AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1995
REGISTRATION NO. 33-45208
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------------
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-6
------------------------------------------
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
------------------------------------------
A. EXACT NAME OF TRUST:
DEFINED ASSET FUNDS--
CORPORATE INCOME FUND
INTERMEDIATE TERM SERIES--35
(A UNIT INVESTMENT TRUST)
B. NAMES OF DEPOSITORS:
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
DEAN WITTER REYNOLDS INC.
C. COMPLETE ADDRESSES OF DEPOSITORS' PRINCIPAL EXECUTIVE OFFICES:
MERRILL LYNCH, PIERCE,
FENNER & SMITH
INCORPORATED
DEFINED ASSET FUNDS
POST OFFICE BOX 9051
PRINCETON, N.J.
08543-9051 SMITH BARNEY INC.
388 GREENWICH
STREET--23RD FLOOR
NEW YORK, NY 10013
PAINEWEBBER INCORPORATED PRUDENTIAL SECURITIES DEAN WITTER REYNOLDS INC.
1285 AVENUE OF THE INCORPORATED TWO WORLD TRADE
AMERICAS ONE SEAPORT PLAZA CENTER--59TH FLOOR
NEW YORK, N.Y. 10019 199 WATER STREET NEW YORK, N.Y. 10048
NEW YORK, N.Y. 10292
D. NAMES AND COMPLETE ADDRESSES OF AGENTS FOR SERVICE:
TERESA KONCICK, ESQ. THOMAS D. HARMAN, ESQ. ROBERT E. HOLLEY
P.O. BOX 9051 388 GREENWICH ST. 1200 HARBOR BLVD.
PRINCETON, N.J. NEW YORK, N.Y. 10013 WEEHAWKEN, N.J. 07087
08543-9051
COPIES TO:
LEE B. SPENCER, JR. DOUGLAS LOWE, ESQ. PIERRE DE SAINT PHALLE,
ONE SEAPORT PLAZA 130 LIBERTY STREET--29TH ESQ.
199 WATER STREET FLOOR 450 LEXINGTON AVENUE
NEW YORK, N.Y. 10292 NEW YORK, N.Y. 10006 NEW YORK, N.Y. 10017
The issuer has registered an indefinite number of Units under the Securities Act
of 1933 pursuant to Rule 24f-2 and filed the Rule 24f-2 Notice for the most
recent fiscal year on February 17, 1995.
Check box if it is proposed that this filing will become effective on May 26,
1995 pursuant to paragraph (b) of Rule 485. / x /
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<PAGE>
DEFINED
ASSET FUNDSSM
CORPORATE INCOME
FUND
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INTERMEDIATE TERM SERIES--35
(A UNIT INVESTMENT TRUST)
PROSPECTUS, PART A
DATED MAY 26, 1995
SPONSORS:
Merrill Lynch,
Pierce, Fenner & Smith Incorporated
Smith Barney Inc.
PaineWebber Incorporated
Prudential Securities Incorporated
Dean Witter Reynolds Inc.
This Defined Fund is a portfolio of preselected securities formed for the
purpose of providing a high level of current income through investment in a
fixed portfolio (the 'Portfolio') of intermediate-term corporate debt
obligations (the 'Debt Obligations') issued after July 18, 1984. This income is
taxable to U.S. Holders, but in the opinion of counsel is exempt from U.S.
Federal income taxes, including withholding taxes, for many foreign Holders.
There is no assurance that this objective will be met because it is subject to
the continuing ability of issuers of the Debt Obligations held by the Fund to
meet their principal and interest requirements. Furthermore, the market value of
the underlying Securities, and therefore the value of the Units, will fluctuate
with changes in interest rates and other factors.
Minimum Purchase: One Unit
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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NOTE: PART A OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED
UNLESS ACCOMPANIED BY DEFINED ASSET FUNDS--CORPORATE INCOME FUND PROSPECTUS,
PART B.
This Prospectus consists of two parts. The first includes an Investment Summary
and certified financial statements of the Fund, including the related securities
portfolio; the second contains a general summary of the Fund.
- ------------------------------------------------------------------------
Read and retain both parts of this Prospectus for future reference.
<PAGE>
DEFINED ASSET FUNDSSM is America's oldest and largest family of unit investment
trusts with over $95 billion sponsored since 1971. Each Defined Fund is a
portfolio of preselected securities. The portfolio is divided into 'units'
representing equal shares of the underlying assets. Each unit receives an equal
share of income and principal distributions.
With Defined Asset Funds you know in advance what you are investing in and that
changes in the portfolio are limited. Most defined bond funds pay interest
monthly and repay principal as bonds are called, redeemed, sold or as they
mature. Defined equity funds offer preselected stock portfolios with defined
termination dates.
Your financial advisor can help you select a Defined Fund to meet your personal
investment objectives. Our size and market presence enable us to offer a wide
variety of investments. Defined Funds are available in the following types of
securities: municipal bonds, corporate bonds, government bonds, utility stocks,
growth stocks, even international securities denominated in foreign currencies.
Termination dates are as short as one year or as long as 30 years. Special funds
are available for investors seeking extra features: insured funds, double and
triple tax-free funds, and funds with 'laddered maturities' to help protect
against rising interest rates. Defined Funds are offered by prospectus only.
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CONTENTS
Investment Summary.......................................... A-3
Accountants' Opinion Relating to the Fund................... D-1
Statement of Condition...................................... D-2
Portfolio................................................... D-6
A-2
<PAGE>
DEFINED ASSET FUNDS--CORPORATE INCOME FUND, INTERMEDIATE TERM SERIES--35
INVESTMENT SUMMARY
AS OF FEBRUARY 28, 1995, THE EVALUATION DATE
FACE AMOUNT OF SECURITIES(a).............................$ 16,590,000
NUMBER OF UNITS.......................................... 16,590
FACE AMOUNT OF SECURITIES PER UNIT.......................$ 1,000.00
FRACTIONAL UNDIVIDED INTEREST IN FUND REPRESENTED BY EACH
UNIT................................................... 1/16,590th
PUBLIC OFFERING PRICE
Aggregate bid side evaluation of Securities.........$ 17,021,960
--------------------
Divided by Number of Units..........................$ 1,026.04
Plus sales charge of 4.75% of Public Offering Price
(4.987% of net amount invested)(b)................ 51.17
--------------------
Public Offering Price per Unit......................$ 1,077.21
(plus cash
adjustments and
accrued interest)(c)
SPONSORS' REPURCHASE PRICE AND REDEMPTION PRICE PER
UNIT...................................................$ 1,026.04
(aggregate bid side evaluation of Securities) ($51.17 (plus cash
less than Public Offering Price per Unit) adjustments and
accrued interest)(c)
PREMIUM AND DISCOUNT ISSUES IN PORTFOLIO
Face amount of Debt Obligations with bid side
evaluation:
Over par.......................................... 73%
At a discount from par............................ 27%
CALCULATION OF ESTIMATED NET ANNUAL INTEREST RATE PER
UNIT (BASED ON FACE AMOUNT PER UNIT)
Annual interest rate per Unit....................... 8.573%
Less estimated annual expenses per Unit ($1.44)
expressed as a percentage......................... .144%
--------------------
Estimated net annual interest rate per Unit......... 8.429%
--------------------
--------------------
DAILY RATE AT WHICH ESTIMATED NET INTEREST ACCRUES PER
UNIT...................................................... .0234%
MONTHLY INCOME DISTRIBUTIONS
Estimated net annual interest rate per Unit times the
Face Amount per Unit.................................$ 84.29
Divided by 12..........................................$ 7.02
RECORD DAY
The 10th day of each month.
DISTRIBUTION DAY
The 25th day of each month.
MINIMUM CAPITAL DISTRIBUTION
No distribution need be made from Capital Account if balance is less than
$5.00 per Unit.
TRUSTEE'S ANNUAL FEE AND EXPENSES(d)
$1.44 per Unit (see Expenses and Charges in Part B).
PORTFOLIO SUPERVISION FEE(e)
Maximum of $0.35 per $1,000 face amount of underlying Debt Obligations (see
Expenses and Charges in Part B).
EVALUATOR'S FEE FOR EACH EVALUATION
Maximum of $14. (See Expenses and Charges in Part B).
EVALUATION TIME
3:30 P.M. New York Time
MINIMUM VALUE OF FUND
Trust may be terminated if value of Fund is less than 40% of the Face Amount
of Securities on the date of their deposit. As of the Evaluation Date, the
value of the Fund was 97% of the Face Amount of Securities on the date of
their deposit.
- ------------------------------
(a)On the initial date of Deposit (March 26, 1992) the Face Amount of
Securities in the Fund was $17,500,000. Cost of Securities is set
forth under Portfolio.
(b)The sales charge will be reduced on a graduated scale in the case of
quantity purchases (see Public Sale of Units-- Public Offering Price
in Part B). The resulting reduction in the Public Offering Price will
increase the effective return on a Unit.
(c)For Units purchased or redeemed on the Evaluation Date, accrued
interest is approximately equal to the undistributed net investment
income of the Fund (see Statement of Condition on p. D-2) divided by
the number of outstanding Units, plus accrued interest per Unit to the
expected date of settlement (5 business days after purchase or
redemption). The amount of the cash adjustment which is added is equal
to the cash per Unit in the Capital Account not allocated to the
purchase of specific Securities (see Public Sale of Units--Public
Offering Price and Redemption in Part B).
(d)Of this figure, the Trustee receives annually for its service as
Trustee $0.70 per $1,000 face amount of Debt Obligations. The
Trustee's Annual Fee and Expenses also includes the Portfolio
Supervision Fee and Evaluator's Fee set forth herein.
(e)The Sponsors also may be reimbursed for their costs of bookkeeping and
administrative services to the Fund. Portfolio supervision fees
deducted in excess of portfolio supervision expenses may be used for
this reimbursement. Additional deductions for this purpose are
currently estimated not to exceed an annual rate of $0.10 per Unit.
A-3
<PAGE>
DEFINED ASSET FUNDS--CORPORATE INCOME FUND, INTERMEDIATE TERM SERIES--35
INVESTMENT SUMMARY AS OF THE EVALUATION DATE (CONTINUED)
NUMBER OF ISSUES IN PORTFOLIO............................... 10
NUMBER OF ISSUES RATED BY:(a)
Standard & Poor's Corporation/
rating ............................................... A-- 8
BBB-- 1
Moody's Investors Service/
rating ............................................... A-- 10
RANGE OF MATURITIES.................................................2001-2006
NUMBER OF ISSUERS BY INDUSTRY CATEGORY(b):
Banks/Financial Institutions.............................. 5
Consumer Goods............................................ 1
Natural Resources......................................... 1
Retailing................................................. 1
Foreign Government........................................ 2
INDUSTRY CONCENTRATIONS(c) EXPRESSED AS PERCENTAGE OF
AGGREGATE FACE AMOUNT OF PORTFOLIO:
Banks/Financial Institutions.............................. 33%
PERCENTAGE OF AGGREGATE FACE AMOUNT OF PORTFOLIO(d):
Unsecured................................................. 100%
Subordinated.............................................. 13%
- ------------------------------
(a) The ratings assigned by the bond rating agencies may change from time
to time. Certain of the ratings may be provisional or conditional. Moody's
ratings have been furnished by the Evaluator but not confirmed by Moody's. See
Description of Ratings in Part B.
(b) See Risk Factors--Other Risk Factors in Part B.
(c) A Fund is considered to be 'concentrated' in a category when the
Securities in that category constitute 25% or more of the aggregate face amount
of the Portfolio. See Risk Factors--Other Risk Factors in Part B for a
description of certain investment risks relating to these types of obligations.
(d) See Description of the Fund--The Portfolio in Part B.
A-4
<PAGE>
DEFINED ASSET FUNDS - CORPORATE INCOME FUND
INTERMEDIATE TERM SERIES - 35
REPORT OF INDEPENDENT ACCOUNTANTS
The Sponsors, Co-Trustees and Holders
of Defined Asset Funds - Corporate Income Fund,
Intermediate Term Series - 35:
We have audited the accompanying statement of condition of Defined Asset
Funds - Corporate Income Fund, Intermediate Term Series - 35, including
the portfolio, as of February 28, 1995 and the related statements of
operations and of changes in net assets for the years ended February 28,
1995 and 1994 and the period March 27, 1992 to February 28, 1993. These
financial statements are the responsibility of the Co-Trustees. 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 February 28, 1995, as shown in such
portfolio, were confirmed to us by Investors Bank & Trust Company, a
Co-Trustee. An audit also includes assessing the accounting principles
used and significant estimates made by the Co-Trustees, 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 -
Corporate Income Fund, Intermediate Term Series - 35 at February 28, 1995
and the results of its operations and changes in its net assets for the
above-stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
NEW YORK, N.Y.
March 30, 1995
D - 1
<PAGE>
DEFINED ASSET FUNDS - CORPORATE INCOME FUND
INTERMEDIATE TERM SERIES - 35
STATEMENT OF CONDITION
As of February 28, 1995
<TABLE>
<S> <C>
TRUST PROPERTY:
INVESTMENT IN MARKETABLE SECURITIES - AT VALUE (COST $16,626,638) (NOTE 1)................................. $ 17,021,960
CASH PRINCIPAL............................................................................................. 6
ACCRUED INTEREST RECEIVABLE................................................................................ 418,117
-------------
TOTAL TRUST PROPERTY....................................................................................... 17,440,083
LESS LIABILITIES:
ADVANCE FROM CO-TRUSTEE...................................................................... $ 72,142
ACCRUED EXPENSES............................................................................. 7,078
-------------
TOTAL LIABILITIES............................................................................ 79,220
-------------
NET ASSETS, REPRESENTED BY:
16,590 UNITS OF FRACTIONAL UNDIVIDED INTEREST OUTSTANDING (NOTE 3).......................... 17,021,966
UNDISTRIBUTED NET INVESTMENT INCOME.......................................................... 338,897
-------------
NET ASSETS..................................................................................... $ 17,360,863
=============
UNITS OUTSTANDING............................................................................................ 16,590
=============
NET ASSET VALUE PER UNIT..................................................................................... $ 1,046.47
=============
</TABLE>
See Notes To Financial Statements.
D - 2
<PAGE>
DEFINED ASSET FUNDS - CORPORATE INCOME FUND
INTERMEDIATE TERM SERIES - 35
STATEMENTS OF OPERATIONS
<TABLE><CAPTION>
March 27,
1992
Year Ended Year Ended to
February 28, February 28, February 28,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
INVESTMENT INCOME:
INTEREST INCOME.............................................................. $ 1,427,975 $ 1,486,588 $ 1,400,215
CO-TRUSTEES' FEES AND EXPENSES............................................... (20,700) (25,373) (23,932)
SPONSORS' FEES............................................................... (5,828) (5,742) (4,880)
------------- ------------- -------------
NET INVESTMENT INCOME........................................................ 1,401,447 1,455,473 1,371,403
------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
NET REALIZED GAIN ON SECURITIES SOLD OR REDEEMED............................. 25,282 71,364 802
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS........................ (1,207,352) 49,746 1,552,928
------------- ------------- -------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS....................... (1,182,070) 121,110 1,553,730
------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................... $ 219,377 $ 1,576,583 $ 2,925,133
============= ============= =============
</TABLE>
See Notes to Financial Statements.
D - 3
<PAGE>
DEFINED ASSET FUNDS - CORPORATE INCOME FUND
INTERMEDIATE TERM SERIES - 35
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE><CAPTION>
March 27,
1992
Year Ended Year Ended to
February 28, February 28, February 28,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
OPERATIONS:
NET INVESTMENT INCOME........................................................ $ 1,401,447 $ 1,455,473 $ 1,371,403
NET REALIZED GAIN ON SECURITIES SOLD OR REDEEMED............................. 25,282 71,364 802
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS........................ (1,207,352) 49,746 1,552,928
------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS......................... 219,377 1,576,583 2,925,133
------------- ------------- -------------
DISTRIBUTIONS TO HOLDERS: (NOTE 2)
INCOME....................................................................... (1,401,899) (1,455,613) (1,013,921)
PRINCIPAL.................................................................... (13,936) (17,671) 0
------------- ------------- -------------
TOTAL DISTRIBUTIONS.......................................................... (1,415,835) (1,473,284) (1,013,921)
------------- ------------- -------------
UNIT TRANSACTIONS:
REDEMPTION AMOUNTS - PRINCIPAL............................................... (434,473) (473,243) (77,107)
REDEMPTION AMOUNTS - INCOME.................................................. (7,961) (8,523) (1,508)
------------- ------------- -------------
TOTAL UNIT TRANSACTIONS...................................................... (442,434) (481,766) (78,615)
------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS.......................................... (1,638,892) (378,467) 1,832,597
NET ASSETS AT BEGINNING OF PERIOD.............................................. 18,999,755 19,378,222 17,545,625
------------- ------------- -------------
NET ASSETS AT END OF PERIOD.................................................... $ 17,360,863 $ 18,999,755 $ 19,378,222
============= ============= =============
PER UNIT:
INCOME DISTRIBUTIONS DURING PERIOD........................................... $ 84.15 $ 84.15 $ 57.96
============= ============= =============
PRINCIPAL DISTRIBUTIONS DURING PERIOD........................................ $ 0.84 $ 1.03 $ 0.00
============= ============= =============
NET ASSET VALUE AT END OF PERIOD............................................. $ 1,046.47 $ 1,117.17 $ 1,111.90
============= ============= =============
TRUST UNITS:
REDEEMED DURING PERIOD....................................................... 417 421 72
============= ============= =============
OUTSTANDING AT END OF PERIOD................................................. 16,590 17,007 17,428
============= ============= =============
</TABLE>
See Notes To Financial Statements.
D - 4
<PAGE>
DEFINED ASSET FUNDS - CORPORATE INCOME FUND
INTERMEDIATE TERM SERIES - 35
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940 as a
Unit Investment Trust. The following is a summary of significant
accounting policies consistently followed by the Fund in the
preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles.
(a) Securities are stated at value as determined by the Evaluator
based on bid side evaluations for the securities (see
"Redemption - Computation of Redemption Price Per Unit" in this
Prospectus, Part B), except that value on March 27, 1992 was
based upon offering side evaluations at March 25, 1992, the
day prior to the Date of Deposit. Cost of securities at
March 27, 1992 was also based on such offering side
evaluations.
(b) The Fund is not subject to income taxes. Accordingly, no
provision for such taxes is required.
(c) Interest income is recorded as earned.
2. DISTRIBUTIONS
A distribution of net investment income is made to Holders each month.
Receipts other than interest, after deductions for redemptions and
applicable expenses, are distributed as explained in "Administration
of the Fund - Accounts and Distributions" in this Prospectus, Part B.
3. NET CAPITAL
Cost of 16,590 units as of Date of Deposit............. $ 17,326,383
Less sales charge...................................... 693,130
-------------
Net amount applicable to Holders....................... 16,633,253
Redemptions of units - net cost of 910 units redeemed
less redemption amounts.............................. (72,450)
Net realized gain on securities sold or redeemed....... 97,448
Unrealized appreciation of investments................. 395,322
Principal distributions................................ (31,607)
-------------
Net capital applicable to Holders...................... $ 17,021,966
=============
4. INCOME TAXES
As of February 28, 1995, unrealized appreciation of investments, based
on cost for Federal income tax purposes, aggregated $395,322, all of
which related to appreciated securities. The cost of investment
securities for Federal income tax purposes was $16,626,638 at
February 28, 1995.
D - 5
<PAGE>
DEFINED ASSET FUNDS - CORPORATE INCOME FUND
INTERMEDIATE TERM SERIES - 35
PORTFOLIO
AS OF FEBRUARY 28, 1995
<TABLE><CAPTION>
Ratings of Issues(1)
Portfolio No. and Moody's Standard & Face
Title of Securities Investors Poors Corp Amount Coupon Maturities(3)
___________________ _________ __________ ______ ______ _____________
<S> <C> <C> <C> <C> <C> <C>
1 BankAmerica Corp, Sub Debs A3 A- $ 1,000,000 8.375% 03/15/02
2 Bear Stearns, Notes A2 A 1,470,000 8.750 03/15/04
3 Ford Capital BV, Gtd Notes A2 A+ 2,000,000 9.375 05/15/01
4 Korea Development Bank, Bonds A1 A+ 2,000,000 7.900 02/01/02
5 J.C. Penney Co Inc, Notes A1 A+ 2,000,000 9.050 03/01/01
6 Philip Morris Co, Notes A2 A 1,000,000 7.500 01/15/02
7 Rhone Poulenc Rorer Inc, Notes A3 BBB+ 1,500,000 7.750 01/15/02
8 Texas Pub Fin Auth, Texas Worker's Compensation A NR 2,500,000 9.000 12/01/06
Ins Fund, Maintenance Tax Surcharge Rev Bonds,
Taxable Series 1991
9 Thailand Kingdom, Notes A2 A 2,000,000 8.250 03/15/02
10 Westpac Banking Corp, Sub Debs A2 A 1,120,000 9.125 08/15/01
____________
TOTAL $ 16,590,000
============
</TABLE>
D - 6
<PAGE>
DEFINED ASSET FUNDS - CORPORATE INCOME FUND
INTERMEDIATE TERM SERIES - 35
PORTFOLIO
AS OF FEBRUARY 28, 1995
<TABLE><CAPTION>
Optional
Portfolio No. and Redemption
Title of Securities Provisions(3) Cost(2) Value(2)
___________________ _____________ _______ ________
<S> <C> <C> <C> <C>
1 BankAmerica Corp, Sub Debs None $ 986,250 $ 1,020,443
2 Bear Stearns, Notes None 1,479,188 1,498,708
3 Ford Capital BV, Gtd Notes None 2,095,000 2,143,700
4 Korea Development Bank, Bonds None 1,935,000 1,964,494
5 J.C. Penney Co Inc, Notes None 2,112,500 2,139,172
6 Philip Morris Co, Notes None 962,500 975,530
7 Rhone Poulenc Rorer Inc, Notes None 1,451,250 1,481,819
8 Texas Pub Fin Auth, Texas Worker's Compensation None 2,506,250 2,571,875
Ins Fund, Maintenance Tax Surcharge Rev Bonds,
Taxable Series 1991
9 Thailand Kingdom, Notes None 1,967,500 2,040,342
10 Westpac Banking Corp, Sub Debs None 1,131,200 1,185,877
____________ ____________
TOTAL $ 16,626,638 $ 17,021,960
============ ============
</TABLE>
See Notes To Portfolio.
D - 7
<PAGE>
DEFINED ASSET FUNDS - CORPORATE INCOME FUND
INTERMEDIATE TERM SERIES - 35
NOTES TO PORTFOLIO
AS OF FEBRUARY 28, 1995
(1) A description of the rating symbols and their meanings appears under
"Description of Ratings" in this Prospectus, Part B. "NR", if
applicable, indicates that this security is not currently rated by
the indicated rating service.
(2) See Notes to Financial Statements.
(3) Optional redemption provisions, which may be exercised in whole or
in part, are initially at prices of par plus a premium, then
subsequently at prices declining to par. Certain securities may
provide for redemption at par prior or in addition to any optional or
mandatory redemption dates or maturity, for example, through the
operation of a maintenance and replacement fund, if proceeds are not
able to be used as contemplated, the project is condemned or sold or
the project is destroyed and insurance proceeds are used to redeem
the securities. Many of the securities are also subject to mandatory
sinking fund redemption commencing on dates which may be prior to the
date on which securities may be optionally redeemed. Sinking fund
redemptions are at par and redeem only part of the issue. Some of
the securities have mandatory sinking funds which contain optional
provisions permitting the issuer to increase the principal amount
of securities called on a mandatory redemption date. The sinking
fund redemptions with optional provisions may, and optional refunding
redemptions generally will, occur at times when the redeemed
securities have an offering side evaluation which represents a
premium over par. To the extent that the securities were acquired at
a price higher than the redemption price, this will represent a loss
of capital when compared with the Public Offering Price of the Units
when acquired. Distributions will generally be reduced by the amount
of the income which would otherwise have been paid with respect to
redeemed securities and there will be distributed to Holders any
principal amount and premium received on such redemption after
satisfying any redemption requests for Units received by the Fund.
The estimated current return may be affected by redemptions. The tax
effect on Holders of redemptions and related distributions is
described under "Taxes" in this Prospectus, Part B.
<PAGE>
DEFINED ASSET FUNDS--
CORPORATE INCOME FUND
INTERMEDIATE TERM SERIES
I want to learn more about automatic reinvestment in the Investment Accumulation
Program. Please send me information about participation in the Corporate Fund
Accumulation Program, Inc. and a current Prospectus.
My name (please
print) ________________________________________________________________________
My address (please print):
Street and Apt.
No. ___________________________________________________________________________
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
INVESTMENT ACCUMULATION PROGRAM (CIF) UNITED STATES
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 FUNDS--
CORPORATE INCOME FUND
CASH OR ACCRETION BOND SERIES MONTHLY PAYMENT SERIES
FIRST GNMA SERIES PREFERRED STOCK PUT SERIES
GNMA-COLLATERALIZED BOND SERIES PREFERRED STOCK SERIES
INSURED SERIES SELECT HIGH YIELD SERIES
INTERMEDIATE TERM SERIES SELECT SERIES
PROSPECTUS, PART B
NOTE: PART B OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED BY
PART A.
INDEX
PAGE
-----------
Fund Summary......................................... 1
Fund Structure....................................... 2
Risk Factors......................................... 3
General............................................ 3
Select High Yield Series........................... 4
Insured Series..................................... 6
First GNMA Series.................................. 9
Cash or Accretion Bond Series, Select Series and
GNMA-Collateralized Bond Series............... 11
Preferred Stock and Preferred Stock Put Series..... 14
Other Risk Factors................................. 18
Description of the Fund.............................. 29
PAGE
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Taxes................................................ 34
Retirement Plans..................................... 40
Public Sale of Units................................. 41
Market for Units..................................... 44
Redemption........................................... 44
Expenses and Charges................................. 46
Administration of the Fund........................... 46
Resignation, Removal and Limitations on Liability.... 50
Miscellaneous........................................ 51
Description of Ratings............................... 54
Exchange Option...................................... 56
FUND SUMMARY
RISK FACTORS. Certain Debt Obligations from time to time may be redeemed or
prepaid pursuant to optional refunding or sinking fund redemption provisions or
may mature according to their terms or be sold under certain circumstances
described herein; accordingly, no assurance can be given that the Fund will
retain for any length of time its present size and composition (see Payment of
the Debt Obligations and Life of the Fund; Redemption; Administration of the
Fund--Portfolio Supervision). Certain Funds provide for deposits of additional
Securities and the creation of additional Units subsequent to the initial Date
of Deposit (see Administration of the Fund-- Portfolio Supervision).
Units offered hereby may reflect redemptions, prepayments, defaults or
dispositions of Securities originally deposited in the Fund. A reduction in the
value of a Unit resulting from these events does not mean that a Unit is valued
at a market discount; market discounts or premiums on Units represent the
difference between the face amount of Securities per Unit and the price per
Unit. As they approach maturity, discount securities tend to increase in market
value while premium securities tend to decrease in market value. If currently
prevailing interest rates for newly issued and otherwise comparable securities
decline, the market discount of previously issued securities will be reduced and
the market premium of previously issued securities will increase. Conversely, if
currently prevailing interest rates increase, the market discount of previously
issued securities will become deeper and the market premium of previously issued
securities will decline. The Investment Summary in Part A sets forth the
percentages of the aggregate face amount of the Portfolio valued at a discount
from the par (maturity) value and at a premium over par and sets forth the face
amount of Securities underlying each Unit and the value of the Unit as of the
Evaluation Date. For additional risk factors depending on the types of
securities in particular series, see Risk Factors below.
THE PUBLIC OFFERING PRICE of the Units is generally based on the
Evaluator's determination of the aggregate bid side evaluation of the underlying
Securities (computed as of the Evaluation Time for all sales made subsequent to
the previous evaluation) divided by the number of Units outstanding. A sales
charge (set forth under Investment Summary in Part A), accrued interest and cash
adjustments are added. The Public Offering Price on the date of this Prospectus
or on any subsequent date will vary from the Public Offering Price set forth
under Investment Summary in Part A. (See Public Sale of Units--Public Offering
Price.) Units offered hereby are
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issued and outstanding Units which have been purchased by the Sponsors in the
secondary market or from the Trustee following tender for redemption. Any profit
or loss resulting from the sale of these Units will accrue to the Sponsors. No
proceeds from the sale will be received by the Fund.
MARKET FOR UNITS. The Sponsors, though not obligated to do so, intend to
maintain a secondary market for Units based for most Series on the aggregate bid
side evaluation of the underlying Securities (see Market for Units). So long as
the Sponsors are maintaining a secondary market at prices not less than the
Redemption Price per Unit, they will repurchase any Units tendered for
redemption. If this market is not maintained, a Holder will be able to dispose
of his Units through redemption at prices also based on the aggregate bid side
evaluation of the underlying Securities (see Redemption). Market conditions may
cause the prices available in the market maintained by the Sponsors or available
upon exercise of redemption rights to be more or less than the amount paid for
Units plus accrued interest.
ESTIMATED CURRENT RETURN; LONG-TERM RETURN. Estimated Current Return on a
Unit represents annual cash receipts from coupon-bearing debt obligations (after
estimated expenses) divided by the maximum Public Offering Price (including the
sales charge). 'Current return' provides different information than 'long-term
return', which represents yield to maturity (or earlier call date) and reflects
not only the interest payable on the debt obligations but also the amortization
or accretion to that date of any premium over or discount from the par value in
the obligation purchase price. Long-term return on Units in the secondary market
may be lower, sometimes significantly, than current return. Changes in the
composition of the Portfolio and its market valuation, as well as the estimated
fees and expenses payable by the Fund, will cause current return and long-term
return, as well as the difference between them, to fluctuate in the future. Both
current return and long-term return may be substantially lower than originally
estimated. (See Description of the Fund--Income; Estimated Current Return;
Long-Term Return.)
DISTRIBUTIONS of net income, any principal or premium and any capital gains
WILL BE PAID IN CASH unless the Holder elects to reinvest distributions as
described below (see Reinvestment). Holders will be taxed in the manner
described under Taxes regardless of whether these distributions from the Fund
are actually received by the Holders in cash or are automatically reinvested.
REINVESTMENT. Holders of Units of INTERMEDIATE TERM SERIES, INSURED SERIES,
MONTHLY PAYMENT SERIES, PREFERRED STOCK SERIES and SELECT HIGH YIELD SERIES may
reinvest distributions of net income, any principal or premium and any capital
gains in The Corporate Fund Accumulation Program, Inc. Holders of Units of the
FIRST GNMA SERIES and the GNMA-COLLATERALIZED BOND SERIES may reinvest their
distributions in the GNMA Fund Investment Accumulation Program, Inc. For more
complete information about the applicable reinvestment program, including
charges and expenses, return the enclosed form for a prospectus. Read it
carefully before you decide to participate. It should be noted that interest
distributions to Foreign Holders from a reinvestment program will be subject to
U.S. Federal income taxes, including withholding taxes, and that income on
shares of a program will not be eligible for the dividends received deduction
for corporations. Reinvestment is not offered to Holders of PREFERRED STOCK PUT
SERIES, CASH OR ACCRETION BOND SERIES and SELECT SERIES.
TAXATION. In the opinion of special counsel to the Sponsors, for a Fund
that is organized as a 'grantor trust' under the Internal Revenue Code of 1986,
as amended (the 'Code'), each Holder will be considered the owner of a pro rata
portion of each Debt Obligation in the Fund and of each debt obligation in any
Other Fund, and will be considered to have received the interest on his pro rata
portion of each Debt Obligation (including debt obligations in any Other Funds)
when interest on the Debt Obligation is received by the Fund or an Other Fund,
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as the case may be. For certain Series, original issue discount on the
Securities must be amortized over the term of the Securities and must be
included in a Holder's ordinary gross income before the Holder receives the cash
attributable to that income. (See Taxes.)
For any MONTHLY PAYMENT SERIES or FIRST GNMA SERIES that qualifies as a
'regulated investment company' under the Code, distributions from the Fund will
be included in a U.S. Holder's gross income (but will not be eligible for the
dividends-received deductions for corporations), and distributions to Holders
who are not U.S. citizens or residents ('Foreign Holders') will be subject to
withholding tax at the statutory rate of 30% (or a lesser treaty rate.)
Distributions which are taxable as ordinary income to Holders of Units of the
PREFERRED STOCK and PREFERRED STOCK PUT SERIES will be eligible for the
dividends-received deduction for corporations, and distributions to Foreign
Holders will be subject to withholding tax at the statutory rate of 30% (or
lesser treaty rate (see Taxes)).
FUND STRUCTURE
The Fund, a series of The Corporate Income Fund, is a 'unit investment
trust' created by a Trust Indenture (the 'Indenture') among the Sponsors, the
Trustee (and Custodian Trustee, if any) and the Evaluator. The First through One
Hundred Thirtieth Monthly Payment Series and First GNMA Series were created
under Massachusetts law and all other Series were created under New York law.
The Indenture for each trust of those Series of The Corporate Income Fund to
which this Part B is applicable conforms substantially to the descriptions of
the Indenture provided below, except that with respect to certain Series (a) the
Trustee's liability for negligence is limited to acts of gross negligence and
(b) the Sponsors' ability to remove a Trustee without the consent of Holders is
limited to circumstances in which the Trustee becomes incapable of acting or
becomes bankrupt or its affairs are taken over by public authorities. Most Funds
were formed for the purpose of providing a high level of current income through
investment in a fixed portfolio (the 'Portfolio') of Securities issued primarily
by corporations, although an additional objective of the INSURED SERIES, FIRST
GNMA SERIES and GNMA-COLLATERALIZED BOND SERIES is to obtain substantial safety
of capital. Additional objectives of the PREFERRED STOCK and PREFERRED STOCK PUT
SERIES are to provide dividend income that is eligible for the
dividends-received deductions for corporations, and of THE PREFERRED STOCK PUT
SERIES to minimize loss of capital and reduce fluctuations in the value of the
Units. In addition, the objective of the CASH OR ACCRETION BOND SERIES and the
SELECT SERIES is to provide investors a choice between semi-annual distributions
of cash or additional Units through compounding. The Debt Obligations may
include taxable obligations issued or guaranteed by the United States or foreign
governments, or agencies, political subdivisions or instrumentalities thereof,
and payable in United States currency. The Debt Obligations held by the Fund may
be secured or unsecured (including both senior unsecured indebtedness and
indebtedness which is subordinated to other indebtedness), have fixed final
maturity dates and do not have any conversion or equity features. To the extent
that references in this Prospectus are to articles and sections of the
Indenture, which are hereby incorporated by reference, the statements made
herein are qualified in their entirety by this reference. Unless otherwise
indicated, when Investors Bank & Trust Company and The First National Bank of
Chicago act as Co-Trustees to the Fund, references to the Trustee in this
prospectus shall be deemed to refer to the Co-Trustees. The Fund may be an
appropriate investment vehicle for investors who desire to participate in a
portfolio of taxable fixed rate securities with greater diversification than
they might be able to acquire individually. In addition, securities of the type
deposited in the Fund often are not available in small amounts.
3
<PAGE>
The Portfolio contains different issues of debt obligations with fixed
final maturity or disposition dates. As used herein, the terms 'Debt
Obligations' and 'Securities' mean the debt obligations or securities initially
deposited in the Fund and described under Portfolio in Part A and replacement
and additional debt obligations or securities acquired and held by the Fund
pursuant to the provisions of the Indenture (see Description of the Fund--The
Portfolio; Administration of the Fund--Portfolio Supervision).
The deposit of the Securities in the Fund on the Initial Date of Deposit
established a proportionate relationship among the face amounts of Securities of
specified interest rates and maturities in the Portfolio. For certain Series,
following the Initial Date of Deposit, the Sponsors may deposit additional
Securities ('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 in order to create new Units.
Replacement Securities may be acquired under specified conditions (see
Description of the Fund--The Portfolio Administration of the Fund-- Portfolio
Supervisions).
The holders ('Holders') of units of interest ('Units') will have the right
to have their Units redeemed (see Redemption) at a price based on the aggregate
bid side evaluation of the Securities ('Redemption Price per Unit') if the Units
cannot be sold in the over-the-counter market which the Sponsors propose to
maintain at prices determined in the same manner (see Market for Units). On the
Evaluation Date, each Unit represented the fractional undivided interest in the
Securities in the Fund as set forth under Investment Summary in Part A, plus any
cash adjustments and accrued interest. Thereafter, if any Units are redeemed,
the face amount of Securities in the Fund will be reduced and the fractional
undivided interest represented by each remaining Unit in the balance will be
increased. Units will remain outstanding until redeemed upon tender to the
Trustee by any Holder (which may include the Sponsors) or until termination of
the Indenture (see Redemption; Administration of the Fund-- Amendment and
Termination).
The Units being offered by this Prospectus are issued and outstanding Units
which have been reacquired by the Sponsors either by purchase in the open market
or by purchase of Units tendered to the Trustee for redemption. No offering is
being made on behalf of the Fund and any profit or loss realized on the sale of
Units will accrue to the Sponsors.
RISK FACTORS
GENERAL
An investment in Units of the Fund should be made with an understanding of
the risks which an investment in fixed-rate securities may entail, including the
risk that the value of the Portfolio and hence of the Units will decline with
increases in interest rates, as described below. In recent years there have been
wide fluctuations in interest rates and thus in the value of fixed rate
securities generally. The Sponsors cannot predict future economic policies or
their consequences or, therefore, the course or extent of any similar
fluctuations in the future. The Portfolio consists primarily of publicly held
Securities which, in many cases, do not have the benefit of covenants which
would prevent the issuer from engaging in capital restructurings or borrowing
transactions in connection with corporate acquisitions, leveraged buyouts or
restructurings, which could have the effect of reducing the ability of the
corporation to meet its obligations and may in the future result in the ratings
of the Debt Obligations and the value of the underlying Portfolio being reduced.
