<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--550 is, with certain exceptions,exempt from regular
A Unit Investment Trust Federal income taxes under existing law through
8,000 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
6.73% Portfolio of underlying securities.
Estimated Current Return The Estimated Current Return and Estimated Long
6.89% Term Return figures shown give different
Estimated Long Term Return information about the return to investors.
as of November 14, 1994 Estimated Current Return on a Unit shows a net
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
SPONSORS: HAS THE COMMISSION OR ANY STATE SECURITIES
Merrill Lynch, COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
Pierce, Fenner & Smith OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
Incorporated CONTRARY IS A CRIMINAL OFFENSE.
Smith Barney Inc. Inquiries should be directed to the Trustee at
PaineWebber Incorporated 1-800-221-7771.
Prudential Securities Prospectus dated November 15, 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
Fee Table................................................ A-7
Report of Independent Accountants........................ A-8
Statement of Condition................................... A-8
Portfolio................................................ A-9
Description of Fund Investments.......................... 1
Risk Factors............................................. 2
How To Buy............................................... 16
How To Sell.............................................. 17
Income and Distributions................................. 18
Exchange Option.......................................... 21
Taxes.................................................... 22
Administration of the Fund............................... 24
Trust Indenture.......................................... 24
Miscellaneous............................................ 25
Appendix A............................................... A-1
Appendix B............................................... B-1
Appendix C............................................... C-1
A-2
<PAGE>
INVESTMENT SUMMARY AS OF NOVEMBER 14, 1994 (THE BUSINESS DAY PRIOR TO THE
INITIAL DATE OF DEPOSIT)(a)
ESTIMATED CURRENT RETURN(b)
(based on Public Offering Price) 6.73%
ESTIMATED LONG TERM RETURN(b)
(based on Public Offering Price) 6.89%
PUBLIC OFFERING PRICE PER UNIT
(including 4.50% sales charge) $ 939.10(c)
FACE AMOUNT OF SECURITIES-- $ 8,000,000
NUMBER OF UNITS-- 8,000
SPONSORS' REPURCHASE PRICE AND
REDEMPTION PRICE PER UNIT(d)
(based on bid side evaluation) $ 892.54(c)
FRACTIONAL UNDIVIDED INTEREST IN FUND REPRESENTED BY EACH
UNIT-- 1/8,000TH
CALCULATION OF PUBLIC OFFERING PRICE
Aggregate offer side evaluation of Securities in Fund.....$ 7,174,734.30
----------------
Divided by 8,000 Units....................................$ 896.84
Plus sales charge of 4.50% of Public Offering Price
(4.712% of net amount invested in Securities)(e)........ 42.26
----------------
Public Offering Price per Unit............................ 939.10
Plus accrued interest(f).................................. 1.22
----------------
Total...................................................$ 940.32
----------------
----------------
PREMIUM AND DISCOUNT ISSUES IN PORTFOLIO
Face amount of Securities with offer side evaluation:
over par-- 8%
at a discount from par--92%
PERCENTAGE OF AGGREGATE FACE AMOUNT OF DEBT OBLIGATIONS
ISSUED AT 'ORIGINAL ISSUE DISCOUNT' (see Taxes)........... 63%
CALCULATION OF ESTIMATED NET ANNUAL INTEREST RATE PER UNIT
(based on face amount of $1,000 per Unit)
Annual interest rate per Unit............................. 6.498%
Less estimated annual expenses per Unit ($1.74) expressed
as a percentage......................................... .174%
----------------
Estimated net annual interest rate per Unit............... 6.324%
----------------
----------------
DAILY RATE AT WHICH ESTIMATED NET INTEREST ACCRUES PER
UNIT-- .0175%
MONTHLY INCOME DISTRIBUTIONS
First distribution to be paid on the 25th day of February,
1995 to Holders of record on the 10th day of February,
1995......................................................$ 4.47
Calculation of second and following distributions:
Estimated net annual interest rate per Unit times
$1,000..................................................$ 63.24
Divided by 12...........................................$ 5.27
REDEMPTION PRICE PER UNIT LESS THAN:
Public Offering Price by..................................$ 46.56
Sponsors' Initial Repurchase Price by.....................$ 4.30
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 .............................. $90,700.60
TRUSTEE'S ANNUAL FEE AND EXPENSES(g)
$1.74 per Unit commencing November, 1994 (see
Income and Distributions--Fund Expenses)
PORTFOLIO SUPERVISION FEE(h)
Maximum of $0.35 per $1,000 face amount of underlying
Debt Obligations (see Income and Distributions--Fund
Expenses)
EVALUATOR'S FEE FOR EACH EVALUATION
Minimum of $5.00 (see Income and Distributions-- Fund
Expenses)
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.
- ------------------
(a) The Indenture was signed and the deposit was made on the date of this
Prospectus.
(b) 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.
(c) Plus accrued interest.
(d) 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 How To Sell.)
(e) 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 Appendix B). Any resulting
reduction in the Public Offering Price will increase the effective current and
long term returns on a Unit.
(f) 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 How To Buy--Accrued Interest).
(g) In the event that any Debt Obligations have a delayed delivery, the
Trustee's Annual Fee and Expenses will be reduced over a period in the amount of
interest that would have accrued on the Debt Obligations between the date of
settlement for the Units and the actual date of delivery of the Debt
Obligations. The Trustee will be reimbursed for this reduction (see Income and
Distributions--Income).
(h) 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 NOVEMBER 14, 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 Ratings Group, a division of McGraw-Hill, Inc. ('Standard & Poor's')
rated 1 issue AAA, 3 issues AA and 8 issues A. Moody's Investors Service
('Moody's') rated 2 issues A. (See Appendix A.)
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.
All of the Debt Obligations are subject to optional refunding redemptions, but
not before 2002, and then at prices initially not less than 100% 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--The issues have maturity dates ranging from 2011 to 2025.
Two issues are general obligation bonds; the remaining 12 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, 5; Housing, 3;
State/Local Municipal Utilities, 1; Industrial Development Revenue, 2 and
Special Tax, 1.
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. In addition, 34% of the aggregate face amount of the Portfolio consists
of Hospital/Health Care Facility issues.* (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.
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
Income and Distributions). Alternatively, Holders may elect to have their
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 Income and
Distributions--Investment Accumulation Program.)
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. 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. 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.
(See How To Buy; How To Sell.)
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
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TAXABLE INCOME 1994*
SINGLE RETURN 6% 6.5% 7%
<S> <C> <C> <C>
- ------------------
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
- ------------------
</TABLE>
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. 1313 NEW YORK, NY NECESSARY
IF MAILED
POSTAGE WILL BE PAID BY ADDRESSEE IN THE
THE BANK OF NEW YORK UNITED STATES
UNIT INVESTMENT TRUST DEPARTMENT
P.O. BOX 974
WALL STREET STATION
NEW YORK, NEW YORK 10268-0974
- --------------------------------------------------------------------------------
(Fold along this line.)
- --------------------------------------------------------------------------------
(Fold along this line.)
<PAGE>
INVESTMENT SUMMARY AS OF NOVEMBER 14, 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 offer 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 offer 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 Appendix B. 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 How To Buy; How
To Sell.)
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 offer 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 Income and Distributions--Returns.)
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 was acquired. None of the Sponsors has
acted as agent in the direct placement of any of the Debt Obligations.
UNDERWRITING ACCOUNT
The names and addresses of the Underwriters and their several interests in
the Underwriting Account are:
<TABLE>
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith P.O. Box 9051, Princeton, N.J. 08543-9051 69.37%
Incorporated
Smith Barney Inc. Two World Trade Center--101st Floor
New York, N.Y. 10048 6.25
PaineWebber Incorporated 1285 Avenue of the Americas, New York, N.Y. 10019 15.63
Prudential Securities Incorporated One Seaport Plaza--199 Water Street, New York, N.Y. 10292 2.50
Dean Witter Reynolds Inc. Two World Trade Center--59th Floor, New York, N.Y. 10048 6.25
------
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 Appendix B).
A-6
<PAGE>
INVESTMENT SUMMARY AS OF NOVEMBER 14, 1994 (CONTINUED)
FEE TABLE
THIS FEE TABLE IS INTENDED TO ASSIST INVESTORS IN UNDERSTANDING THE COSTS
AND EXPENSES THAT AN INVESTOR IN THE FUND WILL BEAR DIRECTLY OR INDIRECTLY. SEE
HOW TO BUY AND INCOME AND DISTRIBUTIONS--FUND EXPENSES. ALTHOUGH THE FUND IS A
UNIT INVESTMENT TRUST RATHER THAN A MUTUAL FUND, THIS INFORMATION IS PRESENTED
TO PERMIT A COMPARISON OF FEES.
