DEFINED
ASSET FUNDSSM
GOVERNMENT SECURITIES
INCOME FUND
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U.S. GOVERNMENT
ZERO COUPON BOND
SERIES 3
(A UNIT INVESTMENT TRUST)
PROSPECTUS, PART A
DATED JULY 28, 1995
SPONSOR:
Merrill Lynch,
Pierce, Fenner & Smith Incorporated
This Series (the 'Fund') was formed to provide safety of capital and a high
yield to maturity through investment in fixed portfolios consisting primarily of
stripped debt obligations of the United States of America ('Stripped Treasury
Securities'). There is no assurance that these objectives will be met if Units
are sold before the underlying Securities mature because market prices of the
Securities before maturity and therefore the value of the Units will vary with
changes in interest rates and other factors. Stripped Treasury Securities do not
make any periodic payments of interest prior to maturity; accordingly, each
Trust's portfolio as a whole is priced at a deep discount from face amount and
Unit prices may be subject to greater fluctuations in response to changing
interest rates than a fund consisting of debt obligations of comparable
maturities that pay interest currently. This risk is greater when the period to
maturity is longer. See Risk Factors. The Fund consists of the 1999 and 2009
Trusts, each a separate unit investment trust ('Trust'), designated by the year
in which its Stripped Treasury Securities mature. Each Trust also contains an
interest-bearing Treasury security (the 'Treasury Note') to provide income to
pay the expenses of the Trust and the Sponsor's administrative fee.
Units of interest ('Units') in the Trusts will be sold only to employee benefit
plans (the 'Plans') as an investment alternative for Plan allocations to help
participants meet their personal retirement needs and goals. The choice of
maturities is offered to enable Plan allocations to be tailored to participants'
retirement planning objectives and financial requirements. Each Plan will invest
in Units of the Trusts in accordance with allocation instructions received from
employees pursuant to the Plan. Accordingly, the interest of an employee in the
Units is subject to the terms of the Plan. The rights of a Plan as a Holder of
Units should be distinguished from the rights of an employee. The term 'Holder'
in this Prospectus shall refer to the Plans, to the Sponsor if it holds Units
(see Market for Units) and to any employee who holds Units distributed from a
Plan.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Read and retain this Prospectus for future reference.
<PAGE>
DEFINED ASSET FUNDSSM is America's oldest and largest family of unit investment
trusts with over $95 billion sponsored since 1971. Each Defined Fund is a
portfolio of preselected securities. The portfolio is divided into 'units'
representing equal shares of the underlying assets. Each unit receives an equal
share of income and principal distributions.
With Defined Asset Funds you know in advance what you are investing in and that
changes in the portfolio are limited. Most defined bond funds pay interest
monthly and repay principal as bonds are called, redeemed, sold or as they
mature. Defined equity funds offer preselected stock portfolios with defined
termination dates.
Your financial advisor can help you select a Defined Fund to meet your personal
investment objectives. Our size and market presence enable us to offer a wide
variety of investments. Defined Funds are available in the following types of
securities: municipal bonds, corporate bonds, government bonds, utility stocks,
growth stocks, even international securities denominated in foreign currencies.
Termination dates are as short as one year or as long as 30 years. Special funds
are available for investors seeking extra features: insured funds, double and
triple tax-free funds, and funds with 'laddered maturities' to help protect
against rising interest rates. Defined Funds are offered by prospectus only.
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CONTENTS
Investment Summary.......................................... 3
Fund Structure.............................................. 6
Risk Factors................................................ 6
Description of the Fund..................................... 7
Taxes....................................................... 9
Sale of Units............................................... 10
Market for Units............................................ 11
Redemption.................................................. 11
Expenses and Charges........................................ 13
Administration of the Fund.................................. 14
Resignation, Removal and Limits on Liability................ 15
Miscellaneous............................................... 16
Accountants' Opinion Relating to the Fund................... D-1
Statement of Condition...................................... D-2
Portfolio................................................... D-8
2
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INVESTMENT SUMMARY AS OF MARCH 31, 1995 THE EVALUATION DATE+
This Series consists of separate unit investment trusts, each designated for
the maturity of its underlying Securities (see Portfolios).
1999 2009
TRUST TRUST
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FACE AMOUNT OF SECURITIES..............$ 48,178,324 $ 92,263,553
NUMBER OF UNITS........................ 481,627.298 921,699.307
FACE AMOUNT OF SECURITIES PER UNIT.....$ 100.032 $ 100.102
FRACTIONAL UNDIVIDED INTEREST IN FUND
REPRESENTED BY EACH UNIT............... 1/481,627.298th 1/921,699.307th
OFFER PRICE PER UNIT
Net Assets of Trust*...............$ 35,303,526 $ 33,034,792
Divided by Number of Units.........$ 73.301 $ 35.841
Plus Adjustment Factor**........... .110 .107
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Total++............................ 73.411 35.948
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REDEMPTION PRICE PER UNIT
(net of Adjustment Factor**)++.......$ 73.191 $ 35.734
REDEMPTION PRICE PER UNIT LESS
THAN OFFER PRICE BY..................$ .220 $ .214
CALCULATION OF ESTIMATED NET ANNUAL
CASH INTEREST INCOME PER 1,000 FACE
AMOUNT
Gross annual cash income........... 1.82 1.38
Less estimated annual expenses..... .71 .64
Less annual Sponsor's
administrative fee***................ 1.11 .74
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Estimated net annual cash income...$ 0.00 $ 0.00
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ESTIMATED YIELD TO MATURITY (based on
Price per Unit)........................ 6.810% 7.381%
ESTIMATED MAXIMUM DOLLAR AMOUNT PER 10
UNITS PAYABLE ON ACCOUNT OF SPONSOR'S
ADMINISTRATIVE FEE****...............$ 5.14 $ 10.45
INCOME ACCOUNT DISTRIBUTIONS
Although no periodic distributions
of income should be expected, the
Sponsor may direct the Trustee to
distribute any accumulated net
interest income on the business day
in June or December of any year
which immediately precedes the
investment date in that month for
Merrill Lynch's Savings &
Investment Plan ('SIP'), as defined
in the benefits handbook, to
Holders of record at the close of
business on the fifth day prior to
that distribution date.
CAPITAL ACCOUNT DISTRIBUTIONS
Distributions from the Capital
Account will be made on the first
business day following the maturity
of the Stripped Treasury Securities
in a Trust to holders of record on
the business day immediately
preceding the date of the
distribution.
TRUSTEE'S ANNUAL FEE AND EXPENSES*****
Per 10 Units (see Expenses and
Charges)...........................$ .71+++ $ .64+++
EVALUATOR'S FEE FOR EACH EVALUATION
Minimum of $5.00 plus $0.25 for
each issue of underlying Securities
in excess of 50 issues, treating
separate maturities as separate
issues (see Expenses and Charges).
EVALUATION TIME
3:30 P.M. New York Time
MANDATORY TERMINATION DATE
Each Trust must be terminated no
later than one year after the
maturity date of the last maturing
Security in that Trust listed under
Portfolio (see Portfolio).
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+ The Indenture was signed and the initial deposit was made as of
February 2, 1989.
++ Plus any net cash.
+++ During the last 12 months of the 1999 Trust, and for up to 60 months
in the 2009 Trust in the event the Treasury Note is called at its earliest call
date, the Trustee's Annual Fee and Expenses will be reduced, and the estimated
net annual income per Unit should remain the same (see Expenses and
Charges--Fees).
* The net assets of the Trust represent the aggregate value of Securities
(including amortization of discount) plus other assets less accrued liabilities,
determined as described under Redemption--Computation of Redemption Price per
Unit.
** The net asset value per Unit is adjusted by adding to the Offer Price
and subtracting from the Redemption Price, an amount (the 'Adjustment Factor'),
currently .0015 times the net assets per Unit for the 1999 Trust and .003 for
the 2009 Trust. See Sale of Units--Unit Offer Price.
***There is no sales charge on purchases of Units. Income on the Units
will be subject to a Sponsor's administrative fee accrued at the annual rate
shown. This fee will be calculated on a daily basis and will accrue from the
settlement date for Units purchased on the Initial Date of Deposit. This fee
will be deducted from interest income on the U.S. Treasury Notes semi-annually
(see Expenses and Charges). For Units that are tendered for redemption, a pro
rata portion of the accrued administrative fee will be deducted at the time of
redemption (see Redemption). See the chart at the end of this Investment Summary
for the percentage which the present value of the Sponsor's administrative fee
represents at various intervals of the Price per 10 Units.
**** This amount assumes that each Holder holds his Units until termination
of the Trust. This amount may differ from actual payments on account of the
Sponsor's administrative fee as a result of the length of time a Holder holds
his Units and other factors.
***** Of this amount, the Trustee receives annually for its services as
Trustee, $0.50 per 10 Units, payable in semi-annual installments.
3
<PAGE>
INVESTMENT SUMMARY AS OF MARCH 31, 1995 THE EVALUATION DATE
TRUST PORTFOLIOS (SEE PORTFOLIOS)
SECURITIES--Each Trust consists primarily of issues of Stripped Treasury
Securities purchased at a deep discount. The Securities are not rated but, in
the opinion of the Sponsor, have credit characteristics comparable to those of
Securities rated 'AAA' by nationally recognized rating agencies. Each Trust also
contains one interest-bearing Treasury Security (the 'Treasury Note') deposited
in order to provide cash income with which to pay the expenses, including the
Sponsor's administrative fee, of the Trust.
RISK FACTORS--An investment in Units of a Trust should be made with an
understanding of the risks which an investment in debt obligations, most of
which were purchased at a deep discount, may entail, including the risk that the
value of a Trust and hence of the Units will decline with increases in interest
rates. The market value of Stripped Treasury Securities, and therefore the value
of the Units, may be subject to greater fluctuations in response to changing
interest rates than debt obligations of comparable maturities which pay interest
currently. The risk is greater when the period to maturity is longer. (See pages
6-7.) For each 10 Units of a Trust purchased, a Holder will receive total
distributions of approximately $1,000 for Units held until maturity of the
underlying Securities of that Trust. Furthermore, the price per Unit will vary
in accordance with fluctuations in the values of the Securities and the
distributions could change if the Securities are paid or sold, or if the
expenses or Sponsor's administrative fee of the Trust change. For a discussion
of the economic differences between the Trusts and a fund consisting of
customary securities, see Description of the Fund--Income and Estimated Yield to
Maturity.
Additional Units may be offered subsequent to the Initial Date of Deposit,
which may have an effect upon the value of previously existing Units. Additional
Units may be created by depositing Securities (or contracts to purchase
Securities accompanied by cash, or a bank letter of credit in an amount
sufficient to complete the contracts) or cash (or a bank letter of credit) to
purchase additional Securities, in each instance maintaining precisely the
original proportionate relationship between the face amounts of Stripped
Treasury Securities and the Treasury Notes of identical maturities. If cash (or
a letter of credit) is deposited to purchase Securities, the value of existing
Units will change to the extent the price of a Security increases or decreases
between the time of deposit and the time the Security is purchased. See Fund
Structure. The Adjustment Factor, which is added to the Offer Price and
subtracted from the Redemption Price, is intended to cover the costs of
acquiring and disposing of securities so that they are not borne by the Trust.
See Sale of Units--Unit Offer Price.
ML PLANS--Units may be purchased by certain employee benefit plans
established for employees of Merrill Lynch & Co., Inc. and its affiliates ('ML
Plans'). A ML Plan may buy Units only directly from the Trustee and may realize
the value of Units only by tendering them for redemption. See FUND STRUCTURE--ML
Plans.
DISTRIBUTIONS--There will be no payments of interest on the Securities other
than on the Treasury Note in each Trust, which will be used to pay the expenses
of and Sponsor's administrative fee on the Trust. Consequently, no distributions
of interest income should be expected; however, the Sponsor may direct the
Trustee to distribute any accumulated net interest income to Holders of a Trust
in June or December of any year (see 'Income Account Distributions' on page 3).
Nevertheless, the gross interest income on all Securities in the Trust is
taxable to Holders. Each Stripped Treasury Security will be treated for Federal
income tax purposes as having 'original issue discount,' which must be amortized
over the term of the Stripped Treasury Security and included in a Holder's
ordinary gross income before the Holder receives the cash attributable to that
income. These tax consequences would apply to an employee only if he becomes a
Holder by taking Units upon terminating participation in the Plan. See Taxes.
The final distribution will be made in cash following the maturity of the
Stripped Treasury Securities in the Trust, and may include any amount received
upon the sale of Securities to meet redemptions of Units which exceeds the
amount necessary to meet those redemptions and any accumulated net interest
income. Principal from maturity of the Treasury Note will not be distributed
until disposition of the Stripped Treasury Security in the Trust. See
Administration of the Fund--Accounts and Distributions.
ESTIMATED YIELD TO MATURITY ON UNITS--The yield to maturity on the Units of
each Trust is the annual percentage return to the investor based on amortization
of discount, compounded semi-annually, divided by the Offer Price per Unit. It
is assumed that interest income will equal expenses and other deductions. The
value of the Units will fluctuate with the value of the portfolio of underlying
Securities. The yield to maturity will change with changes in the price per Unit
(including the Adjustment Factor) and any change in the Trust's expenses or the
Sponsor's administrative fee.
UNIT PRICE--The price of the Units is based on the net asset value per Unit,
determined as described under Redemption--Computation of Redemption Price per
Unit. The Adjustment Factor, at current rates described under Sale of
Units--Unit Offer Price, is added in computing the Offer Price of Units and
deducted in computing the Redemption Price or sale price. Units are subject to a
Sponsor's administrative fee calculated on a daily basis at the annual rate of
$1.11 per 10 Units of the 1999 Trust; and $.74 per 10 Units of the 2009 Trust.
The following chart states these administrative fees as percentages of the
prices at various intervals. It is assumed that Trust expenses and the accrued
Sponsor's administrative fee will exactly offset any accrued interest. There is
no minimum purchase.
4
<PAGE>
INVESTMENT SUMMARY AS OF MARCH 31, 1995 THE EVALUATION DATE
PRESENT VALUE OF SPONSOR'S ADMINISTRATIVE FEE AS
PERCENT OF PRICE PER 10 UNITS AT SELECTED INTERVALS*
<TABLE><CAPTION>
PRICE PER
$10
UNITS AS
OF
MARCH 31,
1995,
THE
EVALUATION
$25 LESS DATE $25 MORE $50 MORE $100 MORE
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1999 TRUST Public Offering Price $ 709.11 $ 734.11 $ 759.11 $ 784.11 $ 834.11
4.27 4.35 4.42 4.50 4.65
Present value of Sponsor's
administrative fee
0.60% 0.59% 0.58% 0.57% 0.56%
Sponsor's Fee
2009 TRUST Public orrering Price $ 334.48 $ 359.48 $ 384.48 $ 409.48 $ 459.48
6.23 6.43 6.62 6.81 7.17
Present value of Sponsor's
administrative fee
1.86% 1.79% 1.72% 1.66% 1.56%
Sponsor's Fee
</TABLE>
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* These represent the maximum fees and figures assume that Units are
purchased on the Evaluation Date and are held until maturity of the Trust.
Purchase after the Evaluation Date or sale before maturity will result in lesser
deductions and therefore a lesser rate of administrative fee. The present value
is computed at the same interest rate as the estimated yield to maturity at each
purchase price.
MARKET FOR UNITS--The Sponsor, though not obligated to do so, intends to
maintain a market for Units at the Redemption Price per Unit. See Page 12. If
that market is not maintained, a Holder will be able to dispose of Units through
redemption at prices computed on the same basis. See Redemption. Market
conditions and the Adjustment Factor may cause the prices available in the
market maintained by the Sponsor or upon exercise of redemption rights to be
more or less than the amount paid for Units. The market prices of Stripped
Treasury Securities, and hence of the Units, are subject to greater fluctuations
than the prices of securities making current payments of interest.
5
<PAGE>
FUND STRUCTURE
This Series (the 'Fund') consists of a number of separate unit investment
trusts (each a 'Trust') created under New York law by one Trust indenture (the
'Indenture') among the Sponsor, the Trustee and the Evaluator. To the extent
that references in the Prospectus are to articles and sections of the Indenture,
which are hereby incorporated by reference, the statements made herein are
qualified in their entirety by this reference. The record holders ('Holders') of
Units of interest ('Units') in a Trust will have the right to have their Units
redeemed (see Redemption) if the Units cannot be sold in the market which the
Sponsor intends to maintain (see Market for Units). Redemption will be made in
securities ('in kind') or in cash at the option of the Holder.
With the initial deposit in each Trust, a proportionate relationship was
established between the face amounts of Stripped Treasury Securities and the
Treasury Note therein. Additional Units may be issued on deposit of additional
Securities by the Sponsor or on deposit of cash (or a bank letter of credit) to
purchase Securities. In either case, the additional Securities will have
maturities identical to those in the Trust and maintain precisely the original
proportionate relationship among the face amounts of each type of Security.
Units will to the extent practicable continue to represent the identical face
amount of each Security. However, it may not be practicable to maintain this
identical face amount per Unit because of, among other reasons, changes in
prices. Units in the Trusts may be continuously offered for sale by means of
this Prospectus (see Sale of Units--Distribution), resulting in a potential
increase in the number of outstanding Units of each Trust (see Selection and
Acquisition of Securities).
As used herein, 'Securities' includes the Stripped Treasury Securities and
interest-bearing Treasury Note deposited in the Trusts and described under
Portfolios and any additional Treasury Securities deposited thereafter or
contracts for the purchase thereof together with an irrevocable letter or
letters of credit sufficient to perform such contracts. As used herein, the term
'Units,' unless the context otherwise indicates, means the units of interest in
all Trusts of the Fund.
ML PLANS
As the Sponsor is a 'party in interest' with respect to each ML Plan, it is
prohibited by ERISA from selling Units to or buying them from any ML Plan.
Accordingly, any ML Plan will purchase Units directly from the Trustee and may
only tender Units to the Trustee for redemption. The Sponsor is also prohibited
from acting as dealer, and from charging for its services as broker, for the
Trust in acquiring Securities with monies paid for Units, and in selling
Securities to pay redemptions of Units, by ML Plans. In addition, ERISA
prohibits the Sponsor from receiving compensation or other consideration except
for reimbursement of its direct expenses. Therefore, the proceeds of the
Sponsor's administrative fee paid by any ML Plan will be used to reimburse the
Sponsor for these expenses, and the Sponsor will not collect the administrative
fee on Units held by ML Plans at any time when it has no unreimbursed expenses.
RISK FACTORS
An investment in Units should be made with an understanding of the risks
which an investment in deep discount debt obligations may entail, including the
risk that the value of the Trust's portfolio (the 'Portfolio') and hence of the
Units will decline with increases in interest rates. High inflation and
recession, together with the fiscal and monetary measures adopted to attempt to
deal with those and other economic problems, have contributed to recent wide
fluctuations in interest rates and thus in the value of fixed-rate debt
obligations generally. The Sponsor cannot predict future economic policies or
their consequences or, therefore, the course or extent of any similar
fluctuations in the future. Furthermore, a Holder (but not employees before they
terminate Plan participation--see Taxes) will have significant amounts of
taxable income attributable to it before the receipt of the cash attributable to
that income.
SPECIAL CHARACTERISTICS OF STRIPPED TREASURY SECURITIES
Stripped Treasury Securities are sold at a deep discount from their face
amounts payable at maturity because the buyer of those securities receives only
the right to receive a future fixed payment on the security and not any rights
to periodic interest payments thereon. Purchasers of these securities acquire,
in effect, discount obligations that are economically identical to the
'zero-coupon bonds' that have been issued by corporations. Zero coupon bonds are
debt obligations which do not make any periodic payments of interest prior to
maturity and accordingly are issued at a deep discount. Accordingly, the Trusts
are not a suitable investment to persons seeking current cash distributions.
6
<PAGE>
Because interest on 'zero coupon' debt obligations is not distributed on a
current basis but in effect compounded, the value of securities of this type,
including the value of accrued and reinvested interest (and of a fund comprised
of these obligations), is subject to greater fluctuations than on obligations
which distribute income regularly. Accordingly, while the full faith and credit
of the U.S. government provides a high level of protection against credit risks
on the Securities, sale of Units before maturity of the Securities at a time
when interest rates have increased would involve greater market risk than in a
fund which is invested in debt obligations of comparable maturity which pay
interest currently. This risk is greater when the period to maturity is longer.
Stripped Treasury Securities held by any Trust shall consist solely of
registered U.S. Treasury debt obligations which may be held through the Federal
Reserve Bank's book entry system called 'Separate Trading of Registered Interest
and Principal of Securities' ('STRIPS'). STRIPS, while direct obligations of the
United States and issued under programs introduced by the U.S. Treasury, are not
issued directly by the U.S. government. The STRIPS program facilitates secondary
market stripping of selected Treasury notes and bonds into individual principal
and interest components by purchasers with access to a book-entry account at a
Federal Reserve bank. Those obligations may be maintained in the book-entry
system operated by the Federal Reserve in a manner that permits separate trading
and ownership of interest and principal payments. The Federal Reserve does not
charge a fee for this service, but book-entry transfers of interest and
principal components are subject to the same fee schedule generally applicable
to transfers of Treasury securities. The Stripped Treasury Securities are
payable in full at maturity at their stated maturity amount, and are not subject
to redemption prior to maturity. In addition, the Stripped Treasury Securities
do not make any periodic payments of interest.
Sales of Units in California may be made only to persons which have a minimum
net worth (exclusive of home, home furnishings, and automobiles for personal
use) of at least (i) $75,000 or (ii) $30,000 if the investor has an adjusted
gross income of at least $30,000. A holder of Stripped Treasury Securities will
be required to include annually in gross income an allocable portion of the
deemed original issue discount, prior to receipt of the cash attributable to
that income. However, a qualified retirement plan is not taxed on income.
Under generally accepted accounting principles, a holder of a security
purchased at a discount normally must report as an item of income for financial
accounting purposes the portion of the discount attributable to the applicable
reporting period. The calculation of this attributable income would be made on
the 'interest' method which generally will result in a lesser amount of
includible income in earlier periods and a correspondingly larger amount in
later periods. For Federal income tax purposes, the inclusion will be on a basis
that reflects the effective semi-annual compounding of accrued but unpaid
interest effectively represented by the discount. Although this treatment is
similar to the 'interest' method described above, the 'interest' method may
differ to the extent that generally accepted accounting principles permit or
require the inclusion of interest on the basis of a compounding period other
than the semi-annual period (see Taxes).
DESCRIPTION OF THE FUND
THE PORTFOLIO
The Portfolio of each Trust consists of different issues of Stripped
Treasury Securities, with fixed maturity dates and not having any equity or
conversion features, that do not pay interest before maturity and as such were
purchased at a deep discount (see above) and of the Treasury Note deposited in
order to provide cash income with which to pay the expenses of the Trust and the
Sponsor's administrative fee.
SELECTION AND ACQUISITION OF SECURITIES
In selecting Securities for deposit in a Trust, the following factors,
among others, were considered by the Unit Investment Trusts of Merrill Lynch,
Pierce, Fenner & Smith Incorporated: (i) the types of securities available; (ii)
the prices of those securities relative to other comparable securities; (iii)
the extent to which those securities trade at a discount from par once the
interest coupons are stripped; (iv) the yield to maturity of those securities;
and (v) the maturities of those securities.
The yield to maturity and discount from par on securities of the type
deposited in the Trusts are dependent on a variety of factors, including general
money market conditions, general conditions of the bond market, prevailing
interest rates and the maturities of the securities.
Each Trust consists of the Securities (or contracts to purchase the
Securities) listed under Portfolios and any additional Securities acquired
pursuant to the terms of the Indenture (including provisions with respect to
deposit
7
<PAGE>
of Securities in connection with the sale of additional Units) as long as they
may continue to be held from time to time in the Trust together with accrued and
undistributed interest on any interest-bearing securities deposited in order to
pay the expenses of the Trust and the Sponsor's administrative fee,
undistributed cash representing payments of principal and cash realized from the
disposition of Securities.
Neither the Sponsor nor the Trustee shall be liable in any way for any
default, failure or defect in any of the Securities. In the event of a failure
to deliver any Security that has been purchased for a Trust under a contract
('Failed Security'), the Sponsor is authorized under the Indenture to direct the
Trustee to acquire substitute securities ('Replacement Securities') to make up
the portfolio of the Trust. Replacement Securities must be deposited within 20
days after delivery of notice of the Failed Security; the purchase price may not
exceed the amount of funds reserved for the purchase of the Failed Security. The
Replacement Securities must (i) be Securities issued by the U.S. Treasury, that
if stripped make no periodic payments of interest, or if interest-bearing are of
the same issue, (ii) have a fixed maturity identical to that of the Failed
Security, (iii) be purchased at a price that results in a yield to maturity as
of the date of deposit of the Failed Security which is equivalent (taking into
consideration then current market conditions) to the yield to maturity of the
Failed Security and (iv) not be when, as and if issued obligations. If this
right of substitution is not utilized to acquire Replacement Securities in the
event of a failed contract, the Sponsor will cause to be refunded any
attributable sales charge plus the attributable Cost of Securities to Trust,
plus accrued interest and amortization attributable to the relevant Security.
Because certain of the Securities from time to time may be sold under
certain circumstances described herein, each Trust is not expected to retain its
present size and composition (see Redemption). The Indenture also authorizes the
increase of the size and number of Units of any Trust by the deposit of
additional Securities or cash and the issue of a corresponding number of
additional Units, provided that the maturity of any additional Securities so
acquired is identical to the maturity of the Securities initially deposited in
the Trust and the relative face amounts of Securities deposited maintain as
closely as practicable the original proportionate relationship between the face
amounts of those Securities.
THE UNITS
On the date of the Investment Summary of each Trust each Unit represented
the fractional undivided interest in the Securities held in the Trust and net
income of the Trust set forth under Investment Summary. Thereafter, if Units of
any Trust are redeemed the face amount of Securities in that Trust will be
reduced by amounts allocable to redeemed Units, and the fractional undivided
interest represented by each remaining Unit in the balance will be increased.
However, if additional Units are issued by any Trust, the aggregate face amount
of Securities in the Trust will be increased by amounts allocable to the
additional Units, and the fractional undivided interest represented by each Unit
in the balance of the Trust will be decreased. Units will remain outstanding
until redeemed upon tender to the Trustee by a Holder (which may include the
Sponsor) or until the termination of the Indenture (see Redemption and
Administration of the Fund--Amendment and Termination).
INCOME AND ESTIMATED YIELD TO MATURITY
The estimated yield to maturity per Unit of each Trust is the annual
percentage return to the investor based on amortization of discount, compounded
semi-annually, divided by the Unit Offer Price. It is assumed that interest
income on the Treasury Note will equal expenses and other deductions. If the
price of the Units is less than stated in the Investment Summary, the yield to
maturity will be greater, if the price is greater (other than additional accrued
original discount), the yield to maturity will be less.
The economic effect of purchasing Units of a Trust is that the investor who
holds his Units until maturity of the underlying Securities should receive
approximately a fixed yield, not only on his original investment but on all
earned discount during the life of the Securities. The assumed or implicit
automatic reinvestment at market rates at the time of purchase of the portion of
the yield represented by earned discount differentiates the Trusts from funds
consisting of customary securities on which current periodic interest is paid at
market rates at the time of issue. Accordingly, an investor in the Units, unlike
an investor in a fund comprised of customary securities, virtually eliminates
his risk of being unable to invest distributions at a rate as high as the yield
on his Trust, but will forego the ability to reinvest at higher rates in the
future.
The price per Unit of each Trust will vary in accordance with fluctuations
in the prices of the Securities held by the Trust. Changes in the Offer and
Redemption Price per Unit or in a Trust's expenses will result in changes in the
yields to maturity.
8
<PAGE>
TAXES
An employee who elects to receive his pro rata portion of Units held by a
Plan that is qualified under Section 401(a) of the Internal Revenue Code of
1986, as amended (the 'Code') when he terminates participation in such Plan and
does not roll over those Units to an eligible retirement plan as described in
Section 402(c) of the Code, will be taxable under rules applicable to qualified
plan distributions as described in Section 402 of the Code. Thereafter, the
employee will be taxable as a Holder as described below.
In the opinion of Davis Polk & Wardwell, special counsel for the Sponsor,
under existing law:
Each Trust is not an association taxable as a corporation for Federal
income tax purposes, and income received by the Trust will be treated as
the income of the Holders of the Trust in the manner set forth below.
