DEFINED ASSET FUNDSSM
- --------------------------------------------------------------------------------
GOVERNMENT This Defined Fund was formed for the purpose of
SECURITIES obtaining safety of capital and current monthly
INCOME FUND distributions of payments of interest and
FREDDIE MAC principal through investment in a fixed portfolio
SERIES--11 consisting primarily of mortgage-backed securities
A UNIT INVESTMENT of the modified pass-through type (the 'Freddie
TRUST Macs') fully guaranteed as to principal and
- ------------------------------interest by the Federal Home Loan Mortgage
/ / MONTHLY INCOME Corporation ('FHLMC'). The full faith and credit
/ / MORTGAGE BACKED of the United States is not pledged to the payment
SECURITIES of the securities in the Fund and the units of the
/ / INTERMEDIATE TERM Fund, as such, are not backed by the United States
or any Federal Home Loan Bank full faith and
credit. (See Risk Factors--GNMA Series and Freddie
Mac Series in Part B.) The value of the units of
the Fund will fluctuate with the value of the
Portfolio of underlying securities, and the
principal amount of underlying securities
represented by each unit will be reduced as
principal is paid on the underlying mortgages.
Minimum Purchase: $250
-------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-------------------------------------------------
SPONSORS: PART A OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED
Merrill Lynch, UNLESS ACCOMPANIED BY GOVERNMENT SECURITIES
Pierce, Fenner & Smith INCOME FUND PROSPECTUS PART B.
Incorporated INVESTORS SHOULD READ BOTH PARTS OF THIS
Smith Barney Inc. PROSPECTUS CAREFULLY AND RETAIN THEM FOR FUTURE
Prudential Securities REFERENCE.
Incorporated INQUIRIES SHOULD BE DIRECTED TO THE TRUSTEE AT
Dean Witter Reynolds Inc. 1-800-323-1508.
PaineWebber Incorporated PROSPECTUS PART A DATED MAY 22, 1998.
<PAGE>
- --------------------------------------------------------------------------------
Def ined Asset FundsSM
Defined Asset Funds is America's oldest and largest family of unit investment
trusts, with over $115 billion sponsored over the last 25 years. Each Defined
Asset 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.
Defined Asset Funds offer several defined 'distinctives'. You know in advance
what you are investing in and that changes in the portfolio are limited - a
defined portfolio. Most defined bond funds pay interest monthly - defined
income. The portfolio offers a convenient and simple way to invest - simplicity
defined.
Your financial professional can help you select a Defined Asset Fund to meet
your personal investment objectives. Our size and market presence enable us to
offer a wide variety of investments. The Defined Asset Funds family offers:
o Municipal portfolios
o Corporate portfolios
o Government portfolios
o Equity portfolios
o International portfolios
The terms of Defined Funds are as short as one year or as long as 30 years.
Special defined funds are available including: insured funds, double and triple
tax-free funds and funds with 'laddered maturities' to help protect against
changing interest rates. Defined Asset Funds are offered by prospectus only.
- ----------------------------------------------------------------
Defined Freddie Mac Series
- ----------------------------------------------------------------
Our defined portfolio of mortgage-backed Freddie Mac Securities offers you a
simple and convenient way to participate in the Freddie Mac market and obtain
monthly income while earning an attractive return as well as the assurance of an
investment in securities that are guaranteed by FHLMC, a federal agency.
INVESTMENT OBJECTIVES
To obtain safety of capital and current monthly income distributions through
investment in a portfolio of interest-bearing Freddie Mac Securities with an
estimated average life of 10 years. The units of the Fund are backed by FHLMC,
but are not backed by the United States or any Federal Home Loan Bank.
- ----------------------------------------------------------------
Defining Your Portfolio
- ----------------------------------------------------------------
PROFESSIONAL SELECTION AND SUPERVISION
The Portfolio of Securities is selected by experienced buyers. The Fund is not
actively managed; however, it is regularly reviewed and a Security can be sold
if retaining it is considered detrimental to investors' interests.
PORTFOLIO COMPOSITION
The Portfolio consists of 2 different issues of mortgage-backed Securities of
the modified pass-through type guaranteed by FHLMC: 6.50% Freddie Macs maturing
08/01/07 to 12/01/09, 77%; 7.00% Freddie Macs maturing 09/01/07 to 11/01/09.
23%. All of the Freddie Macs in the Fund are backed by pools of long term
mortgages on 1-to 4-family dwellings. The Ginnie Maes are fully guaranteed as to
payment of principal and interest by FHLMC. The Fund was created March 10, 1993.
The information in this prospectus is as of February 28, 1998, the evaluation
date.
TAX INFORMATION
Distributions of ordinary income or capital gain from the Fund will be included
in a U.S. investor's gross income, but will not be eligible for the dividends-
received deduction for corporations. Noncorproate investors may be entitled to a
20% maximum federal tax rate for capital gains derived from the Fund. (See Taxes
in Part B.)
The Fund is not likely to be suitable for foreign investors (including
nonresident alien individuals and foreign corporations) not engaged in U.S.
trade or business, because distributions to foreign investors (if not designated
as capital gain dividends) will generally be subject to 30% U.S. withholding tax
(or a lower applicable treaty rate), whereas interest income of the type
received by the Fund would generally not have been subject to withholding if it
had been received directly by foreign investors. Under certain circumstances,
withholding agents will file with the Internal Revenue Service foreign person
information returns. (See Taxes in Part B.)
- ----------------------------------------------------------------
Defining Your Investment
- ----------------------------------------------------------------
PUBLIC OFFERING PRICE PER 1,000 UNITS $590.93
The Public Offering Price as of February 28, 1998, the evaluation date, is based
on the aggregate bid side value of the underlying Securities in the Fund
($27,762,654), divided by the number of units outstanding (48,685,657) times
1,000 plus a sales charge of 3.50% of the Public Offering Price (3.627% on the
value of the underlying Securities). The Public Offering Price on any subsequent
date will vary. An amount equal to principal cash, if any, as well as net
accrued but undistributed interest on the unit is added to the Public Offering
Price. The underlying Securities are evaluated by an independent evaluator at
3:30 p.m. Eastern time on every business day.
PREMIUM AND DISCOUNT ISSUES
On the evaluation date, all of the Securities were valued at a premium over par
(see Risk Factors in Part B).
LOW MINIMUM INVESTMENT
You can get started with a minimum purchase of $250. There is no minimum
purchase for payroll deduction plans.
A-2
<PAGE>
- --------------------------------------------------------------------------------
REINVESTMENT
You can elect to automatically reinvest your distributions into additional units
of the Fund at a reduced sales charge. Reinvestment helps to compound your
investment.
TERMINATION DATE
The Fund will generally terminate no later than one year following the maturity
date of the last maturing Security listed in the Portfolio. The Fund may be
terminated earlier if the value is less than 40% of the face amount of
securities deposited. On the evaluation date the value of the fund was 41% of
the face amount of securities deposited.
- ---------------------------------------------------------------
Defining Your Risks
- ---------------------------------------------------------------
RISK FACTORS
While the securities may not be affected by credit risk they are subject to
changes in market value resulting from changes in interest rates. Unit price
fluctuates and the value of units will decline if interest rates increase. The
mortgages underlying the Freddie Macs are amortized, and there is no prepayment
protection. The potential for appreciation that might otherwise result from a
decline in interest rates would be limited by any increase in prepayments by
mortgagors as interest rates decline. Investors may also receive payments of
principal sooner than anticipated, and interest payments will decrease as
principal is returned. Because regular payments of principal will be received
over the life of the Fund and because of the possible maturity, sale or other
disposition of Securities, the size, composition and return of the Portfolio may
change at any time. Because of the sales charges, returns of principal and
fluctuations in unit price, among other reasons, the sale price will generally
be less than the cost of your units. There is no guarantee that the Fund will
achieve its investment objective.
Neither the Freddie Macs nor the Fund itself or the units are backed by the U.S.
Government or any Federal Home Loan Bank (see Risk Factors in Part B).
- ---------------------------------------------------------------
Defining Your Costs
- ---------------------------------------------------------------
SALES CHARGES
Although the Fund is a unit investment trust rather than a mutual fund, the
following information is presented to permit a comparison of fees and an
understanding of the direct or indirect costs and expenses that you pay.
As a %
of Secondary
Market
Public Offering
Price
---------------
Maximum Sales Charges 3.50%
ESTIMATED ANNUAL FUND OPERATING EXPENSES
Per 1,000
Units
---------------
Trustee's Fee $ 0.34
Portfolio Supervision, Bookkeeping and
Administrative Fees $ 0.25
Evaluator's Fee $ 0.06
Other Operating Expenses $ 0.22
---------------
TOTAL $ 0.87
REDEEMING OR SELLING YOUR INVESTMENT
You may redeem or sell your units at any time. Your price is based on the Fund's
then current net asset value (based on the lower, bid side evaluation of the
Securities, as determined by an independent evaluator), plus principal cash, if
any, as well as accrued interest. The bid side redemption and secondary market
repurchase price per 1,000 units as of the evaluation date was $570.24 ($20.69
less than the Public Offering Price). There is no fee for redeeming or selling
your units.
- ---------------------------------------------------------------
Defining Your Income
- ---------------------------------------------------------------
MONTHLY INTEREST INCOME
The Fund pays monthly income.
WHAT YOU MAY EXPECT
(PAYABLE ON THE 23RD DAY OF THE MONTH TO HOLDERS OF RECORD ON THE 10TH DAY OF
THE MONTH):
Regular Monthly Income per 1,000 units: $ 2.28
Annual Income per 1,000 units: $ 27.41
These figures are estimates determined as of the evaluation date and actual
payments may vary.