<TABLE>
<S> <C>
UNITHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases during the Initial Offering Period (as a percentage
of Public Offering Price)....................................................................................... 4.50%
Maximum Sales Charge Imposed on Purchases during the Secondary Offering Period (as a percentage of Public Offering
Price).......................................................................................................... 5.50%
---------
ESTIMATED ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS1)
Trustee's Fee...................................................................................................... .078%
Portfolio Supervision, Bookkeeping and Administrative Fees......................................................... .045%
Other Operating Expenses........................................................................................... .071%
---------
Total........................................................................................................... .194%
---------
---------
</TABLE>
- ------------------
1Based on the mean of the bid and offer side evaluations; this figure may differ
from that set forth as estimated annual expenses per unit expressed as a
percentage on p. A-3.
EXAMPLE
<TABLE><CAPTION>
CUMULATIVE EXPENSES PAID FOR PERIOD OF:
-----------------------------------------
1 YEAR 3 YEARS 5 YEARS
----------- ------------- -------------
<S> <C> <C> <C>
An investor would pay the following expenses on a $1,000 investment,
assuming the Fund's estimated operating expense ratio of .194% and a 5%
annual return on the investment throughout the periods.................. $ 47 $ 51 $ 55
<CAPTION>
10 YEARS
-------------
<S> <C>
An investor would pay the following expenses on a $1,000 investment,
assuming the Fund's estimated operating expense ratio of .194% and a 5%
annual return on the investment throughout the periods.................. $ 69
</TABLE>
The Example assumes reinvestment of all distributions into additional units of
the Fund (a reinvestment option different from that offered by this Fund--see
Income and Distributions--Investment Accumulation Program) and utilizes a 5%
annual rate of return as mandated by Securities and Exchange Commission
regulations applicable to mutual funds. Cumulative Expenses above reflect both
sales charges and operating expenses on an increasing investment (because the
net annual return is reinvested.) In addition to the charges described above, a
Holder selling or redeeming his Units in the secondary market (before the Fund
terminates) will receive a price based on the then-current bid side evaluation
of the underlying securities. The difference between this bid side evaluation
and the offer side evaluation (the basis for the Public Offering Price), as of
the day before the Initial Date of Deposit, is $4.30 per Unit. Of course, this
difference may change over time. The Example should not be considered a
representation of past or future expenses or annual rate of return; the actual
expenses and annual rate of return may be more or less than those assumed for
purposes of the Example.
A-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Sponsors, Trustee and Holders of Municipal Investment Trust Fund, Monthly
Payment Series--550, Defined Asset Funds:
We have audited the accompanying statement of condition, including the
portfolio, of Municipal Investment Trust Fund, Monthly Payment Series--550,
Defined Asset Funds as of November 15, 1994. This financial statement is the
responsibility of the Trustee. 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 November
15, 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
The Bank of New York, the Trustee. An audit also includes assessing the
accounting principles used and significant estimates made by the Trustee, as
well as evaluating the overall financial statement presentation. We believe that
our 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--550, Defined Asset Funds at November 15, 1994 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, N.Y.
November 15, 1994
MUNICIPAL INVESTMENT TRUST FUND
MONTHLY PAYMENT SERIES--550
DEFINED ASSET FUNDS
STATEMENT OF CONDITION AS OF INITIAL DATE OF DEPOSIT, NOVEMBER 15, 1994
TRUST PROPERTY
Investment in Debt Obligations(1):
Contracts to purchase Debt
Obligations................... $ 7,174,734.30
Accrued interest to Initial Date of
Deposit on underlying Debt
Obligations........................ 100,086.10
--------------------
Total....................... $ 7,274,820.40
--------------------
--------------------
LIABILITY AND INTEREST OF HOLDERS
Liability--Accrued interest to Initial
Date of Deposit on underlying Debt
Obligations(2)..................... $ 100,086.10
Interest of Holders--
8,000 Units of fractional undivided
interest outstanding:
Cost to investors(3).............$ 7,512,814.30
Gross underwriting
commissions(4)................... (338,080.00)
--------------------
Net amount applicable to investors...... 7,174,734.30
--------------------
Total....................... $ 7,274,820.40
--------------------
--------------------
- ------------------
(1) Aggregate cost to the Fund of the Debt Obligations listed under Portfolio is
based upon the offer 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 How To Buy. See also the column headed Cost of Debt
Obligations to Fund under Portfolio. An irrevocable letter or letters of
credit in the amount of $7,190,164.49 have been deposited with the Trustee.
The amount of such letter or letters of credit includes $7,084,033.70 (equal
to the purchase price to the Sponsors) for the purchase of $8,000,000 face
amount of Debt Obligations in connection with contracts to purchase Debt
Obligations, plus $106,130.79 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 Di Milano, New York Branch.
(2) Representing, as set forth under How To Buy--Accrued Interest, 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 the 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 How To Buy.
A-8
<PAGE>
PORTFOLIO OF MUNICIPAL INVESTMENT TRUST FUND, ON THE INITIAL DATE OF DEPOSIT,
MONTHLY PAYMENT SERIES--550 NOVEMBER 15, 1994
DEFINED ASSET FUNDS
<TABLE><CAPTION>
PORTFOLIO NO. AND TITLE OF RATINGS OF FACE
DEBT OBLIGATIONS CONTRACTED FOR ISSUES (1) AMOUNT COUPON MATURITIES
----------------------------------------------- ----------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C>
1) City of Valdez, AK, Marine Terminal Rev. Rfdg. AA- $ 600,000 5.85% 8/1/25
Bonds (BP Pipelines Inc. Proj.), Ser. 1993
A
2) District of Columbia (Washington, D.C.), G.O. A- 600,000 6.00 6/1/11
Bonds, Ser. 1993 E
3) Palm Beach Cnty., FL, Hlth. Facs. Auth., Hosp. A- 600,000 6.30 10/1/22
Rev. Bonds (Good Samaritan Hlth. Systems,
Inc. Proj.), Ser. 1993
4) Metro. Pier and Expo. Auth., IL, McCormick A+ 505,000 6.50 6/15/22
Place Expansion Proj. Bonds, Ser. 1992 A
5) Indiana Hlth. Fac. Financing Auth., Hosp. Rev. A(m) 600,000 7.00 10/1/12
Rfdg. Bonds, Ser. 1992 A (St. Anthony Med.
Ctr., Inc.)
6) Maine State Hsg. Auth., Mtge. Purchase Bonds, AA- 600,000 7.00 11/15/23
1992 Ser. A
7) Prince George's Cnty., MD, Proj. and Rfdg. Rev. A(m) 450,000 5.30 7/1/24
Bonds (Dimensions Hlth. Corp. Iss.), Ser.
1994
8) Massachusetts Hlth. and Educl. Facs. Auth., A- 550,000 6.875 10/1/22
Rev. Bonds, Jordan Hosp. Iss., Ser. C
<CAPTION>
YIELD TO
SINKING COST OF MATURITY
OPTIONAL FUND DEBT ON INITIAL DATE
REFUNDING REDEMPTIONS OBLIGATIONS OF
REDEMPTIONS(2) (2) TO FUND (3) DEPOSIT (3)
-------------------- -------------- ------------------- ---------------
<S> <C> <C> <C> <C>
1) 8/1/03 @ 102 -- $ 487,734.00 7.400%
2) 6/1/03 @ 102 -- 525,744.00 7.300
3) 10/1/03 @ 102 10/1/12 519,366.00 7.450
4) 6/15/03 @ 102 -- 454,525.25 7.350
5) 4/1/02 @ 102 10/1/07 582,114.00 7.300
6) 5/15/02 @ 102 11/15/13 578,418.00 7.300
7) 7/1/04 @ 102 7/1/15 332,851.50 7.500
8) 10/1/02 @ 102 10/1/03 498,173.50 7.700
</TABLE>
A-9
<PAGE>
PORTFOLIO OF MUNICIPAL INVESTMENT TRUST FUND, ON THE INITIAL DATE OF DEPOSIT,
MONTHLY PAYMENT SERIES--550 NOVEMBER 15, 1994
DEFINED ASSET FUNDS (continued)
<TABLE><CAPTION>
PORTFOLIO NO. AND TITLE OF RATINGS OF FACE
DEBT OBLIGATIONS CONTRACTED FOR ISSUES (1) AMOUNT COUPON MATURITIES
----------------------------------------------- ----------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C>
9) Clark Cnty., NV, Indl. Dev. Rfdg. Rev. Bonds AAA $ 600,000 7.20% 10/1/22
(NV Pwr. Co. Proj.), Ser. 1992 (AMBAC
Ins.)
10) New Hampshire Higher Educl. and Hlth. Facs. A- 495,000 6.00 10/1/23
Auth., Hosp. Rev. Bonds, Nashua Mem. Hosp.