Units offered in the secondary market may reflect redemptions or
prepayments, in whole or in part, or defaults on, certain of the Securities
originally deposited in the Fund or the disposition of certain Securities
4
<PAGE>
originally deposited in the Fund to satisfy redemptions of Units or pursuant to
the exercise by the Sponsors of their supervisory role over the Fund (see
Payment of the Debt Obligations and Life of the Fund and Administration of the
Fund--Portfolio Supervision). Accordingly, the face amount of Units may be less
than their original face amount at the time of the creation of the Fund. A
reduced value per Unit does not therefore mean that a Unit is necessarily valued
at a market discount; market discounts, as well as market premiums, on Units are
determined solely by a comparison of a Unit's outstanding face amount and its
evaluated price.
Certain of the Securities in the Fund may be valued at a market discount.
Securities trade at less than par value because the interest rates on the
Securities are lower than interest on comparable debt securities being issued at
currently prevailing interest rates. The current returns of securities trading
at a market discount are lower than the current returns of comparably rated debt
securities of a similar type issued at currently prevailing interest rates
because discount securities tend to increase in market value as they approach
maturity and the full principal amount becomes payable. If currently prevailing
interest rates for newly issued and otherwise comparable securities increase,
the market discount of previously issued securities will become deeper and if
currently prevailing interest rates for newly issued comparable securities
decline, the market discount of previously issued securities will be reduced,
other things being equal. Market discount attributable to interest rate changes
does not indicate a lack of market confidence in the issue.
Certain of the Securities in the Fund may be valued at a market premium.
Securities trade at a premium because the interest rates on the Securities are
higher than interest rates on comparable debt securities being issued at
currently prevailing interest rates. The current returns of securities trading
at a market premium are higher than the current returns of comparably rated debt
securities of a similar type issued at currently prevailing interest rates
because premium securities tend to decrease in market value as they approach
maturity when the face amount becomes payable. Because part of the purchase
price is thus returned not at maturity but through current income payments, an
early redemption of a premium security at par will result in a reduction in
yield. If currently prevailing interest rates for newly issued and otherwise
comparable securities increase, the market premium of previously issued
securities will decline and if currently prevailing interest rates for newly
issued comparable securities decline, the market premium of previously issued
securities will increase, other things being equal. Market premium attributable
to interest rate changes does not indicate market confidence in the issue.
The Securities are generally not listed on a national securities exchange.
Whether or not the Securities are listed, the principal trading market for the
Securities will generally 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 any Sponsor. 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.
A Fund may contain or be concentrated in one or more of the classifications
set forth below under Other Factors. A Fund is considered to be 'concentrated'
in a particular classification when the aggregate face amount, or par or stated
value, of those securities constitutes more than 25% of the aggregate face
amount, or par or stated value, of the Securities in the Fund. The types of
issuers and the percentage of any concentrations are set forth under Investment
Summary in Part A. An investment in Units should be made with an understanding
of the risks which these investments may entail, certain of which are described
under Other Risk Factors below.
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SELECT HIGH YIELD SERIES
An investment in Units of the SELECT HIGH YIELD SERIES should be made with
an understanding of the risks which an investment in 'high yield', high risk,
fixed rate corporate debt obligations, or 'junk bonds', may entail, including
increased credit risks and the risk that the value of the Units will decline,
and may decline precipitously, with increases in interest rates. In recent years
there have been wide fluctuations in interest rates and thus in the value of
fixed rate, intermediate and long term debt obligations generally. Securities
such as those included in these Funds are, under most circumstances, subject to
greater market fluctuations and risk of loss of income and principal than are
investments in lower yielding, higher rated securities, and their value may
decline precipitously because of increases in interest rates, not only because
the increases in rates generally decrease values but also because increased
rates may indicate a slowdown in the economy and a decrease in the value of
assets generally which may adversely affect the credit of issuers of 'high
yield' securities resulting in a higher incidence of defaults among high yield
securities. A slowdown in the economy, or a development adversely affecting an
issuer's creditworthiness, may result in the issuer being unable to maintain
earnings or sell assets at the rate and at the prices, respectively, that are
required to produce sufficient cash flow to meet its interest and principal
requirements. For an issuer that has outstanding both senior commercial bank
debt and subordinated high yield securities, an increase in interest rates will
increase that issuer's interest expense insofar as the interest rate on the bank
debt is fluctuating. Some leveraged issuers enter into interest rate protection
agreements to fix or cap the interest rate on a large portion of their bank
debt. This reduces exposure to increasing rates but reduces the benefit to the
issuer of declining rates.
The Debt Obligations in the portfolio of the SELECT HIGH YIELD SERIES
consist exclusively of 'high yield', high risk corporate bonds. 'High yield' or
'junk' bonds, the generic names for corporate bonds rated below BBB or Baa by
Standard & Poor's or Moody's, are frequently issued by corporations in the
growth stage of their development, by established companies whose operations or
industries are depressed or by highly leveraged companies purchased in leveraged
buyout transactions. The market for high yield bonds is very specialized and
investors in it have been predominantly financial institutions. High yield bonds
are generally not listed on a national securities exchange. Trading of high
yield bonds, therefore, takes place primarily in overthecounter markets which
consist of groups of dealer firms that are typically major securities firms.
Because the high yield bond market is a dealer market, rather than an auction
market, no single obtainable price for a given bond prevails at any given time.
Prices are determined by negotiation between traders. 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. Not all dealers
maintain markets in all high yield bonds. Therefore, since there are fewer
traders in these bonds than there are in 'investment grade' bonds, the bid-offer
spread is usually greater for high yield bonds than it is for investment grade
bonds. In addition, these Funds may be restricted under the Investment Company
Act of 1940 from selling Securities to any Sponsor, including those Sponsors who
have been or may become active in the 'junk' bond market. The price at which the
Securities may be sold to meet redemptions and the value of these Funds will be
adversely affected if trading markets for the Securities are limited or absent.
If the rate of redemptions is great, the value of the Fund may decline to a
level that requires liquidation (see Amendment and Termination).
Lower-rated and comparable non-rated securities tend to offer higher yields
than higher-rated securities with the same maturities because the
creditworthiness of the issuers of lower-rated securities may not be as strong
as that of other issuers. Moreover, if a Debt Obligation is recharacterized as
equity by the Internal Revenue Service
6
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for Federal income tax purposes, the issuer's interest deduction with respect to
the Debt Obligation will be disallowed and this disallowance may adversely
affect the issuer's credit rating. Because investors generally perceive that
there are greater risks associated with lower-rated and non-rated securities in
the Fund, the yields and prices of these securities tend to fluctuate more than
higher-rated securities with changes in the perceived quality of the credit of
their issuers. In addition, the market value of high yield, fixed income
securities may fluctuate more than the market value of higher-rated securities
since high yield, fixed income securities tend to reflect short term credit
developments to a greater extent than higher-rated securities. Also, because
'high yield' bonds may be more sensitive to adverse changes in credit status
than bonds of investment grade and because the Fund provides for the automatic
sale of any Security if its yield to maturity exceeds 130% of the High Yield
Master Index for High Yield Corporate Bonds (the 'Index'), sales of Debt
Obligations from the Portfolio may occur more frequently than sales of portfolio
securities from funds invested in higher-rated bonds; this could result in
possible loss of principal and a more rapid decline in the size of the Fund than
otherwise would be the case. Lower-rated and non-rated securities generally
involve greater risks of loss of income and principal than higher-rated
securities, and recent studies have indicated that the number of defaults by
issuers and the amount of debt in default have increased substantially in the
past few years. Issuers of lower-rated and non-rated securities may possess less
creditworthy characteristics than issuers of higher-rated securities and,
especially in the case of issuers whose obligations or credit standing have
recently been downgraded, may be subject to claims by debtholders, owners of
property leased to the issuer or others which, if sustained, would make it more
difficult for the issuers to meet their payment obligations. High yield bonds
are also affected by variables such as interest rates, inflation rates and real
growth in the economy. Therefore, investors should consider carefully the
relative risks associated with investment in securities which carry lower
ratings or which are not rated.
The value of the Units reflects the value of the portfolio securities,
including the value (if any) of securities in default. Should the issuer of any
Debt Obligation default in the payment of principal or interest, the Fund may
incur additional expenses seeking payment on the defaulted Debt Obligation.
Because amounts (if any) recovered by the Fund in payment under the defaulted
Debt Obligation may not be reflected in the value of the Units until actually
received by the Fund, and depending upon when a Holder purchases or sells his
Units, it is possible that a Holder would bear a portion of the cost of recovery
without receiving any portion of the payment recovered.
High yield bonds are generally subordinated obligations. The payment of
principal (and premium, if any), interest and sinking fund requirements with
respect to subordinated obligations of an issuer is subordinated in right of
payment to the payment of senior obligations of the issuer. Senior obligations
generally include most, if not all, significant debt obligations of an issuer,
whether existing at the time of issuance of subordinated debt or created
thereafter. Upon any distribution of the assets of an issuer with subordinated
obligations upon dissolution, total or partial liquidation or reorganization of
or similar proceeding relating to the issuer, the holders of senior indebtedness
will be entitled to receive payment in full before holders of subordinated
indebtedness will be entitled to receive any payment. Moreover, generally no
payment with respect to subordinated indebtedness may be made while there exists
a default with respect to any senior indebtedness. Thus, in the event of
insolvency, holders of senior indebtedness of any issuer generally will recover
more, ratably, than holders of subordinated indebtedness of that issuer.
Debt Obligations that are rated lower than BBB or Baa by Standard & Poor's
or Moody's, respectively, should be considered speculative as such ratings
indicate a quality of less than investment grade. Debt Obligations that are not
rated by either Standard & Poor's or Moody's should also be considered
speculative. There is no established retail secondary market for many of these
Debt Obligations. The Sponsors do not anticipate that these Debt
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Obligations could be sold other than to institutional investors. However, the
Sponsors expect that there is a readily available market among institutional
investors for these Debt Obligations in the event it is necessary to sell these
Debt Obligations to meet redemptions of Units. The limited market for these Debt
Obligations may affect the price of the particular Security to be sold for
purposes of redemption and the amount actually realized by the Fund upon a sale.
Any sale may therefore result in a loss to the Fund. Investors should carefully
review the objective of the Fund and consider their ability to assume the risks
involved before making an investment in the SELECT HIGH YIELD SERIES. (See
Description of Ratings for a description of speculative ratings issued by
Standard & Poor's and Moody's.)
INSURED SERIES
The Investment Summary in Part A sets forth the aggregate face amount of
the Portfolio that is insured by an insurance company and whether the insurance
covers the bonds as long as they are outstanding ('permanent insurance' or
insurance 'to maturity') or while the bonds are held by the Fund ('portfolio
insurance').
Permanent Insurance
The Debt Obligations in FIRST THROUGH FOURTH INSURED SERIES (the 'Insured
Debt Obligations') have been insured by Financial Security Assurance Inc.
('Financial Security') (see The Insurers below). These surety bonds are
non-cancellable and will continue in force so long as the Insured Debt
Obligations are outstanding. The cost of this insurance is borne by the
Sponsors. The insurance guarantees the scheduled payment of principal and
interest on but does not guarantee the market value of the Insured Debt
Obligations or the value of the Units. The Insurance does not guarantee
accelerated payments of principal or cover redemptions.
Portfolio Insurance
The FIFTH AND SUBSEQUENT INSURED SERIES have obtained portfolio insurance
('Portfolio Insurance') from either Municipal Bond Investors Assurance
Corporation ('MBIA Corp.') or Financial Security (each referred to as an
'Insurer' or the 'Insurers') (see The Insurers below) that guarantees the
scheduled payments of the principal of and interest on the Debt Obligations
('Portfolio-Insured Debt Obligations') while they are owned by the Fund. Since
the Portfolio Insurance applies to Debt Obligations only while they are owned by
the Fund, the value of Portfolio-Insured Debt Obligations (and hence the value
of the Units) may decline if the credit quality of any Portfolio-Insured Debt
Obligation is reduced. Premiums for Portfolio Insurance are payable monthly in
advance by the Trustee on behalf of the Fund. The insurance obtained by the Fund
is only effective as to Debt Obligations owned by and held in the Fund and,
consequently, does not cover Debt Obligations for which the contract for
purchase fails. A 'when issued' bond will be covered under each policy upon the
settlement date of the 'when issued' bond. Each policy shall continue in force
only with respect to Debt Obligations held in and owned by the Fund, and the
Insurer shall not have any liability under the policy with respect to any Debt
Obligations which do not constitute part of the Fund.
By the terms of its policy, the Insurer will unconditionally guarantee to
the Fund the payment, when due, required of the issuer of the Debt Obligations
of an amount equal to the principal of (either at the stated maturity or by any
advancement of maturity pursuant to a mandatory sinking fund payment) and
interest on the Bonds as the payments shall become due but not paid except that
in the event of any acceleration of the due date of principal by reason of
mandatory or optional redemption (other than mandatory sinking fund redemption),
default or otherwise, the payments guaranteed will be made in the amounts and at
the times as would have been due had there not been an acceleration by reason of
mandatory or optional redemption (other than a mandatory
8
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sinking fund redemption), default or otherwise. The Insurer will be responsible
for those payments less any amounts received by the Fund from any trustee for
the bond issuers or from any other source. In the event the due date of the
principal of any Debt Obligation is accelerated, the payments required by the
acceleration are received by the Fund, and the Debt Obligation is cancelled, the
Portfolio Insurance will terminate with respect to that Debt Obligation. Each
policy does not guarantee payment on an accelerated basis, the payment of any
redemption premium or the value of the Units. Each policy also does not insure
against nonpayment of principal of or interest on the Debt Obligations resulting
from the insolvency, negligence or any other act or omission of the trustee or
other paying agent for the Debt Obligations.
Each insurance policy is non-cancellable and will continue in force so long
as the Fund is in existence and the Securities described in the policy continue
to be held in and owned by the Fund. Each policy shall terminate as to any Debt
Obligation which has been redeemed from the Fund or sold by the Trustee on the
date of the redemption or on the settlement date of the sale, and the Insurer
shall not have any liability under the policy as to that Debt Obligation
thereafter. If the date of the redemption or the settlement date of the sale
occurs between a record date and a date of payment of any Debt Obligation, the
policy will terminate as to that Debt Obligation on the business day next
succeeding the date of payment. The termination of the policy as to any Debt
Obligation shall not affect the Insurer's obligations regarding any other Debt
Obligation in the Fund or any other fund which has obtained an insurance policy
from the Insurer. Each policy will terminate as to all Debt Obligations on the
date on which the last of the Debt Obligations matures, is redeemed or is sold
by the Fund. As Portfolio-Insured Debt Obligations are redeemed by their
respective issuers or are sold by the Trustee, the amount of the premium payable
for the Portfolio Insurance will be correspondingly reduced. Nonpayment of
premiums on the policy obtained by the Fund will not result in the cancellation
of insurance but will permit the Insurer to take action against the Trustee to
recover premium payments due it. The Trustee in turn will be entitled to recover
the payments from the Fund.
Upon the sale of a Portfolio-Insured Debt Obligation from the Fund, the
Trustee has the right, pursuant to an irrevocable commitment obtained from the
Insurer, to obtain insurance to maturity ('Permanent Insurance') on the Debt
Obligation upon the payment of a single predetermined insurance premium from the
proceeds of the sale. Accordingly, any Debt Obligation in the Fund is eligible
to be sold on an insured basis. It is expected that the Trustee will exercise
the right to obtain Permanent Insurance upon instructions from the Sponsors only
if the Fund would receive net proceeds from the sale of the Debt Obligation
(sale proceeds less the insurance premium attributable to the Permanent
Insurance and the related custodial and rating agency fees) in excess of the
sale proceeds that would be received if the Debt Obligation were sold on an
uninsured basis. The aggregate premium that would have been payable for
Permanent Insurance if Permanent Insurance had been obtained for all of the
Portfolio-Insured Debt Obligations on the Date of Deposit is set forth under
Investment Summary in Part A. The premiums for Permanent Insurance for each
Portfolio-Insured Debt Obligation will decline over the life of the Debt
Obligation. The predetermined Permanent Insurance premium with respect to each
Debt Obligation is based upon the insurability of each Debt Obligation as of the
Date of Deposit and will not be increased for any change in the creditworthiness
of such Debt Obligation unless that Debt Obligation is in default as to payment
of principal and/or interest. In such event, the Permanent Insurance premium
shall be subject to an increase predetermined at the Date of Deposit and payable
from the proceeds of the sale of that Debt Obligation.
Although all Debt Obligations are individually insured, neither the Fund,
the Units nor the Portfolio is insured directly or indirectly by the Insurer.
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The Public Offering Price does not reflect any element of value for
Portfolio Insurance. The Evaluator will attribute a value to the Portfolio
Insurance (including the right to obtain Permanent Insurance) for the purpose of
computing the price or redemption value of Units only if the Portfolio-Insured
Debt Obligations are in default in payment of principal or interest or, in the
opinion of Defined Asset Funds research analysts, in significant risk of
default. In making this determination Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as agent for the Sponsors ('Agent for the Sponsors') has
established as a general standard that Portfolio-Insured Debt Obligation which
is rated less than BB by Standard & Poor's or Ba by Moody's will be deemed in
significant risk of default although the Agent for the Sponsors retains the
discretion to conclude that a Portfolio-Insured Debt Obligation is in
significant risk of default even though at the time it has a higher rating, or
not to reach that conclusion even if it has a lower rating. (See Description of
Ratings). The value of the insurance will be equal to the difference between (i)
the market value of the Portfolio-Insured Debt Obligation assuming the exercise
of the right to obtain Permanent Insurance (less the insurance premium
attributable to the purchase of Permanent Insurance and the related custodial
and rating agency fees) and (ii) the market value of the Portfolio-Insured Debt
Obligation not covered by Permanent Insurance.
With respect to MBIA Portfolio Insurance, in the event that interest on or
principal of a Debt Obligation is due for payment but is unpaid by reason of
nonpayment by the issuer thereof, MBIA will make payments to its fiscal agent,
Citibank, N.A., New York, New York (the Fiscal Agent'), equal to the unpaid
amounts of principal and interest not later than one business day after MBIA has
been notified by the Trustee that the nonpayment has occurred (but not earlier
than the date such payment is due). The Fiscal Agent will disburse to the
Trustee the amount of principal and interest which is then due for payment but
is unpaid upon receipt by the Fiscal Agent of (i) evidence of the Trust's right
to receive payment of the principal and interest and (ii) evidence, including
any appropriate instruments of assignment, that all of the rights to payment of
the principal or interest then due for payment shall thereupon vest in MBIA.
Upon payment by MBIA of any principal or interest payments with respect to any
Debt Obligation, MBIA shall succeed to the rights of the owner of such Debt
Obligation with respect to that payment.
The MBIA policies of insurance are not covered by the Property/Casualty
Insurance Security Fund specified in Article 76 of the New York Insurance Law.
Ratings of Bonds and Units. The Debt Obligations, as insured, have been
rated AAA by Standard & Poor's. In addition, Moody's has rated the Debt
Obligations backed by Portfolio Insurance Aaa. The Portfolio Insurance is
effective only while the Debt Obligations are retained in the Fund.
Standard & Poor's has rated the Units of the Insured Series AAA because of
the insurance on the Debt Obligations. The assignment of the AAA rating is due
to Standard & Poor's assessment of the creditworthiness of the Insurer and of
its ability to pay claims on its policies of insurance. In the event that
Standard & Poor's reassesses the creditworthiness of the Insurer which would
result in the Fund's rating being reduced, the Sponsors are authorized to direct
the Trustee to obtain additional insurance in order to maintain the AAA rating
on the Units (see Expenses and Charges).
The Insurers
Financial Security is a monoline property and casualty insurance company
incorporated in New York in 1984. It is an indirect subsidiary of US West Inc.
On December 27, 1990, US West Inc. sold a 10% (approximately) stake to The Tokio
Marine and Fire Insurance Co., Ltd. US West is currently seeking to dispose
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of its 91% interest in FSA as part of a corporate strategy to disengage from the
financial services industry and focus its resources on its core
telecommunications businesses. FSA is currently contemplating an initial public
offering, at the conclusion of which FSA will be owned 46.1% (39.2% if the
underwriter's over-allotment option is exercised in full) by US West and 7.5% by
The Tokio Marine and Fire Insurance Co., Ltd. The disposal of US West's
remaining interest in FSA is expected to be done in an orderly manner which will
maintain the current ratings by the major rating agencies and protect the value
of its business. No shareholder of Financial Security is obligated to pay any
debt of or claim against Financial Security or to make any additional
contribution to the capital of Financial Security. Financial Security and its
two wholly-owned subsidiaries are licensed to engage in the surety business in
42 states and the District of Columbia. Financial Security and its subsidiaries
have the highest claims-paying ability rating by two major rating agencies and
are engaged exclusively in the business of writing financial guaranty insurance
on asset-backed and other collateralized securities offered in domestic and
foreign markets and on tax-exempt securities. Pursuant to an intercompany
agreement, liabilities on financial guaranty insurance policies issued by
Financial Security or either of its subsidiaries are reinsured among such
companies on an agreed-upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable statutory risk
limitations. As of June 30, 1993, Financial Security had policyholders' surplus
of approximately $397,000,000 and total admitted assets of approximately
$772,000,000. Copies of quarterly and annual financial statements prepared in
accordance with generally accepted accounting principles are available upon
written request to Financial Security Assurance Inc., 350 Park Avenue, New York,
New York 10022, Attn: Market Development. Copies of the statutory quarterly and
annual statements filed with the State of New York Insurance Department by
Financial Security are available upon request to the State of New York Insurance
Department.
MBIA Corp. is the principal operating subsidiary of MBIA Inc. The principal
shareholders of MBIA Inc. were originally AEtna Casualty and Surety Company, The
Fund American Companies Inc., subsidiaries of CIGNA Corporation and Credit Local
de France, CAECL, S.A. These shareholders now own approximately 13% of the
outstanding common stock of MBIA Inc. following a series of four public equity
offerings over a five-year period. As of June 30, 1993, MBIA had admitted assets
of $2,891,000,000 and policyholders' surplus of $945,000,000.
BIG, a stock insurance company incorporated in Illinois and now known as
'MBIA Insurance Corp. of Illinois', is a wholly-owned subsidiary of Bond
Investors Group, Inc., a Delaware insurance holding company. Effective December
31, 1989, MBIA Inc. acquired Bond Investors Group, Inc. Through a reinsurance
agreement, BIG has ceded all of its net insured risks, as well as its unearned
premium and contingency reserves to MBIA Corp. and MBIA Corp. has reinsured
BIG's net outstanding exposure. Neither MBIA Inc., nor Bond Investors Group,
Inc. or any of their shareholders are obligated to pay the debts of or claims
against MBIA Corp. or BIG.
Moody's rates all bond issues insured by MBIA and BIG 'Aaa' and short term
loans 'MIG 1,' both designated to be of the highest quality. Standard and Poor's
rates all issues insured by MBIA and BIG 'AAA', short term debt A-1I and notes
SP-1I. The Moody's rating of MBIA should be evaluated independently of the
Standard & Poor's rating of MBIA. No application has been made to any other
rating agency in order to obtain additional ratings on the Debt Obligations. The
ratings reflect the respective agency's current assessment of the
creditworthiness of MBIA and its ability to pay claims on its policies of
insurance. Any further explanation as to the significance of the above ratings
may be obtained only from the applicable rating agency. The above ratings are
not recommendations to buy, sell or hold the Debt Obligations, and those ratings
may be subject to revision or withdrawal at any time by the rating agencies. Any
downward revision or withdrawal of either or both ratings
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may have an adverse effect on the market price of the Debt Obligations. The
above financial information has been obtained from publicly available
information. No representation is made herein as to the accuracy or adequacy of
the above information relating to the Insurers or as to the absence of material
adverse changes since the information was made available to the public. The
Sponsors are not aware that the information herein is inaccurate or incomplete
as of the date hereof.
Regulation of Insurance Companies
Insurance companies are subject to regulation and supervision in the
jurisdictions in which they do business under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. This regulation, supervision and administration relate, among
other things, to: the standards of solvency which must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; deposits of securities for the benefit of policyholders; approval
of policy forms and premium rates; periodic examinations of the affairs of
insurance companies; annual and other reports required to be filed on the
financial condition of insurers or for other purposes; and requirements
regarding reserves for unearned premiums, losses and other matters. Insurance
regulation in many states also includes 'assigned risk' plans, reinsurance
facilities, and joint underwriting associations, under which all insurers
writing particular lines of insurance within the jurisdiction must accept, for
one or more of those lines, risks unable to secure coverage in voluntary
markets. A significant portion of the assets of insurance companies is required
by law to be held in reserve for potential claims on policies and is not
available to general creditors.
Although the Federal government does not regulate the business of
insurance, Federal initiatives can significantly impact the insurance business.
Current and proposed Federal measures which may significantly affect the
insurance business include pension regulation (ERISA), controls on medical care
costs, minimum standards for no-fault automobile insurance, national health
insurance, personal privacy protection, tax law changes affecting life insurance
companies or the relative desirability of various personal investment vehicles
and repeal of the current antitrust exemption for the insurance business. (If
this exemption is eliminated, it will substantially affect the way premium rates
are set by all property-liability insurers). In addition, the Federal government
operates in some cases as a co-insurer with the private sector insurance
companies.
Insurance companies are also affected by a variety of state and Federal
regulatory measures and judicial decisions that define and extend the risks and
benefits for which insurance is sought and provided. These include judicial
redefinitions of risk exposure in areas such as products liability and state and
Federal extension and protection of employee benefits, including pension,
workers' compensation, and disability benefits. These developments may result in
short-term adverse effects on the profitability of various lines of insurance.
Longer-term adverse effects can often be minimized through prompt repricing of
coverages and revision of policy terms. In some instances these developments may
create new opportunities for business growth. All insurance companies write
policies and set premiums based on actuarial assumptions about mortality,
injury, the occurrence of accidents and other insured events. These assumptions,
while well supported by past experience, necessarily do not take account of
future events. The occurrence in the future of unforeseen circumstances could
affect the financial condition of one or more insurance companies. The insurance
business is highly competitive and with the deregulation of financial service
businesses, it should become more competitive. In addition, insurance companies
may expand into non-traditional lines of business which may involve different
types of risks.
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The above financial information relating to the Insurance Companies has
been obtained from publicly available information. No representation is made as
to the accuracy or adequacy of the information or as to the absence of material
adverse changes since the information was made available to the public.
FIRST GNMA SERIES
The Portfolio of the FIRST GNMA SERIES consists primarily of
mortgage-backed securities of the modified pass-through type fully guaranteed as
to payment of principal and interest by the Government National Mortgage
Association ('GNMA'). An investment in Units should be made with an
understanding of the risks which an investment in fixed rate long-term debt
obligations without prepayment protection may entail, including the risk that
the value of the Portfolio and hence of the Units will decline with increases in
interest rates and that payments of principal may be received sooner than
anticipated, especially if interest rates decline. The potential for
appreciation on the Securities, which could otherwise be expected to result from
a decline in interest rates, may tend to be limited by any increased prepayments
by mortgagors as interest rates decline. In addition, prepayments of principal
on Ginnie Maes purchased at a premium over par will result in some loss on
investment while prepayments on Ginnie Maes purchased at a discount from par
will result in some gain on investment. The Sponsors cannot predict future
economic policies or their consequences or, therefore, the course or extent of
interest rate fluctuations in the future. (For a discussion of the average life
of the Ginnie Maes and the Fund see below under Payment of the Securities and
Life of the Fund--First GNMA Series.)
GNMA is a wholly-owned U.S. government corporation within the Department of
Housing and Urban Development. GNMA is authorized by Section 306(g) of Title III
of the National Housing Act to guarantee the timely payment of the principal of,
and interest on, certificates which are based on and backed by pools of
residential mortgage loans insured or guaranteed by the Federal Housing
Administration ('FHA'), the Farmers' Home Administration ('FMHA') or the
Department of Veteran's Affairs ('VA'). In order to meet its obligation under
its guaranty, GNMA may issue its general obligations to the United States
Treasury. In the event it is called upon at any time to make good its guaranty,
GNMA has the full power and authority to borrow from the Treasury of the United
States, if necessary, amounts sufficient to make payments of principal and
interest on the GNMA Certificates ('GNMA Pass-throughs' or 'Ginnie Maes').
Section 306(g) provides further that the full faith and credit of the
United States is pledged to the payment of all amounts which may be required to
be paid under any guaranty under that subsection. An opinion of an Assistant
Attorney General of the United States, dated December 9, 1969, states that these
guaranties 'constitute general obligations of the United States backed by its
full faith and credit.' Any statement in this Prospectus that a particular
Security is backed by the full faith and credit of the United States is based
upon the opinion of an Assistant Attorney General of the United States and
should be so construed.
GNMA Pass-throughs. The Ginnie Maes are of the 'modified pass-through'
type, the terms of which provide for timely monthly payments by the issuers to
the registered holders (including the Fund) of their pro rata shares of the
scheduled principal payments, whether or not collected by the issuers, on
account of the mortgages backing these Ginnie Maes, plus any prepayments of
principal of such mortgages received, and interest (net of the servicing and
other charges described above) on the aggregate unpaid principal balance of
these Ginnie Maes, whether or not interest on account of these mortgages has
been collected by the issuers. Ginnie Maes are guaranteed by GNMA as to timely
payment of principal and interest. Funds received by the issuers on account of
the mortgages backing the several issues of the Ginnie Maes are intended to be
sufficient to make the required payments of principal and interest on these
Ginnie Maes but, if these funds are insufficient for that purpose, the
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guaranty agreements between the issuers and GNMA require the issuers to make
advances sufficient for these payments. If the issuers fail to make these
payments GNMA will do so. The full faith and credit of the United States is
pledged to the payment of all amounts which may be required to be paid under the
guaranty. The payment cycle of Ginnie Maes is 45 days between the date of
security issuance and the first investor payments.
Origination of Mortgage-Backed Securities. The pool of mortgages that is to
underlie a particular new issue of Ginnie Maes, such as the Ginnie Maes in the
Fund, is assembled by the proposed issuer of these Ginnie Maes. This issuer is
typically a mortgage banking firm, savings institution or commercial bank and in
every instance must be a mortgagee approved by and in good standing with the
FHA. In addition, GNMA imposes its own criteria on the eligibility of issuers,
including a net worth requirement and a requirement that a principal element of
its business operation be the origination or servicing of mortgage loans.
The mortgages which are to compose the new pool may have been originated by
the issuer itself in its capacity as a mortgage lender, or they may be acquired
by the issuer from a third party, such as another mortgage banker, a banking
institution, the VA, which in certain instances acts as a direct lender and thus
originates its own mortgages, or one of several other governmental agencies. All
mortgages in any given pool will be insured under the National Housing Act, as
amended ('FHA-insured') or Title V of the Housing Act of 1949 ('YMHA-insured')
or insured or guaranteed under Chapter 37 of Title 38, U.S.C. ('VA-guaranteed');
will have a date for the first scheduled monthly payment of principal and
interest that is not more than 24 months prior to the issue date of the Ginnie
Mae to be issued; will have homogeneity as to interest rate, maturity and type
of dwelling (e.g., project mortgages on apartment projects and hospitals will
not be mixed with 1-to 4-family mortgages); and will meet additional criteria of
GNMA. All mortgages in the pools backing the Ginnie Maes contained in the
Portfolio are mortgages on 1-to 4-family dwellings (amortizing over a period of
up to 30 years). In general, the mortgages in these pools provide for equal
monthly payments over the life of the mortgage (aside from prepayments),
designed to repay the principal of the mortgage over this period, together with
interest at a fixed rate on the unpaid balance.
In seeking GNMA approval of a new pool, the issuer files with GNMA an
application containing information concerning itself, describing generally the
pooled mortgages, and requesting that GNMA approve the issue and issue its
commitment (subject to its satisfaction with the mortgage documents and other
relevant documentation) to guarantee the timely payment of principal of and
interest on the Ginnie Maes to be issued by the issuer on the basis of that
pool. If the application is in order, GNMA issues its commitment, assigning a
GNMA pool number to the pool. Upon completion of the required documentation,
including detailed information as to the underlying mortgages, a custodial
agreement with a Federal or state regulated financial institution satisfactory
to GNMA pursuant to which the underlying mortgages will be held in safekeeping,
and a detailed guaranty agreement between GNMA and the issuer, the issuance of
the Ginnie Maes is permitted, and GNMA, upon their issuance, endorses its
guaranty thereon. The aggregate principal amount of Ginnie Maes issued will be
equal to the then aggregate unpaid principal balances of the pooled mortgages.
The interest rate borne by the Ginnie Maes is currently fixed at .5 of 1% below
the interest rate of the pooled 1-to 4-family mortgages, the differential being
applied to the payment of servicing and custodial charges as well as GNMA's
guaranty fee.
Each group of Ginnie Maes described above as having a specified range of
maturities includes individual Ginnies Maes having varying ranges of maturities
within that mentioned. Each group is described as one category of Securities
with a single range of maturities because of current market conditions that
accord no difference in price among the Securities grouped together on the basis
of the difference in their maturity ranges. Accordingly, as
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long as this market condition prevails, a purchase of securities with the same
coupon rate and a maturity date within the range mentioned above will be
considered as an acquisition of the same security.
The Ginnie Maes are based upon and backed by the aggregate indebtedness
secured by the underlying FHA-insured, FMHA-insured or VA-guaranteed mortgages
and, except to the extent of funds received by the issuers on account of these
mortgages, the Ginnie Maes do not constitute a liability of nor evidence any
recourse against the issuers, but recourse thereon is solely against GNMA.
Holders of Ginnie Maes have no security interest in or lien on the pooled
mortgages.
The GNMA guaranties referred to herein relate only to payment of principal
of and interest on the Ginnie Maes in the Portfolio and not to the Units offered
hereby.
CASH OR ACCRETION BOND SERIES, SELECT SERIES AND GNMA-COLLATERALIZED BOND SERIES
The Bonds in the Portfolio of the GNMA-COLLATERALIZED BOND SERIES provide
for periodic payments of interest, but CASH OR ACCRETION BOND SERIES and SELECT
SERIES contain Compound Interest Bonds that initially do not make periodic
payments of interest. It should also be noted that the potential for
appreciation on the Securities which would otherwise be expected to result from
a decline in interest rates, may tend to be limited by any increased prepayments
by mortgagors as interest rates decline.
The Compound Interest Bonds contained in CASH OR ACCRETION BOND SERIES and
SELECT SERIES initially do not pay either principal or interest, although they
do accrue interest. As used herein the term 'Payment Commencement Date' means
the time prior to maturity at which all other classes of bonds of an issue
issued by the issuers have been fully paid and at which payment of interest and
principal on the Compound Interest Bonds commences. Prior to the Payment
Commencement Date of any Compound Interest Bond accrued but unpaid interest will
be added to principal and compounded, generally on a quarterly or semi-annual
basis, and additional Units will be issued to Holders and credited to the
accounts of Holders ratably on each semi-annual Unit Accretion Distribution Day.
Additional Units credited to Holders during this period may be sold at any time.
When all of the Compound Interest Bonds have reached their respective Payment
Commencement Dates, they pay interest and principal.
The value of the Compound Interest Bonds and therefore of the Units, may be
subject to greater fluctuations in response to changing interest rates than
obligations making current interest payments. During the period prior to their
Payment Commencement Dates, however, the Compound Interest Bonds provide a
substantial degree of protection from prepayment because no payments of
principal may be made on the Compound Interest Bonds until the principal amount
of the other classes of bonds issued by the respective issuers concurrently with
the Compound Interest Bonds have been paid in full. The Compound Interest Bonds
also provide protection from reinvestment risk because, during this initial
period, the accrued interest is added to principal and therefore automatically
reinvested at the same interest rate as the original principal amount of the
Compound Interest Bonds. Accordingly, an investor in the Units who does not
elect automatic liquidation, unlike an investor in a fund composed of customary
securities, lessens his risk of being unable to invest cash distributions at a
rate as high as the rate on the Compound Interest Bonds, but may forego the
ability to reinvest fully at higher rates in the future. (See Administration of
the Fund--Automatic Unit Accretion Liquidations below.) Because the interest on
the Compound Interest Bonds accrues but is not paid until their respective
Payment Commencement Dates and because these Bonds may have been originally
issued at a price less than their original stated principal amounts, the
Compound Interest Bonds will be treated for Federal income tax purpose as having
'original issue discount'.
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Holders of Units will accordingly be required to report as taxable income, in
each year, a portion of this original issue discount prior to the receipt of the
cash attributable to such income (see Taxes below).
If a bankruptcy proceeding is commenced involving an issuer of a compound
interest or original issue discount security, under Section 502(b)(2) of Title
11 of the United States Code, generally the claim of holders of the security
would be limited to the initial public offering price of the security plus
accrued but unpaid interest and the amortized portion of the difference between
the original principal amount and the initial public offering price of the
security to the commencement of the proceeding. Similar limitations may result
under applicable state law. Similarly, the respective Bond Indentures under
which the Compound Interest Bonds were issued generally provide that the bond
trustee named in the Bond Indenture as the registered holder of the primary
collateral for the Compound Interest Bonds (the 'Bond Trustee') may accelerate
the Compound Interest Bonds if an event of default occurs and is continuing.
