Rule 497(b)
Registration No. 33-50903
Note: Part A of This Prospectus May Not Be
Distributed Unless Accompanied by Part B.
MORTGAGE SECURITIES TRUST
CMO SERIES 14
The Trust is a unit investment trust designated Mortgage Series
Trust, CMO Series 14 Intermediate Portfolio (the "Trust"). The Trust consists
of an underlying portfolio of collateralized mortgage obligations ("CMOs" or
"Securities") and was formed to obtain safety of capital and provide a high
level of current distributions of interest income. The Trust seeks to obtain a
higher yield than fixed income investments with comparable AAA ratings. The
Trust seeks to achieve its objectives through investment in a fixed portfolio
of CMOs which may have been issued as debt obligations of a trust or
corporation or which may represent certificated interests of beneficial
ownership in pools of mortgage-backed securities. All of the CMOs in the
portfolio are backed by underlying mortgage-backed securities which are pledged
as collateral to secure payment of principal and interest on the CMOs. Each of
these underlying mortgage-backed securities is guaranteed as to the payment of
principal and interest by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal
Home Loan Mortgage Corporation ("FHLMC"). All of the CMOs in the Trust are
issued by GNMA, FNMA or FHLMC or were otherwise rated AAA by Standard & Poor's
and, therefore, the Units of the Trust were rated AAA by Standard & Poor's
Corporation. The Units of the Trust are not, however, guaranteed by GNMA, FNMA,
FHLMC, the United States or any of its agencies. The full faith and credit of
the United States is pledged to the payment of all amounts guaranteed by GNMA.
However, payments guaranteed by FNMA and FHLMC are not guaranteed by the United
States and neither the CMOs in the Trust nor any underlying Fannie Maes or
Freddie Macs constitute a debt obligation of the United States or any of its
agencies. The Sponsor is Reich & Tang Distributors L.P. The value of the Units
will fluctuate with the value of the CMOs in the portfolio. Both the Estimated
Current Return and the Estimated Long Term Return are subject to fluctuations
with changes in portfolio composition, principal payments and prepayments,
changes in the market value of the CMOs in the portfolio and changes in fees
and expenses. Minimum purchase: 1,000 Units.
This Prospectus consists of two parts. Part A contains the Summary
of Essential Information, including descriptive material relating to the Trusts
as of June 30, 1996 (the "Evaluation Date"), a summary of certain specific
information regarding the Trust and audited financial statements of the Trust,
including the Portfolio as of the Evaluation Date. Part B of this Prospectus
contains general information about the Trust. Part A may not be distributed
unless accompanied by Part B of this Prospectus.
Investors Should Read and 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
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus Part A Dated October 31, 1996
219084.1
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THE TRUST. The Trust is a unit investment trust designated Mortgage
Securities Trust, CMO Series 14 Intermediate Portfolio ("Intermediate
Portfolio"). The Trust was formed to obtain safety of capital and a high level
of current distributions of interest income through investment in a fixed
portfolio of CMOs. A CMO is a multiclass bond backed by a pool of mortgage
pass-through securities or mortgage loans. CMOs are also known as "real estate
mortgage investment conduits" (REMICs). As a result of the 1986 Tax Reform Act,
most CMOs are issued in REMIC form to create a certain tax advantage for the
issuer. The terms CMO and REMIC are used interchangeably. The Trust seeks to
obtain a higher yield than fixed income investments with comparable AAA
ratings.
The Intermediate Portfolio will invest primarily in planned
amortization or target amortization classes of CMOs. Such 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 principal is reduced only in specified amounts at
specified times resulting in greater predictability of principal payments for
the planned amortization bonds or targeted amortization bonds. For a discussion
on planned amortization bonds or targeted amortization bonds see "The
Trust--CMO Structure" in this Part A and "The Trust--The Securities-Planned
Amortization or Targeted Amortization Bonds and Support Bonds" in Part B of
this Prospectus. The Intermediate Portfolio may also invest in other types of
CMOs described above and in "The Trust--The Securities" in Part B of this
Prospectus.
All of the CMOs in the Trust are backed by underlying
mortgage-backed securities which are pledged as collateral to secure payment of
principal and interest on the CMOs. Each of these mortgage-backed securities is
guaranteed as to the payment of principal and interest by either the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC").
All of the CMOs in the Trust are issued by GNMA, FNMA or FHLMC or were
otherwise rated AAA by Standard & Poor's Corporation ("Standard & Poor's") and
therefore, the Units of the Trust were rated AAA by Standard & Poor's. There
can be no assurance that the Trust's investment objectives can be achieved. An
investment in the Trust should be made with an understanding of the risks
inherent in an investment in CMOs. (See "The Trust--Risk Considerations" in
this Part A.) The Units of the Trust represent an undivided interest in the
principal and net income of the Trust in the ratio of one thousand Units for
the indicated principal amount of Securities in the Trust. (See "The
Trust--Organization" in Part B of this Prospectus.) (For the specific number of
Units in the Trust, see "Summary of Essential Information" in this Part A.)
Generally, CMOs are designed to provide a substantial degree of
prepayment and reinvestment risk protection as compared to other mortgage
related securities. The CMOs may have been issued as debt obligations of a
trust or corporation or as certificated interests representing beneficial
ownership in a pool of mortgage-backed securities (See "The Trust--The
Securities" in Part B of this Prospectus for further description and examples)
which trust, corporation or pool may have been established for the sole purpose
of issuing CMOs by any of GNMA, FNMA or FHLMC or by a private business
organization. Such private business organizations are typically single-purpose
corporations established by mortgage-banking institutions for the sole purpose
of issuing CMOs. Any CMOs in the Trust that have been issued by private
business organizations have been rated AAA by Standard & Poor's. The sole
assets of the issuers of the CMOs are the underlying mortgage-backed
securities. If the collateral securing the Securities of these issuers is
insufficient to make payments on those Securities, it is unlikely that any
other assets of these issuers will be available for payment of the deficiency.
The underlying mortgage-backed securities which are pledged as collateral to
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secure the payment of principal and interest on the CMOs may be (i) "fully
modified pass-through" mortgage-backed certificates, guaranteed by GNMA
("Ginnie Maes"), (ii) mortgage pass-through certificates guaranteed by FNMA
("Fannie Maes") or (iii) mortgage participation certificates guaranteed by
FHLMC ("Freddie Macs"). The full faith and credit of the United States is
pledged to the payment of all amounts guaranteed by GNMA. However, payments
guaranteed by FNMA and FHLMC are not guaranteed by the United States and
neither the CMOs in the Trust nor any underlying Fannie Maes or Freddie Macs
constitute a debt or obligation of the United States or any of its agencies.
The Units of the Trust, as such, are not guaranteed by any of GNMA, FNMA,
FHLMC, the United States or any of its agencies. Additionally, CMOs that are
issued by GNMA, FNMA or FHLMC or by any entity established by GNMA, FNMA or
FHLMC are guaranteed as to payment of principal and interest by GNMA, FNMA or
FHLMC, respectively. The guaranty obligations of GNMA with respect to any
Ginnie Maes or any CMOs are supported by the full faith and credit of the
United States. However, the guaranty of obligations of FNMA and FHLMC with
respect to any Fannie Maes or Freddie Macs or any CMOs are obligations of FNMA
and FHLMC only (limited by their respective credit capabilities) and are not
supported by the full faith and credit of the United States or any other
governmental entity.
CMO Structure. CMOs are generally issued as a series of different
classes. An issue of CMOs generally is backed by a larger number of mortgages
than a pool of 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. Principal payments on the underlying mortgages are thereafter
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
allows a more predictable 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
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. If the rate of prepayment 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, then 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. (See "Description
of Portfolios" in this Part A for the number of planned amortization bonds,
targeted amortization bonds or support class bonds in the Trust portfolio.) The
rate of prepayment on the underlying mortgages of a CMO
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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.
Investors should be aware that the Federal Financial Institutions Examination
Council recently announced that certain high-risk CMO tranches are generally
not suitable investments for depository institutions.
Some of the CMOs in the Trust may be either a class of Guaranteed
REMIC Certificates ("REMIC Certificate") issued by FNMA or a class of REMIC
Certificates issued by FHLMC. A FNMA REMIC Certificate represents a beneficial
ownership interest in a certain class of a FNMA REMIC Trust consisting of
Fannie Maes, each of which in turn represents a beneficial interest in a pool
of first lien, single-family, fixed-rate residential mortgage loans. FNMA REMIC
Certificates are issued pursuant to trust agreements executed by FNMA in both
its corporate capacity and its capacity as trustee. A FNMA REMIC Certificate
evidences a beneficial ownership interest in the distribution of principal and
interest on the underlying Fannie Maes, subject to certain limits and in an
order of distribution established for the particular FNMA REMIC Trust. Each
FNMA REMIC Certificate is backed by the guaranty obligation of FNMA to
distribute on a timely basis required installments of principal and interest
and to distribute the principal balance of the FNMA REMIC Certificate in full
no later than an established final distribution date, notwithstanding
insufficiency of funds from the underlying Fannie Maes. A FHLMC REMIC
Certificate represents a beneficial ownership interest in a certain class of a
pool of Freddie Macs, each of which in turn represents undivided interests in
discrete pools of fixed-rate, first lien, residential mortgages or
participations therein purchased by FHLMC. FHLMC REMIC Certificates are issued
pursuant to multiclass mortgage participation certificate agreements executed
by FHLMC. A FHLMC REMIC Certificate evidences a beneficial ownership interest
in the distributions of principal and interest on the underlying Freddie Macs,
subject to certain limits and in an order of distribution established for the
particular FHLMC REMIC pool. Each FHLMC REMIC Certificate is backed by the
guaranty obligation of FHLMC to distribute required interest payments on a
timely basis and to distribute required principal payments as principal
payments on the underlying Freddie Macs are required to be made. Except with
respect to certain issues of "Gold" PCs, FHLMC generally does not guarantee
timely payment of principal but does guarantee ultimate payment. Both FNMA
REMIC Certificates and FHLMC REMIC Certificates pay interest monthly. (See "The
Trust--The Securities" in Part B of this Prospectus for a description of FHLMC
Gold PCs.)
If FNMA or FHLMC were unable to fulfill its guarantees,
distributions to holders of REMIC Certificates such as the Trust would consist
solely of payments and other recoveries upon the mortgages underlying the
pledged Fannie Maes or Freddie Macs, respectively, and, accordingly,
delinquencies and defaults would diminish distributions to the holders. (See
"Description of Portfolios" in this Part A for the number of FNMA REMIC
Certificates and FHLMC REMIC Certificates in each Trust portfolio.)
Some of the CMOs in the Trust may be a class of compound interest
bonds or principal only bonds. Interest on compound interest bonds is accrued
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and is added to principal. Such interest is not paid until all classes of CMOs
issued in the same series with earlier final distributions dates are paid in
full. Principal only bonds entitle the holder to no payments of interest but
the holder will receive cash flow from the amortization of principal and
prepayments. Both compound interest bonds and principal only bonds sell at a
deep discount from par. The Sponsor believes that a portfolio with a limited
amount of compound interest bonds and principal only bonds will assist the
Trust in achieving their objective of preserving capital. Since the principal
only bond will accrue to par if held to maturity, the holder of such a bond
would receive a full return of his or her initial investment upon maturity of
the bond. In addition, compound interest bonds also assist in the preservation
of capital as interest which accrues on these bonds is added to principal. (See
"Description of Portfolios" in this Part A for the amount of Securities in the
Trust that are a class of compound interest bonds or principal only bonds.)
Risk Considerations. An investment in Units of the Trust should be
made with an understanding of risks which an investment in fixed rate CMOs may
entail, including the risk that the value of the portfolio and, hence, the
value of the Units will decline with increases in interest rates and that the
life of the CMOs in the portfolio depends on the actual prepayments received on
the underlying mortgage-backed securities, the timing of which cannot be
determined but which may be sooner or later than anticipated, especially if
interest rates decline. The potential for appreciation, which could otherwise
be expected to result from a decline in interest rates, may be limited by any
increased prepayments by mortgagors. Investors should also note that
prepayments of principal on CMOs purchased at a premium over par will result in
some loss on investment while prepayments on CMOs purchased at a discount from
par will result in some gain on investment. Also, if interest rates rise, the
prepayment risk of higher yielding, premium CMOs and the prepayment benefit for
lower yielding, discount CMOs will be reduced. (See "The Trust-Life of the
Securities and of the Trust" in Part B of this Prospectus.) In addition, a
number of factors, including the extent of prepayments of principal on the
underlying mortgage-backed securities, affect the availability of funds for
payment of principal of bonds on any payment date and, therefore, the timing of
principal payments on each class of such bonds.
While all of the mortgage-backed securities underlying each of the
CMOs in the Trust are guaranteed as to the payment of principal and interest by
GNMA, FNMA or FHLMC, the CMOs in the Trust represent obligations solely of the
issuers of those CMOs and are not themselves insured or guaranteed by GNMA,
FNMA or FHLMC, or any other governmental agency. If a default were to occur
with respect to any of the CMOs, there can be no assurance that the collateral
securing such bonds would be sufficient to pay the principal and interest then
due.
CMOs are generally not listed on a national securities exchange or
on the National Association of Securities Dealers Automated Quotation System,
Inc. Whether or not CMOs are listed on a national securities exchange, the
principal trading market for the CMOs will generally be in the over-the-counter
market. As a result the existence of a liquid trading market for CMOs may
depend on whether dealers will make a market in CMOs. There can be no assurance
that a market will be made for any of the CMOs in the Trust, that any market
for the CMOs in the Trust's portfolios will be maintained or of the liquidity
of the CMOs in the Trust in any markets made. The price at which the CMOs in
the Trust may be sold to meet redemptions and the value of the Trust will be
adversely affected if trading markets for the CMOs in the Trust are limited or
absent. (See "The Trust--Liquidity" in Part B of this Prospectus.) In addition,
the Trust may be restricted under the Investment Company Act of 1940 from
selling securities to the Sponsor. However, taking into account the foregoing
and other factors, the Sponsor believes that the nature of the GNMA, FNMA or
FHLMC guarantees of any securities that have been
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issued by them, respectively, and the nature of the Ginnie Maes, Fannie Maes or
Freddie Macs securities payments of principal and interest due on the
Securities make the Securities adequately marketable for purposes of
redemptions of Units by the Trustee (see "Redemption" in Part B of this
Prospectus).
Investors should note that all of the CMOs in the Trust have been
issued by trusts, corporations or other entities that have elected to be
treated as Real Estate Mortgage Investment Conduits ("REMICs"). As such,
Certificateholders will be required to include in income their respective pro
rata share of interest on each Security (whether or not the Security has
original issue discount) as interest accrues, whether or not the
Certificateholder is an accrual method taxpayer. (See "Tax Status" in Part B of
this Prospectus.)
The principal amount of Securities actually deposited in the Trust
is affected by the prepayment estimate or factor for each CMO. If the
prepayment estimate or factor is adjusted because the level of actual
prepayments increases with respect to a particular CMO prior to the settlement
date of the Securities, the actual principal amount of Securities deposited in
Trust may be less than the amount noted above and the excess of any cash
returned to the Trust as a result of these prepayments will be held in the
Trust's principal account. Cash balances maintained in the principal account do
not generate income for the Trust.
Educational material regarding CMOs is available upon request, from
the Sponsor.
