<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 1, 1995
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------------
FORM S-6
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FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
------------------------------------------
A. EXACT NAME OF TRUST:
MUNICIPAL INVESTMENT TRUST FUND
INVESTMENT GRADE PORTFOLIO
INTERMEDIATE TERM SERIES
DEFINED ASSET FUNDS
B. NAMES OF DEPOSITORS:
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
SMITH BARNEY INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
DEAN WITTER REYNOLDS INC.
C. COMPLETE ADDRESSES OF DEPOSITORS' PRINCIPAL EXECUTIVE OFFICES:
MERRILL LYNCH, PIERCE,
FENNER & SMITH
INCORPORATED
DEFINED ASSET FUNDS
POST OFFICE BOX 9051
PRINCETON, N.J. 08543-9051 SMITH BARNEY INC.
388 GREENWICH STREET
23RD FLOOR
NEW YORK, N.Y. 10013
PRUDENTIAL SECURITIES DEAN WITTER REYNOLDS INC. PAINEWEBBER INCORPORATED
INCORPORATED TWO WORLD TRADE 1285 AVENUE OF THE
ONE SEAPORT PLAZA CENTER--59TH FLOOR AMERICAS
199 WATER STREET NEW YORK, N.Y. 10048 NEW YORK, N.Y. 10019
NEW YORK, N.Y. 10292
D. NAMES AND COMPLETE ADDRESSES OF AGENTS FOR SERVICE:
TERESA KONCICK, ESQ. THOMAS D. HARMAN, ESQ. LEE B. SPENCER, JR.
P.O. BOX 9051 388 GREENWICH ST. ONE SEAPORT PLAZA
PRINCETON, N.J. 08543-9051 NEW YORK, N.Y. 10013 199 WATER STREET
NEW YORK, N.Y. 10292
COPIES TO:
DOUGLAS LOWE, ESQ. ROBERT E. HOLLEY PIERRE DE SAINT PHALLE,
130 LIBERTY STREET--29TH 1200 HARBOR BLVD. ESQ.
FLOOR WEEHAWKEN, N.J. 07087 450 LEXINGTON AVENUE
NEW YORK, N.Y. 10006 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.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
Def ined
Asset FundsSM
MUNICIPAL INVESTMENT This Defined Fund is a portfolio of preselected
TRUST FUND securities, formed to provide interest income
- ------------------------------which in the opinion of counsel is, with certain
Investment Grade Portfolio exceptions, exempt from regular Federal income
Intermediate Term Series taxes under current law. The defined portfolio
(A Unit Investment Trust) consists of fixed rate Securities with fixed
Units maturity or disposition dates ranging from 200 to
/ / Tax Free 200 , issued primarily by states, municipalities,
/ / Monthly Income public authorities and similar entities or by
/ / Professional Selection certain U.S. territories or possessions, and rated
% investment grade by Fitch Investors Service, Inc.,
ESTIMATED CURRENT RETURN the credit consultant, or having, in the opinion
AS OF , 1995 of Fitch credit characteristics comparable to
% investment grade securities (see Description of
ESTIMATED LONG TERM RETURN Fund Investments--Portfolio Selection and Risk
AS OF , 1995 Factors). Although interest on certain of the
Securities in this Fund may be a preference item
for purposes of Alternative Minimum Tax ("AMT"),
the yield on these Securities is generally higher
than on obligations of comparable quality that are
not subject to AMT. The value of the Units of the
Fund will fluctuate with the value of the
Portfolio of underlying Securities. Certain of the
Securities may have speculative characteristics
(see Risk Factors).
The Estimated Current Return and Estimated Long
Term Return figures shown give different
information about the return to investors.
Estimated Current Return on a Unit shows a net
annual current cash return based on the initial
Public Offering Price and the maximum applicable
sales charge and is computed by multiplying the
estimated net annual interest rate per Unit by
$1,000 and dividing the result by the Public
Offering Price per Unit (including the sales
charge but not including accrued interest).
Estimated Long Term Return shows a net annual
long-term return to investors holding to maturity
based on the yield on the individual Securities in
the Portfolio, weighted to reflect the time to
maturity (or in certain cases to an earlier call
date) and market value of each Security, adjusted
to reflect the Public Offering Price (including
the sales charge) and estimated expenses. Unlike
Estimated Current Return, Estimated Long Term
Return takes into account maturities of the
underlying Securities and discounts and premiums.
Distributions of income on Units are generally
subject to certain delays; if the Estimated Long
Term Return figure shown took these delays into
account, it would be lower. Both Estimated Current
Return and Estimated Long Term Return are subject
to fluctuations with changes in Portfolio
composition (including the redemption, sale or
other disposition of Securities in the Portfolio),
changes in the market value of the underlying
Securities and changes in fees and expenses.
Estimated cash flows for the Fund are available
without charge from the Sponsors upon request.
Minimum purchase: 1 Unit.
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
SPONSORS: STATE SECURITIES COMMISSION PASSED UPON THE
Merrill Lynch, ACCURACY
Pierce, Fenner & Smith OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
Incorporated TO THE CONTRARY IS A CRIMINAL OFFENSE.
Smith Barney Inc. INQUIRIES SHOULD BE DIRECTED TO THE TRUSTEE AT
PaineWebber Incorporated 1-800-323-1508.
Prudential Securities PROSPECTUS DATED , 1995
Incorporated READ AND RETAIN THIS PROSPECTUS FOR FUTURE
Dean Witter Reynolds Inc. REFERENCE.
<PAGE>
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DEFINED ASSET FUNDSSM is America's oldest and largest family of unit investment
trusts with over $90 billion sponsored since 1970. Each Defined 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.
With Defined Asset Funds you know in advance what you are investing in and that
changes in the portfolio are limited. Most defined bond funds pay interest
monthly and repay principal as bonds are called, redeemed, sold or as they
mature. Defined equity funds offer preselected stock portfolios with defined
termination dates.
Your financial advisor can help you select a Defined Fund to meet your personal
investment objectives. Our size and market presence enable us to offer a wide
variety of investments. Defined Funds are available in many types of securities:
municipal bonds, corporate bonds, government bonds, utility stocks, growth
stocks, real estate investment trusts, even international securities denominated
in foreign currencies.
The terms of Defined Funds are as short as one year or as long as 30 years.
Special bond funds are available for investors seeking extra features: insured
funds, double and triple tax-free funds, and funds with "laddered maturities" to
help protect against rising interest rates. Defined Funds are offered by
prospectus only.
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CONTENTS
Investment Summary.......................................... A-3
Tax-Free vs. Taxable Income................................. A-5
Underwriting Account........................................ A-7
Fee Table................................................... A-8
Report of Independent Accountants........................... A-9
Statement of Condition...................................... A-10
Portfolio................................................... A-11
Description of Fund Investments............................. 1
Risk Factors................................................ 3
How To Buy.................................................. 17
How To Sell................................................. 19
Income and Distributions.................................... 20
Exchange Option............................................. 22
Taxes....................................................... 23
Administration of the Fund.................................. 25
Trust Indenture............................................. 25
Miscellaneous............................................... 26
Appendix A.................................................. A-1
Appendix B.................................................. B-1
Appendix C.................................................. C-1
A-2
<PAGE>
INVESTMENT SUMMARY AS OF , 1995 (THE BUSINESS DAY PRIOR TO THE INITIAL
DATE OF DEPOSIT)(a)
ESTIMATED CURRENT RETURN(b)
(based on Public Offering Price) %
ESTIMATED LONG TERM RETURN(b)
(based on Public Offering Price) %
PUBLIC OFFERING PRICE PER UNIT
(including 4.00% sales charge) $ (c)
FACE AMOUNT OF SECURITIES-- $
INITIAL NUMBER OF UNITS--(d)
SPONSORS' REPURCHASE PRICE AND
REDEMPTION PRICE PER UNIT(e)
(based on bid side evaluation) $ (c)
FRACTIONAL UNDIVIDED INTEREST IN FUND REPRESENTED BY EACH
UNIT-- 1/ TH
CALCULATION OF PUBLIC OFFERING PRICE
Aggregate offer side evaluation
of Securities in Fund.................................. $
------------------
Divided by Units.................................. $
Plus sales charge of 4.00% of
Public Offering Price (4.167% of
net amount invested in
Securities)(f).........................................
------------------
Public Offering Price per Unit...........................
Plus accrued interest(g).................................
------------------
Total.................................................. $
------------------
------------------
PREMIUM AND DISCOUNT ISSUES IN PORTFOLIO
Face amount of Securities with offer side
evaluation: over par-- %
at a discount from par-- %
PERCENTAGE OF AGGREGATE FACE AMOUNT OF
SECURITIES ISSUED AT "ORIGINAL ISSUE DISCOUNT" (see
Taxes)...................................................... %
CALCULATION OF ESTIMATED NET ANNUAL INTEREST RATE PER UNIT
(based on face amount of $1,000 per Unit)
Annual interest rate per Unit............................. %
Less estimated annual expenses per Unit ($ ) expressed
as a percentage......................................... %
------------------
Estimated net annual interest rate
per Unit................................................ %
------------------
------------------
DAILY RATE AT WHICH ESTIMATED NET
INTEREST ACCRUES PER UNIT-- %
MONTHLY INCOME DISTRIBUTIONS
First distribution to be paid on the 25th
day of , 1995 to Holders of
record on the 10th day of , 1995.................. $
Calculation of second and following
distributions, to be paid on the 25th
day of each month:
Estimated net annual interest rate per Unit times
$1,000...................................................... $
Divided by 12............................................. $
REDEMPTION PRICE PER UNIT LESS THAN:
Public Offering Price by.................................... $
Sponsors' Initial Repurchase Price by....................... $
RECORD DAY--The 10th day of each month
DISTRIBUTION DAY--The 25th day of each month
MINIMUM CAPITAL DISTRIBUTION
No distribution need be made from Capital Account if
balance is less than $5.00 per Unit
SPONSORS' PROFIT (LOSS) ON DEPOSIT............................ $
TRUSTEE'S ANNUAL FEE AND EXPENSES(h)
$ per Unit commencing , 1995 (see Income and Distributions--Fund
Expenses)
PORTFOLIO SUPERVISION FEE(i)
Maximum of $0. per $1,000 face amount of underlying Securities (see Income
and Distributions--Fund Expenses)
CREDIT CONSULTANT'S ANNUAL FEE
$ per $1,000 face amount of underlying Securities (see Income and
Distributions--Fund Expenses)
EVALUATOR'S FEE FOR EACH EVALUATION
Minimum of $5.00 (see Income and Distributions--Fund Expenses)
EVALUATION TIME
3:30 P.M. New York Time
MANDATORY TERMINATION DATE
Trust must be terminated no later than one year
after the maturity date of the last maturing Security listed under Portfolio
(see Portfolio).
MINIMUM VALUE OF FUND
Trust may be terminated if value of Fund is less than 40% of the face amount
of Securities in the
Portfolio on the date of their deposit.
- ------------------
(a) The Indenture was signed and the deposit was made on the date of this
Prospectus.
(b) Estimated Current Return represents annual interest income after
estimated annual expenses divided by the
maximum public offering price including a 4.00% maximum sales charge. Estimated
Long Term Return is the net
annual percentage return based on the yield on each underlying Security weighted
to reflect market value and time to
maturity or earlier call date. Estimated Long Term Return is adjusted for
estimated expenses and the maximum
offering price but not for delays in the Fund's distribution of income.
Estimated Current Return shows current annual
cash return to investors while Estimated Long Term Return shows the return on
Units held to maturity, reflecting
maturities, discounts and premiums on underlying Securities. Each figure will
vary with purchase price including
sales charge, changes in the net interest income and the redemption, sale or
other disposition of Securities in the
Portfolio.
(c) Plus accrued interest.
(d) The Sponsors may create additional Units during the offering period of
the Fund.
(e) During the initial offering period, the Fund's Sponsors intend to offer
to purchase Units at prices based on the
offer side value of the underlying Securities. Thereafter, the Sponsors intend
to maintain such a market based on the
bid side value of the underlying Securities, which will be equal to the
Redemption Price. (See How To Sell.)
(f) The sales charge during the initial offering period and in the secondary
market will be reduced on a graduated
scale in the case of purchases of 250 or more Units; the secondary market sales
charge will also vary depending on the
maturities of the underlying Securities (see Appendix B). Any resulting
reduction in the Public Offering Price will
increase the effective current and long term returns on a Unit.
(g) Figure shown represents interest accrued on underlying Securities from
the Initial Date of Deposit to expected
date of settlement (normally five business days after purchase) for Units
purchased on Initial Date of Deposit (see
How To Buy--Accrued Interest).
(h) During the first year the Trustee's Annual Fee and Expenses will be
reduced by $ per Unit. Estimated
annual interest income per Unit (estimated annual interest rate per Unit times
$1,000) will be $ , estimated
expenses per Unit will be $ and estimated annual income per Unit will remain
the same (see Income and
Distributions--Income).
(i) The Sponsors may also be reimbursed for bookkeeping or other
administrative expenses not exceeding their
actual costs, currently at a maximum annual rate of $0.10 per Unit.
A-3
<PAGE>
INVESTMENT SUMMARY AS OF , 1995 (CONTINUED)
OBJECTIVES OF THE FUND--To provide attractive tax exempt income for
investors who are not subject to Alternative Minimum Tax ("AMT") through
investment in a defined portfolio consisting of intermediate term, fixed-income
Securities with fixed maturity or disposition dates, issued by states,
municipalities, public authorities and similar entities or by certain United
States territories or possessions and rated investment grade by Fitch Investors
Service, Inc. ("Fitch" or the "Credit Consultant") or, in the opinion of Fitch,
have comparable credit characteristics to investment grade securities. There is
no assurance that this objective will be met because it is subject to the
continuing ability of issuers to meet their principal and interest obligations
or of insurers to meet their obligations under their insurance policies, as well
as to investors not being subject to AMT. Furthermore, the market value of the
underlying Securities, and therefore the value of the Units, will fluctuate with
changes in interest rates, credit quality of the Securities and other factors.
(See Risk Factors.)