Under these circumstances, the claim of a holder of a Compound Interest Bond may
be limited to an amount equal to the then outstanding principal amount of the
Compound Interest Bond plus accrued interest to the date of actual payment.
For CASH OR ACCRETION BOND SERIES and SELECT SERIES, principal and interest
payments received by a Bond Trustee will generally be used to pay interest on
and the outstanding principal amount of classes of bonds with earlier stated
maturities issued by the issuers of the Compound Interest Bonds before any
principal or interest payments are applied to pay the principal or interest on
the Compound Interest Bonds included in the Portfolio. For GNMA-Collateralized
Bond Series, principal payments received by a Bond Trustee will generally be
used to pay the outstanding principal amount of classes of bonds with earlier
stated maturities issued by the issuers of the Bonds before any principal
payment is applied to pay the principal on the Bonds included in the Portfolio.
Thus, a degree of prepayment protection is provided. For certain Bond issues,
the initial principal payments may be paid into a fund held by the Bond Trustee
and, together with any cash reserves deposited by the issuer which may be used
by the Bond Trustee to make any required payments of principal and interest on
the bonds to the extent cash is not otherwise available, reinvested on behalf of
the bondholders (including the Fund). Whenever, because of the reinvestment rate
of interest, the amount of principal being prepaid or otherwise, the Bond
Trustee does not believe it will have sufficient collateral if all the bonds
remain outstanding, the Bond Trustee will prepay the appropriate amount of bonds
so that the bonds then outstanding will be fully collateralized. The Bonds may
also be redeemed at the option of the issuer under circumstances permitted under
the respective Bond Indentures.
The Fund may be an appropriate medium for investors who desire to
participate in a portfolio of taxable fixed income bonds offering the safety of
capital provided by an investment which is primarily secured by collateral
backed by the guarantees of GNMA, FNMA or FHLMC (see below) and who wish to have
a degree of prepayment protection from the effects of redemption by the issuers
of similar securities due to the call protection features of the Bonds.
The Bond Indentures require that the collateral for the Bonds of each
issuer include Ginnie Maes, Fannie Maes or Freddie Macs with a principal amount
which, together with any other collateral for the bonds held by the Bond Trustee
for payments of principal on the bonds, will be at least equal to the aggregate
unpaid principal amount of the bonds, and for the Ginnie Maes, Fannie Maes or
Freddie Macs and other collateral held by the Bond Trustee for the bonds to
produce a cash flow sufficient to make interest payments required to be made on
the outstanding bonds until the earlier of the maturity of the bonds or their
redemption. The foregoing assumes that there will be timely payment of principal
and interest on the Ginnie Maes, Fannie Maes or Freddie Macs, that the issuers
and the Bond Trustees will comply with the provisions of the Bond Indentures,
and that collateral
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for the Bonds of each issuer is invested by the Bond Trustee in a manner which
will produce the return anticipated at the time such investments are made.
Frequently, as a condition to the issuance of a rating on the bonds, the rating
agency will require the issuer to deposit excess collateral with the Bond
Trustee to insure the availability of funds to make payments on outstanding
bonds. This other collateral may include cash reserves or letters of credit
which may be drawn upon to satisfy cash requirements. Thus, the Sponsors believe
that the Bonds will be fully collateralized at all times.
GNMA. For a description of GNMA and Ginnie Maes, see above under First GNMA
Series.
FNMA. The Federal National Mortgage Association ('FNMA') is a Federally
chartered, privately owned corporation organized and existing under the Federal
National Mortgage Association Charter Act. It is the nation's largest supplier
of residential mortgage funds. FNMA was originally established in 1938 as a
United States government agency to provide supplemental liquidity to the
mortgage market but was transformed into a stockholder owned and privately
managed corporation by legislation enacted in 1968. The Secretary of Housing and
Urban Development exercises general regulatory power over FNMA. Although the
Secretary of the Treasury has discretionary authority to lend FNMA up to $2.25
billion outstanding at any time, neither the United States nor any agency
thereof is obligated to finance FNMA's obligations or to assist FNMA in any
other matter, and obligations issued by FNMA are not guaranteed by and do not
constitute a debt or obligation of the United States or of any agency or
instrumentality thereof other than FNMA. FNMA provides funds to the mortgage
market primarily by purchasing home mortgage loans from local lenders, thereby
replenishing funds for additional lending. FNMA acquires funds to purchase home
mortgage loans from many capital market investors which may not ordinarily
invest in mortgages, thereby expanding the total amount of funds available for
housing.
FNMA Pass-throughs ('Fannie Maes'). Fannie Maes are certificates of
beneficial interest evidencing pro rata undivided ownership interests in pools
of residential mortgages either previously owned by FNMA or purchased by it in
connection with the formation of a pool. FNMA guarantees the full and timely
payment of principal and interest (adjusted to the pass-through rate) on the
mortgage loans in the pool, whether or not received by FNMA or recovered by it
in foreclosure. If FNMA were unable to fulfill its guaranty, distributions to
holders of FNMA Certificates would consist solely of payments and other
recoveries upon the underlying mortgages, and, accordingly, delinquencies and
defaults would diminish distributions to the holders.
FHLMC. The Federal Loan Mortgage Corporation ('FHLMC') is a corporate
instrumentality of the United States created pursuant to the Emergency Home
Finance Act of 1970 (the 'FHLMC Act'). The principal activity of FHLMC consists
of the purchase of the first lien, fixed rate conventional mortgage loans and
participations therein and the resale of these loans as participation
certificates. Mortgage loans retained by FHLMC are financed by debt and equity
capital.
FHLMC PCs ('Freddie Macs'). Freddie Macs represent an undivided interest in
identified pools of residential mortgages (a 'FHLMC Certificate group')
purchased by FHLMC. Each mortgage loan must meet the applicable standards set
forth in the FHLMC Act. A FHLMC Certificate group may include whole loans,
participation interests in whole loans and undivided interest in whole loans or
participations comprising another FHLMC Certificate group. FHLMC guarantees the
full and timely payment of interest at the rate provided for by Freddie Macs on
the unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate group represented by the Freddie Mac, whether or not received.
FHLMC also guarantees collection of all principal on the underlying mortgage
loans, without any offset or deduction, but does not guarantee the timely
payment of scheduled principal. Freddie Macs are not guaranteed by the United
States or by any Federal Home
17
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Loan Bank and do not constitute debts or obligations of the United States or any
Federal Home Loan Bank. The obligations of FHLMC under its guarantee are
obligations solely of FHLMC and are not backed by, not entitled to, the full
faith and credit of the United States.
Liquidity. The Bonds in the Portfolio have been registered under the
Securities Act of 1933 and, therefore, may be sold by the Fund at any time to
provide funds for purposes of redemption of Units. However, the Securities are
generally not listed on a national securities exchange or on the National
Association of Securities Dealers Automated Quotation System, Inc. Whether or
not the Securities are listed, the principal trading market for the Securities
will generally 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. 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. However, taking into account the foregoing and other factors,
the Sponsors believe that the Standard & Poor's rating of the Bonds and the
nature of the Ginnie Maes, Fannie Maes or Freddie Macs and other collateral
securing payments of principal and interest due on the Bonds make the Bonds
adequately marketable for purposes of redemptions of Units by the Fund Trustee
(see Redemption).
Limited Assets and Limited Liability. Except as indicated under Investment
Summary in Part A, the issuers of the Bonds generally are limited purpose
corporations organized solely for the purpose of issuing GNMA, FNMA or
FHLMC-collateralized bonds. The issuers thus do not have, nor are they expected
in the future to have, any significant assets other than assets pledged to
secure the GNMA, FNMA or FHLMC-collateralized bonds issued by them. None of the
Bonds are guaranteed by the parent company or any other affiliate of any issuer.
Consequently, holders of the Bonds (including the Fund) must rely upon payments
on the collateral securing Bonds for the payment of principal and interest due.
If the collateral is insufficient to make payments on those Bonds, it is
unlikely that any other asset of the issuer will be available for payment of the
deficiency. The collateral securing the Bonds of each issuer will be held by the
Bond Trustee as security for the bonds of that issuer. Although payment of
principal of, and interest on, Ginnie Maes, Fannie Maes or Freddie Macs securing
the Compound Interest Bonds is guaranteed by GNMA, FNMA or FHLMC, the Bonds
represent obligations solely of the issuers and are not insured or guaranteed by
GNMA, FNMA or FHLMC or any other governmental agency. A default with respect to
the Bonds of a particular issuer may not necessarily result from a corresponding
default with respect to the Ginnie Maes, Fannie Maes or Freddie Macs securing
those Bonds.
Sale of Collateral on Default; Interest Rate Fluctuations. If an event of
default occurs with respect to the Bonds of any issuer and the bonds are
declared due and payable, there can be no assurance that the collateral securing
the bonds will be sufficient to pay the principal and interest then due on the
bonds. The value of the Ginnie Maes, Fannie Maes or Freddie Macs securing the
bonds and the value of the property in which other collateral for the bonds have
been invested in accordance with the respective Bond Indentures ('Eligible
Investments') will fluctuate with changes in prevailing rates of interest
generally. Consequently, the Ginnie Maes, Fannie Maes or Freddie Macs and the
Eligible Investments may have to be liquidated at a discount from par value or
from their purchase price, in which case the proceeds of liquidation might be
less than the outstanding principal and interest due on the bonds. In that
event, the issuer of the bonds may be unable to pay in full the principal and
interest due on the bonds. However, the Bond Indentures generally provide that
the Bond Trustees may, in their discretion if they determine the action to be in
the best interests of the bondholders, refrain from liquidating the collateral
for the bonds if the collateral continues to provide sufficient funds for the
payment of
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principal of, and interest on, the bonds as the principal and interest would
have become due had the bonds not been declared due and payable. The Bond
Trustee would then continue to apply payments received from the Ginnie Maes,
Fannie Maes or Freddie Macs and other collateral to the payment of principal and
interest on the bonds and for other purposes as provided in the respective Bond
Indentures. Furthermore, the Bond Indentures may prohibit the Bond Trustee from
selling the Ginnie Maes, Fannie Maes or Freddie Macs and the other collateral
unless (i) the proceeds from the sale are sufficient to pay in full the
principal and accrued interest on the outstanding bonds of the Issuer at the
date of the sale or (ii) the Bond Trustee determines that the Ginnie Maes,
Fannie Maes or Freddie Macs and the other collateral would not be sufficient on
an ongoing basis to make all payments on the bonds as they would have become due
if the bonds had not been declared immediately due and payable and the Bond
Trustee obtains, pursuant to the requirements of the relevant Bond Indenture,
the consent of the requisite number of holders (including the Fund) of all or
substantially all of the bonds.
Payments Directly to the Issuers and Withdrawals of Collateral. The Bond
Indentures pursuant to which the Bonds were issued may provide either that the
issuer may recalculate the amount of collateral required by the Bond Indenture
and may, under certain circumstances, withdraw excess collateral from the lien
of the Bond Indenture, or that the Bond Trustee may, under certain
circumstances, release to the issuer certain excess proceeds of the collateral
from the lien of the Bond Indenture. Any amount so paid to any issuer will no
longer be subject to the lien of the Bond Indenture or available to make
payments on outstanding Bonds of the issuer.
PREFERRED STOCK AND PREFERRED STOCK PUT SERIES
An investment in Units of the Fund should be made with an understanding of
the risks which an investment in preferred stocks may entail, including the risk
that the value of the Portfolio and hence of the Units will decline with
increases in interest rates. There have been recent wide fluctuations in
interest rates and thus in the value of preferred stocks generally. The Sponsors
cannot predict future economic policies or their consequences, or, therefore,
the course or extent of any similar fluctuations in the future.
Holders of preferred stocks of the type held in the Portfolio have the
right to receive dividends at a fixed or adjustable rate, as the case may be,
when and as declared by the issuer's Board of Directors but do not participate
in other amounts available for distribution by the issuing corporation.
Preferred stock dividends must be paid before common stock dividends and any
cumulative preferred stock dividend omitted is added to future dividends payable
to holders of the cumulative preferred stock before holders of common stock may
receive a dividend. For that reason, preferred stocks entail less risk than
common stocks. Preferred stocks are, however, equity securities in the sense
that they do not represent a liability of the issuer and therefore do not offer
as great a degree of protection of capital or assurance of continued income as
investments in corporate debt securities. In addition, the issuance of debt
securities or senior issues of preferred stock may create prior claims for
payment of principal, interest and dividends which could adversely affect the
ability of the issuer to pay dividends or the rights of holders of preferred
stock with respect to the assets of the issuer upon liquidation.
From time to time Congress considers proposals to reduce the rate of the
dividends-received deduction. Enactment into law of such a proposal would
adversely affect the after-tax return to corporate investors who can take
advantage of the deduction.
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THE FOLLOWING INFORMATION PERTAINS TO THE PREFERRED STOCK PUT SERIES
Sellers
The Securities in these Funds were acquired from one or more savings banks,
savings and loan associations and similar institutions ('thrifts') or insurance
companies or affiliates of any of the foregoing (the 'Seller' or 'Sellers')
which have committed under certain circumstances described below to repurchase
the Securities from the Fund ('purchase commitment'). In view of the fact that
each Security is backed by a purchase commitment of a Seller, an investment in
Units of these Funds should be made with an understanding of the characteristics
of these institutions and of the risks which such an investment may entail.
Historically, thrifts primarily financed residential and commercial real
estate by making fixed-rate mortgage loans and funded those loans from various
types of deposits. Thrifts were restricted as to the types of accounts which
could be offered and the rates that could be paid on those accounts. During
previous periods of high interest rates, large amounts of deposits were
withdrawn as depositors invested in Treasury bills and notes and in money market
funds which provided liquidity and high yields not subject to regulation. As a
result the cost of thrifts' funds exceeded income from mortgage loan portfolios
and other investments, and their financial positions have been adversely
affected. Laws and regulations eliminating interest rate ceilings and
restrictions on types of accounts that may be offered by thrifts were designed
to permit thrifts to compete for deposits on the basis of current market rates
and to improve their financial positions. (See Other Risk Factors--Obligations
of Banks and Other Financial Institutions below for a further discussion of
financial institutions; see general discussion of insurance companies above for
information concerning Sellers who are insurance companies.) However, the Funds
containing Securities purchased from thrifts have been structured so that,
notwithstanding interest rate fluctuations and any consequent changes in the
financial positions of Sellers, investors in the Units should in any event rely
solely on the Collateral for the performance of the purchase commitments.
Accordingly, the Sponsors have structured the collateralization provisions to
afford to investors in the Units security which, in the opinion of the Sponsors,
is reasonably adequate to support the purchase commitments without regard to the
ability of the Sellers to meet these commitments or to provide additional
Collateral if called for. (See Collateralized Purchase Commitments below.)
Investors should recognize that they are subject to having all or part of
the principal amount of their investment returned prior to the termination date
of the Fund if a thrift becomes or is deemed to be insolvent or in any of the
situations outlined under Purchase Commitments below.
The thrift industry has experienced severe strains as demonstrated by the
failure of numerous savings banks and savings and loan associations. One
consequence of this was the insolvency of the deposit insurance fund of the
Federal Savings and Loan Insurance Corporation ('FSLIC'). As a result, in 1989
Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act
('FIRREA') which significantly altered the legal rules and regulations governing
banks and thrifts. Among other things, FIRREA abolished the FSLIC and created a
new agency, the Resolution Trust Corporation ('RTC'), investing it with certain
of the FSLIC's powers. The balance of the FSLIC's powers were transferred to the
Federal Deposit Insurance Corporation ('FDIC'). Under FIRREA, as subsequently
amended in 1990, the RTC was appointed as receiver or conservator of thrifts
that failed between January 1, 1989 and October 1, 1993 if their deposits, prior
to FIRREA, were insured by the FSLIC. The FDIC is to be appointed as receiver or
conservator for all thrifts that fail on or after October 1, 1993. While
legislation that would transfer responsibility for thrifts that were the RTC's
responsibility prior to October
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1, 1993 back to the RTC until as late as March 31, 1995 has been under
consideration in the U.S. Congress, there is no certainty that it will be
enacted in any form.
FIRREA generally permits the FDIC or the RTC, as the case may be, to
prevent the exercise of a Seller's Insolvency purchase commitment and empowers
that agency to repudiate a Seller's contracts, including a Seller's other
purchase commitments. FIRREA also creates a risk that damages against the FDIC
or RTC would be limited and that investors could be left without the full
protections afforded by the Purchase Commitments and the Collateral.
Policy statements adopted by the FDIC and the RTC concerning collateralized
repurchase commitments have substantially ameliorated these risks for the Funds.
According to these policy statements, the FDIC or the RTC, as conservator or
receiver, will not assert the position that it can repudiate the repurchase
commitments without the payment of damages from the collateral, and will instead
either (i) accelerate the collateralized repurchase commitments, in which event
payment will be made under the repurchase commitments to the extent of available
collateral, or (ii) enforce the repurchase commitments, except that any
insolvency clause would not be enforceable against the FDIC and the RTC. Should
the FDIC choose to accelerate, however, there is some question whether the
payment made would include interest on the defaulted Debt Obligations for the
period after the appointment of the receiver or conservator through the payment
date.
Investors should realize that should the FDIC or the RTC make payment under
a Purchase Commitment prior to the scheduled maturity or disposition dates of
the related Debt Obligation their investment will be returned sooner than
originally anticipated.
The possibility of such early payment has been increased significantly by
the enactment in December 1991 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ('FDICIA'). FDICIA requires federal regulators of
insured banks, savings banks, and thrifts to act more quickly to address the
problems of undercapitalized institutions than previously, and specifies in more
detail the actions they must take. One such requirement virtually compels the
appointment of a receiver or conservator for any institution when its ratio of
tangible equity to total assets declines to two percent. Others force aggressive
intervention in the business of an institution at even earlier stages of
deterioration.
Each Seller has made its purchase commitments only with respect to
Securities which that Seller has sold; consequently, if a particular Seller
fails to meet its commitments, no recourse is available against any other
Seller. The Sponsors have agreed that the sole recourse in connection with any
default, including insolvency, by a Seller whose purchase commitments are
collateralized will be to exercise available remedies with respect to that
Seller's Collateral on deposit with the Collateral Agent; should this Collateral
be insufficient, therefore, it will not be possible to pursue any default
judgment against the Seller.
Each Seller that is subject to regulations by the New York Superintendent
of Banks has agreed to provide without charge to each person to whom this
prospectus is delivered, upon written request, a copy of its financial statement
most recently prepared for delivery to depositors in accordance with the banking
laws of the State of New York and the regulations prescribed by the New York
Superintendent of Banks thereunder. Each Seller which is a thrift that is not
subject to regulation by the New York Superintendent of Banks has agreed to
provide without charge to each person to whom this prospectus is delivered, upon
written request, a copy of its most recent audited financial statements. Each
Seller that is an insurance company has agreed to provide without charge to each
person to whom this prospectus is delivered, upon written request, a copy of its
financial
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statements most recently prepared for delivery to policy holders in accordance
with the insurance laws of the jurisdiction under which the Seller is chartered
or otherwise organized and the regulations thereunder, or other applicable laws,
rules and regulations. Written requests should be directed to the Trustee.
Purchase Commitments
Pursuant to a purchase commitment made by each Seller, the Trustee may at
any time not later than two hours after the Evaluation Time on any Purchase Date
(annual for the FIRST THROUGH THIRD PREFERRED STOCK PUT SERIES and semi-annual
for subsequent Preferred Stock Put Series) as set forth under Investment Summary
in Part A (or if a Purchase Date is not a business day, on the next business day
thereafter), deliver written notice requiring the Seller of any Security sold by
it to the Fund to purchase the Security if necessary to satisfy redemptions of
Units (a 'Liquidity Purchase'). Settlement of the purchase of a Security by a
Seller will occur on the seventh calendar day following the Purchase Date (or if
the seventh calendar day is not a business day, on the next business day
thereafter). Additionally, if the Sponsors elect to remarket Units which have
been received at or before the Evaluation Time on any Purchase Date (the
'Tendered Units'), each Seller of the Sixth Preferred Stock Put Series has
committed to purchase from the Fund Securities sold by that Seller to the extent
necessary to satisfy any tenders of Tendered Units for redemption by the
Sponsors between the Evaluation Time and the close of business on the tenth
business day following the Purchase Date. Any such purchase will take place on
the date 15 business days after the Purchase Date.
Each Seller, severally and not jointly, has also made the following
commitments with respect to each Security sold by it: (i) to purchase at any
time on 14 calendar days' notice (seven calendar days' notice for the Sixth
Preferred Stock Put Series) any Security if the issuer should fail to make any
sinking fund or other redemption payments related to the Securities it has
issued or fail to declare and pay a dividend at a rate at least equal to the
dividend rate prescribed for the Preferred Stock at issuance (the 'Stated
Dividend Rate') (a 'Default Purchase'); (ii) to purchase at any time immediately
(on 14 calendar days' notice for the FIRST PREFERRED STOCK PUT SERIES) all
Securities if a Seller becomes or is deemed to be bankrupt or insolvent (an
'Insolvency Purchase'); and (iii) (except with respect to the FIRST PREFERRED
STOCK PUT SERIES) to purchase on 14 calendar days' notice (seven calendar days'
notice for the SIXTH PREFERRED STOCK PUT SERIES) prior to the Final Disposition
Date as listed under Portfolio all Preferred Stocks remaining in the Fund on the
Final Disposition Date (a 'Disposition Purchase'). (With respect to clause (ii)
of the previous sentence, although a bankrupt Seller would likely be incapable
of honoring the Insolvency Purchase commitment, for the SECOND PREFERRED STOCK
PUT AND SUBSEQUENT PUT SERIES the Insolvency Purchase commitment would create
for the Fund an immediate right to the Seller's collateral. The ability of the
Fund to exercise this right is described above under Sellers.)
Any purchase of a Security from the FIRST PREFERRED STOCK PUT SERIES as
described in this paragraph will be at a price (the 'Put Price') equal to the
fair market value of the Preferred Stock together with the Default and
Insolvency Purchase Commitments on the fifty-third day after the Date of
Deposit, as determined by the Evaluator. The Put Price of a Security purchased
from the SECOND THROUGH FIFTH PREFERRED STOCK PUT SERIES as described in this
paragraph will be equal to the cost of that Security to the Fund increased or
decreased by any increase or decrease in the evaluation of that Security without
the purchase commitments between the Date of Deposit and the forty-sixth day
after settlement for purchase of the Preferred Stocks. For the SIXTH PREFERRED
STOCK PUT SERIES, the Put Price for any Liquidity or Disposition Purchase of a
Security will be equal to its original cost to the Fund, while any Default or
Insolvency Purchase will be at its Put Price plus (or minus) the portion of any
discount (or premium) which has accrued (or amortized) to the repurchase date.
With respect to any missed
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dividend, any purchase will also include an amount equal to such missed
dividend. With respect to the FIRST PREFERRED STOCK PUT SERIES, the amount for
any missed dividend will be calculated so that every Holder receives what he
would have received from the payment of the dividend, after taxes and other
applicable charges, were he subject to Federal income taxation at the maximum
tax rate applicable to corporations and entitled to a deduction for dividends
received by the Fund at the maximum percentage applicable to corporations.
If the sale of a Security by the Fund to a third party is necessary to
satisfy redemptions of Units prior to the Security's final redemption or
disposition date, the related Liquidity Purchase and Disposition Purchase
commitments will be transferable and will be exercisable by the buyer free from
the restriction that the annual or semi-annual purchase right may only be
exercised to satisfy redemption of Units. The Default Purchase and Insolvency
Purchase commitments also will not terminate upon disposition of the Security by
the Fund. Prior to the sale of Securities by the Fund to a third party, the
Seller will have the right to purchase the Securities at a price equal to the
greater of the Put Price or the price offered by the third party (then current
market value or may separately pay for the cancellation of all or some of the
purchase commitments related thereto for the FIRST PREFERRED STOCK PUT SERIES).
In addition, with respect to the FIRST PREFERRED STOCK PUT SERIES, under
certain circumstances relating to actions by Federal or state regulatory
authorities, the Seller has the right to substitute a new obligor for the
purchase commitments so long as (i) the Units would continue to be rated AAA by
Standard & Poor's; (ii) the new obligor shall have issued or guaranteed
obligations rated AAA by Standard & Poor's; and (iii) the fair market value of
the Seller's Securities, including its purchase commitments, after the
substitution shall, in the opinion of the Evaluator, remain at least 97.5% of
their fair market value prior to the substitution. As a condition to its sale of
the Securities, the Seller has required that it be permitted to act as agent
with respect to waivers, amendments or other modifications to the Securities
sold by it. As agent, the Seller shall make all decisions regarding amendments
to the Securities sold by it, but prior to taking any action relating to the
face amount, liquidation value, dividend rate or redemption schedule of a
Security, it shall notify the Agent for the Sponsors whether it recommends
approval or rejection of the proposed change. In the event that the Agent for
the Sponsors disapproves of the proposed action, the Seller will have a right to
purchase the Security at a price equal to no less than its Put Price.
Collateralized Purchase Commitments (SECOND AND SUBSEQUENT PREFERRED STOCK PUT
SERIES)
The purchase commitments of each Seller to these Series are secured by a
security interest in 'Eligible Collateral'. Eligible Collateral may consist of
mortgage-backed securities issued by private parties and guaranteed as to full
and timely payment of interest and principal by GNMA or FNMA, mortgage-backed
securities issued and guaranteed as to full and timely payment of interest and
full collection of principal by FHLMC, conventional, FHA insured, VA guaranteed
and privately insured mortgages ('Mortgages'), debt obligations of states and
their political subdivisions and public authorities ('Municipal Obligations'),
debt obligations of public nongovernmental corporations, or in the case of the
SIXTH PREFERRED STOCK PUT SERIES, preferred stocks of such corporations
('Corporate Obligations'), U.S. Government securities and cash. For a
description of GNMA, FNMA and FHLMC obligations, see above under Cash or
Accretion Bond Series and Select Series. The remaining types of Eligible
Collateral are described below. In addition, Eligible Collateral may also
consist of other securities with collateral requirements specified by the
Sponsors. The types of Eligible Collateral and the
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<PAGE>
lowest required percentages of the aggregate market value of each type to the
aggregate Put Prices of the Securities (the 'Collateral Requirements') are as
follows:
TYPE OF ELIGIBLE COLLATERAL REQUIRED PERCENTAGE
- --------------------------------------------------------------------------------
Cash........................................................ 105%
U.S. Governments............................................ 113
GNMA Pass-Throughs.......................................... 145
FNMA Pass-Throughs.......................................... 155
FHLMC PCs................................................... 155
Mortgages................................................... 170
Municipal Obligations....................................... 150
Corporate Obligations--Bonds................................ 155
Corporate Obligations--Preferred Stocks..................... 160
The market value of all collateral other than cash is to be determined no
less often than quarterly. If on any valuation date it is determined that the
aggregate market value of the Eligible Collateral does not satisfy the
applicable Collateral Requirements, additional Eligible Collateral must be
delivered. Eligible Collateral may be withdrawn or substituted at any time,
provided that the remaining or substituted Eligible Collateral meets the
applicable Collateral Requirements. Although the Sponsors believe that the
Collateral Requirements are sufficient to provide a high degree of protection
against loss on the Preferred Stocks, investors in the Units should be aware
that if liquidation of the collateral is required and proves insufficient to
provide for payment in full of the Put Price and any past unpaid dividends on
such Preferred Stocks, then the full amount of their investment could not be
returned.
Mortgages--In order to be eligible as Collateral a Mortgage must either be
insured by FHA or guaranteed by VA or must (i) secure a loan not in excess of
80% of the lesser of the purchase price or appraised value, (ii) be secured by a
first lien on a single-family (one unit) detached structure that at the time of
origination was owner-occupied and designated and intended for use as a primary
residence, (iii) not have had any payment of principal or interest or escrow
payment in arrears for 60 or more days at any time during the twelve months
preceding its pledge date and, as of its pledge date, have no payments more than
30 days due and unpaid, (iv) provide for level monthly payments of principal and
interest for an original term to maturity not in excess of 30 years, (v) bear
interest at a fixed annual rate and (vi) if originated subsequent to January 1,
1977, be written on then-applicable FHLMC/FNMA documentation.
FHA Insurance--The regulations governing the FHA single family programs
under which a Mortgage may be insured provide that a mortgage will be
considered to be in default if the mortgagor fails to make any payment or
perform any other obligation under the mortgage and such failure continues
for a period of thirty days. Insurance benefits are payable to the
mortgagee either upon foreclosure or other acquisition of the property
(which, in either case, may be subject to certain delays) or upon
assignment of the defaulted mortgage to the United States Department of
Housing and Urban Development ('HUD'). Under most FHA insurance programs
for single family residences the Federal Housing Commissioner has the
option of paying insurance claims in cash or in debentures, although
current FHA policy is to pay insurance claims in cash.
VA Guarantee--Claims for the payment of a VA guarantee may be submitted
when any default of the mortgagor continues for a period of three months. A
guarantee may be paid without the mortgagee instituting
24
<PAGE>
foreclosure proceedings or otherwise acquiring title. The maximum amount of
guarantee that may be paid is limited to the lesser of (1) sixty percent
(60%) of the original principal balance of the mortgage loan or (2) $27,500
for mortgage loans made on or after October 7, 1980. The liability on the
guarantee is reduced or increased pro rata with any reduction or increase
in the amount of the indebtedness.
Private Mortgage Insurance--Private mortgage insurance policies
currently being issued by private mortgage insurers approved by FHLMC
contain provisions substantially as follows: (a) the private mortgage
insurer must pay a claim, including unpaid principal, accrued interest and
certain expenses, within 60 days of presentment of the claim by the
insured; (b) in order for the insured to present a claim, the insured must
have acquired, and tendered to the insurer, title to the property free and
clear of all liens and encumbrances including any right of redemption by
the mortgagor; (c) when a claim is presented, the insurer will have the
option of paying the claim in full and taking title to the property and
arranging for its sale or of paying the insured percentage of the claim
(the insured percentages vary but are customarily 20-25% of the claim) and
allowing the insured to retain title to the property; and (d) claims may
also be settled by the insurer at the option of the insured for actual
losses where such losses are less than the insured percentage of the claim.
Delays in Foreclosure--Mortgages insured by FHA or guaranteed by VA are
subject to current Federal regulations which provide that a mortgagee may
not initiate foreclosure proceedings on an FHA insured or VA guaranteed
loan unless at least three full monthly installments are due and unpaid. An
administrative appeal prior to foreclosure is available to a mortgagor,
and, if the mortgagor utilizes this procedure, the foreclosure may be
delayed an additional three months. No delay in the foreclosure action is
required if the property is encumbered by an FHA/VA mortgage and is
abandoned by the mortgagor.
Municipal Obligations--Debt Obligations issued by or on behalf of states or
their political subdivisions or public authorities, bearing interest at a fixed
or variable rate, insured as to timely payments of principal and interest due
and rated at least BBB by Standard & Poor's (or another acceptable rating
agency).
U.S. Government Securities--Direct obligations of the United States that
mature within 30 years at the time of being pledged under the Collateral
Agreement.
Corporate Obligations--Marketable direct obligations of public,
nongovernmental corporations payable in U.S. dollars, bearing dividends or
interest at a fixed or variable rate and rated at least A, or marketable
preferred stocks bearing dividends rated at least BBB, by Standard & Poor's (or
another acceptable rating agency at the time rating the Fund).
Liquidity
All of the Securities in PREFERRED STOCK PUT SERIES were purchased by the
Sponsors from the Sellers and were originally acquired by one of the Sellers in
the ordinary course of its business and held in its investment portfolio or the
portfolios of its subsidiaries prior to the sale of the Sponsors. There may be
no established secondary market for certain of the Securities initially
deposited in the Portfolios of these Series. However, based upon the experience
of the Sponsors in the markets which are established for similar Securities and
based upon the Sponsors' analysis of the market for Securities similar to those
in the Portfolio (including Securities subject to purchase commitments and
'puts' which have been marketed to the public in recent years) for which there
is no established market, the Sponsors believe that there should be a readily
available market among institutional investors for these Securities in the event
it is necessary to sell these Securities to meet redemptions of Units. In
addition, upon the sale of a Security to meet redemptions by the Fund to a third
party prior to the Security's final
25
<PAGE>
redemption or disposition date, the related Liquidity Purchase and any
Disposition Purchase commitment will be exercisable by the buyer free from the
restriction that the annual or semi-annual purchase right may only be exercised
to satisfy redemptions of Units.
Liquidity of the Fund is additionally augmented by the Sellers' Liquidity
Purchase commitments in the event it is necessary to sell any Securities to meet
redemptions of Units. There can be no assurance that the prices that can be
obtained for the Securities at any time in the open market will exceed the Put
Prices of the Securities. In addition, the Evaluator has valued the Securities
due in large part to the existence of the Sellers' Liquidity Purchase and any
Disposition Purchase commitments, which are transferable if the Security is sold
to meet redemptions. Because these Purchase commitments may be called upon
during the life of the Fund, the Securities are comparable to short-term
instruments and carry a yield comparable to instruments of short-term maturity
issued by obligors of similar credit standing.
The Portfolio may consist partly of privately placed issues of Securities.
Any privately placed issues, while not registered under the Securities Act of
1933, have in most cases been held by the Sellers for more than three years and
would therefore generally be transferable in the open market without
registration. Any Securities that are not freely transferable should be readily
marketable to institutional investors. However, if the Sellers should become
unable to honor their purchase commitments and the Trustee is consequently
forced to sell these Securities in the open market, it is possible that the
price realized on this sale of these Securities would be adversely affected by
the absence of an established secondary market for certain of these Securities.
OTHER RISK FACTORS
As set forth under Investment Summary in Part A, the Fund may contain or be
concentrated in one or more of the classifications of obligations referred to
below. An investment in Units of the Fund should be made with an understanding
of the risks which these investments may entail, certain of which are described
below.
Utilities
The ability of utilities to meet their obligations with respect to revenue
bonds issued on their behalf is dependent on various factors, including the
rates they may charge their customers, the demand for a utility's services and
the cost of providing those services. Utilities, in particular investor-owned
utilities, are subject to extensive regulation relating to the rates which they
may charge customers. Utilities can experience regulatory, political and
consumer resistance to rate increases. Utilities engaged in long-term capital
projects are especially sensitive to regulatory lags in granting rate increases.
Any difficulty in obtaining timely and adequate rate increases could adversely
affect a utility's results of operations.
The demand for a utility's services is influenced by, among other factors,
competition, weather conditions and economic conditions. Electric utilities, for
example, have experienced increased competition as a result of the availability
of other energy sources, the effects of conservation on the use of electricity,
self-generation by industrial customers and the generation of electricity by
co-generators and other independent power producers. Also, increased competition
will result if federal regulators determine that utilities must open their
transmission lines to competitors. Utilities which distribute natural gas also
are subject to competition from alternative fuels, including fuel oil, propane
and coal.
The utility industry is an increasing cost business making the cost of
generating electricity more expensive and heightening its sensitivity to
regulation. A utility's costs are influenced by the utility's cost of capital,
the
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availability and cost of fuel and other factors. In addition, natural gas
pipeline and distribution companies have incurred increased costs as a result of
long-term natural gas purchase contracts containing 'take or pay' provisions
which require that they pay for natural gas even if natural gas is not taken by
them. There can be no assurance that a utility will be able to pass on these
increased costs to customers through increased rates. Utilities incur
substantial capital expenditures for plant and equipment. In the future they
will also incur increasing capital and operating expenses to comply with
environmental legislation such as the Clean Air Act of 1990, and other energy,
licensing and other laws and regulations relating to, among other things, air
emissions, the quality of drinking water, waste water discharge, solid and
hazardous substance handling and disposal, and siting and licensing of
facilities. Environmental legislation and regulations are changing rapidly and
are the subject of current public policy debate and legislative proposals. It is
increasingly likely that some or many utilities will be subject to more
stringent environmental standards in the future that could result in significant
capital expenditures. Future legislation and regulation could include, among
other things, regulation of so-called electromagnetic fields associated with
electric transmission and distribution lines as well as emissions of carbon
dioxide and other so-called greenhouse gases associated with the burning of
fossil fuels. Compliance with these requirements may limit a utility's
operations or require substantial investments in new equipment and, as a result,
may adversely affect a utility's results of operations.
The electric utility industry in general is subject to various external
factors including (a) the effects of inflation upon the costs of operation and
construction, (b) substantially increased capital outlays and longer
construction periods for larger and more complex new generating units, (c)
uncertainties in predicting future load requirements, (d) increased financing
requirements coupled with limited availability of capital, (e) exposure to
cancellation and penalty charges on new generating units under construction, (f)
problems of cost and availability of fuel, (g) compliance with rapidly changing
and complex environmental, safety and licensing requirements, (h) litigation and
proposed legislation designed to delay or prevent construction of generating and
other facilities, (i) the uncertain effects of conservation on the use of
electric energy, (j) uncertainties associated with the development of a national
energy policy, (k) regulatory, political and consumer resistance to rate
increases and (l) increased competition as a result of the availability of other
energy sources. These factors may delay the construction and increase the cost
of new facilities, limit the use of, or necessitate costly modifications to,
existing facilities, impair the access of electric utilities to credit markets,
or substantially increase the cost of credit for electric generating facilities.
In addition, there are various proposals for a new energy tax before Congress.
The Sponsors cannot predict at this time the ultimate effect of such factors on
the ability of any issuers to meet their obligations with respect to Debt
Obligations.
