<PAGE>
Def ined
Asset FundsSM
MUNICIPAL INVESTMENT This Defined Fund is a portfolio of preselected
TRUST FUND securities formed for the purpose of providing
- ------------------------------interest income which in the opinion of counsel
Monthly Payment Series--538 is, with certain exceptions,exempt from regular
A Unit Investment Trust Federal income taxes under existing law through
10,000 Units investment in a fixed portfolio consisting
/ / Tax-Free primarily of long-term state, municipal and public
/ / Diversified authority Debt Obligations. The value of the Units
/ / Investment Grade of the Fund will fluctuate with the value of the
5.61% Portfolio of underlying securities.
Estimated Current Return The Estimated Current Return and Estimated Long
as of March 8, 1994 Term Return figures shown give different
5.65% information about the return to investors.
Estimated Long Term Return Estimated Current Return on a Unit shows a net
as of March 8, 1994 annual current cash return based on the initial
Public Offering Price and the maximum applicable
sales charge and is computed by multiplying the
estimated net annual interest rate per Unit by
$1,000 and dividing the result by the Public
Offering Price per Unit (including the sales
charge but not including accrued interest).
Estimated Long Term Return shows a net annual
long-term return to investors holding to maturity
based on the yield on the individual bonds in the
Portfolio, weighted to reflect the time to
maturity (or in certain cases to an earlier call
date) and market value of each bond in the
Portfolio, adjusted to reflect the Public Offering
Price (including the sales charge) and estimated
expenses. Unlike Estimated Current Return,
Estimated Long Term Return takes into account
maturities of the underlying Securities and
discounts and premiums. Distributions of income on
Units are generally subject to certain delays; if
the Estimated Long Term Return figure shown took
these delays into account, it would be lower. Both
Estimated Current Return and Estimated Long Term
Return are subject to fluctuations with changes in
Portfolio composition (including the redemption,
sale or other disposition of Securities in the
Portfolio), changes in the market value of the
underlying Securities and changes in fees and
expenses. Estimated cash flows for the Fund are
available upon request from the Sponsors at no
charge.
Minimum purchase: 1 Unit.
-------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES
SPONSORS: COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
Merrill Lynch, OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
Pierce, Fenner & Smith Inc. CONTRARY IS A CRIMINAL OFFENSE.
Smith Barney Shearson Inc. Inquiries should be directed to the Trustee at
PaineWebber Incorporated 1-800-338-6019.
Prudential Securities Prospectus dated March 9, 1994.
Incorporated READ AND RETAIN THIS PROSPECTUS FOR FUTURE
Dean Witter Reynolds Inc. REFERENCE.
<PAGE>
- --------------------------------------------------------------------------------
DEFINED ASSET FUNDSSM is America's oldest and largest family of unit
investment trusts, with over $90 billion sponsored since 1970. Each Defined
Fund is a portfolio of preselected securities. The portfolio is divided into
'units' representing equal shares of the underlying assets. Each unit
receives an equal share of income and principal distributions.
With Defined Asset Funds you know in advance what you are investing in and
that changes in the portfolio are limited. Most defined bond funds pay
interest monthly and repay principal as bonds are called, redeemed, sold or
as they mature. Defined equity funds offer preselected stock portfolios with
defined termination dates.
Your financial advisor can help you select a Defined Fund to meet your
personal investment objectives. Our size and market presence enable us to
offer a wide variety of investments. Defined Funds are available in the
following types of securities: municipal bonds, corporate bonds, government
bonds, utility stocks, growth stocks, even international securities
denominated in foreign currencies.
Termination dates are as short as one year or as long as 30 years. Special
funds are available for investors seeking extra features: insured funds,
double and triple tax-free funds, and funds with 'laddered maturities' to
help protect against rising interest rates. Defined Funds are offered by
prospectus only.
- -----------------------------------------------------------------------------
CONTENTS
Investment Summary....................................... A-3
Tax Free vs. Taxable Income.............................. A-5
Underwriting Account..................................... A-6
Report of Independent Accountants........................ A-7
Statement of Condition................................... A-7
Portfolio................................................ A-8
Fund Structure........................................... 1
Risk Factors............................................. 2
Description of the Fund.................................. 16
Taxes.................................................... 19
Public Sale of Units..................................... 21
Market for Units......................................... 24
Redemption............................................... 25
Expenses and Charges..................................... 26
Administration of the Fund............................... 27
Resignation, Removal and Limitations on Liability........ 30
Miscellaneous............................................ 31
Description of Ratings................................... 33
Exchange Option.......................................... 34
A-2
<PAGE>
INVESTMENT SUMMARY AS OF MARCH 8, 1994 (THE BUSINESS DAY PRIOR TO THE INITIAL
DATE OF DEPOSIT)+
ESTIMATED CURRENT RETURN*
(based on Public Offering Price) 5.61%
ESTIMATED LONG TERM RETURN*
(based on Public Offering Price) 5.65%
PUBLIC OFFERING PRICE PER UNIT
(including 4.50% sales charge) $ 1,021.75**
FACE AMOUNT OF SECURITIES-- $ 10,000,000
NUMBER OF UNITS-- 10,000
SPONSORS' REPURCHASE PRICE AND
REDEMPTION PRICE PER UNIT***
(based on bid side evaluation) $ 971.77**
FRACTIONAL UNDIVIDED INTEREST IN FUND REPRESENTED BY EACH
UNIT-- 1/10,000TH
CALCULATION OF PUBLIC OFFERING PRICE
Aggregate offering side evaluation of Securities in
Fund....................................................$ 9,757,720.00
----------------
Divided by 10,000 Units...................................$ 975.77
Plus sales charge of 4.50% of Public Offering Price
(4.712% of net amount invested in Securities)++......... 45.98
----------------
Public Offering Price per Unit............................ 1,021.75
Plus accrued interest+++.................................. 1.11
----------------
Total...................................................$ 1,022.86
----------------
----------------
PREMIUM AND DISCOUNT ISSUES IN PORTFOLIO
Face amount of Securities with offering side evaluation:
over par--35%
at par--8%
at a discount from par--57%
PERCENTAGE OF AGGREGATE FACE AMOUNT OF DEBT OBLIGATIONS
ISSUED AT 'ORIGINAL ISSUE DISCOUNT' (see Taxes)........... 73%
CALCULATION OF ESTIMATED NET ANNUAL INTEREST RATE PER UNIT
(based on face amount of $1,000 per Unit)
Annual interest rate per Unit............................. 5.906%
Less estimated annual expenses per Unit ($1.70) expressed
as a percentage......................................... .170%
----------------
Estimated net annual interest rate per Unit............... 5.736%
----------------
----------------
DAILY RATE AT WHICH ESTIMATED NET INTEREST ACCRUES PER
UNIT-- .0159%
MONTHLY INCOME DISTRIBUTIONS
First distribution to be paid on the 25th day of June,
1994 to Holders of record on the 10th day of June, 1994...$ 5.05
Calculation of second and following distributions:
Estimated net annual interest rate per Unit times
$1,000..................................................$ 57.36
Divided by 12...........................................$ 4.78
REDEMPTION PRICE PER UNIT LESS THAN:
Public Offering Price by..................................$ 49.98
Sponsors' Initial Repurchase Price by.....................$ 4.00
RECORD DAY--The 10th day of each month
DISTRIBUTION DAY--The 25th day of each month
MINIMUM CAPITAL DISTRIBUTION
No distribution need be made from Capital Account if
balance is less than $5.00 per Unit
SPONSORS' PROFIT (LOSS) ON DEPOSIT .............................. $81,925.00
TRUSTEE'S ANNUAL FEE AND EXPENSES++++
$1.70 per Unit commencing March, 1994 (see
Expenses and Charges)
PORTFOLIO SUPERVISION FEE+++++
Maximum of $0.25 per $1,000 face amount of underlying
Debt Obligations (see Expenses and Charges)
EVALUATOR'S FEE FOR EACH EVALUATION
Minimum of $10.00 (see Expenses and Charges)
EVALUATION TIME
3:30 P.M. New York Time
MANDATORY TERMINATION DATE
Trust must be terminated no later than one year after
the maturity date of the last maturing Debt Obligation
listed under Portfolio (see Portfolio).
MINIMUM VALUE OF FUND
Trust may be terminated if value of Fund is less than
40% of the face amount of Securities in the Portfolio on
the dates of their deposit.
- ------------------
* Estimated Current Return represents annual interest income after
estimated annual expenses divided by the maximum public offering price including
a 4.50% maximum sales charge. Estimated Long Term Return is the net annual
percentage return based on the yield on each underlying Debt Obligation weighted
to reflect market value and time to maturity or earlier call date. Estimated
Long Term Return is adjusted for estimated expenses and the maximum offering
price but not for delays in the Fund's distribution of income. Estimated Current
Return shows current annual cash return to investors while Estimated Long Term
Return shows the return on Units held to maturity, reflecting maturities,
discounts and premiums on underlying Debt Obligations. Each figure will vary
with purchase price and changes in Fund income after expenses.
** Plus accrued interest.
*** During the initial offering period, the Fund's Sponsors intend to offer
to purchase Units at prices based on the offer side value of the underlying
Securities. Thereafter, the Sponsors intend to maintain such a market based on
the bid side value of the underlying Securities, which will be equal to the
Redemption Price. (See Market for Units.)
+ The Indenture was signed and the deposit was made on the date of this
Prospectus.
++ The sales charge during the initial offering period and in the
secondary market will be reduced on a graduated scale in the case of purchases
of 250 or more Units; the secondary market sales charge will also vary depending
on the maturities of the underlying Securities (see Public Sale of Units--Public
Offering Price). Any resulting reduction in the Public Offering Price will
increase the effective current and long term returns on a Unit.
+++ Figure shown represents interest accrued on underlying Securities from
the Initial Date of Deposit to expected date of settlement (normally five
business days after purchase) for Units purchased on the Initial Date of Deposit
(see Description of the Fund--Income; Estimated Current Return; Estimated Long
Term Return).
++++ During the first year the Trustee's Annual Fee and Expenses will be
reduced by $0.02 per Unit. Estimated annual interest income per Unit (estimated
annual interest rate per Unit times $1,000) will be $59.04, estimated expenses
per Unit will be $1.68 and estimated net annual income per Unit will remain the
same (see Description of the Fund--Income; Estimated Current Return; Estimated
Long Term Return).
+++++ The Sponsors may also be reimbursed for bookkeeping or other
administrative expenses not exceeding their actual costs currently at a maximum
annual rate of $0.10 per Unit.
A-3
<PAGE>
INVESTMENT SUMMARY AS OF MARCH 8, 1994 (CONTINUED)
OBJECTIVE OF THE FUND--To provide tax exempt income through investment in a
fixed portfolio consisting primarily of long-term state, municipal and public
authority Debt Obligations. There is no assurance that this objective will be
met because it is subject to the continuing ability of the issuers of the Debt
Obligations held by the Fund to meet their principal and interest requirements.
Furthermore, the market value of the underlying Debt Obligations, and therefore
the value of the Units, will fluctuate with changes in interest rates and other
factors.
PORTFOLIO AT A GLANCE--
DIVERSIFICATION--The Portfolio is diversified among 14 issues. Spreading
the investment among different securities and issuers reduces risk, but does not
eliminate it. Because of possible maturity, sale or other disposition of
Securities, the size, composition, and return of the Portfolio may change at any
time.
INVESTMENT QUALITY--All of the issues are investment grade. Standard &
Poor's rated 1 issue AAA, 3 issues AA and 7 issues A. Moody's rated 1 issue Aa
and 2 issues A. The issues have maturity dates ranging from 2010 to 2033.
CALL PROTECTION--Issuers are usually able to redeem bonds under optional
refunding and sinking fund provisions. Optional refunding redemptions, which may
redeem all or part of an issue, are in most cases initially at a premium, and
then in subsequent years at declining prices, but typically not below par value.
100% of the Debt Obligations are subject to optional refunding redemptions, but
not before 2002, and then at prices initially not less than 101.5% of par (see
Portfolio). Bonds are also generally subject to mandatory sinking fund
redemptions at par over the life of the issue and may also provide for
redemption at par prior to optional or mandatory redemption dates or maturity,
for example, if proceeds are not able to be used as contemplated, the project is
condemned or sold or the project is destroyed and insurance proceeds are used to
redeem the bonds.
DEBT OBLIGATIONS--One issue is a General Obligation issue. The remaining 13
issues are payable from the income of a specific project or authority and can be
divided by source of revenue as follows: Hospitals/Health Care Facilities, 3;
Housing, 3; Lease Rental Appropriation, 1; State/Local Municipal Utilities, 3;
Industrial Development Revenues, 1; Municipal Water/Sewer Utilities, 1 and
Airports/Ports/Highways, 1.
The Sponsors may deposit additional Securities in the Fund (where
additional Units are to be offered to the public) subsequent to the Initial Date
of Deposit (see Fund Structure).
RISK FACTORS--Investment in the Fund should be made with an understanding
that the value of the underlying Portfolio may decline with increases in
interest rates. In recent years, there have been wide fluctuations in interest
rates and thus in the value of fixed-rate, long-term debt obligations generally.
The Sponsors cannot predict whether these fluctuations will continue in the
future. The Fund is not considered to be concentrated in any particular category
of Debt Obligations* (See Risk Factors for a brief summary of certain investment
risks pertaining to the obligations held by the Fund.)
The Securities are generally not listed on a national securities exchange.
Whether or not the Securities are listed, the principal trading market for the
Securities will generally be in the over-the-counter market. As a result, the
existence of a liquid trading market for the Securities may depend on whether
dealers will make a market in the Securities. There can be no assurance that a
market will be made for any of the Securities, that any market for the
Securities will be maintained or of the liquidity of the Securities in any
markets made. In addition, the Fund may be restricted under the Investment
Company Act of 1940 from selling Securities to any Sponsor. The price at which
the Securities may be sold to meet redemptions and the value of the Fund will be
adversely affected if trading markets for the Securities are limited or absent.
MARKET FOR UNITS--The Sponsors, though not obligated to do so, intend to
maintain a secondary market for Units based on the aggregate bid side evaluation
of the underlying Securities (see Market for Units). 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). There is no fee for selling Units. Market
conditions may cause the prices available in the market maintained by the
Sponsors or available upon exercise of redemption rights to be more or less than
the total of the amount paid for Units plus accrued interest.
TAXATION--In the opinion of special counsel to the Sponsors, 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. In
the opinion of bond counsel rendered on the date of issuance of the Debt
Obligation, this interest is exempt under existing law from regular Federal
income taxes (except in certain circumstances depending on the
Holder) but may be subject to state and local taxes. Any gain on the disposition
of a Holder's pro rata portion of a Debt Obligation will be subject to tax. (See
Taxes.)
- ---------------
* A Fund is considered to be 'concentrated' in a particular category when
the debt obligations in that category constitute 25% or more of the aggregate
face amount of the Portfolio. (See Risk Factors.)
A-4
<PAGE>
Def ined
Asset Funds
INVESTOR'S GUIDE DEFINED MUNICIPAL INVESTMENT TRUST FUNDS
MUNICIPAL INVESTMENT Our defined portfolios of municipal bonds offer
TRUST FUND investors a simple and convenient way to earn
- ------------------------------monthly income. And by purchasing Defined Funds,
MONTHLY PAYMENT SERIES investors not only avoid the problem of selecting
municipal bonds by themselves, but also gain the
advantage of a higher degree of safety by
investing in bonds of several different issuers.
MONTHLY TAX-FREE INTEREST INCOME
The Fund pays monthly income, even though the
underlying bonds pay interest semi-annually. This
income is generally 100% exempt under existing
laws from regular federal income tax. Depending on
where you live, some of the income also may be
exempt from certain state and local personal
income taxes. Any gain on disposition of the
underlying bonds will be subject to tax.
REINVESTMENT OPTION
You can elect to automatically reinvest your
distributions into a separate portfolio of
tax-exempt bonds. Reinvesting helps to compound
your income tax-free.
A-RATED INVESTMENT QUALITY
Each bond in the Fund has been selected by
investment professionals among available bonds
rated A or better by at least one national rating
organization or has, in the opinion of Defined
Asset Funds research analysts, comparable credit
characteristics. Bonds with these 'investment
grade' ratings are judged to have a strong
capacity to pay interest and repay principal.
PROFESSIONAL SELECTION AND SUPERVISION
The Fund contains a variety of securities selected
by experienced buyers and market analysts.
Spreading your investment among different
securities and issuers reduces your risk, but does
not eliminate it. The Fund is not actively
managed. However, the portfolio is regularly
reviewed and a security can be sold if retaining
it could be detrimental to investors' interest.
A LIQUID INVESTMENT
Although not legally required to do so, the
Sponsors have maintained a secondary market for
Defined Asset Funds for over 20 years. You can
cash in your units at any time. Your price is
based on the market value of bonds in the Fund's
portfolio at that time as determined by an
independent evaluator. Or, you can exchange your
investment for another Defined Fund at a reduced
sales charge. There is never a fee for cashing in
your investment.
PRINCIPAL DISTRIBUTIONS
Principal from sales, redemptions and maturities
of bonds in the fund is distributed to investors
periodically.
RISK FACTORS
Unit price fluctuates and is affected by interest
rates as well as the financial condition of the
issuers of the bonds.
THIS PAGE MAY NOT BE DISTRIBUTED UNLESS INCLUDED IN A CURRENT PROSPECTUS.
INVESTORS SHOULD REFER TO THE PROSPECTUS FOR FURTHER INFORMATION.
<PAGE>
TAX-FREE VS. TAXABLE INCOME
A COMPARISON OF TAXABLE AND TAX-FREE YIELDS
<TABLE><CAPTION>
TAXABLE INCOME 1994* % TAX TAX-FREE YIELD OF
SINGLE RETURN JOINT RETURN BRACKET 3% 3.5% 4% 4.5% 5% 5.5%
IS EQUIVALENT TO A TAXABLE YIELD OF
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
$0-36,900 15.00 3.53 4.12 4.71 5.29 5.88 6.47
- ---------------------------------------------------------------------------------------------------------------------------
$0-22,100 15.00 3.53 4.12 4.71 5.29 5.88 6.47
- ---------------------------------------------------------------------------------------------------------------------------
$36,900-89,150 28.00 4.17 4.86 5.56 6.25 6.94 7.64
- ---------------------------------------------------------------------------------------------------------------------------
$22,100-53,500 28.00 4.17 4.86 5.56 6.25 6.94 7.64
- ---------------------------------------------------------------------------------------------------------------------------
$89,150-140,000 31.00 4.35 5.07 5.80 6.52 7.25 7.97
- ---------------------------------------------------------------------------------------------------------------------------
$53,500-115,000 31.00 4.35 5.07 5.80 6.52 7.25 7.97
- ---------------------------------------------------------------------------------------------------------------------------
$140,000-250,000 36.00 4.69 5.47 6.25 7.03 7.81 8.59
- ---------------------------------------------------------------------------------------------------------------------------
$115,000-250,000 36.00 4.69 5.47 6.25 7.03 7.81 8.59
- ---------------------------------------------------------------------------------------------------------------------------
OVER $250,000 39.60 4.97 5.79 6.62 7.45 8.28 9.11
- ---------------------------------------------------------------------------------------------------------------------------
OVER $250,000 39.60 4.97 5.79 6.62 7.45 8.28 9.11
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
TAXABLE INCOME 1994*
SINGLE RETURN 6% 6.5% 7%
- ------------------
7.06 7.65 8.24
- ------------------
$0-22,100 7.06 7.65 8.24
- ------------------
8.33 9.03 9.72
- ------------------
$22,100-53,500 8.33 9.03 9.72
- ------------------
8.70 9.42 10.14
- ------------------
$53,500-115,000 8.70 9.42 10.14
- ------------------
9.38 10.16 10.94
- ------------------
$115,000-250,000 9.38 10.16 10.94
- ------------------
9.93 10.76 11.59
- ------------------
OVER $250,000 9.93 10.76 11.59
- ------------------
To compare the yield of a taxable security with the yield of a
tax-free security, find your taxable income and read across. The
table incorporates current Federal income tax rates and assumes
that all income would otherwise be taxed at the investor's highest
tax rate. Yield figures are for example only.