Each Holder will be considered the owner of a pro rata portion of each
Security in his Trust under the grantor trust rules of Sections 671-679 of
the Code. The total cost to a Holder for his Units (i.e., for an individual
Holder, the fair market value of his Units on the date the Plan distributes
them to him) is allocated among his pro rata portion of each Security in
his Trust (in proportion to the fair market values thereof on that date) in
order to determine his tax cost for his pro rata portion of each Security.
A Holder will be entitled to add to his tax cost of his pro rata portion of
each Security that portion of the administrative fee which is not
characterized as imputed interest (see below).
Each Trust consists primarily of Stripped Treasury Securities. A Holder
is required to treat his pro rata portion of each Stripped Treasury
Security in his Trust as a bond that was originally issued on the date the
Holder purchased his Units (for an individual Holder, the date of
distribution) at an original issue discount equal to the excess of the
stated redemption price at maturity over the Holder's tax cost therefor as
discussed above, and to include annually in income a portion of such
original issue discount determined under a formula which takes into account
the compounding of interest. The amount of accrued original issue discount
so included in income in respect of a Holder's pro rata portion of a
Security is added to the Holder's tax basis therefor.
Each Holder will be considered to have received the income on his pro
rata portion of the Treasury Note in his Trust when interest on the Note is
received by his Trust. An individual Holder who itemizes deductions may
deduct his pro rata share of the fees and expenses of his Trust, but only
to the extent that this amount together with the Holder's other
miscellaneous deductions exceeds 2% of his adjusted gross income.
Except with respect to Units held in a Plan, a Holder will recognize
taxable gain or loss when all or part of his pro rata portion of a Security
in his Trust is disposed of (i.e., when the Security is sold by the Trust
or is redeemed or paid at maturity or when the Holder sells or redeems for
cash all or some of his Units) for an amount greater or less than his
original tax cost therefor, increased by the amount of original issue
discount included in the Holder's gross income as discussed above. This
resulting gain or loss generally will be capital gain or loss (except in
the case of a dealer or financial institution), and will be long-term if
the Holder has held his Units for more than one year. Capital gains are
generally taxed at the same rate as ordinary income. However, the excess of
net long-term capital gains over net short-term capital losses may be taxed
at a lower rate than ordinary income for certain non-corporate taxpayers.
The deduction of capital losses is subject to limitations.
A distribution to a Holder of Securities upon redemption of Units will
not be a taxable event to the Holder or to nonredeeming Holders. The
redeeming Holder's basis for such Securities will be equal to his basis for
the Securities (previously represented by his Units) prior to such
redemption, and his holding period for such Securities will include the
period during which he held his Units. However, a Holder may recognize
taxable gain or loss when the Holder sells the Securities so distributed
for cash.
Under the income tax laws of the State and City of New York, each Trust
is not an association taxable as a corporation and income received by the
Trust will be treated as income of the Holders.
Holders will be required for Federal income tax purposes to include
amounts in ordinary gross income in advance of the receipt of the cash
attributable to such income. Therefore, direct holding of Units may be
appropriate only for a tax-deferred account which can have taxable income
attributed in advance of the receipt of the cash attributable to such
income.
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The foregoing discussion relates only to Federal and certain aspects of
New York income taxes. Depending on their state of residence, Holders may
be subject to state and local taxation and should consult their own tax
advisors in this regard.
* * *
After the end of each calendar year, the Trustee will furnish to each
Holder a report from which the Holder may determine the income received by his
Trust on his pro rata portion of the Treasury Note, the gross proceeds received
by the Trust from the disposition of any Security and the Holder's pro rata
portion of the fees and expenses paid by his Trust. In order to enable them to
comply with Federal and state tax reporting requirements, Holders will be
furnished upon request to the Trustee with evaluations of Securities furnished
to it by the Evaluator (Section 4.02). The Trustee will also furnish to each
Holder and the Internal Revenue Service all required information returns
(including a return with respect to original issue discount).
SALE OF UNITS
UNIT OFFER PRICE
Units may be purchased by a Plan at the Offer Price by means of this
Prospectus. The Offer Price per Unit of a Trust is computed as of the Evaluation
Time by adding the evaluation of the underlying Securities, as determined by the
Evaluator as described under Redemption--Computation of Redemption Price per
Unit, plus the Adjustment Factor, divided by the number of Units outstanding.
The Adjustment Factor is currently .0015 for the 1999 Trust and .003 for the
2009 Trust. The Adjustment Factor (as determined by the Sponsor) may be changed
for each calendar quarter but in no event will it exceed .007 for the 1999 Trust
or .0175 for the 2009 Trust. This factor is designed to cover the Trust's costs,
without profit, of buying and selling securities in connection with sales and
redemptions of Units, and is intended to ensure that the prices for purchases or
sales of Units more closely match the market value of the underlying Securities.
A proportionate share of any cash in the Capital Account not allocated to the
purchase of specific Securities is added. Because the income on the Treasury
Note is designed to exactly equal the Trust expenses, accrued interest on the
Note is not reflected in the offering, repurchase or redemption prices of Units.
In practice, as determined on an accrual basis by the auditors, accumulated
expenses have been slightly higher or lower than the interest on the Treasury
Notes. These differences are immaterial and may change over time. If there is an
expense deficit at termination of a Trust, either the Trustee will waive part of
its fee or the Sponsor will bear sufficient expenses to eliminate the deficit.
If a surplus remains at termination, the amount will be distributed to Holders.
The Offer Price per Unit of a Trust will vary after the Evaluation Date (set
forth under Investment Summary) in accordance with fluctuations in the
evaluations of the underlying Securities. Amortization of discount will have the
effect of increasing at any particular time the evaluation of the Securities.
No sales charge is payable when Units are purchased. Instead, Units are
subject to a Sponsor's administrative fee at the annual rates set forth under
Investment Summary. The percentage which their present values represent of the
Offer Price per Unit at various intervals is shown in the chart at the end of
the Investment Summary. If a Holder sells or redeems Units before the maturity
of a Trust, except for the Adjustment Factor only the administrative fees
accrued to the date of sale or redemption will be payable, and this will have
the effect of reducing the rate of administrative fees. Similarly, if Units are
purchased after the Evaluation Date, the purchaser will not pay fees previously
accrued and this will also have the effect of reducing the rate of
administrative fees.
Evaluations of the Securities are determined by the Evaluator taking into
account the same factors referred to under Redemption--Computation of Redemption
Price per Unit. The determinations are made on each business day, effective for
all sales made since the last of these evaluations (Section 4.01). The term
'business day', as used herein and under 'Redemption', shall exclude Saturdays,
Sundays and the following holidays as observed by the New York Stock Exchange:
New Year's Day, Washington's birthday, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas; and the following Federal holidays:
Martin Luther King's birthday, Columbus Day and Veterans Day.
Because of fluctuations in the market prices of these Securities and the
fact that the Adjustment Factor and the accrued portion of the administrative
fee will be deducted from amounts paid to Holders upon redemption, among other
reasons, the amount realized by a Holder upon any sale or redemption of Units
may be less than the price paid for these Units.
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SPONSOR'S PROFITS
The Sponsor receives the administrative fee through periodic deductions at
the rates set forth above and through deduction of a pro rata portion of the
accrued administrative fee at the time of any redemption.
The following chart sets forth the estimated maximum dollar amount payable
on account of the Sponsor's administrative fee assuming that Holders hold their
Units for the following periods of time from March 31, 1995:
MAXIMUM DOLLAR AMOUNT PER 10 UNITS
PAYABLE ON ACCOUNT OF SPONSOR'S ADMINISTRATIVE FEE
YEARS HELD 1999 TRUST 2009 TRUST
- ------------------------------------------------------------
1 $ 1.11$ 0.74
2 2.22 1.48
3 3.33 2.22
4 4.44 2.96
5 5.14 3.70
6 4.44
7 5.18
8 5.92
9 6.66
10 7.40
11 8.14
12 8.88
13 9.62
14 10.36
15 10.45
The Sponsor may also realize a profit or loss on each deposit of Securities
in a Trust. This is the difference between the cost of the Securities to the
Trusts (which is based on the mean between the bid and offering side evaluation
of the Securities on the date of deposit) and the purchase price of those
Securities to the Sponsor. To the extent additional Units continue to be offered
for sale, the Sponsor also may realize profits or sustain losses as a result of
fluctuations after the date of deposit in the Offer Price of the Units.
Employees may incur an annual account maintenance fee after termination of Plan
participation--see Expenses and Charges below. Cash, if any, made available by
buyers of Units to the Sponsor prior to the settlement dates for purchase 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.
In maintaining a market for the Units the Sponsor will also realize profits
or sustain losses in the amount of any difference between the prices at which it
buys Units and the prices at which it resells or redeems those Units, as the
case may be.
MARKET FOR UNITS
While the Sponsor is not obligated to do so, it intends to maintain a
secondary market for Units of each Trust and continuously to offer to purchase
Units of each Trust. The Sponsor, of course, does not in any way guarantee the
enforceability, marketability or price of any Securities in the Trusts or of the
Units. The Sponsor may discontinue purchases of Units of any Trust should the
supply of Units exceed demand or for other business reasons.
The Sponsor may redeem any Units it has purchased in the secondary market
or through the Trustee in accordance with the procedures described below if it
determines it is undesirable to continue to hold those Units in its inventory.
REDEMPTION
Units may be redeemed at the office of the Trustee upon delivery on any
business day, as defined under Sale of Units--Unit Price, of a request for
redemption, and payment of any relevant tax, without any other fee
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(Section 5.02). Holders' signatures must be guaranteed by an eligible guarantor
institution or in some other manner acceptable to the Trustee. In certain
instances the Trustee may require additional documents including, but not
limited to, trust instruments, certificates of death, appointments as executor
or administrator or certificates of corporate authority.
The Trustee will redeem Units either in cash or, at the option of certain
qualified Holders as specified in writing to the Trustee, in kind. Unless
otherwise specified, redemptions will be made in cash. On the seventh calendar
day following the tender (or if the seventh calendar day is not a business day
on the first business day prior thereto), the Holder will be entitled to receive
the proceeds of the redemption in an amount and value of Securities per Unit
equal to the Redemption Price per Unit (see below) as determined as of the
Evaluation Time next following the tender.
The Trustee is empowered to sell Securities from a Trust in order to make
funds available for cash redemptions (Section 5.02). The Securities to be sold
so as to maintain, as closely as practicable, the percentage relationship
between the face amounts of Stripped Treasury Securities and the Treasury Note
in the Trust at the time of sale. Provision is made under the Indenture for the
Sponsor to specify minimum face amounts in which blocks of Securities are to be
sold in order to obtain the best price for the Trust. While these minimum
amounts may vary from time to time in accordance with market conditions, the
Sponsor believes that the minimum face amounts which would be specified would
range from $25,000 to $100,000.
Holders tendering Units for redemption may, in lieu of receiving cash,
request the Trustee to distribute in kind an amount and value of Securities per
Unit equal to the Redemption Price per Unit as determined as of the Evaluation
Time next following the tender. The distribution in kind on redemption of Units
will be held by a Distribution Agent (the 'Distribution Agent') for the account
of, and for disposition in accordance with the instructions of, the tendering
Holder. If a qualified tendering Holder requests redemption in kind, the Trustee
as Distribution Agent for the account of the redeeming Holder will sell the
Securities and distribute the net cash proceeds to the Holder (unless he
requests that the in kind redemption be held on a book entry system for his
account). A Holder will not recognize any gain or loss for Federal income tax
purposes to the extent the Holder receives a distribution in kind. In
implementing these redemption procedures, the Trustee and Distribution Agent
shall make any adjustments necessary to reflect differences between the
Redemption Price of the Units and the value of the Securities distributed in
kind as of the date of tender. If funds in the Capital Account are insufficient
to cover the required cash distribution to the tendering Holder, the Trustee may
sell Securities according to the criteria discussed above. (Section 5.02)
To the extent that Securities in a Trust are redeemed in kind or sold, the
size of the relevant Trust will be reduced. Sales will usually be required at a
time when Securities would not otherwise be sold and may result in lower prices
than might otherwise be realized. In addition, because of the minimum face
amounts in which Securities are required to be sold, the proceeds of sale may,
if the Sponsor fails to purchase Units tendered for redemption, exceed the
amount required at the time to redeem Units; any excess proceeds will be
deposited in the Capital Account. See Administration of the Fund--Accounts and
Distributions. The price received upon redemption may be more than or less than
the amount paid by the Holder depending on the value of the Securities in the
Trust at the time of redemption.
The right of redemption may be suspended and payment postponed (1) for any
period during which the New York Stock Exchange, Inc. is closed other than for
customary weekend and holiday closings or (2) for any period during which, as
determined by the Securities and Exchange Commission, (i) trading on that
Exchange is restricted or (ii) an emergency exists as a result of which disposal
or evaluation of the Securities is not reasonably practicable, or (3) for any
other periods which the Commission may by order permit (Section 5.02).
COMPUTATION OF REDEMPTION PRICE PER UNIT
Redemption Price per Unit of a Trust is computed by the Trustee as of the
Evaluation Time on each June 30 and December 31 (or the last business day prior
thereto), on any business day, as of the Evaluation Time next following the
tender of any Unit for redemption, and on any other business day desired by the
Trustee or the Sponsor, by adding (a) the value of the Securities in the Trust,
(b) cash on hand in the Trust (other than cash covering contracts to purchase
Securities), (c) accrued and unpaid interest on these Securities up to but not
including the date of redemption and (d) all other assets of the Trust;
deducting therefrom the sum of (v) taxes or other governmental charges against
the Trust not previously deducted, (w) accrued fees and expenses of the Trustee
(including legal and auditing expenses), the Evaluator and counsel, and certain
other expenses, (x) the
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Adjustment Factor at the applicable rate, (y) accrued administrative fees
payable and (z) any cash held for distribution to Holders of record as of a date
prior to the evaluation; and dividing the result by the number of Units
outstanding as of the date of computation (Sections 4.01 and 5.01). The
Adjustment Factor will not be deducted from a redemption in kind nor from the
distribution when the Trust terminates.
The value of the Securities is determined by the Evaluator in the following
manner: (a) on the basis of the mean between the current bid and offering prices
for the Securities, (b) if bid and offering prices are not available for any
Securities, on the basis of current bid and offering prices for comparable
securities, (c) by appraising the value of the Securities, or (d) by any
combination of the above. The Evaluator may obtain current price information as
to the Securities from investment dealers or brokers (including the Sponsor)
which customarily deal in that type of securities. On the day on which a Holder
is entitled to receive the Redemption Price, the accrued but unpaid
administrative fee will be deducted from the accrued interest on the Securities
to provide funds to meet such redemption and will be distributed to the Sponsor.
While Securities of the type included in the Trusts' Portfolios involve
minimal risk of loss of principal when held to maturity, due to variations in
interest rates the market value of the Securities and Redemption Price per Unit
can be expected to fluctuate during the period of an investment in a Trust.
EXPENSES AND CHARGES
SPONSOR'S ADMINISTRATIVE FEE
An administrative fee, to reimburse the Sponsor for certain expenses
described under Fund Structure--ML Plans, at the rates set forth under
Investment Summary, calculated on a daily basis, will be deducted from interest
income received by the Fund semi-annually and will be distributed to the Sponsor
upon certification of its reimbursable expenses.
FEES
The Trustee's and Evaluator's fees are set forth under Investment Summary.
The Trustee's fees for its services as Trustee, payable in semi-annual
installments, are accrued daily based on the number of Units in a Trust. Certain
regular and recurring expenses of each Trust, including the Evaluator's fee and
certain mailing and printing expenses, are also included in the amount set forth
under Investment Summary as Trustee's Annual Fee and Expenses (Section 3.14).
Expenses in excess of the amount included for these expenses in the Trustee's
Annual Fee and Expenses under Investment Summary will be borne by the Trust. The
Trustee also receives benefits to the extent that it holds funds on deposit in
the various non-interest bearing accounts created under the Indenture.
The interest bearing Securities in the 1999 Trust mature several months
before the Stripped Treasury Securities therein and in the 2009 Trust, may be
called up to five years before maturity (see Portfolio). The Trustee will reduce
its fees and expenses for these Trusts in the amount of interest that would have
accrued on these Securities between their maturity date and the maturity date of
the Stripped Treasury Securities in the Trust. This reduction will eliminate the
necessity of charging the Capital Account for the Trust expenses during this
period.
When an employee receives Units from a Plan, he may establish an individual
account or deposit the Units in an existing account with Merrill Lynch. Merrill
Lynch currently charges annual maintenance fees on some types of accounts. The
individual Holder would be responsible for any such charge. The fee is not
payable if the employee is the record holder of the Units.
OTHER CHARGES
These include: (a) fees of the Trustee for extraordinary services (Section
8.05), (b) certain expenses of the Trustee (including legal and auditing
expenses) and of counsel designated by the Sponsor (Sections 3.04, 3.09, 8.01e],
8.03 and 8.05), (c) various governmental charges (Sections 3.03 and 8.01h]), (d)
expenses and costs of any action taken to protect any Trust (Section 8.01d]),
(e) indemnification of the Trustee for any loss, liabilities and expenses
incurred without gross negligence, bad faith or wilful misconduct on its part
(Section 8.05), (f) indemnification of the Sponsor for any losses, liabilities
and expenses incurred without gross negligence, bad faith, wilful misconduct or
reckless disregard of its duties (Section 7.05b]) and (g) expenditures incurred
in contacting Holders upon termination of the Trust (Section 9.02). The amounts
of these charges and fees are
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secured by a lien on the relevant Trust and, if the balances in the Income and
Capital Accounts (see below) are insufficient, the Trustee has the power to sell
Securities to pay these amounts (Section 8.05).
ADMINISTRATION OF THE FUND
RECORDS
The Trustee keeps a register of the names, address and holdings of all
Holders of each Trust. The Trustee also keeps records of the transactions of
each Trust, including a current list of the Securities and a copy of the
Indenture, which are available to record Holders for inspection at the office of
the Trustee at reasonable times during business hours (Sections 8.02 and 8.04).
ACCOUNTS AND DISTRIBUTIONS
The terms of the Securities provide for payment to the holders thereof
(including the Trusts) upon their maturities. Interest received on any
Securities in a Trust which bear current interest, including that part of the
proceeds of any disposition of any such Security which represents accrued
interest and any late payment penalties, is credited to an Income Account for
the applicable Trust and other receipts to a Capital Account for the Trust
(Sections 3.01 and 3.02). While income distributions are not anticipated, the
Sponsor is authorized in its discretion to direct the Trustee to distribute any
accumulated net income in June or December of any year. Distributions for
Holders as of the Record Day normally will be made by mail on the following
Distribution Day and shall consist of an amount substantially equal to each
Holder's pro rata share of the distributable cash balance of the Income Account
of the Trust computed as of the close of business on the Record Day. The balance
in the Capital Account shall be distributed on the business day following the
maturity of the Stripped Treasury Securities in the Trust Portfolio; the Record
Day for that distribution shall be the business day immediately preceding the
distribution day. The Trustee will acquire additional Securities as directed by
the Sponsor, in the original proportionate relationship between face amounts, if
there is a sufficient cash balance in the Capital Account.
The amount to be distributed may change as Securities are exchanged, paid
or sold. A Reserve Account may be created by the Trustee by withdrawing from the
Income or Capital Accounts, from time to time, amounts which it deems requisite
to establish a reserve for any taxes or other governmental charges that may be
payable out of the Trust (Section 3.03). Funds held by the Trustee in the
various accounts created under the Indenture do not bear interest (Section
8.01).
PORTFOLIO SUPERVISION
Each Trust is part of a unit investment trust and its not an actively
managed fund. Traditional methods of investment management for a managed fund
typically involve frequent changes in a portfolio of securities on the basis of
economic, financial and market analyses. The Portfolios of the Trusts, however,
will not be actively managed and therefore the adverse financial condition of an
issuer will not necessarily require the sale of its securities from a Trust.
However, the Sponsor may direct the disposition of Securities upon default in
payment of amounts due on any Securities which is not promptly cured,
institution of certain legal proceedings, default in payment of amounts due on
other Treasury Securities, or decline in price or the occurrence of other market
or credit factors that in the opinion of the Sponsor would make the retention of
these Securities in any Trust detrimental to the interest of the Holders of that
Trust. If a default in payment of amounts due on any Security occurs and if the
Sponsor fails to give instructions to sell or hold the Security the Indenture
provides that the Trustee, within 30 days of that failure by the Sponsor, may
sell the Security (Sections 3.07 and 3.10).
REPORTS TO HOLDERS
The Trustee will furnish Holders of record with each distribution a
statement of the amounts of interest and other receipts which are being
distributed, expressed in each case as a dollar amount per Unit. After the end
of each calendar year (usually within twenty to sixty days), the Trustee will
furnish to Holders of record a statement (i) summarizing transactions for the
year in the Income, Capital and Reserve Accounts of the Trust, (ii) indentifying
Securities sold and purchased during the year and listing Securities held and
the number of Units oustanding at the end of the year by the Trust, (iii)
stating the Trust's Redemption Price per Unit based upon the computation thereof
made at the end of that year and (iv) specifying the amounts distributed during
that year from the Trust's Income and Capital Accounts (Section 3.06). The
accounts of each Trust shall be audited at least annually by independent
certified public accountants designated by the Sponsor, and the report of the
accountants shall be furnished by the Trustee to Holders upon request (Section
8.01[e]).
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In order to enable them to comply with Federal and state tax reporting
requirements, Holders will be furnished upon request to the Trustee with
evaluations of Securities furnished to it by the Evaluator (Section 4.02).
UNCERTIFICATED UNITS
All Holders are required to hold their Units in uncertificated form. The
Trustee will credit a Holder's account with the number of Units held by the
Holder. This relieves the Holder of the responsibility of safekeeping of
certificates and the need to deliver certificates upon sale or redemption of
Units. Units are transferable by the Trustee, with a payment of $2.00 if
required by the Trustee (or such other amount as may be specified by the Trustee
and approved by the Sponsor) for each transfer and any sums payable for taxes or
other governmental charges imposed upon these transactions and compliance with
the formalities necessary to redeem Units (Section 6.02).
AMENDMENT AND TERMINATION
The Sponsor and Trustee may amend the Indenture without the consent of
Holders (a) to cure any ambiguity or to correct or supplement any provision
thereof which may be defective or inconsistent, (b) to change any provision
thereof as may be required by the Securities and Exchange Commission or any
successor governmental agency, or (c) to make any other provisions which do not
adversely affect the interest of the Holders (as determined in good faith by the
Sponsor). The Indenture may also be amended in any respect by the Sponsor and
Trustee, or any of the provisions thereof may be waived, with the consent of the
Holders of 51% of the Units then outstanding, provided that none of these
amendments or waivers will reduce the interest in any Trust of any Holder
without the consent of the Holder or reduce the percentage of Units required to
consent to any of these amendments or waivers without the consent of all Holders
(Section 10.01).
The Indenture will terminate upon the earlier of the disposition of the
last Security held thereunder or the mandatory termination date. The Indenture
as to any Trust may be terminated at any time by written instrument executed by
the Sponsor and consented to by Holders of 51% of the Units (Sections 8.01[g]
and 9.01). The Trustee will deliver written notice of any termination to each
Holder within a reasonable period of time prior to the termination, specifying
the times at which the Holders may surrender their Certificates for
cancellation. Within a reasonable period of time after the termination, the
Trustee must sell all of the Securities then held and distribute to each Holder,
upon surrender for cancellation of his Certificates, and after deductions for
accrued but unpaid fees, taxes and governmental and other charges, the Holder's
interest in the Income and Capital Accounts (Section 9.01). This distribution
will normally be made by mailing a check in the amount of each Holder's interest
in these accounts to the address of the Holder appearing on the record books of
the Trustee.
RESIGNATION, REMOVAL AND LIMITATIONS ON LIABILITY
THE TRUSTEE
The Trustee or any successor may resign upon notice to the Sponsor. The
Trustee may be removed upon the direction of the Holders of 51% of the Units at
any time or by the Sponsor without the consent of any of the Holders, if the
Trustee becomes incapable of acting or becomes bankrupt or its affairs are taken
over by public authorities or if for any reason the Sponsor determines in good
faith that the replacement of the Trustee is in the best interests of the
Holders. The resignation or removal shall become effective upon the acceptance
of appointment by the successor. In case of resignation or removal the Sponsor
is to use its best efforts to appoint a successor promptly and if upon
resignation of the Trustee no successor has accepted appointment within thirty
days after notification, the Trustee may apply to a court of competent
jurisdiction for the appointment of a successor (Section 8.06). The Trustee
shall be under no liability for any action taken in good faith in reliance on
prima facie properly executed documents or for the disposition of monies or
Securities, nor shall it be liable or responsible in any way for depreciation or
loss incurred by reason of the sale of any Security. This provision, however,
shall not protect the Trustee in cases of wilful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties. In the event of
the failure of the Sponsor to act, the Trustee may act under the Indenture and
shall not be liable for any of these actions taken in good faith. The Trustee
shall not be personally liable for any taxes or other governmental charges
imposed upon or in respect of the Securities or upon the interest thereon. In
addition, the Indenture contains other customary provisions limiting the
liability of the Trustee (Sections 3.07, 3.10, 8.01 and 8.05).
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THE EVALUATOR
The Evaluator may resign or may be removed, effective upon the acceptance
of appointment by its successor, by the Sponsor, who is to use its best efforts
to appoint a successor promptly. If upon resignation of the Evaluator no
successor has accepted appointment within thirty days after notification, the
Evaluator may apply to a court of competent jurisdiction for the appointment of
a successor (Section 4.40). Determinations by the Evaluator under the Indenture
shall be made in good faith upon the basis of the best information available to
it; provided, however, that the Evaluator shall be under no liability to the
Trustee, the Sponsor or the Holders for errors in judgment. This provision,
however, shall not protect the Evaluator in cases of wilful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties
(Section 4.03). 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.
THE SPONSOR
If the Sponsor fails to perform its duties or becomes incapable of acting
or becomes bankrupt or its affairs are taken over by public authorities, then
the Trustee may (a) appoint a successor Sponsor at rates of compensation deemed
by the Trustee to be reasonable and as may not exceed amounts prescribed by the
Securities and Exchange Commission, or (b) terminate the Indenture and liquidate
the Trusts or (c) continue to act as Trustee without terminating the Indenture
(Section 8.01[f]). The Sponsor shall be under no liability to the Trusts or to
the Holders for taking any action or for refraining from the taking any action
in good faith or for errors in judgment and shall not be liable or responsible
in any way for depreciation or loss incurred by reason of the sale of any
Security. This provision, however, shall not protect the Sponsor in cases of
wilful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties (Section 7.02). The Sponsor may transfer all or
substantially all of its assets to a corporation or partnership which carries on
its business and duly assumes all of its obligations under the Indenture and in
that event shall be relieved of all futher liability under the Indenture
(Section 7.01)
MISCELLANEOUS
TRUSTEE
The Trustee of the Fund is The Bank of New York, a New York banking
corporation with its Unit Investment Trust Department at 101 Barclay Street, New
York, New York 10286 (which is subject to supervision by the New York
Superintendent of Banks, the Federal Deposit Insurance Corporation and the Board
of Governors of the Federal Reserve System). The Bank of New York was appointed
successor Trustee effective February 28, 1995.
LEGAL OPINION
The legality of the Units has been passed upon by Davis Polk & Wardwell,
450 Lexington Avenue, New York, New York 10017, as special counsel for the
Sponsor.
AUDITORS
The financial statements, including the Portfolios of the Trusts, included
herein have been audited by Deloitte & Touche LLP, independent accountants, as
stated in their opinion appearing herein and have been so included in reliance
upon that opinion given on the authority of that firm as experts in accounting
and auditing.
SPONSOR
The Sponsor is a Delaware corporation and is engaged in the underwriting,
securities and commodities brokerage business, and is a member of the New York
Stock Exchange, Inc., other major securities exchanges and commodity exchanges,
and the National Association of Securities Dealers, Inc. The Sponsor and Merrill
Lynch Asset Management, Inc., a Delaware corporation and subsidiary of Merrill
Lynch & Co., Inc., the parent of the Sponsor, are engaged in the investment
advisory business. The Sponsor has acted as sponsor of a number of series of
unit investment trusts. The Sponsor has acted as principal underwriter and
managing underwriter of other investment companies. The Sponsor, in addition to
participating as a member of various selling groups or as an agent of other
investment companies, executes orders on behalf of investment companies for the
purchase and sale of securities of these companies and sells securities to these
companies in its capacity as a broker or dealer in securities.
