<PAGE>
DEFINED ASSET FUNDSSM
- --------------------------------------------------------------------------------
EQUITY INVESTOR FUND This Fund was created to provide investors with
SECOND EXCHANGE SERIES the opportunity to invest in a fixed portfolio
AT&T SHARES consisting of shares of AT&T common stock and
(A UNIT INVESTMENT shares of common stock of the regional holding
TRUST) companies created pursuant to its Plan of
- ------------------------------Reorganization. The value of the Securities and
- -- MONTHLY INCOME therefore the value of Units of the Fund may be
- -- PROFESSIONAL SELECTION expected to fluctuate with changes in the values
- -- DIVERSIFICATION of stocks in general and of telephone company
- -- REINVESTMENT OPTION stocks in particular. The payment of dividends and
preservation of capital depend upon several
factors including the financial condition of these
issuers and general economic conditions.
Therefore, there is no assurance that the past
rate of income will be maintained in the future.
Minimum purchase in individual transactions: One
Unit.
-------------------------------------------------
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 DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-------------------------------------------------
PART A OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED
SPONSORS: UNLESS ACCOMPANIED BY EQUITY INCOME FUND
Merrill Lynch, PROSPECTUS PART B.
Pierce, Fenner & Smith INVESTORS SHOULD READ BOTH PARTS OF THIS
Incorporated PROSPECTUS CAREFULLY AND RETAIN THEM FOR FUTURE
Salomon Smith Barney Inc. REFERENCE.
Prudential Securities INQUIRIES SHOULD BE DIRECTED TO THE TRUSTEE AT
Incorporated 1-800-221-7771.
Dean Witter Reynolds Inc. PROSPECTUS DATED OCTOBER 2, 1998.
<PAGE>
- --------------------------------------------------------------------------------
Defined Asset FundsSM
Defined Asset Funds is America's oldest and largest family of unit investment
trusts, with over $115 billion sponsored in the last 25 years. Each Defined
Asset Fund is a portfolio of preselected securities. The portfolio is divided
into 'units' representing equal shares of the underlying assets. Each unit
receives an equal share of income and principal distributions.
Defined Asset Funds offer several defined 'distinctives'. You know in advance
what you are investing in and that changes in the portfolio are limited - a
defined portfolio. Most defined bond funds pay interest monthly - defined
income. The portfolio offers a convenient and simple way to invest - simplicity
defined.
Your financial professional can help you select a Defined Asset Fund to meet
your personal investment objectives. Our size and market presence enable us to
offer a wide variety of investments. The Defined Asset Funds family offers:
o Municipal bond portfolios
o Corporate bond portfolios
o Government bond portfolios
o Equity portfolios
o International bond and equity portfolios
The terms of Defined Funds are as short as one year or as long as 30 years.
Special defined bond funds are available including: insured funds, double and
triple tax-free funds and funds with 'laddered maturities' to help protect
against changing interest rates. Defined Asset Funds are offered by prospectus
only.
- ----------------------------------------------------------------
Defining Your Portfolio
- ----------------------------------------------------------------
The Portfolio contains 10 common stocks issued by telecommunications companies.
The Fund was created on December 6, 1983. Investing in the Portfolio, rather
than in only one or two of the underlying stocks, is a way to diversify your
investment, even though 100% of the Portfolio is invested in a single industry.
FRACTIONAL INTERESTS PER UNIT
Each Unit represents the following percentages of one share of each of the
issuers:
SBC Communications 175.8%
Bell Atlantic Corporation 139.3%
Ameritech 118.2%
AT&T 98.5%
Bell South Corporation 88.6%
Lucent Technologies 63.8%
U.S. West Communications 40.5%
Airtouch Communications 39.4%
U.S. West Media Group 39.4%
NCR Corporation 6.2%
MONTHLY INCOME DISTRIBUTIONS
The Fund pays monthly income, even though the Securities generally pay dividends
quarterly. Monthly distributions of dividends are payable on the 1st day of the
month to holders of record on the 15th day of the preceding month.
REINVESTMENT OPTION
You can elect to automatically reinvest your distributions into additional units
of the Portfolio with no sales charge. Reinvesting helps to compound your income
for a greater total return.
TAXES
In the opinion of counsel, you will be considered to have received all the
dividends paid on your pro rata portion of each security in the Portfolio when
those dividends are received by the Portfolio, regardless of whether you
reinvest your dividends in the Portfolio.
MANDATORY TERMINATION DATE
The Portfolio will terminate by August 1, 2008. The final distribution will be
made within a reasonable time afterward. The Portfolio may be terminated earlier
if its value is less than 40% of the value of deposited Securities.
- ----------------------------------------------------------------
Defining Your Investment
- ----------------------------------------------------------------
PUBLIC OFFERING PRICE PER UNIT $427.87
The Public Offering Price as of June 30, 1998, the evaluation date, is based on
the aggregate value of the underlying securities ($63,206,758) plus a maximum
sales charge of 2.50% of the value of the securities, plus cash, divided by the
number of units outstanding (151,513). The Public Offering Price on any
subsequent date will vary. The underlying securities are valued by the Trustee
on the basis of their closing sale prices at 4:00 p.m. Eastern time on every
business day.
A-2
<PAGE>
- ----------------------------------------------------------------
Defining Your Risks
- ----------------------------------------------------------------
The Portfolio is considered to be 'concentrated' in stocks of telecommunications
companies and is therefore dependent on revenues from those particular
activities. (See Risk Factors in Part B.)
Unit price fluctuates with the value of the Portfolio, and the value of the
Portfolio will be affected by changes in the financial condition of the issuers,
changes in the telecommunications industry, general economic conditions,
movements in stock prices generally, the impact of the Sponsors' purchase and
sale of the securities and other factors. Further distributions of income on the
underlying securities will generally depend upon the declaration of dividends by
the issuers, and there can be no assurance that the issuers of securities will
pay dividends or that the current level of dividends can be maintained or
increased. Therefore, there is no guarantee that the objective of the Portfolio
will be achieved. Also, the value of equity securities issued by utilities,
because of their higher yields, might be more adversely affected by a reduction
in the dividends-received deduction than equity securities generally.
Unlike a mutual fund, the Portfolio is not actively managed and the Sponsors
receive no management fee. Therefore, the adverse financial condition of an
issuer or any market movement in the price of a security will not necessarily
require the sale of securities from the Portfolio or mean that the Sponsors will
not continue to purchase the Security in order to create additional Units.
Although the Portfolio is regularly reviewed and evaluated and Sponsors may
instruct the Trustee to sell securities under certain limited circumstances,
Securities will not be sold to take advantage of market fluctuations or changes
in anticipated rates of appreciation.
- ----------------------------------------------------------------
Defining Your Costs
- ----------------------------------------------------------------
SALES CHARGES
Although the Fund is a unit investment trust rather than a mutual fund, the
following information is presented to permit a comparison of fees and an
understanding of the direct or indirect costs and expenses that you pay
As a %
of Secondary
Market
Public
Offering Price
-----------------
Maximum Sales Charge 2.50%
ESTIMATED ANNUAL FUND OPERATING EXPENSES
Amount per
Unit
---------------
Trustee's Fee $ 0.06
Portfolio Supervision, Bookkeeping and
Administrative Fees $ 0.01
Other Operating Expenses $ 0.21
---------------
TOTAL $ 0.28
REDEEMING OR SELLING YOUR INVESTMENT
You may sell or redeem your units at any time prior to the termination of the
Portfolio. Your price will be based on the then current net asset value. The
redemption and secondary market repurchase price as of the evaluation date, June
30, 1998, was $417.17 per unit ($10.70 per unit less than the Public Offering
Price).
- ----------------------------------------------------------------
Taxes
- ----------------------------------------------------------------
The following discussion addresses only the tax consequences of Units held as
capital assets and does not address the tax consequences of Units held by
dealers, financial institutions or insurance companies.
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, and income received by the Fund will be treated as income of the
investors in the manner set forth below. Each investor will be considered the
owner of a pro rata portion of each Security in the Fund under the grantor trust
rules of Sections 671-679 of the Internal Revenue Code of 1986, as amended (the
'Code'). The total cost to an investor of his Units, including sales charges, is
allocated among his pro rata portion of each Security, in proportion to the fair
market values thereof on the date the investor purchases his Units, in order to
determine his tax cost for his pro rata portion of each Security.
Each investor will be considered to have received all of the dividends paid on
his pro rata portion of each Security when such dividends are received by the
Fund, regardless of whether such dividends are automatically reinvested (see
Reinvestment Plan).
If the Fund participates in any dividend reinvestment plan of the issuer of any
of the Securities and therefore receives dividends in the form of additional
shares of such issuer, each investor will be considered to have received a
dividend equal to the value of the additional shares of such issuer received by
the Fund with respect to the investor's pro rata portion of the Securities of
such issuer in the Fund. An investor will have a tax basis in such additional
shares equal to the value thereof. The sale by an investor who does not
A-3
<PAGE>
participate in the Fund's Reinvestment Plan (or by the Distribution Agent on his
behalf) of such additional shares may give rise to a taxable gain or loss. The
exchange by an investor (or by the Distribution Agent on his behalf) who
participates in the Fund's Reinvestment Plan of such additional shares for
additional Units will be tax free to the extent such additional shares are
represented by the additional Units received; any shares sold to purchase other
Securities in order to maintain the proportionate relationship of Securities
represented by the Units may give rise to taxable gain or loss to the investor
on whose behalf the transaction was made.
Amounts considered to have been received by a corporate investor from domestic
corporations that constitute dividends for federal income tax purposes will
generally qualify for the dividends-received deduction, which is currently 70%.
Depending upon the particular corporate investor's circumstances, limitations on
the availability of the dividends-received deduction may be applicable. Further,
Congress from time to time considers proposals that would adversely affect the
after-tax return to investors that can take advantage of the deduction. For
example, the recently enacted Taxpayer Relief Act of 1997 requires that the
holding period for the dividends-received deduction must begin before and
include each ex-dividend date and exclude the purchase date and any days during
which the investor's investment is hedged. Investors are urged to consult their
own tax advisers in this regard.
An individual investor who itemizes deductions will be entitled to deduct his
pro rata share of current Portfolio expenses only to the extent that this amount
together with the investor's other miscellaneous deductions exceeds 2% of his
adjusted gross income. The Code further restricts the ability of an individual
investor with an adjusted gross income in excess of a specified amount (for
1998, $124,500 or $62,250 for a married person filing a separate return) to
claim itemized deductions (including his pro rata share of Fund expenses).
An investor will recognize capital gain or loss when the investor disposes of
his Units (by sale or redemption) or when the Trustee disposes of the Securities
from the Fund. An investor will not recognize gain or loss upon the distribution
of a pro rata amount of each of the Securities by the Trustee to an investor (or
to his agent) in redemption of Units or upon termination of the Fund, except to
the extent of cash received in lieu of fractional shares. The redeeming
investor's basis for such Securities will be equal to his basis for the same
Securities (previously represented by his Units) prior to such redemption, and
his holding period for such Securities will include the period during which he
held his Units.
A capital gain or loss is long-term if the relevant asset is held for more than
one year and short-term if held for one year or less. A noncorporate investor
who has held his Units for more than one year may be entitled to a 20% maximum
federal tax rate for capital gains derived from the Fund. Investors should
consult their tax advisers in this regard.
Under the income tax laws of the State and City of New York, the Fund is not an
association taxable as a corporation and the income of the Fund will be treated
as the income of the investors in the same manner as for federal income tax
purposes.
The foregoing discussion relates only to the federal and certain aspects of New
York State and City income taxes. Investors that are not U.S. citizens or
Residents ('Foreign Investors') should be aware that dividend distributions from
the Fund will generally be subject to a withholding tax of 30%, or a lower
treaty rate. Investors may be subject to taxation in New York or in other
jurisdictions (including a Foreign Investor's country of residence) and should
consult their own tax advisors in this regard.
* * * *
The Trustee will furnish to each investor an annual statement containing
information relating to the dividends received by the Fund on the Securities,
the cash proceeds received by the Fund from the disposition of any Security
(resulting from redemption or the sale by the Fund of any Security), and the
fees and expenses paid by the Fund. The Trustee will also furnish annual
information returns to each investor and to the Internal Revenue Service.
A-4
<PAGE>
DEFINED ASSET FUNDS - THE EQUITY INCOME FUND,
SECOND EXCHANGE SERIES - AT&T SHARES
REPORT OF INDEPENDENT ACCOUNTANTS
The Sponsors, Trustee and Holders of
Defined Asset Funds - Equity Income Fund,
Second Exchange Series - AT&T Shares:
We have audited the accompanying statement of condition of Defined Asset
Funds - The Equity Income Fund, Second Exchange Series - AT&T Shares as
of June 30, 1998 and the related statements of operations and of changes
in net assets for the years ended June 30, 1998, 1997 and 1996. 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 June 30, 1998, as shown in such portfolio, were
confirmed to us by The Bank of New York, 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 - The Equity Income Fund, Second Exchange Series - AT&T
Shares, at June 30, 1998 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.
