer or other credit provider, but these ratings are
only general standards of quality (see Appendix A).
After the initial date of deposit, the ratings of some Bonds may be reduced
or withdrawn, or the credit characteristics of the Bonds may no longer be
comparable to bonds rated A or better. Bonds rated BBB or Baa (the lowest
investment grade rating) or lower may have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case
with higher grade bonds. Bonds rated below investment grade or unrated bonds
with
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similar credit characteristics are often subject to
greater market fluctuations and risk of loss of principal and income than higher
grade bonds and their value may decline precipitously in response to rising
interest rates.
Because each Defined Asset Fund is a preselected portfolio of bonds, you
know the securities, maturities, call dates and ratings before you invest. Of
course, the Portfolio will change somewhat over time, as Bonds mature, are
redeemed or are sold to meet Unit redemptions or in other limited circumstances.
Because the Portfolio is not actively managed and principal is returned as the
Bonds are disposed of, this principal should be relatively unaffected by changes
in interest rates.
BOND 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. The Fund may retain an issuer's bonds despite adverse financial
developments. Experienced financial analysts regularly review the Portfolio and
a Bond may be sold in certain circumstances including the occurrence of a
default in payment or other default on the Bond, a decline in the projected
income pledged for debt service on a revenue bond, institution of certain legal
proceedings, if the Bond becomes taxable or is otherwise inconsistent with the
Fund's investment objectives, a decline in the price of the Bond or the
occurrence of other market or credit factors (including advance refunding) that,
in the opinion of Defined Asset Funds research analysts, makes retention of the
Bond detrimental to the interests of investors. The Trustee must generally
reject any offer by an issuer of a Bond to exchange another security pursuant to
a refunding or refinancing plan.
The Sponsors and the Trustee are not liable for any default or defect in a
Bond. If a contract to purchase any Bond fails, the Sponsors may generally
deposit a replacement bond so long as it is a tax-exempt bond, has a fixed
maturity or disposition date substantially similar to the failed Bond and is
rated A or better by at least one nationally recognized rating organization or
has comparable credit characteristics. A replacement bond must be deposited
within 110 days after deposit of the failed contract, at a cost that does not
exceed the funds reserved for purchasing the failed Bond and at a yield to
maturity and current return substantially equivalent (considering then current
market conditions and relative creditworthiness) to those of the failed Bond, as
of the date the failed contract was deposited.
RISK FACTORS
An investment in the Fund entails certain risks, including the risk that
the value of your investment will decline with increases in interest rates.
Generally speaking, bonds with longer maturities will fluctuate in value more
than bonds with shorter maturities. In recent years there have been wide
fluctuations in interest rates and in the value of fixed-rate bonds generally.
The Sponsors cannot predict the direction or scope of any future fluctuations.
Certain of the Bonds may have been deposited at a market discount or
premium principally because their interest rates are lower or higher than
prevailing rates on comparable debt securities. The current returns of market
discount bonds are lower than comparably rated bonds selling at par because
discount bonds tend to increase in market value as they approach maturity. The
current returns of market premium bonds are higher than comparably rated bonds
selling at par because premium bonds tend to decrease in market value as they
approach maturity. Because part of the purchase price is returned through
current income payments and not at maturity, an early redemption at par of a
premium bond will result in a reduction in yield to the Fund. Market premium or
discount attributable to interest rate changes does not indicate market
confidence or lack of confidence in the issue.
Certain Bonds deposited into the Fund may have been acquired on a
when-issued or delayed delivery basis. The purchase price for these Bonds is
determined prior to their delivery to the Fund and a gain or loss may result
from fluctuations in the value of the Bonds. Additionally, in any Defined Asset
Funds Municipal Series, if the value of the Bonds reserved for payment of the
periodic deferred sales charge, together with the interest thereon, were to
become insufficient to pay these charges, additional bonds would be required to
be sold.
The Fund may be concentrated in one or more of types of bonds.
Concentration in a State may involve additional risk because of the decreased
diversification of economic, political, financial and market risks. Set forth
below is a brief description of certain risks associated with bonds which may be
held by the Fund. Additional information is contained in the Information
Supplement which is available from the Trustee at no charge to the investor.
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GENERAL OBLIGATION BONDS
Certain of the Bonds may be general obligations of a governmental entity.
General obligation bonds are backed by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. However, the
taxing power of any governmental entity may be limited by provisions of state
constitutions or laws and its credit will depend on many factors, including an
erosion of the tax base resulting from population declines, natural disasters,
declines in the state's industrial base or an inability to attract new
industries, economic limits on the ability to tax without eroding the tax base
and the extent to which the entity relies on federal or state aid, access to
capital markets or other factors beyond the entity's control. In addition,
political restrictions on the ability to tax and budgetary constraints affecting
state governmental aid may have an adverse impact on the creditworthiness of
cities, counties, school districts and other local governmental units.
As a result of the recent recession's adverse impact upon both revenues and
expenditures, as well as other factors, many state and local governments have
confronted deficits which were the most severe in recent years. Many issuers are
facing highly difficult choices about significant tax increases and spending
reductions in order to restore budgetary balance. The failure to implement these
actions on a timely basis could force these issuers to issue additional debt to
finance deficits or cash flow needs and could lead to a reduction of their bond
ratings and the value of their outstanding bonds.
MORAL OBLIGATION BONDS
The Portfolio may include 'moral obligation' bonds. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of the bonds
becomes a moral commitment but not a legal obligation of the state or local
government in question. Even though the state or local government may be called
on to restore any deficits in capital reserve funds of the agencies or
authorities which issued the bonds, any restoration generally requires
appropriation by the state or local legislature and does not constitute a
legally enforceable obligation or debt of the state or local government. The
agencies or authorities generally have no taxing power.
REFUNDED BONDS
Refunded bonds are typically secured by direct obligations of the U.S.
Government or in some cases obligations guaranteed by the U.S. Government placed
in an escrow account maintained by an independent trustee until maturity or a
predetermined redemption date. These obligations are generally noncallable prior
to maturity or the predetermined redemption date. In a few isolated instances,
however, bonds which were thought to be escrowed to maturity have been called
for redemption prior to maturity.
MUNICIPAL REVENUE BONDS
Municipal revenue bonds are tax-exempt securities issued by states,
municipalities, public authorities or similar entities to finance the cost of
acquiring, constructing or improving various projects. Municipal revenue bonds
are not general obligations of governmental entities backed by their taxing
power and payment is generally solely dependent upon the creditworthiness of the
public issuer or the financed project or state appropriations. Examples of
municipal revenue bonds are:
Municipal utility bonds, including electrical, water and sewer revenue
bonds, whose payments are dependent on various factors, including the rates
the utilities may charge, the demand for their services and their operating
costs, including expenses to comply with environmental legislation and
other energy and licensing laws and regulations. Utilities are particularly
sensitive to, among other things, the effects of inflation on operating and
construction costs, the unpredictability of future usage requirements, the
costs and availability of fuel and, with certain electric utilities, the
risks associated with the nuclear industry;
Lease rental bonds which are generally issued by governmental financing
authorities with no direct taxing power for the purchase of equipment or
construction of buildings that will be used by a state or local government.
