<PAGE>
AMERICAN ASSOCIATION OF HOMES FOR THE AGING TAX-FREE TRUST
HIGH INCOME SERIES 1
4,050 UNITS
AMERICAN ASSOCIATION OF HOMES FOR THE AGING TAX-FREE TRUST, HIGH INCOME SERIES 1
(THE "TRUST") IS A UNIT INVESTMENT TRUST OF WHICH HERBERT J. SIMS & CO., INC. IS
THE SPONSOR. THE OBJECTIVE OF THIS TRUST IS TO PROVIDE A HIGH LEVEL OF TAX
EXEMPT INTEREST INCOME, THROUGH INVESTMENT IN A FIXED PORTFOLIO CONSISTING
PRIMARILY OF LONG TERM STATE, MUNICIPAL AND PUBLIC AUTHORITY DEBT OBLIGATIONS
("BONDS"), THE INTEREST ON WHICH, IN THE OPINION OF BOND COUNSEL, IS, WITH
CERTAIN EXCEPTIONS, EXEMPT FROM FEDERAL INCOME TAXES, BUT MAY BE SUBJECT TO
STATE AND LOCAL TAXES. CAPITAL GAINS, IF ANY, ARE SUBJECT TO TAX. THE TRUST
HAS INVESTED AND INTENDS TO CONTINUE TO INVEST PRIMARILY IN OBLIGATIONS ISSUED
ON BEHALF OF MEMBERS OF THE AMERICAN ASSOCIATION OF HOMES AND SERVICES FOR THE
AGING, FORMERLY KNOWN AS THE AMERICAN ASSOCIATION OF HOMES FOR THE AGING, TO
FINANCE OR REFINANCE HOUSING AND HEALTH CARE FACILITIES FOR THE ELDERLY. THE
AMERICAN ASSOCIATION OF HOMES AND SERVICES FOR THE AGING IS A NATIONAL NON-
PROFIT ORGANIZATION THAT REPRESENTS NOT-FOR-PROFIT HOMES, HOUSING, HEALTH-
RELATED FACILITIES AND COMMUNITY SERVICES FOR THE ELDERLY. AMERICAN ASSOCIATION
OF HOMES AND SERVICES FOR THE AGING MEMBERS ARE SPONSORED BY RELIGIOUS,
FRATERNAL, LABOR, PRIVATE AND GOVERNMENTAL ORGANIZATIONS. THE AMERICAN
ASSOCIATION OF HOMES AND SERVICES FOR THE AGING HAS OVER 4,000 MEMBERS AND IS
REPRESENTED IN 48 STATES AS WELL AS IN THE DISTRICT OF COLUMBIA, PUERTO RICO,
GUAM AND THE UNITED STATES VIRGIN ISLANDS.
THE VALUE OF THE UNITS OF THE TRUST WILL FLUCTUATE WITH THE VALUE OF THE
PORTFOLIO OF UNDERLYING BONDS. MINIMUM PURCHASE: 1 UNIT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
__________________________________________________________________
HERBERT J. SIMS & CO., INC.
_________________________________________________________________________
PROSPECTUS DATED APRIL 30, 1997
READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE
3
<PAGE>
INVESTMENT SUMMARY AS OF DECEMBER 31, 1996
Date of Deposit 3/10/88
Principal Amount of Bonds/Per Unit $3,105,000
Number of Units- 4,050
Fractional Undivided Interest In
Trust Represented By Each Unit- 1/4050th
Secondary Market Public Offering Price + $3,074,234
Aggregate Bid Price of Bonds in Trust $ 759.06
Divided by 4,050 Units . . . .
Plus sales charge of 5.5%
of Secondary Market Public Offering Price
(5.82% of net amount
invested in Bonds) $ 44.18
Secondary Market Public Offering
Price per Unit $ 803.24
Redemption and Sponsor's Repurchase $ 803.24
Price per Unit
Excess (Deficiency) Secondary Market
Public Offering Price over Redemption
and Sponsor's Repurchase Price per Unit $ 44.18
(Under) Principal Amount of Bonds per Unit $ 36.57
Minimum Value of Trust $1,620,000
* Units are offered at the Secondary Market Public Offering Price plus
accrued interest from the preceding Record Date to, but not including, the
date of settlement (normally five Business Days after purchase).
** Price will include accrued interest income on the Units to expected date of
settlement.
+ Includes undistributed principal from bonds sold or redeemed.
4
<PAGE>
Minimum Capital Distribution
No distribution need be made from Capital
Account if balance in Account is less than
$1.00 per Unit outstanding
Trustee
Chase Manhattan Bank, N.A.
(New York)
Trustee's Annual Fee
Monthly plan - $1.05 per $1,000 face amount
of underlying Bonds;
Semi-Annual plan - $.55 per $1,000 of face
amount underlying Bonds
(See Expenses and Charges)
Evaluator
Herbert J. Sims & Co., Inc. will evaluate
the Bonds. (See Public Sale of Units)
Evaluator's Fee For Each Evaluation
The Evaluator will receive a maximum of $10.00 for
each evaluation. (See Trust Expenses and Charges)
Evaluation Time
As of the close of business of the New York
Stock Exchange
Mandatory Termination Date
December 31, 2037
Minimum Value Of Trust
Trust Agreement may be terminated if value of
Trust is less than 40% of the face amount of
Bonds underlying each Unit on the initial
Date of Deposit.
Sponsor
Herbert J. Sims & Co., Inc.
Sponsor's Annual Fee
Maximum of 25c per $1,000 face amount
of underlying Bonds (See Trust Expenses
and Charges)
5
<PAGE>
Secondary Market Public Offering Price $803.24
Sales charge as a percentage of the
Secondary Market Public Offering Price 5.5%
Net amount invested in Bonds per Unit 5.82%
<TABLE>
<CAPTION>
Monthly Semi-Annual
Distribution Distribution
Plan Plan
------------- -------------
<S> <C> <C>
Secondary Market Public Offering
Price $803.24 $803.24
Accrued Interest per Unit $ 31.60 $ 31.65
$834.84 $834.89
ESTIMATED CURRENT RETURN: 7.96% 8.04%
ESTIMATED LONG-TERM YIELD 9.25% 9.33%
</TABLE>
6
<PAGE>
PER UNIT INFORMATION BASED UPON INTEREST DISTRIBUTION PLAN ELECTED
<TABLE>
<CAPTION>
Monthly Option Semi-Annual Option
-------------- ------------------
<S> <C> <C>
Gross annual interest income (cash)+ $66.68 $66.68
Less estimated annual fees and expenses............................................... 2.71 2.14
Estimated net annual interest income (cash)........................................... $63.97 $64.54
Estimated interest distribution....................................................... 5.33 32.27
Estimated daily interest income accrual++............................................. .1777 .1793
Estimated current return based on Public
Offering Price+++.................................................................. 7.96% 8.04%
Estimated Long-term yield based on Public
Offering Price+++ 9.25% 9.33%
Record dates ......................................................................... 1st of each month Dec. & June 1
Interest distribution dates .......................................................... 15th of each month Dec. & June 15
</TABLE>
_________________
+ Does not include income accrual from original issue discount bonds.
++ Interest will accrue assuming a year of 360 days, with 12 months consisting
of 30 days each.
+++ The estimated current return and long-term yield is higher under the semi-
annual option due to lower Trustee's fees and expenses.
7
<PAGE>
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each unit outstanding for the period below:
<TABLE>
<CAPTION>
Net Asset* Distributions of Interest Distributions of Principal
Period Units Value During the Period During the Period
Ended Outstanding Per Unit (Per Unit) (Per Unit)
- -------------------- ----------- ---------- ------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Monthly Semi Annual
Option Option
------- -----------
December 31, 1996 4,050 $790.72 $63.97 $64.54 $ 0
</TABLE>
* Net Asset Value per unit is calculated by dividing net assets as disclosed
in the "Statement of Net Assets" by the number of units outstanding as of
the date of the Statement of Net Assets. See Note 5 of Notes to Financial
Statements for a description of the components of Net Assets.
8
<PAGE>
INVESTMENT SUMMARY AS OF DECEMBER 31, 1996 (Continued)
OBJECTIVE OF THE TRUST - To provide a high level of tax-exempt income
through investment in a fixed portfolio consisting primarily of long-term debt
obligations ("Bonds") issued by or on behalf of various states, counties,
municipalities and other political subdivisions thereof or issued by certain
United States territories or possessions, the interest on which is, in the
opinion of bond counsel, with certain exceptions, exempt from federal income
taxes, but may be subject to state and local taxes. The Trust has invested and
intends to continue to invest primarily in obligations issued on behalf of
members of the American Association of Homes and Services for the Aging to
finance or refinance the costs of long term care facilities, rental housing for
the elderly and continuing care retirement centers. The American Association of
Homes and Services for the Aging is not a sponsor of the Trust; however, it does
have an arrangement with the Sponsor under which it has agreed to discuss with
its members the potential availability of the Trust for financing projects of
members. AAHA Development Corporation, a wholly-owned subsidiary of American
Association of Homes and Services for the Aging, received from the Sponsor .5%
of the principal amount of the Bonds deposited in the Trust upon termination of
the initial offering period. There is no assurance that the objective of the
Trust will be met because it is subject to the continuing ability of obligors on
the Bonds held by the Trust to meet their principal and interest requirements.
Furthermore, the market value of the underlying Bonds, and therefore, the value
of the Units, will fluctuate with changes in interest rates and other factors.
TRUST PORTFOLIO (see Trust Portfolio) - The Trust consists of different
issues of long-term Bonds issued by or on behalf of various states, counties,
municipalities and other political subdivisions thereof or issued by certain
United States territories or possessions. Funds for payment of the face amount
of each Bond initially deposited in the Trust will be obtained from the income
of the specific project financed by such Bond. The issues have fixed final
maturity dates ranging from July 1, 1998 through November 1, 2017. None of the
Bonds in the Trust have been purchased on a when, as and if issued basis.
Approximately 44% of the aggregate face amount of the Bonds initially deposited
in the Trust were purchased in excess of par, approximately 9% were purchased at
par and approximately 47% were purchased at a discount from par. In addition,
approximately 6% of the aggregate face amount of the Bonds initially deposited
in the Trust were issued at an "original issue discount" all of which were Zero
Coupon Bonds. (See Description of the Trust - Taxes). Zero Coupon Bonds do not
provide for the payment of any current interest and provide for payment at
maturity at par value unless sooner sold or redeemed. The market value of Zero
Coupon Bonds is subject to greater fluctuations than coupon bonds in response to
changes in interest rates. (See Description of Trust - Original Issue Discount
Bonds). No interest on the aggregate par value of the bonds is a specific
preference item for purposes of the federal individual and corporate alternate
minimum taxes.
9
<PAGE>
At the time of purchase by the Trust approximately 56% of the aggregate par
value of the Bonds were rated A- or better by Fitch Investors Service, Inc.
("Fitch") or by Standard & Poor's ("S&P") or by Moody's Investors Service
("Moody's"), and approximately 94% of the aggregate par value of the Bonds were
rated BBB- or better by Fitch or by S&P or Baa-3 or better by Moody's. The
balance of the Bonds were rated BB by Fitch or S&P or Ba by Moody's or, if non-
rated, had, at the time of purchase, at least comparable credit characteristics
in the opinion of the Sponsor. As of December 31, 1996, two Bond issues,
representing 40% of the aggregate par value of the Bonds were rated BBB while
the balance of the Bonds were non-rated. The Sponsor does not provide ongoing
comparable credit quality determinations for Bonds that are non-rated, and no
assurance can be given that Bonds which were rated at the time of purchase by
the Trust and which are now non-rated, as well as Bonds that were non-rated at
the time of purchase, have maintained their credit quality since the time of
purchase. See Trust Portfolio.
Ratings of BB/Ba indicate a quality of less than investment grade, and
Bonds carrying such ratings have speculative elements. Bonds rated BBB or Baa,
although investment grade, should be considered to have certain speculative
characteristics as well. For a discussion of the significance of these ratings,
see Description of Bond Ratings. Bonds having ratings below BBB or Baa
generally reflect a higher risk than bonds carrying higher ratings because the
issuers thereof may be unable to meet their obligations to make timely payments
of principal and interest. See Description of the Trust - Special
Considerations.
RISK FACTORS ASSOCIATED WITH LOWER-RATED BONDS AND NON-RATED BONDS-Lower-
rated and comparable non-rated Bonds in the Trust (i.e. Bonds which have not
been rated by Fitch, S & P or Moody's) tend to offer higher yields than higher
rated bonds with the same maturities because the creditworthiness of the
obligors on lower rated and comparable non-rated bonds has not been recognized
to be as strong as that of other issuers. Lower-rated and comparable non-rated
bonds, like other long term, fixed rate bonds, may also be adversely affected by
fluctuations in interest rates, unemployment rates, inflation rates and the real
growth rate of the economy. Lower rated and comparable non-rated Bonds included
in the Trust may be subject to greater market fluctuations and risk of loss of
income and principal than are investments in higher rated lower yielding bonds.
Such fluctuations affect the value of the Bonds and the Units. Since the market
for lower rated and comparable non-rated bonds is not as broad as the market for
higher rated bonds, this may result in less flexibility in the disposal, if
required, of such lower rated and comparable non-rated Bonds. Although certain
dealers maintain a secondary market for certain lower rated and comparable non-
rated bonds, there can be no assurance such dealers will continue to do so, or
that they will make a secondary market in all lower rated and comparable non-
rated bonds. Thus, there may not be an established secondary market for the
lower rated and comparable non-rated Bonds in the Trust. The limited market for
these Bonds may affect the choice of the particular Bond to be sold for purposes
of
10
<PAGE>
redemption and the amount actually realized by the Trust upon such sale. Such
sale may result in a loss to the Trust.
The underlying obligors of two Bond issues purchased by the Trust defaulted
in payment obligations thereunder. Holders of such Bonds (including the Trust)
incurred a substantial loss on one such investment and a significant loss on the
other investment. (See Description of the Trust - Special Considerations.)
SPECIAL CONSIDERATIONS - Investment in the Trust should be made with an
understanding that the value of the underlying Bonds may decline with increases
in market interest rates. In addition, the Trust is considered to be
"concentrated" in obligations issued to provide housing and health care
facilities. Substantially all of the Bonds in the Trust are Bonds issued to
finance or refinance housing facilities for the elderly or retirement centers
containing both housing and health care facilities. (See Description of the
Trust - Special Considerations, for a brief summary of certain investment risks
pertaining to such obligations.)
