File No. 33-56314
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
POST-EFFECTIVE
AMENDMENT NO. 5
TO
FORM S-6
For Registration Under the Securities Act of 1933 of Securities
of Unit Investment Trusts Registered on Form N-8B-2
THE FIRST TRUST SPECIAL SITUATIONS TRUST, SERIES 51
THE CMO UNIT INVESTMENT TRUST, SERIES 2
(Exact Name of Trust)
NIKE SECURITIES L.P.
(Exact Name of Depositor)
1001 Warrenville Road
Lisle, Illinois 60532
(Complete address of Depositor's principal executive offices)
NIKE SECURITIES L.P. CHAPMAN AND CUTLER
Attn: James A. Bowen Attn: Eric F. Fess
1001 Warrenville Road 111 West Monroe Street
Lisle, Illinois 60532 Chicago, Illinois 60603
(Name and complete address of agents for service)
It is proposed that this filing will become effective (check
appropriate box)
: : immediately upon filing pursuant to paragraph (b)
: x : November 28, 1997
: : 60 days after filing pursuant to paragraph (a)
: : on (date) pursuant to paragraph (a) of rule (485 or 486)
Pursuant to Rule 24f-2 under the Investment Company Act of
1940, the issuer has registered an indefinite amount of
securities. A 24f-2 Notice for the offering was last filed on
September 15, 1997.
<PAGE>
THE FIRST TRUST SPECIAL SITUATIONS TRUST, SERIES 51
THE CMO UNIT INVESTMENT TRUST, SERIES 2
1,377 UNITS
PROSPECTUS
Part One
Dated November 25, 1997
Note: Part One of this Prospectus may not be distributed unless accompanied by
Part Two.
The Trust
The CMO Unit Investment Trust, Series 2 (the "Trust") is a fixed portfolio of
taxable collateralized mortgage obligations (CMOs). At October 16, 1997, each
Unit represented a 1/1,377 undivided interest in the principal and net income
of the Trust (see "What is the First Trust Special Situations Trust?" in Part
Two).
The Units being offered by this Prospectus are issued and outstanding Units
which have been purchased by the Sponsor in the secondary market or from the
Trustee after having been tendered for redemption. The profit or loss
resulting from the sale of Units will accrue to the Sponsor. No proceeds from
the sale of Units will be received by the Trust.
Public Offering Price per Unit
The Public Offering Price per Unit is equal to the aggregate value of the
Securities in the Portfolio of the Trust divided by the number of Units
outstanding, plus a sales charge of 5.5% of the Public Offering Price (5.820%
of the amount invested). At October 16, 1997, the Public Offering Price per
Unit was $464.62 plus net interest accrued to date of settlement (three
business days after such date) of $1.88 (see "Market for Units" in Part Two).
Please retain both parts of this Prospectus for future reference.
______________________________________________________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
______________________________________________________________________________
NIKE SECURITIES L.P.
Sponsor
<PAGE>
Estimated Current Return and Estimated Long-Term Return
Estimated Current Return to Unit holders was 6.94% per annum on October 16,
1997. Estimated Long-Term Return to Unit holders was 7.03% per annum on
October 16, 1997. Estimated Current Return is calculated by dividing the
Estimated Net Annual Interest Income per Unit by the Public Offering Price per
Unit. Estimated Long-Term Return is calculated using a formula which (1)
takes into consideration and determines and factors in the relative weightings
of the market values, yields (which take into account the amortization of
premiums and the accretion of discounts) and estimated average life of all of
the Securities in the Trust and (2) takes into account a compounding factor
and the expenses and sales charge associated with each Unit of the Trust.
Since the market values and estimated average lives of the Securities and the
expenses of the Trust will change, there is no assurance that the present
Estimated Current Return and Estimated Long-Term Return indicated above will
be realized in the future. Estimated Current Return and Estimated Long-Term
Return are expected to differ because the calculation of the Estimated Long-
Term Return reflects the estimated date and amount of principal returned while
the Estimated Current Return calculations include only Net Annual Interest
Income and Public Offering Price. The above figures are based on estimated
per Unit cash flows. Estimated cash flows will vary with changes in fees and
expenses, with changes in current interest rates, and with the principal
prepayment, redemption, maturity, exchange or sale of the underlying
Securities and with changes in the average life assumptions of the CMO
securities. See "What are Estimated Current Return and Estimated Long-Term
Return?" in Part Two.
<PAGE>
THE FIRST TRUST SPECIAL SITUATIONS TRUST, SERIES 51
THE CMO UNIT INVESTMENT TRUST, SERIES 2
SUMMARY OF ESSENTIAL INFORMATION AS OF OCTOBER 16, 1997
Sponsor: Nike Securities L.P.
Evaluator: First Trust Advisors L.P.
Trustee: The Chase Manhattan Bank
<TABLE>
<CAPTION>
GENERAL INFORMATION
<S> <C>
Principal Amount of Securities in the Trust $615,076
Number of Units 1,377
Fractional Undivided Interest in the Trust per Unit 1/1,377
Public Offering Price:
Aggregate Value of Securities in the Portfolio $604,597
Aggregate Value of Securities per Unit $439.07
Sales Charge 5.820% (5.5% of Public Offering Price) $25.55
Public Offering Price per Unit $464.62*
Redemption Price and Sponsor's Repurchase Price per Unit
($25.55 less than the Public Offering Price per Unit) $439.07*
Liquidation Amount of the Trust $2,000,000
</TABLE>
Date Trust Established January 13, 1993
Mandatory Termination Date December 31, 2042
[FN]
*Plus net interest accrued to date of settlement (three business days after
purchase) (see "Public Offering Price per Unit" herein and "Redemption of
Units" and "Purchase of Units by the Sponsor" in Part Two).
<PAGE>
THE FIRST TRUST SPECIAL SITUATIONS TRUST, SERIES 51
THE CMO UNIT INVESTMENT TRUST, SERIES 2
SUMMARY OF ESSENTIAL INFORMATION AS OF OCTOBER 16, 1997
Sponsor: Nike Securities L.P.
Evaluator: First Trust Advisors L.P.
Trustee: The Chase Manhattan Bank
<TABLE>
<CAPTION>
SPECIAL INFORMATION
<S> <C>
Calculation of Estimated Net Annual Interest Income per Unit
(Excluding the Effect of Premiums and Discounts):
Estimated Annual Interest Income $34.59
Less: Estimated Annual Expense $2.35
______
Estimated Net Annual Interest Income per Unit $32.24
======
Estimated Daily Rate of Net Interest Accrual per Unit $.0896
======
Estimated Current Return Based on Public Offering Price 6.94%
======
Estimated Long-Term Return Based on Public Offering Price 7.03%
======
</TABLE>
Trustee's Annual Fee: $.90 per Unit outstanding, exclusive of expenses of the
Trust.
Evaluator's Annual Fee: $.30 per $1,000 principal amount of underlying
securities.
Supervisory Fee: Maximum of $.25 per Unit outstanding annually.
Distributions will generally be made on or shortly after the twenty-eighth day
of each month to Unit holders of record on the first day of such month.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Unit Holders of The First Trust
Special Situations Trust, Series 51, The
CMO Unit Investment Trust, Series 2
We have audited the accompanying statement of assets and liabilities,
including the portfolio, of The First Trust Special Situations Trust, Series
51, The CMO Unit Investment Trust, Series 2 as of July 31, 1997, and the
related statements of operations and changes in net assets for each of the
three years in the period then ended. These financial statements are the
responsibility of the Trust's Sponsor. 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. Our
procedures included confirmation of securities owned as of July 31, 1997, by
correspondence with the Trustee. An audit also includes assessing the
accounting principles used and significant estimates made by the Sponsor, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The First Trust Special
Situations Trust, Series 51, The CMO Unit Investment Trust, Series 2 at July
31, 1997, and the results of its operations and changes in its net assets for
each of the three years in the period then ended in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 24, 1997
<PAGE>
THE FIRST TRUST SPECIAL SITUATIONS TRUST, SERIES 51
THE CMO UNIT INVESTMENT TRUST, SERIES 2
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Securities, at market value (cost $591,427)
(Note 1) $615,843
Accrued interest 3,950
________
619,793
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND NET ASSETS
<S> <C> <C>
Accrued liabilities 2,557
Cash overdraft 2,529
________
5,086
________
Net assets, applicable to 1,391 outstanding
units of fractional undivided interest:
Cost of Trust assets (Note 1) $591,427
Unrealized appreciation 24,416
Distributable funds (deficit) (1,136)
________
$614,707
========
Net asset value per unit $441.92
========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
THE FIRST TRUST SPECIAL SITUATIONS TRUST, SERIES 51
THE CMO UNIT INVESTMENT TRUST, SERIES 2
PORTFOLIO
July 31, 1997
The portfolio consists of the following collateralized mortgage obligations,
all of which are Support Class Bonds.
<TABLE>
<CAPTION>
Final
Name of issuer and Coupon distribution Principal Market
title of security rate date amount value
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation Multiclass
Mortgage Participation
Certificates (Guaranteed),
Series, 1434-V 7.50% 12/15/2022 $106,076 105,418
Federal National Mortgage
Association Guaranteed
REMIC Pass-Through
Certificates, Fannie Mae
REMIC Trust, 1992-215,
Class 215-L 7.75 12/25/2022 509,000 510,425
____________________
$615,076 615,843
====================
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
THE FIRST TRUST SPECIAL SITUATIONS TRUST, SERIES 51
THE CMO UNIT INVESTMENT TRUST, SERIES 2
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended July 31,
1997 1996 1995
<S> <C> <C> <C>
Interest income $49,735 56,693 75,660
Expenses:
Trustee's fees and related
expenses (3,737) (5,796) (4,959)
Evaluator's fees (193) (63) (298)
Supervisory fees (361) (410) (917)
______________________________________
Investment income - net 45,444 50,424 69,486
Net gain (loss) on investments:
Net realized gain (loss) (273) 3,445 (11,581)
Change in net unrealized
appreciation/depreciation 25,311 (23,392) 65,114
______________________________________
25,038 (19,947) 53,533
______________________________________
Net increase in net assets
resulting from operations $70,482 30,477 123,019
======================================
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
THE FIRST TRUST SPECIAL SITUATIONS TRUST, SERIES 51
THE CMO UNIT INVESTMENT TRUST, SERIES 2
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year ended July 31,
1997 1996 1995
<S> <C> <C> <C>
Net increase in net assets
resulting from operations:
Investment income - net $45,444 50,424 69,486
Net realized gain (loss) on
investments (273) 3,445 (11,581)
Change in net unrealized
appreciation/depreciation
on investments 25,311 (23,392) 65,114
_______________________________________
70,482 30,477 123,019
Units redeemed (113, 325 and
694 in 1997, 1996 and
1995, respectively):
Principal portion (48,981) (145,964) (298,884)
Net interest accrued (100) (352) (1,283)
_______________________________________
(49,081) (146,316) (300,167)
Distributions to unit holders:
Investment income - net (46,018) (52,494) (66,644)
Principal from investment
transactions - - (11,404)
_______________________________________
(46,018) (52,494) (78,048)
_______________________________________
Total increase (decrease) in
net assets (24,617) (168,333) (255,196)
Net assets:
At the beginning of the
year 639,324 807,657 1,062,853
_______________________________________
At the end of the year
(including distributable
funds (deficit) applicable
to Trust units of $(1,136),
$(113) and $(6,966) at
July 31, 1997, 1996 and
1995, respectively) $614,707 639,324 807,657
=======================================
Trust units outstanding at the
end of the year 1,391 1,504 1,829
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
THE FIRST TRUST SPECIAL SITUATIONS TRUST, SERIES 51
THE CMO UNIT INVESTMENT TRUST, SERIES 2
NOTES TO FINANCIAL STATEMENTS
1. Significant accounting policies
Security valuation -
Securities are stated at values as determined by First Trust Advisors L.P., an
affiliate of the Sponsor. The values of the securities are based on (1)
current bid prices for the securities obtained from dealers or brokers who
customarily deal in securities comparable to those held by the Trust, (2)
current bid prices for comparable securities, (3) appraisal or (4) any
combination of the above.
Security cost -
The Trust's cost of its portfolio is based on the offering prices of the
securities on the Date of Deposit, January 13, 1993. The premium or discount
is not being amortized. Realized gain (loss) from security transactions is
reported on an identified cost basis. Sales of securities are recorded on the
trade date.
Federal income taxes -
The Trust is not taxable for Federal income tax purposes. Each unit holder is
considered to be the owner of a pro rata portion of the Trust and,
accordingly, no provision has been made for Federal income taxes.
Expenses of the Trust -
The Trustee's fees are $.90 per unit outstanding, exclusive of expenses of the
Trust. Prior to September 1, 1995, the Trustee was United States Trust
Company of New York; effective September 1, 1995, The Chase Manhattan Bank
succeeded United States Trust Company of New York as Trustee. An annual fee
of $.30 per $1,000 principal amount of securities outstanding is payable to
the Evaluator. Additionally, the Trust pays all related expenses of the
Trustee, recurring financial reporting costs and an annual supervisory fee
payable to an affiliate of the Sponsor.
Distributions to unit holders -
Distributions to unit holders of investment income - net and principal are
presented on the accrual basis.
2. Unrealized appreciation and depreciation
An analysis of net unrealized appreciation at July 31, 1997 follows:
<TABLE>
<S> <C>
Unrealized appreciation $24,416
Unrealized depreciation -
_______
$24,416
=======
</TABLE>
<PAGE>
3. Other information
Cost to investors -
The cost to initial investors of units of the Trust was based on the aggregate
offering price of the securities on the date of an investor's purchase, plus a
sales charge of 5.5% of the public offering price which is equivalent to
approximately 5.820% of the net amount invested.
