AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 8, 1994
REGISTRATION NO. 33-56381
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------------
AMENDMENT NO.1
TO
FORM S-6
------------------------------------------
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
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A. EXACT NAME OF TRUST:
DEFINED ASSET FUNDS
FLORIDA INSURED SERIES
B. NAMES OF DEPOSITORS:
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
C. COMPLETE ADDRESSES OF DEPOSITORS' PRINCIPAL EXECUTIVE OFFICES:
MERRILL LYNCH, PIERCE, FENNER & SMITH SMITH BARNEY INC.
INCORPORATED 388 GREENWICH STREET--23RD FLOOR
P.O. BOX 9051 NEW YORK, N.Y. 10013
PRINCETON, N.J. 08543-9051
PAINEWEBBER INCORPORATED PRUDENTIAL SECURITIES
1285 AVENUE OF THE INCORPORATED
AMERICAS ONE SEAPORT PLAZA
NEW YORK, N.Y. 10019 199 WATER STREET
NEW YORK, N.Y. 10292
D. NAMES AND COMPLETE ADDRESSES OF AGENTS FOR SERVICE:
TERESA KONCICK, ESQ. LEE B. SPENCER, JR. THOMAS D. HARMAN, ESQ.
P.O. BOX 9051 ONE SEAPORT PLAZA 388 GREENWICH STREET
PRINCETON, N.J. 8543-9051 199 WATER STREET NEW YORK, NY 10013
NEW YORK, N.Y. 10292
COPIES TO:
ROBERT E. HOLLEY
1200 HARBOR BLVD.
WEEHAWKEN, N.J. 07087
PIERRE DE SAINT PHALLE,
ESQ.
450 LEXINGTON AVENUE
NEW YORK, N.Y. 10017
E. TITLE AND AMOUNT OF SECURITIES BEING REGISTERED:
An indefinite number of Units of Beneficial Interest pursuant to Rule 24f-2
promulgated under the Investment Company Act of 1940, as amended.
F. PROPOSED MAXIMUM OFFERING PRICE TO THE PUBLIC OF THE SECURITIES BEING
REGISTERED: Indefinite
G. AMOUNT OF FILING FEE: $500 (as required by Rule 24f-2)
H. APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of the registration statement.
THIS REGISTRATION STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
DEFINED ASSET FUNDS
FLORIDA INSURED SERIES
CROSS REFERENCE SHEET
Pursuant to Rule 404(c) of Regulation C under the Securities Act of 1933 (Form
N-8B-2 Items Required by Instruction 1 as to Prospectus on Form S-6)
Form N-8B-2 Item Number Form S-6 Heading in Prospectus
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I. Organization and General Information
1. (a) Name of Trust..................Part A - Front Cover
(b) Title of securities issued.....Part A - Statement of Condition
2. Name and address of Depositor......Part A - Back Cover
3. Name and address of Trustee........Part A - Back Cover
4. Name and address of principal
underwriter........................Part A - Back Cover
5. Organization of trust..............Part B - Trust Indenture
6. Execution and termination of Trust
Indenture and Agreement..........Part A - Defined Portfolio and
Defining Your Investment
Part B - Risk Factors--Fund
Termination
7. Changes of Name....................*
8. Fiscal year........................*
9. Material Litigation................*
II. General Description of the Trust and Securities of the Trust
10. General information regarding
trust's securities.................Part A - Selling Your Investment
Defining Your Income
Part B - Fund Description - Bond
Portfolio
Supervision
How To Buy Units - Certificates
How To Sell Units
Income, Distributions and
Reinvestment
Records and Reports
Trust Indenture
11. Types of securities comprising
units..............................Part A - Investment Objective
Types of Bonds
AAA-Rated and Insured
Part B - Fund Description - Bond
Portfolio
Selection
Risk Factors
12. Certain information regarding
periodic payment certificates....*
13. (a) Load, fees, expenses, etc......Part A - Defining Your Investment
Defining Your Costs
Back Cover
Part B - How to Buy Units - Public
Offering Price
Income, Distributions and
Reinvestment
(b) Certain information regarding
periodic payment certificates....*
(c) Certain percentages............Part A - Defining Your Costs
Part B - How To Buy Units - Public
Offering Price
Income, Distributions and
Reinvestment
Appendix B
(d) Price to affiliates............Part B - How To Buy Units - Public
Offering Price
(e) Other expenses and fees........*
(f) Certain profits receivable by
the depositor, principal
underwriter, trustee or affiliated
persons Part A - Defining Your Investment
Part B - Income, Distributions and
Reinvestment
Miscellaneous-Underwriters' and
Sponsors' Profits
(g) Ratio of annual charges to
income.............................*
14. Issuance of trust's securities.....Part A - Low Minimum Investment
Defining Your Investment
Defining Your Costs
Part B - How To Buy Units
15. Receipt and handling of payments
from purchasers....................Part B - How To Buy Units
16. Acquisition and disposition of
underlying securities Part A - Professional Selection -
Supervision
Part B - Fund Description
<PAGE>
17. Withdrawal or redemption...........Part A - Selling Your Investment
Back Cover
Part B - How To Sell Units
18. (a) Receipt and disposition of
income.............................Part A - Principal Distributions
Defining Your Income
Part B - Income, Distributions and
Reinvestment
(b) Reinvestment of
distributions......................Part B - Income, Distributions and
Reinvestment
(c) Reserves or special funds......Part B - Income, Distributions and
Reinvestment
(d) Schedule of distributions......*
19. Records, accounts and reports......Part B - Records and Reports
20. (a) Amendments.....................Part B - Trust Indenture
(b) Extension or Termination.......Part A - Defining Your Investment -
Termination
Part B - Trust Indenture
(c) and (d) Removal or Resignation
of Trustee.........................Part B - Trust Indenture
(e) and (f) Removal or Resignation
of Sponsor.........................Part B - Trust Indenture
21. Loans to security holders..........*
22. Limitations on liability...........Part B - Trust Indenture
23. Bonding arrangements...............*
24. Other material provisions of Trust
Indenture Agreement..............*
III. Organization, Personnel and Affiliated Persons of Depositor
25. Organization of Depositor..........Part B - Miscellaneous - Sponsors
26. Fees received by Depositor.........Part A - Defining Your Investment -
Sponsors' Profit
(Loss) on Deposit
27. Business of Depositor..............Part B - Miscellaneous - Sponsors
28. Certain information as to officials
and affiliated persons of
Depositor........................Part II - A.II
29. Voting securities of Depositor.....Part B - Miscellaneous - Sponsors
30. Person controlling Depositor.......*
31. Payments by depositor for certain
services render to trust.........*
32. Remuneration of directors of
Depositor for certain services
rendered to trust..................*
33. Remuneration of directors of
Depositor for certain services
rendered to trust..................*
34. Remuneration of other persons for
certain services rendered to
trust............................*
IV. Distribution and Redemption of Securities
35. Distribution of trust's securities
by States..........................Part B - Miscellaneous - Public
Distribution
36. Suspension of sales of trust's
securities.........................*
37. Revocation of authority to
distribute.........................*
38. (a) Method of distribution.........Part A - Back Cover - Underwriting
Account
Part B - How To Buy Units
Miscellaneous - Public Distribution
(b) Underwriting agreements........Part A - Back Cover
Part B - Miscellaneous - Public
Distribution
(c) Selling agreements.............Part B - How To Buy Units
Miscellaneous - Public Distribution
Appendix B
39. (a) Organization of principal
underwriter........................Part B - Miscellaneous - Sponsors
(b) N.A.S.D. membership by
principal underwriter..............Part B - Miscellaneous - Sponsors
40. Certain fees received by principal
underwriter........................*
41. (a) Business of principal
underwriter........................*
(b) Branch offices of principal
underwriter........................*
(c) Salesmen of principal
underwriter........................*
42. Ownership of trust's securities by
certain persons....................*
43. Certain brokerage commissions
received by principal
underwriter......................*
44. (a) Method of valuation............Part A - Defining Your Investment -
Public Offering Price
Part B - How To Buy Units
(b) Schedule as to offering
price..............................Part A - Defining Your Investment -
Public Offering Price
(c) Variation in offering price....Part B - How to Buy Units - Public
Offering Price
Appendix B
45. Suspension of redemption rights....*
<PAGE>
46. (a) Redemption valuation...........Part B - How to Sell Units
How to Buy Units - Evaluations
(b) Schedule as to redemption
price..............................*
47. Maintenance of position in
underlying securities..............Part A - Back Cover - Underwriting
Account
V. Information Concerning the Trustee or Custodian
48. Organization and regulation of
Trustee............................Part A - Back Cover
Part B - Miscellaneous - Trustee
49. Fees and expenses of Trustee.......Part A - Defining Your Costs
Part B - Income, Distributions and
Reinvestment
50. Trustee's Lien.....................Part B - Income, Distributions and
Reinvestment
VI. Information Concerning Insurance of Holders
51. Insurance of Holders...............*
VII. Policy of Registrant
52. Method of Selection of
Securities.........................Part B - Fund Description - Bond
Portfolio Selection
Fund Description - Bond Portfolio
Supervision
53. Regulated Investment Company.......Part B - Taxes
VIII. Financial and Statistical Information
54. Information on Outstanding
Securities.........................*
55. Issuers of Periodic Payment
Plans..............................*
59. Financial Statements (Instruction
1(b) to Form S-6) Part A - Report of Independent
Public Accountants,
Statement of Condition, Defined
Portfolio
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* Inapplicable, omitted, answer negative or not required.
<PAGE>
DEFINED ASSET FUNDSSM
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FLORIDA INSURED 6.02% ESTIMATED CURRENT RETURN shows the estimated
SERIES annual cash to be received from interest-bearing
(A UNIT INVESTMENT bonds in the Portfolio (net of estimated annual
TRUST) expenses) divided by the Public Offering Price
- ------------------------------(including the maximum sales charge).
/ / DESIGNED FOR 6.23% ESTIMATED LONG TERM RETURN is a measure of
TAX-FREE INCOME the estimated return over the estimated life of
/ / DEFINED PORTFOLIO OF the Fund. This represents an average of the yields
INSURED MUNICIPAL BONDS to maturity (or in certain cases, to an earlier
/ / MONTHLY INCOME call date) of the individual bonds in the
/ / AAA-RATED Portfolio, adjusted to reflect the maximum sales
6.02% charge and estimated expenses. The average yield
ESTIMATED CURRENT RETURN for the Portfolio is derived by weighting each
AS OF DECEMBER 7, 1994 bond's yield by its market value and the time
6.23% remaining to the call or maturity date, depending
ESTIMATED LONG TERM RETURN on how the bond is priced. Unlike Estimated
AS OF DECEMBER 7, 1994 Current Return, Estimated Long Term Return takes
into account maturities, discounts and premiums of
the underlying bonds.
No return estimate can be predictive of your
actual return because returns will vary with
purchase price (including sales charges), how long
units are held, changes in Portfolio composition,
changes in interest income and changes in fees and
expenses. Therefore, Estimated Current Return and
Estimated Long Term Return are designed to be
comparative rather than predictive. A yield
calculation which is more comparable to an
individual bond may be higher or lower than
Estimated Current Return or Estimated Long Term
Return which are more comparable to return
calculations used by other investment products.
-------------------------------------------------
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
SPONSORS: COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
Merrill Lynch, Pierce, OF THIS DOCUMENT. ANY REPRESENTATION TO THE
Fenner & CONTRARY IS A CRIMINAL OFFENSE.
Smith Incorporated Inquiries should be directed to the Trustee at
Smith Barney Inc. 1-800-323-1508.
PaineWebber Incorporated Prospectus Part A dated December 8, 1994.
Prudential Securities INVESTORS SHOULD READ THIS PROSPECTUS CAREFULLY
Incorporated AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
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Defined Asset FundsSM
Defined Asset Funds is America's oldest and largest family of unit investment
trusts, with over $90 billion sponsored since 1970. Each Defined Asset Fund is a
portfolio of preselected securities. The portfolio is divided into 'units'
representing equal shares of the underlying assets. Each unit receives an equal
share of income and principal distributions.
Defined Asset Funds offer several defined 'distinctives'. You know in advance
what you are investing in and that changes in the portfolio are limited - a
defined portfolio. Most defined bond funds pay interest monthly - defined
income. The portfolio offers a convenient and simple way to invest - simplicity
defined.
Your financial professional can help you select a Defined Asset Fund to meet
your personal investment objectives. Our size and market presence enable us to
offer a wide variety of investments. The Defined Asset Funds family offers:
. Municipal portfolios
. Corporate portfolios
. Government portfolios
. Equity portfolios
. International portfolios
Termination dates are as short as one year or as long as 30 years. Special
defined funds are available including: insured funds, double and triple tax-free
funds and funds with 'laddered maturities' to help protect against changing
interest rates. Defined Asset Funds are offered by prospectus only. A complete
prospectus consists of this Part A and a Part B.
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Defined Florida Insured Series
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Our defined portfolio of municipal bonds offers you a simple and convenient way
to earn tax-free monthly income. And by purchasing Defined Asset Funds, you not
only receive professional selection but also gain the advantage of reduced risk
by investing in insured bonds of several different issuers.
INVESTMENT OBJECTIVE
To provide interest income exempt from regular federal income taxes through
investment in a fixed portfolio consisting primarily of insured long-term bonds
issued by or on behalf of the State of Florida and its local governments and
authorities. Units may also be exempt from certain state and local taxes in the
State of Florida.
DIVERSIFICATION
The Portfolio contains 10 Florida bond issues. Spreading your investment among
different issuers reduces your risk, but does not eliminate it, especially since
the Portfolio contains only Florida bonds. Because of maturities, sales or other
dispositions of bonds, the size, composition and return of the Portfolio will
change over time.
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Defining Your Portfolio
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PROFESSIONAL SELECTION AND SUPERVISION
The Portfolio contains a variety of bonds selected by experienced buyers and
research analysts. The Fund is not actively managed; however, it is regularly
reviewed and a bond can be sold if retaining it is considered detrimental to
investors' interests.
TYPES OF BONDS
The Portfolio consists of $15,000,000 face amount of municipal revenue bonds
which are payable from the income generated by a specific project or authority:
SOURCE OF REVENUE
/ / Airports/Ports/Highways 6%
/ / Hospitals/Health Care Facilities 13%
/ / Lease Rental Appropriation 27%
/ / Municipal Water/Sewer Utilities 50%
/ / Special Tax 4%
AAA-RATED AND INSURED
The bonds included in the Portfolio are insured. This insurance guarantees the
timely payment of principal and interest of the bonds, but does not guarantee
the value of the bonds or the Fund units. As a result of the insurance, the
units of the Fund are AAA-rated by Standard & Poor's Ratings Group. Insurance
does not cover accelerated payments of principal or any increase in interest
payments or premiums payable on mandatory redemptions, including if interest on
a bond is determined to be taxable. The percentage of the aggregate face amount
insured by each insurance company is:
PORTFOLIO
INSURANCE COMPANY PERCENTAGE
Financial Guaranty Insurance Company 57%
Municipal Bond Investors Assurance Corporation 30%
AMBAC Indemnity Corporation 13%
BOND CALL FEATURES
It is possible that during periods of falling interest rates, a bond with a
coupon higher than current market rates will be prepaid or 'called', at the
option of the bond issuer, before its expected maturity. When bonds are
initially callable, the price is usually at a premium to par which then declines
to par over time. Bonds may also be subject to a mandatory sinking fund or have
extraordinary redemption provisions. For example, if the bond's proceeds are not
able to be used as intended the bond may be redeemed. This redemption and the
sinking fund are often at par.
2
<PAGE>
<TABLE><CAPTION>
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Defined Portfolio
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Florida Insured Series December 7, 1994
OPTIONAL SINKING
RATING REFUNDING FUND COST
PORTFOLIO TITLE OF ISSUES (1) REDEMPTIONS (2) REDEMPTIONS (2) TO FUND (3)
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<S> <C> <C> <C> <C>
1. $950,000 State of Florida,
Orlando-Orange Cnty. Expressway
Auth. Sen. Lien Rev. Rfdg. Bonds,
Ser. of 1993, 5.50%, 7/1/18
(Financial Guaranty Ins.) AAA 7/1/03 @ 102 7/1/15 $ 805,885.00
2. $2,000,000 Certs. of Part., Ser.
1992 A, The Sch. Bd. of Brevard
Cnty., FL, 6.50%, 7/1/12 (AMBAC
Ins.) AAA 7/1/02 @ 102 7/1/07 1,958,920.00
3. $2,000,000 Charlotte Cnty., FL,
Util. Sys. Rev. Bonds, Ser. 1994,
6.875%, 10/1/21 (Financial Guaranty
Ins.)(4) AAA 10/1/03 @ 102 10/1/14 2,011,080.00
4. $1,550,000 Dade Cnty., FL, Pub.
Facs. Rev. Bonds (Jackson Mem.
Hosp.), Ser. 1993, 5.625%, 6/1/18
(MBIA Ins.) AAA 6/1/03 @ 102 6/1/14 1,329,776.00
5. $530,000 Orange Cnty., FL,
Tourist Dev. Tax Rev. Bonds, Ser.
1994 B, 6.00%, 10/1/24 (MBIA Ins.) AAA 10/1/04 @ 102 10/1/20 479,183.60
6. $2,050,000 Pinellas Cnty., FL,
Swr. Rev. Bonds, Ser. 1994, 5.875%,
10/1/20 (Financial Guaranty Ins.) AAA 10/1/02 @ 102 -- 1,820,523.00
7. $2,000,000 Certs. of Part., Ser.
1994 B, The Sch. Bd. of Seminole
Cnty., FL, 6.50%, 7/1/21 (MBIA
Ins.) AAA 7/1/04 @ 101 7/1/15 1,950,540.00
8. $1,975,000 City of Key West, FL,
Swr. Sys. Rfdg. Rev. Bonds, Ser.
1993, 5.70%, 10/1/26 (Financial
Guaranty Ins.) AAA 10/1/03 @ 102 10/1/21 1,693,345.25
9. $1,500,000 City of Port St.
Lucie, FL, Util. Sys. Rev. Bonds,
Ser. 1994, 6.00%, 9/1/24 (Financial
Guaranty Ins.) AAA 9/1/04 @ 100 9/1/15 1,356,300.00
10. $445,000 City of Tampa, FL,
Allegany Hlth. Sys. Rev. Bonds, St.
Joseph's Hosp., Inc. Iss., Ser.
1994, 6.50%, 12/1/23 (MBIA Ins.) AAA 12/1/04 @ 102 12/1/19 430,915.75
------------------
$ 13,836,468.60
------------------
------------------
</TABLE>
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(1) All ratings are by Standard & Poor's Ratings Group. (See Appendix A to
Prospectus Part B.)
(2) Bonds are first subject to optional redemptions (which may be exercised in
whole or in part) on the dates and at the prices indicated under the Optional
Refunding Redemptions column. In subsequent years, bonds are redeemable at
declining prices, but typically not below par value. Some issues may be subject
to sinking fund redemption or extraordinary redemption with premium prior to the
dates shown.
(3) Evaluation of the bonds by the Evaluator is made on the basis of current
offer side evaluation. On this basis, 13% of the bonds were purchased at a
premium and 87% at a discount from par.
(4) It is anticipated that the interest on $767,673.00 face amount of this bond
will be applied to the payment of the Fund's deferred sales charge and,
therefore, this amount has not been included in the Fund's calculation of
Estimated Current Return and Estimated Long Term Return.
3
<PAGE>
CALL PROTECTION
Although each of the bonds is subject to optional refunding or call provisions,
we have selected bonds with call protection. This call protection means that any
bond in the Portfolio generally cannot be called for a number of years and
thereafter at a declining premium over par.
TAX INFORMATION
Based on the opinion of bond counsel, income from the bonds held by this Fund is
generally 100% exempt under existing laws from regular federal income tax. Any
gain on a disposition of the underlying bonds or units will be subject to tax.
Units may also be exempt from certain state and local taxes in the State of
Florida.
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Defining Your Investment
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PUBLIC OFFERING PRICE PER UNIT $1,000.00
The Public Offering Price as of December 7, 1994, the business day prior to the
Initial Date of Deposit is based on the aggregate offer side value of the
underlying bonds in the Fund ($13,836,468.60), the price at which they can be
directly purchased by the public assuming they were available, plus cash
($198,531.40), divided by the number of units outstanding (14,035). Units
offered on the Initial Date of Deposit will also be priced at $1,000 although
the offer side value of the bonds, cash amount and number of units may vary. The
Public Offering Price on any subsequent date will vary. An amount equal to net
accrued but undistributed interest on the unit is added to the Public Offering
Price for sales made after the Initial Date of Deposit. The underlying bonds are
evaluated by an independent evaluator at 1:00 p.m. Eastern time on the business
day prior to and the day of the Initial Date of Deposit, and at 3:30 p.m.
Eastern time on every business day thereafter.
LOW MINIMUM INVESTMENT
You can get started with a minimum purchase of $1,000.
REINVESTMENT OPTION
You can elect to automatically reinvest your distributions into a separate
portfolio of federally tax-exempt bonds. Most or all of the bonds in that
portfolio, however, will not be insured or exempt from Florida state and local
taxes. Reinvesting helps to compound your income tax-free.
PRINCIPAL DISTRIBUTIONS
Principal from sales, redemptions and maturities of bonds in the Fund not needed
to pay the deferred sales charge will be distributed to investors periodically
when the amount to be distributed is more than $5.00 per unit.
TERMINATION DATE
The Fund will generally terminate following the maturity date of the last
maturing bond listed in the Portfolio. The Fund may be terminated if the value
is less than 40% of the face amount of bonds deposited.
SPONSORS' PROFIT OR LOSS
The Sponsors' profit or loss associated with the Fund will include the receipt
of applicable sales charges, any fees for underwriting or placing bonds,
fluctuations in the Public Offering Price or secondary market price of units and
a gain of $315,710.55 on the deposit of the bonds.
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<TABLE><CAPTION>
TAX-FREE VS. TAXABLE INCOME
A Comparison Of Taxable and Tax-Free Yields For Florida Residents
EFFECTIVE
TAXABLE INCOME 1995* % TAX TAX-FREE YIELD OF
SINGLE RETURN JOINT RETURN BRACKET 3% 3.5% 4% 4.5% 5% 5.5%
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 23,350 $ 0- 39,000 15.00 3.53 4.12 4.71 5.29 5.88 6.47
- ---------------------------------------------------------------------------------------------------------------------------
$ 23,350- 56,550 $ 39,000- 94,250 28.00 4.17 4.86 5.56 6.25 6.94 7.64
- ---------------------------------------------------------------------------------------------------------------------------
$ 56,550-117,950 $ 94,250-143,600 31.00 4.35 5.07 5.80 6.52 7.25 7.97
- ---------------------------------------------------------------------------------------------------------------------------
$ 117,950-256,500 $ 143,600-256,500 36.00 4.69 5.47 6.25 7.03 7.81 8.59
- ---------------------------------------------------------------------------------------------------------------------------
OVER $256,500 OVER $256,500 39.60 4.97 5.79 6.62 7.45 8.28 9.11
</TABLE>
TAXABLE INCOME 1995*
SINGLE RETURN 6% 6.5% 7%
- ------------------
$ 0- 23,350 7.06 7.65 8.24
- ------------------
$ 23,350- 56,550 8.33 9.03 9.72
- ------------------
$ 56,550-117,950 8.70 9.42 10.14
- ------------------
$ 117,950-256,500 9.38 10.16 10.94
- ------------------
OVER $256,500 9.93 10.76 11.59
To compare the yield of a taxable security with the yield of a tax-free
security, find your taxable income and read across. The table incorporates
projected 1995 federal income tax rates and assumes that all income would
otherwise be taxed at the investor's highest tax rate. Yield figures are for
example only.