PUBLIC OFFERING PRICE. The secondary market Public Offering Price
per 1,000 Units of the Trust is equal to the aggregate bid side evaluation of
the underlying Securities in the Trust divided by the number of Units
outstanding times 1,000, plus a sales charge of 3.627% of the Public Offering
Price per 1,000 Units or 3.763% of the net amount invested in Securities per
1,000 Units of the Intermediate Portfolio. In addition, accrued interest to the
expected date of settlement is added to the Public Offering Price. If the Units
of the Intermediate Portfolio had been purchased on the Evaluation Date, the
Public Offering Price per 1,000 Units would have been $943.02, plus accrued
interest of $5.61, for a total of $948.63. The Public Offering Price per 1,000
Units may vary on a daily basis in accordance with the fluctuations in the
aggregate bid price of the Bonds. (See "Public Offering" in Part B of this
Prospectus.)
The figures abo`ve assume a purchase of 1,000 Units. The price of a
single Unit, or any multiple thereof, is calculated by dividing the secondary
market Public Offering Price per 1,000 Units by 1,000 and multiplying by the
number of Units.
DISTRIBUTIONS. Distributions of principal and interest income, less
expenses, will be made by the Trust monthly on the 20th of each month. (See
"Rights of Certificateholders--Interest and Principal Distributions" in Part B
of this Prospectus. For the estimated amount of distributions see "Summary of
Essential Information" for the Trust in this Part A.)
ESTIMATED LONG TERM RETURN AND ESTIMATED CURRENT RETURN. Estimated
Long Term Return for the Trust is calculated by: (1) computing the yield to
maturity for each CMO in the Trust's portfolio in accordance with accepted CMO
practices, which practices take into account not only the interest payable on
the CMO but also the amortization of premiums or accretion of discounts, if
any, and estimates of projected prepayments; (2) calculating the average of the
yields for the CMOs in the Trust's portfolio by weighing each CMO's yield by
the market value of the CMO and by the amount of time remaining to the date to
which the CMO is priced (thus creating an average
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yield for the portfolio of the Trust); and (3) reducing the average yield for
the portfolio of the Trust in order to reflect estimated fees and expenses of
the Trust and the maximum sales charge paid by Certificateholders. The
resulting Estimated Long Term Return represents a measure of the return to
Certificateholders earned over the estimated life of the Trust. (For the
Estimated Long Term Return to Certificateholders, see "Summary of Essential
Information" for Trust. See "Estimated Long Term Return and Estimated Current
Return" in Part B of this Prospectus.)
Estimated Current Return for the Trust is computed by dividing the
Estimated Net Annual Interest Income per 1,000 Units by the Public Offering
Price per 1,000 Units. In contrast to the Estimated Long Term Return, the
Estimated Current Return does not take into account estimates of prepayments or
the amortization of premium or accretion of discount, if any, on the CMOs in
the portfolio of the Trust. For the Estimated Net Annual Interest Income to
Certificateholders, see "Summary of Essential Information" in Part A.
If the CMOs in the Trust are priced at a discount, the Estimated
Current Return will generally be lower relative to the Estimated Long Term
Return, whereas if the CMOs are priced at a premium, the Estimated Current
Return will generally be higher relative to the Estimated Long Term Return.
This is because Estimated Current Return reflects primarily the interest rate
on the CMOs, while Estimated Long Term Return reflects yield and timing of
principal payments, and thus increases when the principal returned is greater
than the price paid for the CMOs (discount) and decreases when the principal
returned is lower than the price paid (premium). Estimated Long Term Return is
calculated using an estimated average life for the CMOs in the Trust. 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 CMOs priced at a discount
and lower if the CMOs are priced at a premium. Conversely, when a Trust has a
longer average life than is estimated, Estimated Long Term Return will be lower
if the CMOs are priced at a discount and higher if the CMOs are priced at a
premium. To calculate estimated average life several assumptions are made to
derive an estimated prepayment rate for the mortgages underlying the Ginnie
Maes, Fannie Maes or Freddie Macs that may back the CMOs in the Portfolio; the
calculation of estimated prepayment rates is based upon actual recent
prepayments and analysis of several factors including, among other things, the
spread between present market interest rates and the rate on the mortgages and
the housing environment. The estimated prepayment rate that is derived is then
applied to retire the principal amount of each CMO class of the same series as
each CMO in the Trust, including those CMOs in the Trust, according to the
specific principal reduction schedule of each series. For a more detailed
explanation of the calculation of estimated average life, see "Estimated Long
Term Return and Estimated Current Return" in Part B of this Prospectus. The
estimated average life for the Trusts is subject to change with alterations in
the data used in any of the underlying assumptions. The actual average lives of
the CMOs in the Trust portfolio and the actual long term returns will be
different from the estimated average lives and the estimated long term returns.
The Estimated Net Annual Interest Income per 1,000 Units of the
Trust will vary with changes in the fees and expenses of the Trustee and the
Evaluator applicable to the Trust and with the redemption, prepayment,
maturity, sale or other disposition of the CMOs in the Trust. The Secondary
Market Public Offering Price will vary with changes in the bid prices of the
CMOs. Therefore, there is no assurance that the present Estimated Current
Return or Estimated Long Term Return will be realized in the future.
Market for Units. The Sponsor, although not obligated to do so,
intends to maintain a secondary market for the Units at prices based on the
aggregate bid side evaluation of the Securities in the Trust. The reoffer
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price will be based on the aggregate bid side evaluation of the Securities,
divided by the number of Units outstanding times 1,000, plus a sales charge of
3.5% (3.627% of the net amount invested), plus net accrued interest for the
Intermediate Portfolio. If a market is not maintained a Certificateholder will
be able to redeem his or her Units with the Trustee at a price based on the
aggregate bid side evaluation of the Securities. (See "Sponsor Repurchase" in
Part B of this Prospectus.)
Total Reinvestment Plan. Distributions from the Trust are made to
Certificateholders monthly. The Certificateholder has the option, however, of
either receiving his interest check, together with any principal payments, from
the Trustee or participating in a reinvestment program offered by the Sponsor
in shares of The Treasurer's Fund, Inc., U.S. Treasury Money Market Portfolio
(the "Fund"). Gabelli-O'Connor Fixed Income Mutual Funds Management Co. serves
as the investment advisor of the Fund and GOC Fund Distributors, Inc. serves as
distributor for the Fund. Participation in the reinvestment option is
conditioned on the Fund's lawful qualification for sale in the state in which
the Certificateholder is a resident. The Plan is not designed to be a complete
investment program. See "Total Reinvestment Plan" in Part B of this Prospectus.
The shares of the Fund are not rated by Standard & Poor's.
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MORTGAGE SECURITIES TRUST
CMO SERIES 14, INTERMEDIATE PORTFOLIO
SUMMARY OF ESSENTIAL INFORMATION AS OF JUNE 30, 1996
Date of Deposit:* December 15, 1993 Evaluation Time: 4.00 p.m.
Principal Amount of New York Time.
Securities ................ $8,695,000 Minimum Principal Distribution:
Principal Amount of Secu- $1 per 1,000 Units.
rities per 1,000 Units..... $999.21 Weighted Average Life to
Number of Units ............. 8,701,900 Maturity: 8.3 years
Fractional Undivided Inter- Minimum Value of Trust:
est in Trust per Unit ..... 1/8701900 Trust may be terminated if
Secondary Market Public less than $4,000,000 in
Offering Price**+ principal amount of
Aggregate Bid Price of Securities.
Securities in Trust ..... $7,918,990.11 Mandatory Termination Date:
Divided by 8,701,900 Units The earlier of December 31,
times $1,000 ............ $910.03 2043 or the disposition of the
Plus Sales Charge of 3.627% last Security in the Trust.
of Public Offering Price $32.99 Trustee: The Chase Manhattan
Public Offering Price Bank.
per 1,000 Units........ $943.02 Trustee's Annual Fee: $.84 per
Redemption and Sponsor's $1,000.
Repurchase Price Evaluator: Kenny S&P
per 1,000 Units+ .......... $910.03+++# Evaluation Services.
Excess of Public Offering Evaluator's Fee for Each
Price over Redemption and Evaluation: $7 per
Sponsor's Repurchase Price evaluation.
per 1,000 Units#........... $32.99 Sponsor: Reich & Tang
Difference between Public Distributors L.P.
Offering Price per 1,000 Sponsor's Annual Fee: Maximum
Units and Principal of $.25 per $1,000
Amount per 1,000 Units principal amount of Securities
Premium/(Discount) ........ $56.19 (see "Trust Expense and
Charges" in Part B of this
Prospectus).
PER 1,000 UNIT INFORMATION
Gross annual interest income (cash)............................. $62.19
Less estimated annual fees and expenses......................... 1.62
Estimated net annual interest income (cash)..................... 60.57
Estimated interest distribution................................. 5.05
Estimated daily interest accrual............................... .1683
Estimated current return++(1)................................... 6.42%
Estimated long term return++(1)................................. 7.38%
Record dates.................................................... 1st of
each month
Interest distribution dates..................................... 20th of
each month
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Footnotes to Summary of Essential Information
* The Date of Deposit is the date on which the Trust Agreement was signed
and the deposit of the Bonds with the Trustee made.
** Per 1,000 Units.
+ Plus accrued interest.
++ The estimated current return and estimated long term return are increased
for transactions entitled to a discount (see "Volume and Other Discounts"
in Part B of this Prospectus).
+++ Based solely upon the bid side evaluation of the underlying Securities.
Upon tender for redemption, the price to be paid will be calculated as
described under "Trustee Redemption" in Part B of this Prospectus.
# See "Comparison of Public Offering Price, Sponsor's Repurchase Price and
Redemption Price" in Part B of this Prospectus.
(1) Estimated current return represents annual interest income after
estimated annual expenses divided by the Public Offering Price, including
a 3.627% maximum sales charge. Estimated long term return is the net
annual percentage return based on the yield on each underlying Security in
the Trust weighted to reflect market value and estimated average life. The
estimated weighted average life to maturity of the Trust is an estimate
based upon various assumptions discussed more fully under "Estimated Long
Term Return and Estimated Current Return" in Part B of this Prospectus.
Estimated long term return is adjusted for estimated expenses and the
maximum public offering price but not for delays in the Trust's
distribution of income. Estimated current return shows current annual
cash return to investors while estimated long term return shows the
return on Units held to estimated average life, reflecting prepayments of
principal, maturities, discounts and premiums on underlying Securities.
Actual returns will vary with purchase price, payments and prepayments of
principal on the underlying Ginnie Maes, Fannie Maes or Freddie Macs
which back the Securities, and changes in Trust income after expenses.
These returns do not include the effects of any delay in payments to
Unitholders and a calculation which includes those effects would be
lower. See "Estimated Long Term Return and Estimated Current Return" in
Part B of this Prospectus.
A-10
219084.1
<PAGE>
INFORMATION REGARDING THE TRUSTS
AS OF JUNE 30, 1996
Description of Portfolios
The Trust consists of 3 issues of CMOs. The Sponsor has not
participated as a sole underwriter or manager, co-manager or member of an
underwriting syndicate from which any of the initial aggregate principal amount
of the CMOs in the Portfolio were acquired. None of the CMOs have been issued
by entities created by GNMA, 3 have been issued by entities created by FNMA,
none have been issued by entities created by FHLMC and none have been issued by
private issuers. All of the CMOs in the Trust have been issued by trusts,
corporations or other entities that have elected to be treated as Real Estate
Mortgage Investment Conduits. The CMOs in the Trust have stated final
distribution dates ranging from April 25, 2021 through February 25, 2022 and
average lives (based on estimated prepayment rates on the initial date of
deposit) ranging from 6.14 to 12.74 years.
All of the CMOs in the Portfolio (representing $8,695,000 of the
principal amount of the Securities in the Trust) are planned amortization bonds
or targeted amortization bonds. None of the principal amount of the Securities
are support class bonds that are part of a series that contains planned
amortization bonds or targeted amortization bonds. $8,695,000 of the principal
amount of the Securities in the Trust are FNMA REMIC Certificates. None of the
principal amount of the Securities in the Trust are a class of compound
interest bonds or principal only bonds.
As of June 30, 1996, 37.9% of the aggregate principal amount of the
Securities in the Trust were acquired at a discount from par, 62.1% of the
Securities in the Trust were acquired at a premium and none were acquired at
par. A Certificateholder may receive more or less than his original purchase
price upon disposition of his Units because the value of the Units fluctuates
with the value of the underlying Securities.
A-11
219084.1
<PAGE>
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each Unit of each Trust outstanding for the periods listed
below:
Distribu-
tions of
Distributions Principal
Net Asset* of Interest During the
Value During the Period
Units Out- Per 1,000 Period (per (Per 1,000
Period Ended standing Units 1,000 Units) Units)
June 30, 1994 10,000,000 $891.33 $25.40 -0-
June 30, 1995 10,000,000 945.77 59.88 -0-
June 30, 1996 8,701,900 919.01 61.26 $130.33
- --------
* Net Asset Value per 1,000 Units is calculated by dividing net assets as
disclosed in the "Statement of Net Assets" by the number of Units
outstanding as of the date of the Statement of Net Assets. See Note 5 of
Notes to Financial Statements for a description of the components of Net
Assets.
A-12
219084.1
<PAGE>
Report of Independent Accountants
To the Sponsor Trustee and Certificateholders of
Mortgage Securities Trust, CMO Series 14 Intermediate
In our opinion, the accompanying statement of net assets, including the
portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Mortgage Securities Trust, CMO
Series 14 Intermediate (the "Trust") at June 30, 1996, the results of its
operations, the changes in its net assets and the financial highlights for the
year then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit, which included confirmation of
securities at June 30, 1996 by correspondence with the Trustee, provides a
reasonable basis for the opinion expressed above. The financial statements for
the prior periods presented were audited by other independent accountants whose
report dated September 15, 1995, except as to Note 7 as to which the date is
September 28, 1995, expressed an unqualified opinion on those financial
statements.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
October 16, 1996
<PAGE>
<TABLE>
<CAPTION>
Mortgage Securities Trust, CMO Series 14 Intermediate
Portfolio of Investments June 30, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Coupon Rate/ Estimated First
Final Principal
Portfolio Principal Distribution Distribution Date Market
No. Amount Securities(3) Date(1) (unaudited) Value(2)
<S> <C> <C> <C> <C> <C>
1 $ 2,400,000 Federal National 7.500% 7/25/2001 $ 2,325,648
Mortgage Association 2/25/2022
Guaranteed REMIC
Pass-Through
Certificates Fannie Mae
REMIC Trust - 1993
Class 2-PK
2 3,000,000 Federal National 7.000 8/25/1999 2,836,430
Mortgage Association 1/25/2022
Guaranteed REMIC
Pass-Through
Certificates Fannie Mae
REMIC Trust 1993 -
Class 9-PH
3 3,295,000 Federal National 4.588 8/25/2002 2,751,897
Mortgage Association 4/25/2021
Guaranteed REMIC
Pass-Through
Certificates Fannie Mae
REMIC Trust 1993 -
Class 16-H
------------------- -------------
$ 8,695,000 Total Investments (Cost (3) $8,386,130) $ 7,913,975
=================== =============
</TABLE>
See accompanying footnotes to portfolio and notes to financial statements.
<PAGE>
Mortgage Securities Trust, CMO Series 14 Intermediate
Footnotes to Portfolio - June 30, 1996
- --------------------------------------------------------------------------------
(1) See "The Trust - Portfolio" in Part B of this Prospectus for an
explanation of redemptions features. See "Tax Status" in Part B of
this Prospectus for a statement of the Federal tax consequences to a
Certificateholder upon the sale, redemption or maturity of a security.
