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 SERIES--12 principal through investment in a fixed portfolio
A UNIT INVESTMENT consisting of Gold Mortgage Participation
TRUST Certificates ('Gold PCs'), representing undivided
- ------------------------------interests in specified fixed rate, first lien
/ / MONTHLY INCOME conventional residential mortgages guaranteed by
/ / MORTGAGE BACKED the Federal Home Loan Mortgage Corporation
SECURITIES ('FHLMC' or 'Freddie Mac'). The estimated life of
/ / INTERMEDIATE TERM the Fund is about 5 years. While Freddie Mac is a
corporate instrumentality of the United States,
the Freddie Mac PCs are not guaranteed by the
United States or by any Federal Home Loan Bank and
do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The
obligations of FHLMC under its guarantee are
obligations solely of FHLMC and are not backed by,
or entitled to, the full faith and credit of the
United States. (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
SPONSORS: OF THIS DOCUMENT. ANY REPRESENTATION TO THE
Merrill Lynch, CONTRARY IS A CRIMINAL OFFENSE.
Pierce, Fenner & Smith -------------------------------------------------
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 17, 1996.
<PAGE>
- --------------------------------------------------------------------------------
Def ined Asset FundsSM
Defined Asset Funds is America's oldest and largest family of unit investment
trusts, with over $100 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 portfolios of mortgage-backed Freddie Mac Gold PCs offer investors a
simple and convenient way to participate in the FHLMC market while earning an
attractive return. And by purchasing Freddie Mac funds, investors avoid the
problem of selecting securities by themselves.
INVESTMENT OBJECTIVES
To obtain safety of capital and current monthly distributions of interest and
principal through investment in a fixed portfolio of Gold PCs fully guaranteed
as to principal and interest by the FHLMC. All of the Gold PCs in the Fund are
backed by pools of residential mortgages. A further objective of the Fund is to
permit investors to reinvest income or principal distributions in additional
Units of the Fund.
- ----------------------------------------------------------------
Defining Your Portfolio
- ----------------------------------------------------------------
PROFESSIONAL SELECTION AND SUPERVISION
The Portfolio of Securities is selected by experienced buyers and research
analysts. 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
Two different issues of Gold PCS representing undivided interests in specified
fixed rate, first lien conventional residential mortgages purchased by Freddie
Mac and guaranteed by it as to timely payment of interest and principal. The
percentage relationship is as follows: 7.00% Freddie Mac Gold PCs maturing
6/01/01 to 1/01/02, 51% and 7.50% Freddie Mac Gold PCs maturing 3/01/01 to
1/01/02, 49%. The Fund was created March 8, 1995. The information in this
prospectus is as of February 29, 1996, 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. Distributions to investors who are not U.S.
citizens or residents will generally be subject to withholding tax at the
statutory rate of 30% (or a lesser treaty rate). (See Taxes in Part B).
- ----------------------------------------------------------------
Defining Your Investment
- ----------------------------------------------------------------
PUBLIC OFFERING PRICE PER 1,000 UNITS $960.51
The Public Offering Price as of February 29, 1996, the evaluation date, is based
on the aggregate offer side value of the underlying Securities in the Fund
($26,960,219), divided by the number of units outstanding (29,011,334) times
1,000 plus a sales charge of 3.25% of the Public Offering Price (3.359% on the
value of the underlying bonds). 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, 100% of the bonds 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.
PRINCIPAL DISTRIBUTIONS
Principal from sales, redemptions and maturities of Securities in the Fund will
be distributed to investors periodically when the amount to be distributed is
more than $5.00 per 1,000 units.
A-2
<PAGE>
- --------------------------------------------------------------------------------
REINVESTMENT OPTION
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 96% of
the face amount of securities deposited.