*Based upon net amount subject to federal income tax after deductions and
exemptions. This table does not reflect the possible effect of other tax
factors, such as alternative minimum tax, personal exemptions, the phase out of
exemptions, itemized deductions or the possible partial disallowance of
deductions. Consequently, holders are urged to consult their own tax advisers in
this regard.
4
<PAGE>
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Defining Your Costs
- -----------------------------------------------------------------
NO UP-FRONT SALES CHARGE
The Fund does not have an up-front sales charge during the first year of the
Fund. In the first five years of owning the Fund you will pay $11 per Unit each
year ($2.75 quarterly), a total of $55. This sales charge will be paid from
interest on $55 of bonds notionally reserved for that purpose and the periodic
sale of bonds. Interest on the reserved bonds accrues to you and is not included
in the Fund's return figures. Although the Fund is a unit investment trust
rather than a mutual fund, the following information is presented to permit a
comparison of fees and an understanding of the direct or indirect costs and
expenses that you pay.
As a Percentage
of Initial Public Amount per
Offering Price $1,000 Invested
------------------- ---------------
Maximum Sales Charges 5.5% $ 55.00
ESTIMATED ANNUAL FUND OPERATING EXPENSES
Trustee's Fee .070% $ 0.70
Maximum Portfolio Supervision,
Bookkeeping and
Administrative Fees .040% $ 0.40
Evaluator's Fee .009% $ 0.09
Other Operating Expenses .040% $ 0.40
----------------- ---------------
TOTAL .159% $ 1.59
COSTS OVER TIME
You would pay the following cumulative expenses on a $1,000 investment, assuming
a 5% annual return on the investment throughout the indicated periods and
redemption at the end of the period:
1 Year 3 Years 5 Years 10 Years
$38 $48 $64 $75
No redemption at the end of the period:
$13 $38 $64 $75
The example assumes reinvestment of all distributions into additional units of
the Fund (a reinvestment option different from that offered by this Fund) and
uses a 5% annual rate of return as mandated by Securities and Exchange
Commission regulations applicable to mutual funds. The Costs Over Time above
reflect both sales charges and operating expenses on an increasing investment
(because the net annual return is reinvested). The example should not be
considered a representation of past or future expenses or annual rate of return;
the actual expenses and annual rate of return may be more or less than the
example.
SELLING YOUR INVESTMENT
You may sell your units at any time. Your price is based on the Fund's then
current net asset value (based on the offer side evaluation of the bonds during
the initial public offering period for at least the first three months and the
lower, bid side evaluation thereafter, as determined by an independent
evaluator, plus accrued interest). If you sell your units before the fourth
anniversary of the Fund, you will pay a contingent deferred sales charge of $25
per unit if sold in the first year, $15 per unit if sold in the second year, $10
per unit if sold in the third year and $5 per unit if sold in the fourth year.
The redemption and secondary market repurchase price as of December 7, 1994 was
$989.31 ($10.69 less than the Public Offering Price).
- -----------------------------------------------------------------
Defining Your Income
- -----------------------------------------------------------------
MONTHLY FEDERALLY TAX-FREE INTEREST INCOME
The Fund pays monthly income, even though the bonds generally pay interest
semi-annually.
WHAT YOU MAY EXPECT
(PAYABLE ON THE 25TH DAY OF THE MONTH TO HOLDERS OF RECORD ON THE 10TH DAY OF
THE MONTH):
First Distribution
(January 25, 1995): $ 4.18
Regular Monthly Income
(Beginning on February 25, 1995): $ 5.02
Annual Income: $ 60.24
These figures are estimates determined as of the business day prior to the
Initial Date of Deposit and actual payments may vary.
Estimated cash flows are available upon request from the Sponsors.
- ----------------------------------------------------------------
Defining Your Risks
- ----------------------------------------------------------------
RISK FACTORS
Unit price fluctuates and could be adversely affected by increasing interest
rates as well as the financial condition of the issuers of the bonds and any
insurance companies backing the bonds. Because of the possible maturity, sale or
other disposition of securities, the size, composition and return of the
portfolio may change at any time. Because of the sales charges, returns of
principal and fluctuations in unit price, among other reasons, the sale price
will generally be less than the cost of your units. Unit prices could also be
adversely affected if a limited trading market exists in any security to be
sold. There is no guarantee that the Fund will achieve its investment objective.
The Fund is considered to be concentrated in municipal water/sewer utility bonds
and lease rental appropriation bonds and is therefore dependent to a significant
degree on revenues generated from those particular activities. In addition, the
Fund is concentrated in bonds of Florida issuers and is subject to additional
risk from decreased diversification as well as factors that may be particular to
Florida, including dependence on tourism, agriculture and the construction
industry and political, economic and social issues that arise from Florida's
proximity to Central and South America. (See Risk Factors in Part B).
5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Sponsors, Trustee and Holders of Defined Asset Funds, Florida Insured Series
(the 'Fund'):
We have audited the accompanying statement of condition and the related
portfolio included in the prospectus of the Fund as of December 7, 1994. This
financial statement is the responsibility of the Trustee. Our responsibility is
to express an opinion on this financial statement 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. Our procedures included
confirmation of securities and the irrevocable letters of credit deposited for
the purchase of securities, as described in the statement of condition, 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 statement referred to above presents fairly, in
all material respects, the financial position of the Fund as of December 7, 1994
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, N.Y.
December 7, 1994
STATEMENT OF CONDITION AS OF DECEMBER 7, 1994
TRUST PROPERTY
Investments--Bonds and Contracts to purchase Bonds(1) $ 13,836,468.60
Cash 198,531.40
Accrued interest to Initial Date of Deposit on underlying
Bonds 181,115.34
--------------------
Total $ 14,216,115.34
--------------------
--------------------
LIABILITY AND INTEREST OF HOLDERS
Liability--Advance by Trustee for accrued interest(2) $ 181,115.34
Interest of Holders of 14,035 Units of fractional
undivided interest outstanding(3);
Cost to investors(4)(5) 14,035,000.00
--------------------
Total $ 14,216,115.34
--------------------
--------------------
COST TO INVESTORS PER UNIT $ 1,000.00
--------------------
--------------------
- ---------------
(1) AGGREGATE COST TO THE FUND OF THE BONDS LISTED UNDER DEFINED
PORTFOLIO IS BASED UPON THE OFFER SIDE EVALUATION DETERMINED BY THE EVALUATOR AT
THE EVALUATION TIME ON THE BUSINESS DAY PRIOR TO THE INITIAL DATE OF DEPOSIT
(1:00 P.M., EASTERN TIME). THE CONTRACTS TO PURCHASE THE BONDS ARE
COLLATERALIZED BY IRREVOCABLE LETTERS OF CREDIT WHICH HAVE BEEN ISSUED BY SAN
PAOLO BANK, NEW YORK BRANCH, IN THE AMOUNT OF $7,975,501.55 AND DEPOSITED WITH
THE TRUSTEE. THE AMOUNT OF LETTERS OF CREDIT INCLUDES $7,889,302.90 FOR THE
PURCHASE OF $9,055,000 FACE AMOUNT OF THE BONDS, PLUS $86,198.65 FOR ACCRUED
INTEREST.
(2) REPRESENTING A SPECIAL DISTRIBUTION BY THE TRUSTEE OF AN AMOUNT
EQUAL TO THE ACCRUED INTEREST ON THE BONDS AS OF THE INITIAL DATE OF DEPOSIT.
(3) BECAUSE THE VALUE OF BONDS BASED ON THE EVALUATION TIME ON THE
INITIAL DATE OF DEPOSIT MAY DIFFER FROM THE AMOUNTS SHOWN IN THIS STATEMENT OF
CONDITION, THE UNITS OFFERED ON THE INITIAL DATE OF DEPOSIT WILL BE ADJUSTED
FROM THE INITIAL NUMBER OF UNITS TO MAINTAIN THE INITIAL $1,000.00 PER UNIT
OFFERING PRICE.
(4) AGGREGATE PUBLIC OFFERING PRICE (EXCLUSIVE OF INTEREST) COMPUTED ON
THE BASIS OF THE OFFER SIDE EVALUATION OF THE UNDERLYING BONDS AS OF THE
EVALUATION TIME ON THE BUSINESS DAY PRIOR TO THE INITIAL DATE OF DEPOSIT (1:00
P.M., EASTERN TIME).
(5) A DEFERRED SALES CHARGE OF $2.75 PER UNIT WILL BE PAID QUARTERLY BY
THE TRUSTEE ON BEHALF OF THE INVESTORS UP TO AN AGGREGATE OF $55.00 PER UNIT
OVER A FIVE YEAR PERIOD. SHOULD AN INVESTOR REDEEM UNITS PRIOR TO THE END OF THE
FOURTH ANNIVERSARY OF THE FUND, A CONTINGENT DEFERRED SALES CHARGE (INITIALLY
$25.00 PER UNIT) WILL BE DEDUCTED FROM REDEMPTION PROCEEDS AND PAID TO THE
SPONSORS.
15021A--12/94
6
<PAGE>
UNDERWRITING ACCOUNT
One of the Sponsors has participated as sole underwriter, managing underwriter
or member of an underwriting syndicate from which approximately 13% of the bonds
in the Portfolio were acquired.
SPONSORS
MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED
P.O. Box 9051,
Princeton, NJ 08543-9051 88.33%
SMITH BARNEY INC.
388 Greenwich Street--23rd Floor,
New York, NY 10013 1.67%
PAINEWEBBER INCORPORATED
1285 Avenue of the Americas,
New York, NY 10019 6.67%
PRUDENTIAL SECURITIES INCORPORATED
One Seaport Plaza--199 Water Street,
New York, NY 10292 3.33%
-----------------
100.00%
-----------------
--------------
DEFINED ASSET FUND
FLORIDA INSURED SERIES
I want to learn more about automatic
reinvestment in the Investment
Accumulation Program. Please send me
information about participation in the
Municipal Fund Accumulation
Program, Inc. and a current Prospectus.
- ---------------------------------------------------------------
NAME
- ---------------------------------------------------------------
ADDRESS
- ---------------------------------------------------------------
CITY
- ---------------------------------------------------------------
STATE ZIP
- ---------------------------------------------------------------
PHONE
This card is a self mailer.
Please remove along perforation and mail.
<PAGE>
EVALUATOR:
Kenny S&P Evaluation Services
65 Broadway, New York, NY 10019
TRUSTEE:
The Chase Manhattan Bank, N.A.
(a National Banking Association)
Defined Asset Funds
Box 2051, New York, NY 10081
1-800-323-1508
Units of this Fund may no longer be available and therefore information
contained herein may be subject to amendment. A registration statement relating
to securities of a future series has been filed with the Securities and Exchange
Commission. These securities may not be sold nor may offers to buy be accepted
prior to the time the registration statement becomes effective. This document
shall not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
FOR MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING ADDITIONAL INFORMATION
ON CHARGES AND EXPENSES, PLEASE CALL OR WRITE FOR PART B OF THE PROSPECTUS. READ
BOTH PARTS A AND B BEFORE YOU INVEST OR SEND MONEY.
<PAGE>
BUSINESS REPLY MAIL NO POSTAGE
FIRST CLASS PERMIT NO. 644 NEW YORK, NY NECESSARY
IF MAILED
POSTAGE WILL BE PAID BY ADDRESSEE IN THE
THE CHASE MANHATTAN BANK, N.A. UNITED STATES
DEFINED ASSET FUNDS
BOX 2051
NEW YORK, NY 10081
<PAGE>
DEFINED ASSET FUNDSSM
PROSPECTUS--PART B
MUNICIPAL SERIES
THIS PART B OF THE PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED OR
PRECEDED BY PART A. FURTHER DETAIL REGARDING ANY OF THE INFORMATION
PROVIDED IN THE PROSPECTUS MAY BE OBTAINED WITHIN FIVE DAYS OF WRITTEN
OR TELEPHONIC REQUEST TO THE TRUSTEE, THE ADDRESS AND TELEPHONE NUMBER
OF WHICH ARE SET FORTH IN PART A OF THIS PROSPECTUS.
Index
PAGE
---------
Fund Description...................................... 1
Risk Factors.......................................... 2
How to Buy Units...................................... 7
How to Sell Units..................................... 8
Income, Distributions and Reinvestment................ 8
Fund Expenses......................................... 9
Fund Performance...................................... 10
Taxes................................................. 10
PAGE
---------
Records and Reports................................... 11
Trust Indenture....................................... 11
Miscellaneous......................................... 12
Supplemental Information.............................. 13
Appendix A--Description of Ratings.................... a-1
Appendix B--Sales Charge Schedules.................... b-1
Appendix C--Florida Disclosure........................ c-1
FUND DESCRIPTION
DEFINED ASSET FUNDS
Defined Asset Funds is the oldest and largest family of unit investment
trusts. For decades informed investors have purchased unit investment trusts for
dependability and professional selection of investments. Defined Asset Funds'
philosophy is to allow investors to 'buy with knowledge' (because, unlike
managed funds, the portfolio of municipal bonds and the return are relatively
fixed) and 'hold with confidence' (because the portfolio is professionally
selected and regularly reviewed). Defined Asset Funds offers an array of simple
and convenient investment choices, suited to fit a wide variety of personal
financial goals--a buy and hold strategy for capital accumulation, such as for
children's education or retirement, or attractive, regular current income
consistent with the preservation of principal. Tax-exempt income can help
investors keep more today for a more secure financial future. It can also be
important in planning because tax brackets may increase with higher earnings or
changes in tax laws. Unit investment trusts are particularly suited for the many
investors who prefer to seek long-term income by purchasing sound investments
and holding them, rather than through active trading. Few individuals have the
knowledge, resources or capital to buy and hold a diversified portfolio on their
own; it would generally take a considerable sum of money to obtain the breadth
and diversity that Defined Asset Funds offer. One's investment objectives may
call for a combination of Defined Asset Funds.
BOND PORTFOLIO SELECTION
Professional buyers and market analysts for Defined Asset Funds, with
access to extensive research, selected the Bonds for the Portfolio after
considering the Fund's investment objective as well as the quality of the Bonds
(all Bonds in the Portfolio are initially rated in the category A or better by
at least one nationally recognized rating organization or have comparable credit
characteristics), the yield and price of the Bonds compared to similar
securities, the maturities of the Bonds and the diversification of the
Portfolio. Only issues meeting these stringent criteria of the Defined Asset
Funds team of dedicated market analysts are included in the Portfolio. No
leverage or borrowing is used nor does the Portfolio contain other kinds of
securities to enhance yield. A summary of the Bonds in the Portfolio appears
under Defined Portfolio in Part A of the Prospectus.
1
<PAGE>
Yields on bonds depend on many factors including general conditions of the
bond markets, the size of a particular offering and the maturity and quality
rating of the particular issues. Yields can vary among bonds with similar
maturities, coupons and ratings. Ratings represent opinions of the rating
organizations as to the quality of the bonds rated, based on the credit of the
issuer or any guarantor, insurer or other credit provider, but these ratings are
general standards of quality (see Appendix A).
The Sponsors and the Trustee are not liable for any default or defect in a
Bond. If a contract to purchase any Bond fails, the Sponsors may generally
deposit a replacement bond so long as it is a tax-exempt bond, has a fixed
maturity or disposition date substantially similar to the failed Bond and is
rated A or better by at least one nationally recognized rating organization or
has comparable credit characteristics. A replacement bond must be deposited
within 110 days after deposit of the failed contract, at a cost that does not
exceed the funds reserved for purchasing the failed Bond and at a yield to
maturity and current return substantially equivalent (considering then current
market conditions and relative creditworthiness) to those of the failed Bond, as
of the date the failed contract was deposited.
Because each Defined Asset Fund is a preselected portfolio of bonds,
purchasers know the securities, maturities, call dates and ratings before they
invest. Of course, the Portfolio will change somewhat over time, as Bonds
mature, are redeemed or are sold to meet Unit redemptions or in other limited
circumstances. Because the Portfolio is not actively managed and principal is
returned as the bonds are disposed of, this principal should be relatively
unaffected by changes in interest rates.
BOND PORTFOLIO SUPERVISION
The Fund follows a buy and hold investment strategy in contrast to the
frequent portfolio changes of a managed fund based on economic, financial and
market analyses. The Fund may retain an issuer's bonds despite adverse financial
developments. Experienced financial analysts regularly review the Portfolio and
a Bond may be sold in certain circumstances including the occurrence of a
default in payment or other default on the Bond, a decline in the projected
income pledged for debt service on a revenue bond, institution of certain legal
proceedings, if the Bond becomes taxable or is otherwise inconsistent with the
Fund's investment objectives, a decline in the price of the Bond or the
occurrence of other market or credit factors (including advance refunding) that,
in the opinion of Defined Asset Funds research analysts, makes retention of the
Bond detrimental to the interests of investors. The Trustee must generally
reject any offer by an issuer of a Bond to exchange another security pursuant to
a refunding or refinancing plan.
RISK FACTORS
An investment in the Fund entails certain risks, including the risk that
the value of your investment will decline with increases in interest rates.
Generally speaking, bonds with longer maturities will fluctuate in value more
than bonds with shorter maturities. In recent years there have been wide
fluctuations in interest rates and in the value of fixed-rate bonds generally.
The Sponsors cannot predict the direction or scope of any future fluctuations.
Certain of the Bonds may have been deposited at a market discount or
premium principally because their interest rates are lower or higher than
prevailing rates on comparable debt securities. The current returns of market
discount bonds are lower than comparably rated bonds selling at par because
discount bonds tend to increase in market value as they approach maturity. The
current returns of market premium bonds are higher than comparably rated bonds
selling at par because premium bonds tend to decrease in market value as they
approach maturity. Because part of the purchase price is returned through
current income payments and not at maturity, an early redemption at par of a
premium bond will result in a reduction in yield to the Fund. Market premium or
discount attributable to interest rate changes does not indicate market
confidence or lack of confidence in the issue.
The Fund generally is 'at risk' for Bonds purchased on a when-issued or
delayed delivery basis because the purchase price is determined prior to
purchase and either a gain or loss may result from fluctuations in the value of
the Bonds from the date the price is determined. Additionally, if the value of
the bonds reserved for payment of the periodic deferred sales charge, together
with the interest thereon, were to become insufficient to pay these charges,
additional bonds would be required to be sold.
The Fund may be concentrated in one or more of types of Bonds.
Concentration in a State may involve additional risk because of the decreased
diversification of economic, political, financial and market risks. Set forth
below is a brief description of certain risks associated with bonds which may be
held by the Fund. Additional information is contained in the Information
Supplement which is available from the Trustee at no charge to the investor.
GENERAL OBLIGATION BONDS
Certain of the Bonds may be general obligations of a governmental entity.
General obligation bonds are backed by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. However, the
taxing power of any governmental entity may be limited by provisions of state
constitutions or laws and its credit will
2
<PAGE>
depend on many factors, including an erosion of the tax base resulting from
population declines, natural disasters, declines in the state's industrial base
or an inability to attract new industries, economic limits on the ability to tax
without eroding the tax base and the extent to which the entity relies on
federal or state aid, access to capital markets or other factors beyond the
entity's control. In addition, political restrictions on the ability to tax and
budgetary constraints affecting state governmental aid may have an adverse
impact on the creditworthiness of cities, counties, school districts and other
local governmental units.
As a result of the recent recession's adverse impact upon both revenues and
expenditures, as well as other factors, many state and local governments have
confronted deficits which were the most severe in recent years. Many issuers are
facing highly difficult choices about significant tax increases and spending
reductions in order to restore budgetary balance. The failure to implement these
actions on a timely basis could force these issuers to issue additional debt to
finance deficits or cash flow needs and could lead to a reduction of their bond
ratings and the value of their outstanding bonds.
MORAL OBLIGATION BONDS
The Portfolio may include 'moral obligation' bonds. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of the bonds
becomes a moral commitment but not a legal obligation of the state or local
government in question. Even though the state or local government may be called
on to restore any deficits in capital reserve funds of the agencies or
authorities which issued the bonds, any restoration generally requires
appropriation by the state or local legislature and does not constitute a
legally enforceable obligation or debt of the state or local government. The
agencies or authorities generally have no taxing power.
REFUNDED BONDS
Refunded Bonds are typically secured by direct obligations of the U.S.
Government or in some cases obligations guaranteed by the U.S. Government placed
in an escrow account maintained by an independent trustee until maturity or a
predetermined redemption date. These obligations are generally noncallable prior
to maturity or the predetermined redemption date. In a few isolated instances,
however, bonds which were thought to be escrowed to maturity have been called
for redemption prior to maturity.
MUNICIPAL REVENUE BONDS
Municipal revenue bonds are tax-exempt securities issued by states,
municipalities, public authorities or similar entities to finance the cost of
acquiring, constructing or improving various projects. Municipal revenue bonds
are not general obligations of governmental entities backed by their taxing
power and payment is generally solely dependent upon the creditworthiness of the
public issuer or the financed project or state appropriations. Examples of
municipal revenue bonds are:
Municipal utility bonds, including electrical, water and sewer revenue
bonds, whose payments are dependent on various factors, including the rates
the utilities may charge, the demand for their services and their operating
costs, including expenses to comply with environmental legislation and
other energy and licensing laws and regulations. Utilities are particularly
sensitive to, among other things, the effects of inflation on operating and
construction costs, the unpredictability of future usage requirements, the
costs and availability of fuel and, with certain electric utilities, the
risks associated with the nuclear industry;
Lease rental bonds which are generally issued by governmental financing
authorities with no direct taxing power for the purchase of equipment or
construction of buildings that will be used by a state or local government.
Lease rental bonds are generally subject to an annual risk that the lessee
government might not appropriate funds for the leasing rental payments to
service the bonds and may also be subject to the risk that rental
obligations may terminate in the event of damage to or destruction or
condemnation of the equipment or building;
Multi-family housing revenue bonds and single family mortgage revenue
bonds which are issued to provide financing for various housing projects
and which are payable primarily from the revenues derived from mortgage
loans to housing projects for low to moderate income families or notes
secured by mortgages on residences; repayment of this type of bonds is
therefore dependent upon, among other things, occupancy levels, rental
income, the rate of default on underlying mortgage loans, the ability of
mortgage insurers to pay claims, the continued availability of federal,
state or local housing subsidy programs, economic conditions in local
markets, construction costs, taxes, utility costs and other operating
expenses and the managerial ability of project managers. Housing bonds are
generally prepayable at any time and therefore their average life will
ordinarily be less than their stated maturities;
Hospital and health care facility bonds whose payments are dependent
upon revenues of hospitals and other health care facilities. These revenues
come from private third-party payors and government programs, including
3
<PAGE>
the Medicare and Medicaid programs, which have generally undertaken cost
containment measures to limit payments to health care facilities. Hospitals
and health care facilities are subject to various legal claims by patients
and others and are adversely affected by increasing costs of insurance;
Airport, port, highway and transit authority revenue bonds which are
dependent for payment on revenues from the financed projects, including
user fees from ports and airports, tolls on turnpikes and bridges, rents
from buildings, transit fare revenues and additional financial resources
including federal and state subsidies, lease rentals paid by state or local
governments or a pledge of a special tax such as a sales tax or a property
tax. In the case of the air travel industry, airport income is largely
affected by the airlines' ability to meet their obligations under use
agreements which in turn is affected by increased competition among
airlines, excess capacity and increased fuel costs, among other factors.