UNDERWRITING - Herbert J. Sims & Co., Inc. has participated as sole
underwriter, managing underwriter or a member of an underwriting syndicate from
which 100% of the Bonds in the Trust were acquired.
PUBLIC OFFERING PRICE - The secondary market Public Offering Price (the
"Public Offering Price") per Unit is based upon a pro rata share of the
aggregate bid price of the Bonds in the Trust plus a sales charge of 5.5% of the
Public Offering Price, which is the same as 5.82% of the net amount invested in
Bonds per unit. In addition, accrued interest to the expected date of
settlement is added to the Public Offering Price. Any profit or loss resulting
from the resale of such Units belongs to the Sponsor. Had the Units been
available for sale on December 31, 1996, the Public Offering Price per Unit
would have been $803.24 plus accrued interest to the expected date of settlement
of $31.60 under the monthly distribution plan and $ 31.65 under the semi-annual
distribution plan for a total of $834.84 and $834.89, respectively.
The Public Offering Price per Unit can vary on a daily basis in accordance
with fluctuations in the aggregate bid price of the Bonds. (See Public Sale of
Units.)
DISTRIBUTIONS - Distributions of principal and interest received by the
Trust, less expenses, are made in cash by the Trust either monthly or semi-
annually depending upon the distribution plan chosen by the Holder. A purchaser
of a Unit will initially receive distributions in accordance with the plan
selected by the prior owner of such Unit and may thereafter change the plan as
provided under "Rights of Holders - Distribution Elections". Distributions of
principal, if any, are made semi-annually on December 15 and June 15 of each
year. (See Rights of Holders - Interest and Principal Distributions).
11
<PAGE>
ESTIMATED CURRENT RETURN AND LONG-TERM YIELD - The estimated current return
to Holders on December 31, 1996 under the monthly distribution plan was 7.96%
and under the semi-annual distribution plan was 8.04%. Estimated current return
is computed by dividing the estimated net annual interest income per Unit (the
return per Unit based on approximately $1,000 face amount) by the Public
Offering Price per Unit (which includes accrued interest or accrued income from
original issue discount Bonds). The estimated long-term yield to Holders on
December 31, 1996 under the monthly distribution plan was 9.25% and under the
semi-annual distribution plan was 9.33%. The calculation for long-term yield
factors in yield to maturity or to an earlier redemption date of the debt
obligation as well as amortization of discount or premium to the specified date.
Distributed interest income per Unit of the Trust will vary with changes in fees
and expenses of the Trust, and with the redemption, maturity, sale or exchange
of the Bonds in the Trust, and there is therefore no assurance that the present
estimated current return will be realized in the future. In the opinion of
counsel to the Sponsor, each Holder will be considered for federal income tax
purposes to have received the interest on his or her pro rata portion of each
Bond when interest on the Bond is received by the Trust. Bond counsel have
rendered their opinions on the dates of issuance of the Bonds that such interest
is exempt from federal income taxes under existing law (except in the case of
certain corporate Holders, alternative minimum tax and environmental tax and
except for certain collateral tax consequences affecting certain Holders). None
of the interest on the Bonds is subject to alternative minimum tax as a specific
preference item. Interest on the Bonds may be subject to state and local taxes.
Capital gains, if any, are subject to tax. (See Description of the Trust -
Taxes.)
MARKET FOR UNITS - The Sponsor, though not obligated to do so, currently
maintains and intends to continue to maintain a market for Units based on the
aggregate bid side evaluation of the underlying Bonds (See Market for Units).
If such market is not maintained a Holder will be able to dispose of his Units
through redemption at prices based on the aggregate bid side evaluation of the
underlying Bonds (see Redemption).
DESCRIPTION OF THE TRUST
STRUCTURE
This Series (the "Trust") of the American Association of Homes for the
Aging Tax-Free Trust is a "unit investment trust" created under New York law on
March 10, 1988 (the "Date of Deposit") by a Trust Indenture and Agreement (the
"Trust Agreement") dated as of March 8, 1988. The American Association of Homes
and Services for the Aging, formerly known as the American Association of Homes
for the Aging, is a national non-profit organization formed in 1962 that
represents not-for-profit homes, housing, health related facilities and
community services for the elderly. Its members are sponsored by religious,
fraternal, labor,
12
<PAGE>
private and governmental organizations. The American Association of Homes
and Services for the Aging is not a sponsor of the Trust; however, it does have
an arrangement with the Sponsor under which it has agreed to discuss with its
members the potential availability of the Trust for financing projects of
members.
On the Date of Deposit, the Sponsor deposited the underlying Bonds with the
Trustee at a price equal to the evaluation of such Bonds on the offering side of
the market on such date, as determined by the initial evaluator of the Bonds.
Following the deposit, the Trustee delivered a trust receipt evidencing the
entire ownership of each Trust to or on the order of the Sponsor. Some of the
Bonds so deposited were represented by purchase contracts assigned to the
Trustee together with a certified check in the amount necessary to complete the
purchase thereof. The holders ("Holders") of Units have the right to have their
Units redeemed (see Redemption) at a price based on the aggregate bid side
evaluation of the Bonds (the "Redemption Price per Unit") if they cannot be sold
in the over-the-counter market which the Sponsor currently maintains and intends
to continue to maintain (see Market for Units). The Trust will not continuously
offer Units for sale to the public.
On the Date of Deposit, each Unit represented a fractional undivided
interest in the Trust in an amount equal to one divided by the total number of
units outstanding. On the Date of Deposit there was 1 Unit for each $1,000 face
amount of Bonds initially deposited in the Trust. As of December 31, 1996, no
Units had been redeemed. If any Units are redeemed, the face amount of Bonds in
the Trust 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 Sponsor) or until the termination of the Trust Agreement. Units may
also be redeemed by the Trustee in the event of a termination of the Trust upon
redemption of the underlying Bonds or upon the occurrence of certain events that
would, in the opinion of the Sponsor, make the retention of such Bonds
detrimental to the interests of Holders. (See Redemption; Trust Administration
- -Portfolio Supervision; Trust Administration - Amendment and Termination of
Trust Agreement).
SPECIAL CONSIDERATIONS
An investment in Units of the Trust should be made with an understanding of
the risks which an investment in fixed rate long-term debt obligations may
entail, including the risk that the value of the Bonds and hence of the Units
will decline with increases in market interest rates. During the past several
years, interest rates have fluctuated widely and thus the value of fixed rate
long-term debt obligations generally have fluctuated widely. The Sponsor cannot
predict whether such fluctuations will continue in the future.
13
<PAGE>
At the time of purchase by the Trust approximately 56% of the aggregate par
value of the Bonds were rated A- or better by Fitch Investors Service, Inc.
("Fitch") or by Standard & Poor's ("S&P") or by Moody's Investors Service
("Moody's"), and approximately 94% of the aggregate par value of the Bonds were
rated BBB- or better by Fitch or by S&P or Baa-3 or better by Moody's. The
balance of the Bonds were rated BB by Fitch or S&P or Ba by Moody's or, if non-
rated, had, at the time of purchase, at least comparable credit characteristics
in the opinion of the Sponsor. As of December 31, 1996, two Bond issues,
representing 53% of the aggregate par value of the Bonds, were rated BBB, while
the balance of the Bonds were non-rated. The Sponsor does not provide ongoing
comparable credit quality determinations for Bonds that are non-rated, and no
assurance can be given that Bonds which were rated at the time of purchase by
the Trust and which are now non-rated, as well as Bonds that were non-rated at
the time of purchase, have maintained their credit quality since the time of
purchase. See Trust Portfolio.
RISK FACTORS ASSOCIATED WITH LOWER RATED AND CERTAIN NON-RATED BONDS.
Lower rated and comparable non-rated Bonds tend to offer higher yields than
higher rated bonds with the same maturities because the creditworthiness of the
issuers of lower rated Bonds has not been recognized to be as strong as that of
other issuers. Since there is a general perception that there are greater risks
associated with the lower-rated Bonds in the Trust, the yields and prices of
such Bonds tend to fluctuate more with changes in the perceived quality of the
credit of their issuers. Lower rated securities are generally defined as Baa or
lower by Moody's or BBB or lower by S&P and BBB or lower by Fitch. In addition,
the market value of lower rated and comparable non-rated bonds may fluctuate
more than the market value of higher rated bonds since such bonds tend to
reflect short-term market developments to a greater extent than higher rated
bonds, which fluctuate primarily in response to the general level of interest
rates, assuming that there has been no change in the fundamental quality of such
bonds. The issuers of lower rated bonds possess less creditworthy
characteristics than the issuers of higher rated bonds. Lower rated and
comparable non-rated bonds may also be directly and adversely affected to a
greater extent than higher rated bonds by variables such as interest rates,
unemployment rates, inflation rates and real growth in the economy and other
changes in the economy's general condition and certain legislative or regulatory
proposals. Lower rated bonds can also be expected to have a narrower market
then higher rated bonds resulting in less flexibility in the disposal, if
required, of such lower rated and comparable non-rated bonds.
Lower rated and comparable non-rated Bonds included in the Trust are
subject to greater market fluctuations and risk of loss of income and principal
than are investments in rated lower yielding bonds. Such fluctuations affect
the value of the Bonds and the Units. Bonds which are rated BB or Ba indicate a
quality of less than investment grade, and Bonds
14
<PAGE>
carrying such ratings should be considered to have speculative elements. Bonds
rated BBB or Baa, although investment grade, reflect speculative characteristics
with respect to capacity to repay interest and principal as well. Most of the
Bonds are unrated by any national rating organization and the market for unrated
bonds is not as broad as the market for rated bonds, which may result in less
flexibility in the disposal, if required, of such non-rated Bonds. The Bonds are
typically special obligations of their municipal issuers, but mostly obligations
of private entities which in turn may be limited to specified security and
revenues. Although certain dealers maintain a secondary market for certain lower
rated and non-rated bonds, there can be no assurance such dealers will continue
to do so, or that they will make a secondary market in all lower rated or non-
rated bonds. Thus, there may not be an established secondary market for the
lower rated or non-rated Bonds in the Trust. The limited market for these Bonds
may affect the choice of the particular Bond to be sold for purposes of
redemption and the amount actually realized by the Trust upon such sale. Such
sale may result in a loss to the Trust. See Description of Bond Ratings for a
comparison of ratings issued by Fitch, S & P and Moody's.
Defaulted Bonds
---------------
In 1990, a default occurred with respect to the payment of principal and
interest on the Public Facility Board of the City of Hot Springs, Arkansas
Revenue Bonds (Heritage Center Project) Series 1985 of which the Trust held
$100,000 in principal amount and which were purchased by the Trust at a price in
excess of par. Due to the default, the obligor, with the consent of
bondholders, was permitted to sell the congregate care facility that was
constructed with the bond proceeds from the issue. The Trust received
approximately $57,000, representing its pro rata share of proceeds from the sale
of the facility as well as an additional distribution, and recognized a loss of
approximately $50,000 on its investment.
The Trust also held $25,000 in principal amount of the Berks County
Municipal Authority, Berks County, Pennsylvania, Revenue Bonds, Series 1985
(Adventist Living Centers, Inc. Project). The obligor defaulted with regard to
the payment of principal and interest on the bonds and filed a petition in
bankruptcy with a view to liquidate its assets, including the health care
facility which was financed with the proceeds from the bonds. As a result of
the liquidation, the Trust received a distribution in the amount of $18,017,
resulting in a realized loss of $9,362 to the Trust. Such bonds were purchased
by the Trust at a price in excess of par.
Investors should carefully review Objective of the Trust and Risk Factors
Associated with Lower-Rated Bonds under Investment Summary and Special
Considerations under Description of the Trust and consider their ability to
assume the risks involved before making an investment in the Trust.
15
<PAGE>
TAX EXEMPT STATUS OF BONDS.
In the opinion of bond counsel (which may be counsel to the Trust or the
Sponsor) delivered on the date of issuance of each issue of Bonds, interest on
the Bonds is excluded from gross income for the purposes of federal income tax
under existing law, with certain limitations described under Description of the
Trust - Taxes. It is anticipated that many of the Bonds will constitute
"qualified 501(c)(3) bonds" under the Internal Revenue Code of 1986, as amended
(the "Code"). Interest on "qualified 501(c)(3) bonds" is not a specific
preference item for purposes of the federal individual and corporate alternative
minimum taxes.
Exemption of the interest on "private activity bonds" (bonds issued to
provide facilities used in the trade or business of private entities) depends on
compliance with certain requirements by the private entity obligated to make
payments to the issuer for debt service on the bonds. Some requirements must be
complied with for the entire term of the bonds, such as limitation on the
investment of certain funds and rebate to the United States Treasury of certain
arbitrage profits from such investments. Failure to comply with such continuing
requirements may result in loss of the tax exempt status of the bonds,
retroactive to the date of issue. There can be no assurance that these
requirements will be complied with or, in the event of failure to meet such
requirements that the trustee for the bondholders would be able to recover
sufficient funds to pay the outstanding principal of the bonds or to compensate
the bondholders for the loss of tax exemption. In addition, interest on the
Bonds may be subject to state and local taxation.
INDUSTRY CONCENTRATION.
1. Background.
----------
Through a combination of demographics, income growth, and changing social
practices, the need for facilities for the elderly is growing.
According to Time (April 6, 1987), during the period from 1970 to 1986, the
----
number of Americans aged 65 and over has increased by 45%, accounting for 12% of
the country's population. The 65+ population was estimated by Laventhol &
Horwath (quoted in Modern Healthcare, April 24, 1987) to rise by almost 10
-----------------
million by the year 2001.
According to the Employee Benefit Research Institute, almost 50% of
American couples retired in 1982 with private employer or government sponsored
pension plans. Due in part to increased Social Security payments, better
pension benefits and growing financial assets, Laventhol & Horwath (supra)
estimates that 30% of elderly households have annual incomes of over $20,000,
and Time (supra) reports that almost 25% of the elderly have a median net worth
----
between $100,000 and $250,000.
16
<PAGE>
Changing social and cultural practices are also increasing the need for
facilities. Much of the care of the elderly in the past has focused on
daughters and daughters-in-law. Today, children and parents are often
physically separated, more women are working full-time and the elderly's
children are frequently elderly themselves. Several major insurance companies
have also recognized the need for policies in this area and are now offering
long-term care insurance.
The increase in the population and income of the elderly and the declining
availability of family care has resulted in more demand for facilities providing
for the care of the elderly. According to the American Health Care Association,
the nationwide occupancy rate for nursing homes has been over 90% for each year
for the past decade; and Time (supra) reported in April 1987 that there were
----
also 700 retirement communities providing some form of continuing care for about
200,000 residents. The American Association of Homes and Services for the Aging
expects the number of these centers to double by 2000.