September 14, 1998
D - 1
<PAGE>
DEFINED ASSET FUNDS - EQUITY INCOME FUND,
SECOND EXCHANGE SERIES - AT&T SHARES
STATEMENT OF CONDITION
AS OF JUNE 30, 1998
<TABLE>
<S> <C> <C>
TRUST PROPERTY:
Investment in marketable securities - at value
(cost $17,535,250) (Notes 1 and 2)............ $63,206,758
Dividends receivable............................ 103,316
Cash............................................ 14,848
Receivable from securities sold................. 206,608
____________
Total trust property.................. 63,531,530
Less Liabilities:
Distributuion payable........................... $ 107,017
Redemption payable.............................. 207,675
Accrued expenses................................ 666 315,358
____________ ____________
NET ASSETS, REPRESENTED BY:
151,513 units of fractional undivided
interest outstanding (Note 6)................. 63,209,456
Undistributed net investment income............. 6,716
____________
$63,216,172
==============
UNIT VALUE ($63,216,172/151,513 units)............ $417.23
==============
</TABLE>
See Notes to Financial Statements.
D - 2
<PAGE>
DEFINED ASSET FUNDS - EQUITY INCOME FUND,
SECOND EXCHANGE SERIES - AT&T SHARES
STATEMENTS OF OPERATIONS
<TABLE><CAPTION>
............Years Ended June 30,..........
1998 1997 1996
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income................................. $ 1,317,253 $1,291,827 $1,255,688
Trustee's fees and expenses..................... (41,410) (36,123) (23,726)
Sponsors' fees ................................. (1,578) (1,894) (820)
__________________________________________
Net investment income........................... 1,274,265 1,253,810 1,231,142
__________________________________________
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENT:
Realized gain on securities sold
or redeemed............................. 332,829 623,593
Unrealized appreciation
of investments.............................. 20,314,553 4,010,191 5,955,443
__________________________________________
Net realized and unrealzed gain on
investments. ............................. 20,647,382 4,633,784 5,955,443
__________________________________________
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS............................... $21,921,647 $5,887,594 $7,186,585
==========================================
</TABLE>
See Notes to Financial Statements.
D - 3
<PAGE>
DEFINED ASSET FUNDS - EQUITY INCOME FUND,
SECOND EXCHANGE SERIES - AT&T SHARES
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE><CAPTION>
............Years Ended June 30,..........
1998 1997 1996
<S> <C> <C> <C>
OPERATIONS:
Net investment income........................... $ 1,274,265 $ 1,253,810 $ 1,231,142
Realized gain on securities sold
or redeemed................................. 332,829 623,593
Unrealized appreciation o investments........... 20,314,553 4,010,191 5,955,443
__________________________________________
Net increase in net assets resulting
from operations.............................. 21,921,647 5,887,594 7,186,585
__________________________________________
INCOME DISTRIBUTIONS TO HOLDERS (Note 3)......... (1,270,679) (1,253,189) (1,357,026)
__________________________________________
CAPITAL SHARE TRANSACTIONS:
Issuances of 774, 1,665, and 6,733 additional
units, respectively (Note 4)................. 253,918 401,814 1,673,494
Redemptions of 1,395, 4,166, and 25 units,
respectively (Note 5)........................ (484,391) (1,037,745) (5,969)
__________________________________________
Net capital share transactions................... (230,473) (635,931) 1,667,525
__________________________________________
NET INCREASE (DECREASE) IN NET ASSETS............. 20,420,495 3,998,474 7,497,084
NET ASSETS AT BEGINNING OF YEAR................... 42,795,677 38,797,203 31,300,119
__________________________________________
NET ASSETS AT END OF YEAR......................... $63,216,172 $42,795,677 $38,797,203
==========================================
PER UNIT:
Income distributions during year................ $8.36 $8.14 $8.29
==========================================
Net asset value at end of year.................. $417.23 $281.30 $250.90
==========================================
TRUST UNITS OUTSTANDING AT END OF YEAR............ 151,513 152,134 154,635
==========================================
</TABLE>
See Notes to Financial Statements.
D - 4
<PAGE>
DEFINED ASSET FUNDS - EQUITY INCOME FUND,
SECOND EXCHANGE SERIES - AT&T SHARES
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940 as a Unit
Investment Trust. A summary of the significant accounting policies, which
are in conformity with generally accepted accounting principles, followed
by the Fund in the preparation of its financial statements since
December 7, 1983, it's initial date of deposit, is as follows:
(a) Securities are stated at market value based on the last sales prices
reported at the close of business on the New York Stock Exchange. The
aggregate cost of securities represents the market value of the
securities on the dates they were acquired by the Fund; the
appropriate portion of such aggregate cost was allocated among the
portfolio holdings in shares of AT&T and seven regional holding
companies following their divestiture by AT&T in accordance with its
Plan of Reorganization. Realized gains or losses on sales of
securities are determined using the first-in first-out cost basis.
See "Redemption - Computation of redemption Price Unit" in this
Prospectus, Part B.
(b) The Fund is not subject to income taxes. Accordingly, no provision for
such taxes is required.
(c) Dividend income has been recognized on the ex-dividend date.
2. PORTFOLIO - JUNE 30, 1998
<TABLE><CAPTION>
Number
Shares
Common Market
Name of Issuer Stock Cost Value
________________ ________ _______ _________
<S> <C> <C> <C>
Airtouch Communications 59,696 $ 716,647 $ 3,488,485
AT&T 149,239 2,974,945 8,525,278
Ameritech (1) 179,088 2,037,049 8,036,574
Bell Atlantic Corporation (1) (2) 211,083 3,606,865 9,630,662
BellSouth Corporation 134,315 2,467,861 9,015,894
Lucent Technologies (1) 96,708 1,216,231 8,044,897
NCR Corp. 9,328 148,461 303,160
SBC Communications (1) 266,416 2,866,344 10,656,640
U.S. West Inc (formerly U.S. West
Communications) (3) 61,325 924,744 2,882,275
Mediaone Group (formerly U.S. West Media Group) 59,696 576,103 2,622,893
__________ __________
Total $17,535,250 $63,206,758
=========== ===========
</TABLE>
(1) Stock Split 2 for 1
(2) Merged with NYNEX
(3) Spinoff from U.S West Media Group.
D - 5
<PAGE>
DEFINED ASSET FUNDS - EQUITY INCOME FUND,
SECOND EXCHANGE SERIES - AT&T SHARES
NOTES TO FINANCIAL STATEMENTS
3. DISTRIBUTIONS
Any monthly distributions to Holders, who have not elected to participate
in the Fund's Reinvestment Plan, are made on or about the first day of
each month. Receipts other than interest, after deductions for redemptions
and applicable expenses, are distibuted as explained in "Administrations
of the Fund - Accounts and Distributions" in this Prospectus, Part B. The
income distribution payable at June 30, 1998 was at the rate of $0.704
per unit.
4. REINVESTMENT PROGRAM
Holders may reinvest any distibutions in the Fund by executing an
appropriate notice of election to participate in the Fund's Reinvestment
Plan. The Sponsors (Merrill Lynch, Pierce, Fenner & Smith Inc., Morgan
Stanley Dean Witter, Prudential Securities Inc. and Smith Barney
Inc.) may, in their sole discretion, cancel the Fund's Reinvestment Plan
at any time. Subsequent to March 31, 1984, Holders of The Equity Income
Fund, First Exchange Series - AT&T Shares could, by executing an
appropriate notice of election, reinvest any of their distributions from
that Fund into this Fund.
5. REDEMPTIONS
Holders may request redemptions of units by presentation thereof to the
Trustee, The Bank of New York. The Trustee has the option of redeeming
units in kind or in cash. The tax effect on Holders of redemptions and
related distributions is described under "Taxes" in this Prospectus,
Part B.
6. NET CAPITAL
<TABLE>
<S> <C>
Cost, including reinvested distributions, of 151,513 units at Dates
of Deposit............................................................ $17,852,510
Less sales charge....................................................... 803,032
____________
Net amount applicable to Holders........................................ 17,049,478
Redemptions of units - net cost of 7,081 units redeemed less redemption
amounts............................................................... (1,004,117)
Realized gain on securities sold or redeemed............................ 1,492,587
Unrealized appreciation of investments.................................. 45,671,508
____________
Net capital applicable to Holders....................................... $63,209,456
============
</TABLE>
D - 6
<PAGE>
DEFINED ASSET FUNDS - EQUITY INCOME FUND,
SECOND EXCHANGE SERIES - AT&T SHARES
NOTES TO FINANCIAL STATEMENTS
7. INCOME TAXES
All Fund items of income received, expenses paid, and realized gains and
losses on securities sold are attributable to the Holder's on a pro rata
basis, for Federal income tax purposes in accordance with the grantor
trust rules of the United States Internal Revenue Code.
At June 30, 1998, the cost of investment securities for Federal income tax
purposes was approximately equivalent to the cost as shown in the Fund's
portfolio.
D - 7
<PAGE>
AUTHORIZATION FOR REINVESTMENT
DEFINED ASSET FUNDS--EQUITY INVESTOR FUND
SECOND EXCHANGE SERIES--AT&T SHARES
/ / Yes, I want to participate in the Fund's Reinvestment Plan and purchase
additional Units of the Fund each month.
I hereby acknowledge receipt of the Prospectus for Defined Asset
Funds--Equity Investor Fund, Second Series--AT&T Shares and authorize The Bank
of New York to pay distributions on my Units as indicated below (distributions
to be reinvested will be paid for my account to The Bank of New York).
/ / I want to invest all distributions of income and principal (including
capital gains) in additional Units of the Fund.
Please print or type
Name Registered Holder
Address
Registered Holder
(Two signatures required if
joint tenancy)
City State Zip Code
This page is a self-mailer. Please complete the information above, cut
along the dotted line, fold along the lines on the reverse side, tape, and mail
with the Trustee's address displayed on the outside.
12345678
<PAGE>
BUSINESS REPLY MAIL NO POSTAGE
FIRST CLASS PERMIT NO. 1313 NEW YORK, N.Y. NECESSARY
IF MAILED
POSTAGE WILL BE PAID BY ADDRESSEE IN THE
DEFINED ASSET FUNDS--EQUITY INVESTOR FUND UNITED STATES
SECOND EXCHANGE SERIES--AT&T SHARES
THE BANK OF NEW YORK
UNIT INVESTMENT TRUST DEPARTMENT
P.O. BOX 974
WALL STREET STATION
NEW YORK, N.Y. 10268-0974
- --------------------------------------------------------------------------------
(Fold along this line.)
- --------------------------------------------------------------------------------
(Fold along this line.)
<PAGE>
<PAGE>
DEFINED ASSET FUNDSSM
PROSPECTUS--PART B
EQUITY INVESTOR FUND
FURTHER INFORMATION REGARDING THE FUND MAY BE OBTAINED
WITHIN FIVE DAYS BY WRITING OR CALLING THE TRUSTEE AT THE ADDRESS AND
TELEPHONE NUMBER SET FORTH ON THE BACK COVER OF PART A OF THE PROSPECTUS.
INDEX
PAGE
---------
FUND DESCRIPTION............................ 1
RISK FACTORS................................ 2
HOW TO BUY UNITS............................ 12
HOW TO REDEEM OR SELL UNITS................. 13
INCOME, DISTRIBUTIONS AND REINVESTMENT...... 14
FUND EXPENSES............................... 15
TAXES....................................... 16
RECORDS AND REPORTS......................... 18
TRUST INDENTURE............................. 18
MISCELLANEOUS............................... 19
EXCHANGE OPTION............................. 21
SUPPLEMENTAL INFORMATION.................... 21
FUND DESCRIPTION
PORTFOLIO SELECTION
Professional securities buyers and research analysts for Defined Asset
Funds, with access to extensive research, participated in the selection of the
Securities for the Portfolio after considering the Fund's investment objective
as well as the quality of the stocks, the dividend payment record of the issuers
and the prices of the stocks. The yield and price of stocks of the type
deposited in the Portfolio are dependent on a variety of factors, including
money market conditions, general conditions of the corporate bond and equity
markets, size of a particular offering and capital structure of the issuer.
While it is unlikely that the declaration or payment of dividends on any stocks
would be discontinued, no assurances can be given in this regard because
dividends are subject to the availability of earnings, which are, in turn,
subject to numerous events which are often beyond the issuer's control
regardless of the size of the company.
Because each Defined Asset Fund is a preselected portfolio, you know the
securities before you invest. Of course, the Portfolio will change somewhat over
time, as Securities are purchased upon creation of additional Units, as
securities are sold to meet Unit redemptions or in other limited circumstances.
PORTFOLIO SUPERVISION
The Fund follows a buy and hold investment strategy in contrast to the
frequent portfolio changes of a managed fund based on economic, financial and
market analyses. In the event a public tender offer is made for a Security or a
merger or acquisition is announced affecting a Security, the Sponsors may
instruct the Trustee to tender or sell the Security in the open market when in
its opinion it is in the best interests of investors to do so. Although the
Portfolio is not actively managed, it is regularly reviewed and evaluated and
Securities may be sold
1
<PAGE>
in case of certain adverse developments concerning a Security, including the
adverse financial condition of the issuer, the institution of legal proceedings
against the issuer, a decline in the price or the occurrence of other market or
credit factors that might otherwise make retention of the Security detrimental
to the interest of investors or if the disposition of these Securities is
necessary in order to enable the Fund to make distributions of the Fund's
capital gain net income. Securities can also be sold to meet redemption of
Units. In Funds organized as regulated investment companies, Securities may be
sold in order to maintain the qualification of the Fund as a regulated
investment company under the Internal Revenue Code, and the Sponsors are also
authorized to direct the reinvestment of the proceeds of the sale of Securities,
as well as moneys held to cover the purchase of Securities pursuant to contracts
which have failed, in additional Securities.