(2) At June 30, 1996, the net unrealized depreciation of all the
securities was comprised of the following:
Gross Unrealized Appreciation $ 0
Gross Unrealized Depreciation (472,155)
------------------
Net Unrealized Depreciation $ (472,155)
==================
(3) All of the CMOs in the portfolio are backed by underlying
mortgage-backed securities which are pledged as collateral to secure
payment of principal and interest on the CMOs. All of the CMOs in the
Trust are issued by the Federal National Mortgage Association
("FNMA"). The Units of the Trust are not, however, guaranteed by FNMA,
the United States or any of its agencies. Payments guaranteed by FNMA
are not guaranteed by the United States and neither the CMOs in the
Trust nor any underlying Fannie Maes constitute a debt obligation of
the United States or any of its agencies.
The accompanying notes form an integral part of the financial statements.
<PAGE>
Mortgage Securities Trust, CMO Series 14 Intermediate
Statement of Net Assets
June 30, 1996
- --------------------------------------------------------------------------------
Investments in Marketable Securities,
at Market Value (Cost $8,386,130) $ 7,913,975
------------------
Other Assets
Accrued Interest 37,146
Cash 47,323
------------------
Total Other Assets 84,469
------------------
Other Liabilities
Accrued Expenses 1,350
------------------
Total Other Liabilities 1,350
------------------
Excess of Other Assets over Other Liabilities 83,119
------------------
Net Assets (8,701,900 Units of Fractional Undivided
Interest Outstanding, $919.01 per 1000 Units) $ 7,997,094
=================
The accompanying notes form an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Mortgage Securities Trust, CMO Series 14 Intermediate
Statements of Operations
- -------------------------------------------------------------------------------------------------------------------
For the Years Ended June 30,
1996 1995 1994
<S> <C> <C> <C>
Investment Income
Interest $ 581,688 $ 615,150 $ 333,216
-------------- -------------- -------------
Expenses
Trustee's Fees 12,020 21,894 8,527
Evaluator's Fees 3,819 1,470 -
Sponsor's Advisory Fee 2,500 - -
-------------- -------------- -------------
Total Expenses 18,339 23,364 8,527
-------------- -------------- -------------
Net Investment Income 563,349 591,786 324,689
-------------- -------------- -------------
Realized and Unrealized Gain (Loss)
Realized Gain (Loss) on
Investments (23,941) - -
Change in Unrealized Appreciation
(Depreciation) on Investments (208,394) 551,335 (815,096)
-------------- -------------- -------------
Net Gain (Loss) on Investments (232,335) 551,335 (815,096)
-------------- -------------- -------------
Net Increase (Decrease) in Net Assets
Resulting from Operations $ 331,014 $ 1,143,121 $ (490,407)
============== ============== =============
</TABLE>
The accompanying notes form an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Mortgage Securities Trust, CMO Series 14 Intermediate
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------------------------
For the Years Ended June 30,
1996 1995 1994
<S> <C> <C> <C>
Operations
Net Investment Income $ 563,349 $ 591,786 $ 324,689
Realized Gain (Loss)
on Investments (23,941) - -
Change in Unrealized Appreciation
(Depreciation) on Investments (208,394) 551,335 (815,096)
-------------- -------------- -------------
Net Increase (Decrease) in Net
Assets Resulting
From Operations 331,014 1,143,121 (490,407)
-------------- -------------- -------------
Distributions to Certificateholders
Investment Income 563,341 598,800 230,077
Redemptions
Interest 9,499 - -
Principal 1,218,737 - -
-------------- -------------- -------------
Total Distributions
and Redemptions 1,791,577 598,800 230,077
-------------- -------------- -------------
Total Increase (Decrease) (1,460,563) 544,321 (720,484)
Net Assets
Beginning of Year 9,457,657 8,913,336 9,633,820
-------------- -------------- -------------
End of Year (Including
Undistributed Net Investment
Income of $78,106, $87,598 and
$94,612, Respectively) $ 7,997,094 $ 9,457,657 $ 8,913,336
-------------- -------------- -------------
</TABLE>
The accompanying notes form an integral part of the financial statements.
<PAGE>
Mortgage Securities Trust, CMO Series 14 Intermediate
Notes to Financial Statements
June 30, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
1. Organization and Financial and Statistical Information
Mortgage Securities Trust, CMO Series 14 (the "Trust") was organized
on December 15, 1993 (date of deposit) by Bear Stearns & Co. Inc. and
Gruntal & Co., Incorporated (Co-Sponsors) under the laws of he State
of New York by a Trust Indenture and Agreement, and is registered
under the Investment Company Act of 1940. The Trust consists of an
underlying portfolio of collateralized mortgage obligations and was
formed to obtained safety of capital and provide a high level of
current distributions of interest income.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies
consistently followed by the Trust in preparation of its financial
statements. The policies are in conformity with generally accepted
accounting principles ("GAAP"). The preparation of financial
statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual amounts could differ
from those estimates.
Security Valuation
Investments are carried at market value which is determined by Kenny
S&P Evaluation Services, a business unit of J.J. Kenny Company, Inc.,
a subsidiary of The McGraw-Hill Companies, Inc. The market value of
the portfolio is based upon the bid prices for the bonds at the end of
the period, which approximates the fair value of the securities at
that date, except that the market value on the date of deposit
represents the cost to the Trust based on the offering prices for
investments at that date. The differences between cost (including
accumulated accretion of original issue discount on zero-coupon bonds)
and market value is reflected as unrealized appreciation
(depreciation) of investments. Securities transactions are recorded on
the trade date. Realized gains (losses) from securities transactions
are determined on the basis of average cost of the securities sold or
redeemed.
3. Income Taxes
No provision for federal income taxes has been made in the
accompanying financial statements because the Trust intends to
continue to qualify for the tax treatment applicable to Grantor Trusts
under the Internal Revenue Code. Under existing law, if the Trust so
qualifies, it will not be subject to federal income tax on net income
and capital gains that are distributed to unitholders.
<PAGE>
2
Mortgage Securities Trust, CMO Series 14 Intermediate
Notes to Financial Statements
June 30, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
4. Trust Administration
The Trustee has custody of assets and responsibility for the
accounting records and financial statements of the Trust and is
responsible for establishing and maintaining a system of internal
control related thereto. The Trustee is also responsible for all
estimates of expenses and accruals reflected in the Trust's financial
statements.
The Trust Indenture and Agreement provides for interest distributions
as often as monthly (depending upon the distribution plan elected by
the Certificateholders).
The Trust Indenture and Agreement further requires that principal
received from the disposition of bonds, other than those bonds sold in
connection with the redemption of units, be distributed to
Certificateholders.
The Trust Indenture and Agreement also requires the Trust to redeem
units tendered. For the year ended June 30, 1996, 1,298,100 units were
redeemed. No units had been redeemed for the years ended June 30, 1995
and 1994.
The Trust pays an annual fee for trustee services rendered by the
Trustee that is based on $.84 per $1,000 of outstanding investment
principal. In addition, $7.00 is paid to a service bureau for each
portfolio valuation. A maximum fee of $.25 per $1,000 of outstanding
investment principal is paid to the Sponsor. For the year ended June
30, 1996, the "Trustee's Fees" are comprised of Trustee fees of
$8,046, and other expenses of $3,974. The other expenses include
professional, printing and miscellaneous fees.
<PAGE>
3
Mortgage Securities Trust, CMO Series 14 Intermediate
Notes to Financial Statements
June 30, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
5. Net Assets
At June 30, 1996, the net assets of the Trust represented the interest
of Certificateholders as follows:
Original Cost to Certificateholders $ 9,983,233
Less Initial Gross Underwriting Commission (349,413)
------------------
9,633,820
Accumulated Cost of Bonds Sold,
Matured or Called (1,247,690)
Net Unrealized Depreciation (472,155)
Undistributed Net Investment Income 78,106
Undistributed Proceeds from Investments 5,013
------------------
Total $ 7,997,094
==================
The original cost to Certificateholders, less the initial gross
underwriting commission, represents the aggregate initial public
offering price net of the applicable sales charge on 10,000,000 units
of fractional undivided interest of the Trust as of the date of
deposit.
<PAGE>
4
Mortgage Securities Trust, CMO Series 14 Intermediate
Notes to Financial Statements
June 30, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
6. Financial Highlights (per 1,000 unit)*
Selected data for 1,000 units of the Trust outstanding for the year
ended June 30, 1996:
Net Asset Value, Beginning of Period** $ 945.77
Interest Income $ 62.21
Expenses (1.96)
-----------
Net Investment Income 60.25
Net Gain or Loss on Investments(1) 104.58
-----------
Total from Investment Operations 1,110.60
Less Distributions
to Certificateholders
Income 60.24
for Redemptions
Interest 1.02
Principal 130.33
-----------
Total Distributions 191.59
-----------
Net Asset Value, End of Period** $ 919.01
===========
See "Financial and Statistical Information" in Part A of this
Prospectus for amounts of per unit distributions during the years
ended June 30, 1996, 1995 and 1994 based on actual units.
(1) Net gain or loss on investments is a result of changes in outstanding
units since July 1, 1995 and the dates of net gain and loss on
investments.
- --------------------------------
* Unless otherwise stated, based upon average units outstanding during
the year of 9,350,950 ([10,000,000+8,701,900]/2).
** Based upon actual units outstanding.
<PAGE>
5
Mortgage Securities Trust, CMO Series 14 Intermediate
Notes to Financial Statements
June 30, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
7. Successor Sponsor
Effective September 28, 1995, Reich & Tang Distributors L.P. ("Reich &
Tang") has become the successor sponsor (the "Sponsor") to certain of
the unit investments trusts previously sponsored by Bear Stearns & Co.
Inc. As successor Sponsor, Reich & Tang has assumed all of the
obligations and rights of Bear Stearns & Co. Inc., the previous
sponsor.
Note: Part B of This Prospectus
May Not Be Distributed unless
Accompanied by Part A
Please Read and Retain Both Parts of This
Prospectus for Future Reference.
MORTGAGE SECURITIES TRUST
CMO SERIES
Prospectus Part B
Dated: October 31, 1996
THE TRUST
Organization
"Mortgage Securities Trust CMO Series" (the "Trust") consists of the
"unit investment trusts" designated as set forth in Part A.* The Trust was
created under the laws of the State of New York pursuant to the Trust Indenture
and Agreements** (the "Trust Agreement"), dated the Date of Deposit, among
Reich & Tang Distributors L.P. (successor Sponsor to Bear, Stearns & Co. Inc.),
or depending on the particular Trust, among Reich & Tang Distributors L.P. and
Gruntal & Co., Incorporated as Co-Sponsors (the Sponsor or Co-Sponsors, if
applicable, are referred to herein as the "Sponsor"), The Chase Manhattan Bank,
as Trustee, and Kenny S&P Evaluation Services, a business unit of J.J. Kenny
Company, Inc., a subsidiary of The McGraw-Hill Companies, Inc., as Evaluator.
The name of the Sponsor for a particular Trust is contained in the "Summary of
Additional Information" in Part A.
The Trust contains different issues of collateralized mortgage
obligations ("CMOs" or "Securities"). On the Date of Deposit the Sponsor
deposited with the Trustee the underlying Securities as set forth in Part A,
including delivery statements relating to contracts for the purchase of such
Securities, and cash or an irrevocable letter of credit issued by a major
commercial bank in the amount required for such purchases. Thereafter, the
Trustee delivered to the Sponsor units of interest ("Units") representing the
entire ownership of the Trust. Each "Unit" of a Trust outstanding on the
Evaluation Date represents an undivided interest or pro rata share in the
principal and interest of the Trust in the ratio of one Unit for the indicated
principal amount of Securities in that Trust on such date as specified in Part
A of this Prospectus. Certificateholders will have the right to have their
Units redeemed (see "Redemption") at a price based on the aggregate bid side
evaluation of the Securities. To the extent that any Units are redeemed by the
Trustee, the fractional undivided interest or pro rata share in the Trust
represented by each unredeemed Unit will increase, although the actual interest
in the Trust represented by such fraction will remain unchanged. Units will
remain outstanding until redeemed upon tender to the Trustee by
Certificateholders, which may include the Sponsor or the underwriters (the
"Underwriters"), or until the termination of the Trust Agreement. -------- *
This Part B relates to the outstanding series of Short-Intermediate Portfolio,
Intermediate Portfolio or Long-Intermediate Portfolio as reflected in Part A
attached hereto.
** References in this Prospectus to the Trust Agreement are qualified in
their entirety by the Trust Indenture and Agreement which is
incorporated herein.
1427.4
<PAGE>
Objectives
The Trust offers investors the opportunity to participate in a
portfolio of collateralized mortgage obligations with a greater degree of
safety and diversification than they might be able to acquire themselves. The
objectives of the Trust are to obtain safety of capital and a high level of
current distribution of interest income through investment in a fixed portfolio
of CMOs. The Trust seeks to obtain a higher yield than fixed income investments
with comparable AAA ratings. These CMOs may have been issued as debt
obligations of a trust or corporation or as certificated interests representing
beneficial ownership in pools of mortgage-backed securities. All of the CMOs in
the Trust are backed by underlying mortgage-backed securities which are pledged
as collateral to secure payment of principal and interest on the CMOs. Each of
these mortgage-backed securities is guaranteed by either the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC").
All of the CMOs in the Trust are issued by GNMA, FNMA or FHLMC or are otherwise
rated AAA by Standard & Poor's Ratings Services, a division of the McGraw-Hill
Companies ("Standard & Poor's") and, therefore, the Units of the Trust are
rated AAA by Standard & Poor's. However, neither GNMA, FNMA, FHLMC, the United
States or any of its agencies guarantees payment on Units of the Trust. The
full faith and credit of the United States is pledged to the payment of all
amounts guaranteed by GNMA. However, payments guaranteed by FNMA and FHLMC are
not guaranteed by the United States and neither the CMOs in the Trust nor any
underlying Fannie Maes or Freddie Macs constitute a debt obligation of the
United States or any of its agencies.
Investors should be aware that there is no assurance that the Trust's
objectives will be achieved. An investment in Units of the Trust should be made
with an understanding of the risks which an investment in a fixed portfolio of
fixed rate CMOs may entail, including the risk that the value of a Trust
portfolio and hence of the Units will decline with increases in interest rates.
It should also be noted that the potential for appreciation on the Securities
which would otherwise be expected to result from a decline in interest rates,
may tend to be limited by any increased prepayments including selling the
property, refinancing the mortgage or otherwise paying off the loan in whole or
in part by mortgagors as interest rates decline. In addition, prepayments of
principal on Securities purchased at a premium over par will result in some
loss on investment, while prepayments on Securities purchased at a discount
from par will result in some gain on investment. The Sponsor cannot predict
future economic policies or their consequences or, therefore, the course or
extent of any similar fluctuations in the future. Educational materials
regarding CMOs, including a discussion of risk factors, investment features of
CMOs and questions an investor should ask before investing are available, upon
request, from the Sponsor.
Since disposition of Units prior to final liquidation of the Trust
may result in an investor receiving less than the amount paid for such Units
(see "Comparison of Public Offering Price, Sponsor's Repurchase Price and
Redemption Price"), the purchase of a Unit should be looked upon as a long-term
investment. Neither the Trust nor the Total Reinvestment Plan are designed to
be complete investment programs.
Portfolios
The portfolios of the Trust consist of the Securities described in
"Description of Portfolio" in Part A.
In selecting Securities for deposit in the Trust, the Sponsor
considered the following factors, among others: (i) the types of CMOs
available, (ii) the yield and price of the Securities relative to other
-2-
1427.4
<PAGE>
comparable mortgage-backed securities, (iii) the estimated average lives and
prepayment schedules of the Securities, (iv) the payment provisions applicable
to the Securities, and (v) whether the Securities were issued after July 18,
1984 if interest thereon is United States source income.