PORTFOLIO AT A GLANCE--
DIVERSIFICATION--The Portfolio contains different issues of state,
municipal and public authority intermediate-term Securities. Approximately %
of the aggregate face amount of the Portfolio consists of Securities of issuers
in ( %), ( %) and ( %). Because of
possible maturity, sale or other disposition of Securities, the size,
composition, and return of the Portfolio may change at any time.
INVESTMENT QUALITY--Fitch will review each Security prior to deposit in the
Portfolio to assess its credit quality. All issues are rated at least in the BBB
category by Fitch or, in its opinion, have comparable credit characteristics to
investment grade securities: Fitch rated issues A, issues BBB and issues
BBB-. issues are unrated but in the opinion of the Fitch, have comparable
credit characteristics to investment grade securities. Fitch's opinions
regarding investment grade characteristics are based exclusively on information
provided to it by Merrill Lynch, Pierce, Fenner & Smith Incorporated, as agent
for the Sponsors ("Agent for the Sponsors") and other information already in
Fitch's possession. None of the Securities, if rated, is rated less than
investment grade by Fitch, Standard & Poor's Ratings Group ("Standard & Poor's")
or Moody's Investors Service, Inc. ("Moody's"). Following deposit, Fitch will
monitor the Securities and inform the Agent for the Sponsors of any significant
unfavorable changes in its opinion of the credit quality of any Security not
rated by Fitch. The Agent for the Sponsors will receive information from Fitch
about changes in the credit quality of Securities rated by Fitch at essentially
the same time as the general public. (See Portfolio Supervision and Risk
Factors.)
INTERMEDIATE-TERM MATURITIES--The issues have maturity or disposition dates
ranging from 200 to 200 . These maturities give investors an opportunity to take
advantage of current intermediate-term rates.
CALL PROTECTION--Issuers are usually able to redeem securities under
optional refunding and sinking fund provisions. Optional refunding redemptions,
which may redeem all or part of an issue, are in most cases initially at a
premium, and then in subsequent years at declining prices, but typically not
below par value. Approximately % of the aggregate face amount of the Portfolio
is not subject to optional refunding redemptions prior to maturity;
approximately % of the aggregate face amount of the Portfolio is subject to
optional refunding redemption but not before 200 and then at prices initially
not less than 100% of par. Securities are also generally subject to mandatory
sinking fund redemptions at par over the life of the issue and may also provide
for redemption at par prior or in addition to optional or mandatory redemption
dates or maturity (see Footnote (2) to Portfolio).
CREDIT CONSULTANT'S ANNUAL FEE--Fitch, which is unaffiliated with any of
the Sponsors, will provide the ongoing research described in this Prospectus to
the Agent for the Sponsors for which it will be compensated by the Fund as set
forth under Investment Summary. (See Description of Fund Investments--Portfolio
Selection). The total annual fees are greater for this Fund than for other
Intermediate-Term Series of Municipal Investment Trust Fund because those other
funds do not generally pay consultants for ongoing research. The Sponsors
believe that this research arrangement is desirable in the present circumstances
due to the increased risk of securities rated lower than A. Certain of the
Securities may have speculative characteristics (see Risk Factors.)
RISK FACTORS--Investment in the Fund should be made with an understanding
that the value of the underlying Portfolio may decline with increases in
interest rates or with a decline in the credit quality of the Securities. In
recent years, there have been wide fluctuations in interest rates and thus in
the value of fixed-rate debt obligations generally. The Sponsors cannot predict
future economic policies or their consequences or, therefore, the course or
extent of any similar fluctuations in the future. Since the interest on certain
of the Securities is a preference item for purposes of AMT, the Fund may be
appropriate only for investors who are not subject to AMT (see Taxation below).
The Portfolio contains Securities rated in the BBB category by Fitch, which
are the lowest "investment grade" ratings assigned by the rating agency. The
Portfolio may also contain Securities which are not rated but which have, in the
opinion of the Credit Consultant, comparable credit characteristics to
securities rated investment grade. While none of the Securities is rated below
investment grade by Fitch, Standard & Poor's or Moody's, investors should be
aware that these Securities may have speculative characteristics and that
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments on these Securities
than is the case with higher rated securities.
A-4
<PAGE>
Def ined
Asset Funds
INVESTOR'S GUIDE DEFINED MUNICIPAL INVESTMENT TRUST FUNDS
MUNICIPAL INVESTMENT Our defined portfolios of municipal bonds offer investors
TRUST FUND a simple and convenient way to earn monthly income. And by
- -------------------- purchasing municipal Defined Funds, investors not only
INVESTMENT GRADE PORTFOLIO avoid the problem of selecting municipal bonds by
INTERMEDIATE TERM themselves, but also gain the advantage of diversification
SERIES by investing in bonds of several different issuers.
Spreading your investment among different securities and
issuers reduces your risk, but does not eliminate it.
MONTHLY TAX-FREE INTEREST INCOME
The Fund pays monthly income, even though the underlying
bonds pay interest semi-annually. This income is generally
100% exempt under existing laws from regular federal
income tax, but not from Alternative Minimum Tax ("AMT").
The portfolio contains AMT municipal bonds which generally
offer higher rates than other types of municipals, which
may benefit investors not subject to AMT. Depending on
where you live, some of the income also may be exempt from
certain state and local personal income taxes. Any gain on
disposition of the underlying bonds will be subject to
tax.
INTERMEDIATE MATURITIES
Most of the bonds in the Fund's portfolio will mature or
can be resold by the Fund in about 10 years. These
maturities give investors an opportunity to take advantage
of current intermediate-term rates.
INVESTMENT GRADE
Fitch Investors Service, Inc. ("Fitch" or the "Credit
Consultant") will review the Portfolio to ensure it is of
investment grade quality. The bonds in the Fund are rated
at least in the BBB category by Fitch or, in the opinion
of Fitch, have comparable credit characteristics to
investment grade securities. Of course, the market value
of the underlying bonds and the value of the units will
fluctuate with changes in interest rates, credit quality
of the bonds and other factors.
PROFESSIONAL SELECTION AND SUPERVISION
With credit analysis provided by Fitch, acting as credit
consultant, we selected each bond after considering the
yield, liquidity and maturity of each bond and the
diversification of the Portfolio. Fitch, which is
unaffiliated with any of the sponsors, will provide the
sponsors the ongoing research described in this Prospectus
regarding the bonds. Fitch will monitor the Portfolio and
advise the Agent for the Sponsors of any significant
unfavorable changes in its opinion of the credit quality
of any Portfolio Security not rated by Fitch. The Agent
for the Sponsors will receive information from Fitch about
changes in the credit quality of Portfolio Securities
rated by Fitch at essentially the same time as the general
public. (see Portfolio Supervision). The Fund is not
actively managed. However, the portfolio is monitored and
a bond can be sold if, in the opinion of the Sponsors,
retaining it would be detrimental to investors' interests.
A LIQUID INVESTMENT
Although not legally required to do so, the Sponsors have
maintained a secondary market for their Defined Asset
Funds for over 20 years. You can cash in your units at any
time. Your price is based on the market value of the bonds
in the Fund's portfolio at that time as determined by an
independent evaluator. Or, you can exchange your
investment for another Defined Fund at a reduced sales
charge. There is never a fee for cashing in your
investments.
REINVESTMENT OPTION
You can elect to automatically reinvest your distributions
into a separate portfolio of tax-exempt bonds. Reinvesting
helps to compound your federal tax-free income.
RISK FACTORS
Unit price fluctuates and is affected by interest rates as
well as the financial condition of the issuers of the
bonds. Certain of the Securities may have speculative
characteristics.
<PAGE>
TAX-FREE VS. TAXABLE INCOME
A COMPARISON OF TAXABLE AND TAX-FREE YIELDS
<TABLE><CAPTION>
TAXABLE INCOME 1994* % TAX TAX-FREE YIELD OF
SINGLE RETURN JOINT RETURN BRACKET 3% 3.5% 4% 4.5% 5% 5.5%
IS EQUIVALENT TO A TAXABLE YIELD OF
<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
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TAXABLE INCOME 1995*
SINGLE RETURN 6% 6.5% 7%
<S> <C> <C> <C>
- ------------------
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
- ------------------
</TABLE>
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 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 the alternative minimum tax, personal exemptions, the phase out
of the tax benefit of exemptions, itemized deductions or the possible partial
disallowance of deductions. Consequently, holders are urged to consult their own
tax advisers in this regard.
MUNICIPAL BONDS AND
THE ALTERNATIVE MINIMUM TAX
INCOME+ MUNICIPAL BOND "PREFERENCE"
INTEREST INCOME*
(STATE INCOME TAX RATES)
SINGLE ++ JOINT ++ 0% 7% 11%
$50,000 $23,000 $18,000 $16,000
$30,000 $21,000 $18,000 $16,000
$100,000 $27,000 $18,000 $14,000
$55,000 $23,000 $18,000 $15,000
$225,000 $33,000 $16,000 $7,000
$205,000 $32,000 $16,000 $8,000
Notes:
* Assuming no "preference" or similar items except for municipal bond
"preference" interest income and state income taxes.
+ Regular taxable income plus state income taxes and personal exemptions.
++ Assuming no dependents.
Under the tax law, interest income on certain municipal bonds, although
exempt from regular federal income tax, is treated as a "preference" item for
purposes of the alternative minimum tax (the "AMT").
The table above shows amounts of such municipal bond "preference" interest
income that individual taxpayers could receive in 1995 without becoming subject
to the AMT. The table gives information for single and joint returns of
individuals having no dependents. The table provides three income levels and
three hypothetical state income tax rates.
The table assumes that the taxpayer has no "preference" or similar items
which must be added to "regular" taxable income in computing the alternative
minimum taxable income, other than the stated amount of municipal bond
"preference" interest income and state income taxes. The table does not reflect
the phase out of the tax benefit of personal exemptions, the possible
disallowance of deductions. The table further assumes that the stated amount of
municipal bond "preference" interest income is subject to state income taxes. If
the taxpayer has any other "preference" or similar items (e.g., real estate
taxes, appreciation on charitable contributions of property, accelerated
depreciation, losses from passive activities and certain interest deductions)
then the amount of municipal bond "preference" interest income that the taxpayer
could have before being subject to the AMT would be less. Home mortgage
interest, charitable contributions and certain other items are deductible from
adjusted gross income in computing "regular" taxable income and are not added
back in computing alternative minimum taxable income. Holders are urged to
consult their own tax advisers.
A-5
<PAGE>
MUNICIPAL INVESTMENT TRUST FUND
INVESTMENT GRADE PORTFOLIO
INTERMEDIATE TERM SERIES
DEFINED ASSET FUNDS
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.
My name (please
print) ________________________________________________________________________
My address (please print):
Street and Apt.
No. ___________________________________________________________________________
City, State, Zip
Code __________________________________________________________________________
This page is a self-mailer. Please complete the information above, cut along the
dotted line, fold along the lines on the reverse side, tape, and mail with the
Trustee's address displayed on the outside.
<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
UNIT TRUST DEPARTMENT
BOX 2051
NEW YORK, NY 10081
- --------------------------------------------------------------------------------
(Fold along this line.)
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<PAGE>
INVESTMENT SUMMARY AS OF , 1995 (CONTINUED)
Because ratings may be lowered or the credit assessment of the Credit
Consultant may change, an investment in Units should be made with an
understanding of the risks of investing in "junk bonds" (bonds rated below
investment grade or unrated bonds having similar credit characteristics),
including increased risk of loss of principal and interest on the underlying
bonds. (see Risk Factors).
The opinions provided to the Agent for the Sponsors by the Credit
Consultant on unrated Securities will not be traditional ratings because they
will generally not be based on the level of information or access to public
officials generally utilized in connection with a traditional credit rating
because they are likely to be given on an expedited basis and because the
opinion will generally not be based on formal procedures normally associated
with traditional credit ratings, such as the use of a rating committee.
Therefore, the Credit Consultant's opinions on credit quality are likely to have
less certainty than traditional credit ratings. The opinions, however, will be
the opinions of experienced professional research analysts for Fitch and will
take into account factors typically considered in debt credit analysis. The
Credit Consultant will render an opinion only when in the judgement of its
analysts it has sufficient information to determine whether a security has
investment grade credit characteristics (see Risk Factors).
issues are general obligation bonds; the remaining issues
(approximately % of the aggregate face amount of the Portfolio) are payable
from the income of a specific project or authority, which can be divided by
source of revenue as follows: Hospitals, ; Financial Institutions, ; Lease
Rental, and Transportation, . In addition, approximately % of the aggregate
face amount of the Portfolio represents bonds.* (See Risk
Factors for a brief summary of certain investment risks pertaining to the
Securities held by the Fund.)
Approximately % of the aggregate face amount of the Portfolio is insured
or guaranteed as to payment of principal and interest by insurance policies
issued by certain municipal bond insurance companies (see Risk Factors--Insured
Obligations).
Certain Securities may have been issued under bond resolutions or trust
indentures which provided for the issuance of bonds in small denominations. The
Sponsors believe that all the Securities in the Portfolio would be readily
marketable or, in the case of certain Securities which are guaranteed, insured
or otherwise secured by banks, thrifts, insurance companies or other
corporations or entities, marketable to institutions should it be necessary for
the Trustee to sell Securities to meet redemptions (see Risk
Factors--Liquidity).
The Securities are generally not listed on a national securities exchange.
Whether or not the Securities are listed, the principal trading market for the
Securities will generally be in the over-the-counter market. As a result, the
existence of a liquid trading market for the Securities may depend on whether
dealers will make a market in the Securities. There can be no assurance that a
market will be made for any of the Securities, that any market for the
Securities will be maintained or of the liquidity of the Securities in any
markets made. In addition, the Fund may be restricted under the Investment
Company Act of 1940 from selling Securities to any Sponsor. The price at which
the Securities may be sold to meet redemptions and the value of the Fund will be
adversely affected if trading markets for the Securities are limited or absent.