16
<PAGE>
DEFINED ASSET FUNDS - GOVERNMENT SECURITIES INCOME FUND,
U.S. GOVERNMENT ZERO COUPON BOND SERIES - 3
REPORT OF INDEPENDENT ACCOUNTANTS
The Sponsor, Co-Trustees and Holders
of Defined Asset Funds - Government Securities Income Fund,
U.S. Government Zero Coupon Bond Series - 3:
We have audited the accompanying statements of condition of the 1999 Trust and
the 2009 Trust of Defined Asset Funds - Government Securities Income Fund, U.S.
Government Zero Coupon Bond Series - 3, including the portfolios, as of
March 31, 1995 and the related statements of operations and of changes in net
assets for the years ended March 31, 1995, 1994 and 1993. These financial
statements are the responsibility of the Trustee. (See Note 6.) Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Securities owned at
March 31, 1995, as shown in such portfolios, were confirmed to us by The Bank of
New York, the Trustee. An audit also includes assessing the accounting
principles used and significant estimates made by the Trustee, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the above-mentioned Trusts of
Defined Asset Funds - Government Securities Income Fund, U.S. Government Zero
Coupon Bond Series - 3 at March 31, 1995 and the results of their operations and
changes in their net assets for the above-stated years in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, N.Y.
July 21, 1995
D-1
<PAGE>
DEFINED ASSET FUNDS - GOVERNMENT SECURITIES INCOME FUND,
U.S. GOVERNMENT ZERO COUPON BOND SERIES - 3
STATEMENTS OF CONDITION
AS OF MARCH 31, 1995
<TABLE><CAPTION>
1999
TRUST
<S> <C>
TRUST PROPERTY:
Investment in marketable securities - at value
(cost $34,292,250) (Note 1) $35,303,526
Accrued interest receivable 33,036
Cash 140,638
Total trust property 35,477,200
LESS LIABILITIES:
Accrued expenses $ 39,245
Liability for securities purchased 93,722
Redemptions payable 2,415 135,382
NET ASSETS (Note 2) $35,341,818
UNITS OUTSTANDING 481,627.298
UNIT VALUE $73.38
2009
TRUST
TRUST PROPERTY:
Investment in marketable securities - at value
(cost $31,215,717) (Note 1) $33,034,792
Accrued interest receivable 47,798
Receivable from securities sold or redeemed 64,025
Cash 72,303
Total trust property 33,218,918
LESS LIABILITIES:
Accrued expenses $40,634
Redemptions payable 64,577 105,211
NET ASSETS (Note 2) $33,113,707
UNITS OUTSTANDING 921,699.307
UNIT VALUE $35.93
See Notes to Financial Statements.
</TABLE>
D-2
<PAGE>
DEFINED ASSET FUNDS - GOVERNMENT SECURITIES INCOME FUND,
U.S. GOVERNMENT ZERO COUPON BOND SERIES - 3
STATEMENTS OF OPERATIONS
1999 TRUST
<TABLE>
<CAPTION>
Years Ended March 31,
1995 1994 1993
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest income $ 76,068 $ 72,523 $ 76,988
Accretion of original issue discount 2,147,882 1,894,492 1,897,209
Trustees' fees and expenses (34,821) (27,597) (30,063)
Sponsors' fees 42,900 (44,861) (55,869)
Net investment income 2,232,029 1,894,557 1,888,265
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain on securities sold or redeemed 64,553 1,037,077 400,371
Unrealized appreciation (depreciation) of
investments (951,890) (2,082,261) 2,817,119
Net realized and unrealized gain (loss) on
investments (887,337) (1,045,184) 3,217,490
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $1,344,692 $ 849,373 $5,105,755
2009 TRUST
Years Ended March 31,
1995 1994 1993
INVESTMENT INCOME:
Interest income $ 115,175 $ 100,309 $ 111,389
Accretion of original issue discount 1,944,176 1,628,064 1,656,612
Trustees' fees and expenses (60,786) (44,847) (52,003)
Sponsors' fees 90,688 (54,606) (84,822)
Net investment income 2,089,253 1,628,920 1,631,176
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain on securities sold or
redeemed 441,568 2,020,300 453,945
Unrealized appreciation (depreciation) of
investments (636,414) (2,082,706) 3,378,855
Net realized and unrealized gain (loss) on
investments (194,846) (62,406) 3,832,800
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $1,894,407 $1,566,514 $5,463,976
See Notes to Financial Statements.
</TABLE>
D-3
<PAGE>
DEFINED ASSET FUNDS - GOVERNMENT SECURITIES INCOME FUND,
U.S. GOVERNMENT ZERO COUPON BOND SERIES - 3
STATEMENTS OF CHANGES IN NET ASSETS
1999 TRUST
<TABLE>
<CAPTION>
Years Ended March 31,
1995 1994 1993
<S> <C> <C> <C>
OPERATIONS:
Net investment income $ 2,232,029 $ 1,894,557 $ 1,888,265
Realized gain on securities sold or redeemed 64,553 1,037,077 400,371
Unrealized appreciation (depreciation) of
investments (951,890) (2,082,261) 2,817,119
Net increase in net assets resulting from
operations 1,344,692 849,373 5,105,755
INCOME DISTRIBUTIONS (88,524)
CAPITAL SHARE TRANSACTIONS (Note 3):
Voluntary Contribution by Affiliate
of Sponsor 135,008
Issuance of additional units 10,368,975 3,906,487 7,730,515
Redemptions of units (3,173,145) (7,828,047) (5,272,030)
Net capital share transactions 7,195,830 (3,786,552) 2,458,485
NET INCREASE (DECREASE) IN NET ASSETS 8,451,998 (2,937,179) 7,564,240
NET ASSETS AT BEGINNING OF YEAR 26,889,820 29,826,999 22,262,759
NET ASSETS AT END OF YEAR $35,341,818 $26,889,820 $29,826,999
PER UNIT:
Net asset value at end of year. $73.38 $70.75 $68.84
Income distribution $0.19
TRUST UNITS OUTSTANDING AT END OF YEAR 481,627.298 380,053.673 433,265.276
See Notes to Financial Statements.
</TABLE>
D-4
<PAGE>
DEFINED ASSET FUNDS - GOVERNMENT SECURITIES INCOME FUND,
U.S. GOVERNMENT ZERO COUPON BOND SERIES - 3
STATEMENTS OF CHANGES IN NET ASSETS
2009 TRUST
<TABLE>
<CAPTION>
Years Ended March 31,
1995 1994 1993
<S> <C> <C> <C>
OPERATIONS:
Net investment income $ 2,089,253 $ 1,628,920 $ 1,631,176
Realized gain on securities sold or
redeemed 441,568 2,020,300 453,945
Unrealized appreciation (depreciation) of
investments (636,414) (2,082,706) 3,378,855
Net increase in net assets resulting
from operations 1,894,407 1,566,514 5,463,976
INCOME DISTRIBUTIONS (151,971)
CAPITAL SHARE TRANSACTIONS (Note 3):
Voluntary Contribution by Affiliate
of Sponsor 216,142
Issuance of additional units 11,990,965 6,381,661 8,708,468
Redemptions of units (5,353,303) (9,480,835) (7,837,490)
Net capital share transactions 6,637,662 (2,883,032) 870,978
NET INCREASE (DECREASE) IN NET ASSETS 8,380,098 (1,316,518) 6,334,954
NET ASSETS AT BEGINNING OF YEAR 24,733,609 26,050,127 19,715,173
NET ASSETS AT END OF YEAR $33,113,707 $24,733,609 $26,050,127
PER UNIT:
Net asset value at end of year $35.93 $34.20 $32.37
Income distribution $0.17
TRUST UNITS OUTSTANDING AT END OF YEAR 921,699.307 723,288.954 804,786.144
See Notes to Financial Statements.
</TABLE>
D-5
<PAGE>
DEFINED ASSET FUNDS - GOVERNMENT SECURITIES INCOME FUND,
U.S. GOVERNMENT ZERO COUPON BOND SERIES - 3
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940 as a Unit
Investment Trust. The Fund consists of the 1999 and 2009 Trusts, each a
separate unit investment trust. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of
its financial statements. The policies are in conformity with generally
accepted accounting principles.
(a) Securities are stated at value as determined by the Evaluator based on
the mean between bid and offering prices for the securities (see
"Redemption - Computation of Redemption Price Per Unit" in this
Prospectus).
(b) Cost of securities has been adjusted to include the accretion of
original issue discount on the Stripped Treasury Securities.
(c) Each Trust is not subject to income taxes. Accordingly, no provision
for such taxes is required.
2. NET ASSETS, MARCH 31, 1995
1999 TRUST
Cost of 481,627.298 units at Dates of Deposit $26,687,872
Redemption of units - Net cost of 352,453.515 units
redeemed less redemption amounts (176,308)
Realized gain on securities sold or redeemed 1,736,221
Unrealized appreciation of investments 1,011,276
Net capital applicable to Holders 29,259,061
Undistributed net investment income - accretion of original
issue discount ($6,086,962) less excess ($4,205) of fees
and expenses over interest income 6,082,757
Net assets $35,341,818
2009 TRUST
Cost of 921,699.307 units at Dates of Deposit $23,578,686
Redemption of units - Net cost of 1,349,407.729 units redeemed
less redemption amounts (243,532)
Realized gain on securities sold or redeemed 3,112,810
Unrealized appreciation of investments 1,819,075
Net capital applicable to Holders 28,267,039
Undistributed net investment income - accretion of original
issue discount ($4,855,155) less excess ($8,487) of fees
and expenses over interest income 4,846,668
Net assets $33,113,707
D-6
<PAGE>
DEFINED ASSET FUNDS - GOVERNMENT SECURITIES INCOME FUND,
U.S. GOVERNMENT ZERO COUPON BOND SERIES - 3
NOTES TO FINANCIAL STATEMENTS
3. CAPITAL SHARE TRANSACTIONS
Additional units were issued by the Trusts as follows:
Year Ended Year Ended Year Ended
Trust March 31, 1995 March 31, 1994 March 31, 1993
1999 147,198.417 54,539.727 123,828.126
2009 360,097.229 178,220.474 307,177.790
Units were redeemed as follows:
Year Ended Year Ended Year Ended
Trust March 31, 1995 March 31, 1994 March 31, 1993
1999 45,624.792 107,751.330 81,710.862
2009 161,686.876 259,717.664 266,132.027
Units may be redeemed at the office of the Trustee upon tender thereof
generally on any business day or, in the case of uncertificated units, upon
delivery of a request for redemption and payment of any relevant tax. The
Trustee may redeem units either in cash or in kind at the option of the
Holder as specified in writing to the Trustee.
On July 21, 1993, an affiliate of the Sponsor, as Plan Administrator, made
voluntary contributions of $135,008 and $216,142 into the 1999 and 2009
Trusts, respectively, to purchase additional securities.
4. INCOME TAXES
All Trust items of income received, accretion of original issue discount,
expenses paid, and realized gains and losses on securities sold are
attributable to the Holders, on a pro rata basis, for Federal income tax
purposes in accordance with the grantor trust rules of the United States
Internal Revenue Code.
At March 31, 1995, the cost of investment securities for Federal income tax
purposes was approximately equivalent to the adjusted cost as shown in each
Trust's portfolio.
5. DISTRIBUTIONS
It is anticipated that the Trusts will make distributions on the first
business day following the maturity of their holdings in the Stripped
Treasury Securities which are non-interest bearing. Any excess of interest
income over fees and expenses may be distributed periodically.
6. TRUSTEE CHANGE
On March 1, 1995, The Bank of New York assumed all of the Trustee
responsibilities from Investors Bank & Trust Company.
D-7
<PAGE>
DEFINED ASSET FUNDS - GOVERNMENT SECURITIES INCOME FUND,
U.S. GOVERNMENT ZERO COUPON BOND SERIES - 3
PORTFOLIOS
AS OF MARCH 31, 1995
<TABLE><CAPTION>
Portfolio No. and Title Interest Face Adjusted
of Securities Rates Maturities Amount Cost(1) Value(1)
<S> <C> <C> <C> <C> <C>
1999 TRUST
1 Stripped Treasury Securities(2) 0.000% 11/15/99 $47,193,000 $33,246,015 $34,259,999
2 U.S. Treasury Notes 8.875 11/15/98 985,324 1,046,235 1,043,527
Total $48,178,324 $34,292,250 $35,303,526
2009 TRUST
1 Stripped Treasury Notes Securities(2) 0.000% 5/15/09 $90,877,000 $29,685,876 $31,492,515
2 U.S. Treasury Bonds 9.125 5/15/09(3) 1,386,553 1,529,841 1,542,277
Total $92,263,553 $31,215,717 $33,034,792
</TABLE>
(1) See Notes to Financial Statements.
(2) See "Risk Factors - Special Characteristics of Stripped Treasury
Securities" in this Prospectus.
(3) Callable beginning 5/15/04 at par.
D-8
<PAGE>
<PAGE>
DEFINED ASSET FUNDS --
GOVERNMENT SECURITIES INCOME FUND
GNMA SERIES U.S. TREASURY ACCUMULATION
FREDDIE MAC SERIES SERIAL PAYOUT SERIES
MONTHLY PAYMENT U.S. U.S. TREASURY SERIES 7--
TREASURY SERIES LADDERED ZERO COUPONS
U.S. TREASURY ACCUMULATION U.S. TREASURY SERIES 11
SERIES
PROSPECTUS, PART B
NOTE: PART B OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED BY
PART A.
INDEX
PAGE
-----------
Fund Summary......................................... 1
Fund Structure....................................... 3
Risk Factors......................................... 4
General............................................ 4
U.S. Treasury Accumulation and Accumulation Serial
Payout Series and U.S. Treasury Series
7--Laddered Zero Coupons........................ 5
GNMA Series and Freddie Mac Series................. 6
Monthly Payment U.S. Treasury Series and U.S.
Treasury Series 11.............................. 9
Payment of the Securities and Life of the Fund..... 9
Description of the Fund.............................. 11
Income; Estimated Current and Long Term Returns
(Monthly Payment U.S. Treasury Series, GNMA
Series and Freddie Mac Series).................. 11
PAGE
-----------
Taxes................................................ 12
Section A.--Certain GNMA Series, U.S. Treasury
Series 11 and Freddie Mac Series 10 and 11...... 12
Section B.--Other Series........................... 13
Retirement Plans..................................... 15
Public Sale of Units................................. 16
Market for Units..................................... 21
Redemption........................................... 22
Expenses and Charges................................. 24
Administration of the Fund........................... 25
Resignation, Removal and Limitations on Liability.... 28
Miscellaneous........................................ 29
Description of Standard & Poor's Rating.............. 32
Exchange Option...................................... 32
FUND SUMMARY
RISK FACTORS. GNMA and Freddie Mac Series. An investment in Units of these
Series should be made with an understanding of the risks which an investment in
fixed-rate, long-term debt obligations without prepayment protection may entail,
including the risk that the value of the Portfolio and hence of the Units will
decline with increases in interest rates and that payments of principal may be
received sooner than anticipated, especially if interest rates decline. The
potential for appreciation which could otherwise be expected to result from a
decline in interest rates, may tend to be limited by any increased prepayments
by mortgagors as interest rates decline. In addition, prepayments of principal
on Securities purchased at a premium over par will result in some loss on
investment while prepayments on Securities purchased at a discount from par will
result in some gain on investment. (See Payment of the Debt Obligations and Life
of the Fund; Redemption). If interest rates rise, the prepayment risk of
higher-yielding, premium Securities and the prepayment benefit for
lower-yielding, discount Securities will be reduced. Since higher coupon,
premium Securities are more likely to prepay than lower coupon, discount
Securities, certain investors may wish to consider investing in units of GNMA
Series that may be available from the Sponsors with portfolios of Securities,
the majority of which are currently trading at a market discount, especially if
they believe that interest rates are likely to fall.
Treasury 'Zero' Series. The value of Stripped Treasury Securities, and
therefore of the Units of these Series, may be subject to greater fluctuations
in response to changing interest rates than in a fund consisting of debt
obligations with comparable maturities that pay interest currently. This risk is
greater when the period to maturity is longer.
1
<PAGE>
All Series. U.S. Government securities (but not necessarily Freddie Macs)
are not affected by credit risk but are subject to changes in market value
resulting from changes in interest rates. Therefore, an investment in Units of
the Fund should be made with an understanding of the risks which an investment
in fixed-rate debt obligations may entail, including the risk that the value of
the Portfolio, and hence of the Units, will decline with increases in interest
rates. In recent years there have been fluctuations in interest rates and thus
in the value of fixed-rate debt obligations generally. The Sponsors cannot
predict future economic policies or their consequences or, therefore, the course
or extent of any similar fluctuations in the future.
In certain Funds, the Sponsors may deposit additional Securities and
additional Units may be created, which may have an effect upon the value of
previously existing Units. Additional Units may be created by depositing
Securities (or contracts to purchase Securities accompanied by cash or a letter
of credit in an amount sufficient to complete the contracts) or cash (or a bank
letter of credit) to purchase Securities, in each instance maintaining the
original proportionate relationship among the principal amounts of Securities of
specified interest rates and maturities in the Portfolio. If cash (or a letter
of credit) is deposited to purchase Securities, the value of existing Units will
change to the extent the price of a Security increases or decreases between the
time of deposit and the time the Security is purchased. In addition, brokerage
commissions or dealer spreads in buying and selling Securities will be borne by
the Fund. See Fund Structure.
Units offered hereby may reflect redemptions, prepayments, defaults or
dispositions of Securities originally deposited in the Fund. A reduction in the
value of a Unit resulting from these events does not mean that a Unit is valued
at a market discount; market discounts or premiums on Units represent the
difference between the face amount of Securities per Unit and the price per
Unit. As they approach maturity, discount securities tend to increase in market
value while premium securities tend to decrease in market value. If currently
prevailing interest rates for newly issued and otherwise comparable securities
decline, the market discount of previously issued securities will be reduced and
the market premium of previously issued securities will increase. Conversely, if
currently prevailing interest rates increase, the market discount of previously
issued securities will become deeper and the market premium of previously issued
securities will decline. The Investment Summary in Part A sets forth the
percentages of the aggregate face amount of the Portfolio valued at a discount
from the par (maturity) value and at a premium over par and sets forth the face
amount of Securities underlying each Unit and the value of the Unit as of the
Evaluation Date. For additional risk factors depending on the types of
securities in particular series, see Risk Factors below.
THE PUBLIC OFFERING PRICE of the Units is generally based on the
Evaluator's determination of the aggregate bid side evaluation of the underlying
Securities (computed as of the Evaluation Time for all sales made subsequent to
the previous evaluation) divided by the number of Units outstanding. A sales
charge (set forth under Investment Summary in Part A), accrued interest net of
expenses and cash adjustments are added. The Public Offering Price on the date
of this Prospectus or on any subsequent date will vary from the Public Offering
Price set forth under Investment Summary in Part A. (See Public Sale of
Units--Public Offering Price.) This prospectus may be used either to offer
additional Units of the Fund in connection with subsequent deposits or to offer
previously issued and outstanding Units which have been purchased by the
Sponsors. The profit or loss will accrue to the Sponsors, and in the latter case
no proceeds will be received by the Fund.
MARKET FOR UNITS. The Sponsors, though not obligated to do so, intend to
maintain a secondary market for Units based for most Series on the aggregate bid
side evaluation of the underlying Securities (see Market for Units). So long as
the Sponsors are maintaining a secondary market at prices not less than the
Redemption Price
2
<PAGE>
per Unit, they will repurchase any Units tendered for redemption. If this market
is not maintained, a Holder will be able to dispose of his Units through
redemption at prices also based on the aggregate bid side evaluation of the
underlying Securities (see Redemption). Market conditions (as well as payments
and prepayments of principal on Securities in GNMA and Freddie Mac Series) may
cause the prices available in the market maintained by the Sponsors or available
upon exercise of redemption rights to be more or less than the amount paid for
Units plus accrued interest.
ESTIMATED CURRENT AND LONG TERM RETURNS. Estimated current return on a Unit
represents annual cash receipts from coupon-bearing debt obligations (after
estimated expenses) divided by the maximum Public Offering Price (including the
sales charge). 'Current return' provides different information than 'long-term
return', which represents yield to maturity (or earlier call date) and reflects
not only the interest payable on the debt obligations but also the amortization
or accretion to that date of any premium over or discount from the par value in
the obligation purchase price. Long-term return on Units in the secondary market
may be lower, sometimes significantly, than current return. Changes in the
composition of the Portfolio and its market valuation, as well as the estimated
fees and expenses payable by the Fund, will cause current return and long-term
return, as well as the difference between them, to fluctuate in the future. Both
current return and long-term return may be substantially lower than originally
estimated. (See Description of the Fund--Income and Estimated Current and Long
Term Returns.)
ESTIMATED YIELD TO MATURITY (TREASURY 'ZERO' SERIES). The yield to maturity
on the Units of each Trust is the annual percentage return to the investor based
on amortization of discount, compounded semi-annually on a 365-day year, divided
by the price per Unit. It is assumed that interest income will equal expenses
and other deductions. The value of the Units will fluctuate with the value of
the portfolio of underlying Securities. The yield to maturity will change with
changes in the price per Unit and any change in the Trust's expenses.
DISTRIBUTIONS of net income, any principal or premium and any capital gains
will be paid in cash unless the Holder elects to reinvest distributions as
described below (see Reinvestment). Holders will be taxed in the manner
described under Taxes regardless of whether these distributions from the Fund
are actually received by the Holders in cash or are automatically reinvested.
REINVESTMENT. Holders of Freddie Mac Series and GNMA Series (except for
GNMA Series 1L, 1N, 1P, 1R, 1S and 1T) may reinvest distributions of net income,
any principal or premium and any capital gains in The GNMA Fund Investment
Accumulation Program, Inc. (the 'Program'). For more complete information about
the Program, including charges and expenses, return the form included in Part A
for a prospectus. Read it carefully before you decide to participate. It should
be noted that interest distributions to foreign Holders from the Program will be
subject to U.S. Federal income taxes, including withholding taxes, and that
income on shares of the Program will not be eligible for the dividends received
deduction for corporations. Holders of GNMA Series 1L, 1N, 1P, 1R, 1S and 1T and
Monthly Payment U.S. Treasury Series 1-5 may reinvest their distributions into
additional Units of the Fund. Changes from month to month in the market value of
the underlying Securities could increase or decrease the compounded return as
compared with the current return. Holders electing to reinvest their
distributions will receive additional Units and therefore will own a greater
percentage of the Fund than Holders who receive their distributions in cash and
may realize a higher compounded return than the Estimated Current Return. (See
Reinvestment Plan.) Holders of Units in IRA's, Keogh plans and other tax-
deferred retirement plans should consult their plan custodian as to the
appropriate disposition of distributions (see Retirement Plans).
3
<PAGE>
TAXATION. For any Series that qualifies as a 'regulated investment company'
under the Internal Revenue Code of 1986, as amended (the 'Code') (see Taxes,
Section A below), distributions from the Fund will be included in a U.S.
Holder's gross income (but will not be eligible for the dividends-received
deduction for corporations), and distributions to Holders who are not U.S.
citizens or residents will generally be subject to withholding tax at the
statutory rate of 30% (or a lesser treaty rate). In the opinion of special
counsel to the Sponsors, for any Series that is organized as a 'grantor trust'
under the Code (see Taxes, Section B below), each Holder will be considered the
owner of a pro rata portion of each Debt Obligation in the Fund, and will be
considered to have received the interest or principal on his pro rata portion of
each Debt Obligation when received by the Fund. Interest is taxable as ordinary
income for U.S. Holders. Distributions on GNMA Series W through 1K, 1M, 1O-NRA,
1Q-NRA, all Freddie Mac Series, Monthly Payment U.S. Treasury Series (except
Series 1) and U.S. Treasury Series 7--Laddered Zero Coupons are also exempt from
U.S. Federal income taxes, including withholding taxes, for qualifying foreign
Holders. Individual U.S. Holders of Units of Monthly Payment U.S. Treasury
Series and U.S. Treasury Series 7--Laddered Zero Coupons may benefit from the
exemption from state and local personal income taxes that pass through the Fund
to Holders in all states.
FUND STRUCTURE
The Fund, a series of The Government Securities Income Fund, is a 'unit
investment trust' created by a Trust Indenture (the 'Indenture') among the
Sponsors, the Trustee (and Co-Trustee, if any) and the Evaluator. GNMA Series 1
through 29, A and B were created under Massachusetts law and all other Series
under New York law. GNMA Series consist primarily of mortgage-backed Securities
of the modified pass-through type ('Ginnie Maes') fully guaranteed as to
payments of principal and interest by the Government National Mortgage
Association ('GNMA'). GNMA's guarantee is backed by the full faith and credit of
the U.S. government. Freddie Mac Series hold Mortgage Participation Certificates
('PCs'), representing undivided interests in specified fixed-rate, first lien
conventional residential mortgages guaranteed by the Federal Home Loan Mortgage
Corporation ('FHLMC' or 'Freddie Mac'). FHLMC's guarantee is not backed by the
U.S. government. Monthly Payment U.S. Treasury Series and U.S. Treasury Series
11 hold short-to-intermediate-term U.S. Treasury debt obligations which are
direct obligations of the United States and are backed by its full faith and
credit.
U.S. Treasury Accumulation Series and Trusts of U.S. Treasury Accumulation
Serial Payout Series consist, respectively, of long-term debt obligations, or
serially maturing interest coupons, that were stripped from debt obligations of
the United States of America. U.S. Treasury Series 7--Laddered Zero Coupons
consist primarily of stripped debt obligations of the United States of America
and receipts and certificates for such stripped debt obligations ('Stripped
Treasury Securities'). See Special Characteristics of Stripped Treasury
Securities below. Each of these Funds also contains an interest-bearing Treasury
Note deposited in order to provide income with which to pay the expenses of the
Fund.
With the deposit of the Securities on the Initial Date of Deposit, the
Sponsors established a percentage relationship among the principal amounts of
Securities of specified interest rates and maturities (ranges of maturities in
GNMA and Freddie Mac Series) in the Fund. The Sponsors may deposit additional
Securities in certain of these Funds and Units may be continuously offered to
the public by means of this Prospectus (see Public Sale of Units), resulting in
a potential increase in the number of Units outstanding. Any additional
Securities deposited in these Funds will maintain as closely as practicable
(exactly in the case of Series organized as 'grantor trusts'--see Section B of
Taxes) the original percentage relationship among the principal amounts of
Securities of specified interest rates and maturities (or ranges of maturities)
in the Portfolio. Precise duplication of
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this original percentage relationship may not ever be possible because fractions
of Securities may not be purchased, but duplication will continue to be the goal
in connection with any such additional Securities deposited (see Administration
of the Fund--Portfolio Supervision).
Each group of Ginnie Maes or Freddie Mac PCs described in Part A as having
a specified range of maturities includes individual Securities having varying
maturities within that range. Each group is described as one category of
Securities with a single range of maturities because of current market
conditions that accord no difference in price among the Securities grouped
together on the basis of the difference in their maturity ranges. Accordingly,
as long as this market condition prevails, a purchase of Securities on a
subsequent deposit with the same coupon rate and a maturity date within the
range mentioned above will be considered as an acquisition of the same Security.
As used herein, the term 'Securities' includes all securities in the Fund
and described herein and any additional securities which may be acquired by the
Fund pursuant to the provisions of the Indenture. The Securities were selected
for deposit in the Fund on the basis described under Description of the
Fund--The Portfolio.
To the extent that references in this Prospectus are to articles and
sections of the Indenture, which are hereby incorporated by reference, the
statements made herein are qualified in their entirety by this reference. The
Fund may be an appropriate investment vehicle for investors who desire to
participate in a portfolio of taxable fixed rate securities with greater
diversification than they might be able to acquire individually. In addition,
securities of the type deposited in the Fund often are not available in small
amounts.
The holders ('Holders') of units of interest ('Units') will have the right
to have their Units redeemed (see Redemption) at a price based on the aggregate
bid side evaluation of the Securities ('Redemption Price per Unit') if the Units
cannot be sold in the over-the-counter market which the Sponsors propose to
maintain at prices determined for most Series in the same manner (see Market for
Units). On the Evaluation Date, each Unit represented the fractional undivided
interest in the Securities and net income of the Fund set forth under Investment
Summary in Part A. Thereafter, if any Units are redeemed or additional Units are
issued, the face amount of Securities in the Fund and the fractional undivided
interest represented by each remaining Unit in the balance will change. Units
will remain outstanding until redeemed upon tender to the Trustee by any Holder
(which may include the Sponsors) or until termination of the Indenture (see
Redemption; Administration of the Fund--Amendment and Termination).