The Trust consists of the Securities listed under "Portfolio" in Part
A as long as they may continue to be held from time to time in the Trust
together with accrued and undistributed interest thereon and undistributed and
uninvested cash realized from the disposition or redemption of Securities (see
"Trust Administration--Portfolio Supervision").
A CMO is a multiclass bond backed by a pool of mortgage pass-through
securities or mortgage loans. CMOs are also known as "real estate mortgage
investment conduits" (REMICs). As a result of the 1986 Tax Reform Act, most
CMOs are issued in REMIC form to create a certain tax advantage for the issuer.
The terms CMO and REMIC are used interchangeably. CMOs generally are bond-like
tranches of the cash flow from a mortgage pool. An issue of CMOs generally is
backed by a larger number of mortgages than a pool of Ginnie Maes, Fannie Maes
or Freddie Macs, thus allowing greater statistical prediction of prepayment
characteristics. CMOs also differ from regular mortgage-backed securities in
that the cash flow on the mortgage pool are applied to the various classes of
any series of CMOs in the order specified by that series, rather than to each
CMO in the series pro rata.
The Securities
The Securities in the Long-Intermediate Trust portfolio consist of
support class bonds, described below. The Securities in the Intermediate Trust
Portfolio may consist primarily of planned amortization or targeted
amortization bonds. The Securities in the Short-Intermediate Portfolio may
consist of one or more of several classes of CMOs, including:
Standard (Plain Vanilla) 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. In addition, some Standard
Bonds may be issued as a support class to Planned Amortization Bonds or
Targeted Amortization Bonds (see below).
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 Bond.
Adjustable Rate Bonds: Interest rates on this class of CMO may
increase or decrease at one or more specified dates 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) in relation to
generally accepted market interest rate indices. The interest rate is usually
capped to limit the extent of over-collateralization with mortgage-backed
securities required in order to ensure that there is sufficient cash flow to
service all the classes of CMOs in that series.
Planned Amortization Bonds or Targeted Amortization Bonds and Support
Bonds: Planned Amortization or Target Amortization 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
-3-
1427.4
<PAGE>
specified amounts at specified times resulting in greater predictability of
principal payments for the Planned Amortization Bonds or Targeted Amortization
Bonds. The greater predictability of cash flows for Planned Amortization and
Target Amortization Bonds is achieved by creating other classes of bonds
commonly called "support classes." Support classes generally receive principal
payments on any payment date only if scheduled payments have been made on
specified Planned Amortization and/or Target Amortization classes. Support
classes absorb the variability of principal cash flows from the underlying
mortgage-backed securities. For instance, 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 support classes of CMOs in the particular series
until the principal amount of each of the other classes has been paid in full,
resulting in less predictability of cash flows for the support classes.
Accordingly, the support classes are subject to a higher level of risk than the
Planned Amortization or Target Amortization Bonds because the support classes
have a higher degree of average life variability. Because the support classes
have a higher degree of average life variability, they generally pay a higher
yield.
Principal Only Bonds: This class of stripped CMOs 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. Slow
prepayment can also cause great delays in recognizing gains.
Pledged as collateral to secure the payment of interest and principal
on each type of CMO in the Portfolio will be Ginnie Maes, Fannie Maes or
Freddie Macs, guaranteed by GNMA, FNMA and FHLMC, respectively. The Units of
the Trust, however, will not be guaranteed by GNMA, FNMA, FHLMC, the United
States or any of its agencies. The Trust may contain CMOs, the collateral
pledged to secure which, are mortgages referred to as "Relocation Mortgages."
Relocation Mortgages are issued expressly to finance home purchases by
transferred employees. Since such mortgages are related to the relocation of
the individual rather than housing activity and mortgages rates generally, the
anticipated prepayment rate for them is different than other individual
mortgage-backed securities. Historically, prepayment speeds with respect to
Relocation Mortgages are faster and less interest rate sensitive than
traditional single family mortgages. Therefore, with respect to any CMOs in the
Trust supported by such Relocation Mortgages, the Trust would expect to receive
prepayment of principal on such instruments at a faster rate than that with
respect to other CMOs in the 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 partially 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
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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. 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 U.S. 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
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 default
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 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 residential
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.
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Freddie Macs. Freddie Macs represent an undivided interest in a pool
of first lien, residential mortgages and mortgage participations ("Mortgages"
or "PCs") purchased by FHLMC. PCs include "Gold PCs," "Original PCs," "ARM
PCs," "Gold Giant PCs," "Original Giant PCs," and "ARM Giant PCs." PCs may
include whole loans, participation interests in whole loans and undivided
interest in whole loans or participations comprising other PCs. For example,
Gold PCs, Original PCs and ARM PCs represent undivided interests in discrete
pools consisting of Mortgages. Gold Giant PCs, Original Giant PCs and ARM Giant
PCs represent beneficial ownership interests in discrete pools consisting of
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 PCs 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.
Special Features of Market Discount Securities
Certain of the Securities in the Trust may have been valued at a
market discount. Securities trade at less than par value because the interest
rates on the Securities are lower than interest on comparable obligations being
issued at currently prevailing interest rates. The current returns of
Securities trading at a market discount are lower than the current returns of
comparably rated obligations of a similar type issued at currently prevailing
interest rates because discount securities tend to increase in market value as
they approach maturity and the full principal amount becomes payable. If
currently prevailing interest rates for newly issued and otherwise comparable
securities increase, the market discount of previously issued securities will
become deeper, and if currently prevailing interest rates for newly issued
comparable securities decline, the market discount of previously issued
securities will be reduced, other things, including, without limitation, credit
quality and rate of prepayment, being equal. Investors should also note that
the value of the Securities valued at a market discount will increase faster
than the Securities valued at a market premium if interest rates decrease.
Conversely, if interest rates increase, the value of the Securities valued at a
market discount will decrease faster than the Securities valued 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. Market discount attributable to interest rate
changes does not indicate a lack of market confidence in the issue.
Special Features of Market Premium Securities
Certain of the Securities in the Trust may have been valued at a
market premium. Securities trade at a premium because the interest rates on the
Securities are higher than interest on comparable obligations being issued
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at currently prevailing interest rates. The current returns of Securities
trading at a market premium are higher than the current returns of comparably
rated obligations 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 principal amount becomes payable. Because part of
the purchase price is returned not at maturity but through current income
payments, an early redemption of a premium security at par will result in a
reduction in yield. If currently prevailing interest rates for newly issued and
otherwise comparable securities increase, the market premium of previously
issued securities will decline and if currently prevailing interest rates for
newly issued comparable securities decline the market premium of previously
issued securities will increase, other things, including, without limitation,
credit quality and rate of prepayment, being equal. Market premium attributable
to interest rate changes does not indicate 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. Because certain of the
Securities from time to time may be redeemed or will mature in accordance with
their terms or may be sold under certain circumstances, no assurance can be
given that the Trust will retain its present size and composition for any
length of time. The proceeds from the sale of a Security or the exercise of any
redemption or call provision will be distributed to Certificateholders except
to the extent such proceeds are applied to meet redemptions of Units (see
"Trustee Redemption").
Liquidity
The Securities in the Trust have been registered, or are exempt from
registration, under the Securities Act of 1933 and, therefore, may be sold by a
Trust 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 for the Securities will be maintained or of the liquidity of
the Securities in any markets made. In addition, the Trust 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 Trust 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 of any Securities that have been issued by them, respectively,
and the nature of the Ginnie Maes, Fannie Maes or Freddie Macs security
payments of principal and interest due on the Securities make the Securities
adequately marketable for purposes of redemption of Units by the Trustee (see
"Redemption").
Limited Assets and Limited Liability
Except as indicated under "Description of Portfolio" in Part A 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 Ginnie
Mae, Fannie Mae or Freddie Mac-collateralized CMOs. None of the securities
issued by the Limited Purpose Issuers (including the Securities deposited in
the Trust) are guaranteed by the parent company or any other affiliate of any
Limited Purpose Issuer. Consequently, holders of these securities (including
the Trust) must rely upon payments on the Ginnie Maes,
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Fannie Maes or Freddie Macs and upon any other collateral securing the
securities (including the Securities deposited in the Trust) 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 Trust) 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 the Securities is guaranteed by GNMA, FNMA and FHLMC,
respectively, the CMOs (including the Securities deposited in the Trust 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. A default
with respect to the securities of a particular Issuer (including the Securities
of the Issuer deposited in the Trust) may not necessarily result from a
corresponding default with respect to the underlying Ginnie Maes, Fannie Maes
or Freddie Macs.
For any Securities that have been issued by issuers other than GNMA,
FNMA or FHLMC, the Sponsor has obtained representations from the issuer that it
has received an opinion of counsel 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. With respect to any
Securities of issuers that have been exempted from the definition of an
investment company by order of the Securities and Exchange Commission, the
value of the Securities will not exceed more than 5% individually, or 10% in
the aggregate, of the total value of the Securities in the Trust.
Life of the Securities and of the Trust
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 a pool of
Ginnie Maes, Fannie Maes or Freddie Macs, thus allowing greater statistical
prediction of prepayment characteristics. However, mortgage prepayment rates
are likely to fluctuate significantly from time to time and investors should
consider the associated risks. (See "Risk Considerations" in Part A.) 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
allows a more predictable 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. If the rate of prepayments
on the underlying mortgages is faster than assumed, then classes with maturity
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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 (see "Description of Portfolios" in
each Part A for the number of planned amortization bonds, target amortization
bonds and support bonds contained in the Trust portfolios). With respect to the
Long-Intermediate Portfolio, this fluctuation may be substantial, both in the
amount of income earned and in the timing of principal distributions. This
fluctuation may adversely affect the repurchase and redemption prices of Units
of the Long-Intermediate Portfolio. 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, 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 prepayment period for any class of CMO is based upon certain assumptions
as to the prepayment speed of the underlying mortgages, which assumptions may
prove to be inaccurate over time. See "Estimated Long Term Return and Estimated
Current Return."
All of the mortgages in the pools relating to the Ginnie Maes, Fannie
Maes or Freddie Macs backing the Securities in the 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 the Trust will retain for any length of time its present size
and composition (see "Redemption").
While the mortgages on the 1 to 4 family dwellings underlying Ginnie
Maes, Fannie Maes or Freddie Macs which may back 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
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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
"Estimated Long Term Return and Estimated Current 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 or Freddie Macs which back the Securities in the Trust
and, accordingly, there can be no assurance that the prepayment levels which
will be actually realized will conform to the estimated levels. Changes in
prepayment patterns, as reported by each of GNMA, FNMA and FHLMC 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 rooms and pricing of CMOs.
Moreover, there is no assurance that the pools of mortgage loans relating to
the Securities in the 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 the 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 Portfolio to a size resulting in
the termination of the Trust (termination for this reason would be delayed if
additional Units are issued). Early termination of a Trust may have important
consequences to Certificateholders, e.g., 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.
PUBLIC OFFERING
Offering Price
The secondary market Public Offering Price per 1,000 Units of the
Trust is computed by adding to the aggregate bid price of the Securities in the
Trust divided by the number of Units outstanding times 1,000, an amount equal
to (a) for the Short-Intermediate Portfolio, 3.627% of the aggregate bid
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price of the Securities per 1,000 Units which is equal to 3.5% of the Public
Offering Price per 1,000 Units, (b) for the Intermediate Portfolio, 3.896% of
the aggregate bid price of the Securities per 1,000 Units which is 3.75% of the
Public Offering Price per 1,000 Units and (c) for the Long-Intermediate
Portfolio, 4.167% of the aggregate offering price of the Securities per 1,000
Units which is equal to 4% of the Public Offering Price per 1,000 Units. A
proportionate share of accrued interest on the Securities is added to the
Public Offering Price. Accrued interest is the accumulated and unpaid interest
on Securities from the last day on which interest was paid and is accounted for
daily by the Trust at the initial daily rate set forth under "Summary of
Essential Information" in Part A. The Public Offering Price can vary on a daily
basis from the amount stated in this Prospectus in accordance with fluctuations
in the prices of the Securities and the price to be paid by each investor will
be computed as of the date the Units are purchased. The aggregate bid price
evaluation of the Bonds is determined in the manner set forth under "Trustee
Redemption."
The Evaluator may obtain current bid or offering prices for the
Securities from investment dealers or brokers (including the Sponsor) that
customarily deal in CMOs or from any other report service or source of
information which the Evaluator deems appropriate.
Accrued Interest
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
the Trust is actually paid monthly to the Trust. However, interest on
Securities in the Trust is accounted for daily on an accrual basis. Because of
this, a Trust always has an amount of interest earned but not yet collected by
the Trustee because of non-collected coupons. For this reason, the Public
Offering Price of Units will have added to it the proportionate share of
accrued and undistributed interest to Date of Settlement.
A Certificateholder will not recover his proportionate share of
accrued interest until the Units are sold or redeemed, or the Trust is
terminated. At that time, the Certificateholder will receive his proportionate
share of the accrued interest computed to the Settlement Date in the case of
sale or termination and to the date of tender in the case of redemption.
Employee Discounts
Employees (and their immediate families) of Reich & Tang Distributors
L.P. and its affiliates, Gruntal & Co., Incorporated and of any underwriter of
a Trust, pursuant to employee benefit arrangements, may purchase Units of a
Trust at a price equal to the bid side evaluation of the underlying securities
in the Trust divided by the number of Units outstanding plus a reduced sales
charge. Such arrangements result in less selling effort and selling expenses
than sales to employee groups of other companies. Resales or transfers of Units
purchased under the employee benefit arrangements may only be made through the
Sponsor's secondary market, so long as it is being maintained.
Distribution of Units
Certain banks and thrifts will make Units of the Trust available to
their customers on an agency basis. A portion of the sales charge paid by their
customers is retained by or remitted to the banks. Under the Glass- Steagall
Act, banks are prohibited from underwriting Units; however, the Glass-Steagall
Act does permit certain agency transactions and the banking regulators have
indicated that these particular agency transactions are
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permitted under such Act. In addition, state securities laws on this issue may
differ from the interpretations of federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to state
law.
The Sponsor intends to qualify the Units for sale in substantially
all States through the Underwriters and through dealers who are members of the
National Association of Securities Dealers, Inc. Units may be sold to dealers
at prices which represent a concession of up to $25 per 1,000 Units, subject to
the Sponsor's right to change the dealers' concession from time to time. In
addition, for transactions of 1,000,000 Units or more, the Sponsor intends to
negotiate the applicable sales charge and such charge will be disclosed to any
such purchaser. Such Units may then be distributed to the public by the dealers
at the Public Offering Price then in effect. The Sponsor reserves the right to
reject, in whole or in part, any order for the purchase of Units. The Sponsor
reserves the right to change the discounts from time to time.
Sponsor's and Underwriters' Profits
The Sponsor will receive a gross commission equal to (a) for the
Short-Intermediate Portfolio, 3.5% of the Public Offering Price per 1,000 Units
(equivalent to 3.627% of the net amount invested in the Securities), (b) for
the Intermediate Portfolio, 3.75% of the Public Offering Price per 1,000 Units
(equivalent to 3.896% of the net amount invested in the Securities) and (c) for
the Long-Intermediate Portfolio, 4% of the Public Offering Price per 1,000
Units (equivalent to 4.167% of the net amount invested in the Securities). In
addition, in maintaining a market for the Units (see "Sponsor's Repurchase")
the Sponsor will realize profits or sustain losses in the amount of any
difference between the price at which they buy Units and the price at which
they resell such Units.
Participants in the Total Reinvestment Plan can designate a broker as
the recipient of a dealer concession (see "Total Reinvestment Plan").