RISK FACTORS
An investment in the Fund entails certain risks, including the risk that
the value of your investment will decline if the financial condition of the
issuers of the Securities becomes impaired or if the general condition of the
stock market worsens. In addition, holders of common stocks have generally
inferior rights to receive payments from the issuer in comparison with the
rights of creditors of, or holders of debt obligations or preferred stocks
issued by, the issuer. Moreover, common stocks do not represent an obligation of
the issuer and therefore do not offer any assurance of income or provide the
degree of protection of capital provided by debt securities. Common stocks in
general may be especially susceptible to general stock market movements and to
volatile increases and decreases in value as market confidence in and
perceptions of the issuers change. These perceptions are based on unpredictable
factors including expectations regarding government, economic, monetary and
fiscal policies, inflation and interest rates, economic expansion or
contraction, and global or regional political, economic or banking crises. The
Sponsors cannot predict the direction or scope of any of these factors.
A Portfolio may be concentrated in one or more of the following categories.
Concentration may involve additional risk because of the decreased
diversification of economic, financial and market risks. Set forth below is a
brief description of certain risks associated with certain of the Securities.
Additional information is contained in the Information Supplement which is
available from the Trustee at no charge to the investor.
CONSUMER PRODUCTS COMPANIES
Risk factors include cyclicality of revenues and earnings, changing
consumer demands, regulatory restrictions, products liability litigation and
other litigation, extensive competition (including that of low-cost foreign
companies), unfunded pension fund liabilities, employee and retiree benefit
costs and financial deterioration resulting from leveraged buy-outs, takeovers
or acquisitions. In general, expenditures on consumer products will be affected
by the economic health of consumers. A continuing weak economy with its
consequent effect on consumer spending would have an adverse effect on the
industry.
HEALTH CARE
Most health care companies are extensively regulated. All are subject to
extreme cost-containment pressures and competition. As a result, they may not be
able to raise prices for their products or services, or may experience price
declines. They are required to spend vast amounts of capital to keep pace with
technological innovation. These constraints affect the various health care
sectors in the Portfolio in specific ways. Strategic alliances are being formed
by pharmaceutical companies, biotechnology companies, medical technology
companies, HMOs and hospitals as well as other health care companies to reduce
costs and benefit from economies of scale. The inability to form these alliances
on favorable terms or to compete with other alliances could adversely affect a
company's profits and the price of its securities.
Many problems faced by pharmaceutical companies, biotechnology companies
and medical technology companies typify those faced by the health care industry
in general. These companies are regulated by the federal Food and Drug
Administration (the 'FDA'). The FDA regulates the development, manufacture and
marketing of all drugs and medical products. Before a product can be sold it
must receive FDA approval, a long and very costly process. The cost of marketing
a drug is increasing while at the same time it is becoming increasingly
difficult to recoup that cost. Future trends in drug pricing remain unclear.
HMOs and other third-party payors are gaining power and demanding larger
discounts. Pharmaceutical companies must devote large amounts of risk capital to
research and development in order to develop new and unique drugs with patent
protection from
2
<PAGE>
generic substitutes and other competitors. Pharmaceutical companies,
biotechnology companies and medical technology companies also face the risk of
large product liability suits and consequently expensive liability insurance.
Moreover, several pharmaceutical companies are currently involved in litigation
in connection with alleged price fixing. Finally, technological change is
becoming increasingly rapid and products tend to become obsolete more quickly
than before.
Medical Technology Companies. Medical technology companies face the risk
that hospitals will reduce spending on supplies and devices to maximize profits.
(See Health Care Reform below.) Medical technology companies must invest
significant capital in research and development to remain competitive. Hospitals
are also increasingly demanding discounts and that pressure may continue to grow
as hospitals consolidate.
Hospital Management Companies. Hospital management companies are subject to
extensive regulation on federal, state and local levels. Many states require
hospital management companies to submit their financial statements for review
and some even regulate the rates they charge. When treatment costs are
reimbursed by third parties such as Medicare or Medicaid, hospitals have to work
within the discipline of the prospective payment system and also face more
specific cost-containment measures. Many hospital management companies have
recently consolidated. The success of the consolidated companies is dependant
upon the ability to successfully integrate management and policy to take
advantage of economies of scale. The effort to reduce costs has resulted in a
movement away from more expensive inpatient treatment to treatment on an
out-patient basis or in specialized facilities. The increase in managed care
facilities has significantly decreased the demand for traditional hospital care.
This has reduced bed-occupancy rates in the large general hospitals and affected
revenues adversely.
Hospitals may be adversely affected by competitive pressure to consolidate.
There can be no assurance that hospitals will be able to make profitable
acquisitions. Hospitals may be subject to federal, state or insurer inquiries or
investigations, which may lead to sanctions. Hospitals also face the risk of
large liability suits and must carry expensive liability insurance and maintain
loss reserves, which may not be sufficient to cover claims. To the extent
hospital management companies are adversely impacted by any of the foregoing,
services companies and medical technology companies would also be affected
adversely.
Biotechnology Companies. The biotechnology industry in general is an
emerging growth industry. Biotechnology companies are regulated by the FDA to
the same extent as traditional pharmaceutical companies. As emerging growth
companies, they may be thinly capitalized and more susceptible to general market
fluctuations than companies with greater capitalization. Earnings are generally
retained to finance the company's expansion and thus no dividends may be paid
and additional capital may be required to market new products on a commercial
basis. Biotechnology companies may also be dependent for their revenues upon
only a few products and upon larger pharmaceutical companies (who may be their
competitors) to produce and market their products. This dependence upon a
limited range of products increases the problems that would be caused by product
obsolescence, a risk that is greater in a rapidly developing area like
biotechnology.
Managed Care. HMOs are subject to federal and state regulation which adds
to the cost of health care coverage. Specifically, states are beginning to raise
concern about how HMOs try to control pharmaceutical costs. Most states require
HMOs to provide periodic financial reports and some even require HMOs to
maintain minimum reserve requirements. Several states have recently rejected
proposed legislation that would allow consumers to sue managed-care plans for
not providing the proper degree of care or for bad medical decisions made by the
plan's employees. Similar legislation is still pending in six states. HMOs are
paid a fixed membership fee. Some HMOs are turning to 'capitation,' where they
contract to provide services for a certain population for a set price,
regardless of whether or not the service is provided. Depending on the
negotiated provisions of the contract, costs in excess of set fees may be borne
either by the HMO or the health care provider or shared by both. HMOs run the
risk that inflation, epidemics, lack of financial controls among professional
staff and the need to acquire new technology will increase treatment costs and
erode profits.
Physician practice management companies have been consolidating to improve
their competitive position. The combinations have often not been as successful
as projected.
Nursing Homes. Nursing homes face federal, state and local governmental
regulation. Failure to comply with applicable laws and regulations could result,
in extreme circumstances, in the revocation of facility's license. Regulatory
changes such as the recent change in the Medicare reimbursement system may have
an adverse impact. Staes may also reduce Medicaid reimbursement for long-term
care. Competition is also increasing from
3
<PAGE>
companies providing rehabilitation therapy, home care services, respiratory
treatment and clinical labs. Nursing homes often expand through acquisitions.
There is no assurance that suitable acquisitions can be identified or completed
in the future. Even if successfully completed, acquisitions may entail
unanticipated business risks or legal liabilities.
Information Technology. - These companies must deal with compliance with
the year 2000. They are also subject to very competitive pricing and rapidly
changing technology.
Health Care Reform. A number of legislative proposals concerning health
care have been introduced in the U.S. Congress in recent years or have been
reported to be under consideration. These proposals span a wide range of topics,
including cost controls, national health insurance, incentive for competition in
the provision of health care services, tax incentives and penalties related to
health care insurance premiums, and promotion of prepaid health care plans. It
is not possible to predict the effect of any of these proposals if enacted.
THE FINANCIAL INDUSTRY
Financial institutions may be subject to extensive governmental regulation
which may limit both the amount and types of loans and other financial
commitments they can make as well as the interest rates and other fees they can
charge. The following sectors may be represented in the Portfolio:
Banking. The profitability of a bank 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. The activities of U.S. banks and bank holding companies are subject
to comprehensive federal and state regulation which is expected to continue to
change over the life of the Portfolio. Federal regulators may impose
restrictions on dividend payment policies, and transactions between banks and
their parent holding companies, as well as establish requirements for the level
of the allowance for loan losses. In addition, federal regulators require banks
and thrifts to maintain minimum capital requirements; to the extent additional
equity is issued to meet the requirements, outstanding equity holdings will be
diluted. Recent changes in federal and state regulations which will permit
greater consolidation and branching within the industry may lead to increased
competition among larger bank complexes. Legislation is currently being
considered which would reduce the separation between commerical and investment
banking businesses. The enactment of any new legislation or regulations, or any
change in interpretation or enforcement of existing laws or regulations, may
affect the profitablity of participants in the banking industry.
The banking industry is particularly susceptible to downturns in economic
conditions and volatility in political conditions as well as fiscal or monetary
policies of governmental units. Banking operations depend heavily on the
availability and cost of capital, and are highly sensitive to interest rate
levels.
Banks are subject to substantial competition from other banking and thrift
institutions and from other financial service institutions for deposits, as well
as corporate and retail customers. To the extent a bank's portfolio is
concentrated in assets related to a particular industry or geographic region,
the bank's operating results will be subject to additional risks associated with
that industry or region. Loan portfolios of banks have been adversely affected
by depressed conditions in certain markets, including real estate, agriculture
and energy. Profitability, therefore, is subject to significant fluctuation.
Banks are also exposed to the risks of a deflationary economy, which may
diminish the value of a bank's direct investments and contribute to loan
defaults if the value of secured property or other collateral for loans
declines.
Thrifts. The savings and loan or thrift industry is generally subject to
similar risks as the banking industry, including, interest rate changes, credit
risks and regulatory risks. Such risks may have different effects on the thrift
industry because of differences in the general composition of their loan
portfolios. The loan portfolios of thrifts, therefore, may be less diversified
than bank portfolios and have a greater concentration in real estate, consumer
and small business loans. The loan portfolios of thrifts may also be
concentrated in the geographic area in which they are located. Local market
conditions, particularly if the economic base of the area depends on a depressed
industry, may have adverse effects on the financial condition of thrifts. The
enactment of any new legislation or regulations, or any change in interpretation
or enforcement of existing laws or regulations, may affect the profitability of
participants in the thrift industry. No assurance can be given as to what form
any legislation or
4
<PAGE>
regulation would take, if enacted, or what effects any new legislation or
regulation would have on the thrift industry.
Insurance. Insurance companies are subject to extensive regulation and
supervision by state insurance commissioners who regulate the standards of
solvency, the nature of and limitations on investments, reports of financial
condition, and reserve requirements 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 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. Insurance companies are also
affected by state and federal judicial and regulatory decisions that redefine
risk exposure in areas such as products liability, workers' compensation and
disability benefits. Developments in these areas may reduce short-term
profitability of certain lines of insurance, but long-term effects may be
minimized through revision of coverage and policy terms. Insurance companies'
profitability depends largely on actuarial assumptions based on past experience
and on the investment returns on reserve and surplus funds. The occurrence of
certain significant and unforeseen events may therefore have an adverse effect
on the financial condition of insurance companies. Certain types of insurance,
such as property and casualty insurance, may be impacted by natural catastrophes
or environmental and asbestos claims under decades-old policies or similar
events. In addition, insurance companies are affected by real estate and equity
market returns, interest rate levels, economic conditions and price and
marketing competition. Deregulation of the financial services industry may
result in greater diversification of products offered by financial services
companies amd expose insurance companies to increased competition.
Financial Services. The financial services industry includes credit card
issuers, asset management companies and companies that provide private mortgage
insurance, home equity loans, point-of-sale loans for various durable goods and
other consumer and commercial loans. Companies in the credit card and certain
other businesses are subject to the demands of a competitive market, including
increased use of solicitations, target marketing and pricing competition.
Because of increased competition, some credit card issuers have pursued
customers with lower credit quality and have experienced rising delinquency
rates. Profitability for credit card issuers is largely dependent on the ability
to generate new receivables as well as on their continued ability to fund
themselves by asset securitization, the level of delinquencies and losses and
pricing power. Social, legal and economic factors, including inflation,
unemployment levels and interest rates, may result in changes in market demand,
credit use and payment patterns of customers. No assurance can be given as to
what effect these factors may have on the credit card industry. Asset management
companies also operate in a competitive environment and their profitability is
dependent upon the performance of their funds relative to that of competing
firms and to conditions in the equity and fixed income markets in general.