Solid waste disposal bonds which are generally payable from dumping and
user fees and from revenues that may be earned by the facility on the sale
of electrical energy generated in the combustion of waste products and
which are therefore dependent upon the ability of municipalities to fully
utilize the facilities, sufficient supply of waste for disposal, economic
or population growth, the level of construction and maintenance costs, the
existence of lower-cost alternative modes of waste processing and
increasing environmental regulation. A recent decision of the U.S. Supreme
Court limiting a municipality's ability to require use of its facilities
may have an adverse affect on the credit quality of various issues of these
bonds;
Special tax bonds which are not secured by general tax revenues but are
only payable from and secured by the revenues derived by a municipality
from a particular tax--for example, a tax on the rental of a hotel room, on
the purchase of food and beverages, on the rental of automobiles or on the
consumption of liquor and may therefore be adversely affected by a
reduction in revenues resulting from a decline in the local economy or
population or a decline in the consumption, use or cost of the goods and
services that are subject to taxation;
University and college bonds, the payments on which are dependent upon
various factors, including the size and diversity of their sources of
revenues, enrollment, reputation, the availability of endowments and other
funds and, in the case of public institutions, the financial condition of
the relevant state or other governmental entity and its policies with
respect to education; and
Tax increment and tax allocation bonds, which are secured by ad valorem
taxes imposed on the incremental increase of taxable assessed valuation of
property within a jurisdiction above an established base of assessed value.
The issuers of these bonds do not have general taxing authority and the tax
assessments on which the taxes used to service the bonds are based may be
subject to devaluation due to market price declines or governmental action.
Puerto Rico. Certain Bonds may be affected by general economic conditions
in the Commonwealth of Puerto Rico. Puerto Rico's economy is largely dependent
for its development on federal programs and current federal budgetary policies
suggest that an expansion of its programs is unlikely. Reductions in federal tax
benefits or incentives or curtailment of spending programs could adversely
affect the Puerto Rican economy.
Industrial Development Revenue Bonds. Industrial development revenue bonds
are municipal obligations issued to finance various privately operated projects
including pollution control and manufacturing facilities. Payment is generally
solely dependent upon the creditworthiness of the corporate operator of the
project and, in certain cases, an affiliated or third party guarantor and may be
affected by economic factors relating to the particular industry as well as
varying degrees of governmental regulation. In many cases industrial revenue
bonds do not have the benefit of covenants which would prevent the corporations
from engaging in capital restructurings or borrowing transactions which could
reduce their ability to meet their obligations and result in a reduction in the
value of the Portfolio.
BONDS BACKED BY LETTERS OF CREDIT OR INSURANCE
Certain Bonds may be secured by letters of credit issued by commercial
banks or savings banks, savings and loan associations and similar thrift
institutions or are direct obligations of banks or thrifts. The letter of credit
may be drawn upon, and the Bonds redeemed, if an issuer fails to pay amounts due
on the Bonds or, in certain cases, if the interest on the Bond becomes taxable.
Letters of credit are irrevocable obligations of the issuing institutions. The
profitability of a financial institution is largely dependent upon the credit
quality of its loan portfolio which, in turn, is affected by the institution's
underwriting criteria, concentrations within the portfolio and specific industry
and general economic conditions. The operating performance of financial
institutions is also impacted by changes in interest rates, the availability and
cost of funds, the intensity of competition and the degree of governmental
regulation.
Certain Bonds may be insured or guaranteed by insurance companies listed
below. The claims-paying ability of each of these companies, unless otherwise
indicated, was rated AAA by Standard & Poor's or another nationally recognized
rating organization at the time the insured Bonds were purchased by the Fund.
The ratings are subject to
4
<PAGE>
change at any time at the discretion of the rating agencies. In the event that
the rating of an Insured Fund is reduced, the Sponsors are authorized to direct
the Trustee to obtain other insurance on behalf of the Fund. The insurance
policies guarantee the timely payment of principal and interest on the Bonds but
do not guarantee their market value or the value of the Units. The insurance
policies generally do not provide for accelerated payments of principal or cover
redemptions resulting from events of taxability.
The following summary information relating to the listed insurance
companies has been obtained from publicly available information:
<TABLE><CAPTION>
FINANCIAL INFORMATION
AS OF JUNE 30, 1994
(IN MILLIONS OF DOLLARS)
-------------------------------------
POLICY HOLDER
NAME DATE ESTABLISHED ADMITTED ASSETS SURPLUS
- ----------------------------------------------------- ----------------- --------------- --------------------
<S> <C> <C> <C>
AMBAC Indemnity Corporation.......................... 1970 $ 2,060 $ 767
Asset Guaranty Insurance Co. (AA by S&P)............. 1988 145 73
Capital Guaranty Insurance Company................... 1986 287 164
Capital Markets Assurance Corp....................... 1987 194 140
Connie Lee Insurance Company......................... 1987 193 105
Financial Guaranty Insurance Company................. 1984 2,055 850
Financial Security Assurance Inc..................... 1984 731 366
Municipal Bond Investors Assurance Corporation....... 1986 3,253 1,049
</TABLE>
Insurance companies are subject to extensive regulation and supervision
where they do business by state insurance commissioners who regulate the
standards of solvency which must be maintained, the nature of and limitations on
investments, reports of financial condition, and requirements regarding reserves
for unearned premiums, losses and other matters. A significant portion of the
assets of insurance companies are required by law to be held in reserve against
potential claims on policies and is not available to general creditors. Although
the federal government does not regulate the business of insurance, federal
initiatives including pension regulation, controls on medical care costs,
minimum standards for no-fault automobile insurance, national health insurance,
tax law changes affecting life insurance companies and repeal of the antitrust
exemption for the insurance business can significantly impact the insurance
business.
STATE RISK FACTORS
Investment in a single State Trust, as opposed to a Fund which invests in
the obligations of several states, may involve some additional risk due to the
decreased diversification of economic, political, financial and market risks. A
brief description of the factors which may affect the financial condition of the
applicable State for any State Trust, together with a summary of tax
considerations relating to that State, appear in Appendix C to this Part B and
further information is contained in the Information Supplement.
LITIGATION AND LEGISLATION
The Sponsors do not know of any pending litigation as of the Initial Date
of Deposit which might reasonably be expected to have a material adverse effect
upon the Fund. At any time after the Initial Date of Deposit, litigation may be
initiated on a variety of grounds, or legislation may be enacted, affecting the
Bonds in the Fund. Litigation, for example, challenging the issuance of
pollution control revenue bonds under environmental protection statutes may
affect the validity of certain Bonds or the tax-free nature of their interest.
While the outcome of litigation of this nature can never be entirely predicted,
opinions of bond counsel are delivered on the date of issuance of each Bond to
the effect that it has been validly issued and that the interest thereon is
exempt from federal income tax. Also, certain proposals, in the form of state
legislative proposals or voter initiatives, seeking to limit real property taxes
have been introduced in various states, and an amendment to the constitution of
the State of California, providing for strict limitations on real property
taxes, has had a significant impact on the taxing powers of local governments
and on the financial condition of school districts and local governments in
California. In addition, other factors may arise from time to time which
potentially may impair the ability of issuers to make payments due on the Bonds.
Under the Federal Bankruptcy Code, for example, municipal bond issuers, as well
as any underlying corporate obligors or guarantors, may proceed to restructure
or otherwise alter the terms of their obligations.
From time to time Congress considers proposals to prospectively and
retroactively tax the interest on state and local obligations, such as the
Bonds. The Supreme Court clarified in South Carolina v. Baker (decided on April
20, 1988) that the U.S. Constitution does not prohibit Congress from passing a
nondiscriminatory tax on interest on state and local obligations. This type of
legislation, if enacted into law, could require investors to pay income tax on
interest from the Bonds and could adversely affect an investment in Units. See
Taxes.
5
<PAGE>
PAYMENT OF THE BONDS AND LIFE OF THE FUND
The size and composition of the Portfolio will change over time. Most of
the Bonds are subject to redemption prior to their stated maturity dates
pursuant to optional refunding or sinking fund redemption provisions or
otherwise. In general, optional refunding redemption provisions are more likely
to be exercised when the value of a Bond is at a premium over par than when it
is at a discount from par. Some Bonds may be subject to sinking fund and
extraordinary redemption provisions which may commence early in the life of the
Fund. Additionally, the size and composition of the Fund will be affected by the
level of redemptions of Units that may occur from time to time. Principally,
this will depend upon the number of investors seeking to sell or redeem their
Units and whether or not the Sponsors are able to sell the Units acquired by
them in the secondary market. Factors that the Sponsors will consider in
determining whether or not to sell Units acquired in the secondary market
include the diversity of the Portfolio, the size of the Fund relative to its
original size, the ratio of Fund expenses to income, the Fund's current and
long-term returns, the degree to which Units may be selling at a premium over
par and the cost of maintaining a current prospectus for the Fund. These factors
may also lead the Sponsors to seek to terminate the Fund earlier than its
mandatory termination date.
FUND TERMINATION
The Fund will be terminated no later than the mandatory termination date
specified under Defining Your Investment in Part A of the Prospectus. It will
terminate earlier upon the disposition of the last Bond or upon the consent of
investors holding 51% of the Units. The Fund may also be terminated earlier by
the Sponsors once the total assets of the Fund have fallen below the minimum
value specified under Defining Your Investment in Part A of the Prospectus. A
decision by the Sponsors to terminate the Fund early will be based on factors
similar to those considered by the Sponsors in determining whether to continue
the sale of Units in the secondary market.
Notice of impending termination will be provided to investors and
thereafter units will no longer be redeemable. On or shortly before termination,
the Fund will seek to dispose of any Bonds remaining in the Portfolio although
any Bond unable to be sold at a reasonable price may continue to be held by the
Trustee in a liquidating trust pending its final disposition. A proportional
share of the expenses associated with termination, including brokerage costs in
disposing of Bonds, will be borne by investors remaining at that time. This may
have the effect of reducing the amount of proceeds those investors are to
receive in any final distribution.
LIQUIDITY
Up to 40% of the value of the Portfolio may be attributable to guarantees
or similar security provided by corporate entities. These guarantees or other
security may constitute restricted securities that cannot be sold publicly by
the Trustee without registration under the Securities Act of 1933, as amended.
The Sponsors nevertheless believe that, should a sale of the Bonds guaranteed or
secured be necessary in order to meet redemption of Units, the Trustee should be
able to consummate a sale with institutional investors.
The principal trading market for the Bonds will generally be in the
over-the-counter market and the existence of a liquid trading market for the
Bonds may depend on whether dealers will make a market in them. There can be no
assurance that a liquid trading market will exist for any of the Bonds,
especially since the Fund may be restricted under the Investment Company Act of
1940 from selling Bonds to any Sponsor. The value of the Portfolio will be
adversely affected if trading markets for the Bonds are limited or absent.
HOW TO BUY UNITS
Units are available from any of the Sponsors, Underwriters and other
broker-dealers at the Public Offering Price plus accrued interest on the Units
and (after the Fund's first anniversary) an up-front sales charge at time of
purchase. The Public Offering Price varies each Business Day with changes in the
value of the Portfolio and other assets and liabilities of the Fund. To allow
Units to be priced at $1,000, the Units outstanding as of the Evaluation Time on
the Initial Date of Deposit (all of which are held by the Sponsors) will be
split (or split in reverse).
PUBLIC OFFERING PRICE
During the initial offering period for at least the first three months of
the Fund, the Public Offering Price (and the Initial Repurchase Price) is based
on the higher, offer side evaluation of the Bonds at the next Evaluation Time
after the order is received. In the secondary market (after the initial offering
period), the Public Offering Price (and the Sponsors' Repurchase Price and the
Redemption Price) is based on the lower, bid side evaluation of the Bonds. In
the past, the bid prices of publicly offered tax-exempt issues have been lower
than the offer prices by as much as 3 1/2% or more of face amount in the case of
inactively traded issues and as little as 1/2 of 1% in the case of actively
traded issues, but the difference between the offer and bid prices has averaged
between 1 and 2% of face amount.
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Investors will be subject to differing types and amounts of sales charge
depending upon the timing of their purchases and redemptions of Units. A
periodic deferred sales charge in the amount of $2.75 per Unit will be payable
quarterly through about the fifth anniversary of the Fund from a portion of the
interest on and principal of Bonds reserved for that purpose. Commencing on the
first anniversary of the Fund, the Public Offering Price will also include an
up-front sales charge applied to the value of the Bonds in the Portfolio.
Lastly, investors redeeming their Units prior to the fourth anniversary of the
Fund will be charged a contingent deferred sales charge payable out of the
redemption proceeds of their Units. These charges may be less than you would pay
to buy and hold a comparable managed fund. A complete schedule of sales charges
payable during the first two years of the Fund appears in Appendix B. The
Sponsors have received an opinion of their counsel that the deferred sales
charge described in this Prospectus is consistent with an exemptive order
received from the SEC.
Because accrued interest on the Bonds is not received by the Fund at a
constant rate throughout the year, any monthly income distribution may be more
or less than the interest actually received by the Fund. To eliminate
fluctuations in the monthly income distribution, a portion of the Public
Offering Price consists of an advance to the Trustee of an amount necessary to
provide approximately equal distributions. Upon the sale or redemption of Units,
investors will receive their proportionate share of the Trustee advance. In
addition, if a Bond is sold, redeemed or otherwise disposed of, the Fund will
periodically distribute the portion of the Trustee advance that is attributable
to the Bond to investors.
The regular monthly income distribution stated under Defining Your Income
in Part A of the Prospectus is based on the financial data on the Initial Date
of Deposit, after deducting estimated Fund expenses, and will change as the
composition of the Portfolio changes over time.
EVALUATIONS
Evaluations are determined by the independent Evaluator on each Business
Day. This excludes Saturdays, Sundays and the following holidays as observed by
the New York Stock Exchange: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. Bond
evaluations are based on closing sales prices (unless the Evaluator deems these
prices inappropriate). If closing sales prices are not available, the evaluation
is generally determined on the basis of current bid or offer prices for the
Bonds or comparable securities or by appraisal or by any combination of these
methods. Neither the Sponsors, the Trustee or the Evaluator will be liable for
errors in the Evaluator's judgment. The fees of the Evaluator will be borne by
the Fund.
CERTIFICATES
Certificates for Units are issued upon request and may be transferred by
paying any taxes or governmental charges and by complying with the requirements
for redeeming Certificates (see Redemption). Certain Sponsors collect additional
charges for registering and shipping Certificates to purchasers. Lost or
mutilated Certificates can be replaced upon delivery of satisfactory indemnity
and payment of costs.
HOW TO SELL UNITS
SPONSORS' MARKET FOR UNITS
You can sell your Units at any time without a fee. The Sponsors (although
not obligated to do so) will normally buy any Units offered for sale at the
repurchase price next computed after receipt of the order. The Sponsors have
maintained secondary markets in Defined Asset Funds for over 20 years. Primarily
because of the sales charge and fluctuations in the market value of the Bonds,
the sale price may be less than the cost of your Units. You should consult your
financial professional for current market prices to determine if other
broker-dealers or banks are offering higher prices for Units.
The Sponsors may discontinue this market without prior notice if the supply
of Units exceeds demand or for other business reasons; in that event, the
Sponsors may still purchase Units at the redemption price as a service to
Holders. The Sponsors may reoffer or redeem Units repurchased.
TRUSTEE'S REDEMPTION OF UNITS
You may redeem your Units by sending the Trustee a redemption request
together with any certificates you hold. Certificates must be properly endorsed
or accompanied by a written transfer instrument with signatures guaranteed by an
eligible institution. In certain instances, additional documents may be required
such as a certificate of death, trust instrument, certificate of corporate
authority or appointment as executor, administrator or guardian. If the Sponsors
are maintaining a market for Units, they will purchase any Units tendered at the
price described above. If they do not purchase Units tendered, the Trustee is
authorized in its discretion to sell Units in the over-the-counter market if it
believes it will obtain a higher net price for the redeeming Holder.
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By the seventh calendar day after tender you will be mailed an amount equal
to the Redemption Price per Unit. Because of market movements or changes in the
Portfolio, this price may be more or less than the cost of your Units. The
Redemption Price per Unit is computed each Business Day by adding the value of
the Bonds (evaluated on the offer side during the initial offering period for at
least the first three months of the Fund (even in the secondary market) and on
the bid side thereafter), net accrued interest, cash and the value of any other
Fund assets; deducting unpaid taxes or other governmental charges, accrued but
unpaid Fund expenses, unreimbursed Trustee advances, cash held to redeem Units
or for distribution to investors and the value of any other Fund liabilities;
and dividing the result by the number of outstanding Units.
If cash is not available in the Fund's Income and Capital Accounts to pay
redemptions, the Trustee may sell Bonds selected by the Agent for the Sponsors
based on market and credit factors determined to be in the best interest of the
Fund. These sales are often made at times when the Bonds would not otherwise be
sold and may result in lower prices than might be realized otherwise and will
also reduce the size and diversity of the Fund.
Redemptions may be suspended or payment postponed if the New York Stock
Exchange is closed other than for customary weekend and holiday closings, if the
SEC determines that trading on that Exchange is restricted or that an emergency
exists making disposal or evaluation of the Bonds not reasonably practicable, or
for any other period permitted by the SEC.
INCOME, DISTRIBUTIONS AND REINVESTMENT
INCOME
Some of the Bonds may have been purchased on a when-issued basis or may
have a delayed delivery. Since interest on these Bonds does not begin to accrue
until the date of their delivery to the Fund, the Trustee's annual fee and
expenses may be reduced to provide tax-exempt income to investors for this
non-accrual period. If a when-issued Bond is not delivered until later than
expected and the amount of the Trustee's annual fee and expenses is insufficient
to cover the additional accrued interest, the Sponsors will treat the contracts
as failed Bonds. The Trustee is compensated for its fee reduction by drawing on
the letter of credit deposited by the Sponsors before the settlement date for
these Bonds and depositing the proceeds in a non-interest bearing account for
the Fund.
Interest received is credited to an Income Account and other receipts to a
Capital Account. A Reserve Account may be created by withdrawing from the Income
and Capital Accounts amounts considered appropriate by the Trustee to reserve
for any material amount that may be payable out of the Fund.
DISTRIBUTIONS
Each Unit receives an equal share of monthly distributions of interest
income net of estimated expenses. Interest on the Bonds is generally received by
the Fund on a semi-annual or annual basis. Because interest on the Bonds is not
received at a constant rate throughout the year, any Monthly Income Distribution
may be more or less than the interest actually received. To eliminate
fluctuations in the Monthly Income Distribution, the Trustee will advance
amounts necessary to provide approximately equal interest distributions; it will
be reimbursed, without interest, from interest received on the Bonds, but the
Trustee is compensated, in part, by holding the Fund's cash balances in
non-interest bearing accounts. Along with the Monthly Income Distributions, the
Trustee will distribute the investor's pro rata share of principal received from
any disposition of a Bond to the extent available for distribution. In addition,
distributions of amounts necessary to pay the deferred portion of the sales
charge will be made from the Capital and Income Accounts to an account
maintained by the Trustee for purposes of satisfying investors' sales charge
obligations.
The initial estimated annual income per Unit, after deducting estimated
annual Fund expenses and the portion of the deferred sales charge payable from
interest income, as stated in Defining Your Income in Part A of the Prospectus
will change as Bonds mature, are called or sold or otherwise disposed of, as
replacement bonds are deposited and as Fund expenses change. Because the
Portfolio is not actively managed, income distributions will generally not be
affected by changes in interest rates. Depending on the financial conditions of
the issuers of the Bonds, the amount of income should be substantially
maintained as long as the Portfolio remains unchanged; however, optional bond
redemptions or other Portfolio changes may occur more frequently when interest
rates decline, which would result in early returns of principal and possibly
earlier termination of the Fund.
REINVESTMENT
Distributions will be paid in cash unless the investor elects to have
distributions reinvested without sales charge in the Municipal Fund Accumulation
Program, Inc. The Program is an open-end management investment company
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whose investment objective is to obtain income exempt from regular federal
income taxes by investing in a diversified portfolio of state, municipal and
public authority bonds rated A or better or with comparable credit
characteristics. Reinvesting compounds earnings free from federal tax. Holders
participating in the Program will be subject to state and local income taxes to
the same extent as if the distributions had been received in cash, and most of
the income on the Program is subject to state and local income taxes. For more
complete information about the Program, including charges and expenses, return
the card enclosed in Part A of the Prospectus for the Program's prospectus. Read
it carefully before you decide to participate. Written notice of election to
participate must be received by the Trustee at least ten days before the Record
Day for the first distribution to which the election is to apply.
FUND EXPENSES
Estimated annual Fund expenses are listed under Defining Your Costs in Part
A of the Prospectus; if actual expenses exceed the estimate, the excess will be
borne by the Fund. The Trustee's annual fee is payable in monthly installments.
The Trustee also benefits when it holds cash for the Fund in non-interest
bearing accounts. Possible additional charges include Trustee fees and expenses
for extraordinary services, costs of indemnifying the Trustee and the Sponsors,
costs of action taken to protect the Fund and other legal fees and expenses,
Fund termination expenses and any governmental charges. The Trustee has a lien
on Fund assets to secure reimbursement of these amounts and may sell Bonds for
this purpose if cash is not available. The Sponsors receive an annual fee of a
maximum of $0.35 per $1,000 face amount to reimburse them for the cost of
providing Portfolio supervisory services to the Fund. While the fee may exceed
their costs of providing these services to the Fund, the total supervision fees
from all Defined Asset Funds will not exceed their costs for these services to
all of those Series during any calendar year. The Sponsors may also be
reimbursed for their costs of providing bookkeeping and administrative services
to the Fund, currently estimated at $0.10 per Unit. The Trustee's, Sponsors' and
Evaluator's fees may be adjusted for inflation without investors' approval.
All expenses in establishing the Fund will be paid from the Underwriting
Account at no charge to the Fund. Sales charges on Defined Asset Funds range
from under 1.0% to 5.5%. This may be less than you might pay to buy and hold a
comparable managed fund. Defined Asset Funds can be a cost-effective way to
purchase and hold investments. Annual operating expenses are generally lower
than for managed funds. Because Defined Asset Funds have no management fees,
limited transaction costs and no ongoing marketing expenses, operating expenses
are generally less than 0.25% a year. When compounded annually, small
differences in expense ratios can make a big difference in your investment
results.