Comparison of Public Offering Price, Sponsor's
Repurchase Price and Redemption Price
The secondary market Public Offering Price of the Units will be
determined on the basis of the current bid prices of the Securities in the
Trust, plus the applicable sale charges. The value at which Units may be resold
in the secondary market will be determined on the basis of the aggregate bid
side evaluation of the Securities. On the Evaluation Date, the Public Offering
Price per 1,000 Units and the Sponsor's Repurchase Price per 1,000 Units (each
based on the bid side evaluation of the Securities) each exceeded the
Redemption Price per 1,000 Units and the Sponsor's secondary market Repurchase
Price per 1,000 Units (based on the current bid side evaluation of the
Securities) by the amounts shown under "Summary of Essential Information" in
Part A.
ESTIMATED LONG TERM RETURN AND ESTIMATED CURRENT RETURN
The rate of return on an investment in Units of the Trust is measured
in terms of "Estimated Current Return" and "Estimated Long Term Return" as
described below.
The Estimated Net Annual Interest Income per 1,000 Units for the
Trust, set forth under "Summary of Essential Information", shows the return
based on $1.00 principal amount per Unit after deducting estimated annual fees
and expenses. This figure will change as Securities mature, are prepaid,
exchanged, redeemed, pair or sold, as replacements or Additional Securities
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are purchased and deposited in the Trust or as the expenses of the Trust
change.
In actual operation, payments received in respect of the mortgages
underlying the Ginnie Maes, Fannie Maes or Freddie Macs which in turn back the
Securities will consist of a portion representing interest and a portion
representing principal. Although the aggregate monthly payment made by the
obligor on each mortgage remains constant (aside from optional prepayments of
principal), in the early years the larger proportion of each payment will
represent interest, while in later years, the proportion representing interest
will decline and the proportion representing principal will increase, although
the interest rate remains constant. Moreover, by reason of optional
prepayments, payments in the earlier years on mortgages may be substantially in
excess of those required by the amortization schedules of these mortgages;
conversely, payments in later years may be substantially less since the
aggregate unpaid principal balances of the underlying mortgages and, hence, the
related Ginnie Maes, Fannie Maes or Freddie Macs may have been greatly
reduced--ultimately even sufficiently reduced to accelerate termination of the
Trust. To the extent that those Securities bearing the higher interest rate
represented in the Portfolio are prepaid faster than other Securities, the net
annual interest per 1,000 Units and the return on the Units can be expected to
decline. Monthly payments to the Certificateholders will reflect all of the
foregoing factors.
Interest on the Securities in the Trust, less estimated fees of the
Trustee and Sponsor and certain other expenses, is expected to accrue per 1,000
Units at the daily rate (based on a 360-day year) shown under "Summary of
Essential Information". The actual daily rate will vary as Securities are
prepaid, exchanged, redeemed, paid or sold or as the expenses of the Trust
change.
The Estimated Current Return and the Estimated Long Term Return for
each Trust on the Evaluation Date are set forth under "Summary of Essential
Information" in Part A. Estimated Long Term Return is calculated by: (1)
computing the yield to maturity for each CMO in the Trust's portfolio in
accordance with accepted CMO practices, which practices take into account not
only the interest payable on the CMO but also the amortization of premiums or
accretion of discounts, if any, and estimated appropriate prepayments; (2)
calculating the average of yields for the CMOs in the Trust's portfolio by
weighing each CMOs' yield by the market value of the CMO and by the amount of
time remaining to the date to which the CMO is priced (thus creating an average
yield for the portfolio of the Trust); and (3) reducing the average yield for
the portfolio of the Trust in order to reflect estimated fees and expenses of
the Trust and the maximum sales charge paid by Certificateholders. The
resulting Estimated Long Term Return represents a measure of the return to
Certificateholders earned over the estimated life of the Trust.
Estimated Current Return for each Portfolio is computed by dividing
the Estimated Net Annual Interest Income per 1,000 Units by the Public Offering
Price per 1,000 Units. In contrast to the Estimated Long Term Return, the
Estimated Current Return does not take into account the amortization of premium
or accretion of discount, if any, on the CMOs in the portfolio of the Trust.
The calculation of an estimated average life for any Security in the
Trust is a two stage process. First, several assumptions are made to derive an
estimated prepayment rate for the mortgages underlying the Ginnie Maes, Fannie
Maes or Freddie Macs which back the Securities. Based upon historical
prepayment data provided by GNMA, FNMA or FHLMC an assumption is made as to how
the prepayment behavior of the mortgages will be affected as they amortize.
However, because historical prepayment data afford only a limited basis upon
which to analyze prepayment behavior, the Sponsor has
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developed an econometric model that allows an analysis of several other
important variables. The principal variables are the spread between present
market interest rates and the interest rate on the mortgages and the turnover
rate in the housing market. Finally, the Sponsor uses this model's prepayment
predictions to derive an estimated prepayment rate for the mortgage pool,
expressed in terms of the PSA Prepayment Model, from which an estimated average
life an estimated prepayment schedule can be projected for the Ginnie Maes,
Fannie Maes or Freddie Macs themselves. While the various estimates made in
this first stage are subjected to rigorous analysis, investors should be aware
that they are based upon reported statistical relations that may not remain
constant and assumptions about the future of an uncertain economic environment.
The second stage in determining the estimated average life of any
Security in the 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 or Freddie Macs 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 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 those other classes. The estimated
average life for the Trust provided under the "Summary of Essential
Information" 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.
Both Estimated Current Return and Estimated Long Term Return are
subject to fluctuation with changes in Portfolio composition, principal
payments and prepayments and changes in market value of the underlying
Securities and changes in fees and expenses, including sales charges, and
therefore can be materially different than the figures set forth under the
Summary of Essential Information. The size of any difference between Estimated
Current Return and Estimated Long Term Return can also be expected to fluctuate
at least as frequently. In addition, both return figures may not be directly
comparable to yield figures used to measure other investments, and since the
return figures are based on certain assumptions and variables the actual
returns received by a Certificateholder may be higher or lower. The Estimated
Long Term Return and Estimated Current Return calculations do 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
lower figures.
In addition to the Public Offering Price, the price of a Unit
includes accrued interest on the Securities. Securities deposited in the Trust
include an item of accrued but unpaid interest up to the date of delivery of
the Securities. Certificateholders pay for this additional accrued interest
when they purchase Units. In addition, interest accruing after the date of
delivery of the Securities is added to the Public Offering Price. Accrued
interest earns no return.
The payment dates of the Securities may vary and therefore accrued
interest at any time may be greater than the amount of interest actually
received by the Trust and distributed to Certificateholders. Therefore, accrued
interest (if any) is always added to the value of the Units. If a
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Certificateholder sells all or a portion of his Units, he will receive his
proportionate share of the accrued interest from the purchaser of his Units.
Similarly, if a Certificateholder redeems all or a portion of his Units, the
Redemption Price per Unit will include accrued interest on the Securities.
RIGHTS OF CERTIFICATEHOLDERS
Certificates
Ownership of Units of the Trust is evidenced by registered
Certificates executed by the Trustee and the Sponsor. Certificates may be
issued in denominations of one thousand or more Units. Certificates are
transferable by presentation and surrender to the Trustee properly endorsed
and/or accompanied by a written instrument or instruments of transfer. Although
no such charge is presently made or contemplated, the Trustee may require a
Certificateholder to pay $2.00 for each Certificate reissued or transferred and
any governmental charge that may be imposed in connection with each such
transfer or interchange. Mutilated, destroyed, stolen or lost Certificates will
be replaced upon delivery of satisfactory indemnity and payment of expenses
incurred.
Interest and Principal Distributions
Interest received by each Trust is credited by the Trustee to an
Interest Account for the Trust. Proceeds representing principal received from
the maturity, redemption, sale or other disposition of the Securities are
credited to the Principal Account of the Trust.
Distributions to each Certificateholder from the Interest Account are
computed as of the close of business on each Record Date for the following
Payment Date and consist of an amount substantially equal to such Certificate-
holder's pro rata share of the amount of interest received on the Securities
during such month in the Interest Account less amounts deducted or estimated to
be deducted as discussed below. Distributions from the Principal Account of
each Trust (other than amount representing failed contracts, as previously
discussed) will be computed as of each monthly Record Date, and will be made to
the Certificateholders of that Trust on the next monthly Payment Date. Proceeds
representing principal received from the disposition of any of the Securities
between a Record Date and a Payment Date which are not used for redemptions of
Units will be held in the Principal Account and not distributed until the
second succeeding monthly Payment Date. No distributions will be made to
Certificateholders electing to participate in the Total Reinvestment Plan.
Persons who purchase Units between a Record Date and a Payment Date will
receive their first distribution on the second Payment Date after such
purchase. All funds in respect of the Securities received and held by the
Trustee prior to distribution to Certificateholders may be of benefit to the
Trustee and do not bear interest to Certificateholders.
As of the first day of each month, the Trustee will deduct from the
Interest Account of each Trust, and, to the extent funds are not sufficient
therein, from the Principal Account of the Trust, amounts necessary to pay the
expenses of the Trust (as determined on the basis set forth under "Trust
Expenses and Charges"). The Trustee also may withdraw from said accounts such
amounts, if any, as it deems necessary to establish a reserve for any
applicable taxes or other governmental charges that may be payable out of the
Trust. Amounts so withdrawn shall not be considered a part of the Trust's
assets until such time as the Trustee shall return all or any part of such
amounts to the appropriate accounts. In addition, the Trustee may withdraw from
the Interest and Principal Accounts such amounts as may be necessary to cover
purchases of Replacement Securities and redemptions of Units by the Trustee.
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The estimated monthly distribution per 1,000 Units will be in the
approximate amount shown under "Summary of Essential Information" in Part A and
will change and may be reduced as Securities are prepaid or are redeemed,
exchanged or sold, or as expenses of the Trust fluctuate. No distribution need
be made from the Principal Account until the balance therein is an amount
sufficient to distribute $1 per 1,000 Units.
Records
The Trustee shall furnish Certificateholders in connection with each
distribution a statement of the amount of interest, if any, and the amount of
the receipts, if any, which are being distributed, expressed in each case as a
dollar amount per 1,000 Units. 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 Certificateholder of record, a statement showing (a) as
to the Interest Account: interest received, amounts paid for purchases of
Replacement Securities and redemptions of Units, if any, deductions for
applicable taxes and fees and expenses of the Trust, 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 of each 1,000
Units outstanding on the last business day of such calendar year; (b) as to the
Principal Amount: the dates of disposition of any Securities and the net
proceeds received therefrom, deductions for payments of applicable taxes and
fees and expenses of the Trust, amounts paid for purchases of Replacement
Securities and redemptions of Units, if any, 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 of each 1,000 Units
outstanding on the last business day of such calendar year; (c) a list of the
Securities held and the number of Units outstanding on the last business day of
such calendar year; (d) the Redemption Price per 1,000 Units based upon the
last computation thereof made during such calendar year; and (e) amounts
actually distributed to Certificateholders during such calendar year from the
Interest and Principal Accounts, separately stated, of the Trust, expressed
both as total dollar amounts and as dollar amounts representing the pro rata
share of each 1,000 Units outstanding on the last business day of such calendar
year.
The Trustee shall keep available for inspection by Certificateholders
at all reasonable times during usual business hours, books or record and
account of its transactions as Trustee, including records of the names and
address of Certificateholders, Certificates issued or held, a current list of
Securities in the Portfolio and a copy of the Trust Agreement.
TAX STATUS
The Sponsor believes that (i) each Security the interest on which is
United States source income (which is the case for most Securities issued by
United States issuers) was or will have been issued after July 18, 1984, (ii)
each Security is a regular interest in a REMIC, as defined in Sections 860A-G
of the Code, and (iii) interest on any Security issued by a non-United States
issuer is not subject to any foreign withholding taxes under current law. There
can be no assurance, however, that foreign withholding taxes will not be
imposed on interest on Securities issued by non-United States issuers in the
future.
Neither the Sponsor nor Battle Fowler LLP has made or will make a
review of the facts and circumstances relating to the issuance of any Security.
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Based on the foregoing, in the opinion of Battle Fowler LLP, special
counsel for the Sponsor, under existing law:
The Trust is not an association taxable as a corporation for
Federal income tax purposes, and income received by the Trust will be
treated as the income of the Certificateholder in the manner set forth
below.
Each Certificateholder will be considered the owner of a pro
rata portion of each Security in the Trust under the grantor trust
rules of Sections 671-679 of the Internal Revenue Code of 1986, as
amended (the "Code"). In order to determine the face amount of the
Certificate- holder's pro rata portion of each Security on the initial
Date of Deposit, see Principal Amount of Securities under "Portfolio."
The total cost to a Certificateholder of his Units, including sales
charges, is allocated among his or her pro rata portion of each
Security (in proportion to the fair market values thereof on the date
the Certificateholder purchases his Units) in order to determine his
tax cost for his pro rata portion of each Security. In order for a
Certificateholder who purchases his Units on the initial Date of
Deposit to determine the fair market value of his pro rata portion of
each Security on such date, see Cost of Securities to Trust under
"Portfolio."
A Certificateholder will be required to include in income his
or her respective pro rata share of interest on each Security (whether
or not the Security has original issue discount, as discussed below)
as interest accrues, whether or not the Certificateholder is an
accrual method taxpayer. An individual Certificateholder who itemizes
deductions may deduct his pro rata share of fees and expenses of the
Trust only to the extent that such amount together with the
Certificateholder's other miscellaneous deductions exceeds 2% of his
adjusted gross income and subject to overall restrictions on itemized
deductions set forth in Section 68 of the Code.
The Trust may contain Securities which were originally issued
at a discount ("original issue discount"). In general, original issue
discount is defined as the difference between the price at which a
security was issued and its stated redemption price at maturity.
Original issue discount on a Security will accrue as interest over the
life of the Security under a formula based on the compounding of
interest. Such formula requires the adoption by the issuer of the
Securities of certain prepayment assumptions, discussed in more detail
in "Estimated Long Term Return and Estimated Current Return."
Certificateholders are urged to consult their own tax advisers. In the
case of a Certificateholder who purchases Units in a trust holding a
Security that was originally issued at a discount, the amount of
original issue discount that will accrue will be reduced if the
Certificateholder purchases the Units at a price that reflects a lower
yield for the Security than the yield thereon at the time of the
original issuance of such Security. Each Certificateholder will be
required to include in income in each year the amount of original
issue discount which accrues during the year on his pro rata portion
of any Security originally issued at a discount. The amount of
original issue discount so included in income in respect of a
Certificateholder's pro rata portion of a Security is added to the
Certificateholder's tax cost therefor.
If a Certificateholder's tax cost for his pro rata portion of
a Security exceeds the redemption price at maturity thereof, the
Certificateholder will be considered to have purchased his pro rata
portion of the Security at a "premium." The Certificateholder (except
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in the case of a dealer in securities or one who holds debt
obligations primarily for sale to customers in the ordinary course of
his trade or business) may elect to amortize the premium prior to the
maturity of the Security. The amount amortized in any year should be
applied to offset the Certificateholder's interest from the Security
and should result in an adjustment to basis (i.e., a reduction of the
Certificateholder's tax cost) for his pro rata portion of the
Security.
A Certificateholder will recognize taxable gain or loss when
all or part of his pro rata portion of a Security is disposed of for
an amount greater or less than his original tax cost therefor plus any
accrued original issue discount or minus any amortized premium. Any
such taxable gain or loss will be capital gain or loss, except in the
case of a dealer, and except as provided for in the next paragraph.