*Based upon net amount subject to Federal income tax after
deductions and exemptions. This table does not reflect the
possible effect of other tax factors, such as the alternative
minimum tax, personal exemptions, the phase out of the tax benefit
of exemptions, itemized deductions or the possible partial
disallowance of deductions. Consequently, holders are urged to
consult their own tax advisers in this regard.
A-5
<PAGE>
MUNICIPAL INVESTMENT TRUST FUND
MONTHLY PAYMENT SERIES
DEFINED ASSET FUNDS
I want to learn more about automatic reinvestment in the Investment Accumulation
Program. Please send me information about participation in the Municipal Fund
Accumulation Program, Inc. and a current Prospectus.
My name (please
print) ________________________________________________________________________
My address (please
print): ______________________________________________________________________
City, State, Zip
Code ___________________________________________________________________________
This page is a self-mailer. Please complete the information above, cut along the
dotted line, fold along the lines on the reverse side, tape, and mail with the
Trustee's address displayed on the outside.
12345678
<PAGE>
BUSINESS REPLY MAIL NO POSTAGE
FIRST CLASS PERMIT NO. 7036 BOSTON, MA NECESSARY
IF MAILED
POSTAGE WILL BE PAID BY ADDRESSEE IN THE
INVESTORS BANK & TRUST COMPANY UNITED STATES
P.O. BOX 1537
BOSTON, MA 02205-1537
- ------------------------------------------------------------------------------
(Fold along this line.)
- ------------------------------------------------------------------------------
(Fold along this line.)
<PAGE>
INVESTMENT SUMMARY AS OF MARCH 8, 1994 (CONTINUED)
PUBLIC OFFERING PRICE--During the initial offering period and any offering
of additional Units, the Public Offering Price of the Units is based on the
aggregate offering side evaluation of the underlying Securities in the Fund (the
price at which they could be directly purchased by the public assuming they were
available), divided by the number of Units outstanding plus a sales charge of
4.712%* of the offering side evaluation per Unit (the net amount invested); this
results in a sales charge of 4.50%* of the Public Offering Price. For secondary
market sales charges, see Public Sale of Units--Public Offering Price. Units are
offered at the Public Offering Price computed as of the Evaluation Time for all
sales made subsequent to the previous evaluation, plus cash per Unit in the
Capital Account not allocated to the purchase of specific Securities and net
interest accrued. The Public Offering Price on the Initial Date of Deposit, and
on subsequent dates, will vary from the Public Offering Price set forth on page
A-3. (See Public Sale of Units--Public Offering Price; and Redemption.)
MONTHLY DISTRIBUTIONS--Monthly distributions of interest and any principal
or premium received by the Fund will be made in cash on or shortly after the
25th day of each month to Holders of record on the 10th day of such month
commencing with the first distribution on the date indicated on page A-3 (see
Administration of the Fund--Accounts and Distributions). Alternatively, Holders
may elect to have their monthly distributions reinvested in the Municipal Fund
Accumulation Program, Inc. Further information about the program, including a
current prospectus, may be obtained by returning the enclosed form. (See
Administration of the Fund-- Investment Accumulation Program.)
ESTIMATED CURRENT RETURN; ESTIMATED LONG TERM RETURN--Estimated Return on a
Unit shows the return based on the initial Public Offering Price and the maximum
applicable sales charge of 4.50%* and is computed by multiplying the estimated
net annual interest rate per Unit (which shows the return per Unit based on
$1,000 face amount per Unit) by $1,000 and dividing the result by the Public
Offering Price per Unit (not including accrued interest). Estimated Long Term
Return on a Unit shows a net annual long-term return to investors holding to
maturity based on the individual Debt Obligations in the Portfolio weighted to
reflect the time to maturity (or in certain cases to an earlier call date) and
market value of each Debt Obligation in the Portfolio, adjusted to reflect the
Public Offering Price (including the maximum applicable sales charge of 4.50%*)
and estimated expenses. The net annual interest rate per Unit and the net annual
long-term return to investors will vary with changes in the fees and expenses of
the Trustee and the Sponsors and the fees of the Evaluator, which are paid by
the Fund, and with the exchange, redemption, sale or maturity of the underlying
Securities; the Public Offering Price will vary with any reduction in sales
charges paid in the case of purchases of 250 or more Units, as well as with
fluctuations in the offering side evaluation of the underlying Securities.
Therefore, it can be expected that the current return and long term return will
fluctuate in the future. (See Description of the Fund--Income; Estimated Current
Return; Estimated Long Term Return.)
UNDERWRITING--None of the Sponsors have participated as sole underwriter,
managing underwriter or member of an underwriting syndicate from which any of
the Debt Obligations in the Portfolio were acquired.
REPLACEMENT SECURITIES--The Indenture permits the deposit of Replacement
Securities under certain circumstances described under Administration of the
Fund--Portfolio Supervision. The Securities on the current list from which
Replacement Securities are to be selected are:
California Hsg. Fin. Agency, Home Mtge. Rev. Bonds, 1993 Ser. B,
5.70%, due 2/1/25.
Massachusetts Wtr. Resources Auth., Gen. Rev. Bonds, 1992 Ser. A,
5.50%, due 7/15/22.
South Carolina Pub. Serv. Auth., Rev. Bonds, 1993 Rfdg. Ser. C,
5.125%, due 1/1/32.
UNDERWRITING ACCOUNT
The names and addresses of the Underwriters and their several interests in
the Underwriting Account are:
<TABLE>
<S> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith P.O. Box 9051, Princeton, N.J. 08543-9051 83.00%
Incorporated
Smith Barney Shearson Inc. Two World Trade Center--101st Floor
New York, N.Y. 10048 5.00
PaineWebber Incorporated 1285 Avenue of the Americas, New York, N.Y. 10019 2.00
Prudential Securities Incorporated One Seaport Plaza--199 Water Street, New York, N.Y. 10292 5.00
Dean Witter Reynolds Inc. Two World Trade Center--59th Floor, New York, N.Y. 10048 5.00
------
100.00%
------
------
</TABLE>
- ---------------
* This sales charge during the initial offering period and in the secondary
market will be reduced on a graduated scale in the case of purchases of 250 or
more Units (see Public Sale of Units--Public Offering Price).
A-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Sponsors, Co-Trustees and Holders of Municipal Investment Trust Fund,
Monthly Payment Series--538, Defined Asset Funds:
We have audited the accompanying statement of condition, including the
portfolio, of Municipal Investment Trust Fund, Monthly Payment Series--538,
Defined Asset Funds as of March 9, 1994. This financial statement is the
responsibility of the Co-Trustees. Our responsibility is to express an opinion
on this financial statement based on our audit.
We conducted our audit 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. The deposit on March 9,
1994 of an irrevocable letter or letters of credit for the purchase of
securities, as described in the statement of condition, was confirmed to us by
Investors Bank & Trust Company, a Co-Trustee. An audit also includes assessing
the accounting principles used and significant estimates made by the
Co-Trustees, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Municipal Investment Trust
Fund, Monthly Payment Series--538, Defined Asset Funds at March 9, 1994 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
New York, N.Y.
March 9, 1994
MUNICIPAL INVESTMENT TRUST FUND
MONTHLY PAYMENT SERIES--538
DEFINED ASSET FUNDS
STATEMENT OF CONDITION AS OF INITIAL DATE OF DEPOSIT, MARCH 9, 1994
TRUST PROPERTY
Investment in Debt Obligations(1):
Contracts to purchase Debt
Obligations................... $ 9,757,720.00
Accrued interest to Initial Date of
Deposit on underlying Debt
Obligations........................ 107,951.04
--------------------
Total....................... $ 9,865,671.04
--------------------
--------------------
LIABILITY AND INTEREST OF HOLDERS
Liability--Accrued interest to Initial
Date of Deposit on underlying Debt
Obligations(2)..................... $ 107,951.04
Interest of Holders--
10,000 Units of fractional
undivided interest outstanding:
Cost to investors(3).............$ 10,217,520.00
Gross underwriting
commissions(4)................... (459,800.00)
--------------------
Net amount applicable to investors...... 9,757,720.00
--------------------
Total....................... $ 9,865,671.04
--------------------
--------------------
- ------------------
(1) Aggregate cost to the Fund of the Debt Obligations listed under Portfolio is
based upon the offering side evaluation determined by the Evaluator at the
Evaluation Time on the business day prior to the Initial Date of Deposit as
set forth under Public Sale of Units--Public Offering Price. See also the
column headed Cost of Debt Obligations to Fund under Portfolio. An
irrevocable letter or letters of credit in the amount of $9,793,721.02 have
been deposited with the Trustee. The amount of such letter or letters of
credit includes $9,675,795.00 (equal to the purchase price to the Sponsors)
for the purchase of $10,000,000 face amount of Debt Obligations in
connection with contracts to purchase Debt Obligations, plus $117,926.02
covering accrued interest to the earlier of the date of settlement for the
purchase of Units or the date of delivery of the Debt Obligations. The
letter or letters of credit have been issued by Banca Popolare DiMilano, New
York Branch.
(2) Representing, as set forth under Description of the Fund--Income; Estimated
Current Return; Estimated Long Term Return, a special distribution by the
Trustee of an amount equal to accrued interest as of the Initial Date of
Deposit.
(3) Aggregate public offering price (exclusive of interest) computed on the
basis of the offering side evaluation of the underlying Debt Obligations as
of the Evaluation Time on he Business Day prior to the Initial Date of
Deposit.
(4) Assumes a sales charge of 4.50% on all Units computed on the basis set forth
under Public Sale of Units--Public Offering Price.
A-7
<PAGE>
PORTFOLIO OF MUNICIPAL INVESTMENT TRUST FUND, ON THE INITIAL DATE OF DEPOSIT,
MONTHLY PAYMENT SERIES--538 MARCH 9, 1994
DEFINED ASSET FUNDS
<TABLE><CAPTION>
OPTIONAL
PORTFOLIO NO. AND TITLE OF RATINGS OF FACE REFUNDING
DEBT OBLIGATIONS CONTRACTED FOR ISSUES (1) AMOUNT COUPON MATURITIES REDEMPTIONS(2)
--------------------------------------------- ----------- --------------- --------- ----------- --------------------
<S> <C> <C> <C> <C> <C>
1) Alaska Hsg. Fin. Corp., Ins. Mtge. Prog. A+ $ 750,000 5.90% 12/1/33 12/1/03 @ 102
Bonds, 1993 First Series
2) City of Valdez, AK, Marine Terminal Rev. AA- 750,000 5.85 8/1/25 8/1/03 @ 102
Rfdg. Bonds (BP Pipelines (Alaska) Inc.
Proj.), Ser. 1993 A
3) Central California Joint Powers, Hlth. Fin. A(m) 750,000 5.25 2/1/13 2/1/03 @ 102
Auth., Certificates of Participation
(Community Hospital of Central California
Oblig. Group), Ser. 1993
4) Dept. of Wtr. and Pwr. of the City of Los AA 500,000 6.375 2/1/20 2/1/02 @ 102
Angeles, CA, Elec. Plant Rfdg. Rev.
Bonds, Iss. of 1992
5) State of Public Works Board of the State of A 750,000 5.50 6/1/19 6/1/03 @ 102
California, Lease Rev. Bonds (The Regents
of the Univ. of California), 1993 Ser. B
6) Illinois Hlth. Fac. Auth. Rev. Bonds, Ser. A+ 750,000 6.00 11/15/10 11/15/03 @ 102
1993 (OSF Healthcare Sys.)
7) Illinois Hsg. Dev. Auth., Multi-Family Prog. A+ 750,000 6.20 9/1/23 9/1/03 @ 102
Bonds, Ser. 3
8) Prince George's Cnty., MD, Proj. and Rfdg. A(m) 750,000 5.30 7/1/24 7/1/04 @ 102
Rev. Bonds (Dimensions Hlth. Corp. Iss.),
Ser. 1994
</TABLE>
YIELD TO
SINKING COST OF MATURITY
FUND DEBT ON INITIAL DATE
REDEMPTIONS OBLIGATIONS OF
(2) TO FUND (3) DEPOSIT (3)
-------------- ------------------- ---------------
1) 12/1/24 $ 716,827.50 6.200%
2) -- 728,962.50 6.050
3) 2/1/05 675,127.50 6.150
4) 2/1/10 519,490.00 5.950+
5) 6/1/15 701,482.50 6.000
6) 11/15/08 742,132.50 6.100
7) 3/1/14 751,875.00 6.169+
8) 7/1/15 658,155.00 6.200
A-8
<PAGE>
PORTFOLIO OF MUNICIPAL INVESTMENT TRUST FUND, ON THE INITIAL DATE OF DEPOSIT,
MONTHLY PAYMENT SERIES--538 MARCH 9, 1994
DEFINED ASSET FUNDS (continued)
<TABLE><CAPTION>
OPTIONAL
PORTFOLIO NO. AND TITLE OF RATINGS OF FACE REFUNDING
DEBT OBLIGATIONS CONTRACTED FOR ISSUES (1) AMOUNT COUPON MATURITIES REDEMPTIONS(2)
--------------------------------------------- ----------- --------------- --------- ----------- --------------------
<S> <C> <C> <C> <C> <C>
9) Clark Cnty., NV, Las Vegas-McCarran AAA $ 750,000 6.00% 7/1/22 7/1/02 @ 102
International Airport, Passenger Fac.
Charge Rev. Bonds, 1992 Ser. A (AMBAC
Ins.)
10) New Hampshire Hsg. Fin. Auth., Single Family Aa(m) 750,000 6.05 7/1/25 7/1/03 @ 102
Mtge. Rev. Bonds, 1993 Ser. B
11) The City of New York, NY, G.O. Bonds, Fiscal A- 500,000 5.75 8/15/14 8/15/03 @ 101.5
1994 Ser. D
12) North Carolina Eastern Muni. Pwr. Agency, A- 750,000 6.25 1/1/12 1/1/03 @ 102
Pwr. Sys. Rev. Bonds, Rfdg. Ser. 1993 B
13) City of Houston, TX, Wtr. and Swr. Sys. Prior A 750,000 6.375 12/1/14 12/1/02 @ 102
Lien Rev. Rfdg. Bonds, Ser. 1992 B
14) Intermountain Pwr. Auth., UT, Pwr. Supply AA 750,000 6.00 7/1/21 7/1/02 @ 102
Rev. Rfdg. Bonds, 1992 Ser. B
---------------
$ 10,000,000
---------------
---------------
</TABLE>
YIELD TO
SINKING COST OF MATURITY
FUND DEBT ON INITIAL DATE
REDEMPTIONS OBLIGATIONS OF
(2) TO FUND (3) DEPOSIT (3)
-------------- ------------------- ---------------
9) 7/1/11 $ 755,655.00 5.900%+
10) 1/1/17 744,705.00 6.100
11) -- 479,685.00 6.100
12) 7/1/09 761,692.50 6.050+
13) 12/1/10 771,930.00 6.000+
14) 7/1/19 750,000.00 5.999
-------------------
$ 9,757,720.00
-------------------
-------------------
See Footnotes on following page.
A-9
<PAGE>
- ------------
NOTES
(1) All ratings are by Standard & Poor's Corporation unless followed by '(m)'
which indicates a Moody's Investors Service rating. Moody's ratings have
been furnished by the Evaluator but not confirmed with Moody's. Any rating
followed by a '*' is subject to submission and review of final
documentation. Any rating followed by 'p' is provisional and assumes the
successful completion of the project being financed. (See Description of
Ratings.)
(2) Debt Obligations are first subject to optional redemptions (which may be
exercised in whole or in part) on the dates and at the prices indicated
under the Optional Refunding Redemptions column in the table. In subsequent
years Debt Obligations are redeemable at declining prices, but typically
not below par value. Some issues may be subject to sinking fund redemption
or extraordinary redemption with premium prior to the dates shown.
Certain Debt Obligations may be redeemed at par pursuant to mandatory
redemption provisions which require redemption from amounts in excess of
scheduled principal payments. Certain Debt Obligations may provide for
redemption at par prior or in addition to any optional or mandatory
redemption dates or maturity, for example, if proceeds are not able to be
used as contemplated, if the project is sold by the owner, if the project
is condemned or sold, if the project is destroyed and insurance proceeds
are used to redeem the Debt Obligations, if any related credit support
expires prior to maturity and is not renewed or substitute credit support
not obtained, if interest on the Debt Obligations becomes subject to
taxation, if, in the case of housing obligations, mortgages are prepaid, or
in other special circumstances.
Sinking fund redemptions are all at par and generally redeem only part of
an issue. Some of the Debt Obligations have mandatory sinking funds which
contain optional provisions permitting the issuer to increase the principal
amount of Debt Obligations called on a mandatory redemption date. The
sinking fund redemptions with optional provisions may, and optional
refunding redemptions generally will, occur at times when the redeemed Debt
Obligations have an offering side evaluation which represents a premium
over par. To the extent that the Debt Obligations were acquired at a price
higher than the redemption price, this will represent a loss of capital
when compared with the original Public Offering Price of the Units. Monthly
distributions will generally be reduced by the amount of the income which
would otherwise have been paid with respect to redeemed Debt Obligations
and there will be distributed to Holders any principal amount and premium
received on such redemption after satisfying any redemption requests
received by the Fund. The current return and long term return in this event
may be affected by redemptions. The tax effect on Holders of redemptions
and related distributions is described under Taxes.
(3) Evaluation of Debt Obligations by the Evaluator is made on the basis of
current offering side evaluation. The offering side evaluation is greater
than the current bid side evaluation of the Debt Obligations, which is the
basis on which Redemption Price per Unit is determined (see Redemption
herein). The aggregate value based on the bid side evaluation at the
Evaluation Time on the business day prior to the Initial Date of Deposit
was $9,717,720.00 which is $40,000.00 (.40% of the aggregate face amount)
lower than the aggregate Cost of Debt Obligations to Fund based on the
offering side evaluation.
Yield to Maturity on Initial Date of Deposit of Debt Obligations was
computed on the basis of the offering side evaluation at the Evaluation
Time on the business day prior to Initial Date of Deposit. Percentages in
this column represent Yield to Maturity on Initial Date of Deposit unless
followed by '+' which indicates yield to an earlier redemption date. (See
Description of the Fund--Income; Estimated Current Return; Estimated Long
Term Return for a description of the computation of yield price.)
------------------------------------
All Debt Obligations are represented entirely by contracts to purchase such
Debt Obligations, which were entered into by the Sponsors on March 8, 1994.
All contracts are expected to be settled by the initial settlement date for
purchase of Units, except for the Debt Obligations in Portfolio Number 12
(approximately 8% of the aggregate face amount of the Portfolio) which have
been purchased on a when, as and if issued basis, or have a delayed
delivery, and are expected to be settled 1 day after the settlement date for
purchase of Units. The Debt Obligations in Portfolio Number 9 have been
insured to maturity by the indicated insurance company (see Risk
Factors--Debt Obligations Backed by Insurance).
+ See Footnote (3).
A-10
<PAGE>
MUNICIPAL INVESTMENT TRUST FUND
MONTHLY PAYMENT SERIES
DEFINED ASSET FUNDS
FUND STRUCTURE
This Series (the 'Fund') is a 'unit investment trust' created under New
York law by a Trust Indenture (the 'Indenture') among the Sponsors, the Trustee
and the Evaluator. Unless otherwise indicated, when Investors Bank & Trust
Company and the First National Bank of Chicago act as Co-Trustees to the Fund,
references to the Trustee in this Prospectus shall be deemed to refer to
Investors Bank & Trust Company and The First National Bank of Chicago as
Co-Trustees. 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. On the
date of this Prospectus (the 'Initial Date of Deposit') the Sponsors, acting as
managers for the underwriters named under Underwriting Account, deposited the
underlying Securities with the Trustee at a price equal to the evaluation of the
Securities on the offering side of the market on that date as determined by the
Evaluator, and the Trustee delivered to the Sponsors units of interest ('Units')
representing the entire ownership of the Fund. Except as otherwise indicated
under Portfolio (the 'Portfolio'), the Securities so deposited were represented
by purchase contracts assigned to the Trustee together with an irrevocable
letter or letters of credit issued by a commercial bank or banks in the amount
necessary to complete the purchase thereof.