Companies in other areas of the financial services industry are dependent on
federal housing legislation and other laws and regulations that affect the
demand for home equity loans and mortgage insurance. These companies are also
subject to insurance laws and regulations in the jurisdictions where they do
business. Future changes in laws or regulations relating to this industry may
adversely affect market demand, restrict premium rates or otherwise impair
transactions in this industry. Companies in this industry are exposed to credit
risk and may be adversely affected by economic events such as national or
regional economic recession, falling housing prices, rising unemployment rates
and changes in interest rates.
MANUFACTURING COMPANIES
Growth in the manufacturing industry is closely linked to expansion in the
domestic and global economies (i.e., the demand for both durable and non-durable
goods, level of capital spending, export demand, level of competition and
technological developments). Historically, financial expenditures on capital
improvements by the U.S. government and many state, local and foreign
governments have been extremely limited. The lack of funds allocated by public
entities to capital improvement projects may adversely affect manufacturers
engaged in the production of industrial materials used for capital improvements
or for the upgrade of the infrastructure. Environmental and safety issues
increasingly affect the manufacturing industry. Issuers may experience decreases
in profitability as legislative mandates impose costs associated with compliance
with environmental regulations and manufacturing more environmentally sound and
safer equipment. Furthermore, the cost of product liability
5
<PAGE>
insurance and the inability of some manufacturing companies to obtain this
insurance may have an adverse impact on the industry. The long-term outlook is
largely dependent upon the growth and competitiveness of the U.S. manufacturing
base.
REAL ESTATE INVESTMENT TRUSTS (REITS)
Real estate is a traditional investment. REITs are financial vehicles that
have as their objective the pooling of capital from a number of investors in
order to participate directly in real estate ownership or financing and offer a
convenient and cost effective way to diversify your portfolio with real estate
investments. They generally have interests in income-producing real estate.
Equity REITs emphasize direct property investment, holding their invested assets
primarily in the ownership of real estate or other equity interests. The
objective of an equity REIT is to purchase income-producing real estate
properties in order to generate high levels of cash flow from rental income and
a gradual asset appreciation, and they typically invest in properties such as
office, retail, industrial, hotel and apartment buildings and health care
facilities. The majority of the REITs in the Portfolio are not highly leveraged
and generate most of their income from rents on established properties. Their
properties are geographically diversified around the country. While past
experience is no guarantee of the future, REITs historically have distributed
high levels of income through various economic and market cycles. REITs have
grown significantly in recent years and have been a stablizing force in the U.S.
real estate market.
Many factors can have an adverse impact on the performance of a particular
REIT, its cash available for distribution, the credit quality of a particular
REIT or the real estate industry generally. Risks associated with the direct
ownership of real estate include, among other factors, general and local
economic conditions, decline in real estate values, the financial health of
tenants, overbuilding and increased competition for tenants, oversupply of
properties for sale, changing demographics, changes in interest rates, changes
in government regulations, faulty construction, changes in neighborhood values,
and the unavailability of construction financing or mortgage loans at rates
acceptable to developers. Variations in rental income and space availability and
vacancy rates in terms of supply and demand are additional factors affecting
real estate generally and REITs in particular. Investors should also be aware
that REITs may not be diversified and are subject to the risks of financing
projects. REITs are also subject to defaults by borrowers, self-liquidation and
the market's perception of the REIT industry generally.
Certain REITs may be structured as UPREITs. This form of REIT owns an
interest in a partnership that owns real estate, which can result in a potential
conflict of interest between shareholders who may want to sell an asset and
partnership interest holders who would be subject to tax liability if the REIT
sells the property. In some cases, REITS have entered into 'no sell' agreements,
which are designed to avoid a taxable event to the holders of partnership units
by preventing the REIT from selling the property. This kind of arrangement could
mean that the REIT would refuse a lucrative offer for an asset or be forced to
hold on to a poor asset. Since 'no sell' agreements are often undisclosed, it is
often unknown whether specific REITS have entered into this kind of arrangement.
REIT Taxation. Each of the REITs in which the Portfolio invests will
generally state its intention to operate in such manner as to qualify for
taxation as a 'real estate investment trust' under Sections 850-860 of the
Internal Revenue Code of 1986, as amended, although no assurance can be given
that each REIT will at all times so qualify. So long as an issuer qualifies as a
REIT, it will, in general, be subject to Federal income tax only on income that
is not distributed to stockholders. In order to qualify as a REIT for any
taxable year, a REIT must, among other things, hold at least 75% of its assets
in real estate, cash items and government securities; derive at least 75% of its
gross income from rents, interest on mortgages, gain from disposition of real
property that is not inventory, distributions from other REITs, and certain
other types of real estate related income; and distribute to its stockholders an
amount at least equal to 95% of its taxable income. Failure to qualify for
taxation as a REIT in any taxable year will subject an issuer to tax on its
taxable income at regular corporate rates. Unless entitled to relief under
specific statutory provisions, the issuer would not qualify for taxation as a
REIT for the next four taxable years after failing to qualify in any year. Each
REIT may also be subject to state, local or other taxation in various state,
local or other jurisdictions.
TECHNOLOGY COMPANIES
A Portfolio may be concentrated in stocks of issuers that manufacture
semiconductors, electronic components, software, integrated systems and other
related products. These kinds of companies are rapidly developing and highly
competitive, both domestically and internationally, and tend to be relatively
volatile as
6
<PAGE>
compared to other types of investments. Certain of these companies may be
smaller and less seasoned companies with limited product lines, markets or
financial resources and limited management or marketing personnel. These
companies are characterized by a high degree of investment to maintain
competitiveness and are affected by worldwide scientific and technological
developments (and resulting product obsolescence) as well as government
regulation, increase in material or labor costs, changes in distribution
channels and the need to manage inventory levels in line with product demand.
Other risk factors include short product life cycles, aggressive pricing and
reduced profit margins, dramatic and often unpredictable changes in growth
rates, frequent new product introduction, the need to enhance existing products,
intense competition from large established companies and potential competition
from small start up companies. These companies are also dependent to a
substantial degree upon skilled professional and technical personnel and there
is considerable competition for the services of qualified personnel in the
industry.
THE TELECOMMUNICATIONS INDUSTRY
Companies in this industry are engaged in providing local, long-distance,
wireless, cable television and internet services, in the manufacture of
telecommunications products and in a wide range of other activities including
directory publishing, information systems and the operation of voice, data and
video telecommunications networks.
General. Payment on common stocks of companies in the telecommunications
industry, including local, long-distance, wireless, cable television and
internet services, the manufacture of telecommunications equipment, and other
ancillary services, is generally dependent upon the amount and growth of
customer demand, the level of rates permitted to be charged by regulatory
authorities and the effects of inflation on the cost of providing services and
the rate of technological innovation. The domestic telecommunications industry
is characterized by increasing competition in all sectors and regulation by the
Federal Communications Commission and various state regulatory authorities. To
meet increasing competition, companies may have to commit substantial capital,
particularly in the formulation of new products and services using new
technology. Telecommunications companies in both developed and emerging
countries are undergoing significant change due to varying and evolving levels
of governmental regulation or deregulation and other factors. As a result,
competitive pressures are intense and the securities of such companies may be
subject to significant price volatility. In addition, all telecommunications
companies in both developed and emerging countries are subject to the additional
risk that technological innovations will make their products and services
obsolete.
The Telecommunications Act of 1996. The Telecommunications Act of 1996;
Communication Decency Act of 1996 (the 'Communications Act'), which became law
on February 8, 1996, permits greater competition in the local and long distance
telephone and equipment manufacturing markets. In addition, it changed the
regulatory structure governing the Regional Bell Operating Companies ('RBOCs')
from one based on rate of return to one based on price. The overall impact of
the Communications Act is uncertain as full competition has not yet set in.
Regional Bell Operating Companies. The Portfolio contains securities of the
five RBOCs. These corporations were spun off from AT&T in 1984. The RBOCs are
seeking to increase profits through the development and sale of new
high-margined products, such as caller ID, voicemail, call return, call waiting
and interactive multimedia, to their existing customer base. To the extent that
the demand for such products is less than anticipated, the price of securities
of RBOCs could be adversely affected. Many of the RBOCs are also aggressively
looking to expand into overseas markets through both direct and indirect
investment. The impact of this expansion on the price of securities of the RBOCs
is uncertain.
Wireless Telephone Companies. Wireless telephone companies provide wireless
services including paging, dispatch, cellular and Personal Communication Systems
('PCS') services throughout the United States and abroad. Most of the RBOCs as
well as long distance companies are seeking to increase their share of the
wireless market in view of perceived future growth prospects. It is unclear what
effect, if any, increased competition between wireless and traditional telephone
services will ultimately have.
Telecommunications Equipment Manufacturers. While the worldwide market for
telecommunications equipment is expected to grow, the overall effect of factors
such as competing technologies, increasing capital requirements, protectionist
actions by foreign governments and demand for new technologies, is impossible to
predict.
7
<PAGE>
International Companies. These companies consist predominantly of former
government owned telecommunications systems that have been privatized in stages.
The Sponsors cannot predict whether such privatization will continue in the
future or what, if any, effect this will have.
UTILITIES
Payments on utility stocks 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. The largest value risk to the electric
utility industry over the next 10 years may be environmental compliance costs,
as well as the effects of competition. The difference between recent
environmental proposals from the Environmental Protection Agency and the modest
effect of the 1990 Clean Air Act amendments is the extent of the compliance
costs and the much higher risk of non-recovery in a competitive marketplace.
Investors should focus on whether utility competitive transition plans include
special environmental clauses or re-openers. Utilities with the greatest
coal-fired generation will feel the greatest impact. With coal currently 55
percent of utility generation this could have a drastic impact on electricity
prices and the economy.
Looking ahead, coal generators which were thought to have been favorably
positioned for a competitive market owing to low costs may be disadvantaged --
particularly if states do not view future environmental costs as stranded and
include them in transition plans. Finally, the effect of new air pollution rules
could be the most critical value risk to industry fundamentals, particularly for
coal-fired generators, over the next 10 years.
Another issue facing utilities is a fundamental structural change in the
separation of generation from the transmission and distribution functions
affecting the traditional vertically integrated electric utilities. This is part
of a plan to increase competition in the utility industry from its historical
monopoly interest. This action is being taken on a state-by-state basis with the
most decisions being taken in states with high electric rates. Most generation
is being ordered to be sold along with customer rate cuts in exchange for
recouping of most of the utility's unrecovered generation costs that are no
longer economically viable in a competitive environment (stranded costs). Risks
facing the utilities are the extent of the rate reductions and ability to
recover all the stranded costs before competition becomes effective.
FOREIGN ISSUERS
Certain of the Securities in a Portfolio may consist of securities of
foreign issuers. An investment in such a Fund involves some investment risks
that are different in some respects from an investment in a fund that invests
entirely in securities of domestic issuers. Those investment risks include
future political and economic developments, the possibility of withholding
taxes, exchange controls or other restrictions which might adversely affect the
payment or receipt of payment of dividends on the relevant Securities. In
addition, there may be less publicly available information than is available
from a domestic issuer and foreign issuers are not necessarily subject to
uniform accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic issuers. In addition,
earnings and dividends for foreign companies are in non-U.S. currencies.
Therefore, the U.S. dollar value of the stock and dividends for these issuers
will vary with fluctuations in the U.S. dollar foreign exchange rates for the
relevant currencies. Most foreign currencies have fluctuated widely in value
against the U.S. dollar for many reasons, including changing investor
perceptions, currency speculation by institutional investors, supply and demand
for the respective currency, the impact of actual and proposed government
policies, interest rate differentials between currencies and the balance of
imports and exports of goods and services and transfers of income and capital
from one country to another, the soundness of the world economy and the strength
of the respective economy as compared to the economies of the United States and
other countries.
The Trustee is required to conduct a Fund's foreign exchange transactions
either on a spot (i.e., cash) or forward foreign exchange basis, whichever will
synchronize the currency conversions as exactly as practicable with the
settlement dates of the relevant foreign stock or with the dividend distribution
dates of the Fund, as the case may be. Foreign currency exchange transactions
are generally conducted on a principal basis and foreign exchange dealers
realize a profit based upon the difference between the price at which they are
willing to buy a particular currency (bid price) and the price at which they are
willing to sell the currency (offer price). The cost to
8
<PAGE>
the Fund of engaging in these foreign currency transactions also varies with
such factors as the currency involved, the length of the contract period and the
market conditions then prevailing. Portfolio evaluations include the cost of
buying or selling a forward foreign exchange contract in the relevant currency
to correspond to the settlement period for purchases and redemptions of Units.
American Depositary Shares and Receipts. Many of the Securities of foreign
issuers were purchased in ADR form in the United States. ADRs evidence American
Depositary Shares which represent common stock deposited with a custodian in a
depositary. American Depositary Shares (ADSs) and receipts therefor (ADRs) are
issued by an American bank or trust company to evidence ownership of underlying
securities issued by a foreign corporation. These instruments may not
necessarily be denominated in the same currency as the securities into which
they may be converted. Generally, ADSs and ADRs are designed for use in the
United States securities markets. For purposes of this Prospectus, the term ADR
generally includes ADSs.