Iss., Ser. 1993
11) The City of New York, NY, G.O. Bonds, Fiscal A- 600,000 7.00 2/1/20
1992 Ser. H
12) North Carolina Eastern Muni. Pwr. Agy., Pwr. A- 600,000 5.50 1/1/21
Sys. Rev. Bonds, Rfdg. Ser. 1993 B
13) West Virginia Hsg. Dev. Fund, Hsg. Finance AA+ 600,000 7.05 11/1/24
Bonds, 1992 Ser. D
14) Wisconsin Hsg. and Econ. Dev. Auth., Hsg. Rev. A 600,000 7.05 11/1/22
Bonds, 1992 Ser. B
--------------
$ 8,000,000
--------------
--------------
<CAPTION>
YIELD TO
SINKING COST OF MATURITY
OPTIONAL FUND DEBT ON INITIAL DATE
REFUNDING REDEMPTIONS OBLIGATIONS OF
REDEMPTIONS(2) (2) TO FUND (3) DEPOSIT (3)
-------------------- -------------- ------------------- ---------------
<S> <C> <C> <C> <C>
9) 10/1/02 @ 102 -- $ 602,028.00 7.150%+
10) 10/1/03 @ 102 10/1/14 402,826.05 7.600
11) 2/1/02 @ 101.5 -- 562,938.00 7.550
12) 1/1/03 @ 100 7/1/18 460,518.00 7.550
13) 5/1/02 @ 102 11/1/20 581,820.00 7.300
14) 4/1/02 @ 102 5/1/15 585,678.00 7.250
-------------------
$ 7,174,734.30
-------------------
-------------------
</TABLE>
See Footnotes on following page.
A-10
<PAGE>
- ------------
NOTES
(1) All ratings are by Standard & Poor's unless followed by '(m)' which
indicates a Moody's 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 Appendix A.)
(2) Debt Obligations are first subject to optional redemptions by the issuers
thereof (which may be exercised in whole or in part) or by other third
parties who have purchased call rights, on the dates and at the prices
indicated under the Optional Refunding Redemptions column in the table. In
subsequent years Debt Obligations are redeemable or callable 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 offer 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 offer side evaluation. The offer 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 How To Sell). 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 $7,140,334.30
which is $34,400.00 (.43% of the aggregate face amount) lower than the
aggregate Cost of Debt Obligations to Fund based on the offer side
evaluation.
Yield to Maturity on Initial Date of Deposit of Debt Obligations was
computed on the basis of the offer 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
Income and Distributions--Returns 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 during the period
November 9, 1994 to November 14, 1994. All contracts are expected to be
settled by the initial settlement date for purchase of Units.
+ See Footnote (3).
A-11
<PAGE>
MUNICIPAL INVESTMENT TRUST FUND
DEFINED ASSET FUNDS
PROSPECTUS PART B
AMT SERIES
INSURED SERIES
INTERMEDIATE TERM SERIES
MONTHLY PAYMENT SERIES
STATE SERIES
DESCRIPTION OF FUND INVESTMENTS
PORTFOLIO SELECTION
Experienced professional buyers and research analysts for Defined Asset
Funds, with information on the markets for suitable securities and on
thousands of issues, selected securities for the Fund's portfolio (the
'Portfolio'), considering its investment objective and other factors
including: (1) the quality of the Debt Obligations, as evidenced by a rating
in the category A or better by at least one recognized rating organization
(see Appendix A) or comparable credit enhancement or (in the opinion of
Defined Asset Funds research) credit characteristics; (2) yield and price
relative to comparable securities; (3) diversification as to purpose and
location of issuer, subject to availability of suitable debt obligations; and
(4) maturities (including call protection). There is no leverage or borrowing
to increase the risk to the Fund, nor does the Portfolio contain other kinds
of securities to enhance yield.
Composition of the Portfolio is summarized under Investment Summary and
the names and certain characteristics of the debt obligations in the Portfolio
(the 'Debt Obligations' or the 'Securities') are listed in the financial
statements.
Yields on debt obligations depend on factors including general conditions
of the municipal bond market and the general bond markets, size of a
particular offering, and the maturity and rating of the particular issue.
Ratings represent opinions of the rating organizations as to the quality of
securities rated, but these are general (not absolute) standards of quality.
Yields can vary among obligations with similar maturities, coupons and
ratings.
Neither the Sponsors nor the Trustee are liable for any default, failure
or defect in a Security. If a contract to purchase any Debt Obligation fails
(a 'Failed Debt Obligation'), the Sponsors are authorized to deposit
Replacement Securities which (i) are tax-exempt bonds issued by a state or
political subdivision or a U.S. territory or possession; (ii) have a fixed
maturity or disposition date substantially similar to the Failed Debt
Obligation; (iii) are rated A or better by at least one recognized rating
organization or have comparable credit characteristics; and (iv) are not when,
as and if issued. Replacement Securities must be deposited within 110 days
after deposit of the failed contract, at a cost not exceeding funds reserved
for purchasing the Failed Debt Obligation and at a yield to maturity and
current return, as of the date the failed contract was deposited,
substantially equivalent (considering then current market conditions and
relative creditworthiness) to those of the Failed Debt Obligation.
Because each Defined Fund is a portfolio of preselected securities,
purchasers know in advance what they are investing in. The Portfolio is listed
in the prospectus so that generally the securities, maturities, call dates and
ratings are known when they buy. Of course, the Portfolio changes somewhat
over time as additional Securities are deposited, as Securities are called or
redeemed, or as they are sold to meet redemptions and in the limited
circumstances described below.
PORTFOLIO SUPERVISION
The Fund is a unit investment trust which follows a buy and hold
investment strategy. Traditional methods of investment management for mutual
funds typically involve frequent changes in fund holdings based on economic,
financial and market analyses. Because the Fund is not actively managed, it
may retain an issuer's securities despite adverse financial developments.
However, Defined Asset Funds' experienced financial analysts regularly review
the Portfolio, and the Sponsors may instruct the Trustee to sell securities in
the following
1
<PAGE>
circumstances: (i) default in payment of amounts due on the security; (ii)
institution of certain legal proceedings; (iii) other legal questions or
impediments affecting the security or payments thereon; (iv) default under
certain documents adversely affecting debt service or in payments on other
securities of the same issuer or guarantor; (v) decline in projected income
pledged for debt service on a revenue bond; (vi) if a security becomes taxable
or otherwise inconsistent with the Fund's investment objectives; (vii) a right
to sell or redeem the security pursuant to a guarantee or other credit
support; or (viii) decline in security price or other market or credit factors
(including advance refunding) that, in the opinion of Defined Asset Funds
research, makes retention of the security detrimental to the interests of
Holders. If there is a payment default on any Security and the Agent for the
Sponsors fails to instruct the Trustee within 30 days after notice of the
default, the Trustee will sell the Security.
The Trustee must reject any offer by an issuer of a Debt Obligation to
exchange another security pursuant to a refunding or refinancing plan unless
(a) the Debt Obligation is in default or (b) in the written opinion of Defined
Asset Funds research analysts, a default is probable in the reasonably
foreseeable future, and the Sponsors instruct the Trustee to accept the offer
or take any other action with respect to the offer as the Sponsors consider
appropriate.
RISK FACTORS
An investment in units of beneficial interest in the Fund ('Units')
should be made with an understanding of the risks which an investment in
fixed-rate debt obligations may entail, including the risk that the value of
the Portfolio and hence of the Units will decline with increases in interest
rates. In recent years there have been 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. 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.
Certain of the Securities in the Fund may have been deposited 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 deposited 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 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 to the Fund. 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
2
<PAGE>
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.
Holders of Units will be 'at risk' with respect to Securities purchased
on a when, as and if issued basis or for delayed delivery (i.e., either a gain
or loss may result from fluctuations in the offering side evaluation of the
Securities) from the date they commit for Units.
As set forth under Investment Summary and Portfolio, the Fund may contain
or be concentrated in one or more of the types of Debt Obligations discussed
below. An investment in the Fund should be made with an understanding of the
risks that these securities may entail, certain of which are described below.
In addition, investment in a single State Trust, as opposed to a Fund which
invests in the obligations of several states, may involve some additional risk
due to the decreased diversification of economic, political, financial and
market risks. Political restrictions on the ability to tax and budgetary
constraints affecting the state government 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 health care
organizations, with municipal debt outstanding, may also be negatively
impacted by reductions in state appropriations.
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 recession's adverse impact upon both revenue and
expenditures, as well as other factors, many state and local governments have
confronted deficits which were 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 issue
additional debt to finance deficits or cash flow needs.
In addition, certain of the Debt Obligations in the Fund may be
obligations of 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 condition 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, however, bonds which were thought to be escrowed
to maturity have been called for redemption prior to maturity.
3
<PAGE>
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
manufacturing facilities. These projects are usually operated by corporations.
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
from receipts or revenues under arrangements between the issuer and the
corporate operator of the 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 to the issuer
by the corporate operator of the 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 an affiliated company. Regardless of the structure, payment
of IDRs is solely dependent upon the creditworthiness of the corporate
operator of the project, corporate guarantor and credit enhancer. Corporate
operators or 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 under revenue bonds
issued on their behalf is dependent on various factors, including the rates
they may charge their customers, the demand for their 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 and disallowances 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 and the impact of deregulation.