PUBLIC OFFERING PRICE--During the initial offering period and any offering
of additional Units, the Public Offering Price of the Units will be based on the
aggregate offer side evaluation of the underlying Securities (the price at which
they could be directly purchased by the public divided by the number of Units
outstanding, plus a sales charge of 4.167%* of the offer side evaluation per
Unit (the net amount invested); this results in a sales charge of 4.00%* of the
Public Offering Price. For secondary market sales charges, see Appendix B. Units
are offered at the Public Offering Price computed as of the Evaluation Time for
all sales made subsequent to the previous evaluation, plus cash per Unit in the
Capital Account not allocated to the purchase of specific Securities and net
interest accrued. The Public Offering Price on the Initial Date of Deposit, and
on subsequent dates, will vary from the Public Offering Price set forth on page
A-3 (see How To Buy; How To Sell).
MONTHLY DISTRIBUTIONS--Monthly distributions of interest and any principal
or premium received by the Fund will be made in cash, on or shortly after the
25th day of each month to Holders of record on the 10th day of the month
commencing with the first distribution on the date indicated on page A-3 (see
Income and Distributions). Alternatively, Holders may elect to have their
monthly distributions reinvested in The Municipal Fund Accumulation Program,
Inc. Further information about the program, including a current prospectus, may
be obtained by returning the enclosed form. (See Income and
Distributions--Investment Accumulation Program).
- ---------------
* A Fund is considered to be "concentrated" in a particular category when the
Securities in that category constitute 25% or more of the Portfolio (see Risk
Factors).
A-6
<PAGE>
INVESTMENT SUMMARY AS OF , 1995 (CONTINUED)
ESTIMATED CURRENT RETURN; ESTIMATED LONG TERM RETURN--Estimated Current
Return on a Unit shows the return based on the Public Offering Price and the
maximum applicable sales charge of 4.00%* and is computed by multiplying the
estimated net annual interest rate per Unit (which shows the return per Unit
based on $1,000 face amount) by $1,000 and dividing the result by the Public
Offering Price per Unit (not including accrued interest). Estimated Long Term
Return on a Unit of the Fund shows a net annual long-term return to investors
holding to maturity based on the yield on the individual Securities in the
Portfolio weighted to reflect the time to maturity (or in certain cases to an
earlier call date) and market value of each Security in the Portfolio, adjusted
to reflect the Public Offering Price (including the maximum applicable sales
charge of 4.00%*) and estimated expenses. The net annual interest rate per Unit
and the net annual long-term return to investors will vary with changes in the
fees and expenses of the Trustee and Sponsors and the fees of the Evaluator
which are paid by the Fund, and with the exchange, redemption, sale, prepayment
or maturity of the underlying Securities; the Public Offering Price will vary
with any reduction in sales charges paid in the case of purchases of 250 or more
Units, as well as with fluctuations in the offer side evaluation of the
underlying Securities. Therefore, it can be expected that the Estimated Current
Return and Estimated Long Term Return will fluctuate in the future. (See Income
and Distributions--Returns.)
TAXATION--In the opinion of special counsel to the Sponsors, each Holder
will be considered to have received the interest on his pro rata portion of each
Security when interest on the Security is received by the Fund. In the opinion
of bond counsel rendered on the date of issuance of the Security, this interest
is exempt under existing law from regular Federal income taxes (except in
certain circumstances depending on the Holder) but may be subject to state and
local taxes. In addition, interest on certain of the Securities, as indicated
under Portfolio (approximately % of the aggregate face amount of the
Portfolio) will be a preference item for purposes of AMT. Any gain on the
disposition of a Holder's pro rata portion of a Security will be subject to tax.
(See Portfolio; Taxes.)
MARKET FOR UNITS--The Sponsors, though not obligated to do so, intend to
maintain a secondary market for Units based on the aggregate bid side evaluation
of the underlying Securities. If this market is not maintained a Holder will be
able to dispose of his Units through redemption at prices also based on the
aggregate bid side evaluation of the underlying Securities. There is no fee for
selling your Units. Market conditions may cause the prices available in the
market maintained by the Sponsors or available upon exercise of redemption
rights to be more or less than the total of the amount paid for Units plus
accrued interest. (See How To Buy; How To Sell.)
UNDERWRITING-- of the Sponsors has participated as sole underwriter,
managing underwriter or member of an underwriting syndicate from which
approximately % of the Securities in the Portfolio were acquired. None of the
Sponsors has acted as agent in the direct placement of any of the Securities.
UNDERWRITING ACCOUNT
The names and addresses of the Underwriters and their several interests in
the Underwriting Account are:
<TABLE>
<S> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith P.O. Box 9051, Princeton, N.J. 08543-9051 %
Incorporated
Smith Barney Inc. 388 Greenwich Street--23rd Floor, New York, N.Y. 10013
PaineWebber Incorporated 1285 Avenue of the Americas, New York, N.Y. 10019
Prudential Securities Incorporated One Seaport Plaza--199 Water Street, New York, N.Y. 10292
Dean Witter Reynolds Inc. Two World Trade Center--59th Floor, New York, N.Y. 10048
Gruntal & Co. Inc. 14 Wall Street, New York, N.Y. 10005
-------
100.00%
-------
-------
</TABLE>
- ---------------
* This sales charge during the initial offering period and in the secondary
market will be reduced on a graduated scale in the case of purchases of 250 or
more Units (see Appendix B).
A-7
<PAGE>
INVESTMENT SUMMARY AS OF , 1995 (CONTINUED)
FEE TABLE
THIS FEE TABLE IS INTENDED TO ASSIST INVESTORS IN UNDERSTANDING THE COSTS
AND EXPENSES THAT AN INVESTOR IN THE FUND WILL BEAR DIRECTLY OR INDIRECTLY. SEE
HOW TO BUY AND INCOME AND DISTRIBUTIONS--FUND EXPENSES. ALTHOUGH THE FUND IS A
UNIT INVESTMENT TRUST RATHER THAN A MUTUAL FUND, THIS INFORMATION IS PRESENTED
TO PERMIT A COMPARISON OF FEES.
<TABLE>
<S> <C>
UNITHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases during the Initial Offering Period (as a percentage
of Public Offering Price)....................................................................................... 4.00%
Maximum Sales Charge Imposed on Purchases during the Secondary Offering Period (as a percentage of Public Offering
Price)............................................................................................................... 4.50%
---------
ESTIMATED ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS1)
Trustee's Fee...................................................................................................... %
Portfolio Supervision, Bookkeeping and Administrative Fees......................................................... %
Other Operating Expenses........................................................................................... %
---------
Total........................................................................................................... %
---------
---------
</TABLE>
- ------------------
1Based on the mean of the bid and offer side evaluations; this figure may differ
from that set forth as estimated annual expenses per unit expressed as a
percentage on p. A-3.
<TABLE><CAPTION>
EXAMPLE
CUMULATIVE EXPENSES PAID FOR PERIOD OF:
------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000 investment,
assuming the Fund's estimated operating expense ratio of % and a 5%
annual return on the investment throughout the periods................. $ $ $ $
</TABLE>
The Example assumes reinvestment of all distributions into additional units of
the Fund (a reinvestment option different from that offered by this Fund--see
Income and Distributions--Investment Accumulation Program) and utilizes a 5%
annual rate of return as mandated by Securities and Exchange Commission
regulations applicable to mutual funds. The Cumulative Expenses reflect both
sales charges and operating expenses on an increasing investment (because the
net annual return is reinvested). In addition to the charges described above, a
Holder selling or redeeming his Units in the secondary market (before the Fund
terminates) will receive a price based on the then-current bid side evaluation
of the underlying securities. The difference between this bid side evaluation
and the offer side evaluation (the basis for the Public Offering Price), as of
the day before the Initial Date of Deposit, is $ per Unit. Of course, this
difference may change over time. 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 those assumed for
purposes of the Example.
A-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Sponsors, Trustee and Holders of Municipal Investment Trust Fund, Investment
Grade Portfolio,
Intermediate Term Series, Defined Asset Funds:
We have audited the accompanying statement of condition, including the
portfolio, of Municipal Investment Trust Fund, Investment Grade Portfolio,
Intermediate Term Series, Defined Asset Funds as of , 1995. 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. The deposit on ,
1995 of an irrevocable letter or letters of credit for the purchase of
securities, as described in the statement of condition, was confirmed to us by
The Chase Manhattan Bank, N.A., 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 Municipal Investment Trust
Fund, Investment Grade Portfolio, Intermediate Term Series, Defined Asset Funds
at , 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, N.Y.
, 1995
A-9
<PAGE>
MUNICIPAL INVESTMENT TRUST FUND
INVESTMENT GRADE PORTFOLIO
INTERMEDIATE TERM SERIES
DEFINED ASSET FUNDS
STATEMENT OF CONDITION AS OF INITIAL DATE OF DEPOSIT, , 1995
TRUST PROPERTY
Investment in Securities(1):
Contracts to purchase
Securities.............................. $
Accrued interest to Initial Date of
Deposit on underlying Securities
--------------------
Total....................... $
--------------------
--------------------
LIABILITY AND INTEREST OF HOLDERS
Liability--Accrued interest to Initial
Date of Deposit on underlying
Securities(2)...................... $
Interest of Holders--
Units of fractional undivided
interest outstanding:
Cost to investors(3)............. $
Gross underwriting
commissions(4).......................... ()
--------------------
Net amount applicable to investors......
--------------------
Total....................... $
--------------------
--------------------
- ------------------
(1) Aggregate cost to the Fund of the Securities listed under 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 as set forth
under How To Buy. See also the column headed Cost of Securities to Fund
under Portfolio. An irrevocable letter or letters of credit in the amount of
$ has been deposited with the Trustee. The amount of such
letter or letters of credit includes $ (equal to the purchase
price to the Sponsors) for the purchase of $ face amount of
Securities in connection with contracts to purchase Securities, plus
$ covering accrued interest to the earlier of the date of
settlement for the purchase of Units or the date of delivery of the
Securities. The letter or letters of credit has been issued by
, New York Branch.
(2) Representing, as set forth under How To Buy--Accrued Interest, a special
distribution by the Trustee of an amount equal to accrued interest on the
Securities as of the Initial Date of Deposit.
(3) Aggregate public offer price (exclusive of interest) computed on the basis
of the offer side evaluation of the underlying Securities as of the
Evaluation Time on the Business Day prior to the Initial Date of Deposit.
(4) Assumes a sales charge of 4.00% computed on the basis set forth under How To
Buy.
A-10
<PAGE>
PORTFOLIO OF MUNICIPAL INVESTMENT TRUST FUND, ON THE INITIAL DATE OF DEPOSIT,
INVESTMENT GRADE PORTFOLIO ,1995
INTERMEDIATE TERM SERIES
DEFINED ASSET FUNDS
<TABLE><CAPTION>
MATURITY OR
PORTFOLIO NO. AND TITLE OF FACE DISPOSITION
SECURITIES CONTRACTED FOR RATINGS(1) AMOUNT COUPON DATE
-------------------------------------------------- ------------ --------------------------------------
<S> <C> <C> <C> <C>
1)
$
2)
3)
4)
5)
6)
7)
8)
<CAPTION>
OPTIONAL SINKING COST OF YIELD TO MATURITY
REDEMPTIONS (2) REDEMPTIONS (2) TO FUND (3) DEPOSIT (3)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1)
% @
2)
@
3)
4)
@
5)
@
6)
@
7)
@
8)
@
A-11
<PAGE>
PORTFOLIO OF MUNICIPAL INVESTMENT TRUST FUND, ON THE INITIAL DATE OF DEPOSIT,
INVESTMENT GRADE PORTFOLIO ,1995
INTERMEDIATE TERM SERIES
DEFINED ASSET FUNDS
(continued)
</TABLE>
<TABLE><CAPTION>
MATURITY OR
PORTFOLIO NO. AND TITLE OF FACE DISPOSITION
SECURITIES CONTRACTED FOR RATINGS(1) AMOUNT COUPON DATE
-------------------------------------------------- ------------ --------------------------------------
<S> <C> <C> <C> <C>
9)
$
10)
11)
12)
13)
14)
----------------
$
----------------
----------------
<CAPTION>
OPTIONAL SINKING COST OF YIELD TO MATURITY
REFUNDING FUND SECURITIES ON INITIAL DATE OF
REDEMPTIONS (2) REDEMPTIONS (2) TO FUND (3) DEPOSIT (3)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9)
% @
10)
@
11)
@
12)
@
13)
@
14)
@
------------------
$
------------------
------------------
</TABLE>
(See Footnotes on Following Page)
A-12
<PAGE>
- ------------
NOTES
(1) These ratings are ratings of the issues themselves by Fitch, or if followed
by "(s)" by Standard & Poor's, or if by "(m)", by Moody's. NR indicates
that while the issue is not rated by Fitch, it has, in the opinion of the
Credit Consultant, investment grade credit characteristics. (See Appendix
A.)
(2) Certain Securities 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 the table. In subsequent
years Securities are redeemable at declining prices, but typically not
below par value. Some issues may be subject to sinking fund redemption or
extraordinary redemption without premium prior to the dates shown.
Securities may provide for redemption at par or, in certain circumstances, at a
premium, prior or in addition to any optional or mandatory redemption dates
or maturity, for example, if proceeds are not able to be used as
contemplated, if the project is sold by the owner, if the project is
condemned and sold, if the project is destroyed and insurance proceeds are
used to redeem the Securities, if interest on the Securities becomes subject
to taxation, if any related credit support expires prior to maturity and is
not renewed or substitute credit support not obtained, if, in the case of
housing obligations, mortgages are prepaid, or in other special
circumstances.
Sinking fund redemptions are all at par and generally redeem only part of an
issue. Some Securities may have mandatory sinking funds which contain
optional provisions permitting the issuer to increase the principal amount
of securities called on a mandatory redemption date. The sinking fund
redemptions with optional provisions may, and optional refunding redemptions
generally will, occur at times when the redeemed Securities have an offer
side evaluation which represents a premium over par. To the extent that the
Securities were deposited in the Fund at a price higher than the redemption
price, this will represent a loss of capital when compared with the original
Public Offering Price of the Units. Monthly distributions will generally be
reduced by the amount of the income which would otherwise have been paid
with respect to redeemed Securities and there will be distributed to Holders
any principal amount and premium received on such redemption after
satisfying any redemption requests received by the Fund. The estimated
current return and estimated long term return in this event may be affected
by redemptions. The tax effect on Holders of redemptions and related
distributions is described under Taxes.