- ---------------------------------------------------------------
Defining Your Risks
- ---------------------------------------------------------------
RISK FACTORS
An investment in Units of the Fund should be made with an understanding of the
risks which an investment in fixed-rate intermediate-term debt obligations
without prepayment protection may entail, including the risk that the value of
the Portfolio and hence of the Units will decline with increases in interest
rates and that payments of principal may be received sooner than anticipated
especially if interest rates decline. The potential for appreciation, which
could otherwise be expected to result from a decline in interest rates, may be
limited by any prepayments by mortgagors as interest rates decline. Also,
prepayments of principal on Freddie Mac Gold PCs purchased at a premium over par
will result in some loss on investment while prepayments on Freddie Mac Gold PCs
purchased at a discount from par may result in some gain on investment. Also, if
interest rates rise, the prepayment risk of higher yielding, premium Freddie Mac
Gold PCs and the prepayment benefit for lower yielding, discount Freddie Mac PCs
will be reduced. There is no guarantee that the Fund will reach its investment
objective. The Fund may recognize gain on the payment of principal on an
underlying Gold PC or on the sale of a Security. A distribution of such gain
will be taxable to an investor as ordinary income or capital gain even though as
to a particular investor the distribution may economically represent a return of
capital. (See Taxes 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 Initial
Public Offering
Price
---------------
Maximum Sales Charges 3.25%
ESTIMATED ANNUAL FUND OPERATING EXPENSES
Per 1,000
Units
---------------
Trustee's Fee $ 0.66
Maximum Portfolio Supervision, Bookkeeping and
Administrative Fees $ 0.23
Evaluator's Fee $ 0.09
Other Operating Expenses $ 0.58
---------------
TOTAL $ 1.56
SELLING YOUR INVESTMENT
You may 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 $929.30 ($31.21
less than the Public Offering Price). There is no fee for selling your units.
- ---------------------------------------------------------------
Defining Your Income
- ---------------------------------------------------------------
MONTHLY INTEREST INCOME
The Fund pays monthly income, even though the Securities generally pay interest
semi-annually.
WHAT YOU MAY EXPECT
(PAYABLE ON THE 23RD DAY OF THE MONTH TO HOLDERS OF RECORD ON THE 17TH DAY OF
THE MONTH):
Regular Monthly Income per 1,000 units: $ 5.38
Annual Income per 1,000 units: $ 64.65
These figures are estimates determined as of the evaluation date and actual
payments may vary.
A-3
<PAGE>
GOVERNMENT SECURITIES INCOME FUND, FREDDIE MAC SERIES - 12,
DEFINED ASSET FUNDS
REPORT OF INDEPENDENT ACCOUNTANTS
The Sponsors, Trustee and Holders
of Government Securities Income Fund, Freddie Mac Series - 12,
Defined Asset Funds:
We have audited the accompanying statement of condition of
Government Securities Income Fund, Freddie Mac Series - 12,
Defined Asset Funds, including the portfolio, as of February
29, 1996 and the related statements of operations and of changes
in net assets for the period March 9, 1995 to 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 audit.
We conducted our audit in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial 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
29, 1996, as shown in such portfolio, were confirmed to us
by The Chase Manhattan Bank (National Association), the
Trustee. An audit also includes assessing the accounting
principles used and significant estimates made by the
Trustee, as well as evaluating the overall financial
statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
financial position of Government Securities Income Fund,
Freddie Mac Series - 12, Defined Asset Funds at February
29, 1996 and the results of its operations and changes in
its net assets for the above-stated period in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, N.Y.
April 24, 1996
D - 1.
<PAGE>
GOVERNMENT SECURITIES INCOME FUND, FREDDIE MAC SERIES - 12,
DEFINED ASSET FUNDS
STATEMENT OF CONDITION
As of February 29, 1996
<TABLE>
<S> <C> <C>
TRUST PROPERTY:
Investment in marketable securities -
at value (cost $ 26,883,757 )(Note 1)........ $26,860,799
Accrued interest ............................... 160,084
Cash - income .................................. 834
Cash - principal ............................... 202
-----------
Total trust property ......................... 27,021,919
LESS LIABILITIES:
Accrued Sponsors' fees ......................... $ 1,560
Trustee's fees and expenses payable ............ 3,215 4,775
----------- -----------
NET ASSETS, REPRESENTED BY:
29,011,334 units of fractional undivided
interest outstanding (Note 3)................ 26,861,001
Undistributed net investment income ............ 156,143 $27,017,144
----------- ===========
UNIT VALUE ($ 27,017,144 / 29,011,334 units )..... $ .93126
===========
</TABLE>
See Notes to Financial Statements.
D - 2.