Lease rental bonds are generally subject to an annual risk that the lessee
government might not appropriate funds for the leasing rental payments to
service the bonds and may also be subject to the risk that rental
obligations may terminate in the event of damage to or destruction or
condemnation of the equipment or building;
Multi-family housing revenue bonds and single family mortgage revenue
bonds which are issued to provide financing for various housing projects
and which are payable primarily from the revenues derived from mortgage
loans to housing projects for low to moderate income families or notes
secured by mortgages on residences; repayment of this type of bonds is
therefore dependent upon, among other things, occupancy
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levels, rental income, the rate of default on underlying mortgage loans,
the ability of mortgage insurers to pay claims, the continued availability
of federal, state or local housing subsidy programs, economic conditions in
local markets, construction costs, taxes, utility costs and other operating
expenses and the managerial ability of project managers. Housing bonds are
generally prepayable at any time and therefore their average life will
ordinarily be less than their stated maturities;
Hospital and health care facility bonds whose payments are dependent
upon revenues of hospitals and other health care facilities. These revenues
come from private third-party payors and government programs, including the
Medicare and Medicaid programs, which have generally undertaken cost
containment measures to limit payments to health care facilities. Hospitals
and health care facilities are subject to various legal claims by patients
and others and are adversely affected by increasing costs of insurance;
Airport, port, highway and transit authority revenue bonds which are
dependent for payment on revenues from the financed projects, including
user fees from ports and airports, tolls on turnpikes and bridges, rents
from buildings, transit fare revenues and additional financial resources
including federal and state subsidies, lease rentals paid by state or local
governments or a pledge of a special tax such as a sales tax or a property
tax. In the case of the air travel industry, airport income is largely
affected by the airlines' ability to meet their obligations under use
agreements which in turn is affected by increased competition among
airlines, excess capacity and increased fuel costs, among other factors.
Solid waste disposal bonds which are generally payable from dumping and
user fees and from revenues that may be earned by the facility on the sale
of electrical energy generated in the combustion of waste products and
which are therefore dependent upon the ability of municipalities to fully
utilize the facilities, sufficient supply of waste for disposal, economic
or population growth, the level of construction and maintenance costs, the
existence of lower-cost alternative modes of waste processing and
increasing environmental regulation. A recent decision of the U.S. Supreme
Court limiting a municipality's ability to require use of its facilities
may have an adverse affect on the credit quality of various issues of these
bonds;
Special tax bonds which are not secured by general tax revenues but are
only payable from and secured by the revenues derived by a municipality
from a particular tax--for example, a tax on the rental of a hotel room, on
the purchase of food and beverages, on the rental of automobiles or on the
consumption of liquor and may therefore be adversely affected by a
reduction in revenues resulting from a decline in the local economy or
population or a decline in the consumption, use or cost of the goods and
services that are subject to taxation;
Student loan revenue bonds which are typically secured by pledges of new
or existing student loans. The loans, in turn, are generally either
guaranteed by eligible guarantors and reinsured by the Secretary of the
U.S. Department of Education, directly insured by the federal government,
or financed as part of supplemental or alternative loan programs within a
state (e.g., loan repayments are not guaranteed). These bonds often permit
the issuer to enter into interest rate swap agreements with eligible
counterparties in which event the bonds are subject to the additional risk
of the counterparty's ability to fulfill its swap obligation;
University and college bonds, the payments on which are dependent upon
various factors, including the size and diversity of their sources of
revenues, enrollment, reputation, the availability of endowments and other
funds and, in the case of public institutions, the financial condition of
the relevant state or other governmental entity and its policies with
respect to education; and
Tax increment and tax allocation bonds, which are secured by ad valorem
taxes imposed on the incremental increase of taxable assessed valuation of
property within a jurisdiction above an established base of assessed value.
The issuers of these bonds do not have general taxing authority and the tax
assessments on which the taxes used to service the bonds are based may be
subject to devaluation due to market price declines or governmental action.
Puerto Rico. Certain Bonds may be affected by general economic conditions
in the Commonwealth of Puerto Rico. Puerto Rico's economy is largely dependent
for its development on federal programs and current federal budgetary policies
suggest that an expansion of its programs is unlikely. Reductions in federal tax
benefits or incentives or curtailment of spending programs could adversely
affect the Puerto Rican economy.
Industrial Development Revenue Bonds. Industrial development revenue bonds
are municipal obligations issued to finance various privately operated projects
including pollution control and manufacturing facilities. Payment is generally
solely dependent upon the creditworthiness of the corporate operator of the
project and, in
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certain cases, an affiliated or third party guarantor and may be affected by
economic factors relating to the particular industry as well as varying degrees
of governmental regulation. In many cases industrial revenue bonds do not have
the benefit of covenants which would prevent the corporations from engaging in
capital restructurings or borrowing transactions which could reduce their
ability to meet their obligations and result in a reduction in the value of the
Portfolio.
BONDS BACKED BY LETTERS OF CREDIT OR INSURANCE
Certain Bonds may be secured by letters of credit issued by commercial
banks or savings banks, savings and loan associations and similar thrift
institutions or are direct obligations of banks or thrifts. The letter of credit
may be drawn upon, and the Bonds redeemed, if an issuer fails to pay amounts due
on the Bonds or, in certain cases, if the interest on the Bond becomes taxable.
Letters of credit are irrevocable obligations of the issuing institutions. The
profitability of a financial institution is largely dependent upon the credit
quality of its loan portfolio which, in turn, is affected by the institution's
underwriting criteria, concentrations within the portfolio and specific industry
and general economic conditions. The operating performance of financial
institutions is also impacted by changes in interest rates, the availability and
cost of funds, the intensity of competition and the degree of governmental
regulation.
Certain Bonds may be insured or guaranteed by insurance companies listed
below. The claims-paying ability of each of these companies, unless otherwise
indicated, was rated AAA by Standard & Poor's or another nationally recognized
rating organization at the time the insured Bonds were purchased by the Fund.
The ratings are subject to change at any time at the discretion of the rating
agencies. In the event that the rating of an Insured Fund is reduced, the
Sponsors are authorized to direct the Trustee to obtain other insurance on
behalf of the Fund. The insurance policies guarantee the timely payment of
principal and interest on the Bonds but do not guarantee their market value or
the value of the Units. The insurance policies generally do not provide for
accelerated payments of principal or cover redemptions resulting from events of
taxability.