Selected data per unit of the Trust
outstanding throughout each year -
<TABLE>
<CAPTION>
Year ended July 31,
1997 1996 1995
<S> <C> <C> <C>
Interest income $34.26 34.13 38.74
Expenses (2.96) (3.77) (3.16)
_______________________________________
Investment income - net 31.30 30.36 35.58
Distributions to unit holders:
Investment income - net (31.68) (31.68) (31.80)
Principal from investment
transactions - - (4.52)
Net gain (loss) on investments 17.22 (15.18) 21.05
_______________________________________
Total increase (decrease)
in net assets 16.84 (16.50) 20.31
Net assets:
Beginning of the year 425.08 441.58 421.27
_______________________________________
End of the year $441.92 425.08 441.58
=======================================
</TABLE>
<PAGE>
THE FIRST TRUST SPECIAL SITUATIONS TRUST, SERIES 51
THE CMO UNIT INVESTMENT TRUST, SERIES 2
PART ONE
Must be Accompanied by Part Two
_____________________
P R O S P E C T U S
_____________________
SPONSOR: Nike Securities L.P.
1001 Warrenville Road
Lisle, Illinois 60532
(800) 621-1675
TRUSTEE: The Chase Manhattan Bank
4 New York Plaza, 6th Floor
New York, New York 10004-2413
LEGAL COUNSEL Chapman and Cutler
TO SPONSOR: 111 West Monroe Street
Chicago, Illinois 60603
LEGAL COUNSEL Carter Ledyard & Milburn
TO TRUSTEE: 2 Wall Street
New York, New York 10005
INDEPENDENT Ernst & Young LLP
AUDITORS: Sears Tower
233 South Wacker Drive
Chicago, Illinois 60606
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, securities in any jurisdiction to any person to whom it is not
lawful to make such offer in such jurisdiction.
This Prospectus does not contain all the information set forth in the
registration statement and exhibits relating thereto, which the Trust has
filed with the Securities and Exchange Commission, Washington, D.C., under the
Securities Act of 1933 and the Investment Company Act of 1940, and to which
reference is hereby made.
THE CMO UNIT INVESTMENT TRUST SERIES
The First Trust (registered trademark) Special Situations Trust
PROSPECTUS
Part Two NOTE: THIS PART TWO PROSPECTUS MAY
Dated November 28, 1997 ONLY BE USED WITH PART ONE
The Trust. The First Trust Special Situations Trust (the "Trusts" and
each a "Trust") are unit investment trusts consisting of a fixed
portfolio of taxable collateralized mortgage obligations ("CMOs"). The
estimated average life of each Trust is set forth in Part One for each
Trust. CERTAIN TRUSTS ARE COMPRISED PRINCIPALLY OF "SUPPORT CLASS"
BONDS. FOR A DISCUSSION OF THE RISKS INHERENT IN AN INVESTMENT IN
SUPPORT CLASS BONDS, SEE "WHAT IS THE FIRST TRUST SPECIAL SITUATIONS
TRUST?-THE SECURITIES-LIFE OF THE SECURITIES AND OF THE TRUSTS." AN
INVESTMENT IN SUCH A TRUST MAY NOT BE SUITABLE FOR AN INVESTOR WHO SEEKS
A FIXED RATE OF RETURN FOR A SPECIFIED PERIOD OF TIME. THE RATE OF
PREPAYMENT ON THE UNDERLYING MORTGAGES OF SUPPORT CLASS CMOs IN A TRUST
WILL CAUSE FLUCTUATION, WHICH MAY BE SUBSTANTIAL, BOTH IN THE AMOUNT OF
INCOME EARNED BY THE TRUST AND IN THE TIMING OF THE PRINCIPAL
DISTRIBUTIONS. THIS FLUCTUATION MAY ALSO ADVERSELY AFFECT THE REPURCHASE
AND REDEMPTION PRICES OF, AND TOTAL RETURN FROM, UNITS OF SUCH A TRUST.
The Objectives of each Trust are monthly distributions of interest and
principal and conservation of capital through an investment in a
portfolio of CMOs.
Attention Foreign Investors: Your interest income from the Trusts may be
exempt from Federal withholding taxes if you are not a United States
citizen or resident and certain conditions are met. See "What is the
Federal Tax Status of Unit Holders?"
The Trusts may be well suited for purchase by Individual Retirement
Accounts, Keogh Plans, pension funds and other tax-deferred retirement
plans. The minimum purchase is 1 Unit. Investors should consult with
their tax advisers before investing. See "Why are Investments in the
Trusts Suitable for Retirement Plans?"
For Information on Estimated Current Return and Estimated Long-Term
Return, see "Special Information" appearing in Part One for each Trust.
Public Offering Price The secondary market Public Offering Price per
Unit will be equal to the aggregate bid price of the Securities in the
portfolio of a Trust divided by the number of Units outstanding, plus a
sales charge as indicated in Part One for each Trust. The sales charge
is reduced on a graduated scale for sales involving at least that amount
specified in Part One for each Trust. See "How is the Public Offering
Price Determined?" for the method of evaluation.
Monthly Distributions of principal, prepayments of principal, if any,
and interest received by a Trust will be paid in cash unless the Unit
holder elects to have them automatically reinvested as described herein.
See "How Can Distributions to Unit Holders be Reinvested?" Investors, at
the time of purchase, will have the ability to designate that only
principal payments (including prepayments) or only interest payments or
both are to be reinvested. Monthly distributions will be made on those
dates specified in Part One for each Trust.
The Sponsor, although not obligated to do so, intends to maintain a
market for the Units at prices based upon the aggregate bid price of the
Securities in the Trusts. In the absence of such a market, a Unit holder
will nonetheless be able to dispose of the Units through redemption at
prices based upon the bid prices of the underlying Securities (see "How
May Units be Redeemed?").
BOTH PARTS OF THE PROSPECTUS SHOULD BE RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Page 1
THE CMO UNIT INVESTMENT TRUST SERIES
The First Trust Special Situations Trust
What is the First Trust Special Situations Trust?
The First Trust Special Situations Trust is a series of investment
companies created by the Sponsor under the name of The First Trust
Special Situations Trust, all of which are generally similar but each of
which is separate and is designated by a different series number (the
"Trusts" and each a "Trust"). Each Series consists of an underlying
separate unit investment trust consisting of a portfolio containing
taxable collateralized mortgage obligations ("CMOs"). Each Trust was
created under the laws of the State of New York pursuant to a Trust
Agreement (the "Indenture"), dated the Initial Date of Deposit, with
Nike Securities L.P., as Sponsor, The Chase Manhattan Bank, as Trustee,
First Trust Advisors L.P., as Portfolio Supervisor and Evaluator.
The objectives of each Trust are monthly distributions of interest and
principal and conservation of capital through an investment in a
portfolio of Securities (the "Portfolio"). Because certain of the
Securities from time to time may be prepaid or will mature in accordance
with their terms or may be sold under circumstances described herein,
the Trusts are not expected to retain their present size and
composition. Units will remain outstanding until redeemed upon tender to
the Trustee by any Unit holder (which may include the Sponsor) or until
the termination of the Trusts pursuant to the Indenture.
In selecting Securities for deposit in the Trusts, the following
factors, among others, were considered by the Sponsor: (i) the types of
such CMOs available; (ii) the prices and yields of such Securities
relative to other comparable securities, including the extent to which
such securities are trading at a premium or at a discount from par;
(iii) the estimated average lives of the Securities; (iv) the payment
provisions applicable to the Securities; and (v) whether the Securities
were issued after July 18, 1984. See "Portfolio" appearing in Part One
for each Trust for information with respect to the Securities in the
Trusts.
An investment in Units of a Trust should be made with an understanding
of the risks which an investment in fixed rate long-term debt
obligations may entail, including the risk that the value of a Portfolio
and hence of the Units will decline with increases in interest rates.
The value of the underlying Securities will fluctuate inversely with
changes in interest rates. In addition, the potential for appreciation
of the underlying Securities, which might otherwise be expected to occur
as a result of a decline in interest rates, may be limited or negated by
increased principal prepayments in respect of the underlying mortgages.
The high inflation of the early 1980s, together with the fiscal measures
adopted to attempt to deal with it, has resulted in wide fluctuations in
interest rates and, thus, in the value of fixed rate long-term debt
obligations generally. The Sponsor cannot predict whether such
fluctuations will continue in the future.
The Portfolios of the Trusts may contain Securities which were acquired
at a market discount. Such Securities trade at less than par value
because the interest rates thereon are lower than interest rates on
comparable debt securities being issued at currently prevailing interest
rates. If such interest rates for newly issued and otherwise comparable
securities increase, the market discount of previously issued securities
will become greater, and if such interest rates for newly issued
comparable securities decline, the market discount of previously issued
securities will be reduced, other things being equal. Investors should
also note that the value of securities purchased at a market discount
will increase in value faster than securities purchased at a market
premium if interest rates decrease. Conversely, if interest rates
increase the value of securities purchased at a market discount will
decrease faster than securities 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. Prepayments of principal on securities
purchased at a market discount will result in some gain on investment.
Market discount attributable to interest changes does not indicate a
lack of market confidence in the issue. Neither the Sponsor nor the
Trustee shall be liable in any way for any default, failure or defect in
any of the Securities.
The Portfolios of the Trusts may contain Securities which were acquired
at a market premium. Such Securities trade at more than par value
because the interest coupons thereon are higher than interest coupons on
Page 2
comparable debt securities being issued at currently prevailing interest
rates. If such interest rates for newly issued and otherwise comparable
securities decrease, the market premium of previously issued securities
will be increased, and if such interest rates for newly issued
comparable securities increase, the market premium of previously issued
securities will be reduced, other things being equal. The current
returns of securities trading at a market premium are initially higher
than the current returns of comparably rated debt securities of a
similar type issued at currently prevailing interest rates because
premium securities tend to decrease in market value as they approach
maturity when the face amount becomes payable. Because part of the
purchase price is thus returned not at maturity but through current
income payments, early redemption of a premium security at par or early
prepayments of principal will result in a reduction in yield.
Prepayments of principal on securities purchased at a market premium are
more likely than prepayments on securities purchased at par or at a
market discount and the level of prepayments will generally increase if
interest rates decline. Prepayments of principal on securities purchased
at a market premium will result in some loss on investment. Market
premium attributable to interest changes does not indicate market
confidence in the issue.
The Securities. The Securities in the Trusts may consist of one or more
of several classes of CMOs, including:
Standard Bonds: This class of CMO accrues interest at a fixed rate on
its outstanding principal amount. The interest is payable monthly,
quarterly or semi-annually as specified. Holders of Standard Bonds
receive only interest until all CMOs issued in the same series with
earlier final distribution dates have been paid in full.
Compound Interest Bonds: Interest accrues upon this class of CMO but is
not payable until all classes of CMOs issued in the same series with
earlier final distribution dates have been paid in full. Interest that
accrues but is not paid is added to the principal amount of the Compound
Interest Bonds.
Adjustable Rate Bonds: Interest rates on these classes of CMOs may
increase or decrease at one or more dates in the future according to the
documentation governing their issuance.
Floating Rate Bonds: Interest rates on these classes of CMOs vary
directly or inversely (although not necessarily proportionately) to an
interest rate index. The interest rate is usually capped to limit the
extent to which it is required to over-collateralize the CMOs in the
series with mortgage backed securities in order to ensure that there is
sufficient cash flow to service all the classes of CMOs in that series.
Support Class Bonds and Planned Amortization Bonds or Targeted
Amortization Bonds: These classes of CMOs receive payments of principal
according to a planned schedule to the extent that prepayments on the
underlying mortgage backed securities occur within a broad time period
(the "Protection Period"). The principal is reduced only in specified
amounts at specified times resulting in greater predictability of
payment for the Planned Amortization Bonds or Targeted Amortization
Bonds. IF PREPAYMENTS ON THE UNDERLYING MORTGAGE BACKED SECURITIES OCCUR
AT A RATE GREATER OR LESS THAN THAT PROVIDED FOR BY THE PROTECTION
PERIOD, THEN THE EXCESS OR DEFICIENCY OF CASH FLOWS GENERATED IS
ABSORBED BY THE OTHER SUPPORT CLASSES OF CMOs IN THE PARTICULAR SERIES
UNTIL THE PRINCIPAL AMOUNT OF EACH OF THE OTHER SUPPORT CLASSES HAS BEEN
PAID IN FULL, RESULTING IN LESS PREDICTABILITY FOR THOSE OTHER SUPPORT
CLASSES. The principal reduction schedule of the Planned Amortization
Bonds or Targeted Amortization Bonds may be determined according to an
interest rate index. If the index rises or falls, then more or less,
respectively, of the payments on the underlying mortgage backed
securities will be applied to amortize the Planned Amortization Bonds or
Targeted Amortization Bonds.
Principal Only Bonds: This class of stripped CMO has the right to all
principal payments from the underlying mortgage backed securities.
Principal Only Bonds sell at a deep discount. The return on a Principal
Only Bond increases the faster prepayments are received at par. The
return on a Principal Only Bond decreases if the rate of prepayment is
slow.
Interest Only Bonds: This class of CMO has the right to receive only
payments of interest from the pool of underlying mortgage backed
securities. Interest Only Bonds have only a notional principal amount
and are entitled to no payments of principal. The Interest Only Bond
sells at a substantial premium and therefore the return on an Interest
Only Bond increases as the rate of prepayment decreases because the
notional principal amount upon which interest accrues remains large for
a longer period of time.
A Trust may also invest in CMOs which contain or exhibit combinations of
the foregoing classes of CMOs.