<PAGE>
GOVERNMENT SECURITIES INCOME FUND, FREDDIE MAC SERIES - 12,
DEFINED ASSET FUNDS
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
March 9, 1995
to
February 29,
1996
----
<S> <C>
INVESTMENT INCOME:
Interest income ........................ $ 957,257
Trustee's fees and expenses ............ (18,401)
Sponsors' fees ......................... (3,308)
---------------
Net investment income .................. 935,548
---------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized loss on
securities sold or redeemed .......... (21,346)
Unrealized depreciation
of investments ....................... (22,958)
---------------
Net realized and unrealized
loss on investments ................. (44,304)
---------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .............. $ 891,244
===============
</TABLE>
See Notes to Financial Statements.
D - 3.
<PAGE>
GOVERNMENT SECURITIES INCOME FUND, FREDDIE MAC SERIES - 12,
DEFINED ASSET FUNDS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
March 9, 1995
to
February 29,
1996
----
<S> <C>
OPERATIONS:
Net investment income .................. $ 935,548
Realized loss on
securities sold or redeemed .......... (21,346)
Unrealized depreciation
of investments ....................... (22,958)
---------------
Net increase in net assets
resulting from operations ............ 891,244
---------------
DISTRIBUTIONS TO HOLDERS (Note 2):
Income ................................ (779,405)
Principal .............................. (1,290,358)
---------------
Total distributions .................... (2,069,763)
---------------
Subscription amounts .................... 27,709,026
NET INCREASE IN NET ASSETS ............... 26,530,507
NET ASSETS AT BEGINNING OF PERIOD ........ 486,637
---------------
NET ASSETS AT END OF PERIOD .............. $27,017,144
===============
PER UNIT:
Income distributions during
period ............................... $ .06287
===============
Principal distributions during
period ............................... $ .08612
===============
Net asset value at end of
period ............................... $ .93126
===============
TRUST UNITS:
Issued during period ................... 28,511,334
Outstanding at end of period ........... 29,011,334
===============
</TABLE>
See Notes to Financial Statements.
D - 4.
<PAGE>
GOVERNMENT SECURITIES INCOME FUND, FREDDIE MAC SERIES - 12,
DEFINED ASSET FUNDS
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940 as a Unit
Investment Trust. The 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), except that value on March 9,
1995 was based upon offering side evaluations at March 7,
1995, the day prior to the Date of Deposit. Cost of
securities at March 9, 1995 was also based on such offering
side evaluations.
(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 29,011,334 units at Date of Deposit ................ $29,142,756
Less sales charge .......................................... 947,092
-----------
Net amount applicable to Holders ........................... 28,195,664
Realized loss on securities sold or redeemed ............... (21,346)
Principal distributions .................................... (1,290,358)
Unrealized depreciation of investments ..................... (22,958)
-----------
Net capital applicable to Holders .......................... $26,861,001
===========
4. INCOME TAXES
As of February 29, 1996, unrealized appreciation of investments, based on
cost for Federal income tax purposes, aggregated $ 22,958, all of which
related to depreciated securities. The cost of investment securities for
Federal income tax purposes approximates the amount shown in the
accompanying financial statements at February 29, 1996.
D - 5.
<PAGE>
GOVERNMENT SECURITIES INCOME FUND, FREDDIE MAC SERIES - 12,
DEFINED ASSET FUNDS
<TABLE><CAPTION>
PORTFOLIO
As of February 29, 1996
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 7.00% 06/01/01 $ 13,489,310 $ 13,594,437 $ 13,577,800
Participation Certificates to
01/01/02
2 Federal Home Loan Gold Mortgage 7.50% 03/01/01 13,022,547 13,289,320 13,282,999
Participation Certificates to
01/01/02
-------------- -------------- ---------------
TOTAL $ 26,511,857 $ 26,883,757 $ 26,860,799
============== ============== ===============
(1) See Note 1 to Financial Statements.
(2) On the Dates Of Deposit, the Ranges of stated maturities
were as follows:
7.00% FHLMC - 01/15/09 to 01/15/10
7.50% FHLMC - 01/15/09 to 01/15/10
</TABLE>
D - 6.
<PAGE>
<PAGE>
AUTHORIZATION FOR REINVESTMENT
DEFINED ASSET FUNDS--
GOVERNMENT SECURITIES INCOME FUND
FREDDIE MAC SERIES--12
/ / 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--12 and authorize
The Chase Manhattan Bank, N.A. to pay distributions on my Units as indicated
below (distributions to be reinvested will be paid for my account to The Chase
Manhattan Bank, N.A.).