The Portfolio contains different issues of debt obligations with fixed
final maturity dates. As used herein, the term 'Debt Obligations' or
'Securities' means the long-term debt obligations initially deposited in the
Fund and described under Portfolio and any replacement and additional
obligations acquired and held by the Fund pursuant to the provisions of the
Indenture. (See Description of the Fund--The Portfolio; Administration of the
Fund--Portfolio Supervision).
With the deposit of the Securities in the Fund on the Initial Date of
Deposit, the Sponsors established a proportionate relationship among the face
amounts of each Security in the Portfolio. During the 90-day period following
the Initial Date of Deposit, the Sponsors may deposit additional Securities
('Additional Securities'), contracts to purchase Additional Securities or cash
(or a bank letter of credit in lieu of cash) with instructions to purchase
Additional Securities, in order to create new Units, maintaining to the extent
practicable the original proportionate relationship among the face amounts of
each Security in the Portfolio. It may not be possible to maintain the exact
original proportionate relationship among the Securities deposited on the
Initial Date of Deposit because of, among other reasons, purchase requirements,
changes in prices, or unavailability of Securities. Replacement Securities may
be acquired under specified conditions when Securities originally deposited are
unavailable (see Description of the Fund--The Portfolio; Administration of the
Fund--Portfolio Supervision). Units may be continuously offered to the public by
means of this Prospectus (see Public Sale of Units--Public Distribution)
resulting in a potential increase in the number of Units outstanding. Deposits
of Additional Securities subsequent to the 90-day period following the Initial
Date of Deposit must replicate exactly the proportionate relationship among the
face amounts of Securities comprising the Portfolio at the end of the initial
90-day period, subject to certain events as discussed under Administration of
the Fund--Portfolio Supervision.
Certain of the Securities in the Fund may have been 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 have been valued at a market
premium. Securities trade at a premium because the interest rates on the
Securities are higher than interest on comparable debt securities being issued
at currently prevailing interest rates. The current returns of securities
trading at a market premium are
1
<PAGE>
higher than the current returns of comparably rated debt securities of a similar
type issued at currently prevailing interest rates because premium securities
tend to decrease in market value as they approach maturity when the face amount
becomes payable. Because part of the purchase price is thus returned not at
maturity but through current income payments, an early redemption of a premium
security at par will result in a reduction in yield. If currently prevailing
interest rates for newly issued and otherwise comparable securities increase,
the market premium of previously issued securities will decline and if currently
prevailing interest rates for newly issued comparable securities decline, the
market premium of previously issued securities will increase, other things being
equal. Market premium attributable to interest rate changes does not indicate
market confidence in the issue.
The holders ('Holders') of Units will have the right to have their Units
redeemed (see Redemption) at a price based on the aggregate bid side evaluation
of the Securities ('Redemption Price per Unit') if the Units cannot be sold in
the over-the-counter market which the Sponsors propose to maintain at prices
determined in the same manner (see Market for Units). On the Initial Date of
Deposit each Unit represented the fractional undivided interest in the
Securities and net income of the Fund set forth under the Investment Summary in
the ratio of one Unit for each approximately $1,000 face amount of Securities
initially deposited. Thereafter, if any Units are redeemed, the face amount of
Securities in the Fund will be reduced, and the fractional undivided interest
represented by each remaining Unit in the balance will be increased. However, if
additional Units are issued (through deposit of Additional Securities) the
aggregate face amount of Securities will be increased and the fractional
undivided interest represented by each Unit will be decreased. Units will remain
outstanding until redeemed upon tender to the Trustee by any Holder (which may
include the Sponsors) or until the termination of the Indenture (see Redemption;
Administration of the Fund--Amendment and Termination).
RISK FACTORS
An investment in Units of the Fund should be made with an understanding of
the risks which an investment in fixed-rate long-term debt obligations may
entail, including the risk that the value of the Portfolio and hence of the
Units will decline with increases in interest rates. In recent years there have
been wide fluctuations in interest rates and thus in the value of fixed-rate
debt obligations generally. The Sponsors cannot predict future economic policies
or their consequences or, therefore, the course or extent of any similar
fluctuations in the future. Furthermore, since the issuers of the Debt
Obligations are state and local governmental entities, political restrictions on
the ability to tax and budgetary constraints affecting the state government,
particularly in the current recessionary climate, may result in reductions of or
delays in the payment of state aid to cities, counties, school districts and
other local units of government, which in turn, may strain the financial
operations and have an adverse impact on the creditworthiness of these entities.
State agencies, colleges and universities and healthcare organizations, with
municipal debt outstanding, may also be negatively impacted by reductions in
state appropriations. To the extent that payment of amounts due on Debt
Obligations depends on revenue from publicly held corporations, an investor
should understand that these Debt Obligations, in many cases, do not have the
benefit of covenants which would prevent the corporations from engaging in
capital restructurings or borrowing transactions in connection with corporate
acquisitions, leveraged buyouts or restructurings, which could have the effect
of reducing the ability of the corporation to meet its obligations and may in
the future result in the ratings of the Debt Obligations and the value of the
underlying Portfolio being reduced.
The Securities are generally not listed on a national securities exchange.
Whether or not the Securities are listed, the principal trading market for the
Securities will generally be in the over-the-counter market. As a result, the
existence of a liquid trading market for the Securities may depend on whether
dealers will make a market in the Securities. There can be no assurance that a
market will be made for any of the Securities, that any market for the
Securities will be maintained or of the liquidity of the Securities in any
markets made. In addition, the Fund may be restricted under the Investment
Company Act of 1940 from selling Securities to any Sponsor. The price at which
the Securities may be sold to meet redemptions and the value of the Fund will be
adversely affected if trading markets for the Securities are limited or absent.
As set forth under Investment Summary and Portfolio, the Fund may contain
or be concentrated in one or more of the classifications of Debt Obligations
referred to below. Percentages of any concentrations for this Fund are set forth
under the Investment Summary. An investment in Units of the Fund should be made
with an understanding of the risks that these investments may entail, certain of
which are described below.
2
<PAGE>
GENERAL OBLIGATION BONDS
Certain of the Debt Obligations in the Portfolio may be general obligations
of a governmental entity that are secured by the taxing power of the entity.
General obligation bonds are backed by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. However, the
taxing power of any governmental entity may be limited by provisions of state
constitutions or laws and an entity's credit will depend on many factors,
including an erosion of the tax base due to population declines, natural
disasters, declines in the state's industrial base or inability to attract new
industries, economic limits on the ability to tax without eroding the tax base
and the extent to which the entity relies on Federal or state aid, access to
capital markets or other factors beyond the entity's control.
As a result of the recent recession's adverse impact upon both their
revenues and expenditures, as well as other factors, many state and local
governments are confronting deficits and potential deficits which are the most
severe in recent years. Many issuers are facing highly difficult choices about
significant tax increases and/or spending reductions in order to restore
budgetary balance. Failure to implement these actions on a timely basis could
force the issuers to depend upon market access to finance deficits or cash flow
needs.
In addition, certain of the Debt Obligations in the Fund may be obligations
of issuers (including California issuers) who rely in whole or in part on ad
valorem real property taxes as a source of revenue. Certain proposals, in the
form of state legislative proposals or voter initiatives, to limit ad valorem
real property taxes have been introduced in various states, and an amendment to
the constitution of the State of California, providing for strict limitations on
ad valorem real property taxes, has had a significant impact on the taxing
powers of local governments and on the financial conditions of school districts
and local governments in California. It is not possible at this time to predict
the final impact of such measures, or of similar future legislative or
constitutional measures, on school districts and local governments or on their
abilities to make future payments on their outstanding debt obligations.
MORAL OBLIGATION BONDS
The Fund may also include 'moral obligation' bonds. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of the bonds
becomes a moral commitment but not a legal obligation of the state or
municipality in question. Even though the state may be called on to restore any
deficits in capital reserve funds of the agencies or authorities which issued
the bonds, any restoration generally requires appropriation by the state
legislature and accordingly does not constitute a legally enforceable obligation
or debt of the state. The agencies or authorities generally have no taxing
power.
REFUNDED DEBT OBLIGATIONS
Refunded Debt Obligations are typically secured by direct obligations of
the U.S. Government, or in some cases obligations guaranteed by the U.S.
Government, placed in an escrow account maintained by an independent trustee
until maturity or a predetermined redemption date. These obligations are
generally noncallable prior to maturity or the predetermined redemption date. In
a few isolated instances to date, however, bonds which were thought to be
escrowed to maturity have been called for redemption prior to maturity.
INDUSTRIAL DEVELOPMENT REVENUE BONDS ('IDRS')
IDRs, including pollution control revenue bonds, are tax-exempt securities
issued by states, municipalities, public authorities or similar entities
('issuers') to finance the cost of acquiring, constructing or improving various
projects, including pollution control facilities and certain industrial
development facilities. These projects are usually operated by corporate
entities. IDRs are not general obligations of governmental entities backed by
their taxing power. Issuers are only obligated to pay amounts due on the IDRs to
the extent that funds are available from the unexpended proceeds of the IDRs or
receipts or revenues of the issuer under arrangements between the issuer and the
corporate operator of a project. These arrangements may be in the form of a
lease, installment sale agreement, conditional sale agreement or loan agreement,
but in each case the payments to the issuer are designed to be sufficient to
meet the payments of amounts due on the IDRs.
IDRs are generally issued under bond resolutions, agreements or trust
indentures pursuant to which the revenues and receipts payable under the
issuer's arrangements with the corporate operator of a particular project have
been assigned and pledged to the holders of the IDRs or a trustee for the
benefit of the holders of the IDRs. In certain cases, a mortgage on the
underlying project has been assigned to the holders of the IDRs or a trustee as
additional security for the IDRs. In addition, IDRs are frequently directly
guaranteed by the corporate operator of the project or by another affiliated
company. Regardless of the structure, payment of IDRs is solely dependent upon
the creditworthiness of the corporate operator of the project or corporate
guarantor. Corporate operators or
3
<PAGE>
guarantors that are industrial companies may be affected by many factors which
may have an adverse impact on the credit quality of the particular company or
industry. These include cyclicality of revenues and earnings, regulatory and
environmental restrictions, litigation resulting from accidents or
environmentally-caused illnesses, extensive competition (including that of
low-cost foreign companies), unfunded pension fund liabilities or off-balance
sheet items, and financial deterioration resulting from leveraged buy-outs or
takeovers. However, as discussed below, certain of the IDRs in the Portfolio may
be additionally insured or secured by letters of credit issued by banks or
otherwise guaranteed or secured to cover amounts due on the IDRs in the event of
default in payment by an issuer.
STATE AND LOCAL MUNICIPAL UTILITY OBLIGATIONS
The ability of utilities to meet their obligations with respect to revenue
bonds issued on their behalf is dependent on various factors, including the
rates they may charge their customers, the demand for a utility's services and
the cost of providing those services. Utilities, in particular investor-owned
utilities, are subject to extensive regulation relating to the rates which they
may charge customers. Utilities can experience regulatory, political and
consumer resistance to rate increases. Utilities engaged in long-term capital
projects are especially sensitive to regulatory lags in granting rate increases.
Any difficulty in obtaining timely and adequate rate increases could adversely
affect a utility's results of operations.
The demand for a utility's services is influenced by, among other factors,
competition, weather conditions and economic conditions. Electric utilities, for
example, have experienced increased competition as a result of the availability
of other energy sources, the effects of conservation on the use of electricity,
self-generation by industrial customers and the generation of electricity by
co-generators and other independent power producers. Also, increased competition
will result if federal regulators determine that utilities must open their
transmission lines to competitors. Utilities which distribute natural gas also
are subject to competition from alternative fuels, including fuel oil, propane
and coal.
The utility industry is an increasing cost business making the cost of
generating electricity more expensive and heightening its sensitivity to
regulation. A utility's costs are influenced by the utility's cost of capital,
the availability and cost of fuel and other factors. In addition, natural gas
pipeline and distribution companies have incurred increased costs as a result of
long-term natural gas purchase contracts containing 'take or pay' provisions
which require that they pay for natural gas even if natural gas is not taken by
them. There can be no assurance that a utility will be able to pass on these
increased costs to customers through increased rates. Utilities incur
substantial capital expenditures for plant and equipment. In the future they
will also incur increasing capital and operating expenses to comply with
environmental legislation such as the Clean Air Act of 1990, and other energy,
licensing and other laws and regulations relating to, among other things, air
emissions, the quality of drinking water, waste water discharge, solid and
hazardous substance handling and disposal, and siting and licensing of
facilities. Environmental legislation and regulations are changing rapidly and
are the subject of current public policy debate and legislative proposals. It is
increasingly likely that some or many utilities will be subject to more
stringent environmental standards in the future that could result in significant
capital expenditures. Future legislation and regulation could include, among
other things, regulation of so-called electromagnetic fields associated with
electric transmission and distribution lines as well as emissions of carbon
dioxide and other so-called greenhouse gases associated with the burning of
fossil fuels. Compliance with these requirements may limit a utility's
operations or require substantial investments in new equipment and, as a result,
may adversely affect a utility's results of operations.
The electric utility industry in general is subject to various external
factors including (a) the effects of inflation upon the costs of operation and
construction, (b) substantially increased capital outlays and longer
construction periods for larger and more complex new generating units, (c)
uncertainties in predicting future load requirements, (d) increased financing
requirements coupled with limited availability of capital, (e) exposure to
cancellation and penalty charges on new generating units under construction, (f)
problems of cost and availability of fuel, (g) compliance with rapidly changing
and complex environmental, safety and licensing requirements, (h) litigation and
proposed legislation designed to delay or prevent construction of generating and
other facilities, (i) the uncertain effects of conservation on the use of
electric energy, (j) uncertainties associated with the development of a national
energy policy, (k) regulatory, political and consumer resistance to rate
increases and (l) increased competition as a result of the availability of other
energy sources. These factors may delay the construction and increase the cost
of new facilities, limit the use of, or necessitate costly modifications to,
existing facilities, impair the access of electric utilities to credit markets,
or substantially increase the cost of credit for electric generating facilities.
The Sponsors cannot predict at this time the ultimate effect of such factors on
the ability of any issuers to meet their obligations with respect to Debt
Obligations.
4
<PAGE>
The National Energy Policy Act ('NEPA'), which became law in October, 1992,
makes it mandatory for a utility to permit non-utility generators of electricity
access to its transmission system for wholesale customers, thereby increasing
competition for electric utilities. NEPA also mandated demand-side management
policies to be considered by utilities. NEPA prohibits the Federal Energy
Regulatory Commission from mandating electric utilities to engage in retail
wheeling, which is competition among suppliers of electric generation to provide
electricity to retail customers (particularly industrial retail customers) of a
utility. However, under NEPA, a state can mandate retail wheeling under certain
conditions.
There is concern by the public, the scientific community, and the U.S.
Congress regarding environmental damage resulting from the use of fossil fuels.
Congressional support for the increased regulation of air, water, and soil
contaminants is building and there are a number of pending or recently enacted
legislative proposals which may affect the electric utility industry. In
particular, on November 15, 1990, legislation was signed into law that
substantially revises the Clean Air Act (the '1990 Amendments'). The 1990
Amendments seek to improve the ambient air quality throughout the United States
by the year 2000. A main feature of the 1990 Amendments is the reduction of
sulphur dioxide and nitrogen oxide emissions caused by electric utility power
plants, particularly those fueled by coal. Under the 1990 Amendments the U.S.
Environmental Protection Agency ('EPA') must develop limits for nitrogen oxide
emissions by 1993. The sulphur dioxide reduction will be achieved in two phases.
Phase I addresses specific generating units named in the 1990 Amendments. In
Phase II the total U.S. emissions will be capped at 8.9 million tons by the year
2000. The 1990 Amendments contain provisions for allocating allowances to power
plants based on historical or calculated levels. An allowance is defined as the
authorization to emit one ton of sulphur dioxide.
The 1990 Amendments also provide for possible further regulation of toxic
air emissions from electric generating units pending the results of several
federal government studies to be conducted over the next three to four years
with respect to anticipated hazards to public health, available corrective
technologies, and mercury toxicity.
Electric utilities which own or operate nuclear power plants are exposed to
risks inherent in the nuclear industry. These risks include exposure to new
requirements resulting from extensive federal and state regulatory oversight,
public controversy, decommissioning costs, and spent fuel and radioactive waste
disposal issues. While nuclear power construction risks are no longer of
paramount concern, the emerging issue is radioactive waste disposal. In
addition, nuclear plants typically require substantial capital additions and
modifications throughout their operating lives to meet safety, environmental,
operational and regulatory requirements and to replace and upgrade various plant
systems. The high degree of regulatory monitoring and controls imposed on
nuclear plants could cause a plant to be out of service or on limited service
for long periods. When a nuclear facility owned by an investor-owned utility or
a state or local municipality is out of service or operating on a limited
service basis, the utility operator or its owners may be liable for the recovery
of replacement power costs. Risks of substantial liability also arise from the
operation of nuclear facilities and from the use, handling, and possible
radioactive emissions associated with nuclear fuel. Insurance may not cover all
types or amounts of loss which may be experienced in connection with the
ownership and operation of a nuclear plant and severe financial consequences
could result from a significant accident or occurrence. The Nuclear Regulatory
Commission has promulgated regulations mandating the establishment of funded
reserves to assure financial capability for the eventual decommissioning of
licensed nuclear facilities. These funds are to be accrued from revenues in
amounts currently estimated to be sufficient to pay for decommissioning costs.
The ability of state and local joint action power agencies to make payments
on bonds they have issued is dependent in large part on payments made to them
pursuant to power supply or similar agreements. Courts in Washington, Oregon and
Idaho have held that certain agreements between the Washington Public Power
Supply System ('WPPSS') and the WPPSS participants are unenforceable because the
participants did not have the authority to enter into the agreements. While
these decisions are not specifically applicable to agreements entered into by
public entities in other states, they may cause a reexamination of the legal
structure and economic viability of certain projects financed by joint action
power agencies, which might exacerbate some of the problems referred to above
and possibly lead to legal proceedings questioning the enforceability of
agreements upon which payment of these bonds may depend.
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LEASE RENTAL OBLIGATIONS
Lease rental obligations are issued for the most part by governmental
authorities that have no taxing power or other means of directly raising
revenues. Rather, the authorities are financing vehicles created solely for the
construction of buildings (administrative offices, convention centers and
prisons, for example) or the purchase of equipment (police cars and computer
systems, for example) that will be used by a state or local government (the
'lessee'). Thus, the obligations are subject to the ability and willingness of
the lessee government to meet its lease rental payments which include debt
service on the obligations. Willingness to pay may be subject to changes in the
views of citizens and government officials as to the essential nature of the
finance project. Lease rental obligations are subject, in almost all cases, to
the annual appropriation risk, i.e., the lessee government is not legally
obligated to budget and appropriate for the rental payments beyond the current
fiscal year. These obligations are also subject to the risk of abatement in many
states--rental obligations cease in the event that damage, destruction or
condemnation of the project prevents its use by the lessee. (In these cases,
insurance provisions and reserve funds designed to alleviate this risk become
important credit factors). In the event of default by the lessee government,
there may be significant legal and/or practical difficulties involved in the
reletting or sale of the project. Some of these issues, particularly those for
equipment purchase, contain the so-called 'substitution safeguard', which bars
the lessee government, in the event it defaults on its rental payments, from the
purchase or use of similar equipment for a certain period of time. This
safeguard is designed to insure that the lessee government will appropriate the
necessary funds even though it is not legally obligated to do so, but its
legality remains untested in most, if not all, states.