A-3
<PAGE>
DEFINED ASSET FUNDS - GOVERNMENT SECURITIES INCOME FUND,
FREDDIE MAC SERIES - 11
REPORT OF INDEPENDENT ACCOUNTANTS
The Sponsors, Trustee and Holders
of Defined Asset Funds - Government Securities Income Fund,
Freddie Mac Series - 11:
We have audited the accompanying statement of condition of
Defined Asset Funds - Government Securities Income Fund,
Freddie Mac Series - 11, including the portfolio, as of
February 28, 1998 and the related statements of operations
and of changes in net assets for the years ended February
28, 1998 and 1997 and February 29, 1996. These financial
statements are the responsibility of the Trustee. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures
in the financial statements. Securities owned at February
28, 1998, as shown in such portfolio, were confirmed to us
by The Chase Manhattan Bank , the Trustee. An audit also
includes assessing the accounting principles used and
significant estimates made by the Trustee, as well as
evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
financial position of Defined Asset Funds - Government
Securities Income Fund, Freddie Mac Series - 11 at February
28, 1998 and the results of its operations and changes in
its net assets for the above-stated years in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, N.Y.
April 16, 1998
D - 1.
<PAGE>
DEFINED ASSET FUNDS - GOVERNMENT SECURITIES INCOME FUND,
FREDDIE MAC SERIES - 11
STATEMENT OF CONDITION
As of February 28, 1998
TRUST PROPERTY:
Investment in marketable securities -
at value (cost $ 27,123,174 )(Note 1)....... $27,762,654
Accrued interest .............................. 151,958
Cash - income ................................. 1,402
Cash - principal .............................. 11,470
-----------
Total trust property ........................ 27,927,484
LESS LIABILITIES:
Accrued Sponsors' fees ........................ $ 2,128
Redemption payable ............................ 171,291
Trustee's fees and expenses payable ........... 2,533 175,952
----------- -----------
NET ASSETS, REPRESENTED BY:
48,685,657 units of fractional undivided
interest outstanding (Note 3)............... 27,603,607
Undistributed net investment income ........... 147,925 $27,751,532
----------- ===========
UNIT VALUE ($ 27,751,532 / 48,685,657 units ).... $ .57001
===========
See Notes to Financial Statements.
D - 2.
<PAGE>
DEFINED ASSET FUNDS - GOVERNMENT SECURITIES INCOME FUND,
FREDDIE MAC SERIES - 11
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
Years Ended February 28, February 29,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest income ...................... $ 2,095,191 $ 2,705,515 $ 3,454,291
Trustee's fees and expenses .......... (32,692) (38,610) (49,165)
Sponsors' fees ....................... (12,370) (5,145) (7,983)
------------------------------------------------
Net investment income ................ 2,050,129 2,661,760 3,397,143
------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain (loss) on
securities sold or redeemed ........ 104,610 (317,225) (291,303)
Unrealized appreciation
of investments ..................... 478,915 101,720 2,329,811
------------------------------------------------
Net realized and unrealized
gain (loss) on investments ......... 583,525 (215,505) 2,038,508
------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ............ $ 2,633,654 $ 2,446,255 $ 5,435,651
================================================
</TABLE>
See Notes to Financial Statements.
D - 3.
<PAGE>
DEFINED ASSET FUNDS - GOVERNMENT SECURITIES INCOME FUND,
FREDDIE MAC SERIES - 11
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended
Years Ended February 28, February 29,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATIONS:
Net investment income ............... $ 2,050,129 $ 2,661,760 $ 3,397,143
Realized gain (loss) on
securities sold or redeemed ....... 104,610 (317,225) (291,303)
Unrealized appreciation
of investments .................... 478,915 101,720 2,329,811
------------------------------------------------
Net increase in net assets
resulting from operations ......... 2,633,654 2,446,255 5,435,651
------------------------------------------------
DISTRIBUTIONS TO HOLDERS (Note 2):
Income ............................. (2,082,245) (2,698,837) (3,433,026)
Principal ........................... (5,127,154) (5,823,852) (5,747,777)
------------------------------------------------
Total distributions ................. (7,209,399) (8,522,689) (9,180,803)
------------------------------------------------
SHARE TRANSACTIONS:
Redemption amounts - income ......... (16,309) (18,108) (23,774)
Redemption amounts - principal ...... (3,595,499) (4,235,270) (5,197,804)
------------------------------------------------
Total share transactions ............ (3,611,808) (4,253,378) (5,221,578)
------------------------------------------------
NET DECREASE IN NET ASSETS ............ (8,187,553) (10,329,812) (8,966,730)
NET ASSETS AT BEGINNING OF YEAR ....... 35,939,085 46,268,897 55,235,627
------------------------------------------------
NET ASSETS AT END OF YEAR ............. $27,751,532 $35,939,085 $46,268,897
================================================
PER UNIT:
Income distributions during
year .............................. $ .03995 $ .04649 $ .05292
================================================
Principal distributions during
year .............................. $ .09857 $ .10024 $ .08889
================================================
Net asset value at end of
year .............................. $ .57001 $ .65781 $ .76164
================================================
TRUST UNITS:
Redeemed during year ................ 5,949,000 6,114,000 6,561,729
Outstanding at end of year .......... 48,685,657 54,634,657 60,748,657
================================================
</TABLE>
See Notes to Financial Statements.
D - 4.
<PAGE>
DEFINED ASSET FUNDS - GOVERNMENT SECURITIES INCOME FUND,
FREDDIE MAC SERIES - 11
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
1. SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940 as a Unit
Investment Trust. The following is a summary of significant accounting
policies consistently followed by the Fund in the preparation of its
financial statements. The policies are in conformity with generally accepted
accounting principles.
(A) Securities are stated at value as determined by the
Evaluator based on bid side evaluations for the securities.
See "How to Sell Units - Trustee's Redemption of Units"
in this Prospectus, Part B.
(B) The Fund is not subject to income taxes. Accordingly, no
provision for such taxes is required.
(C) Interest income is recorded as earned.
2. DISTRIBUTIONS
Distributions of combined interest and principal (plus any prepayments and
redemption proceeds) are made to Holders each month. Receipts other than
interest and principal paydowns, after deductions for redemptions and
applicable expenses, are also distributed as explained in "Income,
Distributions and Reinvestment - Distributions" in this Prospectus, Part B.
3. NET CAPITAL
Cost of 48,685,657 units at Date of Deposit ................ $47,641,832
Less sales charge .......................................... 1,548,241
-----------
Net amount applicable to Holders ........................... 46,093,591
Redemptions of units - net cost of 18,624,729 units redeemed
less redemption amounts (principal)....................... 4,604,558
Realized loss on securities sold or redeemed ............... (647,024)
Principal distributions .................................... (23,086,998)
Unrealized appreciation of investments...................... 639,480
-----------
Net capital applicable to Holders .......................... $27,603,607
===========
4. INCOME TAXES
As of February 28, 1998, unrealized appreciation of investments, based on
cost for Federal income tax purposes, aggregated $ 639,480, all of which
related to appreciated securities. The cost of investment securities
for federal income tax purposes approximates the amount shown in the
accompanying financial statements at February 28, 1998.
</TABLE>
D - 5.
<PAGE>
DEFINED ASSET FUNDS - GOVERNMENT SECURITIES INCOME FUND,
FREDDIE MAC SERIES - 11
PORTFOLIO
As of February 28, 1998
<TABLE>
<CAPTION>
Range of
Interest Stated Face
Security Description Rate Maturities(2) Amount Cost Value(1)
--------------------------------- -------- ---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
1 Federal Home Loan Gold Mortgage 6.500% 08/01/07 $ 21,185,053 $ 20,806,107 $ 21,271,022
Participation Certificates to
12/01/09
2 Federal Home Loan Gold Mortgage 7.000 09/01/07 6,378,051 6,317,067 6,491,632
Participation Certificates to
11/01/09
---------- ---------- ----------
TOTAL $ 27,563,104 $ 27,123,174 $ 27,762,654
========== ========== ==========
</TABLE>
(1) See Note 1 to Financial Statements.
(2) On the Dates of Deposit, the range of stated maturities
were as follows:
6.50% FHMLC - 08/01/07 to 12/01/09
7.00% FHMLC - 09/01/07 to 11/01/09
D - 6.
<PAGE>
AUTHORIZATION FOR REINVESTMENT
DEFINED ASSET FUNDS--
GOVERNMENT SECURITIES INCOME FUND
FREDDIE MAC SERIES--11
/ / Yes, I want to participate in the Fund's Reinvestment Plan and purchase
additional Units of the Fund each month.
I hereby acknowledge receipt of the Prospectus for Defined Asset
Funds--Government Securities Income Fund, Freddie Mac Series--11 and authorize
The Chase Manhattan Bank to pay distributions on my Units as indicated below
(distributions to be reinvested will be paid for my account to The Chase
Manhattan Bank).
Income
distributions: reinvested / /
Capital
distributions: reinvested / /
Please print or type
Name Registered Holder
Address
Registered Holder
(Two signatures required if
joint tenancy)
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. 644, NEW YORK, NY NECESSARY
IF MAILED
POSTAGE WILL BE PAID BY ADDRESSEE IN THE
THE CHASE MANHATTAN BANK (FREDDIE MAC--11) UNITED STATES
RETAIL PROCESSING DEPARTMENT
BOWLING GREEN STATION
P.O. BOX 5179
NEW YORK, NY 10274-5179
- --------------------------------------------------------------------------------
(Fold along this line.)
- --------------------------------------------------------------------------------
(Fold along this line.)
<PAGE>
DEFINED ASSET FUNDSSM
PROSPECTUS--PART B
GOVERNNMENT SECURITIES INCOME FUND
THIS PART B OF THE PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED OR
PRECEDED BY PART A.
FURTHER NFORMATION REGARDING THE FUND MAY BE OBTAINED
WITHIN FIVE DAYS BY WRITING OR CALLING THE TRUSTEE, AT THE ADDRESS AND
TELEPHONE NUMBER SET FORTH ON THE BACK COVER OF THIS PROSPECTUS.