The National Energy Policy Act ('NEPA'), which became law in October, 1992,
makes it mandatory for a utility to permit non-utility generators of electricity
access to its transmission system for wholesale customers, thereby increasing
competition for electric utilities. NEPA also mandated demand-side management
policies to be considered by utilities. NEPA prohibits the Federal Energy
Regulatory Commission from mandating electric utilities to engage in retail
wheeling, which is competition among suppliers of electric generation to provide
electricity to retail customers (particularly industrial retail customers) of a
utility. However, under NEPA, a state can mandate retail wheeling under certain
conditions.
There is concern by the public, the scientific community, and the U.S.
Congress regarding environmental damage resulting from the use of fossil fuels.
Congressional support for the increased regulation of air, water, and soil
contaminants is building and there are a number of pending or recently enacted
legislative proposals which may affect the electric utility industry. In
particular, on November 15, 1990, legislation was signed into law that
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substantially revises the Clean Air Act (the '1990 Amendments'). The 1990
Amendments seek to improve the ambient air quality throughout the United States
by the year 2000. A main feature of the 1990 Amendments is the reduction of
sulphur dioxide and nitrogen oxide emissions caused by electric utility power
plants, particularly those fueled by coal. Under the 1990 Amendments the U.S.
Environmental Protection Agency ('EPA') must develop limits for nitrogen oxide
emissions by 1993. The sulphur dioxide reduction will be achieved in two phases.
Phase I addresses specific generating units named in the 1990 Amendments. In
Phase II the total U.S. emissions will be capped at 8.9 million tons by the year
2000. The 1990 Amendments contain provisions for allocating allowances to power
plants based on historical or calculated levels. An allowance is defined as the
authorization to emit one ton of sulphur dioxide.
The 1990 Amendments also provide for possible further regulation of toxic
air emissions from electric generating units pending the results of several
federal government studies to be conducted over the next three to four years
with respect to anticipated hazards to public health, available corrective
technologies, and mercury toxicity.
Electric utilities which own or operate nuclear power plants are exposed to
risks inherent in the nuclear industry. These risks include exposure to new
requirements resulting from extensive federal and state regulatory oversight,
public controversy, decommissioning costs, and spent fuel and radioactive waste
disposal issues. While nuclear power construction risks are no longer of
paramount concern, the emerging issue is radioactive waste disposal. In
addition, nuclear plants typically require substantial capital additions and
modifications throughout their operating lives to meet safety, environmental,
operational and regulatory requirements and to replace and upgrade various plant
systems. The high degree of regulatory monitoring and controls imposed on
nuclear plants could cause a plant to be out of service or on limited service
for long periods. When a nuclear facility owned by an investor-owned utility or
a state or local municipality is out of service or operating on a limited
service basis, the utility operator or its owners may be liable for the recovery
of replacement power costs. Risks of substantial liability also arise from the
operation of nuclear facilities and from the use, handling, and possible
radioactive emissions associated with nuclear fuel. Insurance may not cover all
types or amounts of loss which may be experienced in connection with the
ownership and operation of a nuclear plant and severe financial consequences
could result from a significant accident or occurrence. The Nuclear Regulatory
Commission (the 'NRC') has promulgated regulations mandating the establishment
of funded reserves to assure financial capability for the eventual
decommissioning of licensed nuclear facilities. These funds are to be accrued
from revenues in amounts currently estimated to be sufficient to pay for
decommissioning costs.
Telecommunications. The Portfolio may contain obligations of companies
engaged in providing local, long-distance and cellular services, in the
manufacture of telecommunications products and in a wide range of other
activities including directory publishing, information systems and the operation
of voice, data and video telecommunications networks. Technological innovations
in fiber optics, cellular products and services, voice messaging, call waiting
and automatic dialing offer additional potential for significant expansion.
Advances like formation of a national cellular grid should also contribute to
the anticipated growth of this industry. The Fund may contain obligations of the
Regional Bell Holding Companies ('RBOCs') which were spun off from AT&T in 1984
pursuant to approval of the U.S. District Court for the District of Columbia
(the 'Court'), implementing a consent decree relating to antitrust proceedings
brought by the U.S. Department of Justice. The RBOCs include: Ameritech
Corporation, Bell Atlantic Corporation, BellSouth Corporation, NYNEX
Corporation, Pacific Telesis Group, Southwestern Bell Corporation and U.S. West,
Inc. These companies provide near monopoly local and intrastate telephone
service as well as cellular and other generally unregulated services. The Fund
may contain
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obligations of certain independent telephone companies which are subject to
regulation by the Federal Communications Commissions (the 'FCC') and state
utility commissions but not subject to the consent decree binding the RBOCs and
AT&T or of certain long-distance telecommunications carriers, certain tele-
communications equipment manufacturers or of U.S. companies which provide
telecommunitions services or equipment mainly outside the United States.
International communications facilities in the United States are also subject to
the jurisdiction of the FCC, and the provision of service to foreign countries
is subject to the approval of the FCC and the appropriate foreign governmental
agencies.
In accordance with the consent decree, the RBOCs provide local telephone
service, including exchange access for long-distance companies, and may provide
directory advertising and new customer equipment. Many of the RBOCs, pursuant to
waivers, may also engage in a broad range of businesses including foreign
consulting, servicing computers and marketing or leasing office equipment. AT&T
provides interexchange long distance telephone service in competition with
numerous other providers and certain other products, services and customer
equipment.
The Court's order approving the consent decree provided for periodic
reviews of the restrictions imposed by it. In April 1990, a Federal appeals
court directed the Court to review its ruling that restricts RBOC involvement in
the information services business and to determine whether removal of the
information services restriction would be in the public interest. On July 25,
1991, the Court lifted the information services ban. Other portions of the
consent decree are being litigated. As RBOCs are released from the restrictions
of the 1984 divestiture decree, they and other telephone companies are being
freed to create new products, services and businesses. For example, a federal
district court recently permitted Bell Atlantic to enter the cable business and
it has recently proposed a merger with Tele-Communications, Inc., a large cable
corporation. Bills have been introduced in the U.S. House of Representatives and
the Senate that would require the RBOCs to pass a competitive market test that
would block them from offering information services in the near future.
The independent telephone companies, like the RBOCs, provide local
telecommunications services, but operate in a more limited area. These companies
are not subject to the consent decree and therefore can provide the full range
of telecommunications services including local exchange services, the
installation of business systems, telephone consulting, the manufacture of
telecommunications equipment, operation of voice and data networks and directory
publishing. Cellular service is providing an increasing component of the
revenues of the RBOCs and independent telephone companies. Both the RBOCs and
independents are subject to regulation by the FCC and state regulatory
authorities. The FCC also has the power to regulate the types of
telecommunications equipment which may be used and therefore may affect the
business of companies in the manufacturing of telecommunications equipment.
Long-distance companies which provide long-distance telecommunications services
are subject to regulation by the FCC. The long-distance industry is
consolidating into larger carriers.
Certain telecommunications services have in the past been fairly resistant
to recession with the exception of long-distance carriers. During the recession
of 1982-83, growth in access lines simply slowed down for the independent
telephone companies and only one of the predecessor Bell operating companies
experienced such a downturn. The Sponsors believe that companies in the
telephone business may remain resistant to recession the next few years and may
experience some growth in access lines and message units. Cellular telephone
service should continue to expand, although at lesser rates of growth than in
the recent past. Also, ongoing technological change may lead to an increase in
the development of new services such as voice messaging, call screening and
automatic dialing and the demand for business services such as the use of fax
machines and the movement of data
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information should continue to grow. Of course, there can be no assurance that
dividends on the Stocks in the Fund will be increased or maintained.
Business conditions in the telecommunications industry may affect the
performance of the Fund. The FCC and certain state utility regulators have
introduced certain incentive plans such as price-cap regulation which apply to
certain portions of the business of certain local exchange carriers. Price-cap
regulation offers local exchange carriers an opportunity to share in higher
earnings provided they become more efficient. These new approaches to regulation
by the FCC and various state or other regulatory agencies result in increased
competition and could lead to greater risks as well as greater rewards for
operating telephone companies such as those in the Fund. Technology has tended
to offset the effects of inflation and is expected to continue to do so. Under
traditional regulation, continuing cost increases, to the extent not offset by
improved productivity and revenues from increased volume of business, would
result in a decreasing rate of return and a continuing need for rate increases.
Although allowance is generally made in ratemaking proceedings for cost
increases, delays may be experienced in obtaining the necessary rate increases
through these proceedings and there can be no assurance that these regulatory
commissions in the future will grant rate increases adequate to cover operating
and other expenses and debt service requirements. The long-distance industry has
been increasingly opened to competition over the last number of years. As a
result, the major long-distance companies compete actively for market share.
Indeed, to meet increasing competition, telecommunications companies will have
to commit substantial capital, technological and marketing resources.
Cellular and cable companies provide wireless services including paging,
dispatch and cellular services throughout the U.S. Most of the RBOCs, as well as
long distance companies, are seeking to increase their share of the cellular
market in view of perceived future growth prospects. It is unclear what effect,
if any, increased competition between wireless and traditional services will
have on the telecommunications industry including proposed mergers between Bell
Atlantic and Tele-Communications, Inc. and the competing bids by QVC and Viacom
for Paramount Communications. Other potential competition for local service has
also developed. The deregulated cellular telephone industry has a limited
operating history and there is significant uncertainty regarding its future,
particularly with regard to increased competition, the continued growth in the
number of customers, the usage and pricing of cellular services, and the cost of
providing cellular services, including the cost of attracting new customers,
developing new technology and the ability to obtain licenses to provide cellular
services. Recent industry developments, such as the proposed purchase of McCaw
Cellular Communications Inc., the largest U.S. cellular carrier, by AT&T, may
provide increased competition and reduced revenues from cellular service for
RBOCs and independent telephone companies. The uncertain outcomes of future
labor agreements and employee and retiree benefit costs may also have a negative
impact on profitability. Telephone usage, and therefore revenues, could also be
adversely affected by any sustained economic recession. Each of these problems
would adversely affect the profitability of the telecommunications issuers of
the Securities, the value of the Securities and the ability of the issuers of
the Securities to meet their obligations.
Telecommunications equipment companies design, manufacture, and distribute
telecommunication equip-
ment such as central office switching equipment, switches, displays, mobile and
cellular equipment and systems, network transmission equipment, PBXs, satellite,
microwave, antennas, and digital communication networks. Growth of these
companies may result from telephone service industry expansion, modernization
requirements and possible new technology such as interactive television. As less
developed countries modernize their telecommunications infrastructure, the
demand for these products increases. This segment of the industry is
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subject to rapidly changing technology and the risk of technological
obsolescense. This sector of the industry is generally not subject to regulation
as other telecommunications issuers are.
In addition, the portfolio may contain securities issued by telephone
companies which provide telecommunications services or equipment outside the
United States; these companies are subject to regulation by foreign governments
or governmental authorities which have broad authority regulating the provision
of telecommunications services and the use of certain telecommunication
equipment. Consequently, certain Securities in the Fund may be affected by the
rules and regulations adopted by regulatory agencies in other countries from
time to time. In addition, foreign telecommunications companies state earnings
and pay dividends in a non-United States currency. Therefore, the United States
dollar value of the stock and dividends of these companies will vary with
fluctuations in the United States dollar foreign exchange rates for the relevant
currencies. Also, investment risks will include future political and economic
development, the establishment of exchange controls or other governmental
restrictions that might adversely affect the payment or receipt of payment of
dividend on, or the value of, the relevant securities.
Banks and Other Financial Institutions
Banks are subject to extensive governmental regulations which may limit
both the amounts and types of loans and other financial commitments which may be
made and interest rates and fees which may be charged. The profitability of
financial institutions is largely dependent upon the availability and cost of
funds for the purpose of financing lending operations under prevailing money
market conditions. General depositor worries over perceived risks at many banks
may keep funding costs unusually high. Also, general economic conditions play an
important part in the operations of this industry and exposure to credit losses
arising from possible financial difficulties of borrowers might affect an
institution's ability to meet its obligations.
Since the late 1980s, the ratings of U.S. and foreign banks and holding
companies were subject to extensive downgrades due primarily to deterioration in
asset quality and the attendant impact on earnings and capital adequacy. Major
U.S. banks, in particular, suffered from a decline in asset quality in the area
of loans to Lesser Developed Countries ('LDCs'), construction and commercial
real-estate loans and lending to support Highly Leveraged Transactions ('HLTs').
LDC and HLT problems have been largely addressed, although construction and
commercial real estate loans remain areas of some concern. The FDIC indicated
that in 1990 168 federally insured banks with an aggregate total of $15.7
billion in assets failed, and that in 1991 124 federally insured banks with an
aggregate total of $64.3 billion in assets failed. During 1992, the FDIC
resolved 120 failed banks with combined assets of $44.2 billion. Consumer loans
would almost certainly begin to deteriorate should economic and employment
conditions worsen. These factors also affect bank holding companies and other
financial institutions, which may not be as highly regulated as banks and may be
more able to expand into other non-financial and non-traditional businesses.
The Resolution Trust Corporation Refinancing, Restructuring and Improvement
Act of 1991 and FDICIA imposed many new limitations on the way in which banks,
savings banks, and thrifts may conduct their business and mandated early and
aggressive regulatory intervention for unhealthy institutions. Periodic efforts
by recent Administrations to introduce legislation broadening the ability of
banks and thrifts to compete with new products have not been successful, but if
enacted could lead to more failures as a result of increased competition and
added risks. Failure to enact such legislation, on the other hand, may lead to
declining earnings and an inability to compete with unregulated financial
institutions. Efforts to expand the ability of federal thrifts to branch on an
interstate basis have been initially successful through promulgation of
regulations, but legislation to liberalize
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interstate branching for banks has been stalled in the Congress. Consolidation
is likely to continue in both cases. The Securities and Exchange Commission
('SEC') is attempting to require the expanded use of market value accounting by
banks and thrifts, and has imposed rules requiring market accounting for
investment securities held for sale. Adoption of additional such rules may
result in increased volatility in the reported health of the industry, and
mandated regulatory intervention to correct such problems.
Hospitals and Health Care Facilities
The ability of hospitals and other health care facilities to meet their
obligations with respect to revenue bonds issued on their behalf is dependent on
various factors, including the level of payments received from private
third-party payors and government programs and the cost of providing health care
services.
A significant portion of the revenues of hospitals and other health care
facilities is derived from private third-party payors and government programs,
including the Medicare and Medicaid programs. Both private third-party payors
and government programs have undertaken cost containment measures designed to
limit payments made to health care facilities. Furthermore, government programs
are subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which may
materially decrease the rate of program payments for health care facilities.
There can be no assurance that payments under governmental programs will remain
at levels comparable to present levels or will, in the future, be sufficient to
cover the costs allocable to patients participating in such programs. In
addition, there can be no assurance that a particular hospital or other health
care facility will continue to meet the requirements for participation in such
programs.
The costs of providing health care services are subject to increase as a
result of, among other factors, changes in medical technology and increased
labor costs. In addition, health care facility construction and operation is
subject to federal, state and local regulation relating to the adequacy of
medical care, equipment, personnel, operating policies and procedures,
rate-setting, and compliance with building codes and environmental laws.
Facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with the various standards necessary
for licensing and accreditation. These regulatory requirements are subject to
change and, to comply, it may be necessary for a hospital or other health care
facility to incur substantial capital expenditures or increased operating
expenses to effect changes in its facilities, equipment, personnel and services.
Hospitals and other health care facilities are subject to claims and legal
actions by patients and others in the ordinary course of business. Although
these claims are generally covered by insurance, there can be no assurance that
a claim will not exceed the insurance coverage of a health care facility or that
insurance coverage will be available to a facility. In addition, a substantial
increase in the cost of insurance could adversely affect the results of
operations of a hospital or other health care facility. The Clinton
Administration may impose regulations which could limit price increases for
hospitals, the level of reimbursements for third-party payors or other measures
to reduce health care costs and make health care available to more individuals,
which would reduce profits for hospitals. Some states, such as New Jersey, have
significantly changed their reimbursement systems. If a hospital cannot adjust
to the new system by reducing expenses or raising rates, financial difficulties
may arise. Also, Blue Cross has denied reimbursement for some hospitals for
services other than emergency room services. The lost volume would reduce
revenue unless replacement patients were found.
Certain hospital bonds may provide for redemption at par at any time upon
the sale by the issuer of the hospital facilities to a non-affiliated entity, if
the hospital becomes subject to ad valorem taxation, or in various
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other circumstances. For example, certain hospitals may have the right to call
bonds at par if the hospital may be legally required because of the bonds to
perform procedures against specified religious principles or to disclose
information that it considers confidential or privileged. Certain FHA-insured
bonds may provide that all or a portion of those bonds, otherwise callable at a
premium, can be called at par in certain circumstances. If a hospital defaults
upon a bond obligation, the realization of Medicare and Medicaid receivables may
be uncertain and, if the bond obligation is secured by the hospital facilities,
legal restrictions on the ability to foreclose upon the facilities and the
limited alternative uses to which a hospital can be put may severely reduce its
collateral value.
The Internal Revenue service is currently engaged in a program of intensive
audits of certain tax-exempt hospital and health care facility organizations.
Although these audits have not yet been completed, it has been reported that the
tax-exempt status of some of these organizations will be revoked. At this time,
it is uncertain whether any of the hospital and health care facility obligations
held by the Fund will be affected by such audit proceedings.
Retailing Companies
The profitability of companies engaged in the retailing industry will be
affected by various factors including the general state of the economy and
consumer spending trends. There have been major changes in the retail
environment in recent years due to the declaration of bankruptcy by some of the
major corporations involved in the retail industry, and the department store
segment in particular. The continued viability of the retail industry will
depend on the industry's ability to adapt and to compete in changing economic
and social conditions, to attract and retain capable management, and to finance
expansion. Continued weakness in the banking and real estate industry, the
current recessionary economic climate with the consequent slowdown in employment
growth, less favorable trends in unemployment and a marked deceleration in real
disposable personal income growth has resulted in significant pressure on both
consumer wealth and consumer confidence. In addition, competitiveness of the
retail industry will require large capital outlays for investment in the
installation of automated checkout equipment to control inventory, to track the
sale of individual items and to gauge the success of sales campaigns. Increasing
employee and retiree benefit costs may also have an adverse effect on the
industry.
Consumer Products Companies
Investment in securities issued by consumer products companies should be
made with an understanding of the many factors which may have an adverse impact
on the credit quality of the particular company or industry. These include
cyclicality of revenues and earnings, changing consumer demands, regulatory
restrictions, products liability litigation and other litigation resulting from
accidents, extensive competition (including that of low-cost foreign companies),
unfunded pension fund liabilities and employee and retiree benefit costs and
financial deterioration resulting from leveraged buy-outs, takeovers or
acquisitions. In general, expenditures on consumer products will be affected by
the economic health of consumers. A continuing weak economy with its consequent
effect on consumer spending would have an adverse effect on the industry. Other
factors of particular relevance to the profitability of the industry are the
effects of increasing environmental regulation on packaging and on waste
disposal, the continuing need to conform with foreign regulations governing
packaging and the environment, the outcome of trade negotiations and their
effect on foreign subsidies and tariffs, foreign exchange rates, the price of
oil and its effect on energy costs, inventory cutbacks by retailers,
transportation and distribution costs, health concerns relating to the
consumption of certain products, the effect of demographics on consumer demand,
the availability and cost of raw materials and the ongoing need to develop new
products and to improve productivity.
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Real Estate Companies
Investment in securities issued by real estate companies should be made
with an understanding of the many factors which may have an adverse impact on
the credit quality of the particular company or industry. These include economic
recession, competitive overbuilding, unusually adverse weather conditions,
changing demographics, changes in government regulations (including tax laws and
environmental, building zoning and sales regulation by various federal, state
and local authorities), increases in real estate taxes or costs of material and
labor, the inability to secure performance guarantees as required and the
unavailability of construction financing or mortgage loans at rates acceptable
to builders and home buyers.
In particular, commercial real estate was especially hard hit by the crisis
in the savings and loan industry. The collapse of hundreds of lending
institutions has removed many of the most aggressive lenders and investors, and
most of the remaining institutions have become wary of new real estate loans.
Furthermore, FIRREA places restrictions on developers through limiting the
amount of acquisition, development and construction lending by financial
institutions. This restriction in credit to the real estate industry is reducing
asset prices and further restricting demand for new construction. At present,
vacancy rates for apartments and commercial buildings remain high, which also
depresses the demand for new construction. According to the U.S. Department of
Commerce, growth in white collar employment is likely to slow over the next
several years, due to demographic reasons and this factor will tend to keep
office vacancy rates high. In addition, The Fair Housing Act of 1988, which
requires a certain portion of apartments in newly constructed buildings be made
accessible to the handicapped, is expected to increase costs and reduce overall
profit margins for these projects. According to the U.S. Department of Commerce,
the commercial real estate slump is likely to persist for several years.
Manufacturing Companies
Growth in the manufacturing industry is closely linked to expansion in the
domestic and global economies. The ongoing global recession with its consequent
effect on industrial growth, employment and consumer spending in addition to any
increase in oil prices or in interest rates may lead to a decrease in demand for
the products of companies engaged in manufacturing industrial and automotive
products. Also, since the federal government and many state, local and foreign
governments now have a budget deficit, financial expenditures by these entities
on capital improvements may be extremely limited. The lack of funds allocated by
public entities to capital improvement projects may adversely affect
manufacturers engaged in the production of industrial materials used for capital
improvements or for the upgrade of the infrastructure. Indeed, government
contracts with certain issuers may contain unfavorable provisions, including
provisions allowing the government to terminate these contracts without prior
notice, or to audit and redetermine amounts payable to the issuer pursuant to
these contracts or to require the issuer to pay for cost overruns. Additionally,
legislation to limit excess profits on government contracts is introduced in the
United States Congress from time to time. Cutbacks in defense spending by the
federal and foreign governments has adversely impacted many of the companies
engaged in the aerospace and arms/defense sectors of the manufacturing industry.
Environmental and safety issues increasingly affect the manufacturing
industry. Issuers may experience decreases in profitability as legislative
mandates impose costs associated with compliance with environmental regulations
and manufacturing more environmentally sound and safer equipment. Furthermore,
the cost of product liability insurance and the inability of some manufacturing
companies to obtain this insurance may have an adverse impact on the industry.
Financial Accounting Standard Board regulations with regard to accounting for,
among other things, post retirement benefits may lead to changes in accounting
which could have significant
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negative effects on reported earnings and reported long term liabilities and
book value of some manufacturing companies. The lack of demand for new home and
office construction will affect the demand for certain tools and industrial
machinery products. Inflation, slow growth in personal disposable income,
tighter loan qualification standards, higher downpayments, the lower rate of job
creation, increased cost of vehicle ownership and operation and oil prices will
also affect companies engaged in manufacturing, particularly in the automotive
industry. Shortages of skilled labor, particularly in the machine tools
industry, may become a major problem in the future.
The long-term outlook is largely dependent upon the growth and
competitiveness of the U.S. manufacturing base. Increased consolidation and
merger activity increases competitiveness in general but individual companies
may experience severe financial problems due to this increased competitiveness.
Strong competition from foreign nations, particularly Latin American and Pacific
Rim countries which have lower labor costs, will severely impact the
profitability of the U.S. manufacturing business. The continuing establishment
of manufacturing and sales facilities abroad to take advantage of international
marketing operations is crucial and the success of these foreign operations
could be affected by a strengthening of the dollar which could lead to a
decrease in demand for U.S. products, the outcome of trade negotiations which
will affect foreign tariffs on U.S. exports abroad and U.S. taxes on foreign
imports to the U.S. and the ability to provide attractive financing packages to
customers in the current tight credit market.
U.S. manufacturers may also experience increased outlays of capital in
their efforts to manufacture products which comply with foreign standards for
certain manufacturing products. Also, since contracts may often be concluded
with entities or governments of unstable foreign nations in, for example,
Eastern Europe, South America or the Middle East, completion of and payment for
certain products and services will be subject to the risks associated with
political instability such as the risk of insurrection, hostilities from the
local population, government policies against businesses owned by non-nationals
and the possibility of expropriation. Certain of these nations may not honor
obligations under contracts when payments are due. Furthermore, it may be more
difficult to enforce a judgment against a foreign contracting party.
Natural Resource Companies
Investment in securities issued by companies primarily engaged in the
extraction or sale of natural resources should be made with an understanding of
the many factors which may have an adverse impact on the credit quality of the
particular company or industry. These include declining prices for natural
resource products, over-supply, regulation throughout the world of production
(including price control regulation in the United States by state and federal
agencies), federal, state and local environmental laws and regulations,
extensive competition for reserve acquisitions and exploration leases, licenses
and concessions, litigation resulting from accidents or environmentally-caused
illnesses and unavailability of exploration financing.
In particular, the impact of increasing environmental regulation with
legislation such as the Clean Air Act and the Resource Conservation and Recovery
Act, among others, in addition to the increasing pressure to withdraw land from
the mining and forestry industries due to environmental and conservation
concerns may adversely affect companies engaged in the natural resource
industries. Other issues which affect these industries are the possibility of
labor stoppages through strikes, the impact of regulation of worker conditions
by the Occupational Safety and Health Administration, the imposition of taxes on
the extraction of certain materials, fluctuations in the price of oil, the cost
of raw materials, the slump in the construction industry and the consequent
decrease in the demand for wood products, intellectual property disputes, the
time lapse between
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<PAGE>
exploration and the commencement of mining which may discourage continued
investment in exploration in the future, international competition, foreign
exchange rates and the outcome of trade negotiations.
Foreign Obligors
On the basis of the best information available to the Sponsors, except as
indicated in Part A, under existing law there are no withholding taxes
applicable to any foreign Debt Obligations in the Portfolio. Issues of foreign
obligors may involve investment risks that are different from those of domestic
issues, including fluctuations in the value of the U.S. dollar and foreign
currencies, future political and economic developments and the possible
imposition of withholding taxes on interest income payable on the Debt
Obligations and the possible imposition of exchange controls or other foreign
governmental restrictions (including expropriation, burdensome or confiscatory
taxation and moratoriums) which might adversely affect the payment or receipt of
payment of amounts due on the Debt Obligations. In addition, it may be more
difficult to obtain and enforce a judgment against a foreign obligor, there may
be less publicly available information about a foreign obligor than about
domestic issuers, foreign obligors generally operate in different regulatory
environments than comparable domestic issuers and foreign obligors are not
generally subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
issuers.
PAYMENT OF THE SECURITIES AND LIFE OF THE FUND
Because certain of the Debt Obligations from time to time may be redeemed
or prepaid or will mature in accordance with their terms or may be sold under
certain circumstances described herein, no assurance can be given that the Fund
will retain for any length of time its present size and composition. Many of the
Debt Obligations may be subject to redemption prior to their stated maturity
dates pursuant to optional refunding or sinking fund redemption provisions or
otherwise. Issues of preferred stock generally provide that the preferred stock
may be liquidated, either by a partial scheduled redemption pursuant to a
sinking fund or by a refunding redemption pursuant to which, at the option of
the issuer, all or part of the issue can be retired from any available funds, at
prices which may or may not include a premium over the involuntary liquidation
preference, which is the same as the par or stated value of the Preferred Stocks
except as referred to under Investment Summary in Part A. In general, optional
refunding redemption provisions are more likely to be exercised when the
Securities are valued at a premium over par or stated value than when they are
valued at a discount from par or stated value. Generally, the value of the
Securities will be at a premium over par when market interest rates fall below
the coupon rate. The percentage of the face amount, or par or stated value, of
Securities in the Portfolio which were valued on the Evaluation Date in excess
of par is set forth under Investment Summary in Part A.
Certain Debt Obligations in the Portfolio may be currently subject to
sinking fund provisions. These provisions are designed to redeem a significant
portion of an issue gradually over the life of the issue; obligations to be
redeemed are generally chosen by lot. The Portfolio in Part A contains a listing
of the sinking fund and optional redemption provisions with respect to the Debt
Obligations or Preferred Stocks. In addition, certain issues of mortgage bonds
require that the issuer make either scheduled additions to the property securing
the bonds or deposit cash into a replacement, maintenance or similar fund. Under
certain circumstances the deposited cash may be used to redeem bonds at prices
lower than those permissible for optional redemptions. Additionally, the size
and composition of the Fund will be affected by the level of redemptions of
Units that may occur from time to time and the consequent sale of Securities
(see Redemption). Principally, this will depend upon the number of Holders
seeking to sell or redeem their Units and whether or not the Sponsors continue
to reoffer Units acquired by them in the secondary market. Factors that the
Sponsors will consider in the future in
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determining to cease offering Units acquired in the secondary market include,
among other things, the diversity of the portfolio remaining at that time, the
number of units of all series of funds which they hold in their inventories, the
saleability of the units and their estimate of the time required to sell the
units and general market conditions, the size of the Fund relative to its
original size, the ratio of Fund expenses to income, the Fund's current return
and the degree to which Units may be selling at a premium over par, and the cost
of maintaining a current prospectus for the Fund. These factors may also lead
the Sponsors to seek to terminate the Fund earlier than would otherwise be the
case (see Administration of the Fund--Amendment and Termination).
FIRST GNMA SERIES. Monthly payments and prepayments of principal are made
to the Fund in respect of the mortgages underlying the Ginnie Maes (see Income;
Estimated Current Return; Estimated Long Term Return below). All of the
mortgages in the pools relating to the Ginnie Maes are subject to prepayment
without any significant premium or penalty at the option of the mortgagors (i.e.
the homeowners). While the mortgages on 1-to 4-family dwellings underlying the
Ginnie Maes are amortized over a period of up to 30 years, it has been the
experience of the mortgage industry that the average life of comparable
mortgages, owing to prepayments, is much less. Pricing of GNMA Securities has
been based upon yield assumptions grounded in this historical experience of the
FHA relating to 26-30 year mortgages on 1-to 4-family dwellings at various
interest rates (which, in general, have been lower than the rates of the Ginnie
Maes in the Portfolios.) Yield tables for Ginnie Maes utilize a 12-year average
life assumption for Ginnie Mae pools of 30 year mortgages on 1-to 4-family
dwellings. This assumption was derived from the FHA experience relating to
prepayments on such mortgages during the period from the mid 1950's to the mid
1970's. This 12 year average life assumption was calculated in respect of a
period during which mortgage lending rates were fairly stable. That assumption
is probably no longer an accurate measure of the average life of Ginnie Maes or
their underlying single family mortgage pools. While the mortgages on 1-to
4-family dwellings underlying the FHLMC Certificates are amortized over a period
of up to 15 years, the average life of comparable mortgages, owing to
prepayments, is much less. Freddie Mac's current estimate of the weighted
average life of 30-year conventional mortgages is approximately 8.5 years. The
weighted average life of 15-year conventional mortgages is approximately 6
years. Pricing of FHLMC Certificates has been based upon yield assumptions based
on this estimate. The principal repayment behavior of any individual mortgage
will likely vary from this estimate. The extent of this variation will depend on
a variety of factors, including the relationship between the coupon rate on a
mortgage and prevailing mortgage origination rates. As prevailing mortgage
origination rates increase in relationship to a mortgage coupon rate, the
likelihood of prepayment of that mortgage decreases. Conversely, during periods
in which prevailing mortgage origination rates are significantly less than a
mortgage coupon rate, prepayment of that mortgage becomes increasingly likely.
Freddie Mac revises its weighted average life estimate from time to time to
better reflect both actual and projected payment experience. The bases for the
calculation of the estimated average life and the relationship of this
calculation to Estimated Long Term Return are more fully described below under
Description of the Fund-- Income; Estimated Current Return; Long Term Return.
While the industry estimates that Freddie Mac PCs and Ginnie Maes will
prepay as described herein, it is not possible to predict meaningfully
prepayment levels on those Securities in the Fund. Today, research analysts use
complex formulae to scrutinize the prepayments of mortgage pools in an attempt
to predict more accurately the average life of these mortgage backed securities.
Generally speaking, a number of factors, including mortgage market interest
rates and homeowners mobility, will affect the average life of these Securities.
Changes in prepayment patterns, as reported by the agencies on a periodic basis,
if generally applicable to the mortgage pools related to specific
mortgage-backed securities, could
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<PAGE>
influence yield assumptions used in pricing the securities. Shifts in prepayment
patterns are influenced by changes in housing cycles and mortgage refinancing
and are also subject to certain limitations on the gathering of the data; it is
impossible to predict how new statistics will affect the yield assumptions that
determine mortgage industry norms and pricing of mortgagebacked securities.
Moreover, there is no assurance that the pools of mortgage loans relating to the
Securities in the Fund will conform to prepayment experience as reported by the
agencies on a periodic basis, or the prepayment experience of other mortgage
lenders.
While the value of these mortgage backed securities generally fluctuates
inversely with changes in interest rates, it should also be noted that their
potential for appreciation, which could otherwise be expected to result from a
decline in interest rates, may tend to be limited by any increased prepayments
by mortgagors as interest rates decline. Accordingly, the termination of the
Fund might be accelerated as a result of prepayments made as described above. It
is also possible that, in the absence of a secondary market for the Units or
otherwise, redemptions of Units may occur in sufficient numbers to reduce the
Portfolio to a size resulting in such termination (termination for this reason
would be delayed if additional Units are issued). Early termination of the Fund
or early payments of principal may have important consequences to the Holders.
To the extent that Units were purchased with a view to an investment of longer
duration, the overall investment program of the investor may require
readjustment or the overall return on investment may be less or greater than
anticipated, depending in part on whether the purchase price paid for Units
represented the payment of an overall premium or a discount, respectively, above
or below the stated principal amounts of the underlying mortgages. In this
connection, attention is directed to The GNMA Fund Investment Accumulation
Program and the Reinvestment Plan described below under Administration of the
Fund, which afford to Holders the opportunity to automatically reinvest
distributions of principal resulting from prepayments and termination as
described above (as well as regular payments of interest and distributions of
principal received upon maturity).
CASH OR ACCRETION BOND SERIES AND SELECT SERIES. Periodic payments of
principal and interest on the Ginnie Maes, Fannie Maes or Freddie Macs which
back the Compound Interest Bonds in the Portfolio will be made to the respective
Bond Trustees subsequent to the Payment Commencement Dates of the respective
Compound Interest Bonds. In addition, prepayments of principal on the Ginnie
Maes, Fannie Maes or Freddie Macs will be made to the Bond Trustees and the
Ginnie Maes, Fannie Maes or Freddie Macs may be prepaid in their entirety prior
to their stated maturity. All or a portion of the principal and interest
payments and prepayments received on Ginnie Maes, Fannie Maes or Freddie Macs
included in the collateral for the Bonds deposited in the Fund will be used to
make principal and interest payments on the bonds of the issuer (other than the
Compound Interest Bonds) until the bonds are paid in full. Thereafter, principal
and interest payments will be used to pay principal and interest on the Compound
Interest Bonds. Payments of principal will first be allocated to the holders of
any bonds of the issuer which have the earliest stated maturity. When these
bonds have been fully paid, principal payments will next be allocated to the
holders of the remaining bonds of the issuer in the order of their respective
stated maturities. Bonds may also be redeemed or sold under certain
circumstances (See Redemption; Administration of the Fund--Portfolio
Supervision). Because the principal on the Ginnie Maes, Fannie Maes or Freddie
Macs and the proceeds of any sales of Bonds received by the Fund (less certain
amounts deducted by the Fund Trustee) may be distributed to Holders after an
initial period or paid out upon redemptions, the aggregate principal amount of
the Compound Interest Bonds in the Portfolio, and accordingly the principal
amount of Compound Interest Bonds underlying each Unit, will decrease over time.
(For a description of Ginnie Maes, see above under Risk Factors--First GNMA
Series; for a description of Fannie Maes and Freddie Macs see above under Risk
Factors--Cash or Accretion Bond Series, Select Series and GNMA-Collateralized
Bond Series.)
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As noted above, all of the mortgages in the pools relating to the Ginnie
Maes, Fannie Maes or Freddie Macs are subject to prepayment without any
significant premium or penalty at the option of the mortgagors (i.e., the
homeowners). While the mortgages on the single-family dwellings underlying the
Ginnie Maes and the 1 to 4 family dwellings underlying the Fannie Maes and
Freddie Macs which back the Compound Interest Bonds have a stated maturity of up
to 30 years, it has been the experience of the mortgage industry that the
average life of comparable mortgages, owing to prepayments, is considerably
less. Prepayments on mortgages are commonly measured relative to a prepayment
standard or model (a 'Prepayment Model'), which represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of new mortgage loans. 100% of the Prepayment Model assumes prepayment
rates of 0.2% per annum of the then outstanding principal balance of such
mortgage loans in the first month of the life of the mortgage loans and an
additional 0.2% per annum in each month thereafter until the 30th month.
Beginning in the 30th month and in each month thereafter during the life of the
mortgage loans, 100% of the Prepayment Model assumes a constant prepayment rate
of 6% per annum. The principal repayment behavior of any individual mortgage
will likely vary from these assumptions. The extent of this variation will
depend on a variety of factors, including the relationship between the coupon
rate on a mortgage and prevailing mortgage origination rates. As prevailing
mortgage origination rates increase in relationship to a mortgage coupon rate,
the likelihood of prepayment of that mortgage decreases. Conversely, during
periods in which prevailing mortgage origination rates are significantly less
than a mortgage coupon rate, prepayment of that mortgage becomes increasingly
likely.