The Trust may have a high degree of concentration in Bonds which have been
issued to finance or refinance health care facilities, such as nursing
facilities and hospitals (collectively, "Health Care Facilities"), continuing
care retirement centers ("Retirement Communities") and rental housing projects
and congregate living facilities for the elderly (collectively, "Housing
Facilities"), which facilities, in most cases, are owned or operated by
charitable or religious entities exempt from federal income tax as organizations
described in Section 501(c)(3) of the Code. The Trust may also invest in other
types of tax exempt bonds, provided that such bonds have similar risks,
maturities, yields and tax status as other Bonds in the Trust and provided that
acquisition of such bonds is consistent with the objectives of the Trust. In
view of the potential degree of concentration in Bonds issued to finance or
refinance Health Care Facilities, Retirement Communities and Housing Facilities,
an investment in Units of the Trust should be made with an understanding of the
risks which such investments may entail, certain of which are described below.
2. GENERAL RISK FACTORS. BONDS FINANCING HEALTH CARE FACILITIES,
--------------------
RETIREMENT COMMUNITIES AND HOUSING FACILITIES ARE GENERALLY PAYABLE SOLELY FROM
THE REVENUES AND RECEIPTS DERIVED BY THE ISSUER OF SUCH BONDS FROM A LEASE
AGREEMENT, LOAN AGREEMENT, OR OTHER REVENUE AGREEMENT BETWEEN THE ISSUER AND THE
OWNER OF THE FACILITY. WHILE THE FUTURE ABILITY OF THE OWNER OF THE FACILITY TO
MEET ITS OBLIGATIONS UNDER SUCH AN AGREEMENT MAY BE BASED UPON ASSUMPTIONS AND
BUSINESS JUDGMENTS WHICH THE OWNER BELIEVES ARE REASONABLE AND APPROPRIATE, AND
MAY BE SUPPORTED BY A FINANCIAL FEASIBILITY STUDY, SUCH ABILITY IS SUBJECT TO
ECONOMIC AND OTHER CONDITIONS WHICH MAY CHANGE IN THE FUTURE TO AN EXTENT THAT
CANNOT BE PREDICTED. THUS, NO ASSURANCE CAN BE GIVEN THAT REVENUES WILL BE
REALIZED BY THE FACILITY IN AMOUNTS SUFFICIENT TO PAY THE PRINCIPAL OF AND
INTEREST ON THE BONDS AS THEY BECOME DUE, OR IN THE AMOUNTS WHICH MAY HAVE BEEN
17
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FORECASTED IN A FINANCIAL FEASIBILITY STUDY. SUCH BONDS ARE GENERALLY SECURED
BY A FIRST MORTGAGE LIEN ON THE FINANCED FACILITY.
The ability of the Health Care Facilities, Retirement Communities and
Housing Facilities financed with proceeds of the Bonds to pay debt service on
the Bonds may be adversely affected by a number of factors, including the
following:
(1) In the case of construction projects, delays in the progress of
construction, or increases in construction costs which exceed available
reserves or contingencies, which may result in a failure to complete the
facility in time to generate revenues sufficient to pay debt service on the
Bonds becoming due after capitalized interest funds (or other funds
available for payment of debt service during construction) have been
exhausted;
(2) Inability to attract a sufficient number of residents or
patients to achieve the levels of occupancy needed to provide the revenues
required for payment of operating expenses and debt service on the Bonds;
(3) Competition from similar facilities presently existing and
operating in the service area or market area of the facility and
competition from similar facilities constructed in the future;
(4) Unfavorable demographic or economic changes affecting the
population of the area from which it is expected that the facility will
draw its residents or patients;
(5) Adoption of new legislation or regulations (or amendments to
existing laws or regulations) changing the regulation of such facilities,
which may limit the revenues such facilities may charge or may increase the
cost of operating such facilities;
(6) Establishment of or extension of wage, rent or price
controls;
(7) Inability to control expenses during a period of inflation
and difficulty in increasing charges and other fees while maintaining the
amount and quality of services;
(8) Relations of the facility with its professional staff and
union and non-union employees;
(9) Changes in the availability and cost of liability insurance
including, in the case of Health Care Facilities, malpractice insurance
insuring against patient malpractice claims;
(10) Scarcity in skilled personnel required for proper staffing
of a facility;
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(11) Changes in tax, pension, social security or other laws and
regulations affecting the provision of health care and other services to
the elderly;
(12) Increases in utility costs due to an energy shortage, unless
such increased costs can be fully passed through to patients and residents;
and
(13) Risks normally attending any real estate financing, such as
fire or other casualty, condemnation, increases in property taxes, water
and sewer rates and other such costs.
As a result of these uncertainty factors, there can be no assurance
that the issuer of the Bonds will receive revenues sufficient to make full and
timely payments on the Bonds. In the event of a default by the facility on its
obligation to pay the debt service on the Bonds, no assurance can be given that
the facility will be able to refinance its obligations and there may be no
recourse to any property or funds for payment of the Bonds other than the
facility financed by the Bonds. Also, there can be no assurance that the
facility can be sold or leased to provide sufficient funds for payment of the
Bonds, due to the lower than normal prices which generally are paid in a
"distressed sale." In the case of Health Care Facilities and Retirement
Communities, such facilities also tend to have special design characteristics
and may be subject to restrictions limiting their use; and these factors may
limit the number of purchasers and the amount realized from a disposition of the
facility. In the event a facility experiences financial difficulties, the
rights of creditors (including bondholders) may be limited or stayed by the
commencement of bankruptcy, receivership or similar proceedings.
In 1990, a default occurred with respect to the payment of principal and
interest on the Public Facility Board of the City of Hot Springs, Arkansas
Revenue Bonds (Heritage Center Project) Series 1985 of which the Trust held
$100,000 in principal amount. The bonds were purchased by the Trust at a price
in excess of par. Due to the default, the obligor, with the consent of
bondholders, was permitted to sell the congregate care facility that was
constructed with the bond proceeds from the issue. The Trust received
approximately $57,000, representing its pro-rata share of proceeds from the sale
of the facility as well as an additional distribution, and recognized a loss of
approximately $50,000 on its investment.
The Trust also held $25,000 in principal amount of the Berks County
Municipal Authority, Berks County, Pennsylvania, Revenue Bonds, Series 1985,
(Adventist Living Centers, Inc. Project). The obligor defaulted with regard to
the payment of principal and interest on the bonds and filed a petition in
bankruptcy with a view to liquidate its assets, including the health care
facility which was financed with the proceeds from the bonds. As a result of
such liquidation, the Trust received
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$18,017 and realized a loss of $9,362 on its investment. Such bonds were
purchased by the Trust at a price in excess of par.
The following is a discussion of some of the factors specifically affecting
Health Care Facilities, Retirement Communities and Housing Facilities which may
have an impact on the Bonds in the Trust.
3. HEALTH CARE FACILITIES.
----------------------
a. Medicare and Medicaid. Most Health Care Facilities are highly
---------------------
dependent upon revenues from reimbursement for patient services under the
Medicare and Medicaid programs. Medicare is a federally funded and
administered program established under Title XVIII of the federal Social
Security Act providing for payments for certain health care services to persons
aged 65 and older and to participating Health Care Facilities providing covered
services to beneficiaries. Medicaid (or medical assistance) is a health care
reimbursement program established under Title XIX of the federal Social Security
Act for the indigent which is jointly funded by federal and state appropriations
and administered by the states. Medicaid provides for payments to beneficiaries
and Health Care Facilities for certain health care services. Medicare and
Medicaid beneficiaries comprise a substantial percentage (in some cases
substantially all) of the patients in Health Care Facilities. Both Medicare and
Medicaid prescribe conditions of participation by Health Care Facilities,
including licensure, staffing and accreditation standards.
In recent years, the cost of the Medicare and Medicaid programs has
increased dramatically and substantial revisions have been made in Federal
legislation and regulations (and in some cases, state legislation and
regulations) affecting the methodology of determining payments to Health Care
Facilities under these programs and the amount of funding to be provided from
federal and state sources. The ability of a Health Care Facility to meet its
obligations for the debt service on Bonds may be adversely affected by any such
changes in the Medicare or Medicaid reimbursement programs (or in the
interpretation of the regulations under the existing programs), or by any
decrease in the governmental appropriations provided to such programs. Such
changes may decrease the amount of payments, or delay the receipt of payments by
a Health Care Facility, or may change the methodology of determining such
payments in a manner which makes certain services or certain methods of
operations unprofitable (or less profitable) for the facility. In particular,
Congress passed legislation in 1992 to prohibit certain "pooling" transactions
among hospitals in various states which increased the amount of federal Medicaid
matching funds available to those states. Some states have found techniques to
replace the prohibited pooling transactions, but it is not clear whether they
will be permitted by Congress for any length of time. In the absence of pooling
or of an alternative procedure, Medicaid funds may be substantially reduced over
the next several years.
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It is also possible that the Medicaid program will be substantially revised
with increased emphasis on serving Medicaid beneficiaries through managed care
organizations which may limit the number of Health Care Facilities providing
services to Medicaid beneficiaries, and the amount paid by Medicaid for such
services. It is also possible that national healthcare reform legislation will
include a new mechanism for funding long-term care, which could increase the
amount of funds available for reimbursement to nursing homes. It is not
possible, however, to predict whether, or in what form, healthcare reform
legislation may be enacted by Congress, or the effect such legislation would
have on the Health Care Facilities.
The nature and extent of any other future changes in the Medicare or
Medicaid programs, or in state regulation of rates and charges, the impact of
such changes on the Health Care Facilities and their ability to adapt
successfully to such changes also cannot be determined at this time.
b. Private Pay, Commercial Insurance and Blue Cross. Due to the
------------------------------------------------
limitations on Medicare and Medicaid reimbursement, Health Care Facilities
generally recover a smaller percentage of the cost of providing services to
Medicare and Medicaid patients than they do in the case of patients covered by
commercial insurance programs or of patients who pay their own health care
bills, where the Health Care Facility can bill its full charges. Most
commercial insurance plans reimburse their subscribers or make direct payments
to the Health Care Facility for expenses at established charges, subject to
certain limitations and deductibles. Patients carrying such coverage are
responsible for any deficiency between insurance payments and total charges
incurred. Blue Cross insurance is not included in this category of commercial
insurance, since Blue Cross generally makes payments to Health Care Facilities
on the basis of reasonable cost, subject to certain limitations, or on the basis
of diagnosis-related groups.
Some Health Care Facilities are dependent to a degree on maintaining a
certain level of occupancy by private pay patients, since the facility can
"shift" some of its costs not recovered from Medicare or Medicaid by raising
charges to private pay and to commercial insurance patients. A Health Care
Facility which depends on such cost shifting may be adversely affected by
economic or demographic changes in its service area reducing the number of
private pay and of commercial insurance patients. Cost shifting may also be
limited by state regulation, in the event that charges by Health Care Facilities
to all patients are regulated.
c. Nursing Facilities. Most patients in nursing facilities are either
------------------
Medicaid beneficiaries or private pay. Medicaid nursing facility reimbursement
is required under federal law to be reasonable and adequate to meet the needs of
efficient providers in accordance with a state plan approved by the United
States Department of Health and Human Services ("Health and Human Services"),
which on occasion has threatened to suspend federal funding to states not
complying with federal regulations. In
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general, Medicaid plans provide for reimbursement of certain allowable operating
costs incurred by the nursing facility, on the basis of a per diem charge
approved by the state. Some states have adopted regulations establishing a
prospective method of payment, which bases reimbursement on resource utilization
groups or other methods of classifying patients according to level of the
nursing care, rather than a nursing facility's cost. Per diem charges and
allowable costs are often subject to regional or statewide ceilings. Capital
costs are usually included by providing for reimbursement of depreciation and
interest expense, which may be subject to a maximum cost per bed. Some states
have established a formula approach to capital cost reimbursement, based on
approved construction costs and interest charges, which are applied to
facilities irrespective of their actual costs.
Medicaid plans often reimburse less than the full cost incurred by the
Health Care Facility, which makes it very important for nursing facilities to
maintain stringent cost control measures and to maintain a favorable balance in
patient mix between Medicaid and private pay patients. The ability of a nursing
facility to generate and maintain sufficient revenues for payment of operating
expenses and debt service on the Bonds will depend on ability of management to
respond to these factors and the general risk factors described above.
d. Referral Restrictions. Federal law and some state laws prohibit the
---------------------
solicitation, payment or receipt of any remuneration in exchange for or as an
inducement to make a referral of a patient for the provision of goods or
services which may be reimbursed, in whole or in part, under the Medicare or
Medicaid programs. Health Care Facilities and others, including physicians, are
prohibited from engaging in any activity or participating in any joint venture
which could be interpreted to involve an inducement for the referral of Medicare
or Medicaid beneficiaries. Violation of these laws may lead to criminal and
civil penalties, as well as exclusion from the Medicare and Medicaid programs.
Legislation has been introduced in Congress which would prohibit referrals of
Medicare and Medicaid beneficiaries by physicians to facilities (including
hospitals) in which the referring physician or any immediate family member has
an ownership or financial interest. Such restrictions currently apply to
referrals to providers of home IV therapy and to providers of clinical
laboratory services. No assurance can be given as to the effect these or any
current or future proposed restrictions, if enacted, would have on the Health
Care Facilities.
e. Nursing Shortage. In many parts of the nation, there has been a
----------------
shortage of nurses and skilled health technical personnel. Some facilities have
successfully mitigated the impact of the nursing shortage by increasing
retention through programs designed to improve working conditions and career
advancement for nurses. However, some Health Care Facilities have had
difficulty in recruiting and retaining sufficient nurses and other personnel to
provide staffing at adequate levels. Many have found it necessary to grant
significant salary increases to maintain
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<PAGE>
adequate staffing. The shortage of nurses has also led to the growth of
employment agencies specializing in providing nurses to Health Care Facilities.
Facilities utilizing such agencies have often experienced a significant increase
in personnel costs. The increases in salaries for nurses has exceeded the rate
of inflation and the increase in reimbursement from third party payors for these
costs. Such cost increases can have an adverse effect on the financial condition
of Health Care Facilities and shortages in health care personnel necessary to
provide adequate staffing may force some Health Care Facilities to curtail
services.
f. Licensure Requirements. Health Care Facilities are subject to
----------------------
licensure by the state in which such facilities are located. Licensure
requirements include minimum standards for the number and qualification of
personnel, provision of health care services and health and safety standards
relating to the design, equipment and maintenance of the facility. Failure to
obtain or maintain a license in accordance with these minimum standards would
adversely affect the facility's revenues. Such standards are also subject to
change and future changes may require Health Care Facilities to incur increased
costs in order to remain in compliance.
g. Certificate of Need. In many states, a certificate of need must be
-------------------
obtained before a Health Care Facility may be permitted to add new beds or
services or to make capital expenditures in excess of certain threshold amounts.