SINGLE FAMILY AND MULTI-FAMILY HOUSING OBLIGATIONS
Multi-family housing revenue bonds and single family mortgage revenue bonds
are state and local housing issues that have been issued to provide financing
for various housing projects. Multi-family housing revenue bonds are payable
primarily from the revenues derived from mortgage loans to housing projects for
low to moderate income families. Single-family mortgage revenue bonds are issued
for the purpose of acquiring from originating financial institutions notes
secured by mortgages on residences.
Housing obligations are not general obligations of the issuer although
certain obligations may be supported to some degree by Federal, state or local
housing subsidy programs. Budgetary constraints experienced by these programs as
well as the failure by a state or local housing issuer to satisfy the
qualifications required for coverage under these programs or any legal or
administrative determinations that the coverage of these programs is not
available to a housing issuer, probably will result in a decrease or elimination
of subsidies available for payment of amounts due on the issuer's obligations.
The ability of housing issuers to make debt service payments on their
obligations will also be affected by various economic and non-economic
developments including, among other things, the achievement and maintenance of
sufficient occupancy levels and adequate rental income in multi-family projects,
the rate of default on mortgage loans underlying single family issues and the
ability of mortgage insurers to pay claims, employment and income conditions
prevailing in local markets, increases in construction costs, taxes, utility
costs and other operating expenses, the managerial ability of project managers,
changes in laws and governmental regulations and economic trends generally in
the localities in which the projects are situated. Occupancy of multi-family
housing projects may also be adversely affected by high rent levels and income
limitations imposed under Federal, state or local programs.
All single family mortgage revenue bonds and certain multi-family housing
revenue bonds are prepayable over the life of the underlying mortgage or
mortgage pool, and therefore the average life of housing obligations cannot be
determined. However, the average life of these obligations will ordinarily be
less than their stated maturities. Single-family issues are subject to mandatory
redemption in whole or in part from prepayments on underlying mortgage loans;
mortgage loans are frequently partially or completely prepaid prior to their
final stated maturities as a result of events such as declining interest rates,
sale of the mortgaged premises, default, condemnation or casualty loss.
Multi-family issues are characterized by mandatory redemption at par upon the
occurrence of monetary defaults or breaches of covenants by the project
operator. Additionally, housing obligations are generally subject to mandatory
partial redemption at par to the extent that proceeds from the sale of the
obligations are not allocated within a stated period (which may be within a year
of the date of issue). To the extent that these obligations were valued at a
premium when a Holder purchased Units, any prepayment at par would result in a
loss of capital to the Holder and, in any event, reduce the amount of income
that would otherwise have been paid to Holders.
The tax exemption for certain housing revenue bonds depends on
qualification under Section 143 of the Internal Revenue Code of 1986, as amended
(the 'Code'), in the case of single family mortgage revenue bonds or Section
142(a)(7) of the Code or other provisions of Federal law in the case of certain
multi-family housing
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revenue bonds (including Section 8 assisted bonds). These sections of the Code
or other provisions of Federal law contain certain ongoing requirements,
including requirements relating to the cost and location of the residences
financed with the proceeds of the single family mortgage revenue bonds and the
income levels of tenants of the rental projects financed with the proceeds of
the multi-family housing revenue bonds. While the issuers of the bonds and other
parties, including the originators and servicers of the single-family mortgages
and the owners of the rental projects financed with the multi-family housing
revenue bonds, generally covenant to meet these ongoing requirements and
generally agree to institute procedures designed to ensure that these
requirements are met, there can be no assurance that these ongoing requirements
will be consistently met. The failure to meet these requirements could cause the
interest on the bonds to become taxable, possibly retroactively from the date of
issuance, thereby reducing the value of the bonds, subjecting the Holders to
unanticipated tax liabilities and possibly requiring the Trustee to sell the
bonds at reduced values. Furthermore, any failure to meet these ongoing
requirements might not constitute an event of default under the applicable
mortgage or permit the holder to accelerate payment of the bond or require the
issuer to redeem the bond. In any event, where the mortgage is insured by the
Federal Housing Administration, its consent may be required before insurance
proceeds would become payable to redeem the mortgage bonds.
HOSPITAL AND HEALTH CARE FACILITY OBLIGATIONS
The ability of hospitals and other health care facilities to meet their
obligations with respect to revenue bonds issued on their behalf is dependent on
various factors, including the level of payments received from private
third-party payors and government programs and the cost of providing health care
services.
A significant portion of the revenues of hospitals and other health care
facilities is derived from private third-party payors and government programs,
including the Medicare and Medicaid programs. Both private third-party payors
and government programs have undertaken cost containment measures designed to
limit payments made to health care facilities. Furthermore, government programs
are subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which may
materially decrease the rate of program payments for health care facilities.
There can be no assurance that payments under governmental programs will remain
at levels comparable to present levels or will, in the future, be sufficient to
cover the costs allocable to patients participating in such programs. In
addition, there can be no assurance that a particular hospital or other health
care facility will continue to meet the requirements for participation in such
programs.
The costs of providing health care services are subject to increase as a
result of, among other factors, changes in medical technology and increased
labor costs. In addition, health care facility construction and operation is
subject to federal, state and local regulation relating to the adequacy of
medical care, equipment, personnel, operating policies and procedures,
rate-setting, and compliance with building codes and environmental laws.
Facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with the various standards necessary
for licensing and accreditation. These regulatory requirements are subject to
change and, to comply, it may be necessary for a hospital or other health care
facility to incur substantial capital expenditures or increased operating
expenses to effect changes in its facilities, equipment, personnel and services.
Hospitals and other health care facilities are subject to claims and legal
actions by patients and others in the ordinary course of business. Although
these claims are generally covered by insurance, there can be no assurance that
a claim will not exceed the insurance coverage of a health care facility or that
insurance coverage will be available to a facility. In addition, a substantial
increase in the cost of insurance could adversely affect the results of
operations of a hospital or other health care facility. The Clinton
Administration may impose regulations which could limit price increases for
hospitals or the level of reimbursements for third-party payors or other
measures to reduce health care costs and make health care available to more
individuals, which would reduce profits for hospitals. Some states, such as New
Jersey, have significantly changed their reimbursement systems. If a hospital
cannot adjust to the new system by reducing expenses or raising rates, financial
difficulties may arise. Also, Blue Cross has denied reimbursement for some
hospitals for services other than emergency room services. The lost volume would
reduce revenues unless replacement patients were found.
Certain hospital bonds may provide for redemption at par at any time upon
the sale by the issuer of the hospital facilities to a non-affiliated entity, if
the hospital becomes subject to ad valorem taxation, or in various other
circumstances. For example, certain hospitals may have the right to call bonds
at par if the hospital may be legally required because of the bonds to perform
procedures against specified religious principles or to disclose information
that is considered confidential or privileged. Certain FHA-insured bonds may
provide that all or a portion of those bonds, otherwise callable at a premium,
can be called at par in certain circumstances. If a hospital defaults upon a
bond obligation, the realization of Medicare and Medicaid receivables may be
uncertain
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and, if the bond obligation is secured by the hospital facilities, legal
restrictions on the ability to foreclose upon the facilities and the limited
alternative uses to which a hospital can be put may severely reduce its
collateral value.
The Internal Revenue Service is currently engaged in a program of intensive
audits of certain large tax-exempt hospital and health care facility
organizations. Although these audits have not yet been completed, it has been
reported that the tax-exempt status of some of these organizations may be
revoked. At this time, it is uncertain whether any of the hospital and health
care facility obligations held by the Fund will be affected by such audit
proceedings.
AIRPORT, PORT AND HIGHWAY REVENUE OBLIGATIONS
Certain facility revenue bonds are payable from and secured by the revenues
from the ownership and operation of particular facilities, such as airports
(including airport terminals and maintenance facilities), bridges, marine
terminals, turnpikes and port authorities. For example, the major portion of
gross airport operating income is generally derived from fees received from
signatory airlines pursuant to use agreements which consist of annual payments
for airport use, occupancy of certain terminal space, facilities, service fees,
concessions and leases. Airport operating income may therefore be affected by
the ability of the airlines to meet their obligations under the use agreements.
The air transport industry is experiencing significant variations in earnings
and traffic, due to increased competition, excess capacity, increased aviation
fuel, deregulation, traffic constraints, the current recession and other
factors. As a result, several airlines are experiencing severe financial
difficulties. Several airlines including America West Airlines have sought
protection from their creditors under Chapter 11 of the Bankruptcy Code. In
addition, other airlines such as Midway Airlines, Inc., Eastern Airlines, Inc.
and Pan American Corporation have been liquidated. However, within the past few
months Northwest Airlines, Continental Airlines and Trans World Airlines have
emerged from bankruptcy. The Sponsors cannot predict what effect these industry
conditions may have on airport revenues which are dependent for payment on the
financial condition of the airlines and their usage of the particular airport
facility.
Similarly, payment on bonds related to other facilities is dependent on
revenues from the projects, such as use fees from ports, tolls on turnpikes and
bridges and rents from buildings. Therefore, payment may be adversely affected
by reduction in revenues due to such factors and increased cost of maintenance
or decreased use of a facility, lower cost of alternative modes of
transportation or scarcity of fuel and reduction or loss of rents.
SOLID WASTE DISPOSAL BONDS
Bonds issued for solid water disposal facilities are generally payable from
tipping fees and from revenues that may be earned by the facility on the sale of
electrical energy generated in the combustion of waste products. The ability of
solid waste disposal facilities to meet their obligations depends upon the
continued use of the facility, the successful and efficient operation of the
facility and, in the case of waste-to-energy facilities, the continued ability
of the facility to generate electricity on a commercial basis. All of these
factors may be affected by a failure of municipalities to fully utilize the
facilities, an insufficient supply of waste for disposal due to economic or
population decline, rising construction and maintenance costs, any delays in
construction of facilities, lower-cost alternative modes of waste processing and
changes in environmental regulations. Because of the relatively short history of
this type of financing, there may be technological risks involved in the
satisfactory construction or operation of the projects exceeding those
associated with most municipal enterprise projects. Increasing environmental
regulation on the federal, state and local level has a significant impact on
waste disposal facilities. While regulation requires more waste producers to use
waste disposal facilities, it also imposes significant costs on the facilities.
These costs include compliance with frequently changing and complex regulatory
requirements, the cost of obtaining construction and operating permits, the cost
of conforming to prescribed and changing equipment standards and required
methods of operation and, for incinerators or waste-to-energy facilities, the
cost of disposing of the waste residue that remains after the disposal process
in an environmentally safe manner. In addition, waste disposal facilities
frequently face substantial opposition by environmental groups and officials to
their location and operation, to the possible adverse effects upon the public
health and the environment that may be caused by wastes disposed of at the
facilities and to alleged improper operating procedures. Waste disposal
facilities benefit from laws which require waste to be disposed of in a certain
manner but any relaxation of these laws could cause a decline in demand for the
facilities' services. Finally, waste-to-energy facilities are concerned with
many of the same issues facing utilities insofar as they derive revenues from
the sale of energy to local power utilities (see State and Local Municipal
Utility Obligations above).
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SPECIAL TAX BONDS
Special tax bonds are payable from and secured by the revenues derived by a
municipality from a particular tax such as a tax on the rental of a hotel room,
on the purchase of food and beverages, on the rental of automobiles or on the
consumption of liquor. Special tax bonds are not secured by the general tax
revenues of the municipality, and they do not represent general obligations of
the municipality. Therefore, payment on special tax bonds may be adversely
affected by a reduction in revenues realized from the underlying special tax due
to a general decline in the local economy or population or due to a decline in
the consumption, use or cost of the goods and services that are subject to
taxation. Also, should spending on the particular goods or services that are
subject to the special tax decline, the municipality may be under no obligation
to increase the rate of the special tax to ensure that sufficient revenues are
raised from the shrinking taxable base.
TRANSIT AUTHORITY OBLIGATIONS
Mass transit is generally not self-supporting from fare revenues.
Therefore, additional financial resources must be made available to ensure
operation of mass transit systems as well as the timely payment of debt service.
Often such financial resources include Federal and state subsidies, lease
rentals paid by funds of the state or local government or a pledge of a special
tax such as a sales tax or a property tax. If fare revenues or the additional
financial resources do not increase appropriately to pay for rising operating
expenses, the ability of the issuer to adequately service the debt may be
adversely affected.
MUNICIPAL WATER AND SEWER REVENUE BONDS
Water and sewer bonds are generally payable from user fees. The ability of
state and local water and sewer authorities to meet their obligations may be
affected by failure of municipalities to utilize fully the facilities
constructed by these authorities, economic or population decline and resulting
decline in revenue from user charges, rising construction and maintenance costs
and delays in construction of facilities, impact of environmental requirements,
failure or inability to raise user charges in response to increased costs, the
difficulty of obtaining or discovering new supplies of fresh water, the effect
of conservation programs and the impact of 'no growth' zoning ordinances. In
some cases this ability may be affected by the continued availability of Federal
and state financial assistance and of municipal bond insurance for future bond
issues.
UNIVERSITY AND COLLEGE OBLIGATIONS
The ability of universities and colleges to meet their obligations is
dependent upon various factors, including the size and diversity of their
sources of revenues, enrollment, reputation, management expertise, the
availability and restrictions on the use of endowments and other funds, the
quality and maintenance costs of campus facilities, and, in the case of public
institutions, the financial condition of the relevant state or other
governmental entity and its policies with respect to education. The
institution's ability to maintain enrollment levels will depend on such factors
as tuition costs, demographic trends, geographic location, geographic diversity
and quality of the student body, quality of the faculty and the diversity of
program offerings.
Legislative or regulatory action in the future at the Federal, state or
local level may directly or indirectly affect eligibility standards or reduce or
eliminate the availability of funds for certain types of student loans or grant
programs, including student aid, research grants and work-study programs, and
may affect indirect assistance for education.
PUERTO RICO
The Portfolio may contain Debt Obligations of issuers which will be
affected by general economic conditions in Puerto Rico. Puerto Rico's
unemployment rate remains significantly higher than the U.S. unemployment rate.
Furthermore, the economy is largely dependent for its development upon U.S.
policies and programs that are being reviewed and may be eliminated.
The Puerto Rican economy is affected by a number of Commonwealth and
Federal investment incentive programs. For example, Section 936 of the Internal
Revenue Code (the 'Code') provides for a credit against Federal income taxes for
U.S. companies operating on the island if certain requirements are met. The
Omnibus Budget Reconciliation Act of 1993 imposes limits on such credit,
effective for tax years beginning after 1993. In addition, from time to time
proposals are introduced in Congress which, if enacted into law, would eliminate
some or all of the benefits of Section 936. Although no assessment can be made
at this time of the precise effect of such limitation, it is expected that the
limitation of Section 936 credits would have a negative impact on Puerto Rico's
economy.
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Aid for Puerto Rico's economy has traditionally depended heavily on Federal
programs, and current Federal budgetary policies suggest that an expansion of
aid to Puerto Rico is unlikely. An adverse effect on the Puerto Rican economy
could result from other U.S. policies, including a reduction of tax benefits for
distilled products, further reduction in transfer payment programs such as food
stamps, curtailment of military spending and policies which could lead to a
stronger dollar.
In a plebiscite held in November, 1993, the Puerto Rican electorate chose
to continue Puerto Rico's Commonwealth status. Previously proposed legislation,
which was not enacted, would have preserved the federal tax exempt status of the
outstanding debts of Puerto Rico and its public corporations regardless of the
outcome of the referendum, to the extent that similar obligations issued by
states are so treated and subject to the provisions of the Code currently in
effect. There can be no assurance that any pending or future legislation finally
enacted will include the same or similar protection against loss of tax
exemption. The November 1993 plebiscite can be expected to have both direct and
indirect consequences on such matters as the basic characteristics of future
Puerto Rico debt obligations, the markets for these obligations, and the types,
levels and quality of revenue sources pledged for the payment of existing and
future debt obligations. Such possible consequences include, without limitation,
legislative proposals seeking restoration of the status of Section 936 benefits
otherwise subject to the limitations discussed above. However, no assessment can
be made at this time of the economic and other effects of a change in federal
laws affecting Puerto Rico as a result of the November 1993 plebiscite.
OBLIGATIONS BACKED BY LETTERS OF CREDIT
Certain Debt Obligations may be secured by letters of credit issued by
commercial banks or collateralized letters of credit issued by savings banks,
savings and loan associations and similar institutions ('thrifts') or direct
obligations of banks or thrifts pursuant to 'loans-to-lenders' programs. The
letter of credit may be drawn upon, and the Debt Obligations consequently
redeemed, should an issuer fail to make payments of amounts due on a Debt
Obligation backed by a letter of credit or default under its reimbursement
agreement with the issuer of the letter of credit or, in certain cases, in the
event the interest on a Debt Obligation should be deemed to be taxable and full
payment of amounts due is not made by the issuer. The letters of credit are
irrevocable obligations of the issuing institutions, which are subject to
extensive governmental regulations which may limit both the amounts and types of
loans and other financial commitments which may be made and interest rates and
fees which may be charged.
The profitability of financial institutions is largely dependent upon the
availability and cost of funds for the purpose of financing lending operations
under prevailing money market conditions. Also, general economic conditions play
an important part in the operations of this industry and exposure to credit
losses arising from possible financial difficulties of borrowers might affect an
institution's ability to meet its obligations. Since the late 1980's the ratings
of U.S. and foreign banks and holding companies have been subject to extensive
downgrades due primarily to deterioration in asset quality and the attendant
impact on earnings and capital adequacy. Major U.S. banks, in particular,
suffered from a decline in asset quality in the areas of loans to Lesser
Developed Countries (LDC's), construction and commercial real estate loans and
lending to support Highly Leveraged Transactions (HLT's). LDC and HLT problems
have been largely addressed, although construction and commercial real estate
loans remain areas of concern. The Federal Deposit Insurance Corporation
('FDIC') indicated that in 1990, 168 federally insured banks with an aggregate
total of $45.7 billion in assets failed and that in 1991, 124 federally insured
banks with an aggregate total of $64.3 billion in assets failed. During 1992,
the FDIC resolved 120 failed banks with combined assets of $44.2 billion. These
factors also affect bank holding companies and other financial institutions,
which may not be as highly regulated as banks, and may be more able to expand
into other non-financial and non-traditional businesses.
The Resolution Trust Corporation Refinancing, Restructuring and Improvement
Act of 1991 and the Federal Deposit Insurance Corporation Improvement Act of
1991 imposed many new limitations on the way in which banks, savings banks, and
thrifts may conduct their business and mandated early and aggressive regulatory
intervention for unhealthy institutions. Periodic efforts by recent
Administrations to introduce legislation broadening the ability of banks and
thrifts to compete with new products have not been successful, but if enacted
could lead to more failures as a result of increased competition and added
risks. Failure to enact such legislation, on the other hand, may lead to
declining earnings and an inability to compete with unregulated financial
institutions. Efforts to expand the ability of federal thrifts to branch on an
interstate basis have been initially successful through promulgation of
regulations, but legislation to liberalize interstate branching for banks has
stalled in the Congress. Consolidation is likely to continue in both cases. The
Securities and Exchange Commission ('SEC') is attempting to require the expanded
use of market value accounting by banks and thrifts, and has imposed rules
requiring market accounting for investment securities held for sale. Adoption of
additional
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such rules may result in increased volatility in the reported health of the
industry and mandated regulatory intervention to correct such problems.
In addition, historically, thrifts primarily financed residential and
commercial real estate by making fixed-rate mortgage loans and funded those
loans from various types of deposits. Thrifts were restricted as to the types of
accounts which could be offered and the rates that could be paid on those
accounts. During periods of high interest rates, large amounts of deposits were
withdrawn as depositors invested in Treasury bills and notes and in money market
funds which provided liquidity and high yields not subject to regulation. As a
result the cost of thrifts' funds exceeded income from mortgage loan portfolios
and other investments, and their financial positions were adversely affected.