The following summary information relating to the listed insurance
companies has been obtained from publicly available information:
<TABLE><CAPTION>
FINANCIAL INFORMATION
AS OF SEPTEMBER 30, 1994
(IN MILLIONS OF DOLLARS)
--------------------------------------
POLICYHOLDERS'
NAME DATE ESTABLISHED ADMITTED ASSETS SURPLUS
- ---------------------------------------------------- ----------------- --------------- ---------------------
<S> <C> <C> <C>
AMBAC Indemnity Corporation......................... 1970 $ 2,150 $ 779
Asset Guaranty Insurance Co. (AA by S&P) 1988 152 73
Capital Guaranty Insurance Company.................. 1986 293 166
Capital Markets Assurance Corp...................... 1987 198 139
Connie Lee Insurance Company........................ 1987 193 106
Continental Casualty Company........................ 1948 19,220 3,309
Financial Guaranty Insurance Company................ 1984 2,092 872
Financial Security Assurance Inc.................... 1984 776 369
Firemen's Insurance Company of Newark, NJ........... 1855 2,236 383
Industrial Indemnity Co. (HIBI)..................... 1920 1,853 299
Municipal Bond Investors Assurance Corporation...... 1986 3,314 1,083
Insurance companies are subject to extensive regulation and supervision
where they do business by state insurance commissioners who regulate the
standards of solvency which must be maintained, the nature of and limitations on
investments, reports of financial condition, and requirements regarding reserves
for unearned premiums, losses and other matters. A significant portion of the
assets of insurance companies are required by law to be held in reserve against
potential claims on policies and is not available to general creditors. Although
the federal government does not regulate the business of insurance, federal
initiatives including pension regulation, controls on medical care costs,
minimum standards for no-fault automobile insurance, national health insurance,
tax law changes affecting life insurance companies and repeal of the antitrust
exemption for the insurance business can significantly impact the insurance
business.
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STATE RISK FACTORS
Investment in a single State Trust, as opposed to a Fund which invests in
the obligations of several states, may involve some additional risk due to the
decreased diversification of economic, political, financial and market risks. A
brief description of the factors which may affect the financial condition of the
applicable State for any State Trust, together with a summary of tax
considerations relating to that State, appear in Part A (or for certain State
Trusts, Part C), of the Prospectus; further information is contained in the
Information Supplement.
LITIGATION AND LEGISLATION
The Sponsors do not know of any pending litigation as of the initial date
of deposit which might reasonably be expected to have a material adverse effect
upon the Fund. 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
Bonds in the Fund. Litigation, for example, challenging the issuance of
pollution control revenue bonds under environmental protection statutes may
affect the validity of certain Bonds or the tax-free nature of their interest.
While the outcome of litigation of this nature can never be entirely predicted,
opinions of bond counsel are delivered on the date of issuance of each Bond to
the effect that it has been validly issued and that the interest thereon is
exempt from federal income tax. Also, certain proposals, in the form of state
legislative proposals or voter initiatives, seeking to limit real property taxes
have been introduced in various states, and an amendment to the constitution of
the State of California, providing for strict limitations on real property
taxes, has had a significant impact on the taxing powers of local governments
and on the financial condition of school districts and local governments in
California. In addition, other factors may arise from time to time which
potentially may impair the ability of issuers to make payments due on the Bonds.
Under the Federal Bankruptcy Code, for example, municipal bond issuers, as well
as any underlying corporate obligors or guarantors, may proceed to restructure
or otherwise alter the terms of their obligations.
From time to time Congress considers proposals to prospectively and
retroactively tax the interest on state and local obligations, such as the
Bonds. The Supreme Court clarified in South Carolina v. Baker (decided on April
20, 1988) that the U.S. Constitution does not prohibit Congress from passing a
nondiscriminatory tax on interest on state and local obligations. This type of
legislation, if enacted into law, could require investors to pay income tax on
interest from the Bonds and could adversely affect an investment in Units. See
Taxes.
PAYMENT OF THE BONDS AND LIFE OF THE FUND
The size and composition of the Portfolio will change over time. Most of
the Bonds are subject to redemption prior to their stated maturity dates
pursuant to optional refunding or sinking fund redemption provisions or
otherwise. In general, optional refunding redemption provisions are more likely
to be exercised when the value of a Bond is at a premium over par than when it
is at a discount from par. Some Bonds may be subject to sinking fund and
extraordinary redemption provisions which may commence early in the life of the
Fund. Additionally, the size and composition of the Fund 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 and whether or not the Sponsors are able to sell the Units acquired by
them in the secondary market. As a result, Units offered in the secondary market
may not represent the same face amount of Bonds as on the initial date of
deposit. Factors that the Sponsors will consider in determining whether or not
to sell Units acquired in the secondary market include the diversity of the
Portfolio, the size of the Fund relative to its original size, the ratio of Fund
expenses to income, the Fund's current and long-term returns, the degree to
which Units may be selling at a premium over par and the cost of maintaining a
current prospectus for the Fund. These factors may also lead the Sponsors to
seek to terminate the Fund earlier than its mandatory termination date.
FUND TERMINATION
The Fund 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 Bond or upon the consent of investors holding 51% of the
Units. The Fund may also be terminated earlier by the Sponsors once the total
assets of the Fund have fallen below the minimum value specified in Part A of
the Prospectus. A decision by the Sponsors to terminate the Fund early will be
based on factors similar to those considered by the Sponsors in determining
whether to continue the sale of Units in the secondary market.
Notice of impending termination will be provided to investors and
thereafter units will no longer be redeemable. On or shortly before termination,
the Fund will seek to dispose of any Bonds remaining in the
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Portfolio although any Bond 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 Bonds, 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.
LIQUIDITY
Up to 40% of the value of the Portfolio may be attributable to guarantees
or similar security provided by corporate entities. These guarantees or other
security may constitute restricted securities that cannot be sold publicly by
the Trustee without registration under the Securities Act of 1933, as amended.
The Sponsors nevertheless believe that, should a sale of the Bonds guaranteed or
secured be necessary in order to meet redemption of Units, the Trustee should be
able to consummate a sale with institutional investors.
The principal trading market for the Bonds will generally be in the
over-the-counter market and the existence of a liquid trading market for the
Bonds may depend on whether dealers will make a market in them. There can be no
assurance that a liquid trading market will exist for any of the Bonds,
especially since the Fund may be restricted under the Investment Company Act of
1940 from selling Bonds to any Sponsor. The value of the Portfolio will be
adversely affected if trading markets for the Bonds are limited or absent.
HOW TO BUY UNITS
Units are available from any of the Sponsors, Underwriters and other
broker-dealers at the Public Offering Price plus accrued interest on the Units.
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--DEFINED ASSET FUNDS MUNICIPAL SERIES
To allow Units to be priced at $1,000, the Units outstanding as of the
Evaluation Time on the Initial Date of Deposit (all of which are held by the
Sponsors) will be split (or split in reverse).