Issuance of a certificate of need for new beds for a Health Care Facility is
usually based on a demographic model forecasting the need for such beds in the
facility's service area. Such bed need formulas regulate the supply of hospital
and nursing facility beds and, for existing facilities, may limit future
competition. Most states with certificate of need programs have determined that
new hospital and nursing facility beds are not needed in most regions within the
states. The inability to obtain certificate of need approval, where required,
may adversely affect the ability of a hospital or nursing facility to undertake
new projects, to make needed improvements or renovations, or to compete
successfully with other hospitals or nursing facilities in offering newly
developed treatment programs and technology in health care services.
h. Rate Regulation. Several states have adopted, and other states may in
---------------
the future adopt, legislation establishing regulatory authority over the rates
and charges which may be established by Health Care Facilities for certain
groups of patients. Such rate regulation may establish state review over a
Health Care Facility's budget, or impose formulas for the establishment or
revision of rates and charges.
4. RETIREMENT COMMUNITIES.
----------------------
Retirement Community revenues are based on a combination of initial
entrance fees payable when a resident enters the facility and monthly service
fees which are payable for the term the resident stays in the
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facility. (Housing for the elderly which is based only on monthly fees or
rentals is described below under "Housing Facilities".) Many Retirement
Communities include both residential units and nursing facilities on the same
premises (or have contracts with nursing facilities to provide nursing care for
residents at the Retirement Community). Such Retirement Communities usually
agree to provide their residents with a residential unit or, if the resident's
health so requires, a nursing facility bed, in either case at the same monthly
service fee or at a reduced charge which is less than free-standing nursing
facility rates. The term of such "residence and care agreements" may be for a
stated number of years or for the remainder of the resident's life. In addition
to the general risk factors described above, several factors listed below may
have an adverse affect on the operation of Retirement Communities.
Where a Retirement Community enters into a residence and care agreement
with its resident, the cost of providing nursing services will generally exceed
the cost of maintaining the resident in a residential unit. The Retirement
Community's financial condition would be adversely affected if:
(a) the Retirement Community is unable to generate and maintain
sufficient reserves to cover the added cost of providing nursing care
to residents;
(b) cost of nursing care increases more rapidly than the cost of
providing residential care and the Retirement Community is unable to
increase monthly service fees to cover increases in the cost of
providing nursing care; or
(c) the residents transferred to the nursing facility reside
there for an extended period of time.
The economic feasibility of a Retirement Community often depends to a
certain degree on the rate of turnover of occupancy in the facility. Payment of
debt service on the Bonds and establishment of reserves for the costs of nursing
care often depends on continued receipt of new entrance fees from new residents.
If a substantial number of residents occupy residential units longer than
expected, either because such residents live beyond the life expectancy assumed
by the owner, or because the number of residents transferring from residential
units to the nursing facility is less than expected, the receipt of additional
entrance fees and the revenues of the Retirement Community may be adversely
affected. Receipt of entrance fees also depends on an effective marketing plan
by the Retirement Community. Marketing of units in a Retirement Community may
also be adversely affected by adverse conditions in the residential real estate
market limiting the ability of prospective residents to sell their homes, if
needed to provide the funds for payment of the entrance fee.
Some newly constructed Retirement Communities have encountered financial
difficulties for various reasons, such as inadequate initial
24
<PAGE>
occupancy rates and inability to achieve forecasted levels of revenues and
expenses. Several states have adopted legislation regulating Retirement
Communities, in order to screen applications for new facilities and protect the
interests of residents. Such regulation generally includes requirements for:
issuance of a certificate of authority prior to construction of a Retirement
Community (to screen prospective applicants); standards of disclosure to
prospective residents; minimum requirements for residence and care agreements to
protect the interests of residents; and maintenance of minimum reserves for
payment of debt service and, in some states, reserves for operating expenses.
Although designed to protect the interests of residents, such state regulation
may increase the cost of development or operation of Retirement Communities and
make profitable operation more difficult.
5. HOUSING FACILITIES.
------------------
The increase in the elderly population has stimulated the growth of Housing
Facilities catering to the special needs of the elderly. In addition to
conventional apartments, congregate living facilities have been developed which
offer special services for elderly residents. These usually include a central
dining hall and kitchen with meal plans as part of the basic rent, special
design features in the apartments for the elderly or handicapped, emergency call
systems monitored by on-site nursing personnel, organized social and
recreational activities and other special services. Congregate living
facilities are subject to licensure in some states. Requirements for licensing
may include inspections for health and safety as well as requirements for
admissions and contracts with residents.
Housing Facilities generally are dependent on timely completion of
construction, successful marketing of rental units, and maintenance of
substantial levels of occupancy. Marketing and occupancy may be adversely
affected by general economic conditions in the facility's market area, including
unemployment rates and inflation, and by other factors affecting the supply of
and demand for rental housing units. Management may be unable to increase
rentals due to market conditions, rent control or other factors, to levels
sufficient to pay debt service on the Bonds and operating expenses. New Housing
Facilities are generally not supported by federal subsidies due to limited
funding in recent years of the principal federal rental subsidy program (Section
8 of the United States Housing Act of 1937).
____________________
To the best knowledge of the Sponsor, there is no litigation or
administrative proceeding pending as of the date of this Prospectus in respect
of any Bonds which might reasonably be expected to have a material adverse
effect upon the Trust. At any time after the date of this Prospectus,
litigation or administrative proceedings may be initiated on
25
<PAGE>
a variety of grounds with respect to Bonds in the Trust. Such litigation or
proceedings may affect the validity of such Bonds or the tax-free nature of the
interest thereon. While the outcome of litigation or proceedings of such nature
can never be entirely predicted, opinions of bond counsel are delivered with
respect to each Bond on the date of issuance to the effect that such Bond has
been validly issued and that the interest thereon is exempt from federal income
tax. In addition, other factors may arise from time to time which potentially
may impair the ability of issuers to meet obligations undertaken with respect to
Bonds.
Because certain of the Bonds from time to time may be redeemed or will
mature in accordance with their terms or may be sold under certain
circumstances described herein, no assurance can be given that the Trust will
retain for any length of time its present size and composition (see Redemption).
Many of the Bonds may be subject to redemption prior to their stated maturity
dates pursuant to optional sinking fund redemption provisions or otherwise. In
general, optional redemption provisions are more likely to be exercised when the
Bonds are trading at a premium over par than when they are trading at a discount
from par. Generally, the Bonds will trade at a premium over par when the market
interest rates fall below the coupon rate on such Bonds. The percentage of the
face amount of Bonds in the Trust which were acquired by the Trust on the Date
of Deposit in excess of par is set forth under Investment Summary. Certain
Bonds in the Trust may be subject to sinking fund provisions early in the life
of the Trust. Such 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. Of the eleven issues held by the Trust as of December
31, 1996, eight were valued at amounts that exceeded par. See Trust Portfolio
for a listing of the sinking fund and optional redemption provisions with
respect to the Bonds.
The $800,000 of Massachusetts Industrial Finance Agency First Mortgage
Revenue Bonds (Brookhaven at Lexington Retirement Community --1988 Issue) (the
"Brookhaven Bonds") held by the Trust have been advance-refunded. Under the
terms of the refunding, United States Treasury obligations have been deposited
with the Trustee for such Bonds, the principal and interest payments on which
have been calculated to provide sufficient funds to pay the interest on the
Bonds held by the Trust to and including January 1, 1998 and to pay the
redemption price on the Bonds on such date. On January 1, 1998, the Brookhaven
Bonds will be redeemed at a redemption price of 103% of the principal amount.
BONDS COMPRISING TRUST
The Bonds in the Trust consist of different issues of debt obligations with
fixed final maturity dates. As used herein the term "Bonds" means the long-term
debt obligations initially deposited in the Trust and described under Trust
Portfolio.
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ORIGINAL ISSUE DISCOUNT BONDS. Some of the aggregate principal amount of
------------------------------
the Bonds in the Trust are original issue discount bonds. The original issue
discount, which is generally the difference between the initial purchase price
of the Bonds and the face value, is deemed to accrue on a daily basis and the
accrued portion will be treated as tax-exempt interest income for federal income
tax purposes. On sale or redemption any gain realized that is in excess of the
earned portion of original issue discount will be taxable as capital gain. The
current value of an original issue discount bond reflects the present value of
its face amount at maturity. The market value tends to increase more slowly in
early years and in greater increments as the Bonds approach maturity. Some of
the original issue discount bonds in the Trust may be Zero Coupon Bonds. Zero
----
Coupon Bonds do not provide for the payment of any current interest and provide
- -------------------------------------------------------------------------------
for payment at maturity at face value unless sooner sold or redeemed. The market
- --------------------------------------------------------------------
value of Zero Coupon Bonds is subject to greater fluctuation in response to
changes in interest rates. Zero Coupon Bonds generally are subject to redemption
at compound accredit value based on par value at maturity. Because the issue is
not obligated to make current interest payments, Zero Coupon Bonds may be less
likely to be redeemed than coupon bonds issued at a similar interest rate,
although certain zero coupon housing bonds may be subject to mandatory call
provisions.
GENERAL. The yields on debt obligations of the type deposited in the Trust
-------
are dependent on a variety of factors including general money market conditions,
general conditions of the municipal bond market, size of a particular offering,
and the maturity of the obligations.
The Trust consists of such Bonds listed under Trust Portfolio as long as
they may continue to be held from time to time in the Trust (including certain
securities deposited in the Trust in exchange or substitution for any Bonds upon
certain refundings) together with accrued and undistributed interest thereon and
undistributed and uninvested cash realized from the disposition of Bonds (see
Trust Administration -Portfolio Supervision).
Neither the Sponsor nor the Trustee shall be liable in any way for any
default, failure or defect in any Bonds.
INCOME AND ESTIMATED CURRENT RETURN AND LONG-TERM YIELD
The estimated net annual interest income per Unit on December 31, 1996 is
set forth under Investment Summary. Net annual interest income per Unit is
determined based on $1,000 face amount per Bond after deducting estimated annual
fees and expenses. Net annual interest income will change as Bonds are
exchanged, redeemed, paid or sold, or as the expenses of the Trust change.
Normally, interest on the Bonds in the Trust is paid on a semi-annual (or
less frequently, annual) basis (see Investment Summary for
27
<PAGE>
estimates of the amounts of the monthly and semi-annual income distributions).
Because interest on the Bonds is not received by the Trust at a constant rate
throughout the year, any income distribution may be more or less than the amount
actually received by the Trust representing interest on Bonds in the Trust
Portfolio as of the Record Date for such distribution. In order to eliminate
fluctuations in income distributions resulting from such variances, the Trustee
is required to advance such amounts as may be necessary to provide income
distributions of approximately equal amounts. The Trustee will be reimbursed,
without interest, for any such advances from interest received on the Bonds. In
the event the Trustee has made advances on Bonds which subsequently default, and
the interest thereon is not received within 120 days after the due date, such
interest shall be deemed uncollectible and the Trustee may reimburse itself for
such advances and reduce if necessary the amount of the next ensuing semi-annual
or monthly distribution, as appropriate.
In addition to the Public Offering Price, the price of a Unit includes
accrued interest to, but not including, the settlement date of a Unit. Because
of the varying interest payment dates of the Bonds, accrued interest at any
point in time will be greater than the amount of interest actually received by
the Trust and distributed to Holders. Therefore, accrued interest is always
added to the value of the Units. 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 Bonds.
Interest on the Bonds in the Trust, less estimated fees of the Trustee and
Sponsor and certain other expenses, is expected to accrue at the daily rate
(based on a 360-day year) shown under Investment Summary.
The Units of the Trust 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, which is computed as set forth under Investment
Summary. The use of "current return" should be contrasted with the "long-term
yield" whereby the price 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
Public Offering Price of the Units is less than $1,000, the yield to maturity
generally will be greater than the current return; if the Public Offering Price
of the Units is greater than $1,000, the yield to maturity generally will be
less than the current return; however, yields to maturity may be affected in the
event the Trust contains original issue discount or zero coupon Bonds.
The estimated current return and long term yield on December 31, 1996 is
set forth under Investment Summary. The Public Offering Price will vary in
accordance with fluctuations in the prices of the Bonds.
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<PAGE>
TAXES
Interest to be received by holders of the Bonds was, as of the date of
their issuance, generally exempt from federal income taxation under the Internal
Revenue Code of 1954, as amended, or, if applicable, the Code, in the opinion of
bond counsel to the respective issuers. Neither the Sponsor nor its counsel has
---------------------------------------
made any review of the proceedings relating to the issuance of the Bonds or the
- -------------------------------------------------------------------------------
bases for bond counsels' opinions.
- ---------------------------------
The opinions of bond counsel indicate that it is possible for interest
on certain Bonds to become taxable. For example, interest on "private activity
bonds" (including "qualified 501(c)(3) bonds") may become subject to federal
income taxation if certain requirements of the Code and the Treasury regulations
regarding investment of bond proceeds, arbitrage and rebates are not satisfied.
Interest on such Bonds may therefore become subject to federal income taxation
as a result of events occurring after the date of issue of such Bonds.
In the opinion of Ballard Spahr Andrews & Ingersoll, special counsel
to the Sponsor, under existing law:
(1) The Trust is not an association taxable as a corporation for
federal income tax purposes and interest on the underlying Bonds which
would be exempt from federal income taxation if paid directly to a Holder
will, to the same extent, be exempt from federal income taxation when
received by the Trust and when received by such Holder.
(2) Each Holder will be considered the owner of a pro rata portion of
the Trust under the grantor trust rules of Sections 671 through 679 of the
Code. Each Holder will be considered to have received his pro rata share
of Bond interest when it is received by the Trust. In addition, each
Holder will have a taxable event when the Trust disposes of a Bond (whether
by sale, exchange, redemption, or payment at maturity) or when the Holder
redeems or sells his Units. In determining the amount of gain or loss upon
such an event, (a) the total tax cost of each Unit of the Trust to a Holder
is allocated among each of the Bonds held in the Trust (in proportion to
the fair market values thereof on the date the Holder purchased his Units)
in order to determine his per-Unit tax cost for each Bond, and (b) the tax
cost reduction requirements of the Code relating to amortization of bond
premium will apply separately to the per-Unit tax cost of each Bond. In
particular if the tax cost of a Bond exceeds the amount payable at
maturity, such excess will be treated as non-deductible bond premium and
will be amortized as a reduction in the tax cost of such Bond over the
period in which such Bond is held by the Trust. Because such amortization
of bond premium will reduce the per-Unit tax cost of the Bond, a Holder
under some circumstances may realize taxable gain when his Units are
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sold or redeemed for an amount equal to or less than his original cost.