The terms and conditions of depositary facilities may result in less
liquidity or lower market prices for ADRs than for the underlying shares. For
those Securities that are ADRs, currency fluctuations will also affect the U.S.
dollar equivalent of the local currency price of the underlying domestic share
and, as a result, are likely to affect the value of the ADRs and consequently
the value of the Securities.
United Kingdom Risk Factors
Many British companies are subject to extensive government regulation which
may have a materially adverse effect on the performance of their securities. The
economy of the United Kingdom is focused upon the private services sector, which
includes the wholesale and retail sector, banking, finance, insurance, and
tourism. Services as a whole account for a majority of the United Kingdom's
gross national product and make a significant contribution to the country's
balance of payments. In addition, the United Kingdom, as a member of the
European Union (the 'EU'), formerly known as the European Community, is subject
to the effects of the recent rapid political and social change throughout Europe
although the extent and nature of future economic development in the United
Kingdom and Europe and the impact of such development upon the value of the
securities in the United Kingdom Portfolio is impossible to predict.
European Risk Factors
The economies of individual European countries may differ favorably or
unfavorably from the U.S. economy in gross national product, growth of gross
national product, rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments position.
For a number of years, certain European countries have been seeking
economic and political unification which would reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries and reduce or eliminate currency fluctuations among these
European countries. The Maastricht Treaty on economic and monetary union (EMU)
attempts to provide a stable monetary framework. But until the EMU takes effect
on January 1, 1999, the countries in the European community will face the need
to reinforce monetary cooperation in order to reduce the risk of a recurrence of
tensions between domestic and external policy objectives. No assurances can be
given that the EMU can be successfully implemented or that these changes will
result in higher market prices for the Securities in the Portfolio.
The risks associated with investing in European Securities may be
heightened in the case of investments in smaller or emerging European Securities
markets because of risks due to the inexperience of financial intermediaries,
the lack of modern technology, the lack of a sufficient capital base to expand
business operations and the possibility of permanent or temporary termination of
trading and greater spreads between bid and asked prices for securities in those
markets.
Japan Risk Factors
There is currently uncertainty as to the future of Japan's political
outlook (including the influence and effectiveness of Japan's bureaucracy) and
the impact of these political factors on the Japanese economy and the stock
market. Reports of official improprieties, resignations and political
realignments have recently been followed by significant economic reforms.
9
<PAGE>
The Japanese economy has experienced its worst recession since World War II
in the 1990s. The economy emerged from this recession for a short time in 1996,
only to weaken again in 1997. Further deceleration of economic growth is evident
thus far in 1998. Consequently, the unemployment rate has been rising. Japan has
also recently experienced a period of prolonged price deflation, weak real
estate prices and a weak currency. The government budget deficits have been
rising in part due to fiscal stimulus policies. Strains on the financial system
in the form of non-performing loans of financial institutions and real estate
companies have also been one of the major causes of Japan's economic weakness.
Resolution of the bad debt problem may require disproportionate contributions by
major banks. Structural problems of overregulation, excessive government
intervention and under-consumption, coupled with the current government's
relative inexperience in applying fiscal direction, could undercut Japan's
economic recovery. Japanese exports could be adversely affected by pressure from
trading partners--particularly the U.S.--to improve trade imbalances. The
Japanese Ministry of Health and Welfare may remove drugs from the market which
would adversely affect sales.
Japan's economy is vulnerable to the current instability of its trading
partners in South East Asia.
THE S&P 500 INDEX AND THE S&P MIDCAP INDEX
The S&P 500 Index is composed of 500 selected common stocks, most of which
are listed in the New York Stock Exchange. This well-known index, originally
consisting of 233 stocks in 1923, was expanded to 500 stocks in 1957 and was
restructured in 1976 to a composite consisting of four major industry sectors:
industrial, utility, financial and transportation. The four major industry
sectors are comprised of eleven regular industry sectors which are further
divided into industry groups. The S&P 500 Index contains a variety of stocks
which are market-value weighted to represent the overall market. The Index
represents approximately 70% of U.S. stock market capitalization. At present,
the mean market capitalization of the companies in the S&P 500 Index is
approximately $17.253 billion.
The S&P MidCap Index is composed of 400 selected common stocks; at present,
303 are listed on the New York Stock Exchange, 7 are listed on the American
Stock Exchange and 90 are quoted on The Nasdaq National Market. The MidCap Index
stocks were chosen for market size, liquidity and industry group representation.
As of March 31, 1998, industrial stocks accounted for approximately 77.3% of S&P
MidCap Index market capitalization, utilities approximately 10.7%, financial
stocks approximately 9.0% and transportation stocks approximately 3.0%. The
capitalizations of individual companies ranged from about $20 million to over
$14.3 billion; the mean market capitalization of the companies in the S&P MidCap
Index was approximately $2.5 billion.
The weightings of stocks in the S&P 500 Index and the S&P MidCap Index are
primarily based on each stock's relative total market value; that is, its market
price per share times the number of shares outstanding.
Standard and Poor's only relationship to the Portfolios is the licensing of
the right to use the S&P 500 Index and the S&P MidCap Index as bases for
determining the composition of the Portfolios and to use the related trademarks
and tradenames in the name of the Fund and in the Prospectus and related sales
literature to the extent that the Sponsors deem appropriate or desirable under
Federal and state securities laws and to indicate the source of the Indexes. The
Indexes are determined, comprised and calculated without regard to the Funds.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500
Index or the S&P MidCap Index or any data included therein and S&P shall have no
liability for any errors, omissions, or interruptions therein. S&P makes no
warranty, express or implied, as to results to be obtained by the sponsors, the
funds, any person or any entity from the use of the S&P index or the S&P MidCap
Index or any data included therein. S&P makes no express or implied warranties,
and expressly disclaims all warranties of merchantability or fitness for a
particular purpose or use, with respect to the S&P 500 Index or the S&P MidCap
Index or any data included therein. Without limiting any of the foregoing, in no
event shall S&P have any liability for any special, punitive, indirect, or
consequential damages (including lost profits), even if notified of the
possibility of such damages.
EQUITY PARTICIPATION SERIES LOW FIVE PORTFOLIO
The Portfolio consists of call options on a basket of the five lowest
dollar price per share common stocks of the ten highest dividend yielding common
stocks in the Dow Jones Industrial Average and U.S. Treasury zero
10
<PAGE>
coupon bonds. The Low Five Stocks underlying the call options will adjust
annually each August, 1998-2002 to continue to reflect the Low Five Strategy.
An investment in the Portfolio entails certain risks, including the risk
that the value of your investment will decline if the value of the call options
decrease due to the impaired financial condition of the issuers of the call
options or the Low Five Stocks or a decline in the general condition of the
stock market. The obligations of the issuers of the call options are not
collateralized or otherwise secured. However, if any rating of an issuer's (or
guarantor's) long-term debt or financial strength and claims-paying ability is
reduced to below the investment grade, collateral will be required for that
issuer's (or guarantor's) obligation to the Trust.
The trading prices of the call options will be directly affected by the
trading prices of and dividends on the Low Five Stocks as well as by the time to
maturity of the call options, the market volatility and the level of interest
rates generally. The market for the call options is likely to influence and be
influenced by the market for Low Five Stocks. For example, the market for the
Low Five Stocks could be depressed by investors' anticipation of the potential
distribution into the market of substantial amounts of Low Five Stocks on the
termination date and by hedging or arbitrage activity that may develop involving
the call options and the Low Five Stocks. The Sponsors believe that there should
be a readily available market among institutional investors for the call options
in the event it is necessary to sell the options to meet redemptions of units.
The Trust seeks to provide protection against a loss of capital by
investing in the zero coupon bonds. The zero coupon bonds pay no income until
maturity. The sale of units before the zero coupon bonds' maturity at a time
when interest rate have increased would involve greater market risk than
investment in a fund holding comparable debt obligations which pay interest
currently. While the Trust is designed to return to investors $1,000 per unit at
its termination, if you redeem or sell your units prior to termination of the
Trust, you may receive less.
LIQUIDITY
Whether or not the Securities are listed on a national securities exchange,
the principal trading market for the Securities may be in the over-the-counter
market. As a result, the existence of a liquid trading market for the Securities
may depend on whether dealers will make a market in the Securities. There can be
no assurance that a market will be made for any of the Securities, that any
market for the Securities will be maintained or of the liquidity of the
Securities in any markets made. In addition, the Fund may be restricted under
the Investment Company Act of 1940 from selling Securities to the Sponsors. The
price at which the Securities may be sold to meet redemptions and the value of
the Fund will be adversely affected if trading markets for the Securities are
limited or absent.
LITIGATION AND LEGISLATION
At any time after the initial date of deposit, litigation may be initiated
on a variety of grounds, or legislation may be enacted, affecting the Securities
in the Portfolio or the issuers of the Securities. Changing approaches to
regulation may have a negative impact on certain companies represented in the
Portfolio. There can be no assurance that future litigation, legislation,
regulation or deregulation will not have a material adverse effect on the
Portfolio or will not impair the ability of the issuers of the Securities to
achieve their business goals. From time to time Congress considers proposals to
reduce the rate of the dividends-received deduction. This type of legislation,
if enacted into law, would adversely affect the after-tax return to investors
who can take advantage of the deduction. See Taxes.
LIFE OF THE FUND; FUND TERMINATION
The size and composition of the Portfolio will be affected by the level of
redemptions of Units that may occur from time to time. Principally, this will
depend upon the number of investors seeking to sell or redeem their Units. The
Portfolio will be terminated no later than the mandatory termination date
specified in Part A of the Prospectus. It will terminate earlier upon the
disposition of the last Security or upon the consent of investors holding 51% of
the Units. The Portfolio may also be terminated earlier by the Sponsors once its
total assets have fallen below the minimum value specified in Part A of the
Prospectus. A decision by the Sponsors to terminate the Portfolio early will be
based on factors such as the size of the Portfolio relative to its original
size, the ratio of Portfolio expenses to income, and the cost of maintaining a
current prospectus.
11
<PAGE>
Notice of impending termination will be provided to investors and
thereafter units will no longer be redeemable. On or shortly before termination,
the Trustee will seek to dispose of any Securities remaining in the Portfolio
although any Security unable to be sold at a reasonable price may continue to be
held by the Trustee in a liquidating trust pending its final disposition. A
proportional share of the expenses associated with termination, including
brokerage costs in disposing of Securities, will be borne by investors remaining
at that time. This may have the effect of reducing the amount of proceeds those
investors are to receive in any final distribution.
HOW TO BUY UNITS
Units are available from any of the Sponsors, Underwriters and other
broker-dealers at the Public Offering Price, which includes the applicable sales
charge -- see Appendix A. 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
In the secondary market (after the initial offering period), the Public
Offering Price is based on the next evaluation of the Securities, and includes a
sales charge based (a) on the number of Units of the Fund purchased in the
secondary market on the same day by a single purchaser (see Secondary Market
Sales Charge Schedule in Appendix A). 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 or single fiduciary account is also considered a
single purchaser.
Unless otherwise indicated under Secondary Market Sales Charge Schedule in
Appendix A, employees of certain Sponsors and Sponsor affiliates and
non-employee directors of Merrill Lynch & Co. Inc. may purchase Units at a
reduced initial sales charge of not less than $5.00 per Unit or per 1,000 Units,
as the case may be.
S&P 500 TRUST 2 AND S&P MIDCAP TRUST. The graduated sales charges shown in
Appendix A will apply on all purchases on any one day (with credit given for
previously purchased Units as described below under Right of Accumulation) by a
single purchaser of Units in one or both Trusts of this Fund only in the amounts
stated. For this purpose purchases will not be aggregated with concurrent
purchases of any other unit trusts sponsored by the Sponsors. However, Units
held in the name of the spouse of the purchaser or in the name of a child of the
purchaser under 21 years of age are deemed to be registered in the name of the
purchaser. The graduated sales charges are also applicable to a trustee or other
fiduciary purchasing securities for a single trust estate or single fiduciary
account. To qualify for the reduced sales charge and concession applicable to
quantity purchases, the dealer must confirm that the sale is to a single
purchaser. The sales charge is lower than sales charges on many other equity
investments.
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase Units
of either Trust at the offering price applicable to the total of (a) the dollar
amount then being purchased plus (b) an amount equal to the then current net
asset value of the purchaser's holdings of Units of both Trusts. To be eligible
either for this right of accumulation or the reduced sales charge applicable to
purchases of both Trusts on the same day, the purchaser or the purchaser's
securities dealer must notify the Sponsors at the time of purchase that such
purchase qualifies under this accumulation provision and supply sufficient
information to permit confirmation of qualification. Acceptance of the purchase
order is subject to such confirmation. These reduced sales charge provisions may
be amended or terminated at any time without notice.