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 affected by its cost of capital, the
availability and cost of fuel and other factors. 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 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
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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
and additional factors including (a) the effects of inflation upon the costs
of operation and construction, (b) uncertainties in predicting future load
requirements, (c) increased financing requirements coupled with limited
availability of capital, (d) exposure to cancellation and penalty charges on
new generating units under construction, (e) problems of cost and availability
of fuel, (f) litigation and proposed legislation designed to delay or prevent
construction of generating and other facilities, (g) the uncertain effects of
conservation on the use of electric energy and (h) increased competition as a
result of the availability of other energy sources and state deregulation
efforts. 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 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. California, Michigan, New Mexico and Ohio
have instituted investigations into the possible introduction of retail
wheeling within their respective states, which could foster competition among
the utilities. Retail wheeling might result in the issue of stranded
investment (investment in assets not being recovered in base rates), thus
hampering a utility's ability to meet its obligations.
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 presented to Congress by the end of 1995 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
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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. Since there have been very few nuclear plants
decommissioned to date, these estimates may be unrealistic.
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.
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
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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 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. Certain special revenue obligations (i.e., Medicare or Medicaid
revenues) may be payable subject to appropriations by state legislatures.
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
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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 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
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,
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. Furthermore,
proposed legislation would provide the U.S. Secretary of Transportation with
the temporary authority to freeze airport fees upon the occurrence of disputes
between a particular airport facility and the airlines utilizing that
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 waste disposal facilities are generally payable
from dumping 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
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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).
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.
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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 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.
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 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 savings banks, savings and loan associations and similar
institutions ('thrifts') or are 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, if an issuer fails to
pay amounts due on the Debt Obligation or defaults under its reimbursement
agreement with the issuer of the letter of credit or, in certain cases, if the
interest on the Debt Obligation is 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 (and therefore their ability
to honor letters of credit or guarantees) 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. In the late 1980's
and early 1990's the credit ratings of U.S. banks and bank holding companies
were subject to extensive downgrades due primarily to deterioration in asset
quality and the attendant impact on earnings and capital adequacy. Major U.S.
banks, in particular, suffered from a decline in asset quality in the areas of
construction and commercial real estate loans. These problem loans have been
largely addressed. During the early 1990's the credit ratings of many foreign
banks have also been subject to
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significant downgrades due to a deterioration in asset quality which has
negatively impacted earnings and capital adequacy. The decline in asset
quality of major foreign banks has been brought about largely by recessionary
conditions in their local economies. 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. In 1993, a total of 41 banks with combined assets of $3.5 billion
were closed. The 1993 total was the lowest level in twelve years. Bank holding
companies and other financial institutions may not be as highly regulated as
banks, and may be more able to expand into other non-financial and
non-traditional businesses.
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.
Recent legislation, including the Financial Institutions Reform, Recovery
and Enforcement Act of 1989, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ('FDICIA') and the Resolution Trust Corporation
Refinancing, Restructuring, and Improvement Act of 1991 have significantly
altered the legal rules and regulations governing banks and thrifts and
mandated early and aggressive regulatory intervention for unhealthy
institutions. For those thrifts that have failed, either the FDIC or the
Resolution Trust Corporation ('RTC') will be appointed as receiver or
conservator. Periodic efforts by recent Administrations to introduce
legislation broadening the ability of banks and thrifts to compete with new
products generally 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. Legislation to
liberalize interstate branching for banks has been stalled in Congress, but
may be more successful this year. 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 these and similar rules may result in increased volatility
in the reported health of the industry and mandated regulatory intervention to
correct such problems.
Investors should realize that should the FDIC or the RTC make payment
under a letter of credit prior to the scheduled maturity or disposition dates
of the related Debt Obligation their investment will be returned sooner than
originally anticipated. The possibility of such early payment has been
increased significantly by the enactment of FDICIA, which requires federal
regulators of insured banks, savings banks, and thrifts to act more quickly to
address the problems of undercapitalized institutions than previously, and
specifies in more detail the actions they must take. One such requirement
virtually compels the appointment of a receiver or conservator for any
institution when its ratio of tangible equity to total assets declines to two
percent. Others force aggressive intervention in the business of an
institution at even earlier stages of deterioration.
Certain letters of credit or guarantees backing Debt Obligations may have
been issued by a foreign bank or corporation or similar entity (a 'Foreign
Guarantee'). On the basis of information available to the Sponsors at the
present time no Foreign Guarantee is subject to exchange control restrictions
under existing law which would materially interfere with payments to the Fund
under the Foreign Guarantee. However, there can be no assurance that exchange
control regulations might not be adopted in the future which might affect
adversely the payment to the Fund. Nor are there any withholding taxes under
existing law applicable to payments made on any Foreign Guarantee. While there
can be no assurance that withholding taxes might not be imposed in the future,
provision is made in the instruments governing any Foreign Guarantee that, in
substance, to the extent permitted by applicable law, additional payments will
be made by the guarantor so that the total amount paid, after deduction of any
applicable tax, will not be less than the amount then due and payable on the
Foreign Guarantee. The adoption of exchange control regulations and other
legal restrictions could have an adverse impact on the marketability of any
Debt Obligations backed by a Foreign Guarantee and on the ability of the Fund
to satisfy its obligation to redeem Units tendered to the Trustee for
redemption (see How to Sell).
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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, 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.
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.
Standard & Poor's has rated the Units of any Insured Fund AAA because the
Insurance Companies have insured the Debt Obligations. The assignment of such
AAA ratings is due to Standard & Poor's assessment of the creditworthiness of
the Insurance Companies and of their ability to pay claims on their policies
of insurance. In the event that Standard & Poor's reassesses the
creditworthiness of any Insurance Company which would result in the rating of
an Insured Fund being reduced, the Sponsors are authorized to direct the
Trustee to obtain other insurance.
The following are brief descriptions of certain Insurance Companies. 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 $1,988,000,000 and
policyholders' surplus of approximately $749,000,000 as of March 31, 1994.
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. 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, 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 for
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
March 31, 1994 Asset Guaranty had admitted assets of approximately
$142,000,000 and policyholders' surplus of approximately $73,000,000.
CGIC, a monoline bond insurer 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, USF&G, the eighth largest
property/casualty
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company in the U.S. as measured by net premiums written, and CGC management.
As of March 31, 1994, CGIC had total admitted assets of approximately
$288,000,000 and policyholders' surplus of approximately $171,000,000.
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., 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 March 31, 1994 CAPMAC's admitted assets were
approximately $188,000,000 and its policyholders' surplus was approximately
$145,000,000.
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 credit 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 March 31, 1994, its total admitted
assets were approximately $185,000,000 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 March 31, 1994,
Continental had policyholders' surplus of approximately $3,410,000,000 and
admitted assets of approximately $19,140,000,000. Continental is the lead
property-casualty company of a fleet of carriers nationally known and marketed
as 'CNA Insurance Companies'. CNA is rated AAI 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 March 31, 1994, its total
admitted assets were approximately $1,995,000,000 and its policyholders'
surplus was approximately $805,000,000.
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
March 31, 1994, FSA had policyholders' surplus of approximately $368,000,000
and total admitted assets of approximately $759,000,000.
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 March 31, 1994, the total admitted assets of
Firemen's were approximately $2,206,000,000 and its policyholders' surplus was
approximately $422,000,000.
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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 March
31, 1994, MBIA had admitted assets of approximately $3,152,000,000 and
policyholders' surplus of approximately $998,000,000.
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 March
31, 1994, the total admitted assets and policyholders' surplus of National
Union were approximately $8,517,000,000 and approximately $1,422,000,000,
respectively.
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 that are
otherwise uninsurable. 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.
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
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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 type of 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. 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 (see Portfolio in Part A). In general, optional
refunding redemption provisions are more likely to be exercised when the offer
side evaluation is at a premium over par than when it is at a discount from
par. Generally, the offer 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 which
were acquired on the Date of Deposit at an offer 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. 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 How to
Sell--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, 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 Trust Indenture).
LIQUIDITY
Certain of the Debt Obligations may have been guaranteed or similarly
secured by insurance companies or other corporations or entities. The
guarantee or similar commitment may constitute a security (a 'Restricted
Security') that cannot, in the opinion of counsel, be sold publicly by the
Trustee without registration under the Securities Act of 1933, as amended, or
similar provisions of law subsequently enacted. The Sponsors nevertheless
believe that, should a sale of these Debt Obligations be necessary in order to
meet redemption, the Trustee should be able to consummate a sale with
institutional investors. Up to 40% of the Portfolio may consist of Debt
Obligations purchased from various banks and thrifts and other Debt
Obligations with guarantees which may constitute Restricted Securities.