(3) Evaluation of Securities by the Evaluator is made on the basis of current
offer side evaluation. The offer side evaluation is greater than the
current bid side evaluation of the Debt Obligations, which is the basis on
which Redemption Price per Unit is determined (see How to
Sell--Redemption). The aggregate value based on the bid side evaluation at
the Evaluation Time on the business day prior to the Initial Date of
Deposit was $ , which is $ ( % of the aggregate
face amount) lower than the aggregate Cost of Securities to Fund based on
the offer side evaluation.
Yield to Maturity on Initial Date of Deposit of Securities was computed on the
basis of the offer side evaluation at the Evaluation Time on the business
day prior to Initial Date of Deposit. Percentages in this column represent
Yield to Maturity on Initial Date of Deposit unless followed by "+" which
indicates yield to an earlier redemption date. (See Income and
Distribution--Returns for a description of the computation of yield price.)
------------------------------------
All Securities are represented entirely by contracts to purchase such
Securities, which were entered into by the Sponsors during the period ,
1995 to , 1995. All contracts are expected to be settled by the
settlement date for the purchase of Units except the Securities in Portfolio
Numbers and (approximately % of the aggregate face amount of the
Portfolio) which have been purchased on a when, as and if issued basis, or
have a delayed delivery, and are expected to be settled to days after the
settlement date for purchase of Units.
+ See Footnote (3).
++ Subject to AMT (see Investment Summary--Taxation; Taxes).
A-13
<PAGE>
MUNICIPAL INVESTMENT TRUST FUND
DEFINED ASSET FUNDS
PROSPECTUS PART B
INVESTMENT GRADE PORTFOLIO
INTERMEDIATE TERM SERIES
DESCRIPTION OF FUND INVESTMENTS
PORTFOLIO SELECTION
In selecting the Securities the Sponsors considered the following factors,
among others: (i) whether the Securities are rated investment grade by Fitch or
if unrated, whether, in the opinion of the Credit Consultant, the Securities
have investment grade credit characteristics; (ii) the risk-adjusted potential
return, the yield and the liquidity of the Securities; (iii) the tax-exempt
nature of the Securities; (iv) the maturities of the Securities (including call
protection) and (v) the diversification of the Fund Portfolio. There is no
leverage or borrowing to increase the risk to the Fund, nor does the Portfolio
contain other kinds of securities to enhance yield.
Composition of the Portfolio is summarized under Investment Summary and the
names, yields and certain other characteristics of the securities in the
Portfolio (the "Securities") are listed in the financial statements. Yields can
vary among obligations with similar maturities, coupons and ratings and depend
on various factors, including general conditions of the municipal bond market
and the general bond markets, size of a particular offering, and the maturity
and rating of the particular issue.
Ratings represent opinions of the rating organizations as to the quality of
securities rated, but these are general (not absolute) standards of quality. And
in some instances, the opinions provided to the Agent for the Sponsors by the
Credit Consultant on unrated securities will not be traditional ratings because
they will generally not be based on the level of information or access to public
officials generally utilized in connection with a traditional credit rating
because they are likely to be given on an expedited basis and because they will
generally not be based on formal procedures normally associated with traditional
credit ratings, such as the use of a rating committee. Therefore, the Credit
Consultant's opinions on credit quality are likely to have less certainty than
traditional credit ratings. The opinions, however, will be the opinions of
experienced professional research analysts for Fitch and will take into account
factors typically considered in debt credit analysis. The Credit Consultant will
render an opinion only when in the judgement of its analysts it has sufficient
information to determine whether a security has investment grade credit
characteristics.
Once the Securities have been deposited in the Portfolio, the Agent for the
Sponsors will provide the Credit Consultant with sufficient information to
enable the Credit Consultant to monitor the Securities. The Credit Consultant
will advise the Agent for the Sponsors in the event of any significant
unfavorable changes in its opinion of the credit quality of any Security not
rated by Fitch, and if, in the opinion of the Credit Consultant, any unrated
Security not rated by Fitch ceases to have investment grade credit
characteristics. The Agent for the Sponsors will receive information from the
Credit Consultant about changes in the credit quality of Securities rated by the
Credit Consultant at essentially the same time as the general public. In the
event that the Credit Consultant does not, in its judgement, have sufficient
information to monitor the Securities, the Credit Consultant will notify the
Agent for the Sponsors of the insufficiency and if the necessary information is
not received, will withdraw its opinion regarding investment grade
characteristics of the Securities.
Neither the Sponsors, the Trustee nor the Credit Consultant are liable for
any default, failure or defect in a Security. If a contract to purchase any
Security fails (a "Failed Security"), the Sponsors are authorized to deposit
Replacement Securities which (i) are tax-exempt bonds issued by a state or
political subdivision or a U.S. territory or possession; (ii) have a fixed
maturity or disposition date substantially similar to the Failed Security; (iii)
are rated at least in the BBB category by Fitch or, in the opinion of the Credit
Consultant, have comparable credit characteristics to investment grade
securities; and (iv) are not when, as and if issued. Replacement Securities must
be deposited within 110 days after deposit of the failed contract, at a cost not
exceeding funds reserved for purchasing the Failed Security and at a yield to
maturity and current return, as of the date the failed contract was deposited,
substantially equivalent (considering then current market conditions and
relative creditworthiness) to those of the Failed Security.
1
<PAGE>
Because each Defined Fund is a portfolio of preselected securities,
purchasers know in advance what they are investing in. The Portfolio is listed
in the prospectus so that generally investors know the securities, maturities,
call dates and ratings when they purchase units of the Fund. Of course, the
Portfolio changes somewhat over time as additional Securities are deposited, as
Securities are called or redeemed, or as they are sold to meet redemptions and
in the limited circumstances described below.
The Credit Consultant. The Credit Consultant, Fitch Investors Service,
Inc., is a Nationally Recognized Statistical Rating Organization, whose primary
business is to provide credit ratings on securities issued by states and
municipalities and their instrumentalities and political subdivisions,
industrial companies, utilities, financial institutions, and issuers of
mortgage- and asset-backed securities.
The Credit Consultant is based in New York City and was originally
organized in 1913. The Credit Consultant is registered as an investment adviser
with the Securities and Exchange Commission ("SEC") and various states. The
Credit Consultant did not recommend the Securities for purchase by the Fund.
Fitch reviewed securities proposed by the Agent for the Sponsors for inclusion
in the Portfolio and indicated whether, in their judgment, the Securities have
characteristics similar to securities that are of investment grade credit
quality. In addition, the Credit Consultant will monitor the Securities in the
Portfolio and notify the Agent for the Sponsors if, in the opinion of the Credit
Consultant, any of the Securities cease to have investment grade
characteristics. The Agent for the Sponsors shall receive notice of a downgrade
in the rating of any rated Security in the same way the information is received
by the general public. In the event any of the Securities cease to have
investment grade credit characteristics the Agent for the Sponsors shall
determine, in its sole discretion, whether to dispose of any of the Securities
(see Portfolio Supervision below).
Fitch ratings and credit opinions are not recommendations to buy, sell, or
hold any security. They do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt nature
or taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of the
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
PORTFOLIO SUPERVISION
The 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 the Fund is not actively managed, it may retain an
issuer's securities despite adverse financial developments. However, the Credit
Consultant will monitor the Securities on an ongoing basis and advise the Agent
for the Sponsors in the event of any significant unfavorable changes in its
opinion of the credit quality of any Security not rated by Fitch, and if, in the
opinion of the Credit Consultant, any Security not rated by Fitch ceases to have
investment grade credit characteristics. The Agent for the Sponsors will recieve
information from Fitch about changes in the credit quality of Securities rated
by Fitch at essentially the same time as the general public. The Sponsors will
consider information provided by the Credit Consultant in conducting the
Portfolio supervision.
The Sponsors may instruct the Trustee to sell securities 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 the 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 the Sponsors, makes retention of the
security detrimental to the interests of Holders. If there is a payment default
on any Security and the Agent for the Sponsors fails to instruct the Trustee
within 30 days after notice of the default, the Trustee will sell the Security.
The Trustee must reject any offer by an issuer of a Security to exchange
another security pursuant to a refunding or refinancing plan unless (a) the
Security is in default or (b) in the opinion of the Sponsors or the Credit
Consultant 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.
2
<PAGE>
RISK FACTORS
An investment in units of beneficial interest in the Fund ("Units") should
be made with an understanding of the risks which an investment in fixed-rate
securities may entail, including the risk that the value of the Portfolio and
hence of the Units will decline with increases in interest rates. In recent
years there have been wide fluctuations in interest rates and thus in the value
of fixed-rate securities generally. The Sponsors cannot predict future economic
policies or their consequences or, therefore, the course or extent of any
similar fluctuations in the future. To the extent that payment of amounts due on
securities depends on revenue from publicly held corporations, an investor
should understand that these securities, in many cases, do not have the benefit
of covenants which would prevent the corporations from engaging in capital
restructurings or borrowing transactions in connection with corporate
acquisitions, leveraged buyouts or restructurings, which could have the effect
of reducing the ability of the corporation to meet its obligations and may in
the future result in the ratings of the securities and the value of the
underlying Portfolio being reduced.
The Portfolio contains Securities rated in the BBB category by Fitch, which
is the lowest "investment grade" rating assigned by the rating agency. The
Portfolio may also contain Securities which are not rated but which have in the
opinion of the Credit Consultant, comparable credit characteristics to
securities rated investment grade. Investors should therefore be aware that
these Securities may have speculative characteristics and that changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments on these Securities than is the
case with higher rated securities. Moreover, conditions may develop with respect
to any of the issuers of the Securities that may cause the rating agencies to
lower their ratings below investment grade on a given Security or cause the
Credit Consultant to determine that the credit characteristics of a given
Security are not comparable to those of obligations rated investment grade.
There can be no assurance that the rating currently assigned to a given Security
by a rating agency or the credit assessment of the Credit Consultant actually
reflects all current information about the issuer of that Security. Subsequent
to the Initial Date of Deposit, a Security or other obligations of the issuer or
guarantor or bank or other entity issuing a letter of credit related thereto may
cease to be rated, its rating may be reduced or the credit assessment of the
Credit Consultant may change. Because of the fixed nature of the Portfolio, none
of these events requires an elimination of that Security from the Portfolio, but
the lowered rating or changed credit assessment may be considered in the
Sponsors' determination to direct the disposal of the Security (see Portfolio
Supervision above).
Because ratings may be lowered or the credit assessment of the Credit
Consultant may change, an investment in Units should be made with an
understanding of the risks of investing in "junk bonds" (bonds rated below
investment grade or unrated bonds having similar credit characteristics),
including increased risk of loss of principal and interest on the underlying
bonds. Securities that are rated below investment grade or unrated debt
obligations having similar credit characteristics are often subject to greater
market fluctuations and risk of loss of income and principal than securities
rated investment grade, and their value may decline more precipitously in
response to rising interest rates. This effect is so not only because increased
interest rates generally lead to decreased values for fixed-rate instruments,
but also because increased interest rates may indicate a slowdown in the economy
generally, which could result in defaults by less creditworthy issuers. Because
investors generally perceive that there are greater risks associated with
lower-rated securities, the yields and prices of these securities tend to
fluctuate more than higher-rated securities with changes in the perceived credit
quality of their issuers, whether these changes are short-term or structural,
and during periods of economic uncertainty. Moreover, issuers whose obligations
have been recently downgraded may be subject to claims by debtholders and
suppliers which, if sustained, would make it more difficult for these issuers to
meet payment obligations.
Debt rated below investment grade or having similar credit characteristics
also tends to be more thinly traded than investment-grade debt and held
primarily by institutions, and this lack of liquidity can negatively affect the
value of the debt. Debt which is not rated investment grade or having similar
credit characteristics may be subordinated to other obligations of the issuer.
Senior debtholders would be entitled to receive payment in full before
subordinated debtholders receive any payment at all in the event of a bankruptcy
or reorganization. Lower rated debt obligations and debt obligations having
similar credit characteristics may also present payment-expectation risks. For
example, these securities may contain call or redemption provisions that would
make it attractive for the issuers to redeem them in periods of declining
interest rates, and investors would therefore not be able to take advantage of
the higher yield offered.
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The opinions provided to the Agent for the Sponsors by the Credit
Consultant on unrated securities will not be traditional ratings because they
will generally not be based on the level of information or access to public
officials generally utilized in connection with a traditional credit rating
because they are likely to be given on an expedited basis and because they will
generally not be based on formal procedures normally associated with traditional
credit ratings, such as the use of a rating committee. Therefore, the Credit
Consultant's opinions on credit quality are likely to have less certainty than
traditional credit ratings. The opinions, however, will be the opinions of
experienced professional research analysts for Fitch and will take into account
factors typically considered in debt credit analysis. The Credit Consultant will
render an opinion only when in the judgement of its analysts it has sufficient
information to determine whether a security has investment grade credit
characteristics.
The Securities are generally not listed on a national securities exchange.
Whether or not the Securities are listed, the principal trading market for the
Securities will generally be in the over-the-counter market. As a result, the
existence of a liquid trading market for the Securities may depend on whether
dealers will make a market in the Securities. There can be no assurance that a
market will be made for any of the Securities, that any market for the
Securities will be maintained or of the liquidity of the Securities in any
markets made. In addition, the Fund may be restricted under the Investment
Company Act of 1940 from selling Securities to any Sponsor. The price at which
the Securities may be sold to meet redemptions and the value of the Fund will be
adversely affected if trading markets for the Securities are limited or absent.