Index
PAGE
---------
Fund Description...................................... 1
Risk Factors.......................................... 2
How to Buy Units...................................... 4
How to Redeem or Sell Units........................... 5
Income and Distributions.............................. 6
Fund Expenses......................................... 8
PAGE
---------
Taxes................................................. 8
Records & Reports..................................... 13
Trust Indenture....................................... 13
Miscellaneous......................................... 14
Supplemental Information.............................. 15
Appendix A--Secondary Market Sales.................... a-1
FUND DESCRIPTION
PORTFOLIO SELECTION
Professional buyers and research analysts for Defined Asset Funds, with
access to extensive research, selected the Securities for the Portfolio after
considering the Fund's investment objectives as well as the availability of the
Securities, the price of the Securities compared to similar securities and the
extent to which they were trading at discounts or premiums to par, and the
maturities of the Securities. Only issues meeting these stringent criteria of
the Defined Asset Funds team of dedicated research analysts are included in the
Portfolio. No leverage or borrowing is used nor does the Portfolio contain other
kinds of securities to enhance yield. A summary of the Securities in the
Portfolio appears in Part A of the Prospectus.
Because each Defined Asset Fund is a preselected portfolio of securities,
you know the terms of the Securities before you invest. Of course, the Portfolio
will change somewhat over time, as Securities mature, are redeemed or are sold
to meet Unit redemptions or in other limited circumstances.
GNMA Series and Freddie Mac Series. Ginnie Maes are mortgage-backed
Securities issued by the Government National Mortgage Association (GNMA), which
is a wholly-owned instrumentality of the United States within the Department of
Housing and Urban Development. The Ginnie Maes are of the 'modified pass-
through' type, the terms of which provide for timely monthly payments by the
issuers to the registered holders (including the Fund) of their pro rata shares
of the scheduled principal payments on account of the mortgages backing these
Ginnie Maes, plus any prepayments of principal of such mortgages received, and
interest on the aggregate unpaid principal balance of these Ginnie Maes. Ginnie
Maes are guaranteed by GNMA as to timely payment of principal and interest. The
full faith and credit of the United States is pledged to the payment of all
amounts which may be required to be paid under the guaranty. The GNMA guaranty
relates only to payment of principal of and interest on the Ginnie Maes in the
Portfolio and not to the Units of the Fund. All mortgages in the pools backing
the Ginnie Maes contained in the Portfolio are mortgages on 1-to 4-family
dwellings (amortizing over a period of up to 30 years). In general, the
mortgages in these pools provide for equal monthly payments over the life of the
mortgage (aside from prepayments), designed to repay the principal of the
mortgage over this period, together with interest at a fixed rate on the unpaid
balance.
Freddie Macs are mortgage-backed securities issued by the Federal Home Loan
Mortgage Corporation (FHLMC), which is a corporate instrumentality of the United
States, established by Congress to increase the availability of mortgage credit
for residential housing. The common stock of FHLMC is owned by the Federal
1
<PAGE>
Home Loan Banks. FHLMC Mortgage Participation Certificates (PCs) of the type
held by the Portfolios represent an undivided interest in a group of mortgages
purchased by FHLMC. The underlying mortgage loans are fixed-rate mortgages with
original terms to maturity of about 15 years, most of which are secured by first
liens on 1-to 4-family dwellings. FHLMC guarantees the timely payment of
interest, the amount of principal due to be paid on the underlying mortgage and
the ultimate collection of all principal. The FHLMC PCs are not guaranteed by
the United States or by any Federal Home Loan Bank, and they are not backed by
the full faith and credit of the United States.
PORTFOLIO SUPERVISION
The Fund follows a buy and hold investment strategy in contrast to the
frequent portfolio changes of a managed fund based on economic, financial and
market analyses. Experienced financial analysts regularly review the Portfolio
and a Security may be sold in certain circumstances including the occurrence of
a default in payment on the Security, institution of certain legal proceedings,
if the Security becomes inconsistent with the Fund's investment objectives, a
decline in the price of the Security or the occurrence of other market or credit
factors that, in the opinion of Defined Asset Funds research analysts, makes
retention of the Security detrimental to the interests of investors.
The Sponsors and the Trustee are not liable for any default or defect in a
Security. If a contract to purchase any Security fails, the Sponsors may
generally deposit a replacement security so long as it is a security issued by
the same issuer as that of the failed Security and has a fixed maturity date
substantially similar to the failed Security. A replacement security must be
deposited within 110 days after deposit of the failed contract, at a cost that
does not exceed the funds reserved for purchasing the failed Security and at a
yield to maturity and current return substantially equivalent (considering then
current market conditions and relative creditworthiness) to those of the failed
Security, as of the date the failed contract was deposited.
RISK FACTORS
An investment in the Fund entails certain risks, including the risk that
the value of your investment will decline with increases in interest rates.
Generally speaking, securities with longer maturities will fluctuate in value
more than securities with shorter maturities. In recent years there have been
wide fluctuations in interest rates and in the value of fixed-rate bonds
generally. The Sponsors cannot predict the direction or scope of any future
fluctuations.
Certain of the Securities may have been deposited at a market discount or
premium principally because their interest rates are lower or higher than
prevailing rates on comparable debt securities. The current returns of market
discount securities are lower than comparably rated securities selling at par
because discount securities tend to increase in market value as they approach
maturity. The current returns of market premium securities are higher than
comparably rated securities selling at par because premium securities tend to
decrease in market value as they approach maturity. Because part of the purchase
price is returned through current income payments and not at maturity, an early
redemption at par of a premium security will result in a reduction in yield to
the Fund. Market premium or discount attributable to interest rate changes does
not indicate market confidence or lack of confidence in the issue.
U.S. Treasury Series. U.S. Treasury obligations, though backed by the full
faith and credit of the United States, are subject to changes in market value
when interest rates fluctuate. 'Laddered' Series seek to protect against
declining interest rates by investing a portion of the Portfolio in longer-term
Securities, while if interest rates rise investors will be able to reinvest the
proceeds of principal as it is returned in higher yielding obligations. It is
anticipated that equal portions of principal invested will be returned annually
as Securities mature.
Treasury 'Zero' Series. The value of Stripped Treasury Securities, and
therefore of the Units of these Series, may be subject to greater fluctuations
in response to changing interest rates than in a fund consisting of debt
obligations with comparable maturities that pay interest currently. This risk is
greater when the period to maturity is longer. Furthermore, the stripping of the
interest coupons will cause the Units and therefore the investor's pro rata
portion of each Stripped Treasury Security to be purchased at a deep discount.
The Stripped Treasury Securities do not make any periodic payments of interest.
Accordingly, Funds holding primarily Stripped Treasury Securities are not a
suitable investment for persons seeking current cash distributions.
2
<PAGE>
GNMA Series and Freddie Mac Series. Ginnie Maes and Freddie Mac PCs
purchased at a market discount will increase in value faster than Ginnie Maes
and Freddie Mac PCs purchased at a market premium if interest rates decrease.
Conversely, if interest rates increase, the value of these Securities purchased
at a market discount will decrease faster than those purchased at a premium. In
addition, if interest rates rise, the prepayment risk of higher yielding,
premium Securities and the prepayment benefit for lower yielding, discount
Securities will be reduced. The potential for appreciation on the Securities,
which could otherwise be expected to result from a decline in interest rates,
may tend to be limited by any increased prepayments by mortgagors as interest
rates decline. In addition, prepayments of principal on Ginnie Maes and Freddie
Mac PCs purchased at a premium over par will result in some loss on investment
while prepayments on Ginnie Maes and Freddie Mac PCs purchased at a discount
from par will result in some gain on investment. The Securities in the
Portfolio, though backed by GNMA or FHLMC, are subject to changes in market
value when interest rates fluctuate.
LITIGATION AND LEGISLATION
The Sponsors do not know of any pending litigation as of the date of this
Prospectus 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, affecting the
Securities in the Fund.
PAYMENT OF THE SECURITIES AND LIFE OF THE FUND
The size and composition of the Fund will be affected by the level of
redemptions of Units that may occur from time to time. Principally, this will
depend upon the number of investors seeking to sell or redeem their Units and
whether or not the Sponsors are able to sell the Units acquired by them in the
secondary market. As a result, Units offered in the secondary market may not
represent the same face amount of Securities as on the initial date of deposit.
Factors that the Sponsors will consider in determining whether or not to sell
Units acquired in the secondary market include 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 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 its
mandatory termination date.
GNMA Series and Freddie Mac Series. Monthly payments and prepayments of
principal are made to the Fund in respect of the mortgages underlying the
Securities. All of the mortgages in the pools relating to the Securities are
subject to prepayment without any significant premium or penalty at the option
of the mortgagors (i.e., the homeowners). While the mortgages on 1-to 4-family
dwellings underlying the Ginnie Maes are amortized over a period of up to 30
years and those underlying the FHLMC PCs are amortized over a period of up to 15
years, it has been the experience of the mortgage industry that the average life
of comparable mortgages, owing to prepayments, is much less, perhaps as little
as nine and six years, respectively. Generally speaking, a number of factors,
including mortgage market interest rates and homeowners mobility, will affect
the average life of the Ginnie Maes and FHLMC PSc. Changes in prepayment
patterns which are influenced by changes in housing cycles and mortgage
refinancing could influence yield assumptions used in pricing the securities.
While the value of these mortgage backed securities generally fluctuates
inversely with changes in interest rates, it should be noted that their
potential for appreciation, which could otherwise be expected to result from a
decline in interest rates, may tend to be limited by any increased prepayments
by mortgagors as interest rates decline. Accordingly, the termination of the
Fund might be accelerated as a result of prepayments made as described above.
Early termination of a Fund or early payments of principal may have
important consequences to the investor; e.g., to the extent that Units were
purchased with a view to an investment of longer duration, the overall
investment program of the investor may require readjustment; or the overall
return on investment may be less or greater than anticipated, depending in part
on whether the purchase price paid for Units represented the payment of an
overall premium or a discount, respectively, above or below the stated principal
amounts of the underlying mortgages.