(3) When a contract to acquire Bonds is settled after the Holder's
settlement date for a Unit, the Holder's proportionate share of the
interest accrued on the Bonds on the Bonds' settlement date will exceed the
portion of the purchase price that was allocable to interest accrued on the
Unit settlement date. A Holder will not be subject to federal income tax
when his proportionate share of the Bond interest which accrues prior to or
during the period between the Unit settlement date and the Bonds'
settlement date is received by the Trust or when it is distributed to him.
A Bond will have "original issue discount" if and to the extent the
sum of all payments provided by its terms (other than any payments of "qualified
stated interest", i.e., stated interest that is unconditionally payable at least
----
annually at a single fixed rate) exceeds its issue price. Original issue
discount on Bonds is treated as an addition to the tax cost of a Bond as it
accrues. If a Bond is purchased on the market for a price that is less than its
"revised issue price" (issue price plus accrued original issue discount, if
any), the difference will be treated as market discount and will be neither
currently included in taxable income nor accrued as an addition to the tax cost
of the Bond. On the other hand if the purchase price of a Bond issued after
September 3, 1982 exceeds its "adjusted issue price" (issue price plus accrued
original issue discount (if any), less any payment made prior to the purchase
date other than as payment of "qualified stated interest") (but is less than or
equal to the sum of all amounts payable on the Bond after the purchase date
other than payments of "qualified stated interest"), the excess will be treated
as "acquisition premium" and amortized as a reduction in the amount of accruable
original issue discount. If the purchase price of a Bond exceeds the sum of all
amounts payable on the Bond after the purchase date other than payments of
"qualified stated interest", the excess will be treated as bond premium and
amortized as a reduction in the tax cost of the Bond (see discussion above) and
no original issue discount on the Bonds will be accrued.
For federal income tax purposes, any amounts received by the Trust
upon the disposition of a Bond that are attributable to market discount or
unaccrued original issue discount will be included in the measure of the taxable
gain. Thus, when a Bond is disposed of by the Trust the taxable gain or loss,
if any, will be determined by the difference between (i) the amounts received
and (ii) the Holder's tax cost of the Bond (a) reduced by the amount of
amortized bond premium or (b) increased by the amount of accrued original issue
discount (less the amount of amortized acquisition premium in the case of a Bond
issued after September 3, 1982). Any taxable gain recognized by a Holder that
acquired its Units after April 30, 1993, will be treated as ordinary income to
the extent of the accrued market discount on such Bond with respect to the
Holder.
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Any original issue discount on Bonds issued after September 3, 1982 is
accrued for federal income tax purposes using a constant (compound) interest
method. Original issue discount on other Bonds is accrued using a straight-line
method. Except as may otherwise be permitted under Treasury regulations, any
bond premium on Bonds issued after September 27, 1985 must be amortized for
federal income tax purposes using a constant (compound) yield method.
Interest on bonds exempt from regular federal income tax may, in two
circumstances, be subject to alternative minimum tax. First, interest on
"specified private activity bonds" (which do not include "qualified 501(c)(3)
bonds") issued after August 7, 1986 will generally constitute a specific item of
tax preference for both corporate and non-corporate taxpayers. Because none of
the Bonds held by the Trust are "specified private activity bonds", none of the
interest paid or accrued on the Bonds constitutes a specific item of tax
preference. Second, interest on all Bonds held by the Trust, regardless of the
date of issue, must be taken into account by corporate taxpayers in determining
their adjusted current earnings adjustment. Alternative minimum tax is imposed
at a maximum rate of 28 percent in the case of non-corporate taxpayers (and at
the rate of 20 percent in the case of corporate taxpayers).
All Holders required to file a federal income tax return will be
required to report their pro rata share of Bond interest received or accrued by
the Trust on their returns, regardless of whether such Holders are subject to
alternative minimum tax. Under proposed Treasury regulations (which will
generally not apply to Units acquired before their adoption as final Treasury
regulations), a Holder's pro rata share of interest received or accured by the
Trust for any Bond will be reduced for all federal income tax purposes by any
amortized bond premium allocable to the period with respect to which the Bond
interest has accrued.
Interest on indebtedness which is incurred to purchase or carry
obligations bearing tax-exempt interest is not deductible for federal income tax
purposes. Therefore, Holders may not deduct interest on indebtedness incurred
or continued to purchase or carry Units for regular federal income tax purposes
but may (in the case of corporate taxpayers) deduct such interest for
alternative minimum tax purposes in determining their adjusted current earnings
adjustment. Under rules adopted by the Internal Revenue Service, the purchase
of Units may be considered to have been made with borrowed funds even though the
borrowed funds are not directly traceable to the purchase of Units. Investors
should consult their tax advisors regarding the application of these rules for
their purchase of Units.
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An individual Holder receiving Social Security or Railroad Retirement
benefits will be required to include his pro rata share of Bond interest in
"modified adjusted gross income" for purposes of determining whether such
benefits are subject to federal income taxation. In addition, the receipt of
interest on Bonds may result in collateral federal income tax consequences to
certain other taxpayers, including financial institutions, property and casualty
insurance companies, "S corporations," and foreign corporations engaged in a
trade or business in the United States. Prospective investors should consult
their tax advisors as to the relationship of the foregoing tax consequences to
their particular situations.
A non-corporate Holder may not deduct any expenses incurred by the
Trust that are allocable to tax-exempt interest that would otherwise be
allowable as a deduction under Section 212 of the Code. A non-corporate Holder
thus may have to report a higher amount of tax-exempt interest for federal
income tax purposes than that which such Holder actually receives from the
Trust. In addition, expenses incurred by the Trust that are allocable to
amounts received by the Trust subject to federal income taxation, such as
capital gains, may not be allowable to non-corporate Holders because of the
limitations imposed on the Code or the deductibility of "miscellaneous itemized
deductions" and of "itemized deductions" generally. In such instances, a Holder
could recognize taxable income without a corresponding deduction. Prospective
investors are urged to consult their tax advisors regarding this issue.
From time to time proposals have been introduced before Congress the
purpose of which is to restrict further or to eliminate the federal income tax
exemption for interest on debt obligations similar to the Bonds, and it can be
expected that similar proposals may be introduced in the future. The Trust
cannot predict what additional legislation, if any, in respect to the tax status
of interest on debt obligations may be proposed by the present or future
Administrations or by members of Congress, nor can it predict which proposals,
if any, might be enacted or what effect any legislation, if enacted, could have
on any Bonds held by the Trust or the Trust's ability to achieve its objective.
Investors should also note that any exemption of interest on Bonds
(including accrued original issue discount) from federal income taxation does
not necessarily result in exemption under any other federal tax law or under the
income or other tax laws of any state, city or other local taxing authority.
The laws of the several states vary with respect to the taxation of such
obligations, and investors are advised to consult their tax advisors as to the
tax consequences of owning Units under state and local tax laws.
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PUBLIC SALE OF UNITS
PUBLIC OFFERING PRICE
The Public Offering Price per Unit is based upon a pro rata share of the
aggregate bid price of the Bonds in the Trust plus a sales charge of 5.5% of the
Public Offering Price, which is the same as 5.82% of the net amount invested in
Bonds per Unit. Any profit or loss resulting from the resale of such Units will
belong to the Sponsor. A proportionate share of accrued and undistributed
interest on the Bonds to the date of delivery of the Units to the purchaser is
added to the Public Offering Price. The Public Offering Price on the date of
this Prospectus or on any subsequent date will vary from the Public Offering
Price on December 31, 1996 (set forth under Investment Summary) in accordance
with fluctuations in the aggregate bid side evaluation of the underlying Bonds.
COMPARISON OF PUBLIC OFFERING PRICE, SPONSOR'S REPURCHASE PRICE AND REDEMPTION
PRICE
On December 31, 1996 the Public Offering Price per Unit (which included the
5.5% sales charge) exceeded the Redemption Price per Unit and the Sponsor's
Repurchase Price per Unit (each on the bid side evaluation thereof - see
Redemption) by the amounts set forth under Investment Summary.
PUBLIC DISTRIBUTION
Units which may be acquired in the secondary market (see Market for Units)
may be offered directly to the public by this Prospectus at the Public Offering
Price next determined in the manner provided above.
The Sponsor, a member of the National Association of Securities Dealers,
Inc., initially qualified the Units for sale in many states and has continued to
maintain such qualifications or registrations in some of such jurisdictions.
The Sponsor intends to continue to qualify or register Units of the Trust for
sale in the jurisdictions where such qualification or registration is deemed
necessary by it. Sales to dealers, if any, will initially be made at prices
which represent a concession of $30.00 per Unit, but the Sponsor reserves the
right to change the amount of the concession to dealers from time to time.
SPONSOR'S PROFITS
The Sponsor will receive a gross commission on all Units sold in the
secondary market equal to the 5.5% sales charge on each transaction, which is
the same as 5.82% of the net amount invested in Bonds per unit (see Public
Offering Price). In addition, in maintaining a market for the Units (see Market
for Units), the Sponsor will also realize profits or sustain losses in the
amount of any difference between the prices at which it buys Units (based on the
bid side evaluation of the Bonds) and the
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prices at which it resells such Units (which include the sales charge of 5.5%)
or the prices at which it redeems such Units (based on the bid side evaluation
of the Bonds), as the case may be. Cash, if any, made available by buyers of
Units to the Sponsor prior to the settlement date for purchases of Units may be
used in the Sponsor's business subject to the limitations of Rule 15c3-3 under
the Securities Exchange Act of 1934 and may be of benefit to the Sponsor.
MARKET FOR UNITS
While the Sponsor is not obligated to do so, it currently maintains and
intends to continue to maintain a market for Units of the Trust and continuously
to offer to purchase Units of the Trust at prices, subject to change at any
time, which will be computed on each Business Day as of the Evaluation Time on
the basis of the bid side of the market, taking into account the same factors
referred to in determining the bid side evaluation of Bonds for purposes of
redemption (see Redemption). The price offered by the Sponsor for the purchase
of Units shall be an amount not less than the Redemption Price per Unit, based
on the aggregate bid side evaluation of the Bonds in the Trust on the date on
which the Units are tendered for redemption (see Redemption). Holders who wish
to dispose of their Units should inquire of the Trustee or their bank or broker
as to current market prices in order to determine whether there exists any price
in excess of the Redemption Price per Unit. Business Day shall mean any weekday
except for the following legal bank holidays: New Year's Day, Martin Luther
King's Day, President's Day, Memorial Day, Independence Day, Labor Day, Columbus
Day, Veteran's Day, Thanksgiving Day and Christmas Day and any other day on
which banks are authorized by law or executive order to be closed.
The Sponsor may redeem any Units it has purchased in the secondary market
if it determines it is undesirable to continue to hold such Units in its
inventory. Factors which the Sponsor will consider in making such a
determination will include the number of units of all series of all unit
investment trusts which it holds in its inventory, the salability of such units
and its estimate of the time required to sell such units and general market
conditions. For a description of certain consequences of such redemption for
remaining Holders, see Redemption.
REDEMPTION
Units may be submitted for redemption at the office of the Sponsor by
tendering Certificates and payment of any relevant tax, without any other fee.
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 signature guaranteed
by an eligible guarantor institution meeting the
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requirements of the Trustee, which include participation in the Securities
Transfer Agents Medallion Program ("STAMP") or such other signature guarantee
program as may be acceptable to the Trustee. In certain instances the Trustee
may require additional documents such as, 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 such 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 in cash an amount per Unit equal to the
Redemption Price per Unit (see below) as determined as of the Evaluation Time
next following such tender. So long as the Sponsor is maintaining a bid in the
secondary market, the Sponsor 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 empowered to sell Bonds in order to make funds available for
redemption. The Bonds to be sold will be selected from a list supplied by the
Sponsor. Bonds will be chosen for this list by the Sponsor on the basis of such
market and credit factors as it may determine are in the best interests of the
Trust. Provision is made under the Indenture for the Sponsor to specify minimum
face amounts in which blocks of Bonds are to be sold in order to obtain the best
price for the Trust.
To the extent that Bonds are sold, the size and diversity of the Trust will
be reduced. Such sales will usually be required at a time when Bonds would not
otherwise be sold and may result in lower prices than might otherwise be
realized. The price received upon redemption of the Units may be more or less
than the amount paid by the Holder.
The right of redemption may be suspended and payment postponed for any
period (1) during which the New York Stock Exchange, Inc. is closed other than
for customary weekend and holiday closings, or (2) during which, as determined
by the Securities and Exchange Commission, (a) trading on that Exchange is
restricted or (b) an emergency exists as a result of which disposal or
evaluation of the Bonds is not reasonably practicable, or (3) for such other
periods as such Commission may by order permit.
Certain Bonds may provide for redemption at par prior to optional or
mandatory redemption dates, for example, if proceeds are not able to be used as
contemplated, the project is condemned or the project is destroyed and insurance
proceeds are used to redeem the Bonds. Some of the Bonds have mandatory sinking
funds which contain optional provisions permitting the issuer to increase the
number of Bonds 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 Bonds have an offering side
evaluation which represents a premium over par. To the extent that the Bonds
were deposited in the Trust at a price higher than the price at which they are
redeemed, this will represent a loss of capital when compared with the original
Public Offering Price of the Units (including any applicable sales charge).
Conversely, to the extent that the Bonds were acquired at a price lower
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than the redemption price, this will represent an increase in capital when
compared with the original Public Offering Price of the Units (including any
applicable sales charge). Distributions will generally be reduced by the amount
of the income which would otherwise have been paid with respect to redeemed
Bonds and there will be distributed to Holders the principal amount and any
premium received on such redemption. The estimated current return in this event
may be affected by such redemptions. The tax effect on Holders of such
redemptions and resultant distributions is described under Description of the
Trust - Taxes.