During the initial offering period for at least the first three months of
the Fund, the Public Offering Price (and the Initial Repurchase Price) is based
on the higher, offer side evaluation of the Bonds at the next Evaluation Time
after the order is received. In the secondary market (after the initial offering
period), the Public Offering Price (and the Sponsors' Repurchase Price and the
Redemption Price) is based on the lower, bid side evaluation of the Bonds.
Investors will be subject to differing types and amounts of sales charge
depending upon the timing of their purchases and redemptions of Units. A
periodic deferred sales charge will be payable quarterly through about the fifth
anniversary of the Fund from a portion of the interest on and principal of Bonds
reserved for that purpose. Commencing on the first anniversary of the Fund, the
Public Offering Price will also include an up-front sales charge applied to the
value of the Bonds in the Portfolio. Lastly, investors redeeming their Units
prior to the fourth anniversary of the Fund will be charged a contingent
deferred sales charge payable out of the redemption proceeds of their Units.
These charges may be less than you would pay to buy and hold a comparable
managed fund. A complete schedule of sales charges appears in Appendix B. The
Sponsors have received an opinion of their counsel that the deferred sales
charge described in this Prospectus is consistent with an exemptive order
received from the SEC.
Because accrued interest on the Bonds is not received by the Fund at a
constant rate throughout the year, any Monthly Income Distribution may be more
or less than the interest actually received by the Fund. To eliminate
fluctuations in the Monthly Income Distribution, a portion of the Public
Offering Price consists of an advance to the Trustee of an amount necessary to
provide approximately equal distributions. Upon the sale or redemption of Units,
investors will receive their proportionate share of the Trustee advance. In
addition, if a Bond is sold, redeemed or otherwise disposed of, the Fund will
periodically distribute the portion of the Trustee advance that is attributable
to the Bond to investors.
The regular Monthly Income Distribution is stated in Part A of the
Prospectus and will change as the composition of the Portfolio changes over
time.
PUBLIC OFFERING PRICE--MUNICIPAL INVESTMENT TRUST FUND
In the initial offering period, the Public Offering Price is based on the
next offer side evaluation of the Bonds, and includes a sales charge based on
the number of Units of a single Fund or Trust purchased on the same or any
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preceding day by a single purchaser. See Initial Offering sales charge schedule
in Appendix C. The purchaser or his dealer must notify the Sponsors at the time
of purchase of any previous purchase to be aggregated and supply sufficient
information to permit confirmation of eligibility; acceptance of the purchase
order is subject to confirmation. Purchases of Fund Units may not be aggregated
with purchases of any other unit trust. This procedure may be amended or
terminated at any time without notice.
In the secondary market (after the initial offering period), the Public
Offering Price is based on the bid side evaluation of the Bonds, and includes a
sales charge based (a) on the number of Units of the Fund and any other Series
of Municipal Investment Trust Fund purchased in the secondary market on the same
day by a single purchaser (see Secondary Market sales charge schedule in
Appendix C) and (b) the maturities of the underlying Bonds (see Effective Sales
Charge Schedule in Appendix C). To qualify for a reduced sales charge, the
dealer must confirm that the sale is to a single purchaser or is purchased for
its own account and not for distribution. For these purposes, Units held in the
name of the purchaser's spouse or child under 21 years of age are deemed to be
purchased by a single purchaser. A trustee or other fiduciary purchasing
securities for a single trust estate or single fiduciary account is also
considered a single purchaser.
In the secondary market, the Public Offering Price is further reduced
depending on the maturities of the various Bonds in the Portfolio, by
determining a sales charge percentage for each Bond, as stated in Effective
Sales Charge in Appendix C. The sales charges so determined, multiplied by the
bid side evaluation of the Bonds, are aggregated and the total divided by the
number of Units outstanding to determine the Effective Sales Charge. On any
purchase, the Effective Sales Charge is multiplied by the applicable secondary
market sales charge percentage (depending on the number of Units purchased) in
order to determine the sales charge component of the Public Offering Price.
* * *
Employees of certain Sponsors and Sponsor affiliates and non-employee
directors of Merrill Lynch & Co. Inc. may purchase Units at any time at prices
including a sales charge of not less than $5 per Unit.
Net accrued interest is added to the Public Offering Price, the Sponsors'
Repurchase Price and the Redemption Price per Unit. This represents the interest
accrued on the Bonds, net of Fund expenses, from the initial date of deposit to,
but not including, the settlement date for Units (less any prior distributions
of interest income to investors). Bonds deposited also carry accrued but unpaid
interest up to the initial date of deposit. To avoid having investors pay this
additional accrued interest (which earns no return) when they purchase Units,
the Trustee advances and distributes this amount to the Sponsors; it recovers
this advance from interest received on the Bonds. Because of varying interest
payment dates on the Bonds, accrued interest at any time will exceed the
interest actually received by the Fund.
EVALUATIONS
Evaluations are determined by the independent Evaluator 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. Bond
evaluations are based on closing sales prices (unless the Evaluator deems these
prices inappropriate). If closing sales prices are not available, the evaluation
is generally determined on the basis of current bid or offer prices for the
Bonds or comparable securities or by appraisal or by any combination of these
methods. In the past, the bid prices of publicly offered tax-exempt issues have
been lower than the offer prices by as much as 3 1/2% or more of face amount in
the case of inactively traded issues and as little as 1/2 of 1% in the case of
actively traded issues, but the difference between the offer and bid prices has
averaged between 1 and 2% of face amount. Neither the Sponsors, the Trustee or
the Evaluator will be liable for errors in the Evaluator's judgment. The fees of
the Evaluator will be borne by the Fund.
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.
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HOW TO SELL UNITS
SPONSORS' MARKET FOR UNITS
You can sell your Units at any time without a fee. The 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 Bonds,
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; in that event, the
Sponsors may still purchase Units at the redemption price as a service to
investors. 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
together with any certificates you hold. Certificates must be properly endorsed
or accompanied by a written transfer instrument with signatures 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. While Defined Asset Funds Municipal Series
have a declining deferred sales charge payable on redemption (see Appendix B),
Municipal Investment Trust Fund has no back-end load or 12b-1 fees, so there is
never a fee for cashing in your investment (see Appendix C). 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 Bonds, net accrued interest, cash and the value of any other Fund assets;
deducting unpaid taxes or other governmental charges, accrued but unpaid Fund
expenses, unreimbursed Trustee advances, cash held to redeem Units or for
distribution to investors and the value of any other Fund liabilities; and
dividing the result by the number of outstanding Units.
For Defined Asset Funds Municipal Series, Bonds are evaluated on the offer
side during the initial offering period and for at least the first three months
of the Fund (even in the secondary market) and on the bid side thereafter. For
Municipal Investment Trust Fund, Bonds are evaluated on the offer side during
the initial offering period and on the bid side thereafter.