Page 3
Ginnie Maes, Fannie Maes or Freddie Macs, guaranteed by GNMA, FNMA and
FHLMC, respectively, will be pledged as collateral to secure the payment
of principal and interest on CMOs in a Trust.
GNMA. The Government National Mortgage Association is a wholly-owned
corporate instrumentality of the United States within the Department of
Housing and Urban Development. The National Housing Act of 1943, as
amended, authorizes GNMA to guarantee the timely payment of the
principal of, and interest on, certificates which are based on and
backed by a pool of mortgage loans insured by the Federal Housing
Administration ("FHA"), or guaranteed by the Veteran's Administration
("VA"). In order to meet its obligations under such guaranty, GNMA may
issue its general obligations to the United States Treasury in an amount
which is at any time sufficient to enable GNMA, with no limitations as
to amount, to perform its obligations under its guaranty. In the event
it is called upon at any time to make good its guaranty, GNMA has the
full power and authority to borrow from the Treasury of the United
States, if necessary, amounts sufficient to make payments of principal
and interest on the Ginnie Maes.
Ginnie Maes. Ginnie Maes are mortgage backed securities of the "fully
modified pass-through" type, the terms of which provide for timely
monthly payments by the issuers to the registered holders of their pro
rata shares of the scheduled principal payments, whether or not
collected by the issuers, on account of the mortgages backing such
Ginnie Maes, plus any prepayment of principal of such mortgages
received, and interest (net of servicing and guarantee charges) on the
aggregate unpaid principal balance of such Ginnie Maes, whether or not
interest on account of such mortgages has been collected by the issuers.
Ginnie Maes will be guaranteed as to timely payment of principal and
interest by GNMA. 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.
FNMA. The Federal National Mortgage Association is a Federally
chartered, privately owned corporation organized and existing under the
Federal National Mortgage Association Charter Act. It is the nation's
largest supplier of residential mortgage funds. FNMA was originally
established in 1938 as a United States Government agency to provide
supplemental liquidity to the mortgage market but was transformed into a
stockholder owned and privately managed corporation by legislation
enacted in 1968. The Secretary of Housing and Urban Development
exercises general regulatory power over FNMA. FNMA nevertheless
maintains certain relationships with the United States Government.
Although thirteen members of its board of directors are authorized to be
elected by the shareholders, five are appointed by the President of the
United States. The President can also remove board members, including
those elected by the shareholders. Although the Secretary of the
Treasury has discretionary authority to lend FNMA up to $2.25 billion
outstanding at any time, neither the United States nor any agency
thereof is obligated to finance FNMA's obligations or to assist FNMA in
any other matter, and obligations issued by FNMA are not guaranteed by
and do not constitute a debt or obligation of the United States or of
any agency or instrumentality thereof other than FNMA. FNMA provides
funds to the mortgage market primarily by purchasing home mortgage loans
from local lenders, thereby replenishing funds for additional lending.
FNMA acquires funds to purchase home mortgage loans from many capital
market investors which may not ordinarily invest in mortgages, thereby
expanding the total amount of funds available for housing.
Fannie Maes. Fannie Maes are certificates of beneficial interest
evidencing pro rata undivided ownership interests in pools of
residential mortgages either previously owned by FNMA or purchased by it
in connection with the formation of a pool. FNMA guarantees the full and
timely payment of principal and interest (adjusted to the pass-through
rate) on the mortgage loans in the pool, whether or not received by FNMA
or recovered by it in foreclosure. If FNMA were unable to fulfill its
guaranty, distributions to holders of Fannie Maes would consist solely
of payments and other recoveries upon the underlying mortgages, and,
accordingly, delinquencies and defaults would diminish distributions to
the holders. The obligations of FNMA under its guaranty are solely those
of FNMA and are not backed by the full faith and credit of the United
States. Moreover, neither the United States nor any of its agencies is
obligated to finance the operations of FNMA or to assist it.
FHLMC. The Federal Home Loan Mortgage Corporation is a corporate
instrumentality of the United States created pursuant to the Emergency
Home Finance Act of 1970 (the "FHLMC Act"). FHLMC's common stock is
owned by the Federal Home Loan Banks. FHLMC was established primarily
for the purpose of increasing the availability of mortgage credit for
the financing of urgently needed housing. It seeks to provide an
Page 4
enhanced degree of liquidity for residential mortgage investments
primarily by assisting in the development of secondary markets for
conventional mortgages. The principal activity of FHLMC currently
consists of the purchase of first lien conventional mortgage loans or
participation interests in such mortgage loans and the resale of the
mortgage loans so purchased in the form of mortgage securities,
primarily Freddie Macs. All mortgage loans purchased by FHLMC must meet
certain standards set forth in the FHLMC Act. Mortgages retained by
FHLMC are financed with debt and equity capital.
Freddie Macs. Freddie Macs represent undivided interests in a group of
mortgages (a "FHLMC Certificate Group") purchased by FHLMC. Each
mortgage loan must meet the applicable standards set forth in the FHLMC
Act. A FHLMC Certificate Group may include whole loans, participation
interests in whole loans and undivided interest in whole loans or
participations comprising another FHLMC Certificate Group. There are two
types of Freddie Macs commonly referred to as "Original PCs" and "Gold
PCs." In the case of Original PCs, FHLMC guarantees the timely payment
of interest, at the rate provided for by Freddie Macs, on the unpaid
principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate Group represented by the Freddie Macs, whether or not
received, and also guarantees collection of all principal on the
underlying mortgage loans, without any offset or deduction, but does not
guarantee the timely payment of scheduled principal. Unlike Original
PCs, Gold PCs guarantee the timely payment of both interest and
scheduled principal, thus producing a more predictable payment stream.
Gold PCs also offer a shorter payment delay than that of conventional
mortgage pass-through securities (FHLMC advances payment to Gold PC
holders 14 days after the borrower's scheduled principal and interest
payments are due), and a shorter period (approximately 45 days) between
the first day of the month in which the Gold PCs are issued and the
initial payment date. Freddie Macs are not guaranteed by the United
States or by any Federal Home Loan Bank and do not constitute debts or
obligations of the United States or any Federal Home Loan Bank. The
obligations of FHLMC under its guarantee are obligations solely of FHLMC
and are not backed by, nor entitled to, the full faith and credit of the
United States. If FHLMC were unable to fulfill its guaranty,
distributions to holders of Freddie Macs would consist solely of
payments and other recoveries upon the underlying mortgages, and,
accordingly, delinquencies and defaults would diminish distributions to
the holders.
Liquidity. The Securities in the Trusts have been registered under, or
are exempt from registration under, the Securities Act of 1933 and,
therefore, may be sold by the Trusts at any time to provide funds for
purposes of redemption of Units. However, the Securities are generally
not listed on a national securities exchange or on the National
Association of Securities Dealers Automated Quotation System, Inc.
Whether or not the Securities are listed, the principal trading market
for the Securities will generally be in the over-the-counter market. As
a result, the existence of a liquid trading market for the Securities
may depend on whether dealers will make a market in the Securities.
There can be no assurance that a market will be made for any of the
Securities, that any market made for the Securities will be maintained
or of the liquidity of the Securities in any markets made. The Trusts
may be restricted under the Investment Company Act of 1940 from selling
Securities to the Sponsor. The price at which the Securities may be sold
to meet redemptions and the value of the Trusts will be adversely
affected if trading markets for the Securities are limited or absent.
However, taking into account the foregoing and other factors, the
Sponsor believes that the nature of the GNMA, FNMA or FHLMC guarantees
or other enhancement features of any Securities, and the nature of the
collateral securing payments of principal and interest due on the
Securities make the Securities adequately marketable for purposes of
redemptions of Units by the Trustee. See "How May Units be Redeemed?"
Limited Assets and Limited Liability. Except as indicated under
"Portfolio" appearing in Part One for each Trust and except for any
Securities that were issued by GNMA, FNMA or FHLMC, the issuers of the
Securities are limited purpose corporations, trusts or other entities
("Limited Purpose Issuers"), organized solely for the purpose of issuing
CMOs collateralized by Ginnie Maes, Fannie Maes, Freddie Macs, mortgage
loans, or certificates or other participations evidencing an interest in
mortgage loans. None of the securities (including the Securities
deposited in the Trusts) are guaranteed by the parent company or any
other affiliate of any Limited Purpose Issuer. Consequently, holders of
these securities (including the Trusts) must rely upon payments on the
Ginnie Maes, Fannie Maes, Freddie Macs, the mortgage loans or other
certificates or participations evidencing an interest in mortgage loans,
and upon any credit enhancement and any other collateral securing the
Page 5
securities (including the Securities deposited in the Trusts) for the
payment of principal and interest due on the securities. If the
collateral securing the securities of each Limited Purpose Issuer is
insufficient to make payments on those securities, it is unlikely that
any other asset of the Limited Purpose Issuer will be available for
payment of the deficiency. The collateral securing the CMOs of each
Issuer (including the Securities deposited in the Trusts) will be held
by the CMO trustee as security for the CMOs of that Issuer. Although
payment of principal of and interest on Ginnie Maes, Fannie Maes and
Freddie Macs securing certain of the Securities is guaranteed by GNMA,
FNMA and FHLMC, respectively, the CMOs (including the Securities
deposited in the Trusts except for any Securities which have been issued
directly or indirectly by GNMA, FNMA or FHLMC) represent obligations
solely of the Issuers and are not insured or guaranteed by GNMA, FNMA or
FHLMC or any other governmental agency. The Units of the Trusts are also
not guaranteed by any of GNMA, FNMA or FHLMC, the United States or any
of its agencies. A default with respect to the securities of a
particular Issuer (including the Securities of an Issuer deposited in
the Trusts) may not necessarily result from a corresponding default with
respect to the underlying Ginnie Maes, Fannie Maes, Freddie Macs or any
credit enhancement.
For any Securities that have been issued by issuers other than GNMA,
FNMA or FHLMC, the Sponsor has been informed that each issuer of such
Securities has received an opinion of counsel or similar assurances to
the effect that it is not an investment company or that it has been
exempted from the definition of an investment company by order of the
Securities and Exchange Commission.
Investors should note that some of the CMOs in the Trusts have been
issued by trusts, corporations or other entities that have elected to be
treated as Real Estate Mortgage Investment Conduits ("REMICs"). As such,
Unit holders will be required to include in income their respective pro
rata share of interest on each such Security (whether or not the
Security has original issue discount) as interest accrues, whether or
not the Unit holder is an accrual method taxpayer.
Life of the Securities and of the Trusts. CMOs are generally issued as a
series of different classes. An issue of CMOs tends to be backed by a
larger number of mortgages than Ginnie Maes, Fannie Maes or Freddie
Macs, thus allowing greater statistical prediction of prepayment
characteristics. Interest and principal payments on the mortgages
underlying any series will first be applied to meet the interest payment
requirements of each class in the series other than any class in respect
of which interest accrues but is not paid or any principal only class.
Then, principal payments on the underlying mortgages are generally
applied to pay the principal amount of the class that has the earliest
maturity date. Once that class is retired, the principal payments on the
underlying mortgages are applied to the class with the next earliest
maturity date. This is repeated until all classes are paid. Therefore,
while each class of CMOs remains subject to prepayment as the underlying
mortgages prepay, structuring several classes of CMOs in the stream of
principal payments generally allows a closer estimate of the period of
time when any one class is likely to be repaid. The estimate can be even
closer with a class of Planned Amortization Bonds or Targeted
Amortization Bonds. The amortization schedule for these CMOs is
structured so that, at specified prepayment rates within a relatively
wide range, their principal will be repaid at specified times and in
specified amounts. However, if any series of CMOs contains a class of
Planned Amortization Bonds or Targeted Amortization Bonds, then the
other classes in that series may not be retired in an order of priority
determined strictly with reference to their maturity dates.
These other classes are often referred to as "support classes" because
their function is to support the amortization schedule of the Planned
Amortization Bonds or Targeted Amortization Bonds by absorbing the
prepayment risks associated with an investment in a CMO. IF THE RATE OF
PREPAYMENTS ON THE UNDERLYING MORTGAGES IS FASTER THAN ASSUMED, THEN
CLASSES WITH MATURITY DATES LATER THAN THE PLANNED AMORTIZATION BONDS OR
TARGETED AMORTIZATION BONDS MAY BE RETIRED EARLIER THAN ESTIMATED TO
ENSURE THAT THE PLANNED AMORTIZATION BONDS OR TARGETED AMORTIZATION
BONDS RECEIVE THE PRINCIPAL PAYMENTS REQUIRED BY THEIR AMORTIZATION
SCHEDULE. SIMILARLY, IF THE RATE OF PREPAYMENTS IS SLOWER THAN
ANTICIPATED, EARLIER SUPPORT CLASSES MAY BE RETIRED LATER THAN
ESTIMATED. HENCE, SUPPORT CLASSES OF A SERIES THAT CONTAINS PLANNED
AMORTIZATION BONDS OR TARGETED AMORTIZATION BONDS HAVE LESS PREDICTABLE
PREPAYMENT CHARACTERISTICS THAN CLASSES OF A SERIES THAT DOES NOT. THIS
LACK OF PREDICTABILITY REGARDING PREPAYMENTS ALSO CAUSES SUPPORT CLASS
BONDS TO HAVE GREATER MARKET VALUE FLUCTUATION THAN OTHER CLASSES OF A
CMO AND CAUSES FLUCTUATION, WHICH MAY BE SUBSTANTIAL, BOTH IN THE AMOUNT
OF INCOME EARNED BY A TRUST CONTAINING SUCH SECURITIES AND IN THE TIMING
OF THE PRINCIPAL DISTRIBUTIONS FROM SUCH A TRUST. TO THE EXTENT SUCH
Page 6
SECURITIES ARE CONTAINED IN A TRUST THIS FLUCTUATION MAY ADVERSELY
AFFECT THE REPURCHASE AND REDEMPTION PRICES OF, AND TOTAL RETURN FROM
THE UNITS. See "Portfolio" appearing in Part One for each Trust for the
number of Planned Amortization Bonds, Target Amortization Bonds and
Support Class Bonds, if any, contained in a Trust. The rate of
prepayment on the underlying mortgages of a CMO will most likely decline
as interest rates increase. If the rate of prepayment declines, the
weighted average life of the Support Class Bonds will most likely
increase and, in some cases, the decline will impact the yield and
market value of these Securities. This may cause an investor's principal
in a Support Class Bond to be outstanding for a longer period of time
than initially anticipated. Conversely, if interest rates decline,
prepayments on the underlying mortgages will most likely increase, and
the weighted average life of the Support Class Bonds may be shorter than
anticipated. A holder of a Support Class Bond in these situations may be
unable to reinvest the proceeds of these principal distributions at an
effective interest rate equal to the specified coupon rate on the
original Support Class Bond. THEREFORE, AN INVESTOR EXPECTING TO EARN A
FIXED RETURN FOR A FIXED NUMBER OF YEARS MAY FIND THE LIFE OF A SUPPORT
CLASS INVESTMENT DECREASES AS INTEREST RATES FALL AND INCREASES AS THEY
RISE.