FUND TERMINATION
The Fund will be terminated no later than the termination date specified in
Part A of the Prospectus. It will terminate earlier upon the disposition of the
last Security or upon the consent of investors holding 51% of the
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Units. The Fund may also be terminated earlier by the Sponsors once the total
assets of the Fund have fallen below the minimum value specified in Part A of
the Prospectus. A decision by the Sponsors to terminate the Fund early will be
based on factors similar to those considered by the Sponsors in determining
whether to continue the sale of Units in the secondary market.
Notice of impending termination will be provided to investors and
thereafter Units will no longer be redeemable. On or shortly before termination,
the Fund will seek to dispose of any Securities remaining in the Portfolio
although any Security unable to be sold at a reasonable price may continue to be
held by the Trustee in a liquidating trust pending its final disposition. A
proportional share of the expenses associated with termination, including
brokerage costs in disposing of Securities, will be borne by investors remaining
at that time. This may have the effect of reducing the amount of proceeds those
investors are to receive in any final distribution.
HOW TO BUY UNITS
PUBLIC OFFERING PRICE
Units are available from any of the Sponsors at the Public Offering Price
plus accrued interest on the Units. The Public Offering Price varies each
Business Day with changes in the value of the Portfolio and other assets and
liabilities of the Fund. In the secondary market (after the initial offering
period), the Public Offering Price is based on the bid side evaluation of the
Securities, and includes a sales charge based on the number of Units of the Fund
purchased in the secondary market on the same day by a single purchaser (see
Secondary Market sales charge schedule in Appendix A). Purchases in the
secondary market of one or more Series sponsored by the Sponsors that have the
same rates of sales charge may be aggregated.
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. This
procedure may be amended or terminated at any time without notice.
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 or per 1,000 Units, as
applicable.
Commercial banks and their securities broker subsidiaries that have
agreements with the Sponsors may make Units available to their customers as
their agents. A portion of the sales charge (equal to the dealer commission
referred to in Appendix A), will be retained or remitted to the banks. Under the
Glass-Steagall Act, banks are prohibited from underwriting Units; however, the
Glass-Steagall Act permits banks to act as agents of their customers on a
disclosed basis and federal banking regulations have approved similar
arrangements. In addition, state securities laws on this issue may differ from
the interpretation of federal law expressed above and banks and financial
institutions may be required to register as dealers pursuant to state law.
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 date of purchase to,
but not including, the settlement date for Units (less any prior distributions
of interest income to investors).
EVALUATIONS
Evaluations are determined by the independent Evaluator on each Business
Day. This excludes Saturdays, Sundays and the following holidays as observed by
the New York Stock Exchange: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas, and the following Federal holidays: Columbus Day and
Veterans Day. Securities evaluations are generally determined on the basis of
current bid or offer prices for the Securities or comparable securities or by
appraisal or by any combination of these methods. Under current market
conditions the bid prices for Treasury obligations of the type deposited in the
Portfolio are expected to be approximately .10% less than the offer price. The
bid price for the Ginnie Maes and Freddie Mac PCs of the type deposited in the
Portfolio
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are expected to be 1/4 to 1/2 of 1% less than the offer price. Neither the
Sponsors, the Trustee or the Evaluator will be liable for errors in the
Evaluator's judgment. The fees of the Evaluator will be borne by the Fund.
CERTIFICATES
Certificates for Units are issued upon request and may be transferred by
paying any taxes or governmental charges and by complying with the requirements
for redeeming Certificates (see How To Sell Units--Trustee's Redemption of
Units). 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.
HOW TO REDEEM OR SELL UNITS
You can redeem your Units at any time for net asset value. In addition, the
Sponsors have maintained an uninterrupted secondary market for Units for over 20
years and will ordinarily buy back Units at net asset value. The following
describes these two methods to redeem or sell Units in greater detail.
REDEEMING UNITS WITH THE TRUSTEE
You can always redeem your Units directly with the Trustee for net asset
value. This can be done by sending the Trustee a redemption request together
with any Unit certificates you hold, which must be properly endorsed or
accompanied by a written transfer instrument with signatures guaranteed by an
eligible institution. In certain instances, additional documents may be required
such as a trust instrument, certificate of corporate authority, certificate of
death or appointment as executor, administrator or guardian.
Within seven days after the Trustee's receipt of your request containing
the necessary documents, a check will be mailed to you in an amount equal to the
net asset value of your Units. Because of the sales charge, market movements or
changes in the Portfolio, net asset value at the time you redeem your Units may
be greater or less than the original cost of your Units. Net asset value is
calculated each Business Day by adding the value of the Securities, net accrued
interest, cash and the value of any other Fund assets; deducting unpaid taxes or
other governmental charges, accrued but unpaid Fund expenses, unreimbursed
Trustee advances, cash held to redeem Units or for distribution to investors and
the value of any other Fund liabilities; and dividing the result by the number
of outstanding Units.
As long as the Sponsors are maintaining a secondary market for Units (as
described below), the Trustee will not actually redeem your Units but will sell
them to the Sponsors for net asset value. If the Sponsors are not maintaining a
secondary market, the Trustee will redeem your Units for net asset value or will
sell your Units in the over-the-counter market if the Trustee believes it will
obtain a higher net price for your Units. If the Trustee is able to sell the
Units for a net price higher than net asset value, you will receive the net
proceeds of the sale.
Securities are evaluated on the offer side during the initial offering
period and on the bid side thereafter.
If cash is not available in the Fund's Income and Capital Accounts to pay
redemptions, the Trustee may sell Securities selected by the Agent for the
Sponsors, based on market and credit factors determined to be in the best
interest of the Fund. These sales are often made at times when the Securities
would not otherwise be sold and may result in lower prices than might be
realized otherwise and will also reduce the size of the Fund. If Securities are
being sold during a time when additional Units are being created by the purchase
of additional Securities (as described under Portfolio Selection), Securities
will be sold in a manner designed to maintain, to the extent practicable, the
proportionate relationship among the face amounts of each Security in the
Portfolio.
Redemptions may be suspended or payment postponed (i) if the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (ii) if
the SEC determines that trading on the New York Stock Exchange is restricted or
that an emergency exists making disposal or evaluation of the Securities not
reasonably practicable or (iii) for any other period permitted by SEC order.
Monthly Payment U.S. Treasury Series. You may request distribution in kind
from the Trustee instead of cash redemption, provided that you are tendering
Units with a value of at least $50,000. By the seventh calendar day after
tender, an amount and value of Securities per Unit, together with a pro rata
portion of the cash balance in the Fund, equal to the Redemption Price per Unit,
will be paid over to the Trustee, as distribution agent, and either held for
your account or disposed of in accordance with your instructions. Any brokerage
commissions on
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sales of Securities in connection with in-kind redemptions will be borne by you.
The Sponsors may modify or terminate this redemption in kind option at any time
without notice to investors.
SPONSORS' SECONDARY MARKET FOR UNITS
The Sponsors, while not obligated to do so, will buy back Units at net
asset value without any other fee or charge as long as they are maintaining a
secondary market for Units. Because of the sales charge, market movements or
changes in the portfolio, net asset value at the time you sell your Units may be
greater or less than the original cost of your Units. The Sponsors may resell
the Units to other buyers or redeem the Units by tendering them to the Trustee.
You should consult your financial professional for current market prices to
determine if other broker-dealers or banks are offering higher prices for Units.
The Sponsors may discontinue the secondary market for Units without prior
notice if the supply of Units exceeds demand or for other business reasons.
Regardless of whether the Sponsors maintain a secondary market, you have the
right to redeem your Units for net asset value with the Trustee at any time, as
described above.
REDEMPTION BY CHECK -- MONTHLY PAYMENT U.S. TREASURY SERIES 1-5; GNMA SERIES I,
K-1K
Investors in these Funds who have submitted a properly completed
application form and who have elected, by surrendering any Certificates with
this application, to hold their Units in uncertificated form are entitled to
receive upon request without charge checks which will be drawn upon a special
account of the Fund with the Trustee bank (the 'Bank'). This election, however,
does not create a checking or other bank account relationship between an
investor and the Bank. Checks may be made payable to the order of any person in
amounts of $500 or more. When a check is presented to the Bank for payment, this
shall be treated as a tender for redemption of a sufficient number of Units to
cover the amount of the check. So long as the Sponsors are maintaining a market
at prices in excess of the Redemption Price per Unit, the Sponsors will
repurchase any of the Units that are tendered at a price computed as set forth
under Market for Units. If the Sponsors are no longer maintaining such a market,
Units tendered for redemption by check will be redeemed at their Redemption
Price per Unit, based on the lower bid side evaluation of the Securities. Units
may not be tendered by check within 15 days following their date of purchase.
Investors who choose to utilize the Fund's check writing service are
subject to the procedures, rules and regulations of the Bank governing checking
accounts and redemptions by draft.
The Bank will not honor checks for amounts exceeding the value of the
investor's Units at the time the check is presented to the Bank for payment. If
insufficient Units are in the account, the check will be returned marked
'insufficient funds'. Since the dollar value of the Units may change daily, the
total value of the account may not be determined in advance and, accordingly,
the account may not be entirely redeemed by check. For the same reason, even
checks written for amounts less than the present value of an investor's account
may be dishonored if the value of the Units in the account declines between the
time when the check is written and the time when it is presented for payment.
The Bank will not honor checks personally presented for payment at any office of
the Bank. This checking service may be terminated or modified at any time by the
Bank upon prior notice to the investors.
INCOME, DISTRIBUTIONS AND REINVESTMENT
INCOME
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
and Capital Accounts amounts considered appropriate by the Trustee to reserve
for any material amount that may be payable out of the Fund.