The Portfolio may contain certain Debt Obligations purchased directly
from issuers. These Debt Obligations are generally issued under bond
resolutions or trust indentures providing for the issuance of bonds in
publicly saleable denominations (usually $100,000), may be sold free of the
registration requirements of the Securities Act of 1933 and are otherwise
structured in contemplation of ready marketability. In addition, the Sponsors
generally obtain letters of intention to repurchase or to use best efforts to
remarket these Debt Obligations from the issuers, the placement agents acting
in connection with their sale or the entities providing the additional credit
support, if
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any. These letters do not express legal obligations; however, in the opinion
of the Sponsors, these Debt Obligations should be readily marketable.
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 and may be a preference item for purposes of the Alternative
Minimum Tax (see Portfolio in Part A; Taxes below). 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 has announced an expansion of its
examination program with respect to tax-exempt bonds. The expanded examination
program will consist of, 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.
HOW TO BUY
Units are available from any of the Underwriters and other broker-dealers
at the Public Offering Price (including the applicable sales charge) plus a
proportionate share of any cash held by the Fund in the Capital Account
(unless allocated to the purchase of specific securities) and net accrued and
undistributed interest. Because both the value of Securities and accrued
interest change, the Public Offering Price varies each Business Day.
PUBLIC OFFERING PRICE
In the initial offering period, the Public Offering Price is based on the
next offer side evaluation of the Securities, and includes a sales charge
based on the number of Units of a single Fund or Trust purchased on the same
or any preceding day by a single purchaser. See Initial Offering Sales Charge
Schedule in Appendix B. The purchaser or his dealer must notify the Sponsors
at the time of purchase of any previous purchase to be aggregated and supply
sufficient information to permit confirmation of eligibility; acceptance of
the purchase order is subject to such confirmation. Purchases of Fund Units
may not be aggregated with purchases of any other unit trust. This procedure
may be amended or terminated at any time without notice.
In the secondary market (after the initial offering period), the Public
Offering Price is based on the next bid side evaluation of the Securities, and
includes a sales charge based (a) on the number of Units of the Fund and any
other Series of Municipal Investment Trust Fund purchased in the secondary
market on the same day by a single purchaser (see Secondary Market Sales
Charge Schedule in Appendix B) and (b) the maturities of the underlying
Securities (see Effective Sales Charge in Appendix B). To qualify for a
reduced sales charge, the dealer must confirm that the sale is to a single
purchaser or is purchased for its own account and not for distribution. For
these purposes, Units held in the name of the purchaser's spouse or child
under 21 years of age are deemed to be purchased by a single purchaser. A
trustee or other fiduciary purchasing securities for a single trust estate or
single fiduciary account is also considered a single purchaser.
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In the secondary market, the Public Offering Price is further reduced
depending on the maturities of the various bonds in the Portfolio, by
determining a sales charge percentage for each bond, as stated in Effective
Sales Charge in Appendix B. The sales charges so determined, multiplied by the
bid side evaluation of the Securities, are aggregated and the total divided by
the number of Units outstanding to determine the Effective Sales Charge. On
any purchase, the Effective Sales Charge is multiplied by the applicable
secondary market sales charge percentage (depending on the number of Units
purchased) in order to determine the sales charge component of the Public
Offering Price.
Employees of certain Sponsors and Sponsor affiliates and non-employee
directors of Merrill Lynch & Co. Inc. may purchase Units at any time at prices
including a sales charge of not less than $5 per Unit.
SECURITIES EVALUATIONS
The Public Offering Price is based on the evaluation of Securities in the
Fund, at the offer or bid side as described above, at the Evaluation Time next
following receipt of the order. Evaluations are determined by the Evaluator as
described under Redemption on each Business Day (this excludes 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).
ACCRUED INTEREST
Net accrued interest is added to the Public Offering Price, the Sponsors'
Repurchase Price and the Redemption Price per Unit. This represents the
interest accrued on the Securities, net of Fund expenses, from the Initial
Date of Deposit to, but not including, the settlement date for Units (less any
prior distributions of interest income to Holders). Securities deposited also
carry 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 advances and distributes this amount to
the Sponsors; it recovers this advance from interest received on the Debt
Obligations. Because of varying interest payment dates on the Securities,
accrued interest at any time will exceed the interest actually received by the
Fund.
CERTIFICATES
Certificates for Units are issued upon request, and are transferable upon
payment of any taxes or governmental charges and compliance with the
requirements for redeeming Certificates (see Redemption). Certain Sponsors
collect additional charges for registering and shipping Certificates to
purchasers. Lost or mutilated Certificates can be replaced upon delivery of
satisfactory indemnity and payment of costs.
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 offer 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 How to Sell--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 offer 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 offer 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 offer and bid prices
has averaged between 1 and 2% of face amount; the difference on the day before
the date of this Prospectus is stated in a note to the Portfolio.
HOW TO SELL
SPONSORS' MARKET FOR UNITS
Holders can cash in Units at any time without a fee. The Sponsors
(although not obligated to do so) normally repurchase any Units offered for
sale, at the repurchase price next computed after receipt of the order.
Because of the sales charge and fluctuations in the market value of the
Securities (among other reasons) the repurchase price may be less than the
investor's cost for the Units. Holders disposing of Units should consult their
financial
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professional as to current market prices to determine if other broker-dealers
or banks offer higher prices for those Units.
The Sponsors may discontinue this market without prior notice if the
supply of Units exceeds demand or for other business reasons; in that event,
the Sponsors may still purchase Units at the redemption price as a service to
Holders. Although the Sponsors may reoffer Units repurchased, alternatively
they may redeem those Units; see Redemption for a description of certain
consequences of redemptions to remaining Holders.
REDEMPTION
Holders may redeem Units by tendering to the Trustee Certificates (if
issued) or a request for redemption. Certificates must be properly endorsed or
accompanied by a written transfer instrument. Each Holder must sign the
Certificate, transfer instrument or request exactly as the name appears on the
face of the Certificate; signatures must be guaranteed by an eligible
guarantor institution or in another manner acceptable to the Trustee. In
certain instances, additional documents may be required such as a certificate
of death, trust instrument, certificate of corporate authority or appointment
as executor, administrator or guardian. If the Sponsors are maintaining a
market for Units, they will purchase any Units tendered at the price described
in the preceding section. If the Sponsors do not purchase Units tendered, the
Trustee is authorized in its discretion to sell Units in the over-the-counter
market if it believes it will obtain for the redeeming Holder a higher net
price.
Redemptions may be suspended or payment postponed in limited
circumstances: (1) if the New York Stock Exchange is closed other than for
customary weekend and holiday closings; (2) if the SEC determines that trading
on that Exchange is restricted or an emergency exists making disposal or
evaluation of the Securities not reasonably practicable; or (3) for any other
period which the SEC by order permits.
On the seventh calendar day after tender (the preceding Business Day if
the seventh day is not a Business Day), the Holder will be mailed an amount
per Unit equal to the Redemption Price Per Unit at the Evaluation Time next
following receipt of the tender. As noted above, this price may be more or
less than the cost of those Units.
Redemption Price per Unit is computed each Business Day by adding (a) the
aggregate bid side evaluation of the Securities, (b) cash in the Fund
(excluding cash held to pay contracts to purchase Securities or in a reserve
account), (c) accrued but unpaid interest on the Securities up to but not
including the payment date and (d) the aggregate value of any other Fund
assets; deducting (v) unpaid taxes or other governmental charges, (w) accrued
but unpaid Fund expenses, (x) unreimbursed Trustee advances, (y) cash held to
redeem Units or for distribution to Holders and (z) the aggregate value of any
other Fund liabilities; and dividing the result by the Units outstanding as of
the computation. Evaluations of Securities are determined by the Evaluator as
follows: During the initial syndicate offering period for any Debt Obligation,
its evaluation will be at the syndicate offer price unless the Evaluator
determines that this price does not accurately reflect the market value. For
Securities traded over-the-counter, the evaluation is generally based on the
closing sales prices on that market (unless the Evaluator deems these prices
inappropriate for valuation). If closing sales prices are not available, the
evaluation is generally determined on the basis of current bid or offer prices
for the Securities or (if not available) for comparable securities or by
appraising the value or any combination of these methods.
The value of any insurance is reflected in the market value of any
Insured Debt Obligation. The Sponsors believe that this is a fair method of
valuing the Insured Debt Obligations and the insurance.
If cash is not available in the Fund's Income and Capital Accounts to pay
redemptions, the Trustee is authorized to sell Securities. Securities to be
sold will be selected by the Agent for the Sponsors in accordance with
procedures specified in the Indenture, based on market and credit factors that
they determine are in the best interests of the Fund. The Sponsors are
authorized to specify minimum face amounts in which Securities are sold, to
obtain a better price for the Fund. When Securities are sold (or mature or are
called), the size and diversity of the Fund is reduced. Sales to meet
redemptions are often made at times when Securities would not otherwise be
sold, and may result in lower prices than might be realized otherwise.