Laws and regulations eliminating interest rate ceilings and restrictions on
types of accounts that may be offered by thrifts were designed to permit thrifts
to compete for deposits on the basis of current market rates and to improve
their financial positions.
However, with respect to any Debt Obligations included in the fund that are
secured by collateralized letters of credit or guarantees of thrifts, on the
basis of the current financial positions of the thrifts, the Sponsors believe
that investors in the Units should rely solely on the collateral securing the
performance of the thrifts' obligations with respect to those Debt Obligations
and not on the financial positions of the thrifts.
In certain cases, the Sponsors have agreed that their sole recourse in
connection with any default, including insolvency, by the thrifts whose
collateralized letter of credit or guarantee may back any of the Debt
Obligations will be to exercise available remedies with respect to the
collateral pledged by the thrift; should such collateral be insufficient, the
Sponsors will therefore be unable to pursue any default judgement against that
thrift.
Certain of these collateralized letters of credit or guarantees may provide
that they are to be drawn upon in the event the thrift becomes or is deemed to
be insolvent. Accordingly, investors should recognize that they are subject to
having the principal amount of their investment represented by a Debt Obligation
secured by such a collateralized letter of credit or guarantee returned prior to
the termination date of the Fund or the maturity or disposition dates of the
Debt Obligations if the thrift becomes or is deemed to be insolvent.
Certain Debt Obligations in the Portfolio may be supported by guarantees or
letters of credit which are secured by a security interest in 'Eligible
Collateral'. Eligible Collateral may consist of mortgage-backed securities
issued by private parties and guaranteed as to full and timely payment of
interest and principal by the Government National Mortgage Association ('GNMA')
('GNMA Pass-Throughs') or by the Federal National Mortgage Association ('FNMA')
('FNMA Pass-Throughs'), mortgage-backed securities issued by the Federal Home
Loan Mortgage Corporation ('FHLMC') and guaranteed as to full and timely payment
of interest and full collection of principal by FHLMC ('FHLMC PCs'),
conventional, FHA insured, VA guaranteed and privately insured mortgages
('Mortgages'), debt obligations of states and their political subdivisions and
public authorities ('Municipal Obligations'), debt obligations of public
nongovernmental corporations rated at least A by Standard & Poor's (or another
acceptable rating agency at the time rating the Fund) ('Corporate Obligations'),
U.S. Government Securities and cash. In addition, Eligible Collateral may also
consist of other securities specified by the Sponsors.
With respect to each Debt Obligation as to which Eligible Collateral has
been pledged, the Sponsors have established minimum percentage levels
('Collateral Requirements') of the aggregate market value of each type of
Eligible Collateral consistent with the standards described under The Portfolio
below. Eligible Collateral is to be valued no less often than quarterly. If on
any valuation date it is determined that the aggregate market value of the
Eligible Collateral does not satisfy the applicable Collateral Requirements,
additional Eligible Collateral must be delivered. Eligible Collateral may be
withdrawn or substituted at any time, provided that the remaining or substituted
Eligible Collateral meets the applicable Collateral Requirements. Although the
Sponsors believe that the Collateral Requirements are sufficient to provide a
high degree of protection against loss on the Debt Obligations backed by
collateralized letters of credit or guarantees, investors in the Units should be
aware that if liquidation of the collateral is required and proves insufficient
to provide for payment in full of the principal and accrued interest on such
Debt Obligations, then the full principal amount of their investment could not
be returned.
OBLIGATIONS BACKED BY INSURANCE
Certain Debt Obligations (the 'Insured Debt Obligations') may be insured or
guaranteed by AMBAC Indemnity Corporation ('AMBAC'), Asset Guaranty Reinsurance
Co. ('Asset Guaranty'), Capital Guaranty Insurance Company ('CGIC'), Capital
Markets Assurance Corp. ('CAPMAC'), Connie Lee Insurance Company ('Connie Lee'),
Continental Casualty Company ('Continental'), Financial Guaranty Insurance
Company ('Financial Guaranty'), Financial Security Assurance Inc. ('FSA'),
Firemen's Insurance Company of Newark,
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New Jersey ('Firemen's'), Municipal Bond Investors Assurance Corporation
('MBIA') or National Union Fire Insurance Company of Pittsburgh, Pa. ('National
Union') (collectively, the 'Insurance Companies'). The claims-paying ability of
each of these companies, unless otherwise indicated, is rated AAA by Standard &
Poor's or another acceptable national rating agency. The ratings are subject to
change at any time at the discretion of the rating agencies. In determining
whether to insure bonds, the Insurance Companies severally apply their own
standards. The cost of this insurance is borne either by the issuers or previous
owners of the bonds or by the Sponsors. The insurance policies are
non-cancellable and will continue in force so long as the Insured Debt
Obligations are outstanding and the insurers remain in business. The insurance
policies guarantee the timely payment of principal and interest on but do not
guarantee the market value of the Insured Debt Obligations or the value of the
Units. The insurance policies generally do not provide for accelerated payments
of principal or cover redemptions resulting from events of taxability. If the
issuer of any Insured Debt Obligation should fail to make an interest or
principal payment, the insurance policies generally provide that the Trustee or
its agent shall give notice of nonpayment to the Insurance Company or its agent
and provide evidence of the Trustee's right to receive payment. The Insurance
Company is then required to disburse the amount of the failed payment to the
Trustee or its agent and is thereafter subrogated to the Trustee's right to
receive payment from the issuer.
The following are brief descriptions of certain of the insurance companies
that may insure or guarantee certain Debt Obligations. The financial information
presented for each company has been determined on a statutory basis and is
unaudited.
AMBAC is a Wisconsin-domiciled stock insurance company, regulated by the
Insurance Department of the State of Wisconsin, and licensed to do business in
various states, with admitted assets of approximately $1,936,000,000 and
policyholders' surplus of approximately $728,000,000 as of September 30, 1993.
AMBAC is a wholly-owned subsidiary of AMBAC Inc., a financial holding company
which is publicly owned following a complete divestiture by Citibank during the
first quarter of 1992.
Asset Guaranty is a New York State insurance company licensed to write
financial guarantee, credit, residual value and surety insurance. Asset Guaranty
commenced operations in mid-1988 by providing reinsurance to several major
monoline insurers. Asset Guaranty also issues limited amounts of primary
financial guaranty insurance, but not in direct competition with the primary
mono-line companies for which it acts as a reinsurer. The parent holding company
of Asset Guaranty, Asset Guarantee Inc. (AGI), merged with Enhance Financial
Services (EFS) in June, 1990 to form Enhance Financial Services Group Inc.
(EFSG). The two main, 100%-owned subsidiaries of EFSG, Asset Guaranty and
Enhance Reinsurance Company (ERC), share common management and physical
resources. After an initial public offering completed in February 1992 and the
sale by Merrill Lynch & Co. of its stake, EFSG is 49.8%-owned by the public,
29.9% by US West Financial Services, 14.1% by Manufacturers Life Insurance Co.
and 6.2% by senior management. Both ERC and Asset Guaranty are rated 'AAA' for
claims paying ability by Duff & Phelps. ERC is rated triple-A for
claims-paying-ability by both S&P and Moody's. Asset Guaranty received a 'AA'
claims-paying-ability rating from S&P during August 1993, but remains unrated by
Moody's. As of September 30, 1993 Asset Guaranty had admitted assets of
approximately $130,000,000 and policyholders' surplus of approximately
$72,000,000.
CGIC, a monoline bond insuror headquartered in San Francisco, California,
was established in November 1986 to assume the financial guaranty business of
United States Fidelity and Guaranty Company ('USF&G'). It is a wholly-owned
subsidiary of Capital Guaranty Corporation ('CGC') whose stock is owned by:
Constellation Investments, Inc., an affiliate of Baltimore Gas & Electric,
Fleet/Norstar Financial Group, Inc., Safeco Corporation, Sibag Finance
Corporation, an affiliate of Siemens AG, and USF&G, the 8th largest
property/casualty company in the U.S. as measured by net premiums written and
CGC management. As of September 30, 1993, CGIC had total admitted assets of
approximately $270,000,000 and policyholders' surplus of approximately
$160,000,000.
CAPMAC commenced operations in December 1987, as the second mono-line
financial guaranty insurance company (after FSA) organized solely to insure
non-municipal obligations. CAPMAC, a New York corporation, is a wholly-owned
subsidiary of CAPMAC Holdings, Inc. (CHI), which was sold in 1992 by Citibank
(New York State) to a group of 12 investors led by the following: Dillon Read's
Saratoga Partners II; L.P. (Saratoga), an acquisition fund; Caprock Management,
Inc., representing Rockefeller family interests; Citigrowth Fund, a Citicorp
venture capital group; and CAPMAC senior management and staff. These groups
control approximately 70% of the stock of CHI. CAPMAC had traditionally
specialized in guaranteeing consumer loan and trade receivable asset-backed
securities. Under the new ownership group CAPMAC intends to become involved in
the municipal bond insurance business, as well as their traditional
non-municipal business. As of
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September 30, 1993 CAPMAC's admitted assets were approximately $182,000,000 and
its policyholders' surplus was approximately $146,000,000.
Connie Lee is a wholly owned subsidiary of College Construction Loan
Insurance Association ('CCLIA'), a government-sponsored enterprise established
by Congress to provide American academic institutions with greater access to
low-cost capital through enhancement. Connie Lee, the operating insurance
company, was incorporated in 1987 and began business as a reinsurer of
tax-exempt bonds of colleges, universities, and teaching hospitals with a
concentration on the hospital sector. During the fourth quarter of 1991 Connie
Lee began underwriting primary bond insurance which will focus largely on the
college and university sector. CCLIA's founding shareholders are the U.S.
Department of Education, which owns 36% of CCLIA, and the Student Loan Marketing
Association ('Sallie Mae'), which owns 14%. The other principal owners are:
Pennsylvania Public School Employees' Retirement System, Metropolitan Life
Insurance Company, Kemper Financial Services, Johnson family funds and trusts,
Northwestern University, Rockefeller & Co., Inc. administered trusts and funds,
and Stanford University. Connie Lee is domiciled in the state of Wisconsin and
has licenses to do business in 47 states and the District of Columbia. As of
September 30, 1993, its total admitted assets were approximately $173,000,000
and policyholders' surplus was approximately $104,000,000.
Continental is a wholly-owned subsidiary of CNA Financial Corp. and was
incorporated under the laws of Illinois in 1948. As of September 30, 1993,
Continental had policyholders' surplus of approximately $3,332,000,000 and
admitted assets of approximately $18,458,000,000. Continental is the lead
property-casualty company of a fleet of carriers nationally known as 'CNA
Insurance Companies'. CNA is rated AA+ by Standard & Poor's.
Financial Guaranty, a New York stock insurance company, is a wholly-owned
subsidiary of FGIC Corporation which is wholly owned by General Electric Capital
Corporation. The investors in the FGIC Corporation are not obligated to pay the
debts of or the claims against Financial Guaranty. Financial Guaranty commenced
its business of providing insurance and financial guarantees for a variety of
investment instruments in January 1984 and is currently authorized to provide
insurance in 49 states and the District of Columbia. It files reports with state
regulatory agencies and is subject to audit and review by those authorities. As
of September 30, 1993, its total admitted assets were approximately
$1,889,000,000 and its policyholders' surplus was approximately $745,000,000.
FSA is a monoline property and casualty insurance company incorporated in
New York in 1984. It is a wholly-owned subsidiary of Financial Security
Assurance Holdings Ltd., which was acquired in December 1989 by US West, Inc.,
the regional Bell Telephone Company serving the Rocky Mountain and Pacific
Northwestern states. U.S. West is currently seeking to sell FSA. FSA is licensed
to engage in the surety business in 42 states and the District of Columbia. FSA
is engaged exclusively in the business of writing financial guaranty insurance
on both tax-exempt and non-municipal securities. As of September 30, 1993, FSA
had policyholders' surplus of approximately $412,000,000 and total admitted
assets of approximately $799,000,000.
Firemen's, which was incorporated in New Jersey in 1855, is a wholly-owned
subsidiary of The Continental Corporation and a member of The Continental
Insurance Companies, a group of property and casualty insurance companies the
claims paying ability of which is rated AA-by Standard & Poor's. It provides
unconditional and non-cancellable insurance on industrial development revenue
bonds. As of September 30, 1993, the total admitted assets of Firemen's were
approximately $2,227,000,000 and its policyholders' surplus was approximately
$496,000,000.
MBIA is the principal operating subsidiary of MBIA Inc. The principal
shareholders of MBIA Inc. were originally Aetna Casualty and Surety Company, The
Fund American Companies Inc., subsidiaries of CIGNA Corporation and Credit Local
de France, CAECL, S.A. These principal shareholders now own approximately 13% of
the outstanding common stock of MBIA Inc., following a series of four public
equity offerings over a five-year period. As of September 30, 1993, MBIA had
admitted assets of approximately $3,000,000,000 and policyholders' surplus of
approximately $951,000,000.
National Union is a stock insurance company incorporated in Pennsylvania
and a wholly-owned subsidiary of American International Group, Inc. National
Union was organized in 1901 and is currently licensed to provide insurance in 50
states and the District of Columbia. It files reports with state insurance
regulatory agencies and is subject to regulation, audit and review by those
authorities including the State of New York Insurance Department. As of
September 30, 1993, the total admitted assets and policyholders' surplus of
National Union were approximately $7,907,000,000 and approximately
$1,408,000,000, respectively.
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Insurance companies are subject to regulation and supervision in the
jurisdictions in which they do business under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. This regulation, supervision and administration relate, among
other things, to: the standards of solvency which must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; deposits of securities for the benefit of policyholders; approval
of policy forms and premium rates; periodic examinations of the affairs of
insurance companies; annual and other reports required to be filed on the
financial condition of insurers or for other purposes; and requirements
regarding reserves for unearned premiums, losses and other matters. Regulatory
agencies require that premium rates not be excessive, inadequate or unfairly
discriminatory. Insurance regulation in many states also includes 'assigned
risk' plans, reinsurance facilities, and joint underwriting associations, under
which all insurers writing particular lines of insurance within the jurisdiction
must accept, for one or more of those lines, risks unable to secure coverage in
voluntary markets. A significant portion of the assets of insurance companies is
required by law to be held in reserve against potential claims on policies and
is not available to general creditors.
Although the Federal government does not regulate the business of
insurance, Federal initiatives can significantly impact the insurance business.
Current and proposed Federal measures which may significantly affect the
insurance business include pension regulation (ERISA), controls on medical care
costs, minimum standards for no-fault automobile insurance, national health
insurance, personal privacy protection, tax law changes affecting life insurance
companies or the relative desirability of various personal investment vehicles
and repeal of the current antitrust exemption for the insurance business. (If
this exemption is eliminated, it will substantially affect the way premium rates
are set by all property-liability insurers.) In addition, the Federal government
operates in some cases as a co-insurer with the private sector insurance
companies.
Insurance companies are also affected by a variety of state and Federal
regulatory measures and judicial decisions that define and extend the risks and
benefits for which insurance is sought and provided. These include judicial
redefinitions of risk exposure in areas such as products liability and state and
Federal extension and protection of employee benefits, including pension,
workers' compensation, and disability benefits. These developments may result in
short-term adverse effects on the profitability of various lines of insurance.
Longer-term adverse effects can often be minimized through prompt repricing of
coverages and revision of policy terms. In some instances these developments may
create new opportunities for business growth. All insurance companies write
policies and set premiums based on actuarial assumptions about mortality,
injury, the occurrence of accidents and other insured events. These assumptions,
while well supported by past experience, necessarily do not take account of
future events. The occurrence in the future of unforeseen circumstances could
affect the financial condition of one or more insurance companies. The insurance
business is highly competitive and with the deregulation of financial service
businesses, it should become more competitive. In addition, insurance companies
may expand into non-traditional lines of business which may involve different
types of risks.
The above financial information relating to the Insurance Companies has
been obtained from publicly available information. No representation is made as
to the accuracy or adequacy of the information or as to the absence of material
adverse changes since the information was made available to the public.
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LITIGATION AND LEGISLATION
To the best knowledge of the Sponsors, there is no litigation pending as of the
Initial Date of Deposit in respect of any Debt Obligations which might
reasonably be expected to have a material adverse effect upon the Fund. At any
time after the Initial Date of Deposit, litigation may be initiated on a variety
of grounds, or legislation may be enacted, with respect to Debt Obligations in
the Fund. Litigation, for example, challenging the issuance of pollution control
revenue bonds under environmental protection statutes may affect the validity of
Debt Obligations or the tax-free nature of their interest. While the outcome of
litigation of this nature can never be entirely predicted, opinions of bond
counsel are delivered on the date of issuance of each Debt Obligation to the
effect that the Debt Obligation has been validly issued and that the interest
thereon is exempt from Federal income tax. In addition, other factors may arise
from time to time which potentially may impair the ability of issuers to make
payments due on Debt Obligations.
Under the Federal Bankruptcy Act, a political subdivision or public agency
or instrumentality of any state, including municipalities, may proceed to
restructure or otherwise alter the terms of its obligations, including those of
the type comprising the Fund's Portfolio. The Sponsors are unable to predict
what effect, if any, this legislation might have on the Fund.
From time to time Congress considers proposals to tax the interest on state
and local obligations, such as the Debt Obligations. The Supreme Court clarified
in South Carolina v. Baker (decided April 20, 1988) that the U.S. Constitution
does not prohibit Congress from passing a nondiscriminatory tax on interest on
state and local obligations. This type of legislation, if enacted into law,
could adversely affect an investment in Units. Holders are urged to consult
their own tax advisers.
PAYMENT OF THE DEBT OBLIGATIONS 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 (see
Redemption). Many of the Debt Obligations may be subject to redemption prior to
their stated maturity dates pursuant to optional refunding or sinking fund
redemption provisions or otherwise. In general, optional refunding redemption
provisions are more likely to be exercised when the offering side evaluation is
at a premium over par than when it is at a discount from par. Generally, the
offering side evaluation of Debt Obligations will be at a premium over par when
market interest rates fall below the coupon rate on the Debt Obligations. The
percentage of the face amount of Debt Obligations in the Portfolio which were
acquired on the Date of Deposit at an offering side evaluation in excess of par
is set forth under Investment Summary. Certain Debt Obligations in the Portfolio
may be subject to sinking fund provisions early in the life of the Fund. These
provisions are designed to redeem a significant portion of an issue gradually
over the life of the issue; obligations to be redeemed are generally chosen by
lot. The Portfolio contains a listing of the sinking fund and optional
redemption provisions with respect to the Debt Obligations. 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 Debt
Obligations (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 diversity of
the portfolio remaining at that time, the size of the Fund relative to its
original size, the ratio of Fund expenses to income, the Fund's current and
long-term returns and the degree to which Units may be selling at a premium over
par relative to other funds sponsored by the Sponsors, 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).
TAX EXEMPTION
In the opinion of bond counsel rendered on the date of issuance of each
Debt Obligation, the interest on each Debt Obligation is excludable from gross
income under existing law for regular Federal income tax purposes (except in
certain circumstances depending on the Holder) but may be subject to state and
local taxes. As discussed under Taxes below, interest on some or all of the Debt
Obligations may become subject to regular Federal income tax, perhaps
retroactively to their date of issuance, as a result of changes in Federal law
or as a result of the failure of issuers (or other users of the proceeds of the
Debt Obligations) to comply with certain ongoing requirements.
Moreover, the Internal Revenue Service announced on June 14, 1993 that it
will be expanding its examination program with respect to tax-exempt bonds. The
expanded examination program will consist of,
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among other measures, increased enforcement against abusive transactions,
broader audit coverage (including the expected issuance of audit guidelines) and
expanded compliance achieved by means of expected revisions to the tax-exempt
bond information return forms. At this time, it is uncertain whether the tax
exempt status of any of the Debt Obligations would be affected by such
proceedings, or whether such effect, if any, would be retroactive.