If cash is not available in the Fund's Income and Capital Accounts to pay
redemptions, the Trustee may sell Bonds selected by the Agent for the Sponsors
based on market and credit factors determined to be in the best interest of the
Fund. These sales are often made at times when the Bonds 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 Bonds not reasonably practicable, or
for any other period permitted by the SEC.
INCOME, DISTRIBUTIONS AND REINVESTMENT
INCOME
Some of the Bonds may have been purchased on a when-issued basis or may
have a delayed delivery. Since interest on these Bonds does not begin to accrue
until the date of their delivery to the Fund, the Trustee's annual fee and
expenses may be reduced to provide tax-exempt income to investors for this
non-accrual period. If a when-issued Bond is not delivered until later than
expected and the amount of the Trustee's annual fee and expenses is insufficient
to cover the additional accrued interest, the Sponsors will treat the contracts
as failed Bonds. The Trustee is compensated for its fee reduction by drawing on
the letter of credit deposited by the
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Sponsors before the settlement date for these Bonds and depositing the proceeds
in a non-interest bearing account for the Fund.
Interest received is credited to an Income Account and other receipts 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.
DISTRIBUTIONS
Each Unit receives an equal share of monthly distributions of interest
income net of estimated expenses. Interest on the Bonds is generally received by
the Fund on a semi-annual or annual basis. Because interest on the Bonds is not
received at a constant rate throughout the year, any Monthly Income Distribution
may be more or less than the interest actually received. To eliminate
fluctuations in the Monthly Income Distribution, the Trustee will advance
amounts necessary to provide approximately equal interest distributions; it will
be reimbursed, without interest, from interest received on the Bonds, but the
Trustee is compensated, in part, by holding the Fund's cash balances in
non-interest bearing accounts. Along with the Monthly Income Distributions, the
Trustee will distribute the investor's pro rata share of principal received from
any disposition of a Bond to the extent available for distribution. In addition,
for Defined Asset Funds Municipal Series, distributions of amounts necessary to
pay the deferred portion of the sales charge will be made from the Capital and
Income Accounts to an account maintained by the Trustee for purposes of
satisfying investors' sales charge obligations.
The initial estimated annual income per Unit, after deducting estimated
annual Fund expenses (and, for Defined Asset Funds Municipal Series, the portion
of the deferred sales charge payable from interest income) as stated in Part A
of the Prospectus, will change as Bonds mature, are called or sold or otherwise
disposed of, as replacement bonds are deposited and as Fund expenses change.
Because the Portfolio is not actively managed, income distributions will
generally not be affected by changes in interest rates. Depending on the
financial conditions of the issuers of the Bonds, the amount of income should be
substantially maintained as long as the Portfolio remains unchanged; however,
optional bond redemptions or other Portfolio changes may occur more frequently
when interest rates decline, which would result in early returns of principal
and possibly earlier termination of the Fund.
REINVESTMENT
Distributions will be paid in cash unless the investor elects to have
distributions reinvested without sales charge in the Municipal Fund Accumulation
Program, Inc. The Program is an open-end management investment company whose
investment objective is to obtain income exempt from regular federal income
taxes by investing in a diversified portfolio of state, municipal and public
authority bonds rated A or better or with comparable credit characteristics.
Reinvesting compounds earnings free from federal tax. Investors participating in
the Program will be subject to state and local income taxes to the same extent
as if the distributions had been received in cash, and most of the income on the
Program is subject to state and local income taxes. For more complete
information about the Program, including charges and expenses, request the
Program's prospectus from the Trustee. Read it carefully before you decide to
participate. Written notice of election to participate must be received by the
Trustee at least ten days before the Record Day for the first distribution to
which the election is to apply.
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 Bonds for this purpose if
cash is not available. The Sponsors receive an annual fee of a maximum of $0.35
per $1,000 face amount 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
Defined Asset Funds Municipal Series will not exceed their costs for these
services to all of those Series during any calendar year; and the total
supervision fees from all Series of Municipal Investment Trust 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 Unit. The Trustee's, Sponsors' and Evaluator's fees may be adjusted
for inflation without investors' approval.
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All expenses in establishing the Fund will be paid from the Underwriting
Account at no charge to the Fund. Sales charges on Defined Asset Funds range
from under 1.0% to 5.5%. This may be less than you might pay to buy and hold a
comparable managed 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.
TAXES
The following discussion addresses only the U.S. federal and certain New
York State and City income tax consequences under current law of Units held as
capital assets and does not address the tax consequences of Units held by
dealers, financial institutions or insurance companies or other investors with
special circumstances.
In the opinion of Davis Polk & Wardwell, special counsel for the Sponsors,
under existing law:
The Fund is not an association taxable as a corporation for federal
income tax purposes. Each investor will be considered the owner of a pro
rata portion of each Bond in the Fund under the grantor trust rules of
Sections 671-679 of the Internal Revenue Code of 1986, as amended (the
'Internal Revenue Code'). Each investor will be considered to have received
the interest and accrued the original issue discount, if any, on his pro
rata portion of each Bond when interest on the Bond is received or original
issue discount is accrued by the Fund. The investor's basis in his Units
will be equal to the cost of his Units, including any up-front sales
charge.
When an investor pays for accrued interest, the investor's confirmation
of purchase will report to him the amount of accrued interest for which he
paid. These investors will receive the accrued interest amount as part of
their first monthly distribution. Accordingly, these investors should
reduce their tax basis by the accrued interest amount after the first
monthly distribution.
An investor will recognize taxable gain or loss when all or part of his
pro rata portion of a Bond is disposed of by the Fund. An investor will
also be considered to have disposed of all or a portion of his pro rata
portion of each Bond when he sells or redeems all or some of his Units. An
investor who is treated as having acquired his pro rata portion of a Bond
at a premium will be required to amortize the premium over the term of the
Bond. The amortization is only a reduction of basis for the investor's pro
rata portion of the Bond and does not result in any deduction against the
investor's income. Therefore, under some circumstances, an investor may
recognize taxable gain when his pro rata portion of a Bond is disposed of
for an amount equal to or less than his original tax basis therefor.
Under Section 265 of the Internal Revenue Code, a non-corporate investor
is not entitled to a deduction for his pro rata share of fees and expenses
of the Fund, because the fees and expenses are incurred in connection with
the production of tax-exempt income. Further, if borrowed funds are used by
an investor to purchase or carry Units of the Fund, interest on this
indebtedness will not be deductible for federal income tax purposes. In
addition, under rules used by the Internal Revenue Service, the purchase of
Units may be considered to have been made with borrowed funds even though
the borrowed funds are not directly traceable to the purchase of Units.
Under the income tax laws of the State and City of New York, the Fund is
not an association taxable as a corporation and income received by the Fund
will be treated as the income of the investors in the same manner as for
federal income tax purposes, but will not necessarily be tax-exempt.
The foregoing discussion relates only to U.S. federal and certain
aspects of New York State and City income taxes. Depending on their state
of residence, investors may be subject to state and local taxation and
should consult their own tax advisers in this regard.