COMPUTATION OF REDEMPTION PRICE PER UNIT
The Redemption Price per Unit is computed by the Trustee as of the
Evaluation Time on each December 31 (or the last Business Day prior thereto), on
any day on which the New York Stock Exchange is open, 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 Sponsor, by adding (a) the aggregate bid side
evaluation of the Bonds, (b) cash on hand in the Trust (other than cash covering
contracts to purchase Bonds), (c) accrued and unpaid interest on the Bonds as of
the date of computation and (d) all other assets of the Trust; deducting
therefrom the sum of (x) taxes or other governmental charges against the Trust
not previously deducted, (y) accrued fees and expenses of the Trustee (including
legal and auditing expenses), of the Sponsor, of the Evaluator and of counsel,
and certain other expenses and (z) cash held for distribution to Holders of
record as of a date prior to the evaluation and cash being held for Unit
redemption; and dividing the result by the number of Units outstanding as of the
date of computation.
The aggregate current bid price evaluation of the Bonds shall be determined
by the Evaluator in the following manner: If the Bonds are traded on the over-
the-counter market, such evaluation shall generally be based on the closing sale
prices on the over-the-counter market (unless the Evaluator deems such prices
inappropriate as a basis for evaluation) or if no such closing sale prices are
available for any Bonds, (a) on the basis of current bid prices for the Bonds,
(b) if bid prices are not available for any Bonds, on the basis of current bid
prices for comparable securities, (c) by determining the value of the Bonds on
the bid side of the market by appraisal or (d) by any combination thereof.
RIGHTS OF HOLDERS
CERTIFICATES
Ownership of Units of the Trust is evidenced by registered Certificates
executed by the Trustee and the Sponsor. Certificates may be issued in
denominations of one or more Units and will bear appropriate notations on their
faces indicating which plan of distribution has been selected by the Holder.
Certificates are transferable by presentation and
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surrender to the Trustee properly endorsed and/or accompanied by a written
instrument or instruments of transfer. Although no such charge is presently made
or contemplated, the Trustee may require a Holder to pay $2.00 for each
Certificate reissued or transferred and any governmental charge that may be
imposed in connection with each such transfer or interchange. Mutilated,
destroyed, stolen or lost Certificates will be replaced upon delivery of
satisfactory indemnity and payment of expenses incurred.
INTEREST AND PRINCIPAL DISTRIBUTIONS
Interest received by the Trust is credited by the Trustee to an Interest
Account and a deduction is made to reimburse the Trustee without interest for
any amounts previously advanced. Proceeds representing principal received from
the maturity, redemption, sale or other disposition of the Bonds are credited to
a Principal Account.
Distributions to each Holder from the Interest Account are computed as of
the close of business on each Record Date for the following Payment Date and
consist of an amount substantially equal to one-twelfth or one-half of such
Holder's pro rata share of the Estimated Net Annual Interest Income in the
Interest Account, depending upon the applicable plan of distribution.
Distributions from the Principal Account (other than amounts representing failed
contracts, as previously discussed) will be computed as of each semi-annual
Record Date, and will be made to the Holders on or shortly after the next semi-
annual Payment Date. Proceeds representing principal received from the
disposition of any of the Bonds between a Record Date and a Payment Date which
are not used for redemptions of Units will be held in the Principal Account and
not distributed until the second succeeding semi-annual Payment Date. Persons
who purchase Units between a Record Date and a Payment Date will receive their
first distribution on the second Payment Date after such purchase.
Because interest payments are not received by the Trust at a constant rate
throughout the year, interest distributions may be more or less than the amount
credited to the Interest Account as of a given Record Date. For the purpose of
minimizing fluctuations in the distributions from the Interest Account, the
Trustee will advance sufficient funds, without interest, as may be necessary to
provide interest distributions of approximately equal amounts. All funds in
respect of the Bonds received and held by the Trustee prior to distribution to
Holders may be of benefit to the Trustee and do not bear interest to Holders.
The Trustee is entitled to the benefit of any reasonable cash balance in the
Income and Principal Accounts.
As of the first day of each month, the Trustee will deduct from the
Interest Account, and, to the extent funds are not sufficient therein, from the
Principal Account, amounts necessary to pay the expenses of the Trust (as
determined on the basis set forth under Trust Expenses and Charges). The
Trustee also may withdraw from said accounts such amounts,
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if any, as it deems necessary to establish a reserve for any applicable taxes or
other governmental charges that may be payable out of the Trust. Amounts so
withdrawn shall not be considered a part of the Trust's assets until such time
as the Trustee shall return all or any part of such amounts to the appropriate
accounts. In addition, the Trustee may withdraw from the Interest and Principal
Accounts such amounts as may be necessary to cover redemptions of Units by the
Trustee.
The estimated monthly or semi-annual interest distribution per Unit will
initially be in the amounts shown under Investment Summary and will change and
may be reduced as Bonds mature or are redeemed, exchanged or sold, or as
expenses of the Trust fluctuate. No distribution need be made from the
Principal Account until the balance therein is an amount sufficient to
distribute $1.00 per Unit.
DISTRIBUTION ELECTIONS
Interest is paid to investors according to a monthly or semi-annual
interest distribution plan. Record Dates for monthly interest distributions
are the first day of each month and the first day of June and December for semi-
annual distributions. Payment Dates will be the fifteenth day of each month
following the respective Record Dates.
Holders purchasing Units in the secondary market will initially receive
distributions in accordance with the election of the prior owner. Every
October, the Trustee will furnish each Holder with a card to be returned to the
Trustee on or before November 1 of such year. When a Holder who desires to
change his current distribution plan returns his card and Certificate to the
Trustee, the change will take effect December 2. If the card and a Certificate
are not returned to the Trustee, the Holder will be deemed to have elected to
continue with the plan previously selected for the following 12 months.
REPORTS AND RECORDS
The Trustee shall furnish Holders in connection with each distribution a
statement of the amount of interest, if any, and the amount of other receipts,
if any, which are being distributed, expressed in each case as a dollar amount
per Unit. Within a reasonable time after the end of each fiscal year (December
31), the Trustee will furnish to each person who at any time during the calendar
year was a Holder of record, a statement showing (a) as to the Interest Account:
interest received (including any earned original issue discount and amounts
representing interest received upon any disposition of Bonds), amounts paid for
redemptions of Units, if any, distributions paid, deductions for applicable
taxes and fees and expenses of the Trust, and the balance remaining after such
distributions and deductions, expressed both as a total dollar amount and as a
dollar amount representing the pro rata share of each Unit outstanding on the
last Business Day of such calendar year; (b) as to the Principal Account: the
dates of disposition of any Bonds
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and the net proceeds received therefrom (including any unearned original issue
discount but excluding any portion representing accrued interest), distributions
paid, deductions for payments of applicable taxes and fees and expenses of the
Trust, amounts paid for redemptions of Units, if any, and the balance remaining
after such distributions and deductions, expressed both as a total dollar amount
and as a dollar amount representing the pro rata share of each Unit outstanding
on the last Business Day of such calendar; (c) a list of the Bonds held and the
number of Units outstanding on the last Business Day of such calendar year; (d)
the Redemption Price per Unit based upon the last computation thereof made
during such calendar year; and (e) amounts actually distributed to Holders
during such calendar year from the Interest and Principal Accounts, separately
stated, expressed both as total dollar amounts and as dollar amounts
representing the pro rata share of each Unit outstanding on the last Business
Day of such calendar year.
The Trustee shall keep available for inspection by Holders at all
reasonable times during business hours, books of record and account of its
transactions as Trustee, including records of the names and addresses of
Holders, Certificates issued or held, a current list of Bonds in the Trust and a
copy of the Trust Agreement.
TRUST ADMINISTRATION
PORTFOLIO SUPERVISION
The Sponsor may direct the Trustee to dispose of Bonds upon (i)
default in payment of principal or interest on such Bonds, (ii) institution of
certain legal proceedings with respect to the issuers of such Bonds, (iii)
breach or default under indenture or other documents adversely affecting debt
service on or impairing the sound investment character of such Bonds, (iv)
default in payment of principal or interest on other obligations of the same
issuer or guarantor, (v) with respect to revenue Bonds, decline in revenues and
income of any facility or project below the estimated levels calculated by
proper officials charged with the construction or operation of such facility or
project, that in the opinion of the Sponsor would make the retention of such
Bonds in the Trust detrimental to the interests of the Holders or (vi) decline
in price or the occurrence of other market or credit factors that in the opinion
of the Sponsor would make the retention of such Bonds in the Trust detrimental
to the interests of the Holders. If a default in the payment of principal of or
interest on any of the Bonds occurs and if the Sponsor fails to instruct the
Trustee to sell or hold such Bonds, the Trust Agreement provides that the
Trustee may sell such Bonds. The Trustee shall not be liable for any
depreciation or loss by reason of any sale of Bonds or by reason of the failure
of the Sponsor to give directions to the Trustee.
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The Sponsor is required to instruct the Trustee to reject any offer
made by an issuer of any of the Bonds to issue new Bonds in exchange or
substitution for any Bonds pursuant to a refunding or refinancing plan, or an
exchange offer therefor, or tenders of Bonds for sinking fund or other cash
redemption except that the Sponsor may instruct the Trustee to accept or reject
any offer or to take any other action with respect thereto as the Sponsor may
deem proper if (a) the issuer is in default with respect to these Bonds or (b)
in the written opinion of the Sponsor the issuer will probably default with
respect to these Bonds in the reasonably foreseeable future. Any Bonds so
received in exchange or substitution will be held by the Trustee subject to the
terms and conditions of the Trust Agreement to the same extent as Bonds
originally deposited thereunder. Within five days after the deposit of Bonds in
exchange or substitution for underlying Bonds, the Trustee is required to mail
notice thereof to each holder, identifying the Bonds eliminated and the Bonds
substituted therefor. Except as stated herein, the acquisition by the Trust of
any securities other than the Bonds initially deposited is prohibited.
AMENDMENT AND TERMINATION OF TRUST AGREEMENT
The Trust Agreement may be amended by the Trustee, the Sponsor and the
Evaluator without the consent of any of the Holders: (1) to cure any ambiguity
or to correct or supplement any provision which may be defective or
inconsistent; (2) to change any provision thereof as may be required by the
Securities and Exchange Commission or any successor governmental agency; or (3)
to make such other provisions in regard to matters arising thereunder as shall
not adversely affect the interests of the Holders.
The Trust Agreement may also be amended in any respect, or performance
of any of the provisions thereof may be waived, with the consent of the Holders
of Certificates evidencing 66 2/3% of the Units then outstanding for the purpose
of modifying the rights of Holders; provided that no such amendment or waiver
shall reduce any Holder's interest in the Trust without his consent or reduce
the percentage of Units required to consent to any such amendment or waiver
without the consent of the Holders of all Certificates. The Trust Agreement may
not be amended, without the consent of the Holders of all Certificates then
outstanding, to increase the number of Units issuable or to permit the
acquisition of any bonds in addition to or in substitution for those initially
deposited in the Trust, except in accordance with the provisions of the Trust
Agreement. The Trustee shall promptly notify Holders, in writing, of the
substance of any such amendment.
The Trust Agreement provides that the Trust shall terminate upon the
maturity, redemption or other disposition, as the case may be, of the last of
the Bonds held in the Trust but in no event is it to continue beyond the end of
the calendar year preceding the fiftieth anniversary of the execution of the
Trust Agreement. If the value of the Trust shall be less than the Minimum
Amount of Trust set forth under Investment Summary, the
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Trustee may, in its discretion, and shall when so directed by the Sponsor,
terminate the Trust. The Trust may also be terminated at any time with the
consent of the Holders of Certificates representing 51% of the Units then
outstanding. In the event of termination, written notice thereof will be sent by
the Trustee to all Holders. Within a reasonable period after termination, the
Trustee must sell any Bonds remaining in the Trust, and, after paying all
expenses and charges incurred by the Trust, distribute to each Holder, upon
surrender for cancellation of his Certificate for Units, his pro rata share of
the Interest and Principal Accounts.
THE SPONSOR
Herbert J. Sims & Co., Inc., 1221 Post Road East, Westport,
Connecticut 06880 ("Sims"), is a New York corporation established in 1935.
Sims, an investment banking and securities broker-dealer firm, is a member of
the National Association of Securities Dealers, the Securities Industry
Association, the Public Securities Association, and the Securities Investor
Protection Corporation, and is a wholly-owned subsidiary of Teksys Corporation,
a privately owned holding company organized as a Delaware corporation with a
principal office at the same location as Sims' principal office. William B.
Sims, the President of Sims, is a controlling person of Sims as a result of his
ownership of over 90% of the outstanding shares of Teksys Corporation. Sims is
registered with the Securities and Exchange Commission. Sims executes orders for
the purchase and sale of securities of investment companies and sells securities
to such companies in its capacities as brokers or dealers in securities.
The Sponsor is liable for the performance of its obligations arising
from its responsibilities under the Trust Agreement, but will be under no
liability to Holders, for taking any action or refraining from any action in
good faith pursuant to the Trust Agreement, or for errors in judgment except in
cases of its own willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
The Sponsor may resign at any time by delivering to the Trustee an
instrument of resignation executed by the Sponsor.
If at any time the Sponsor shall resign or fail to perform any of its
duties under the Trust Agreement or becomes incapable of acting or becomes
bankrupt or its affairs are taken over by public authorities, then the Trustee
may either (a) appoint a successor Sponsor; (b) terminate the Trust Agreement
and liquidate the Trust; or (c) continue to act as Trustee without terminating
the Trust Agreement. Any successor Sponsor appointed by the Trustee shall be
satisfactory to the Trustee and, at the time of appointment, shall have a net
worth of at least $1,000,000.
THE TRUSTEE
41
<PAGE>
The Trustee is Chase Manhattan Bank, N.A., with its principal unit
investment trust office at Four New York Plaza, New York, New York 10004 (800)
428-8890. The Trustee is subject to supervision and examination by the
Superintendent of Bonds of the state of New York of the Company, the Federal
Deposit Insurance Corporation and the Board of Governors of the Federal Reserve
System. The Trustee was formerly the United States Trust Company of New
York.
The Trustee shall not be liable or responsible in any way for taking
any action or for refraining from taking any action in good faith pursuant to
the Trust Agreement, or for errors in judgment, or for any disposition of any
moneys, Bonds or Certificates in accordance with the Trust Agreement, except in
cases of its own willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties; provided, however, that the Trustee
shall not in any event be liable or responsible for any evaluation made by the
initial evaluator or the Evaluator. In addition, the Trustee shall not be
liable for any taxes or other governmental charges imposed upon or in respect of
the Bonds or the Trust which it may be required to pay under current or future
law of the United States or any other taxing authority having jurisdiction. The
Trustee shall not be liable for depreciation or loss incurred by reason of
the sale by the Trustee of any of the Bonds pursuant to the Trust Agreement.