FUND PERFORMANCE
Information on the performance of the Fund for various periods, on the
basis of changes in Unit price plus the amount of income and principal
distributions reinvested, may be included from time to time in advertisements,
sales literature, reports and other information furnished to current or
prospective investors. Total return figures are not averaged, and may not
reflect deduction of the sales charge, which would decrease the return. Average
annualized return figures reflect deduction of the maximum sales charge. No
provision is made for any income taxes payable.
Past performance may not be indicative of future results. The Fund is not
actively managed. Unit price and return fluctuate with the value of the Bonds in
the Portfolio, so there may be a gain or loss when Units are sold.
Fund performance may be compared to performance on the same basis (with
distributions reinvested) of Moody's Municipal Bond Averages or performance data
from publications such as Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, The New York Times, U.S. News and World
Report, Barron's Business Week, CDA Investment Technology, Inc., Forbes Magazine
or Fortune Magazine. As with other performance data, performance comparisons
should not be considered representative of the Fund's relative performance for
any future period.
TAXES
The following discussion addresses only the U.S. federal tax consequences
under current law of Units held as capital assets and does not address the tax
consequences of Units held by dealers, financial institutions or insurance
companies or other investors with special circumstances.
In the opinion of Davis Polk & Wardwell, special counsel for the Sponsors,
under existing law:
The Fund is not an association taxable as a corporation for federal
income tax purposes. Each investor will be considered the owner of a pro
rata portion of each Bond in the Fund under the grantor trust rules of
Sections 671-679 of the Internal Revenue Code of 1986, as amended (the
'Internal Revenue Code'). Each investor will be considered to have received
the interest and accrued the original issue discount, if any, on his pro
rata portion
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of each Bond when interest on the Bond is received or original issue
discount is accrued by the Fund. The investor's basis in his Units will be
equal to the cost of his Units, including any up-front sales charge.
When an investor pays for accrued interest, the investor's confirmation
of purchase will report to him the amount of accrued interest for which he
paid. These investors will receive the accrued interest amount as part of
their first monthly distribution. Accordingly, these investors should
reduce their tax basis by the accrued interest amount after the first
monthly distribution.
An investor will recognize taxable gain or loss when all or part of his
pro rata portion of a Bond is disposed of by the Fund. An investor will
also be considered to have disposed of all or a portion of his pro rata
portion of each Bond when he sells or redeems all or some of his Units. An
investor who is treated as having acquired his pro rata portion of a Bond
at a premium will be required to amortize the premium over the term of the
Bond. The amortization is only a reduction of basis for the investor's pro
rata portion of the Bond and does not result in any deduction against the
investor's income. Therefore, under some circumstances, an investor may
recognize taxable gain when his pro rata portion of a Bond is disposed of
for an amount equal to or less than his original tax basis therefor.
Under Section 265 of the Internal Revenue Code, a non-corporate investor
is not entitled to a deduction for his pro rata share of fees and expenses
of the Fund, because the fees and expenses are incurred in connection with
the production of tax-exempt income. Further, if borrowed funds are used by
an investor to purchase or carry Units of the Fund, interest on this
indebtedness will not be deductible for federal income tax purposes. In
addition, under rules used by the Internal Revenue Service, the purchase of
Units may be considered to have been made with borrowed funds even though
the borrowed funds are not directly traceable to the purchase of Units.
Under the income tax laws of the State and City of New York, the Fund is
not an association taxable as a corporation and income received by the Fund
will be treated as the income of the investors in the same manner as for
federal income tax purposes, but will not necessarily be tax-exempt.
The foregoing discussion relates only to U.S. federal and certain
aspects of New York State and City income taxes. Depending on their state
of residence, investors may be subject to state and local taxation and
should consult their own tax advisers in this regard.
* * *
In the opinion of bond counsel rendered on the date of issuance of each
Bond, the interest on each Bond is excludable from gross income under existing
law for regular federal income tax purposes (except in certain circumstances
depending on the investor) but may be subject to state and local taxes, and
interest on some or all of the Bonds may become subject to regular federal
income tax, perhaps retroactively to their date of issuance, as a result of
changes in federal law or as a result of the failure of issuers (or other users
of the proceeds of the Bonds) to comply with certain ongoing requirements. If
the interest on a Bond should be determined to be taxable, the Bond would
generally have to be sold at a substantial discount. In addition, investors
could be required to pay income tax on interest received prior to the date on
which the interest is determined to be taxable.
Neither the Sponsors nor Davis Polk & Wardwell have made or will make any
review of the proceedings relating to the issuance of the Bonds or the basis for
these opinions and there can be no assurance that the issuer (and other users)
will comply with any ongoing requirements necessary for a Bond to maintain its
tax-exempt character.
RECORDS AND REPORTS
The Trustee keeps a register of the names, addresses and holdings of all
investors. The Trustee also keeps records of the transactions of the Fund,
including a current list of the Bonds and a copy of the Indenture, and
supplemental information on the operations of the Fund and the risks associated
with the Bonds held by the Fund, which may be inspected by investors at
reasonable times during business hours.
With each distribution, the Trustee includes a statement of the interest
and any other receipts being distributed. Within five days after deposit of
Bonds in exchange or substitution for Bonds (or contracts) previously deposited,
the Trustee will send a notice to each investor, identifying both the Bonds
removed and the replacement bonds deposited. The Trustee sends each investor of
record an annual report summarizing transactions in the Fund's accounts and
amounts distributed during the year and Bonds held, the number of Units
outstanding and the Redemption Price at year end, the interest received by the
Fund on the Bonds, the gross proceeds received by the Fund from the disposition
of any Bond (resulting from redemption or payment at maturity or sale of any
Bond), and the fees and expenses paid by the Fund, among other matters. The
Trustee will also furnish annual information returns to each investor and to the
Internal Revenue Service. Investors are required to report to the Internal
Revenue Service the amount of tax-exempt interest received during the year.
Investors may obtain copies of Bond evaluations from the Trustee to enable them
to comply with federal and state tax reporting requirements. Fund accounts are
audited annually by independent accountants selected by the Sponsors. Audited
financial statements are available from the Trustee on request.
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TRUST INDENTURE
The Fund is a 'unit investment trust' created under New York law by a Trust
Indenture among the Sponsors, the Trustee and the Evaluator. This Prospectus
summarizes various provisions of the Indenture, but each statement is qualified
in its entirety by reference to the Indenture.
The Indenture may be amended by the Sponsors and the Trustee without
consent by investors to cure ambiguities or to correct or supplement any
defective or inconsistent provision, to make any amendment required by the SEC
or other governmental agency or to make any other change not materially adverse
to the interest of investors (as determined in good faith by the Sponsors). The
Indenture may also generally be amended upon consent of investors holding 51% of
the Units. No amendment may reduce the interest of any investor in the Fund
without the investor's consent or reduce the percentage of Units required to
consent to any amendment without unanimous consent of investors. Investors will
be notified on the substance of any amendment.
The Trustee may resign upon notice to the Sponsors. It may be removed by
investors holding 51% of the Units at any time or by the Sponsors without the
consent of investors if it becomes incapable of acting or bankrupt, its affairs
are taken over by public authorities, or if under certain conditions the
Sponsors determine in good faith that its replacement is in the best interest of
the investors. The Evaluator may resign or be removed by the Sponsors and the
Trustee without the investors' consent. The resignation or removal of either
becomes effective upon acceptance of appointment by a successor; in this case,
the Sponsors will use their best efforts to appoint a successor promptly;
however, if upon resignation no successor has accepted appointment within 30
days after notification, the resigning Trustee or Evaluator may apply to a court
of competent jurisdiction to appoint a successor.
Any Sponsor may resign so long as one Sponsor with a net worth of
$2,000,000 remains and is agreeable to the resignation. A new Sponsor may be
appointed by the remaining Sponsors and the Trustee to assume the duties of the
resigning Sponsor. If there is only one Sponsor and it fails to perform its
duties or becomes incapable of acting or bankrupt or its affairs are taken over
by public authorities, the Trustee may appoint a successor Sponsor at reasonable
rates of compensation, terminate the Indenture and liquidate the Fund or
continue to act as Trustee without a Sponsor. Merrill Lynch, Pierce, Fenner &
Smith Incorporated has been appointed as Agent for the Sponsors by the other
Sponsors.
The Sponsors, the Trustee and the Evaluator are not liable to investors or
any other party for any act or omission in the conduct of their responsibilities
absent bad faith, willful misfeasance, negligence (gross negligence in the case
of a Sponsor or the Evaluator) or reckless disregard of duty. The Indenture
contains customary provisions limiting the liability of the Trustee.
MISCELLANEOUS
LEGAL OPINION
The legality of the Units has been passed upon by Davis Polk & Wardwell,
450 Lexington Avenue, New York, New York 10017, as special counsel for the
Sponsors.
AUDITORS
The Statement of Condition in Part A of the Prospectus was audited by
Deloitte & Touche LLP, independent accountants, as stated in their opinion. It
is included in reliance upon that opinion given on the authority of that firm as
experts in accounting and auditing.
TRUSTEE
The Trustee and its address are stated in Part A of the Prospectus. The
Trustee is subject to supervision by the Federal Deposit Insurance Corporation,
the Board of Governors of the Federal Reserve System and either the Comptroller
of the Currency or state banking authorities.
SPONSORS
Each Sponsor is a Delaware corporation and is engaged directly or
indirectly in the investment advisory business, and the underwriting, securities
and commodities brokerage business and is a member of the New York Stock
Exchange, Inc., other major securities exchanges and commodity exchanges, and
the National Association of Securities Dealers, Inc. Merrill Lynch, Pierce,
Fenner & Smith Incorporated is a wholly-owned subsidiary of Merrill Lynch Co.
Inc. Smith Barney Inc. is an indirect wholly-owned subsidiary of The Travelers
Inc. Prudential Securities Incorporated is an indirect wholly-owned subsidiary
of the Prudential Insurance Company of America. PaineWebber Incorporated is a
wholly-owned subsidiary of PaineWebber Group Inc. Each Sponsor, or one of its
predecessor corporations, has acted as Sponsor of a number of series of unit
investment trusts. Each Sponsor has acted as principal underwriter and managing
underwriter of other investment companies. The Sponsors, in addition to
participating as members of various selling groups or as agents of other
investment companies, execute orders on behalf of investment companies for the
purchase and sale of securities of these companies and sell securities to these
companies in their capacities as brokers or dealers in securities.
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PUBLIC DISTRIBUTION
In the initial offering period Units will be distributed to the public
through the Underwriting Account and dealers who are members of the National
Association or Securities Dealers, Inc. The initial offering period is 30 days
or less if all Units are sold. If some Units initially offered have not been
sold, the Sponsors may extend the initial offering period for up to four
additional successive 30-day periods.
The Sponsors intend to qualify Units for sale in all states in which
qualification is deemed necessary through the Underwriting Account and by
dealers who are members of the National Association of Securities Dealers, Inc.;
however, Units of a State trust will be offered for sale only in the State for
which the trust is named, except that Units of a New Jersey trust will also be
offered in Connecticut, Units of a Florida trust will also be offered in New
York and Units of a New York trust will also be offered in Connecticut, Florida
and Puerto Rico. The Sponsors do not intend to qualify Units for sale in any
foreign countries and this Prospectus does not constitute an offer to sell Units
in any country where Units cannot lawfully be sold. Sales to dealers and to
introducing dealers, if any, will initially be made at prices which represent a
concession from the Public Offering Price, but the Agent for the Sponsors
reserves the right to change the rate of any concession from time to time. Any
dealer or introducing dealer may reallow a concession up to the concession to
dealers.
UNDERWRITERS' AND SPONSORS' PROFITS
Upon sale of the Units, the Underwriters will be entitled to receive sales
charges. The Sponsors also realize a profit or loss on deposit of the Bonds
equal to the difference between the cost of the Bonds to the Fund (based on the
offer side evaluation on the Initial Date of Deposit) and the Sponsors' cost of
the Bonds. In addition, a Sponsor or Underwriter may realize profits or sustain
losses on Bonds it deposits in the Fund which were acquired from underwriting
syndicates of which it was a member. During the initial offering period, the
Underwriting Account also may realize profits or sustain losses as a result of
fluctuations after the Initial Date of Deposit in the Public Offering Price of
the Units. In maintaining a secondary market for Units, the Sponsors will also
realize profits or sustain losses in the amount of any difference between the
prices at which they buy Units and the prices at which they resell these Units
(which include the sales charge) or the prices at which they redeem the Units.
Cash, if any, made available by buyers of Units to the Sponsors prior to a
settlement date for the purchase of Units may be used in the Sponsors'
businesses to the extent permitted by Rule 15c3-3 under the Securities Exchange
Act of 1934 and may be of benefit to the Sponsors.
SUPPLEMENTAL INFORMATION
Upon written or telephonic request to the Trustee shown in Part A of this
Prospectus, investors will receive at no cost to the investor supplemental
information about the Fund, which has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference. The supplemental
information includes more detailed risk factor disclosure about the types of
Bonds that may be part of the Fund's Portfolio, general risk disclosure
concerning any letters of credit or insurance securing certain Bonds, and
general information about the structure and operation of the Fund.
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APPENDIX A
DESCRIPTION OF RATINGS (AS DESCRIBED BY THE RATING COMPANIES THEMSELVES)
STANDARD & POOR'S RATINGS GROUP, A DIVISION OF MCGRAW-HILL, INC.
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC--Debt rated BB, B, CCC and CC is regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
The ratings may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
A provisional rating, indicated by 'p' following a rating, assumes the
successful completion of the project being financed by the issuance of the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion.
NR--Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
MOODY'S INVESTORS SERVICE, INC.
Aaa--Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edge'. Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
a-1
<PAGE>
Rating symbols may include numerical modifiers 1, 2 or 3. The numerical
modifier 1 indicates that the security ranks at the high end, 2 in the
mid-range, and 3 nearer the low end, of the generic category. These modifiers of
rating symbols give investors a more precise indication of relative debt quality
in each of the historically defined categories.
Conditional ratings, indicated by 'Con.', are sometimes given when the
security for the bond depends upon the completion of some act or the fulfillment
of some condition. Such bonds are given a conditional rating that denotes their
probable credit stature upon completion of that act or fulfillment of that
condition.
NR--Should no rating be assigned, the reason may be one of the following:
(a) an application for rating was not received or accepted; (b) the issue or
issuer belongs to a group of securities that are not rated as a matter of
policy; (c) there is a lack of essential data pertaining to the issue or issuer
or (d) the issue was privately placed, in which case the rating is not published
in Moody's publications.
FITCH INVESTORS SERVICE, INC.
AAA--These bonds are considered to be investment grade and of the highest
quality. The obligor has an extraordinary ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--These bonds are considered to be investment grade and of high quality.
The obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA rated securities or more subject to possible change
over the term of the issue.
A--These bonds are considered to be investment grade and of good quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--These bonds are considered to be investment grade and of satisfactory
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however are more likely to weaken this ability than bonds with higher ratings.
A '+' or a '-' sign after a rating symbol indicates relative standing in
its rating.
DUFF & PHELPS CREDIT RATING CO.
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic condtions.
A--Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
A '+' or a '-' sign after a rating symbol indicates relative standing in
its rating.
a-2
<PAGE>
APPENDIX B
SALES CHARGE SCHEDULES
DEFERRED SALES CHARGES. Units purchased during the first year of the Fund
will be subject to periodic deferred and contingent deferred sales charges.
Units purchased in the second year will be subject to an up-front sales charge
as well as periodic deferred and contingent deferred sales charges. During the
first five years of the Fund, a fixed periodic deferred sales charge of $2.75
per Unit is payable on 20 quarterly payment dates occurring on the 10th day of
February, May, August and November, commencing no earlier than 45 days after the
Initial Date of Deposit. Investors purchasing Units on the Initial Date of
Deposit and holding for at least five years, for example, would incur total
periodic deferred sales charges of $55.00 per Unit. Because of the time value of
money, however, as of the Initial Date of Deposit this periodic deferred sales
charge obligation would, at current interest rates, equate to an up-front sales
charge of approximately 4.75%.
On the Fund's initial offering date, the Public Offering Price per Unit
will be $1,000. Subsequently, the Public Offering Price per Unit will fluctuate.
As the periodic deferred sales charge is a fixed dollar amount irrespective of
the Public Offering Price, it will represent a varying percentage of the Public
Offering Price Price. An up-front sales charge will be imposed on all unit
purchases after the first year of the Fund. The following table illustrates the
combined maximum up-front and periodic deferred sales charges that would be
incurred by an investor purchasing Units at the beginning of each of the first
two years of the Fund (based on a constant Unit price) and holds them through
the fifth year of the Fund:
<TABLE><CAPTION>
TOTAL
--------------------
UP-FRONT AND
MAXIMUM PERIODIC
AMOUNT DEFERRED SALES
DEFERRED PER CHARGES
UP-FRONT SALES CHARGE $1,000 INVESTED PER $1,000 INVESTED
----------------------------------------------------------- --------------- --------------------
YEAR OF UNIT AS PERCENT OF PUBLIC AS PERCENT OF NET AMOUNT PER
PURCHASE OFFERING PRICE AMOUNT INVESTED $1,000 INVESTED
- ----------------- --------------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
1 None None None $ 55.00 $ 55.00
2 1.10% 1.11% $ 11.00 44.00 55.00
</TABLE>
CONTINGENT DEFERRED SALES CHARGE. Units redeemed or repurchased within 4
years after the Fund's Initial Date of Deposit will not only incur the periodic
deferred sales charge until the quarter of redemption or repurchase but will
also be subject to a contingent deferred sales charge:
YEAR SINCE FUND'S CONTINGENT DEFERRED
INITIAL DATE OF SALES CHARGE PER
DEPOSIT UNIT
- -------------------- --------------------
1 $ 25.00
2 15.00
3 10.00
4 5.00
5 and thereafter None
The contingent deferred sales charge is waived on any redemption or
repurchase of Units after the death (including the death of a single joint
tenant with rights of survivorship) or disability (as defined in the Internal
Revenue Code) of an investor, provided the redemption or repurchase is requested
within one year of the death or initial determination of disability. The
Sponsors may require receipt of satisfactory proof of disability before
releasing the portion of the proceeds representing the amount of the contingent
deferred sales charge waived.
To assist investors in understanding the total costs of purchasing units
during the first two years of the Fund and disposing of those units by the fifth
year, the following tables set forth the maximum combined up-front, periodic and
contingent deferred sales charges that would be incurred (assuming a constant
Unit price) by an investor:
<TABLE><CAPTION>
UNITS PURCHASED ON INITIAL OFFERING DATE
YEAR OF UNIT DEFERRED SALES CONTINGENT DEFERRED
DISPOSITION UP-FRONT SALES CHARGE CHARGE SALES CHARGE TOTAL SALES CHARGES
- ------------------- --------------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C>
1 None $ 11.00 $ 25.00 $ 36.00
2 None 22.00 15.00 37.00
3 None 33.00 10.00 43.00
4 None 44.00 5.00 49.00
5 None 55.00 0.00 55.00
</TABLE>
<TABLE><CAPTION>
UNITS PURCHASED ON FIRST ANNIVERSARY OF FUND
YEAR OF UNIT DEFERRED SALES CONTINGENT DEFERRED
DISPOSITION UP-FRONT SALES CHARGE CHARGE SALES CHARGE TOTAL SALES CHARGES
- ----------------- --------------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C>
2 $ 11.00 $ 11.00 $ 15.00 $ 37.00
3 11.00 22.00 10.00 43.00
4 11.00 33.00 5.00 49.00
5 11.00 44.00 0.00 55.00
b-1
<PAGE>
APPENDIX C
FLORIDA DISCLOSURE
FLORIDA RISK FACTORS
The financial condition of the State of Florida is affected by various
national, economic, social and environmental policies and conditions.
Additionally, limitations placed by the State's Constitution on the State and
its local governments covering income taxes, ad valorem taxes, bond indebtedness
and other matters, as well as various statutory limitations, may constrain the
revenue-generating capacity of the State and its local governments and,
therefore, the ability of the issuers of the Bonds to satisfy their obligations.
The economic vitality of the State and its various regions and, therefore,
the ability of the State and its local govenments to satisfy the Bonds, are
affected by numerous factors. South Florida is susceptible to international
trade and currency imbalances and to economic problems in Central and South
America due to its geographical location and its involvement with foreign trade,
tourism and investment capital. The central and northern portions of the State,
on the other hand, could be impacted by problems in the agricultural sector,
including crop failures, severe weather conditions or other agriculture-related
problems, particularly with regard to the citrus and sugar industries. The
State's economy also has historically been somewhat dependent on the tourism and
construction industries and is sensitive to trends in those sectors.
General obligation bonds of the State are currently rated Aa by Moody's
Investors Service and AA by Standard & Poor's.
FLORIDA TAXES
In the opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel,
P.A., Miami, Florida, special counsel on Florida tax matters, under
existing Florida law:
1. The Fund will not be subject to income, franchise or other taxes of a
similar nature imposed by the State of Florida or its subdivisions,
agencies or instrumentalities.
2. Because Florida does not impose a personal income tax, non-corporate
investors in Units of the Fund will not be subject to any Florida income
taxes with respect to (i) amounts received by the Fund on the Bonds it
holds; (ii) amounts which are distributed by the Fund to non-corporate
investors in Units of the Fund or (iii) any gain realized on the sale or
redemption of Bonds by the Fund or of a Unit of the Fund by a non-corporate
investor. However, corporations as defined in Chapter 220, Florida Statutes
(1991), which are otherwise subject to Florida income taxation will be
subject to tax on their respective share of any income and gain realized by
the Fund and on any gain realized by a corporate investor on the sale or
redemption of Units of the Fund by the corporate investor.
3. The Units will be subject to Florida estate taxes only if held by
Florida residents, or if held by non-residents deemed to have business
sites in Florida. The Florida estate tax is limited to the amount of the
credit for state death taxes provided for in Section 2011 of the Internal
Revenue Code.
4. Bonds issued by the State of Florida or its political subdivisions
are exempt from Florida intangible personal property taxation under Chapter
199, Florida Statutes (1991), as amended. Bonds issued by the Government of
Puerto Rico or by the Government of Guam, or by their authority, are exempt
by Federal statute from taxes such as the Florida intangible personal
property tax. Thus, the Fund will not be subject to Florida intangible
personal property tax on any Bonds in the Fund issued by the State of
Florida or its political subdivisions, by the Government of Puerto Rico or
by its authority or by the Government of Guam or by its authority. In
addition, the Units of the Fund will not be subject to the Florida
intangible personal property tax if the Fund invests solely in such
Florida, Puerto Rico or Guam debt obligations.
c-1
<PAGE>
PROSPECTUS PARTS A AND B
A prospectus for Defined Asset Funds Municipal Series consists of a Part A
and Part B. The Prospectus does not contain all of the information with respect
to the investment company set forth in its registration statement and exhibits
relating thereto which have been filed with the Securities and Exchange
Commission, Washington, D.C. under the Securities Act of 1933 and the Investment
Company Act of 1940, and to which reference is hereby made.
No person is authorized to give any information or to make any
representations with respect to this investment company not contained in the
Prospectus; and any information or representation not contained herein must not
be relied upon as having been authorized. The 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.