RISK FACTORS
GENERAL
Units offered in the secondary market may reflect redemptions or
prepayments, in whole or in part, on certain of the Securities originally
deposited in the Fund or the disposition of certain Securities originally
deposited in the Fund to satisfy redemptions of Units or pursuant to the
exercise by the Sponsors of their supervisory role over the Fund (see Payment of
the Securities and Life of the Fund; Administration of the Fund-- Portfolio
Supervision). Accordingly, the face amount of Units may be less than their
original face amount at the time of the creation of the Fund. A reduced value
per Unit does not therefore mean that a Unit is necessarily valued at a market
discount; market discounts, as well as market premiums, on Units are determined
solely by a comparison of a Unit's outstanding face amount and its evaluated
price.
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Certain of the Securities in the Fund may be valued at a market discount.
Securities trade at less than par value because the interest rates on the
Securities are lower than interest on comparable debt securities being issued at
currently prevailing interest rates. The current returns of securities trading
at a market discount are lower than the current returns of comparably rated debt
securities of a similar type issued at currently prevailing interest rates
because discount securities tend to increase in market value as they approach
maturity and the full principal amount becomes payable. If currently prevailing
interest rates for newly issued and otherwise comparable securities increase,
the market discount of previously issued securities will become deeper and if
currently prevailing interest rates for newly issued comparable securities
decline, the market discount of previously issued securities will be reduced,
other things being equal. Market discount attributable to interest rate changes
does not indicate a lack of market confidence in the issue.
Certain of the Securities in the Fund may be valued at a market premium.
Securities trade at a premium because the interest rates on the Securities are
higher than interest rates on comparable debt securities being issued at
currently prevailing interest rates. The current returns of securities trading
at a market premium are higher than the current returns of comparably rated debt
securities of a similar type issued at currently prevailing interest rates
because premium securities tend to decrease in market value as they approach
maturity when the face amount becomes payable. Because part of the purchase
price is thus returned not at maturity but through current income payments, an
early redemption of a premium security at par will result in a reduction in
yield. If currently prevailing interest rates for newly issued and otherwise
comparable securities increase, the market premium of previously issued
securities will decline and if currently prevailing interest rates for newly
issued comparable securities decline, the market premium of previously issued
securities will increase, other things being equal. Market premium attributable
to interest rate changes does not indicate market confidence in the issue.
An investment in Units should be made with an understanding of the risks
which these investments may entail, certain of which are described below.
U.S. TREASURY ACCUMULATION AND ACCUMULATION SERIAL PAYOUT SERIES
AND U.S. TREASURY SERIES 7--LADDERED ZERO COUPONS
An investment in Units of the Fund should be made with an understanding of
the risks which an investment in deep discount securities may entail, including
the risk that the value of the Portfolio and hence of the Units will decline
with increases in interest rates and that Holders will have a significant amount
of taxable income attributed to them before receipt of the cash attributable to
that income. Purchasers of Units will accordingly be required to report as
income, in each taxable year, a portion of the original issue discount on the
Securities (see Taxes, Section B below). The value of a fund consisting of
discount securities may be subject to greater fluctuations in response to
changing interest rates than a fund consisting of debt obligations with
comparable maturities that pay interest currently. This risk is greater when the
period to maturity is longer.
Special Characteristics of Stripped Treasury Securities. Bearer bonds are
transferable by delivery; payments are made to the holder of these bonds.
Stripped bonds have been stripped of their unmatured interest coupons; stripped
coupons are coupons that have been stripped from an issuer's bonds. Stripped
bonds and stripped coupons are sold at a deep discount because the buyer of
those securities receives only the right to receive a future fixed payment on
the security and not any rights to periodic interest payments thereon.
Purchasers of these securities acquire, in effect, discount obligations that are
economically identical to the 'zero-coupon bonds' that have been issued by
corporations. Zero coupon bonds are bonds which do not make any periodic
payments of interest prior to maturity and accordingly are issued at a deep
discount.
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Stripped Treasury Securities held by any Fund or Trust consist solely of
one or more of the following types of securities: (a) U.S. Treasury debt
obligations which have been stripped of their unmatured interest coupons, (b)
coupons which have been stripped from U.S. Treasury bonds, either of which may
be held through the Federal Reserve Bank's book entry system called 'Separate
Trading of Registered Interest and Principal of Securities' ('STRIPS'), and (c)
receipts or certificates for stripped U.S. Treasury debt obligations having the
following characteristics. These receipts or certificates evidence ownership of
future interest or principal payments on U.S. Treasury notes or bonds which are
direct obligations of the United States. The receipts or certificates are issued
in registered form by a major bank which acts as custodian and nominal holder of
the underlying stripped U.S. Treasury debt obligation (which may be held by it
either in physical or in book entry form). The terms of custody provide that the
underlying debt obligations will be held separate from the general assets of the
custodian and will not be subject to any right, charge, security interest, lien
or claim of any kind in favor of the custodian or any person claiming through
the custodian, and the custodian will be responsible for applying all payments
received on those underlying debt obligations to the related receipts or
certificates without making any deductions other than applicable tax
withholding. The custodian is required to maintain insurance for the protection
of holders of receipts or certificates in customary amounts against losses
resulting from the custody arrangement due to dishonest or fraudulent action by
the custodian's employees. The holders of receipts or certificates, as the real
parties in interest, are entitled to the rights and privileges of the underlying
debt obligations including the right in the event of default in payment of
principal or interest thereon to proceed individually against the United States
without acting in concert with other holders of those receipts or certificates
or the custodian.
The Stripped Treasury Securities in any Fund or Trust are debt obligations
of the United States government which are payable in full at maturity at their
stated maturity amount and are not subject to redemption prior to maturity. The
Stripped Treasury Securities do not make any periodic payments of interest.
The Stripped Treasury Securities in each Fund or Trust are sold at a
substantial discount from their face amounts payable at maturity. Because
interest on Stripped Treasury Securities and other 'zero coupon' obligations is
not distributed on a current basis but in effect compounded, the value of
securities of this type, including the value of accrued and reinvested interest
(and of a Fund comprised of these obligations) is subject to greater
fluctuations in response to changing interest rates than on debt obligations
which distribute interest periodically. Accordingly, while the full faith and
credit of the U.S. government provides a high level of protection against credit
risks on the Securities, sale of Units before maturity of the Securities at a
time when interest rates have increased would involve greater market risk than
in a fund which is invested in debt obligations of comparable maturity which pay
interest currently. This risk is greater when the period to maturity is longer.
Furthermore, the stripping of the interest coupons will cause the Units and
therefore the Holder's pro rata portion of each Stripped Treasury Security to be
purchased at a deep discount. The Stripped Treasury Securities do not make any
periodic payments of interest. Accordingly, Funds holding primarily Stripped
Treasury Securities are not a suitable investment for persons seeking current
cash distributions. Sales of Units in California may be made only to persons who
have a minimum net worth (exclusive of home, home furnishings, and automobiles
for personal use) of at least (i) $75,000 or (ii) $30,000 if the investor has an
adjusted gross income of at least $30,000. A holder of Stripped Treasury
Securities will be required to include annually in gross income an allocable
portion of the discount created by coupon stripping, prior to receipt of the
cash attributable to that income. Accordingly, a Fund or Trust holding Stripped
Treasury Securities may be a suitable investment only if purchased by IRAs,
Keogh plans or other tax-deferred accounts (see Taxes below). Stripped Treasury
Securities are marketable in substantially the same manner as other discount
Treasury securities.
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Under generally accepted accounting principles, a holder of a Security
purchased at a discount normally must report as an item of income for financial
accounting purposes the portion of the discount attributable to the applicable
reporting period. The calculation of this attributable income would be made on
the 'interest' method which generally will result in a lesser amount of
includible income in earlier periods and a correspondingly larger amount in
later periods. For Federal income tax purposes, the inclusion will be on a basis
that reflects the effective semi-annual compounding of accrued but unpaid
interest effectively represented by the discount. Although this treatment is
similar to the 'interest' method described above, the 'interest' method may
differ to the extent that generally accepted accounting principles permit or
require the inclusion of interest on the basis of a compounding period other
than the semi-annual period (see Taxes).
GNMA AND FREDDIE MAC SERIES
The Ginnie Maes or Freddie Mac PCs included in the Portfolios of these
Funds are backed by the indebtedness secured by the mortgages contained in the
underlying mortgage pools. In order for these Securities to be eligible for
inclusion in Funds designated as tax-exempt for foreign Holders (see Section B
of Taxes below), evidence must be received that the underlying mortgages were
originated after July 18, 1984. Although the Sponsors believe that all the
underlying mortgages in those Funds were originated after July 18, 1984, to the
extent that is not the case and on Funds not so designated, a foreign Holder
will be subject to United States Federal income taxes on income derived from
mortgages that were originated prior to July 18, 1984 (see Taxes).
Set forth below is a brief description of the current method of origination
of mortgage-backed Securities; the nature of these Securities, including the
nature of the guaranty of these Securities; the basis of selection and
acquisition of these Securities included in the Portfolio; and the expected life
of these Securities and the Fund. The Portfolios contain information concerning
the coupon rate and range of stated maturities of the Ginnie Maes or Freddie Mac
PCs in the Fund.
GINNIE MAES. The Portfolios of GNMA Series consist primarily of
mortgage-backed securities of the modified pass-through type fully guaranteed as
to payment of principal and interest by the Government National Mortgage
Association ('GNMA').
GNMA is a wholly-owned U.S. government corporation within the Department of
Housing and Urban Development. GNMA is authorized by Section 306(g) of Title III
of the National Housing Act to guarantee the timely payment of the principal of,
and interest on, certificates which are based on and backed by pools of
residential mortgage loans insured or guaranteed by the Federal Housing
Administration ('FHA'), the Farmers' Home Administration ('FMHA') or the
Department of Veteran's Affairs ('VA'). In order to meet its obligation under
its guaranty, GNMA may issue its general obligations to the United States
Treasury. In the event it is called upon at any time to make good its guaranty,
GNMA has the full power and authority to borrow from the Treasury of the United
States, if necessary, amounts sufficient to make payments of principal and
interest on the GNMA Certificates ('GNMA Pass-throughs' or 'Ginnie Maes').
Section 306(g) provides further that the full faith and credit of the
United States is pledged to the payment of all amounts which may be required to
be paid under any guaranty under that subsection. An opinion of an Assistant
Attorney General of the United States, dated December 9, 1969, states that these
guaranties 'constitute general obligations of the United States backed by its
full faith and credit.' Any statement in this Prospectus that a particular
Security is backed by the full faith and credit of the United States is based
upon the opinion of an Assistant Attorney General of the United States and
should be so construed.
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GNMA Pass-throughs. The Ginnie Maes are of the 'modified pass-through'
type, the terms of which provide for timely monthly payments by the issuers to
the registered holders (including the Fund) of their pro rata shares of the
scheduled principal payments, whether or not collected by the issuers, on
account of the mortgages backing these Ginnie Maes, plus any prepayments of
principal of such mortgages received, and interest (net of the servicing and
other charges described above) on the aggregate unpaid principal balance of
these Ginnie Maes, whether or not interest on account of these mortgages has
been collected by the issuers. Ginnie Maes are guaranteed by GNMA as to timely
payment of principal and interest. Funds received by the issuers on account of
the mortgages backing the several issues of the Ginnie Maes are intended to be
sufficient to make the required payments of principal and interest on these
Ginnie Maes but, if these funds are insufficient for that purpose, the guaranty
agreements between the issuers and GNMA require the issuers to make advances
sufficient for these payments. If the issuers fail to make these payments GNMA
will do so. The full faith and credit of the United States is pledged to the
payment of all amounts which may be required to be paid under the guaranty. The
payment cycle of Ginnie Maes is 45 days between the date of security issuance
and the first investor payments.
Origination of Mortgage-Backed Securities. The pool of mortgages that is to
underlie a particular new issue of Ginnie Maes, such as the Ginnie Maes in the
Fund, is assembled by the proposed issuer of these Ginnie Maes. This issuer is
typically a mortgage banking firm, savings institution or commercial bank and in
every instance must be a mortgagee approved by and in good standing with the
FHA. In addition, GNMA imposes its own criteria on the eligibility of issuers,
including a net worth requirement and a requirement that a principal element of
its business operation be the origination or servicing of mortgage loans.
The mortgages which are to compose the new pool may have been originated by
the issuer itself in its capacity as a mortgage lender, or they may be acquired
by the issuer from a third party, such as another mortgage banker, a banking
institution, the VA, which in certain instances acts as a direct lender and thus
originates its own mortgages, or one of several other governmental agencies. All
mortgages in any given pool will be insured under the National Housing Act, as
amended ('FHA-insured') or Title V of the Housing Act of 1949 ('YMHA-insured')
or insured or guaranteed under Chapter 37 of Title 38, U.S.C. ('VA-guaranteed');
will have a date for the first scheduled monthly payment of principal and
interest that is not more than 24 months prior to the issue date of the Ginnie
Mae to be issued; will have homogeneity as to interest rate, maturity and type
of dwelling (e.g., project mortgages on apartment projects and hospitals will
not be mixed with 1-to 4-family mortgages); and will meet additional criteria of
GNMA. All mortgages in the pools backing the Ginnie Maes contained in the
Portfolio are mortgages on 1-to 4-family dwellings (amortizing over a period of
up to 30 years). In general, the mortgages in these pools provide for equal
monthly payments over the life of the mortgage (aside from prepayments),
designed to repay the principal of the mortgage over this period, together with
interest at a fixed rate on the unpaid balance.
In seeking GNMA approval of a new pool, the issuer files with GNMA an
application containing information concerning itself, describing generally the
pooled mortgages, and requesting that GNMA approve the issue and issue its
commitment (subject to its satisfaction with the mortgage documents and other
relevant documentation) to guarantee the timely payment of principal of and
interest on the Ginnie Maes to be issued by the issuer on the basis of that
pool. If the application is in order, GNMA issues its commitment, assigning a
GNMA pool number to the pool. Upon completion of the required documentation,
including detailed information as to the underlying mortgages, a custodial
agreement with a Federal or state regulated financial institution satisfactory
to GNMA pursuant to which the underlying mortgages will be held in safekeeping,
and a detailed guaranty agreement between GNMA and the issuer, the issuance of
the Ginnie Maes is permitted, and GNMA, upon their issuance,
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<PAGE>
endorses its guaranty thereon. The aggregate principal amount of Ginnie Maes
issued will be equal to the then aggregate unpaid principal balances of the
pooled mortgages. The interest rate borne by the Ginnie Maes is currently fixed
at .5 of 1% below the interest rate of the pooled 1-to 4-family mortgages, the
differential being applied to the payment of servicing and custodial charges as
well as GNMA's guaranty fee.
The Ginnie Maes are based upon and backed by the aggregate indebtedness
secured by the underlying FHA-insured, FMHA-insured or VA-guaranteed mortgages
and, except to the extent of funds received by the issuers on account of these
mortgages, the Ginnie Maes do not constitute a liability of nor evidence any
recourse against the issuers, but recourse thereon is solely against GNMA.
Holders of Ginnie Maes have no security interest in or lien on the pooled
mortgages.
The GNMA guaranties referred to herein relate only to payment of principal
of and interest on the Ginnie Maes in the Portfolio and not to the Units offered
hereby.
Other Securities. A part of GNMA Series may consist of Securities on which
the payment of principal and interest is backed by the full faith and credit of
the United States through an agency other than the GNMA. Certain Series contain
Securities guaranteed by the Small Business Administration ('SBA'). These
Securities are issued by financial institutions and are backed by loans to small
businesses, which loans are guaranteed by the SBA pursuant to Section 7(a) of
the Small Business Administration Act of 1958, as amended (15 U.S.C.
Section636). It has been the experience of the industry that such loans default
at a rate of between and percent. In the event of such default, the holder of
these Securities may experience delays in payment on the Securities of between
60 and 120 days. Such Securities, which may have been deposited in the Fund at a
premium over par, are currently prepayable at par subject to certain
limitations. To the extent that they are so prepaid, the premium over par will
represent a loss of capital when compared with the original Public Offering
Price of the Units.
FREDDIE MACS. The Federal Home Loan Mortgage Corporation ('FHLMC') is a
publicly-held government sponsored enterprise created pursuant to the Federal
Home Loan Mortgage Corporation Act, Title III of the Emergency Home Finance Act
of 1970 (the 'FHLMC Act'). FHLMC's common stock is owned by the Federal Home
Loan Banks. FHLMC was established primarily for the purpose of increasing the
availability of mortgage credit for the financing of urgently needed housing. It
seeks to provide an enhanced degree of liquidity for residential mortgage
investments primarily by assisting in the development of secondary markets for
conventional mortgages. The principal activity of FHLMC currently consists of
purchasing first lien, conventional residential mortgage loans and participation
interests therein (collectively, 'mortgages'), which FHLMC repackages and sells
as guaranteed mortgage securities, primarily FHLMC Certificates. These mortgages
must meet certain mortgage purchase requirements (including mortgage purchase
amount limits) and must be deemed by FHLMC to be of a quality, type and class to
meet generally the purchase standards of private institutional mortgage
investors.
Prior to October 1992, substantially all of the mortgages acquired by FHLMC
had been acquired from mortgagees approved by the Secretary of Housing and Urban
Development ('HUD') for participation in mortgage insurance programs under the
National Housing Act (primarily mortgage bankers) or from federally insured
financial institutions (primarily savings associations, commercial banks and
savings banks). The FHLMC Act was amended in October, 1992 to remove the
restrictions on the types of mortgage sellers from whom FHLMC may purchase
mortgages. Accordingly, mortgage bankers and other mortgage sellers that are not
10
<PAGE>
federally insured financial institutions no longer need to be HUD-approved
mortgagees to be approved to sell mortgages to FHLMC.
To minimize interest rate risk FHLMC generally coordinates the volume of
and effective interest rates on mortgage purchase commitments with its
commitments to sell mortgage-related securities. Mortgages retained by FHLMC are
financed with short-term and long-term debt, cash temporarily held pending
disbursement to securities holders (float) and equity capital. FHLMC has stated
that as of December 31, 1992, it had issued approximately $407.5 billion of
mortgage participation and guaranteed mortgage certificates and had an adjusted
total capital base of approximately $5.81 billion; during the year ended
December 31, 1992 FHLMC had net income of approximately $622 million.
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMC's Information Statement, and the most recent Supplement to the Information
Statement and any quarterly report made available by FHLMC can be obtained by
writing or calling the Investor Inquiry Department at Freddie Mac at 8200 Jones
Branch Drive, McLean, Virginia 22102 (outside the Washington, D.C. metropolitan
area, telephone 800/336-FMPC; within the Washington, D.C. metropolitan area,
telephone 703/759-8160). The Sponsors do not participate in the preparation of
FHLMC's Offering Circulars, Information Statements or Supplements.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. Certain of the mortgages are
insured by the FHA or guaranteed by the VA, both of which are federal agencies.
FHLMC PCs ('FHLMC Certificates'). FHLMC Mortgage Participation Certificates
represent an undivided interest in a group of mortgages (a 'FHLMC Certificate
group') purchased by FHLMC. FHLMC Certificates are sold under the terms of a
Mortgage Participation Certificate Agreement. A FHLMC Certificate may be issued
under FHLMC's Cash, Guarantor or Multilender Swap Programs.
Mortgage loans underlying the FHLMC Certificates included in the Portfolio
will consist of fixed-rate mortgages with original terms to maturity of
approximately 15 years, substantially all of which are secured by first liens on
one-to four-family residential properties. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. A FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans or participations comprising another FHLMC Certificate
group.
FHLMC guarantees the timely payment of interest, the payment of the amount
of principal scheduled to be paid by mortgagors due on the underlying mortgage
loans to the extent of the holder's pro rata share of the unpaid principal
balance of such mortgages, whether or not received by FHLMC, and the ultimate
collection of all principal on the underlying mortgage loans, without any offset
or deduction. FHLMC may remit the amount due on account of its guarantee of
collection of principal at any time after default on an underlying mortgage
loan, but not later than 30 days following (i) foreclosure sale, (ii) payment of
the claim by any mortgage insurer or the FHA or payment of the guaranty claim by
the VA, or (iii) the expiration of any right of redemption, whichever occurs
later, but in any event no later than one year after demand has been made upon
the mortgagor for accelerated payment of principal or payment of principal at
maturity of a mortgage. In taking actions regarding the collection of principal
after default on the mortgage loans underlying FHLMC Certificates, including the
timing of demand for acceleration, FHLMC reserves the right to exercise its
judgment in the same manner as for mortgages which it
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<PAGE>
has purchased but not sold. FHLMC Certificates are not guaranteed by the United
States or by any Federal Home Loan Bank and do not constitute debts or
obligations of the United States or any Federal Home Loan Bank. The obligations
of FHLMC under its guarantee are obligations solely of FHLMC and are not backed
by, nor entitled to, the full faith and credit of the United States. Certain of
the mortgages are insured by the FHA or guaranteed by the VA, both of which are
federal agencies.
The payment cycle of FHLMC Certificates is generally 75 days between month
of issuance of the Security and the first investor payment. As noted above,
FHLMC guarantees the timely payment of interest (adjusted to the certificate
rate), whether or not received, on the unpaid principal balance of mortgage
loans in the FHLMC Certificate group as determined or estimated by FHLMC. For
standard 75-day PCs, FHLMC also guarantees collection of all principal on the
underlying mortgage loans, without any offset or deduction, but does not
guarantee the timely payment of scheduled principal. FHLMC Gold Certificates
('Gold PCs'), however, pay on a 45-day cycle and are also guaranteed as to
timely payment of scheduled principal. The portfolios of Freddie Mac Series 10
and 11 consists of Gold PCs.
Holders of FHLMC Certificates are entitled to receive interest at the FHLMC
Certificate rate on their pro rata share of the unpaid principal balance of the
underlying mortgage loans. Holders of FHLMC Certificates are also entitled to
receive (i) their pro rata share of all principal payments on the underlying
mortgage loans received by FHLMC, including any scheduled principal payments,
full and partial prepayments of principal, and principal received by FHLMC by
virtue of condemnation, insurance, liquidation or foreclosure, including
repayments of principal resulting from acquisition by FHLMC of the real property
securing the mortgage and (ii) its pro rata share of the amount of principal
scheduled to be paid by mortgagors due on the underlying mortgage loans, whether
or not received by FMHLC. FHLMC is required to remit to each registered FHLMC
Certificate holder its pro rata share of principal payments on the underlying
mortgage loans, interest at the FHLMC Certificate rate and any other sums such
as prepayment fees, within 60 days of the date on which payments are received by
FHLMC.
Under FHLMC's Cash Program, FHLMC purchases groups of whole mortgage loans
from sellers at specified percentages of their unpaid principal balances,
adjusted for accrued or prepaid interest, which, when applied to the interest
rate of the mortgage loans purchased, results in the yield (expressed as a
percentage) required by FHLMC. The required yield, which includes a minimum
servicing fee retained by the servicer, is calculated using the outstanding
principal balance of the mortgage loans, an assumed term and a prepayment period
as determined by FHLMC. Loans may be purchased by FHLMC at an amount above, at
or below 100% of the outstanding principal balance. The range of interest rates
on the mortgage loans in a FHLMC Certificate group under the Cash Program will
vary since mortgage loans are purchased and identified to a FHLMC Certificate
group based upon their yield to FHLMC rather than on the interest rate on the
mortgage loans. Under FHLMC's Guarantor Program, the interest rate on a FHLMC
Certificate is established based upon the lowest interest rate on the underlying
mortgage loans, minus a minimum servicing fee and the amount of FHLMC's
management and guaranty income as agreed upon between the seller and FHLMC.
The Federal Reserve Bank of New York maintains book-entry accounts with
respect to FHLMC Gold Certificates and makes payments of interest and principal
each month to holders in accordance with the holders' instructions. The first
payment to a holder of a FHLMC Gold Certificate will normally be received by the
holder by the 15th day of the first month following the month in which the
person became a holder of the FHLMC Gold Certificate. Thereafter, payments will
normally be received by the 15th day of each month.
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The FHLMC guarantees referred to herein relate only to payment of principal
of and interest on the FHLMC Certificates in the Portfolio and not to the Units
offered hereby.
MONTHLY PAYMENT U.S. TREASURY SERIES AND U.S. TREASURY SERIES 11
The U.S. Treasury debt obligations included in the Portfolio, though backed
by the full faith and credit of the United States, are subject to changes in
market value when interest rates fluctuate. Certain Series contain 'laddered'
portfolios. These Funds seek to protect against declining interest rates by
investing a portion of the Portfolio in longer-term Securities, while if
interest rates rise Holders will be able to reinvest the proceeds of principal
returned each year in higher yielding obligations. It is anticipated that equal
portions of principal invested will be returned annually as Securities mature.
The Portfolio in Part A contains information concerning the coupon rates and
maturities of the Securities in the Fund.
PAYMENT OF THE SECURITIES AND LIFE OF THE FUND
Because certain of the Debt Obligations from time to time may be redeemed
or prepaid or will mature in accordance with their terms or may be sold under
certain circumstances described herein, no assurance can be given that the Fund
will retain for any length of time its present size and composition.
Additionally, the size and composition of the Fund will be affected by the level
of redemptions of Units that may occur from time to time and the consequent sale
of Securities (see Redemption). Principally, this will depend upon the number of
Holders seeking to sell or redeem their Units and whether or not the Sponsors
continue to reoffer Units acquired by them in the secondary market. Factors that
the Sponsors will consider in the future in determining to cease offering Units
acquired in the secondary market include, among other things, the number of
units of all series of funds which they hold in their inventories, the
saleability of the units and their estimate of the time required to sell the
units and general market conditions, the size of the Fund relative to its
original size, the ratio of Fund expenses to income, the Fund's current return
and the degree to which Units may be selling at a premium over par, and the cost
of maintaining a current prospectus for the Fund. These factors may also lead
the Sponsors to seek to terminate the Fund earlier than would otherwise be the
case (see Administration of the Fund--Amendment and Termination).
GNMA and Freddie Mac Series. Monthly payments and prepayments of principal
are made to the Fund in respect of the mortgages underlying the Securities (see
Income and Estimated Current Return below). All of the mortgages in the pools
relating to the Ginnie Maes and FHLMC Certificates are subject to prepayment
without any significant premium or penalty at the option of the mortgagors
(i.e., the homeowners). While the mortgages on 1-to 4-family dwellings
underlying the Ginnie Maes are amortized over a period of up to 30 years, it has
been the experience of the mortgage industry that the average life of comparable
mortgages, owing to prepayments, is much less. Pricing of GNMA Securities has
been based upon yield assumptions grounded in this historical experience of the
FHA relating to 30 year mortgages on 1-to 4-family dwellings at various interest
rates (which, in general, have been lower than the rates of the Ginnie Maes in
the Portfolios.) Yield tables for Ginnie Maes utilize a 12-year average life
assumption for Ginnie Mae pools of 30 year mortgages on 1-to 4-family dwellings.
This assumption was derived from the FHA experience relating to prepayments on
such mortgages during the period from the mid 1950's to the mid 1970's. This 12
year average life assumption was calculated in respect of a period during which
mortgage lending rates were fairly stable. That assumption is probably no longer
an accurate measure of the average life of Ginnie Maes or their underlying
single family mortgage pools. While the mortgages on 1-to 4-family dwellings
underlying the FHLMC Certificates are amortized over a period of up to 15 years,
the
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average life of comparable mortgages, owing to prepayments, is much less.
Freddie Mac's current estimate of the weighted average life of 30-year
conventional mortgages is approximately 8.5 years. The weighted average life of
15-year conventional mortgages is approximately 6 years. Pricing of FHLMC
Certificates has been based upon yield assumptions based on this estimate. The
principal repayment behavior of any individual mortgage will likely vary from
this estimate. The extent of this variation will depend on a variety of factors,
including the relationship between the coupon rate on a mortgage and prevailing
mortgage origination rates. As prevailing mortgage origination rates increase in
relationship to a mortgage coupon rate, the likelihood of prepayment of that
mortgage decreases. Conversely, during periods in which prevailing mortgage
origination rates are significantly less than a mortgage coupon rate, prepayment
of that mortgage becomes increasingly likely. Freddie Mac revises its weighted
average life estimate from time to time to better reflect both actual and
projected payment experience.