In contrast, with Ginnie Maes, Fannie Maes or Freddie Macs, estimation
of repayment is more difficult as the cash flow on the underlying
mortgages is simply passed through on a pro rata basis to the holders.
However, any estimate of the repayment period for any class of CMO is
based upon certain assumptions as to the repayment speed of the
underlying mortgages, which assumptions may prove to be inaccurate over
time. In addition, the prepayment characteristics of the CMOs which are
not guaranteed by GNMA, FNMA or FHLMC may be influenced by factors that
are different than those for Ginnie Maes, Fannie Maes or Freddie Macs.
See "What are Estimated Current Return and Estimated Long Term Return?"
ALL OF THE MORTGAGES IN THE POOLS BACKING THE SECURITIES IN A TRUST ARE
SUBJECT TO PREPAYMENT WITHOUT ANY SIGNIFICANT PREMIUM OR PENALTY AT THE
OPTION OF THE MORTGAGORS (I.E., THE HOMEOWNERS). BECAUSE CERTAIN OF THE
SECURITIES FROM TIME TO TIME MAY BE REDEEMED OR PREPAID OR WILL MATURE
IN ACCORDANCE WITH THEIR TERMS OR MAY BE SOLD UNDER CERTAIN
CIRCUMSTANCES DESCRIBED HEREIN, NO ASSURANCE CAN BE GIVEN THAT A TRUST
WILL RETAIN FOR ANY LENGTH OF TIME ITS PRESENT SIZE AND COMPOSITION.
While the mortgages on the 1 to 4 family dwellings underlying the
Securities are amortized over a period of up to 30 years, it has been
the experience of the mortgage industry that the average life of
comparable mortgages, owing to prepayments, is considerably less.
Prepayments on mortgages are commonly measured relative to a prepayment
standard or model. The prepayment model of the Public Securities
Association (the "Prepayment Model") represents an assumed rate of
prepayment each month relative to the then outstanding principal balance
of a pool of new mortgage loans. 100% of the Prepayment Model assumes
prepayment rates of 0.2% per annum of the then outstanding principal
balance of such mortgage loans in the first month of the life of the
mortgage loans and an additional 0.2% per annum in each month thereafter
until the 30th month. Beginning in the 30th month and in each month
thereafter during the life of the mortgage loans, 100% of the Prepayment
Model assumes a constant prepayment rate of 6% per annum. The principal
repayment behavior of any individual mortgage will likely vary from
these assumptions. The extent of this variation will depend on a variety
of factors, including the relationship between the coupon rate on a
mortgage and prevailing mortgage origination rates. As prevailing
mortgage origination rates increase in relationship to a mortgage coupon
rate, the likelihood of prepayment of that mortgage decreases.
Conversely, during periods in which prevailing mortgage origination
rates are significantly less than a mortgage coupon rate, prepayment of
that mortgage becomes increasingly likely. Research analysts use complex
formulae to scrutinize the prepayments of mortgage pools in an attempt
to predict more accurately the average life of any particular class of
mortgage backed bonds. The basis for the calculation of estimated
average life and the relationship of this calculation for Estimated Long
Term Return is more fully described under "What are Estimated Current
Return and Estimated Long Term Return?"
Generally speaking, a number of factors, including mortgage market
interest rates and homeowners' mobility, will affect the average life of
the Ginnie Maes, Fannie Maes, Freddie Macs or mortgages which back the
Securities in a Trust and, accordingly, there can be no assurance that
the prepayment levels which will actually be realized will conform to
the estimated levels. Changes in prepayment patterns, as reported by
Page 7
each of GNMA, FNMA, FHLMC and other mortgage lenders on a periodic
basis, if generally applicable to the mortgage pools related to specific
CMOs, could influence yield assumptions used in pricing the Securities.
Shifts in prepayment patterns are influenced by changes in housing
cycles and mortgage refinancing and are also subject to certain
limitations on the gathering of the data. It is impossible to predict
how new statistics will affect the yield assumptions that determine
mortgage industry norms and pricing of CMOs. Moreover, there is no
assurance that the pools of mortgage loans relating to the Securities in
a Trust will conform to prepayment experience as reported by GNMA, FNMA
or FHLMC on a periodic basis or the prepayment experience of other
mortgage lenders.
While the value of CMOs generally fluctuates inversely with changes in
interest rates, it should also be noted that the potential for
appreciation on CMOs, 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 (except for
Principal Only Bonds whose yield increases with the speed at which
payments of principal are received at par). Accordingly, the termination
of a Trust might be accelerated as a result of prepayments made as
described above. In addition, it is possible that, in the absence of a
secondary market for the Units or otherwise, redemption of Units may
occur in sufficient numbers to reduce a Trust to a size resulting in the
early termination of such Trust. Early termination of a Trust may have
important consequences to the Unit holders, 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. In addition, a capital gain or loss may result for
tax purposes from termination of a Trust.
What is the Rating of the Units?
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's") has rated Units of the Trusts
"AAA." This is the highest rating assigned by Standard & Poor's. See
"Description of Standard & Poor's Rating." The obtaining of this rating
by a Trust should not be construed as an approval of the offering of the
Units by Standard & Poor's or as a guarantee of the market value of a
Trust or the Units. Standard & Poor's has indicated that this rating is
not a recommendation to buy, hold or sell Units nor does it take into
account the extent to which expenses of a Trust or sales by a Trust of
Securities for less than the purchase price paid by the Trust will
reduce payment to Unit holders of the interest and principal required to
be paid on such Securities. There is no guarantee that the "AAA"
investment rating with respect to the Units will be maintained. Standard
& Poor's was compensated by the Sponsor for its services in rating Units
of a Trust.
What are Estimated Current Return and Estimated Long-Term Return?
Debt securities are customarily offered to investors on a "yield price"
basis (as contrasted to a "dollar price" basis) at the lesser of the
price as computed to maturity of such debt security or to an earlier
redemption date. Since Units of the Trusts are offered on a dollar price
basis, the estimated rate of return on an investment in Units of a Trust
is stated in terms of "Estimated Current Return" and "Estimated Long-
Term Return."
The Estimated Current Return and the Estimated Long-Term Return for each
Trust is as set forth under "Special Information" appearing in Part One
for each Trust. Estimated Current Return is computed by dividing the
Estimated Net Annual Interest Rate per Unit by the Public Offering Price
per Unit. The Estimated Net Annual Interest Rate per Unit will vary with
changes in fees and expenses of the Trustee and the Evaluator and with
the principal prepayment, redemption, maturity, exchange or sale of
Securities while the Public Offering Price will vary with changes in the
offering price of the underlying Securities. Therefore, there is no
assurance that the present Estimated Current Return will be realized in
the future. Estimated Current Return does not take into account timing
of distributions of income and other amounts (including delays in
distribution to Unit Holders), and it only partially reflects the
effects of premiums paid and discounts realized in the purchase price of
Units.
Unlike Estimated Current Return, Estimated Long-Term Return is a measure
Page 8
of the estimated return to the investor earned over the estimated life
of a Trust. The Estimated Long-Term Return represents an average of the
yields to estimated average life of the Securities in a Trust adjusted
to reflect expenses and sales charges. Estimated average life is an
essential factor in the calculation of Estimated Long-Term Return. When
a Trust has a shorter average life than is estimated, Estimated Long-
Term Return will be higher if the Trust contains Securities priced at a
discount and lower if the Securities are priced at a premium.
Conversely, when the Trust 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.
In order to calculate estimated average life, an estimated prepayment
rate for the remaining term of the mortgage pools underlying the
Securities must be determined. Each of the primary market makers in CMOs
has sophisticated computer models which are used to determine the
estimated prepayment rate for CMOs. Each computer model takes into
account a number of factors and assumptions including: actual prepayment
data reported for recent periods on a particular pool, the impact of
aging on the prepayment of mortgage pools, the current interest rate
environment, the coupon, the housing environment, historical trends on
CMOs as a group, geographical factors and general economic trends.
Because of differences in the weighting of such factors and assumptions,
such computer models maintained by the market makers in CMOs produce
estimated prepayment rates which vary. In connection with the deposit of
Securities in a Trust, the Sponsor, in determining an estimated
prepayment rate, has utilized information provided by a market maker in
CMOs which it believes to be reliable. However, it is possible that
another computer model might provide an estimated prepayment rate which
would prove over the life of the Securities to be more accurate. Once an
appropriate estimated prepayment rate is ascertained, an estimated
average life is calculated.
The estimated average life of any Security in a Trust involves the use
of a formula to apply the estimated rate of principal payments on the
mortgage pool to amortize the Ginnie Maes, Fannie Maes, Freddie Macs and
mortgage loans or certificates or other participations evidencing an
interest in mortgage loans which back the Securities and to retire the
principal amount of each CMO class of the same series, including the
Security itself, according to the specific principal reduction schedule
of that series. This results in an estimate of the point at which the
principal of any Security will begin to be paid and how long it will
take for the principal to be fully paid. If any Security was issued in a
series that contains Planned Amortization Bonds or Targeted Amortization
Bonds, then the estimated rate of principal payments on the underlying
mortgages will be applied to the other classes (Support Classes) in that
series in a manner that takes account of the amortization schedule of
the Planned Amortization Bonds or Targeted Amortization Bonds. This
results in less predictable prepayment characteristics for Support
Classes. The estimated average life for a Trust is subject to change
with alterations in the data used in any of the underlying assumptions.
The actual average lives of the Securities and the actual long term
returns will be different from the estimated average lives and the
estimated long term returns. In calculating Estimated Long-Term Return,
the average yield for the Portfolio is derived by weighting each
Security's yield by the market value of the Security and by the amount
of time remaining to its estimated average life. Once the average yield
on the Securities of a Trust is computed, this figure is then adjusted
for estimated expenses and the effect of the maximum sales charge paid
by investors. The Estimated Long-Term Return calculation does not take
into account certain delays in distributions of income and the timing of
other receipts and distributions on Units and may, depending on
maturities, over or understate the impact of sales charges. Both of
these factors may result in a lower return.
Both Estimated Current Return and Estimated Long-Term Return are subject
to fluctuation with changes in the composition of the Portfolio of a
Trust, principal payments and prepayments, changes in market value of
the underlying Securities and changes in fees and expenses, including
sales charges. Therefore, these returns can be materially different than
the figures set forth under "Special Information" appearing in Part One
of each Trust. In addition, return figures may not be directly
comparable to yield figures used to measure other investments, and since
return figures are based on certain assumptions and variables, the
actual returns received by a Unit holder may be higher or lower.
Payments received in respect of the mortgages underlying the Securities
in a Trust will consist of a portion representing interest and a portion
representing principal. Although the aggregate monthly payment made by
Page 9
the obligor on each mortgage remains constant (aside from optional
prepayments of principal), in the early years most of each such payment
will represent interest, while in later years, the proportion
representing interest will decline and the proportion representing
principal will increase. However, by reason of optional prepayments,
principal payments in the earlier years on the mortgages underlying the
Securities may be substantially in excess of those required by the
amortization schedules of such mortgages. Therefore, principal payments
in later years may be substantially less since the aggregate unpaid
principal balances of such underlying mortgages may have been greatly
reduced. To the extent that the underlying mortgages bearing higher
interest rates in a Trust are prepaid faster than the other underlying
mortgages, the Net Annual Interest Rate per Unit and the Estimated
Returns on the Units with respect to such Trust can be expected to
decline. Monthly payments to the Unit holders will reflect all of the
foregoing factors.
In order to acquire certain of the Securities contracted for by the
Sponsor for deposit in a Trust, it may be necessary to pay on the
settlement dates for delivery of such Securities amounts covering
accrued interest on such Securities which exceed the amounts furnished
by the Sponsor. The Trustee has agreed to pay for any amounts necessary
to cover any such excess and will be reimbursed therefor, without
interest, when funds become available from interest payments on the
particular Securities with respect to which such payments have been made.
Record Dates and Distribution Dates for monthly distributions of
principal and interest are those dates as set forth in Part One for each
Trust.
How is Accrued Interest Treated?
Accrued interest is the accumulation of unpaid interest on a security
from the last day on which interest thereon was paid. Interest on
Securities in each Trust is paid monthly. However, interest on the
Securities in a Trust is accounted for daily on an accrual basis.
Because of this, each Trust always has an amount of interest earned but
not yet collected by the Trustee. For this reason, the Public Offering
Price of Units will have added to it the proportionate share of accrued
and undistributed interest to the date of settlement.