INCOME AND DISTRIBUTIONS
INCOME
Income is received by the Fund upon semi-annual payments of interest on
the Debt Obligations held in the Portfolio. Some of the Debt Obligations may
be purchased on a when, as and if issued basis or may have a
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delayed delivery (see Portfolio). Since interest on these Debt Obligations
does not begin to accrue until the date of delivery to the Fund, in order to
provide tax-exempt income to the Holders for this non-accrual period, the
Trustee's Annual Fee and Expenses is reduced by the interest that would have
accrued on these Debt Obligations between the initial settlement date for
Units and the delivery dates of the Debt Obligations. This eliminates
reduction in Monthly Income Distributions. Should when-issued Debt Obligations
be issued later than expected, the fee reduction will be increased
correspondingly. If the amount of the Trustee's Annual Fee and Expenses is
insufficient to cover the additional accrued interest, the Sponsors will treat
the contracts as Failed Debt Obligations. As the Trustee is authorized to draw
on the letter of credit deposited by the Sponsors before the settlement date
for these Debt Obligations and deposit the proceeds in an account for the Fund
on which it pays no interest, its use of these funds compensates the Trustee
for the reduction described above.
RETURNS
Estimated Current Return represents annual cash to be received from
interest-bearing Debt Obligations in the Portfolio (net of estimated annual
expenses) divided by the Public Offering Price (including sales charge).
Estimated Long-Term Return is a measure of the estimated return earned
over the estimated life of the Fund. This represents an average of the yields
to maturity (or earliest call date for obligations trading at a premium over
the call price) of the Debt Obligations in the Portfolio, calculated in
accordance with accepted bond practice and adjusted to reflect expenses and
sales charges. Bonds are customarily offered on a 'yield price' basis, which
reflects computation of yield to maturity (or call date) and not only the
interest payable but amortization or accretion to a specified date of any
premium over or discount from par (maturity) value in the bond's purchase
price. In calculating Estimated Long Term Return, the average yield for the
Portfolio is derived by weighting each Debt Obligation's yield by its market
value and the time remaining to the call or maturity date depending on how the
Debt Obligation is priced. The average Portfolio yield is then adjusted to
reflect estimated expenses and the maximum sales charge. This calculation does
not reflect certain delays in distributing income nor the timing of other
receipts and distributions on Units; depending on maturities, it may therefore
overstate or understate the impact of sales charges. Both of these factors may
result in a lower figure.
Both Estimated Current Return and Estimated Long Term Return can
fluctuate with changes in Portfolio composition, in market value of the Debt
Obligations, in Fund expenses and sales charges; these returns therefore can
vary materially from the figures at the time of purchase. Any difference
between Estimated Current Return and Estimated Long Term Return will probably
fluctuate at least as frequently. No return estimate can be predictive of an
investor's actual return because an investor's actual return will depend on
many factors, including the value of the underlying Debt Obligations when the
investor purchases and sells Units of the Fund and the period of time the
investor holds the Units. Therefore, Estimated Current Return and Estimated
Long Term Return are designed to be comparative rather than predictive. A
yield calculation which is more comparable to an individual bond may be higher
or lower than Estimated Current Return or Estimated Long Term Return which are
more comparable to return calculations used by other investment products.
FUND ACCOUNTS
Interest received is credited to an Income Account and other receipts to
a Capital Account. A Reserve Account may be created by withdrawing from the
Income or Capital Accounts amounts considered appropriate by the Trustee to
reserve for any material amount that may be payable out of the Fund. Monies
held by the Trustee in the various accounts for the Fund do not bear interest.
DISTRIBUTIONS
The initial estimated net annual interest rate per Unit is stated in
Investment Summary. This is based on $1,000 face amount per Unit, after
deducting estimated annual Fund expenses. The rate will change as Securities
mature, are called or sold or otherwise disposed of, as Replacement Securities
are deposited and as Fund expenses change. Because the Portfolio is not
actively managed, income distributions may not be affected by changes in
interest rates. Subject to the financial conditions of the issuers of the
Securities, the amount of income should 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.
Each Unit receives an equal share of monthly distributions of interest
income and any principal distributed, substantially equal to the proportionate
income during the month preceding the Record Day less estimated
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expenses. Interest on the Debt Obligations is received by the Fund on a
semi-annual or annual basis. Therefore, it takes 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 first and following Monthly Income Distributions.
When a Security is sold, redeemed or otherwise disposed of, accrued interest
is received by the Fund. 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.
To eliminate fluctuations in the Monthly Income Distribution, the Trustee will
advance amounts necessary to provide approximately equal distributions; it
will be reimbursed, without interest, from interest received on the
Securities. However, the amount of Monthly Income Distributions will change
over time as described above.
Along with the Monthly Income Distributions, 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 stated in Investment
Summary). Principal proceeds received from disposition of any Security after a
Record Day and prior to the related Distribution Day will be held in the
Capital Account subject to distribution on the second following Distribution
Day. The first distribution for a purchaser of Units between a Record Day and
the related Distribution Day will be made on the second following Distribution
Day.
Any funds held to acquire Replacement Securities which have not been used
to purchase Securities within 90 days after the initial deposit, unless
promptly used to purchase Replacement Securities, will be distributed to
Holders together with the attributable sales charge and interest attributable
to those funds. This interest will not be exempt from tax.
INVESTMENT ACCUMULATION PROGRAM
Distributions of interest and any principal or premium received by the
Fund will be paid in cash unless the Holder elects 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 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 rated A or
better or with comparable credit characteristics. Reinvesting compounds
earnings free from Federal tax. Holders participating in the Program will be
subject to State and local income taxes to the same extent as if the
distributions had been received in cash, and most of the income on the Program
is subject to State and local income taxes. 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.
FUND EXPENSES
See Trustee's Annual Fee and Expenses under Investment Summary for
estimated annual Fund expenses; if actual expenses exceed the estimate, the
excess will be borne by the Fund. The annual fee solely for the Trustee's
services is $0.70 per $1,000 face amount of Debt Obligations, payable in
monthly installments. The Trustee also benefits when it holds cash for the
Fund in non-interest bearing accounts. Possible additional charges include
Trustee fees and expenses for extraordinary services, costs of indemnifying
the Trustee and the Sponsors to the extent permitted by law and the Indenture,
costs of action taken to protect the Fund and other legal fees and expenses,
Fund termination expenses and any governmental charges. The Trustee has a lien
on Fund assets to secure reimbursement of these amounts, and may sell
Securities for this purpose. The Sponsors receive an annual fee for Portfolio
supervisory services at the maximum stated under Investment Summary, based on
the initial face amount in any calendar year. While this may exceed their
costs of providing these services to the Fund, the total supervision fees from
all Municipal Investment Trust Fund Series will not exceed their costs for
these services to all of those Series during any calendar year. The Sponsors
may also be reimbursed for their costs of providing bookkeeping and
administrative services to the Fund. The Trustees's, Sponsors' and Evaluators
fees may be adjusted for inflation without Holders' approval.
LOW COSTS
All expenses in establishing the Fund, including the cost of the initial
preparation and printing of documents relating to the Fund, cost of the
initial evaluation, the initial fees and expenses of the Trustee, legal
expenses,
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advertising and selling expenses and any other out-of-pocket expenses, will be
paid from the Underwriting Account at no charge to the Fund.
Sales charges on 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 Asset
Funds have no 12b-1 or back-end load fees. These 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 costs and no ongoing marketing expenses, operating
expenses are generally less than 0.25% a year. When compounded annually, small
differences in expense ratios can make a big difference in expenses.
FUND PERFORMANCE
Information on the performance of the Fund for various periods, on the
basis of changes in Unit price plus the amount of income and principal
distributions reinvested, may be included from time to time in advertisements,
sales literature, reports and other information furnished to current or
prospective investors. Total return figures are not averaged, and may not
reflect deduction of the sales charge, which would decrease the return.
Average annualized return figures reflect deduction of the maximum sales
charge. No provision is made for any income taxes payable. Past performance
may not be indicative of future results. The Fund is not actively managed.
Unit price and return fluctuate with the value of the Bonds in the Portfolio,
so there may be a gain or loss when Units are sold.
Fund performance may be compared to performance on the same basis (with
distributions reinvested) of Moody's Municipal Bond Averages or performance
data from publications such as Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, The New York Times, U.S. News and World
Report, Barron's Business Week, CDA Investment Technology, Inc., Forbes
Magazine or Fortune Magazine. As with other performance data, performance
comparisons should not be considered representative of the Fund's relative
performance for any future period.
EXCHANGE OPTION
Holders may exchange Units (except of Short Intermediate Series) at a
reduced sales charge for units of one or more series of the types listed in
Appendix C ('Exchange Funds'). This includes the current maximum sales charge
and exchange fee for each type of Exchange Fund. (If units held less than five
months are exchanged for a series with a higher regular sales charge, the
Holder will pay the difference between the sales charges paid on the units
exchanged and the regular sales charge for the units acquired, if greater than
the exchange fee.)