* * *
In the opinion of bond counsel rendered on the date of issuance of each
Bond, the interest on each Bond is excludable from gross income under existing
law for regular federal income tax purposes (except in certain circumstances
depending on the investor) but may be subject to state and local taxes, and
interest on some or all of the Bonds may become subject to regular federal
income tax, perhaps retroactively to their date of issuance, as a result of
changes in federal law or as a result of the failure of issuers (or other users
of the proceeds of the Bonds) to comply with certain ongoing requirements. If
the interest on a Bond should be determined to be taxable, the
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Bond would generally have to be sold at a substantial discount. In addition,
investors could be required to pay income tax on interest received prior to the
date on which the interest is determined to be taxable.
Neither the Sponsors nor Davis Polk & Wardwell have made or will make any
review of the proceedings relating to the issuance of the Bonds or the basis for
these opinions and there can be no assurance that the issuer (and other users)
will comply with any ongoing requirements necessary for a Bond to maintain its
tax-exempt character.
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 Bonds and a copy of the Indenture, and
supplemental information on the operations of the Fund and the risks associated
with the Bonds held by the Fund, which may be inspected by investors at
reasonable times during business hours.
With each distribution, the Trustee includes a statement of the interest
and any other receipts being distributed. Within five days after deposit of
Bonds in exchange or substitution for Bonds (or contracts) previously deposited,
the Trustee will send a notice to each investor, identifying both the Bonds
removed and the replacement bonds deposited. The Trustee sends each investor of
record an annual report summarizing transactions in the Fund's accounts and
amounts distributed during the year and Bonds held, the number of Units
outstanding and the Redemption Price at year end, the interest received by the
Fund on the Bonds, the gross proceeds received by the Fund from the disposition
of any Bond (resulting from redemption or payment at maturity or sale of any
Bond), and the fees and expenses paid by the Fund, among other matters. The
Trustee will also furnish annual information returns to each investor and to the
Internal Revenue Service. Investors are required to report to the Internal
Revenue Service the amount of tax-exempt interest received during the year.
Investors may obtain copies of Bond evaluations from the Trustee to enable them
to comply with federal and state tax reporting requirements. Fund accounts are
audited annually by independent accountants selected by the Sponsors. Audited
financial statements are 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, the Trustee and the Evaluator. 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 on 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 Evaluator may resign or be removed by the Sponsors and the
Trustee without the investors' consent. The resignation or removal of either
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 or Evaluator 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 and is agreeable to the resignation. 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, the Trustee and the Evaluator 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
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in the case of a Sponsor or the Evaluator) or reckless disregard of duty. The
Indenture contains customary provisions limiting the 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.
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 in Part A 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 in Part A 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; Dean
Witter Reynolds, Inc., a principal operating subsidiary of Dean Witter Discover
& Co. and PaineWebber Incorporated, a wholly-owned subsidiary of PaineWebber
Group Inc. 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
In the initial offering period Units will be distributed to the public
through the Underwriting Account and dealers who are members of the National
Association of Securities Dealers, Inc. The initial offering period is 30 days
or less if all Units are sold. If some Units initially offered have not been
sold, the Sponsors may extend the initial offering period for up to four
additional successive 30-day periods.
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.;
however, Units of a State trust will be offered for sale only in the State for
which the trust is named, except that Units of a New Jersey trust will also be
offered in Connecticut, Units of a Florida trust will also be offered in New
York and Units of a New York trust will also be offered in Connecticut, Florida
and Puerto Rico. 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. Sales to dealers and to
introducing dealers, if any, will initially be made at prices which represent a
concession from the Public Offering Price, but the Agent for the Sponsors
reserves the right to change the rate of any concession from time to time. Any
dealer or introducing dealer may reallow a concession up to the concession to
dealers.
UNDERWRITERS' AND SPONSORS' PROFITS
Upon sale of the Units, the Underwriters will be entitled to receive sales
charges. The Sponsors also realize a profit or loss on deposit of the Bonds
equal to the difference between the cost of the Bonds to the Fund (based on the
offer side evaluation on the initial date of deposit) and the Sponsors' cost of
the Bonds. In addition, a Sponsor or Underwriter may realize profits or sustain
losses on Bonds 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,
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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.
FUND PERFORMANCE
Information on the performance of the Fund for various periods, on the
basis of changes in Unit price plus the amount of income and principal
distributions reinvested, may be included from time to time in advertisements,
sales literature, reports and other information furnished to current or
prospective 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 may not be indicative of future results. The Fund is not
actively managed. Unit price and return fluctuate with the value of the Bonds in
the Portfolio, so there may be a gain or loss when Units are sold.
Fund performance may be compared to performance on the same basis (with
distributions reinvested) of Moody's Municipal Bond Averages 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. As with other performance data, performance comparisons
should not be considered representative of the Fund's relative performance for
any future period.
DEFINED ASSET FUNDS
Municipal Investment Trust Funds have provided investors with tax-free
income for more than 30 years. 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 of municipal bonds and
the return are 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. Tax-exempt
income can help investors keep more today for a more secure financial future. It
can also be important in planning because tax brackets may increase with higher
earnings or changes in tax laws. Unit investment trusts are particularly suited
for the many investors who prefer to seek long-term income 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.
One's 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.
EXCHANGE OPTION--MUNICIPAL INVESTMENT TRUST FUND ONLY.
You may exchange Fund Units for units of certain other Defined Asset Funds
subject only to a reduced sales charge. You may exchange your units of any
Select Ten Portfolio, of any other Defined Asset Fund with a regular maximum
sales charge of at least 3.50%, or of any unaffiliated unit trust with a regular
maximum sales charge of at least 3.0%, for Units of this Fund at their relative
net asset values, subject only to a reduced sales charge, or to any remaining
Deferred Sales Charge, as applicable.
To make an exchange, you should contact your financial professional to find
out what suitable Exchange Funds are available and to obtain a prospectus. You
may acquire units of only those Exchange Funds in which the Sponsors are
maintaining a secondary market and which are lawfully for sale in the state
where you reside. Except for the reduced sales charge, an exchange is a taxable
event normally requiring recognition of any gain or loss on the units exchanged.
However, the Internal Revenue Service may seek to disallow a loss if the
portfolio of the
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units acquired is not materially different from the portfolio of the units
exchanged; you should consult your own tax advisor. If the proceeds of units
exchanged are insufficient to acquire a whole number of Exchange Fund units, you
may pay the difference in cash (not exceeding the price of a single unit
acquired).
As the Sponsors are not obligated to maintain a secondary market in any
series, there can be no assurance that units of a desired series will be
available for exchange. The Exchange Option may be amended or terminated at any
time without notice.