15021B--12/94
<PAGE>
PART II
ADDITIONAL INFORMATION NOT INCLUDED IN THE PROSPECTUS
A. The following information relating to the Depositors is incorporated by
reference to the SEC filings indi-
cated and made a part of this Registration Statement.
SEC FILE OR
IDENTIFICATION
NUMBER
--------------------
I. Bonding Arrangements and Date of Organization of the
Depositors filed pursuant to Items A and B of
Part II of the Registration Statement on Form
S-6 under the Securities Act of 1933:
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... 2-52691
Smith Barney Inc................................ 33-29106
PaineWebber Incorporated........................ 2-87965
Prudential Securities Incorporated.............. 2-61418
II. Information as to Officers and Directors of the
Depositors filed pursuant to Schedules A and D
of Form BD under Rules 15b1-1 and 15b3-1 of the
Securities Exchange Act of 1934:
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... 8-7221
Smith Barney Inc................................ 8-8177
PaineWebber Incorporated........................ 8-16267
Prudential Securities Incorporated.............. 8-27154
III. Charter documents of the Depositors filed as
Exhibits to the Registration Statement on Form
S-6 under the Securities Act of 1933 (Charter,
By-Laws):
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... 2-73866, 2-77549
Smith Barney Inc................................ 33-20499
PaineWebber Incorporated........................ 2-87965, 2-87965
Prudential Securities Incorporated.............. 2-86941, 2-86941
B. The Internal Revenue Service Employer Identification
Numbers of the Sponsors and Trustee are as
follows:
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... 13-5674085
Smith Barney Inc................................ 13-1912900
PaineWebber Incorporated........................ 13-2638166
Prudential Securities Incorporated.............. 22-2347336
The Chase Manhattan Bank, N.A................... 13-2633612
UNDERTAKINGS
The Sponsors undertake that they will not instruct the Trustee to accept from
(i) Asset Guaranty Reinsurance Company, Municipal Bond Investors Assurance
Corporation or any other insurance company affiliated with any of the Sponsors,
in settlement of any claim, less than an amount sufficient to pay any principal
or interest (and, in the case of a taxability redemption, premium) then due on
any Security in accordance with the municipal bond guaranty insurance policy
attached to such Security or (ii) any affiliate of the Sponsors who has any
obligation with respect to any Security, less than the full amount due pursuant
to the obligation, unless such instructions have been approved by the Securities
and Exchange Commission pursuant to Rule 17d-1 under the Investment Company Act
of 1940.
II-1
<PAGE>
The Sponsors undertake that they will not make any amendment to the
Supplement to this Registration Statement which includes material changes
without submitting the amendment for Staff review prior to distribution.
The Sponsors undertake that if, based on the portfolio of any specific
Trust they believe that either financial statements of third parties or
disclosure of the risks of investing in a specific state are required, they will
not seek to go effective with a registration statement for that Trust without
previously submitting the disclosure for Staff review.
II-2
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
The Registration Statement on Form S-6 comprises the following papers and
documents:
The facing sheet of Form S-6.
The Cross-Reference Sheet.
The Prospectus.
Additional Information not included in the Prospectus (Part II).
Consent of independent accountants.
The following exhibits:
1.1 --Form of Trust Indenture
1.1.1 --Form of Standard Terms and Conditions of Trust Effective October 21,
1993 (incorporated by reference to Exhibit 1.1.1 to the Registration
Statement of Municipal Investment Trust Fund, Multistate Series-48,
1933 Act File No. 33-50247).
1.2 --Form of Master Agreement Among Underwriters (incorporated by reference
to Exhibit 1.2 to the Registration Statement of The Corporate Income
Fund, One Hundred Ninety-Fourth Monthly Payment Series, 1933 Act File
No. 2-90925).
2.1 --Form of Certificate of Beneficial Interest (included in Exhibit
1.1.1).
3.1 --Opinion of counsel as to the legality of the securities being issued
including their consent to the use of their names under the headings
'Taxes' and 'Miscellaneous--Legal Opinion' in the Prospectus.
4.1.1 --Consent of the Evaluator.
4.1.2 --Consent of the Rating Agency.
9.1 --Form of Information Supplement
R-1
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS
DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT TO THE REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY
AUTHORIZED IN THE CITY OF NEW YORK AND STATE OF NEW YORK ON THE 8TH DAY OF
DECEMBER, 1994.
SIGNATURES APPEAR ON PAGES R-3, R-4, R-5 AND R-6.
A majority of the members of the Board of Directors of Merrill Lynch,
Pierce, Fenner & Smith Incorporated has signed this Registration Statement or
Amendment to the Registration Statement pursuant to Powers of Attorney
authorizing the person signing this Registration Statement or Amendment to the
Registration Statement to do so on behalf of such members.
A majority of the members of the Board of Directors of Smith Barney Inc.
has signed this Registration Statement or Amendment to the Registration
Statement pursuant to Powers of Attorney authorizing the person signing this
Registration Statement or Amendment to the Registration Statement to do so on
behalf of such members.
A majority of the members of the Executive Committee of the Board of
Directors of PaineWebber Incorporated has signed this Registration Statement or
Amendment to the Registration Statement pursuant to Powers of Attorney
authorizing the person signing this Registration Statement or Amendment to the
Registration Statement to do so on behalf of such members.
A majority of the members of the Board of Directors of Prudential
Securities Incorporated has signed this Registration Statement or Amendment to
the Registration Statement pursuant to Powers of Attorney authorizing the person
signing this Registration Statement or Amendment to the Registration Statement
to do so on behalf of such members.
R-2
<PAGE>
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
DEPOSITOR
By the following persons, who constitute Powers of Attorney have been filed
a majority of under
the Board of Directors of Merrill Form SE and the following 1933 Act
Lynch, Pierce, File
Fenner & Smith Incorporated: Number: 33-43466
HERBERT M. ALLISON, JR.
BARRY S. FREIDBERG
EDWARD L. GOLDBERG
STEPHEN L. HAMMERMAN
JEROME P. KENNEY
DAVID H. KOMANSKY
DANIEL T. NAPOLI
THOMAS H. PATRICK
JOHN L. STEFFENS
DANIEL P. TULLY
ROGER M. VASEY
ARTHUR H. ZEIKEL
By
ERNEST V. FABIO
(As authorized signatory for Merrill Lynch, Pierce,
Fenner & Smith Incorporated and
Attorney-in-fact for the persons listed above)
R-3
<PAGE>
SMITH BARNEY INC.
DEPOSITOR
By the following persons, who constitute a majority of Powers of Attorney
the Board of Directors of Smith Barney Inc.: have been filed
under the 1933 Act
File Number:
33-49753 and
33-51607
STEVEN D. BLACK
JAMES BOSHART III
ROBERT A. CASE
JAMES DIMON
ROBERT DRUSKIN
ROBERT F. GREENHILL
JEFFREY LANE
JACK L. RIVKIN
By GINA LEMON
(As authorized signatory for
Smith Barney Inc. and
Attorney-in-fact for the persons listed above)
R-4
<PAGE>
PAINEWEBBER INCORPORATED
DEPOSITOR
By the following persons, who constitute Powers of Attorney have been filed
a majority of under
the Executive Committee of the Board the following 1933 Act File
of Directors Number: 33-55073
of PaineWebber Incorporated:
PAUL B. GUENTHER
DONALD B. MARRON
JOSEPH J. GRANO, JR.
LEE FENSTERSTOCK
By
ROBERT E. HOLLEY
(As authorized signatory for PaineWebber Incorporated
and Attorney-in-fact for the persons listed above)
R-5
<PAGE>
PRUDENTIAL SECURITIES INCORPORATED
DEPOSITOR
By the following persons, who constitute Powers of Attorney have been filed
a majority of under Form SE and the following 1933
the Executive Committee of the Board Act File Number: 33-41631
of Directors of
Prudential Securities Incorporated:
ALAN D. HOGAN
HOWARD A. KNIGHT
GEORGE A. MURRAY
LELAND B. PATON
HARDWICK SIMMONS
By
RICHARD R. HOFFMANN
(As authorized signatory for Prudential Securities
Incorporated and Attorney-in-fact for the persons listed above)
R-6
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
The Sponsors and Trustee of
Defined Asset Funds Florida Insured Series:
We hereby consent to the use in this Registration Statement No. 33-56381 of our
opinion dated December 7, 1994, relating to the Statement of Condition of
Defined Asset Funds Florida Insured Series and to the reference to us under the
heading 'Auditors' in the Prospectus which is a part of this Registration
Statement.
DELOITTE & TOUCHE LLP
New York, N.Y.
December 7, 1994
R-7
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-END> DEC-08-1994
<INVESTMENTS-AT-COST> 13,836,469
<INVESTMENTS-AT-VALUE> 13,836,469
<RECEIVABLES> 181,115
<ASSETS-OTHER> 198,531
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14,216,115
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 181,115
<TOTAL-LIABILITIES> 181,115
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14,035,000
<SHARES-COMMON-STOCK> 14,035
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 14,035,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
Exhibit 1.1
DEFINED ASSET FUNDS
FLORIDA INSURED SERIES
REFERENCE TRUST INDENTURE
Dated as of December 8, 1994
This Trust Indenture (the "Indenture") sets forth certain
provisions in full and incorporates other provisions by reference to
the document entitled "Standard Terms and Conditions of Trust
Effective October 21, 1993" (the "Standard Terms and Conditions of
Trust") and such provisions as are set forth in full herein and such
provisions as are incorporated by reference constitute a single
instrument. All references herein to Articles and Sections are to
Articles and Sections of the Standard Terms and Conditions of Trust.
WITNESSETH THAT:
In consideration of the premises and of the mutual
agreements herein contained, the Sponsors, the Trustee and the
Evaluator agree as follows:
Part I
STANDARD TERMS AND CONDITIONS OF TRUST
Subject to the provisions of Part II hereof, all the
provisions contained in the Standard Terms and Conditions of
Trust are herein incorporated by reference in their entirety
and shall be deemed to be a part of this instrument as fully and
to the same extent as though said provisions had been set forth
in full in this instrument.
<PAGE>
Part II
SPECIAL TERMS AND CONDITIONS OF TRUST
The following special terms and conditions are hereby
agreed to:
(a) The Securities (or contracts for the purchase of such
Securities) listed under "Defined Portfolio" in the Prospectus have
been deposited with (or assigned to) the Trustee under this
Indenture, and the number of Units specified under "Defining Your
Investment" in the Prospectus have been delivered to, or assigned in
the name of or on the order of, the Sponsors by the Trustee in
exchange therefor.
(b) The Sponsors are Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Smith Barney Inc., PaineWebber Incorporated, Prudential
Securities Incorporated and Dean Witter Reynolds Inc.
(c) The Trustee is The Chase Manhattan Bank, N.A.
(d) The Evaluator is Kenny S&P Evaluation Services.
(e) The Trust is organized as a grantor trust for Federal tax
purposes.
(f) Units may be held in certificated form.
(g) Section 3.18 is amended by deleting the second paragraph
thereof and inserting in lieu thereof the following:
The "Trustee Expense Limit" shall initially mean $[ ]
-----
per Unit, provided that the amount of the Trustee Expense
--------
Limit shall be reviewed at least annually by the Trustee
and the Sponsors and adjusted by the mutual written
agreement of the Trustee and the Sponsors to reflect
estimated expenses of the Trust for the succeeding year
(and the "Trustee Expense Limit" shall mean thereafter such
amount as so adjusted). In connection with any such
review, the Trustee shall furnish to the Sponsors records
in reasonable detail indicating for calendar years ended
prior to such review actual expenses incurred by the
Trustee and the Trust and the amounts paid to the Trustee
pursuant to Section 3.04(a)(1) in such calendar years.
-2-
EXHIBIT 3.1
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 450-4000
December 8, 1994
DEFINED ASSET FUNDS
FLORIDA INSURED SERIES
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
C/O MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
UNIT INVESTMENT TRUSTS
P.O. BOX 9051
PRINCETON, NJ 08543-9051
Dear Sirs:
We have acted as special counsel for you, as sponsors (the 'Sponsors') of
Defined Asset Funds Florida Insured Series (the 'Fund'), in connection with the
issuance of units of fractional undivided interest in the Fund (the 'Units') in
accordance with the Trust Indenture relating to the Fund (the 'Indenture').
We have examined and are familiar with originals or copies, certified or
otherwise identified to our satisfaction, of such documents and instruments as
we have deemed necessary or advisable for the purpose of this opinion.
Based upon the foregoing, we are of the opinion that (i) the execution and
delivery of the Indenture and the issuance of the Units have been duly
authorized by the Sponsor and (ii) the Units, when duly issued and delivered by
the Sponsors and the Trustee in accordance with the Indenture, will be legally
issued, fully paid and non-assessable.
We hereby consent to the use of this opinion as Exhibit 3.1 of the
Registration Statement relating to the Units filed under the Securities Act of
1933 and to the use of our name in such Registration Statement and in the
related prospectus under the headings 'Taxes' and 'Miscellaneous--Legal
Opinion.'
Very truly yours,
DAVIS POLK & WARDWELL
EXHIBIT 4.1
DECEMBER 8, 1994
KENNY S&P EVALUATION SERVICES
A Division of Kenny Information System, Inc.
65 Broadway
New York, New York 10006
Telephone (212) 770-4405
Fax 212/797-8681
F. A. Shinal
Senior Vice President
Chief Financial Officer
Merrill Lynch, Pierce, Fenner & Smith
Inc.
Unit Investment Trust Division
P.O. Box 9051
Princeton, N.J. 08543-9051
The Chase Manhattan Bank, N.A.
Unit Investment Trust Department
Box 2051
New York, New York 10048
Re: Defined Asset Funds Florida Insured Series
Gentlemen:
We have examined the Registration Statement File No. 33-56381, for the
above captioned trust. We hereby acknowledge that Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc. is currently acting as the
evaluator for the trust. We hereby consent to the use in the Registration
Statement of the references to Kenny S&P Evaluation Services, a division of
Kenny Information Systems, Inc. as evaluator.
In addition, we hereby confirm that the ratings indicated in the
Registration Statement for the respective bonds comprising the trust portfolio
are the ratings indicated in our KENNYBASE database as of the date of the
Evaluation Report.
You are hereby authorized to file a copy of this letter with the Securities
and Exchange Commission.
Sincerely,
F. A. Shinal
Senior Vice President
Chief Financial Officer
EXHIBIT 4.1.2
STANDARD & POOR'S RATINGS GROUP
BOND INSURANCE ADMINISTRATION
25 BROADWAY
NEW YORK, NEW YORK 10004
TELEPHONE (212) 208-1061
December 8, 1994
Merrill Lynch Pierce The Chase Manhattan Bank, N.A.
Fenner & Smith Incorporated Unit Trust Department
Unit Investment Trusts Box 2051
P.O. Box 9051 New York, N.Y. 10048
Princeton, NJ 08543-9051
Re: Defined Asset Funds Florida Insured Series
Gentlemen:
Pursuant to your request for a Standard & Poor's rating on the units of the
above-captioned trust, SEC No. 33-56381, we have reviewed the information
presented to us and have assigned a 'AAA' rating to the units of the trust and a
'AAA' rating to the securities contained in the trust. The ratings are direct
reflections, of the portfolios of the trust, which will be composed solely of
securities covered by bond insurance policies that insure against default in the
payment of principal and interest on the securities so long as they remain
outstanding. Since such policies have been issued by one or more insurance
companies which have been assigned 'AAA' claims paying ability ratings by S&P,
S&P has assigned a 'AAA' rating to the units of the trust and to the securities
contained in the trust.
You have permission to use the name of Standard & Poor's Corporation and
the above-assigned ratings in connection with your dissemination of information
relating to these units, provided that it is understood that the ratings are not
'market' ratings nor recommendations to buy, hold, or sell the units of the
trusts or the securities contained in the trust. Further, it should be
understood the rating on the units 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 holders of the interest and principal
required to be paid on the portfolio assets. S&P reserves the right to advise
its own clients, subscribers, and the public of the ratings. S&P relies on the
sponsor and its counsel, accountants, and other experts for the accuracy and
completeness of the information submitted in connection with the ratings. S&P
does not independently verify the truth or accuracy of any such information.
This letter evidences our consent to the use of the name of Standard &
Poor's Corporation in connection with the rating assigned to the units in the
registration statement or prospectus relating to the units or the trust.
However, this letter should not be construed as a consent by us, within the
meaning of Section 7 of the Securities Act of 1933, to the use of the name of
Standard & Poor's Corporation in connection with the ratings assigned to the
securities contained in the trust. You are hereby authorized to file a copy of
this letter with the Securities and Exchange Commission.
Please be certain to send us three copies of your final prospectus as soon
as it becomes available. Should we not receive them within a reasonable time
after the closing or should they not conform to the representations made to us,
we reserve the right to withdraw the rating.
We are pleased to have had the opportunity to be of service to you. If we
can be of further help, please do not hesitate to call upon us.
Very truly yours,
VINCENT S. ORGO
Standard & Poor's Corporation
DEFINED ASSET FUNDS
-------------------
INFORMATION SUPPLEMENT
This Information Supplement provides additional
information concerning the structure, operations and risks
of municipal bond trusts (each, a "Fund") of Defined Asset
Funds not found in the prospectuses for the Funds. This
Information Supplement is not a prospectus and does not
include all of the information that a prospective investor
should consider before investing in a Fund. This
Information Supplement should be read in conjunction with
the prospectus for the Fund in which an investor is
considering investing ("Prospectus"). Copies of the
Prospectus can be obtained by calling or writing the Trustee
at the telephone number and address indicated in Part A of
the Prospectus. This Information Supplement has been
incorporated by reference into the Prospectus.
This Information Supplement is dated December 8, 1994.
Capitalized terms have been defined in the Prospectus.
TABLE OF CONTENTS
-----------------
Description of Fund Investments
Portfolio Supervision. . . . . . . . . . . . . . . 2
Risk Factors
Concentration. . . . . . . . . . . . . . . . . . . 2
General Obligation Bonds . . . . . . . . . . . . . 3
Moral Obligation Bonds . . . . . . . . . . . . . . 4
Refunded Bonds . . . . . . . . . . . . . . . . . . 4
Industrial Development Revenue Bonds . . . . . . . 4
Municipal Revenue Bonds. . . . . . . . . . . . . . 5
Municipal Utility Bonds. . . . . . . . . . . . . 5
Lease Rental Bonds . . . . . . . . . . . . . . . 9
Housing Bonds. . . . . . . . . . . . . . . . . . 9
Hospital and Health Care Bonds . . . . . . . . . 11
Facility Revenue Bonds . . . . . . . . . . . . . 13
Solid Waste Disposal Bonds . . . . . . . . . . . 14
Special Tax Bonds. . . . . . . . . . . . . . . . 15
Transit Authority Bonds. . . . . . . . . . . . . 15
Municipal Water and Sewer Revenue Bonds. . . . . 15
University and College Bonds . . . . . . . . . . 16
Puerto Rico. . . . . . . . . . . . . . . . . . . . 16
Bonds Backed by Letters of Credit. . . . . . . . . 17
Bonds Backed by Insurance. . . . . . . . . . . . . 20
State Risk Factors . . . . . . . . . . . . . . . . 25
Payment of Bonds and Life of a Fund. . . . . . . . 25
Tax Exemption. . . . . . . . . . . . . . . . . . . 26
Income and Returns
Income . . . . . . . . . . . . . . . . . . . . . . 27
Appendix A - Florida Matters . . . . . . . . . . . . A-1
<PAGE>
DESCRIPTION OF FUND INVESTMENTS
Portfolio Supervision
Each Fund is a unit investment trust which follows
a buy and hold investment strategy. Traditional methods of
investment management for mutual funds typically involve
frequent changes in fund holdings based on economic,
financial and market analyses. Because a Fund is not
actively managed, it may retain an issuer's securities
despite financial or economic developments adversely
affecting the market value of the securities held by a Fund.
However, Defined Asset Funds' financial analysts regularly
review a Fund's Portfolio, and the Sponsors may instruct a
Trustee to sell securities in a Portfolio in the following
circumstances: (i) default in payment of amounts due on the
security; (ii) institution of certain legal proceedings;
(iii) other legal questions or impediments affecting the
security or payments thereon; (iv) default under certain
documents adversely affecting debt service or in payments on
other securities of the same issuer or guarantor; (v)
decline in projected income pledged for debt service on a
revenue bond; (vi) if a security becomes taxable or
otherwise inconsistent with a Fund's investment objectives;
(vii) a right to sell or redeem the security pursuant to a
guarantee or other credit support; or (viii) decline in
security price or other market or credit factors (including
advance refunding) that, in the opinion of Defined Asset
Funds research, makes retention of the security detrimental
to the interests of Holders. If there is a payment default
on any Bond and the Agent for the Sponsors fails to instruct
the Trustee within 30 days after notice of the default, the
Trustee will sell the Bond.
A Trustee must reject any offer by an issuer of a
Bond to exchange another security pursuant to a refunding or
refinancing plan unless (a) the Bond is in default or (b) in
the written opinion of Defined Asset Funds research
analysts, a default is probable in the reasonably
foreseeable future, and the Sponsors instruct the Trustee to
accept the offer or take any other action with respect to
the offer as the Sponsors consider appropriate.
RISK FACTORS
Concentration
A Portfolio may contain or be concentrated in one
or more of the types of Bonds discussed below. An
investment in a Fund should be made with an understanding of
the risks that these bonds may entail, certain of which are
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described below. Political restrictions on the ability to
tax and budgetary constraints affecting the state or local
government may result in reductions of, or delays in the
payment of, state aid to cities, counties, school districts
and other local units of government which, in turn, may
strain the financial operations and have an adverse impact
on the creditworthiness of these entities. State agencies,
colleges and universities and health care organizations,
with municipal debt outstanding, may also be negatively
impacted by reductions in state appropriations.
General Obligation Bonds
General obligation bonds are backed by the
issuer's pledge of its full faith and credit and are secured
by its taxing power for the payment of principal and
interest. However, the taxing power of any governmental
entity may be limited by provisions of state constitutions
or laws and an entity's credit will depend on many factors,
including an erosion of the tax base due to population
declines, natural disasters, declines in the state's
industrial base or inability to attract new industries,
economic limits on the ability to tax without eroding the
tax base and the extent to which the entity relies on
Federal or state aid, access to capital markets or other
factors beyond the entity's control.
Over time, many state and local governments may
confront deficits due to economic or other factors. In
addition, a Portfolio may contain obligations of issuers who
rely in whole or in part on ad valorem real property taxes
as a source of revenue. Certain proposals, in the form of
state legislative proposals or voter initiatives, to limit
ad valorem real property taxes have been introduced in
various states, and an amendment to the constitution of the
State of California, providing for strict limitations on ad
valorem real property taxes, has had a significant impact on
the taxing powers of local governments and on the financial
condition of school districts and local governments in
California. It is not possible at this time to predict the
final impact of such measures, or of similar future
legislative or constitutional measures, on school districts
and local governments or on their abilities to make future
payments on their outstanding bonds.