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. Appendix C lists certain
characteristics of each type of Exchange Fund which a Holder should consider
in determining whether it would be an appropriate investment and therefore an
appropriate exchange for Units of the Fund.
Holders of Exchange Funds can similarly exchange units of those funds for
Units of the Fund. However, units of series offered at a maximum applicable
sales charge below 3.50% of the public offering price (including certain
series of Exchange Funds listed in Appendix C) are not eligible for exchange
except that Holders may exchange Units of the Fund for Freddie Mac or Select
Ten Series during their initial offering periods. Holders of other registered
unit investment trusts originally offered at a maximum applicable sales charge
of at least 3.0% ('Conversion Trusts') may similarly acquire Units at the
exchange fee.
To make an exchange, a Holder should contact his financial professional
to find out what suitable Exchange Funds are available and to obtain a
prospectus. The Holder may only acquire units of an Exchange Fund in which the
Sponsors maintain a secondary market and which are lawfully available for sale
in the state where the Holder resides. Except for the sales charge, an
exchange is like any other purchase and sale of units in the secondary market.
An exchange is a taxable event normally requiring recognition of any gain or
loss on the units exchanged. However, the Internal Revenue Service may seek to
disallow a loss if the portfolio of the units acquired is not materially
different from the portfolio of the units exchanged; Holders should consult
their own tax advisers. If the proceeds of units exchanged is insufficient to
acquire a whole number of Exchange Fund units, the Holder may pay the
difference in cash (not exceeding the price of a single unit acquired).
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As the Sponsors are not obligated to maintain a secondary market in any
series, there can be no assurance that units of a desired series will be
available for exchange. The Exchange Option may be amended or terminated by
the Sponsors at any time, without notice to Holders.
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 amortization 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.
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
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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.
* * *
The Fund may include Debt Obligations issued after August 7, 1986 (see
Investment Summary--Taxation and Portfolio in Part A). Interest (including any
original issue discount) on certain of these Debt Obligations will be a
preference item for purposes of the alternative minimum tax ('AMT'). In
addition, a corporate Holder should be aware 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.
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
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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.
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
may be inspected by Holders at reasonable times during business hours.
REPORTS TO HOLDERS
With each distribution, the Trustee includes a statement of the interest
and any other receipts being distributed. Within five days after deposit of
Debt Obligations in exchange or substitution for Debt Obligations (or
contracts) previously deposited, the Trustee will send a notice to each
Holder, identifying both the Debt Obligations removed and the Replacement
Securities deposited. The Trustee sends each record Holder an annual report
summarizing transactions in the Fund's accounts and amounts distributed during
the year and Securities held, number of Units outstanding and Redemption Price
at year end, among other matters. Holders may obtain copies of Securities
evaluations from the Trustee to enable them to comply with Federal and state
tax reporting requirements. Fund accounts are audited annually by independent
accountants selected by the Sponsors; audited financial statements are
available on request.
TRUST INDENTURE
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. This Prospectus summarizes various provisions of the Indenture, but
each statement herein is qualified in its entirety by reference to the
Indenture.
The Indenture may be amended by the Sponsors and the Trustee, without
consent by Holders: (a) to cure ambiguities or to correct or supplement any
defective or inconsistent provision, (b) to make any amendment required by the
SEC or other governmental agency, or (c) to make any other change not
materially adverse to the interest of Holders (as determined in good faith by
the Sponsors). The Indenture may also be amended upon consent of Holders of
51% of the Units. No amendment may reduce the interest of any Holder in the
Fund without the Holder's consent or reduce the percentage of Units required
to consent to any amendment without unanimous consent of Holders. Holders will
be notified on the substance of any amendment.
The Fund will be terminated, and any remaining Securities sold, no later
than the mandatory termination date specified in Investment Summary. It will
terminate earlier upon the disposition of the last Security, upon direction of
the Sponsors if total assets are below the minimum value specified in
Investment Summary or upon consent of Holders of 51% of the Units. The Trustee
will notify each Holder in writing within a reasonable time before
termination, specifying when Certificates should be surrendered. After
termination, the Trustee will sell any remaining Securities and distribute (by
check mailed to the Holder) each Holder's pro rata interest in the Fund, net
of any unpaid fees, taxes, governmental and other charges and subject to
surrender of any outstanding Certificate by the Holder.
Merrill Lynch, Pierce, Fenner & Smith Incorporated has been appointed as
Agent for the Sponsors by the other Sponsors.
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The Trustee may resign upon notice to the Sponsors; it may be removed by
direction of Holders of 51% of the Units at any time or by the Sponsors
without consent of Holders if it becomes incapable of acting or bankrupt, its
affairs are taken over by public authorities, or if for any reason the
Sponsors determine in good faith that its replacement is in the best interest
of the Holders. The Evaluator may resign or be removed by the Sponsors and the
Trustee without consent of Holders. The resignation or removal of either
becomes effective upon acceptance of appointment by a successor; in this case,
the Sponsors (and the Trustee in the case of a successor Evaluator) will use
their best efforts to appoint a successor promptly; however, if upon
resignation no successor has accepted appointment within 30 days after
notification, the resigning Trustee or Evaluator may apply to a court of
competent jurisdiction to appoint a successor.
Any Sponsor may resign if one remaining Sponsor maintains a net worth of
$2,000,000 and is agreeable to the resignation. A new Sponsor may be appointed
by the remaining Sponsors and the Trustee to assume the duties of the
resigning Sponsor. If there is only one Sponsor and it fails to perform its
duties or becomes incapable of acting or bankrupt or its affairs are taken
over by public authorities, the Trustee may (a) appoint a successor Sponsor at
rates of compensation deemed by the Trustee to be reasonable and not exceeding
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.
The Sponsors, the Trustee and the Evaluator are not liable to any other
party (including Holders) for any act or omission in the conduct of their
responsibilities absent bad faith, willful misfeasance, negligence (gross
negligence in the case of a Sponsor) or reckless disregard of duty. The
Trustee will not be personally liable for taxes or other governmental charges
with respect to the Securities or interest thereon. The Indenture contains
other customary provisions limiting liability of the Trustee.
MISCELLANEOUS
TRUSTEE
The Trustee is named on the back cover of the Prospectus and is either
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 FDIC and
the Board of Governors of the Federal Reserve System ('Federal Reserve')); 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 FDIC and the
Federal Reserve); 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 regulation by the New York Superintendent of Banks,
the FDIC and the Federal Reserve; 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 FDIC
and the Federal Reserve) 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 FDIC and the Federal
Reserve). Unless otherwise indicated, when Investors Bank & Trust and The
First National Bank of Chicago act as Co-Trustees, the term 'Trustee' in this
Prospectus refers to these banks as co-trustee.
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, 120 Broadway, New York, New York 10271, 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 in Part A was audited by Deloitte & Touche
LLP, independent accountants, as stated in their opinion. It is included in
reliance upon that opinion given on the authority of that firm as experts in
accounting and auditing.
25
<PAGE>
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, a subsidiary of Merrill
Lynch & Co., Inc., is engaged in the investment advisory business. Smith
Barney 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.
PUBLIC DISTRIBUTION
On the Initial Date of Deposit, the Sponsors, acting as managers for the
underwriters ('Underwriters') named under Underwriting Account, deposited the
Debt Obligations listed under Portfolio (or purchase contracts for these
Securities together with a letter of credit to complete the purchase), in
exchange for Units representing the entire ownership of the Fund.
During the initial offering period Units will be distributed to the
public at the Public Offering Price through the Underwriting Account and
dealers. The initial offering period is 30 days or less if all Units are sold.
If some 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 were repurchased may be offered by this Prospectus at the secondary
market Public Offering Price.
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.; however, Units of a State Trust will be offered for sale only in the
State for which the Trust is named, except that Units of a New Jersey Trust
will also be offered in Connecticut, and Units of a New York Trust will also
be offered in Connecticut, Florida and Puerto Rico. 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 Appendix B, but the 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 up to the concession to dealers.
UNDERWRITERS' AND SPONSORS' PROFITS
Upon sale of the Units, the Underwriters will receive sales charges at
the rates listed in Appendix B. The Sponsors also realized the profit or loss
on deposit of the Securities stated in Investment Summary. This is the
difference between the cost of the Securities to the Fund (based on the offer
side evaluation of the Securities on the Initial Date of Deposit) and the
Sponsors' cost of the Securities. The amount of any additional fees received
in connection with the direct placement of certain Debt Obligations deposited
in the Portfolio is also stated in Investment Summary. In addition, a Sponsor
or Underwriter may realize profits or sustain losses on Debt Obligations it
deposits in the Fund which were acquired from underwriting syndicates of which
it was a member. During the initial offering period the Underwriting Account
also may realize profits or sustain losses as a result of fluctuations after
the Initial Date of Deposit in the Public Offering Price of the Units (see
Investment Summary). In maintaining a secondary market for 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 and the
prices at which they resell these Units (which include the sales charge) or
the prices at which they redeem the Units. Cash, if any, made available by
buyers of Units to the Sponsors prior to a settlement date for the purchase of
Units may be used in the Sponsors' businesses to the extent permitted by Rule
15c3-3 under the Securities Exchange Act of 1934 and may be of benefit to the
Sponsors.
