Rule 497(b)
Registration No. 33-57315
Note: Part A of This Prospectus May Not Be
Distributed Unless Accompanied by Part B.
MORTGAGE SECURITIES TRUST
CMO SERIES 16
The Trust consists of 1 unit investment trust designated Mortgage
Series Trust, CMO Series 16, 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.
An investment in the Trust entails differing degrees of risk. 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 are otherwise rated AAA by Standard & Poor's and, therefore, the Units
of the Trust are 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. (successor Sponsor to Bear, Stearns & Co. Inc.). 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 portfolios and
changes in fees and expenses. Minimum purchase: 1,000 Units.
This Prospectus consists of two parts. Part A contains the Summary
Fof Essential Information, including descriptive material relating to the Trust
as of December 31, 1995 (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 April 30, 1996
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THE TRUST. The Trust consists of a unit investment trust designated
Mortgage Securities Trust, CMO Series 16, 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. An investment in the Trust
entails differing degrees of risk.
The Trust, as an 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--Description of the Portfolio" and "The Trust--CMO Structure" in this Part
A and "The Trust--The Securities--Planned Amortization Bonds or Targeted
Amortization Bonds and Support Bonds" in Part B of this Prospectus. The Trust
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 are otherwise
rated AAA by Standard & Poor's Corporation ("Standard & Poor's") and therefore,
the Units of the Trust are rated AAA by Standard & Poor's. There can be no
assurance that the Trust's investment objectives can be achieved. Investments 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.) Each
Unit of the Trust represents 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.
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The underlying mortgage-backed securities which are pledged as collateral to
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 and causes
fluctuation, which may be substantial, both in the amount of income earned by
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the Trust and in the timing of the Trust's principal distributions. This
fluctuation may adversely affect the repurchase and redemption prices of Units
of the Trust. (See "Description of the Portfolio" 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 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. Support class
bonds such as those in the Long-Intermediate Portfolio would be characterized as
high-risk CMO tranches and, therefore, not suitable for depository institutions.
Investors should carefully consider all the risks inherent in an investment in
support class bonds before investing in the Trust.
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.)
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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 Portfolio" in this Part A for the number of FNMA REMIC
Certificates and FHLMC REMIC Certificates in the 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
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 its 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 Portfolio" in this Part A for the amount of Securities in the Trust that is 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. Mortgage prepayment rates are likely to fluctuate significantly from
time to time as they have in recent years and at a rate faster or slower than
that initially assumed. The rate of prepayments depends on a variety of
geographic, social and other functions, including prevailing market interest
rates and general economic factors. 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.
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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 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 the 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 3.5% of the Public Offering
Price per 1,000 Units or 3.626% of the net amount invested in Securities per
1,000 Units of the Trust. 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 $1,064.74, plus accrued interest
of $3.83, for a total of $1,068.57. 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 above assume a purchase of 1,000 Units. The price of
a single Unit, or any multiple thereof, is calculated by dividing the
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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 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 the 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 particular 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, if the 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
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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 Trust 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's 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 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% (3.626%
of the net amount invested), plus net accrued interest. 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 16, INTERMEDIATE PORTFOLIO
<TABLE>
SUMMARY OF ESSENTIAL INFORMATION AS OF DECEMBER 31, 1995
<S> <C>
Date of Deposit:* February 9, 1995 Evaluation Time: 4.00 p.m.
Principal Amount of New York Time.
Securities ................ $8,000,000 Minimum Principal Distribution:
Principal Amount of Secu- $1 per 1,000 Units.
rities per 1,000 Units..... $1,000.00 Weighted Average Life to
Number of Units ............. 8,000,000 Maturity: 3.9 years
Fractional Undivided Inter- Minimum Value of Trust:
est in Trust per Unit ..... 1/8000000 Trust may be terminated if less than
Secondary Market Public $3,200,000 in principal amount of
Offering Price**+ Securities.
Aggregate Bid Price of Mandatory Termination Date:
Securities in Trust ..... $8,219,792 The earlier of December 31, 2044 or the
Divided by 8,000,000 Units disposition of the last Security in the
times $1,000 ............ $1,027.47 Trust.
Plus Sales Charge of 3.50% Trustee: The Chase Manhattan Bank, N.A.
of Public Offering Price $37.27 Trustee's Annual Fee: $.84 per $1,000.
Public Offering Price Evaluator: Kenny S&P Evaluation Services.
per 1,000 Units.......... $1,064.74 Evaluator's Fee for Each
Redemption and Sponsors' Evaluation: $10 per evaluation.