Moral Obligation Bonds
The repayment of a "moral obligation" bond is only
a moral commitment, and not a legal obligation, of the state
or municipality in question. Even though the state may be
called on to restore any deficits in capital reserve funds
of the agencies or authorities which issued the bonds, any
restoration generally requires appropriation by the state
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legislature and accordingly does not constitute a legally
enforceable obligation or debt of the state. The agencies
or authorities generally have no taxing power.
Refunded Bonds
Refunded Bonds are typically secured by direct
obligations of the U.S. Government, or in some cases
obligations guaranteed by the U.S. Government, placed in an
escrow account maintained by an independent trustee until
maturity or a predetermined redemption date. These bonds
are generally noncallable prior to maturity or the
predetermined redemption date. In a few isolated instances,
however, bonds which were thought to be escrowed to maturity
have been called for redemption prior to maturity.
Industrial Development Revenue Bonds
Industrial Development Revenue Bonds, or "IDRs",
including pollution control revenue bonds, are tax-exempt
bonds issued by states, municipalities, public authorities
or similar entities to finance the cost of acquiring,
constructing or improving various projects, including
pollution control facilities and certain manufacturing
facilities. These projects are usually operated by private
corporations. IDRs are not general obligations of
governmental entities backed by their taxing power.
Municipal issuers are only obligated to pay amounts due on
the IDRs to the extent that funds are available from the
unexpended proceeds of the IDRs or from receipts or revenues
under arrangements between the municipal issuer and the
corporate operator of the project. These arrangements may
be in the form of a lease, installment sale agreement,
conditional sale agreement or loan agreement, but in each
case the payments to the issuer are designed to be
sufficient to meet the payments of amounts due on the IDRs.
IDRs are generally issued under bond resolutions,
agreements or trust indentures pursuant to which the
revenues and receipts payable to the issuer by the corporate
operator of the project have been assigned and pledged to
the holders of the IDRs or a trustee for the benefit of the
holders of the IDRs. In certain cases, a mortgage on the
underlying project has been assigned to the holders of the
IDRs or a trustee as additional security for the IDRs. In
addition, IDRs are frequently directly guaranteed by the
corporate operator of the project or by an affiliated
company. Regardless of the structure, payment of IDRs is
solely dependent upon the creditworthiness of the corporate
operator of the project, corporate guarantor and credit
enhancer. Corporate operators or guarantors that are
industrial companies may be affected by many factors which
may have an adverse impact on the credit quality of the
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particular company or industry. These include cyclicality
of revenues and earnings, regulatory and environmental
restrictions, litigation resulting from accidents or
environmentally-caused illnesses, extensive competition
(including that of low-cost foreign companies), unfunded
pension fund liabilities or off-balance sheet items, and
financial deterioration resulting from leveraged buy-outs or
takeovers. However, certain of the IDRs in the Portfolio
may be additionally insured or secured by letters of credit
issued by banks or otherwise guaranteed or secured to cover
amounts due on the IDRs in the event of a default in
payment.
Municipal Revenue Bonds
Muncipal Utility Bonds. The ability of utilities
to meet their obligations under revenue bonds issued on
their behalf is dependent on various factors, including the
rates they may charge their customers, the demand for their
services and the cost of providing those services.
Utilities, in particular investor-owned utilities, are
subject to extensive regulation relating to the rates which
they may charge customers. Utilities can experience
regulatory, political and consumer resistance to rate
increases. Utilities engaged in long-term capital projects
are especially sensitive to regulatory lags in granting rate
increases. Any difficulty in obtaining timely and adequate
rate increases could adversely affect a utility's results of
operations.
The demand for a utility's services is influenced
by, among other factors, competition, weather conditions and
economic conditions. Electric utilities, for example, have
experienced increased competition as a result of the
availability of other energy sources, the effects of
conservation on the use of electricity, self-generation by
industrial customers and the generation of electricity by
co-generators and other independent power producers. Also,
increased competition will result if federal regulators
determine that utilities must open their transmission lines
to competitors. Utilities which distribute natural gas also
are subject to competition from alternative fuels, including
fuel oil, propane and coal.
The utility industry is an increasing cost
business making the cost of generating electricity more
expensive and heightening its sensitivity to regulation. A
utility's costs are affected by its cost of capital, the
availability and cost of fuel and other factors. There can
be no assurance that a utility will be able to pass on these
increased costs to customers through increased rates.
Utilities incur substantial capital expenditures for plant
and equipment. In the future they will also incur
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increasing capital and operating expenses to comply with
environmental legislation such as the Clean Air Act of 1990,
and other energy, licensing and other laws and regulations
relating to, among other things, air emissions, the quality
of drinking water, waste water discharge, solid and
hazardous substance handling and disposal, and citing and
licensing of facilities. Environmental legislation and
regulations are changing rapidly and are the subject of
current public policy debate and legislative proposals. It
is increasingly likely that many utilities will be subject
to more stringent environmental standards in the future that
could result in significant capital expenditures. Future
legislation and regulation could include, among other
things, regulation of so-called electromagnetic fields
associated with electric transmission and distribution lines
as well as emissions of carbon dioxide and other so-called
greenhouse gases associated with the burning of fossil
fuels. Compliance with these requirements may limit a
utility's operations or require substantial investments in
new equipment and, as a result, may adversely affect a
utility's results of operations.
The electric utility industry in general is
subject to various external factors including (a) the
effects of inflation upon the costs of operation and
construction, (b) substantially increased capital outlays
and longer construction periods for larger and more complex
new generating units, (c) uncertainties in predicting future
load requirements, (d) increased financing requirements
coupled with limited availability of capital, (e) exposure
to cancellation and penalty charges on new generating units
under construction, (f) problems of cost and availability of
fuel, (g) compliance with rapidly changing and complex
environmental, safety and licensing requirements, (h)
litigation and proposed legislation designed to delay or
prevent construction of generating and other facilities, (i)
the uncertain effects of conservation on the use of electric
energy, (j) uncertainties associated with the development of
a national energy policy, (k) regulatory, political and
consumer resistance to rate increases and (l) increased
competition as a result of the availability of other energy
sources. These factors may delay the construction and
increase the cost of new facilities, limit the use of, or
necessitate costly modifications to, existing facilities,
impair the access of electric utilities to credit markets,
or substantially increase the cost of credit for electric
generating facilities.
The National Energy Policy Act ("NEPA"), which
became law in October, 1992, makes it mandatory for a
utility to permit non-utility generators of electricity
access to its transmission system for wholesale customers,
thereby increasing competition for electric utilities. NEPA
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also mandated demand-side management policies to be
considered by utilities. NEPA prohibits the Federal Energy
Regulatory Commission from mandating electric utilities to
engage in retail wheeling, which is competition among
suppliers of electric generation to provide electricity to
retail customers (particularly industrial retail customers)
of a utility. However, under NEPA, a state can mandate
retail wheeling under certain conditions. California,
Michigan, New Mexico and Ohio have instituted investigations
into the possible introduction of retail wheeling within
their respective states, which could foster competition
among the utilities. Retail wheeling might result in the
issue of stranded investment (investment in assets not being
recovered in base rates), thus hampering a utility's ability
to meet its obligations.
There is concern by the public, the scientific
community, and the U.S. Congress regarding environmental
damage resulting from the use of fossil fuels.
Congressional support for the increased regulation of air,
water, and soil contaminants is building and there are a
number of pending or recently enacted legislative proposals
which may affect the electric utility industry. In
particular, on November 15, 1990, legislation was signed
into law that substantially revises the Clean Air Act (the
"1990 Amendments"). The 1990 Amendments seek to improve the
ambient air quality throughout the United States by the year
2000. A main feature of the 1990 Amendments is the
reduction of sulphur dioxide and nitrogen oxide emissions
caused by electric utility power plants, particularly those
fueled by coal. Under the 1990 Amendments the U.S.
Environmental Protection Agency ("EPA") must develop limits
for nitrogen oxide emissions by 1993. The sulphur dioxide
reduction will be achieved in two phases. Phase I addresses
specific generating units named in the 1990 Amendments. In
Phase II the total U.S. emissions will be capped at 8.9
million tons by the year 2000. The 1990 Amendments contain
provisions for allocating allowances to power plants based
on historical or calculated levels. An allowance is defined
as the authorization to emit one ton of sulphur dioxide.
The 1990 Amendments also provide for possible
further regulation of toxic air emissions from electric
generating units pending the results of several federal
government studies to be presented to Congress by the end of
1995 with respect to anticipated hazards to public health,
available corrective technologies, and mercury toxicity.
Electric utilities which own or operate nuclear
power plants are exposed to risks inherent in the nuclear
industry. These risks include exposure to new requirements
resulting from extensive federal and state regulatory
oversight, public controversy, decommissioning costs, and
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spent fuel and radioactive waste disposal issues. While
nuclear power construction risks are no longer of paramount
concern, the emerging issue is radioactive waste disposal.
In addition, nuclear plants typically require substantial
capital additions and modifications throughout their
operating lives to meet safety, environmental, operational
and regulatory requirements and to replace and upgrade
various plant systems. The high degree of regulatory
monitoring and controls imposed on nuclear plants could
cause a plant to be out of service or on limited service for
long periods. When a nuclear facility owned by an
investor-owned utility or a state or local municipality is
out of service or operating on a limited service basis, the
utility operator or its owners may be liable for the
recovery of replacement power costs. Risks of substantial
liability also arise from the operation of nuclear
facilities and from the use, handling, and possible
radioactive emissions associated with nuclear fuel.
Insurance may not cover all types or amounts of loss which
may be experienced in connection with the ownership and
operation of a nuclear plant and severe financial
consequences could result from a significant accident or
occurrence. The Nuclear Regulatory Commission has
promulgated regulations mandating the establishment of
funded reserves to assure financial capability for the
eventual decommissioning of licensed nuclear facilities.
These funds are to be accrued from revenues in amounts
currently estimated to be sufficient to pay for
decommissioning costs. Since there have been very few
nuclear plants decommissioned to date, these estimates may
be unrealistic.
The ability of state and local joint action power
agencies to make payments on bonds they have issued is
dependent in large part on payments made to them pursuant to
power supply or similar agreements. Courts in Washington,
Oregon and Idaho have held that certain agreements between
the Washington Public Power Supply System ("WPPSS") and the
WPPSS participants are unenforceable because the
participants did not have the authority to enter into the
agreements. While these decisions are not specifically
applicable to agreements entered into by public entities in
other states, they may cause a reexamination of the legal
structure and economic viability of certain projects
financed by joint action power agencies, which might
exacerbate some of the problems referred to above and
possibly lead to legal proceedings questioning the
enforceability of agreements upon which payment of these
bonds may depend.
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Lease Rental Bonds. Lease rental bonds are issued
for the most part by governmental authorities that have no
taxing power or other means of directly raising revenues.
Rather, the authorities are financing vehicles created
solely for the construction of buildings (administrative
offices, convention centers and prisons, for example) or the
purchase of equipment (police cars and computer systems, for
example) that will be used by a state or local government
(the "lessee"). Thus, the bonds are subject to the ability
and willingness of the lessee government to meet its lease
rental payments which include debt service on the bonds.
Willingness to pay may be subject to changes in the views of
citizens and government officials as to the essential nature
of the finance project. Lease rental bonds are subject, in
almost all cases, to the annual appropriation risk, i.e.,
----
the lessee government is not legally obligated to budget and
appropriate for the rental payments beyond the current
fiscal year. These bonds are also subject to the risk of
abatement in many states--rental obligations cease in the
event that damage, destruction or condemnation of the
project prevents its use by the lessee. (In these cases,
insurance provisions and reserve funds designed to alleviate
this risk become important credit factors). In the event of
default by the lessee government, there may be significant
legal and/or practical difficulties involved in the
reletting or sale of the project. Some of these issues,
particularly those for equipment purchase, contain the
so-called "substitution safeguard", which bars the lessee
government, in the event it defaults on its rental payments,
from the purchase or use of similar equipment for a certain
period of time. This safeguard is designed to insure that
the lessee government will appropriate the necessary funds
even though it is not legally obligated to do so, but its
legality remains untested in most, if not all, states.
Housing Bonds. Multi-family housing revenue bonds
and single family mortgage revenue bonds are state and local
housing issues that have been issued to provide financing
for various housing projects. Multi-family housing revenue
bonds are payable primarily from the revenues derived from
mortgage loans to housing projects for low to moderate
income families. Single-family mortgage revenue bonds are
issued for the purpose of acquiring from originating
financial institutions notes secured by mortgages on
residences.
Housing bonds are not general obligations of the
issuer although certain obligations may be supported to some
degree by Federal, state or local housing subsidy programs.
Budgetary constraints experienced by these programs as well
as the failure by a state or local housing issuer to satisfy
the qualifications required for coverage under these
programs or any legal or administrative determinations that
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the coverage of these programs is not available to a housing
issuer, probably will result in a decrease or elimination of
subsidies available for payment of amounts due on the
issuer's bonds. The ability of housing issuers to make debt
service payments on their bonds will also be affected by
various economic and non-economic developments including,
among other things, the achievement and maintenance of
sufficient occupancy levels and adequate rental income in
multi-family projects, the rate of default on mortgage loans
underlying single family issues and the ability of mortgage
insurers to pay claims, employment and income conditions
prevailing in local markets, increases in construction
costs, taxes, utility costs and other operating expenses,
the managerial ability of project managers, changes in laws
and governmental regulations and economic trends generally
in the localities in which the projects are situated.
Occupancy of multi-family housing projects may also be
adversely affected by high rent levels and income
limitations imposed under Federal, state or local programs.
All single family mortgage revenue bonds and
certain multi-family housing revenue bonds are prepayable
over the life of the underlying mortgage or mortgage pool,
and therefore the average life of housing obligations cannot
be determined. However, the average life of these
obligations will ordinarily be less than their stated
maturities. Single-family issues are subject to mandatory
redemption in whole or in part from prepayments on
underlying mortgage loans; mortgage loans are frequently
partially or completely prepaid prior to their final stated
maturities as a result of events such as declining interest
rates, sale of the mortgaged premises, default, condemnation
or casualty loss. Multi-family issues are characterized by
mandatory redemption at par upon the occurrence of monetary
defaults or breaches of covenants by the project operator.
Additionally, housing obligations are generally subject to
mandatory partial redemption at par to the extent that
proceeds from the sale of the obligations are not allocated
within a stated period (which may be within a year of the
date of issue).
The tax exemption for certain housing revenue
bonds depends on qualification under Section 143 of the
Internal Revenue Code of 1986, as amended (the "Code"), in
the case of single family mortgage revenue bonds or Section
142(a)(7) of the Code or other provisions of Federal law in
the case of certain multi-family housing revenue bonds
(including Section 8 assisted bonds). These sections of the
Code or other provisions of Federal law contain certain
ongoing requirements, including requirements relating to the
cost and location of the residences financed with the
proceeds of the single family mortgage revenue bonds and the
income levels of tenants of the rental projects financed
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with the proceeds of the multi-family housing revenue bonds.
While the issuers of the bonds and other parties, including
the originators and servicers of the single-family mortgages
and the owners of the rental projects financed with the
multi-family housing revenue bonds, generally covenant to
meet these ongoing requirements and generally agree to
institute procedures designed to ensure that these
requirements are met, there can be no assurance that these
ongoing requirements will be consistently met. The failure
to meet these requirements could cause the interest on the
bonds to become taxable, possibly retroactively from the
date of issuance, thereby reducing the value of the bonds,
subjecting Holders to unanticipated tax liabilities and
possibly requiring a Trustee to sell these bonds at reduced
values. Furthermore, any failure to meet these ongoing
requirements might not constitute an event of default under
the applicable mortgage or permit the holder to accelerate
payment of the bond or require the issuer to redeem the
bond. In any event, where the mortgage is insured by the
Federal Housing Administration, its consent may be required
before insurance proceeds would become payable to redeem the
mortgage bonds.
Hospital and Health Care Bonds. The ability of
hospitals and other health care facilities to meet their
obligations with respect to revenue bonds issued on their
behalf is dependent on various factors, including the level
of payments received from private third-party payors and
government programs and the cost of providing health care
services.
A significant portion of the revenues of hospitals
and other health care facilities is derived from private
third-party payors and government programs, including the
Medicare and Medicaid programs. Both private third-party
payors and government programs have undertaken cost
containment measures designed to limit payments made to
health care facilities. Furthermore, government programs
are subject to statutory and regulatory changes, retroactive
rate adjustments, administrative rulings and government
funding restrictions, all of which may materially decrease
the rate of program payments for health care facilities.
Certain special revenue obligations (i.e., Medicare or
Medicaid revenues) may be payable subject to appropriations
by state legislatures. There can be no assurance that
payments under governmental programs will remain at levels
comparable to present levels or will, in the future, be
sufficient to cover the costs allocable to patients
participating in these programs. In addition, there can be
no assurance that a particular hospital or other health care
facility will continue to meet the requirements for
participation in these programs.
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The costs of providing health care services are
subject to increase as a result of, among other factors,
changes in medical technology and increased labor costs. In
addition, health care facility construction and operation is
subject to federal, state and local regulation relating to
the adequacy of medical care, equipment, personnel,
operating policies and procedures, rate-setting, and
compliance with building codes and environmental laws.
Facilities are subject to periodic inspection by
governmental and other authorities to assure continued
compliance with the various standards necessary for
licensing and accreditation. These regulatory requirements
are subject to change and, to comply, it may be necessary
for a hospital or other health care facility to incur
substantial capital expenditures or increased operating
expenses to effect changes in its facilities, equipment,
personnel and services.
Hospitals and other health care facilities are
subject to claims and legal actions by patients and others
in the ordinary course of business. Although these claims
are generally covered by insurance, there can be no
assurance that a claim will not exceed the insurance
coverage of a health care facility or that insurance
coverage will be available to a facility. In addition, a
substantial increase in the cost of insurance could
adversely affect the results of operations of a hospital or
other health care facility. The Clinton Administration may
impose regulations which could limit price increases for
hospitals or the level of reimbursements for third-party
payors or other measures to reduce health care costs and
make health care available to more individuals, which would
reduce profits for hospitals. Some states, such as New
Jersey, have significantly changed their reimbursement
systems. If a hospital cannot adjust to the new system by
reducing expenses or raising rates, financial difficulties
may arise. Also, Blue Cross has denied reimbursement for
some hospitals for services other than emergency room
services. The lost volume would reduce revenues unless
replacement patients were found.
Certain hospital bonds provide for redemption at
par at any time upon the sale by the issuer of the hospital
facilities to a non-affiliated entity, if the hospital
becomes subject to ad valorem taxation, or in various other
circumstances. For example, certain hospitals may have the
right to call bonds at par if the hospital may be legally
required because of the bonds to perform procedures against
specified religious principles or to disclose information
that is considered confidential or privileged. Certain
FHA-insured bonds may provide that all or a portion of those
bonds, otherwise callable at a premium, can be called at par
in certain circumstances. If a hospital defaults upon a
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bond, the realization of Medicare and Medicaid receivables
may be uncertain and, if the bond is secured by the hospital
facilities, legal restrictions on the ability to foreclose
upon the facilities and the limited alternative uses to
which a hospital can be put may severely reduce its
collateral value.
The Internal Revenue Service is currently engaged
in a program of intensive audits of certain large tax-exempt
hospital and health care facility organizations. Although
these audits have not yet been completed, it has been
reported that the tax-exempt status of some of these
organizations may be revoked.
Facility Revenue Bonds. Facility revenue bonds
are generally payable from and secured by the revenues from
the ownership and operation of particular facilities such as
airports (including airport terminals and maintenance
facilities), bridges, marine terminals, turnpikes and port
authorities. For example, the major portion of gross
airport operating income is generally derived from fees
received from signatory airlines pursuant to use agreements
which consist of annual payments for airport use, occupancy
of certain terminal space, facilities, service fees,
concessions and leases. Airport operating income may
therefore be affected by the ability of the airlines to meet
their obligations under the use agreements. The air
transport industry is experiencing significant variations in
earnings and traffic, due to increased competition, excess
capacity, increased aviation fuel, deregulation, traffic
constraints and other factors. As a result, several airlines
are experiencing severe financial difficulties. Several
airlines including America West Airlines have sought
protection from their creditors under Chapter 11 of the
Bankruptcy Code. In addition, other airlines such as Midway
Airlines, Inc., Eastern Airlines, Inc. and Pan American
Corporation have been liquidated. However, Continental
Airlines and Trans World Airlines have emerged from
bankruptcy. The Sponsors cannot predict what effect these
industry conditions may have on airport revenues which are
dependent for payment on the financial condition of the
airlines and their usage of the particular airport facility.
Furthermore, proposed legislation would provide the U.S.
Secretary of Transportation with the temporary authority to
freeze airport fees upon the occurrence of disputes between
a particular airport facility and the airlines utilizing
that facility.
Similarly, payment on bonds related to other
facilities is dependent on revenues from the projects, such
as use fees from ports, tolls on turnpikes and bridges and
rents from buildings. Therefore, payment may be adversely
affected by reduction in revenues due to these factors and
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increased cost of maintenance or decreased use of a
facility, lower cost of alternative modes of transportation
or scarcity of fuel and reduction or loss of rents.
Solid Waste Disposal Bonds. Bonds issued for
solid waste disposal facilities are generally payable from
dumping fees and from revenues that may be earned by the
facility on the sale of electrical energy generated in the
combustion of waste products. The ability of solid waste
disposal facilities to meet their obligations depends upon
the continued use of the facility, the successful and
efficient operation of the facility and, in the case of
waste-to-energy facilities, the continued ability of the
facility to generate electricity on a commercial basis. All
of these factors may be affected by a failure of
municipalities to fully utilize the facilities, an
insufficient supply of waste for disposal due to economic or
population decline, rising construction and maintenance
costs, any delays in construction of facilities, lower-cost
alternative modes of waste processing and changes in
environmental regulations. Because of the relatively short
history of this type of financing, there may be
technological risks involved in the satisfactory
construction or operation of the projects exceeding those
associated with most municipal enterprise projects.
Increasing environmental regulation on the federal, state
and local level has a significant impact on waste disposal
facilities. While regulation requires more waste producers
to use waste disposal facilities, it also imposes
significant costs on the facilities. These costs include
compliance with frequently changing and complex regulatory
requirements, the cost of obtaining construction and
operating permits, the cost of conforming to prescribed and
changing equipment standards and required methods of
operation and, for incinerators or waste-to-energy
facilities, the cost of disposing of the waste residue that
remains after the disposal process in an environmentally
safe manner. In addition, waste disposal facilities
frequently face substantial opposition by environmental
groups and officials to their location and operation, to the
possible adverse effects upon the public health and the
environment that may be caused by wastes disposed of at the
facilities and to alleged improper operating procedures.
Waste disposal facilities benefit from laws which require
waste to be disposed of in a certain manner but any
relaxation of these laws could cause a decline in demand for
the facilities' services. Finally, waste-to-energy
facilities are concerned with many of the same issues facing
utilities insofar as they derive revenues from the sale of
energy to local power utilities.