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, N.Y. NECESSARY
IF MAILED
POSTAGE WILL BE PAID BY ADDRESSEE IN THE
THE CHASE MANHATTAN BANK, N.A. (FREDDIE MAC 12) UNITED STATES
RETAIL PROCESSING DEPARTMENT
770 BROADWAY--7th FLOOR
NEW YORK, N.Y. 10003-9598
- --------------------------------------------------------------------------------
(Fold along this line.)
- --------------------------------------------------------------------------------
(Fold along this line.)
<PAGE>
PROSPECTUS--PART B
GOVERNNMENT SECURITIES INCOME FUND
FREDDIE MAC SERIES
FURTHER INFORMATION 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...................................... 3
How to Sell Units..................................... 4
Income, Distributions and Reinvestment................ 5
Fund Expenses......................................... 6
PAGE
---------
Taxes................................................. 7
Records & Reports..................................... 8
Trust Indenture....................................... 9
Miscellaneous......................................... 9
Supplemental Information.............................. 11
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. Because the
Portfolio is not actively managed and principal is returned as the Securities
are disposed of, this principal should be relatively unaffected by changes in
interest rates.
The deposit of the Securities in the Fund on the initial date of deposit
established a proportionate relationship between the face amounts of the
Securities. Following the initial date of deposit the Sponsors may deposit
additional Securities in order to create new Units, maintaining to the extent
possible that original proportionate relationship.
Freddie Mac Series. 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 primarily to increase the
availability of mortgage credit for the financing of urgently needed housing.
The common stock of FHLMC is owned by the Federal 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.
1
<PAGE>
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.
Freddie Mac Series. FHLMC PCs purchased at a market discount will increase
in value faster than FHLMC 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
FHLMC PCs purchased at a premium over par will result in some loss on investment
while prepayments on FHLMC PCs purchased at a discount from par will result in
some gain on investment. The Securities in the Portfolio, though backed by
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
2
<PAGE>
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.
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 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 six years.
Generally speaking, a number of factors, including mortgage market interest
rates and homeowners mobility, will affect the average life of the FHLMC PCs.
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 mandatory 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 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.
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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.
Net accrued interest is added to the Public Offering Price, the Sponsors'
Repurchase Price and the Redemption Price per Unit. This represents the interest
accrued on the Securities, net of Fund expenses, from the initial date of
deposit to, but not including, the settlement date for Units (less any prior
distributions of interest income to 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, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas, and the
following Federal holidays: Martin Luther King's Birthday, Columbus Day and
Veterans Day. 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 Freddie Mac PCs of the type deposited in the Portfolio 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 SELL UNITS
SPONSORS' MARKET FOR UNITS
You can sell your Units at any time without a fee. The Sponsors (although
not obligated to do so) will normally buy any Units offered for sale at the
repurchase price next computed after receipt of the order. The Sponsors have
maintained secondary markets in Defined Asset Funds for over 20 years. Primarily
because of the sales charge and fluctuations in the market value of the
Securities, the sale price may be less than the cost of your Units. 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 this market without prior notice if the supply
of Units exceeds demand or for other business reasons; in that event, the
Sponsors may still purchase Units at the redemption price as a service to
investors. The Sponsors may reoffer or redeem Units repurchased.
TRUSTEE'S REDEMPTION OF UNITS
You may redeem your Units by sending the Trustee a redemption request
together with any certificates you hold. Certificates 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 certificate of death, trust instrument, certificate of corporate
authority or appointment as executor, administrator or guardian. If the Sponsors
are maintaining a market for Units, they will purchase any Units tendered at the
repurchase price described above. The Fund has no back-end load or 12b-1 fees,
so there is never a fee for cashing in your investment. If they do not purchase
Units tendered, the Trustee is authorized in its discretion to sell Units in the
over-the-counter market if it believes it will obtain a higher net price for the
redeeming investor.
By the seventh calendar day after tender you will be mailed an amount equal
to the Redemption Price per Unit. Because of market movements or changes in the
Portfolio, this price may be more or less than the cost of your Units. The
Redemption Price per Unit is computed 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
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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.
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 and diversity of the Fund.
Redemptions may be suspended or payment postponed if the New York Stock
Exchange is closed other than for customary weekend and holiday closings, if the
SEC determines that trading on that Exchange is restricted or that an emergency
exists making disposal or evaluation of the Securities not reasonably
practicable, or for any other period permitted by the SEC.