In certain cases, a Debt Obligation may provide that if the interest on the
Debt Obligation should ultimately be determined to be taxable, the Debt
Obligation would become due and payable by its issuer, and, in addition, may
provide that any related letter of credit or other security could be called upon
if the issuer failed to satisfy all or part of its obligation. In other cases,
however, a Debt Obligation may not provide for the acceleration or redemption of
the Debt Obligation or a call upon the related letter of credit or other
security upon a determination of taxability. In those cases in which a Debt
Obligation does not provide for acceleration or redemption or in which both the
issuer and the bank or other entity issuing the letter of credit or other
security are unable to meet their obligations to pay the amounts due on the Debt
Obligation as a result of a determination of taxability, the Trustee would be
obligated to sell the Debt Obligation and, since it would be sold as a taxable
security, it is expected that it would have to be sold at a substantial discount
from current market price. In addition, as mentioned above, under certain
circumstances Holders could be required to pay income tax on interest received
prior to the date on which the interest is determined to be taxable.
DESCRIPTION OF THE FUND
THE PORTFOLIO
The Portfolio contains different issues of debt obligations with fixed
final maturity dates. See the Investment Summary for a summary of particular
matters relating to the Portfolio.
Each security and issuer must be approved by Defined Asset Funds research
analysts. Since 1970, the Sponsors have purchased more than $90 billion of
securities for Defined Asset Funds. Experienced professional buyers and research
analysts for Defined Asset Funds, with access to thousands of different issues
and extensive information who are in close contact with markets for suitable
securities, select securities for deposit in the Fund considering the following
factors, among others: (i) whether the Debt Obligations were rated in the
category A or better by either Standard & Poor's or Moody's (or had, in the
opinion of Defined Asset Funds research analysts, comparable credit
characteristics) (see Description of Ratings); (ii) the yield and price of the
Debt Obligations relative to other comparable debt securities and (iii) the
diversification of the Portfolio as to purpose and location of issuer, taking
into account the availability in the market of issues that meet the Fund's
criteria. Subsequent to the Initial Date of Deposit, a Debt Obligation may cease
to be rated or its rating may be reduced. Neither event requires an elimination
of that Debt Obligation from the Portfolio, but may be considered in the
Sponsors' determination to direct the disposal of the Debt Obligation (see
Administration of the Fund--Portfolio Supervision). There is no leverage or
borrowing to increase risk, nor is the portfolio modified with other kinds of
securities to enhance yields.
The yields on debt obligations of the type deposited in the Fund are
dependent on a variety of factors, including general money market conditions,
general conditions of the municipal bond market, size of a particular offering,
the maturity of the obligation and rating of the issue. The ratings represent
the opinions of the rating organizations as to the quality of the debt
obligations that they undertake to rate. It should be emphasized, however, that
ratings are general and are not absolute standards of quality. Consequently,
debt obligations with the same maturity, coupon and rating may have different
yields, while debt obligations of the same maturity and coupon with different
ratings may have the same yield.
The Fund consists of the Securities (or contracts to purchase the
Securities) listed under Portfolio (including any replacement debt obligations
and Additional Securities deposited in the Fund in connection with the sale of
additional Units to the public as described below), as long as they may continue
to be held from time to time in the Fund together with accrued and undistributed
interest thereon and undistributed and uninvested cash realized from the
disposition or redemption of Securities (see Administration of the
Fund--Portfolio Supervision).
The Indenture authorizes the Sponsors to increase the size and the number
of Units of the Fund by the deposit of Additional Securities and the issue of a
corresponding number of additional Units subsequent to the Initial Date of
Deposit provided that the original relationship among the face amounts of
Securities of specified interest rates and maturities is maintained subject to
certain events (Sections 3.07, 3.08 and 3.10). Also, Securities may be sold
under certain circumstances. (See Redemption; Administration of the
Fund--Portfolio Supervision). As a result, the aggregate face amount of the
Securities in the Portfolio will vary over time.
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Each portfolio is divided into units, representing equal shares of
underlying assets. On the Initial Date of Deposit each Unit represented the
fractional undivided interest in the Fund set forth under the Investment
Summary. Thereafter, if any Units are redeemed by the Trustee the face amount of
Securities in the Fund will be reduced by amounts allocable to redeemed Units,
and the fractional undivided interest represented by each Unit in the balance
will be increased. However, if additional Units are issued by the Fund, the
aggregate value of Securities in the Fund will be increased by amounts allocable
to additional Units, and the fractional undivided interest represented by each
Unit in the balance will be decreased. Units will remain outstanding until
redeemed upon tender to the Trustee by any Holder (which may include the
Sponsors) or until the termination of the Indenture (see Redemption;
Administration of the Fund--Amendment and Termination).
Neither the Sponsors nor the Trustee shall be liable in any way for any
default, failure or defect in any Security. In the event of a failure to deliver
any Debt Obligation that has been purchased for a Fund under a contract
deposited hereunder ('Failed Debt Obligation'), including any Debt Obligation
purchased on a when, as and if issued basis, the Sponsors are authorized under
the Indenture to direct the Trustee to acquire replacement obligations
substantially similar to those originally contracted for and not delivered to
make up the original Portfolio of the Fund. If replacement obligations are not
acquired, the Sponsors will, on or before the next following Distribution Day,
cause to be refunded the attributable sales charge, plus the attributable Cost
of Debt Obligations to Fund listed under Portfolio, plus interest attributable
to the Failed Debt Obligation. (See Administration of the Fund--Portfolio
Supervision.)
INCOME; ESTIMATED CURRENT RETURN; ESTIMATED LONG TERM RETURN
Generally. Each unit receives an equal share of monthly distributions of
interest income and of any principal distributions as bonds mature or are
called, redeemed or sold. The estimated net annual interest rate per Unit on the
business day prior to the date of this Prospectus is set forth under Investment
Summary. This rate shows the percentage return based on $1,000 face amount per
Unit, after deducting estimated annual fees and expenses expressed as a
percentage. This rate will change as Securities mature, are exchanged, redeemed,
paid or sold, as replacement obligations are purchased, as Additional Securities
are deposited and as the expenses of the Fund change. Because the Portfolio is
not actively managed, the Fund's income distributions would not necessarily be
affected by changes in interest rates. Depending on the financial condition of
the issuers, the amount of tax-free monthly income from fixed income obligations
in the Portfolio would be substantially maintained as long as the Portfolio
remains unchanged. However, optional bond redemptions or other Portfolio changes
may occur more frequently when interest rates decline, which would result in
early return of principal.
The Sponsors deliver to the Trustee on the Initial Date of Deposit and on
each subsequent date of deposit a letter or letters of credit in the amount of
the cost (plus accrued interest) of securities to be acquired pursuant to
contracts deposited in the Fund. The Trustee may draw down on this letter of
credit at any time and deposit the cash so drawn in a non-interest bearing
account for the Fund. The Trustee has the use of these funds, on which it pays
no interest, for the period prior to its purchase of when-issued and
delayed-delivery securities. The use of these funds compensates the Trustee for
the reduction of the Trustee's Annual Fee and Expenses.
Interest on the Securities in the Fund, less estimated fees of the Trustee
and Sponsors and certain other expenses, is expected to accrue at the daily rate
(based on a 360-day year) shown under the Investment Summary. The actual daily
rate will vary as Securities are exchanged, redeemed, paid or sold or as the
expenses of the Fund change.
The Estimated Current Return and the Estimated Long Term Return on the
business day prior to the date of this Prospectus are set forth under the
Investment Summary and 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 Fund's Portfolio (after estimated annual
expenses) divided by the Public Offering Price (including the sales charge).
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.
The 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.
Under accepted bond practice, bonds are customarily offered to investors on a
'yield price' basis, which involves 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
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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 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.
While relatively fixed at the time of purchase both Estimated Current
Return and Estimated Long Term Return are subject to fluctuation with changes in
Portfolio composition (including the redemption, sale or other disposition of
Debt Obligations in the Portfolio), changes in market value of the underlying
Debt Obligations and changes in fees and expenses, including sales charges, and
therefore can be materially different than the figures set forth herein. The
size of any difference between Estimated Current Return and Estimated Long Term
Return can also be expected to fluctuate at least as frequently. In addition,
both return figures may not be directly comparable to yield figures used to
measure other investments, and since the return figures are based on certain
assumptions and variables the actual returns received by a Holder may be higher
or lower.
Sales charges of Defined Asset Funds range from under 1.0% to 5.5%. This
may be less than you might pay to buy a comparable mutual fund. Defined Funds
have no 12b-1 or back-end load fees. While sales charges on certain Defined
Funds are deferred, only the previously accrued but unpaid portion of the sales
charge is deducted from the sales proceeds. Defined Funds can be a
cost-effective way to purchase and hold investments. Annual operating expenses
are generally lower than for managed funds. Because Defined Funds have no
management fees, limited transaction cash and no ongoing marketing expenses,
operating expenses are generally less than 0.25% per year. When compounded
annually, small differences in expense ratios can make a big difference in
earnings.
Accrued Interest. In addition to the Public Offering Price, the price of a
Unit includes accrued interest on the Securities from the Initial Date of
Deposit. The accrued interest which is added to the Public Offering Price
represents the amount of accrued interest on the Securities from the Initial
Date of Deposit to, but not including, the settlement date for Units. However,
Securities deposited in the Fund also include an item of accrued but unpaid
interest up to the Initial Date of Deposit. To avoid having Holders pay this
additional accrued interest (which earns no return) when they purchase Units,
the Trustee is responsible for the payment of accrued interest on the Debt
Obligations to the Initial Date of Deposit and then recovers this amount from
the earliest interest payments received by the Fund. Thus, the Sponsors can sell
the Units at a price that includes interest from the Initial Date of Deposit to
the initial settlement date for the Units.
Additionally, interest on the Debt Obligations in the Fund is paid on a
semi-annual (or less frequently, annual) basis. Therefore, it may take several
months after the Initial Date of Deposit for the Trustee to receive sufficient
interest payments on the Securities to begin distributions to Holders (see
Investment Summary for estimates of the amounts of the first and following
Monthly Income Distributions). Further, because interest on the Securities is
not received by the Fund at a constant rate throughout the year, any Monthly
Income Distribution may be more or less than the interest actually received by
the Fund. In order to eliminate 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. Therefore, to account for
those 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. And if a Security is sold, redeemed or otherwise
disposed of, accrued interest will be received by the Fund and will be
distributed periodically to Holders.
Certain Debt Obligations may have been purchased on a when, as and if
issued basis or may have a delayed delivery (see Portfolio). Holders of Units
will be 'at risk' with respect to these Debt Obligations (i.e, may derive either
gain or loss from fluctuations in the offering side evaluation of the Debt
Obligations) from the date they commit for Units. Since interest on when-issued
and delayed-delivery Debt Obligations does not begin accruing to the benefit of
Holders until their respective dates of delivery, in order to provide tax-exempt
income to the Holders for this non-accrual period, the Trustee's Annual Fee and
Expenses (set forth under Investment Summary) will be reduced in an amount equal
to the amount of interest that would have accrued on these Debt Obligations
between the date of settlement for the Units and the dates of delivery of the
Debt Obligation. The
18
<PAGE>
reduction of the Trustee's Annual Fee and Expenses eliminates the necessity of
reducing Monthly Income Distributions until when-issued or delayed-delivery Debt
Obligations are delivered and sufficient interest payments are received to begin
distributions to Holders. Should when-issued Debt Obligations be issued later
than the expected date of issue, the amount of the reduction will be equal to
the amount of interest which would have accrued on the Debt Obligations between
the expected date of issue and the actual date of issue. If the amount of the
Trustee's Annual Fee and Expenses is inadequate to cover the additional accrued
interest, the Sponsors will treat the contracts as failed contracts.
TAXES
The following discussion addresses only the tax consequences of Units held
as capital assets and does not address the tax consequences of Units held by
dealers, financial institutions or insurance companies.
In the opinion of Davis Polk & Wardwell, special counsel for the Sponsors,
under existing law:
The Fund is not an association taxable as a corporation for Federal
income tax purposes, and income received by the Fund will be treated as the
income of the Holders in the manner set forth below.
Each Holder will be considered the owner of a pro rata portion of each
Debt Obligation in the Fund under the grantor trust rules of Sections
671-679 of the Internal Revenue Code of 1986, as amended (the 'Code'). In
order to determine the face amount of a Holder's pro rata portion of each
Debt Obligation on the Initial Date of Deposit, see Face Amount under
Portfolio. The total cost to a Holder of his Units, including sales
charges, is allocated to his pro rata portion of each Debt Obligation, in
proportion to the fair market values thereof on the date the Holder
purchases his Units, in order to determine his tax basis for his pro rata
portion of each Debt Obligation. In order for a Holder who purchases his
Units on the Initial Date of Deposit to determine the fair market value of
his pro rata portion of each Debt Obligation on such date, see Cost of Debt
Obligations to Fund under Portfolio.
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. In the opinion of bond counsel (delivered on the
date of issuance of the Debt Obligation), such interest will be excludable
from gross income for regular Federal income tax purposes (except in
certain limited circumstances referred to below). Amounts received by the
Fund pursuant to a bank letter of credit, guarantee or insurance policy
with respect to payments of principal, premium or interest on a Debt
Obligation will be treated for Federal income tax purposes in the same
manner as if such amounts were paid by the issuer of the Debt Obligation.
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
at 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
tax-exempt obligation issued after September 3, 1982 is deemed to accrue as
tax-exempt interest over the life of the obligation under a formula based
on the compounding of interest. Original issue discount on a tax-exempt
obligation issued before July 2, 1982 is deemed to accrue as tax-exempt
interest ratably over the life of the obligation. Original issue discount
on any tax-exempt obligation issued during the period beginning July 2,
1982 and ending September 3, 1982 is also deemed to accrue as tax-exempt
interest over the life of the obligation, although it is not clear whether
such accrual is ratable or is determined under a formula based on the
compounding of interest. If a Holder's tax basis 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'. A Holder's adjusted tax basis for his pro rata
portion of the Debt Obligation issued with original issue discount will
include original issue discount accrued during the period such Holder held
his Units. Such increases to the Holder's tax basis in his pro rata portion
of the Debt Obligation resulting from the accrual of original issue
discount, however, will be reduced by the amount of any such acquisition
premium.
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 with 'amortizable bond premium'. The Holder
is required to amortize such premium over the term of the Debt Obligation.
Such amortization is only a reduction of basis for his pro rata portion of
the Debt Obligation and does not result in any deduction against the
Holder's income. Therefore, under some circumstances, a Holder may
recognize taxable gain when his pro rata portion of a Debt Obligation is
disposed of for an amount equal to or less than his original tax basis
therefor.
19
<PAGE>
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
a 'market discount' (i.e., where the Holder's original tax basis for his
pro rata portion of the Debt Obligation (plus any original issue discount
which will accrue thereon until its maturity) is less than its stated
redemption price at maturity) would 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.
Under Section 265 of the Code, a Holder (except a corporate Holder) is
not entitled to a deduction for his pro rata share of fees and expenses of
the Fund, because the fees and expenses are incurred in connection with the
production of tax-exempt income. Further, if borrowed funds are used by a
Holder to purchase or carry Units of the Fund, interest on this
indebtedness will not be deductible for Federal income tax purposes. In
addition, under rules used by the Internal Revenue Service, the purchase of
Units may be considered to have been made with borrowed funds even though
the borrowed funds are not directly traceable to the purchase of Units.
Under the income tax laws of the State and City of New York, the Fund is
not an association taxable as a corporation and income received by the Fund
will be treated as the income of the Holders in the same manner as for
Federal income tax purposes, but will not necessarily be tax-exempt.
Holders will be taxed in the manner described above regardless of
whether the distributions from the Fund are actually received by the
Holders or are automatically reinvested in the Municipal Fund Accumulation
Program, Inc.
From time to time proposals are introduced in Congress and state
legislatures which, if enacted into law, could have an adverse impact on
the tax-exempt status of the Debt Obligations. It is impossible to predict
whether any legislation in respect of the tax status of interest on the
Debt Obligations may be proposed and eventually enacted at the Federal or
state level.
The foregoing discussion relates only to Federal and certain aspects of
New York State and City income taxes. Depending on their state of
residence, Holders may be subject to state and local taxation and should
consult their own tax advisers in this regard.
* * *
Interest on certain tax-exempt bonds issued after August 7, 1986 will be a
preference item for purposes of the alternative minimum tax ('AMT'). The
Sponsors believe that interest (including any original issue discount) on the
Debt Obligations should not be subject to the AMT for individuals or
corporations under this rule. A corporate Holder should be aware, however, that
the accrual or receipt of tax-exempt interest not subject to the AMT may give
rise to an alternative minimum tax liability (or increase an existing liability)
because the interest income will be included in the corporation's 'adjusted
current earnings' for purposes of the adjustment to alternative minimum taxable
income required by Section 56(g) of the Code, and will be taken into account for
purposes of the environmental tax on corporations under Section 59A of the Code,
which is based on alternative minimum taxable income. In addition, interest on
the Debt Obligations must be taken into consideration in computing the portion,
if any, of social security benefits that will be included in an individual's
gross income and subject to Federal income tax. Holders are urged to consult
their own tax advisers concerning an investment in Units.
At the time of issuance of each Debt Obligation, an opinion relating to the
validity of the Debt Obligation and to the exemption of interest thereon from
regular Federal income taxes was or will be rendered by bond counsel. Neither
the Sponsors nor Davis Polk & Wardwell have made or will make any review of the
proceedings relating to the issuance of the Debt Obligations or the basis for
these opinions. The tax exemption is dependent upon the issuer's (and other
users') compliance with certain ongoing requirements, and the opinion of bond
counsel assumes that these requirements will be complied with. However, there
can be no assurance that the issuer (and other users) will comply with these
requirements, in which event the interest on the Debt Obligation could be
determined to be taxable retroactively from the date of issuance.
20
<PAGE>
In the case of certain Debt Obligations, the opinions of bond counsel
indicate that interest on these Debt Obligations received by a 'substantial
user' of the facilities being financed with the proceeds of such Debt
Obligations, or persons related thereto, for periods while such Debt Obligations
are held by such a user or related person, will not be exempt from regular
Federal income taxes, although interest on such Debt Obligations received by
others would be exempt from regular Federal income taxes. 'Substantial user' is
defined under U.S. Treasury Regulations to include only a person whose gross
revenue derived with respect to the facilities financed by the issuance of bonds
is more than 5% of the total revenue derived by all users of these facilities,
or who occupies more than 5% of the usable area of these facilities or for whom
these facilities or a part thereof were specifically constructed, reconstructed
or acquired. 'Related persons' are defined to include certain related natural
persons, affiliated corporations, partners and partnerships.
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. Holders are required to report to the Internal Revenue Service the
amount of tax-exempt interest received during the year.
PUBLIC SALE OF UNITS
PUBLIC OFFERING PRICE
INITIAL OFFERING PERIOD
The Public Offering Price of the Units during the initial offering period
is computed by dividing the offering side evaluation of the Securities (as
determined by the Evaluator) by the number of Units outstanding and adding
thereto the sales charge at the applicable percentage stated below of the
offering side evaluation per Unit (the net amount invested). The Public Offering
Price will vary from day to day in accordance with fluctuations in the
evaluations of the underlying Securities.