Certain of the Securities in the Fund may have been deposited at a market
discount. Securities trade at less than par value because the interest rates on
the Securities are lower than interest on comparable debt securities being
issued at currently prevailing interest rates. The current returns of securities
trading at a market discount are lower than the current returns of comparably
rated debt securities of a similar type issued at currently prevailing interest
rates because discount securities tend to increase in market value as they
approach maturity and the full principal amount becomes payable. If currently
prevailing interest rates for newly issued and otherwise comparable securities
increase, the market discount of previously issued securities will become deeper
and if currently prevailing interest rates for newly issued comparable
securities decline, the market discount of previously issued securities will be
reduced, other things being equal. Market discount attributable to interest rate
changes does not indicate a lack of market confidence in the issue.
Certain of the Securities in the Fund may have been deposited at a market
premium. Securities trade at a premium because the interest rates on the
Securities are higher than interest on comparable debt securities being issued
at currently prevailing interest rates. The current returns of securities
trading at a market premium are higher than the current returns of comparably
rated debt securities of a similar type issued at currently prevailing interest
rates because premium securities tend to decrease in market value as they
approach maturity when the face amount becomes payable. Because part of the
purchase price is thus returned not at maturity but through current income
payments, an early redemption of a premium security at par will result in a
reduction in yield to the Fund. If currently prevailing interest rates for newly
issued and otherwise comparable securities increase, the market premium of
previously issued securities will decline and if currently prevailing interest
rates for newly issued comparable securities decline, the market premium of
previously issued securities will increase, other things being equal. Market
premium attributable to interest rate changes does not indicate market
confidence in the issue.
Holders of Units will be "at risk" with respect to Securities purchased on
a when, as and if issued basis or for delayed delivery (i.e., either a gain or
loss may result from fluctuations in the offering side evaluation of the
Securities) from the date they commit for Units.
As set forth under Investment Summary and Portfolio, the Fund may contain
or be concentrated in one or more of the types of Securities discussed below. An
investment in the Fund should be made with an understanding of the risks that
these Securities may entail, certain of which are described below.
GENERAL OBLIGATION BONDS
Certain of the Securities in the Portfolio may be general obligations of a
governmental entity that are secured by the taxing power of the 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 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
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the extent to which the entity relies on Federal or state aid, access to capital
markets or other factors beyond the entity's control.
Many state and local governments have recently confronted severe deficits.
Many issuers are facing highly difficult choices about significant tax increases
and/or spending reductions in order to restore budgetary balance. Failure to
implement these actions on a timely basis could force the issuers to issue
additional debt to finance deficits or cash flow needs.
In addition, certain of the Securities in the Fund may be 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 obligations.
MORAL OBLIGATION BONDS
The Fund may also 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
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
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 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.
INDUSTRIAL DEVELOPMENT REVENUE BONDS ("IDRS")
IDRs, including pollution control revenue bonds, are tax-exempt securities
issued by states, municipalities, public authorities or similar entities
("issuers") 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 corporations. IDRs are not
general obligations of governmental entities backed by their taxing power.
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 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 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, as discussed below, 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
default in payment by an issuer.
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STATE AND LOCAL MUNICIPAL UTILITY OBLIGATIONS
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 and disallowances 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, and the impact of deregulation.
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 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 siting 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 and
additional factors including (a) the effects of inflation upon the costs of
operation and construction, (b) uncertainties in predicting future load
requirements, (c) increased financing requirements coupled with limited
availability of capital, (d) exposure to cancellation and penalty charges on new
generating units under construction, (e) problems of cost and availability of
fuel, (f) litigation and proposed legislation designed to delay or prevent
construction of generating and other facilities, (g) the uncertain effects of
conservation on the use of electric energy, (h) regulatory, political and
consumer resistance to rate increases and (i) increased competition as a result
of the availability of other energy sources and state deregulation efforts.
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 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
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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 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.
LEASE RENTAL OBLIGATIONS
Lease rental obligations 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 obligations are subject to the ability and willingness of
the lessee government to meet its lease rental payments which include debt
service on the obligations. 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 obligations 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 obligations 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
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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.
SINGLE FAMILY AND MULTI-FAMILY HOUSING OBLIGATIONS
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 obligations 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 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 obligations.
The ability of housing issuers to make debt service payments on their
obligations 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). To the extent that these obligations were valued at a
premium when a Holder purchased Units, any prepayment at par would result in a
loss of capital to the Holder and, in any event, reduce the amount of income
that would otherwise have been paid to Holders.
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 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
the Holders to unanticipated tax liabilities and possibly requiring the Trustee
to sell the bonds at reduced values. Furthermore, any failure to meet these
ongoing
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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 FACILITY OBLIGATIONS
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 such 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 such programs.
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 may 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
bond obligation, the realization of Medicare and Medicaid receivables may be
uncertain and, if the bond obligation 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. At this time, it is uncertain whether any of the hospital and health
care facility obligations held by the Fund will be affected by such audit
proceedings.
AIRPORT, PORT AND HIGHWAY REVENUE OBLIGATIONS
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Certain facility revenue bonds are 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 such factors and 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 (see State and Local Municipal
Utility Obligations above).
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
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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 OBLIGATIONS
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 such 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.
UNIVERSITY AND COLLEGE OBLIGATIONS
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
The Portfolio may contain Securities of issuers which will 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
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 such 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 such 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, 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
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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. Such 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.
OBLIGATIONS BACKED BY LETTERS OF CREDIT
Certain Securities may be secured by letters of credit issued by commercial
banks or savings banks, savings and loan associations and similar institutions
("thrifts") or are direct obligations of banks or thrifts pursuant to
"loans-to-lenders" programs. The letter of credit may be drawn upon, and the
Securities consequently redeemed, if an issuer fails to pay amounts due on the
Security or defaults under its reimbursement agreement with the issuer of the
letter of credit or, in certain cases, if the interest on the Security 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 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 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 such
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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 SEC
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 such 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 Debt Obligation their investment will be returned sooner than originally
anticipated. The possibility of such 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 such 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 Securities may have been
issued by a foreign bank or corporation or similar entity (a "Foreign
Guarantee"). On the basis of information available to the Sponsors at the
present time no Foreign Guarantee is subject to exchange control restrictions
under existing law which would materially interfere with payments to the Fund
under the Foreign Guarantee. However, there can be no assurance that exchange
control regulations might not be adopted in the future which might affect
adversely the payment to the Fund. Nor are there any withholding taxes under
existing law applicable to payments made on any Foreign Guarantee. While there
can be no assurance that withholding taxes might not be imposed in the future,
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 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 Securities
backed by a Foreign Guarantee and on the ability of the Fund to satisfy its
obligation to redeem Units tendered to the Trustee for redemption (see How to
Sell).
OBLIGATIONS BACKED BY INSURANCE
Certain Securities (the "Insured Securities") may be insured or guaranteed
by 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"),
Continental Casualty Company ("Continental"), Financial Guaranty Insurance
Company ("Financial Guaranty"), Financial Security Assurance Inc. ("FSA") or
Municipal Security Investors Assurance Corporation ("MBIA") (collectively, the
"Insurance Companies"). The claims-paying ability of each of these companies,
unless otherwise indicated below, is rated AAA or the equivalent by Fitch 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 Debt Obligations 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 Securities 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
Debt Obligation should fail to make an interest or principal payment, the
insurance policies generally provide that the Trustee or its agent shall 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.
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The following are brief descriptions of certain 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 $2,150,000,000 and
policyholders' surplus of approximately $779,000,000 as of September 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, share
common management and physical resources. After an initial public offering
completed in February 1992 and the sale by Merrill Lynch & Co. of its stake,
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, 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 September 30, 1994 Asset Guaranty
had admitted assets of approximately $152,000,000 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,
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 September 30, 1994, CGIC had total admitted assets of
approximately $293,000,000 and policyholders' surplus of approximately
$166,000,000.
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
September 30, 1994, CAPMAC's admitted assets were approximately $198,000,000 and
its policyholders' surplus was approximately $139,000,000.
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
September 30, 1994, its total admitted assets were approximately $193,000,000
and policyholders' surplus was approximately $106,000,000.
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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 ("GECC"). 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 September 30, 1994, its total
admitted assets were approximately $2,092,000,000 and its policyholders' surplus
was approximately $872,000,000.
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 September 30, 1994, FSA
had policyholders' surplus of approximately $369,000,000 and total admitted
assets of approximately $776,000,000.
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 September 30, 1994, MBIA
had admitted assets of approximately $3,314,000,000 and policyholders' surplus
of approximately $1,083,000,000.
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 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
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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 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.
LITIGATION AND LEGISLATION
To the best knowledge of the Sponsors, there is no litigation pending as of
the Initial Date of Deposit in respect of any of the Securities 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, with respect to the Securities.
Litigation, for example, challenging the issuance of pollution control revenue
bonds under environmental protection statutes may affect the validity of
Securities 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 Security to the effect
that the Security has been validly issued and that the interest thereon is
exempt from Federal income tax. In addition, other factors may arise from time
to time which potentially may impair the ability of issuers to make payments due
on Securities.
Under the Federal Bankruptcy Act, a political subdivision or public agency
or instrumentality of any state, including municipalities, may proceed to
restructure or otherwise alter the terms of its obligations, including those of
the type comprising the Fund's Portfolio. The Sponsors are unable to predict
what effect, if any, this type of legislation might have on the Fund.
From time to time Congress considers proposals to tax the interest on state
and local obligations, such as the Debt Obligations. The Supreme Court clarified
in South Carolina v. Baker (decided 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 adversely affect an investment in Units. Holders are urged to consult
their own tax advisers.
PAYMENT OF THE SECURITIES AND LIFE OF THE FUND
Because certain of the Securities from time to time may be redeemed or
prepaid or will mature in accordance with their terms or may be sold under
certain circumstances described herein, no assurance can be given that the Fund
will retain for any length of time its present size and composition. Many of the
Securities may be subject to redemption prior to their stated maturity dates
pursuant to optional refunding or sinking fund redemption provisions or
otherwise (see Portfolio in Part A). 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 Securities will be at a premium over par when market interest
rates fall below the coupon rate on the Securities. The percentage of the face
amount of Securities which were acquired on the Date of Deposit at an offer side
evaluation in excess of par is set forth under Investment Summary. Certain
Securities in the Portfolio may be subject to sinking fund provisions early in
the life of the 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
the Fund will be affected by the level of redemptions of Units that may occur
from time to time and the consequent sale of Securities (see How to
Sell--Redemption). 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
the Portfolio remaining at that time, 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 relative to other funds sponsored by the Sponsors 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 would otherwise be the case
(see Trust Indenture).
LIQUIDITY
Certain of the Securities may have been guaranteed or similarly secured by
insurance companies or other corporations or entities. The guarantee or similar
commitment may constitute a security that cannot, in the opinion of counsel, be
sold publicly by the Trustee without registration under the Securities Act of
1933, as amended, or similar provisions of law subsequently enacted (a
"Restricted Security"). The Sponsors nevertheless believe that, should a sale of
these Securities be necessary in order to meet redemption, the Trustee should be
able to
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consummate a sale with institutional investors. Up to 40% of the Portfolio may
consist of Securities purchased from various banks and thrifts and other
Securities with guarantees which may constitute Restricted Securities.
The Portfolio may contain certain Securities purchased directly from
issuers. These Securities are generally issued under bond resolutions or trust
indentures providing for the issuance of bonds in publicly saleable
denominations (usually $100,000), may be sold free of the registration
requirements of the Securities Act of 1933 and are otherwise structured in
contemplation of ready marketability. In addition, the Sponsors generally obtain
letters of intention to repurchase or to use best efforts to remarket these
Securities from the issuers, the placement agents acting in connection with
their sale or the entities providing the additional credit support, if any.
These letters do not express legal obligations; however, in the opinion of the
Sponsors, these Securities should be readily marketable.
TAX EXEMPTION
In the opinion of bond counsel rendered on the date of issuance of each
Security, the interest on each Security 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
(see Portfolio in Part A; Taxes below). As discussed under Taxes below, interest
on some or all of the Securities 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 Securities) 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. At this time, it is
uncertain whether the tax exempt status of any of the Securities would be
affected by such proceedings, or whether such effect, if any, would be
retroactive.
In certain cases, a Security may provide that if the interest on the
Security should ultimately be determined to be taxable, the Security 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
Security may not provide for the acceleration or redemption of the Security or a
call upon the related letter of credit or other security upon a determination of
taxability. In those cases in which a Security 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 Security as a result of a determination of
taxability, the Trustee would be obligated to sell the Security 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 received prior to the date on which the interest is
determined to be taxable.
FUND PERFORMANCE
Information on the performance of the Fund for various periods, on the
basis of changes in Unit price plus the amount of income and principal
distributions reinvested, may be included from time to time in advertisements,
sales literature, reports and other information furnished to current or
prospective investors. Total return figures are not averaged, and may not
reflect deduction of the sales charge, which would decrease the return. Average
annualized return figures reflect deduction of the maximum sales charge. No
provision is made for any income taxes payable.
Past performance may not be indicative of future results. The Fund is not
actively managed. Unit price and return fluctuate with the value of the
Securities in the Portfolio, so there may be a gain or loss when Units are sold.
Fund performance may be compared to performance 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.
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HOW TO BUY
Units are available from any of the Underwriters and other broker-dealers
at the Public Offering Price (including the applicable sales charge) plus a
proportionate share of any cash held by the Fund in the Capital Account (unless
allocated to the purchase of specific securities) and net accrued and
undistributed interest. Because both the value of Securities and accrued
interest change, the Public Offering Price varies each Business Day.
PUBLIC OFFERING PRICE
In the initial offering period, the Public Offering Price is based on the
next offer side evaluation of the Securities, and includes a sales charge based
on the number of Units of a single Fund or Trust purchased on the same or any
preceding day by a single purchaser. See Initial Offering Sales Charge Schedule
in Appendix B. The purchaser or his dealer must notify the Sponsors at the time
of purchase of any previous purchase to be aggregated and supply sufficient
information to permit confirmation of eligibility; acceptance of the purchase
order is subject to such confirmation. Purchases of Fund Units may not be
aggregated with purchases of any other unit trust. This procedure may be amended
or terminated at any time without notice.