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.
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 estimatd 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.
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
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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--Freddie Mac Series above.
REINVESTMENT
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.
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.
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 of
a maximum of $0.25 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 the Fund, 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.
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TAXES
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 without regard to its net capital gain (net capital gain is
defined as the excess of net long-term capital gain over short-term capital
loss), it will not be subject to Federal income tax on the portion of its
taxable income (including any net capital gain) 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 any net
short-term capital gain in any year will be taxable as ordinary income to
investors to the extent of the Fund's taxable income (without regard to any net
capital gain) for that year. Any excess will be treated as a return of capital
and will reduce the investor's basis in his Units and, to the extent that they
exceed his basis, will be treated as a gain from the sale of his Units as
discussed below. It is anticipated that substantially all of the distributions
of the Fund's interest income, ordinary gain and any net short-term capital gain
will be taxable as ordinary income to 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 (designated as capital gain dividends by the Fund) will
be taxable to investors as long-term capital gain, regardless of the time the
Units have been held by an investor. An investor will recognize taxable gain or
loss if the investor sells or redeems his Units. Any gain or loss arising from
(or treated as arising from) the sale or redemption of Units will be capital
gain or loss, except in the case of a dealer. Capital gains are currently taxed
at the same rate as ordinary income. However, the excess of net long-term
capital gains over net short-term capital losses may be taxed at a lower rate
than ordinary income for certain noncorporate taxpayers. A capital gain or loss
is long-term if the asset is held for more than one year and short-term if held
for one year or less. 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 capital gain dividends previously distributed
to the investor by the Fund. The deduction of capital losses is subject to
limitations.
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. Such gain must be distributed to
Investors to avoid Federal income (or excise) taxation to the Fund. In the case
of sales to meet redemptions, some or all of such gain must be so distributed to
nonredeeming investors. Any such distribution will be taxable to investors as
discussed above (i.e., as ordinary income or long-term capital gain), even if as
to a particular investor the distribution economically represents a return of
capital. Since such distributions do not reduce an investor's tax basis in his
Units, an investor will have a corresponding capital loss (or a reduced amount
of gain) on a subsequent sale or redemption of his Units.
The Federal tax status of each year's distributions will be reported to
investors and to the Internal Revenue Service. The foregoing discussion relates
only to the Federal income tax status of the Fund and to the tax treatment of
distributions by the Fund to U.S. investors. Investors who are not U.S. citizens
or residents should be aware that distributions from the Fund generally will be
subject to a withholding tax of 30%, or a lower treaty rate, and should consult
their own tax advisers 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.
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Investors will be taxed in the manner described above regardless of whether
distributions from the Fund are actually received by the investor or are
automatically reinvested (see Income, Distributions and Reinvestment--
Reinvestment above).
The information statement relating to Freddie Mac PCs indicates that the
mortgages underlying the Freddie Mac PCs may be subject to rules for obligations
originally issued at a discount or to rules for stripped bonds and coupons under
Section 1286 of the Code. Investors are urged to consult their tax advisers with
respect to the application of these rules to an investment in Units. Investors
may also recognize ordinary gain or loss as a result of principal payments
received on underlying mortgages issued by natural persons.
RETIREMENT PLANS
Certain Series of Government Securities Income Fund may be well suited for
purchase by Individual Retirement Accounts ('IRAs'), Keogh plans, pension funds
and other qualified retirement plans, certain of which are briefly described
below. Generally, capital gains and income received in each of the foregoing
plans are exempt from Federal taxation. All distributions from such plans are
generally treated as ordinary income but may, in some cases, be eligible for
special 5 or 10 year averaging or tax-deferred rollover treatment. 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 Sponsor 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 ($2,250 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
in an IRA equal to the lesser of $2,000 ($2,250 in a spousal account) or 100% of
earned income; such investment must be made in cash. However, the deductible
amount an individual may contribute will be reduced if the individual's adjusted
gross income exceeds $25,000 (in the case of a single individual), $40,000 (in
the case of married individuals filing a joint return) or $200 (in the case of a
married individual filling a separate return). 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 (at least annual) payments that are to be made over the life
expectancies of the participant and his or her beneficiary, are generally
subject to a surtax in an amount equal to 10% of the distribution.