Because of the varying interest payment dates of the Securities, accrued
interest at any point in time will be greater than the amount of
interest actually received by the Trusts and distributed to Unit
holders. If a Unit holder sells or redeems all or a portion of his
Units, he will be entitled to receive his proportionate share of the
accrued interest from the purchaser of his Units. Since the Trustee has
the use of the interest held in the Interest Account for distributions
to Unit holders and since such Account is non-interest bearing to Unit
holders, the Trustee benefits thereby.
What are the Expenses and Charges?
At no cost to the Trusts, the Sponsor has borne all the expenses of
creating and establishing each Trust, including the cost of the initial
preparation, printing and execution of the Indenture and the
certificates for the Units, legal, accounting and other out-of-pocket
expenses. The Sponsor will not receive any fees in connection with its
activities relating to the Trusts. However, First Trust Advisors L.P.,
an affiliate of the Sponsor, will receive an annual supervisory fee,
which is not to exceed the amount set forth under "Summary of Essential
Information" appearing in Part One for each Trust, for providing
portfolio supervisory services for the Trusts. The fee may exceed the
actual costs of providing such supervisory services for the Trusts, but
at no time will the total amount received for portfolio supervisory
services rendered to unit investment trusts of which Nike Securities
L.P. is the Sponsor in any calendar year exceed the aggregate cost to
First Trust Advisors L.P. of supplying such services in such year.
For purposes of evaluation of the Securities in the Trusts, the
Evaluator will receive a fee as indicated in "Summary of Essential
Information" appearing in Part One for each Trust. The Trustee pays
certain expenses of each Trust for which it is reimbursed by such Trust.
The Trustee will receive for its ordinary recurring services to a Trust
an annual fee computed at $.90 per Unit outstanding annually. For a
discussion of the services performed by the Trustee pursuant to its
obligations under the Indentures, reference is made to the material set
forth under "Rights of Unit Holders." The Trustee's and Evaluator's fees
are payable monthly on or before each Distribution Date from the
Interest Account to the extent funds are available and then from the
Principal Account. Since the Trustee has the use of the funds being held
Page 10
in the Principal and Interest Accounts for future distributions, payment
of expenses and redemptions and since such Accounts are non-interest
bearing to Unit holders, the Trustee benefits thereby. Part of the
Trustee's compensation for its services to a Trust is expected to result
from the use of these funds. Both fees may be increased without approval
of the Unit holders by amounts not exceeding proportionate increases
under the category "All Services Less Rent of Shelter" in the Consumer
Price Index published by the United States Department of Labor.
The following additional charges with respect to a Trust are or may be
incurred by the Trusts: all expenses (including legal and annual
auditing expenses) of the Trustee incurred in connection with its
responsibilities under the Indentures, except in the event of
negligence, bad faith or willful misconduct on its part; the expenses
and costs of any action undertaken by the Trustee to protect a Trust and
the rights and interests of the Unit holders; fees of the Trustee for
any extraordinary services performed under the Indenture;
indemnification of the Trustee for any loss, liability or expense
incurred by it without negligence, bad faith or willful misconduct on
its part, arising out of or in connection with its acceptance or
administration of a Trust; indemnification of the Sponsor for any loss,
liability or expense incurred without gross negligence, bad faith or
willful misconduct in acting as Depositor of a Trust; all taxes and
other government charges imposed upon the Securities or any part of a
Trust (no such taxes or charges are being levied or made upon
termination of a Trust). The above expenses and the Trustee's annual
fee, when paid or owing to the Trustee, are secured by a lien on the
Trust. In addition, the Trustee is empowered to sell Securities in order
to make funds available to pay all these amounts if funds are not
otherwise available in the Interest and Principal Accounts. Due to the
minimum principal amount in which Securities may be required to be sold,
the proceeds of such sales may exceed the amount necessary for the
payment of such fees and expenses.
Unless the Sponsor determines that such an audit is not required, the
Indenture requires the accounts of a Trust shall be audited on an annual
basis at the expense of such Trust by independent auditors selected by
the Sponsor. So long as the Sponsor is making a secondary market for
Units, the Sponsor shall bear the cost of such annual audits to the
extent such cost exceeds $.50 per Unit. Unit holders of a Trust covered
by an audit may obtain a copy of the audited financial statements from
the Trustee upon request.
What is the Tax Status of Unit Holders?
The following is a general discussion of certain of the Federal income
tax consequences of the purchase, ownership and disposition of the
Units. The summary is limited to investors who hold the Units as
"capital assets" (generally, property held for investment) within the
meaning of Section 1221 of the Internal Revenue Code of 1986 (the
"Code"). Unit holders should note that certain provisions of the Code
that may be relevant to Unit holders, particularly the real estate
mortgage investment conduit ("REMIC") provisions and the provisions
dealing with original issue discount, market discount, bond premium
amortization, and stripped debt instruments, have recently been enacted
or amended. The Internal Revenue Service (the "IRS") has not yet
provided final guidance on many aspects of these provisions as now in
effect. Thus, no assurance can be provided that the interpretations of
law discussed herein will be reflected in future guidance from the IRS,
which could apply retroactively. This summary does not address the
Federal tax consequences to all categories of investors, some of which
(for example, non-U.S. persons, insurance companies, pension funds or
other tax-exempt organizations, and real estate investment trusts) may
be subject to special rules. Investors should consult their own tax
advisers in determining the Federal, state, local and other tax
consequences of the purchase, ownership and disposition of the Units.
Neither the Sponsor nor Chapman and Cutler has reviewed the Securities
deposited in the Trusts. Rather, they have assumed that for Federal
income tax purposes the Securities qualify as debt instruments or "REMIC
regular interests" and that none of the Securities constitute "REMIC
residual interests."
As discussed below, Chapman and Cutler has opined that the Unit holders
will be treated as indirectly owning an interest in the Securities held
by a Trust. Investors owning REMIC regular interests are subject to
special rules. These rules impact the timing of income (and loss)
recognition, a holder's basis in such interests, the character of income
recognized upon the sale or other disposition of such interests, and
have other special tax consequences as well. In addition, the REMIC
Page 11
rules of the Code impose additional taxes (the prohibited transactions
tax, the tax on income from foreclosure property, the contributions tax,
and the tax on transfers of REMIC residual interests to prohibited
persons) that could reduce amounts available for distribution to holders
of such interests, including Unit holders. Unit holders should consult
their own tax advisers regarding the special tax consequences relating
to REMIC regular interests.
In the opinion of Chapman and Cutler, Counsel for the Sponsor, under
existing law:
The Trusts are not associations taxable as corporations for Federal
income tax purposes.
Each Unit holder of a Trust is considered to be the owner of a pro rata
portion of each of the assets of the Trust under subpart E, subchapter J
of chapter 1 of the Internal Revenue Code of 1986 (hereinafter the
"Code"). Each Unit holder will be considered to have received his pro
rata share of income derived from each Trust asset when such income is
considered to be received by a Trust. Each Unit holder will be required
to include in income his respective pro rata share of interest on each
Security as such interest accrues or is considered to be received by the
Trust, depending upon such Unit holder's method of accounting for tax
purposes, except that a Unit holder must include in income his
respective pro rata share of interest on each REMIC regular interest
Security as interest accrues, regardless of such Unit holder's method of
tax accounting. Each Unit holder will also be required to include in
taxable income for Federal income tax purposes, original issue discount
with respect to his interest in any Securities held by a Trust at the
same time and in the same manner as though the Unit holder were the
direct owner of such interest as discussed below.
Each Unit holder will have a taxable event when a Trust disposes of a
Security (whether by sale, exchange, liquidation, redemption or
otherwise), or when the Unit holder redeems or sells his Units. A Unit
holder's tax basis in his Units will equal his tax basis in his pro rata
portion of all the assets of the Trust. Such basis is determined (before
the adjustments described below) by apportioning the tax basis for the
Units among each of the Trust's assets according to the value as of the
valuation date nearest the date of acquisition of the Units. Unit
holders must reduce the tax basis of their Units for their share of
accrued interest received, if any, on Securities delivered after the
date the Unit holders pay for their Units to the extent that such
interest accrued on such Securities before the date the Trust acquired
ownership of the Securities (and the amount of this reduction may exceed
the amount of accrued interest paid to the seller) and, consequently,
such Unit holders may have an increase in taxable gain or reduction in
capital loss upon the disposition of such Units. Gain or loss upon the
sale or redemption of Units is measured by comparing the proceeds of
such sale or redemption with the adjusted basis of the Units. If the
Trustee disposes of Securities (whether by sale, exchange, payment on
maturity, redemption or otherwise), gain or loss is recognized to the
Unit holder (subject to various non-recognition provisions of the Code).
The amount of any such gain or loss is measured by comparing the Unit
holder's pro rata share of the total proceeds from such disposition with
his basis for his fractional interest in the asset disposed of. The
basis of each Unit and of each Security which was issued with original
issue discount (or which has market discount) must be increased by the
amount of accrued original issue discount (and market discount, if the
Unit holder elects to include market discount in income as it accrues),
and the basis of each Unit and each Security which was purchased by a
Trust at a premium must be reduced by the annual amortization of premium
which the Unit holder has properly elected to amortize under Section 171
of the Code as described more fully below. The tax basis reduction
requirements of the Code relating to amortization of bond premium may,
under some circumstances, result in the Unit holder realizing a taxable
gain when his Units are sold or redeemed for an amount equal to or less
than his original cost.
Each Unit holder's pro rata share of each expense paid by a Trust is
deductible by the Unit holder to the same extent as though the expense
had been paid directly by him. It should be noted that as a result of
the Tax Reform Act of 1986 (the "Act"), certain miscellaneous itemized
deductions, such as investment expenses, tax return preparation fees and
employee business expenses will be deductible by an individual only to
the extent they exceed 2% of such individual's adjusted gross income.
Unit holders may be required to treat some or all of the expenses paid
by the Trust as miscellaneous itemized deductions subject to this
limitation.
Certain of the Securities in the Trusts may have been acquired with
"original issue discount." In the case of any Securities in the Trusts
acquired with "original issue discount" that exceeds a "de minimis"
amount as specified in the Code, such discount is includable in taxable
income of the Unit holders on an accrual basis computed daily, without
Page 12
regard to when payments of interest on such Securities are received. The
Code provides a complex set of rules regarding the accrual of original
issue discount. These rules provide that original issue discount
generally accrues on the basis of a constant compound interest rate over
the term of the Securities. In the case of certain collateralized
mortgage-backed securities, REMIC regular interest securities, and
certain other debt instruments subject to prepayment risk, including
certain of the Securities, the Code requires the accrual of original
issue discount under a special set of rules that take into account the
original prepayment assumptions relating to such Securities. Unit
holders should consult their tax advisers as to the amount of original
issue discount which accrues.
Special original issue discount rules apply if the purchase price of the
Security by a Trust exceeds its original issue price plus the amount of
original issue discount which would have previously accrued based upon
its issue price (its "adjusted issue price"). Similarly these special
rules would apply to a Unit holder if the tax basis of his pro rata
portion of a Security issued with original issue discount exceeds his
pro rata portion of its adjusted issue price. Unit holders should also
consult their tax advisers regarding these special rules.
If a Unit holder's tax basis in his pro rata portion of Securities is
less than the allocable portion of such Security's stated redemption
price at maturity (or, if issued with original issue discount, the
allocable portion of its "revised issue price"), such difference will
constitute market discount unless the amount of market discount is "de
minimis" as specified in the Code. Market discount accrues daily
computed on a straight line basis, unless the Unit holder elects to
calculate accrued market discount under a constant yield method. As
discussed above relating to original issue discount, the accrual of
market discount with respect to certain Securities must take into
account the original prepayment assumptions relating to such Securities.
Unit holders should consult their tax advisers regarding whether an
election should be made and as to the amount of market discount which
accrues.
Accrued market discount is generally includable in taxable income to the
Unit holders as ordinary income for Federal tax purposes upon the
receipt of serial principal payments on the Securities, on the sale,
maturity or disposition of such Securities by a Trust, and on the sale
by a Unit holder of Units, unless a Unit holder elects to include the
accrued market discount in taxable income as such discount accrues. If a
Unit holder does not elect to annually include accrued market discount
in taxable income as it accrues, deductions for any interest expenses
incurred by the Unit holder which is incurred to purchase or carry his
Units will be reduced by such accrued market discount. In general, the
portion of any interest expense which was not currently deductible would
ultimately be deductible when the accrued market discount is included in
income. Unit holders should consult their tax advisers regarding whether
an election should be made to include market discount in income as it
accrues and as to the amount of interest expense which may not be
currently deductible.
If a Unit holder's tax basis of his pro rata portion in any Securities
held by a Trust exceeds the amount payable by the issuer of the
Securities with respect to such pro rata interest upon maturity of the
Security, such excess would be considered premium which may be amortized
by the Unit holder at the Unit holder's election as provided in Section
171 of the Code. Congress intended that regulations will provide rules
for computing the amortization of premium with respect to certain
collateralized mortgage-backed securities, REMIC regular interest
securities, and certain other debt instruments subject to prepayment
risk, including certain of the Securities, that take into account the
original prepayment assumptions relating to such Securities. Unit
holders should consult their tax advisers regarding whether such
election should be made and the manner of amortizing premium.
The tax basis of a Unit holder with respect to his interest in a
Security is increased by the amount of original issue discount (and
market discount, if the Unit holder elects to include market discount,
if any, on the Securities held by a Trust in income as it accrues)
thereon properly included in the Unit holder's gross income as
determined for Federal income tax purposes and reduced by the amount of
any amortized premium which the Unit holder has properly elected to
amortize under Section 171 of the Code. A Unit holder's tax basis in his
Units will equal his tax basis in his pro rata portion of all of the
assets of a Trust.