In the secondary market (after the initial offering period), the Public
Offering Price is based on the next bid side evaluation of the Securities, and
includes a sales charge based (a) on the number of Units of the Fund and any
other Series of Municipal Investment Trust Fund purchased in the secondary
market on the same day by a single purchaser (see Secondary Market Sales Charge
Schedule in Appendix B) and (b) the maturities of the underlying Securities (see
Effective Sales Charge in Appendix B). To qualify for a reduced sales charge,
the dealer must confirm that the sale is to a single purchaser or is purchased
for its own account and not for distribution. For these purposes, Units held in
the name of the purchaser's spouse or child under 21 years of age are deemed to
be purchased by a single purchaser. A trustee or other fiduciary purchasing
securities for a single trust estate or single fiduciary account is also
considered a single purchaser.
In the secondary market, the Public Offering Price is further reduced
depending on the maturities of the various Securities in the Portfolio, by
determining a sales charge percentage for each Security, as stated in Effective
Sales Charge in Appendix B. The sales charges so determined, multiplied by the
bid side evaluation of the Securities, are aggregated and the total divided by
the number of Units outstanding to determine the Effective Sales Charge. On any
purchase, the Effective Sales Charge is multiplied by the applicable secondary
market sales charge percentage (depending on the number of Units purchased) in
order to determine the sales charge component of the Public Offering Price.
Employees of certain Sponsors and Sponsor affiliates and non-employee
directors of Merrill Lynch & Co. Inc. may purchase Units at any time at prices
including a sales charge of not less than $5 per Unit.
SECURITIES EVALUATIONS
The Public Offering Price is based on the evaluation of Securities in the
Fund, at the offer or bid side as described above, at the Evaluation Time next
following receipt of the order. Evaluations are determined by the Evaluator as
described under Redemption on each Business Day (this excludes Saturdays,
Sundays and the following holidays as observed by the New York Stock Exchange:
New Year's Day, Washington's Birthday, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas).
ACCRUED INTEREST
Net accrued interest is added to the Public Offering Price, the Sponsors'
Repurchase Price and the Redemption Price per Unit. This represents the interest
accrued on the Securities, net of Fund expenses, from the Initial Date of
Deposit to, but not including, the settlement date for Units (less any prior
distributions of interest income to Holders). Securities deposited also carry
accrued but unpaid interest up to the Initial Date of Deposit. To avoid having
Holders pay this additional accrued interest (which earns no return) when they
purchase Units, the Trustee advances and distributes this amount to the
Sponsors; it recovers this advance from interest received on the Securities.
Because of varying interest payment dates on the Securities, accrued interest at
any time will exceed the interest actually received by the Fund.
CERTIFICATES
Certificates for Units are issued upon request, and are transferable upon
payment of any taxes or governmental charges and compliance with the
requirements for redeeming Certificates (see Redemption). Certain Sponsors
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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.
COMPARISON OF PUBLIC OFFERING PRICE, SPONSORS' INITIAL REPURCHASE PRICE,
SECONDARY MARKET REPURCHASE PRICE AND REDEMPTION PRICE
On the business day prior to the Initial Date of Deposit the Public
Offering Price per Unit (which includes the sales charge) and the Sponsors'
Initial Repurchase Price per Unit (each based on the offer side evaluation of
the Securities in the Fund--see above) exceeded the Sponsors' Repurchase Price
and the Redemption Price per Unit (each based on the bid side evaluation
thereof--see How to Sell--Redemption) by the amounts set forth under the
Investment Summary.
The initial Public Offering Price per Unit of the Trust and the Initial
Repurchase Price are based on the offer side evaluations of the Securities. The
secondary market Public Offering Price and the Sponsors' Repurchase Price in the
secondary market are based on bid side evaluations of the Securities. 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; the difference on the day before the date of
this Prospectus is stated in a note to the Portfolio.
HOW TO SELL
SPONSORS' MARKET FOR UNITS
Holders can cash in Units at any time without a fee. The Sponsors (although
not obligated to do so) normally repurchase any Units offered for sale, at the
repurchase price next computed after receipt of the order. Because of the sales
charge and fluctuations in the market value of the Securities (among other
reasons) the repurchase price may be less than the investor's cost for the
Units. Holders disposing of Units should consult their financial professional as
to current market prices to determine if other broker-dealers or banks offer
higher prices for those 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. Although the Sponsors may reoffer Units repurchased, alternatively they
may redeem those Units; see Redemption for a description of certain consequences
of redemptions to remaining Holders.
REDEMPTION
Holders may redeem Units by tendering to the Trustee Certificates (if
issued) or a request for redemption. Certificates must be properly endorsed or
accompanied by a written transfer instrument. Each Holder must sign the
Certificate, transfer instrument or request exactly as the name appears on the
face of the Certificate; signatures must be guaranteed by an eligible guarantor
institution or in another manner acceptable to the Trustee. 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 in the preceding
section. If the Sponsors 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 for the redeeming Holder a higher net price.
Redemptions may be suspended or payment postponed in limited circumstances:
(1) if the New York Stock Exchange is closed other than for customary weekend
and holiday closings; (2) if the SEC determines that trading on that Exchange is
restricted or an emergency exists making disposal or evaluation of the
Securities not reasonably practicable; or (3) for any other period which the SEC
by order permits.
On the seventh calendar day after tender (the preceding Business Day if the
seventh day is not a Business Day), the Holder will be mailed an amount per Unit
equal to the Redemption Price Per Unit at the Evaluation Time next following
receipt of the tender. As noted above, this price may be more or less than the
cost of those Units.
Redemption Price per Unit is computed each Business Day by adding (a) the
aggregate bid side evaluation of the Securities, (b) cash in the Fund (excluding
cash held to pay contracts to purchase Securities or in a reserve account), (c)
accrued but unpaid interest on the Securities up to but not including the
payment date and (d) the aggregate value of any other Fund assets; deducting (v)
unpaid taxes or other governmental charges, (w) accrued but unpaid Fund
expenses, (x) unreimbursed Trustee advances, (y) cash held to redeem Units or
for distribution
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to Holders and (z) the aggregate value of any other Fund liabilities; and
dividing the result by the Units outstanding as of the computation. Evaluations
of Securities are determined by the Evaluator as follows: During the initial
syndicate offering period for any Security, its evaluation will be at the
syndicate offer price unless the Evaluator determines that this price does not
accurately reflect the market value. For Securities traded over-the-counter, the
evaluation is generally based on the closing sales prices on that market (unless
the Evaluator deems these prices inappropriate for valuation). If closing sales
prices are not available, the evaluation is generally determined on the basis of
current bid or offer prices for the Securities or (if not available) for
comparable securities or by appraising the value or any combination of these
methods.
The value of any insurance is reflected in the market value of any Insured
Security. The Sponsors believe that this is a fair method of valuing the Insured
Security and the insurance.
If cash is not available in the Fund's Income and Capital Accounts to pay
redemptions, the Trustee is authorized to sell Securities. Securities to be sold
will be selected by the Agent for the Sponsors in accordance with procedures
specified in the Indenture, based on market and credit factors that they
determine are in the best interests of the Fund. The Sponsors are authorized to
specify minimum face amounts in which Securities are sold, to obtain a better
price for the Fund. When Securities are sold (or mature or are called), the size
and diversity of the Fund is reduced. Sales to meet redemptions are often made
at times when Securities would not otherwise be sold, and may result in lower
prices than might be realized otherwise.
INCOME AND DISTRIBUTIONS
INCOME
Income is received by the Fund upon semi-annual payments of interest on the
Securities held in the Portfolio. Some of the Securities may be purchased on a
when, as and if issued basis or may have a delayed delivery (see Portfolio).
Since interest on these Securities does not begin to accrue until the date of
delivery to the Fund, in order to provide tax-exempt income to the Holders for
this non-accrual period, the Trustee's Annual Fee and Expenses is reduced by the
interest that would have accrued on these Securities between the initial
settlement date for Units and the delivery dates of the Securities. This
eliminates reduction in Monthly Income Distributions. Should when-issued
Securities 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 Securities. As the Trustee is authorized to draw on the
letter of credit deposited by the Sponsors before the settlement date for these
Securities 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.
RETURNS
Estimated Current Return represents annual cash to be received from
interest-bearing Securities in the Portfolio (net of estimated annual expenses)
divided by the Public Offering Price (including sales charge).
Estimated Long-Term Return is a measure of the estimated return earned over
the estimated life of the Fund. This represents an average of the yields to
maturity (or earliest call date for obligations trading at a premium over the
call price) of the Securities in the Portfolio, calculated in accordance with
accepted bond practice and adjusted to reflect expenses and sales charges.
Securities are customarily offered on a "yield price" basis, which reflects
computation of yield to maturity (or call date) and not only the interest
payable but amortization or accretion to a specified date of any premium over or
discount from par (maturity) value in the bond's purchase price. In calculating
Estimated Long Term Return, the average yield for the Portfolio is derived by
weighting each Security's yield by its market value and the time remaining to
the call or maturity date depending on how the Security is priced. The average
Portfolio yield is then adjusted to reflect estimated expenses and the maximum
sales charge. This calculation does not reflect certain delays in distributing
income nor the timing of other receipts and distributions on Units; depending on
maturities, it may therefore overstate or understate the impact of sales
charges. Both of these factors may result in a lower figure.
Both Estimated Current Return and Estimated Long Term Return can fluctuate
with changes in Portfolio composition, in market value of the Securities, in
Fund expenses and sales charges; these returns therefore can vary materially
from the figures at the time of purchase. Any difference between Estimated
Current Return and Estimated Long Term Return will probably fluctuate at least
as frequently. No return estimate can be predictive of an investor's actual
return because an investor's actual return will depend on many factors,
including the value
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of the underlying Securities when the investor purchases and sells Units of the
Fund and the period of time the investor holds the Units. 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.
FUND ACCOUNTS
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
or Capital Accounts amounts considered appropriate by the Trustee to reserve for
any material amount that may be payable out of the Fund. Monies held by the
Trustee in the various accounts for the Fund do not bear interest.
DISTRIBUTIONS
The initial estimated net annual interest rate per Unit is stated in
Investment Summary. This is based on $1,000 face amount per Unit, after
deducting estimated annual Fund expenses. The rate will change as Securities
mature, are called or sold or otherwise disposed of, as Replacement Securities
are deposited and as Fund expenses change. Because the Portfolio is not actively
managed, income distributions may not be affected by changes in interest rates.
Subject to the financial conditions of the issuers of the Securities, 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
return of principal.
Each Unit receives an equal share of monthly distributions of interest
income and any principal distributed, substantially equal to the proportionate
income during the month preceding the Record Day less estimated expenses.
Interest on the Securities is received by the Fund on a semi-annual or annual
basis. Therefore, it takes several months after the Initial Date of Deposit for
the Trustee to receive sufficient interest payments on the Securities to begin
distributions to Holders; see Investment Summary for estimates of the first and
following Monthly Income Distributions. When a Security is sold, redeemed or
otherwise disposed of, accrued interest is received by the Fund. Further,
because interest on the Securities 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. To eliminate fluctuations in the Monthly
Income Distribution, the Trustee will advance amounts necessary to provide
approximately equal distributions; it will be reimbursed, without interest, from
interest received on the Securities. However, the amount of Monthly Income
Distributions will change over time as described above.
Along with the Monthly Income Distributions, the Trustee will distribute
the Holder's pro rata share of the distributable cash balance of the Capital
Account, computed as of the close of business on the preceding Record Day (if at
least equal to the Minimum Capital Distribution stated in Investment Summary).
Principal proceeds received from disposition of any Security after a Record Day
and prior to the related Distribution Day will be held in the Capital Account
subject to distribution on the second following Distribution Day. The first
distribution for a purchaser of Units between a Record Day and the related
Distribution Day will be made on the second following Distribution Day.
Any funds held to acquire Replacement Securities which have not been used
to purchase Securities within 90 days after the initial deposit, unless promptly
used to purchase Replacement Securities, will be distributed to Holders together
with the attributable sales charge and interest attributable to those funds.
This interest will not be exempt from tax.
INVESTMENT ACCUMULATION PROGRAM
Distributions of interest and any principal or premium received by the Fund
will be paid in cash unless the Holder elects to have these distributions
reinvested without sales charge in the Municipal Fund Accumulation Program, Inc.
(the "Program"). The Program is an open-end management investment company whose
investment objective is to obtain income that is exempt from regular Federal
income taxes through investment in a diversified portfolio consisting primarily
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
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complete information about the Program, including charges and expenses, return
the enclosed form for a prospectus. Read it carefully before you decide to
participate. Notice of election to participate must be received by the Trustee
in writing at least ten days before the Record Day for the first distribution to
which the notice is to apply.
FUND EXPENSES
See Trustee's Annual Fee and Expenses under Investment Summary for
estimated annual Fund expenses; if actual expenses exceed the estimate, the
excess will be borne by the Fund. The annual fee to be paid by the Fund to the
Credit Consultant for providing ongoing research on the Securities in the Fund
generally shall be the amount set forth under Investment Summary based on the
face amount of Securities in the Portfolio, computed annually, payable
quarterly. In addition, the Credit Consultant receives fees from the issuers of
the securities that it rates. The annual fee solely for the Trustee's services
is $0.70 per $1,000 face amount of Securities, 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
to the extent permitted by law and the Indenture, costs of action taken to
protect the Fund and other legal fees and expenses, Fund termination expenses
and any governmental charges. The Trustee has a lien on Fund assets to secure
reimbursement of these amounts, and may sell Securities for this purpose. The
Sponsors receive an annual fee for Portfolio supervisory services at the maximum
stated under Investment Summary, based on the face amount of Securities in the
Fund on the Initial Date of Deposit and on the first business day of each
calendar year thereafter, except that if in any calendar year Additional
Securities are deposited, the fee for the balance of the year will be based on
the face amounts on each Record Day. While this may exceed their costs of
providing these services to the Fund, the total supervision fees from all
Municipal Investment Trust Fund Series 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. The Trustees's, Sponsors' and Evaluators fees may be
adjusted for inflation without Holders' approval.