EVALUATIONS
Evaluations are determined by the Trustee on each Business Day. This
excludes Saturdays, Sundays and the following holidays as observed by the New
York Stock Exchange: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas. If the Securities are listed on a national securities exchange or the
Nasdaq National Market, evaluations are generally based on closing sales prices
on that exchange or that system (unless the Trustee deems these prices
inappropriate) or, if closing sales prices are not available, at the mean
between the closing bid and offer prices. If the Securities are not listed or if
listed but the principal market is elsewhere, the evaluation is generally
12
<PAGE>
determined based on sales prices of the Securities on the over-the-counter
market or, if sales prices in that market are not available, on the basis of the
mean between current bid and offer prices for the Securities or for comparable
securities or by appraisal or by any combination of these methods. Neither the
Sponsors nor the Trustee guarantee the enforceability, marketability or price of
any Securities.
Equity Participation Series Low Five Portfolio. Evaluations are determined
by an independent Evaluator on each Business Day. This excludes Sundays and the
following holidays as observed by the New York Stock Exchange: New Year's Day,
Martin Luther King Jr., Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas and the following
federal holidays: Columbus Day and Veterans Day. The Public Offering Price (and
the Sponsors Repurchase Price and the Redemption Price) is based on the lower,
bid side evaluation of the Securities. Neither the Sponsors, the Trustee nor the
Evaluator guarantee the enforceability, marketability or price of any Securities
or will be liable for errors in the Evaluator's judgment. The value of the call
options, which have no readily ascertainable market value, will be determined in
good faith. The fees of the Evaluator will be borne by the Trust.
CERTIFICATES
Certificates for Units may be issued for certain Funds 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. Units of certain Funds identified in Part A of the Prospectus must be
held in uncertificated form.
HOW TO REDEEM OR SELL UNITS
You can redeem your Units at any time for net asset value. In addition, the
Sponsors have maintained an uninterrupted secondary market for Units for over 20
years and will ordinarily buy back Units at net asset value. The following
describes these two methods to redeem or sell Units in greater detail.
REDEEMING UNITS
You can always redeem your Units for net asset value. This can be done by
contacting your broker, dealer or financial institution that holds your Units in
street name. In certain instances, additional documents may be required such as
a trust instrument, certificate of corporate authority, certificate of death or
appointment as executor, administrator or guardian.
Within seven days after the receipt of your request (and any necessary
documents), a check will be mailed to you in an amount equal to the net asset
value of your Units. Because of the sales charge, market movements or changes in
the Portfolio, net asset value at the time you redeem your Units may be greater
or less than the original cost of your Units. Net asset value is calculated each
Business Day by adding the value of the Securities, declared but unpaid
dividends on the Securities, cash and the value of any other Portfolio assets;
deducting unpaid taxes or other governmental charges, accrued but unpaid
Portfolio expenses and any remaining Deferred Sales Charges, unreimbursed
Trustee advances, cash held to redeem Units or for distribution to investors and
the value of any other Portfolio liabilities; and dividing the result by the
number of outstanding Units. After the initial offering period, net asset value
will be reduced to reflect the cost to the Portfolio of liquidating Securities
to pay the redemption price.
As long as the Sponsors are maintaining a secondary market for Units (as
described below), the Trustee will not actually redeem your Units but will sell
them to the Sponsors for net asset value. If the Sponsors are not maintaining a
secondary market, the Trustee will redeem your Units for net asset value or will
sell your Units in the over-the-counter market if the Trustee believes it will
obtain a higher net price for your Units. If the Trustee is able to sell the
Units for a net price higher than net asset value, you will receive the net
proceeds of the sale.
If cash is not available in the Income and Capital Accounts to pay
redemptions, the Trustee may sell Securities 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 Securities
would not otherwise be sold and may result in lower prices than might be
realized otherwise and may also reduce the size and diversity of the Portfolio.
If Securities are being sold during a time when additional Units are being
created by the purchase of additional
13
<PAGE>
Securities, Securities will be sold in a manner designed to maintain, to the
extent practicable, the proportionate relationship among the number of shares of
each Security in the Portfolio.
Redemptions may be suspended or payment postponed (i) if the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (ii) if
the SEC determines that trading on the New York Stock Exchange is restricted or
that an emergency exists making disposal or evaluation of the Securities not
reasonably practicable or (iii) for any other period permitted by SEC order.
SPONSORS' SECONDARY MARKET FOR UNITS
The Sponsors, while not obligated to do so, will buy back Units at net
asset value without any other fee or charge as long as they are maintaining a
secondary market for Units. Because of the sales charge, market movements or
changes in the portfolio, net asset value at the time you sell your Units may be
greater or less than the original cost of your Units. The Sponsors may resell
the Units to other buyers or redeem the Units by tendering them to the Trustee.
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 the secondary market for Units without prior
notice if the supply of Units exceeds demand or for other business reasons.
Regardless of whether the Sponsors maintain a secondary market, you have the
right to redeem your Units for net asset value with the Trustee at any time, as
described above.
REDEMPTION IN KIND--CONCEPT SERIES, BLUE CHIP STOCK SERIES, PREMIER WORLD
PORTFOLIO, SECOND EXCHANGE SERIES--AT&T SHARES. You may request distribution in
kind from the Trustee instead of cash redemption, provided that you are
tendering Units with a required minimum value. Generally, whole shares of each
Security together with cash from the Capital Account equal to any fractional
shares to which the investor would be entitled (less any Deferred Sales Charge
payable) will be paid over to a distribution agent and either held for the
account of the investor or disposed of in accordance with instructions of the
investor. Any brokerage commissions on sales of Securities in connection with
in-kind redemptions will be borne by the redeeming investors. The in-kind
redemption option is subject to all applicable legal restrictions and may be
terminated by the Sponsors at any time upon prior notice to investors.
INCOME, DISTRIBUTIONS AND REINVESTMENT
INCOME AND DISTRIBUTIONS
The net annual income per Unit will depend primarily upon the amount of
dividends declared and paid by the issuers of the Securities and changes in the
expenses of the Fund and, to a lesser degree, upon the level of purchases of
additional Securities and sales of Securities. There is no assurance that
dividends on the Securities will continue at their current levels or be declared
or paid.
Each Unit receives an equal share of monthly or quarterly distributions of
dividend income. Because dividends on the Securities are not received at a
constant rate throughout the year, any income distribution may be more or less
than the amount then credited to the Income Account. Dividends payable to the
Fund are credited to an Income Account, as of the date on which the Fund is
entitled to receive the dividends, and other receipts are credited to a Capital
Account. A Reserve Account may be created by withdrawing from the Income and
Capital Accounts amounts considered appropriate by the Trustee to reserve for
any material amount that may be payable out of the Fund. Funds held by the
Trustee in the various accounts do not bear interest.
UTILITY STOCK SERIES, SECOND EXCHANGE SERIES--AT&T SHARES, REAL ESTATE
INCOME FUND BLUE CHIP STOCK SERIES, COHEN & STEERS REALTY MAJORS PORTFOLIO.
Subject to the Reinvestment Plan, the Monthly Income Distribution for each
investor shall consist of an amount, computed monthly by the Trustee,
substantially equal to one-twelfth of the investor's pro rata share of the
estimated annual income to the Income Account, after deducting estimated
expenses.
ALL OTHER FUNDS. Unless otherwise indicated in Part A, dividend income
received by the Fund and available for distribution and the distributable
balance in the Capital Account (other than capital gains) as of any particular
record day will be distributed on or shortly after the related distribution day
to the holders of record on that record day.
14
<PAGE>
There is no assurance that actual distributions will be made since all
dividends received may be used to pay expenses. An amount equal to any capital
gain net income (i.e. the excess of capital gains over capital losses)
recognized by the Fund in any taxable year will generally be distributed shortly
after the end of the year. In order to meet certain tax requirements a Fund may
make a special distribution of income, including capital gains, to holders of
record as of a date in December. Proceeds received from the disposition of any
of the Securities which are not used to make the distribution of capital gain
net income, for redemption of Units or reinvested in additional Securities will
be held in the Capital Account to be distributed on the next succeeding
distribution day.
REINVESTMENT
Unless otherwise indicated in Part A, distributions on Units may be
reinvested by participating in the Fund's reinvestment plan. Under the plan, the
Units acquired for investors will be either Units already held in inventory by
the Sponsors or new Units created by the Sponsors' deposit of additional
Securities, contracts to purchase additional Securities or cash (or a bank
letter of credit in lieu of cash) with instructions to purchase additional
Securities. Purchases made pursuant to the Reinvestment plan will be made
without sales charge at the net asset value for Units of the Fund. Under the
Reinvestment plan, the Fund will pay the distributions to the Trustee which in
turn will purchase for the investor full and fractional Units of the Fund at the
price determined as of the close of business on the distribution day and will
add the Units to the investor's account and send the investor an account
statement reflecting the reinvestment. The Sponsors reserve the right to amend,
modify or terminate the reinvestment plan at any time without prior notice.
Investors holding Units in 'street name' should contact their broker, dealer or
financial institution to determine whether they may participate in the
reinvestment plan.
FUND EXPENSES
Estimated annual Fund expenses are listed in Part A of the Prospectus; if
actual expenses exceed the estimate, the excess will be borne by the Fund. The
estimated expenses do not include any brokerage commissions payable by the Fund
in buying and selling securities. The Trustee's fee shown in Part A of this
Prospectus assumes that the Portfolio will reach a size estimated by the
Sponsors and are based on a sliding fee scale that reduces the per 1,000 units
Trustee's fee as the size of the Portfolio increases. 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, termination expenses and any
governmental charges. The Trustee has a lien on Portfolio assets to secure
reimbursement of these amounts and may sell Securities for this purpose if cash
is not available. The Sponsors receive an annual fee currently estimated at
$0.45 per Unit or per 1,000 Units, as the case may be, to reimburse them for the
cost of providing Portfolio supervisory, bookkeeping and administrative services
and for any other expenses properly chargeable to the Fund. While the fee may
exceed the amount of these costs and expenses attributable to the Fund, the
total of these fees from all Series of Defined Asset Funds will not exceed the
aggregate amount attributable to all of those Series during any calendar year.
The Trustee's and Sponsors' fees may be adjusted for inflation without
investors' approval.
Advertising and selling expenses will be paid from the Underwriting Account
at no charge to the Fund. Defined Asset Funds can be a cost-effective way to
purchase and hold investments. Annual operating expenses are generally lower
than for managed funds. Because Defined Asset Funds have no management fees,
limited transaction costs and no ongoing marketing expenses, operating expenses
are generally less than 0.25% a year. When compounded annually, small
differences in expense ratios can make a big difference in your investment
results.
COHEN & STEERS REALTY MAJORS PORTFOLIO. The annual fee paid by the
Portfolio to the REIT Consultant, which includes a fee to cover the license by
Coehn & Steers to the Sponsor of the use of the service mark. 'Cohen & Steers
Realty MajorsSM,' and a fee for performing ongoing research on the REITs in the
Portfolio and the REIT industry generally, shall be the amount set forth in Part
A of the Prospectus, based on average net assets.
S&P INDEX TRUSTS. The Trusts have entered into license agreements with
Standard & Poor's that permit the Trusts to use the trademarks and tradenames
'S&P 500', 'S&P MidCap 400 Index' and other trademarks and tradenames, to the
extent the Sponsors deem appropriate and desirable under federal and state
securities laws to indicate the source of the Indices as a basis for determining
the composition of the Fund's investment portfolios. As consideration for the
grant of the license, each Portfolio will pay to Standard & Poor's Corporation
an annual
15
<PAGE>
fee equal to .02% of the average net asset value of the Portfolio (or, if
greater, $10,000). In addition, the Fund will pay approximately $45,000 per year
for access to independent computer services that track the S&P 500 Index and the
S&P MidCap Index. Computer expenses will be divided between the Trusts in
proportion to their respective assets during the relevant period.
TAXES
TAXATION OF THE FUND--EXCEPT FOR COHEN & STEERS REALTY MAJORS PORTFOLIO, EQUITY
PARTICPATION SERIES LOW FIVE PORTFOLIO AND SECOND EXCHANGE SERIES--AT&T SHARES
AND ANY OTHER FUNDS STRUCTURED AS GRANTOR TRUSTS (SEE PROSPECTUS PART A).
The Fund intends to qualify for and elect the special tax treatment
applicable to 'regulated investment companies' under Sections 851-855 of the
Internal Revenue Code of 1986, as amended (the 'Code'). If the Fund qualifies as
a 'regulated investment company' and distributes to investors 90% or more of its
taxable income, excluding its net capital gain (i.e., the excess of its net
long-term capital gain over its net short-term capital loss), it will not be
subject to federal income tax on the portion of its taxable income (including
any net capital gain) it distributes to investors in a timely manner. In
addition, the Fund will not be subject to the 4% excise tax on certain
undistributed income of 'regulated investment companies' to the extent it
distributes to investors in a timely manner at least 98% of its taxable income
(including any net capital gain). It is anticipated that the Fund will not be
subject to federal income tax or the excise tax, because the Indenture requires
the distribution of the Fund's taxable income (including any net capital gain)
in a timely manner. Although all or a portion of the Fund's taxable income
(including any net capital gain) for any calendar year may be distributed
shortly after the end of the calendar year, such a distribution will be treated
for federal income tax purposes as having been received by investors during the
calendar year.