A Unit holder will recognize taxable gain (or loss) when all or part of
his pro rata interest in a Security is disposed of in a taxable
transaction for an amount greater (or less) than his tax basis therefor.
As previously discussed, gain realized on the disposition of the
interest of a Unit holder in any Security deemed to have been acquired
Page 13
with market discount will be treated as ordinary income to the extent
the gain does not exceed the amount of accrued market discount not
previously taken into income. In addition, gain from the disposition of
REMIC regular interest Securities that might otherwise be capital gain
will be treated as ordinary income to the extent that such gain does not
exceed the excess, if any, of (i) the amount that would have been
includable in income had the yield on the Security equaled 110% of the
Applicable Federal Rate (as defined in Section 860B of the Code) as of
the date of purchase over (ii) the amount actually includable in income
(the "110% Test"). Any gain to which the 110% Test does not apply
recognized on a sale or exchange and not constituting a realization of
accrued "market discount" and any loss will, under current law,
generally be capital gain or loss. For taxpayers other than
corporations, net capital gains are presently subject to a maximum
stated marginal tax rate of 28 percent. For taxpayers other than
corporations, net capital gain (which is defined as net long-term
capital gain over net short-term capital loss for the taxable year) is
subject to a maximum marginal stated tax rate of either 28% or 20%,
depending upon the holding periods of the capital assets. Capital loss
is long-term if the holding period for the asset is more than one year,
and is short-term if the holding period for the asset is one year or
less. Generally, capital gains realized from assets held for more than
one year but not more than 18 months are taxed at a maximum marginal
stated tax rate of 28% and capital gains realized from assets (with
certain exclusions) held for more than 18 months are taxed at a maximum
marginal stated tax rate of 20% (10% in the case of certain taxpayers in
the lowest tax bracket). Further, capital gains realized from assets
held for one year or less are taxed at the same rates as ordinary
income. Legislation is currently pending that provides the appropriate
methodology that should be applied in netting the realized capital gains
and losses. Such legislation is proposed to be effective retroactively
for tax years ending after May 6, 1997. The Taxpayer Relief Act of 1997
(the "1997 Act") includes provisions that treat certain transactions
designed to reduce or eliminate risk of loss and opportunities for gain
(e.g., short sales, offsetting notional principal contracts, futures or
forward contracts, or similar transactions) as constructive sales for
purposes or recognition of gain (but not loss) and for purposes of
determining the holding period. Unit holders should consult their own
tax advisors with regard to any such constructive sales rules. It should
be noted that legislative proposals are introduced from time to time
that affect tax rates and could affect relative differences at which
ordinary income and capital gains are taxed. The tax basis reduction
requirements of the Code relating to amortization of bond premium may,
under some circumstances, result in a Unit holder realizing taxable gain
when his Units are sold or redeemed for an amount equal to or less than
his original cost.
It should be noted that in some situations capital gains may be
recharacterized as ordinary income in the case of certain financial
transactions that are "conversion transactions" effective for
transactions entered into after April 30, 1993. Unit holders and
prospective investors should consult with their tax advisers regarding
the potential effect of this provision on their investment in Units.
If the Unit holder disposes of a Unit, he is deemed thereby to have
disposed of his entire pro rata interest in all Trust assets including
his pro rata portion of all of the Securities represented by the Unit.
This may result in a portion of the gain, if any, on such sale being
taxable as ordinary income under the market discount rules (assuming no
election was made by the Unit holder to include market discount in
income as it accrues), the original issue discount rules or under the
110% Test as previously discussed.
A Unit holder who is a foreign investor (i.e., an investor other than a
United States citizen or resident or a United States corporation,
partnership, estate or trust) will not be subject to United States
Federal income taxes, including withholding taxes, on interest income
(including any original issue discount) on, or any gain from the sale or
other disposition of, his pro rata interest in any Security or the sale
of his Units provided that all of the following conditions are met: (i)
the interest income or gain is not effectively connected with the
conduct by the foreign investor of a trade or business within the United
States, (ii) if the interest is United States source income, and the
Security is issued after July 18, 1984, then the foreign investor does
not own, directly or indirectly, 10% or more of the total combined
voting power of all classes of voting stock of the issuer of the
Security and the foreign investor is not a controlled foreign
corporation related (within the meaning of Section 864(d)(4) of the
Code) to the issuer of the Security, (iii) with respect to any gain, the
foreign investor (if an individual) is not present in the United States
for 183 days or more during his or her taxable year and (iv) the foreign
investor provides all certification which may be required of his status
(foreign investors may contact the Sponsor to obtain a Form W-8 which
Page 14
must be filed with the Trustee and refiled every three calendar years
thereafter). Foreign investors should consult their tax advisers with
respect to United States tax consequences of ownership of Units.
It should be noted that the Revenue Reconciliation Act of 1993 (the "Tax
Act") includes a provision which eliminates the exemption from United
States taxation, including withholding taxes, for certain "contingent
interest." The provision applies to interest received after December 31,
1993. No opinion is expressed herein regarding the potential
applicability of this provision and whether United States taxation or
withholding taxes could be imposed with respect to income derived from
the Units as a result thereof. Unit holders and prospective investors
should consult with their tax advisers regarding the potential effect of
this provision on their investment in Units.
Each Unit holder (other than a foreign investor who has properly
provided the certifications described above) will be requested to
provide the Unit holder's taxpayer identification number to the trustee
and to certify that the Unit holder has not been notified that payments
to the Unit holder are subject to back-up withholding. If the proper
taxpayer identification number and appropriate certification are not
provided when requested, distributions by a Trust to such Unit holder
(including amounts received upon the redemption of the Units) will be
subject to back-up withholding.
In the opinion of special counsel to the Trusts for New York tax
matters, at the Initial Date of Deposit for each Trust, the Trusts were
not associations taxable as corporations and the income of the Trusts
will be treated as the income of the Unit holders under the existing
income tax laws of the State and City of New York.
The foregoing discussion relates only to United States Federal and
certain New York State and City income taxes. Unit holders may be
subject to state and local taxation in other jurisdictions (including a
foreign investor's country of residence). Unit holders should consult
their tax advisers regarding potential state, local, or foreign taxation
with respect to the Units.
Why are Investments in the Trusts Suitable for Retirement Plans?
The Trusts may be well suited for purchase by Individual Retirement
Accounts, Keogh Plans, pension funds and other tax-deferred retirement
plans. Generally, the Federal income tax relating to capital gains and
income received in each of the foregoing plans is deferred until
distributions are received. Distributions from such plans are generally
treated as ordinary income but may, in some cases, be eligible for
special averaging or tax-deferred rollover treatment. Investors
considering participation in any such plan should review specific tax
laws related thereto and should consult their attorneys or tax advisers
with respect to the establishment and maintenance of any such plan. Such
plans are offered by brokerage firms and other financial institutions.
The Trusts will waive the $1,000 minimum investment requirement for tax-
deferred retirement plan accounts. The minimum investment is $250 for
tax-deferred retirement plans such as IRA accounts. Fees and charges
with respect to such plans may vary.
How Can Distributions to Unit Holders be Reinvested?
The Sponsor has entered into an arrangement with Oppenheimer Management
Corporation which permits Unit holders of the Trusts to elect to have
each distribution of interest income or principal, or both, on their
Units automatically reinvested in shares of mutual funds distributed by
Oppenheimer Fund Management, Inc. at net asset value. The objectives and
policies of each Fund are presented in more detail in the prospectus
pertaining to such Fund.
After electing participation, each distribution of interest income or
principal, or both, on the participant's Units will automatically be
applied by the Trustee to purchase shares (or fractions thereof) of the
Fund selected without a sales charge and with no minimum initial and
subsequent investment requirements.
The transfer agent for the Fund will mail to each participant in the
Reinvestment Option confirmations of all transactions undertaken for
such participant in connection with the receipt of distributions from
the Trusts and the purchase of shares (or fractions thereof) of the Fund.
A participant may at any time, by so notifying the Trustee in writing,
elect to terminate his participation in the Reinvestment Option and
receive future distributions on his Units in cash. There will be no
charge or other penalty for such termination. The Sponsor and
Oppenheimer Fund Management, Inc. all have the right to terminate the
Reinvestment Option, in whole or in part.
Page 15
It should be remembered that even if distributions are reinvested
through the Reinvestment Option they are still treated as distributions
for income tax purposes.
Unit holders of a Trust participating in IRAs, Keogh Plans, pension
funds and other tax-deferred retirement plans may find it highly
advantageous to participate in the Reinvestment Option in order to keep
the monies in the account fully invested at all times. Should such
option be selected, an account with an identical registration to that
established at the time the Units of a Series of the Trust are purchased
will be set up as selected by the investor. Investors should consult
with their plan custodian as to the appropriate disposition of
distributions. Unless participants in IRAs, Keogh Plans and other tax-
deferred retirement plans elect the Reinvestment Option, cash
distributions will be sent to the custodian of the retirement plan and
will not be sent to the investor. See "Why are Investments in the Trusts
Suitable for Retirement Plans?"
PUBLIC OFFERING
How is the Public Offering Price Determined?
Units are offered at the Public Offering Price. During the secondary
market, the Public Offering Price is based on the Evaluator's
determination of the aggregate bid price of the Securities in each
Trust, including any money in the Principal Account other than money
required to redeem tendered Units, and also includes a sales charge as
indicated in Part One for each Trust. Also added to the Public Offering
Price is a proportionate share of interest accrued but unpaid on the
Securities from the last Record Date to the date of settlement of Units
(see "How is Accrued Interest Treated?").
The sales charge is reduced by a discount as indicated below for volume
purchases:
Transaction at Dollar Amount of
Public Offering Price Discount per Unit
_____________________ _________________
$250,000 - $499,999 $2.50
$500,000 - or more $5.00
Any such reduced sales charge shall be the responsibility of the selling
dealer. The reduced sales charge structure will apply on all purchases
of Units in a Trust by the same person on any one day from any one
dealer. Additionally, Units purchased in the name of the spouse of a
purchaser or in the name of a child of such purchaser under 21 years of
age will be deemed, for the purposes of calculating the applicable sales
charge, to be additional purchases by the purchaser. The reduced sales
charges will also be applicable to a trustee or other fiduciary
purchasing securities for a single trust estate or single fiduciary
account. The purchaser must inform the dealer of any such combined
purchase prior to the sale in order to obtain the indicated discount. In
addition, with respect to the employees, officers and directors
(including their immediate family members, defined as spouses, children,
grandchildren, parents, grandparents, mothers-in-law, fathers-in-law,
sons-in-law and daughters-in-law, and trustees, custodians or
fiduciaries for the benefit of such persons) of the Sponsor and its
subsidiaries, the sales charge is reduced by 2.0% of the Public Offering
Price for purchases of Units during the secondary public offering period.
The aggregate price of the Securities in the Trusts is determined by
First Trust Advisors L.P. acting as evaluator (the "Evaluator") on the
basis of bid prices, (1) on the basis of current market prices for the
Securities obtained from dealers or brokers who customarily deal in
Securities comparable to those held by the Trust; (2) if such prices are
not available for any of the Securities, on the basis of current market
prices for comparable securities; (3) by determining the value of the
Securities by appraisal; or (4) by any combination of the above.
During the secondary market, a determination of the aggregate price of
the Securities in the Trusts is made by the Evaluator on a bid price
basis, as of the close of trading on the New York Stock Exchange (4:00
p.m. Eastern time) on each day on which it is open, effective for all
sales, purchases or redemptions made subsequent to the last preceding
determination. No evaluation will be made, however, on any day on which
the markets in which the Securities primarily trade are not generally
open for business.
The Public Offering Price of the Units during the secondary market is
equal to the bid price per Unit of the Securities in a Trust plus the
applicable sales charge. In the past, the bid prices of publicly offered
issues of CMOs have been lower than the offering prices by as much as
1.0% or more of face amount in the case of inactively traded issues and
Page 16
as little as 0.5% in the case of actively traded issues, but the
difference between the offering and bid prices has averaged about 0.75%
of face amount.
Although payment is normally made three business days following the
order for purchase (the "date of settlement"), payment may be made prior
thereto. A person will become an owner of Units on the date of
settlement provided payment has been received. Cash, if any, made
available to the Sponsor prior to the date of settlement for the
purchase of Units may be used in the Sponsor's business and may be
deemed to be a benefit to the Sponsor, subject to the limitations of the
Securities Exchange Act of 1934. Delivery of Certificates representing
Units so ordered will be made three business days following such order
or shortly thereafter. Initial transaction statements for Units held in
uncertificated form representing Units so ordered will be issued to the
registered owner of such Units within two business days of the issuance
of such Units. See "Rights of Unit Holders-How May Units be Redeemed?"
for information regarding the ability to redeem Units ordered for
purchase.
How are Units Distributed?
It is the intention of the Sponsor to qualify Units of the Trusts for
sale in a number of states. Sales initially will be made to dealers and
others at prices which represent a concession or agency commission of
$30.00 per Unit, but the Sponsor reserves the right to change the amount
of the concession to dealers and others from time to time. Certain
commercial banks are making Units of the Trusts available to their
customers on an agency basis. A portion of the sales charge paid by
these customers is retained by or remitted to the banks in the amounts
indicated in the second preceding sentence. Under the Glass-Steagall
Act, banks are prohibited from underwriting Trust Units; however, the
Glass-Steagall Act does permit certain agency transactions and the
banking regulators have not indicated that these particular agency
transactions are not permitted under such Act.
What are the Profits of the Sponsor?