By creating separate 'fast pay/slow pay' classes of debt obligations, the
issuers are able to create a class of Compound Interest Bonds for which the
'weighted average life' may exceed the average life of a typical mortgage. A
number of factors, including mortgage market interest rates and homeowners'
mobility, will affect the average life of the Ginnie Maes, Fannie Maes or
Freddie Macs which back the Compound Interest Bonds in the Portfolio and,
accordingly, there can be no assurance that the prepayment levels which will be
actually realized will conform to the Prepayment Model. While the value of
Ginnie Maes, Fannie Maes or Freddie Macs fluctuates inversely with changes in
interest rates, it should also be noted that the potential for appreciation on
Ginnie Maes, Fannie Maes or Freddie Macs, which could otherwise be expected to
result from a decline in interest rates, may tend to be limited by any increased
prepayments by mortgagors as interest rates decline. Accordingly, the
termination of the Fund might be accelerated as a result of prepayments made as
described above. In addition, it is possible that, in the absence of a secondary
market for the Units or otherwise, redemptions of Units may occur in sufficient
numbers to reduce the Portfolio to a size resulting in the termination of the
Fund (termination for this reason would be delayed if additional Units are
issued). Early termination of the Fund may have important consequences to the
Holders, e.g., to the extent that Units were purchased with a view to an
investment of longer duration, the overall investment program of the investor
may require readjustment, or the overall return on investment may be less or
greater than anticipated, depending in part on whether the purchase price paid
for Units represented the payment of an overall premium or a discount,
respectively, above or below the stated principal amounts of the underlying
mortgages.
The following table, based on a standard prepayment model, illustrates the
prepayment pattern of a typical Compound Interest Bond and, by comparison, the
prepayment pattern of the 'fast-pay' classes of the same issue. THIS TABLE IS
INCLUDED ONLY AS AN EXAMPLE AND DOES NOT REPRESENT THE ACTUAL COMPOUND INTEREST
BONDS IN THE FUND PORTFOLIO. NEITHER THE TABLE NOR ANY OTHER PREPAYMENT MODEL OR
ASSUMPTION PURPORTS TO BE EITHER AN HISTORICAL DESCRIPTION OF THE PREPAYMENT
EXPERIENCE OF ANY POOL OF MORTGAGES OR A
39
<PAGE>
PREDICTION OF THE ANTICIPATED RATE OF PREPAYMENT ON THE COMPOUND INTEREST BONDS
IN THE PORTFOLIO.
As used in the table, '0% of the Prepayment Model' assumes no prepayments;
'100% of the Prepayment Model' assumes prepayment rates equal to 100% of 100% of
the Prepayment Model; '175% of the Prepayment Model' assumes prepayment rates
equal to 175% of 100% of the Prepayment Model; and '250% of the Prepayment
Model' assumes prepayment rates equal to 250% of 100% of the Prepayment Model.
The percentage of the Prepayment Model used for a specific Fund is set forth
under Investment Summary in Part A.
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
0% OF THE PREPAYMENT MODEL 100% OF THE PREPAYMENT MODEL
COMPOUND COMPOUND
--------------------------------
INTEREST------------------------INTEREST
DATE CLASS A CLASS B CLASS C CLASS CLASS A CLASS B CLASS C CLASS
----------------------------------------------------------------
Initial
Balance......... 100 100 100 100 100 100 100 100
August 20,
1989............ 76 100 100 132 45 100 100 132
August 20,
1990............ 67 100 100 145 20 100 100 145
August 20,
1991............ 57 100 100 160 0 97 100 160
August 20,
1992............ 46 100 100 176 0 73 100 176
August 20,
1995............ 7 100 100 233 0 5 100 233
August 20,
1998............ 0 52 100 310 0 0 57 310
August 20,
2000............ 0 6 100 374 0 0 29 374
August 20,
2001............ 0 0 85 411 0 0 18 411
August 20,
2003............ 0 0 68 497 0 0 3 497
August 20,
2004............ 0 0 60 546 0 0 0 455
August 20,
2008............ 0 0 20 797 0 0 0 61
August 20,
2009............ 0 0 8 876 0 0 0 0
August 20,
2013............ 0 0 0 39 0 0 0 0
August 20,
2014............ 0 0 0 0 0 0 0 0
Weighted Average
Life (years)
(1)............. 5.6 12.2 19.1 25.6 2.9 7.2 12.9 20.1
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PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
175% OF THE PREPAYMENT MODEL 250% OF THE PREPAYMENT MODEL
COMPOUND COMPOUND
--------------------------------
INTEREST------------------------INTEREST
DATE CLASS A CLASS B CLASS C CLASS CLASS A CLASS B CLASS C CLASS
----------------------------------------------------------------
Initial
Balance......... 100 100 100 100 100 100 100 100
August 20,
1989............ 22 100 100 132 1 100 100 132
August 20,
1990............ 0 88 100 145 0 56 100 145
August 20,
1991............ 0 55 100 160 0 19 100 160
August 20,
1992............ 0 25 100 176 0 0 90 176
August 20,
1995............ 0 0 64 233 0 0 36 233
August 20,
1998............ 0 0 22 310 0 0 3 310
August 20,
2000............ 0 0 2 374 0 0 0 123
August 20,
2001............ 0 0 0 284 0 0 0 25
August 20,
2003............ 0 0 0 110 0 0 0 0
August 20,
2004............ 0 0 0 36 0 0 0 0
August 20,
2008............ 0 0 0 0 0 0 0 0
August 20,
2009............ 0 0 0 0 0 0 0 0
August 20,
2013............ 0 0 0 0 0 0 0 0
Weighted Average
Life (years)
(1)............. 2.3 5.4 10.3 16.3 2.0 4.4 8.6 13.9
GNMA-Collateralized Bond Series. Periodic payments of principal on the
Ginnie Maes which back the Bonds in the Portfolio will be made to the respective
Bond Trustees. In addition, prepayments of principal on the Ginnie Maes will be
made to the Bond Trustees and the Ginnie Maes may be prepaid in their entirety
prior to their stated maturity. All or a portion of the principal payments and
prepayments received on Ginnie Maes included in the collateral for the bonds of
an Issuer (including the Bonds deposited in the Fund) will be used to make
principal payments on the bonds of the Issuer. Payments of principal will
generally first be allocated to the holders of any bonds of the Issuer which
have the earliest stated maturity. When these bonds have been fully paid,
principal payments will next be allocated to the holders of the remaining bonds
of the Issuer in the order of their respective stated maturities. Bonds may also
be redeemed or sold under certain circumstances (see Redemption; Administration
of the Fund--Portfolio Supervision). Because the principal on the Ginnie Maes
and the proceeds of any sales of Bonds received by the Fund (less certain
amounts deducted by the Fund Trustee) will be distributed to Holders or paid out
upon redemptions, the aggregate principal amount of the Bonds in the Portfolio,
and accordingly the principal amount of Bonds underlying each Unit, will
decrease over time. For a discussion of the average life of Ginnie Maes and the
effect on the life of the Fund see above under Payment of The Securities and
Life of the Fund--First GNMA Series; for a general description of GNMA and
Ginnie Maes see above under First GNMA Series.
LITIGATION AND LEGISLATION
At any time after the Date of Deposit, litigation may be initiated on a
variety of grounds with respect to Debt Obligations in the Fund or the issuers
of the Debt Obligations. There can be no assurance that future litigation will
not have a material adverse effect on the Fund or will not impair the ability of
issuers to make payments due
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on the Debt Obligations. In addition, there can be no assurance that foreign
withholding taxes will not be imposed on interest on Debt Obligations issued by
non-United States issuers in the future.
DESCRIPTION OF THE FUND
THE PORTFOLIO
The Portfolio contains different issues of Debt Obligations with fixed
final maturity or disposition dates or of Preferred Stocks. In addition up to
10% of the initial value of the Portfolio may have consisted of units ('Other
Fund Units') of previously-issued Series of The Corporate Income Fund ('Other
Funds') sponsored and underwritten by certain of the Sponsors and acquired by
the Sponsors in the secondary market. The Other Fund Units are not debt
obligations as such but represent interests in the securities, primarily
corporate debt obligations, in the portfolios of the Other Funds. The Portfolio
may also contain Securities which were acquired in private placements or
otherwise and which cannot, in the opinion of counsel designated by the Sponsors
and satisfactory to the Trustee, be sold publicly by the Trustee without
registration (or perfection of an exemption) under the Securities Act of 1933,
as amended, or similar provisions of law subsequently enacted ('Restricted
Securities'). See Investment Summary in Part A for a summary of particular
matters relating to the Portfolio.
In selecting Debt Obligations for deposit in the Fund, the Defined Asset
Funds research analysts considered the following factors, among others: (i)
whether the Debt Obligations were rated in the category BBB or better by either
Standard & Poor's or Fitch Investors Service, Inc. or Baa or better by Moody's
Investors Service (A or better for certain recent Series--see Investment Summary
in Part A and Description of Ratings below) or, in the opinion of Defined Asset
Funds research analysts, on the Date of Deposit had comparable credit
characteristics; (ii) the yield and price of the Debt Obligations relative to
other comparable debt securities and the yield and price of the Preferred Stocks
relative to other comparable preferred stocks; (iii) the diversification of the
Portfolio as to various utility and industrial classifications, taking into
account the availability in the market of issues which met the Fund's price
criteria and (iv) (for certain Funds organized in 1984 and thereafter as grantor
trusts--see Investment Summary in Part A and Section B of Taxes below) whether
the Debt Obligations were issued after July 18, 1984 if interest thereon is
United States source income. For FIRST GNMA SERIES, selection criteria also
included the maturities of the available Ginnie Maes and the extent to which
they were trading at a premium over or at a discount from par. For SELECT HIGH
YIELD SERIES, the selection factors included (i) whether the Debt Obligation was
rated in the category B or better by Standard & Poor's or Moody's, (ii) whether
the Debt Obligation is part of an issue that has at least $125 million aggregate
principal amount outstanding and (iii) whether the yield to maturity of each
Debt Obligation was no greater than 115% of the Index. For PREFERRED STOCK PUT
SERIES the selection factors included: (a) the yield and price of the
Securities, relative to other comparable preferred stocks; and (b) the terms and
conditions of the purchase commitments of the Sellers with respect to the
Securities. For CASH OR ACCRETION BOND SERIES and SELECT SERIES, selection
factors also included the payment provisions applicable to the Securities. The
restrictions applicable to the purchase of replacement Securities summarized
under Administration of the Fund--Portfolio Supervision were also considered.
The Portfolio may contain debt obligations rated BBB by Standard & Poor's
and Baa by Moody's, which are the lowest 'investment grade' ratings assigned by
the two rating agencies, or debt obligations rated below investment grade.
Certain Funds contain bonds that have been downgraded to non-investment grade
since their deposit into the Fund. The Portfolio may also contain debt
obligations that have received investment grade ratings from one rating agency
but 'junk bond' ratings from the other rating agency. In addition, the Portfolio
may contain debt obligations which are not rated by either agency but have in
the opinion of Defined Asset Funds
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<PAGE>
research analysts, comparable credit characteristics to debt obligations rated
below investment grade. Investors should therefore be aware that these debt
obligations may have speculative characteristics and that changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments on these debt obligations than is the
case with higher rated bonds. Moreover, conditions may develop with respect to
any of the issuers of debt obligations in the Portfolio which may cause the
rating agencies to lower their ratings below investment grade on a given
security or cause Defined Asset Funds research analysts to determine that the
credit characteristics of a given security are comparable to debt obligations
rated below investment grade. As a result of timing lags or a lack of current
information, there can be no assurance that the rating currently assigned to a
given debt obligation by either agency or the credit assessment of the Defined
Asset Funds research analysts actually reflects all current information about
the issuer of that debt obligation.
Subsequent to the Date of Deposit, a Debt Obligation or other obligations
of the issuer or guarantor or bank or other entity issuing a letter of credit
related thereto may cease to be rated, its rating may be reduced or the credit
assessment of the Agent for the Sponsors may change. Because of the fixed nature
of the Portfolio, none of these events require an elimination of that Debt
Obligation from the Portfolio, but the lowered rating or changed credit
assessment may be considered in the Sponsors' determination to direct the
disposal of the Debt Obligation (see Administration of the Fund--Portfolio
Supervision).
Because ratings may be lowered or the credit assessment of Defined Asset
Funds research analysts may change, an investment in Units of the Trust should
be made with an understanding of the risks of investing in 'junk bonds' (bonds
rated below investment grade or unrated bonds having similar credit
characteristics), including increased risk of loss of principal and interest on
the underlying debt obligations and the risk that the value of the Units may
decline with increases in interest rates. In recent years there have been wide
fluctuations in interest rates and thus in the value of fixed-rate debt
obligations generally. Debt obligations which are rated below investment grade
or unrated debt obligations having similar credit characteristics are often
subject to greater market fluctuations and risk of loss of income and principal
than securities rated investment grade, and their value may decline
precipitously in response to rising interest rates. This effect is so not only
because increased interest rates generally lead to decreased values for
fixed-rate instruments, but also because increased interest rates may indicate a
slowdown in the economy generally, which could result in defaults by less
creditworthy issuers. Because investors generally perceive that there are
greater risks associated with lower-rated securities, the yields and prices of
these securities tend to fluctuate more than higher-rated securities with
changes in the perceived credit quality of their issuers, whether these changes
are short-term or structural, and during periods of economic uncertainty.
Debt rated below investment grade or having similar credit characteristics
also tends to be more thinly traded than investment-grade debt and held
primarily by institutions, and this lack of liquidity can negatively affect the
value of the debt. Debt which is not rated investment grade or having similar
credit characteristics may be subordinated to other obligations of the issuer.
Senior debtholders would be entitled to receive payment in full before
subordinated debtholders receive any payment at all in the event of a bankruptcy
or reorganization. Lower rated debt obligations and debt obligations having
similar credit characteristics may also present payment-expectation risks. For
example, these bonds may contain call or redemption provisions that would make
it attractive for the issuers to redeem them in periods of declining interest
rates, and investors would therefore not be able to take advantage of the higher
yield offered.
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<PAGE>
The Investment Summary in Part A contains the number of bonds that are
non-investment grade and the percentage of the aggregate face amount of the
Portfolio representing any defaulted bonds. As with 'high yield' or junk bonds
(see SELECT HIGH YIELD SERIES above), lower-rated securities generally involve
greater risks of loss of income and principal than higher-rated securities, and
recent studies have indicated that the number of defaults by issuers and the
amount of debt in default have increased substantially in the past few years.
Issuers of lower-rated securities may possess less creditworthy characteristics
than issuers of higher-rated securities and, especially in the case of issuers
whose obligations or credit standing have recently been downgraded, may be
subject to claims by debtholders, suppliers, owners of property leased to the
issuer or others which, if sustained, would make it more difficult for the
issuers to meet their payment obligations. Therefore, investors should consider
carefully the relative risks associated with investment in securities which
carry lower ratings.
Debt Obligations that are rated lower than BBB or Baa and unrated bonds
with similar credit characteristics should be considered speculative as such
ratings indicate a quality of less than investment grade. In addition, the
limited market for these Debt Obligations may affect the price of the particular
Security to be sold for purposes of redemption and the amount actually realized
by the Fund upon a sale. Any sale may therefore result in a loss to the Fund.
The value of the Units reflects the value of the portfolio Securities,
including the value (if any) of Securities in default. Should the issuer of any
Debt Obligation default in the payment of principal or interest, the Fund may
incur additional expenses seeking payment on the defaulted Debt Obligation.
Because amounts (if any) recovered by the Fund in payment under the defaulted
Debt Obligation may not be reflected in the value of the Units until actually
received by the Fund, and depending upon when a Holder purchases or sells his
Units, it is possible that a Holder would bear a portion of the cost of recovery
without receiving any portion of the payment recovered. It is possible that new
laws could be enacted which could hurt the market for bonds which are not rated
investment grade. For example, federally regulated financial institutions could
be required to divest their holdings of these bonds, or proposals could be
enacted which might limit the use, or tax or other advantages, of these bonds.
The yields on Securities of the type deposited in the Fund are dependent on
a variety of factors, including general money market conditions, general
conditions of the corporate bond market, size of a particular offering, the
maturity of the obligation and rating or other credit assessment of the issue.
Accordingly, the yields of debt obligations deposited in the Fund will vary with
changes in these factors, including changes in ratings or other credit
assessments. The ratings represent the opinions of the rating organizations as
to the quality of the debt obligations that they undertake to rate. Similarly,
the credit assessments of the Agent for the Sponsors represent the opinion of
the Agent for the Sponsors as to the credit quality of the debt obligations that
it assesses. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. Investors should be aware that ratings and
other credit assessments of debt securities evaluate the ability of the issuer
to pay interest and principal but do not evaluate the risk of decline in the
market value of the debt securities for other reasons. Consequently, debt
obligations with the same maturity, coupon and rating may have different yields,
while debt obligations of the same maturity and coupon with different ratings
may have the same yield.
The Agent for the Sponsors, might have made arrangements with a number of
different issuers which create a framework within which debt obligations may be
acquired for deposit in various series of corporate Defined Funds on a private
placement basis. Under these arrangements the Agent for the Sponsors may make
bids to purchase debt obligations for deposit in a particular series on the
basis of a price and other terms determined for the particular bid. It is not,
however, obligated to make any bids to purchase debt obligations under these
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arrangements and the issuers are not obligated to accept any bid which the Agent
for the Sponsors may choose to make. See Investment Summary in Part A for the
percentage of the Securities in the Portfolio, if any, acquired pursuant to bids
made under these arrangements.
The portfolios underlying any Other Fund Units (the units of no one Other
Fund represented more than 5%, and all Other Fund Units represented less than
10%, of the aggregate offering side evaluation of the Portfolio on the Date of
Deposit) are substantially similar to that of the Fund. The percentage of the
Portfolio, if any, represented by Other Fund Units on the Evaluation Date is set
forth under Investment Summary in Part A. On their respective dates of deposit,
the underlying debt obligations in any Other Funds were rated BBB or better by
Standard & Poor's or Baa or better by Moody's. While certain of those debt
obligations may not currently meet these criteria, they did not represent more
than 0.5% of the face amount of the Portfolio on the Date of Deposit. Debt
obligations in each Other Fund which do not mature according to their terms
within 10 years after the Date of Deposit had an aggregate bid side evaluation
of at least 40% of the initial face amount of the Other Fund. The investment
objectives of the Other Funds are similar to the investment objective of the
Fund, and the Sponsors, Trustee and Evaluator of the Other Funds have
responsibilities and authority paralleling in most important respects those
described in this Prospectus and receive similar fees. The names of any Other
Funds represented in the Portfolio and the number of units of each Other Fund in
the Fund may be obtained without charge by writing to the Trustee.
The Fund consists of the Securities listed under Portfolio in Part A
(including any additional or replacement Securities acquired and held by the
Fund pursuant to the terms of the Indenture) as long as they may continue to be
held in the Fund, together with accrued and undistributed interest thereon and
undistributed and uninvested cash realized from the disposition or redemption of
Securities (see Administration of the Fund--Portfolio Supervision). CASH OR
ACCRETION BOND SERIES and SELECT SERIES consist of the principal amount of the
Compound Interest Bonds, appreciating through compounding of interest, and the
principal amount of the interest-bearing bonds, as they may continue to be held
from time to time in the Fund together with accrued and undistributed interest
thereon and undistributed cash representing payments and prepayments of
principal and proceeds realized from the disposition of Compound Interest Bonds.
The Indenture for certain Funds may authorize the Sponsors to increase the size
and the number of Units of the Fund by the deposit of Additional Securities and
the issue of a corresponding number of additional Units subsequent to the
Initial Date of Deposit provided that the original relationship among the face
amounts of Securities of specified issuers, interest rates, maturities and call
provisions, if any, is maintained. Also, Securities may be sold under certain
circumstances (see Redemption; Administration of the Fund--Portfolio
Supervision). As a result, the aggregate face amount of the Securities in the
Portfolio will vary over time.
On the initial Date of Deposit each Unit represented the fractional
undivided interest in the Fund set forth under Investment Summary in Part A.
Thereafter, if any Units are redeemed by the Trustee the face amount of
Securities in the Fund will be reduced by amounts allocable to redeemed Units,
and the fractional undivided interest represented by each Unit in the balance
will be increased. However, if additional Units are issued by the Fund (through
deposit of Securities by the Sponsor in connection with the sale of additional
Units or reinvestment), the aggregate value of Securities in the Fund will be
increased by amounts allocable to additional Units, and the fractional undivided
interest represented by each Unit in the balance will be decreased. Units will
remain outstanding until redeemed upon tender to the Trustee by any Holder
(which may include the Sponsor) until the termination of the Indenture (see
Redemption; Administration of the Fund--Amendment and Termination). Neither the
Sponsors nor the Trustee shall be liable in any way for any default, failure or
defect in
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any Security. In the event of a failure to deliver any Security that has been
purchased for the Fund under a contract, including any Security purchased on a
when, as and if issued basis, the Sponsors are authorized under the Indenture to
direct the Trustee to acquire other obligations to make up the original
Portfolio of the Fund. If substitute Securities are not acquired, the Sponsors
will, on or before the next following Distribution Day, cause to be refunded the
attributable sales charge, plus the attributable Cost of Securities to Fund
listed under Portfolio in Part A, plus interest attributable to the failed
obligation. (See Administration of the Fund--Portfolio Supervision.)
INCOME; ESTIMATED CURRENT RETURN ESTIMATED LONG-TERM RETURN (MONTHLY PAYMENT
SERIES, FIRST GNMA SERIES, INSURED SERIES, GNMA COLLATERALIZED SERIES,
INTERMEDIATE-TERM SERIES, AND SELECT HIGH YIELD SERIES)
Generally. The estimated net annual interest rate per Unit on the
Evaluation Date is set forth under Investment Summary in Part A. This rate shows
the percentage return based on the face amount per Unit after deducting
estimated annual fees and expenses expressed as a percentage. Interest on the
Securities in the Fund, less estimated fees of the Trustee and (if applicable)
Sponsors and certain other expenses, is expected to accrue at the daily rate
(based on a 360-day year) shown under Investment Summary in Part A. The rate
will vary if any Securities default and as Securities mature, are exchanged,
redeemed, prepaid, paid or sold, or as the expenses of the Fund change.
Estimated Current Return on a Unit represents annual cash receipts from
coupon-bearing debt obligations in the Portfolio (after estimated annual
expenses) divided by the maximum Public Offering Price (including the sales
charge). For investors interested primarily in cash flow, current return is a
readily ascertainable measure.
'Current return' provides different information than 'yield' or 'long-term
return'. Under accepted bond practice, tax-exempt bonds are customarily offered
to investors on a 'yield' basis, which involves a computation of yield to
maturity (or earlier call date), and which takes into account not only the
interest payable on the bonds but also the amortization or accretion to a
specified date of any premium over or discount from the par (maturity) value in
the bond's purchase price. Various formulas exist for calculating long-term
return on a portfolio of debt obligations. Different assumptions regarding,
among other things, reinvestment, term to maturity or call date, application of
sales charge and deduction for expenses, result in different long-term return
figures. Additionally, the resulting figure may be overstated or understated
depending on the manner in which a formula takes into account delays in
distributions of principal and interest on Units and sales charges. For
investors intending to hold Units until the final maturity of the Fund, both
current return and long-term return are relevant measures of performance. For
the investor who redeems Units earlier, both the current return and the
long-term return realized may be diminished, particularly on a sale shortly
after acquisition of those Units--because the price received will not reimburse
the investor for the sales charge paid.
Generally, the long-term return of a Unit offered in the secondary market
will be lower, sometimes significantly, than its current return, primarily as a
result of changes in market rates of interest and any resulting decrease in the
terms to maturity of the Debt Obligations in the Portfolio, as well as the
likelihood that at least certain of the Debt Obligations will be valued at
market premiums. Furthermore, changes in the composition of the Portfolio,
defaults on interest payments, changes in market valuation as well as the
estimated fees and expenses payable by the Fund will cause current and long-term
returns, as well as the difference between them, to fluctuate. Because debt
obligations are more likely to be redeemed when valued at a premium over par
(generally, those debt obligations bearing the higher coupons), the current
return and long-term return realized by an investor may be substantially lower
than originally estimated.
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In addition, for the FIRST GNMA SERIES, in actual operation, payments
received in respect of the mortgages underlying the Ginnie Maes will consist of
a portion representing interest and a portion representing principal. Although
the aggregate monthly payment made by the obligor on each mortgage remains
constant (aside from optional prepayments of principal), in the early years the
larger proportion of each payment will represent interest, while in later years,
the proportion representing interest will decline and the proportion
representing principal will increase, although, of course, the interest rate
remains constant. Moreover, by reason of optional prepayments, payments in the
earlier years on the mortgages in the pools may be substantially in excess of
those required by the amortization schedules of these mortgages; conversely,
payments in later years may be substantially less since the aggregate unpaid
principal balances of the underlying mortgages may have been greatly
reduced--ultimately even sufficiently reduced to accelerate termination of a
Fund. To the extent that those underlying mortgages, bearing the higher interest
rates represented in a Portfolio are prepaid faster than the other underlying
mortgages, the net annual interest rate per Unit and the return on the Units can
be expected to decline. Monthly payments to the Holder will reflect all of the
foregoing factors. If a Holder sells all or a portion of his Units, he will
receive his proportionate share of the accrued interest from the purchaser of
his Units. Similarly, if a Holder redeems all or a portion of his Units, the
Redemption Price per Unit will include accrued interest on the Securities. And
if a Security is sold, redeemed or otherwise disposed of, accrued interest will
be received by the Fund and will be distributed periodically to Holders.
INCOME; ESTIMATED CURRENT RETURN; ESTIMATED AFTER-TAX RETURN (PREFERRED STOCK
AND PREFERRED STOCK PUT SERIES)
The estimated current return is computed by dividing the anticipated net
annual income per Unit (the net annual income rate times the face amount or par
or stated value per Unit for PREFERRED STOCK PUT SERIES) by the Public Offering
Price. For the PREFERRED STOCK PUT SERIES, the estimated net annual income rate
per Unit shows the percentage return based on the face amount or par or stated
value per Unit after deducting estimated annual fees and expenses, including the
cost of insurance, if any, expressed as a percentage.
The Estimated After-Tax Return assumes that Holders are taxed at the
highest current corporate tax rate and that all dividends on the Preferred
Stocks received by the Fund and distributed to Holders will be eligible for the
dividends-received deduction for corporations and is determined without regard
to any capital gains which may be recognized by such a Series and distributed to
Holders. Any such capital gains distributed to Holders will be taxed as a
dividend but will not be eligible for the dividends-received deduction. See
Taxes below. Net income will change as Securities are exchanged, redeemed, paid
or sold, as substitute Securities are purchased, and as the expenses of the Fund
change. The Public Offering Price will vary in accordance with fluctuations in
the prices of the underlying Securities and (except on Put Series) with any
reduction in applicable sales charges in the case of purchases of Units
qualifying for quantity discounts. Any change in the net income per Unit or the
Public Offering Price will result in a change in the current return and the
after-tax return.
There is no assurance that all dividends will be paid in the future on the
Preferred Stocks in the Portfolio. Therefore there is no assurance that the
estimated annual income or income rate set forth under Investment Summary in
Part A will be realized in the future.
Because dividends on the Securities in the Fund are paid at varying
intervals, usually quarterly, any monthly income distribution may be more or
less than the income actually received by the Fund. In order to reduce
fluctuations in distributions, the Trustee is required to advance the amounts
necessary to provide approximately
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equal Monthly Income Distributions. The Trustee will be reimbursed, without
interest, for these advances from income received on the Securities.
In addition to the Public Offering Price, the price of a Unit includes the
amount per Unit in the Income Account at the date of delivery of Units to the
purchaser. If a Holder sells all or a portion of his Units, he will receive his
proportionate share of the amount in the Income Account from the purchaser of
his Units. Similarly, if a Holder redeems all or a portion of his Units, the
Redemption Price per Unit will include the amount per Unit in the Income
Account.
Some of the Securities in the Portfolio may provide for scheduled sinking
fund redemptions and optional redemptions prior to maturity. Payments received
in respect of substantially all of the Securities in the FIRST PREFERRED STOCK
PUT SERIES will consist of a portion representing dividends and a portion
representing capital. Because the proceeds of these payments, together with
amounts realized upon sale of the Securities under certain circumstances (see
Redemption), will be distributed to Holders of Units or paid out upon redemption
of Units, the aggregate par or liquidation value of the Securities in the
Portfolio, and accordingly the par or liquidation value of the Securities
underlying each Unit, may decrease over time. Although the dividend rates on the
Securities will remain constant, as redemptions of Securities are made the
subsequent dividend payments will decline. Monthly payments to Holders will
reflect the foregoing factors.
Units are offered to investors on a 'dollar price' basis whereby the rate
of return on an investment in the Units is stated in terms of estimated current
return. The use of 'current return' should be contrasted with the 'yield to
maturity' basis often used in offerings of debt obligations, whereby the rate of
return of a debt obligation is expressed as a percentage which is the yield to
maturity or to an earlier redemption date of the debt obligation and takes into
account not only the interest payable on the debt obligation but also the
amortization of discount or premium to the specified date. If the price of the
Units is less than $1,000, the yield to maturity will be greater than the
current return; if the price of the Units is greater than $1,000, the yield to
maturity will be less than the current return.
INCOME AND ESTIMATED RATE TO PROJECTED MATURITY (CASH OR ACCRETION BOND SERIES
AND SELECT SERIES)
Estimated Rate to Projected Maturity of the Compound Interest Bonds is
calculated assuming that the mortgages underlying the Ginnie Mae, Fannie Mae or
Freddie Mac collateral for the Compound Interest Bonds are prepaid at a certain
percentage of the Prepayment Model, that payment on any Compound Interest Bond
is not accelerated due to the default of an issuer, that the principal amount of
the interestbearing bonds is distributed when it matures, that interest received
on the interestbearing bonds will precisely cover the expenses of the Fund, that
a Holder does not redeem or sell any Units (including new Units credited
annually in respect of the aggregate increase in Accreted Principal Amount of
the Compound Interest Bonds) prior to Projected Maturity (which is also
calculated assuming prepayments on the underlying mortgages at the specified
percentage of the Prepayment Model). See Notes to Portfolio in Part A for the
specific percentage of the Prepayment Model used for these calculations; see
Risk Factors--Payment of the Securities and Life of the Fund--Cash or Accretion
Bond Series and Select Series above for a discussion of the Prepayment Model. If
the Public Offering Price is less than the current principal amount of the
Compound Interest Bonds and if the mortgages underlying the Ginnie Mae, Fannie
Mae or Freddie Mac collateral prepay faster than the specified assumed rates of
the Prepayment Model, the actual return will be greater; if prepayment occurs
more slowly than these rates, the actual return will be less. The Public
Offering Price will vary in accordance with fluctuations in the prices of the
Securities and any
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reductions in applicable sales charges in the case of quantity purchases of
Units (see Public Sale of Units--Public Offering Price). Any change in the
Public Offering Price will result in a change in the actual return.
The economic effect of purchasing Units of the Fund is that the investor
who holds his Units until the underlying Compound Interest Bonds are paid or
prepaid receives an actual return on his investment over the life of the
Compound Interest Bonds that reflects the assumed or implicit automatic
reinvestment (accretion) of the compounded interest. This feature differentiates
this Fund from funds comprised of customary securities on which periodic
interest is paid at market rates at time of issue. An investor in the Units,
unlike an investor in a fund comprised of customary securities, lessens his risk
of being unable to invest distributions at a comparable rate of return, but may
forgo the ability to reinvest fully at higher rates in the future.
TAXES
Section A. The following describes the tax consequences for FIRST GNMA
SERIES and MONTHLY PAYMENT SERIES 1 THROUGH 212, 214, 216, 218, 222, 224, 228,
289-304.
The Fund intends to qualify for and elect the special tax treatment
applicable to 'regulated investment companies' under Sections 851-855 of the
United States Internal Revenue Code of 1986, as amended (the 'Code').
Qualification and election as a 'regulated investment company' involve no
supervision of investment policy or management by any government agency. If the
Fund qualifies as a 'regulated investment company' and distributes to Holders
90% or more of its taxable income without regard to its net capital gain (net
capital gain is defined as the excess of net long-term capital gain over 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) distributed to
Holders 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 Holders in a timely manner at least 98% of its
taxable income (including any net capital gain). The Indenture requires the
distribution of the Fund's taxable income (including any net capital gain) in a
timely manner. Although all or a portion of the Fund's taxable income (including
any net capital gain) for a taxable year may be distributed shortly after the
end of the calendar year, such a distribution will be treated for Federal income
tax purposes as having been received by Holders during the calendar year.
Distributions to Holders of the Fund's interest income, gain that is
treated as ordinary income under the market discount rules and any net
short-term capital gain in any year will be taxable as ordinary income to
Holders to the extent of the Fund's taxable income (without regard to its net
capital gain) for that year. Any excess will be treated as a return of capital
and will reduce the Holder'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 interest income, ordinary income and any net
short-term capital gain will be taxable as ordinary income to Holders.
Distributions that are taxable as ordinary income to Holders will
constitute dividends for Federal income tax purposes, but will not be eligible
for the dividends-received deduction for corporations. Distributions of the
Fund's net capital gain (designated as capital gain dividends by the Fund) will
be taxable to a Holder as long-term capital gain, regardless of the length of
time the Units have been held by a Holder. A Holder may recognize a taxable gain
or loss if the Holder sells or redeems his Units. Any gain or loss arising from
(or treated as arising from) the sale or redemption of Units will be capital
gain or loss except in the case of a dealer or a financial institution. Capital
gains are generally taxed at the same rate as ordinary income. However, the
excess of net long-
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term capital gains over net short-term capital losses may be taxed at a lower
rate than ordinary income for certain noncorporate taxpayers. A capital gain or
loss is long-term if the asset is held for more than one year and short-term if
held for one year or less. The deduction of capital losses is subject to
limitations.
Sales of Securities by the Fund (to meet redemptions or otherwise) may give
rise to gain (including market discount) to the Fund. The amount of gain will be
based upon the cost of the Security to the Fund and will be without regard to
the value of the Security when a particular Holder purchases his Units. Such
gain must be distributed to Holders to avoid Federal income (or excise) taxation
to the Fund. In the case of sales to meet redemptions, some or all of such gain
must be so distributed to nonredeeming Holders. Any such distribution will be
taxable to Holders as discussed above (i.e., as ordinary income or long-term
capital gain), even if as to a particular Holder the distribution economically
represents a return of capital. Since such distributions do not reduce a
Holder's tax basis in his Units, a Holder will have a corresponding capital loss
(or a reduced amount of gain) on a subsequent sale or redemption of his Units.
The Federal tax status of each year's distributions will be reported to
Holders and to the Internal Revenue Service. The foregoing discussion relates
only to the Federal income tax status of the Fund and to the tax treatment of
distributions by the Fund to U.S. Holders. Holders who are not U.S. citizens or
residents should be aware that distributions from the Fund generally will be
subject to a withholding tax of 30%, or a lower treaty rate, and should consult
their own tax advisers to determine whether investment in the Fund is
appropriate. Distributions may also be subject to state and local taxation and
Holders should consult their own advisers in this regard.
Holders will be taxed in the manner described above regardless of whether
distributions from the Fund are actually received by the Holder or are
automatically reinvested (see Administration of the Fund--Reinvestment).
Section B. The following describes the tax consequences for MONTHLY PAYMENT
SERIES 213, 215, 217, 219-221, 223, 225, 226, 227, 229-288, 305-315, INSURED
SERIES, INTERMEDIATE-TERM SERIES, SELECT HIGH YIELD SERIES, CASH OR ACCRETION
BOND SERIES, SELECT SERIES, and GMNA-COLLATERALIZED BOND SERIES.
The following discussion addresses the tax consequences of Units held only
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 the
income of the Holders in the manner set forth below.
Each Holder will be considered the owner of a pro rata portion of each
Debt Obligation in the Fund and of each debt obligation in any Other 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 a Holder of his
Units, including sales charges, is allocated to his pro rata portion of
each Debt Obligation in proportion to the fair market values thereof on the
date the Holder purchases his Units, in order to determine his tax basis
for his pro rata portion of each Debt Obligation. A Holder's tax basis for
his pro rata portion of any Other Fund Unit as determined above is further
allocated among his pro rata portion of each of the debt obligations in the
Other Fund in order to determine the Holder's tax basis for his pro rata
portion of each such debt obligation. The term 'Debt Obligations' as used
hereinafter under Taxes shall include the debt obligations in any Other
Funds.
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Each Holder will be considered to have received the interest on his pro
rata portion of each Debt Obligation when interest on the Debt Obligation
is received by the Fund or an Other Fund, as the case may be. An individual
Holder who itemizes deductions may deduct his pro rata share of fees and
expenses of the Fund and any Other Fund only to the extent that such amount
together with the Holder's other miscellaneous deductions exceeds 2% of his
adjusted gross income.
The Fund or any Other Fund may contain Debt Obligations which were
originally issued at a discount ('original issue discount'). In general,
original issue discount is defined as the difference between the price at
which a debt obligation was issued and its stated redemption price at
maturity. Original issue discount on a debt obligation issued on or after
July 2, 1982 will accrue as interest over the life of the debt obligation
under a formula based on the compounding of interest. Original issue
discount on a debt obligation issued prior to July 2, 1982 will accrue as
interest over the life of the debt obligation on a straight line basis.
Each Holder will be required to include in income in each year the amount
of original issue discount which accrues during the year on his pro rata
portion of any Debt Obligation originally issued at a discount. If a
Holder's tax basis for his pro rata portion of a Debt Obligation issued
with original issue discount is greater than its 'revised issue price' but
less than its stated redemption price at maturity (as may be adjusted for
certain payments), the Holder will be considered to have purchased his pro
rata portion of the Debt Obligation at an 'acquisition premium.' The amount
of original issue discount which must be accrued will be reduced by the
amount of such acquisition premium. The amount of accrued original issue
discount so included in income in respect of a Holder's pro rata portion of
a Debt Obligation is added to the Holder's tax basis therefor. Under
proposed regulations, if a Debt Obligation is redeemed at a premium
pursuant to its terms, the amount of any such redemption premium may be
treated as ordinary income.