While the industry estimates that Freddie Mac PCs and Ginnie Maes will
prepay as described herein, it is not possible to predict meaningfully
prepayment levels on those Securities in the Fund. Today, research analysts use
complex formulae to scrutinize the prepayments of mortgage pools in an attempt
to predict more accurately the average life of these mortgage backed securities.
Generally speaking, a number of factors, including mortgage market interest
rates and homeowners mobility, will affect the average life of these Securities.
Changes in prepayment patterns, as reported by the agencies on a periodic basis,
if generally applicable to the mortgage pools related to specific
mortgage-backed securities, could influence yield assumptions used in pricing
the securities. Shifts in prepayment patterns are influenced by changes in
housing cycles and mortgage refinancing and are also subject to certain
limitations on the gathering of the data; it is impossible to predict how new
statistics will affect the yield assumptions that determine mortgage industry
norms and pricing of mortgagebacked securities. Moreover, there is no assurance
that the pools of mortgage loans relating to the Securities in the Fund will
conform to prepayment experience as reported by the agencies on a periodic
basis, or the prepayment experience of other mortgage lenders.
While the value of these mortgage backed securities generally fluctuates
inversely with changes in interest rates, it should also be noted that their
potential for appreciation, which could otherwise be expected to result from a
decline in interest rates, may tend to be limited by any increased prepayments
by mortgagors as interest rates decline. Accordingly, the termination of the
Fund might be accelerated as a result of prepayments made as described above. It
is also possible that, in the absence of a secondary market for the Units or
otherwise, redemptions of Units may occur in sufficient numbers to reduce the
Portfolio to a size resulting in such termination (termination for this reason
would be delayed if additional Units are issued). Early termination of the Fund
or early payments of principal may have important consequences to the Holders.
To the extent that Units were purchased with a view to an investment of longer
duration, the overall investment program of the investor may require
readjustment or the overall return on investment may be less or greater than
anticipated, depending in part on whether the purchase price paid for Units
represented the payment of an overall premium or a discount, respectively, above
or below the stated principal amounts of the underlying mortgages. In this
connection, attention is directed to The GNMA Fund Investment Accumulation
Program and the Reinvestment Plan described below under Administration of the
Fund, which afford to Holders the opportunity to automatically reinvest
distributions of principal resulting from prepayments and termination as
described above (as well as regular payments of interest and distributions of
principal received upon maturity).
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DESCRIPTION OF THE FUND
THE PORTFOLIO
In selecting Securities for deposit in the Fund, Defined Asset Funds
research analysts generally considered the following factors, among others: (i)
the types of the securities available; (ii) the price of the Securities relative
to other comparable securities and the extent to which available Securities were
trading at a premium over or at a discount from par, (iii) the maturities of the
Securities and (iv) for certain Funds organized in 1984 and thereafter as
grantor trusts (see Section B of Taxes below), whether the Debt Obligations were
issued after July 18, 1984.
The Fund consists of the Securities listed under Portfolio in Part A
(including any additional or replacement Securities acquired and held by the
Fund pursuant to the terms of the Indenture) as long as they may continue to be
held in the Fund, together with accrued and undistributed interest thereon and
undistributed and uninvested cash representing payments and prepayments of
principal and proceeds realized from the disposition or redemption of Securities
(see Administration of the Fund--Portfolio Supervision). Neither the Sponsors
nor the Trustee shall be liable in any way for any default, failure or defect in
any Security. In the event of a failure to deliver any Security that has been
purchased for the Fund under a contract, the Sponsors are authorized under the
Indenture to direct the Trustee to acquire other obligations in substitution
therefor.
INCOME; ESTIMATED CURRENT AND LONG-TERM RETURNS
Generally. The estimated net annual interest rate per Unit on the
Evaluation Date is set forth under Investment Summary in Part A. This rate shows
the percentage return based on the face amount per Unit after deducting
estimated annual fees and expenses expressed as a percentage. Interest on the
Securities in the Fund, less estimated fees of the Trustee and (if applicable)
Sponsors and certain other expenses, is expected to accrue at the daily rate
(based on a 360-day year) shown under Investment Summary in Part A. These rates
will vary as Securities mature, are exchanged, redeemed, prepaid, paid or sold,
or as the expenses of the Fund change.
The estimated current return and estimated long-term return give different
information about the return to investors. Estimated current return on a Unit
represents annual cash receipts from coupon-bearing debt obligations in the
Portfolio (after estimated annual expenses) divided by the maximum Public
Offering Price (including the sales charge). For investors interested primarily
in cash flow, current return is a readily ascertainable measure. Unlike
estimated current return, estimated long-term return is a measure of the
estimated return to the investor earned over the estimated life of the Fund.
Estimated long-term return represents an average of the yields to maturity (or
earliest call date for obligations trading at prices above the particular call
price) of the Debt Obligations in the Portfolio, calculated in accordance with
accepted bond practice and adjusted to reflect expenses and sales charges.
'Current return' provides different information than 'yield' or 'long-term
return'. Under accepted bond practice, tax-exempt bonds are customarily offered
to investors on a 'yield' basis, which involves a computation of yield to
maturity (or earlier call date), and which takes into account not only the
interest payable on the bonds but also the amortization or accretion to a
specified date of any premium over or discount from the par (maturity) value in
the bond's purchase price. In calculating estimated long-term return, the
average yield for the Portfolio is derived by weighting each Debt Obligation's
yield by the market value of the Debt Obligation and by the amount of time
remaining to the date to which the Debt Obligation is priced. Once the average
Portfolio yield is computed, this figure is then adjusted for estimated expenses
and the effect of the maximum sales charge paid by
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investors. The estimated long-term return calculation does not take into account
certain delays in distributions of income and the timing of other receipts and
distributions on Units and may, depending on maturities, over or understate the
impact of sales charges. Both of these factors may result in a lower figure. For
investors intending to hold their Units until their final maturity, both current
return and long-term return are relevant measures of performance. For the
investor who redeems Units before then, both the current return and the
long-term return realized may be diminished, particularly on a sale shortly
after acquisition of those Units--because the price received will not reimburse
the investor for the sales charge paid.
Generally, the long-term return of a Unit offered in the secondary market
will be lower, sometimes significantly, than its current return, primarily as a
result of changes in market rates of interest and any resulting decrease in the
terms to maturity of the Debt Obligations in the Portfolio, as well as the
likelihood that at least certain of the Debt Obligations will be valued at
market premiums. Furthermore, changes in the composition of the Portfolio and
its market valuation as well as the estimated fees and expenses payable by the
Fund will cause current and long-term returns, as well as the difference between
them, to fluctuate--because Debt Obligations are more likely to be redeemed when
valued at a premium over par (generally, those Debt Obligations bearing the
higher coupons), the current return and long-term return realized by an investor
may be substantially lower than originally estimated.
In addition, for GNMA and Freddie Mac Series, in actual operation, payments
received in respect of the mortgages underlying the Securities will consist of a
portion representing interest and a portion representing principal. Although the
aggregate monthly payment made by the obligor on each mortgage remains constant
(aside from optional prepayments of principal), in the early years the larger
proportion of each payment will represent interest, while in later years, the
proportion representing interest will decline and the proportion representing
principal will increase, although, of course, the interest rate remains
constant. Moreover, by reason of optional prepayments, payments in the earlier
years on the mortgages in the pools may be substantially in excess of those
required by the amortization schedules of these mortgages; conversely, payments
in later years may be substantially less since the aggregate unpaid principal
balances of the underlying mortgages may have been greatly reduced--ultimately
even sufficiently reduced to accelerate termination of the Fund. To the extent
that those underlying mortgages, bearing the higher interest rates represented
in a Portfolio are prepaid faster than the other underlying mortgages, the net
annual interest rate per Unit and the return on the Units can be expected to
decline. Monthly payments to the Holder will reflect all of the foregoing
factors.
U.S. Treasury Series 7--Laddered Zero Coupons. The economic effect of
purchasing Units of the Fund is that the investor who holds his Units until
maturity of the underlying Debt Obligations should receive approximately the
offering yield not only on his original investment but on all earned discount
during the life of the Debt Obligations. The assumed or implicit automatic
reinvestment at market rates at the time of purchase of the portion of the yield
represented by earned discount differentiates this Fund from funds comprised of
customary securities on which current periodic interest is paid at market rates
at the time of issue. Accordingly, an investor in the Units, unlike an investor
in the fund comprised of customary securities, lessens his risk of being unable
to invest distributions at a rate as high as the yield on this Fund, but may
forgo the ability to reinvest fully at higher rates in the future.
Accrued Interest. In addition to the Public Offering Price, the price of a
Unit includes accrued interest on the Securities. Interest on the Debt
Obligations in the Fund is generally paid on a semi-annual (or less frequently,
annual) basis. In Monthly Payment U.S. Treasury Series, because interest on the
Securities is not received by the
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Fund at a constant rate throughout the year, Monthly Income Distributions may be
more or less than the interest actually received by the Fund. In order to
eliminate these fluctuations, the Trustee is required to advance the amounts
necessary to provide approximately equal Monthly Income Distributions. The
Trustee will be reimbursed, without interest, for these advances from interest
received on the Securities. In GNMA and Freddie Mac Series, the Trust
distributes the cash balance of the Income Account once a month. Therefore, to
account for these factors, accrued interest is always added to the value of the
Units and because of the varying interest payment dates of the Securities,
accrued interest at any time will be greater than the amount of interest
actually received by the Fund and distributed to Holders. If a Holder sells all
or a portion of his Units, he will receive his proportionate share of the
accrued interest from the purchaser of his Units. Similarly, if a Holder redeems
all or a portion of his Units, the Redemption Price per Unit will include
accrued interest on the Securities. If a Security is sold, redeemed or otherwise
disposed of, accrued interest will be received by the Fund and will be
distributed periodically to Holders.
TAXES
Section A. The following describes the tax consequences for GNMA Series
1-29, A-E, G, I, K, 1L, 1N, 1P, 1R, 1S, 1T, 1U and 1V: U.S. Treasury Series 11
and Freddie Mac Series 10 and 11.
TAXATION OF THE FUND
The Fund intends to qualify for and elect the special tax treatment
applicable to 'regulated investment companies' under Sections 851-855 of the
United States Internal Revenue Code of 1986, as amended (the 'Code').
Qualification and election as a 'regulated investment company' involve no
supervision of investment policy or management by any government agency. If the
Fund qualifies as a 'regulated investment company' and distributes to Holders
90% or more of its taxable income without regard to its net capital gain (net
capital gain is defined as the excess of net long-term capital gain over net
short-term capital loss), it will not be subject to Federal income tax on the
portion of its taxable income (including any net capital gain) distributed to
Holders in a timely manner. In addition, the Fund will not be subject to the 4%
excise tax on certain undistributed income of 'regulated investment companies'
to the extent it distributes to Holders in a timely manner at least 98% of its
taxable income (including any net capital gain). It is anticipated that the Fund
will not be subject to Federal income tax or the excise tax because the
Indenture requires the distribution of the Fund's taxable income (including any
net capital gain) in a timely manner. Although all or a portion of the Fund's
taxable income (including any net capital gain) for a taxable year may be
distributed shortly after the end of the calendar year, such a distribution will
be treated for Federal income tax purposes as having been received by Holders
during the calendar year.
DISTRIBUTIONS
Distributions to Holders of the Fund's interest income, gain that is
treated as ordinary income under the market discount rules and any net
short-term capital gain in any year will be taxable as ordinary income to
Holders to the extent of the Fund's taxable income (without regard to its net
capital gain) for that year. Any excess will be treated as a return of capital
and will reduce the Holder's basis in his Units and, to the extent that such
distributions exceed his basis, will be treated as a gain from the sale of his
Units as discussed below. It is anticipated that substantially all of the
distributions of the Fund's interest income, ordinary gain and any net
short-term capital gain will be taxable as ordinary income to Holders.
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Distributions that are taxable as ordinary income to Holders will
constitute dividends for Federal income tax purposes, but will not be eligible
for the dividends-received deduction for corporations. Distributions of the
Fund's net capital gain (designated as capital gain dividends by the Fund) will
be taxable to a Holder as long-term capital gain, regardless of the length of
time the Units have been held by a Holder. A Holder may recognize a taxable gain
or loss if the Holder sells or redeems his Units. Any gain or loss arising from
(or treated as arising from) the sale or redemption of Units will be capital
gain or loss except in the case of a dealer or a financial institution. Capital
gains are generally taxed at the same rate as ordinary income. However, the
excess of net long-term capital gains over net short-term capital losses may be
taxed at a lower rate than ordinary income for certain noncorporate taxpayers. A
capital gain or loss is long-term if the asset is held for more than one year
and short-term if held for one year or less. The deduction of capital losses is
subject to limitations.
Sales of Securities by the Fund (to meet redemptions or otherwise) may give
rise to gain (including market discount) to the Fund. The amount of gain will be
based upon the cost of the Security to the Fund and will be without regard to
the value of the Security when a particular Holder purchases his Units. Such
gain must be distributed to Holders to avoid Federal income (or excise) taxation
to the Fund. In the case of sales to meet redemptions, some or all of such gain
must be so distributed to nonredeeming Holders. Any such distribution will be
taxable to Holders as discussed above (i.e., as ordinary income or long-term
capital gain), even if as to a particular Holder the distribution economically
represents a return of capital. Since such distributions do not reduce a
Holder's tax basis in his Units, a Holder will have a corresponding capital loss
(or a reduced amount of gain) on a subsequent sale or redemption of his Units.
Holders will be taxed in the manner described above regardless of whether
distributions from the Fund are actually received by the Holder or are
automatically reinvested (see Administration of the Fund--Reinvestment).
The Federal tax status of each year's distributions will be reported to
Holders and to the Internal Revenue Service. The foregoing discussion relates
only to the Federal income tax status of the Fund and to the tax treatment of
distributions by the Fund to U.S. Holders. Holders who are not U.S. citizens or
residents should be aware that distributions from the Fund generally will be
subject to a withholding tax of 30%, or a lower treaty rate, and should consult
their own tax advisers as to whether an investment in the Fund is appropriate.
Distributions may also be subject to state and local taxation and Holders should
consult their own advisers in this regard.
Section B. The following describes the tax consequences for Monthly Payment
U.S. Treasury Series, GNMA Series F, H, J, L through 1K, 1M, 1O-NRA and 1Q-NRA,
Freddie Mac Series 1 through 9, U.S. Treasury Accumulation Series, U.S. Treasury
Accumulation Serial Payout Series and U.S. Treasury Series 7--Laddered Zero
Coupons.
The term 'Debt Obligation' will mean, where appropriate, Ginnie Mae,
Freddie Mac PC, Bond or Stripped Treasury Security and the term 'Fund' will
include Trust.
The following discussion addresses only the tax consequences of Units held
as capital assets and does not address the tax consequences of Units held by
dealers, financial institutions, or insurance companies.
In the opinion of Davis Polk & Wardwell, special counsel for the Sponsors,
under existing law:
The Fund is not an association taxable as a corporation for Federal income
tax purposes, and income received by the Fund will be treated as the income of
the Holders in the manner set forth below.
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Each Holder will be considered the owner of a pro rata portion of each Debt
Obligation in the Fund under the grantor trust rules of Sections 671-679 of the
Internal Revenue Code of 1986, as amended (the 'Code'). The total cost to a
Holder of his Units, including sales charges, is allocated among his pro rata
portion of each Security (in proportion to the fair market values thereof on the
date the Holder purchases his Units) in order to determine his tax cost for his
pro rata portion of each Security.
Each Holder will be considered to have received the interest on his pro
rata portion of each Debt Obligation when interest on the Debt Obligation is
received by the Fund. An individual Holder who itemizes deductions may deduct
his pro rata share of fees and expenses of the Fund only to the extent that such
amount together with the Holder's other miscellaneous deductions exceeds 2% of
his adjusted gross income.
The Fund may contain Debt Obligations which were originally issued at a
discount ('original issue discount'). The following principles will apply to
each Holder's pro rata portion of any Debt Obligation originally issued a
discount. In general, original issue discount is defined as the difference
between the price at which a debt obligation was issued and its stated
redemption price at maturity. Original issue discount on a debt obligation
issued on or after July 2, 1982 will accrue as interest over the life of the
debt obligation under a formula based on the compounding of interest. Original
issue discount on a debt obligation issued prior to July 2, 1982 will accrue as
interest over the life of the debt obligation on a straight-line basis. If a
Holder's tax cost for his pro rata portion of a Debt Obligation issued with
original issue discount is greater than its 'adjusted issue price' but less than
its stated redemption price at maturity (as may be adjusted for certain
payments), the Holder will be considered to have purchased his pro rata portion
of the Debt Obligation at an 'acquisition premium.' The amount of original issue
discount which must be accrued will be reduced by the amount of such acquisition
premium. Each Holder will be required to include in income in each year the
amount of original issue discount which accrues during the year on his pro rata
portion of any Debt Obligation originally issued at a discount. The amount of
accrued original issue discount so included in income in respect of a Holder's
pro rata portion of a Debt Obligation is added to the Holder's tax basis
therefor.
If a Holder's tax basis for his pro rata portion of a Debt Obligation
exceeds the redemption price at maturity thereof (subject to certain
adjustments), the Holder will be considered to have purchased his pro rata
portion of the Debt Obligation at a 'premium'. The Holder may elect to amortize
the premium prior to the maturity of the Debt Obligation. The amount amortized
in any year should be applied to offset the Holder's interest from the Debt
Obligation and will result in a reduction of basis for his pro rata portion of
the Debt Obligation.
A Holder will recognize taxable gain or loss when all or part of his pro
rata portion of a Debt Obligation is disposed of by the Fund for an amount
greater or less than his adjusted tax basis. Any such taxable gain or loss will
be capital gain or loss, except that any gain from the disposition of a Holder's
pro rata portion of a Debt Obligation acquired by the Holder at 'market
discount' (i.e., if the Holder's original cost for his pro rata portion of the
Debt Obligation (plus any original issue discount which will accrue thereon) is
less than its stated redemption price at maturity) will be treated as ordinary
income to the extent the gain does not exceed the accrued market discount.
Capital gains are generally taxed at the same rate as ordinary income. However,
the excess of net long-term capital gains over net short-term capital losses may
be taxed at a lower rate than ordinary income for certain noncorporate
taxpayers. A capital gain or loss is long-term if the asset is held for more
than one year and short-term if held for one year or less. The deduction of
capital losses is subject to limitations. A Holder will also be considered to
have disposed of all or part of his pro rata portion of each Debt Obligation
when he sells or redeems all or some of his Units.
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Under the income tax laws of the State and City of New York, the Fund is
not an association taxable as a corporation and income received by the Fund will
be treated as the income of the Holders in the same manner as for Federal income
tax purposes.
Notwithstanding the foregoing, a Holder who is a non-resident alien
individual or a foreign corporation (a 'Foreign Holder') will generally not be
subject to U.S. Federal income taxes, including withholding taxes, on the
interest income (including any original issue discount) on, or any gain from the
sale or other disposition of, his pro rata portion of any Debt Obligation
provided that (i) the interest income or gain is not effectively connected with
the conduct by the Foreign Holder of a trade or business within the United
States, (ii) if the interest is United States source income (which is the case
for most Debt Obligations issued by United States issuers), the Debt Obligation
is issued after July 18, 1984 and the Foreign Holder does not own, actually or
constructively, 10% or more of the total combined voting power of all classes of
voting stock of the issuer of the Debt Obligation and is not a controlled
foreign corporation related (within the meaning of Section 864 (d)(4) of the
Code) to the issuer of the Debt Obligation, (iii) with respect to any gain, the
Foreign Holder (if an individual) is not present in the United States for 183
days or more during the calendar year and (iv) the Foreign Holder provides the
required certification of his status and of certain other matters. Withholding
agents will file with the Internal Revenue Service foreign person information
returns with respect to such interest payments accompanied by such
certifications. Foreign Holders should consult their own tax advisers with
respect to United States Federal income tax consequences of ownership of Units.
For GNMA Series F, H, J, L through 1K, 1M, 10-NRA and 1Q-NRA, a Holder may
also recognize ordinary gain or loss as a result of principal payments received
on underlying mortgages issued by natural persons. In addition, any gain
recognized by a Holder on the disposition of his pro rata portion of a Ginnie
Mae will constitute ordinary income (which will be treated as interest income
for most purposes) to the extent it does not exceed the accrued market discount
on the Ginnie Mae attributable to underlying mortgages.
For Freddie Mac Series, the information statement relating to Freddie Mac
PCs indicates that the mortgages underlying the Freddie Mac PCs may be subject
to rules for obligations originally issued at a discount or to rules for
stripped bonds and coupons under Section 1286 of the Code. Holders are urged to
consult their tax advisers with respect to the application of these rules to an
investment in Units. A Holder may also recognize ordinary gain or loss as a
result of principal payments received on underlying mortgages issued by natural
persons.
For U.S. Treasury Accumulation Series, U.S. Treasury Accumulation Serial
Payout Series and U.S. Treasury Series 7--Laddered Zero Coupons, the Fund
consists primarily of Stripped Treasury Securities. A Holder is required to
treat its pro rata portion of each Stripped Treasury Security as a bond that was
originally issued on the date the Holder purchased its Units and at an original
issue discount equal to the excess of the Holder's pro rata portion of the
amount payable on such Stripped Treasury Security over the Stripped Treasury
Security's ratable share of the original bond's purchase price determined on the
basis of the respective fair market values of the stripped bond and the stripped
coupon. A Holder of a pro rata portion of a Stripped Treasury Security is
required to include in income annually a portion of such original issue discount
determined under a formula which takes into account the compounding of interest.
For Monthly Payment U.S. Treasury Series and U.S. Treasury Series
7--Laddered Zero Coupons, a distribution to a Holder of Securities upon
redemption of Units will not be a taxable event to the Holder or to nonredeeming
Holders. The redeeming Holder's basis for such Securities will be equal to his
basis for the Securities (previously represented by his Units) prior to the
redemption, and his holding period for the Securities
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will include the period during which he held his Units. However, the Holder may
recognize taxable gain or loss when the Holder sells the Securities so
distributed for cash.
* * *
In the case of GNMA Series W through 1K, 1M, 1O-NRA and 1Q-NRA, and Freddie
Mac Series 1 through 9, the Sponsors believe that the mortgages underlying the
Ginnie Maes and Freddie Mac PCs originated after July 18, 1984. In the case of
Monthly Payment U.S. Treasury Series (except Series 1) and U.S. Treasury Series
7-- Laddered Zero Coupons, the Sponsors believe that the U.S. Treasury
Securities, the interest on which is United States source income (which is the
case for most Securities issued by United States issuers) were issued after July
18, 1984. To the best knowledge of the Sponsors, interest on any Security issued
by a non-United States issuer is not subject to any foreign withholding taxes
under current law.
For Funds holding Stripped Treasury Securities, Holders should be aware
that, because of the above original issue discount rules, Holders will be
required for Federal income tax purposes to include amounts in ordinary gross
income in advance of the receipt of the cash attributable to such income.
Holders should also be aware that the inclusion of original issue discount in
gross income for Federal income tax purposes may differ from the accrual for
financial accounting purposes to the extent that generally accepted accounting
principles permit or require the inclusion of interest on the basis of a
compounding period other than a semi-annual period. Therefore, purchase of Units
may be appropriate only for Individual Retirement Accounts, Keogh Plans, pension
funds and other tax-deferred retirement plans or for investors who can have
taxable income attributed to them in advance of the receipt of the cash
attributable to such income and prior to the time that such income is earned.
Purchasers of Units should consult their own advisers as to the tax treatment of
original issue discount with respect to their particular circumstances,
including the application of state and local laws, in order to determine whether
an investment in the Fund would be appropriate for them.
For Monthly Payment U.S. Treasury Series and U.S. Treasury Series
7--Laddered Zero Coupons, the Sponsors believe that Holders who are individuals
will not be subject to any state or local personal income taxes on the interest
received by the Fund and distributed to them. However, Holders (including
individuals) may be subject to state and local taxes on any capital gains (or
market discount treated as ordinary income) derived from the Fund and to other
state and local taxes (including corporate income or franchise taxes, personal
property or intangibles taxes, and estate or inheritance taxes) on their Units
or the income derived therefrom. In addition, individual Holders (and any other
Holders which are not subject to state and local taxes on the interest income
derived from the Fund) will probably not be entitled to a deduction for state
and local tax purposes for their share of the fees and expenses paid by the
Fund, or any amortized premium on debt obligations or for any interest on
indebtedness incurred to purchase or carry their Units. Therefore, even though
the Sponsors believe that interest income from the Fund is exempt from state and
local personal income taxes in all states, Holders should consult their own tax
advisers with respect to state and local taxation. Holders will be taxed in the
manner described above regardless of whether distributions from the Fund are
actually received by the Holder or are automatically reinvested (see
Administration of the Fund--Reinvestment).
The foregoing discussion relates only to United States Federal and certain
aspects of New York State and City income taxes. Holders may be subject to
taxation in New York or in other jurisdictions (including a Foreign Holder's
country of residence) and should consult their own tax advisers in this regard.
* * *
21
<PAGE>
After the end of each calendar year, the Trustee will furnish to each
Holder an annual statement containing information relating to the interest
received by the Fund on the Debt Obligations, the gross proceeds received by the
Fund from the disposition of any Debt Obligation (resulting from redemption or
payment at maturity of any Debt Obligation or the sale by the Fund of any Debt
Obligation), and the fees and expenses paid by the Fund. The Trustee will also
furnish annual information returns to each Holder and to the Internal Revenue
Service. To enable Holders to comply with Federal and state tax reporting
requirements, the Trustee will, upon request, furnish Holders with evaluations
of Securities that have been furnished to it by the Evaluator (Section 4.02).
RETIREMENT PLANS
The Fund may be well suited for purchase by individual retirement accounts
(IRAs), Keogh plans, pension funds and other qualified retirement plans, certain
of which are briefly described below. Generally, capital gains and income
received in each of the foregoing plans are exempt from Federal taxation. All
distributions from these plans are generally treated as ordinary income but may,
in some cases, be eligible for special 5 or 10 year averaging or tax-deferred
rollover treatment. Holders of units in IRAs, Keogh plans and other tax-deferred
retirement plans should consult their plan custodian as to the appropriate
disposition of distributions. The check writing privilege offered in certain
Funds (see Redemption--Tender for Redemption by Check) generally will not be
appropriate for such plans. Investors considering participation in any of these
plans should review specific tax laws related thereto and should consult their
attorneys or tax advisers with respect to the establishment and maintenance of
any of these plans. These plans are offered by brokerage firms, including each
of the Sponsors, and other financial institutions. Fees and charges with respect
to these plans may vary.
Retirement Plans for the Self-Employed--Keogh Plans. Units of the Funds may
be purchased by retirement plans established pursuant to the Self-Employed
Individuals Tax Retirement Act of 1962 ('Keogh plans') for self-employed
individuals, partnerships or unincorporated companies. Qualified individuals may
generally make annual tax-deductible contributions up to the lesser of 20% of
annual compensation or $30,000 in a Keogh plan. The assets of the plan must be
held in a qualified trust or other arrangement which meets the requirements of
the Code. Generally there are penalties for premature distributions from a plan
before attainment of age 59 1/2, except in the case of a participant's death or
disability. Keogh plan participants may also establish separate IRAs (see below)
to which they may contribute up to an additional $2,000 per year ($2,250 if a
spousal account).
Individual Retirement Account--IRA. Any individual (including one covered
by an employer retirement plan) can establish an IRA or make use of a qualified
IRA arrangement set up by an employer or union for the purchase of Units of the
Funds. Any individual can make a contribution to an IRA equal to the lesser of
$2,000 ($2,250 in a spousal account or 100% of earned income; such investment
must be made in cash. However, the deductible amount an individual may
contribute will be reduced if the individual's adjusted gross income exceeds
$25,000 (in the case of a single individual), $40,000 (in the case of married
individuals filing a joint return) or $200 (in the case of a married individual
filing a separate return). A married individual filing a separate return will
not be entitled to any deduction if the individual is covered by an
employer-maintained retirement plan without regard to whether the individual's
spouse is an active participant in an employer retirement plan. Unless
nondeductible contributions were made in 1987 or a later year, all distributions
from an IRA will be treated as ordinary income but generally will be eligible
for tax-deferred rollover treatment. It should be noted that certain
transactions which are prohibited under Section 408 of the Code will cause all
or a portion of the amount in an IRA to be deemed to be distributed and subject
to tax at the time. A participant's entire interest in an IRA must be, or
commence to be, distributed to the participant not later than the end of April 1
following the taxable year
22
<PAGE>
during which the participant attains age 70 1/2. Taxable distributions made
before attainment of age 59 1/2, except in the case of the participant's death
or disability or where the amount distributed is part of a series of
substantially equal periodic (at least annual) payments that are to be made over
the life expectancies of the participant and his or her beneficiary, are
generally subject to a surtax in an amount equal to 10% of the distribution.