The Sponsor will receive a gross sales commission as indicated in Part
One for each Trust, less any reduced sales charge for quantity purchases
as described under "Public Offering-How is the Public Offering Price
Determined?" In addition, the Sponsor may be considered to have realized
a profit or the Sponsor may be considered to have sustained a loss, as
the case may be for a Trust, in the amount of any difference between the
cost of the Securities to the Trust and the cost of such Securities to
the Sponsor.
In maintaining a market for the Units, the Sponsor will also realize
profits or sustain losses in the amount of any difference between the
price at which Units are purchased (based on the bid prices of the
Securities in a Trust) and the price at which Units are resold (which
price is also based on the bid prices of the Securities in such Trust
and includes a sales charge as indicated in Part One for each Trust) or
redeemed (based on the bid prices of the Securities in each Trust). The
secondary market public offering price of Units may be greater or less
than the cost of such Units to the Sponsor.
Will There be a Secondary Market?
Although it is not obligated to do so, the Sponsor intends to maintain a
market for the Units and continuously to offer to purchase Units at
prices, subject to change at any time, based upon the aggregate bid
price of the Securities in the portfolio of the Trusts plus interest
accrued to the date of settlement. All expenses incurred in maintaining
a secondary market, other than the fees of the Evaluator and the costs
of the Trustee in transferring and recording the ownership of Units,
will be borne by the Sponsor. If the supply of Units exceeds demand, or
for some other business reason, the Sponsor may discontinue purchases of
Units at such prices. IF A UNIT HOLDER WISHES TO DISPOSE OF HIS UNITS,
HE SHOULD INQUIRE OF THE SPONSOR AS TO CURRENT MARKET PRICES PRIOR TO
MAKING A TENDER FOR REDEMPTION TO THE TRUSTEE.
RIGHTS OF UNIT HOLDERS
How is Evidence of Ownership Issued and Transferred?
The Trustee is authorized to treat as the record owner of Units that
person who is registered as such owner on the books of the Trustee.
Ownership of Units may be evidenced by registered certificates executed
by the Trustee and the Sponsor. Delivery of certificates representing
Units ordered for purchase is normally made three business days
Page 17
following such order or shortly thereafter. Certificates are
transferable by presentation and surrender to the Trustee properly
endorsed or accompanied by a written instrument or instruments of
transfer. Certificates to be redeemed must be properly endorsed or
accompanied by a written instrument or instruments of transfer. A Unit
holder must sign exactly as his name appears on the face of the
certificate with the signature guaranteed by a participant in the
Securities Transfer Agents Medallion Program ("STAMP") or such other
signature guarantee program in addition to, or in substitution for,
STAMP, as may be accepted by the Trustee. In certain instances the
Trustee may require additional documents such as, but not limited to,
trust instruments, certificates of death, appointments as executor or
administrator or certificates of corporate authority. Record ownership
may occur before settlement.
Certificates will be issued in fully registered form, transferable only
on the books of the Trustee in denominations of one Unit or any multiple
thereof, numbered serially for purposes of identification.
Unit holders may elect to hold their Units in uncertificated form. The
Trustee will maintain an account for each such Unit holder and will
credit each such account with the number of Units purchased by that Unit
holder. Within two business days of the issuance or transfer of Units
held in uncertificated form, the Trustee will send to the registered
owner of Units a written initial transaction statement containing a
description of the Trust; the number of Units issued or transferred; the
name, address and taxpayer identification number, if any, of the new
registered owner; a notation of any liens and restrictions of the issues
and any adverse claims to which such Units are or may be subject or a
statement that there are no such liens, restrictions or adverse claims;
and the date the transfer was registered. Uncertificated Units are
transferable through the same procedures applicable to Units evidenced
by certificates (described above), except that no certificate need be
presented to the Trustee and no certificate will be issued upon transfer
unless requested by the Unit holder. A Unit holder may at any time
request the Trustee to issue certificates for Units.
Although no such charge is now made or contemplated, a Unit holder may
be required to pay $2.00 to the Trustee per certificate reissued or
transferred, and to pay any governmental charge that may be imposed in
connection with each such transfer or exchange. For new certificates
issued to replace destroyed, stolen or lost certificates, the Unit
holder may be required to furnish indemnity satisfactory to the Trustee
and pay such expenses as the Trustee may incur. Mutilated certificates
must be surrendered to the Trustee for replacement.
How are Interest and Principal Distributed?
Interest from a Trust, including moneys representing penalties for the
failure to make timely payments on Securities or liquidated damages for
default or breach of any condition or term of the Securities will be
distributed monthly on that date set forth in Part One for each Trust on
a pro rata basis to Unit holders of record as of the preceding Record
Date. All distributions will be net of applicable expenses.
The pro rata share of cash in the Principal Account will also be
computed as of the first day of each month and distributions to the Unit
holders as of such Record Date will be made on that date set forth in
Part One for each Trust. Proceeds from the disposition of any of the
Securities or amounts representing principal on the Securities received
after such Record Date and prior to the following Distribution Date will
be held in the Principal Account and not distributed until the next
Distribution Date. The Trustee is not required to pay interest on funds
held in the Principal or Interest Account (but may itself earn interest
thereon and therefore benefits from the use of such funds) nor to make a
distribution from the Principal Account unless the amount available for
distribution shall equal at least $1.00 per Unit.
The Trustee will credit to the Interest Account all interest received by
a Trust, including moneys representing penalties for the failure to make
timely payments on Securities or liquidated damages for default or
breach of any condition or term of the Securities and that part of the
proceeds of any disposition of Securities which represents accrued
interest. Other receipts will be credited to the Principal Account.
Persons who purchase Units between a Record Date and a Distribution Date
will receive their first distribution on the second Distribution Date
after the purchase.
As of the first day of each month, the Trustee will deduct from the
Interest Account and, to the extent funds are not sufficient therein,
from the Principal Account, amounts necessary to pay the expenses of a
Trust. The Trustee also may withdraw from said accounts such amounts, if
any, as it deems necessary to establish a reserve for any governmental
Page 18
charges payable out of a Trust. Amounts so withdrawn shall not be
considered a part of the assets of such Trust until such time as the
Trustee shall return all or any part of such amounts to the appropriate
account. In addition, the Trustee may withdraw from the Interest Account
and the Principal Account such amounts as may be necessary to cover
redemption of Units by the Trustee.
Record Dates for monthly distributions will be the first day of each
month. Distributions will be made on or shortly after that date set
forth in Part One for each Trust. Distributions for an IRA, Keogh,
pension fund or other tax-deferred retirement plan will not be sent to
the individual Unit holder; these distributions will go directly to the
custodian of the plan to avoid the penalties associated with premature
withdrawals from such accounts.
What Reports Will Unit Holders Receive?
The Trustee shall furnish Unit holders in connection with each
distribution a statement of the amount of interest, if any, and the
amount of other receipts, if any, which are being distributed, expressed
in each case as a dollar amount per Unit. Within a reasonable time after
the end of each calendar year, the Trustee will furnish to each person
who at any time during the calendar year was a Unit holder of record, a
statement as to (1) the Interest Account: interest received (including
amounts representing interest received upon any disposition of
Securities, penalties for the failure to make timely payments on
Securities or liquidated damages for default or breach of any condition
or term of the Securities), deductions for payment of applicable taxes
and for fees and expenses of the Trusts, redemption of Units and the
balance remaining after such distributions and deductions, expressed
both as a total dollar amount and as a dollar amount representing the
pro rata share per Unit outstanding on the last business day of such
calendar year; (2) the Principal Account: payments of principal on
Securities, the dates of disposition of any Securities and the net
proceeds received therefrom (excluding any portion representing
interest), deduction for payment of applicable taxes and for fees and
expenses of the Trusts, redemptions of Units, and the balance remaining
after such distributions and deductions expressed both as a total dollar
amount and as a dollar amount per Unit; (3) the Securities held and the
number of Units outstanding on the last business day of such calendar
year; (4) the Redemption Price per Unit based upon the last computation
thereof made during such calendar year; (5) the dollar amounts actually
distributed during such calendar year from the Interest Account and from
the Principal Account, separately stated; and (6) such other information
as the Trustee may deem appropriate. Unit holders of Units in
uncertificated form shall receive no less frequently than once each year
a dated written statement containing the name, address and taxpayer
identification number, if any, of the registered owner, the number of
Units registered in the name of the registered owner on the date of the
statement and certain other information, that will be provided as
required under applicable law.
In order to comply with Federal and state tax reporting requirements,
Unit holders will be furnished, upon request to the Trustee, evaluations
of the Securities furnished to it by the Evaluator.
How May Units be Redeemed?
A Unit holder may redeem all or a portion of his Units by tender to the
Trustee at its corporate trust office in the City of New York of the
certificates representing the Units to be redeemed, or, in the case of
uncertificated Units, delivery of a request for redemption, duly
endorsed or accompanied by proper instruments of transfer with signature
guaranteed as explained above (or by providing satisfactory indemnity,
as in connection with lost, stolen or destroyed certificates), and
payment of applicable governmental charges, if any. No redemption fee
will be charged. On the third business day following such tender, the
Unit holder will be entitled to receive in cash an amount for each Unit
equal to the Redemption Price per Unit next computed after receipt by
the Trustee of such tender of Units. The "date of tender" is deemed to
be the date on which Units are received by the Trustee (if such day is a
day on which the New York Stock Exchange is open for trading), except
for Units received after 4:00 p.m. Eastern time (or as of any earlier
closing time on a day on which the New York Stock Exchange is scheduled
in advance to close at such earlier time), the date of tender is the
next day on which the New York Stock Exchange is open for trading and
such Units will be deemed to have been tendered to the Trustee on such
day for redemption at the redemption price computed on that day. Units
so redeemed shall be canceled.
Accrued interest to the settlement date paid on redemption shall be
Page 19
withdrawn from the Interest Account or, if the balance therein is
insufficient, from the Principal Account. All other amounts paid on
redemption shall be withdrawn from the Principal Account.
The Redemption Price per Unit (as well as the secondary market Public
Offering Price) will be determined on the basis of the bid price of the
Securities in a Trust. As of the close of trading on the New York Stock
Exchange (4:00 p.m. Eastern time) on the date any such determination is
made. The Redemption Price per Unit is the pro rata share of each Unit
determined by the Trustee on the basis of (1) the cash on hand in a
Trust or moneys in the process of being collected, (2) the value of the
Securities in a Trust based on the prices of the Securities and (3)
interest accrued thereon, less (a) amounts representing taxes or other
governmental charges payable out of a Trust and (b) the accrued expenses
of such Trust. The Evaluator may determine the value of the Securities
in a Trust (1) on the basis of current bid prices of the Securities
obtained from dealers or brokers who customarily deal in securities
comparable to those held by such Trust, (2) on the basis of bid prices
for securities comparable to any securities for which bid prices are not
available, (3) by determining the value of the Securities by appraisal,
or (4) by any combination of the above.
The difference between the bid and offering prices of such Securities
has averaged about 0.50%- 0.75% of face amount. Therefore, the price at
which Units may be redeemed could be less than the price paid by the
Unit holder.
The Trustee is empowered to sell underlying Securities in order to make
funds available for redemption. To the extent that Securities are sold,
the size and diversity of a Trust will be reduced. Such sales may be
required at a time when Securities would not otherwise be sold and might
result in lower prices than might otherwise be realized. Due to the
minimum principal amount in which Securities may be required to be sold,
the proceeds of such sales may exceed the amount necessary for payment
of Units redeemed. Such excess proceeds will be placed in the Principal
Account and be eligible for distribution pro rata to all remaining Unit
holders of record.
The right of redemption may be suspended and payment postponed for any
period during which the New York Stock Exchange is closed, other than
for customary weekend and holiday closings, or during which the
Securities and Exchange Commission determines that trading on that
Exchange is restricted or an emergency exists, as a result of which
disposal or evaluation of the Securities is not reasonably practicable,
or for such other periods as the Securities and Exchange Commission may
by order permit.
How May Units be Purchased by the Sponsor?
The Trustee shall notify the Sponsor of any tender of Units for
redemption. If the Sponsor's bid in the secondary market at that time
equals or exceeds the Redemption Price per Unit, it may purchase such
Units by notifying the Trustee before the close of business on the
second succeeding business day and by making payment therefor to the
Unit holder not later than the day on which the Units would otherwise
have been redeemed by the Trustee. Units held by the Sponsor may be
tendered to the Trustee for redemption as any other Units.
The offering price of any Units acquired by the Sponsor will be in
accord with the Public Offering Price described in the then currently
effective prospectus describing such Units. Any profit or loss resulting
from the resale or redemption of such Units will belong to the Sponsor.
How May Securities be Removed from a Trust?
The Sponsor is empowered, but not obligated, to direct the Trustee to
dispose of Securities in the event certain events occur that adversely
affect the value of Securities including default in payment of interest
or principal, default in payment of interest or principal of other
obligations guaranteed or backed by the full faith and credit of the
United States of America, institution of legal proceedings, default
under other documents adversely affecting debt service, decline in price
or the occurrence of other market or credit factors.
If any default in the payment of principal or interest on any Security
occurs and if the Sponsor fails to instruct the Trustee to sell or to
hold such Security within thirty days after notification by the Trustee
to the Sponsor of such default, the Trustee may, in its discretion, sell
the defaulted Security and not be liable for any depreciation or loss
thereby incurred.
Page 20
The Trustee is also empowered to sell, for the purpose of redeeming
Units tendered by any Unit holder, and for the payment of expenses for
which funds may not be available, such of the Securities in a list
furnished by the Sponsor as the Trustee in its sole discretion may deem
necessary.
INFORMATION AS TO SPONSOR, TRUSTEE AND EVALUATOR
Who is the Sponsor?