SUPPLEMENTAL INFORMATION
Upon written or telephonic request to the Trustee shown in Part A of this
Prospectus, investors will receive at no cost to the investor supplemental
information about the Fund, which has been filed with the SEC and is hereby
incorporated by reference. The supplemental information includes more detailed
risk factor disclosure about the types of Bonds that may be part of the Fund's
Portfolio, general risk disclosure concerning any letters of credit or insurance
securing certain Bonds, and general information about the structure and
operation of the Fund.
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APPENDIX A
DESCRIPTION OF RATINGS (AS DESCRIBED BY THE RATING COMPANIES THEMSELVES)
STANDARD & POOR'S RATINGS GROUP, A DIVISION OF MCGRAW-HILL, INC.
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC--Debt rated BB, B, CCC and CC is regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
The ratings may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
A provisional rating, indicated by 'p' following a rating, assumes the
successful completion of the project being financed by the issuance of the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion.
NR--Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
MOODY'S INVESTORS SERVICE, INC.
Aaa--Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edge'. Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
a-1
<PAGE>
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Rating symbols may include numerical modifiers 1, 2 or 3. The numerical
modifier 1 indicates that the security ranks at the high end, 2 in the
mid-range, and 3 nearer the low end, of the generic category. These modifiers of
rating symbols give investors a more precise indication of relative debt quality
in each of the historically defined categories.
Conditional ratings, indicated by 'Con.', are sometimes given when the
security for the bond depends upon the completion of some act or the fulfillment
of some condition. Such bonds are given a conditional rating that denotes their
probable credit stature upon completion of that act or fulfillment of that
condition.
NR--Should no rating be assigned, the reason may be one of the following:
(a) an application for rating was not received or accepted; (b) the issue or
issuer belongs to a group of securities that are not rated as a matter of
policy; (c) there is a lack of essential data pertaining to the issue or issuer
or (d) the issue was privately placed, in which case the rating is not published
in Moody's publications.
FITCH INVESTORS SERVICE, INC.
AAA--These bonds are considered to be investment grade and of the highest
quality. The obligor has an extraordinary ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--These bonds are considered to be investment grade and of high quality.
The obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA rated securities or more subject to possible change
over the term of the issue.
A--These bonds are considered to be investment grade and of good quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--These bonds are considered to be investment grade and of satisfactory
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however are more likely to weaken this ability than bonds with higher ratings.
A '+' or a '-' sign after a rating symbol indicates relative standing in
its rating.
DUFF & PHELPS CREDIT RATING CO.
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic condtions.
A--Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
A '+' or a '-' sign after a rating symbol indicates relative standing in
its rating.
a-2
<PAGE>
APPENDIX B
SALES CHARGE SCHEDULES FOR DEFINED ASSET FUNDS, MUNICIPAL SERIES
DEFERRED AND UP-FRONT SALES CHARGES. Units purchased during the first year
of the Fund will be subject to periodic deferred and contingent deferred sales
charges. Units purchased in the second through fifth year will be subject to an
up-front sales charge as well as periodic deferred and contingent deferred sales
charges. Units purchased thereafter will be subject only to an up-front sales
charge. During the first five years of the Fund, a fixed periodic deferred sales
charge of $2.75 per Unit is payable on 20 quarterly payment dates occurring on
the 10th day of February, May, August and November, commencing no earlier than
45 days after the initial date of deposit. Investors purchasing Units on the
initial date of deposit and holding for at least five years, for example, would
incur total periodic deferred sales charges of $55.00 per Unit. Because of the
time value of money, however, as of the initial date of deposit this periodic
deferred sales charge obligation would, at current interest rates, equate to an
up-front sales charge of approximately 4.75%.
On the Fund's initial offering date, the Public Offering Price per Unit
will be $1,000. Subsequently, the Public Offering Price per Unit will fluctuate.
As the periodic deferred sales charge is a fixed dollar amount irrespective of
the Public Offering Price, it will represent a varying percentage of the Public
Offering Price. An up-front sales charge will be imposed on all unit purchases
after the first year of the Fund. The following table illustrates the combined
maximum up-front and periodic deferred sales charges that would be incurred by
an investor who purchases Units at the beginning of each of the first five years
of the Fund (based on a constant Unit price) and holds them through the fifth
year of the Fund:
</TABLE>
<TABLE><CAPTION>
TOTAL
UP-FRONT SALES CHARGE MAXIMUM UP-FRONT AND PERIODIC
----------------------------------------------------------- AMOUNT DEFERRED SALES
YEAR OF UNIT AS PERCENT OF PUBLIC AS PERCENT OF NET AMOUNT PER DEFERRED PER CHARGES
PURCHASE OFFERING PRICE AMOUNT INVESTED $1,000 INVESTED $1,000 INVESTED PER $1,000 INVESTED
- ------------------- --------------------- ------------------- --------------- --------------- ---------------------
<S> <C> <C> <C> <C> <C>
1 None None None $ 55.00 $ 55.00
2 1.10% 1.11% $ 11.00 44.00 55.00
3 2.20 2.25 22.00 33.00 55.00
4 3.30 3.41 33.00 22.00 55.00
5 4.40 4.60 44.00 11.00 55.00
</TABLE>
CONTINGENT DEFERRED SALES CHARGE. Units redeemed or repurchased within 4
years after the Fund's initial date of deposit will not only incur the periodic
deferred sales charge until the quarter of redemption or repurchase but will
also be subject to a contingent deferred sales charge:
YEAR SINCE FUND'S
INITIAL DATE OF CONTINGENT DEFERRED
DEPOSIT SALES CHARGE PER UNIT
- --------------------- ---------------------
1 $ 25.00
2 15.00
3 10.00
4 5.00
5 and thereafter None
The contingent deferred sales charge is waived on any redemption or
repurchase of Units after the death (including the death of a single joint
tenant with rights of survivorship) or disability (as defined in the Internal
Revenue Code) of an investor, provided the redemption or repurchase is requested
within one year of the death or initial determination of disability. The
Sponsors may require receipt of satisfactory proof of disability before
releasing the portion of the proceeds representing the amount of the contingent
deferred sales charge waived.