LOW COSTS
All expenses in establishing the Fund, including the cost of the initial
preparation and printing of documents relating to the Fund, cost of the initial
evaluation, the initial fees and expenses of the Trustee, legal expenses,
advertising and selling expenses and any other out-of-pocket expenses, will be
paid from the Underwriting Account at no charge to the Fund.
Sales charges on Defined Asset Funds range from under 1.0% to 5.5%. This
may be less than you might pay to buy a comparable mutual fund. Defined Asset
Funds have no 12b-1 or back-end load fees. These Funds can be a cost-effective
way to purchase and hold investments. Annual operating expenses are generally
lower than for managed funds. Because Defined 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 expenses.
EXCHANGE OPTION
Holders may exchange Units (except Units of Short Intermediate Series) at a
reduced sales charge for units of one or more series of the types listed in
Appendix C ("Exchange Funds"). This includes the current maximum sales charge
and exchange fee for each type of Exchange Fund. (If units held less than five
months are exchanged for a series with a higher regular sales charge, the Holder
will pay the difference between the sales charges paid on the units exchanged
and the regular sales charge for the units acquired, if greater than the
exchange fee.)
The current return from taxable fixed income securities is normally higher
than that available from tax exempt fixed income securities. Certain of the
Exchange Funds do not provide for periodic payments of interest and are best
suited for purchase by IRA's, Keogh plans, pension funds or other tax-deferred
retirement plans. Consequently, some of the Exchange Funds may be inappropriate
investments for some Holders. Appendix C lists certain characteristics of each
type of Exchange Fund which a Holder should consider in determining whether it
would be an appropriate investment and therefore an appropriate exchange for
Units of the Fund.
Holders of Exchange Funds can similarly exchange units of those funds for
Units of the Fund. However, units of series offered at a maximum applicable
sales charge below 3.50% of the public offering price (including certain series
of Exchange Funds listed in Appendix C) are not eligible for exchange except
that Holders may exchange Units of the Fund for Freddie Mac or Select Ten Series
during their initial offering periods. Holders of
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other registered unit investment trusts originally offered at a maximum
applicable sales charge of at least 3.0% ("Conversion Trusts") may similarly
acquire Units at the exchange fee.
To make an exchange, a Holder should contact his financial professional to
find out what suitable Exchange Funds are available and to obtain a prospectus.
The Holder may only acquire units of an Exchange Fund in which the Sponsors
maintain a secondary market and which are lawfully available for sale in the
state where the Holder resides. Except for the sales charge, an exchange is like
any other purchase and sale of units in the secondary market. An exchange is a
taxable event normally requiring recognition of any gain or loss on the units
exchanged. However, the Internal Revenue Service may seek to disallow a loss if
the portfolio of the units acquired is not materially different from the
portfolio of the units exchanged; Holders should consult their own tax advisers.
If the proceeds of units exchanged is insufficient to acquire a whole number of
Exchange Fund units, the Holder may pay the difference in cash (not exceeding
the price of a single unit acquired).
As the Sponsors are not obligated to maintain a secondary market in any
series, there can be no assurance that units of a desired series will be
available for exchange. The Exchange Option may be amended or terminated by the
Sponsors at any time, without notice to Holders.
TAXES
The following discussion addresses only the tax consequences of Units held
as capital assets and does not address the tax consequences of Units held by
dealers, financial institutions or insurance companies.
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, and income received by the Fund will be treated as the
income of the Holders in the manner set forth below.
Each Holder will be considered the owner of a pro rata portion of each
Security in the Fund under the grantor trust rules of Sections 671-679 of
the Internal Revenue Code of 1986, as amended (the "Code"). In order to
determine the face amount of a Holder's pro rata portion of each Security
on the Initial Date of Deposit, see Face Amount under Portfolio. The total
cost to a Holder of his Units, including sales charges, is allocated to his
pro rata portion of each Security, in proportion to the fair market values
thereof on the date the Holder purchases his Units, in order to determine
his tax basis for his pro rata portion of each Security. In order for a
Holder who purchases his Units on the Initial Date of Deposit to determine
the fair market value of his pro rata portion of each Security on such
date, see Cost of Securities to Fund under Portfolio.
Each Holder will be considered to have received the interest on his
pro rata portion of each Security when interest on the Security is received
by the Fund. In the opinion of bond counsel (delivered on the date of
issuance of the Security), such interest will be excludable from gross
income for regular Federal income tax purposes (except in certain limited
circumstances referred to below). Amounts received by the Fund pursuant to
a bank letter of credit, guarantee or insurance policy with respect to
payments of principal, premium or interest on a Security will be treated
for Federal income tax purposes in the same manner as if such amounts were
paid by the issuer of the Security.
The Fund may contain Securities which were originally issued at a
discount ("original issue discount"). The following principles will apply
to each Holder's pro rata portion of any Security originally issued at a
discount. In general, original issue discount is defined as the difference
between the price at which a security was issued and its stated redemption
price at maturity. Original issue discount on a tax-exempt obligation
issued after September 3, 1982 is deemed to accrue as tax-exempt interest
over the life of the obligation under a formula based on the compounding of
interest. Original issue discount on a tax-exempt obligation issued before
July 2, 1982 is deemed to accrue as tax-exempt interest ratably over the
life of the obligation. Original issue discount on any tax-exempt
obligation issued during the period beginning July 2, 1982 and ending
September 3, 1982 is also deemed to accrue as tax-exempt interest over the
life of the obligation, although it is not clear whether such accrual is
ratable or is determined under a formula based on the compounding of
interest. If a Holder's tax basis for his pro rata portion of a Security
issued with original issue discount is greater than its "adjusted issue
price" but less than its stated redemption price at maturity (as may be
adjusted for certain payments), the Holder will be considered to have
purchased his pro rata portion of the Security at an "acquisition premium".
A Holder's adjusted tax basis for his pro rata portion of the Security
issued with original issue discount will include original issue discount
accrued during the period such Holder held his Units. Such increases to the
Holder's tax basis in his pro rata portion of the Security resulting from
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the accrual of original issue discount, however, will be reduced by the
amount of any such acquisition premium.
If a Holder's tax basis for his pro rata portion of a Security exceeds
the redemption price at maturity thereof (subject to certain adjustments),
the Holder will be considered to have purchased his pro rata portion of the
Security with "amortizable bond premium". The Holder is required to
amortize such premium over the term of the Security. Such amortization is
only a reduction of basis for his pro rata portion of the Security and does
not result in any deduction against the Holder's income. Therefore, under
some circumstances, a Holder may recognize taxable gain when his pro rata
portion of a Security is disposed of for an amount equal to or less than
his original tax basis therefor.
A Holder will recognize taxable gain or loss when all or part of his
pro rata portion of a Security is disposed of by the Fund for an amount
greater or less than his adjusted tax basis. Any such taxable gain or loss
will be capital gain or loss, except that any gain from the disposition of
a Holder's pro rata portion of a Security acquired by the Holder at a
"market discount" (i.e., where the Holder's original tax basis for his pro
rata portion of the Security (plus any original issue discount which will
accrue thereon until its maturity) is less than its stated redemption price
at maturity) would be treated as ordinary income to the extent the gain
does not exceed the accrued market discount. Capital gains are generally
taxed at the same rate as ordinary income. However, the excess of net
long-term capital gains over net short-term capital losses may be taxed at
a lower rate than ordinary income for certain noncorporate taxpayers. A
capital gain or loss is long-term if the asset is held for more than one
year and short-term if held for one year or less. The deduction of capital
losses is subject to limitations. A Holder will also be considered to have
disposed of all or part of his pro rata portion of each Security when he
sells or redeems all or some of his Units.
Under Section 265 of the Code, a Holder (except a corporate Holder) 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 a
Holder 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 Holders in the same manner as for
Federal income tax purposes, but will not necessarily be tax-exempt.
Holders will be taxed in the manner described above regardless of
whether the distributions from the Fund are actually received by the
Holders or are automatically reinvested in the Municipal Fund Accumulation
Program, Inc.
From time to time proposals are introduced in Congress and state
legislatures which, if enacted into law, could have an adverse impact on
the tax-exempt status of the Securities. It is impossible to predict
whether any legislation in respect of the tax status of interest on the
Securities may be proposed and eventually enacted at the Federal or state
level.
The foregoing discussion relates only to Federal and certain aspects
of New York State and City income taxes. Depending on their state of
residence, Holders may be subject to state and local taxation and should
consult their own tax advisers in this regard.
* * *
The Fund may include Securities issued after August 7, 1986 (see Investment
Summary--Taxation and Portfolio in Part A). Interest (including any original
issue discount) on certain of these Securities will be a preference item for
purposes of the alternative minimum tax ("AMT"). In addition, a corporate Holder
should be aware that the accrual or receipt of tax-exempt interest not subject
to the AMT may give rise to an alternative minimum tax liability (or increase an
existing liability) because the interest income will be included in the
corporation's "adjusted current earnings" for purposes of the adjustment to
alternative minimum taxable income required by Section 56(g) of the Code, and
will be taken into account for purposes of the environmental tax on corporations
under Section 59A of the Code, which is based on alternative minimum taxable
income. In addition, interest on the Securities must be taken into consideration
in computing the portion, if any, of social security benefits that will be
24
<PAGE>
included in an individual's gross income and subject to Federal income tax.
Holders are urged to consult their own tax advisers concerning an investment in
Units.
At the time of issuance of each Security, an opinion relating to the
validity of the Security and to the exemption of interest thereon from regular
Federal income taxes was or will be rendered by bond counsel. Neither the
Sponsors nor Davis Polk & Wardwell have made or will make any review of the
proceedings relating to the issuance of the Securities or the basis for these
opinions. The tax exemption is dependent upon the issuer's (and other users')
compliance with certain ongoing requirements, and the opinion of bond counsel
assumes that these requirements will be complied with. However, there can be no
assurance that the issuer (and other users) will comply with these requirements,
in which event the interest on the Security could be determined to be taxable
retroactively from the date of issuance.
In the case of certain Securities, the opinions of bond counsel indicate
that interest on these Securities received by a "substantial user" of the
facilities being financed with the proceeds of such Securities, or persons
related thereto, for periods while such Securities are held by such a user or
related person, will not be exempt from regular Federal income taxes, although
interest on such Securities received by others would be exempt from regular
Federal income taxes. "Substantial user" is defined under U.S. Treasury
Regulations to include only a person whose gross revenue derived with respect to
the facilities financed by the issuance of bonds is more than 5% of the total
revenue derived by all users of these facilities, or who occupies more than 5%
of the usable area of these facilities or for whom these facilities or a part
thereof were specifically constructed, reconstructed or acquired. "Related
persons" are defined to include certain related natural persons, affiliated
corporations, partners and partnerships.
After the end of each calendar year, the Trustee will furnish to each
Holder an annual statement containing information relating to the interest
received by the Fund on the Securities, the gross proceeds received by the Fund
from the disposition of any Security (resulting from redemption or payment at
maturity of any Security or the sale by the Fund of any Security), and the fees
and expenses paid by the Fund. The Trustee will also furnish annual information
returns to each Holder and to the Internal Revenue Service. Holders are required
to report to the Internal Revenue Service the amount of tax-exempt interest
received during the year.
ADMINISTRATION OF THE FUND
RECORDS
The Trustee keeps a register of the names, addresses and holdings of all
Holders. The Trustee also keeps records of the transactions of the Fund,
including a current list of the Securities and a copy of the Indenture, which
may be inspected by Holders at reasonable times during business hours.
REPORTS TO HOLDERS
With each distribution, the Trustee includes a statement of the interest
and any other receipts being distributed. Within five days after deposit of
Securities in exchange or substitution for Securities (or contracts) previously
deposited, the Trustee will send a notice to each Holder, identifying both the
Securities removed and the Replacement Securities deposited. The Trustee sends
each record Holder an annual report summarizing transactions in the Fund's
accounts and amounts distributed during the year and Securities held, number of
Units outstanding and Redemption Price at year end, among other matters. Holders
may obtain copies of Securities 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 on request.
TRUST INDENTURE
The Fund is a "unit investment trust" created under New York law by a Trust
Indenture (the "Indenture") among the Sponsors, the Trustee and the Evaluator.
This Prospectus summarizes various provisions of the Indenture, but each
statement herein is qualified in its entirety by reference to the Indenture.
The Indenture may be amended by the Sponsors and the Trustee, without
consent by Holders: (a) to cure ambiguities or to correct or supplement any
defective or inconsistent provision, (b) to make any amendment required by the
SEC or other governmental agency, or (c) to make any other change not materially
adverse to the interest of Holders (as determined in good faith by the
Sponsors). The Indenture may also be amended upon consent of Holders of 51% of
the Units. No amendment may reduce the interest of any Holder in the Fund
25
<PAGE>
without the Holder's consent or reduce the percentage of Units required to
consent to any amendment without unanimous consent of Holders. Holders will be
notified on the substance of any amendment.
The Fund will be terminated, and any remaining Securities sold, no later
than the mandatory termination date specified in Investment Summary. It will
terminate earlier upon the disposition of the last Security, upon direction of
the Sponsors if total assets are below the minimum value specified in Investment
Summary or upon consent of Holders of 51% of the Units. The Trustee will notify
each Holder in writing within a reasonable time before termination, specifying
when Certificates should be surrendered. After termination, the Trustee will
sell any remaining Securities and distribute (by check mailed to the Holder)
each Holder's pro rata interest in the Fund, net of any unpaid fees, taxes,
governmental and other charges and subject to surrender of any outstanding
Certificate by the Holder.
Merrill Lynch, Pierce, Fenner & Smith Incorporated has been appointed as
Agent for the Sponsors by the other Sponsors.
The Trustee may resign upon notice to the Sponsors; it may be removed by
direction of Holders of 51% of the Units at any time or by the Sponsors without
consent of Holders if it becomes incapable of acting or bankrupt, its affairs
are taken over by public authorities, or if for any reason the Sponsors
determine in good faith that its replacement is in the best interest of the
Holders. The Evaluator may resign or be removed by the Sponsors and the Trustee
without consent of Holders. The resignation or removal of either becomes
effective upon acceptance of appointment by a successor; in this case, the
Sponsors (and the Trustee in the case of a successor Evaluator) 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 if one remaining Sponsor maintains a net worth of
$2,000,000 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 (a) appoint a successor Sponsor at rates of
compensation deemed by the Trustee to be reasonable and not exceeding amounts
prescribed by the SEC, or (b) terminate the Indenture and liquidate the Fund or
(c) continue to act as Trustee without terminating the Indenture.