DISTRIBUTIONS
Distributions to investors of the Fund's dividend income and net short-term
capital gain in any year will generally be taxable as ordinary income to
investors to the extent of the Fund's taxable income (other than taxable income
attributable to its net capital gain) for that year. Distributions in excess of
the Fund's taxable income will be treated as a return of capital and will reduce
the investor's basis in his Units and, to the extent that such distributions
exceed his basis, will be treated as a gain from the sale of his Units as
discussed below. It is anticipated that substantially all of the distributions
of the Fund's net capital gains will be designated as capital gain dividends and
that the Fund's dividend income and net short-term capital gain will be taxable
as ordinary income to investors.
Distributions that are taxable as ordinary income to investors will
constitute dividends for federal income tax purposes. Certain corporate
investors will be eligible for the 70% dividends-received deduction to the
extent that the distributions are appropriately designated by the Fund and are
attributable to eligible dividends received by the Fund from domestic issuers
with respect to whose Securities the Fund satisfies the requirements for the
dividends-received deduction. The 46-day holding period for the
dividends-received deducton must begin before and include each ex-dividend date
and excludes the purchase date and any days during which the investor's
investment is hedged. Depending upon the particular corporate investor's
circumstances, additional limitations on the availability of the
dividends-received deduction may be applicable. Further, legislative and
regulatory proposals arise from time to time that may adversely affect the
after-tax returns to investors taking advantage of the deduction. Investors are
urged to consult their own tax advisers in this regard.
Distributions of the Fund's net capital gain that are designated as capital
gain dividends by the Fund will be taxable to investors as long-term capital
gain, regardless of the time the investor has held his Units. However, if the
Fund were to terminate in less than one year, the Fund would not distribute any
capital gain dividends. The Internal Revenue Service has issued a notice (with
interim guidance) of forthcoming temporary regulations to permit a regulated
investment company such as the Fund to designate its dividends, subject to
certain limitations, as 20% or 28% rate gain distributions, which noncorporate
investors would be entitled to treat as long-term capital gains subject to tax
at the maximum rates of 20% or 28% respectively. The Trustee will provide
additional information relating to these amounts to investors, who should
consult their tax advisers regarding these matters.
16
<PAGE>
An investor, other than a dealer in securities, will generally recognize
capital gain or loss when the investor disposes of his Units (by sale,
redemption or otherwise). In the case of a distribution of Securities to an
investor upon redemption of his Units, gain or loss will generally be recognized
in an amount equal to the difference between the investor's tax basis in his
Units and the fair market value of the Securities received in redemption. Net
capital gain may be taxed at a lower rate than ordinary income for certain
non-corporate taxpayers, and noncorporate investors who have held their Units
for more than 18 months may be entitled to a 20% maximum federal tax rate for
gains from the sale of these Units. Any such capital gain or loss is long-term
if the asset is held for more than one year and short-term if held one year or
less. However, any capital loss on the sale or redemption of a Unit that an
investor has held for six months or less will be a long-term capital loss to the
extent of any capital gain dividends previously distributed to the investor by
the Fund, although the proper treatment of this long-term capital loss remains
uncertain pending further consideration by the Internal Revenue Service. The
deduction of capital loss is subject to limitations. Investors should consult
their own tax advisers regarding these matters.
The investor's basis in his Units will be equal to the cost of his Units,
including the sales charge.
Any dividends received by the Fund from foreign issuers will in most cases
be subject to foreign withholding taxes, which will generally be reduced, though
not eliminated, by treaties between the United States and the relevant foreign
country.
The Fund will not be eligible for an election that would enable investors
to credit foreign withholding taxes against their federal income tax liability
on distributions by the Fund, except as follows. If more than 50% of the value
of the Fund's assets at the close of its taxable year consists of Securities in
foreign corporations (see 'Portfolio' in Part A), the Fund will generally be
eligible to make an election that will enable investors to credit or deduct
foreign withholding taxes against their federal income tax liability. If
eligible, the Fund currently intends to make this election, although there can
be no assurance that the election will be made. If the election is made,
investors' proportionate share of foreign taxes withheld will be includible as
gross income, and investors who hold Units on the relevant record date for
dividends on the underlying Securities held by the Fund should be entitled,
subject to applicable limitations, to either a credit or a deduction for foreign
taxes legally owed and designated by the Fund in a notice to investors. However,
any taxes withheld in excess of the rate provided by a treaty between the United
States and the relevant foreign country will not be creditable or deductible by
the investor. There can be no assurance that the Fund will recover such excess
withholding tax. Capital gain on a disposition of foreign stock (or a
proportionate share of Units), if any, will generally be United States source
income. Investors should consult their tax advisers regarding these matters.
Investors will be taxed in the manner described above regardless of whether
distributions from the Fund are actually paid to the investor or are reinvested.
The federal tax status of each year's distributions will be reported to
investors and to the Internal Revenue Service. The Fund intends to report to
each investor, no later than January 31, the amount of distributions to that
investor.
The foregoing discussion summarizes only certain U.S. federal income tax
consequences of an investment in Units by investors who are U.S. persons, as
defined in the Code. Foreign investors (including nonresident alien individuals
and foreign corporations) not engaged in U.S. trade or business will generally
be subject to 30% withholding tax (or lower applicable treaty rate) on dividend
distributions by the Fund (other than capital gain dividends). Investors may be
subject to taxation in New York or in other U.S. or foreign jurisdictions and
should consult their own tax advisers in this regard.
RETIREMENT PLANS
This Series of Equity Investor Fund may be well suited for purchase by
Individual Retirement Accounts ('IRAs'), Keogh plans, pension funds and other
qualified retirement plans, certain of which are briefly described below.
Generally, capital gains and income received in each of the foregoing plans are
exempt from federal taxation. All distributions from such plans are generally
treated as ordinary income but may, in some cases, be eligible for special 5 or
10 year averaging (prior to the year 2000) or tax-deferred rollover treatment.
Investors in IRAs, Keogh plans and other tax-deferred retirement plans should
consult their plan custodian as to the appropriate disposition of distributions.
Investors considering participation in any of these plans should review specific
tax laws related thereto and should consult their attorneys or tax advisers with
respect to the establishment and maintenance of any of these plans. These plans
are generally offered by brokerage firms,
17
<PAGE>
including the Sponsors of this Fund, and other financial institutions. Fees and
charges with respect to such plans may vary.
Retirement Plans for the Self-Employed--Keogh Plans. Units of the Fund may
be purchased by retirement plans established for self-employed individuals,
partnerships or unincorporated companies ('Keogh plans'). The assets of a Keogh
plan must be held in a qualified trust or other arrangement which meets the
requirements of the Code. Keogh plan participants may also establish separate
IRAs (see below) to which they may contribute up to an additional $2,000 per
year ($4,000 in a spousal account).
Individual Retirement Account--IRA. Any individual can make use of a
qualified IRA arrangement for the purchase of Units of the Fund. Any individual
(including one covered by an employer retirement plan) can make a contribution
to an IRA equal to the lesser of $2,000 ($4,000 in a spousal account) or 100% of
earned income; such investment must be made in cash. However, the deductible
amount of a contribution by an individual covered by an employer retirement plan
will be reduced if the individual's adjusted gross income exceeds $25,000 (in
the case of a single individual), $40,000 (in the case of a married individual
filing a joint return) or $200 (in the case of a married individual filing a
separate return). These income threshholds will gradually be increased by the
year 2004 to $50,000 for a single individual and $80,000 for a married
individual filing jointly. Certain transactions which are prohibited under
Section 408 of the Code will cause all or a portion of the amount in an IRA to
be deemed to be distributed and subject to tax at that time. Unless
nondeductible contributions were made in 1987 or a later year, all distributions
from an IRA will be treated as ordinary income but generally are eligible for
tax-deferred rollover treatment. Taxable distributions made before attainment of
age 59 1/2, except in the case of the participant's death or disability or where
the amount distributed is part of a series of substantially equal periodic (at
least annual) payments that are to be made over the life expectancies of the
participant and his or her beneficiary, are generally subject to a surtax in an
amount equal to 10% of the distribution. The 10% surtax will be waived for
withdrawals for certain educational and first-time homebuyer expenses. Subject
to certain income limitations, under a special type of IRA, contributions would
be non-deductible but distributions would be tax-free if the account were held
for at least five years and the account holder was at least 59 1/2 at the time
of distribution.
Corporate Pension and Profit-Sharing Plans. A pension or profit-sharing
plan for employees of a corporation may purchase Units of the Fund.
RECORDS AND REPORTS
The Trustee keeps a register of the names, addresses and holdings of all
investors. The Trustee also keeps records of the transactions of the Fund,
including a current list of the Securities and a copy of the Indenture, which
may be inspected by investors at reasonable times during business hours.
With each distribution, the Trustee includes a statement of the amounts of
income and any other receipts being distributed. The Trustee sends each investor
of record an annual report summarizing transactions in the Fund's accounts
including amounts distributed from them during the year, identifying Securities
sold and purchased and listing Securities held and the number of Units
outstanding and stating the Redemption Price at year end, and the fees and
expenses paid by the Fund, among other matters. Fund accounts are audited
annually by independent accountants selected by the Sponsors and any report of
the accountants will be available from the Trustee on request.
TRUST INDENTURE
The Fund is a 'unit investment trust' created under New York law (under
Massachusetts law for certain Funds) by a Trust Indenture among the Sponsors and
the Trustee. This Prospectus summarizes various provisions of the Indenture, but
each statement is qualified in its entirety by reference to the Indenture.
The Indenture may be amended by the Sponsors and the Trustee without
consent by investors to cure ambiguities or to correct or supplement any
defective or inconsistent provision, to make any amendment required by the SEC
or other governmental agency or to make any other change not materially adverse
to the interest of investors (as determined in good faith by the Sponsors). The
Indenture may also generally be amended upon consent of investors holding 51% of
the Units. No amendment may reduce the interest of any investor in the Fund
without the investor's consent or reduce the percentage of Units required to
consent to any amendment without unanimous consent of investors. Investors will
be notified of the substance of any amendment.
18
<PAGE>
The Trustee may resign upon notice to the Sponsors. It may be removed by
investors holding 51% of the Units at any time or by the Sponsors without the
consent of investors if it becomes incapable of acting or bankrupt, its affairs
are taken over by public authorities, or if under certain conditions the
Sponsors determine in good faith that its replacement is in the best interest of
the investors. The resignation or removal becomes effective upon acceptance of
appointment by a successor; in this case, the Sponsors will use their best
efforts to appoint a successor promptly; however, if upon resignation no
successor has accepted appointment within 30 days after notification, the
resigning Trustee may apply to a court of competent jurisdiction to appoint a
successor.
Any Sponsor may resign so long as one Sponsor with a net worth of
$2,000,000 remains. A new Sponsor may be appointed by the remaining Sponsors and
the Trustee to assume the duties of the resigning Sponsor. If there is only one
Sponsor and it fails to perform its duties or becomes incapable of acting or
bankrupt or its affairs are taken over by public authorities, the Trustee may
appoint a successor Sponsor at reasonable rates of compensation, terminate the
Indenture and liquidate the Fund or continue to act as Trustee without a
Sponsor. Merrill Lynch, Pierce, Fenner & Smith Incorporated has been appointed
as Agent for the Sponsors by the other Sponsors.
The Sponsors and the Trustee are not liable to investors or any other party
for any act or omission in the conduct of their responsibilities absent bad
faith, willful misfeasance, negligence (gross negligence in the case of a
Sponsor) or reckless disregard of duty. The Indenture contains customary
provisions limitingthe liability of the Trustee.
MISCELLANEOUS
LEGAL OPINION
The legality of the Units has been passed upon by Davis Polk & Wardwell,
450 Lexington Avenue, New York, New York 10017, as special counsel for the
Sponsors.
AUDITORS
The Statement of Condition in Part A of the Prospectus was audited by
Deloitte & Touche LLP, independent accountants, as stated in their opinion. It
is included in reliance upon that opinion given on the authority of that firm as
experts in accounting and auditing.
TRUSTEE
The Trustee and its address are stated on the back cover of the Prospectus.
The Trustee is subject to supervision by the Federal Deposit Insurance
Corporation, the Board of Governors of the Federal Reserve System and New York
State banking authorities.
SPONSORS
The Sponsors are listed on the back cover of the Prospectus. They may
include Merrill Lynch, Pierce, Fenner & Smith Incorporated, a wholly-owned
subsidiary of Merrill Lynch & Co. Inc., Smith Barney Inc., an indirect
wholly-owned subsidiary of The Travelers Inc.; Prudential Securities
Incorporated, an indirect wholly-owned subsidiary of the Prudential Insurance
Company of America, PaineWebber Incorporated, a wholly-owned subsidiary of
PaineWebber Group, Inc.; and Dean Witter Reynolds Inc., a principal operating
subsidiary of Morgan Stanley Dean Witter & Co. Each Sponsor, or one of its
predecessor corporations, has acted as Sponsor of a number of series of unit
investment trusts. Each Sponsor has acted as principal underwriter and managing
underwriter of other investment companies. The Sponsors, in addition to
participating as members of various selling groups or as agents of other
investment companies, execute orders on behalf of investment companies for the
purchase and sale of securities of these companies and sell securities to these
companies in their capacities as brokers or dealers in securities.