To assist investors in understanding the total costs of purchasing units
during the first four years of the Fund and disposing of those units by the
fifth year, the following tables set forth the maximum combined up-front,
periodic and contingent deferred sales charges that would be incurred (assuming
a constant Unit price) by an investor:
<TABLE><CAPTION>
UNITS PURCHASED ON INITIAL OFFERING DATE
YEAR OF UNIT DEFERRED SALES CONTINGENT DEFERRED
DISPOSITION UP-FRONT SALES CHARGE CHARGE SALES CHARGE TOTAL SALES CHARGES
- ------------------- --------------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
1 None $ 11.00 $ 25.00 $ 36.00
2 None 22.00 15.00 37.00
3 None 33.00 10.00 43.00
4 None 44.00 5.00 49.00
5 None 55.00 0.00 55.00
b-1
<PAGE>
<CAPTION>
UNITS PURCHASED ON FIRST ANNIVERSARY OF FUND
YEAR OF UNIT DEFERRED SALES CONTINGENT DEFERRED
DISPOSITION UP-FRONT SALES CHARGE CHARGE SALES CHARGE TOTAL SALES CHARGES
- ------------------- --------------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
2 $ 11.00 $ 11.00 $ 15.00 $ 37.00
3 11.00 22.00 10.00 43.00
4 11.00 33.00 5.00 49.00
5 11.00 44.00 0.00 55.00
<CAPTION>
UNITS PURCHASED ON SECOND ANNIVERSARY OF FUND
YEAR OF UNIT DEFERRED SALES CONTINGENT DEFERRED
DISPOSITION UP-FRONT SALES CHARGE CHARGE SALES CHARGE TOTAL SALES CHARGES
- ------------------- --------------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
3 $ 22.00 $ 11.00 $ 10.00 $ 43.00
4 22.00 22.00 5.00 49.00
5 22.00 33.00 0.00 55.00
<CAPTION>
UNITS PURCHASED ON THIRD ANNIVERSARY OF FUND
YEAR OF UNIT DEFERRED SALES CONTINGENT DEFERRED
DISPOSITION UP-FRONT SALES CHARGE CHARGE SALES CHARGE TOTAL SALES CHARGES
- ------------------- --------------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
4 $ 33.00 $ 11.00 $ 5.00 $ 49.00
5 33.00 22.00 0.00 55.00
<CAPTION>
UNITS PURCHASED ON FOURTH ANNIVERSARY OF FUND
YEAR OF UNIT DEFERRED SALES CONTINGENT DEFERRED
DISPOSITION UP-FRONT SALES CHARGE CHARGE SALES CHARGE TOTAL SALES CHARGES
- ------------------- --------------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
5 $ 44.00 $ 11.00 $ 0.00 $ 55.00
</TABLE>
b-2
<PAGE>
APPENDIX C
SALES CHARGE SCHEDULES FOR MUNICIPAL INVESTMENT TRUST FUND
INITIAL OFFERING
<TABLE><CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT)
----------------------------------
AS PERCENT OF AS PERCENT OF DEALER CONCESSION AS PRIMARY MARKET
OFFER SIDE PUBLIC NET AMOUNT PERCENT OF PUBLIC CONCESSION TO
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE INTRODUCING DEALERS
- ----------------------------------- ------------------- ------------- --------------------- -------------------
MONTHLY PAYMENT SERIES, MULTISTATE SERIES, INSURED SERIES
<S> <C> <C> <C> <C>
Less than 250...................... 4.50% 4.712% 2.925% $ 32.40
250 - 499.......................... 3.50 3.627 2.275 25.20
500 - 749.......................... 3.00 3.093 1.950 21.60
750 - 999.......................... 2.50 2.564 1.625 18.00
1,000 or more...................... 2.00 2.041 1.300 14.40
<CAPTION>
INTERMEDIATE SERIES (TEN YEAR MATURITIES)
<S> <C> <C> <C> <C>
Less than 250...................... 4.00% 4.167% 2.600% $ 28.80
250 - 499.......................... 3.00 3.093 1.950 21.60
500 - 749.......................... 2.50 2.564 1.625 18.00
750 - 999.......................... 2.00 2.041 1.300 14.40
1,000 or more...................... 1.50 1.523 0.975 10.00
<CAPTION>
INTERMEDIATE SERIES (SHORT INTERMEDIATE MATURITIES)
<S> <C> <C> <C> <C>
Less than 250...................... 2.75% 2.828% 1.788% $ 19.80
250 - 499.......................... 2.25 2.302 1.463 16.20
500 - 749.......................... 1.75 1.781 1.138 12.60
750 - 999.......................... 1.25 1.266 0.813 9.00
1,000 or more...................... 1.00 1.010 0.650 7.20
</TABLE>
SECONDARY MARKET
ACTUAL SALES CHARGE AS DEALER CONCESSION AS
PERCENT OF EFFECTIVE PERCENT OF EFFECTIVE
NUMBER OF UNITS SALES CHARGE SALES CHARGE
- ----------------- ------------------------- -------------------------
1-249 100% 65%
250-499 80 52
500-749 60 39
750-999 45 29.25
1,000 or more 35 22.75
EFFECTIVE SALES CHARGE
AS PERCENT AS PERCENT
TIME TO OF BID SIDE OF PUBLIC
MATURITY EVALUATION OFFERING PRICE
- ---------------------------- ------------- -----------------
Less than six months 0% 0%
Six months to 1 year 0.756 0.75
Over 1 year to 2 years 1.523 1.50
Over 2 years to 4 years 2.564 2.50
Over 4 years to 8 years 3.627 3.50
Over 8 years to 15 years 4.712 4.50
Over 15 years 5.820 5.50
For this purpose, a Bond will be considered to mature on its stated
maturity date unless it has been called for redemption or funds or securities
have been placed in escrow to redeem it on an earlier date, or is subject to a
mandatory tender, in which case the earlier date will be considered the maturity
date.
c-1
<PAGE>
DEFINED
ASSET FUNDSSM
SPONSORS: MUNICIPAL INVESTMENT
Merrill Lynch, TRUST FUND
Pierce, Fenner & Smith Incorporated Monthly Payment Series--278
Defined Asset Funds (A Unit Investment Trust)
P.O. Box 9051 PROSPECTUS PART A
Princeton, N.J. 08543-9051 This Prospectus does not contain all of
(609) 282-8500 the information with respect to the
Smith Barney Inc. investment company set forth in its
Unit Trust Department registration statement and exhibits
388 Greenwich Street--23rd Floor relating thereto which have been filed
New York, NY 10013 with the Securities and Exchange
1-800-223-2532 Commission, Washington, D.C. under the
Prudential Securities Incorporated Securities Act of 1933 and the
One Seaport Plaza Investment Company Act of 1940, and to
199 Water Street which reference is hereby made.
New York, N.Y. 10292 No person is authorized to give any
(212) 776-1000 information or to make any
Dean Witter Reynolds Inc. representations with respect to this
Two World Trade Center--59th Floor investment company not contained in this
New York, N.Y. 10048 Prospectus; and any information or
(212) 392-2222 representation not contained herein must
EVALUATOR: not be relied upon as having been
Kenny S&P Evaluation Services, authorized. This Prospectus does not
a division of J. J. Kenny Co., Inc. constitute an offer to sell, or a
65 Broadway solicitation of an offer to buy,
New York, N.Y. 10006 securities in any state to any person to
INDEPENDENT ACCOUNTANTS: whom it is not lawful to make such offer
Deloitte & Touche LLP in such state.
2 World Financial Center
9th Floor
New York, N.Y. 10281-1414
TRUSTEE:
The Chase Manhattan Bank, N.A.
Unit Trust Department
Box 2051
New York, N.Y. 10081
1-800-323-1508
13119--3/95