For further information relating to the responsibilities of the
Trustee under the Trust Agreement, reference is made to the material set forth
under Rights of Holders.
The Trustee may resign by executing an instrument in writing and
filing the same with the Sponsor, and mailing a copy of a notice of resignation
to all Holders. In such an event the Sponsor is obligated to appoint a
successor Trustee as soon as possible. In addition, if the Trustee becomes
incapable of acting or becomes bankrupt or its affairs are taken over by public
authorities, the Sponsor may remove the Trustee and appoint a successor as
provided in the Trust Agreement. Notice of such removal and appointment shall
be mailed to each Holder by the Sponsor. If upon resignation of the Trustee no
successor has been appointed and has accepted the appointment within thirty days
after notification, the retiring Trustee may apply to a court of competent
jurisdiction for the appointment of a successor. The resignation or removal of
the Trustee becomes effective only when the successor Trustee accepts its
appointment as such or when a court of competent jurisdiction appoints a
successor Trustee. Upon execution of a written acceptance of such appointment
by such successor Trustee, all rights, powers, duties and obligations of the
original Trustee shall vest in the successor.
Any national banking association or corporation into which the Trustee
may be merged or with which it may be consolidated, or any national banking
association or corporation resulting from any merger or consolidation to which
the Trustee shall be a party, shall be the successor Trustee. The Trustee must
always be a national banking association or banking corporation organized under
the laws of the United
42
<PAGE>
States or any State and have at all times an aggregate capital, surplus and
undivided profits of not less than $2,500,000.
THE EVALUATOR
The Evaluator is Herbert J. Sims & Co., Inc.
The Trustee, the Sponsor and the Holders may rely on any evaluation
furnished by the Evaluator and shall have no responsibility for the accuracy
thereof. Determinations by the Evaluator under the Trust Agreement 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 Sponsor, or Holders for errors in judgment, except in cases of its
own willful misfeasance, bad faith, gross negligence or reckless disregard of
its obligations and duties.
The Evaluator may resign or may be removed by the Sponsor and Trustee,
and the Sponsor and the Trustee are to use their best efforts to appoint a
satisfactory successor. Such resignation or removal shall become effective upon
the acceptance of appointment by the successor. If upon resignation of the
Evaluator no successor has accepted appointment within thirty days after notice
of resignation, the resigning Evaluator may apply to a court of competent
jurisdiction for the appointment of a successor.
TRUST EXPENSES AND CHARGES
At no cost to the Trust, the Sponsor has borne all the expenses of
creating and establishing the Trust, including the cost of initial preparation
and execution of the Trust Agreement, registration of the Trust and the Units
under the Investment Company Act of 1940 and the Securities Act of 1933, initial
preparation and printing of the Certificates, the evaluation fees during the
initial public offering, legal expenses, advertising and selling expenses,
expenses of the Trustee including, but not limited to, an amount equal to
interest on certain "when issued" bonds since the date of settlement for the
Units, initial fees and other out-of-pocket expenses. The Sponsor will not
charge the Trust a fee for its services as such.
The Sponsor will receive for portfolio supervisory services to the
Trust an annual fee on or before the first payment date after the conclusion of
each calendar year in the amount set forth under Investment Summary. The
Sponsor's fee may exceed the actual cost of providing portfolio supervisory
services for this Trust, but at no time will the total amount received for
portfolio supervisory services rendered to all series of the American
Association of Homes for the Aging Tax-Free Trust in any calendar year exceed
the aggregate cost to the Sponsor of supplying such services in such year. (See
Portfolio Supervision.)
43
<PAGE>
The Trustee will receive for its ordinary recurring services to the
Trust an annual fee in the amount set forth under Investment Summary. For a
discussion of the services performed by the Trustee pursuant to its obligations
under the Trust Agreement, see Trust Administration and Rights of Holders.
The Evaluator will receive for each daily evaluation of the Bonds in
the Trust a fee in the amount set forth under Investment Summary. The
Evaluator's fee may exceed the actual cost of providing evaluation of the Bonds
in the Trust, but at no time will the total amount received by the Evaluator for
services rendered to all series of the Trust in any calendar year exceed the
aggregate cost to the Evaluator of supplying such services in such year. For
the period ended September 30, 1996, Herbert J. Sims & Co., Inc., as Evaluator
and Sponsor of the Trust, received fees for evaluation of the Bonds and for
portfolio supervisory services of $260.00 and $766.25, respectively. Total fees
and sales charges received by Herbert J. Sims & Co., Inc. during such period
were approximately $4,325.69. (See Financial Statements.)
The Trustee's and Evaluator's fees are payable monthly as of the
Record Date from the Interest Account to the extent funds are available and then
from the Principal Account. Both fees may be increased without approval of the
Holders by amounts not exceeding proportionate increases in consumer prices for
services as measured by the United States Department of Labor's Consumer Price
Index entitled "All Services Less Rent".
The following additional charges are or may be incurred by the Trust:
all expenses (including counsel fees) of the Trustee incurred and advances made
in connection with its activities under the Trust Agreement, including the
expenses and costs of any action undertaken by the Trustee to protect the Trust
and the rights and interests of the Holders; fees of the Trustee for any
extraordinary services performed under the Trust Agreement; indemnification of
the Trustee for any loss or liability accruing to it without gross negligence,
bad faith or willful misconduct on its part, or without reckless disregard of
its duties, arising out of or in connection with its acceptance or
administration of the Trust; indemnification of the Sponsor for any loss,
liabilities and expenses incurred in acting as Sponsor of the Trust without
gross negligence, bad faith or willful misconduct on its part; and all taxes and
other governmental charges imposed upon the Bonds or any part of the Trust (no
such taxes or charges are being levied, made, or, to the knowledge of the
Sponsor, contemplated). The above expenses, including the Trustee's fees, when
paid by or owing to the Trustee are secured by a first lien on the Trust. In
addition, the Trustee is empowered to sell Bonds in order to make funds
available to pay all expenses.
The accounts of the Trust shall be audited not less than annually by
independent auditors selected by the Sponsor. The expenses of the audit shall
be an expense of the Trust. So long as the Sponsor maintains a
44
<PAGE>
secondary market, the Sponsor will bear any audit expense which exceeds $.50 per
Unit. Holders covered by the audit during the year may receive a copy of the
audited financials upon request.
MISCELLANEOUS
LEGAL OPINION - The legality of the Units originally offered has been
passed upon by Ballard Spahr Andrews & Ingersoll, 1735 Market Street, 51st
Floor, Philadelphia, Pennsylvania 19103-7599, as special counsel for the
Sponsor. Carter, Ledyard & Milburn, 2 Wall Street, New York, New York 10005
acts as counsel for the Trustee.
INDEPENDENT AUDITORS - The financial statements of the Trust,
including the Portfolio of the Trust, included in this Prospectus have been
audited by Ernst & Young LLP independent auditors, as stated in their report
appearing herein. The financial statements referred to above are included in
reliance upon their report given upon the authority of such firm as experts in
accounting and auditing.
DESCRIPTION OF BOND RATINGS/*/
FITCH INVESTORS SERVICE, INC.
The Fitch Bond Rating provides a guide to investors in determining the
investment risk attached to a security. The rating represents Fitch's
assessment of the issuer's ability to meet the obligations of a specific debt
issue.
Fitch Bond ratings are not recommendations to buy, sell or hold
securities since they incorporate no information on market price or yield
relative to other debt instruments.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the record of the issuer and of
any guarantor, as well as the political and economic environment that might
affect the future financial strength of the issuer.
Bonds which have the same rating are of similar but not necessarily
identical investment quality since the limited number of rating categories
cannot fully reflect small differences in the degree of risk. Moreover, the
character of the risk factor varies from industry to industry and between
corporate, health care and municipal obligations.
In assessing credit risks, Fitch Investors Service relies on current
information furnished by the Issuer and/or guarantor and other sources
- -----------------------
/*/ As described by the rating agencies.
45
<PAGE>
which it considers reliable. Fitch does not perform an audit of the financial
statements used in assigning a rating.
Ratings may be changed, withdrawn or suspended at any time to reflect
changes in the financial condition of the issuer, the status of the issue
relative to other debt of the issuer, or any other circumstances that Fitch
considers to have a material effect on the credit of the obligor.
AAA rated bonds are considered to be investment grade and of the
highest quality. The obligor has an extraordinary ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA rated bonds are considered to be investment grade and of high
quality. The obligor's ability to pay interest and repay principal, while very
strong, is somewhat less than for AAA rated securities or more subject to
possible change over the term of the issue.
A rated bonds are considered to be investment grade and of good
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB rated bonds are considered to be investment grade and of
satisfactory quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to weaken this ability than bonds with
higher ratings.
BB rated bonds are considered speculative and of low investment grade.
The obligor's ability to pay interest and repay principal is not strong and is
considered likely to be affected over time by adverse economic changes.
B rated bonds are considered highly speculative. Bonds in this class
are lightly protected as to the obligor's ability to pay interest over the life
of the issue and repay principal when due.
CCC rated bonds may have certain characteristics which, with the
passing of time, could lead to the possibility of default on either principal or
interest payments.
CC rated bonds are minimally protected. Default in payment of interest
and/or principal seems probable.
C rated bonds are in actual or imminent default in payment of interest
or principal.
46
<PAGE>
DDD, DD, D rated bonds are in default and in arrears in interest
and/or principal payments. Such bonds are extremely speculative and should be
valued only on the basis of their value in liquidation or reorganization of the
obligor.
Plus (+) Minus (-) Signs
______________________________________________________________
These signs are used after a rating symbol to designate
the relative position of a credit within the rating grade.
The + and - signs are carried in ratings from "AA" to BB".
______________________________________________________________
NR - indicates that either Fitch has not been requested to rate the
specific issue or that a review of the rating has not taken place
within Fitch's current schedule for updating ratings.
SUSPENDED - a rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for rating
purposes. A rating may also be suspended when situations arise
such as certain types of litigation, governmental actions or
environmental concerns, the outcome of which is uncertain but has
the potential to cause a serious adverse impact on an issuer's
current or future financial condition.
WITHDRAWN - a rating is withdrawn at Fitch's discretion when an issuer
fails to furnish proper and timely information, when an issue
matures, is called or refinanced, or when it does not appear in
the best interests of the investor for Fitch to maintain a
rating.
CONDITIONAL - a conditional rating assumes the timely and successful
completion of the project being financed by the debt securities
being rated and indicates that the payment of debt service
requirements is largely, or entirely dependent upon the
successful completion of the project. In addition, in the case
of a start-up facility the rating may also indicate that the
payment of the debt service requirements is dependent upon the
achievement of a level of operations consistent with that
forecast in the feasibility study.
STANDARD & POOR'S
A brief description of the applicable Standard & Poor's rating symbols and
their meanings is as follows:
47
<PAGE>
A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a specific debt
obligation. This assessment of creditworthiness may take into consideration
obligors such as guarantors, insurers, or lessees.
A bond rating is not a recommendation to purchase or sell a security,
inasmuch as it does not comment as to market price.
The ratings are based on current information furnished to Standard & Poor's
by the issuer and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance
with the terms of the obligation.
II. Nature of and provisions of the obligation.
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degrees.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the
48
<PAGE>
obligation. BB indicates the lowest degree of speculation and CC the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
Plus (+) or Minus (-): To provide more detailed indications of credit
quality, the ratings from "AA" to "BB" may be modified by the additions of a
plus or minus sign to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE
A brief description of the applicable Moody's Investors Service's rating
symbols and their meanings is as follows:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometimes 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.
The market value of Baa-rated bonds is more sensitive to changes in economic
circumstances. Aside from occasional speculative factors and the aforementioned
economic circumstances applying to some bonds of this class, Baa market
valuations move in parallel with Aaa, Aa and A obligations during periods of
economic normalcy, except in instances of oversupply.
49
<PAGE>
Those bonds in the A and Baa group which Moody's believes possess the
strongest investment attributes are designated by the symbol A1 and Baa1. Other
A bonds comprise the balance of the group. These rankings (1) designate the
bonds which offer the maximum in security within their quality group, (2)
designate bonds which can be bought for possible upgrading in quality and (3)
additionally afford the investor an opportunity to gauge more precisely the
relative attractiveness of offering in the market place.
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 a 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.
NR - Indicates that the Security is not rated.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
UNDERWRITING ACCOUNT
The names and addresses of the Underwriters and their several interests in
the Underwriting Account are:
Herbert J. Sims & Co., Inc.
1221 Post Road East
Westport, Connecticut 06880
100%
50
<PAGE>
________________________________________________________________________
PROSPECTUS
________________________________________________________________________
THIS PROSPECTUS DOES NOT CONTAIN ALL OF THE INFORMATION WITH RESPECT TO THE
INVESTMENT COMPANY SET FORTH IN ITS REGISTRATION STATEMENT AND EXHIBITS RELATING
THERETO WHICH HAVE BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
WASHINGTON, D.C. UNDER THE SECURITIES ACT OF 1933 AND THE INVESTMENT COMPANY ACT
OF 1940, AND TO WHICH REFERENCE IS HEREBY MADE.
________________________________________________________________________
AMERICAN ASSOCIATION OF HOMES FOR THE AGING TAX-FREE TRUST
HIGH INCOME SERIES 1
INDEX
___________________________________________________
Page
----
Investment Summary............... 4
Description of the Trust......... 12
Public Sale of Units............. 33
Market for Units................. 34
Redemption....................... 34
Rights of Holders................ 36
Trust Administration............. 39
Trust Expenses and Charges....... 43
Miscellaneous.................... 45
Description of Bond Ratings...... 45
Underwriting Account............. 50
Independent Auditors' Report,
Financial Statements, Notes
and Trust Portfolio............. 51
____________________________________________________
SPONSOR AND EVALUATOR: INDEPENDENT AUDITORS:
Herbert J. Sims & Co., Inc. Ernst & Young LLP
1221 Post Road East 787 7th Avenue
Westport, CT 06880 New York, NY 10019
(203) 221-5000
TRUSTEE:
Chase Manhattan Bank, N.A.
Four New York Plaza
New York, New York 10004
Attention: Unit Investment Trust
Division
________________________________________________________________________
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
WITH RESPECT TO THIS INVESTMENT COMPANY NOT CONTAINED IN THIS PROSPECTUS; AND
ANY INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF ANY OFFER TO BUY, SECURITIES IN ANY STATE TO ANY
PERSON WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE.