If a Holder's tax basis for his pro rata portion of a Debt Obligation
exceeds the redemption price at maturity thereof (subject to certain
adjustments), the Holder will be considered to have purchased his pro rata
portion of the Debt Obligation at a 'premium'. The Holder may elect to
amortize the premium prior to the maturity of the Debt Obligation. The
amount amortized in any year should be applied to offset the Holder's
interest from the Debt Obligation and will result in a reduction of basis
for his pro rata portion of the Debt Obligation.
A Holder will recognize taxable gain or loss when all or part of his pro
rata portion of a Debt Obligation is disposed of for an amount greater or
less than his adjusted tax basis. Any such taxable gain or loss will be
capital gain or loss except that any gain from the disposition of a
Holder's pro rata portion of a Debt Obligation acquired by the Holder at
'market discount' (i.e., if the Holder's original cost for his pro rata
portion of the Debt Obligation (plus any original issue discount which will
accrue thereon) is less than its stated redemption price at maturity) will
be treated as ordinary income to the extent the gain does not exceed the
accrued market discount. Capital gains are generally taxed at the same rate
as ordinary income. However, the excess of net long-term capital gains over
net short-term capital losses may be taxed at a lower rate than ordinary
income for certain noncorporate taxpayers. A capital gain or loss is
long-term if the asset is held for more than one year and short-term if
held for one year or less. The deduction of capital losses is subject to
limitations. A Holder will be considered to have disposed of all or part of
his pro rata portion of each Debt Obligation when he sells or redeems all
or some of his Units. A Holder will be considered to have disposed of all
or part of his pro rata portion of each Debt Obligation in any Other Fund
when the Fund sells or redeems all or some of the Units in the Other Fund.
A Holder will also be considered to have disposed of
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all or part of his pro rata portion of a Debt Obligation when all or part
of the Debt Obligation is sold by the Fund or is redeemed or paid at
maturity.
Under the income tax laws of the State and City of New York, the Fund is
not an association taxable as a corporation and income received by the Fund
will be treated as the income of the Holders in the same manner as for
Federal income tax purposes.
Notwithstanding the foregoing, a Holder who is a non-resident alien
individual or a foreign corporation (a 'Foreign Holder') will generally not
be subject to U.S. Federal income taxes, including withholding taxes, or
information reporting, on the interest income (including any original issue
discount) on, or any gain from the sale or other disposition of, his pro
rata portion of any Debt Obligation provided that (i) the interest income
or gain is not effectively connected with the conduct by the Foreign Holder
of a trade or business within the United States, (ii) if the interest is
United States source income (which is the case on most Debt Obligations
issued by United States issuers), the Debt Obligation is issued after July
18, 1984 and the Foreign Holder does not own, actually or constructively,
10% or more of the total combined voting power of all classes of voting
stock of the issuer of the Debt Obligation and is not a controlled foreign
corporation related (within the meaning of Section 864(d)(4) of the Code)
to the issuer of the Debt Obligation, (iii) with respect to any gain, the
Foreign Holder (if an individual) is not present in the United States for
183 days or more during the taxable year and (iv) the Foreign Holder
provides the required certification of his status and of certain other
matters. Foreign Holders should consult their own tax advisers with respect
to United States Federal income tax consequences of ownership of Units.
* * *
The Sponsors believe that (i) each of the Debt Obligations, the interest on
which is United States source income (which is the case for most Debt
Obligations issued by United States issuers), was or will have been issued after
July 18, 1984 and (ii) interest on any Debt Obligation issued by a non-United
States issuer is not subject to any foreign withholding taxes under current law.
There can be no assurance, however, that foreign withholding taxes will not be
imposed on interest on Debt Obligations issued by non-United States issuers in
the future.
Neither the Sponsors nor Davis Polk & Wardwell has made or will make a
review of the facts and circumstances relating to the issuance of any Debt
Obligation. To the best knowledge of the Sponsors, each Debt Obligation will be
treated as debt for tax purposes by the respective issuers. The Internal Revenue
Service, however, is not bound by an issuer's treatment and may take the
position that a Debt Obligation has more equity than debt features and,
accordingly, should be treated as equity. In the event of such a
recharacterization, a withholding tax at the statutory rate of 30% (or a lesser
treaty rate) would apply on distributions to Foreign Holders in respect of that
Debt Obligation.
After the end of each calendar year, the Trustee will furnish to each
Holder an annual statement containing information relating to the interest
received by the Fund on the Debt Obligations, the gross proceeds received by the
Fund from the disposition of any Debt Obligation (resulting from redemption or
payment at maturity of any Debt Obligation or the sale by the Fund of any Debt
Obligation or Other Fund Unit), and the fees and expenses paid by the Fund. The
Trustee will also furnish annual information returns to each Holder and to the
Internal Revenue Service.
52
<PAGE>
Holders will be taxed in the manner described above regardless of whether
distributions from the Fund are actually received by the Holder or are
automatically reinvested (see Administration of the Fund--Reinvestment).
The foregoing discussion relates only to United States Federal and certain
aspects of New York State and City income taxes. Holders may be subject to
taxation in state and local jurisdictions (including a Foreign Holder's country
of residence) and should consult their own tax advisers in this regard.
* * *
53
<PAGE>
The following supplements 'Taxes--Section B' with respect to the CASH OR
ACCRETION BOND SERIES and SELECT SERIES.
Each Holder's pro rata portion of each Compound Interest Bond will be
considered to have been originally issued at a discount ('original issue
discount'). In general, original issue discount is defined as the
difference between the price at which a debt obligation was issued and its
stated redemption price at maturity. Each Holder will be required to
include in gross income each year the amount of original issue discount
which accrues during the year (determined under a formula based on the
compounding of interest) on his pro rata portion of each Compound Interest
Bond. If a Holder's tax cost for his pro rata portion of a Debt Obligation
issued with original issue discount is greater than its 'adjusted issue
price' but less than its stated redemption price at maturity (as may be
adjusted for certain payments), the Holder will be considered to have
purchased his pro rata portion of the Debt Obligation at an 'acquisition
premium.' The amount of original issue discount which must be accrued will
be reduced by the amount of such acquisition premium. The amount of accrued
original issue discount so included in income in respect of a Holder's pro
rata portion of a Bond is added to the Holder's tax basis therefor. Under
proposed regulations, if a Debt Obligation is redeemed at a premium
pursuant to its terms, the amount of any such redemption may be treated as
ordinary income.
A Holder will not recognize taxable gain or loss when additional Units
are credited to his account to reflect increases in the Accreted Principal
Amount of the Compound Interest Bonds, but taxable gain or loss may be
recognized when the Holder disposes of these Units either pursuant to the
procedures specified for automatic capital appreciation liquidations or
otherwise. As discussed above, when the Holder disposes of these Units he
will be considered to have disposed of a part of his pro rata portion of
each Bond and may recognize taxable gain (or loss) depending on the
Holder's adjusted tax basis for this part of his pro rata portion of each
Bond.
* * *
To the best knowledge of the Sponsors, each Bond was issued after July 18,
1984.
Certain aspects of the above opinion of Davis Polk & Wardwell are based in
part on the assumption that the Compound Interest Bonds are treated as
indebtedness of their respective Issuers for Federal income tax purposes. In
connection with the issuance of each Compound Interest Bond, counsel to the
Issuer thereof has rendered or will render an opinion that the Compound Interest
Bonds (and the other compound interest bonds and other classes of bonds issued
with it) will be treated for Federal income tax purposes as indebtedness of the
Issuer, and not as an ownership interest in the GNMA/FNMA/FHLMC Certificates
collateralizing such bonds, or an equity interest in the Issuer or in a separate
association taxable as a corporation. Neither the Sponsors nor Davis Polk &
Wardwell have made or will make any review of the basis for these opinions.
After the end of each calendar year, the Fund Trustee will furnish to each
Holder an annual statement containing information relating to the interest
received by the Fund on each interest-bearing bond (and on each Compound
Interest Bond after it reaches its Payment Commencement Date), the original
issue discount accrued on any Compound Interest Bond or other bond having
original issue discount, the gross proceeds received by the Fund from the
disposition of any Bond (resulting from redemption or payment at maturity of any
Bond) and the fees and expenses paid by the Fund. The Trustees will also furnish
annual information returns to each Holder and to the Internal Revenue Service.
54
<PAGE>
Holders should be aware that, because of the above original issue discount
rules, Holders will be required for Federal income tax purposes to include
amounts in gross income in advance of the receipt of the cash attributable to
such income. A Holder who elects to sell or redeem the additional Units credited
to his account pursuant to the Fund's automatic Unit accretion liquidations or
otherwise will receive cash each year but will still be required to determine
the amount includable in his gross income under the original issue discount
rules and in addition will be required to calculate whether he recognized any
taxable gain or loss on the sale or redemption of the additional Units.
Therefore, investment in the Fund may be appropriate only for Individual
Retirement Accounts, Keogh plans, pension funds and other tax-deferred
retirement plans (see Retirement Plans below). Purchasers of Units should
consult their own tax advisers as to the tax treatment of original issue
discount with respect to their particular circumstances, and the application of
state and local laws, in order to determine whether an investment in the Fund
would be appropriate for them.
Section C. The following describes the tax consequences for PREFERRED STOCK
SERIES and PREFERRED STOCK PUT SERIES.
TAXATION OF THE FUND
The Fund intends to qualify for and elect the special tax treatment
applicable to 'regulated investment companies' under Sections 851-855 of the
United States Internal Revenue Code of 1986, as amended (the 'Code').
Qualification and election as a 'regulated investment company' involve no
supervision of investment policy or management by any government agency. If the
Fund qualifies as a 'regulated investment company' and distributes to Holders
90% or more of its taxable income without regard to its net capital gain (net
capital gain is defined as the excess of net long-term capital gain over 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) distributed to
Holders 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 the Trust distributes to Holders in a timely manner at least 98%
of its taxable income (including any net capital gain). It is anticipated that
the Fund will not be subject to Federal income tax or the excise tax because the
Indenture requires the distribution of the Fund's taxable income (including any
net capital gain) in a timely manner. Although all or a portion of the Fund's
taxable income (including any net capital gain) for a taxable year may be
distributed shortly after the end of the calendar year, such a distribution will
be treated for Federal income tax purposes as having been received by Holders
during the calendar year.
DISTRIBUTIONS
Distributions to Holders of the Fund's dividend income and net short-term
capital gain in any year will be taxable as ordinary income to Holders to the
extent of the Fund's taxable income (without regard to its net capital gain) for
that year. Any excess will be treated as a return of capital and will reduce the
Holder's basis in his Units and, to the extent that such distributions exceed
his basis, will be treated as a gain from the sale of his Units as discussed
below. It is anticipated that substantially all of the distributions of the
Fund's dividend income and net short-term capital gain will be taxable as
ordinary income to Holders.
Distribution of the Fund's net capital gain (designated as capital gain
dividends by the Fund) will be taxable to Holders as long-term capital gain,
regardless of the length of time the Units have been held by a Holder. A Holder
may recognize a taxable gain or loss if the Holder sells or redeems his Units.
Any gain or loss arising from (or treated as arising from) the sale or
redemption of Units will be a capital gain or loss, except in the case of a
55
<PAGE>
dealer. Capital gains are generally taxed at the same rate as ordinary income.
However, the excess of net long-term capital gains over net short-term capital
losses may be taxed at a lower rate than ordinary income for certain
noncorporate taxpayers. A capital gain or loss is long-term if the asset is held
for more than one year and short-term if held for one year or less. The
deduction of capital losses is subject to limitations.
A distribution of Securities to a Holder upon redemption of his Units will
be a taxable event to such Holder, and that Holder will recognize taxable gain
or loss (equal to the difference between such Holder's tax basis in his Units
and the fair market value of Securities received in redemption), which will be
capital gain or loss except in the case of a dealer in securities, upon such
distribution. Holders should consult their own tax advisers in this regard.
Distributions which are taxable as ordinary income to Holders will
constitute dividends for Federal income tax purposes. To the extent that
distributions are appropriately designated by the Trust and are attributable to
dividends received by the Trust from domestic issuers with respect to whose
securities the Trust satisfied the requirements for the dividends-received
deduction, such distributions will be eligible for the dividends-received
deduction for corporations (other than corporations such as 'S' corporations
which are not eligible for such deduction because of their special
characteristics and other than for purposes of special taxes such as the
accumulated earnings tax and the personal holding company tax).
The dividends-received deduction generally is 70%. However, Congress from
time to time considers proposals to reduce the rate, and enactment of such a
proposal would adversely affect the after-tax return to investors who can take
advantage of the deduction. Holders are urged to consult their own tax advisers.
Sections 246 and 246A of the Code contain additional limitations on the
eligibility of dividends for the corporate dividends-received deduction.
Depending upon the corporate Holder's circumstances (including whether it has a
45-day holding period for his Units and whether its Units are debt financed),
these limitations may be applicable to dividends received by a Holder from the
Fund which would otherwise qualify for the dividends-received deduction under
the principles discussed above. Accordingly, Holders should consult their own
tax advisers in this regard. A corporate Holder should be aware that the receipt
of dividend income for which the dividends-received deduction is available may
give rise to an alternative minimum tax liability (or increase an existing
liability) because the dividend income will be included in the corporation's
'adjusted current earnings' for purposes of the adjustment to alternative
minimum taxable income required by Section 56(g) of the Code.
The Federal tax status of each year's distributions will be reported to
Holders and to the Internal Revenue Service. The foregoing discussion relates
only to the Federal income tax status of the Fund and to the tax treatment of
distributions by the Fund to U.S. Holders. Holders that are not United States
citizens or residents should be aware that distributions from the Fund will
generally be subject to a withholding tax of 30%, or a lower treaty rate, and
should consult their own tax advisers to determine whether investment in the
Fund is appropriate. Distributions may also be subject to state and local
taxation and Holders should consult their own tax advisers in this regard.
* * *
The following supplements 'Taxes--Section C' with respect to the FIRST
THROUGH FIFTH PREFERRED STOCK PUT SERIES:
56
<PAGE>
There are no regulations, published rulings or judicial decisions involving
the characterization for Federal income tax purposes of arrangements involving
the purchase of preferred stocks with purchase commitments that are
substantially the same as the Sellers' purchase commitments with respect to the
Securities. However, Davis Polk & Wardwell, special counsel for the Sponsors,
are of the opinion that, under applicable law, the Fund will be treated as the
owner of the Securities for Federal income tax purposes, notwithstanding the
existence of the Sellers' purchase commitments. (Neither the Fund nor the
Sponsors have applied for a ruling from the Internal Revenue Service regarding
the ownership of the Securities; the Internal Revenue Service has announced in
Rev. Proc. 83-55, as restated as part of Rev. Proc. 93-3, that it will not
ordinarily issue advance rulings or determination letters on the question of who
is the true owner of securities or participation interests therein where the
purchaser has the contractual right to cause the security or participation
interest therein to be purchased by either the seller or a third party;
accordingly, there can be no assurance that the Internal Revenue Service will
agree with the conclusion expressed herein or that it will not take actions
which, if sustained, would result in the Fund not being treated as the owner of
the Securities for Federal income tax purposes.)
The Fund may recognize capital gain upon the sinking fund or optional
redemption of Securities in an amount equal to the excess of the redemption
price of the Securities redeemed over the Fund's cost therefor (including any
portion of such cost allocable to the Seller's purchase commitment). The Fund
may also recognize capital gain if it sells a Security (pursuant to the Seller's
purchase commitment or otherwise). The existence of the Seller's purchase
commitments causes any capital gain realized by the Fund to constitute
short-term capital gain regardless of whether the Security redeemed or sold was
held in excess of the long-term capital gain holding period. Therefore,
distributions of the Fund's capital gain will constitute ordinary income
dividends (not capital gain dividends) to the extent of the Fund's taxable
income for that year but will not qualify for the dividends-received deduction
for corporations.
Only the amount of the Fund's dividend distributions (exclusive of capital
gain dividends) which does not exceed the aggregate amount of dividends received
by the Fund from domestic corporations will qualify for the 70%
dividends-received deduction for corporations. Dividends received by the Fund
will be considered dividends for this purpose only if such dividends would
qualify for the dividends-received deduction for corporations pursuant to the
rules generally applicable to corporations under Section 246(c) of the Code.
Although there are no regulations, published rulings or judicial decisions
involving the eligibility for the dividends-received deduction in circumstances
substantially similar to those present here, it is the opinion of Davis Polk &
Wardwell, special counsel for the Sponsors, that the Fund will be considered to
have a holding period for the Securities of at least 45 days for purposes of
Section 246(c) of the Code and that accordingly all dividends received by the
Fund on the Securities will qualify for the dividends-received deduction and
thus will be considered to be dividends for purposes of determining the amount
of the Fund's dividend distributions which will qualify for the
dividends-received deduction. Opinions of counsel, however, are not binding on
the Internal Revenue Service. The Internal Revenue Service could assert that
because of the existence of the Seller's purchase commitments, none of the
dividends received by the Fund will qualify for the dividends-received
deductions under the rules generally applicable to corporations and therefore
that none of the dividends distributed by the Fund will qualify for the
dividends-received deduction. Although there can be no assurance as to the
outcome, it is the opinion of Davis Polk & Wardwell that the Internal Revenue
Service would not prevail if this issue were properly presented to a court.
It is likely that less than 100% of the Fund's dividend distributions will
qualify for the dividends-received deduction. The exact percentage of the Fund's
dividend distributions in a given year that will qualify for the
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<PAGE>
dividends-received deduction will depend on the expenses of the Fund for such
year and the amount of Securities redeemed or sold in the year and whether any
short-term capital gain results therefrom.
The following supplements 'Taxes--Section C' with respect to the SIXTH
PREFERRED STOCK PUT SERIES:
There are no regulations, published rulings or judicial decisions involving
the characterization for Federal income tax purposes of arrangements involving
the purchase of preferred stocks with purchase commitments that are
substantially the same as the Sellers' purchase commitments with respect to the
Securities. However, Davis Polk & Wardwell, special counsel for the Sponsors,
are of the opinion that, under applicable law, the Fund will be treated as the
owner of the Securities for Federal income tax purposes, notwithstanding the
existence of the Sellers' purchase commitments. (Neither the Fund nor the
Sponsors have applied for a ruling from the Internal Revenue Service regarding
the ownership of the Securities; the Internal Revenue Service has announced in
Rev. Proc. 83-55, as restated as part of Rev. Proc. 93-3, that it will not
ordinarily issue advance rulings or determination letters on the question of who
is the true owner of securities, or participation interests therein, where the
purchaser has the contractual right to cause the security, or participation
interests therein, to be purchased by either the seller or a third party;
accordingly, there can be no assurance that the Internal Revenue Service will
agree with the conclusion expressed herein or that it will not take actions
which, if sustained, would result in the Fund not being treated as the owner of
the Securities for Federal income tax purposes.)
The Fund may recognize capital gain upon the sinking fund or optional
redemption of Securities in an amount equal to the excess of the redemption
price of the Securities redeemed over the Fund's cost therefor (including any
portion of such cost allocable to the Seller's purchase commitment). The Fund
may also recognize capital gain if it sells a Security (pursuant to the Seller's
purchase commitment or otherwise). The existence of the Seller's purchase
commitments causes any such capital gain to constitute short-term capital gain
regardless of whether the Security redeemed or sold was held by the Fund in
excess of the long-term capital gain holding period. Therefore, distributions of
the Fund's capital gain will constitute ordinary income dividends (not capital
gain dividends) to the extent of the Fund's taxable income for that year but
will not qualify for the dividends-received deduction for corporations.
Only the amount of the Fund's dividend distributions (exclusive of capital
gain dividends) which does not exceed the aggregate amount of dividends from
domestic corporations received by the Fund will qualify for the 70%
dividends-received deduction for corporations. Dividends received by the Fund
will be considered dividends for this purpose only if such dividends would
qualify for the dividends-received deduction pursuant to the rules generally
applicable to corporations under Section 246(c) of the Code. Although, there are
no regulations, published rulings or judicial decisions involving the
eligibility for the dividends-received deduction in circumstances substantially
similar to those present here, it is the opinion of Davis Polk & Wardwell,
special counsel for the Sponsors, that upon the sale or other disposition of a
Security, only the last dividend received by the Fund on the Security will fail
to qualify for the dividends-received deduction pursuant to the rules applicable
to the Fund under Section 246(c) of the Code, and therefore that only the last
dividend will not be considered to be a dividend for purposes of determining the
amount of the Fund's dividend distributions which will qualify for the
dividends-received deduction. Opinions of counsel are not binding on the
Internal Revenue Service. The Internal Revenue Service could assert that because
of the existence of the Seller's purchase commitments, none of the dividends
received by the Fund will qualify for the dividends-received deduction under the
rules generally applicable to corporations and therefore that none of the
dividends distributed by the Fund will qualify for the dividends-received
deduction. Although there can be no assurance as to the outcome, it is the
opinion of Davis
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<PAGE>
Polk & Wardwell that the Internal Revenue Service would not prevail if this
issue were properly presented to a court. It should be noted that, in describing
an amendment to Section 246(c) contained in the proposed Technical Corrections
Act of 1985 (which became part of the Tax Reform Act of 1986), the staff of the
Joint Committee on Taxation stated that the pre-Tax Reform Act of 1986 version
of Section 246(c), which is applicable to the Fund, 'appears to retroactively
deny the dividends received deduction' as to all dividends when the holder
disposes of the stock and the 45-day holding period requirement is not met, but
that this may require filing amended returns in some cases and in other cases
the period of limitations may expire. On the other hand, in discussing the pre-
Tax Reform Act of 1986 version of Section 246(c) at the hearings on the proposed
Technical Corrections Act, a representative of the Treasury Department stated
that it believed that the pre-Act version of statute does not provide explicit
guidelines concerning which dividends are denied the dividends-received
deduction when stock is sold or otherwise disposed of and the 45-day holding
period requirement is not met, but that as a policy matter the deduction should
be denied only with respect to the last dividend received prior to the sale or
other disposition of the stock.
It is likely that less than 100% of the Fund's dividend distributions will
qualify for the dividends-received deduction. The exact percentage of the Fund's
dividend distributions in a given year that will so qualify will depend on the
expenses of the Fund for such year and the amount of Securities redeemed or sold
in the year and whether any short-term capital gain results therefrom.
Amounts paid to the Sponsors on account of the deferred portion of the
sales charge will be considered for federal income tax purposes as having been
distributed pro rata to the Holders and then paid by the Holders to the
Sponsors. Accordingly, these deemed distributions will be taxable to Holders as
ordinary income or a return of capital. A portion of the deferred sales charge
may be treated as interest which would be deductible by a Holder subject to
limitations on the deduction of investment interest. The non-interest portion of
the deferred sales charge should be added to the Holder's tax basis in his
Units. The deferred sales charge could cause the Holder's Units to be considered
to be debt-financed under Section 246(A) of the Code which would result in a
proportionately small reduction of the dividends-received deduction. Holders
should consult their own tax advisers as to the income tax consequences of the
deferred sales charge.
RETIREMENT PLANS
The GNMA-COLLATERALIZED BOND SERIES, CASH OR ACCRETION SERIES and SELECT
SERIES 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 these plans are generally treated as ordinary income but may,
in some cases, be eligible for special 5 or 10 year averaging or tax-deferred
rollover treatment. Holders of units in IRAs, Keogh plans and other tax-deferred
retirement plans should consult their plan custodian as to the appropriate
disposition of distributions. Investors considering participation in any of
these plans should review specific tax laws related thereto and should consult
their attorneys or tax advisers with respect to the establishment and
maintenance of any of these plans. These plans are offered by brokerage firms,
including each of the Sponsors, and other financial institutions. Fees and
charges with respect to these plans may vary.
Retirement Plans for the Self-Employed--Keogh Plans. Units of the Funds may
be purchased by retirement plans established pursuant to the Self-Employed
Individuals Tax Retirement Act of 1962 ('Keogh plans') for self-employed
individuals, partnerships or unincorporated companies. Qualified individuals may
generally make
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<PAGE>
annual tax-deductible contributions up to the lesser of 20% of annual
compensation or $30,000 to Keogh plans. The assets of the plan must be held in a
qualified trust or other arrangement which meets the requirements of the Code.
Generally there are penalties for premature distributions from a plan before
attainment of age 59, except in the case of a participant's death or disability
and certain other circumstances. Keogh plan participants may also establish
separate IRAs (see below) to which they may contribute up to an additional
$2,000 per year ($2,250 if a spousal account) is also established.
Individual Retirement Account--IRA. Any individual (including one covered
by an employer retirement plan) can establish an IRA or make use of a qualified
IRA arrangement set up by an employer or union for the purchase of Units of the
Fund. Any individual can make a contribution to an IRA equal to the lesser of
$2,000 ($2,250 if a spousal account is also established) or 100% of earned
income; such investment must be made in cash. However, no deduction is permitted
for an individual over the age of 70 1/2 and the deductible amount an individual
under the age of 70 1/2 may contribute will be reduced if the individual or the
individual's spouse is covered by an employer retirement plan and the
individual's adjusted gross income exceeds $25,000 (in the the case of a single
individual) or $40,000 (in the case of married individuals filing a joint
return). For a married individual who files a separate return, the deductible
contribution is limited to $200 if the individual or the individual's spouse is
covered by a retirement plan, unless the individual's adjusted gross income
exceeds $10,000 in which case the deductible contribution is zero. A married
individual who did not live with a spouse for any part of the year and files a
separate return is treated as a single person for purposes of these rules.
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. It should be noted that 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. A participant's entire interest in an IRA must be, or
commence to be, distributed to the participant not later than the April 1
following the taxable year during which the participant attains age 70 1/2.
Taxable distributions made before attainment of age 59 1/2, except in the case
of a 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.
Corporate Pension and Profit-Sharing Plan. A pension or profit-sharing plan
established for employees of a corporation may purchase Units of the Funds.
PUBLIC SALE OF UNITS
PUBLIC OFFERING PRICE
Unless otherwise specified below or in Part A, the Public Offering Price of
Units is computed by adding to the aggregate bid side (the offering side in CASH
OR ACCRETION BOND SERIES and SELECT SERIES) evaluation of the Securities (as
determined by the Evaluator), divided by the number of Units outstanding, the
sales charge at the applicable percentage of the evaluation per Unit (the net
amount invested). A proportionate share of any cash held by the Fund in the
Capital Account not allocated to the purchase of specific Securities and net
accrued and undistributed interest on the Securities to the date of delivery of
the Units to the purchaser is added to the Public Offering Price. The Public
Offering Price of the Units will vary from day to day in accordance with
fluctuations in the evaluations of the underlying Securities.
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The following tables set forth the applicable percentage of sales charge
and the concession to dealers for the Funds specified. These amounts are reduced
on a graduated scale for quantity purchases and will be applied on whichever
basis is more favorable to the purchaser. 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 as defined below or is purchased for its
own account and not for distribution. Sales charges and dealer concessions are
as follows:
SALES CHARGE
(GROSS UNDERWRITING PROFIT)
DEALER
------------------------------ CONCESSION AS
AS PERCENT OF AS PERCENT OF PERCENT OF
PUBLIC OFFERING NET AMOUNT PUBLIC OFFERING
NUMBER OF UNITS PRICE INVESTED PRICE
- --------------------------------------------------------------------------------
MONTHLY PAYMENT, SELECT HIGH YIELD AND INSURED SERIES
Less than 250...................... 5.50% 5.820% 3.575%
250-499............................ 4.50 4.712 2.925
500-749............................ 3.50 3.627 2.275
750-999............................ 2.50 2.564 1.625
1,000 or more...................... 2.00 2.041 1.300
INTERMEDIATE TERM SERIES
Less than 250...................... 4.75% 4.987% 3.088%
250-499............................ 3.75 3.896 2.438
500-749............................ 2.75 2.828 1.788
750-999............................ 2.00 2.041 1.300
1,000 or more...................... 1.50 1.523 0.975
FIRST GNMA SERIES
Less than 250...................... 4.25% 4.439% 2.763%
250-499............................ 3.25 3.359 2.113
500-749............................ 2.50 2.564 1.625
750-999............................ 2.00 2.041 1.300
1,000 or more...................... 1.50 1.523 0.975
PREFERRED STOCK SERIES
Less than 250...................... 4.50% 4.712% 2.925%
250-499............................ 3.25 3.359 2.113
500-749............................ 2.50 2.564 1.625
750-999............................ 2.00 2.041 1.300
1,000 or more...................... 1.50 1.523 0.975
CASH OR ACCRETION BOND SERIES 1-11 AND SELECT SERIES 12
Less than 250,000.................. 3.50% 3.627% 2.275%
250,000-499,999.................... 2.75 2.828 1.788
500,000-749,999.................... 2.00 2.040 1.300
750,000-999,999.................... 1.50 1.523 0.975
1,000,000 or more.................. 1.00 1.010 0.650
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SALES CHARGE
(GROSS UNDERWRITING PROFIT)
DEALER
------------------------------ CONCESSION AS
AS PERCENT OF AS PERCENT OF PERCENT OF
PUBLIC OFFERING NET AMOUNT PUBLIC OFFERING
NUMBER OF UNITS PRICE INVESTED PRICE
- --------------------------------------------------------------------------------
GNMA-COLLATERALIZED BOND SERIES 8
Less than 250,000.................. 4.50% 4.712% 2.925%
250,000-499-999.................... 3.25 3.359 2.113
500,000-749,999.................... 2.50 2.564 1.625
750,000-999,999.................... 2.00 2.041 1.300
1,000,000 or more.................. 1.50 1.523 0.975
PREFERRED STOCK PUT SERIES
No sales charge; units are priced as set forth below.
The above graduated sales charges will apply on all purchases on any one
day by the same purchaser of Units only in the amounts stated. Concurrent
purchases in the secondary market of one or more Series sponsored by the
Sponsors which have the same rates of sales charge will be aggregated. Units
held in the name of the spouse of the purchaser or in the name of a child of the
purchaser under 21 years of age are deemed to be registered in the name of the
purchaser. The graduated sales charges are also applicable to a trustee or other
fiduciary purchasing securities for a single trust estate or single fiduciary
account.
Employees of certain of the Sponsors and their affiliates may purchase
Units of the Fund at prices based on a reduced sales charge of not less than
$5.00 per Unit (per 1,000 Units in Cash or Accretion and Select Series).
The Public Offering Price of Units of PREFERRED STOCK PUT SERIES is
computed by dividing the offering side evaluation of the Securities (as
determined by the Evaluator) by the number of Units outstanding. A proportionate
share of the amount in the Income Account at the date of delivery of the Units
to the purchaser is added to the Public Offering Price and (on sales of the
SIXTH PREFERRED STOCK PUT SERIES) a proportionate share of the deferred sales
charge (if any) accrued to that date is deducted from the Public Offering Price.
This deferred sales charge, at a rate of .747% per annum of the outstanding par
or stated value of the Securities in that Fund, is calculated on a quarterly
basis on the third day of each January, April, July and October, deducted from
dividend income payable to Holders on the last day of these months and paid to
the Sponsors. The accrued portion is paid out of the proceeds of redemption.
Evaluations of the Securities are determined by the Evaluator, taking into
account the same factors referred to under Redemption--Computation of Redemption
Price per Unit. The determination (except for Put Series) is made each business
day as of the Evaluation Time set forth under Investment Summary in Part A (the
'Evaluation Time'), effective for all sales made since the last of these
evaluations. The determination for Put Series is made on the last business day
of each week, effective for all sales during the following week. (Section 4.01).
The term 'business day', as used herein and under 'Redemption', shall exclude
Saturdays, Sundays and the following holidays as observed by the New York Stock
Exchange: New Year's Day, Washington's Birthday, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. In addition, for FIRST
GNMA SERIES, GNMA COLLATERALIZED BOND SERIES, CASH OR ACCRETION BOND SERIES and
SELECT SERIES, 'business day' shall exclude the following Federal holidays:
Columbus Day, Veteran's Day and Martin Luther King's birthday.
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COMPARISON OF PUBLIC OFFERING PRICE, SPONSORS' REPURCHASE PRICE AND REDEMPTION
PRICE
On the Evaluation Date the Public Offering Price per Unit (which includes
the sales charge) exceeded the Sponsors' Repurchase Price per Unit and the
Redemption Price per Unit (each generally based on the bid side evaluation of
the Securities in the Fund--see Redemption) by the amount set forth under
Investment Summary in Part A. For various reasons (including fluctuations in the
market prices of the Securities and the fact that the Public Offering Price
includes the sales charge), the amount realized by a Holder upon any sale or
redemption of Units may be less than the price paid by him for the Units.
The bid and offering side evaluations of Securities listed on a national
securities exchange or an over-the-counter market will generally be based on the
closing price on that market (see Redemption). In the past, the bid prices of
publicly offered issues have been lower than the offering prices thereof by as
much as 1 1/2% or more of par or stated value in the case of inactively traded
issues and as little as 1/4% in the case of actively traded issues; the
difference between the offering and bid prices has averaged between 1/2% and 1%
of par or stated value. For this and other reasons (including fluctuations in
the market prices of these Securities and the fact that the Public Offering
Price (except on Put Series) includes a sales charge), the amount realized by a
Holder upon any sale or redemption of Units may be less than the price paid by
him for those Units. However, on PUT SERIES, since each Seller has committed to
purchase the Securities on each annual or semi-annual purchase date at the Put
Price, the Sponsors anticipate that the bid side evaluation of the Securities on
those dates will at least equal the Put Price (although not necessarily the
offering side evaluation on the date of purchase). During the period between
these purchase dates, the bid side evaluation of the Securities may fluctuate
but should approach the Put Price as the end of the period approaches.
PUBLIC DISTRIBUTION
The Sponsors intend to continue to qualify Units for sale in certain states
in the U.S. in which qualification is deemed necessary by the Sponsors 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 state or
country where Units cannot lawfully be sold. Sales to dealers are currently made
at prices which represent a concession of the applicable rate specified above,
but the Agent for the Sponsors reserves the right to change the amount of the
concession to dealers from time to time. Any dealer may reallow a concession not
in excess of the concession to dealers.
UNDERWRITERS' AND SPONSORS' PROFITS
In maintaining a market for Units (see Market for Units) the Sponsors will
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 these Units,
as the case may be. On any deposit of Securities into a Fund with respect to the
sale of additional Units to the public the Sponsors may realize a profit or
loss. The amount of any additional fees received in connection with the direct
placement of certain Debt Obligations deposited in the Portfolio is set forth
under Investment Summary in Part A. In addition, any Sponsor or Underwriter may
realize profits or sustain losses in respect of Debt Obligations deposited in
the Fund which were acquired by the Sponsor or Underwriter from underwriting
syndicates of which the Sponsor or Underwriter was a member. On the SIXTH
PREFERRED STOCK PUT SERIES, a deferred sales charge of .747% per annum of the
par or stated value of the Securities, calculated on a quarterly basis, will be
deducted from the dividend income on the Preferred Stocks received by this
Series and will be paid to the Sponsors quarterly. For Units of
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this Series tendered for redemption, a pro rata portion of the accrued deferred
sales charge (if any) will be paid to the Sponsors out of the proceeds of the
redemption. On each PREFERRED STOCK PUT SERIES, the Sponsors also received an
initial placement fee from the Sellers and receive an annual placement fee equal
to a percentage of the Put Price, in the amount indicated under Investment
Summary in Part A. Cash, if any, made available by buyers of Units to the
Sponsors prior to the settlement date for the purchase of Units may be used in
the Sponsors' businesses subject to the limitations of Rule 15c3-3 under the
Securities Exchange Act of 1934 and may be of benefit to the Sponsors.
MARKET FOR UNITS
While the Sponsors are not obligated to do so, it is their intention to
maintain a secondary market for Units of this Series and continuously to offer
to purchase Units of this Series at prices, subject to change at any time, which
will be computed based on the bid side of the market, taking into account the
same factors referred to in determining the bid side evaluation of Securities
for purposes of redemption (see Redemption). The Sponsors also intend to use
their best efforts to maintain a current prospectus for this Series and
subsequent series for a period of approximately six years after initial
distribution of the respective series, the anticipated period of active trading
in units of these series, to the extent required by applicable law in order for
them to dispose of Units held in their inventories. The Sponsors may discontinue
purchases of these Units at prices based on the bid side evaluation of the
Securities (i) should the supply of Units exceed demand or for other business
reasons or (ii) if there is no current prospectus for this Series, or (iii) if,
due to any change subsequent to the date of this Prospectus in conditions
imposed by regulatory or legislative action, the Sponsors cannot at the time
lawfully sell Units to the public without incurring expenses or complying with
conditions which they consider unreasonable or onerous, or (iv) if the right of
redemption shall have been suspended (see Redemption), or (v) if the Indenture
shall have been terminated (see Administration of the Fund--Amendment and
Termination) or (vi) at any time when the aggregate purchase price to the
Sponsors of units of all outstanding series of Defined Asset Funds--Corporate
Income Fund held by the Sponsors in their inventories exceeds an aggregate
amount equal to $3,000,000. In this event the Sponsors may nonetheless under
certain circumstances purchase Units, as a service to Holders, at prices based
on current redemption prices for those Units (see Redemption). The Sponsors, of
course, do not in any way guarantee the enforceability, marketability or price
of any Securities in the Portfolio or of the Units. Prospectuses relating to
certain other unit trusts indicate an intention, subject to change on the part
of the respective sponsors of such trusts, to purchase units of those trusts on
the basis of a price higher than the bid prices of the bonds in the trusts.