Repurchase Price Sponsor: Reich & Tang Distributors L.P.
per 1,000 Units+ .......... $1,027.47+++# Sponsor's Annual Fee: Maximum of
Excess of Public Offering $.25 per $1,000 principal amount
Price over Redemption and of Securities (see "Trust
Sponsors' Repurchase Price Expense and Charges" in Part B
per 1,000 Units#........... $37.27 of this Prospectus).
Difference between Public
Offering Price per 1,000
Units and Principal
Amount per 1,000 Units
Premium/(Discount) ........ $64.74
</TABLE>
PER 1,000 UNIT INFORMATION
Gross annual interest income (cash)............................. $77.06
Less estimated annual fees and expenses......................... 1.82
Estimated net annual interest income (cash)..................... 75.24
Estimated interest distribution................................. 6.27
Estimated daily interest accrual................................ .21
Estimated current return++(1)................................... 7.07%
Estimated long term return++(1)................................. 6.25%
Record dates.................................................... 1st of
each month
Interest distribution dates..................................... 20th of
each month
A-9
C/M: 11939.0001 352475.1
<PAGE>
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, Sponsors' 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 3.5%
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
C/M: 11939.0001 352475.1
<PAGE>
INFORMATION REGARDING THE TRUST
AS OF DECEMBER 31, 1995
Description of the Portfolio*
The Trust consists of 5 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 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, 2 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 March 25, 2020
through June 25, 2023.
All of the CMOs in the Portfolio 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. $4,000,000 of the principal amount of the
Securities in the Trust are FNMA REMIC Certificates. $4,000,000 of the principal
amount of the securities initially deposited in the Trust are FHLMC REMIC
Certificates. None of the principal amount of the Securities initially deposited
in the Trust are a class of compound interest bonds or principal only bonds.
As of December 31, 1995, 75% of the aggregate principal amount of
the Securities in the Trust were acquired at a discount from par, 25% 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.
- --------
* Changes in the Trust Portfolio: From January 1, 1996 to March 22, 1996,
there has been a paydown on the securities in portfolio no. 2 and $3,155
of the principal amount of the securities is no longer contained in the
Trust. $655,000 of the principal amount of the securities in portfolio
no. 4 was sold and is no longer contained in the Trust. 646,130 Units
were redeemed from the Trust.
A-11
C/M: 11939.0001 352475.1
<PAGE>
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each unit of the Trust outstanding for the periods listed
below:
Distribu-
tions of
Principal
Distributions During
Net Asset* of Interest the
Value During the Period
Units Out- Per 1,000 Period (per (Per 1,000
Period Ended standing Units 1,000 Units) Units)
December 31, 1995 8,000,000 $1,037.41 $59.57 -0-
- --------
* 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
C/M: 11939.0001 352475.1
<PAGE>
Independent Auditors' Report
The Sponsor, Trustee and Certificateholders
Mortgage Securities Trust, CMO Series 16 Intermediate:
We have audited the accompanying statement of net assets, including the
portfolio, of Mortgage Securities Trust, CMO Series 16 Intermediate as of
December 31, 1995, and the related statements of operations and changes in net
assets for the period from February 9, 1995 (date of initial deposit) to
December 31, 1995. These financial statements are the responsibility of the
Trustee (see note 2). Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1995, by correspondence with
the Trustee. An audit also includes assessing the accounting principles used and
significant estimates made by the Trustee, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mortgage Securities Trust, CMO
Series 16 Intermediate as of December 31, 1995, and the results of its
operations and the changes in its net assets for the period from February 9,
1995 (date of initial deposit) to December 31, 1995 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
March 31, 1996
<PAGE>
MORTGAGE SECURITIES TRUST, CMO SERIES 16 INTERMEDIATE
Statement of Net Assets
December 31, 1995
Investments in marketable securities, at market
value (cost $7,644,050) $ 8,219,792
Excess of other assets over total liabilities 79,504
------------
Net assets (8,000,000 units per unit of fractional
undivided interest outstanding, $1.04 per unit)
$ 8,299,296
============
See accompanying notes to financial statements.
<PAGE>
MORTGAGE SECURITIES TRUST, CMO SERIES 16 INTERMEDIATE
Statement of Operations
For the period from
February 9, 1995
(date of initial deposit)
to December 31, 1995
--- ------------ ---
Investment income - interest $ 551,663
Expenses:
Trustee's fees 8,378
Evaluator's fees 920
------------
Total expenses 9,298
------------
Investment income, net 542,365
Unrealized appreciation
for the period 575,742
------------
Net increase in net
assets resulting
from operations $ 1,118,107
============
See accompanying notes to financial statements.