_________________________________________________________________________
<PAGE>
Financial Statements and
Supplementary Information
American Association of Homes for the Aging
Tax-Free Trust, High Income Series 1
Year ended December 31, 1996
with Report of Independent Auditors
<PAGE>
American Association of Homes for the Aging
Tax-Free Trust, High Income Series 1
Financial Statements and
Supplementary Information
Year ended December 31, 1996
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors...................... 1
Financial Statements and Supplementary Information
Statement of Net Assets............................. 2
Statements of Operations............................ 3
Statements of Changes in Net Assets................. 4
Notes to Financial Statements....................... 5
Portfolio........................................... 8
Footnotes to Portfolio.............................. 10
</TABLE>
<PAGE>
Report of Independent Auditors
The Sponsor, Trustee and Certificateholders
American Association of Homes for the Aging
Tax-Free Trust, High Income Series 1
We have audited the accompanying statement of net assets of American Association
of Homes for the Aging Tax-Free Trust, High Income Series 1, including the
portfolio, as of December 31, 1996, and the related statements of operations and
changes in net assets for each of the three years in the period then ended and
the supplementary information (see Note 6) for the periods indicated therein.
These financial statements and supplementary information are the responsibility
of the Trust's management. Our responsibility is to express an opinion on these
financial statements and supplementary information 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 and supplementary
information are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and supplementary information. Our procedures included confirmation
of securities owned as of December 31, 1996, by correspondence with the trustee.
An audit also includes assessing the accounting principles used and significant
estimates made by management, 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 and supplementary information referred
to above present fairly, in all material respects, the financial position of
American Association of Homes for the Aging Tax-Free Trust, High Income Series 1
at December 31, 1996, the results of its operations and changes in its net
assets for each of the three years in the period then ended, and the
supplementary information for the indicated periods, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
New York, New York
April 21, 1997
1
<PAGE>
American Association of Homes for the Aging
Tax-Free Trust, High Income Series 1
Statement of Net Assets
December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Investments in marketable securities,
at value (cost $2,894,262) (Note 1b $3,072,196
and Portfolio Footnote 4)
Excess of other assets over total liabilities 130,223
----------
Net assets (4,050 Units of fractional
undivided interest outstanding,
$790.72 per Unit) (Note 5) $3,202,419
==========
</TABLE>
See notes to financial statements.
2
<PAGE>
American Association of Homes for the Aging
Tax-Free Trust, High Income Series 1
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
----------------------------------
<S> <C> <C> <C>
Investment income (Note 1):
Interest income $274,745 $315,385 $ 336,304
----------------------------------
Expenses (Note 2):
Evaluator's fees 520 650 480
Auditor's fees 2,025 2,025 2,025
Trustee's and sponsor's fees 3,707 7,185 4,164
----------------------------------
Total expenses 6,252 9,860 6,669
----------------------------------
Investment income, net 268,493 305,525 329,635
----------------------------------
Realized gain (loss) on bonds sold or
called (Note 1b) 2,030 50,386 480
Unrealized (depreciation) appreciation
for the period (Note 1b) (72,493) 20,017 (126,244)
----------------------------------
Net gain (loss) on investments (70,463) 70,403 (125,764)
----------------------------------
Net increase in net assets resulting
from operations $198,030 $375,928 $ 203,871
==================================
</TABLE>
See notes to financial statements.
3
<PAGE>
American Association of Homes for the Aging
Tax-Free Trust, High Income Series 1
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
OPERATIONS
Investment income, net $ 268,493 $ 305,525 $ 329,635
Realized gain (loss) on bonds
sold or called 2,030 50,386 480
Unrealized appreciation (depreciation)
for the period (72,493) 20,017 (126,244)
-----------------------------------------
Net increase in net assets resulting
from operations 198,030 375,928 203,871
-----------------------------------------
DISTRIBUTIONS (NOTE 3)
Investment income, net 262,347 309,504 325,475
Principal 734,387 5,022
-----------------------------------------
Total distributions 262,347 1,043,891 330,497
-----------------------------------------
Total (decrease) increase (64,317) (667,963) (126,626)
Net assets at beginning of year 3,266,736 3,934,699 4,061,325
-----------------------------------------
Net assets at end of year (including
undistributed net investment income of
$151,802, $145,656 and $149,635,
respectively) $3,202,419 $3,266,736 $3,934,699
=========================================
</TABLE>
See notes to financial statements.
4
<PAGE>
American Association of Homes for the Aging
Tax-Free Trust, High Income Series 1
Notes to Financial Statements
December 31, 1996
1. American Association of Homes for the Aging Tax-Free Trust, High Income
Series 1 (the "Trust") was organized on March 10, 1988 under the laws of the
State of New York by a Trust Indenture and Agreement, and is registered under
the Investment Company Act of 1940. Herbert J. Sims & Co., Inc. is the
Trust's sponsor and evaluator. The significant accounting policies of the
Trust include the following:
A. BASIS OF PRESENTATION
The Trust maintains its books on the cash basis; the accompanying
financial statements have been adjusted to record the unrealized
appreciation (depreciation) of investments and to record interest income
and expenses on the accrual basis.
The discount on the zero-coupon bond held by the Trust is being
amortized by the interest method over the life of the bond. The
amortization of such discount is included in interest income; however, it
will not become distributable until realized in cash upon maturity or sale
of the respective bonds.
B. INVESTMENTS IN TAX-EXEMPT BONDS
Investments are carried at value which is determined by the Evaluator
based upon the bid prices for the bonds at the end of the year. The
difference between cost (including accumulated amortization of original
issue discount on zero-coupon bonds) and value is reflected as unrealized
appreciation (depreciation) of investments. Securities transactions are
recorded on the trade date. Realized gains and losses from securities
transactions are determined on the basis of average cost of the securities
sold or redeemed.
C. INCOME TAXES
No provision for federal income taxes has been made in the accompanying
financial statements because the Trust is not an association taxable as a
corporation.
2. The fees and expenses of the Trust are incurred and paid on the basis set
forth under the caption "Trust Expenses and Charges" in the Prospectus.
3. The Trust Indenture and Agreement provides for net investment income to be
distributed as often as monthly, depending upon the distribution plan elected
by the Certificateholders. Because interest payments are not received by the
Trust at a constant rate throughout the year, interest distributions may be
more or less than the amount of money received. In order to minimize
fluctuations in the distributions
5
<PAGE>
American Association of Homes for the Aging
Tax-Free Trust, High Income Series 1
Notes to Financial Statements (continued)
3.(CONTINUED)
resulting from such variances, the Trustee is required by the Trust Indenture
and Agreement to advance such amounts as may be necessary to provide interest
distributions of approximately equal amounts. The Trustee is reimbursed,
without interest, for any such advances from funds subsequently received.
The Trust Indenture and Agreement further requires that principal received
from the disposition of bonds, other than those bonds sold in connection with
the redemption of Units, distributed to Certificateholders on the basis set
forth under the caption "Rights of Holders--Interest and Principal
Distributions" in the Prospectus.
4. The Trust Indenture and Agreement also requires the Trust to redeem Units
tendered at a price computed on the basis set forth under the caption
"Redemption" in the Prospectus. No Units have been redeemed since the Date of
Deposit (March 10, 1988).
5. At December 31, 1996, the net assets of the Trust represented the interests
of Certificateholders as follows:
<TABLE>
<CAPTION>
<S> <C>
Original cost to Certificateholders $3,971,735
Less initial gross underwriting
commission (178,727)
----------
3,793,008
Cost of bonds called (922,368)
Net unrealized appreciation 177,934
Undistributed net investment income 151,802
Undistributed principal from bond
transactions 2,043
----------
Total $3,202,419
==========
</TABLE>
The original cost to Certificateholders, less the initial gross underwriting
commission, represents the aggregate initial public offering price net of the
applicable sales charge on 4,050 Units of fractional undivided interest of the
Trust as of the Date of Deposit (March 10, 1988), computed on the basis set
forth under the caption "Public Sales of Units--Public Offering Price" in the
Prospectus, except that the offer side rather than the bid side was used.
Undistributed net investment income includes accumulated amortization of
original issue discount of $23,625.
6
<PAGE>
American Association of Homes for the Aging
Tax-Free: Trust, High Income Series 1
Notes to Financial Statements (continued)
6. SUPPLEMENTARY INFORMATION
Selected data for a unit of the Trust outstanding throughout the period follows
(*):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994 1993 1992 1991 1990 1989 1988**
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 67.84 $ 77.87 $ 83.04 $ 83.32 $ 84.71 $ 83.12 $ 84.80 $ 88.15 $ 71.43
Expenses (1.54) (2.43) (1.65) (1.75) (1.62) (1.60) (1.96) (2.05) (1.51)
--------------------------------------------------------------------------------------------------------
Investment income, net 66.30 75.44 81.39 81.57 83.09 81.52 82.84 86.10 69.92
Income distributions (64.78) (76.42) (80.36) (80.77) (80.58) (81.99) (84.37) (85.62) (35.77)
Principal distributions - (181.33) (1.24) (13.09) - (14.16) (9.95) (4.93) -
Realized gain (loss) on
bond called .50 12.44 .12 (.89) (2.31) (12.24) (.11) (.05) -
Net unrealized gain (loss)
on investments 17.90 4.94 (31.18) 58.98 27.95 29.73 (54.99) 29.25 (2.88)
--------------------------------------------------------------------------------------------------------
Increase (decrease) in net
asset value (15.88) (164.93) (31.27) 45.80 28.15 2.86 (66.58) 24.75 31.27
Net asset value, beginning
of the period 806.60 971.53 1,002.80 957.00 928.85 925.99 992.57 967.82 936.55
--------------------------------------------------------------------------------------------------------
Net asset value, end of
the period, including
distributable funds $790.72 $ 806.60 $ 971.53 $1,002.80 $957.00 $928.85 $925.99 $992.57 $967.82
========================================================================================================
</TABLE>
* Per unit data is based on the average units outstanding during the period.
** From date of deposit (March 10, 1988) to December 31, 1988.
7
<PAGE>
American Association of Homes for the Aging
Tax-Free Trust, High Income Series 1
Portfolio
December 31, 1996
<TABLE>
<CAPTION>
REDEMPTION
AGGREGATE FEATURE (2)S.F.--
PORTFOLIO PRINCIPAL RATINGS (1) COUPON DATE OF SINKING FUND
ITEM NO. AMOUNT NAME OF ISSUER AND TITLE OF BOND (UNAUDITED) RATE MATURITY (2) REF.--REFUNDING VALUE (4)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $760,000 New Jersey Health Care Facilities BBB* 8.500% 7/01/2011 7/01/00 @ 100 S.F. $769,500
Financing Authority, First Mortgage
Revenue Refunding Bonds, Cadbury
Corporation Issue, Series B
2 25,000 County of Franklin, Ohio, Hospital NR 8.750 7/01/1999 None 26,125
Facilities Mortgage Revenue Refunding
Bonds, 1987 Series A (Ohio Presbyterian
Retirement Services)
3 300,000 County of Franklin, Ohio, Hospital NR 9.000 7/01/2010 7/01/00 @ 100 S.F. 313,500
Facilities Mortgage Revenue Refunding
Bonds, 1987 Series A (Ohio Presbyterian
Retirement Services)
4 25,000 Connecticut Development Authority, First NR 8.800 4/01/2007 4/01/00 @ 100 S.F. 25,281
Mortgage Gross Revenue Health Care
Project Bonds (Pomperaug Woods Inc. Project--
1987 Series)
5 100,000 Connecticut Development Authority, First NR 8.875 4/01/2017 4/01/08 @ 100 S.F. 101,125
Mortgage Gross Revenue Health Care Project
Bonds (Pomperaug Woods Inc. Project--1987
Series)
6 25,000 Connecticut Development Authority, First NR 10.000(3) 12/01/2015 12/01/03 @ 100 S.F. 28,188
Mortgage Gross Revenue Health Care Project
Bonds (The Lutheran Home of Southbury, Inc.
Project--1985 Series)
</TABLE>
8
<PAGE>
American Association of Homes for the Aging
Tax-Free Trust, High Income Series 1
Portfolio (continued)
December 31, 1996
<TABLE>
<CAPTION>
REDEMPTION
AGGREGATE FEATURE (2)S.F.--
PORTFOLIO PRINCIPAL RATINGS (1) COUPON DATE OF SINKING FUND
ITEM NO. AMOUNT NAME OF ISSUER AND TITLE OF BOND (UNAUDITED) RATE MATURITY (2) REF.--REFUNDING VALUE (4)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
7 $800,000 Massachusetts Industrial Finance Agency BBB* 10.250% 1/01/2018 1/01/06 @ 100 S.F. $872,000
First Mortgage Revenue Bonds (Brookhaven
at Lexington Retirement Community--1988
Issue)
8 20,000 New Hope Foundation of Indiana, Inc., NR 8.500 6/01/2007 None 20,540
Indianapolis, Indiana (an Indiana
Nonprofit Corporation), Health Care
Facilities First Mortgage Gross Revenue
Bonds, Series 1977
9 800,000 County of Pike, Ohio, Hospital Facilities NR 9.875 7/01/2017 7/01/08 @ 100 S.F. 870,000
Revenue Bonds, Series 1987 (National Church
Residences)
10 250,000 Rhode Island Health and Educational Building NR 0.000 11/01/2017 None 45,937
Corporation, Higher Education Facility
Project Revenue Bonds, Providence College Issue,
Series 1987
---------- ----------
$3,105,000 $3,072,196
========== ==========
</TABLE>
9
<PAGE>
American Association of Homes for the Aging
Tax-Free Trust, High Income Series 1
Footnotes to Portfolio
December 31, 1996
(1) All ratings are by Standard & Poor's Corporation except for those identified
by an asterisk (*), which are rated by Fitch Investors Service. A brief
description of the rating symbols and their meanings is set forth under the
caption "Description of Bond Ratings" in the Prospectus. For concentration
of credit risk see "Special Considerations" in the Prospectus.
(2) See "Redemptions" in the Prospectus for an explanation of redemption
features. See "Taxes" in the Prospectus for a statement of the federal tax
consequences to a Certificateholder upon the sale, redemption or maturity of
a Bond.
(3) This bond had been paying interest at 9.90% in 1991 and prior. The rate was
adjusted in 1991 resulting in additional interest income of $25 annually.
(4) At December 31, 1994, the net unrealized appreciation of all the tax-exempt
bonds was comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $178,385
Gross unrealized depreciation (451)
-----------
Net unrealized appreciation $177,934
===========
</TABLE>
(5) The annualized interest income from the Portfolio (excluding amortization of
original issue discount on zero-coupon bonds) at December 31, 1996 is
$270,063.
10