Any gain from the disposition of a Certificateholder's pro
rata portion of a Security issued after July 18, 1984 and acquired by
the Certificateholder at "market discount" (i.e., if the
Certificateholder's original cost for his pro rata portion of the
Security (plus any original issue discount which has accrued thereon)
is less than its stated redemption price at maturity) will be treated
as ordinary income to the extent the gain does not exceed the accrued
market discount. The deduction of capital losses is subject to
limitations. A Certificate- holder will be considered to have disposed
of all or part of his pro rata portion of each Security when he sells
or redeems all or some of his Units. A Certificateholder will also be
considered to have disposed of all or part of his pro rata portion of
a Security when all or part of the Security is sold by the Trust or is
redeemed or paid at maturity.
Units that are owned by Certificateholders, other than a
dealer in securities or one who holds debt obligations primarily for
sale to customers in the ordinary course of his trade or business, are
capital assets and generally produce capital gains and losses upon
their sale or disposition. Gain realized upon the sale or disposition
of an interest in a REMIC, however, will be ordinary income to the
extent of unaccrued original issue discount as determined by a
prescribed formula.
Under the income tax laws of the State and City of New York,
the Trust is not an association taxable as a corporation and income
received by the Trust will be treated as the income of the
Certificateholders in the same manner as for Federal income tax
purposes.
Notwithstanding the foregoing, a Certificateholder who is not
a citizen or resident of the United States or a United States domestic
corporation (a "Foreign Certificateholder") will generally not be
subject to United States Federal income taxes, including withholding
taxes, or information reporting, on the interest income (including any
original issue discount) on, or any gain from the sale or other
disposition of, his pro rata portion of any Security provided that (i)
the interest income or gain is not effectively connected with the
conduct by the Foreign Certificateholder of a trade or business within
the United States, (ii) if the interest is United States source income
(which is the case on most Securities issued by United States
issuers), the Security is issued after July 18, 1984 and the Foreign
Certificate- holder does not own, actually or constructively, 10% or
more of the total combined voting power of all classes of voting stock
of the issuer of the Security and 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 Certificateholder (if an individual) is not present in the
United States for 183 days or more during the taxable year and does
not have a "tax home" (as defined in Section 911(d)(3) of the Code) in
the United
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States, and the gain is not attributable to an office or fixed place
of business maintained by such individual in the United States, and
(iv) the Foreign Certificateholder provides the required certification
of his status and of the matters contained in clauses (i), (ii) and
(iii) above. Foreign Certificateholders should consult their own tax
advisers with respect to United States Federal income tax consequences
of ownership of Units.
After the end of each calendar year, the Trustee will furnish to each
Certificateholder an annual statement containing information relating to the
interest received by the Trust on the Securities, the gross proceeds received
by the Trust from the disposition of any Security (resulting from redemption or
payment at maturity of any Security or the sale by the Trust of any Security),
and the fees and expenses paid by the Trust. The Trustee will also furnish
annual information returns to each Certificateholder and to the Internal
Revenue Service.
The foregoing discussion relates only to United States Federal and,
to a limited extent, New York State and City income taxes. Certificateholders
may be subject to taxation in New York or in other jurisdictions (including a
Foreign Certificateholder's country of residence) and should consult their own
tax advisers in this regard.
Tax-Exempt Investors
Entities that generally qualify for an exemption from federal income
tax, such as many pension trusts, are nevertheless taxed under Section 511 of
the Code on "unrelated business taxable income." Unrelated business taxable
income is income from a trade or business regularly carried on by the
tax-exempt entity that is unrelated to the entity's exempt purpose. Unrelated
business taxable income generally does not include interest income or gain from
the sale of investment property, unless such income is derived from property
that is debt-financed or such gain is derived from property that is dealer
property. A tax-exempt entity's interest income from the Trust and gain from
the sale of Units in the Trust or the Trust's sale of Securities is not
expected to constitute unrelated business income to such tax-exempt entity
unless the acquisition of the Unit itself is debt-financed or constitutes
dealer property in the hands of the tax-exempt entity.
Before investing in the Trust, the trustee or investment manager of
an employee benefit plan (e.g., a pension or profit sharing retirement plan)
should consider among other things (i) whether the investment is prudent under
ERISA, taking into account the needs of the plan and all of the facts and
circumstances of the investment in the Trust; (ii) whether the investment
satisfies the diversification requirement of Section 404(a)(1)(C) of ERISA; and
(iii) whether the assets of the Trust are deemed "plans assets" under ERISA and
the Department of Labor regulations regarding the definition of "plan assets."
Prospective tax-exempt investors are urged to consult their own
advisors prior to investing in the Trust.
LIQUIDITY
Sponsor Repurchase
The Sponsor, although not obligated to do so, intends to maintain a
secondary market for the Units and continuously to offer to repurchase the
Units. The Sponsor's secondary market repurchase price after the initial public
offering is completed will be based on the aggregate bid price of the
Securities in the Trust and will be the same as the redemption price. The
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aggregate bid price will be determined by the Evaluator on a daily basis after
the initial public offering is completed and computed on the basis set forth
under "Trustee Redemption". Certificateholders who wish to dispose of their
Units should inquire of the Sponsor as to current market prices prior to making
a tender for redemption. The Sponsor may discontinue repurchase of Units if the
supply of Units exceeds demand, or for other business reasons. The date of
repurchase is deemed to be the date on which Certificates representing Units
are physically received in proper form by Reich & Tang Distributors L.P., 600
Fifth Avenue, New York, New York 10020, on behalf of the Sponsor. Units
received after 4 P.M., New York Time, will be deemed to have been repurchased
on the next business day. In the event a market is not maintained for the
Units, a Certificateholder may be able to dispose of Units only by tendering
them to the Trustee for redemption.
Units purchased by the Sponsor in the secondary market may be
reoffered for sale by the Sponsor at a price based on the aggregate bid price
of the Securities in the Trust plus (a) for the Short-Intermediate Portfolio, a
3.5% sales charge (3.627% of the net amount invested) plus net accrued
interest, (b) for the Intermediate Portfolio, a 3.75% sales charge (3.896% of
the net amount invested) plus net accrued interest and (c) for the Long-
Intermediate Portfolio, a 4% Sales Charge (4.167% of the net amount invested)
plus net accrued interest. Any Units that are purchased by the Sponsor in the
secondary market also may be redeemed by the Sponsor if it determines such
redemption to be in its best interest.
The Sponsor may, under certain circumstances, as a service to
Certificateholders, elect to purchase any Units tendered to the Trustee for
redemption (see "Trust Redemption"). Factors which the Sponsor will consider in
making a determination will include the number of Units of the Trust which it
has in inventory, its estimate of the salability and the time required to sell
such Units and general market conditions. For example, if in order to meet
redemption of Units the Trustee must dispose of Securities, and if such
disposition cannot be made by the redemption date (seven calendar days after
render), the Sponsor may elect to purchase such Units. Such purchase shall be
made by payment to the Certificateholder not later than the close of business
on the redemption date of an amount equal to the Redemption Price on the date
of tender.
Trustee Redemption
Units may also be tendered to the Trustee for redemption at any time
prior to the termination of the Trust at its unit investment trust office at
770 Broadway, New York, New York 10003, upon proper delivery of Certificates
representing such Units and payment of any relevant tax. Effective on or after
November 15, 1996 the address of the Trustee's unit investment trust office
will be 4 New York Plaza, New York, New York 10004. At the present time there
are no specific taxes related to the redemption of Units. No redemption fee
will be charged by the Sponsor or the Trustee. Units redeemed by the Trustee
will be canceled.
Certificate representing Units to be redeemed must be delivered to
the Trustee and must be properly endorsed or accompanied by proper instruments
of transfer with signature guaranteed (or by providing satisfactory indemnity,
as in the case of lost, stolen or mutilated Certificates). Thus, redemptions of
Units cannot be effected until Certificates representing such Units have been
delivered by the person seeking redemption. (See "Certificates".)
Certificateholders must sign exactly as their names appear on the faces of
their Certificates. 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.
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Within three calendar days following a tender for redemption, or, if
such third day is not a business day, on the first business day prior thereto,
the Certificateholder will be entitled to receive in cash an amount for each
Unit tendered equal to the Replacement Price per Unit computed as of the
Evaluation Time set forth under "Summary of Essential Information" in Part A on
the date of tender. The "date of tender" is deemed to be the date on which
Units are received by the Trustee, except that with respect to Units received
after the close of trading on the New York Stock Exchange, the date of tender
is the next day on which such 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.
Accrued interest paid on redemption shall be 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 Trustee is empowered to sell Securities in order to
make funds available for redemptions. Such sales, if required, could result in
a sale of Securities by the Trustee at a loss. To the extent Securities are
sold, the size and diversity of the Trust will be reduced.
The Redemption Price per Unit is the pro rata share of each Unit in a
Trust determined by the Trustee on the basis of (i) the cash on hand in the
Trust or moneys in the process of being collected, (ii) the value of the
Securities in the Trust based on the bid prices of such Securities and (iii)
interest accrued thereon, less (a) amounts representing taxes or other
governmental charges payable out of the Trust, (b) the accrued expenses of the
Trust and (c) cash allocated for the distribution to Certificateholders of
record as of the business day prior to the evaluation being made. The Evaluator
may determine the value of the Securities in the Trust (i) if the Securities
are listed on a national securities exchange (CMOs are usually not so listed),
based on the closing sale prices on that exchange (unless the Evaluator deems
these prices inappropriate as a basis for valuation), (ii) if the Securities
are not so listed or, if so listed and the principal market therefor is other
than on the exchange or there are no closing sale prices on the exchange, based
on the closing sale prices on the over-the-counter market (unless the Evaluator
deems these prices inappropriate as a basis for evaluation), (iii) if closing
sale prices are unavailable, (a) on the basis of current bid or offering prices
for the Securities, (b) if bid or offering prices are not available for any
Securities, on the basis of current bid or offering prices for comparable
securities, (c) by appraising the value of the Securities on the bid or
offering side of the market or (d) by any combination of the above. The
Evaluator may obtain current price information as to the Securities from
investment dealers or brokers (including the Sponsor) which customarily deal in
this type of security.
While the Sponsor believes that Securities of the type included in
the Trust involve minimal risk of loss of principal, due to variations in
interest rates the market value of these Securities, and Redemption Price per
Unit (particularly of the Long-Intermediate Portfolio), can be expected to
fluctuate during the period of an investment in the Trust.
The Trustee is irrevocably authorized in its discretion, if the
Sponsor does not elect to purchase a Unit tendered for redemption or if the
Sponsor tenders a Unit for redemption, in lieu of redeeming such Unit, to sell
such Unit in the over-the-counter market for the account of the tendering
Certificateholder at prices which will return to the Certificateholder an
amount in cash, net after deducting brokerage commissions, transfer taxes and
other charges, equal to or in excess of the Redemption Price for such Unit. The
Trustee will pay the net proceeds of any such sale to the Certificate- holder
on the day he would otherwise be entitled to receive payment of the Redemption
Price.
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The Trustee reserves the right to suspend the right of redemption and
to postpone the date of payment of the Redemption Price per Unit for any period
during which the New York Stock Exchange is closed, other than customary
weekend and holiday closings, or trading on that Exchange is restricted or
during which (as determined by the Securities and Exchange Commission) an
emergency exists as a result of which disposal or evaluation of the Bonds is
not reasonably practicable, or for such other periods as the Securities and
Exchange Commission may by order permit. The Trustee and the Sponsor is not
liable to any person or in any way for any loss or damage which may result from
any such suspension or postponement.
A Certificateholder who wishes to dispose of his Units should inquire
of his bank or broker in order to determine if there is a current secondary
market price in excess of the Redemption Price.
TOTAL REINVESTMENT PLAN
Distributions of interest and principal, if any, from the Trust are
made to Certificateholders monthly. The Certificateholder has the option,
however, of either receiving his interest check, together with any principal
payments, from the Trustee or participating in a reinvestment program offered
by the Sponsor in shares of The Treasurer's Fund, Inc., U.S. Treasury Money
Market Portfolio (the "Fund"). Participation in the reinvestment option is
conditioned on the Fund's lawful qualification for sale in the state in which
the Certificateholder is a resident.
Upon enrollment in the reinvestment option, the Trustee will direct
interest and/or principal distributions, if any, to the Fund. The Fund seeks to
maximize current income and to maintain liquidity and a stable net asset value
by investing in short term U.S. Treasury Obligations which have effective
maturities of one year or less. For more complete information concerning the
Fund, including charges and expenses, the Certificateholder should fill out and
mail the card attached to the inside back cover of this Prospectus. The
prospectus for the Fund will be sent to Certificateholders. The
Certificateholder should read the prospectus for the Fund carefully before
deciding to participate. The shares of the Fund are not rated by Standard &
Poor's.
TRUST ADMINISTRATION
Portfolio Supervision
The Trust is a unit investment trust and is not an actively managed
fund. Traditional methods of investment management for a managed fund typically
involve frequent changes in a portfolio of securities on the basis of economic,
financial and market analyses. The portfolios of the Trust, however, will not
be actively managed and therefore the adverse financial condition of an issuer
will not require the sale of its Securities from the Portfolios. However, the
Sponsor may direct the disposition of Securities upon default in payment of
amounts due on any of the Securities, institution of certain legal proceedings,
default in payment of amounts due on other securities of the same issuer or
guarantor, or decline in price or the occurrence of other market or credit
factors that in the opinion of the Sponsor would make the retention of these
Securities detrimental to the interest of the Certificateholders. If a default
in the payment of amounts due on any Security occurs and if the Sponsor fails
to give instructions to sell or hold that Security, the Indenture provides that
the Trustee, within 30 days of that failure by the Sponsor, shall sell the
Security.
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The Sponsor is required to instruct the Trustee to reject any offer
made by an issuer of any of the Securities to issue new Securities in exchange
or substitution for any Securities pursuant to a refunding or refinancing plan,
except that the Sponsor may instruct the Trustee to accept or reject any offer
or to take any other action with respect thereto as the Sponsor may deem proper
if (a) the issuer is in default with respect to these Securities or (b) in the
written opinion of the Sponsor the issuer will probably default with respect to
these Securities in the reasonably foreseeable future. Any Securities so
received in exchange or substitution will be held by the Trustee subject to the
terms and conditions of the Indenture to the same extent as Securities
originally deposited thereunder. Within five days after the deposit of
Securities in exchange or substitution for underlying Securities, the Trustee
is required to give notice thereof to each Certificateholder, identifying the
Securities eliminated and the Securities substituted therefor. Except as stated
herein, the acquisition by the Trust of any securities other than the
Securities initially deposited is prohibited.
Trust Agreement, Amendment and Termination
The Trust Agreement may be amended by the Trustee, the Sponsor and
the Evaluator without the consent of any of the Certificateholders; (1) to cure
any ambiguity or to correct or supplement any provision which may be defective
or inconsistent; (2) to change any provision thereof as may be required by the
Securities and Exchange Commission or any successor governmental agency; or (3)
to make such other provisions in regard to matters arising thereunder as shall
not adversely affect the interests of the Certificateholders.
The Trust Agreement may also be amended in any respect, or
performance of any of the provisions thereof may be waived, with the consent of
the holders of Certificates evidencing 66-2/3% of the Units then outstanding
for the purpose of modifying the rights of Certificateholders; provided that no
such amendment or waiver shall reduce any Certificateholder's interest in a
Trust without his consent or reduce the percentage of Units required to consent
to any such amendment or waiver without the consent of the holders of all
Certificates. The Trust Agreement may not be amended, without the consent of
the holders of all Certificates in a Trust then outstanding, to increase the
number of Units issuable or to permit the acquisition of any bonds in addition
to or in substitution for those initially deposited in such Trust, except in
accordance with the provisions of the Trust Agreement. The Trustee shall
promptly notify Certificateholders, in writing, of the substance of any such
amendment.