Corporate Pension and Profit-Sharing Plan. A pension or profit-sharing plan
established for employees of a corporation may purchase Units of the Funds.
PUBLIC SALE OF UNITS
PUBLIC OFFERING PRICE
The Public Offering Price of Units is computed by adding to the aggregate
offering side or bid side evaluation of the Securities (as determined by the
Evaluator), divided by the number of Units outstanding, the sales charge at the
applicable percentage of the evaluation per Unit (the net amount invested).
Generally, the offering side evaluation is the basis for pricing in the primary
market and the bid side evaluation is the basis for pricing in the secondary
market. Certain Funds, as identified in Part A, may still be in the primary
market. A proportionate share of any cash held by the Fund in the Capital
Account not allocated to the purchase of specific Securities and net accrued and
undistributed interest on the Securities to the date of delivery of the Units to
the purchaser is added to the Public Offering Price. The Public Offering Price
of the Units will vary from day to day in accordance with fluctuations in the
evaluations of the underlying Securities.
The following tables set forth the applicable percentage of sales charge
and the concession to dealers for the Funds specified. These amounts may be
reduced on a graduated scale for quantity purchases and will be applied on
whichever basis is more favorable to the purchaser. To qualify for a reduced
sales charge and concession
23
<PAGE>
applicable to quantity purchases, the dealer must confirm that the sale is to a
single purchaser as defined below or is purchased for its own account and not
for distribution. Sales charges and dealer concessions are as follows:
PRIMARY MARKET SALES
U.S. TREASURY SERIES 7--LADDERED ZERO COUPONS
Purchasers of Units of two or more Trusts will pay the sales charge on
Units of each Trust at the rate applicable to the total dollar amount invested
in this Series.
<TABLE>
<CAPTION>
SALES CHARGE
(GROSS UNDERWRITING
PROFIT)
-------------------------- DEALER
AS PERCENT OF CONCESSION
OFFER SIDE AS PERCENT AS PERCENT
PUBLIC OF NET OF PUBLIC
DOLLAR AMOUNT INVESTED OFFERING AMOUNT OFFERING
(IN THOUSANDS) PRICE INVESTED PRICE
--------------------------------------------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Assurance Trust 1995(A) Less than $250..................................... 2.50% 2.564% 1.625%
$250-499........................................... 2.00 2.041 1.300
$500-749........................................... 1.50 1.523 0.975
$750-999........................................... 1.25 1.266 0.813
$1,000 or more..................................... 1.00 1.010 0.650
Assurance Trust 2000(B) Less than $250..................................... 3.00 3.093 1.950
$250-499........................................... 2.50 2.564 1.625
$500-749........................................... 2.00 2.041 1.300
$750-999........................................... 1.50 1.523 0.975
$1,000 or more..................................... 1.25 1.266 0.813
Assurance Trust 2005(C) Less than $250..................................... 4.00 4.167 2.600
$250-499........................................... 3.00 3.093 1.950
$500-749........................................... 2.50 2.564 1.625
$750-999........................................... 2.00 2.041 1.300
$1,000 or more..................................... 1.50 1.523 0.975
CONCESSIONS
TO
INTRODUCING
DEALERS
-----------
Assurance Trust 1995(A) $ 18.00
14.40
10.80
9.00
7.20
Assurance Trust 2000(B) 21.60
18.00
14.40
10.80
9.00
Assurance Trust 2005(C) 28.80
21.60
18.00
14.40
10.80
</TABLE>
24
<PAGE>
MONTHLY PAYMENT U.S. TREASURY SERIES 14
<TABLE>
<CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT)
---------------------------------- DEALER CONCESSIONS
AS PERCENT OF AS PERCENT OF CONCESSION AS TO
OFFER SIDE PUBLIC NET AMOUNT PERCENT OF INTRODUCING
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE DEALERS
- ------------------------------------------------------------- ------------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Less than 1,000,000.......................................... 1.25% 1.523% 0.975% $9.00
1,000,000 or more............................................ 1.00 1.010 0.650 7.20
</TABLE>
MONTHLY PAYMENT U.S. TREASURY SERIES 15
<TABLE>
<CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
CONCESSION AS
PERCENT OF
---------------------------------- PUBLIC OFFERING
AS PERCENT OF OFFER AS PERCENT OF PRICE CONCESSION TO
SIDE PUBLIC NET AMOUNT --------------- INTRODUCING
NUMBER OF UNITS OFFERING PRICE INVESTED DEALERS
- ------------------------------------------------------------- ------------------- ------------- -------------
<S> <C> <C> <C> <C>
Less than 500,000............................................ 2.00% 2.041% 1.300% $ 14.40
500,000-999,999.............................................. 1.50 1.523 0.975 10.80
1,000,000 or more............................................ 1.00 1.010 0.650 7.20
</TABLE>
GNMA SERIES 1V
<TABLE>
<CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
CONCESSION AS
PERCENT OF
---------------------------------- PUBLIC OFFERING
AS PERCENT OF OFFER AS PERCENT OF PRICE CONCESSION TO
SIDE PUBLIC NET AMOUNT --------------- INTRODUCING
NUMBER OF UNITS OFFERING PRICE INVESTED DEALERS
- ------------------------------------------------------------- ------------------- ------------- -------------
<S> <C> <C> <C> <C>
Less than 100,000............................................ 4.00% 4.167% 2.600% $ 28.80
100,000-499,000.............................................. 3.00 3.093 1.950 21.60
500,000-749,999.............................................. 2.50 2.564 1.625 18.00
750,000-999,999.............................................. 2.00 2.041 1.300 14.40
1,000,000 or more............................................ 1.50 1.523 0.975 10.80
</TABLE>
FREDDIE MAC SERIES 11
<TABLE>
<CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
CONCESSION AS
PERCENT OF
---------------------------------- PUBLIC OFFERING
AS PERCENT OF OFFER AS PERCENT OF PRICE CONCESSION TO
SIDE PUBLIC NET AMOUNT --------------- INTRODUCING
NUMBER OF UNITS OFFERING PRICE INVESTED DEALERS
- ------------------------------------------------------------- ------------------- ------------- -------------
<S> <C> <C> <C> <C>
Less than 100,000............................................ 3.25% 3.359% 2.113% $ 23.40
100,000-499,999.............................................. 2.75 2.828 1.788 19.80
500,000-749,999.............................................. 2.00 2.041 1.300 14.40
750,000-999,999.............................................. 1.25 1.266 0.813 9.00
1,000,000 or more............................................ 1.00 1.010 0.650 7.20
</TABLE>
25
<PAGE>
SECONDARY MARKET SALES
GNMA SERIES 1 THROUGH D
<TABLE>
<CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT)
----------------------------------
AS PERCENT OF AS PERCENT OF DEALER CONCESSION AS
BID SIDE PUBLIC NET AMOUNT PERCENT OF PUBLIC
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE
- -------------------------------------------------------------------- ----------------- --------------- -----------------------
<S> <C> <C> <C>
Less than 250....................................................... 4.25% 4.439% 2.763%
250-499............................................................. 3.25 3.359 2.113
500-749............................................................. 2.50 2.564 1.625
750-999............................................................. 2.00 2.041 1.300
1,000 or more....................................................... 1.50 1.523 0.975
</TABLE>
GNMA SERIES E AND SUBSEQUENT SERIES
<TABLE>
<CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
CONCESSION AS
PERCENT OF
------------------------------------ PUBLIC OFFERING
AS PERCENT OF BID AS PERCENT OF PRICE
SIDE PUBLIC NET AMOUNT ---------------
NUMBER OF UNITS OFFERING PRICE INVESTED
- -------------------------------------------------------------------------- ------------------- ---------------
<S> <C> <C> <C>
Less than 250,000......................................................... 4.25% 4.439% 2.763%
250,000-499,999........................................................... 3.25 3.359 2.113
500,000-749,999........................................................... 2.50 2.564 1.625
750,000-999,999........................................................... 2.00 2.041 1.300
1,000,000 or more......................................................... 1.50 1.523 0.975
</TABLE>
FREDDIE MAC SERIES 1 THROUGH 9
<TABLE>
<CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
CONCESSION AS
PERCENT OF
------------------------------------ PUBLIC OFFERING
AS PERCENT OF BID AS PERCENT OF PRICE
SIDE PUBLIC NET AMOUNT ---------------
NUMBER OF UNITS OFFERING PRICE INVESTED
- -------------------------------------------------------------------------- ------------------- ---------------
<S> <C> <C> <C>
Less than 250,000......................................................... 3.50% 3.627% 2.275%
250,000-499,999........................................................... 2.75 2.828 1.788
500,000-749,999........................................................... 2.00 2.041 1.300
750,000-999,999........................................................... 1.50 1.523 0.975
1,000,000 or more......................................................... 1.00 1.010 0.650
</TABLE>
26
<PAGE>
FREDDIE MAC SERIES 10 AND 11
<TABLE>
<CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
CONCESSION AS
PERCENT OF
------------------------------------ PUBLIC OFFERING
AS PERCENT OF BID AS PERCENT OF PRICE
SIDE PUBLIC NET AMOUNT ---------------
NUMBER OF UNITS OFFERING PRICE INVESTED
- -------------------------------------------------------------------------- ------------------- ---------------
<S> <C> <C> <C>
Less than 100,000......................................................... 3.50% 3.627% 2.275%
100,000-499,999........................................................... 3.00 3.093 1.950
500,000-749,999........................................................... 2.25 2.302 1.463
750,000-999,999........................................................... 1.50 1.523 0.975
1,000,000 or more......................................................... 1.25 1.266 0.813
</TABLE>
<TABLE>
<CAPTION>
U.S. TREASURY ACCUMULATION SERIES A AND U.S. TREASURY ACCUMULATION SERIAL PAYOUT SERIES 1
(LONG TERM TRUST)
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
CONCESSION AS
PERCENT OF
------------------------------------ PUBLIC OFFERING
AS PERCENT OF BID AS PERCENT OF PRICE
SIDE PUBLIC NET AMOUNT ---------------
NUMBER OF UNITS OFFERING PRICE INVESTED
- -------------------------------------------------------------------------- ------------------- ---------------
<S> <C> <C> <C>
Less than 250,000......................................................... 4.50% 4.712% 2.925%
250,000-499,999........................................................... 3.25 3.359 2.113
500,000-749,999........................................................... 2.50 2.564 1.625
750,000-999,999........................................................... 2.00 2.041 1.300
1,000,000 or more......................................................... 1.50 1.523 0.975
MONTHLY PAYMENT U.S. TREASURY SERIES 1, 2, 3 AND 4
</TABLE>
<TABLE>
<CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
CONCESSION AS
PERCENT OF
------------------------------------ PUBLIC OFFERING
AS PERCENT OF BID AS PERCENT OF PRICE
SIDE PUBLIC NET AMOUNT ---------------
NUMBER OF UNITS OFFERING PRICE INVESTED
- -------------------------------------------------------------------------- ------------------- ---------------
<S> <C> <C> <C>
Less than 250,000......................................................... 2.50% 2.564% 1.625%
250,000-499,999........................................................... 2.00 2.041 1.300
500,000-749,999........................................................... 1.50 1.523 0.975
750,000-999,999........................................................... 1.25 1.266 0.813
1,000,000 or more......................................................... 1.00 1.010 0.650
</TABLE>
27
<PAGE>
MONTHLY PAYMENT U.S. TREASURY SERIES 5
<TABLE>
<CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
CONCESSION AS
PERCENT OF
------------------------------------ PUBLIC OFFERING
AS PERCENT OF BID AS PERCENT OF PRICE
SIDE PUBLIC NET AMOUNT ---------------
NUMBER OF UNITS OFFERING PRICE INVESTED
- -------------------------------------------------------------------------- ------------------- ---------------
<S> <C> <C> <C>
Less than 250,000......................................................... 2.75% 2.828% 1.788%
250,000-499,999........................................................... 2.25 2.302 1.463
500,000-749,999........................................................... 1.50 1.523 0.975
750,000-999,999........................................................... 1.25 1.266 0.813
1,000,000 or more......................................................... 1.00 1.010 0.650
</TABLE>
<TABLE>
<CAPTION>
MONTHLY PAYMENT U.S. TREASURY SERIES 6
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
CONCESSION AS
PERCENT OF
------------------------------------ PUBLIC OFFERING
AS PERCENT OF BID AS PERCENT OF PRICE
SIDE PUBLIC NET AMOUNT ---------------
NUMBER OF UNITS OFFERING PRICE INVESTED
- -------------------------------------------------------------------------- ------------------- ---------------
<S> <C> <C> <C>
Less than 1,000,000....................................................... 1.00% 1.010% 0.650%
1,000,000 or more......................................................... 0.50 0.503 0.325
</TABLE>
MONTHLY PAYMENT U.S. TREASURY SERIES 10
<TABLE>
<CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
CONCESSION AS
PERCENT OF
------------------------------------ PUBLIC OFFERING
AS PERCENT OF BID AS PERCENT OF PRICE
SIDE PUBLIC NET AMOUNT ---------------
NUMBER OF UNITS OFFERING PRICE INVESTED
- -------------------------------------------------------------------------- ------------------- ---------------
<S> <C> <C> <C>
Less than 500,000......................................................... 2.25% 2.302% 1.463%
500,000-999,999........................................................... 1.75 1.781 1.138
1,000,000 or more......................................................... 1.25 1.266 0.813
</TABLE>
MONTHLY PAYMENT U.S. TREASURY SERIES 8, 12, 13 AND 14
<TABLE>
<CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
CONCESSION AS
PERCENT OF
------------------------------------ PUBLIC OFFERING
AS PERCENT OF BID AS PERCENT OF PRICE
SIDE PUBLIC NET AMOUNT ---------------
NUMBER OF UNITS OFFERING PRICE INVESTED
- -------------------------------------------------------------------------- ------------------- ---------------
<S> <C> <C> <C>
Less than 1,000,000....................................................... 1.50% 1.523% 0.975%
1,000,000 or more......................................................... 1.25 1.266 0.813
</TABLE>
U.S. TREASURY SERIES 11
There is no sales charge for Units of this Fund, but Units are subject to a
Sponsors' administrative fee at the annual rates set forth under Investment
Summary in Part A.
28
<PAGE>
<TABLE>
<CAPTION>
MONTHLY PAYMENT U.S. TREASURY SERIES 15
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
CONCESSION AS
PERCENT OF
------------------------------------ PUBLIC OFFERING
AS PERCENT OF BID AS PERCENT OF PRICE
SIDE PUBLIC NET AMOUNT ---------------
NUMBER OF UNITS OFFERING PRICE INVESTED
- -------------------------------------------------------------------------- ------------------- ---------------
<S> <C> <C> <C>
Less than 500,000......................................................... 2.25% 2.302% 1.463%
500,000-999,999........................................................... 1.75 1.781 1.138
1,000,000 or more......................................................... 1.25 1.266 0.813
</TABLE>
U.S. TREASURY SERIES 7--LADDERED ZERO COUPONS
Sales charges in the secondary market are the same as in the primary market
(see above) but are based on the bid side evaluation of the Securities instead
of the offer side.
U.S. TREASURY ACCUMULATION SERIAL PAYOUT SERIES 1 (INTERMEDIATE-TERM TRUST)
The secondary market sales charge is 2.75% (2.828% of the net amount
invested), based on the bid side evaluation of the underlying Securities.
The above graduated sales charges will apply on all purchases on any one
day by the same purchaser of Units only in the amounts stated. Concurrent
purchases in the secondary market of one or more Series sponsored by the
Sponsors which have the same rates of sales charge will be aggregated. Units
held in the name of the spouse of the purchaser or in the name of a child of the
purchaser under 21 years of age are deemed to be registered in the name of the
purchaser. The graduated sales charges are also applicable to a trustee or other
fiduciary purchasing securities for a single trust estate or single fiduciary
account.
Employees of certain of the Sponsors and their affiliates may purchase
Units of the Fund at prices based on a reduced sales charge of not less than
$5.00 per Unit (or per 1,000 Units).
Evaluations of the Securities are determined by the Evaluator, taking into
account the same factors referred to under Redemption--Computation of Redemption
Price per Unit. The determination is made each business day as of the Evaluation
Time set forth under Investment Summary in Part A (the 'Evaluation Time'),
effective for all sales made since the last of these evaluations. The
determination for Put Series is made on the last business day of each week,
effective for all sales during the following week. (Section 4.01). The term
'business day', as used herein and under 'Redemption', shall exclude Saturdays,
Sundays and the following holidays as observed by the New York Stock Exchange:
New Year's Day, Washington's Birthday, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving, Christmas, Columbus Day, Veteran's Day and Martin
Luther King's birthday.
For GNMA and Freddie Mac Series, there is a period of a few days, beginning
on the first day of each month, during which the total amount of payments
(including prepayments, if any) of principal for the preceding month on the
various mortgages underlying each of the Securities in the Portfolios of these
Funds will not yet have been reported by the issuer and made generally available
to the public. During this period, the precise principal amount of the
underlying mortgages remaining outstanding for each Security in the Portfolio,
and therefore the precise principal amount of the Security to be acquired by the
Trustee as a holder of these Securities and distributed to Holders with the next
monthly distribution, will not be known. The Sponsors do not expect that the
amounts of
29
<PAGE>
these prepayments and the differences in principal amounts from month to month
will be material in relation to these Funds due to the number of mortgages
underlying each Security and the number of these Securities in the Fund.
However, there can be no assurance that they will not be material. For purposes
of the determination by the Evaluator and for purposes of calculations of
accrued interest on the Units, during the period in each month prior to the time
when the precise amounts of principal of the Securities for the month become
publicly available, the Evaluator will base its evaluations and calculations,
which are the basis for calculations of the Public Offering Price, the Sponsors'
Repurchase Price and the Redemption Price per Unit, upon the principal amount
outstanding for the preceding month (see Redemption). Nevertheless, the Sponsors
will adopt procedures as to pricing and evaluation for Units of these Funds
designed to minimize the impact of these differences upon the calculation of the
Public Offering Price per Unit, the Repurchase Price per Unit or the Redemption
Price per Unit, with such modifications, if any, deemed necessary by the
Sponsors for the protection of the Holders, upon notice to the Holders.
COMPARISON OF PUBLIC OFFERING PRICE, SPONSORS' REPURCHASE PRICE AND REDEMPTION
PRICE
On the Evaluation Date the Public Offering Price per Unit (which includes
the sales charge) exceeded the Sponsors' Repurchase Price per Unit and the
Redemption Price per Unit (each generally based on the bid side evaluation of
the Securities in the Fund--see Redemption) by the amount set forth under
Investment Summary in Part A. For various reasons (including fluctuations in the
market prices of the Securities and the fact that the Public Offering Price
includes the sales charge), the amount realized by a Holder upon any sale or
redemption of Units may be less than the price paid by him for the Units.
PUBLIC DISTRIBUTION
The Sponsors intend to continue to qualify Units in certain states in the
U.S. in which qualification is deemed necessary for sale by the Sponsors and by
dealers who are members of the National Association of Securities Dealers, Inc.
The Sponsors do not intend to qualify Units for sale in any foreign countries,
and this Prospectus does not constitute an offer to sell Units in any state or
country where Units cannot lawfully be sold. Sales to dealers are currently made
at prices which represent a concession of the applicable rate specified above,
but Merrill Lynch, Pierce, Fenner & Smith Incorporated, as agent for the
Sponsors ('Agent for the Sponsors') reserves the right to change the amount of
the concession to dealers from time to time. Any dealer may reallow a concession
not in excess of the concession to dealers.
UNDERWRITERS' AND SPONSORS' PROFITS
In maintaining a market for Units (see Market for Units) the Sponsors will
realize profits or sustain losses in the amount of any difference between the
prices at which they buy Units and the prices at which they resell these Units
(which include the sales charge) or the prices at which they redeem these Units,
as the case may be. In addition, on each subsequent deposit of Securities in
connection with the sale of additional Units to the public, the Sponsors may
realize a profit or loss. To the extent that additional Units of the Fund
continue to be offered for sale the Underwriting Account may also realize
profits or losses as a result of fluctuations in the public offering price of
Units. Cash, if any, made available by buyers of Units to the Sponsors prior to
the settlement date for the purchase of Units may be used in the Sponsors'
businesses subject to the limitations of Rule 15c3-3 under the Securities
Exchange Act of 1934 and may be of benefit to the Sponsors.
30
<PAGE>
MARKET FOR UNITS
While the Sponsors are not obligated to do so, it is their intention to
maintain a secondary market for Units of this Series and continuously to offer
to purchase Units of this Series at prices, subject to change at any time, which
will be computed based on the bid side of the market, taking into account the
same factors referred to in determining the bid side evaluation of Securities
for purposes of redemption (see Redemption). The Sponsors may discontinue
purchases of these Units at prices based on the bid side evaluation of the
Securities should the supply of Units exceed demand or for other business
reasons. In this event the Sponsors may nonetheless under certain circumstances
purchase Units, as a service to Holders, at prices based on current redemption
prices for those Units (see Redemption). The Sponsors, of course, do not in any
way guarantee the enforceability, marketability or price of any Securities in
the Portfolio or of the Units. Prospectuses relating to certain other unit
trusts indicate an intention, subject to change on the part of the respective
sponsors of such trusts, to purchase units of those trusts on the basis of a
price higher than the bid prices of the bonds in the trusts. Consequently,
depending upon the prices actually paid, the repurchase price of other sponsors
for units of their trusts may be computed on a somewhat more favorable basis
than the repurchase price offered by the Sponsors for Units of this Series in
secondary market transactions. As in this Series, the purchase price per unit of
such unit trusts will depend primarily on the value of the bonds in the
portfolio of the trust.
The Sponsors may redeem any Units they have purchased in the secondary
market or through the Trustee in accordance with the procedures described below
if they determine it is undesirable to continue to hold these Units in their
inventories. Factors which the Sponsors will consider in making this
determination will include the number of units of all series of all funds which
they hold in their inventories, the saleability of the units and their estimate
of the time required to sell the units and general market conditions. For a
description of certain consequences of any redemption for remaining Holders, see
Redemption.
A Holder who wishes to dispose of his Units should inquire of his bank or
broker as to current market prices in order to determine if there exist
over-the-counter prices in excess of the repurchase price.
REDEMPTION (SERIES OTHER THAN MONTHLY PAYMENT U.S. TREASURY SERIES)
While it is anticipated that Units in most cases can be sold in the
over-the-counter market for an amount equal to the Redemption Price per Unit
(see Market for Units), Units may be redeemed at the office of the Trustee upon
tender on any business day, as defined under Public Sale of Units--Public
Offering Price, of Certificates or, in the case of uncertificated Units,
delivery of a request for redemption, and payment of any relevant tax, without
any other fee (Section 5.02). Certificates to be redeemed must be properly
endorsed or accompanied by a written instrument or instruments of transfer.
Holders must sign exactly as their names appear on the face of the Certificate
with the signatures guaranteed by an eligible guarantor institution, or in some
other manner acceptable to the Trustee. In certain instances the Trustee may
require additional documents including, but not limited to, trust instruments,
certificates of death, appointments as executor or administrator or certificates
of corporate authority.
On the seventh calendar day following the tender (or if the seventh
calendar day is not a business day on the first business day prior thereto), the
Holder will be entitled to receive the proceeds of the redemption in an amount
per Unit equal to the Redemption Price per Unit (see below) as determined as of
the Evaluation Time next following the tender. At the option of qualified
Holders of Treasury 'Zero' Series 5 as specified in writing to the Trustee,
redemption of Units of that Fund may be received in kind (see Redemption in Kind
below). So long
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as the Sponsors are maintaining a market at prices not less than the Redemption
Price per Unit, the Sponsors will repurchase any Units tendered for redemption
no later than the close of business on the second business day following the
tender (see Market for Units). The Trustee is authorized in its discretion, if
the Sponsors do not elect to repurchase any Units tendered for redemption or if
a Sponsor tenders Units for redemption, to sell the Units in the
over-the-counter market at prices which will return to the Holder a net amount
in cash equal to or in excess of the Redemption Price per Unit for the Units
(Section 5.02).
The Trustee is empowered to sell Securities in order to make funds
available for redemption (Section 5.02) if funds are not otherwise available in
the Capital and Income Accounts (see Administration of the Fund-- Accounts and
Distributions). The Securities to be sold will be selected from a list supplied
by the Sponsors. Securities will be chosen for this list by the Sponsors on the
basis of those market and credit factors as they may determine are in the best
interests of the Fund. Provision is made under the Indenture for the Sponsors to
specify minimum face amounts in which blocks of Securities are to be sold in
order to obtain the best price for the Fund. While these minimum amounts may
vary from time to time in accordance with market conditions, the Sponsors
believe that the minimum face amounts which would be specified would range from
$25,000 to $100,000.
To the extent that Securities are sold, the size and diversity of the Fund
will be reduced. The check writing feature described below may increase the rate
of redemption and therefore the rate at which the size of Series on which it is
offered decrease. Sales will usually be required at a time when Securities would
not otherwise be sold and may result in lower prices than might otherwise be
realized. The price received upon redemption may be more or less than the amount
paid by the Holder depending on the value of the Securities in the Portfolio at
the time of redemption. In addition, because of the minimum face amounts in
which Securities are required to be sold, the proceeds of sale may exceed the
amount required at the time to redeem Units; these excess proceeds will be
distributed to Holders (see Administration of the Fund--Portfolio Supervision).
REDEMPTION IN KIND (MONTHLY PAYMENT U.S. TREASURY SERIES AND U.S. TREASURY
SERIES 7--LADDERED ZERO COUPONS)
Except as provided below, and in order to avoid recognition of capital gain
or loss for non-redeeming Holders, the Trustee will effect all redemptions in
kind, except that the portion of the Redemption Price representing accrued
interest on the Bonds and the Holder's pro rata portion of the cash balance in
the Fund will be paid in cash and except that a U.S. Treasury Series 7--Laddered
Zero Coupons Holder will be entitled to receive securities in kind only if that
Holder is entitled to receive at least $100,000 in face amount of each Stripped
Treasury Security in the Portfolio as part of his distribution; in any other
case, the Trustee will deliver tendered Units for sale to the Sponsors at the
equivalent of the Redemption Price per Unit and then pay the net proceeds of any
such sale to the Holder on the day the Holder would otherwise be entitled to
receive the redemption distribution.
On the seventh calendar day following the tender (or if the seventh
calendar day is not a business day, on the first business day prior thereto),
the Holder will be entitled to receive in kind an amount and value of Securities
per Unit equal to the Redemption Price per Unit as determined as of the
Evaluation Time next following the tender, except that if the Sponsor is
maintaining a secondary market for Units at a price which will return to the
Holder an amount in cash, net after deducting any commissions or expenses, equal
to or in excess of the Redemption Price per Unit, the Trustee will deliver
tendered Units for sale to the Sponsor. The Trustee will then pay the net
proceeds of any such sale to the Holder on the day the Holder would otherwise be
entitled to receive
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the redemption distribution. In an in kind redemption the Holder will receive
his pro rata portion of the principal amount of the Portfolio and of the net
cash in the Fund (Section 5.02).
Distribution in kind on redemption of Units shall be held by the Trustee as
Distribution Agent, for the account, and for disposition in accordance with the
instructions of, the tendering Holder, as follows:
(a) If the tendering Holder requests cash payment, the Distribution Agent
shall sell the Securities distributed as of the close of business on the date of
tender and remit to the Holder not later than seven calendar days thereafter the
net proceeds of sale after deducting brokerage commissions and transfer taxes,
if any, on the sale.
(b) If the tendering Holder requests distribution in kind, the Distribution
Agent shall sell any portion of the Securities distributed represented by
fractional interests in accordance with the foregoing and distribute net cash
proceeds to the tendering Holder together with certificates representing whole
Securities received on the in kind distribution.
In order to prevent the Fund from receiving cash on the disposition of less
than a whole Security, the Sponsor will, even if it is not maintaining a market
for Units at prices based on the offering side evaluation thereof, purchase any
Units tendered at the cash equivalent of the Redemption Price per Unit and
tender those Units for redemption only when a whole Security can be received in
exchange therefor.