Consequently, depending upon the prices actually paid, the repurchase price of
other sponsors for units of their trusts may be computed on a somewhat more
favorable basis than the repurchase price offered by the Sponsors for Units of
this Series in secondary market transactions. As in this Series, the purchase
price per unit of such unit trusts will depend primarily on the value of the
bonds in the portfolio of the trust.
The Sponsors may redeem any Units they have purchased in the secondary
market or through the Trustee in accordance with the procedures described below
if they determine it is undesirable to continue to hold these Units in their
inventories. Factors which the Sponsors will consider in making this
determination will include the number of units of all series of all funds which
they hold in their inventories, the saleability of the units and their estimate
of the time required to sell the units and general market conditions. For a
description of certain consequences of any redemption for remaining Holders, see
Redemption.
A Holder who wishes to dispose of his Units should inquire of his bank or
broker as to current market prices in order to determine if there exist
over-the-counter prices in excess of the repurchase price.
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REDEMPTION
While it is anticipated that Units in most cases can be sold in the
over-the-counter market for an amount equal to the Redemption Price per Unit
(see Market for Units), Units may be redeemed at the office of the Trustee upon
tender on any business day, as defined under Public Sale of Units--Public
Offering Price, of Certificates or, in the case of uncertificated Units,
delivery of a request for redemption, and payment of any relevant tax, without
any other fee (Article V). Certificates to be redeemed must be properly endorsed
or accompanied by a written instrument or instruments of transfer. Holders must
sign exactly as their names appear on the face of the Certificate with the
signatures guaranteed by an eligible guarantor institution, or in some other
manner acceptable to the Trustee. In certain instances the Trustee may require
additional documents including, but not limited to, trust instruments,
certificates of death, appointments as executor or administrator or certificates
of corporate authority.
On the seventh calendar day following the tender (or if the seventh
calendar day is not a business day on the first business day prior thereto), the
Holder will be entitled to receive the proceeds of the redemption in an amount
per Unit equal to the Redemption Price per Unit (see below) as determined as of
the Evaluation Time next following the tender. So long as the Sponsors are
maintaining a market at prices not less than the Redemption Price per Unit, the
Sponsors will repurchase any Units tendered for redemption no later than the
close of business on the second business day following the tender (see Market
for Units). The Trustee is authorized in its discretion, if the Sponsors do not
elect to repurchase any Units tendered for redemption or if a Sponsor tenders
Units for redemption, to sell the Units in the over-the-counter market at prices
which will return to the Holder a net amount in cash equal to or in excess of
the Redemption Price per Unit for the Units (Article V).
The Trustee is empowered to sell Securities in order to make funds
available for redemption (Article V) if funds are not otherwise available in the
Capital and Income Accounts (see Administration of the Fund-- Accounts and
Distributions). The Securities to be sold will be selected from a list supplied
by the Sponsors. Securities will be chosen for this list by the Sponsors on the
basis of those market and credit factors as they may determine are in the best
interests of the Fund. Provision is made under the Indenture for the Sponsors to
specify minimum face amounts in which blocks of Securities are to be sold in
order to obtain the best price for the Fund. While these minimum amounts may
vary from time to time in accordance with market conditions, the Sponsors
believe that the minimum face amounts which would be specified would range from
$25,000 for readily marketable Securities to $250,000 for certain less
marketable Securities or Restricted Securities which can be distributed on short
notice only by private sale, usually to institutional investors. Provision is
also made that sales of Securities may not be made so as to (i) result in the
Fund owning less than $250,000 of any Restricted Security or (ii) result in more
than 50% of the Fund consisting of Restricted Securities. In addition, the
Sponsors will use their best efforts to see that these sales of Securities are
carried out in such a way that no more than 40% in face amount of the Fund is
invested in Restricted Securities, provided that sales of unrestricted
Securities may be made if the Sponsors' best efforts with regard to timely sales
of Restricted Securities at prices they deem reasonable are unsuccessful and if
as a result of these sales more than 50% of the Fund does not consist of
Restricted Securities. Thus the redemption of Units may require the sale of
larger amounts of Restricted Securities than of unrestricted Securities.
To the extent that Securities are sold, the size and diversity of the Fund
will be reduced. Sales will usually be required at a time when Securities would
not otherwise be sold and may result in lower prices than might
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otherwise be realized. The price received upon redemption may be more or less
than the amount paid by the Holder depending on the value of the Securities in
the Portfolio at the time of redemption. In addition, because of the minimum
face amounts in which Securities are required to be sold, the proceeds of sale
may exceed the amount required at the time to redeem Units; these excess
proceeds will be distributed to Holders (see Administration of the
Fund--Portfolio Supervision).
The right of redemption may be suspended and payment postponed (1) for any
period during which the New York Stock Exchange, Inc. is closed other than for
customary weekend and holiday closings, or (2) for any period during which, as
determined by the SEC, (i) trading on that Exchange is restricted or (ii) an
emergency exists as a result of which disposal or evaluation of the Securities
is not reasonably practicable, or (3) for any other periods which the SEC may by
order permit (Article V).
COMPUTATION OF REDEMPTION PRICE PER UNIT
Redemption Price per Unit is computed by the Trustee, as of the Evaluation
Time, on each June 30 and December 31 (or the last business day prior thereto),
on any business day as of the Evaluation Time next following the tender of any
Unit for redemption, and on any other business day desired by the Trustee or the
Sponsors, by adding (a) the aggregate bid side evaluation of the Securities, (b)
cash on hand in the Fund (other than cash covering contracts to purchase
Securities or credited to a reserve account), (c) accrued but unpaid interest on
the Securities up to but not including the date of redemption and (d) the
aggregate value of all other assets of the Fund; deducting therefrom the sum of
(v) taxes or other governmental charges against the Fund not previously
deducted, (w) accrued but unpaid expenses of the Fund, (x) amounts payable for
reimbursement of Trustee advances, (y) cash held for redemption of units for
distribution to Holders of record as of a date prior to the evaluation and (z)
the aggregate value of all other liabilities of the Fund; and dividing the
result by the number of Units outstanding as of the date of computation (Article
V).
The aggregate current bid or offering side evaluation of the Securities is
determined by the Evaluator in the following manner: if the Securities are
traded on the over-the-counter market, this evaluation is generally based on the
closing sale prices on the over-the-counter market (unless the Evaluator deems
these prices inappropriate as a basis for evaluation). If closing sale prices
are unavailable, the evaluation is generally determined (a) on the basis of
current bid or offering prices for the Securities, (b) if bid or offering prices
are not available for any Securities, on the basis of current bid or offering
prices for comparable securities, (c) by appraising the value of the Securities
on the bid or offering side of the market or (d) by any combination of the above
(Article IV). Among the factors to be considered in determining the value of any
Restricted Securities are (i) an estimate of the existence and extent of any
available market therfor, (ii) the extent of any discount at which these
Securities were acquired by the Fund, (iii) the estimated period of time during
which these Securities will not be freely marketable, (iv) the estimated
expenses of qualifying these Securities for public sale, (v) estimated
underwriting commissions, if any, and (vi) any credit or other factors affecting
the issuer or the guarantor of these Securities. In making evaluations, opinions
of counsel may be relied upon as to whether any Securities are Restricted
Securities.
The value of any insurance is reflected in the market value of any Insured
Debt Obligations. The Evaluator will consider the value of any Portfolio
Insurance (including the right to obtain Permanent Insurance) in its evaluation
of Portfolio-Insured Debt Obligations only when they are in default in payment
of principal or interest or in significant risk of default. It is the position
of the Sponsors that this is a fair method of valuing the Insured Debt
Obligations and the insurance and reflects a proper valuation method in
accordance with the provisions of the Investment Company Act of 1940.
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EXPENSES AND CHARGES
FEES
An estimate of the total annual expenses of the Fund is set forth under
Investment Summary in Part A. The Trustee (or Co-Trustees, in the case of
Investors Bank & Trust Company and The First National Bank of Chicago) receives
for its services as Trustee and for reimbursement of expenses incurred on behalf
of the Fund, payable in monthly installments, the amount per Unit or per 1,000
Units, as the case may be, set forth under Investment Summary in Part A as
Trustee's Annual Fee and Expenses, which includes the Evaluator's Fee, the
estimated Portfolio Supervision Fee, estimated reimbursable bookkeeping or other
administrative expenses paid to the Sponsors and certain mailing and printing
expenses (Article III). The Trustee also receives benefits to the extent that it
holds funds on deposit in various non-interest bearing accounts created under
the Indenture.
The Portfolio Supervision Fee with respect to a Fund is based on the face
amount of Debt Obligations in the Fund on the Initial Date of Deposit and on the
first business day of each calendar year thereafter, except that if in any
calendar year Additional Securities are deposited, the fee for the balance of
the year will be based on the face amounts on each Record Day. This fee, which
is not to exceed the maximum amount set forth under Investment Summary in Part
A, may exceed the Sponsors' actual costs of providing portfolio supervisory
services for this Fund, but at no time will the total amount they receive for
portfolio supervisory services rendered to all series of Defined Asset
Funds--Corporate Income Fund in any calendar year exceed the aggregate cost to
them of supplying these services in that year. In addition, the Sponsors may
also be reimbursed for bookkeeping and other administrative services provided to
the Fund in amounts not exceeding their costs of providing these services
(Article III or VII).
The Trustee's and Evaluator's fees are payable on or before each
Distribution Day. The foregoing fees may be adjusted for inflation in accordance
with the terms of the Indenture without approval of Holders (Articles IV, VII
and VIII).
OTHER CHARGES
Other charges that may be incurred by the Fund include: (a) fees of the
Trustee for extraordinary services (Article VIII), (b) certain expenses of the
Trustee (including legal and auditing expenses) and of counsel designated by the
Sponsors (Article III or Article III, VII and VIII), (c) various governmental
charges (Articles III and VIII), (d) expenses and costs of action taken to
protect the Fund (Article VIII), (e) indemnification of the Trustee for any
losses, liabilities and expenses incurred without gross negligence, bad faith or
willful misconduct on its part (Article VIII), (f) indemnification of the
Sponsors for any losses, liabilities and expenses incurred without gross
negligence, bad faith, wilful misconduct or reckless disregard of their duties
(Article VII), (g) expenditures incurred in contacting Holders upon termination
of the Fund (Article IX) and (h) any premiums for additional insurance necessary
to retain the rating of any INSURED SERIES that is rated (see Risk
Factors--Insured Series). The amounts of these charges and fees are secured by a
lien on the Fund and, if the balances in the Income and Capital Accounts (see
below) are insufficient, the Trustee has the power to sell Securities to pay
these amounts (Article VIII).
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ADMINISTRATION OF THE FUND
RECORDS
The Trustee keeps a register of the names, addresses and holdings of all
Holders. 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
are available to Holders for inspection at the office of the Trustee at
reasonable times during business hours (Articles VI and VIII).
ACCOUNTS AND DISTRIBUTIONS
Interest received and dividends payable to the Fund (as of the date on
which the Fund is entitled to receive those dividends as a holder of record of
its Preferred Stocks) are credited to an Income Account and other receipts to a
Capital Account (Article III). For Funds making Monthly Income Distributions
these will be made to each Holder as of each Record Day on the following
Distribution Day or shortly thereafter, on which the amount changes monthly)
each distribution shall consist of an amount substantially equal to one-twelfth
of the Holder's pro rata share of the estimated annual income to the Income
Account, after deducting estimated expenses. An estimate of the Income
Distribution is set forth under Investment Summary in Part A. This amount will
change as Securities mature or are exchanged, redeemed, paid or sold (including
with respect to the SELECT HIGH YIELD SERIES, the required sale of a Security if
its yield to maturity exceeds 130% of the Index), as Replacement Securities are
purchased, as Additional Securities are deposited and New Units created and as
the per Unit expenses of the Fund change. At the same time the Trustee will
distribute the Holder's pro rata share of the distributable cash balance of the
Capital Account computed as of the close of business on the preceding Record
Day. Proceeds received from the disposition, payment or prepayment of any of the
Securities subsequent to a Record Day and prior to the succeeding Distribution
Day will be held in the Capital Account to be distributed on the second
succeeding Distribution Day. The first distribution for persons who purchase
Units between a Record Day and a Distribution Day will be made on the second
Distribution Day following their purchase of Units. No distribution need be made
from the Capital Account if the balance therein is less than the minimum amount
set forth under Investment Summary in Part A (Article III). A Reserve Account
may be created by the Trustee by withdrawing from the Income or Capital
Accounts, from time to time, amounts deemed necessary to reserve for any
material amount that may be payable out of the Fund (Article III). Funds held by
the Trustee in the various accounts created under the Indenture do not bear
interest (Article VIII).
AUTOMATIC UNIT ACCRETION LIQUIDATIONS (CASH OR ACCRETION BOND SERIES AND SELECT
SERIES)
In order to permit Holders whose Units are held in brokers' accounts to
receive quarterly or semi-annual cash payments substantially equivalent to the
accrued but unpaid interest on the Compound Interest Bonds, Holders may elect
(by promptly notifying their account executive so that the broker can notify the
Fund Trustee of the election, not later than ten days prior to the quarterly or
semi-annual Record Day for Unit Accretion Distribution of each year set forth
under Investment Summary in Part A) to sell or redeem the additional Units that
have been credited to their account during the previous six months. Holders of
Units registered with the Fund Trustee should notify the Fund Trustee in writing
of their election not later than ten days prior to the Record Day for Unit
Accretion Distribution. Once a Holder has elected automatic liquidation, the
election will remain in effect until the Fund Trustee has received notice to
rescind the election in the same manner as notified of the election to
automatically liquidate. The proceeds from the sale or redemption will be
distributed to the Holder within seven calendar days of the Unit Accretion
Distribution Date. When additional Units are credited
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to the account of a Holder, although the Holder's pro rata portion of each Bond
does not change, the portion of each Bond represented by each of the Holder's
Units (including additional Units) decreases. The Holder's tax cost for his pro
rata portion of each Bond, as discussed under Taxes, also does not change, but
is spread over the portion of each Bond represented by each of the Holder's
Units (including additional Units). Therefore the Holder's tax cost for his per
Unit portion of each Bond will decrease. Although additional Units will have
been credited to a Holder's account on the basis of one Unit per one dollar of
aggregate increase in Accreted Principal Amount of the Compound Interest Bonds,
the Units sold or redeemed may not generate proceeds equal to one dollar per
Unit because the amount of proceeds depends, of course, on the bid or offering
side evaluations of the Bonds at that time.
If Holders make this election, the Units will be sold to the Sponsors for
resale in the secondary market if at the time the Sponsors are making a market
for Units at a price which will be computed on the basis of the offering side of
the market (see Redemption--Computation of Redemption Price per Unit). If no
secondary market is being maintained by the Sponsors, the Units will be
redeemed. Notice of election to have Unit Accretion Distributions automatically
liquidated quarterly must be received by the Fund Trustee at least ten days
prior to the first quarterly Record Day for Unit Accretion Distribution as to
which the election is to apply.
INVESTMENT ACCUMULATION PROGRAMS
Distributions of interest and any principal or premium received by the Fund
will be paid in cash. However, except for FIRST GNMA SERIES, PREFERRED STOCK PUT
SERIES, GNMA-COLLATERALIZED BOND SERIES, CASH OR ACCRETION BOND SERIES and
SELECT SERIES, a Holder may elect to have these distributions reinvested without
sales charge in The Corporate Fund Accumulation Program, Inc., which is an
open-end management investment company whose primary investment objective is to
obtain a high level of current income through investing in a diversified
portfolio consisting primarily of corporate debt obligations with investment
grade credit characteristics. Holders of Units of the FIRST GNMA SERIES and
GNMA-COLLATERALIZED BOND SERIES may reinvest their distributions in the GNMA
Fund Accumulation Program, Inc. For more complete information about a
reinvestment program, including charges and expenses, return the enclosed form
for a prospectus. Read it carefully before you decide to participate. It should
be noted that interest distributions to Foreign Holders from a reinvestment
program will be subject to U.S. Federal income taxes, including withholding
taxes and that income on shares of a program will not be eligible for the
dividends received deduction for corporations. Investors should note that
obligations in these programs are not insured or backed by other third-party
obligations. Holders participating in these reinvestment programs will be taxed
on their reinvested distributions in the manner described under Taxes even
though distributions are automatically reinvested.
Notice of election to participate must be received by the Trustee in
writing at least ten days before the Record Day for the first distribution to
which the notice is to apply.
PORTFOLIO SUPERVISION
The Fund is a unit investment trust which normally follows a buy and hold
investment strategy and is not actively managed. Traditional methods of
investment management for a managed fund typically involve frequent changes in a
portfolio of securities on the basis of economic, financial and market analyses.
The Portfolio of the Fund, however, will not be actively managed and therefore
the adverse financial condition of an issuer will not necessarily require the
sale of its securities from the Portfolio. Defined Asset Funds investment
professionals are dedicated exclusively to selecting and then monitoring
securities held by the various Defined Funds. On an
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ongoing basis, experienced financial analysts regularly review the portfolios
and may direct the disposition of Securities upon default in payment of amounts
due on any of the Securities, institution of certain legal proceedings,
existence of any other legal questions or impediments affecting a Security or
the payment of amounts due on the Security, default under certain documents
adversely affecting debt service, default in payment of amounts due on other
securities of the same issuer or guarantor, decline in projected income pledged
for debt service on revenue bond issues, if a Security is not consistent with
the investment objective of the Fund, if the Trustee has a right to sell or
redeem a Security pursuant to any applicable guarantee or other credit support
or decline in price or the occurrence of other market or credit factors,
including advance refunding (i.e., the issuance of refunding bonds and the
deposit of the proceeds thereof in trust or escrow to retire the refunded
Securities on their respective redemption dates), that in the opinion of the
Sponsors would make the retention of these Securities detrimental to the
interest of the Holders; and, for Funds qualified as 'regulated investment
companies' (see Section A of Taxes above), if the disposition of these
Securities is desirable in order to maintain the qualification of the Fund as a
'regulated investment company' under the Code (Article III). If a default in the
payment of amounts due on any Security occurs and if the Sponsors fail to give
instructions to sell or to hold the Security, the Indenture provides that the
Trustee, within 30 days of that failure by the Sponsors, may sell the Security
(Article III). Within five days after the elimination of a Debt Obligation and
the deposit of a different Debt Obligation in exchange or substitution therefor,
the Trustee is required to give notice thereof to each Holder, identifying the
Debt Obligations eliminated and the Debt Obligations substituted therefor
(Article III).
Additionally, with respect to the SELECT HIGH YIELD SERIES, the Agent for
the Sponsors will, as promptly as practicable, direct the disposition of any
Security whose yield to maturity (based on the closing bid price) is in excess
of 130% of the 'market weighted yield to maturity' of the High Yield Master
Index for High Yield Corporate Bonds (based on bid prices of the previous day)
(the 'Index') (Article III). The proceeds realized from disposition will be
distributed to Holders. Investors should be aware that in these circumstances,
it may not be possible to sell the Security at the bid price. The Index is
currently compiled by the Fixed Income Research Department ('Fixed Income
Research') of Merrill Lynch, Pierce, Fenner & Smith Incorporated and is
comprised of all public, non-convertible domestic debt issues for which there
are publicly available prices and that (i) have a minimum of $25 million
aggregate principal amount outstanding, (ii) are rated below BBB or Baa by
Standard & Poor's or Moody's, (iii) pay a fixed rate of interest currently (this
excludes zero coupon, pay-in kind and floating rate bonds), (iv) have a
remaining term to maturity of one year or longer and (v) are not in default. The
'market weighted yield to maturity' represents an average of the yields to
maturity of the issues that comprise the Index weighted to take into account
both the principal amount outstanding of each issue in the Index and market
value and is computed midafternoon New York time. Fixed Income Research is an
entirely separate entity from Defined Asset Funds research. Fixed Income
Research prepares the Index as a general client service and not as a special
accommodation for the Fund. It should be emphasized that as the Index
effectively represents the market for fixed-interest paying, high yield debt
securities of any significant size, the investor will not be protected if the
overall quality of the market deteriorates.
For Funds organized as grantor trusts (see Section B of Taxes above), the
Sponsors are required to instruct the Trustee to reject any offer made by an
issuer of any of the Debt Obligations to issue new Debt Obligations in exchange
or substitution for any Debt Obligations pursuant to a refunding or refinancing
plan, except that the Sponsors may instruct the Trustee to accept or reject any
offer or to take any other action with respect thereto as the Sponsors may deem
proper if (a) the issuer is in default with respect to these Debt Obligations or
(b) in the written opinion of the Sponsors the issuer will probably default with
respect to these Debt Obligations in the
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reasonably foreseeable future. Any Debt Obligations so received in exchange or
substitution will be held by the Trustee subject to the terms and conditions of
the Indenture to the same extent as Debt Obligations originally deposited
thereunder.
For Funds qualified as 'regulated investment companies', the Sponsors are
also authorized to direct the reinvestment of the proceeds of the sale of
Securities, exclusive of any capital gain (provided, however, that proceeds
received from Securities sold for purposes of redemption of Units and in excess
of the amount needed for these purposes may be reinvested only in an amount each
year not to exceed 10% of the face amount of Securities in the Fund on the Date
of Deposit), as well as moneys held to cover the purchase of Securities pursuant
to contracts which have failed ('Failed Debt Obligations'), in replacement
Securities ('Replacement Securities') which satisfy conditions specified in the
Indenture including, among other conditions, requirements that the Replacement
Securities satisfy the original selection criteria for the Fund (see Description
of the Fund-- The Portfolio above). These conditions also require that the
purchase of the Replacement Securities will not (i) disqualify the Fund as a
'regulated investment company' under the Code, (ii) result in more than 40% of
the aggregate face amount of the Securities held in the Fund being Restricted
Securities, (iii) result in more than 10% (25% with respect to some Funds) of
the Fund consisting of securities of a single issuer (or of two or more issuers
which are Affiliated Persons as this term is defined in the Investment Company
Act of 1940) which are not registered and are not being registered under the
Securities Act of 1933 or (iv) result in the Fund owning more than 50% of any
single issue which has been registered under the Securities Act of 1933 (Article
III). Income on, capital gains from and the proceeds of the maturity or
redemption of, Securities may not be reinvested in substitute Securities but
must be paid out to Holders in accordance with the Indenture.
For Funds organized as grantor trusts, the Sponsors are authorized to
direct the Trustee to deposit Replacement Securities into the Portfolio to
replace any Failed Debt Obligations or, in connection with the deposit of
Additional Securities, when Securities of an issue originally deposited are
unavailable at the time of subsequent deposit as described more fully below.
Replacement Securities that are replacing Failed Debt Obligations will be
deposited into the Trust Fund within 110 days of the date of deposit of the
contracts that have failed at a purchase price that does not exceed the amount
of funds reserved for the purchase of the Failed Debt Obligations and that
results in a yield to maturity and in a current return, in each case as of that
date of deposit, that are equivalent (taking into consideration then current
market conditions and the relative creditworthiness of the underlying
obligation) to the yield to maturity and current return of the Failed Debt
Obligations. The Replacement Securities shall satisfy the original selection
criteria for the Fund and shall be slected by the Sponsors from a list of
Securities maintained by them and updated from time to time.
The Indenture also requires that the purchase of Replacement Securities
will (i) not be when, as and if issued obligations or Restricted Securities;
(ii) be issued or guaranteed by an issuer subject to or exempt from the
reporting requirements under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (or similar provisions of law) or in effect guaranteed, directly or
indirectly, by means of a lease agreement, agreement to buy securities, services
or products, or other similar commitment of the credit of such an issuer to the
payment of the substitute Securities; (iii) not result in more than 10% (25%
with respect to some Funds) of the Fund consisting of securities of a single
issuer (or of two or more issuers which are Affiliated Persons as this term is
defined in the Investment Company Act of 1940) which are not registered and are
not being registered under the Securities Act of 1933 and (iv) not result in the
Fund owning more than 50% of any single issue which has been registered under
the Securities Act of 1933 (Article III).
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Whenever a Replacement Security has been acquired for the Fund, the Trustee
shall, on the next monthly distribution date that is more than 30 days
thereafter, make a pro rata distribution of the amount, if any, by which the
cost to the Fund of the Failed Debt Obligation exceeded the cost of the
Replacement Security plus accrued interest. If Replacement Securities are not
acquired, the Sponsors shall, on or before the next following Distribution Day,
cause to be refunded to Holders the attributable sales charge, plus the
attributable Cost of Securities to Fund listed under Portfolio in Part A, plus
undistributed income attributable to the Failed Debt Obligation.
For certain Funds, the Indenture authorizes the Sponsors to increase the
size and number of Units of the Fund by the deposit of Additional Securities,
contracts to purchase Additional Securities or cash or a letter of credit with
instructions purchase Additional Securities in exchange for the corresponding
number of additional Units provided that the original proportionate relationship
among the face amounts of each Security established on the Initial Date of
Deposit (the 'Original Proportionate Relationship') is maintained. Deposits of
Additional Securities in Funds organized as grantor trusts, subsequent to the
90day period following the Initial Date of Deposit, must replicate exactly the
original proportionate relationship among the face amounts of Securities
comprising the Portfolio. In Funds qualified as 'regulated investment
companies', the Original Proportionate Relationship must be maintained to the
extent practicable; the Sponsors may specify minimum face amounts in which
Additional Securities will be deposited or purchased; and if a deposit is not
sufficient to acquire minimum amounts of each Security, Additional Securities
may be acquired in the order of the Security most under-represented immediately
before the deposit when compared to the Original Proportionate Relationship. If
Securities of an issue originally deposited are unavailable at the time of
subsequent deposit, or cannot be purchased at reasonable prices or their
purchase is prohibited or restricted by law, regulation or policies applicable
to the Fund or any of the Sponsors, the Sponsors may (1) deposit cash or letter
of credit with instructions to purchase the Security when practicable or (2)
deposit (or instruct the Trustee to purchase) either Securities of one or more
other issues originally deposited or a Replacement Security which will meet the
conditions described above except that it must have a rating at least equal to
the rating of the Security it replaces (or, in the opinion of the Sponsors, have
comparable credit characteristics, if not rated).
REPORTS TO HOLDERS
With each distribution, the Trustee furnishes Holders with a statement of
the amounts of income and other receipts, if any, which are being distributed,
expressed in each case as a dollar amount per Unit. After the end of each
calendar year, the Trustee will furnish to each person who at any time during
the calendar year was a Holder of record a statement (i) summarizing
transactions for the year in the Income and Capital Accounts, (ii) listing the
Securities held and the number of Units outstanding at the end of that calendar
year, (iii) stating the Redemption Price per Unit based upon the computation
thereof made at the end of that calendar year and (iv) specifying the amounts
distributed during that calendar year from the Income and Capital Accounts
(Article III). The accounts of the Fund are audited at least annually by
independent certified public accountants designated by the Sponsors and the
report of the accountants shall be furnished by the Trustee to Holders upon
request (Article VIII).
In order to enable them to comply with Federal and state tax reporting
requirements, Holders of Funds organized as grantor trusts (see Section B of
Taxes above) will be furnished upon request to the Trustee with evaluations of
Securities furnished to it by the Evaluator (Article IV) and evaluations of the
debt obligations in any Other Funds.
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CERTIFICATES
Each purchaser is entitled to receive, on request, without charge (except
perhaps a small mailing charge) a registered Certificate for his Units. These
Certificates are transferable or interchangeable upon presentation at the office
of the Trustee with a payment of $2.00 if required by the Trustee (or other
amounts specified by the Trustee and approved by the Sponsors) for each new
Certificate and any sums payable for taxes or other governmental charges imposed
upon the transaction (Article VI) and compliance with the formalities necessary
to redeem Certificates (see Redemption). Mutilated, destroyed, stolen or lost
Certificates will be replaced upon delivery of satisfactory indemnity and
payment of expenses incurred (Article VI).
AMENDMENT AND TERMINATION
The Sponsors and Trustee may amend the Indenture, without the consent of
the Holders, (a) to cure any ambiguity or to correct or supplement any provision
thereof which may be defective or inconsistent, (b) to change any provision
thereof as may be required by the SEC or any successor governmental agency, (c)
to add or change any provision thereof as may be necessary or advisable for
continuing qualification of the Fund as a regulated investment company under the
Code (for Funds qualified as regulated investment companies -- see Section A of
Taxes above) or (d) to any other provisions which do not adversely affect the
interest of the Holders (as determined in good faith by the Sponsors). The
Indenture may not be amended to increase the number of Units issuable
thereunder, or to permit, except in accordance with provisions of the Indenture,
the acquisition of any Securities other than those initially deposited in the
Fund. The Indenture may also be amended in any respect by the Sponsors and the
Trustee, or any of the provisions thereof may be waived, with the consent of the
Holders of 51% of the then outstanding Units (66 2/3% of the then outstanding
Units in the case of First through One Hundred Twenty-Fourth Monthly Payment
Series) provided that none of these amendments or waivers will reduce the
interest in the Fund of any Holder without the consent of the Holder or reduce
the percentage of Units required to consent to any of these amendments or
waivers without the consent of all Holders (Article X).
The Fund will terminate and will be liquidated upon the maturity, sale,
redemption or other disposition of the last Security held thereunder but in no
event is it to continue beyond the mandatory termination date set forth under
Investment Summary in Part A. Any Fund with a Date of Deposit after June 16,
1987 will in no event continue beyond the expiration of 20 years after the death
of the last survivor of eight persons named in the Indenture, the oldest of whom
was born in 1985 and the youngest of whom was born in 1987. The mandatory
termination date for other Funds is approximately 50 years following the Date of
Deposit. The Indenture may be terminated by the Sponsors if the value of the
Fund is less than the minimum value set forth under Investment Summary in Part
A, and may be terminated at any time by written instruments executed by the
Sponsors and consented to by Holders of the same percentage of the Units as
stated in the preceding paragraph (Articles VIII and IX). The Trustee will
deliver written notice of any termination to each Holder within a reasonable
time prior to the termination, specifying the times at which the Holders may
surrender their Certificates for cancellation. Within a reasonable time after
the termination, the Trustee must sell all of the Securities then held and
distribute to each Holder, upon surrender for cancellation of his Certificates
and after deductions for accrued and unpaid fees, taxes and governmental and
other charges, that Holder's interest in the Income and Capital Accounts
(Article IX). This distribution will normally be made by mailing a check in the
amount of each Holder's interest in these accounts to the address of the Holder
appearing on the record books of the Trustee.
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RESIGNATION, REMOVAL AND LIMITATIONS ON LIABILITY
SPONSORS
Any Sponsor may resign if one remaining Sponsor maintains a net worth of
$2,000,000 and is agreeable to the resignation (Article VII). A new Sponsor may
be appointed by the remaining Sponsors and the Trustee (or Co-Trustee , if any)
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 becomes
bankrupt or its affairs are taken over by public authorities, then the Trustee
(or Co-Trustee) may (a) appoint a successor Sponsor at rates of compensation
deemed by the Trustee to be reasonable and as may not exceed amounts prescribed
by the Securities and Exchange Commission, or (b) terminate the Indenture and
liquidate the Fund or (c) continue to act as Trustee without terminating the
Indenture (Article VIII). The Agent for the Sponsors has been appointed by the
other Sponsors for purposes of taking action under the Indenture (Article VII).
If the Sponsors are unable to agree with respect to action to be taken jointly
by them under the Indenture and they cannot agree as to which Sponsors shall
continue to act as Sponsors, then Merrill Lynch, Pierce, Fenner & Smith
Incorporated shall continue to act as sole Sponsor (Article VII). If one of the
Sponsors fails to perform its duties or becomes incapable of acting or becomes
bankrupt or its affairs are taken over by public authorities, then that Sponsor
is automatically discharged and the other Sponsors shall act as Sponsors
(Article VII). The Sponsors shall be under no liability to the Fund or to the
Holders for taking any action or for refraining from taking any action in good
faith or for errors in judgment and shall not be liable or responsible in any
way for depreciation or loss incurred by reason of the sale of any Security.
This provision, however, shall not protect the Sponsors in cases of wilful
misfeasance, bad faith, gross negligence or reckless disregard of their
obligations and duties (Article VII). The Sponsors and their successors are
jointly and severally liable under the Indenture. A Sponsor may transfer all or
substantially all of its assets to a corporation or partnership which carries on
its business and duly assumes all of its obligations under the Indenture and in
that event it shall be relieved of all further liability under the Indenture
(Article VII).
TRUSTEES AND CUSTODIAN
Any Trustee or Custodian or any successor may resign upon notice to the
Sponsors and any remaining Trustee. Any Trustee or Custodian may be removed at
any time upon the direction of the Holders of more than 50% of the Units of
MONTHLY PAYMENT SERIES 125-130 and of 51% or more of the Units of any subsequent
MONTHLY PAYMENT SERIES, or any HIGH YIELD, INSURED, PREFERRED STOCK, PUT, CASH
OR ACCRETION OR SELECT SERIES) or for any Series by the Sponsors (or the
Co-Trustee if the Trustee is the party so affected and the Sponsors do not take
action) without the consent of any of the Holders if that Trustee or Custodian
becomes incapable of acting or becomes bankrupt or its affairs are taken over by
public authorities or if for any reason the Sponsors determine in good faith
that the replacement of the Trustee is in the best interest of the Holders. The
resignation or removal shall become effective upon the acceptance of appointment
by the successor which may, in the case of a resigning or removed Co-Trustee, be
one or more of the remaining Co-Trustees. In the case of a resignation or
removal, the Sponsors are to use their best efforts to appoint a successor
promptly and if upon resignation of the Trustee no successor has accepted
appointment within thirty days after notification, the Trustee or Custodian may
apply to a court of competent jurisdiction for the appointment of a successor
(Article VIII). The Trustees and Custodian shall be under no liability for any
action taken in good faith in reliance on prima facie properly executed
documents or for the disposition of monies or Securities under the Indenture.
This provision, however, shall not protect any Trustee or Custodian in cases of
wilful misfeasance, bad faith, negligence or reckless disregard of its
obligations and duties. In the event of the failure of the Sponsors to act, the
Co-Trustee (or if there is no Co-
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Trustee, the Trustee) and any Custodian may act under the Indenture and shall
not be liable for any of these actions taken in good faith. The Trustees and
Custodian shall not be personally liable for any taxes or other governmental
charges imposed upon or in respect of the Securities or upon the interest
thereon. In addition, the Indenture contains other customary provisions limiting
the liability of the Trustees and any Custodian (Articles III or III and VIII).
THE EVALUATOR
The Evaluator may resign or may be removed, effective upon the acceptance
of appointment by its successor, by the Sponsors and any Co-Trustee, who are to
use their best efforts to appoint a successor promptly. If upon resignation of
the Evaluator no successor has accepted appointment within thirty days after
notification, the Evaluator may apply to a court of competent jurisdiction for
the appointment of a successor (Article IV). Determinations by the Evaluator
under the Indenture shall be made in good faith upon the basis of the best
information available to it; provided, however, that the Evaluator shall be
under no liability to the Trustee, the Sponsors or the Holders for errors in
judgment. This provision, however, shall not protect the Evaluator in cases of
wilful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties (Article IV). The Trustee, the Sponsors and the Holders
may rely on any evaluation furnished by the Evaluator and shall have no
responsibility for the accuracy thereof.
MISCELLANEOUS
TRUSTEE
The Trustee of the Fund is named on the back cover of Part A and is either
(acting as Co-Trustees) Investors Bank & Trust Company, a Massachusetts trust
company with its unit investment trust servicing group at One Lincoln Plaza,
P.O. Box 1537, Boston, Massachusetts 02205-1537 (which is subject to supervision
by the Massachusetts Commissioner of Banks, the Federal Deposit Insurance
Corporation and the Board of Governors of the Federal Reserve System) and the
First National Bank of Chicago, a national banking association with its
corporate trust office at One First National Plaza, Suite 0126, Chicago,
Illinois 60670-0126, Comptroller of the Currency, the Federal Deposit Insurance
Corporation and the Board of Governors of the Federal Reserve System); The Chase
Manhattan Bank N.A., a banking corporation with its Unit Trust Department at 1
Chase Manhattan Plaza--3B, New York, New York 10081 (which is subject to
supervision by the Comptroller of the Currency, the Federal Deposit Insurance
Corporation and the Board of Governors of the Federal Reserve System); The Bank
of New York, a New York banking corporation with its office at Unit Investment
Trust Department at 101 Barclay Street, New York, New York 10286 (which is
subject to supervision by the New York Superintendent of Banks, the Federal
Deposit Insurance Corporation and the Board of Governors of the Federal Reserve
System); Bankers Trust Company, a New York banking corporation with its
corporate trust office at 4 Albany Street, 7th Floor, New York, New York 10015
(which is subject to supervision by the New York Superintendent of Banks, the
Federal Deposit Insurance Corporation and the Board of Governors of the Federal
Reserve System); or United States Trust Company of New York, a banking
corporation with its corporate trust office at 45 Wall Street, New York, New
York 10005 (which is subject to supervision by the New York Superintendent of
Banks, the Federal Deposit Insurance Corporation and the Board of Governors of
the Federal Reserve System).