The Trust Agreement provides that the Trust shall terminate upon the
maturity, redemption or other disposition, as the case may be, of the last of
the Securities held in the Trust but in no event is it to continue beyond the
end of the calendar year preceding the fiftieth anniversary of the execution of
the Trust Agreement. If the value of the Trust shall be less than the minimum
amount set forth under "Summary of Essential Information" in Part A, the
Trustee may, in its discretion, and shall when so directed by the Sponsor,
terminate such Trust. Each Trust may also be terminated at any time with the
consent of the holders of Certificates representing 100% of the Units then
outstanding. In the event of termination, written notice thereof will be sent
by the Trustee to all Certificateholders. Within a reasonable period after
termination, the Trustee must sell any Securities remaining in the terminated
Trust, and, after paying all expenses and charges incurred by the Trust,
distribute to each Certificateholder, upon surrender for calculation of his
Certificate for Units, his pro rata share of the Interest and Principal
Accounts.
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The Sponsor
The Sponsor, Reich & Tang Distributors L.P. ("Reich & Tang")
(successor to the Unit Investment Trust Division of Bear, Stearns & Co. Inc.),
a Delaware limited partnership, is engaged in the brokerage business and is a
member of the National Association of Securities Dealers, Inc. Reich & Tang is
also a registered investment adviser. Reich & Tang maintains its principal
business offices at 600 Fifth Avenue, New York, New York 10020. Reich & Tang
Asset Management L.P. ("RTAM LP"), a registered investment adviser, having its
principal place of business at 399 Boylston Street, Boston, MA 02116, is the
99% limited partner of the Sponsor. RTAM LP is 99.5% owned by New England
Investment Companies, LP ("NEIC LP") and Reich & Tang Asset Management, Inc., a
wholly owned subsidiary of NEIC LP, owns the remaining .5% interest of RTAM LP
and is its general partner.
NEIC LP's general partner is New England Investment Companies, Inc.
("NEIC"), a holding company offering a broad array of investment styles across
a wide range of asset categories through ten investment advisory/management
affiliates and two distribution affiliates. These affiliates in the aggregate
are investment advisers or managers to over 57 registered investment companies.
Reich & Tang is the successor sponsor for numerous series of unit investment
trusts, including, New York Municipal Trust, Series 1 (and Subsequent Series),
Municipal Securities Trust, Series 1 (and Subsequent Series), 1st Discount
Series (and Subsequent Series), Multi-State Series 1 (and Subsequent Series),
Mortgage Securities Trust, Series 1 (and Subsequent Series), Insured Municipal
Securities Trust, Series 1 (and Subsequent Series), 5th Discount Series (and
Subsequent Series), and Equity Securities Trust, Series 1, Signature Series,
Gabelli Communications Income Trust (and Subsequent Series).
On August 30, 1996, the merger of New England Mutual Life Insurance
Company and Metropolitan Life Insurance Company ("MetLife") became effective,
with MetLife being the continuing company. RTAM LP remains a wholly-owned
subsidiary of NEIC LP, a New York Stock Exchange listed company, but its sole
general partner is now an indirect subsidiary of MetLife. MetLife also
indirectly owns a majority of the outstanding limited partnership interest of
NEIC LP.
MetLife is a mutual life insurance company with assets of $142.2
billion at March 31, 1996. It is the second largest life insurance company in
the United States in terms of total assets. MetLife provides a wide range of
insurance and investment products and services to individuals and groups and is
the leader among United States life insurance companies in terms of total life
insurance in force, which exceeded $1.2 trillion at March 31, 1996 for MetLife
and its insurance affiliates. MetLife and its affiliates provide insurance or
other financial services to approximately 36 million people worldwide.
For certain other Trusts as set forth in the "Summary of Essential
Information" in Part A, the Co-Sponsors are Reich & Tang and Gruntal & Co.,
Incorporated, both of whom have entered into an Agreement Among Co-Sponsors
pursuant to which both parties have agreed to act as Co-Sponsors for the Trust.
Reich & Tang has been appointed by Gruntal & Co., Incorporated as agent for
purposes of taking any action required or permitted to be taken by the Sponsors
under the Trust Agreement. If the Sponsors are unable to agree with respect to
action to be taken jointly by them under the Trust Agreement and they cannot
agree as to which Sponsor shall act as sole Sponsor, then Reich & Tang shall
act as sole Sponsor. If one of the Sponsors fails to perform its duties under
the Trust Agreement or becomes incapable of acting or becomes bankrupt or its
affairs are taken over by public authorities, that Sponsor may be discharged
under the Trust Agreement and a new Sponsor may be appointed or the remaining
Sponsor may continue to act as Sponsor.
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Gruntal & Co., Incorporated, a Delaware corporation, operates a
securities broker/dealer from its main office in New York City and branch
offices in ten states. The firm is active in the marketing of investment
companies and has signed dealer agreements with many major mutual fund groups.
Further, through its Syndicate Department, Gruntal & Co. Incorporated has
underwritten a large number of Closed-End Funds and has been Co-Manager on the
following offerings: Cigna High Income Shares; Dreyfus New York Municipal
Income, Inc.; Franklin Principal Maturity Trust and Van Kampen Merritt Limited
Term High Income Trust.
The information included herein is only for the purpose of informing
investors as to the financial responsibility of the Sponsor and their ability
to carry out their contractual obligations.
The Sponsor is liable for the performance of their obligations
arising from their responsibilities under the Trust Agreement, but will be
under no liability to Certificateholders for taking any action, or refraining
from taking any action, in good faith pursuant to the Trust Agreement, or for
errors in judgment except in cases of their own willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations and duties.
The Sponsor may resign at any time by delivering to the Trustee an
instrument of resignation executed by the Sponsor.
If at any time either of the Sponsor shall resign or fail to perform
any of its duties under the Trust Agreement or becomes incapable of acting or
becomes bankrupt or its affairs are taken over by public authorities, then the
Trustee may either (a) appoint a successor Sponsor; (b) terminate the Trust
Agreement and liquidate the Trust; or (c) continue to act as Trustee without
terminating the Trust Agreement. Any successor Sponsor appointed by the Trust
shall be satisfactory to the Trustee and, at the time of appointment, shall
have a net worth of at least $1,000,000.
The Trustee
The Trustee is The Chase Manhattan Bank with its principal executive
office located at 270 Park Avenue, New York, New York 10017, (800) 428-8890 and
its unit investment trust office at 770 Broadway, New York, New York 10003.
Effective on or after November 15, 1996 the address of the Trustee's unit
investment trust office will be 4 New York Plaza, New York, New York 10004. The
Trustee is subject to the 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 shall not be liable or responsible in any way for taking
any action, or for refraining from taking any action, in good faith pursuant to
the Trust Agreement, or for errors in judgment; or for any disposition of any
moneys, Securities or Certificates in accordance with the Trust Agreement,
except in cases of its own willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations and duties; provided, however, that the
Trustee shall not in any event be liable or responsible for any evaluation made
by the Evaluator. In addition, the Trustee shall not be liable for any taxes or
other governmental charges imposed upon or in respect of the Securities or the
Trust which it may be required to pay under current or future law of the United
States or any other taxing authority having jurisdiction. The Trustee shall not
be liable for
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depreciation or loss incurred by reason of the sale by the Trustee of any of
the Securities pursuant to the Trust Agreement.
For further information relating to the responsibilities of the
Trustee under the Trust Agreement, reference is made to the material set forth
under "Rights of Certificateholders.
The 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 Certificateholders. In such an event, the Sponsor is obligated to
appoint a successor Trustee as soon as possible. In addition, 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 Trust Agreement. Notice of such removal and
appointment shall be mailed to each Certificateholder by the Sponsor. If upon
resignation of the Trustee no successor has been appointed and has accepted the
appointment within thirty 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 the Trustee becomes effective only when the
successor Trustee accepts its appointment as such or when a court of competent
jurisdiction appoints a successor Trustee. Upon execution of a written
acceptance of such appointment by such successor Trustee, all the rights,
powers, duties and obligations of the original Trustee shall vest in the
successor.
Any corporation into which the Trustee may be merged or with which it
may be consolidated, or any corporation resulting from any merger or
consolidation to which the Trustee shall be a party, shall be the successor
Trustee. The Trustee must always be a banking corporation organized under the
laws of the United States or any state and have at all times an aggregate
capital, surplus and undivided profits of not less than $2,500,000.
The Evaluator
The Evaluator is Kenny S&P Evaluation Services, a business unit of
J.J. Kenny Company, Inc., a subsidiary of The McGraw-Hill Companies, with main
offices located at 65 Broadway, New York, New York 10006. The Evaluator is a
registered investment advisor and also provides financial information services.
The Trustee, the Sponsor and the Certificateholders may rely on any
evaluation furnished by the Evaluator and shall have no responsibility for the
accuracy thereof. Determinations by the Evaluator under the Trust Agreement
shall be made in good faith upon the basis of the best information available to
it, provided, however, that the Evaluator shall be under no liability to the
Trustee, the Sponsor or Certificateholders for errors in judgment, except in
cases of its own willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
The Evaluator may resign or may be removed by the Sponsor and
Trustee, and 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
thirty days after notice of resignation, the Evaluator may apply to a court of
competent jurisdiction for the appointment of a successor.
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TRUST EXPENSES AND CHARGES
At no cost to the Trust, the Sponsor has borne the expenses of
creating and establishing the Trust, including the cost of initial preparation
and execution of the Trust Agreement, registration of the Trust and the Units
under the Investment Company Act of 1940 and the Securities Act of 1933, the
initial preparation and printing of the Certificates, legal expenses,
advertising and selling expenses, expenses of the Trustee including, but not
limited to, an amount equal to interest accrued on certain "when issued"
securities since the date of settlement for the Units, initial fees and other
out-of-pocket expenses. The fees of the Evaluator, however, incurred during the
Initial Public Offering are paid directly by the Trust.
The Sponsor will not charge the Trust a fee for its services as such.
(See "Sponsor's and Underwriters' Profits.")
The Sponsor will receive for portfolio supervisory services to the
Trust an Annual Fee in the amount set forth under "Summary of Essential
Information" in Part A. The Sponsor's fee may exceed the actual cost of
providing portfolio supervisory services for the Trust, but at no time will the
total amount received for portfolio supervisory services rendered to all series
of the Mortgage Securities Trust in any calendar year exceed the aggregate cost
to the Sponsor of supplying such services in such year. (See "Portfolio
Supervision.") Pursuant to the Agreement Among Co-Sponsors, if applicable,
Reich & Tang Distributors L.P. shall receive the entire Sponsor's fee set forth
in the "Summary of Essential Information" in Part A.
The Trustee will receive for its ordinary recurring services to the
Trust an annual fee in the amount set forth under "Summary of Essential
Information" in Part A. For a discussion of the services performed by the
Trustee pursuant to its obligations under the Trust Agreement, see "Trust
Administration" and "Rights of Certificateholders."
The Evaluator will receive, for each daily evaluation of the
Securities in the Trust after the initial public offering is completed, a fee
in the amount set forth under "Summary of Essential Information" in Part A.
The Trustee's and Evaluator's fees applicable to the Trust are
payable monthly as of the Record Date from the Interest Account of such Trust
to the extent funds are available and then from the Principal Account. Both
fees may be increased without approval of the Certificateholders by amounts not
exceeding proportionate increases in consumer prices for services as measured
by the United States Department of Labor's Consumer Price Index entitled "All
Services Less Rent."
The following additional charges are or may be incurred by the Trust:
all expenses (including counsel fees) of the Trustee incurred and advances made
in connection with its activities under the Trust Agreement, including the
expenses and costs of any action undertaken by the Trustee to protect the Trust
and the rights and interests of the Certificateholders; fees of the Trustee for
any extraordinary services performed under the Trust Agreement; indemnification
of the Trustee for any loss or liability accruing to it without gross
negligence, bad faith or willful misconduct on its part, arising out of or in
connection with its acceptance or administration of the Trust; indemnification
of the Sponsor for any losses, liabilities and expenses incurred in acting as
sponsors of the Trust without gross negligence, bad faith or willful misconduct
on its part; and all taxes and other governmental charges imposed upon the
Securities or any part of the Trust (no such taxes or charges are being levied,
made or, to the knowledge of the Sponsor, contemplated). The above expenses,
including the Trustee's fees, when paid by or owing to the Trustee are secured
by a first lien on the Trust to which such
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<PAGE>
expenses are charged. In addition, the Trustee is empowered to sell
Securities in order to make funds available to pay all expenses.
The accounts of the Trust shall be audited not less than annually by
independent public accountants selected by the Sponsor. The expenses of the
audit shall be an expense of the Trust. So long as the Sponsor maintains a
secondary market, the Sponsor will bear any audit expense which exceeds $.50
per 1,000 Units. Certificateholders covered by the audit during the year may
receive a copy of the audited financials upon request.
EXCHANGE PRIVILEGE AND CONVERSION OFFER
Exchange Privilege
Certificateholders may elect to exchange any or all of their Units of
these Trusts for Units of one or more of any available series of Insured
Municipal Securities Trust, Municipal Securities Trust, New York Municipal
Trust, Mortgage Securities Trust or Equity Securities Trust (the "Exchange
Trusts") at a reduced sales charge as set forth below. Under the Exchange
Privilege, the Sponsor's repurchase price during the initial offering period of
the Units being surrendered will be based on the market value of the Securities
in the Trust portfolio or on the aggregate offer price of the Bonds in the
other Trust Portfolios; and, after the initial offering period has been
completed, will be based on the aggregate bid price of the Bonds in the
particular Trust portfolio. Units in an Exchange Trust then will be sold to the
Certificateholder at a price based on the aggregate offer price of the Bonds in
the Exchange Trust portfolio (or for units of Equity Securities Trust, based on
the market value of the underlying Securities in the Equity Trust portfolio)
during the initial public offering period of the Exchange Trust; and after the
initial public offering period has been completed, based on the aggregate bid
price of the Bonds in the Exchange Trust portfolio if its initial offering has
been completed, plus accrued interest (or for units of Equity Securities Trust,
based on the market value of the underlying securities in the Equity Trust
portfolio) and a reduced sales charge as set forth below.
Except for Certificateholders who wish to exercise the Exchange
Privilege within the first five months of their purchase of Units of a Trust,
the sales charge applicable to the purchase of units of an Exchange Trust shall
be approximately 1.5% of the price of each Exchange Trust unit (or 1,000 Units
for the Mortgage Securities Trust or 100 Units for the Equity Securities
Trust). For certificateholders who wish to exercise the Exchange Privilege
within the first five months of their purchase of Units of a Trust, the sales
charge applicable to the purchase of units of an Exchange Trust shall be the
greater of (i) 1.5% of the price of each Exchange Trust unit (or 1,000 Units
for the Mortgage Securities Trust or 100 Units for the Equity Securities
Trust), or (ii) an amount which when coupled with the sales charge paid by the
certificateholder upon his original purchase of Units of the Trust at least
equals the sales charge applicable in the direct purchase of units of an
Exchange Trust. The Exchange Privilege is subject to the following conditions:
1. The Sponsor must be maintaining a secondary market in both
the Units of the Trust held by the Certificateholder and the Units of
the available Exchange Trust. While the Sponsor has indicated its
intention to maintain a market in the Units of the Trust sponsored by
it, the Sponsor is under no obligation to continue to maintain a
secondary market and therefore there is no assurance that the Exchange
Privilege will be available to a Certificateholder at any specific
time in the future. At the time of the Certificateholder's election to
participate in the Exchange Privilege, there also must be Units of the
Exchange
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<PAGE>
Trust available for sale, either under the initial primary
distribution or in the Sponsor's secondary market.