CODE OF ETHICS
The Agent for the Sponsors has adopted a code of ethics requiring
preclearance and reporting of personal securities transactions by its personnel
who have access to information on Defined Asset Funds portfolio transactions.
The code is intended to prevent any act, practice or course of conduct which
would operate as a
19
<PAGE>
fraud or deceit on any Fund and to provide guidance to these persons regarding
standards of conduct consistent with the Agent's responsibilities to the Funds.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the 'Year 2000 Problem'). Like other investment
companies and financial and business organizations, the Fund could be adversely
affected if the computer systems used by the Agent for the Sponsors or Fund
service providers do not properly address this problem prior to January 1, 2000.
The Agent for the Sponsors has established a dedicated group to analyze these
issues and to implement any systems modifications necessary to prepare for the
Year 2000. Currently, we do not anticipate that the transition to the 21st
century will have any material effect on the Fund. The Agent for the Sponsors
has sought assurances from the Fund's other service providers that they are
taking all necessary steps to ensure that their computer systems will accurately
reflect the Year 2000, and the Agent for the Sponsors will continue to monitor
the situation. At this time, however, no assurance can be given that the Fund's
other service providers have anticipated every step necessary to avoid any
adverse effect on the Fund attributable to the Year 2000 Problem.
PUBLIC DISTRIBUTION
During the initial offering period and thereafter to the extent additional
Units continue to be offered for sale to the public by means of this Prospectus,
Units will be distributed directly to the public by this Prospectus at the
Public Offering Price determined in the manner provided above or to selected
dealers who are members of the National Association of Securities Dealers, Inc.
at a concession not in excess of the maximum sales charge. The Sponsors intend
to qualify Units for sale in all states in which qualification is deemed
necessary through the Underwriting Account and by dealers who are members of the
National Association of Securities Dealers, Inc.. The Sponsors do not intend to
qualify Units for sale in any foreign countries and this Prospectus does not
constitute an offer to sell Units in any country where Units cannot lawfully be
sold.
UNDERWRITERS' AND SPONSORS' PROFITS
Upon sale of the Units, the Underwriters will be entitled to receive sales
charges; each Underwriters' interest in the Underwriting Account will depend on
the number of Units acquired through the issuance of additional Units. The
Sponsors also realize a profit or loss on deposit of the Securities equal to the
difference between the cost of the Securities to the Fund (based on the
aggregate value of the Securities on their date of deposit) and the purchase
price of the Securities to the Sponsors plus commissions payable by the
Sponsors. In addition, a Sponsor or Underwriter may realize profits or sustain
losses on Securities it deposits in the Fund which were acquired from
underwriting syndicates of which it was a member. During the initial offering
period, the Underwriting Account also may realize profits or sustain losses as a
result of fluctuations after the initial date of deposit in the Public Offering
Price of the Units. In maintaining a secondary market for Units, the Sponsors
will also realize profits or sustain losses in the amount of any difference
between the prices at which they buy Units and the prices at which they resell
these Units (which include the sales charge) or the prices at which they redeem
the Units. Cash, if any, made available by buyers of Units to the Sponsors prior
to a settlement date for the purchase of Units may be used in the Sponsors'
businesses to the extent permitted by Rule 15c3-3 under the Securities Exchange
Act of 1934 and may be of benefit to the Sponsors.
PERFORMANCE INFORMATION
Information on the performance of the Fund for various periods, on the
basis of changes in Unit price plus the amount of dividends and capital gains
reinvested, may be included from time to time in advertisements, sales
literature, reports and other information furnished to current or prospective
Holders. Total return figures are not averaged, and may not reflect deduction of
the sales charge, which would decrease the return. Average annualized return
figures reflect deduction of the maximum sales charge. No provision is made for
any income taxes payable.
Past performance of any series may not be indicative of results of future
series. Fund performance may be compared to the performance of the Dow Jones
Industrial Average, the S&P 500 Composite Price Stock Index, the S&P MidCap 400
Index, or performance data from publications such as Lipper Analytical Services,
Inc., Morningstar Publications, Inc., Money Magazine, The New York Times, U.S.
News and World Report, Barron's,
20
<PAGE>
Business Week, CDA Investment Technology, Inc., Forbes Magazine or Fortune
Magazine. Performance of the Stocks may be compared in sales literature to
performance of the S&P 500 Stock Price Composite Index, to which may be added by
year various national and international political and economic events, and
certain milestones in price and market indicators and in offerings of Defined
Asset Funds. This performance may also be compared for various periods with an
investment in short-term U.S. Treasury securities; however, the investor should
bear in mind that Treasury securities are fixed income obligations, having the
highest credit characterisitics, while the Stocks involve greater risk because
they have no maturities, and income thereon is subject to the financial
condition of, and declaration by, the issuers.
DEFINED ASSET FUNDS
For decades informed investors have purchased unit investment trusts for
dependability and professional selection of investments. Defined Asset Funds'
philosophy is to allow investors to 'buy with knowledge' (because, unlike
managed funds, the portfolio is relatively fixed) and 'hold with confidence'
(because the portfolio is professionally selected and regularly reviewed).
Defined Asset Funds offers an array of simple and convenient investment choices,
suited to fit a wide variety of personal financial goals--a buy and hold
strategy for capital accumulation, such as for children's education or
retirement, or attractive, regular current income consistent with the
preservation of principal. Unit investment trusts are particularly suited for
the many investors who prefer to seek long-term profits by purchasing sound
investments and holding them, rather than through active trading. Few
individuals have the knowledge, resources or capital to buy and hold a
diversified portfolio on their own; it would generally take a considerable sum
of money to obtain the breadth and diversity that Defined Asset Funds offer.
Your investment objectives may call for a combination of Defined Asset Funds.
One of the most important investment decisions you face may be how to
allocate your investments among asset classes. Diversification among different
kinds of investments can balance the risks and rewards of each one. Most
investment experts recommend stocks for long-term capital growth. Long-term
corporate bonds offer relatively high rates of interest income. By purchasing
both defined equity and defined bond funds, investors can receive attractive
current income, as well as growth potential, offering some protection against
inflation. From time to time various advertisements, sales literature, reports
and other information furnished to current or prospective investors may present
the average annual compounded rate of return of selected asset classes over
various periods of time, compared to the rate of inflation over the same
periods.
EXCHANGE OPTION
You may be able to exchange Fund Units for units of certain other Defined
Asset Funds 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 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 units acquired is not materially different from the
portfolio of the units exchanged; you should consult your own tax adviser. 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 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 writing or calling the Trustee shown on the back cover of Part A of
this Prospectus, investors will receive without charge supplemental information
about the Fund, which has been filed with the SEC. The supplemental information
includes more detailed risk factor disclosure about the types of securities that
may be part of the Portfolio and general information about the structure and
operation of the Fund.
21
<PAGE>
APPENDIX A
SECONDARY MARKET SALES CHARGE SCHEDULE
UTILITY STOCK SERIES
<TABLE><CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT)
----------------------------------
AS PERCENT OF AS PERCENT OF DEALER CONCESSION AS
PUBLIC OFFERING NET AMOUNT PERCENT OF PUBLIC
AMOUNT PURCHASED PRICE INVESTED OFFERING PRICE
- -------------------------------------------------------------------- ----------------- --------------- -----------------------
<S> <C> <C> <C>
Less than $250,000.................................................. 4.50% 4.712% 2.925%
$250,000-$499,000................................................... 3.75 3.896 2.438
$500,000-$749,000................................................... 2.50 2.564 1.625
$750,000-$999,000................................................... 2.00 2.041 1.300
$1,000,000 or more.................................................. 1.50 1.523 0.975
S&P 500 TRUST 2, S&P MIDCAP TRUST
Less than $25,000................................................... 2.25% 2.302%
$25,000-$49,999..................................................... 2.00 2.041
$50,000-$74,999..................................................... 1.75 1.781
$75,000-$99,999..................................................... 1.50 1.523
$100,000-$249,999................................................... 1.25 1.266
$250,000-$999,999................................................... 1.00 1.010
$1,000,000-$4,999,999............................................... 0.75 0.756
$5,000,000-$14,999,999.............................................. 0.50 0.503
$5,000,000 or more.................................................. 0.25 0.251
</TABLE>
The concession to dealers is 65% of the effective sales charge.
CONCEPT SERIES, BLUE CHIP STOCK SERIES 3 AND 4, PREMIER WORLD PORTFOLIO
The sales charge consists of an initial portion and a deferred portion, the
total of which may equal a maximum of approximately 5.35% of the Public Offering
Price or 5.501% of the net asset value of the Fund over its expected four-year
life. The initial portion of the sales charge is equal to 2.75% of the Public
Offering Price (2.828%) of the net amount invested in the Securities) and the
deferred portion of the sales charge is $1.625 per 1,000 Units ($6.50 per year)
payable by the Fund on behalf of investors out of net asset value of the Fund on
each quarterly Deferred Charge Payment Date until the Fund terminates. If you
sell or redeem Units before a Deferred Charge Payment Date, all future
deductions of deferred sales charges with respect to you will be waived; this
will have the effect of reducing your rate of sales charge.
<TABLE><CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT)
----------------------------------
AS PERCENT OF AS PERCENT OF DEALER CONCESSION AS
PUBLIC OFFERING NET AMOUNT PERCENT OF PUBLIC
AMOUNT PURCHASED PRICE INVESTED OFFERING PRICE
- -------------------------------------------------------------------- ----------------- --------------- -----------------------
<S> <C> <C> <C>
Less than $250,000.................................................. 2.75% 2.828% 1.788%
$250,000-$499,000................................................... 2.25 2.302 1.463
$500,000-$749,000................................................... 1.75 1.781 1.138
$750,000-$999,000................................................... 1.25 1.266 0.813
$1,000,000 or more.................................................. 1.00 1.010 0.650
</TABLE>
For certain Concept Series, these reduced sales charges may not always be
available (see Part A of the Prospectus).
COHEN & STEERS REALTY MAJORS PORTFOLIO
The sales charge for Units is 3.50% of the Public Offering Price (3.627% of
the net amount invested). Sales initially will be made to dealers at prices
which represent as concession of 2.75% of the Public Offering Price. In
addition, dealers and other selling agents who meet minimum sales volume
thresholds may receive additional concessions. The Sponsor reserves the right to
change the amount of the concession from time to time.
SECOND EXCHANGE SERIES--AT&T SHARES
The sales charge for Units of this Trust is 2.25% (2.302% of net amount
invested). There is no reduction for quantity purchases of Units.
a-1
<PAGE>
EQUITY PARTICIPATION SERIES LOW FIVE PORTFOLIO
The maximum sales charge is equal to 3.50% of the Public Offering Price or,
for quantity purchases of units by an investor and the investor's spouse and
minor children, or by a single trust estate or fiduciary account, made on a
single day, the following percentages of the net amount invested:
APPLICABLE SALES CHARGE
(GROSS UNDERWRITING
PROFIT)
AS % OF PUBLIC OFFERING
NUMBER OF UNITS PRICE
- ----------------------------- -----------------------
Less than 250................ 3.50%
250 to749.................... 3.00
750 to 999................... 2.75
1,000 or more................ 2.50
The dealer concession is 70% of the effective sales charge.
Employees of certain of the Sponsors and their affiliates may purchase
Units at a reduced price equal to 50% of the otherwise applicable sales charge.
a-2
<PAGE>
70108--8/98
<PAGE>
Defined
Asset FundsSM
SPONSORS: EQUITY INVESTOR FUND
Merrill Lynch, SECOND EXCHANGE SERIES--
Pierce, Fenner & Smith IncorporatedAT&T SHARES
Defined Asset Funds (A UNIT INVESTMENT TRUST)
P.O. Box 9051
Princeton, NJ 08543-9051 This Prospectus does not contain all of the
(609) 282-8500 information with respect to the investment
Salomon Smith Barney Inc. company set forth in its registration
Unit Trust Department statement and exhibits relating thereto which
388 Greenwich Street--23rd Floor have been filed with the Securities and
New York, NY 10013 Exchange Commission, Washington, D.C. under
(212) 816-4000 the Securities Act of 1933 and the Investment
Prudential Securities Incorporated Company Act of 1940, and to which reference
One New York Plaza is hereby made. Copies of filed material can
New York, NY 10292 be obtained from the Public Reference Section
(212) 778-6164 of the Commission, 450 Fifth Street, N.W.,
Dean Witter Reynolds Inc. Washington, D.C. 20549 at prescribed rates.
Two World Trade Center--59th Floor The Commission also maintains a Web site that
New York, NY 10048 contains information statements and other
(212) 392-2222 information regarding registrants such as
TRUSTEE: Defined Asset Funds that file electronically
The Bank of New York with the Commission at http://www.sec.gov.
Box 974--Wall Street Station ------------------------------
New York, NY 10268-0974 No person is authorized to give any
1-800-221-7771 information or to make any representations
with respect to this investment company not
contained in its registration statement and
exhibits relating thereto; and any
information or representation not contained
therein must not be relied upon as having
been authorized. This Prospectus shall not
constitute an offer to sell or the
solicitation of an offer to buy nor shall
there be any sale of these securities in any
State in which such offer solicitation or
sale would be unlawful prior to registration
or qualification under the securities laws of
any such State.
11820--9/98