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Special Tax Bonds. Special tax bonds are payable
from and secured by the revenues derived by a municipality
from a particular tax such as a tax on the rental of a hotel
room, on the purchase of food and beverages, on the rental
of automobiles or on the consumption of liquor. Special tax
bonds are not secured by the general tax revenues of the
municipality, and they do not represent general obligations
of the municipality. Therefore, payment on special tax
bonds may be adversely affected by a reduction in revenues
realized from the underlying special tax due to a general
decline in the local economy or population or due to a
decline in the consumption, use or cost of the goods and
services that are subject to taxation. Also, should
spending on the particular goods or services that are
subject to the special tax decline, the municipality may be
under no obligation to increase the rate of the special tax
to ensure that sufficient revenues are raised from the
shrinking taxable base.
Transit Authority Bonds. Mass transit is
generally not self-supporting from fare revenues.
Therefore, additional financial resources must be made
available to ensure operation of mass transit systems as
well as the timely payment of debt service. Often these
financial resources include Federal and state subsidies,
lease rentals paid by funds of the state or local government
or a pledge of a special tax such as a sales tax or a
property tax. If fare revenues or the additional financial
resources do not increase appropriately to pay for rising
operating expenses, the ability of the issuer to adequately
service the debt may be adversely affected.
Municipal Water and Sewer Revenue Bonds. Water
and sewer bonds are generally payable from user fees. The
ability of state and local water and sewer authorities to
meet their obligations may be affected by failure of
municipalities to utilize fully the facilities constructed
by these authorities, economic or population decline and
resulting decline in revenue from user charges, rising
construction and maintenance costs and delays in
construction of facilities, impact of environmental
requirements, failure or inability to raise user charges in
response to increased costs, the difficulty of obtaining or
discovering new supplies of fresh water, the effect of
conservation programs and the impact of "no growth" zoning
ordinances. In some cases this ability may be affected by
the continued availability of Federal and state financial
assistance and of municipal bond insurance for future bond
issues.
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University and College Bonds. The ability of
universities and colleges to meet their obligations is
dependent upon various factors, including the size and
diversity of their sources of revenues, enrollment,
reputation, management expertise, the availability and
restrictions on the use of endowments and other funds, the
quality and maintenance costs of campus facilities, and, in
the case of public institutions, the financial condition of
the relevant state or other governmental entity and its
policies with respect to education. The institution's
ability to maintain enrollment levels will depend on such
factors as tuition costs, demographic trends, geographic
location, geographic diversity and quality of the student
body, quality of the faculty and the diversity of program
offerings.
Legislative or regulatory action in the future at
the Federal, state or local level may directly or indirectly
affect eligibility standards or reduce or eliminate the
availability of funds for certain types of student loans or
grant programs, including student aid, research grants and
work-study programs, and may affect indirect assistance for
education.
Puerto Rico
Various Bonds may be affected by general economic
conditions in Puerto Rico. Puerto Rico's unemployment rate
remains significantly higher than the U.S. unemployment
rate. Furthermore, the Puerto Rican economy is largely
dependent for its development upon U.S. policies and
programs that are being reviewed and may be eliminated.
The Puerto Rican economy is affected by a number
of Commonwealth and Federal investment incentive programs.
For example, Section 936 of the Code provides for a credit
against Federal income taxes for U.S. companies operating on
the island if certain requirements are met. The Omnibus
Budget Reconciliation Act of 1993 imposes limits on this
credit, effective for tax years beginning after 1993. In
addition, from time to time proposals are introduced in
Congress which, if enacted into law, would eliminate some or
all of the benefits of Section 936. Although no assessment
can be made at this time of the precise effect of this
limitation, it is expected that the limitation of Section
936 credits would have a negative impact on Puerto Rico's
economy.
Aid for Puerto Rico's economy has traditionally
depended heavily on Federal programs, and current Federal
budgetary policies suggest that an expansion of aid to
Puerto Rico is unlikely. An adverse effect on the Puerto
Rican economy could result from other U.S. policies,
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including a reduction of tax benefits for distilled
products, further reduction in transfer payment programs
such as food stamps, curtailment of military spending and
policies which could lead to a stronger dollar.
In a plebiscite held in November, 1993, the Puerto
Rican electorate chose to continue Puerto Rico's
Commonwealth status. Previously proposed legislation, which
was not enacted, would have preserved the federal tax exempt
status of the outstanding debts of Puerto Rico and its
public corporations regardless of the outcome of the
referendum, to the extent that similar obligations issued by
states are so treated and subject to the provisions of the
Code currently in effect. There can be no assurance that
any pending or future legislation finally enacted will
include the same or similar protection against loss of tax
exemption. The November 1993 plebiscite can be expected to
have both direct and indirect consequences on such matters
as the basic characteristics of future Puerto Rico debt
obligations, the markets for these obligations, and the
types, levels and quality of revenue sources pledged for the
payment of existing and future debt obligations. The
possible consequences include legislative proposals seeking
restoration of the status of Section 936 benefits otherwise
subject to the limitations discussed above. However, no
assessment can be made at this time of the economic and
other effects of a change in federal laws affecting Puerto
Rico as a result of the November 1993 plebiscite.
Bonds Backed by Letters of Credit
In the case of Bonds secured by letters of credit
issued by commercial banks or savings banks, savings and
loan associations and similar institutions ("thrifts"), the
letter of credit may be drawn upon, and the Bonds
consequently redeemed, if an issuer fails to pay amounts due
on the Bonds or defaults under its reimbursement agreement
with the issuer of the letter of credit or, in certain
cases, if the interest on the Bonds is deemed to be taxable
and full payment of amounts due is not made by the issuer.
The letters of credit are irrevocable obligations of the
issuing institutions, which are subject to extensive
governmental regulations which may limit both the amounts
and types of loans and other financial commitments which may
be made and interest rates and fees which may be charged.
The profitability of financial institutions (and
therefore their ability to honor letters of credit or
guarantees) is largely dependent upon the availability and
cost of funds for the purpose of financing lending
operations under prevailing money market conditions. Also,
general economic conditions play an important part in the
operations of this industry and exposure to credit losses
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arising from possible financial difficulties of borrowers
might affect an institution's ability to meet its
obligations. In the late 1980's and early 1990's the credit
ratings of U.S. banks and bank holding companies were
subject to extensive downgrades due primarily to
deterioration in asset quality and the attendant impact on
earnings and capital adequacy. Major U.S. banks, in
particular, suffered from a decline in asset quality in the
areas of construction and commercial real estate loans.
These problem loans have been largely addressed. During the
early 1990's the credit ratings of many foreign banks have
also been subject to significant downgrades due to a
deterioration in asset quality which has negatively impacted
earnings and capital adequacy. The decline in asset quality
of major foreign banks has been brought about largely by
recessionary conditions in their local economies. The
Federal Deposit Insurance Corporation ("FDIC") indicated
that in 1990, 168 federally insured banks with an aggregate
total of $45.7 billion in assets failed and that in 1991,
124 federally insured banks with an aggregate total of $64.3
billion in assets failed. During 1992, the FDIC resolved
120 failed banks with combined assets of $44.2 billion. In
1993, a total of 41 banks with combined assets of $3.5
billion were closed. The 1993 total was the lowest level in
twelve years. Bank holding companies and other financial
institutions may not be as highly regulated as banks, and
may be more able to expand into other non-financial and
non-traditional businesses.
Historically, thrifts primarily financed
residential and commercial real estate by making fixed-rate
mortgage loans and funded those loans from various types of
deposits. Thrifts were restricted as to the types of
accounts which could be offered and the rates that could be
paid on those accounts. During periods of high interest
rates, large amounts of deposits were withdrawn as
depositors invested in Treasury bills and notes and in money
market funds which provided liquidity and high yields not
subject to regulation. As a result the cost of thrifts'
funds exceeded income from mortgage loan portfolios and
other investments, and their financial positions were
adversely affected. Laws and regulations eliminating
interest rate ceilings and restrictions on types of accounts
that may be offered by thrifts were designed to permit
thrifts to compete for deposits on the basis of current
market rates and to improve their financial positions.
Recent legislation, including the Financial
Institutions Reform, Recovery and Enforcement Act of 1989,
the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") and the Resolution Trust Corporation
Refinancing, Restructuring, and Improvement Act of 1991 have
significantly altered the legal rules and regulations
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governing banks and thrifts and mandated early and
aggressive regulatory intervention for unhealthy
institutions. For those thrifts that have failed, either
the FDIC or the Resolution Trust Corporation ("RTC") will be
appointed as receiver or conservator. Periodic efforts by
recent Administrations to introduce legislation broadening
the ability of banks and thrifts to compete with new
products generally have not been successful, but if enacted
could lead to more failures as a result of increased
competition and added risks. Failure to enact this
legislation, on the other hand, may lead to declining
earnings and an inability to compete with unregulated
financial institutions. Efforts to expand the ability of
federal thrifts to branch on an interstate basis have been
initially successful through promulgation of regulations.
Legislation to liberalize interstate branching for banks has
been stalled in Congress, but may be more successful this
year. Consolidation is likely to continue in both cases.
The Securities and Exchange Commission is attempting to
require the expanded use of market value accounting by banks
and thrifts, and has imposed rules requiring market
accounting for investment securities held for sale.
Adoption of these and similar rules may result in increased
volatility in the reported health of the industry and
mandated regulatory intervention to correct problems.
Investors should realize that should the FDIC or
the RTC make payment under a letter of credit prior to the
scheduled maturity or disposition dates of the related Bond
their investment will be returned sooner than originally
anticipated. The possibility of early payment has been
increased significantly by the enactment of FDICIA, which
requires federal regulators of insured banks, savings banks
and thrifts to act more quickly to address the problems of
undercapitalized institutions than previously, and specifies
in more detail the actions they must take. One requirement
virtually compels the appointment of a receiver or
conservator for any institution when its ratio of tangible
equity to total assets declines to two percent. Others
force aggressive intervention in the business of an
institution at even earlier stages of deterioration.
Certain letters of credit or guarantees backing
Bonds may have been issued by a foreign bank or corporation
or similar entity (a "Foreign Guarantee"). Foreign
Guarantees are subject to the risk that exchange control
regulations might be adopted in the future which might
affect adversely payments to the Fund. Similarly, foreign
withholding taxes could be imposed in the future although
provision is made in the instruments governing any Foreign
Guarantee that, in substance, to the extent permitted by
applicable law, additional payments will be made by the
guarantor so that the total amount paid, after deduction of
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any applicable tax, will not be less than the amount then
due and payable on the Foreign Guarantee. The adoption of
exchange control regulations and other legal restrictions
could have an adverse impact on the marketability of any
Bonds backed by a Foreign Guarantee.
Bonds Backed by Insurance
Municipal bond insurance may be provided by one or
more of AMBAC Indemnity Corporation ("AMBAC"), Asset
Guaranty Reinsurance Co. ("Asset Guaranty"), Capital
Guaranty Insurance Company ("CGIC"), Capital Markets
Assurance Corp. ("CAPMAC"), Connie Lee Insurance Company
("Connie Lee"), Financial Guaranty Insurance Company
("Financial Guaranty"), Financial Security Assurance Inc.
("FSA") or Municipal Bond Investors Assurance Corporation
("MBIA") (collectively, the "Insurance Companies"). The
claims-paying ability of each of these companies, unless
otherwise indicated, is rated AAA by Standard & Poor's or
another acceptable national rating agency. The ratings are
subject to change at any time at the discretion of the
rating agencies. In determining whether to insure bonds,
the Insurance Companies severally apply their own standards.
The cost of this insurance is borne either by the issuers or
previous owners of the bonds or by the Sponsors. The
insurance policies are non-cancellable and will continue in
force so long as the insured Bonds are outstanding and the
insurers remain in business. The insurance policies
guarantee the timely payment of principal and interest on
but do not guarantee the market value of the insured Bonds
or the value of the Units. The insurance policies generally
do not provide for accelerated payments of principal or
cover redemptions resulting from events of taxability. If
the issuer of any insured Bond should fail to make an
interest or principal payment, the insurance policies
generally provide that a Trustee or its agent will give
notice of nonpayment to the Insurance Company or its agent
and provide evidence of the Trustee's right to receive
payment. The Insurance Company is then required to disburse
the amount of the failed payment to the Trustee or its agent
and is thereafter subrogated to the Trustee's right to
receive payment from the issuer.
Financial information relating to the Insurance
Companies has been obtained from publicly available
information. No representation is made as to the accuracy
or adequacy of the information or as to the absence of
material adverse changes since the information was made
available to the public. Standard & Poor's has rated the
Units of any Insured Fund AAA because the Insurance
Companies have insured the Bonds. The assignment of a AAA
rating is due to Standard & Poor's assessment of the
creditworthiness of the Insurance Companies and of their
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ability to pay claims on their policies of insurance. In
the event that Standard & Poor's reassesses the
creditworthiness of any Insurance Company which would result
in the rating of an Insured Fund being reduced, the Sponsors
are authorized to direct the Trustee to obtain other
insurance.
The following are brief descriptions of the
Insurance Companies. The financial information presented
for each company has been determined on a statutory basis
and is unaudited.
AMBAC is a Wisconsin-domiciled stock insurance
company, regulated by the Insurance Department of the State
of Wisconsin, and licensed to do business in various states,
with admitted assets of approximately $2,060,000,000 and
policyholders' surplus of approximately $767,000,000 as of
June 30, 1994. AMBAC is a wholly-owned subsidiary of AMBAC
Inc., a financial holding company which is publicly owned
following a complete divestiture by Citibank during the
first quarter of 1992.
Asset Guaranty is a New York State insurance
company licensed to write financial guarantee, credit,
residual value and surety insurance. Asset Guaranty
commenced operations in mid-1988 by providing reinsurance to
several major monoline insurers. The parent holding company
of Asset Guaranty, Asset Guarantee Inc. (AGI), merged with
Enhance Financial Services (EFS) in June, 1990 to form
Enhance Financial Services Group Inc. (EFSG). The two main,
100%-owned subsidiaries of EFSG, Asset Guaranty and Enhance
Reinsurance Company (ERC), share common management and
physical resources. After an initial public offering
completed in February 1992 and the sale by Merrill Lynch &
Co. of its state, EFSG is 49.8%-owned by the public, 29.9%
by US West Financial Services, 14.1% by Manufacturers Life
Insurance Co. and 6.2% by senior management. Both ERC and
Asset Guaranty are rated "AAA" for claims paying ability by
Duff & Phelps, and ERC is rated triple-A for claims-paying-
ability for both S&P and Moody's. Asset Guaranty received a
"AA" claims-paying-ability rating from S&P during August
1993, but remains unrated by Moody's. As of June 30, 1994
Asset Guaranty had admitted assets of approximately
$145,000,000 and policyholders' surplus of approximately
$73,000,000.
CGIC, a monoline bond insurer headquartered in San
Francisco, California, was established in November 1986 to
assume the financial guaranty business of United States
Fidelity and Guaranty Company ("USF&G"). It is a
wholly-owned subsidiary of Capital Guaranty Corporation
("CGC") whose stock is owned by: Constellation Investments,
Inc., an affiliate of Baltimore Gas & Electric,
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Fleet/Norstar Financial Group, Inc., Safeco Corporation,
Sibag Finance Corporation, an affiliate of Siemens AG,
USF&G, the eighth largest property/casualty company in the
U.S. as measured by net premiums written, and CGC
management. As of June 30, 1994, CGIC had total admitted
assets of approximately $287,000,000 and policyholders'
surplus of approximately $164,000,000.
CAPMAC commenced operations in December 1987, as
the second mono-line financial guaranty insurance company
(after FSA) organized solely to insure non-municipal
obligations. CAPMAC, a New York corporation, is a
wholly-owned subsidiary of CAPMAC Holdings, Inc. (CHI),
which was sold in 1992 by Citibank (New York State) to a
group of 12 investors led by the following: Dillon Read's
Saratoga Partners II, L.P., an acquisition fund; Caprock
Management, Inc., representing Rockefeller family interests;
Citigrowth Fund, a Citicorp venture capital group; and
CAPMAC senior management and staff. These groups control
approximately 70% of the stock of CHI. CAPMAC had
traditionally specialized in guaranteeing consumer loan and
trade receivable asset-backed securities. Under the new
ownership group CAPMAC intends to become involved in the
municipal bond insurance business, as well as their
traditional non-municipal business. As of June 30, 1994
CAPMAC's admitted assets were approximately $194,000,000 and
its policyholders' surplus was approximately $140,000,000.
Connie Lee is a wholly owned subsidiary of College
Construction Loan Insurance Association ("CCLIA"), a
government-sponsored enterprise established by Congress to
provide American academic institutions with greater access
to low-cost capital through credit enhancement. Connie Lee,
the operating insurance company, was incorporated in 1987
and began business as a reinsurer of tax-exempt bonds of
colleges, universities, and teaching hospitals with a
concentration on the hospital sector. During the fourth
quarter of 1991 Connie Lee began underwriting primary bond
insurance which will focus largely on the college and
university sector. CCLIA's founding shareholders are the
U.S. Department of Education, which owns 36% of CCLIA, and
the Student Loan Marketing Association ("Sallie Mae"), which
owns 14%. The other principal owners are: Pennsylvania
Public School Employees' Retirement System, Metropolitan
Life Insurance Company, Kemper Financial Services, Johnson
family funds and trusts, Northwestern University,
Rockefeller & Co., Inc. administered trusts and funds, and
Stanford University. Connie Lee is domiciled in the state
of Wisconsin and has licenses to do business in 47 states
and the District of Columbia. As of June 30, 1994, its
total admitted assets were approximately $193,000,000 and
policyholders' surplus was approximately $105,000,000.
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Financial Guaranty, a New York stock insurance
company, is a wholly-owned subsidiary of FGIC Corporation,
which is wholly owned by General Electric Capital
Corporation. The investors in the FGIC Corporation are not
obligated to pay the debts of or the claims against
Financial Guaranty. Financial Guaranty commenced its
business of providing insurance and financial guarantees for
a variety of investment instruments in January 1984 and is
currently authorized to provide insurance in 49 states and
the District of Columbia. It files reports with state
regulatory agencies and is subject to audit and review by
those authorities. As of June 30, 1994, its total admitted
assets were approximately $2,055,000,000 and its
policyholders' surplus was approximately $850,000,000.
FSA is a monoline property and casualty insurance
company incorporated in New York in 1984. It is a
wholly-owned subsidiary of Financial Security Assurance
Holdings Ltd., which was acquired in December 1989 by US
West, Inc., the regional Bell Telephone Company serving the
Rocky Mountain and Pacific Northwestern states. U.S. West
is currently seeking to sell FSA. FSA is licensed to engage
in the surety business in 42 states and the District of
Columbia. FSA is engaged exclusively in the business of
writing financial guaranty insurance, on both tax-exempt and
non-municipal securities. As of June 30, 1994, FSA had
policyholders' surplus of approximately $366,000,000 and
total admitted assets of approximately $731,000,000.
MBIA is the principal operating subsidiary of MBIA
Inc. The principal shareholders of MBIA Inc. were
originally Aetna Casualty and Surety Company, The Fund
American Companies, Inc., subsidiaries of CIGNA Corporation
and Credit Local de France, CAECL, S.A. These principal
shareholders now own approximately 13% of the outstanding
common stock of MBIA Inc. following a series of four public
equity offerings over a five-year period. As of June 30,
1994, MBIA had admitted assets of approximately
$3,253,000,000 and policyholders' surplus of approximately
$1,049,000,000.
Insurance companies are subject to regulation and
supervision in the jurisdictions in which they do business
under statutes which delegate regulatory, supervisory and
administrative powers to state insurance commissioners.
This regulation, supervision and administration relate,
among other things, to: the standards of solvency which must
be met and maintained; the licensing of insurers and their
agents; the nature of and limitations on investments;
deposits of securities for the benefit of policyholders;
approval of policy forms and premium rates; periodic
examinations of the affairs of insurance companies; annual
and other reports required to be filed on the financial
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condition of insurers or for other purposes; and
requirements regarding reserves for unearned premiums,
losses and other matters. Regulatory agencies require that
premium rates not be excessive, inadequate or unfairly
discriminatory. Insurance regulation in many states also
includes "assigned risk" plans, reinsurance facilities, and
joint underwriting associations, under which all insurers
writing particular lines of insurance within the
jurisdiction must accept, for one or more of those lines,
risks that are otherwise uninsurable. A significant portion
of the assets of insurance companies is required by law to
be held in reserve against potential claims on policies and
is not available to general creditors.
Although the Federal government does not regulate
the business of insurance, Federal initiatives can
significantly impact the insurance business. Current and
proposed Federal measures which may significantly affect the
insurance business include pension regulation (ERISA),
controls on medical care costs, minimum standards for
no-fault automobile insurance, national health insurance,
personal privacy protection, tax law changes affecting life
insurance companies or the relative desirability of various
personal investment vehicles and repeal of the current
antitrust exemption for the insurance business. (If this
exemption is eliminated, it will substantially affect the
way premium rates are set by all property-liability
insurers.) In addition, the Federal government operates in
some cases as a co-insurer with the private sector insurance
companies.
Insurance companies are also affected by a variety
of state and Federal regulatory measures and judicial
decisions that define and extend the risks and benefits for
which insurance is sought and provided. These include
judicial redefinitions of risk exposure in areas such as
products liability and state and Federal extension and
protection of employee benefits, including pension, workers'
compensation, and disability benefits. These developments
may result in short-term adverse effects on the
profitability of various lines of insurance. Longer-term
adverse effects can often be minimized through prompt
repricing of coverages and revision of policy terms. In
some instances these developments may create new
opportunities for business growth. All insurance companies
write policies and set premiums based on actuarial
assumptions about mortality, injury, the occurrence of
accidents and other insured events. These assumptions,
while well supported by past experience, necessarily do not
take account of future events. The occurrence in the future
of unforeseen circumstances could affect the financial
condition of one or more insurance companies. The insurance
business is highly competitive and with the deregulation of
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financial service businesses, it should become more
competitive. In addition, insurance companies may expand
into non-traditional lines of business which may involve
different types of risks.
State Risk Factors
Investment in a single State Trust, as opposed to
a Fund which invests in the obligations of several states,
may involve some additional risk due to the decreased
diversification of economic, political, financial and market
risks. See Appendix A to this Information Supplement for
brief summaries of some of the factors which may affect the
financial condition of the States represented in various
State Trusts of Defined Asset Funds, together with summaries
of tax considerations relating to those States.
Payment of Bonds and Life of a Fund
Because Bonds from time to time may be redeemed or
prepaid or will mature in accordance with their terms or may
be sold under certain circumstances described herein, no
assurance can be given that a Portfolio will retain for any
length of time its present size and composition. Bonds may
be subject to redemption prior to their stated maturity
dates pursuant to optional refunding or sinking fund
redemption provisions or otherwise. In general, optional
refunding redemption provisions are more likely to be
exercised when the offer side evaluation is at a premium
over par than when it is at a discount from par. Generally,
the offer side evaluation of Bonds will be at a premium over
par when market interest rates fall below the coupon rate on
the Bonds. Bonds in a Portfolio may be subject to sinking
fund provisions early in the life of a Fund. These
provisions are designed to redeem a significant portion of
an issue gradually over the life of the issue; obligations
to be redeemed are generally chosen by lot. Additionally,
the size and composition of a Portfolio will be affected by
the level of redemptions of Units that may occur from time
to time and the consequent sale of Bonds. Principally, this
will depend upon the number of Holders seeking to sell or
redeem their Units and whether or not the Sponsors continue
to reoffer Units acquired by them in the secondary market.