2. Exchanges will be effected in whole units only. Any excess
proceeds from the Units surrendered for exchange will be remitted and
the selling Certificateholder will not be permitted to advance any new
funds in order to complete an exchange. Units of the Mortgage
Securities Trust may only be acquired in blocks of 1,000 Units. Units
of the Equity Securities Trust may only be acquired in blocks of 100
Units.
3. The Sponsor reserves the right to suspend, modify or
terminate the Exchange Privilege. The Sponsor will provide
Certificateholders of the Trust with 60 days prior written notice of
any termination or material amendment to the Exchange Privilege,
provided that, no notice need be given if (i) the only material effect
of an amendment is to reduce or eliminate the sales charge payable at
the time of the exchange, to add one or more series of the Trust
eligible for the Exchange Privilege or to delete a series which has
been terminated from eligibility for the Exchange Privilege, (ii)
there is a suspension of the redemption of units of an Exchange Trust
under Section 22(e) of the Investment Company Act of 1940, or (iii) an
Exchange Trust temporarily delays or ceases the sale of its units
because it is unable to invest amounts effectively in accordance with
its investment objectives, policies and restrictions. During the 60
day notice period prior to the termination or material amendment of
the Exchange Privilege described above, the Sponsor will continue to
maintain a secondary market in the units of all Exchange Trusts that
could be acquired by the affected certificateholders.
Certificateholders may, during this 60 day period, exercise the
Exchange Privilege in accordance with its terms then in effect. In the
event the Exchange Privilege is not available to a Certificateholder
at the time he wishes to exercise it, the Certificate- holder will
immediately be notified and no action will be taken with respect to
his Units without further instructions from the Certificate- holder.
To exercise the Exchange Privilege, a Certificateholder should notify
the Sponsor of his desire to exercise his Exchange Privilege. If Units of a
designated, outstanding series of an Exchange Trust are at the time available
for sale and such Units may lawfully be sold in the state in which the
Certificateholder is a resident, the Certificateholder will be provided with a
current prospectus or prospectuses relating to each Exchange Trust in which he
indicates an interest. He may then select the Trust or Trusts into which he
desires to invest the proceeds from his sale of Units. The exchange transaction
will operate in a manner essentially identical to a secondary market
transaction except that units may be purchased at a reduced sales charge.
Example: Assume that after the initial public offering has been completed, a
Certificateholder has five units of a Trust with a current value of $700 per
unit which he has held for more than five months and the Certificateholder
wishes to exchange the proceeds for units of a secondary market Exchange Trust
with a current price of $725 per unit. The proceeds from the Certificate-
holder's original units will aggregate $3,500. Since only whole units of an
Exchange Trust may be purchased under the Exchange Privilege, the Certificate-
holder would be able to acquire four units (or 4,000 Units of the Mortgage
Securities Trust or 400 Units of the Equity Securities Trust) for a total cost
of $2,943.50 ($2,900 for units and $43.50 for the sales charge). The remaining
$556.50 would be remitted to the Certificateholder in cash. If the
Certificateholder acquired the same number of units at the same time in a
regular secondary market transaction, the price would have been $3,059.50
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($2,900 for units and $159.50 for the sales charge, assuming a 5 1/2% sales
charge times the public offering price).
The Conversion Offer
Unit owners of any registered unit investment trust for which there
is no active secondary market in the units of such trust (a "Redemption Trust")
may elect to redeem such units and apply the proceeds of the redemption to the
purchase of available Units of one or more series of Municipal Securities
Trust, Insured Municipal Securities Trust, Mortgage Securities Trust, New York
Municipal Trust or Equity Securities Trust (the "Conversion Trusts") at the
Public Offering Price for units of the Conversion Trust based on a reduced
sales charge as set forth below. Under the Conversion Offer, units of the
Redemption Trust must be tendered to the trustee of such trust for redemption
at the redemption price, which is based upon the market value of the underlying
securities in the Trust portfolio or the aggregate bid side evaluation of the
underlying bonds in such trust and is generally about 1 1/2% to 2% lower than
the offering price for such bonds. The purchase price of the units will be
based on the aggregate offer price of the underlying bonds in the Conversion
Trust portfolio during its initial public offering period, or at a price based
on the aggregate bid price of the underlying bonds if the initial public
offering of the Conversion Trust has been completed, plus accrued interest and
a sales charge as set forth below. If the participant elects to purchase units
of the Equity Securities Trust under the Conversion Offer, the purchase price
of the units will be based, at all times, on the market value of the underlying
securities in the Trust portfolio plus a sales charge.
Except for Certificateholders who wish to exercise the Conversion
Offer within the first five months of their purchase of units of a Redemption
Trust, the sales charge applicable to the purchase of Units of the Conversion
Trust shall be 1.5% per Unit (or per 1,000 Units for the Mortgage Securities
Trust or per 100 Units for the Equity Securities Trust). For certificate-
holders who wish to exercise the Conversion Offer within the first five months
of their purchase of units of a Redemption Trust, the sales charge applicable
to the purchase of Units of a Conversion Trust shall be the greater of (i) 1.5%
per Unit (or per 1,000 Units for the Mortgage Securities Trust or per 100 Units
for the Equity Securities Trust) or (ii) an amount which when coupled with the
sales charge paid by the certificateholder upon his original purchase of units
of the Redemption Trust at least equals the sales charge applicable in the
direct purchase of Units of a Conversion Trust. The Conversion Offer is subject
to the following limitations:
1. The Conversion Offer is limited only to unit owners of any
Redemption Trust, defined as a unit investment trust for which there
is no active secondary market at the time the Certificateholder elects
to participate in the Conversion Offer. At the time of the unit
owner's election to participate in the Conversion Offer, there also
must be available units of a Conversion Trust, either under a primary
distribution or in the Sponsor's secondary market.
2. Exchanges under the Conversion Offer will be effected in
whole units only. Unit owners will not be permitted to advance any new
funds in order to complete an exchange under the Conversion Offer. Any
excess proceeds from units being redeemed will be returned to the unit
owner. Units of the Mortgage Securities Trust may only be acquired in
blocks of 1,000 units. Units of the Equity Securities Trust may only
be acquired in blocks of 100 Units.
3. The Sponsor reserves the right to modify, suspend or
terminate the Conversion Offer at any time without notice to unit
owners of Redemption Trusts. In the event the Conversion Offer is not
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available to a unit owner at the time he wishes to exercise it, the
unit owner will be notified immediately and no action will be taken
with respect to his units without further instruction from the unit
owner. The Sponsor also reserves the right to raise the sales charge
based on actual increases in the Sponsor's costs and expenses in
connection with administering the program, up to a maximum sales
charge of $20 per unit (or per 1,000 units for the Mortgage Securities
Trust or per 100 Units for the Equity Securities Trust).
To exercise the Conversion Offer, a unit owner of a Redemption Trust
should notify his retail broker of his desire to redeem his Redemption Trust
Units and use the proceeds from the redemption to purchase Units of one or more
of the Conversion Trusts. If Units of a designated, outstanding series of a
Conversion Trust are at that time available for sale and if such Units may
lawfully be sold in the state in which the unit owner is a resident, the unit
owner will be provided with a current prospectus or prospectuses relating to
each Conversion Trust in which he indicates an interest. He then may select the
Trust or Trusts into which he decides to invest the proceeds from the sale of
his Units. The transaction will be handled entirely through the unit owner's
retail broker. The retail broker must tender the units to the trustee of the
Redemption Trust for redemption and then apply the proceeds of the redemption
toward the purchase of units of a Conversion Trust at a price based on the
aggregate offer or bid side evaluation per Unit of the Conversion Trust,
depending on which price is applicable, plus accrued interest and the
applicable sales charge. The certificates must be surrendered to the broker at
the time the redemption order is placed and the broker must specify to the
Sponsor that the purchase of Conversion Trust Units is being made pursuant to
the Conversion Offer. The unit owner's broker will be entitled to retain $5 of
the applicable sales charge.
Example: Assume that a unit owner has five units of a Redemption Trust which he
has held for more than five months with a current redemption price of $675 per
unit based on the aggregate bid price of the underlying bonds and the unit
owner wishes to participate in the Conversion Offer and exchange the proceeds
for units of a secondary market Conversion Trust with a current price of $750
per Unit. The proceeds for the unit owner's redemption of units will aggregate
$3,375. Since only whole units of a Redemption Trust may be purchased under the
Conversion Offer, the unit owner will be able to acquire four units of the
Conversion Trust (or 4,000 units of the Mortgage Securities Trust or 400 Units
of the Equity Securities Trust) for a total cost of $3,045 ($3,000 for units
and $45 for the sales charge). The remaining $330 would be remitted to the unit
owner in cash. If the unit owner acquired the same number of Conversion Trust
units at the same time in a regular secondary market transaction, the price
would have been $3,165 ($3,000 for units and $165 for the sales charge,
assuming a 5 1/2% sales charge times the public offering price).
Description Of The Exchange Trusts And The Conversion Trusts
Municipal Securities Trust and New York Municipal Trust may be
appropriate investment vehicles for an investor who is more interested in
tax-exempt income. The interest income from New York Municipal Trust is, in
general, also exempt from New York State and local New York income taxes, while
the interest income from Municipal Securities Trust is subject to applicable
New York State and local New York taxes, except for that portion of the income
which is attributable to New York obligations in the Trust portfolio, if any.
The interest income from each State Trust of the Municipal Securities Trust,
Multi-State Series is, in general, exempt from state and local taxes when held
by residents of the state where the issuers of bonds in such State Trusts are
located. The Insured Municipal Securities Trust combines the advantages of
providing interest income free from regular federal income tax under existing
law with the added safety of irrevocable insurance.
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Insured Navigator Series further combines the advantages of providing interest
income free from regular federal income tax and state and local taxes when held
by residents of the state where issuers of bonds in such state trusts are
located with the added safety of irrevocable insurance. Mortgage Securities
Trust offers an investment vehicle for investors who are interested in
obtaining safety of capital and a high level of current distribution of
interest income through investment in a fixed portfolio of collateralized
mortgage obligations. Equity Securities Trust offers investors an opportunity
to achieve capital appreciation together with a high level of current income.
Tax Consequences of the Exchange Privilege
and the Conversion Offer
A surrender of units pursuant to the Exchange Privilege or the
Conversion Offer will constitute a "taxable event" to the Certificateholder
under the Internal Revenue Code. The Certificateholder will realize a tax gain
or loss that will be of a long- or short-term capital or ordinary income nature
depending on the length of time the units have been held and other factors.
(See "Tax Status".) A Certificateholder's tax basis in the Units acquired
pursuant to the Exchange Privilege or Conversion Offer will be equal to the
purchase price of such Units. Investors should consult their own tax advisors
as to the tax consequences to them of exchanging or redeeming units and
participating in the Exchange Privilege or Conversion Offer.
Rating of Units
Standard & Poor's has rated the Units of the Trust AAA. This is the
highest rating assigned by Standard & Poor's Ratings Services, A Division of
The McGraw-Hill Companies ("Standard & Poor's") (see Description of Standard &
Poor's Ratings). Standard & Poor's has been compensated by the Sponsor for its
service in rating the Units.
OTHER MATTERS
Legal Opinions
The legality of the Units offered hereby and certain matters relating
to federal tax law have been passed upon by Battle Fowler LLP, 75 East 55th
Street, New York, New York 10022 as counsel for the Sponsor. Carter, Ledyard &
Milburn, Two Wall Street, New York, New York 10005 have acted as counsel for
the Trustee.
Independent Accountants
The financial statements of the Trusts for the year ended June 30,
1996 included in Part A of this Prospectus have been examined by Price
Waterhouse LLP, independent accountants. The financial statements have been so
included in reliance on their report given upon the authority of said firm as
experts in accounting and auditing. KPMG Peat Marwick LLP has consented to the
incorporation by reference of their report on the statements of operations and
changes in net assets for the Trusts included in Part A of this Prospectus for
the periods ended June 30, 1994 and June 30, 1995, respectively.
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DESCRIPTION OF RATINGS*
Standard & Poor's Ratings Services
A Standard & Poor's rating on the units of an 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, issuers, 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, together
with their credit support are rated AAA by Standard & Poor's. 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 extremely strong.
- --------
* As described by the rating companies themselves.
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INDEX
Title Page MORTGAGE SECURITIES TRUST
Part A CMO SERIES
Risk Considerations..................A-6 (Unit Investment Trust)
Summary of Essential
Information........................A-10
Information Regarding the Trust......A-11
Financial and Statistical Prospectus
Information........................A-12 ----------
Audit and Financial Information
Report of Independent Auditors.....F-1
Statement of Net Assets............F-2 Dated: October 31, 1996
Statement of Operations............F-3
Statement of Changes in Net
Assets...........................F-4 Sponsor:
Notes to Financial Statements......F-5 Reich & Tang Distributors L.P.
Portfolio..........................F-6 600 Fifth Avenue
New York, New York 10020
Part B 212-830-5200
The Trust............................ 1
Public Offering.......................10 (and for certain Trusts:)
Estimated Long Term Return and
Estimated Current Return............12 Gruntal & Co., Incorporated
Rights of Certificateholders..........15 14 Wall Street
Tax Status............................16 New York, New York 10005
Liquidity ............................19 212-267-8800
Total Reinvestment Plan...............22
Trust Administration..................22
Trust Expenses and Charges............26
Exchange Privilege and
Conversion Offer....................28 Trustee:
Other Matters.........................32 The Chase Manhattan Bank
Description of Ratings................32 770 Broadway
New York, New York 10003
800-882-9898
Parts A and B of this Prospectus
do not contain all of the information
set forth in the registration
statement and exhibits relating Evaluator:
thereto, filed with the Securities and Kenny S&P Evaluation Services
Exchange Commission, Washington, D.C. 65 Broadway
under the Securities Act of 1933, and New York, New York 10006
the Investment Company Act of 1940,
and to which reference is made.
* * *
This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, securities in any state to any person to whom
it is not lawful to make such offer in such state.
No person is authorized to give any information or to make any
representations not contained in Parts A and B in this Prospectus; and any
information or representation not contained herein must not be relied upon as
having been authorized by the Trust, the Trustee, the Evaluator, or the
Sponsor. The Trust is registered as a unit investment trust under the
Investment Company Act of 1940. Such registration does not imply that the Trust
or any of its Units have been guaranteed, sponsored, recommended or approved by
the United States or any state or any agency or officer thereof.
1427.4
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<TABLE>
<CAPTION>
=================================================================================================================================
I am the owner of __________ units of Mortgage Securities Trust, CMO Series _______ Short-Intermediate/Intermediate/
Long-Intermediate Portfolio.
I would like to learn more about The Treasurer's Fund, Inc., U.S. Treasury Money Market Portfolio including charges and
expenses. I understand that my request for more information about this fund in no way obligates me to participate in the
reinvestment option, and that this request form is not an offer to sell. Please send me more information, including a copy of the
current prospectus of The Treasurer's Fund, Inc.
Date ______________________ 19__
_________________________________________________________________________________________________________________________________
<S> <C>
___________________________________________________________________________ ________________________________________________
Registered Holder (Print) Registered Holder (Print)
___________________________________________________________________________ ________________________________________________
Registered Holder Signature Registered Holder Signature
(The signatures if joint tenancy)
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
My Brokerage Firm's Name ________________________________________________________________________________________________________
Street Address __________________________________________________________________________________________________________________
City, State & Zip Code __________________________________________________________________________________________________________
Broker's Name _____________________________________________________________ Broker's No. ___________________________________
=================================================================================================================================
MAIL TO:
THE TREASURER'S FUND, INC.
19 OLD KINGS HIGHWAY SOUTH
DARIEN, CONNECTICUT 06820
</TABLE>
1427.1
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