Nike Securities L.P., the Sponsor, specializes in the underwriting,
trading and distribution of unit investment trusts and other securities.
Nike Securities L.P., an Illinois limited partnership formed in 1991,
acts as Sponsor for successive series of The First Trust Combined
Series, the FT Series (formerly known as The First Trust Special
Situations Trust), The First Trust Insured Corporate Trust, The First
Trust of Insured Municipal Bonds, The First Trust GNMA, Templeton Growth
and Treasury Trust, Templeton Foreign Fund & U.S. Treasury Securities
Trust and The Advantage Growth and Treasury Securities Trust. First
Trust introduced the first insured unit investment trust in 1974 and to
date more than $9 billion in First Trust unit investment trusts have
been deposited. The Sponsor's employees include a team of professionals
with many years of experience in the unit investment trust industry. The
Sponsor is a member of the National Association of Securities Dealers,
Inc. and Securities Investor Protection Corporation and has its
principal offices at 1001 Warrenville Road, Lisle, Illinois 60532;
telephone number (630) 241-4141. As of December 31, 1996, the total
partners' capital of Nike Securities L.P. was $9,005,203 (audited).
(This paragraph relates only to the Sponsor and not to the Trust or to
any series thereof or to any other Underwriters. The information is
included herein only for the purpose of informing investors as to the
financial responsibility of the Sponsor and its ability to carry out its
contractual obligations. More detailed financial information will be
made available by the Sponsor upon request.)
Who is the Trustee?
The Trustee is The Chase Manhattan Bank, with its principal executive
office located at 270 Park Avenue, New York, New York 10017 and its unit
investment trust office at 4 New York Plaza, 6th floor, New York, New
York 10004-2413. Unit holders who have questions regarding the Trusts
may call the Customer Service Help Line at 1-800-682-7520. The Trustee
is subject to supervision by the Superintendent of Banks of the State of
New York, the Federal Deposit Insurance Corporation and the Board of
Governors of the Federal Reserve System.
The Trustee, whose duties are ministerial in nature, has not
participated in the selection of the Securities. For information
relating to the responsibilities of the Trustee under the Indenture,
reference is made to the material set forth under "Rights of Unit
Holders."
The Trustee and any successor trustee may resign by executing an
instrument in writing and filing the same with the Sponsor and mailing a
copy of a notice of resignation to all Unit holders. Upon receipt of
such notice, the Sponsor is obligated to appoint a successor trustee
promptly. If the Trustee becomes incapable of acting or becomes bankrupt
or its affairs are taken over by public authorities, the Sponsor may
remove the Trustee and appoint a successor as provided in the Indenture.
If upon resignation of a trustee no successor has accepted the
appointment within 30 days after notification, the retiring trustee may
apply to a court of competent jurisdiction for the appointment of a
successor. The resignation or removal of a trustee becomes effective
only when the successor trustee accepts its appointment as such or when
a court of competent jurisdiction appoints a successor trustee.
Any corporation into which a Trustee may be merged or with which it may
be consolidated, or any corporation resulting from any merger or
consolidation to which a Trustee shall be a party, shall be the
successor Trustee. The Trustee must be a banking corporation organized
under the laws of the United States or any State and having at all times
an aggregate capital, surplus and undivided profits of not less than
$5,000,000.
Limitations on Liabilities of Sponsor and Trustee
The Sponsor and Trustee shall be under no liability to Unit holders for
taking any action or for refraining from taking any action in good faith
pursuant to the Indenture, or for errors in judgment, but shall be
liable only for their own willful misfeasance, bad faith, gross
negligence (ordinary negligence in the case of the Trustee) or reckless
Page 21
disregard of their obligations and duties. The Trustee shall not be
liable for depreciation or loss incurred by reason of the sale by the
Trustee of any of the Securities. In the event of the failure of the
Sponsor to act under the Indenture, the Trustee may act thereunder and
shall not be liable for any action taken by it in good faith under the
Indenture.
The Trustee shall not be liable for any taxes or other governmental
charges imposed upon or in respect of the Securities or upon the
interest thereon or upon it as Trustee under the Indenture or upon or in
respect of a Series of the Trust which the Trustee may be required to
pay under any present or future law of the United States of America or
of any other taxing authority having jurisdiction. In addition, the
Indenture contains other customary provisions limiting the liability of
the Trustee.
If the Sponsor shall fail to perform any of its duties under the
Indenture or become incapable of acting or become bankrupt or its
affairs are taken over by public authorities, then the Trustee may (a)
appoint a successor Sponsor at rates of compensation deemed by the
Trustee to be reasonable and not exceeding amounts prescribed by the
Securities and Exchange Commission, or (b) terminate the Indenture and
liquidate a Trust as provided herein, or (c) continue to act as Trustee
without terminating the Indenture.
Who is the Evaluator?
The Evaluator is First Trust Advisors L.P., an Illinois limited
partnership formed in 1991 and an affiliate of the Sponsor. The
Evaluator's address is 1001 Warrenville Road, Lisle, Illinois 60532. The
Evaluator may resign or may be removed by the Sponsor and the Trustee,
in which event the Sponsor and the Trustee are to use their best efforts
to appoint a satisfactory successor. Such resignation or removal shall
become effective upon the acceptance of appointment by the successor
Evaluator. If upon resignation of the Evaluator no successor has
accepted appointment within 30 days after notice of resignation, the
Evaluator may apply to a court of competent jurisdiction for the
appointment of a successor.
OTHER INFORMATION
How May the Indenture be Amended or Terminated?
The Sponsor and the Trustee have the power to amend the Indenture
without the consent of any of the Unit holders when such amendment is
(1) to cure any ambiguity or to correct or supplement any provision of
the Indenture which may be defective or inconsistent with any other
provision contained therein, or (2) to make such other provisions as
shall not adversely affect the interest of the Unit holders (as
determined in good faith by the Sponsor and the Trustee), provided that
the Indenture is not amended to increase the number of Units issuable
thereunder or to permit the deposit or acquisition of securities either
in addition to or in substitution for any of the Securities initially
deposited in a Trust, except for the substitution of Replacement
Securities for Failed Securities or the purchase of additional
Securities pursuant to the Indenture. In the event of any amendment, the
Trustee is obligated to notify promptly all Unit holders of the
substance of such amendment.
The Trusts may be liquidated at any time by consent of 100% of the Unit
holders or by the Trustee when the principal amount of the Securities
owned by such Trust as shown by any evaluation, is less than the lower
of $2,000,000 or 40% of the total principal amount of the Securities
deposited in such Trust during the primary offering period, or in the
event that Units not yet sold aggregating more than 60% of the Units
initially deposited are tendered for redemption by the Underwriters,
including the Sponsor. If a Trust is liquidated because of the
redemption of unsold Units by the Underwriters, the Sponsor will refund
to each purchaser of Units the entire sales charge paid by such
purchaser. The Indenture will terminate upon the redemption, sale or
other disposition of the last Security held thereunder, but in no event
shall it continue beyond the Mandatory Termination Date as indicated in
Part One. In the event of termination, written notice thereof will be
sent by the Trustee to all Unit holders. Within a reasonable period
after termination, the Trustee will sell any Securities remaining in a
Trust, and, after paying all expenses and charges incurred by a Trust,
will distribute to each Unit holder (including the Sponsor if it then
holds any Units), upon surrender for cancellation of his Units, his pro
rata share of the balances remaining in the Interest and Principal
Accounts, all as provided in the Indenture.
Page 22
Legal Opinions
The legality of the Units offered hereby and certain matters relating to
Federal tax law have been passed upon by Chapman and Cutler, 111 West
Monroe Street, Chicago, Illinois 60603, as counsel for the Sponsor.
Carter, Ledyard & Milburn, 2 Wall Street, New York, New York 10005, acts
as counsel for the Trustee.
Experts
The financial statements, including the portfolio, of the Trust
contained in Part One of the Prospectus and Registration Statement has
been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing therein and in the Registration
Statement, and is included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
DESCRIPTION OF STANDARD & POOR'S RATING
A Standard & Poor's rating on the units of a unit investment trust
(hereinafter referred to collectively as "units" and "trust") is a
current assessment of creditworthiness with respect to the investments
held by such trust. This assessment takes into consideration the
financial capacity of the issuers and of any guarantors, insurers,
lessees or mortgagors with respect to such investments. The assessment,
however, does not take into account the extent to which trust expenses
or portfolio asset sales for less than the trust's purchase price will
reduce payment to the Unit holder of the interest and principal required
to be paid on the portfolio assets. In addition, the rating is not a
recommendation to purchase, sell, or hold units, inasmuch as the rating
does not comment as to market price of the units or suitability for a
particular investor.
Trusts rated "AAA" are composed exclusively of assets that are rated
"AAA" by Standard & Poor's or have, in the opinion of Standard & Poor's,
credit characteristics comparable to assets rated "AAA," or certain
short-term investments. Standard & Poor's defines its "AAA" rating for
such assets as the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is very
strong.
Page 23
CONTENTS:
The First Trust Special Situations Trust
The CMO Unit Investment Trust Series:
What is the First Trust Special Situations Trust? 2
What is the Rating of the Units? 8
What are Estimated Current Return and
Estimated Long-Term Return? 8
How is Accrued Interest Treated? 10
What are the Expenses and Charges? 10
What is the Tax Status of Unit Holders? 11
Why are Investments in the Trusts Suitable
for Retirement Plans? 15
How Can Distributions to Unit Holders be Reinvested? 15
Public Offering:
How is the Public Offering Price Determined? 16
How are Units Distributed? 17
What are the Profits of the Sponsor? 17
Will There be a Secondary Market? 17
Rights of Unit Holders:
How is Evidence of Ownership Issued and Transferred? 17
How are Interest and Principal Distributed? 18
What Reports Will Unit Holders Receive? 19
How May Units be Redeemed? 19
How May Units be Purchased by the Sponsor? 20
How May Securities be Removed from a Trust? 20
Information as to Sponsor, Trustee and Evaluator:
Who is the Sponsor? 21
Who is the Trustee? 21
Limitations on Liabilities of Sponsor and Trustee 21
Who is the Evaluator? 22
Other Information:
How May the Indenture be Amended or Terminated? 22
Legal Opinions 23
Experts 23
Description of Standard & Poor's Rating 23
____________
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY, SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM
IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
THIS PROSPECTUS DOES NOT CONTAIN ALL THE INFORMATION SET FORTH IN THE
REGISTRATION STATEMENTS AND EXHIBITS RELATING THERETO, WHICH THE TRUST
HAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C.
UNDER THE SECURITIES ACT OF 1933 AND THE INVESTMENT COMPANY ACT OF 1940,
AND TO WHICH REFERENCE IS HEREBY MADE.
FIRST TRUST(registered trademark)
THE CMO UNIT
INVESTMENT TRUST SERIES
The First Trust
Special Situations Trust
Prospectus
Part Two
November 28, 1997
First Trust (registered trademark)
1001 Warrenville Road, Suite 300
Lisle, Illinois 60532
1-630-241-4141
Trustee:
The Chase Manhattan Bank
4 New York Plaza, 6th floor
New York, New York 10004-2413
1-800-682-7520
THIS PART TWO MUST BE
ACCOMPANIED BY PART ONE.
PLEASE RETAIN THIS PROSPECTUS
FOR FUTURE REFERENCE
Page 24
CONTENTS OF POST-EFFECTIVE AMENDMENT
OF REGISTRATION STATEMENT
This Post-Effective Amendment of Registration Statement
comprises the following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Auditors
Financial Data Schedule
S-1
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the Registrant, THE FIRST TRUST SPECIAL SITUATIONS TRUST, SERIES
51 THE CMO UNIT INVESTMENT TRUST, SERIES 2, certifies that it
meets all of the requirements for effectiveness of this
Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Post-Effective
Amendment of its Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized in the
Village of Lisle and State of Illinois on November 28, 1997.
THE FIRST TRUST SPECIAL SITUATIONS TRUST,
SERIES 51
THE CMO UNIT INVESTMENT TRUST, SERIES 2
(Registrant)
By NIKE SECURITIES L.P.
(Depositor)
By Robert M. Porcellino
Vice President
Pursuant to the requirements of the Securities Act of 1933,
this Post-Effective Amendment of Registration Statement has been
signed below by the following person in the capacity and on the
date indicated:
Signature Title Date
Robert D. Van Kampen Director of )
Nike Securities )
Corporation, ) November 28, 1997
the General Partner )
of Nike Securities L.P. )
)
) Robert M. Porcellino
David J. Allen Director of Nike ) Attorney-in-Fact**
Securities Corporation,
the Genral Partner of
Nike Securities L.P.
*The title of the person named herein represents his capacity in
and relationship to Nike Securities L.P., Depositor.
**An executed copy of the related power of attorney was filed
with the Securities and Exchange Commission in connection
with the Amendment No. 1 to Form S-6 of The First Trust
Combined Series 258 (File No. 33-63483) and the same is
hereby incorporated herein by this reference.
S-2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption
"Experts" and to the use of our report dated October 24, 1997 in
this Post-Effective Amendment to the Registration Statement and
related Prospectus of The First Trust Special Situations Trust
dated November 25, 1997.
ERNST & YOUNG LLP
Chicago, Illinois
November 24, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
Post Effective Amendment to form S-6 and is qualified in its entirety
by reference to such Post Effective Amendment to form S-6.
</LEGEND>
<SERIES>
<NUMBER> 002
<NAME> CMO UNIT INVESTMENT TRUST SERIES
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 591,427
<INVESTMENTS-AT-VALUE> 615,843
<RECEIVABLES> 3,950
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 619,793
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,086
<TOTAL-LIABILITIES> 5,086
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 591,427
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</TABLE>