Any amounts paid on redemption representing income received will be
withdrawn from the Income Account (see Administration of the Fund--Accounts and
Distributions) to the extent funds are available. In implementing these
redemption procedures, the Trustee and Distribution Agent shall make any
adjustments necessary to reflect differences between the Redemption Price of the
Units and the value of the Securities distributed in kind as of the date of
tender.
To the extent that securities are redeemed in kind, the size of the Fund
will be reduced but each remaining Unit will continue to represent the identical
principal amount of Bonds with specified interest rates, maturities and call
provisions, if any. The value of Securities received upon redemption and the
proceeds received by the Distribution Agent for the account of the redeeming
Holder may be more or less than the amount paid by the Holder depending on the
value of the Securities in the Fund at the time of redemption.
ALL SERIES
The right of redemption may be suspended and payment postponed (1) for any
period during which the New York Stock Exchange, Inc. is closed other than for
customary weekend and holiday closings, or (2) for any period during which, as
determined by the SEC, (i) trading on that Exchange is restricted or (ii) an
emergency exists as a result of which disposal or evaluation of the Securities
is not reasonably practicable, or (3) for any other periods which the SEC may by
order permit (Section 5.02).
TENDER FOR REDEMPTION BY CHECK (AVAILABLE ONLY ON GNMA SERIES K THROUGH 1K,
FREDDIE MAC SERIES 1 THROUGH 9 AND MONTHLY PAYMENT U.S. TREASURY SERIES 1-5)
Holders of these Funds who have submitted a properly completed application
form and who have elected, by surrendering any Certificates with this
application, to hold their Units in uncertificated form are entitled to receive
upon request without charge checks which will be drawn upon a special account of
the Fund with the bank specified in Part A (the 'Bank'). This election, however,
does not create a checking or other bank account relationship between the Holder
and the Bank. Checks may be made payable to the order of any person in
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amounts of $500 or more. When a check is presented to the Bank for payment, this
presentment shall be treated as a tender for redemption of a sufficient number
of Units to cover the amount of the check. So long as the Sponsors are
maintaining a market at prices in excess of the Redemption Price per Unit, the
Sponsors will repurchase any of the Units that are tendered at a price computed
as set forth under Market for Units. If the Sponsors are no longer maintaining
such a market, Units tendered for redemption by check will be redeemed at their
Redemption Price per Unit, based on the lower bid side evaluation of the
Securities. Units may not be tendered by check within 15 days following their
date of purchase.
Expenses incurred as a result of the checking service will be borne by the
Fund. Holders wishing to use this checking service may obtain an application
form by completing and mailing the card attached to the Prospectus. Upon receipt
from a Holder of a properly completed application together with all of such
Holder's Certificates, the Bank will issue a supply of checks to that Holder.
Each check sent to a Holder will have that Holder's name and account number in
the Fund impressed thereon. Checks drawn on a jointly owned account may, at the
option of the joint owners, require only one signature. The Fund's check writing
privilege generally will not be appropriate for retirement plans that may invest
in the Fund (see Description of the Fund--Retirement Plans). Holders who choose
to utilize the Fund's check writing service are subject to the procedures, rules
and regulations of the Bank governing checking accounts and redemptions by
draft.
The Bank will not honor checks which are in amounts exceeding the value of
the Holder's Units at the time the check is presented to the Bank for payment.
If insufficient Units are in the account, the check will be returned marked
'insufficient funds'. Since the dollar value of the Units may change daily, the
total value of the account may not be determined in advance and, accordingly,
the account may not be entirely redeemed by check. For the same reason, Holders
should be aware that even checks written for amounts less than the present value
of a Holder's account may be dishonored if the value of the Units in the account
declines between the time when the check was written and the time when it was
presented for payment. The Bank will not honor checks personally presented for
payment at any office of the Bank. This checking service may be terminated or
modified at any time by the Bank upon prior notice to the Holders.
COMPUTATION OF REDEMPTION PRICE PER UNIT
Redemption Price per Unit is computed by the Trustee, as of the Evaluation
Time, on each June 30 and December 31 (or the last business day prior thereto),
on any business day as of the Evaluation Time next following the tender of any
Unit for redemption, and on any other business day desired by the Trustee or the
Sponsors, by adding (a) the aggregate bid side evaluation of the Securities, (b)
cash on hand in the Fund (other than cash covering contracts to purchase
Securities), (c) accrued and unpaid interest on the Securities up to but not
including the date of redemption and (d) all other assets of the Fund; deducting
therefrom the sum of (x) taxes or other governmental charges against the Fund
not previously deducted, (y) accrued fees and expenses of the Trustee (including
legal and auditing expenses), the Evaluator and counsel, and certain other
expenses and (z) cash held for distribution to Holders of record as of a date
prior to the evaluation; and dividing the result by the number of Units
outstanding as of the date of computation (Section 4.01 and 5.01).
The aggregate current bid or offering side evaluation of the Securities is
determined by the Evaluator in the following manner: (a) on the basis of current
bid or offering prices for the Securities, (b) if bid or offering prices are not
available for any Securities, on the basis of current bid or offering prices for
comparable securities, (c) by determining the value of the Securities on the bid
or offering side of the market by appraisal, or (d) by any
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combination thereof. The Evaluator may obtain current price information as to
the Securities from investment dealers or brokers (including the Sponsors) which
customarily deal in this type of security.
While Securities of the type included in the Portfolio involve minimal risk
of loss of principal, due to variations in interest rates the market value of
these Securities, and Redemption Price per Unit, can be expected to fluctuate
during the period of an investment in the Fund.
EXPENSES AND CHARGES
FEES
The Trustee's Annual Fee and Expenses, Portfolio Supervision Fee (if any)
and Evaluator's fee are set forth under Investment Summary in Part A. For its
services as Trustee, the Trustee (or Co-Trustees, in the case of Investors Bank
& Trust Company and The First National Bank of Chicago) receives annually the
amount set forth under Investment Summary in Part A. The Trustee's fee is
calculated monthly on the basis of the largest face amount of Debt Obligations
outstanding during the previous month. The total amount received by the Trustee,
set forth under Investment Summary in Part A as Trustee's Annual Fee and
Expenses per Unit, includes an additional amount representing certain regular
and recurring expenses of the Fund, including the Evaluator's fee estimated
Portfolio Supervision Fee (if any) and certain mailing and printing expenses
(Section 3.16). Expenses in excess of this amount will be borne by the Fund. The
Trustee also receives benefits to the extent that it holds funds on deposit in
various non-interest bearing accounts created under the Indenture. In addition,
the Co-Trustee of GNMA Series 1 through 29, A and B receives for its services
$200 for each annual period (Section 8.05).
The Portfolio Supervision Fee, is based on the average of the largest face
amount of Securities in the Fund at any time during each month of a calendar
year in which additional Securities are deposited in the Fund, and thereafter on
the largest face amount of Securities in the Fund at any time during each annual
period. This fee, which is not to exceed the maximum amount set forth under
Investment Summary in Part A, may exceed the actual costs of providing portfolio
supervisory services for this Fund, but at no time will the total amount they
receive for portfolio supervisory services rendered to all series of The
Government Securities Income Fund in any calendar year exceed the aggregate cost
to them of supplying these services in that year. In addition, the Sponsors may
also be reimbursed for bookkeeping and other administrative services provided to
the Fund in amounts not exceeding their costs of providing these services
(Section 3.04, 7.05 or 7.06).
The Trustee's and Evaluator's fees are payable on or before each
Distribution Day. The foregoing fees may be adjusted for inflation in accordance
with the terms of the Indenture without approval of Holders (Sections 4.03, 7.06
and 8.05).
OTHER CHARGES
These include: (a) fees of the Trustee for extraordinary services (Section
8.05), (b) certain expenses of the Trustee (including legal and auditing
expenses) and of counsel designated by the Sponsors (Sections 3.04, 3.08 or
3.09, 7.05(b), 8.01, 8.03 and 8.05), (c) various governmental charges (Sections
3.03 and 8.01(h)), (d) expenses and costs of action taken to protect the Fund
(Section 8.01(d)), (e) indemnification of the Trustee for any losses,
liabilities and expenses incurred without gross negligence, bad faith or willful
misconduct on its part (Section 8.05), (f ) indemnification of the Sponsors for
any losses, liabilities and expenses incurred without gross negligence, bad
faith, wilful misconduct or reckless disregard of their duties (Section 7.05(b))
and (g) expenditures
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incurred in contacting Holders upon termination of the Fund (Section 9.02). The
amounts of these charges and fees are secured by a lien on the Fund and, if the
balances in the Income and Capital Accounts (see below) are insufficient, the
Trustee has the power to sell Securities to pay these amounts (Section 8.05).
ADMINISTRATION OF THE FUND
RECORDS
The Trustee keeps a register of the names, addresses and holdings of all
Holders. The Trustee also keeps records of the transactions of the Fund,
including a current list of the Securities and a copy of the Indenture, which
are available to Holders for inspection at the office of the Trustee at
reasonable times during business hours (Sections 6.01, 8.02 and 8.04).
ACCOUNTS AND DISTRIBUTIONS
The terms of the Ginnie Maes and Freddie Mac PCs provide for payment to the
holders thereof (including the Fund), on the fifteenth day of each month, of
amounts collected by or due to the issuers thereof with respect to the
underlying mortgages during the preceding month. Payments on certain other
Securities may be due semi-annually. Stripped ('Zero') Treasury Securities pay
only at maturity.
Interest received by the Fund are credited to an Income Account and other
receipts to a Capital Account (Sections 3.01 and 3.02). Distributions will be
made to each Holder as of each Record Day on the following Distribution Day or
shortly thereafter, and shall consist of an amount substantially equal to the
Holder's pro rata share of the distributable cash balance of the Income Account,
after deducting estimated expenses, plus the Holder's pro rata share of the
distributable cash balance of the Capital Account computed as of the close of
business on the preceding Record Day. For certain Funds with Monthly or
Quarterly Income Distributions, an estimate of the distribution is set forth
under Investment Summary in Part A. This amount will change as Securities are
redeemed, paid, prepaid or sold. Proceeds received from the disposition, payment
or prepayment of any of the Securities subsequent to a Record Day and prior to
the succeeding Distribution Day will be held in the Capital Account to be
distributed on the second succeeding Distribution Day, unless (for Funds
qualified as 'regulated investment companies'--see Section A of Taxes above) the
proceeds are reinvested in new Securities pursuant to the terms of the
Indenture. The first distribution for persons who purchase Units between a
Record Day and a Distribution Day will be made on the second Distribution Day
following their purchase of Units. No distribution need be made from the Capital
Account if the balance therein is less than the amount set forth under
Investment Summary in Part A (Section 3.04). A Reserve Account may be created by
the Trustee by withdrawing from the Income or Capital Accounts, from time to
time, those amounts deemed requisite to establish a reserve for any taxes or
other governmental charges that may be payable out of the Fund (Section 3.03).
Funds held by the Trustee in the various accounts created under the Indenture do
not bear interest (Section 8.01).
INVESTMENT ACCUMULATION PROGRAM (FREDDIE MAC SERIES 1 THROUGH 9 AND GNMA SERIES
(EXCEPT GNMA SERIES I, K, 1L, 1N, 1P, 1R, 1S, 1T AND 1U)
Principal and interest and redemption proceeds received by most of the
Funds are distributed monthly to Holders, normally in cash. However, a Holder
may elect to have his monthly distributions reinvested in The GNMA Fund
Investment Accumulation Program, Inc. (the 'Program'). The Program is an
open-end management investment company whose primary investment objective is to
obtain a high level of current income through investment in a portfolio of
Ginnie Maes. It should be noted, however, that interest distributions to foreign
holders from this Program will be subject to U.S. Federal income taxes,
including withholding taxes. For
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more complete information about the Program, including charges and expenses,
return the form enclosed in Part A for a prospectus. Read it carefully before
you decide to participate. Notice of election to participate must be received by
the Program Agent in writing at least ten days before the Record Day for the
first distribution to which such notice is to apply.
Holders of Units in IRA's, Keogh plans, and other tax-deferred retirement
plans should consult with their plan custodian as to the appropriate disposition
of distributions (see Taxes--Retirement Plans).
REINVESTMENT PLAN (GNMA SERIES I, 1L, 1N, 1P, 1R, 1S, 1T AND 1U, FREDDIE MAC
SERIES 10 AND 11 AND MONTHLY PAYMENT U.S. TREASURY SERIES 1-5 ONLY)
Unless otherwise instructed, the Trustee distributes interest and any
principal, redemption or prepayment proceeds received by these Funds to Holders
in cash. However, a Holder may elect to have his monthly distributions
reinvested by participating in the Fund's reinvestment plan (the 'Reinvestment
Plan'). A Holder, including any Holder which is a broker or nominee of a bank or
other financial institution) may indicate to the Trustee, by completing and
mailing the form enclosed in Part A, that he wishes distributions of income, of
principal or both to be automatically invested in additional Units of the Fund
at the reduced sales charge set forth below. The Holder's completed notice of
election to participate in the Reinvestment Plan must be received by the Trustee
at least ten days (except as described below) before the Record Day for the
first distribution to which the election is to apply and will remain effective
until notice to the contrary is timely received by the Trustee. Holders who
elect to reinvest their distributions will receive additional Units and
therefore will increase their proportionate ownership of the Fund relative to
the proportionate ownership of those Holders who receive their distributions in
cash. Any such election will not reduce the income per Unit distributed to
Holders. Elections may be modified or revoked on similar notice.
Purchases of Units pursuant to the Reinvestment Plan will be made at a
reduced sales charge as follows. Monthly Payment U.S. Treasury Series 1-5: 0.75%
of the Public Offering Price (0.756% of the net amount invested); GNMA Series I
and K: 2.90% of the Public Offering Price (2.99% of the net amount invested);
GNMA Series 1L, 1N, 1P, 1R, 1S, 1T and 1U: 1.50% of the Public Offering Price
(1.523% of the net amount invested); Freddie Mac Series 10 and 11: 1.0% of the
Public Offering Price (1.010% of the net amount invested). Unit prices are based
on the offering side evaluation of underlying Securities while a Fund is in the
primary market, and on the bid side evaluation when the Fund is in the secondary
market. Under the Reinvestment Plan, the Fund will pay the distributions to the
Trustee or Distribution Agent which in turn will purchase for the Holder from
the Sponsors full and fractional Units of the Fund at the price determined as of
the close of business on the Distribution Day. These Units may be Units already
held in inventory by the Sponsors (see Market for Units) or new Units created by
the Sponsors' deposit of additional Securities in the Fund (see Description of
the Fund-- Structure). The Trustee or Distribution Agent will add the Units to
the Holder's account and will send the Holder an account statement reflecting
the reinvestment.
Certificates for whole Units acquired under the Reinvestment Plan will be
issued only if the Holder so requests; fractional Units may only be held in
uncertificated form (see Certificates below). When Certificates are not issued
the Trustee will credit each Holder's account with the number of Units purchased
with such Holder's reinvested distribution. Each Holder receives account
statements both annually and after each Reinvestment Plan transaction to provide
the Holder with a record of the total number of Units in his account. This
relieves the Holder of responsibility for safekeeping of Certificates and,
should he sell his Units, eliminates the need to deliver Certificates. The
Holder may at any time request the Trustee (at the Fund's cost) to issue
Certificates for Units. The cost of administering the Reinvestment Plan will be
borne by the Fund and thus indirectly by all Holders.
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Holders of Units held in 'street name' by their broker or dealer should
contact their account executive or sales representative to determine whether or
not participation in the Reinvestment Plan through that broker or dealer is
available. Holders of Units participating in the Reinvestment Plan through their
broker or dealer will receive confirmation of their reinvestments in their
regular account statements or on a quarterly basis.
The Sponsors may, in their sole discretion, cancel the Reinvestment Plan at
any time. After that time, all Holders of such a Fund, including those who
participate in the Reinvestment Plan, will receive all Monthly Income
Distributions in cash unless the Sponsors provide another reinvestment
alternative at that time.
Holders of Units in IRA's, Keogh plans, and other tax-deferred retirement
plans should consult with their plan custodian as to the appropriate disposition
of distributions (see Taxes--Retirement Plans).
PORTFOLIO SUPERVISION
The Fund is a unit investment trust which normally follows a buy and hold
investment strategy and is not actively managed. Traditional methods of
investment management for a managed fund (such as a mutual fund) typically
involve frequent changes in a portfolio of securities on the basis of economic,
financial and market analyses. The Portfolio of this Series, however, will not
be actively managed and therefore the adverse financial condition of an issuer
will not necessarily require the sale of its Securities from the Portfolio.
Defined Asset Funds investment professionals are dedicated exclusively to
selecting and then monitoring securities held by the various Defined Funds. On
an ongoing basis, experienced financial analysts regularly review the Portfolios
and may direct the disposition of Securities under any of the following
circumstances: (i) a default in payment of amounts due on any Security, (ii)
institution of certain legal proceedings, (iii) existence of any other legal
questions or impediments affecting a Security or the payment of amounts due on
the Security, (iv) default under certain documents adversely affecting debt
service or default in payment of amounts due on other securities of the same
issuer or guarantor, (v) decline in price of the Security or the occurrence of
other market or credit factors, including advance refunding (i.e., the issuance
of refunding bonds and the deposit of the proceeds thereof in trust or escrow to
retire the refunded Securities on their respective redemption dates), that in
the opinion of the Sponsors would make the retention of the Security detrimental
to the interests of the Holders, (vi) if a Security is not consistent with the
investment objective of the Fund, (vii) if the Trustee has a right to sell or
redeem a Security pursuant to any applicable guarantee or other credit support
and (viii), for Funds qualified as 'regulated investment companies' (see Section
A of Taxes above), if the disposition of these Securities is desirable in order
to maintain the qualification of the Fund as a 'regulated investment company'
under the Code. If a default in the payment of amounts due on any Security
occurs and if the Agent for the Sponsors fails to give instructions to sell or
to hold the Security, the Indenture provides that the Trustee, within 30 days of
that failure by the Sponsors, shall sell the Security. Within five days after
the deposit of Debt Obligations in exchange or substitution for underlying Debt
Obligations, the Trustee is required to give notice thereof to each Holder,
identifying the Debt Obligations eliminated and the Debt Obligations substituted
therefor (Section 3.07 or 3.08).
For Funds organized as grantor trusts (see Section B of Taxes above), the
Sponsors are required to instruct the Trustee to reject any offer made by an
issuer of any of the Debt Obligations to issue new Debt Obligations in exchange
or substitution for any Debt Obligations pursuant to a refunding or refinancing
plan, except that the Sponsors may instruct the Trustee to accept or reject any
offer or to take any other action with respect thereto as the Sponsors may deem
proper if (a) the issuer is in default with respect to these Debt Obligations or
(b) in the written opinion of the Sponsors the issuer will probably default with
respect to these Debt Obligations in the reasonably foreseeable future. Any Debt
Obligations so received in exchange or substitution will be held by the
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Trustee subject to the terms and conditions of the Indenture to the same extent
as Debt Obligations originally deposited thereunder.
For Funds qualified as 'regulated investment companies' (see Section A of
Taxes above), the Sponsors are also authorized to direct the reinvestment of the
proceeds of the sale of Securities, exclusive of any capital gain (provided,
however, that proceeds received from Securities sold for purposes of redemption
of Units and in excess of the amount needed for these purposes may be reinvested
only in an amount each year not to exceed 10% of the face amount of Securities
in the Fund on the Date of Deposit), as well as moneys held to cover the
purchase of Securities pursuant to contracts which have failed ('Failed Debt
Obligations'), in replacement Securities ('Replacement Securities') which
satisfy conditions specified in the Indenture including, among other conditions,
requirements that the Replacement Securities satisfy the original selection
criteria for the Fund (see Description of the Fund--The Portfolio above) and
that the purchase of the Replacement Securities will not (i) disqualify the Fund
as a 'regulated investment company' under the Code. Income on, capital gains
from and the proceeds of the maturity or redemption of, Securities may not be
reinvested in substitute Securities but must be paid out to Holders in
accordance with the Indenture.
Whenever a Replacement Security has been acquired for the Fund, the Trustee
shall, on the next monthly distribution date that is more than 30 days
thereafter, make a pro rata distribution of the amount, if any, by which the
cost to the Fund of the Failed Debt Obligation exceeded the cost of the
Replacement Security plus accrued interest. If Replacement Securities are not
acquired, the Sponsors shall, on or before the next following Distribution Day,
cause to be refunded the attributable sales charge, plus the attributable Cost
of Securities to Fund listed under Portfolio in Part A, plus undistributed
income attributable to the Failed Debt Obligation.
For certain Funds, the Indenture authorizes the Sponsors to increase the
size and number of Units of the Fund by the deposit of Additional Securities,
contracts to purchase Additional Securities or cash or a letter of credit with
instructions purchase Additional Securities in exchange for the corresponding
number of additional Units provided that the original proportionate relationship
among the face amounts of each Security established on the Initial Date of
Deposit (the 'Original Proportionate Relationship') is maintained. Deposits of
Additional Securities in Funds organized as grantor trusts must replicate
exactly the original proportionate relationship among the face amounts of
Securities comprising the Portfolio; in Funds qualified as 'regulated investment
companies', the Original Proportionate Relationship must be maintained to the
extent practicable.
REPORTS TO HOLDERS
With each distribution, the Trustee furnishes Holders with a statement of
the amounts of income and other receipts, if any, which are being distributed,
expressed in each case as a dollar amount per Unit. After the end of each
calendar year, the Trustee will furnish to each person who at any time during
the calendar year was a Holder of record a statement (i) summarizing
transactions for the year in the Income and Capital Accounts, (ii) listing the
Securities held and the number of Units outstanding at the end of that calendar
year, (iii) stating the Redemption Price per Unit based upon the computation
thereof made at the end of that calendar year and (iv) specifying the amounts
distributed during that calendar year from the Income and Capital Accounts
(Section 3.05 or 3.06). The accounts of the Fund are audited at least annually
by independent certified public accountants designated by the Sponsors and the
report of the accountants shall be furnished by the Trustee to Holders upon
request (Section 8.01(e)).
In order to enable them to comply with Federal and state tax reporting
requirements, Holders of Funds organized as grantor trusts (see Section B of
Taxes above) will be furnished upon request to the Trustee with
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evaluations of Securities furnished to it by the Evaluator (Section 4.02) and
evaluations of the debt obligations in any Other Funds.
CERTIFICATES
Each purchaser is entitled to receive, on request, a registered Certificate
for his Units. Certain of the Sponsors may collect a charge for registering and
shipping Certificates to purchasers. The Certificates are transferable or
interchangeable upon presentation at the office of the Trustee with a payment of
$2.00 if required by the Trustee (or other amounts specified by the Trustee and
approved by the Sponsors) for each new Certificate and any sums payable for
taxes or other governmental charges imposed upon the transaction (Section 6.01)
and compliance with the formalities necessary to redeem Certificates (see
Redemption). Mutilated, destroyed, stolen or lost Certificates will be replaced
upon delivery of satisfactory indemnity and payment of expenses incurred
(Section 6.02).
Alternatively, Holders may elect to hold their Units in uncertificated form
(which election is required for entitlement to any Fund's check writing
privilege). The Trustee will credit each such Holder's account with the number
of Units purchased by such Holder. This relieves the Holder of the
responsibility of safekeeping of Certificates and of the need to deliver
Certificates upon sale of Units. Uncertificated Units are transferable through
the same procedures applicable to Units evidenced by Certificates (see above),
except that no Certificate need be presented to the Trustee and none will be
issued upon transfer unless requested by the Holder. A Holder may at any time
request the Trustee (at the Fund's cost) to issue Certificates for Units.
AMENDMENT AND TERMINATION
The Sponsors and Trustee may amend the Indenture, without the consent of
the Holders, (a) to cure any ambiguity or to correct or supplement any provision
thereof which may be defective or inconsistent, (b) to change any provision
thereof as may be required by the SEC or any successor governmental agency, (c)
to add or change any provision thereof as may be necessary or advisable for
continuing qualification of the Fund as a regulated investment company under the
Code (for Funds qualified as regulated investment companies -- see Section A of
Taxes above) or (d) to any other provisions which do not adversely affect the
interest of the Holders (as determined in good faith by the Sponsors). The
Indenture may not be amended to increase the number of Units issuable
thereunder, or to permit, except in accordance with provisions of the Indenture,
the acquisition of any Securities other than those initially deposited in the
Fund. The Indenture may also be amended in any respect by the Sponsors and the
Trustee, or any of the provisions thereof may be waived, with the consent of the
Holders of 51% of the Units (66 2/3% of the Units in the case of GNMA Series 1
through 29, A and B) provided that none of these amendments or waivers will
reduce the interest in the Fund of any Holder without the consent of the Holder
or reduce the percentage of Units required to consent to any of these amendments
or waivers without the consent of all Holders (Section 10.01).
The Indenture will terminate upon the maturity, sale, redemption or other
disposition of the last Security held thereunder but in no event is it to
continue beyond the mandatory termination date set forth under Investment
Summary in Part A. The Indenture may be terminated by the Sponsors if the value
of the Fund is less than the minimum value set forth under Investment Summary in
Part A, and may be terminated at any time by written instruments executed by the
Sponsors and consented to by Holders of the same percentage of the Units as
stated in the preceding paragraph (Sections 8.01(g) and 9.01). The Trustee will
deliver written notice of any termination to each Holder within a reasonable
time prior to the termination, specifying the times at which the Holders may
surrender their Certificates for cancellation. Within a reasonable time after
the termination, the
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Trustee must sell all of the Securities then held and distribute to each Holder,
upon surrender for cancellation of his Certificates and after deductions for
accrued and unpaid fees, taxes and governmental and other charges, that Holder's
interest in the Income and Capital Accounts (Section 9.01). This distribution
will normally be made by mailing a check in the amount of each Holder's interest
in these accounts to the address of the Holder appearing on the record books of
the Trustee.
RESIGNATION, REMOVAL AND LIMITATIONS ON LIABILITY
SPONSORS
Any Sponsor may resign if one remaining Sponsor maintains a net worth of
$2,000,000 and is agreeable to the resignation (Section 7.04). A new Sponsor may
be appointed by the remaining Sponsors and the Trustee (or Co-Trustee, if any)
to assume the duties of the resigning Sponsor. If there is only one Sponsor and
it fails to perform its duties or becomes incapable of acting or becomes
bankrupt or its affairs are taken over by public authorities, then the Trustee
(or Co-Trustee) may (a) appoint a successor Sponsor at rates of compensation
deemed by the Trustee to be reasonable and as may not exceed amounts prescribed
by the SEC, or (b) terminate the Indenture and liquidate the Fund or (c)
continue to act as Trustee without terminating the Indenture (Section 8.01(f )).
The Agent for the Sponsors has been appointed by the other Sponsors for purposes
of taking action under the Indenture (Section 7.01). If the Sponsors are unable
to agree with respect to action to be taken jointly by them under the Indenture
and they cannot agree as to which Sponsors shall continue to act as Sponsors,
then Merrill Lynch, Pierce, Fenner & Smith, Incorporated shall continue to act
as sole Sponsor (Section 7.02(b)). If one of the Sponsors fails to perform its
duties or becomes incapable of acting or becomes bankrupt or its affairs are
taken over by public authorities, then that Sponsor is automatically discharged
and the other Sponsors shall act as Sponsors (Section 7.02(a)). The Sponsors
shall be under no liability to the Fund or to the Holders for taking any action
or for refraining from taking any action in good faith or for errors in judgment
and shall not be liable or responsible in any way for depreciation or loss
incurred by reason of the sale of any Security. This provision, however, shall
not protect the Sponsors in cases of wilful misfeasance, bad faith, gross
negligence or reckless disregard of their obligations and duties (Section 7.05).
The Sponsors and their successors are jointly and severally liable under the
Indenture. A Sponsor may transfer all or substantially all of its assets to a
corporation or partnership which carries on its business and duly assumes all of
its obligations under the Indenture and in that event it shall be relieved of
all further liability under the Indenture (Section 7.03).
TRUSTEES
Any Trustee or any successor may resign upon notice to the Sponsors and any
remaining Trustee. Any Trustee may be removed at any time upon the direction of
the Holders of any Series by the same percentage of the Units as required to
amend the Indenture (see above) or by the Sponsors (or the Co-Trustee if any)
without the consent of any of the Holders if that Trustee becomes incapable of
acting or becomes bankrupt or its affairs are taken over by public authorities.