DISTRIBUTIONS
Each Unit receives an equal share of any distributions of interest income
net of estimated expenses. Along with the income distributions, the Trustee will
distribute the investor's pro rata share of principal received from any
disposition of a Security to the extent available for distribution. As each
Security in the Portfolio matures, the balance in the Capital Account will be
distributed on or about the second business day following the maturity date to
investors of record on the business day immediately preceding the distribution
day. Stripped ('Zero') Treasury Securities pay only at maturity.
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The estimated annual income per Unit, after deducting estimated annual Fund
expenses, will change as Securities mature, are called or sold or otherwise
disposed of, as prepayments occur on mortgages underlying any mortgage-backed
Securities, as replacement obligations are deposited and as Fund expenses
change. Because the Portfolio is not actively managed, income distributions will
generally not be affected by changes in interest rates and the amount of income
should be substantially maintained as long as the Portfolio remains unchanged;
however, optional redemptions of Securities, prepayments on mortgage-backed
Securities or other Portfolio changes may occur more frequently when interest
rates decline, which would result in early returns of principal and possibly
earlier termination of the Fund.
RETURN CALCULATIONS
Estimated Current Return shows the estimated annual cash to be received
from interest-bearing securities in the Portfolio (net of estimated annual
expenses) divided by the Public Offering Price (including the maximum sales
charge). Estimated Long Term Return is a measure of the estimated return over
the estimated life of the Fund. This represents an average of the yields to
maturity (or in certain cases, to an earlier call date) of the individual
securities in the Portfolio, adjusted to reflect the maximum sales charge and
estimated expenses. The average yield for the Portfolio is derived by weighting
each security's yield by its market value and the time remaining to the call or
maturity date, depending on how the security is priced. Unlike Estimated Current
Return, Estimated Long Term Return takes into account maturities, discounts and
premiums of the underlying securities.
No return estimated can be predictive of your actual return because returns
will vary with purchase price (including sales charges), how long units are
held, changes in Portfolio composition, changes in interest income and changes
in fees and expenses. 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 security 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.
GNMA Series and Freddie Mac Series. The estimated long-term return figure
is calculated using an estimated average life for the Securities. Estimated
average life is an essential factor in the calculation of Estimated Long Term
Return. When the Fund has a shorter average life than is estimated, Estimated
Long Term Return will be higher if the Fund contains Securities priced at a
discount and lower if the Securities are priced at premium. Conversely, when the
Fund has a longer average life than is estimated, Estimated Long Term Return
will be lower if the Securities are priced at a discount and higher if the
Securities are priced at a premium. To calculate estimated average life an
assumption of the present average age of available mortgage-backed Securities in
the marketplace with the same coupon is made; the calculation of estimated
average life is based upon actual recent prepayments, industry assumptions about
prepayments and analysis of several factors including, among other things, the
coupon, the housing environment, the present interest rate (no change in
interest rate is assumed) and historical trends. For a more detailed explanation
of the calculation of estimated average life, see Payment of the Securities and
Life of the Fund--GNMA Series and Freddie Mac Series above.
REINVESTMENT --GNMA SERIES 2, I, J, 1A, 1B, 1C, 1I, 1K, 1V-2A
Distributions will be paid in cash unless you elect to have your
distributions reinvested in The GNMA Fund Investment Accumulation Program, Inc.
The Program is an open-end management investment company whose primary
investment objective is to obtain a high level of current income through
investment in a portfolio of Ginnie Maes. Investors participating in the Program
will be taxed on their reinvested distributions in the manner described in Taxes
even though distributions are reinvested in the Program. For more complete
information about the Program, including charges and expenses, request 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.
REINVESTMENT --MONTHLY PAYMENT U.S. TREASURY SERIES 1-5, 17, 18, 21, 22, 25, 28;
GNMA SERIES 1R, 1S, 1T, 1U; FREDDIE MAC SERIES 10-12
Distributions on Units may be reinvested by participating in the Fund's
reinvestment plan. Under the plan, the Units acquired for investors will be
either Units already held in inventory by the Sponsors or new Units created by
the Sponsors's deposit of additional Securities.
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Purchases made pursuant to the Reinvestment Plan will be made at a reduced
sales charge. Unit prices are based on the bid side evaluation of the underlying
Securities. Under the Reinvestment Plan, the Fund will pay the distributions to
the Trustee which in turn will purchase for the Holder full and fractional Units
of the Fund at the price determined as of the close of business on the
distribution day and will add the Units to the Holder's account and send the
Holder an account statement reflecting the reinvestment. The Sponsors reserve
the right to amend, modify or terminate the reinvestment plan at any time
without prior notice. Investors holding Units in 'street name' should contact
their broker, dealer or financial institution if they wish to participate in the
reinvestment plan.
Monthly Payment Series 1 and 3. Only income distributions may be
reinvested; principal distributions will be paid in cash. Units purchased by
reinvestment of income distributions will be acquired at net asset value; no
sale charge will be deducted.
FUND EXPENSES
Estimated annual Fund expenses are listed in Part A of the Prospectus; if
actual expenses exceed the estimate, the excess will be borne by the Fund. The
Trustee's annual fee is 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 maintaining
the Fund's registration statement current with Federal and State authorities,
extraordinary services, costs of indemnifying the Trustee and the Sponsors,
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 if cash is not available. The Sponsors receive an annual fee
currently estimated at $0.35 per $1,000 face amount to reimburse them for the
cost of providing Portfolio supervisory services to the Fund. While the fee may
exceed their costs of providing these services to the Fund, the total
supervision fees from all Series of Government Securities Income Fund 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 Defined Asset Funds, currently
estimated at $0.10 per Unit or per 1,000 Units as applicable. The Trustee's,
Sponsors' and Evaluator's fees may be adjusted for inflation without investors'
approval.
All or some portion of the expenses incurred in establishing the Fund,
including the cost of the initial preparation of documents relating to the Fund,
Federal and State registration fees, the initial fees and expenses of the
Trustee, legal expenses and any other out-of-pocket expenses will be paid by the
Fund and amortized over five years. Any balance of the expenses incurred in
establishing the Fund, as well as advertising and selling 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 and hold a comparable managed fund. Defined Asset Funds can be a
cost-effective way to purchase and hold investments. Annual operating expenses
are generally lower than for managed funds. Because Defined Asset 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 your
investment results.
TAXES -- SECTION A: MONTHLY PAYMENT U.S. TREASURY SERIES 18; GNMA SERIES 2,
1R-2A; FREDDIE MAC SERIES 10-12
The following summary describes some of the important income tax
consequences of holding Units, assuming that the investor is not a dealer,
financial institution or insurance company or other investor with special
circumstances. Investors should consult their tax advisers about an investment
in the Fund.
TAXATION OF THE FUND
The Fund intends to qualify for and elect the special tax treatment
applicable to 'regulated investment companies' under Sections 851-855 of the
Internal Revenue Code of 1986, as amended (the 'Code'). Qualification and
election as a 'regulated investment company' involve no supervision of
investment policy or management by any government agency. If the Fund qualifies
as a 'regulated investment company' and distributes to investors 90% or more of
its taxable income excluding its net capital gain (i.e., the excess of its net
long-term capital gain over its short-term capital loss), it will not be subject
to federal income tax on the portion
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of its taxable income (including any net capital gain) it distributes to
investors in a timely manner. In addition, the Fund will not be subject to the
4% excise tax on certain undistributed income of 'regulated investment
companies' to the extent it distributes to investors in a timely manner at least
98% of its taxable income (including any net capital gain). It is anticipated
that the Fund will not be subject to federal income tax or the excise tax
because the Indenture requires the distribution of the Fund's taxable income
(including any net capital gain) in a timely manner. Although all or a portion
of the Fund's taxable income (including any net capital gain) for a calendar
year may be distributed shortly after the end of the calendar year, such a
distribution will be treated for federal income tax purposes as having been
received by investors during the calendar year.
DISTRIBUTIONS
Distributions to investors of the Fund's interest income, gain that is
treated as ordinary income under the market discount rules and net short-term
capital gain in any year will generally be taxable as ordinary income to
investors to the extent of the Fund's taxable income (other than taxable income
attributable to its net capital gain) for that year. Distributions in excess of
the Fund's taxable income will be treated as a return of capital and will reduce
the investor's basis in his Units and, to the extent that such distributions
exceed his basis, will be treated as a gain from the sale of his Units as
discussed below. It is anticipated that substantially all of the distributions
of the Fund's net capital gains will be designated as capital gain dividends and
that the Fund's interest income, ordinary gain and net short-term capital gain
will be taxable as ordinary income to investors. Distributions that are taxable
as ordinary income to investors will constitute dividends for federal income tax
purposes but will not be eligible for the dividends-received deduction for
corporations.
Distributions of the Fund's net capital gain that are designated as capital
gain dividends by the Fund will be taxable to investors as long-term capital
gain, regardless of the time the investor has held his Units. However, if the
Fund were to terminate in less than one year, the Fund would not distribute any
capital gain dividends. The Internal Revenue Service has issued a notice (with
interim guidance) of forthcoming temporary regulations to permit a regulated
investment company such as the Fund to designate its dividends, subject to
certain limitations, as 20% or 28% rate gain distributions, which individual
investors may be entitled to treat as long-term capital gain in the 20% to 28%
groups respectively. The Trustee will provide necessary additional information
with periodic statements to investors, who should consult their tax advisers
regarding these matters.
An investor, other than a dealer in securities, will generally recognize
capital gain or loss when the investor disposes of his Units (by sale,
redemption or otherwise). In the case of a distribution of Securities to an
investor upon redemption of his Units, gain or loss will generally be recognized
in an amount equal to the difference between the investor's tax basis in his
Units and the fair market value of the Securities received in redemption. Net
capital gain may be taxed at a lower rate than ordinary income for certain
non-corporate investors, and non-corporate investors who have held their Units
for more than 18 months may be entitled to a 20% maximum federal tax rate for
gains from the sale of these Units. Any such capital gain or loss is long-term
if the asset is held for more than one year and short-term if held one year or
less. However, any capital loss on the sale or redemption of a Unit that an
investor has held for six months or less will be a long-term capital loss to the
extent of any long-term capital gain dividends previously distributed to the
investor by the Fund, although the proper treatment of this long-term capital
loss remains uncertain pending further consideration by the Internal Revenue
Service. The deduction of capital loss is subject to limitations. Investors
should consult their own tax advisers regarding these matters.