The following table sets forth the applicable percentage of sales charge,
the concession to dealers and the concession to introducing dealers (i.e.,
dealers that buy and clear directly through a Sponsor or an Underwriter who is
an affiliate of a Sponsor). These amounts are reduced on a graduated scale for
sales to any purchaser of at least 250 Units and will be applied on whichever
basis is more favorable to the purchaser. To qualify for the reduced sales
charge and concession applicable to quantity purchases, the dealer must confirm
that the sale is to a single purchaser as defined below or is purchased for its
own account and not for distribution. Sales charges and dealer concessions are
as follows:
<TABLE><CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT)
----------------------------------
AS PERCENT OF AS PERCENT OF DEALER CONCESSION AS PRIMARY MARKET
OFFER SIDE PUBLIC NET AMOUNT PERCENT OF PUBLIC CONCESSION TO
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE INTRODUCING DEALERS
- ----------------------------------- ------------------- ------------- --------------------- -------------------
<S> <C> <C> <C> <C>
Less than 250...................... 4.50% 4.712% 2.925% $ 32.40
250 - 499.......................... 3.50 3.627 2.275 25.20
500 - 749.......................... 3.00 3.093 1.950 21.60
750 - 999.......................... 2.50 2.564 1.625 18.00
1,000 or more...................... 2.00 2.041 1.300 14.40
</TABLE>
The above graduated sales charges will apply on all purchases of units of
the Fund on any one day during the initial offering period by the same purchaser
of Units only in the amounts stated. These purchases will not be aggregated with
concurrent purchases of any other unit trusts sponsored by the Sponsors. 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.
On any subsequent purchase of Units of the Fund during its initial offering
period, the sale charge on that purchase will be determined based on the
aggregate number of Units purchased on that and any previous purchase data. To
be eligible for this right of accumulation, the purchaser or his securities
dealer must notify the Sponsors at the time of purchase that such purchase
qualifies for this right of accumulation and supply sufficient information to
permit confirmation of qualification. Acceptance of the purchase order is
subject to such confirmation. This right of accumulation may be amended or
terminated at any time without notice.
21
<PAGE>
SECONDARY MARKET
The Public Offering Price in the secondary market reflects sales charges
which may be at different rates depending on the maturities of the various bonds
in the Portfolio. The Public Offering Price per Unit will be computed by adding
to the Evaluator's determination of the bid side evaluation of each Security, a
sales charge at a rate based on the time to maturity of that Security as
described below, and dividing the sum of these calculations for all Securities
in the Portfolio by the number of Units outstanding. For this purpose, a
Security will be considered to mature on its stated maturity date unless: (a)
the Security has been called for redemption or funds or securities have been
placed in escrow to redeem it on an earlier call date, in which case the call
date will be used; or (b) the Security is subject to a mandatory tender, in
which case the mandatory tender date will be used.
SALES CHARGE
(AS PERCENT (AS PERCENT
TIME TO OF BID SIDE OF PUBLIC
MATURITY EVALUATION) OFFERING PRICE
- ---------------------------- ----------- -----------------
Less than six months 0% 0%
Six months to 1 year 0.756% 0.75%
Over 1 year to 2 years 1.523% 1.50%
Over 2 years to 4 years 2.564% 2.50%
Over 4 years to 8 years 3.627% 3.50%
Over 8 years to 15 years 4.712% 4.50%
Over 15 years 5.820% 5.50%
The total sales charge per Unit, as a percent of the Public Offering Price,
is referred to below as the 'Effective Sales Charge'. For example, a Fund
consisting entirely of Securities maturing in more than 8 but no more than 15
years would have an Effective Sales Charge of 4.50% of the Public Offering Price
(4.712% of the net amount invested) while a Fund consisting entirely of
Securities maturing in more than 15 years would have an Effective Sales Charge
of 5.50% of the Public Offering Price (5.820% of the net amount invested) and so
forth. A Fund consisting of Securities in each of these maturity ranges would
have an Effective Sales Charge between these rates.
The sales charge per Unit will be reduced on a graduated scale for sales to
any single purchaser, as described above, on a single day of specified numbers
of Units set forth below. The number of units of other series sponsored by the
Sponsors (or an equivalent number in case of units originally offered at about
$1, $10 or $100 each), purchased in the secondary market on the same day will be
added in determining eligibility for this reduction, provided that only units of
series with Effective Sales Charges within a range of 0.5% of their public
offering prices will be eligible. For example, if an investor purchases units of
three series of Municipal Investment Trust Fund in the secondary market on the
same day--200 units with an Effective Sales Charge of 3.4%, 200 units with an
Effective Sales Charge of 3.6% and 100 units with an Effective Sales Charge of
3.9%, he would be entitled to a 40% reduction on each sales charge (an actual
sales charge of 60% of each Effective Sales Charge based on purchase of 500
units). If the lowest sales charge was 3.3%, the purchaser would only be
entitled to a 20% reduction on two of those purchases (actual sales charge of
80% of Effective Sales Charge based on purchase of more than 249 units). The
reduction will be applied on whichever basis is more favorable for the
purchaser.
ACTUAL SALES CHARGE AS % DEALER CONCESSION AS % OF
OF EFFECTIVE SALES CHARGE EFFECTIVE SALES CHARGE
NUMBER OF UNITS DETERMINED ABOVE DETERMINED ABOVE
- ----------------- ------------------------- -------------------------
1-249 100% 65%
250-499 80% 52%
500-749 60% 39%
750-999 45% 29.25%
1,000 or more 35% 22.75%
To qualify for the reduced sales charge and concession applicable to quantity
purchases, the selling dealer must confirm that the sale is to a single
purchaser, as described in the Prospectus, or is purchased for its own account
and not for distribution.
PRICE PAID BY PURCHASERS
In both the initial offering period and the secondary 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.
22
<PAGE>
Employees of certain of the Sponsors and their affiliates and non-employee
directors of Merrill Lynch & Co., Inc. may purchase Units of this Fund at prices
based on a reduced sales charge of not less than $5.00 per Unit.
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 each business day as of the
Evaluation Time set forth under Investment Summary, effective for all sales made
since the last of these evaluations (Section 4.01). With respect to the
evaluation of Debt Obligations during their initial syndicate offering period,
the 'current offering price', as determined by the Evaluator, will normally be
equal to the syndicate offering price as of the Evaluation Time, unless the
Evaluator determines that a material event has occurred which it believes may
result in the syndicate offering price not accurately reflecting the market
value of the Debt Obligations, in which case the Evaluator, in making its
determination, will consider not only the syndicate offering price but also the
factors described in (b) and (c) in the description of how the bid side
evaluation of the Securities is determined for purposes of redemption of Units
(see Redemption). 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.
COMPARISON OF PUBLIC OFFERING PRICE, SPONSORS' INITIAL REPURCHASE PRICE,
SECONDARY MARKET REPURCHASE PRICE AND REDEMPTION PRICE
On the business day prior to the Initial Date of Deposit the Public
Offering Price per Unit (which includes the sales charge) and the Sponsors'
Initial Repurchase Price per Unit (each based on the offering side evaluation of
the Securities in the Fund--see above) exceeded the Sponsors' Repurchase Price
and the Redemption Price per Unit (each based on the bid side evaluation
thereof--see Redemption) by the amounts set forth under the Investment Summary.
The initial Public Offering Price per Unit of the Trust and the Initial
Repurchase Price are based on the offering side evaluations of the Securities.
The secondary market Public Offering Price and the Sponsors' Repurchase Price in
the secondary market are based on bid side evaluations of the Securities. In the
past, the bid prices of publicly offered tax-exempt issues have been lower than
the offering prices by as much as 3 1/2% or more of face amount in the case of
inactively traded issues and as little as 1/2 of 1% in the case of actively
traded issues, but the difference between the offering and bid prices has
averaged between 1 and 2% of face amount; the amount of this difference as of
the Evaluation Time on the business day prior to the Initial date of Deposit, as
determined by the Evaluator, is set forth under Portfolio. For this and other
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
During the initial offering period Units will be distributed to the public
at the Public Offering Price through the Underwriting Account set forth and
dealers. The initial offering period is 30 days or less if all Units are sold.
So long as all Units initially offered have not been sold, the Sponsors may
extend the initial offering period for up to four additional successive 30-day
periods. Upon the completion of the initial offering, Units which remain unsold
or which may be acquired in the secondary market (see Market for Units) may be
offered directly to the public by this Prospectus at the secondary market Public
Offering Price determined in the manner described above.
The Sponsors intend to qualify Units for sale in all states in which
qualification is deemed necessary through the Underwriting Account and by
dealers who are members of the National Association of Securities Dealers, Inc.
The Sponsors do not intend to qualify Units for sale in any foreign countries
and this Prospectus does not constitute an offer to sell Units in any country
where Units cannot lawfully be sold. Sales to dealers and to introducing
dealers, if any, will initially be made at prices which represent a concession
of the applicable rate specified in the table above, but Merrill Lynch, Pierce,
Fenner & Smith Incorporated, as agent for the Sponsors ('Agent for the
Sponsors'), reserves the right to change the rate of the concession to dealers
and the concession to introducing dealers from time to time. Any dealer or
introducing dealer may reallow a concession not in excess of the concession to
dealers.
UNDERWRITERS' AND SPONSORS' PROFITS
Upon sale of the Units, the Underwriters named under Underwriting Account,
including the Sponsors, will receive sales charges at the rates set forth in the
table above. The Sponsors also realized a profit or loss on deposit of the
Securities in the Fund in the amount set forth under Investment Summary. This is
the difference between
23
<PAGE>
the cost of the Securities to the Fund (which is based on the offering side
evaluation of the Securities on the Initial Date of Deposit) and the cost of the
Securities to the Sponsors. The amount of any additional fees received in
connection with the direct placement of certain Debt Obligations deposited in
the Portfolio is also set forth under Investment Summary. In addition, any
Sponsor or Underwriter may realize profits or sustain losses in respect of Debt
Obligations deposited in the Fund which were acquired by the Sponsor or
Underwriter from underwriting syndicates of which the Sponsor or Underwriter was
a member. During the offering period the Underwriting Account also may realize
profits or sustain losses as a result of fluctuations after the Initial Date of
Deposit in the Public Offering Price of the Units (see Investment Summary).
Cash, if any, made available by buyers of Units to the Sponsors prior to a
settlement date for the purchase of Units may be used in the Sponsors'
businesses subject to the limitations of Rule 15c3-3 under the Securities
Exchange Act of 1934 and may be of benefit to the Sponsors.
In maintaining a market for the Units (see Market for Units), the Sponsors
will also realize profits or sustain losses in the amount of any difference
between the prices at which they buy Units (based on the bid side evaluation of
the Securities) and the prices at which they resell these Units (which include
the sales charge) or the prices at which they redeem the Units (based on the bid
side evaluation of the Securities), as the case may be.
MARKET FOR UNITS
During the initial offering period the Sponsors intend to offer to purchase
Units of this Series at prices based upon the offering side evaluation of the
Securities. Thereafter, 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). This
secondary market provides holders with a fully liquid investment. They can cash
in Units at any time without a fee. The Sponsors may discontinue purchases of
Units of this Series 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 the 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
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 set
forth on the back cover of this Prospectus, 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.
24
<PAGE>
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. 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.
Principal is normally distributed as bonds mature, or are called, redeemed or
sold. Except for sales of Securities (which would be at then current market
prices) and subject to the bond issuers paying the amounts due, return of
principal to Holders who retain their Units until termination of the Trust
should be relatively unaffected by changes in interest rates. Of course, a gain
or loss could be recognized if Units are sold before then. So long as the
Sponsors are maintaining a market at prices not less than the Redemption Price
per Unit, the Sponsors will repurchase any Units tendered for redemption no
later than the close of business on the second business day following the tender
(see Market for Units). The Trustee is authorized in its discretion, if the
Sponsors do not elect to repurchase any Units tendered for redemption or if a
Sponsor tenders Units for redemption, to sell the Units in the over-the-counter
market at prices which will return to the Holder a net amount in cash equal to
or in excess of the Redemption Price per Unit for the Units (Section 5.02).
Securities are to be sold from the Portfolio 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 by the Sponsors in
accordance with procedures specified in the Indenture 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.
To the extent that Securities are sold, the size and diversity of the Fund
will be reduced. Sales will usually be required at a time when Securities would
not otherwise be sold and may result in lower prices to the Fund than might
otherwise be realized.
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).
COMPUTATION OF REDEMPTION PRICE PER UNIT
Redemption Price per Unit is computed by the Trustee, as of the Evaluation
Time, on each June 30 and December 31 (or the last business day prior thereto),
on any business day as of the Evaluation Time next following the tender of any
Unit for redemption, and on any other business day desired by the Trustee or the
Sponsors, by adding (a) the aggregate bid side evaluation of the Securities, (b)
cash on hand in the Fund (other than cash covering contracts to purchase
Securities or credited to a reserve account), (c) accrued but unpaid interest on
the Securities up to but not including the date of redemption (less amounts
beneficially owned by the Trustee resulting from unreimbursed advances) and (d)
the aggregate value of all other assets of the Fund; deducting therefrom the sum
of (v) taxes or other governmental charges against the Fund not previously
deducted, (w) accrued but unpaid expenses of the Fund (x) amounts payable for
reimbursement of Trustee advances (y) cash held for redemption of units for
distribution to Holders of record as of a date prior to the evaluation and (z)
the aggregate value of all other liabilities of the Fund; and dividing the
result by the number of Units outstanding as of the date of computation (Section
5.01).
The aggregate current bid or offering side evaluation of the Securities is
determined by the Evaluator in the following manner: if the Securities are
traded on the over-the-counter market, this evaluation is generally based on the
closing sale prices on the over-the-counter market (unless the Evaluator deems
these prices inappropriate as a basis for evaluation). If closing sale prices
are unavailable, the evaluation is generally determined (a) on the basis of
current bid or offering prices for the Securities, (b) if bid or offering prices
are not available for any Securities, on the basis of current bid or offering
prices for comparable securities, (c) by appraising the value of the Securities
on the bid or offering side of the market or (d) by any combination of the
above.
EXPENSES AND CHARGES
INITIAL EXPENSES
All expenses incurred in establishing the Fund, including the cost of the
initial preparation and printing of documents related to the Fund, cost of the
initial evaluation, the initial fees and expenses of the Trustee, legal
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expenses, advertising and selling expenses and any other out-of-pocket expenses,
will be paid by the Underwriting Account at no charge to the Fund.
FEES
An estimate of the total annual expenses of the Fund is set forth under
Investment Summary. The Portfolio Supervision Fee is based on the face amount of
Debt Obligations in the Fund on the Initial Date of Deposit and on the first
business day of each calendar year thereafter, except that if in any calendar
year Additional Securities are deposited, the fee for the balance of the year
will be based on the face amounts on each Record Day. This fee, which is not to
exceed the maximum amount set forth under Investment Summary, may exceed the
actual costs of providing portfolio supervisory services for this Fund, but at
no time will the total amount the Sponsors receive for portfolio supervisory
services rendered to all series of Municipal Investment Trust Fund in any
calendar year exceed the aggregate cost to them of supplying these services in
that year (Section 7.06). In addition, the Sponsors may also be reimbursed for
bookkeeping or other administrative services provided to the Fund in amounts not
exceeding their costs of providing these services (Section 7.05). The Trustee
receives for its services as Trustee and for reimbursement of expenses incurred
on behalf of the Fund, payable in monthly installments, the amount per Unit set
forth under the Investment Summary as Trustee's Annual Fee and Expenses. Of this
amount, the Trustee receives annually for its service as Trustee $0.70 per
$1,000 face amount of Debt Obligations. The Trustee's Annual Fee and Expenses
also includes the Evaluator's Fee, the estimated Portfolio Supervision Fee, any
estimated reimbursable bookkeeping or other administrative expenses paid to the
Sponsors and certain mailing and printing expenses. Expenses in excess of this
amount will be borne by the Fund. Such amount may be reduced in certain cases in
connection with the deposit of when-issued or delayed delivery Debt Obligations
(see Description of the Fund--Income; Estimated Current Return; Estimated Long
Term Return) and in the event of any delay in the tendering of Debt Obligations
for redemption. 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 foregoing fees may be adjusted for inflation in accordance with
the terms of the Indenture without approval of Holders (Sections 3.04, 4.03 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, 3.09,
7.05(b), 8.01 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 wilful 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 7.05b]), (g)
expenditures 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
Interest received is credited to an Income Account and other receipts to a
Capital Account (Sections 3.01 and 3.02). The Monthly Income Distribution for
each Holder as of each Record Day will be made 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 estimated net income accrued during the month
preceding the Record Day, after deducting estimated expenses. Estimates of the
amounts of the first and subsequent Monthly Income Distributions are set forth
under Investment Summary. The amount of the Monthly Income Distributions will
change as Securities are redeemed, paid or sold. At the same time the Trustee
will distribute the Holder's pro rata share of the distributable cash balance of
the Capital Account computed as of the close of business on the preceding Record
Day (if at least equal to the Minimum Capital Distribution set forth under
Investment Summary). Principal proceeds received from the disposition, payment
or prepayment of any of the Securities subsequent to a Record Day and prior to
the
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succeeding Distribution Day will be held in the Capital Account to be
distributed on the second succeeding Distribution Day. The first distribution
for persons who purchase Units between a Record Day and a Distribution Day will
be made on the second Distribution Day following their purchase of Units. A
Reserve Account may be created by the Trustee by withdrawing from the Income or
Capital Accounts, from time to time, amounts deemed necessary to reserve for any
material amount that may be payable out of the Fund (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
Monthly Income Distributions of interest and any principal or premium
received by the Fund will be paid in cash. However, a Holder may elect to have
these distributions reinvested without sales charge in the Municipal Fund
Accumulation Program, Inc. (the 'Program'). The Program is an open-end
management investment company whose primary investment objective is to obtain
income that is exempt from regular Federal income taxes through investment in a
diversified portfolio consisting primarily of state, municipal and public
authority debt obligations with credit characteristics comparable to those of
securities in this Series of Municipal Investment Trust Fund. Reinvesting
compounds the earnings Federally tax-free. Holders participating in the Program
will be taxed on their reinvested distributions in the manner described in Taxes
even though distributions are reinvested in the Program. For more complete
information about the Program, including charges and expenses, return the
enclosed form for a prospectus. Read it carefully before you decide to
participate. Notice of election to participate must be received by the Trustee
in writing at least ten days before the Record Day for the first distribution to
which the notice is to apply.
PORTFOLIO SUPERVISION
The Fund is a unit investment trust which 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 the Fund, however, will not be actively
managed and therefore the adverse financial condition of an issuer will not
necessarily require the sale of its securities from the Portfolio. However,
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 projected income pledged for debt service on
revenue bond issues, (vi) 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 research analyst would make the retention of the
Security detrimental to the interest of the Holders, (vii) if a Security is not
consistent with the investment objective of the Fund or (viii) if the Trustee
has a right to sell or redeem a Security pursuant to any applicable guarantee or
other credit support. If a default in the payment of amounts due on any Security
occurs and the Agent for the Sponsors fails to give instructions to sell or hold
the Security, the Indenture provides that the Trustee, within 30 days of that
failure shall sell the Security (Section 3.08).
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 Trustee subject to the terms and conditions of the Indenture
to the same extent as Debt Obligations originally deposited thereunder (Section
3.11). Within five days after the deposit of Debt Obligations in exchange or
substitution for existing Debt Obligations, the Trustee is required to give
notice thereof to each Holder, identifying the Debt Obligations removed from the
Portfolio and the Debt Obligations substituted therefor (Section 3.07).