26
<PAGE>
DEFINED ASSET FUNDS
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 The
Travelers Inc. (formerly Primerica Corporation), Smith Barney 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 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.
27
<PAGE>
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 14 16 18 20%
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.
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.
28
<PAGE>
APPENDIX A
DESCRIPTION OF RATINGS (AS DESCRIBED BY THE RATING COMPANIES THEMSELVES)
STANDARD & POOR'S RATINGS GROUP, A DIVISION OF MCGRAW-HILL, INC.
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, INC.
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 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
a-1
<PAGE>
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.
FITCH INVESTORS SERVICE, INC.
AAA--These bonds are considered to be investment grade and of the highest
quality. The obligor has an extraordinary ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--These bonds are considered to be investment grade and of high
quality. The obligor's ability to pay interest and repay principal, while very
strong, is somewhat less than for AAA rated securities or more subject to
possible change over the term of the issue.
A--These bonds are considered to be investment grade and of good quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB--These bonds are considered to be investment grade and of
satisfactory quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however are more likely to weaken this ability than bonds
with higher ratings.
A 'I' or a 'J' sign after a rating symbol indicates relative standing in
its rating.
DUFF & PHELPS CREDIT RATING CO.
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic condtions.
A--Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
A 'I' or a 'J' sign after a rating symbol indicates relative standing in
its rating.
a-2
<PAGE>
<TABLE><CAPTION>
APPENDIX B
INITIAL OFFERING SALES CHARGE SCHEDULE
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
MONTHLY PAYMENT SERIES, MULTISTATE SERIES, INSURED SERIES
<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
INTERMEDIATE SERIES (TEN YEAR MATURITIES)
Less than 250...................... 4.00% 4.167% 2.600% $ 28.80
250 - 499.......................... 3.00 3.093 1.950 21.60
500 - 749.......................... 2.50 2.564 1.625 18.00
750 - 999.......................... 2.00 2.040 1.300 14.40
1,000 or more...................... 1.50 1.523 0.975 10.00
INTERMEDIATE SERIES (SHORT INTERMEDIATE MATURITIES)
Less than 250...................... 2.75% 2.828% 1.788% $ 19.80
250 - 499.......................... 2.25 2.302 1.463 16.20
500 - 749.......................... 1.75 1.781 1.138 12.60
750 - 999.......................... 1.25 1.266 0.813 9.00
1,000 or more...................... 1.00 1.010 0.650 7.20
</TABLE>
SECONDARY MARKET SALES CHARGE SCHEDULE
ACTUAL SALES CHARGE AS % DEALER CONCESSION AS % OF
NUMBER OF UNITS OF EFFECTIVE SALES CHARGE EFFECTIVE SALES CHARGE
1-249 100% 65%
250-499 80% 52%
500-749 60% 39%
750-999 45% 29.25%
1,000 or more 35% 22.75%
EFFECTIVE 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%
For this purpose, a Security will be considered to mature on its stated
maturity date unless it has been called for redemption or funds or securities
have been placed in escrow to redeem it on an earlier date, or is subject to a
mandatory tender, in which case the earlier date will be considered the
maturity date.
b-1
<PAGE>
APPENDIX C
EXCHANGE FUNDS
REDUCED
MAXIMUM SALES CHARGE
NAME OF APPLICABLE FOR SECONDARY
EXCHANGE FUND SALES CHARGE(A) MARKET(B)
DEFINED ASSET FUNDS-- MUNICIPAL
INVESTMENT TRUST FUND
Monthly Payment, State and 5.50%(c) $15 per unit
Multistate Series
Intermediate Term Series 4.50%(c) $15 per unit
Insured Series 5.50%(c) $15 per unit
AMT Monthly Payment Series 5.50%(c) $15 per unit
DEFINED ASSET FUNDS-- MUNICIPAL INCOME
FUND
Insured Discount Series 5.50%(c) $15 per unit
DEFINED ASSET FUNDS-- INTERNATIONAL
BOND FUND
Multi-Currency Series 3.75% $15 per unit
Australian and New Zealand Dollar 3.75% $15 per unit
Bond Series
Australian Dollar Bonds Series 3.75% $15 per unit
Canadian Dollar Bonds Series 3.75% $15 per unit
DEFINED ASSET FUNDS-- CORPORATE INCOME
FUND
Monthly Payment Series 5.50% $15 per unit
Intermediate Term Series 4.75% $15 per unit
Cash or Accretion Bond Series and 3.50% $15 per 1,000 units
SELECT Series
Insured Series 5.50% $15 per unit
DEFINED ASSET FUNDS-- GOVERNMENT
SECURITIES INCOME FUND
GNMA Series (other than those 4.25% $15 per unit
below)
GNMA Series E or other GNMA Series 4.25% $15 per 1,000 units
having units with an initial face
value of $1.00
Freddie Mac Series 3.75% $15 per 1,000 units
NAME OF INVESTMENT
EXCHANGE FUND CHARACTERISTICS
DEFINED ASSET FUNDS-- MUNICIPAL
INVESTMENT TRUST FUND
<TABLE>
<S> <C>
Monthly Payment, State and long-term, fixed rate, tax-exempt income
Multistate Series
Intermediate Term Series intermediate-term, fixed rate, tax-exempt income
Insured Series long-term, fixed rate, tax-exempt income,
underlying securities insured by insurance
companies
AMT Monthly Payment Series long-term, fixed rate, income exempt from regular
federal income tax but partially subject to AMT
DEFINED ASSET FUNDS-- MUNICIPAL INCOME
FUND
Insured Discount Series long-term, fixed rate, insured, tax-exempt current
income, taxable capital gains
DEFINED ASSET FUNDS-- INTERNATIONAL
BOND FUND
Multi-Currency Series intermediate-term, fixed rate, payable in foreign
currencies, taxable income
Australian and New Zealand Dollar intermediate-term, fixed rate, payable in
Bond Series Australian and New Zealand dollars, taxable income
Australian Dollar Bonds Series intermediate-term, fixed rate, payable in
Australian dollars, taxable income
Canadian Dollar Bonds Series short intermediate-term, fixed rate, payable in
Canadian dollars, taxable income
DEFINED ASSET FUNDS-- CORPORATE INCOME
FUND
Monthly Payment Series long-term, fixed rate, taxable income
Intermediate Term Series intermediate-term, fixed rate, taxable income
Cash or Accretion Bond Series and 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 long-term, fixed rate, taxable income, underlying
securities are insured
DEFINED ASSET FUNDS-- GOVERNMENT
SECURITIES INCOME FUND
GNMA Series (other than those 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 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 intermediate term, fixed rate, taxable income,
underlying securities are backed by Federal Home
Loan Mortgage Corporation but not by U.S.
Government.
</TABLE>
(a) 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.
(b) 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.
(c) Subject to reduction depending on the maturities of the underlying
Securities.
(d) The reduced sales charge for the Sixth Utility Common Stock Series of
Equity Income Fund is $15 per 2,000 units and for prior Utility Common
Stock Series is $7.50 per unit.
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<PAGE>
REDUCED
MAXIMUM SALES CHARGE
NAME OF APPLICABLE FOR SECONDARY
EXCHANGE FUND SALES CHARGE(A) MARKET(B)
DEFINED ASSET FUNDS--EQUITY INCOME FUND
Utility Common Stock Series 4.50% $15 per 1,000 units(d)
Concept Series 4.00% $15 per 100 units
Select Ten Portfolios (domestic and 2.75% $17.50 per 1,000 units
international)
NAME OF INVESTMENT
EXCHANGE FUND CHARACTERISTICS
DEFINED ASSET FUNDS--EQUITY INCOME FUND
<TABLE>
<S> <C>
Utility Common Stock Series dividends, taxable income, underlying securities
are common stocks of public utilities
Concept Series underlying securities constitute a professionally
selected portfolio of common stocks consistent
with an investment idea or concept
Select Ten Portfolios (domestic and 10 highest dividend yielding stocks in a
international) designated stock index; seeks higher total return
than that stock index; terminates after one year
c-2
</TABLE>
<PAGE>
Def ined
Asset FundsSM
SPONSORS: MUNICIPAL INVESTMENT
Merrill Lynch, TRUST FUND
Pierce, Fenner & Smith Incorporated Monthly Payment Series--550
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 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 LLP
2 World Financial Center
9th Floor
New York, N.Y. 10281-1414
TRUSTEE:
The Bank of New York
Unit Investment Trust Department
P.O. Box 974
Wall Street Station
New York, New York 10268-0974
1-800-221-7771
15011--11/94