Payments of principal on underlying mortgages or sales of Securities by the
Fund (to meet redemptions or otherwise) may give rise to gain (including market
discount) to the Fund. The amount of gain will be based upon the cost of the
Security to the Fund and will be without regard to the value of the Security
when a particular investor purchases his Units. Since distributions of this gain
do not generally reduce an investor's tax basis in his Units, an investor may
have a corresponding capital loss (or a reduced amount of gain) on a subsequent
sale or redemption of his Units.
Investors will be taxed in the manner described above regardless of whether
distributions from the Fund are actually paid to the investor or are
automatically reinvested. The federal tax status of each year's distributions
will be reported to investors and to the Internal Revenue Service. The Fund
intends to report to each investor, no later than January 31, the amount of
distributions to that investor.
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The foregoing discussion relates only to the federal income tax status of
the Fund and to the tax treatment of distributions by the Fund to U.S.
investors. Investors who are not U.S. citizens or residents should be aware that
distributions from the Fund (other than capital gain dividends) generally will
be subject to a withholding tax of 30% or a lower treaty rate. Because interest
income of the type received by the Fund would generally not be subject to
withholding if received directly by the foreign investor, an investment in the
Fund is likely to be appropriate for a foreign investor only when that foreign
investor can utilize a foreign tax credit or corresponding benefit in respect of
such withholding taxes. Foreign investors should consult their own tax advisers
to determine whether investment in the Fund is appropriate. Distributions may
also be subject to state and local taxation and investors should consult their
own tax advisers in this regard.
TAXES -- SECTION B: MONTHLY PAYMENT U.S. TREASURY SERIES 1-17, 19-28; U.S.
TREASURY SERIES 7--LADDERED ZERO COUPONS; GNMA SERIES I, J, 1A, 1B, 1C,
1I, 1K
The following summary describes some of the important income tax
consequences of holding Units, assuming that the investor is not a dealer,
financial institution or insurance company or other investor with special
circumstances. Investors should consult their tax advisers about an investment
in the Fund.
Monthly Payment U.S. Treasury Series (except Series 18) and U.S. Treasury
Series 7--Laddered Zero Coupons. The Sponsors believe that individual investors
will not be subject to any state or local personal income taxes on the interest
received by the Fund and distributed to them. However, investors (including
individuals) may be subject to state and local taxes on any gains (or 'market
discount' treated as ordinary income) and to other state and local taxes
(including corporate income or franchise taxes, personal property or intangibles
taxes, and estate or inheritance taxes) on their Units or the income derived
therefrom. In addition, individual investors (and any other investors that are
not subject to state and local taxes on the interest income derived from the
Fund) will probably not be entitled to a deduction for state and local tax
purposes for their share of the fees and expenses paid by the Fund, for any
amortized bond premium or for any interest on money borrowed to purchase their
Units. Investors should consult their tax advisers regarding the state and local
taxes that may result from an investment in the Fund.
After the end of each calendar year, the Trustee will furnish to each
investor an annual statement containing information relating to the interest
received and 'original issue discount' accrued by the Fund on the Securities,
the cash proceeds received by the Fund from the disposition of any Security, and
the fees and expenses paid by the Fund. The Trustee will also furnish annual
information returns to each investor and to the Internal Revenue Service.
In the opinion of Davis Polk & Wardwell, special counsel for the Sponsors,
under existing law:
GENERAL TREATMENT OF THE FUND
The Fund will not be taxed as a corporation for federal income tax purposes
or for New York State or City purposes, and each investor will be considered to
own directly a share of each Security in the Fund. Each investor will be
considered to have received the interest (and accrued the original issue
discount, if any) on his pro rata portion of each Security when interest is
received (or original issue discount is accrued) by the Fund regardless of
whether the interest is automatically reinvested or a portion of the interest
payments are used to pay Fund expenses.
GNMA Series 1A, 1B, 1C,1I, 1K. In the following summary, references to the
Securities generally include the underlying mortgages that the Securities
represent. Investors should consult their tax advisers for further detail on the
matters summarized.
INCOME OR LOSS UPON DISPOSITION
Upon a disposition of all or part of an investor's pro rata portion of a
Security (by sale, exchange or redemption of the Security or his Units), an
investor will generally recognize capital gain or loss.
Monthly Payment U.S. Treasury Series (except Series 18). However, gain from
the disposition will generally be ordinary income (treated as interest income
for most purposes) to the extent of any accrued market discount attributable to
the security. An investor will generally have market discount to the extent that
his basis in a Security when he purchases a Unit is less than its stated
redemption price at maturity (or, in the case of a Security
10
<PAGE>
issued with original issue discount, the issue price increased by original issue
discount that has accrued on the Security before his purchase). Investors should
consult their tax advisers in this regard.
GNMA Series 1A, 1B, 1C, 1I, 1K. However, gain from the disposition will
generally be ordinary income (treated as interest income for most purposes) to
the extent of market discount attributable to the Security. An investor will
generally have market discount to the extent that his basis in a Security when
he purchases a Unit is less than its aggregate stated redemption price at
maturity (or, to the extent the Security represents an underlying mortgage with
original issue discount, the issue price increased by original issue discount
that has accrued on the mortgage before the investor's purchase). An investor
may also recognize ordinary gain or loss as a result of principal payments
received on underlying mortgages issued by natural persons. Investors should
consult their tax advisers in regard to these matters.
The excess of a non-corporate investor's net long-term capital gains over
his net short-term capital losses may be subject to tax at lower rates than
ordinary income. A capital gain or loss is long-term if the investment is held
for more than one year and short-term if held for one year or less. Because the
deduction of capital losses is subject to limitations, an investor may not be
able to deduct all of his capital losses. A non-corporate investor who has held
his pro rata portions of Securities for more than 18 months may be entitled to a
20% maximum federal tax rate for gains from the sale of these Securities or
corresponding Units. (See Defining Your Investment--Termination Date and the
Maturity column under Portfolio in Part A). Investors should consult their tax
advisers in this regard.
INVESTOR'S BASIS IN THE SECURITIES
An investor's aggregate basis in the Securities will be equal to the cost
of his Units, including any sales charges and organizational expenses borne by
the investor but excluding any amount paid for accrued interest, and adjusted to
reflect accruals of 'original issue discount', 'acquisition premium' and 'bond
premium'. Investors should consult their tax advisers in this regard.
ORIGINAL ISSUE DISCOUNT, ACQUISITION PREMIUM AND BOND PREMIUM
Monthly Payment U.S. Treasury Series (except Series 18) and GNMA Series 1A,
1B, 1C, 1I, 1K. Original issue discount is generally equal to the excess of a
Security's stated redemption price at maturity over its original issue price and
accrues in accordance with a constant yield method based on a compounding of
interest (and, for GNMA Series, reasonable assumptions, subsequently adjusted,
regarding the timing of principal payments on the underlying mortgages).
Original issue discount inclusions are reduced by accruals of acquisition
premium. An investor will have acquisition premium to the extent his basis in a
Security when he purchases a Unit is less than the stated redemption price at
maturity but more than the issue price increased by any original issue discount
that has accrued on the Security before his purchase. Generally, bond premium
accruals on a security are based upon the excess of an investor's basis in the
Security at the time of purchasing a Unit over its stated redemption price at
maturity. If an investor has elected to amortize bond premium, which is an
election that applies to all eligible debt obligations of an investor and that
can be revoked only with consent of the Internal Revenue Service, the amount
amortized may offset the investor's interest from the Security and reduce the
investor's basis, under certain conditions. Investors should consult their tax
advisers in this regard.
GNMA Series 1A, 1B, 1C, 1I, 1K. However, because the Fund consists of
Securities that may represent in part natural persons' mortgage debt obligations
that originated on or before September 27, 1985, on which deductions for bond
premium are not allowed, investors should not plan to deduct any bond premium
with respect to the Securities unless the allowable proportion can be
determined. Investors should consult their tax advisers in this regard.
U.S. Treasury Series 7--Laddered Zero Coupons. Original issue discount
accrues in accordance with a constant yield method based on a compounding of
interest and is generally equal to the excess of a Security's stated redemption
price at maturity over its original issue price, which, in the case of Stripped
Treasury Securities, is the investor's tax cost on the date he purchases his
Units. Because the Fund consists primarily of Stripped Treasury Securities, the
original issue discount rules acquire investors to include amounts in ordinary
gross income for federal income tax purposes in advance of the receipt of the
cash attributable to such income. Therefore, direct holding of Units may be
appropriate only for tax-deferred retirement plans (such as Individual
Retirement Accounts, Keogh Plans and pension funds) or for other investors who
will not be adversely affected by
11
<PAGE>
the attribution of income in advance of the receipt of the cash attributable to
such income. Investors should consult their tax advisers in this regard to
determine whether an investment in the Fund would be appropriate for them.
EXPENSES
An individual investor who itemizes deductions may deduct his pro rata
share of current ongoing Fund expenses only to the extent that this amount,
together with the investor's other miscellaneous deductions, exceeds 2% of his
adjusted gross income. The Internal Revenue Code further restricts the ability
of an individual investor with an adjusted gross income in excess of a specified
amount (for 1998, $124,500 or $62,250 for a married person filing a separate
return) to claim itemized deductions, including his pro rata share of Fund
expenses.