<PAGE>
MORTGAGE SECURITIES TRUST, CMO SERIES 16 INTERMEDIATE
Statement of Changes in Net Assets
For the Period from
February 9, 1995
(date of initial deposit)
to December 31, 1995
-- --------- -----
Operations:
Investment income, net $ 542,365
Unrealized appreciation
for the period 575,742
---------
Net increase in net
assets resulting
from operations 1,118,107
Distributions:
To Certificateholders of investment income 462,861
---------
Total increase 655,246
Net assets, at beginning of period 7,644,050
---------
Net assets, at end of period (including
undistributed net investment
income of $79,504) $ 8,299,296
=========
See accompanying notes to financial statements.
<PAGE>
MORTGAGE SECURITIES TRUST, CMO SERIES 16 INTERMEDIATE
Notes to Financial Statements
December 31, 1995
(1) Organization and Financial and Statistical Information
Mortgage Securities Trust, CMO Series 15 Intermediate (Trust) was
organized on February 9, 1995 (date of deposit) by Bear, Stearns & Co.
Inc. under the laws of the State of New York by a Trust Indenture and
Agreement, and is registered under the Investment Company Act of 1940.
Effective September 28, 1995, Reich & Tang Distributors L.P. (Reich &
Tang) has become the successor 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.
(2) Summary of Significant Accounting Policies
Effective September 2, 1995, United States Trust Company of New York was
merged into Chase Manhattan Bank (National Association) (Chase).
Accordingly, Chase is the successor trustee of the unit investment trusts.
The Trustee has custody of 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 accompanying financial
statements have been adjusted to record the unrealized appreciation
(depreciation) of investments and to record interest income and expenses
on the accrual basis.
Investments are carried at market value which is determined by Kenny S&P
Evaluation Services (Evaluator). The market value of the portfolio is
based upon the bid prices for the bonds at the end of the year, 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
difference between cost 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Trustee to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(3) Income Taxes
The Trust is not subject to Federal income taxes as provided for by the
Internal Revenue Code.
(Continued)
F-5
<PAGE>
MORTGAGE SECURITIES TRUST, CMO SERIES 16 INTERMEDIATE
Notes to Financial Statements
(4) Trust Administration
The fees and expenses of the Trust are incurred and paid on the basis set
forth under "Trust Expenses and Charges" in Part B of this Prospectus.
The Trust Indenture and Agreement provides for interest distributions on
a monthly basis.
See "Financial and Statistical Information" in Part A of this Prospectus
for the amounts of per unit distributions during the years ended December
31, 1995.
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. No units have been redeemed since the inception of
the Trust.
(5) Net Assets
At December 31, 1995, the net assets of the Trust represented the
interest of Certificateholders as follows:
Original cost to Certificateholders $ 7,921,295
Less initial gross underwriting commission (277,245)
-----------
7,644,050
Net unrealized appreciation 575,742
Undistributed net investment income 79,504
------
Total $ 8,299,296
=========
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 8,000,000 units of fractional undivided
interest of the Trust as of the date of deposit.
F-6
<PAGE>
<TABLE>
MORTGAGE SECURITIES TRUST, CMO SERIES 16 INTERMEDIATE
Portfolio
December 31, 1995
Coupon/ Estimated First
<CAPTION>
Port- Final Scheduled Distribution
folio Principal Name of Issuer Distribution Date(s) Market
No. Amount and Title of Bonds(3) Date (unaudited) (1) Value (2)
- ----- ------------ -------------------------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
1 $ 1,000,000 Federal National Mortgage 9.00% 3/25/97 $ 1,058,551
Association Guaranteed REMIC 3/25/2020
Pass-Through Certificates
Fannie Mae REMIC Trust 1990-24 E
2 1,000,000 Federal National Mortgage 8.750 11/25/96 1,041,005
Association Guaranteed REMIC 8/25/2020
Pass-Through Certificates
Fannie Mae REMIC Trust G21 G
3 2,000,000 Federal Home Loan Mortgage 7.950 2/15/01 2,074,923
Corporation Multiclass Mortgage 9/15/2020
Participation Certificates,
Series 1155 J
4 2,000,000 Federal Home Loan Mortgage 7.50% 1/15/99 2,063,144
Corporation Multiclass Mortgage 7/15/2021
Participation Certificates,
Series 1255 G
5 2,000,000 Federal National Mortgage 6.50% 5/25/98 1,982,169
Association Guaranteed REMIC 6/25/2023
Pass-Through Certificates
Fannie Mae REMIC Trust 1994-10 M
------------ ------------
$ 8,000,000 $ 8,219,792
============ ============
</TABLE>
See accompanying footnotes to portfolio and notes to financial statements.