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LEGAL OPINION
The legality of the Units originally offered has been passed upon by Davis
Polk & Wardwell, 450 Lexington Avenue, New York, New York 10017, as special
counsel for the Sponsors. Emmet, Marvin & Martin, 48 Wall Street, New York, New
York 10005, act as counsel for The Bank of New York, as Trustee. Bingham, Dana &
Gould, 150 Federal Street, Boston, Massachusetts 02110, act as counsel for The
First National Bank of Chicago and Investors Bank & Trust Company, as
Co-Trustees. Hawkins, Delafield & Wood, 67 Wall Street, New York, New York
10005, act as counsel for Bankers Trust Company, as Trustee. Carter, Ledyard &
Milburn, 2 Wall Street, New York, New York 10005, act as counsel for United
States Trust Company of New York, as Trustee.
AUDITORS
The financial statements of the Fund included in Part A have been examined
by Deloitte & Touche, independent accountants, as stated in their opinion
appearing therein and have been so included in reliance upon that opinion given
on the authority of that firm as experts in accounting and auditing.
SPONSORS
The Sponsors of this Fund are listed on the cover of Part A. Each Sponsor
is a Delaware corporation and is engaged in the underwriting, securities and
commodities brokerage business, and is a member of the New York Stock Exchange,
Inc., other major securities exchanges and commodity exchanges and the National
Association of Securities Dealers, Inc. Merrill Lynch, Pierce, Fenner and Smith
Incorporated and Merrill Lynch Asset Management, a Delaware corporation, each of
which is a subsidiary of Merrill Lynch & Co., Inc., are engaged in the
investment advisory business. Smith Barney Shearson Inc., an investment banking
and securities broker-dealer firm, is an indirect wholly-owned subsidiary of
Primerica Corporation ('Primerica'). In July 1993 Primerica and Smith Barney,
Harris Upham & Co. Incorporated ('Smith Barney') acquired the assets of the
domestic retail brokerage and asset management businesses of Shearson Lehman
Brothers Inc. ('Shearson'), previously a co-Sponsor of various Defined Asset
Funds. Prudential Securities Incorporated, a wholly-owned subsidiary of
Prudential Securities Group Inc. and an indirect wholly-owned subsidiary of the
Prudential Insurance Company of America, is engaged in the investment advisory
business. Prudential Securities Incorporated, a wholly-owned subsidiary of
Prudential Securities Group Inc. and an indirect wholly-owned subsidiary of the
Prudential Insurance Company of America, is engaged in the investment advisory
business. Dean Witter Reynolds Inc., a principal operating subsidiary of Dean
Witter, Discover & Co., is engaged in the investment advisory business.
PaineWebber Incorporated is engaged in the investment advisory business and is a
wholly-owned subsidiary of PaineWebber Group Inc. 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.
Each Sponsor (or a predecessor) has acted as Sponsor of various series of
Defined Asset Funds. A subsidiary of Merrill Lynch, Pierce, Fenner & Smith
Incorporated succeeded in 1970 to the business of Goodbody & Co., which had been
a co-Sponsor of Defined Asset Funds since 1964. That subsidiary resigned as
Sponsor of each of the Goodbody series in 1971. Merrill Lynch, Pierce, Fenner &
Smith Incorporated has been co-Sponsor and the Agent for the Sponsors of each
series of Defined Asset Funds created since 1971. Shearson Lehman Brothers Inc.
and certain of its predecessor were underwriters beginning in 1962 and
co-Sponsors from 1965 to 1967 and from
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1980 to 1993 of various Defined Asset Funds. As a result of the acquisition of
certain of Shearson's assets by Smith Barney and Primerica, as described above,
Smith Barney Shearson Inc. now serves as co-Sponsor of various Defined Asset
Funds. Prudential Securities Incorporated and its predecessors have been
underwriters of Defined Asset Funds since 1961 and co-Sponsors since 1964, in
which year its predecessor became successor co-Sponsor to the original Sponsor.
Dean Witter Reynolds Inc. and its predecessors have been underwriters of various
Defined Asset Funds since 1964 and co-Sponsors since 1974. PaineWebber
Incorporated and its predecessor have co-Sponsored certain Defined Asset Funds
since 1983.
The Sponsors have maintained secondary markets in Defined Asset Funds for
over 20 years. For decades informed investors have purchased unit investment
trusts for dependability and professional selection of investments. Defined
Asset Funds offers an array of 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 a nest egg for retirement, or attractive,
regular current income consistent with relative protection of capital. There are
Defined Funds to meet the needs of just about any investor. Unit invesment
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, capital
or time 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 offered by
Defined Funds. Sometimes it takes a combination of Defined Assets to plan for
your objectives.
One of your most important investment decisions may be how you divide your
money among asset classes. Spreading your money among different kinds of
investments can balance the risks and rewards of each one. Most investment
experts recommend stocks for long-term capital growth. For attractive income
consider long-term corporate bonds. By purchasing both defined equity and
defined bond funds, investors can receive attractive current income and growth
potential, offering some protection against inflation.
The following chart shows the average annual compounded rate of return of
selected asset classes over the 10-year and 20-year periods ending December 31,
1992, compared to the rate of inflation over the same periods. Of course, this
chart represents past performance of these investment categories and is no
guarantee of future
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results either of these categories or of Defined Funds. Defined Funds also have
sales charges and expenses, which are not reflected in the chart.
Stocks (S&P 500)
20 yr 11.33%
10 yr 16.19%
Small-company stocks
20 yr 15.54%
10 yr 11.55%
Long-term corporate bonds
20 yr 9.54%
10 yr 13.14%
U.S. Treasury bills (short-term)
20 yr 7.70%
10 yr 6.95%
Consumer Price Index
20 yr 6.21%
10 yr 3.81%
0 2 4 6 8 10
12 14 16 18%
Source: Ibbotson Associates (Chicago)
Used with Permission. All rights reserved.
By purchasing Defined Funds, investors not only avoid the responsibility of
selecting individual securities by themselves, but also gain the advantage of a
higher degree of safety by holding interests in securities of several different
issuers. Spreading your investment among different securities and issuers
reduces your risk, but does not eliminate it. Municipal Defined Funds offer a
simple and convenient way for investors to earn monthly income free from regular
Federal income tax. When individual bonds are called or mature, investors might
consider reinvesting their proceeds in municipal Defined Funds. The securities
in managed funds continually change. With defined bond funds, the portfolio is
defined, so that generally the securities, maturities, call dates and rating are
known before you buy. Investors buy bonds for dependability--they know what they
can expect to earn and that principal is distributed as the bonds mature. The
defined portfolio of securities listed in the prospectus and regular income
distributions make defined bond funds a dependable investment. Investors know
when they buy what their estimated income, current and long-term returns will
be, subject to credit and market risks and to changes in the portfolio or the
fund's expenses.
Defined Asset Funds offers a variety of fund types. The tax exemption for
municipal bonds, which makes them attractive to high-bracket taxpayers, is
available through Defined Municipal Investment Trust Funds. Defined Corporate
Income Funds, with higher current returns than municipal or government funds,
are suitable for IRAs and other tax-advantaged accounts and offer investors a
simple and convenient way to earn monthly
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income. Defined Government Securities Income Funds offer investors a simple and
convenient way to participate in markets for Government securities while earning
an attractive current return. Defined International Bond Funds, invested in
bonds payable in foreign currencies, offer a potential to profit from changes in
currency values and possibly from interest rates higher than paid on comparable
U.S. bonds, but investors incur a higher risk for these potentially greater
returns. Historically, stocks have offered a potential for growth of capital,
and thus some protection against inflation, over the long term. Defined Equity
Income Funds offer participation in the stock market, providing current income
as well as the possibility of capital appreciation. The S&P Index Trusts offer a
convenient and inexpensive way to participate in broad market movements. Concept
Series seek to capitalize on selected anticipated economic, political or
business trends. Utility Stock Series, consisting of stocks of issuers with
established reputations for regular cash dividends, seek to benefit from
dividend increases. Select Ten Portfolios seek total return by investing for one
year in the ten highest yielding stocks on a designated Stock Index.
DESCRIPTION OF RATINGS (as described by the rating companies themselves.)
STANDARD & POOR'S CORPORATION
A Standard & Poor's rating on the units of an investment trust (hereinafter
referred to collectively as 'units' and 'funds') is a current assessment of
credit quality of the investments held by the trust. This assessment takes into
consideration the financial capacity of the issuers and of any guarantors,
insurers, lessees, or mortgagors with respect to such investments. The
assessment, however, does not take into account the extent to which fund
expenses or portfolio asset sales for less than the fund's purchase price will
reduce payment to the unit holder of the interest and principal required to be
paid on the portfolio assets. In addition, the rating is not a recommendation to
purchase, sell, or hold units, inasmuch as the rating does not comment as to
market price of the units or suitability for a particular investor. Funds rated
AAA are composed exclusively of assets that are rated AAA by Standard & Poor's
and/or certain short-term investments.
BONDS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB-rating
B--Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair
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capacity or willingness to pay interest and repay principal. The B Rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied BB or BB-rating.
CCC--Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B-rating.
CC--The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C--The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC-debt rating. The C rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
C1--The rating C1 is reserved for income bonds on which no interest is
being paid.
D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Ratings may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.*
NR--Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
MOODY'S INVESTORS SERVICE
Aaa--Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edge'. Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
- ---------------
* A provisional rating, indicated by 'p' following a rating, assumes the
successful completion of the project being financed by the issuance of the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion.
Conditional ratings, indicated by 'Con.', are sometimes given when the
security for the bond depends upon the completion of some act or the fulfillment
of some condition. Such bonds are given a conditional rating that denotes their
probable credit stature upon completion of that act or fulfillment of that
condition.
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<PAGE>
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Rating symbols may include numerical modifiers 1, 2 or 3. The numerical
modifier 1 indicates that the security ranks at the high end, 2 in the
mid-range, and 3 nearer the low end, of the generic category. These modifiers of
rating symbols give investors a more precise indication of relative debt quality
in each of the historically defined categories.
Conditional ratings, indicated by 'Con.', are sometimes given when the
security for the bond depends upon the completion of some condition. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
NR--Should no rating be assigned, the reason may be one of the following:
(a) an application for rating was not received or accepted; (b) the issue or
issuer belongs to a group of securities that are not rated as a matter of
policy; (c) there is a lack of essential data pertaining to the issue or issuer
or (d) the issue was privately placed, in which case the rating is not published
in Moody's publications.
PREFERRED STOCK
STANDARD & POOR'S CORPORATION
AAA--This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA--A preferred stock issue rated 'AA' also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated 'AAA.'
81
<PAGE>
A--An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB--An issue rated 'BBB' is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the A category.
BB, B, CCC--Preferred stock rated 'BB,' 'B' and 'CCC' are regarded, on
balance, as predominately speculative with respect to the issuer's capacity to
pay preferred stock obligations. 'BB' indicates the lowest degree of speculation
and 'CCC' the highest degree of speculation. While such issues will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC--The rating 'CC' is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C--A preferred stock rated 'C' is a nonpaying issue.
D--A preferred stock rated 'D' is a nonpaying issue with the issuer in
default on debt instruments.
NR--Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Plus (I) or Minus (-)--To provide more detailed indications of preferred
stock quality, the ratings from 'AA' to 'B' may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE
aaa--An issue which is rated 'aaa' is considered to be a topquality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa--An issue which is rated 'aa' is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
a--An issue which is rated 'a' is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater that in the 'aaa'
and 'aa' classifications, earnings and asset protections are, nevertheless,
expected to be maintained at adequate levels.
baa--An issue which is rated 'baa' is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba--An issue which is rated 'ba' is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b--An issue which is rated 'b' generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa--An issue which is rated 'caa' is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
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<PAGE>
ca--An issue which is rated 'ca' is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
c--This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
EXCHANGE OPTION (NOT AVAILABLE IN PREFERRED STOCK PUT SERIES)
ELECTION
Holders may elect to exchange any or all of their Units of this Series for
units of one or more of the series of Funds listed in the table below (the
'Exchange Funds'), which normally are sold in the secondary market at prices
which include the sales charge indicated in the table. Certain series of the
Funds listed have lower maximum applicable sales charges than those stated in
the table; also the rates of sales charges may be changed from time to time. No
series with a maximum applicable sales charge of less than 3.50% of the public
offering price is eligible for the Exchange Option, with the following
exceptions: (1) Freddie Mac Series may be acquired by exchange during the
initial offering period from any of the Exchange Funds listed in the table and
(2) Units of any Select Ten Portfolio may be acquired during their initial
offering period or thereafter by exchange from any Series, if available. Units
of the Exchange Funds may be acquired at prices which include the reduced sales
charge for Exchange Fund units listed in the table, subject, however, to these
important limitations:
First, there must be a secondary market maintained by the Sponsors in
units of the series being exchanged and a primary or secondary market in
units of the series being acquired and there must be units of the
applicable Exchange Fund lawfully available for sale in the state in which
the Holder is resident. There is no legal obligation on the part of the
Sponsors to maintain a market for any units or to maintain the legal
qualification for sale of any of these units in any state or states.
Therefore, there is no assurance that a market for units will in fact exist
or that any units will be lawfully available for sale on any given date at
which a Holder wishes to sell his Units of this Series and thus there is no
assurance that the Exchange Option will be available to any Holder.
Second, when units held for less than five months are exchanged for
units with a higher regular sales charge, the sales charge will be the
greater of (a) the reduced sales charge set forth in the table below or (b)
the difference between the sales charge paid in acquiring the units being
exchanged and the regular sales charge for the quantity of units being
acquired, determined as of the date of the exchange.
Third, exchanges will be effected in whole units only. If the proceeds
from the Units being surrendered are less than the cost of a whole number
of units being acquired, the exchanging Holder will be permitted to add
cash in an amount to round up to the next highest number of whole units.
Fourth, the Sponsors reserve the right to modify, suspend or terminate
the Exchange Option at any time without further notice to Holders. In the
event the Exchange Option is not available to a Holder at the time he
wishes to exercise it, the Holder will be immediately notified and no
action will be taken with respect to his Units without further instruction
from the Holder.
PROCEDURES
To exercise the Exchange Option, a Holder should notify one of the Sponsors
of his desire to use the proceeds from the sale of his Units of this Series to
purchase units of one or more of the Exchange Funds. If units of the
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<PAGE>
applicable outstanding series of the Exchange Fund are at that time available
for sale, the Holder may select the series or group of series for which he
desires his Units to be exchanged. Of course, the Holder will be provided with a
current prospectus relating to each series in which he indicates interest. The
exchange transaction will operate in a manner essentially identical to any
secondary market transaction, i.e., Units will be repurchased at a price equal
to the aggregate bid side evaluation per Unit of the Securities in the Portfolio
plus accrued interest. Units of the Exchange Fund generally will be sold to the
Holder at a price equal to the bid side evaluation per unit of the underlying
securities in the Portfolio plus interest plus the applicable sales charge
listed in the table below. Units of a Series acquired during the initial public
offering period will be sold at a price based on the offering side evaluation of
the underlying Securities. Units of The Equity Income Fund are sold, and will be
repurchased, at a price normally based on the closing sale prices on the New
York Stock Exchange, Inc. of the underlying securities in the Portfolio. The
maximum applicable sales charges for units of the Exchange Funds are also listed
in the table. Excess proceeds not used to acquire whole Exchange Fund units will
be paid to the exchanging Holder.
THE EXCHANGE FUNDS
The income from taxable fixed income securities is normally higher than
that available from tax exempt fixed income securities. Certain of the Exchange
Funds do not provide for periodic payments of interest and are best suited for
purchase by IRA's, Keogh plans, pension funds or other tax-deferred retirement
plans. Consequently, some of the Exchange Funds may be inappropriate investments
for some Holders and therefore may be inappropriate exchanges for Units of this
Series. The table below indicates certain characteristics of each of the
Exchange Funds which a Holder should consider in determining whether each
Exchange Fund would be an appropriate investment vehicle and an appropriate
exchange for Units of this Series.
CONVERSION OPTION
Owners of units of any registered unit investment trust sponsored by others
which was initially offered at a maximum applicable sales charge of at least
3.0% ('Conversion Trust') may elect to apply the cash proceeds of sale or
redemption of those units directly to acquire available units of any Exchange
Fund at the reduced sales charge, subject to the terms and conditions applicable
to the Exchange Option (except that no secondary market is required in
Conversion Trust units). To exercise this option, the owner should notify his
retail broker. He will be given a prospectus of each series in which he
indicates interest of which units are available. The broker must sell or redeem
the units of the Conversion Trust. Any broker other than a Sponsor must certify
to the Sponsors that the purchase of units of the Exchange Fund is being made
pursuant to and is eligible for this conversion option. The broker will be
entitled to two thirds of the applicable reduced sales charge. The Sponsors
reserve the right to modify, suspend or terminate the conversion option at any
time without further notice, including the right to increase the reduced sales
charge applicable to this option (but not in excess of $5 more per unit than the
corresponding fee then charged for the Exchange Option).
TAX CONSEQUENCES
An exchange of Units pursuant to the Exchange or Conversion Option for
units of a series of another Fund should constitute a 'taxable event' under the
Code, requiring a Holder to recognize a tax gain or loss, subject to the
limitation discussed below. The Internal Revenue Service may seek to disallow a
loss (or a pro rata portion thereof) on an exchange of Units if the units
received by a Holder in connection with such an exchange represent securities
that are not materially different from the securities that his previous units
represented (e.g., both Funds
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<PAGE>
contain securities issued by the same obligor that have the same material
terms.) Holders are urged to consult their own tax advisers as to the tax
consequences to them of exchanging units in particular cases.
WITH REGARD TO REGULATED INVESTMENT COMPANIES ONLY (SEE TAXES, SECTION A):
A Holder's tax gain recognized on an exchange of Units for units of an Exchange
Fund which is also a regulated investment company will increase (or a Holder's
tax loss will decrease) by the lesser of (a) the sales charge applicable to the
Units of this series or (b) the reduction in the sales charge on the Exchange
Fund Units, if the exchange is made within 90 days of the purchase of the Units
of this series. Any such increase (or decrease) will be reflected in a decreased
tax gain (or increased tax loss) when the Exchange Fund Units were sold.
EXAMPLE
Assume that a Holder, who has three units of a fund with a 5.50% sales
charge in the secondary market and a current price (based on bid side evaluation
plus accrued interest) of $1,100 per unit, sells his units and exchanges the
proceeds for units of a series of an Exchange Fund with a current price of $950
per unit and the same sales charge. The proceeds from the Holder's units will
aggregate $3,300. Since only whole units of an Exchange Fund may be purchased,
the Holder would be able to acquire four units in the Exchange Fund for a total
cost of $3,860 ($3,800 for units and $60 for the $15 per unit sales charge) by
adding an extra $560 in cash. Were the Holder to acquire the same number of
units at the same time in the regular secondary market maintained by the
Sponsors, the price would be $4,021.16 ($3,800 for the units and $221.16 for the
5.50% sales charge).
<TABLE>
<CAPTION>
REDUCED
MAXIMUM SALES CHARGE
NAME OF APPLICABLE FOR SECONDARY INVESTMENT
EXCHANGE FUND SALES CHARGE* MARKET** CHARACTERISTICS
- --------------------------------------- --------------- ---------------------- --------------------------------------------------
<S> <C> <C> <C>
MUNICIPAL INVESTMENT TRUST FUND
Monthly Payment, State and 5.50%+ $15 per unit long-term, fixed rate, tax-exempt income
Multistate Series
Intermediate Term Series 4.50%+ $15 per unit intermediate-term, fixed rate, tax-exempt income
Insured Series 5.50%+ $15 per unit long-term, fixed rate, tax-exempt current income,
underlying securities insured by insurance
companies
AMT Monthly Payment Series 5.50%+ $15 per unit long-term, fixed rate, income exempt from regular
federal income tax but partially subject to AMT
THE EQUITY INCOME FUND
Utility Common Stock Series 4.50% $15 per 1,000 units++ dividends, taxable income, underlying securities
are common stocks of public utilities
Select 10 Portfolios 2.75% $17.50 per 1,000 units underlying securities represent 10 of Dow Jones
Industrial Average stocks with highest dividend
yield as of date of creation of fund
</TABLE>
- ---------------
* As described in the prospectuses relating to certain Exchange Funds, this
sales charge for secondary market sales may be reduced on a graduated scale
in the case of quantity purchases.
** The reduced sales charge for Units acquired during their initial offering
period is: $20 per unit for Series for which the Reduced Sales Charge for
Secondary Market (above) is $15 per unit; $20 per 100 units for Series for
which the Reduced Sales Charge for Secondary Market is $15 per 100 units;
$20 per 1,000 units for Series for which the Reduced Sales Charge for
Secondary Market is $15 per 1,000 units; and the same as in the secondary
market for Series for which the Reduced Sales Charge for Secondary Market is
Maximum $30 deferred sales charge per 1,000 units.
+ Subject to reduction depending on the maturities of the underlying
obligations.
++ The reduced sales charge for the Sixth Utility Common Stock Series of The
Equity Income Fund is $15 per 2,000 units and for prior Utility Common Stock
Series is $7.50 per unit.
85
<PAGE>
<TABLE>
<CAPTION>
REDUCED
MAXIMUM SALES CHARGE
NAME OF APPLICABLE FOR SECONDARY INVESTMENT
EXCHANGE FUND SALES CHARGE* MARKET** CHARACTERISTICS
- --------------------------------------- --------------- ---------------------- --------------------------------------------------
<S> <C> <C> <C>
Concept Series 4.00% $15 per 100 units underlying securities constitute a professionally
selected portfolio of common stocks consistent
with an investment idea or concept
MUNICIPAL INCOME FUND
Insured Discount Series 5.50% $15 per unit long-term, fixed rate, tax-exempt current income,
taxable capital gains
THE CORPORATE INCOME FUND
Monthly Payment Series 5.50% $15 per unit long-term, fixed rate, taxable income
Intermediate Term Series 4.75% $15 per unit intermediate-term, fixed rate, taxable income
Cash or Accretion Bond Series and 3.50% $15 per 1,000 units intermediate-term, fixed rate, underlying
SELECT Series securities composed of compound interest
obligations principally secured by collateral
backed by the full faith and credit of the United
States, taxable return, appropriate for IRA's or
tax-deferred retirement plans
Insured Series 5.50% $15 per unit Long-term, fixed rate, taxable income, underlying
securities are insured
THE INTERNATIONAL BOND FUND
Multi-Currency Series 3.75% $15 per unit intermediate-term, fixed rate, payable in foreign
currencies, taxable income
Australian and New Zealand Dollar 3.75% $15 per unit intermediate-term, fixed rate, payable in
Bonds Series Australian and New Zealand dollars, taxable income
Australian Dollar Bonds Series 3.75 $15 per unit intermediate-term, fixed rate, payable in
Australian dollars, taxable income
Canadian Dollar Bonds Series 3.50% $15 per unit short intermediate term, fixed rate, payable in
Canadian dollars, taxable income
THE GOVERNMENT SECURITIES INCOME FUND
GNMA Series (other than those 4.25% $15 per unit long-term, fixed rate, taxable income, underlying
below) securities backed by the full faith and credit of
the United States
GNMA Series E or other GNMA Series 4.25% $15 per 1,000 units long-term, fixed rate, taxable income, underlying
having units with an initial face securities backed by the full faith and credit of
value of $1.00 the United States, appropriate for IRA's or
tax-deferred retirement plans
Freddie Mac Series 3.50% $15 per 1,000 units intermediate term, fixed rate, taxable income,
underlying securities are backed by Federal Home
Loan Mortgage Corporation but not by U.S.
Government
</TABLE>
- ---------------
* As described in the prospectuses relating to certain Exchange Funds, this
sales charge for secondary market sales may be reduced on a graduated scale
in the case of quantity purchases.
** The reduced sales charge for Units acquired during their initial offering
period is: $20 per unit for Series for which the Reduced Sales Charge for
Secondary Market (above) is $15 per unit; $20 per 100 units for Series for
which the Reduced Sales Charge for Secondary Market is $15 per 100 units;
$20 per 1,000 units for Series for which the Reduced Sales Charge for
Secondary Market is $15 per 1,000 units; and the same as in the secondary
market for Series for which the Reduced Sales Charge for Secondary Market is
Maximum $30 deferred sales charge per 1,000 units.
14100--11/93
86
<PAGE>
DEFINED
ASSET FUNDSSM
SPONSORS: CORPORATE INCOME FUND
Merrill Lynch, Intermediate Term Series--35
Pierce, Fenner & Smith Incorporated (A Unit Investment Trust)
Defined Asset Funds PROSPECTUS PART A
P.O. Box 9051 This Prospectus does not contain all of
Princeton, N.J. 08543-9051 the information with respect to the
(609) 282-8500 investment company set forth in its
Smith Barney Inc. registration statement and exhibits
Unit Trust Department relating thereto which have been filed
388 Greenwich Street--23rd Floor with the Securities and Exchange
New York, NY 10013 Commission, Washington, D.C. under the
1-800-223-2532 Securities Act of 1933 and the
PaineWebber Incorporated Investment Company Act of 1940, and to
1200 Harbor Boulevard which reference is hereby made.
Weehawken, N.J. 07087 No person is authorized to give any
(201) 902-3000 information or to make any
Prudential Securities Incorporated representations with respect to this
One Seaport Plaza investment company not contained in this
199 Water Street Prospectus; and any information or
New York, N.Y. 10292 representation not contained herein must
(212) 776-1000 not be relied upon as having been
Dean Witter Reynolds Inc. authorized. This Prospectus does not
Two World Trade Center--59th Floor constitute an offer to sell, or a
New York, N.Y. 10048 solicitation of an offer to buy,
(212) 392-2222 securities in any state to any person to
EVALUATOR: whom it is not lawful to make such offer
Interactive Data Services Inc. in such state.
14 Wall Street
New York, N.Y. 10005
INDEPENDENT ACCOUNTANTS:
Deloitte & Touche LLP
2 World Financial Center
9th Floor
New York, N.Y. 10281-1414
TRUSTEE:
The Bank of New York
Unit Investment Trust Department
P.O. Box 974
Wall Street Station
New York, N.Y. 10268-0974
1-800-221-7771
14168--5/95
<PAGE>
DEFINED ASSET FUNDS--
CORPORATE INCOME FUND
CONTENTS OF REGISTRATION STATEMENT
This Post-Effective Amendment to the Registration Statement on Form S-6
comprises the following papers and documents:
The facing sheet of Form S-6.
The cross-reference sheet (incorporated by reference to the Cross-Reference
Sheet to Post-Effective Amendment No. 5 to the Registration Statement on Form
S-6 of The Corporate Income Fund, Eighty-First Monthly Payment Series, 1933 Act
File No. 2-63010).
The Prospectus.
The Signatures.
The following exhibits:
1.1.1--Form of Standard Terms and Conditions of Trust Effective as of
October 21, 1993 (incorporated by reference to Exhibit 1.1.1 to the
Registration Statement of Municipal Investment Trust Fund, Multi-
state Series--48, 1933 Act File No. 33-50247).
4.1 --Consent of the Evaluator.
5.1 --Consent of independent accountants.
R-1
<PAGE>
DEFINED ASSET FUNDS--
CORPORATE INCOME FUND
INTERMEDIATE TERM SERIES--35
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT,
DEFINED ASSET FUNDS--CORPORATE INCOME FUND, INTERMEDIATE TERM SERIES--35 (A UNIT
INVESTMENT TRUST), CERTIFIES THAT IT MEETS ALL OF THE REQUIREMENTS FOR
EFFECTIVENESS OF THIS REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE
SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS REGISTRATION STATEMENT OR
AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED IN THE CITY OF NEW YORK AND STATE OF NEW
YORK ON THE 17TH DAY OF MAY, 1995.
SIGNATURES APPEAR ON PAGES R-3, R-4, R-5, R-6 AND R-7.
A majority of the members of the Board of Directors of Merrill Lynch,
Pierce, Fenner & Smith Incorporated has signed this Registration Statement or
Amendment to the Registration Statement pursuant to Powers of Attorney
authorizing the person signing this Registration Statement or Amendment to the
Registration Statement to do so on behalf of such members.
A majority of the members of the Board of Directors of Smith Barney Inc.
has signed this Registration Statement or Amendment to the Registration
Statement pursuant to Powers of Attorney authorizing the person signing this
Registration Statement or Amendment to the Registration Statement to do so on
behalf of such members.
A majority of the members of the Executive Committee of the Board of
Directors of PaineWebber Incorporated has signed this Registration Statement or
Amendment to the Registration Statement pursuant to Powers of Attorney
authorizing the person signing this Registration Statement or Amendment to the
Registration Statement to do so on behalf of such members.
A majority of the members of the Board of Directors of Prudential
Securities Incorporated has signed this Registration Statement or Amendment to
the Registration Statement pursuant to Powers of Attorney authorizing the person
signing this Registration Statement or Amendment to the Registration Statement
to do so on behalf of such members.
A majority of the members of the Board of Directors of Dean Witter Reynolds
Inc. has signed this Registration Statement or Amendment to the Registration
Statement pursuant to Powers of Attorney authorizing the person signing this
Registration Statement or Amendment to the Registration Statement to do so on
behalf of such members.
R-2
<PAGE>
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
DEPOSITOR
By the following persons, who constitute a majority of Powers of Attorney
the Board of Directors of Merrill Lynch, Pierce, have been filed
Fenner & Smith Incorporated: under
Form SE and the
following 1933 Act
File
Number: 33-43466
and 33-51607
HERBERT M. ALLISON, JR.
BARRY S. FREIDBERG
EDWARD L. GOLDBERG
STEPHEN L. HAMMERMAN
JEROME P. KENNEY
DAVID H. KOMANSKY
DANIEL T. NAPOLI
THOMAS H. PATRICK
JOHN L. STEFFENS
DANIEL P. TULLY
ROGER M. VASEY
ARTHUR H. ZEIKEL
By
ERNEST V. FABIO
(As authorized signatory for Merrill Lynch, Pierce,
Fenner & Smith Incorporated and
Attorney-in-fact for the persons listed above)
R-3
<PAGE>
PRUDENTIAL SECURITIES INCORPORATED
DEPOSITOR
By the following persons, who constitute a majority of Powers of Attorney
the Board of Directors of Prudential Securities have been filed
Incorporated: under Form SE and
the following 1933
Act File Number:
33-41631
ARTHUR H. BURTON, JR.
JAMES T. GAHAN
ALAN D. HOGAN
HOWARD A. KNIGHT
LELAND B. PATON
HARDWICK SIMMONS
By
WILLIAM W. HUESTIS
(As authorized signatory for Prudential Securities
Incorporated and Attorney-in-fact for the persons
listed above)
R-4
<PAGE>
SMITH BARNEY INC.
DEPOSITOR
By the following persons, who constitute a majority of Powers of Attorney
the Board of Directors of Smith Barney Inc.: have been filed
under the 1933 Act
File Number:
33-49753 and
33-51607
STEVEN D. BLACK
JAMES BOSHART III
ROBERT A. CASE
JAMES DIMON
ROBERT DRUSKIN
ROBERT F. GREENHILL
JEFFREY LANE
JACK L. RIVKIN
By GINA LEMON
(As authorized signatory for
Smith Barney Inc. and
Attorney-in-fact for the persons listed above)
R-5
<PAGE>
DEAN WITTER REYNOLDS INC.
DEPOSITOR
By the following persons, who constitute Powers of Attorney have been filed
a majority of under Form SE and the following 1933
the Board of Directors of Dean Witter Act File Number: 33-17085
Reynolds Inc.:
NANCY DONOVAN
CHARLES A. FIUMEFREDDO
JAMES F. HIGGINS
STEPHEN R. MILLER
PHILIP J. PURCELL
THOMAS C. SCHNEIDER
WILLIAM B. SMITH
By
MICHAEL D. BROWNE
(As authorized signatory for
Dean Witter Reynolds Inc.
and Attorney-in-fact for the persons listed above)
R-6
<PAGE>
PAINEWEBBER INCORPORATED
DEPOSITOR
By the following persons, who constitute Powers of Attorney have been filed
a majority of under
the Executive Committee of the Board the following 1933 Act File
of Directors of PaineWebber Number: 33-55073
Incorporated:
PAUL B. GUENTHER
DONALD B. MARRON
JOSEPH J. GRANO, JR.
LEE FENSTERSTOCK
By
ROBERT E. HOLLEY
(As authorized signatory for
PaineWebber Incorporated
and Attorney-in-fact for the persons listed above)
R-7
EXHIBIT 4.1
INTERACTIVE DATA
14 WALL STREET
NEW YORK, NEW YORK 10005
(212) 306-6596
FAX 212-306-6545
May 17, 1995
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Unit Investment Trust Division
P.O. Box 9051
Princeton, New Jersey 08543-9051
The Bank of New York
101 Barclay Street
New York, New York 10286
Re: Defined Asset Funds--Corporate Income Fund
Intermediate Term Series--35
(A Unit Investment Trust) Units of Fractional Undivided Interest-Registered
Under the Securities Act of 1933, File No. 33-45208)
Gentlemen:
We have examined the Registration Statement for the above captioned Fund.
We hereby consent to the reference to Interactive Data Services, Inc. in
the Prospectus contained in the Post-Effective Amendment No. 2 to the
Registration Statement for the above captioned Fund and to the use of the
evaluations of the Obligations prepared by us which are referred to in such
Prospectus and Registration Statement.
You are authorized to file copies of this letter with the Securities and
Exchange Commission.
Very truly yours,
JAMES PERRY
Vice President
<TABLE> <S> <C>
<ARTICLE> 6
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 16,626,638
<INVESTMENTS-AT-VALUE> 17,021,960
<RECEIVABLES> 418,117
<ASSETS-OTHER> 6
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 17,440,083
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 79,220
<TOTAL-LIABILITIES> 79,220
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,626,644
<SHARES-COMMON-STOCK> 16,590
<SHARES-COMMON-PRIOR> 17,007
<ACCUMULATED-NII-CURRENT> 338,897
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 395,322
<NET-ASSETS> 17,360,863
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,427,975
<OTHER-INCOME> 0
<EXPENSES-NET> 26,528
<NET-INVESTMENT-INCOME> 1,401,447
<REALIZED-GAINS-CURRENT> 25,282
<APPREC-INCREASE-CURRENT> (1,207,352)
<NET-CHANGE-FROM-OPS> 219,377
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,401,899
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 13,936
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 417
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (1,638,892)
<ACCUMULATED-NII-PRIOR> 347,311
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 0.00
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
Exhibit 5.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Sponsors and Co-Trustees of
Defined Asset Funds--Corporate Income Fund--Intermediate Term Series--35
We consent to the use in this Post-Effective Amendment No. 3 to Registration
Statement No. 33-45208 of our opinion dated March 30, 1995 appearing in the
Prospectus, which is part of such Registration Statement, and to the reference
to us under the heading 'Auditors' in such Prospectus.
DELOITTE & TOUCHE LLP
New York, N.Y.
May 17, 1995
<PAGE>
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 450-4000
May 17, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sirs:
We hereby represent that the Post-Effective Amendments to the registered
unit investment trusts described in Exhibit A attached hereto do not contain
disclosures which would render them ineligible to become effective pursuant to
Rule 485(b) under the Securities Act of 1933.
Very truly yours,
Davis Polk & Wardwell
Attachment
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
1933 ACT 1940 ACT
FUND NAME CIK FILE NO. FILE NO.
- --------- --- -------- --------
<S> <C> <C> <C>
DEFINED ASSET FUNDS-EIF CS FOOD FUND 883462 33-45311 811-3044
DEFINED ASSET FUNDS-GSIF FMS 11 893019 33-49355 811-2810
DEFINED ASSET FUNDS-CIF GNMA SERIES-1 225214 2-60271 811-2295
DEFINED ASSET FUNDS-GSIF GNMA SERIES 1B 781276 33-06711 811-2810
DEFINED ASSET FUNDS-GSIF MPUSTS-10 781820 33-39369 811-2810
DEFINED ASSET FUNDS-MITF MBIA IDS-1 718910 2-83438 811-1777
DEFINED ASSET FUNDS-CIF IS-18 893156 33-49315 811-2295
DEFINED ASSET FUNDS-CIF IS-23 895584 33-50243 811-2295
DEFINED ASSET FUNDS-MITF IS-136 781146 33-25544 811-1777
DEFINED ASSET FUNDS-MITF IS-201 803911 33-52013 811-1777
DEFINED ASSET FUNDS-CIF ITS-35 791023 33-45208 811-2295
DEFINED ASSET FUNDS-MITF ITS-147 781402 33-32653 811-1777
DEFINED ASSET FUNDS-MITF ITS-171 868085 33-38420 811-1777
DEFINED ASSET FUNDS-MITF ITS-172 868086 33-38421 811-1777
DEFINED ASSET FUNDS-MITF ITS-187 868151 33-44584 811-1777
DEFINED ASSET FUNDS-MITF ITS-203 868110 33-49179 811-1777
DEFINED ASSET FUNDS-MITF MPS-63 202666 2-57533 811-1777
DEFINED ASSET FUNDS-MITF MPS-64 202667 2-57643 811-1777
DEFINED ASSET FUNDS-MITF MPS-65 202668 2-57971 811-1777
DEFINED ASSET FUNDS-MITF MPS-413 780783 33-09928 811-1777
DEFINED ASSET FUNDS-MITF MSS 28 895615 33-49295 811-1777
DEFINED ASSET FUNDS- MSS-56 DAF 910002 33-51981 811-1777
DEFINED ASSET FUNDS-MITF MSS 5I 836070 33-25671 811-1777
DEFINED ASSET FUNDS-MITF MSS 6Q 847181 33-32652 811-1777
DEFINED ASSET FUNDS-MITF MSS 8I 868140 33-38785 811-1777
DEFINED ASSET FUNDS-MITF MSS 9V 881820 33-45050 811-1777
TOTAL: 26 FUNDS
</TABLE>