FOREIGN INVESTORS
Notwithstanding the foregoing, foreign investors (including non-resident
alien individuals and foreign corporations) not engaged in U.S. trade or
business will generally not be subject to U.S. federal income tax, including
withholding tax, on the interest or gain on a Security if (i) the investor meets
certain requirements, including the certification of foreign status and other
matters, and (ii) the Security was issued (or for GNMA Series, the mortgages
underlying the Security originated) after July 18, 1984. Unless otherwise stated
in Part A of the Prospectus, the Sponsors believe that all the Securities (or
underlying mortgages) in the Fund were issued after July 18, 1984. Under certain
circumstances, withholding agents will file foreign person information returns
with the Internal Revenue Service. Foreign investors should consult their own
tax advisers about the possible application of federal, state and local taxes in
the U.S. and their foreign countries of residence or organization.
* * *
RETIREMENT PLANS
This Series of Government Securities Income Fund may be suited for purchase
by Individual Retirement Accounts ('IRAs'), Keogh plans, pension funds and other
qualified retirement plans, certain of which are briefly described below.
Generally, capital gains and income received in each of the foregoing plans are
exempt from Federal taxation. All distributions from such plans are generally
treated as ordinary income but may, in some cases, be eligible for special 5 or
10 year averaging (prior to the year 2000) or tax-deferred rollover treatment.
Investors in IRAs, Keogh plans and other tax-deferred retirement plans should
consult their plan custodian as to the appropriate disposition of distributions.
Investors considering participation in any of these plans should review specific
tax laws related thereto and should consult their attorneys or tax advisors with
respect to the establishment and maintenance of any of these plans. These plans
are offered by brokerage firms, including the Sponsors of this Fund, and other
financial institutions. Fees and charges with respect to such plans may vary.
Retirement Plans for the Self-Employed--Keogh Plans. Units of the Fund may
be purchased by retirement plans established for self-employed individuals,
partnerships or unincorporated companies ('Keogh plans'). The assets of a Keogh
plan must be held in a qualified trust or other arrangement which meets the
requirements of the Code. Keogh plan participants may also establish separate
IRAs (see below) to which they may contribute up to an additional $2,000 per
year ($4,000 in a spousal account).
Individual Retirement Account--IRA. Any individual can make use of a
qualified IRA arrangement for the purchase of Units of the Fund. Any individual
(including one covered by an employer retirement plan) can make a contribution
to an IRA equal to the lesser of $2,000 ($4,000 in a spousal account) or 100% of
earned income; such investment must be made in cash. However, the deductible
amount of a contribution by an individual covered by an employer retirement plan
will be reduced if the individual's adjusted gross income exceeds $25,000 (in
the case of a single individual), $40,000 (in the case of a married individual
filing a joint return) or $200 (in the case of a married individual filing a
separate return). These income threshholds will gradually be increased by 2004
to $50,000 for a single individual and $80,000 for a married individual filing
jointly. Certain transactions which are prohibited under Section 408 of the Code
will cause all or a portion of the amount in an IRA to be deemed to be
distributed and subject to tax at that time. Unless nondeductible contributions
were made in 1987 or a later year, all distributions from an IRA will be treated
as ordinary income but generally are eligible for tax-deferred rollover
treatment. Taxable distributions made before attainment of age 59 1/2, except in
the case of the participant's death or disability or where the amount
distributed is part of a series of substantially equal periodic
12
<PAGE>
(at least annual) payments that are to be made over the life expectancies of the
participant and his or her beneficiary, are generally subject to a surtax in an
amount equal to 10% of the distribution. The 10% surtax will be waived for
withdrawals for certain educational and first-time homebuyer expenses. The
Taxpayer Relief Act of 1997 provides, subject to certain income limitations, for
a special type of IRA under which contributions would be non-deductible but
distributions would be tax-free if the account were held for at least five years
and the account holder was at least 59 1/2 at the time of distribution.
Corporate Pension and Profit-Sharing Plans. A pension or profit-sharing
plan for employees of a corporation may purchase Units of the Fund.
RECORDS AND REPORTS
The Trustee keeps a register of the names, addresses and holdings of all
investors. 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 investors at reasonable times during business hours.
With each distribution, the Trustee includes a statement of the interest
and any other receipts being distributed. The Trustee sends each investor of
record an annual report summarizing transactions in the Fund's accounts,
including amounts distributed during the year, identifying Securities sold and
purchased, listing Securities held and the number of Units outstanding and
stating the Redemption Price at year end and the fees and expenses paid by the
Fund, among other matters. Fund accounts are audited annually by independent
accountants selected by the Sponsors. Audited financial statements are available
from the Trustee on request.
TRUST INDENTURE
The Fund is a 'unit investment trust' created under New York law by a Trust
Indenture among the Sponsors, the Trustee and the Evaluator. This Prospectus
summarizes various provisions of the Indenture, but each statement is qualified
in its entirety by reference to the Indenture.
The Indenture may be amended by the Sponsors and the Trustee without
consent by investors to cure ambiguities or to correct or supplement any
defective or inconsistent provision, to make any amendment required by the SEC
or other governmental agency or to make any other change not materially adverse
to the interest of investors (as determined in good faith by the Sponsors). The
Indenture may also generally be amended upon consent of investors holding 51% of
the Units. No amendment may reduce the interest of any investor in the Fund
without the investor's consent or reduce the percentage of Units required to
consent to any amendment without unanimous consent of investors. Investors will
be notified on the substance of any amendment.
The Trustee may resign upon notice to the Sponsors. It may be removed by
investors holding 51% of the Units at any time or by the Sponsors without the
consent of investors if it becomes incapable of acting or bankrupt, its affairs
are taken over by public authorities, or if under certain conditions the
Sponsors determine in good faith that its replacement is in the best interest of
the investors. The Evaluator may resign or be removed by the Sponsors and the
Trustee without the investors' consent. The resignation or removal of either
becomes effective upon acceptance of appointment by a successor; in this case,
the Sponsors 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 so long as one Sponsor with a net worth of
$2,000,000 remains 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 appoint a successor Sponsor at reasonable
rates of compensation, terminate the Indenture and liquidate the Fund or
continue to act as Trustee without a Sponsor. Merrill Lynch, Pierce, Fenner &
Smith Incorporated has been appointed as Agent for the Sponsors by the other
Sponsors.
The Sponsors, the Trustee and the Evaluator are not liable to investors or
any other party 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 the Evaluator) or reckless disregard of duty. The Indenture
contains customary provisions limiting the liability of the Trustee.
13
<PAGE>
MISCELLANEOUS
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.
AUDITORS
The Statement of Condition in Part A of the Prospectus 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.
TRUSTEE
The Trustee and its address are stated on the back cover of the Prospectus.
The Trustee is subject to supervision by the Federal Deposit Insurance
Corporation, the Board of Governors of the Federal Reserve System and New York
State banking authorities.
SPONSORS
The Sponsors are listed on the back cover of the Prospectus. They may
include Merrill Lynch, Pierce, Fenner & Smith Incorporated, a wholly-owned
subsidiary of Merrill Lynch & Co., Inc.; Smith Barney Inc., an indirect
wholly-owned subsidiary of The Travelers Inc.; Prudential Securities
Incorporated, an indirect wholly-owned subsidiary of the Prudential Insurance
Company of America; Dean Witter Reynolds, Inc., a principal operating subsidiary
of Morgan Stanley, Dean Witter, Discover & Co. and PaineWebber Incorporated, 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.
CODE OF ETHICS
The Agent for the Sponsors has adopted a code of ethics requiring
preclearance and reporting of personal securities transactions by its personnel
who have access to information on Defined Asset Funds portfolio transactions.
The code is intended to prevent any act, practice or course of conduct which
would operate as a fraud or deceit on any Fund and to provide guidance to these
persons regarding standards of conduct consistent with the Agent's
responsibilities to the Funds.
PUBLIC DISTRIBUTION
The Sponsors intend to qualify Units for sale in all states in which
qualification is deemed necessary through the Underwriting Account and by
dealers who are members of the National Association of Securities Dealers, Inc.
The Sponsors do not intend to qualify Units for sale in any foreign countries
and this Prospectus does not constitute an offer to sell Units in any country
where Units cannot lawfully be sold. Sales to dealers and to introducing
dealers, if any, will initially be made at prices which represent a concession
from the Public Offering Price, but the Agent for the Sponsors reserves the
right to change the rate of any concession from time to time. Any dealer or
introducing dealer may reallow a concession up to the concession to dealers.
UNDERWRITERS' AND SPONSORS' PROFITS
In maintaining a secondary market for Units, the Sponsors will realize
profits or sustain losses in the amount of any difference between the prices at
which they buy Units and the prices at which they resell these Units (which
include the sales charge) or the prices at which they redeem 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.
14
<PAGE>
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
Securities in the Portfolio, so there may be a gain or loss when Units are sold.
Fund performance may be compared to performance data from publications such
as Donoghue's Money Fund Report, Lehman Brothers Intermediate Treasury Bond
Index, 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.
DEFINED ASSET FUNDS
For decades informed investors have purchased unit investment trusts for
dependability and professional selection of investments. Defined Asset Funds'
philosophy is to allow investors to 'buy with knowledge' (because, unlike
managed funds, the portfolio of bonds and the return are generally fixed) and
'hold with confidence' (because the portfolio is professionally selected and
regularly monitored). 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 retirement, or attractive, regular current income
consistent with the preservation of principal. Unit investment trusts are
particularly suited for the many investors who prefer to seek long-term income
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 that Defined Asset
Funds offer. Your investment objectives may call for a combination of Defined
Asset Funds.
One of the most important investment decisions you face may be how to
allocate your 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. From time to time various advertisements, sales literature, reports
and other information furnished to current or prospective investors may present
the average annual compounded rate of return of selected asset classes over
various periods of time, compared to the rate of inflation over the same
periods.