Factors that the Sponsors will consider in the future in
determining to cease offering Units acquired in the
secondary market include, among other things, the diversity
of a Portfolio remaining at that time, the size of a
Portfolio relative to its original size, the ratio of Fund
expenses to income, a Fund's current and long-term returns,
the degree to which Units may be selling at a premium over
par relative to other funds sponsored by the Sponsors and
the cost of maintaining a current prospectus for a Fund.
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These factors may also lead the Sponsors to seek to
terminate a Fund earlier than would otherwise be the case.
Tax Exemption
In the opinion of bond counsel rendered on the
date of issuance of each Bond, the interest on each Bond is
excludable from gross income under existing law for regular
Federal income tax purposes (except in certain circumstances
depending on the Holder) but may be subject to state and
local taxes and may be a preference item for purposes of the
Alternative Minimum Tax. Interest on Bonds may become
subject to regular Federal income tax, perhaps retroactively
to their date of issuance, as a result of changes in Federal
law or as a result of the failure of issuers (or other users
of the proceeds of the Bonds) to comply with certain ongoing
requirements.
Moreover, the Internal Revenue Service has
announced an expansion of its examination program with
respect to tax-exempt bonds. The expanded examination
program will consist of, among other measures, increased
enforcement against abusive transactions, broader audit
coverage (including the expected issuance of audit
guidelines) and expanded compliance achieved by means of
expected revisions to the tax-exempt bond information return
forms.
In certain cases, a Bond may provide that if the
interest on the Bond should ultimately be determined to be
taxable, the Bond would become due and payable by its
issuer, and, in addition, may provide that any related
letter of credit or other security could be called upon if
the issuer failed to satisfy all or part of its obligation.
In other cases, however, a Bond may not provide for the
acceleration or redemption of the Bond or a call upon the
related letter of credit or other security upon a
determination of taxability. In those cases in which a Bond
does not provide for acceleration or redemption or in which
both the issuer and the bank or other entity issuing the
letter of credit or other security are unable to meet their
obligations to pay the amounts due on the Bond as a result
of a determination of taxability, a Trustee would be
obligated to sell the Bond and, since it would be sold as a
taxable security, it is expected that it would have to be
sold at a substantial discount from current market price.
In addition, as mentioned above, under certain circumstances
Holders could be required to pay income tax on interest
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received prior to the date on which the interest is
determined to be taxable.
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INCOME AND RETURNS
Income
Because accrued interest on Bonds is not received
by a Fund at a constant rate throughout the year, any
monthly income distribution may be more or less than the
interest actually received by the Fund. To eliminate
fluctuations in the monthly income distribution, a portion
of the Public Offering Price consists of an advance to the
Trustee of an amount necessary to provide approximately
equal distributions. Upon the sale or redemption of Units,
investors will receive their proportionate share of the
Trustee advance. In addition, if a Bond is sold, redeemed
or otherwise disposed of, a Fund will periodically
distribute the portion of the Trustee advance that is
attributable to that Bond to investors.
The regular monthly income distribution stated
under Defining Your Income in Part A of the Prospectus is
based on a Public Offering Price of $1,000 per Unit after
deducting estimated Fund expenses, and will change as the
composition of the Portfolio changes over time.
Income is received by a Fund upon semi-annual
payments of interest on the Bonds held in a Portfolio.
Bonds may sometimes be purchased on a when, as and if issued
basis or may have a delayed delivery. Since interest on
these Bonds does not begin to accrue until the date of
delivery to a Fund, in order to provide tax-exempt income to
Holders for this non-accrual period, the Trustee's Annual
Fee and Expenses is reduced by the interest that would have
accrued on these Bonds between the initial settlement date
for Units and the delivery dates of the Bonds. This
eliminates reduction in Monthly Income Distributions.
Should when-issued Bonds be issued later than expected, the
fee reduction will be increased correspondingly. If the
amount of the Trustee's Annual Fee and Expenses is
insufficient to cover the additional accrued interest, the
Sponsors will treat the contracts as Failed Bonds. As the
Trustee is authorized to draw on the letter of credit
deposited by the Sponsors before the settlement date for
these Bonds and deposit the proceeds in an account for the
Fund on which it pays no interest, its use of these funds
compensates the Trustee for the reduction described above.
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Appendix A
FLORIDA SERIES
RISK FACTORS--The State Economy. In 1980 Florida
ranked seventh among the fifty states with a population of
9.7 million people. The State has grown dramatically since
then and, as of April 1, 1993, ranked fourth with an
estimated population of 13.6 million, an increase of
approximately 44.7% since 1980. Since 1982 Florida has
surpassed Ohio, Illinois and Pennsylvania in total
population. Florida's attraction as both a growth and
retirement state has kept net migration fairly steady with
an average of 292,988 new residents each year. Since 1983
the prime working age population (18-44) has grown at an
average annual rate of 2.6%. The share of Florida's total
working age population (18-59) to total state population is
approximately 54%. Non-farm employment has grown by
approximately 64.4% since 1980. The service sector is
Florida's largest employment sector, presently accounting
for 32.1% of total non-farm employment. Manufacturing jobs
in Florida are concentrated in the area of high-tech and
value added sectors, such as electrical and electronic
equipment as well as printing and publishing. Job gains in
Florida's manufacturing sector have exceeded national
averages increasing by 11.7% between 1980 and 1993. Foreign
Trade has contributed significantly to Florida's employment
growth. Florida's dependence on highly cyclical
construction and construction related manufacturing has
declined. Total contract construction employment as a share
of total non-farm employment has fallen from 10% in 1973, to
7% in 1980 to 5% in 1993. Although the job creation rate
for the State of Florida since 1980 is over two times the
rate for the nation as a whole, since 1989 the unemployment
rate for the State has risen faster than the national
average. The average rate of unemployment for Florida since
1980 is 6.5%, while the national average is 7.1%. Because
Florida has a proportionately greater retirement age
population, property income (dividends, interest and rent)
and transfer payments (social security and pension benefits)
are a relatively more important source of income. In 1993,
Florida employment income represented 61% of total personal
income while nationally, employment income represented 72%
of total personal income.
The ability of the State and its local units of
government to satisfy the Debt Obligations may be affected
by numerous factors which impact on the economic vitality of
the State in general and the particular region of the State
in which the issuer of the Debt Obligation is located.
South Florida is particularly susceptible to international
trade and currency imbalances and to economic dislocations
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in Central and South America, due to its geographical
location and its involvement with foreign trade, tourism and
investment capital. The central and northern portions of
the State are impacted by problems in the agricultural
sector, particularly with regard to the citrus and sugar
industries. Short-term adverse economic conditions may be
created in these areas, and in the State as a whole, due to
crop failures, severe weather conditions or other
agriculture-related problems. The State economy also has
historically been somewhat dependent on the tourism and
construction industries and is sensitive to trends in those
sectors.
The State Budget. The State operates under a
biennial budget which is formulated in even numbered years
and presented for approval to the Legislature in odd
numbered years. A supplemental budget request process is
utilized in the even numbered years for refining and
modifying the primary budget. Under the State Constitution
and applicable statutes, the State budget as a whole, and
each separate fund within the State budget, must be kept in
balance from currently available revenues during each State
fiscal year. (The State's fiscal year runs from July 1
through June 30). The Governor and the Comptroller of the
State are charged with the responsibility of ensuring that
sufficient revenues are collected to meet appropriations and
that no deficit occurs in any State fund.
The financial operations of the State covering all
receipts and expenditures are maintained through the use of
three types of funds: the General Revenue Fund, Trust Funds
and Working Capital Fund. The majority of the State's tax
revenues are deposited in the General Revenue Fund and
moneys in the General Revenue Fund are expended pursuant to
appropriations acts. In fiscal year 1992-93, expenditures
for education, health and welfare and public safety
represented approximately 49%, 30% and 11% respectively, of
expenditures from the General Revenue Fund. The Trust Funds
consist of moneys received by the State which under law or
trust agreement are segregated for a purpose authorized by
law. Revenues in the General Revenue Fund which are in
excess of the amount needed to meet appropriations may be
transferred to the Working Capital Fund.
State Revenues. Estimated General Revenue and
Working Capital Fund revenues of $13,582.7 million for 1993-
94 (excluding Hurricane Andrew related revenues and
expenses) represent an increase of 8.4% over revenues for
1992-93. This amount reflects a transfer of $190 million,
out of an estimated $220 million in non-recurring revenue
due to Hurricane Andrew, to a hurricane relief trust fund.
Estimated Revenue for 1994-95 of $14,573.8 million
represents an increase of 87.3% over 1993-1994. This amount
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reflects a transfer of $159 million in non-recurring revenue
due to Hurricane Andrew, to a hurricane trust fund.
In fiscal year 1992-1993, the State derived
approximately 62% of its total direct revenues for deposit
in the General Revenue Fund, Trust Fund and Working Capital
Fund from State taxes. Federal grants and other special
revenues accounted for the remaining revenues. The greatest
single source of tax receipts in the State is the 6% sales
and use tax. For the fiscal year ended June 30, 1993,
receipts from the sales and use tax totaled $9,426 million,
an increase of approximately 12.5% over fiscal year 1991-92.
This amount includes non-recurring increases attributable to
the rebuilding and reconstruction following the hurricane.
The second largest source of State tax receipts is the tax
on motor fuels including the tax receipts distributed to
local governments. Receipts from the taxes on motor fuels
are almost entirely dedicated to trust funds for specific
purposes or transferred to local governments and are not
included in the General Revenue Fund. For the fiscal year
ended June 30, 1992, collections of this tax totaled
$1,475.5 million.
The State currently does not impose a personal
income tax. However, the State does impose a corporate
income tax on the net income of corporations, organizations,
associations and other artificial entities for the privilege
of conducting business, deriving income or existing within
the State. For the fiscal year ended June 30, 1993,
receipts from the corporate income tax totaled $846.6
million, an increase of approximately 5.6% from fiscal year
1991-92. The Documentary Stamp Tax collections totalled
$639 million during fiscal year 1992-93, or approximately
27% over fiscal year 1991-92. The Alcoholic Beverage Tax,
an excise tax on beer, wine and liquor totaled $442.2
million in 1992-93, an increase of 1.6% from fiscal year
1991-92. The Florida lottery produced sales of $2.13
billion of which $810.4 million was used for education in
fiscal year 1992-93.
While the State does not levy ad valorem taxes on
real property or tangible personal property, counties,
municipalities and school districts are authorized by law,
and special districts may be authorized by law, to levy ad
valorem taxes. Under the State Constitution, ad valorem
taxes may not be levied by counties, municipalities, school
districts and water management districts in excess of the
following respective millages upon the assessed value of
real estate and tangible personal property: for all county
purposes, ten mills; for all municipal purposes, ten mills;
for all school purposes, ten mills; and for water management
purposes, either 0.05 mill or 1.0 mill, depending upon
geographic location. These millage limitations do not apply
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to taxes levied for payment of bonds and taxes levied for
periods not longer than two years when authorized by a vote
of the electors. (Note: one mill equals one-tenth of one
cent).
The State Constitution and statutes provide for
the exemption of homesteads from certain taxes. The
homestead exemption is an exemption from all taxation,
except for assessments for special benefits, up to a
specific amount of the assessed valuation of the homestead.
This exemption is available to every person who has the
legal or equitable title to real estate and maintains
thereon his or her permanent home. All permanent residents
of the State are currently entitled to a $25,000 homestead
exemption from levies by all taxing authorities, however,
such exemption is subject to change upon voter approval.
On November 3, 1992, the voters of the State of
Florida passed an amendment to the Florida Constitution
establishing a limitation on the annual increase in assessed
valuation of homestead property commencing January 1, 1994,
of the lesser of 3% or the increase in the Consumer Price
Index during the relevant year, except in the event of a
sale thereof during such year, and except as to improvements
thereto during such year. The amendment did not alter any
of the millage rates described above.
Since municipalities, counties, school districts
and other special purpose units of local governments with
power to issue general obligation bonds have authority to
increase the millage levy for voter approved general
obligation debt to the amount necessary to satisfy the
related debt service requirements, the amendment is not
expected to adversely affect the ability of these entities
to pay the principal of or interest on such general
obligation bonds. However, in periods of high inflation,
those local government units whose operating millage levies
are approaching the constitutional cap and whose tax base
consists largely of residential real estate, may, as a
result of the above-described amendment, need to place
greater reliance on non-ad valorem revenue sources to meet
their operating budget needs.
At the November 1994 general election, voters
approved an amendment to the State Constitution that will
limit the amount of taxes, fees, licenses and charges
imposed by the Legislature and collected during any fiscal
year to the amount of revenues allowed for the prior fiscal
year, plus an adjustment for growth. Growth is defined as
the amount equal to the average annual rate of growth in
Florida personal income over the most recent twenty quarters
times the state revenues allowed for the prior fiscal year.
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The revenues allowed for any fiscal year can be increased by
a two-thirds vote of the legislature. the limit will be
effective starting with fiscal year 1995-1996. Any excess
revenues generated will be deposited in the budget
stabilization fund until it is fully funded and then
refunded to taxpayers. Included amount the categories of
revenues which are exempt from the proposed revenue
limitation, however, are revenues pledged to state bonds.
State General Obligation Bonds and State Revenue
Bonds. The State Constitution does not permit the State to
issue debt obligations to fund governmental operations.
Generally, the State Constitution authorizes State bonds
pledging the full faith and credit of the State only to
finance or refinance the cost of State fixed capital outlay
projects, upon approval by a vote of the electors, and
provided that the total outstanding principal amount of such
bonds does not exceed 50% of the total tax revenues of the
State for the two preceding fiscal years. Revenue bonds may
be issued by the State or its agencies without a vote of the
electors only to finance or refinance the cost of State
fixed capital outlay projects which are payable solely from
funds derived directly from sources other than State tax
revenues.
Exceptions to the general provisions regarding the
full faith and credit pledge of the State are contained in
specific provisions of the State Constitution which
authorize the pledge of the full faith and credit of the
State, without electorate approval, but subject to specific
coverage requirements, for: certain road projects, county
education projects, State higher education projects, State
system of Public Education and construction of air and water
pollution control and abatement facilities, solid waste
disposal facilities and certain other water facilities.
Local Bonds. The State Constitution provides that
counties, school districts, municipalities, special
districts and local governmental bodies with taxing powers
may issue debt obligations payable from ad valorem taxation
and maturing more than 12 months after issuance, only (i) to
finance or refinance capital projects authorized by law,
provided that electorate approval is obtained; or (ii) to
refund outstanding debt obligations and interest and
redemption premium thereon at a lower net average interest
cost rate.
Counties, municipalities and special districts are
authorized to issue revenue bonds to finance a variety of
self-liquidating projects pursuant to the laws of the State,
such revenue bonds to be secured by and payable from the
rates, fees, tolls, rentals and other charges for the
services and facilities furnished by the financed projects.
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Under State law, counties and municipalities are permitted
to issue bonds payable from special tax sources for a
variety of purposes, and municipalities and special
districts may issue special assessment bonds.
Bond Ratings. General obligation bonds of the
State are currently rated Aa by Moody's Investors Service
and AA by Standard & Poor's Corporation.
Litigation. Due to its size and its broad range
of activities, the State (and its officers and employees)
are involved in numerous routine lawsuits. The managers of
the departments of the State involved in such routine
lawsuits believed that the results of such pending
litigation would not materially affect the State's financial
position. In addition to the routine litigation pending
against the State, its officers and employees, the following
lawsuits and claims are also pending:
A. In a suit, plaintiff has sought title to
Hugh Taylor Birch State Recreation Area by virtue
of a reverter clause in the deed from Hugh Taylor
Birch to the State. A final judgment at trial was
entered in favor of the State. The case has been
appealed to the Fourth District Court of Appeal.
The Department of Natural Resources anticipates
the area will remain in State lands; however, in
the event the court should rule in favor of the
plaintiff, the State is subject to a loss of real
property valued at approximately $400 million.
B. In a suit, the Florida Supreme Court
prospectively invalidated a tax preference
methodology under former Sections 554.06 and
565.12 of the Florida Statutes (1985). This
ruling was appealed to the United States Supreme
Court which reversed the State Supreme Court and
remanded the matter back to the State court. The
Supreme Court's opinion suggested that one of the
State's options for correcting the constitutional
problems would be to assess and collect back taxes
at the higher rates applicable to those who were
ineligible for the tax preference from all
taxpayers who had benefitted from the tax
preference during the contested tax period. The
State chose to seek a recovery of taxes from those
who benefitted from the tax preference by
requiring them to pay taxes at the higher rate
that applied to out-of-state manufacturers and
distributors. The Florida Supreme Court remanded
the matter to the Circuit Court for the 2nd
Judicial Circuit to hear arguments on the method
chosen by the State to provide a clear and certain
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remedy. The trial court's decision against the
State is on appeal at the First District Court of
Appeal. With the exception of two parties, all
parties have settled their claims with the State.
Should an unfavorable outcome result in this case,
approximately $33 million may be refunded.
C. A class action suit brought against the
Department of Corrections, alleging race
discrimination in hiring and employment practices,
originally went to trial in 1982 with the
Department prevailing on all claims except a
partial summary judgment to a plaintiff sub-class
claiming a discriminatory impact on hiring caused
by an examination requirement. Jurisdictional
aspects of the testing issue were appealed to the
Eleventh Circuit Court of Appeals which vacated
the trial court's order and was upheld by the
United States Supreme Court. The district court
consolidated three successor lawsuits with this
case and entered a final judgment in favor of the
State. The judgment, however, has been appealed
to the Eleventh Circuit Court of Appeals. Should
the department fail in future appeals, the
liability of the State for back pay and other
monetary relief could exceed $40 million.
D. Complaints were filed in the Second
Judicial Circuit seeking a declaration that
Sections 624.509, 624.512 and 624.514, F.S. (1988)
violate various U.S. and Florida Constitutional
provisions. Relief was sought in the form of a
tax refund. The Florida Supreme Court reversed
the trial court in favor of the State. Plaintiffs
have petitioned for certiorari with the United
States Supreme Court. The State has settled all
outstanding litigation in this area. Similar
issues had been raised in the following cases
which were part of the settlement: Ford Motor
Company v. Bill Gunter, Case No. 86-3714, 2nd
Judicial Circuit, and General Motors Corporation
v. Tom Gallagher, Case Nos. 90-2045 and 88-2925,
2nd Judicial Circuit, where the plaintiffs are
challenging Section 634.131, F.S., which imposes
taxes on the premiums received for certain motor
vehicle service agreements. Current estimates
indicate that the State's potential refund
exposure under the remaining refund applications
yet to be denied is approximately $150 million.
However, the State hopes that refund exposure will
be reduced as these refund requests begin to be
denied based upon the Florida Supreme Court
decision in the instant case.
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E. In two cases, plaintiffs have sought
approximately $25 million in intangible tax
refunds based partly upon claims that Florida's
intangible tax statutes are unconstitutional.
F. A lawsuit was filed against the
Department of Health and Rehabilitative Services
(DHRS) and the Comptroller of the State of Florida
involving a number of issues arising out of the
implementation of a DHRS computer system and
seeking declaratory relief and money damages. The
estimated potential liability to the State is in
excess of $40 million.
G. Plaintiffs in a case have sought a
declaration that statutory assessments on certain
hospital net revenues are invalid,
unconstitutional, and unenforceable and request
temporary and permanent injunctive relief be
granted prohibiting the enforcement or collection
of the assessment and that all monies paid to the
State by the plaintiffs and the class members
within the four years preceding the filing of the
action be reimbursed by the defendants with
interest. An unfavorable outcome to this case
could result in the possibility of refunds
exceeding $50 million.
H. In an inverse condemnation suit claiming
that the actions of the State constitute a taking
of certain leases for which compensation is due,
the Circuit Judge granted the State's motion for
summary judgment finding that the State had not
deprived plaintiff of any royalty rights they
might have. Plaintiff has appealed.
Additionally, plaintiff's request for a drilling
permit was rejected after administrative
proceedings before the Department of Environmental
Protection. Plaintiff is expected to challenge
the decision.
I. In an inverse condemnation suit alleging
the regulatory taking of property without
compensation in the Green Swamp Area of Critical
State Concern, discovery is concluding and a
motion for a summary judgment will likely be made.
If the judgment should be for the plaintiff,
condemnation procedures would be instituted with
costs of $30 million, plus interest from 1975.
J. In 1990, the Florida Legislature passed
an act imposing a $295 impact fee on cars
purchased or titled in other states that are then
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registered in the State by persons having or
establishing permanent residency in the State.
Two separate groups filed suit challenging the
fee. The circuit court consolidated the various
cases and entered final summary judgment finding
the fee unconstitutional under the Commerce Clause
of the United States Constitution and ordered an
immediate refund to all persons having paid the
fee since the statute came into existence. The
State noticed an appeal of the circuit court
ruling which entitled the State to a stay of the
effectiveness of such ruling, thus, the fee
continued to be collected during the period of the
pending appeal. On September 29, 1994, the
Supreme Court of Florida reaffirmed the circuit
court's decision by concluding that the statute
results in discrimination against out of state
economic interests in contravention of the
Commerce Clause and that the proper remedy for
such violation is a full refund to all persons who
have paid the illegal fee. The State's refund
exposure may be in excess of $100 million.
K. Santa Rosa County has filed a complaint
for declaratory relief against the State
requesting the Circuit Court to: (1) find that
Section 206.60(2)(a), F.S., does not allow the
Department to deduct administrative expenses
unrelated to the collection, administration, and
distribution of the county gas tax; and (2) order
the department to pay Santa Rosa County all moneys
shown to have been unlawfully deducted from the
motor fuel tax revenues plus interest. All
hearings in the case have been postponed until
early 1994. This case seeks refunds of
approximately $45 million.
L. Lee Memorial Hospital has contested the
calculation of its disproportionate share payment
for the 1992-93 State fiscal year. An unfavorable
outcome to this case could result in a possible
settlement of $20 to $30 million.
M. A lawsuit has challenged the freezing of
nursing home reimbursement rates for the period
January 1, 1990 through July 1, 1990. The First
District Court of Appeal ruled against the Agency
for Health Care Administration (AHCA). The AHCA
has petitioned the Florida Supreme Court for
review of this declaration. An unfavorable
outcome to this case could result in a potential
liability of $40 million.
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_________________
The Sponsors believe that the information
summarized above described some of the more significant
matters relating to Florida Series. For a discussion of the
particular risks with each of the Bonds, and other factors
to be considered in connection therewith, reference should
be made to the Official Statement and other offering
materials relating to each of the Bonds included in the
portfolio of the Florida Series. The foregoing information
regarding the State, its political subdivisions and its
agencies and authorities constitutes only a brief summary,
does not purport to be a complete description of the matters
covered and is based solely upon information drawn from
official statements relating to offerings of certain bonds
of the State. The Sponsors and their counsel have not
independently verified this information and the Sponsors
have no reason to believe that such information is incorrect
in any material respect. None of the information presented
in this summary is relevant to Puerto Rico or Guam Bonds
which may be included in the Florida Series.
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