F-7
<PAGE>
MORTGAGE SECURITIES TRUST, CMO SERIES 16 INTERMEDIATE
Footnotes to Portfolio
December 31, 1995
(1) See "The Trust - Portfolio" in Part B of this Prospectus for an
explanation of redemption 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 bond.
(2) At December 31, 1995, the net unrealized appreciation of all the securites
was comprised of gross unrealized appreciation of $575,742.
(3) The annual interest income, based upon securities held at December 31,
1995, to the Trust is 616,500.
(4) 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. The CMOs in the Trust are issued by the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"). The Units of the Trust are not, however, guaranteed
by FNMA, FHLMC, the United States or any of its agencies. Payments are not
guaranteed by the United States and neither the CMOs in the Trust nor any
underlying FNMA's or FHLMC's constitute a debt obligation of the United
States or any of its agencies.
F-8
<PAGE>
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: April 30, 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., as 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, N.A., as Trustee, and Kenny S&P Evaluation Services, a
division of J.J. Kenny Co., 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.
1427.3
<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 and, therefore, the Units of the
Trust are rated AAA by Standard & Poor's Corporation. 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
comparable mortgage-backed securities, (iii) the estimated average lives and
-2-
1427.3
<PAGE>
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
specified amounts at specified times resulting in greater predictability of
-3-
1427.3
<PAGE>
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
shares of the scheduled principal payments, whether or not collected by the
-4-
1427.3
<PAGE>
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 of $10.00 per Unit. 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 its
corporate trust office at 770 Broadway, New York, New York 10003, upon proper
delivery of Certificates representing such Units and payment of any relevant
tax. 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.
Within seven calendar days following a tender for redemption, or,
if such seventh day is not a business day, on the first business day prior
thereto, the Certificateholder will be entitled to receive in cash an amount
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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.
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
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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.
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
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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.
The Sponsor
The Sponsor, Reich & Tang Distributors L.P. (successor to the Unit
Investment Trust Division of Bear, Stearns & Co. Inc.), a Delaware limited
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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), 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).
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.
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 and the District of Columbia. 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 Meritt 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.
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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 (National Association), a
national banking association with its principal executive office located at
1 Chase Manhattan Plaza, New York, New York 10081 and its unit investment
trust office at 770 Broadway, New York, New York 10003 (800) 882-9898. The
Trustee is subject to the supervision by the Comptroller of the Currency, 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
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.
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The Evaluator
The Evaluator is Kenny S&P Evaluation Services, a division of J.J.
Kenny Co., Inc. with main offices located at 65 Broadway, New York, New York
10006. The Evaluator is a wholly-owned subsidiary of McGraw-Hill, Inc. 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.
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, 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."
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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
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
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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
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
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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
($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
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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
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
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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.
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 (see Description of Standard
& Poor's Ratings). Standard & Poor's has been compensated by the Sponsor for
its service in rating the Units.
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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 Auditors
The financial statements of the Trust or Trusts included in Part A
of this Prospectus as of the dates set forth in Part A, have been examined by
KPMG Peat Marwick LLP, independent certified public accountants, for the
periods indicated in its reports appearing herein. The financial statements
examined by KPMG Peat Marwick have been so included in reliance on its report
given upon the authority of said firm as experts in accounting and auditing.
DESCRIPTION OF RATINGS*
Standard & Poor's Corporation
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.
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* As described by the rating companies themselves.
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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__
Registered Holder (Print) Registered Holder (Print)
Registered Holder Signature Registered Holder Signature
(The signatures if joint tenancy)
My Brokerage Firm's Name
Street Address
City, State & Zip Code
Broker's Name Broker's No.
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MAIL TO:
THE TREASURER'S FUND, INC.
19 OLD KINGS HIGHWAY SOUTH
DARIEN, CONNECTICUT 06820
1427.1
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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: April 30, 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.......... 13 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.................. 27 Trustee:
Other Matters....................... 32 The Chase Manhattan Bank, N.A.
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. a division of J.J. Kenny Co., Inc.
under the Securities Act of 1933, and 65 Broadway
the Investment Company Act of 1940, New York, New York 10006
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.
1427.3