The resignation or removal shall become effective upon the acceptance of
appointment by the successor. The Sponsors and any remaining Trustee are to use
their best efforts to appoint a successor promptly. If no successor has accepted
appointment within thirty days after notification, the resigning Trustee may
apply to a court of competent jurisdiction for the appointment of a successor
(Section 8.06). The Trustees shall be under no liability for any action taken in
good faith in reliance on prima facie properly executed documents or for the
disposition of monies or Securities, nor liable or responsible in any way for
depreciation or loss incurred by reason of the sale of any Security. This
provision, however, shall not protect any Trustee or Co-Trustee in cases of
wilful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and
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duties. In the event of the failure of the Sponsors to act, the Trustee (or any
Co-Trustee) may act under the Indenture and shall not be liable for any of these
actions taken in good faith. The Trustees shall not be personally liable for any
taxes or other governmental charges imposed upon or in respect of the Securities
or upon the interest thereon. In addition, the Indenture contains other
customary provisions limiting the liability of the Trustees (Sections 3.06 or
3.07, 3.09 or 3.10, 8.01 and 8.05).
THE EVALUATOR
The Evaluator may resign or may be removed, effective upon the acceptance
of appointment by its successor, by the Sponsors, who are to use their best
efforts to appoint a successor promptly. If upon resignation of the Evaluator no
successor has accepted appointment within thirty days after notification, the
Evaluator may apply to a court of competent jurisdiction for the appointment of
a successor (Section 4.05). Determinations by the Evaluator under the Indenture
shall be made in good faith upon the basis of the best information available to
it; provided, however, that the Evaluator shall be under no liability to the
Trustee, the Sponsors or the Holders for errors in judgment. This provision,
however, shall not protect the Evaluator in cases of wilful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties
(Section 4.04). The Trustee, the Sponsors and the Holders may rely on any
evaluation furnished by the Evaluator and shall have no responsibility for the
accuracy thereof.
MISCELLANEOUS
TRUSTEE
The Trustee of the Fund is named on the back cover of Part A and is either
The Chase Manhattan Bank N.A., a banking corporation with its Unit Trust
Department at 1 Chase Manhattan Plaza-3B, New York, New York 10081 (which is
subject to supervision by the Comptroller of the Currency, the Federal Deposit
Insurance Corporation and the Board of Governors of the Federal Reserve System);
The Bank of New York, a New York banking corporation with its Unit Investment
Trust Department at 101 Barclay Street, New York, New York 10286 (which is
subject to supervision by the New York Superintendent of Banks, the Federal
Deposit Insurance Corporation and the Board of Governors of the Federal Reserve
System); Bankers Trust Company, a New York banking corporation with its
corporate trust office at 4 Albany Street, 7th Floor, New York, New York 10015
(which is subject to supervision by the New York Superintendent of Banks, the
Federal Deposit Insurance Corporation and the Board of Governors of the Federal
Reserve System); United States Trust Company of New York, a banking corporation
with its corporate trust office at 45 Wall Street, New York, New York 10005
(which is subject to supervision by the New York Superintendent of Banks, the
Federal Deposit Insurance Corporation and the Board of Governors of the Federal
Reserve System); or (acting as Co-Trustees) Investors Bank & Trust Company, a
Massachusetts trust company with its unit investment trust servicing group at
One Lincoln Plaza, Boston, Massachusetts 02111 (which is subject to supervision
by the Massachusetts Commissioner of Banks, the Federal Deposit Insurance
Corporation and the Board of Governors of the Federal Reserve System) and The
First National Bank of Chicago, a national banking corporation association with
its corporate trust office at One First National Plaza, Suite 0126, Chicago,
Illinois 60670-0126 (which is subject to supervision by the Comptroller of the
Currency, the Federal Deposit Insurance Corporation and the Board of Governors
of the Federal Reserve System).
LEGAL OPINION
The legality of the Units originally offered has been passed upon by Davis
Polk & Wardwell, 450 Lexington Avenue, New York, New York 10017, as special
counsel for the Sponsors. For Series organized under
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Massachusetts law, this counsel relied as to matters of Massachusetts law on
Wayne, Lazares & Chappell, 200 State Street, Boston, Massachusetts 02109.
Emmett, Marvin & Martin, 48 Wall Street, New York, New York 10005, act as
counsel for The Bank of New York, as Trustee. Bingham, Dana & Gould, 150 Federal
Street, Boston, Massachusetts 02110, act as counsel for The First National Bank
of Chicago and Investors Bank & Trust Company, as Co-Trustees. Hawkins,
Delafield & Wood, 67 Wall Street, New York, New York 10005, act as counsel for
Bankers Trust Company, as Trustee. Carter, Ledyard & Milburn, 2 Wall Street, New
York, New York 10005, act as counsel for United States Trust Company of New
York, as Trustee.
AUDITORS
The financial statements of the Fund included in Part A have been examined
by Deloitte & Touche, independent accountants, as stated in their opinion
appearing therein and have been so included in reliance upon that opinion given
on the authority of that firm as experts in accounting and auditing.
SPONSORS
Each Sponsor is a Delaware corporation and is engaged in the underwriting,
securities and commodities brokerage business, and is a member of the New York
Stock Exchange, Inc., other major securities exchanges and commodity exchanges,
and the National Association of Securities Dealers, Inc. Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Merrill Lynch Asset Management, a Delaware
corporation, each of which is a subsidiary of Merrill Lynch & Co., Inc., are
engaged in the investment advisory business. Smith Barney Shearson Inc., an
investment banking and securities broker-dealer firm, is an indirect
wholly-owned subsidiary of Primerica Corporation ('Primerica'). In July 1993,
Primerica and Smith Barney, Harris Upham & Co. Incorporated ('Smith Barney')
acquired the assets of the domestic retail brokerage and asset management
businesses of Shearson Lehman Brothers Inc. ('Shearson'), previously a
co-Sponsor of various Defined Asset Funds. Prudential Securities Incorporated, a
wholly-owned subsidiary of Prudential Securities Group Inc. and an indirect
wholly-owned subsidiary of the Prudential Insurance Company of America, is
engaged in the investment advisory business. PaineWebber Incorporated is engaged
in the investment advisory business and is a wholly-owned subsidiary of
PaineWebber Group Inc. Dean Witter Reynolds Inc., a principal operating
subsidiary of Dean Witter, Discover & Co., is engaged in the investment advisory
business. Each Sponsor has acted as principal underwriter and managing
underwriter of other investment companies. The Sponsors, in addition to
participating as members of various selling groups or as agents of other
investment companies, execute orders on behalf of investment companies for the
purchase and sale of securities of these companies and sell securities to these
companies in their capacities as brokers or dealers in securities.
Each Sponsor (or a predecessor) has acted as Sponsor of various series of
Defined Asset Funds. A subsidiary of Merrill Lynch, Pierce, Fenner & Smith
Incorporated succeeded in 1970 to the business of Goodbody & Co., which had been
a co-Sponsor of Defined Asset Funds since 1964. That subsidiary resigned as
Sponsor of each of the Goodbody series in 1971. Merrill Lynch, Pierce, Fenner &
Smith Incorporated has been co-Sponsor and the Agent for the Sponsors of each
series of Defined Asset Funds created since 1971. Shearson Lehman Brothers Inc.
and certain of its predecessors were underwriters beginning in 1962 and
co-Sponsors from 1965 to 1967 and from 1980 to 1993 of various Defined Asset
Funds. As a result of the acquisition of certain of Shearson's assets by Smith
Barney and Primerica, as described above, Smith Barney Shearson Inc. now serves
as co-Sponsor of various Defined Asset Funds. Prudential Securities Incorporated
and its predecessors have been underwriters of Defined Asset Funds since 1961
and co-Sponsors since 1964, in which year its predecessor became successor co-
Sponsor to the original Sponsor. Dean Witter Reynolds Inc. and its predecessors
have been underwriters of
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various Defined Asset Funds since 1964 and co-Sponsors since 1974. PaineWebber
Incorporated and its predecessor have co-Sponsored certain Defined Asset Funds
since 1983.
The Sponsors have maintained secondary markets in Defined Asset Funds for
over 20 years. For decades informed investors have purchased unit investment
trusts for dependability and professional selection of investments. Defined
Asset Funds offers an array of investment choices, suited to fit a wide variety
of personal financial goals--a buy and hold strategy for capital accumulation,
such as for children's education or a nest egg for retirement, or attractive,
regular current income consistent with relative protection of capital. There are
Defined Funds to meet the needs of just about any investor. Unit investment
trusts are particularly suited for the many investors who prefer to seek
long-term profits by purchasing sound investments and holding them, rather than
through active trading. Few individuals have the knowledge, resources or capital
to buy and hold a diversified portfolio on their own; it would generally take a
considerable sum of money to obtain the breadth and diversity offered by Defined
Funds. Sometimes it takes a combination of Defined Funds to plan for your
objectives.
One of your most important investment decisions may be how you divide your
money among asset classes. Spreading your money among different kinds of
investments can balance the risks and rewards of each one. Most investment
experts recommend stocks for long-term capital growth. For attractive income
consider long-term corporate bonds. By purchasing both defined equity and
defined bond funds, investors can receive attractive current income as well as
growth potential, offering some protection against inflation.
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The following chart shows the average annual compounded rate of return of
selected asset classes over the 10-year and 20-year periods ending December 31,
1992, compared to the rate of inflation over the same periods. Of course, this
chart represents past performance of these investment categories and is no
guarantee of future results either of these categories or of Defined Funds.
Defined Funds also have sales charges and expenses, which are not reflected in
the chart.
Stocks (S&P 500)
20 yr 11.33%
10 yr 16.19%
Small-company stocks
20 yr 15.54%
10 yr 11.55%
Long-term corporate bonds
20 yr 9.54%
10 yr 13.14%
U.S. Treasury bills (short-term)
20 yr 7.70%
10 yr 6.95%
Consumer Price Index
20 yr 6.21%
10 yr 3.81%
0 2 4 6 8 10
12 14 16 18%
Source: Ibbotson Associates (Chicago).
Used with permission. All rights reserved.
By purchasing Defined Funds investors not only avoid the responsibility of
selecting individual securities on their own; they benefit from the expertise of
Defined Asset Funds' experienced buyers and research analysts. In addition, they
gain the advantage of diversification by investing in units of a Defined Fund
holding securities of several different insurers. Such diversification reduces
risk, but does not eliminate it. While the portfolio of managed funds, such as
mutual funds, continually changes, defined bond funds offer a defined portfolio
and a schedule of income distributions identified in the prospectus. Investors
know, generally, when they buy, the issuers, maturities, call dates and ratings
of the securities in the portfolio. Of course, the portfolio may change somewhat
over time as additional securities are deposited, as securities mature or are
called or redeemed or as they are sold to meet redemptions and in certain other
limited circumstances. Investors also know at the time of
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purchase their estimated income and current and long-term returns, subject to
credit and market risks and to changes in the Portfolio or the Fund's expenses.
46
<PAGE>
Defined Asset Funds offers a variety of fund types. The tax exemption of
municipal securities, which makes them attractive to high-bracket taxpayers, is
offered by Defined Municipal Investment Trust Funds. Municipal Defined Funds
offer a simple and convenient way for investors to earn monthly income free from
regular Federal income tax. Defined Municipal Investment Trust Funds have
provided investors with tax-free income for more than 30 years. Defined
Corporate Income Funds, with higher current returns than municipal or government
funds, are suitable for Individual Retirement Accounts and other tax-advantaged
accounts and offer investors a simple and convenient way to earn monthly income.
Defined Government Securities Income Funds offer investors a simple and
convenient way to participate in markets for government securities while earning
an attractive current return. Defined International Bond Funds, invested in
bonds payable in foreign currencies, offer the potential to profit from changes
in currency values and possibly from interest rates higher than paid on
comparable U.S. bonds, but investors incur a higher risk for these potentially
greater returns. Historically, stocks have offered a potential for growth of
capital, and thus some protection against inflation, over the long term. Defined
Equity Income Funds offer participation in the stock market, providing current
income as well as the possibility of capital appreciation. The S&P Index Trusts
offer a convenient and inexpensive way to participate in broad market movements.
Concept Series seek to capitalize on selected anticipated economic, political or
business trends. Utility Stock Series, consisting of stocks of issuers with
established reputations for regular cash dividends, seek to benefit from
dividend increases. Select Ten Portfolios seek total return by investing for one
year in the ten highest yielding stocks on a designated stock index.
DESCRIPTION OF STANDARD & POOR'S RATING (as described by Standard & Poor's)
A Standard & Poor's rating on the units of an investment trust (hereinafter
referred to collectively as 'units' and 'funds') is a current assessment of
credit quality of the investments held by the trust. This assessment takes into
consideration the financial capacity of the issuers and of any guarantors,
insurers, lessees, or mortgagors with respect to such investments. The
assessment, however, does not take into account the extent to which fund
expenses or portfolio asset sales for less than the fund's purchase price will
reduce payment to the unit holder of the interest and principal required to be
paid on the portfolio assets. In addition, the rating is not a recommendation to
purchase, sell, or hold units, inasmuch as the rating does not comment as to
market price of the units or suitability for a particular investor.
AAA--Funds rated AAA are composed exclusively of assets that are rated AAA
by Standard & Poor's and/or certain short-term investments. Debt rated AAA has
the highest rating assigned by Standard & Poor's. Capacity to pay interest and
repay principal is extremely strong.
EXCHANGE OPTION (NOT AVAILABLE FOR MONTHLY PAYMENT U.S. TREASURY SERIES, U.S.
TREASURY SERIES AND THE INTERMEDIATE-TERM TRUST OF U.S. TREASURY ACCUMULATION
SERIAL PAYOUT SERIES 1)
ELECTION
Holders may elect to exchange any or all of their Units of this Series for
units of one or more of the series of Funds listed in the table below (the
'Exchange Funds'), which normally are sold in the secondary market at prices
which include the sales charge indicated in the table. Certain series of the
Funds listed have lower maximum applicable sales charges than those stated in
the table; also the rates of sales charges may be changed from time to time. No
series with a maximum applicable sales charge of less than 3.50% of the public
offering price is eligible for the Exchange Option, with the following
exceptions: (1) Units of any Select Ten Portfolio may be acquired during their
initial offering period or thereafter by exchange from any Exchange Fund Series,
if available; Units of Select Ten Portfolios may be exchanged only for units of
another Select Ten Series, if
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<PAGE>
available, and (2) Freddie Mac Series may be acquired by exchange during the
initial offering period from any of the Exchange Funds listed in the table.
Units of the Exchange Funds may be acquired at prices which include the reduced
sales charge for Exchange Fund units listed in the table, subject, however, to
these important limitations:
First, there must be a secondary market maintained by the Sponsors in
units of the series being exchanged and a primary or secondary market in
units of the series being acquired and there must be units of the
applicable Exchange Fund lawfully available for sale in the state in
which the Holder is resident. There is no legal obligation on the part
of the Sponsors to maintain a market for any units or to maintain the
legal qualification for sale of any of these units in any state or
states. Therefore, there is no assurance that a market for units will in
fact exist or that any units will be lawfully available for sale on any
given date at which a Holder wishes to sell his Units of this Series and
thus there is no assurance that the Exchange Option will be available to
any Holder.
Second, when units held for less than five months are exchanged for
units with a higher regular sales charge, the sales charge will be the
greater of (a) the reduced sales charge set forth in the table below or
(B) the difference between the sales charge paid in acquiring the units
being exchanged and the regular sales charge for the quantity of units
being acquired, determined as of the date of the exchange.
Third, exchanges will be effected in whole units only. If the proceeds
from the Units being surrendered are less than the cost of a whole
number of units being acquired, the exchanging Holder will be permitted
to add cash in an amount to round up to the next highest number of whole
units.
Fourth, the Sponsors reserve the right to modify, suspend or terminate
the Exchange Option at any time without further notice to Holders. In
the event the Exchange Option is not available to a Holder at the time
he wishes to exercise it, the Holder will be immediately notified and no
action will be taken with respect to his Units without further
instruction from the Holder.
PROCEDURES
To exercise the Exchange Option, a Holder should notify one of the Sponsors
of his desire to use the proceeds from the sale of his Units of this Series to
purchase units of one or more of the Exchange Funds. If units of the applicable
outstanding series of the Exchange Fund are at that time available for sale, the
Holder may select the series or group of series for which he desires his Units
to be exchanged. Of course, the Holder will be provided with a current
prospectus relating to each series in which he indicates interest. The exchange
transaction will operate in a manner essentially identical to any secondary
market transaction, i.e., Units will be repurchased at a price equal to the
aggregate bid side evaluation per Unit of the Securities in the Portfolio plus
accrued interest. Units of the Exchange Fund generally will be sold to the
Holder at a price equal to the bid side evaluation per unit of the underlying
securities in the Portfolio plus interest plus the applicable sales charge
listed in the table below. Units of a Series acquired during the initial public
offering period will be sold at a price based on the offering side evaluation of
the underlying Securities. Units of The Equity Income Fund are sold, and will be
repurchased, at a price normally based on the closing sale prices on the New
York Stock Exchange, Inc. of the underlying securities in the Portfolio. The
maximum applicable sales charges for units of the Exchange Funds are also listed
in the table. Excess proceeds not used to acquire whole Exchange Fund units will
be paid to the exchanging Holder.
THE EXCHANGE FUNDS
The income from taxable fixed income securities is normally higher than
that available from tax exempt fixed income securities. Certain of the Exchange
Funds do not provide for periodic payments of interest and are best suited for
purchase by IRA's, Keogh plans, pension funds or other tax-deferred retirement
plans. Consequently,
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<PAGE>
some of the Exchange Funds may be inappropriate investments for some Holders and
therefore may be inappropriate exchanges for Units of this Series. The table
below indicates certain characteristics of each of the Exchange Funds which a
Holder should consider in determining whether each Exchange Fund would be an
appropriate investment vehicle and an appropriate exchange for Units of this
Series.
CONVERSION OPTION
Owners of units of any registered unit investment trust sponsored by others
which was initially offered at a maximum applicable sales charge of at least
3.0% ('Conversion Trust') may elect to apply the cash proceeds of sale or
redemption of those units directly to acquire available units of any Exchange
Fund at the reduced sales charge, subject to the terms and conditions applicable
to the Exchange Option (except that no secondary market is required in
Conversion Trust units). To exercise this option, the owner should notify his
retail broker. He will be given a prospectus of each series in which he
indicates interest of which units are available. The broker must sell or redeem
the units of the Conversion Trust. Any broker other than a Sponsor must certify
to the Sponsors that the purchase of units of the Exchange Fund is being made
pursuant to and is eligible for this conversion option. The broker will be
entitled to two thirds of the applicable reduced sales charge. The Sponsors
reserve the right to modify, suspend or terminate the conversion option at any
time without further notice, including the right to increase the reduced sales
charge applicable to this option (but not in excess of $5 more per unit than the
corresponding fee then charged for the Exchange Option).
TAX CONSEQUENCES
An exchange of Units pursuant to the Exchange or Conversion Option for
units of a series of another Fund should constitute a 'taxable event' under the
Code, requiring a Holder to recognize a tax gain or loss subject to the
following limitation. The Internal Revenue Service may seek to disallow a loss
on an exchange of Units for substantially similar units in another series of the
same type of Exchange Fund (e.g., an exchange of a GNMA Series of The Government
Securities Income Fund for a different GNMA Series of The Government Securities
Income Fund). Holders are urged to consult their own tax advisers as to the tax
consequences to them of exchanging units in particular cases.
WITH REGARD TO REGULATED INVESTMENT COMPANIES ONLY: A Holder's tax gain
recognized on an exchange of Units for units of an Exchange Fund which is also a
regulated investment company will increase (or a Holder's tax loss will
decrease) by the lesser of (a) the sales charge applicable to the Units of this
series or (b) the reduction in the sales charge on the Exchange Fund Units, if
the exchange is made within 90 days of the purchase of the Units of this series.
Any such increase (or decrease) will be reflected in a decreased tax gain (or
increased tax loss) when the Exchange Fund Units are sold.
EXAMPLE
Assume that a Holder, who has three units of a fund with a 5.50% sales
charge in the secondary market and a current price (based on bid side evaluation
plus accrued interest) of $1,100 per unit, sells his units and exchanges the
proceeds for units of a series of an Exchange Fund with a current price of $950
per unit and the same sales charge. The proceeds from the Holder's units will
aggregate $3,300. Since only whole units of an Exchange Fund may be purchased,
the Holder would be able to acquire four units in the Exchange Fund for a total
cost of $3,860 ($3,800 for units and $60 for the $15 per unit sales charge) by
adding an extra $560 in cash. Were the Holder to acquire the same number of
units at the same time in the regular secondary market maintained by the
Sponsors, the price would be $4,021.16 ($3,800 for the units and $221.16 for the
5.50% sales charge).
49
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<TABLE>
<CAPTION>
MAXIMUM REDUCED
NAME OF APPLICABLE SALES CHARGE FOR
EXCHANGE FUND SALES CHARGE* SECONDARY MARKET**
- --------------------------------------------------- --------------- ----------------------
<S> <C> <C>
DEFINED ASSET FUNDS--MUNICIPAL INVESTMENT TRUST
FUND
Monthly Payment, State and Multistate Series 5.50%+ $15 per unit
Intermediate Term Series 4.50%+ $15 per unit
Insured Series 5.50%+ $15 per unit
AMT Monthly Payment Series 5.50%+ $15 per unit
DEFINED ASSET FUNDS--THE EQUITY INCOME FUND
Utility Common Stock Series 4.50% $15 per 1,000 units++
Concept Series 4.00% $15 per 100 units
Select Ten Portfolios 2.75% $17.50 per 1,000 units
DEFINED ASSET FUNDS--MUNICIPAL INCOME FUND
Insured Discount Series 5.50%+ $15 per unit
DEFINED ASSET FUNDS--CORPORATE INCOME FUND
Monthly Payment Series 5.50% $15 per unit
Intermediate Term Series 4.00% $15 per unit
Cash or Accretion Bond Series and SELECT Series 3.50% $15 per 1,000 units
Insured Series 5.50% $15 per unit
DEFINED ASSET FUNDS--INTERNATIONAL BOND FUND
Multi-Currency Series 5.50% $15 per unit
Australian and New Zealand Dollar Bonds Series 3.75% $15 per unit
Australian Dollar Bonds Series 3.75% $15 per unit
Canadian Dollar Bonds Series 3.50% $15 per unit
DEFINED ASSET FUNDS--GOVERNMENT SECURITIES INCOME
FUND
</TABLE>
<TABLE>
<CAPTION>
NAME OF INVESTMENT
EXCHANGE FUND CHARACTERISTICS
- --------------------------------------------------- ---------------------------------------
<S> <C>
DEFINED ASSET FUNDS--MUNICIPAL INVESTMENT TRUST
FUND
Monthly Payment, State and Multistate Series long-term, fixed rate, tax-exempt
income
Intermediate Term Series intermediate-term, fixed rate,
tax-exempt income
Insured Series long-term, fixed rate, tax-exempt
current income, underlying securities
insured by insurance companies
AMT Monthly Payment Series long-term, fixed rate, income exempt
from regular federal income tax but
partially subject to AMT
DEFINED ASSET FUNDS--THE EQUITY INCOME FUND
Utility Common Stock Series dividends, taxable income, underlying
securities are common stocks of public
utilities
Concept Series underlying securities constitute a
professionally selected portfolio of
common stocks consistent with an
investment idea or concept
Select Ten Portfolios underlying securities represent 10
highest yielding stocks on a specified
stock index
DEFINED ASSET FUNDS--MUNICIPAL INCOME FUND
Insured Discount Series long-term, fixed rate, tax-exempt
current income, taxable capital gains
DEFINED ASSET FUNDS--CORPORATE INCOME FUND
Monthly Payment Series long-term, fixed rate, taxable income
Intermediate Term Series intermediate-term, fixed rate, taxable
income
Cash or Accretion Bond Series and SELECT Series intermediate-term, fixed rate,
underlying securities composed of
compound interest obligations
principally secured by collateral
backed by the full faith and credit of
the United States, taxable return,
appropriate for IRA's or tax-deferred
retirement plans
Insured Series Long-term, fixed rate, taxable income,
underlying securities are insured
DEFINED ASSET FUNDS--INTERNATIONAL BOND FUND
Multi-Currency Series intermediate-term, fixed rate, payable
in foreign currencies, taxable income
Australian and New Zealand Dollar Bonds Series intermediate-term, fixed rate, payable
in Australian and New Zealand dollars,
taxable income
Australian Dollar Bonds Series intermediate-term, fixed rate, payable
in Australian dollars, taxable income
Canadian Dollar Bonds Series short intermediate term, fixed rate,
payable in Canadian dollars, taxable
income
DEFINED ASSET FUNDS--GOVERNMENT SECURITIES INCOME
FUND
</TABLE>
- ---------------
* As described in the prospectuses relating to certain Exchange Funds, this
sales charge for secondary market sales may be reduced on a graduated scale
in the case of quantity purchases.
** The reduced sales charge for Units acquired during their initial offering
period is: $20 per unit for Series for which the Reduced Sales Charge for
Secondary Market (above) is $15 per unit; $20 per 100 units for Series for
which the Reduced Sales Charge for Secondary Market is $15 per 100 units
and $20 per 1,000 units for Series for which the Reduced Sales Charge for
Secondary Market is $15 per 1,000 units; and the same as in the secondary
market for Series for which the Reduced Sales Charge for Secondary Market
is Maximum $30 deferred sales charge per 1,000 units.
+ Subject to reduction depending on the maturities of the underlying
Securities.
++ The reduced sales charge for the Sixth Utility Common Stock Series of The
Equity Income Fund is $15 per 2,000 units and for prior Utility Common
Stock Series is $7.50 per unit.
50
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM REDUCED
NAME OF APPLICABLE SALES CHARGE FOR
EXCHANGE FUND SALES CHARGE* SECONDARY MARKET**
- --------------------------------------------------- --------------- ----------------------
<S> <C> <C>
GNMA Series (other than those below) 4.25% $15 per unit
GNMA Series E or other GNMA Series having units 4.25% $15 per 1,000 units
with an initial face value of $1.00
Freddie Mac Series 3.50% $15 per 1,000 units
</TABLE>
<TABLE>
<CAPTION>
NAME OF INVESTMENT
EXCHANGE FUND CHARACTERISTICS
- --------------------------------------------------- ---------------------------------------
<S> <C>
GNMA Series (other than those below) long-term, fixed rate, taxable income,
underlying securities backed by the
full faith and credit of the United
States
GNMA Series E or other GNMA Series having units long-term, fixed rate, taxable income,
with an initial face value of $1.00 underlying securities backed by the
full faith and credit of the United
States, appropriate for IRA's or
tax-deferred retirement plans
Freddie Mac Series intermediate term, fixed rate, taxable
income, underlying securities are
backed by Federal Home Loan Mortgage
Corporation but not by U.S. Government
</TABLE>
51
14102--11/93 CPC
<PAGE>
DEFINED
ASSET FUNDSSM
SPONSOR: GOVERNMENT SECURITIES
Merrill Lynch, INCOME FUND
Pierce, Fenner & Smith Incorporated U.S. Government Zero Coupon
Defined Asset Funds Bond Series 3
P.O. Box 9051 (A Unit Investment Trust)
Princeton, N.J. 08543-9051 PROSPECTUS PART A
(609) 282-8500 This Prospectus does not contain all of
EVALUATOR: the information with respect to the
Kenny S&P Evaluation Services, investment company set forth in its
a division of J. J. Kenny Co., Inc. registration statement and exhibits
65 Broadway relating thereto which have been filed
New York, N.Y. 10006 with the Securities and Exchange
INDEPENDENT ACCOUNTANTS: Commission, Washington, D.C. under the
Deloitte & Touche LLP Securities Act of 1933 and the
2 World Financial Center Investment Company Act of 1940, and to
9th Floor which reference is hereby made.
New York, N.Y. 10281-1414 No person is authorized to give any
TRUSTEE: information or to make any
The Bank of New York representations with respect to this
Unit Investment Trust Department investment company not contained in this
P.O. Box 974 Prospectus; and any information or
Wall Street Station representation not contained herein must
New York, N.Y. 10268-0974 not be relied upon as having been
1-800-221-7771 authorized. This Prospectus does not
constitute an offer to sell, or a
solicitation of an offer to buy,
securities in any state to any person to
whom it is not lawful to make such offer
in such state.
11879--7/95