The Sponsors are authorized to direct the Trustee to deposit replacement
securities ('Replacement Securities') into the Portfolio to replace any Failed
Debt Obligations or in connection with the deposit of Additional Securities when
Securities of an issue originally deposited are unavailable at the time of
subsequent deposit, as described more fully below. Replacement Securities that
are replacing Failed Debt Obligations will be
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deposited into the Fund within 110 days of the date of deposit of the contracts
that have failed at a purchase price that does not exceed the amount of funds
reserved for the purchase of the Failed Debt Obligations and that results in a
yield to maturity and in a current return, in each case as of that date of
deposit, that are substantially equivalent (taking into consideration then
current market conditions and the relative creditworthiness of the underlying
obligation) to the yield to maturity and current return of the Failed Debt
Obligations. The Replacement Securities shall (i) be taxexempt bonds issued by
states or their political subdivisions or certain United States territories or
possessions; (ii) have fixed maturities or disposition dates substantially the
same as those of the Failed Debt Obligation; (iii) not be when, as and if issued
obligations; and (iv) be rated A or better by Standard & Poor's or Moody's (or
if not rated, have, in the opinion of Defined Asset Funds research analysts,
comparable credit characteristics). The Replacement Securities shall be selected
by the Sponsors from a list of Securities maintained by them and updated from
time to time. The Securities on the current list are set forth under the
Investment Summary. 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 will, on or before the next following Distribution Day,
cause to be refunded the attributable sales charge, plus the attributable Cost
of Securities to Fund listed under Portfolio, plus interest attributable to the
Failed Debt Obligation. The portion of interest paid to a Holder which accrued
after the expected date of settlement for purchase of his Units will be paid by
the Sponsors and accordingly will not be treated as tax-exempt income.
The Indenture also 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
to purchase Additional Securities in exchange for the corresponding number of
additional Units during the 90-day period subsequent to the Initial Date of
Deposit, 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 to the extent practicable.
Deposits of Additional Securities subsequent to the 90-day period following the
Initial Date of Deposit must replicate exactly the original proportionate
relationship among the face amounts of Securities comprising the Portfolio at
the end of the initial 90-day period, subject to certain events (Sections 3.07,
3.08 and 3.10).
With respect to deposits of Additional Securities, in connection with
creating additional Units of the Fund during the 90-day period following the
Initial Date of Deposit, the Sponsors may specify minimum face amounts in which
Additional Securities will be deposited or purchased. If a deposit is not
sufficient to acquire minimum amounts of each Security, Additional Securities
may be acquired in the order of the Security most under-represented immediately
before the deposit when compared to the Original Proportionate Relationship. If
Securities of an issue originally deposited are unavailable at the time of
subsequent deposit, or cannot be purchased at reasonable prices or their
purchase is prohibited or restricted by law, regulation or policies applicable
to the Fund or any of the Sponsors, the Sponsors may (1) deposit cash or letter
of credit with instructions to purchase the Security when it becomes available
(provided that it becomes available within 110 days after the Initial Date of
Deposit) or (2) deposit (or instruct the Trustee to purchase) (i) Securities of
one or more other issues originally deposited or (ii) a Replacement Security
which will meet the conditions described above except that it must have a rating
at least equal to that of the Security it replaces (or, in the opinion of the
Sponsors, have comparable credit characteristics, if not rated). Any funds held
to acquire Additional or Replacement Securities which have not been used to
purchase Securities at the end of the 90-day period beginning with the Initial
Date of Deposit, shall be used to purchase Securities as described above or
shall be distributed to Holders together with the attributable sales charge.
REPORTS TO HOLDERS
With each distribution, the Trustee will furnish Holders with a statement
of the amounts of interest and other receipts, if any, that are being
distributed, expressed in each case as a dollar amount per Unit. After the end
of each calendar year during which a Monthly Income Distribution was made to
Holders (normally within 20 to 60 days), 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 that 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 3.07). The accounts of the Fund shall be 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 h).
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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).
CERTIFICATES
Certain of the Sponsors may collect additional charges for registering and
shipping Certificates to purchasers. These Certificates are transferable or
interchangeable upon presentation at the office of the Trustee, with a payment
of $2.00 if required by the Trustee (or other amounts specified by the Trustee
and approved by the Sponsors) for each new Certificate and any sums payable for
taxes or other governmental charges imposed upon the transaction (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).
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 or
(c) to make any other provisions that do not materially adversely affect the
interest of the Holders (as determined in good faith by the Sponsors). 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, 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 Fund will terminate and be liquidated upon the maturity, sale,
redemption or other disposition of the last Security held thereunder but in no
event is it to continue beyond the mandatory termination date set forth under
Investment Summary. 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. A
Fund may be terminated at any time by written instruments executed by the
Sponsors and consented to by Holders of 51% of the then outstanding 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
TRUSTEE
The Trustee or any successor may resign upon notice to the Sponsors. The
Trustee may be removed upon the direction of the Holders of 51% of the Units at
any time or by the Sponsors 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 Sponsors determine in good
faith that the replacement of the Trustee is in the best interest of the
Holders. The resignation or removal shall become effective upon the acceptance
of appointment by the successor, which may, in the case of a resigning or
removed Co-Trustee, be one or more of the remaining Co-Trustees. The Sponsors
are to use their best efforts to appoint a successor promptly and if upon
resignation of the Trustee no successor has accepted appointment within thirty
days after notification, the Trustee 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, under the Indenture. This provision, however, shall not protect the
Trustee in cases of wilful misfeasance, bad faith, negligence or reckless
disregard of its obligations and duties. In the event of the failure of the
Sponsors to act, the 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 8.01 and 8.05).
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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.
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 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 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 8.01e]). The Agent for 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 7.02b]). 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 7.02a]). 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).
MISCELLANEOUS
TRUSTEE
The Trustee of the Fund is named on the back cover page of this Prospectus
and is either 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); The Chase Manhattan Bank, N.A., a national banking association
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); 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 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).
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LEGAL OPINION
The legality of the Units has been passed upon by Davis Polk & Wardwell,
450 Lexington Avenue, New York, New York 10017, as special counsel for the
Sponsors, Emmet, Marvin & Martin, 48 Wall Street, New York, New York 10005, act
as counsel for The Bank of New York, as Trustee. Bingham, Dana & Gould, 150
Federal Street, Boston, Massachusetts 02110, act as counsel for The First
National Bank of Chicago and Investors Bank & Trust Company, as Co-Trustees.
Hawkins, Delafield & Wood, 67 Wall Street, New York, New York 10005, act as
counsel for Bankers Trust Company, as Trustee.
AUDITORS
The Statement of Condition, including the Portfolio of the Fund, included
herein has been audited by Deloitte & Touche, independent accountants, as stated
in their opinion appearing herein and has 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 The Travelers Inc. Prudential Securities
Incorporated, a wholly-owned subsidiary of Prudential Securities Group Inc. and
an indirectly wholly-owned subsidiary of the Prudential Insurance Company of
America, is engaged in the investment advisory business. Dean Witter Reynolds
Inc., a principal operating subsidiary of Dean Witter, Discover & Co., is
engaged in the investment advisory business. PaineWebber Incorporated is engaged
in the investment advisory business and is a wholly-owned subsidiary of
PaineWebber Group Inc. Each Sponsor, or one of its predecessor corporations, has
acted as Sponsor of a number of series of unit investment trusts. Each Sponsor
has acted as principal underwriter and managing underwriter of other investment
companies. The Sponsors, in addition to participating as members of various
selling groups or as agents of other investment companies, execute orders on
behalf of investment companies for the purchase and sale of securities of these
companies and sell securities to these companies in their capacities as brokers
or dealers in securities.
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.
('Shearson') 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, Harris Upham & Co. Incorporated and Primerica Corporation (now the
Travelers, Inc.), Smith Barney Shearson Inc. now serves as co-Sponsor of various
Defined Asset Funds. Prudential Securities Incorporated and its predecessors
have been underwriters of Defined Asset Funds since 1961 and co-Sponsors since
1964, in which year its predecessor became successor co-Sponsor to the original
Sponsor. Dean Witter Reynolds Inc. and its predecessors have been underwriters
of various Defined Asset Funds since 1964 and co-Sponsors since 1974.
PaineWebber Incorporated and its predecessor have co-Sponsored certain Defined
Asset Funds since 1983.
The Sponsors have maintained secondary markets in Defined Asset Funds for
over 20 years. For decades informed investors have purchased unit investment
trusts for dependability and professional selection of investments. Defined
Asset Funds offers an array of simple and convenient investment choices, suited
to fit a wide variety of personal financial goals--a buy and hold strategy for
capital accumulation, such as for children's education or 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 the most important investment decisions an investor faces may be how
to allocate his investments among asset classes. Diversification among different
kinds of investments can balance the risks and rewards of
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each one. Most investment experts recommend stocks for long-term capital growth.
Long-term corporate bonds offer relatively high rates of interest income. By
purchasing both defined equity and defined bond funds, investors can receive
attractive current income, as well as growth potential, offering some protection
against inflation.
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,
1993, compared to the rate of inflation over the same periods. Of course, this
chart represents past performance of these investment categories and there 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 12.76%
10 yr 14.94%
Small-company stocks
20 yr 18.82%
10 yr 9.96%
Long-term corporate bonds
20 yr 10.16%
10 yr 14.00%
U.S. Treasury bills (short-term)
20 yr 7.49%
10 yr 6.35%
Consumer Price Index
20 yr 5.92%
10 yr 3.73%
0 2 4 6 8 10 12%
Source: Ibbotson Associates (Chicago).
Used with permission. All rights reserved.
Instead of having to select individual securities on their own, purchasers
of Defined Funds 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 issuers. 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 defined 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 the limited other
circumstances. Investors buy bonds for dependability--they know what they can
expect to earn and that principal is distributed as the bonds mature. Investors
also know at the time of 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.
Defined Asset Funds offers a variety of fund types. The tax exemption for
municipal bonds, which makes them attractive to high-bracket taxpayers, is
offered by Defined Municipal Investment Trust Funds. Defined Municipal
Investment Trust Funds have provided investors with tax-free income for more
than 30 years. Municipal Defined Funds offer a simple and convenient way for
investors to earn monthly income free from regular Federal income tax. 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 provide investors a simple and convenient way to earn monthly
income. Defined Government Securities Income Funds provide a way to participate
in markets for U.S. government securities while earning an attractive current
return. Defined International Bond Funds, invested in bonds payable in foreign
currencies, offer a potential to profit from changes in currency values and
possibly from interest rates higher than paid on comparable U.S. bonds, but
investors incur a higher risk for these potentially greater returns.
Historically, stocks have offered 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.
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Concept Series seek to capitalize on selected anticipated economic, political or
business trends. Utility Stock Series, consisting of stocks of issuers with
established reputations for regular cash dividends, seek to benefit from
dividend increases. Select Ten Portfolios seek total return by investing for one
year in the ten highest yielding stocks on a designated stock index.
DESCRIPTION OF RATINGS (AS DESCRIBED BY THE RATING COMPANIES THEMSELVES)
STANDARD & POOR'S CORPORATION
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC--Debt rated BB, B, CCC and CC is regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
The ratings may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
A provisional rating, indicated by 'p' following a rating, assumes the
successful completion of the project being financed by the issuance of the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion.
NR--Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
MOODY'S INVESTORS SERVICE
Aaa--Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edge'. Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain
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protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Rating symbols may include numerical modifiers 1, 2 or 3. The numerical
modifier 1 indicates that the security ranks at the high end, 2 in the
mid-range, and 3 nearer the low end, of the generic category. These modifiers of
rating symbols give investors a more precise indication of relative debt quality
in each of the historically defined categories.
Conditional ratings, indicated by 'Con.', are sometimes given when the
security for the bond depends upon the completion of some act or the fulfillment
of some condition. Such bonds are given a conditional rating that denotes their
probable credit stature upon completion of that act or fulfillment of that
condition.
NR--Should no rating be assigned, the reason may be one of the following:
(a) an application for rating was not received or accepted; (b) the issue or
issuer belongs to a group of securities that are not rated as a matter of
policy; (c) there is a lack of essential data pertaining to the issue or issuer
or (d) the issue was privately placed, in which case the rating is not published
in Moody's publications.
EXCHANGE OPTION
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 set forth 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 to be acquired under the Exchange Option, with
the following exceptions: (1) Freddie Mac Series may be acquired by exchange
during the initial offering period from any of the Exchange Funds listed in the
table and (2) Units of any Select Ten Portfolio, if available, may be acquired
during their initial offering period or thereafter by exchange from any Exchange
Fund Series; units of Select Ten Portfolios may be exchanged only for units of
another Select Ten Series, if available. Units of the Exchange Funds may be
acquired at prices which include the reduced sales charge for Exchange Fund
units listed in the table, subject, however, to these important limitations:
First, there must be a secondary market maintained by the Sponsors in
units of the series being exchanged and a primary or secondary market in
units of the series being acquired and there must be units of the
applicable Exchange Fund lawfully available for sale in the state in which
the Holder is resident. There is no legal obligation on the part of the
Sponsors to maintain a market for any units or to maintain the legal
qualification for sale of any of these units in any state or states.
Therefore, there is no assurance that a market for units will in fact exist
or that any units will be lawfully available for sale on any given date at
which a Holder wishes to sell his Units of this Series and thus there is no
assurance that the Exchange Option will be available to any Holder.
Second, when units held for less than five months are exchanged for
units with a higher regular sales charge, the sales charge will be the
greater of (a) the reduced sales charge set forth in the table below or (b)
the difference between the sales charge paid in acquiring the units being
exchanged and the regular sales charge for the quantity of units being
acquired, determined as of the date of the exchange.
Third, exchanges will be effected in whole units only. If the proceeds
from the Units being surrendered are less than the cost of a whole number
of units being acquired, the exchanging Holder will be permitted to add
cash in an amount to round up to the next highest number of whole units.
Fourth, the Sponsors reserve the right to modify, suspend or terminate
the Exchange Option at any time without further notice to Holders. In the
event the Exchange Option is not available to a Holder at the time
34
<PAGE>
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 or prospectuses relating to each series in which he indicates
interest. The exchange transaction will generally 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 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 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.
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 specify
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).
THE EXCHANGE FUNDS
The current return from taxable fixed income securities is normally higher
than that available from tax exempt fixed income securities. Certain of the
Exchange Funds do not provide for periodic payments of interest and are best
suited for purchase by IRA's, Keogh plans, pension funds or other tax-deferred
retirement plans. Consequently, some of the Exchange Funds may be inappropriate
investments for some Holders and therefore may be inappropriate exchanges for
Units of this Series. The table below indicates certain characteristics of each
of the Exchange Funds which a Holder should consider in determining whether each
Exchange Fund would be an appropriate investment vehicle and an appropriate
exchange for Units of this Series.
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
(or a pro rata portion thereof) on an exchange of units if the units received by
a Holder in connection with such an exchange represent securities that are not
materially different from the securities that his previous units represented
(e.g., both Funds contain securities issued by the same obligor that have the
same material terms). Holders are urged to consult their own tax advisers as to
the tax consequences to them of exchanging units in particular cases.
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 the 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).
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<PAGE>
<TABLE><CAPTION>
REDUCED
MAXIMUM SALES CHARGE
NAME OF APPLICABLE FOR SECONDARY INVESTMENT
EXCHANGE FUND SALES CHARGE* MARKET** CHARACTERISTICS
- --------------------------------------- --------------- ---------------------- --------------------------------------------------
<S> <C> <C> <C>
DEFINED ASSET FUNDS-- MUNICIPAL
INVESTMENT TRUST FUND
Monthly Payment, State and 5.50%+ $15 per unit long-term, fixed rate, tax-exempt income
Multistate Series
Intermediate Term Series 4.50%+ $15 per unit intermediate-term, fixed rate, tax-exempt income
Insured Series 5.50%+ $15 per unit long-term, fixed rate, tax-exempt income,
underlying securities insured by insurance
companies
AMT Monthly Payment Series 5.50%+ $15 per unit long-term, fixed rate, income exempt from regular
federal income tax but partially subject to AMT
DEFINED ASSET FUNDS-- MUNICIPAL INCOME
FUND
Insured Discount Series 5.50%+ $15 per unit long-term, fixed rate, insured, tax-exempt current
income, taxable capital gains
DEFINED ASSET FUNDS-- INTERNATIONAL
BOND FUND
Multi-Currency Series 3.75% $15 per unit intermediate-term, fixed rate, payable in foreign
currencies, taxable income
Australian and New Zealand Dollar 3.75% $15 per unit intermediate-term, fixed rate, payable in
Bond Series Australian and New Zealand dollars, taxable income
Australian Dollar Bonds Series 3.75% $15 per unit intermediate-term, fixed rate, payable in
Australian dollars, taxable income
Canadian Dollar Bonds Series 3.75% $15 per unit short intermediate-term, fixed rate, payable in
Canadian dollars, taxable income
DEFINED ASSET FUNDS-- CORPORATE INCOME
FUND
Monthly Payment Series 5.50% $15 per unit long-term, fixed rate, taxable income
Intermediate Term Series 4.75% $15 per unit intermediate-term, fixed rate, taxable income
Cash or Accretion Bond Series and 3.50% $15 per 1,000 units intermediate-term, fixed rate, underlying
SELECT Series securities are collateralized compound interest
obligations, taxable income, appropriate for IRA's
or tax-deferred retirement plans
Insured Series 5.50% $15 per unit long-term, fixed rate, taxable income, underlying
securities are insured
DEFINED ASSET FUNDS-- GOVERNMENT
SECURITIES INCOME FUND
GNMA Series (other than those 4.25% $15 per unit long-term, fixed rate, taxable income, underlying
below) securities backed by the full faith and credit of
the United States
GNMA Series E or other GNMA Series 4.25% $15 per 1,000 units long-term, fixed rate, taxable income, underlying
having units with an initial face securities backed by the full faith and credit of
value of $1.00 the United States, appropriate for IRA's or
tax-deferred retirement plans
Freddie Mac Series 3.75% $15 per 1,000 units intermediate term, fixed rate, taxable income,
underlying securities are backed by Federal Home
Loan Mortgage Corporation but not by U.S.
Government.
DEFINED ASSET FUNDS--EQUITY INCOME FUND
Utility Common Stock Series 4.50% $15 per 1,000 units++ dividends, taxable income, underlying securities
are common stocks of public utilities
Concept Series 4.00% $15 per 100 units underlying securities constitute a professionally
selected portfolio of common stocks consistent
with an investment idea or concept
Select Ten Portfolios (domestic and 2.75% $17.50 per 1,000 units 10 highest dividend yielding stocks in a
international) designated stock index; seeks higher total return
than that stock index; terminates after one year
</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 (above) 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 unit.
+ 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.
36
<PAGE>
Defined
Asset FundsSM
SPONSORS: MUNICIPAL INVESTMENT
Merrill Lynch, TRUST FUND
Pierce, Fenner & Smith Inc. Monthly Payment Series--538
Unit Investment Trusts A Unit Investment Trust
P.O. Box 9051 PROSPECTUS
Princeton, N.J. 08543-9051 This Prospectus does not contain all of
(609) 282-8500 the information with respect to the
Smith Barney Shearson Inc. investment company set forth in its
Unit Trust Department registration statement and exhibits
Two World Trade Center--101st Floor relating thereto which have been filed
New York, N.Y. 10048 with the Securities and Exchange
1-800-298-UNIT Commission, Washington, D.C. under the
PaineWebber Incorporated Securities Act of 1933 and the
1200 Harbor Blvd. Investment Company Act of 1940, and to
Weehawken, N.J. 07087 which reference is hereby made.
(201) 902-3000 No person is authorized to give any
Prudential Securities Incorporated information or to make any
One Seaport Plaza representations with respect to this
199 Water Street investment company not contained in
New York, N.Y. 10292 this Prospectus; and any information or
(212) 776-1000 representation not contained herein
Dean Witter Reynolds Inc. must not be relied upon as having been
Two World Trade Center--59th Floor authorized. This Prospectus does not
New York, N.Y. 10048 constitute an offer to sell, or a
(212) 392-2222 solicitation of an offer to buy,
EVALUATOR: securities in any state to any person
Kenny S&P Evaluation Services to whom it is not lawful to make such
65 Broadway offer in such state.
New York, N.Y. 10006
INDEPENDENT ACCOUNTANTS:
Deloitte & Touche
1633 Broadway
3rd Floor
New York, N.Y. 10019
CO-TRUSTEES:
The First National Bank of Chicago
Investors Bank & Trust Company
P.O. Box 1537
Boston, MA 02205-1537
1-800-338-6019
14754--3/94