Corporate Pension and Profit-Sharing 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, and
supplemental information on the operations of the Fund and the risks associated
with the Securities held by the Fund, 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. Within five days after deposit of
Securities in exchange or substitution for Securities (or contracts) previously
deposited, the Trustee will send a notice to each investor, identifying both the
Securities removed and the replacement Securities deposited. The Trustee sends
each investor of record an annual report summarizing transactions in the Fund's
accounts and amounts distributed during the year and Securities held, the number
of Units outstanding and the Redemption Price at year end, the interest received
by the Fund on the Securities, the gross
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proceeds received by the Fund from the disposition of any Security (resulting
from redemption or payment at maturity or sale of any Security), and the fees
and expenses paid by the Fund, among other matters. The Trustee will also
furnish annual information returns to each investor. Investors may obtain copies
of Security evaluations from the Trustee to enable them to comply with federal
and state tax reporting requirements. Fund accounts are audited annually by
independent accountants selected by the Sponsors. Audited financial statements
are available 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.
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.
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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 either the
Comptroller of the Currency or 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 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.
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.
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 relatively fixed) and
'hold with confidence' (because
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the portfolio is professionally selected and regularly reviewed). 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. One's 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 writing or calling 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.
11
<PAGE>
APPENDIX A
SALES RATE SCHEDULES
INITIAL OFFERING PERIOD
<TABLE><CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT)
---------------------------------- PRIMARY MARKET
AS PERCENT OF AS PERCENT OF DEALER CONCESSION AS CONCESSION TO
OFFER SIDE PUBLIC NET AMOUNT PERCENT OF PUBLIC INTRODUCING
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE DEALERS
- ----------------------------------- ------------------- ------------- --------------------- ------------------
<S> <C> <C> <C> <C>
Less than 100,000.................. 3.25% 3.359% 2.113% $ 23.40
100,000 - 499,999.................. 2.75 2.828 1.788 19.80
500,000 - 749,999.................. 2.00 2.041 1.300 14.40
750,000 - 999,999.................. 1.25 1.266 0.813 9.00
1,000,000 or more.................. 1.00 1.010 0.650 7.20
<CAPTION>
SECONDARY MARKET
SALES CHARGE
(GROSS UNDERWRITING PROFIT) DEALER
---------------------------------- CONCESSION AS
AS PERCENT OF BID AS PERCENT OF PERCENT OF
SIDE PUBLIC NET AMOUNT PUBLIC OFFERING
NUMBER OF UNITS OFFERING PRICE INVESTED 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
</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-1
<PAGE>
DEFINED
ASSET FUNDSSM
SPONSORS: GOVERNMENT SECURITIES
Merrill Lynch, INCOME FUND
Pierce, Fenner & Smith Incorporated Freddie Mac Series--12
Defined Asset Funds (A Unit Investment Trust)
P.O. Box 9051 PROSPECTUS PART A
Princeton, N.J. 08543-9051 This Prospectus does not contain all of
(609) 282-8500 the information with respect to the
Smith Barney Inc. investment company set forth in its
Unit Trust Department registration statement and exhibits
388 Greenwich Street--23rd Floor relating thereto which have been filed
New York, NY 10013 with the Securities and Exchange
1-800-223-2532 Commission, Washington, D.C. under the
PaineWebber Incorporated Securities Act of 1933 and the
1200 Harbor Boulevard Investment Company Act of 1940, and to
Weehawken, N.J. 07087 which reference is hereby made.
(201) 902-3000 No person is authorized to give any
Prudential Securities Incorporated information or to make any
One Seaport Plaza representations with respect to this
199 Water Street investment company not contained in its
New York, N.Y. 10292 registration statement and exhibits
(212) 776-1000 relating thereto; and any information or
Dean Witter Reynolds Inc. representation not contained therein
Two World Trade Center--59th Floor must not be relied upon as having been
New York, N.Y. 10048 authorized. This Prospectus does not
(212) 392-2222 constitute an offer to sell, or a
EVALUATOR: solicitation of an offer to buy,
Kenny S&P Evaluation Services, securities in any state to any person to
a division of J. J. Kenny Co., Inc. whom it is not lawful to make such offer
65 Broadway in such state.
New York, N.Y. 10006 15082--5/96
TRUSTEE:
The Chase Manhattan Bank, N.A.
(a National Banking Association)
Customer Service Retail Department
770 Broadway--7th Floor
New York, N.Y. 10003-9598
1-800-323-1508