SUPPLEMENTAL INFORMATION
Upon written or telephonic request to the Trustee shown on the back cover
of this Prospectus, investors will receive at no cost to the investor
supplemental information about the Fund, which has been filed with the SEC. The
supplemental information includes more detailed risk factor disclosure about the
types of Securities that may be part of the Fund's Portfolio and general
information about the structure and operation of the Fund.
15
<PAGE>
THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY
16
<PAGE>
APPENDIX A
SECONDARY MARKET SALES
GNMA SERIES 2
<TABLE>
<CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
---------------------------------- CONCESSION AS
AS PERCENT OF AS PERCENT OF PERCENT OF
BID SIDE PUBLIC NET AMOUNT PUBLIC
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE
- ------------------------------------------ ----------------- --------------- -----------------------
<S> <C> <C> <C>
Less than 250............................. 4.25% 4.439% 2.763%
250-499................................... 3.25 3.359 2.113
500-749................................... 2.50 2.564 1.625
750-999................................... 2.00 2.041 1.300
1,000 or more............................. 1.50 1.523 0.975
<CAPTION>
GNMA SERIES I AND SUBSEQUENT SERIES
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
---------------------------------- CONCESSION AS
AS PERCENT OF AS PERCENT OF PERCENT OF
BID SIDE PUBLIC NET AMOUNT PUBLIC
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE
- ------------------------------------------ ----------------- --------------- -----------------------
<S> <C> <C> <C>
Less than 250,000......................... 4.25% 4.439% 2.763%
250,000-499,999........................... 3.25 3.359 2.113
500,000-749,999........................... 2.50 2.564 1.625
750,000-999,999........................... 2.00 2.041 1.300
1,000,000 or more......................... 1.50 1.523 0.975
<CAPTION>
FREDDIE MAC SERIES 10, 11 AND 12
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
---------------------------------- CONCESSION AS
AS PERCENT OF AS PERCENT OF PERCENT OF
BID SIDE PUBLIC NET AMOUNT PUBLIC
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE
- ------------------------------------------ ----------------- --------------- -----------------------
<S> <C> <C> <C>
Less than 100,000......................... 3.50% 3.627% 2.275%
100,000-499,999........................... 3.00 3.093 1.950
500,000-749,999........................... 2.25 2.302 1.463
750,000-999,999........................... 1.50 1.523 0.975
1,000,000 or more......................... 1.25 1.266 0.813
<CAPTION>
MONTHLY PAYMENT U.S. TREASURY SERIES 1 AND 3
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
---------------------------------- CONCESSION AS
AS PERCENT OF AS PERCENT OF PERCENT OF
BID SIDE PUBLIC NET AMOUNT PUBLIC
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE
- ------------------------------------------ ----------------- --------------- -----------------------
<S> <C> <C> <C>
Less than 250,000......................... 2.50% 2.564% 1.625%
250,000-499,999........................... 2.00 2.041 1.300
500,000-749,999........................... 1.50 1.523 0.975
750,000-999,999........................... 1.25 1.266 0.813
1,000,000 or more......................... 1.00 1.010 0.650
</TABLE>
a-1
<PAGE>
MONTHLY PAYMENT U.S. TREASURY SERIES 5
<TABLE>
<CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
---------------------------------- CONCESSION AS
AS PERCENT OF AS PERCENT OF PERCENT OF
BID SIDE PUBLIC NET AMOUNT PUBLIC
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE
- ------------------------------------------ ----------------- --------------- -----------------------
<S> <C> <C> <C>
Less than 250,000......................... 2.75% 2.828% 1.788%
250,000-499,999........................... 2.25 2.302 1.463
500,000-749,999........................... 1.50 1.523 0.975
750,000-999,999........................... 1.25 1.266 0.813
1,000,000 or more......................... 1.00 1.010 0.650
U.S. TREASURY SERIES 7--LADDERED ZERO COUPONS
<CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
---------------------------------- CONCESSION AS
AS PERCENT OF AS PERCENT OF PERCENT OF
BID SIDE PUBLIC NET AMOUNT PUBLIC
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE
- ------------------------------------------ ----------------- --------------- -----------------------
<S> <C> <C> <C>
ASSURANCE TRUST 2000
Less than 500........................... 2.00% 2.041% 1.300%
500-999................................. 1.50 1.523 0.975
1,000 or more........................... 1.00 1.010 0.650
ASSURANCE TRUST 2005
Less than 250........................... 3.00% 3.093% 1.950%
250-499................................. 2.50 2.564 1.625
500-749................................. 2.00 2.041 1.300
750-999................................. 1.50 1.523 0.975
1,000 or more........................... 1.00 1.010 0.650
<CAPTION>
MONTHLY PAYMENT U.S. TREASURY SERIES 19, 20, 23, 24, 26 AND 27
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
---------------------------------- CONCESSION AS
AS PERCENT OF AS PERCENT OF PERCENT OF
BID SIDE PUBLIC NET AMOUNT PUBLIC
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE
- ------------------------------------------ ----------------- --------------- -----------------------
<S> <C> <C> <C>
Less than 1,000,000....................... 1.50% 1.523% 0.975%
1,000,000 or more......................... 1.25 1.266 0.813
<CAPTION>
MONTHLY PAYMENT U.S. TREASURY SERIES 10
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
---------------------------------- CONCESSION AS
AS PERCENT OF AS PERCENT OF PERCENT OF
BID SIDE PUBLIC NET AMOUNT PUBLIC
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE
- ------------------------------------------ ----------------- --------------- -----------------------
<S> <C> <C> <C>
Less than 500,000......................... 1.75% 1.781% 1.138%
500,000-999,999........................... 1.25 1.266 0.813
1,000,000 or more......................... 0.75 0.756 0.488
<CAPTION>
MONTHLY PAYMENT U.S. TREASURY SERIES 15
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
---------------------------------- CONCESSION AS
AS PERCENT OF AS PERCENT OF PERCENT OF
BID SIDE PUBLIC NET AMOUNT PUBLIC
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE
- ------------------------------------------ ----------------- --------------- -----------------------
<S> <C> <C> <C>
Less than 500,000......................... 2.00% 2.041% 1.300%
500,000-999,999........................... 1.50 1.523 0.975
1,000,000 or more......................... 1.00 1.010 0.650
<CAPTION>
MONTHLY PAYMENT U.S. TREASURY SERIES 16
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
---------------------------------- CONCESSION AS
AS PERCENT OF AS PERCENT OF PERCENT OF
BID SIDE PUBLIC NET AMOUNT PUBLIC
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE
- ------------------------------------------ ----------------- --------------- -----------------------
<S> <C> <C> <C>
Less than 1,000,000....................... 1.25% 1.266% 0.813%
1,000,000 or more......................... 1.00 1.010 0.650
</TABLE>
a-2
<PAGE>
MONTHLY PAYMENT U.S. TREASURY SERIES 17, 18, 21, 22, 25 AND 28
<TABLE>
<CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
---------------------------------- CONCESSION AS
AS PERCENT OF AS PERCENT OF PERCENT OF
BID SIDE PUBLIC NET AMOUNT PUBLIC
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE
- ------------------------------------------ ----------------- --------------- -----------------------
<S> <C> <C> <C>
Less than 500,000......................... 2.25% 2.302% 1.463%
500,000-999,999........................... 1.75 1.781 1.138
1,000,000 or more......................... 1.25 1.266 0.813
</TABLE>
* * *
The above graduated sales charges will apply on all purchases on any one
day by the same purchaser of Units only in the amounts stated. Concurrent
purchases in the secondary market of one or more Series sponsored by the
Sponsors which have the same rates of sales charge will be aggregated. Units
held in the name of the spouse of the purchaser or in the name of a child of the
purchaser under 21 years of age are deemed to be registered in the name of the
purchaser. The graduated sales charges are also applicable to a trustee or other
fiduciary purchasing securities for a single trust estate or single fiduciary
account.
a-3
<PAGE>
14102--2/98
<PAGE>
DEFINED
ASSET FUNDSSM
SPONSORS: GOVERNMENT SECURITIES
Merrill Lynch, INCOME FUND
Pierce, Fenner & Smith Incorporated Freddie Mac Series--11
Defined Asset Funds (A Unit Investment Trust)
P.O. Box 9051 PROSPECTUS PART A
Princeton, NJ 08543-9051 This Prospectus consists of a Part A and
(609) 282-8500 a Part B. This Prospectus does not
Smith Barney Inc. contain all of the information with
Unit Trust Department respect to the investment company set
388 Greenwich Street--23rd Floor forth in its registration statement and
New York, NY 10013 exhibits relating thereto which have
(212) 816-4000 been filed with the Securities and
PaineWebber Incorporated Exchange Commission, Washington, D.C.
1200 Harbor Boulevard under the Securities Act of 1933 and the
Weehawken, NJ 07087 Investment Company Act of 1940, and to
(201) 902-3000 which reference is hereby made. Copies
Prudential Securities Incorporated of filed material can be obtained from
One New York Plaza the Public Reference Section of the
New York, NY 10292 Commission, 450 Fifth Street, N.W.,
(212) 778-6164 Washington, D.C. 20549 at prescribed
Dean Witter Reynolds Inc. rates. The Commission also maintains a
Two World Trade Center--59th Floor Web site that contains information
New York, NY 10048 statements and other information
(212) 392-2222 regarding registrants such as Defined
EVALUATOR: Asset Funds that file electronically
Interactive Data Services, Inc. with the Commission at
14 Wall Street http://www.sec.gov.
New York, NY 10005 No person is authorized to give any
TRUSTEE: information or to make any
The Chase Manhattan Bank representations with respect to this
Customer Service Retail Department investment company not contained in its
Bowling Green Station registration statement and exhibits
P.O. Box 5187 relating thereto; and any information or
New York, NY 10274-5187 representation not contained therein
1-800-323-1508 must not be relied upon as having been
authorized. This Prospectus does not
constitute an offer to sell, or a
solicitation of an offer to buy,
securities in any state to any person to
whom it is not lawful to make such offer
in such state.
14441--5/98