The Sponsors, the Trustee and the Evaluator are not liable to any other
party (including Holders) 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 reckless disregard of duty. The Trustee
will not be personally liable for taxes or other governmental charges with
respect to the Securities or interest thereon. The Indenture contains other
customary provisions limiting liability of the Trustee.
MISCELLANEOUS
TRUSTEE
The Trustee and its address is named on the back cover of Part A of the
Prospectus. The Trustee is subject to supervision by the FDIC, the Board of
Governors of the Federal Reserve System and either the Comptroller of the
Currency or state banking authorities and the Federal Reserve.
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 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.
SPONSORS
Each Sponsor is a Delaware corporation and is engaged in the underwriting,
securities and commodities brokerage business and is a member of the New York
Stock Exchange, Inc., other major securities exchanges and
26
<PAGE>
commodity exchanges, and the National Association of Securities Dealers, Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated, a subsidiary of Merrill
Lynch & Co., Inc., is engaged in the investment advisory business. Smith Barney
Inc., an investment banking and securities broker-dealer firm, is an indirect
wholly-owned subsidiary of The Travelers Inc. Prudential Securities
Incorporated, a wholly-owned subsidiary of Prudential Securities Group Inc. and
an indirectly wholly-owned subsidiary of the Prudential Insurance Company of
America, is engaged in the investment advisory business. Dean Witter Reynolds
Inc., a principal operating subsidiary of Dean Witter, Discover & Co., is
engaged in the investment advisory business. PaineWebber Incorporated is engaged
in the investment advisory business and 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.
PUBLIC DISTRIBUTION
On the Initial Date of Deposit, the Sponsors, acting as managers for the
underwriters ("Underwriters") named under Underwriting Account, deposited the
Debt Obligations listed under Portfolio (or purchase contracts for these
Securities together with a letter of credit to complete the purchase), in
exchange for Units representing the entire ownership of the Fund.
During the initial offering period Units will be distributed to the public
at the Public Offering Price through the Underwriting Account and dealers. 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. Upon the
completion of the initial offering, Units which remain unsold or were
repurchased may be offered by this Prospectus at the secondary market Public
Offering Price.
The Sponsors intend to qualify Units for sale in all states in which
qualification is deemed necessary through the Underwriting Account and by
dealers who are members of the National Association of Securities Dealers, Inc.
The Sponsors do not intend to qualify Units for sale in any foreign countries
and this Prospectus does not constitute an offer to sell Units in any country
where Units cannot lawfully be sold. Sales to dealers and to introducing
dealers, if any, will initially be made at prices which represent a concession
of the applicable rate specified in Appendix B, but the Agent for the Sponsors
reserves the right to change the rate of the concession to dealers and the
concession to introducing dealers 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 receive sales charges at the
rates listed in Appendix B. The Sponsors also realized the profit or loss on
deposit of the Securities stated in Investment Summary. This is the difference
between the cost of the Securities to the Fund (based on the offer side
evaluation of the Securities on the Initial Date of Deposit) and the Sponsors'
cost of the Securities. The amount of any additional fees received in connection
with the direct placement of certain Securities deposited in the Portfolio is
also stated in the Investment Summary. In addition, a Sponsor or Underwriter may
realize profits or sustain losses on Securities 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 (see Investment Summary). In maintaining
a secondary market for Units (see 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.
DEFINED ASSET FUNDS
Each Sponsor (or a predecessor) has acted as Sponsor of various series of
Defined Asset Funds. A subsidiary of Merrill Lynch, Pierce, Fenner & Smith
Incorporated succeeded in 1970 to the business of Goodbody & Co., which had been
a co-Sponsor of Defined Asset Funds since 1964. That subsidiary resigned as
Sponsor of each of the Goodbody series in 1971. Merrill Lynch, Pierce, Fenner &
Smith Incorporated has been co-Sponsor and the
27
<PAGE>
Agent for the Sponsors of each series of Defined Asset Funds created since 1971.
Shearson Lehman Brothers Inc. ("Shearson") and certain of its predecessors were
underwriters beginning in 1962 and co-Sponsors from 1965 to 1967 and from 1980
to 1993 of various Defined Asset Funds. As a result of the acquisition of
certain of Shearson's assets by Smith Barney, Harris Upham & Co. Incorporated
and The Travelers Inc. (formerly Primerica Corporation), Smith Barney Inc. now
serves as co-Sponsor of various Defined Asset Funds. Prudential Securities
Incorporated and its predecessors have been underwriters of Defined Asset Funds
since 1961 and co-Sponsors since 1964, in which year its predecessor became
successor co-Sponsor to the original Sponsor. Dean Witter Reynolds Inc. and its
predecessors have been underwriters of various Defined Asset Funds since 1964
and co-Sponsors since 1974. PaineWebber Incorporated and its predecessor have
co-Sponsored certain Defined Asset Funds since 1983.
The Sponsors have maintained secondary markets in Defined Asset Funds for
over 20 years. For decades informed investors have purchased unit investment
trusts for dependability and professional selection of investments. 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 a nest egg for
retirement, or attractive, regular current income consistent with relative
protection of capital. There are Defined Funds to meet the needs of just about
any investor. Unit investment trusts are particularly suited for the many
investors who prefer to seek long-term profits 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 offered by Defined Funds. Sometimes it takes a combination of
Defined Funds to plan for your objectives.
One of the most important investment decisions an investor faces may be how
to allocate his investments among asset classes. Diversification among different
kinds of investments can balance the risks and rewards of each one. Most
investment experts recommend stocks for long-term capital growth. Long-term
corporate bonds offer relatively high rates of interest income. By purchasing
both defined equity and defined bond funds, investors can receive attractive
current income, as well as growth potential, offering some protection against
inflation. Sales material for the Fund may show the average annual compounded
rate of return of selected asset classes over the most recent 10-year and
20-year periods for which information is available and may compare such returns
to the rate of inflation over the same periods.
Instead of having to select individual securities on their own, purchasers
of Defined Funds benefit from the expertise of Defined Asset Funds' experienced
buyers and research analysts. In addition, they gain the advantage of
diversification by investing in units of a Defined Fund holding securities of
several different issuers. Such diversification reduces risk, but does not
eliminate it. While the portfolio of managed funds, such as mutual funds,
continually changes, defined bond funds offer a defined portfolio and a schedule
of income distributions defined in the prospectus. Investors know, generally,
when they buy, the issuers, maturities, call dates and ratings of the securities
in the portfolio. Of course, the portfolio may change somewhat over time as
additional securities are deposited, as securities mature or are called or
redeemed or as they are sold to meet redemptions and in the limited other
circumstances. Investors buy bonds for dependability--they know what they can
expect to earn and that principal is distributed as the bonds mature. Investors
also know at the time of purchase their estimated income and current and
long-term returns, subject to credit and market risks and to changes in the
portfolio or the fund's expenses.
Defined Asset Funds offers a variety of fund types. The tax exemption for
municipal bonds, which makes them attractive to high-bracket taxpayers, is
offered by Defined Municipal Investment Trust Funds. Defined Municipal
Investment Trust Funds have provided investors with tax-free income for more
than 30 years. Municipal Defined Funds offer a simple and convenient way for
investors to earn monthly income free from regular Federal income tax. Defined
Corporate Income Funds, with higher current returns than municipal or government
funds, are suitable for Individual Retirement Accounts and other tax-advantaged
accounts and provide investors a simple and convenient way to earn monthly
income. Defined Government Securities Income Funds provide a way to participate
in markets for U.S. government securities while earning an attractive current
return. Defined International Bond Funds, invested in bonds payable in foreign
currencies, offer a potential to profit from changes in currency values and
possibly from interest rates higher than paid on comparable U.S. bonds, but
investors incur a higher risk for these potentially greater returns.
Historically, stocks have offered growth of capital, and thus some protection
against inflation, over the long term. Defined Equity Income Funds offer
participation in the stock market, providing current income as well as the
possibility of capital appreciation. The S&P Index Trusts offer a convenient and
inexpensive way to participate in broad market movements. Concept Series seek to
capitalize on selected anticipated economic, political or business trends.
Utility Stock Series, consisting of stocks of issuers with established
reputations for regular cash dividends, seek to benefit from dividend increases.
Select Ten Portfolios seek total return by investing for one year in the ten
highest yielding stocks on a designated stock index.
28
<PAGE>
APPENDIX A
DESCRIPTION OF RATINGS (AS DESCRIBED BY THE RATING COMPANIES THEMSELVES)
FITCH INVESTORS SERVICE, INC.
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA.
A--Bonds considered to be investment grade and of high credit 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--Bonds considered to be investment grade and of satisfactory high
credit 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 have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB--Bonds considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Bonds considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probabilty of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
Plus (+) Minus (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
Conditional. A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
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.
a-1
<PAGE>
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 securities 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.
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.
a-2
<PAGE>
APPENDIX B
INITIAL OFFERING SALES CHARGE SCHEDULE
<TABLE><CAPTION>
SALES CHARGE
(GROSS UNDERWRITING PROFIT)
----------------------------------
AS PERCENT OF AS PERCENT OF DEALER CONCESSION AS PRIMARY MARKET
OFFER SIDE PUBLIC NET AMOUNT PERCENT OF PUBLIC CONCESSION TO
NUMBER OF UNITS OFFERING PRICE INVESTED OFFERING PRICE INTRODUCING DEALERS
- ----------------------------------- ------------------- ------------- --------------------- -------------------
MONTHLY PAYMENT SERIES, MULTISTATE SERIES, INSURED SERIES
<S> <C> <C> <C> <C>
Less than 250...................... 4.50 % 4.712 % 2.925 % $ 32.40
250 - 499.......................... 3.50 3.627 2.275 25.20
500 - 749.......................... 3.00 3.093 1.950 21.60
750 - 999.......................... 2.50 2.564 1.625 18.00
1,000 or more...................... 2.00 2.041 1.300 14.40
<CAPTION>
INTERMEDIATE SERIES (TEN YEAR MATURITIES)
<S> <C> <C> <C> <C>
Less than 250...................... 4.00 % 4.167 % 2.600 % $ 28.80
250 - 499.......................... 3.00 3.093 1.950 21.60
500 - 749.......................... 2.50 2.564 1.625 18.00
750 - 999.......................... 2.00 2.040 1.300 14.40
1,000 or more...................... 1.50 1.523 0.975 10.00
<CAPTION>
INTERMEDIATE SERIES (SHORT INTERMEDIATE MATURITIES)
<S> <C> <C> <C> <C>
Less than 250...................... 2.75 % 2.828 % 1.788 % $ 19.80
250 - 499.......................... 2.25 2.302 1.463 16.20
500 - 749.......................... 1.75 1.781 1.138 12.60
750 - 999.......................... 1.25 1.266 0.813 9.00
1,000 or more...................... 1.00 1.010 0.650 7.20
</TABLE>
SECONDARY MARKET SALES CHARGE SCHEDULE
ACTUAL SALES CHARGE AS % DEALER CONCESSION AS % OF
NUMBER OF UNITS OF EFFECTIVE SALES CHARGE EFFECTIVE SALES CHARGE
- ----------------- ------------------------- -------------------------
1-249 100% 65%
250-499 80% 52%
500-749 60% 39%
750-999 45% 29.25%
1,000 or more 35% 22.75%
EFFECTIVE SALES CHARGE
(AS PERCENT (AS PERCENT
TIME TO OF BID SIDE OF PUBLIC
MATURITY EVALUATION) OFFERING PRICE
- ---------------------------- ----------- -----------------
Less than six months 0% 0%
Six months to 1 year 0.756% 0.75%
Over 1 year to 2 years 1.523% 1.50%
Over 2 years to 4 years 2.564% 2.50%
Over 4 years to 8 years 3.627% 3.50%
Over 8 years to 15 years 4.712% 4.50%
Over 15 years 5.820% 5.50%
For this purpose, a Security will be considered to mature on its stated
maturity date unless it has been called for redemption or funds or securities
have been placed in escrow to redeem it on an earlier date, or is subject to a
mandatory tender, in which case the earlier date will be considered the maturity
date.
b-1
<PAGE>
APPENDIX C
EXCHANGE FUNDS
<TABLE><CAPTION>
REDUCED
MAXIMUM SALES CHARGE
NAME OF APPLICABLE FOR SECONDARY INVESTMENT
EXCHANGE FUND SALES CHARGE(A) MARKET(B) CHARACTERISTICS
- --------------------------------------- --------------- ---------------------- --------------------------------------------------
<S> <C> <C> <C>
DEFINED ASSET FUNDS-- MUNICIPAL
INVESTMENT TRUST FUND
Monthly Payment, State and 5.50%(c) $15 per unit long-term, fixed rate, tax-exempt income
Multistate Series
Intermediate Term Series 4.50%(c) $15 per unit intermediate-term, fixed rate, tax-exempt income
Insured Series 5.50%(c) $15 per unit long-term, fixed rate, tax-exempt income,
underlying securities insured by insurance
companies
AMT Monthly Payment Series 5.50%(c) $15 per unit long-term, fixed rate, income exempt from regular
federal income tax but partially subject to AMT
DEFINED ASSET FUNDS-- MUNICIPAL INCOME
FUND
Insured Discount Series 5.50%(c) $15 per unit long-term, fixed rate, insured, tax-exempt current
income, taxable capital gains
DEFINED ASSET FUNDS-- INTERNATIONAL
BOND FUND
Multi-Currency Series 3.75% $15 per unit intermediate-term, fixed rate, payable in foreign
currencies, taxable income
Australian and New Zealand Dollar 3.75% $15 per unit intermediate-term, fixed rate, payable in
Bond Series Australian and New Zealand dollars, taxable income
Australian Dollar Bonds Series 3.75% $15 per unit intermediate-term, fixed rate, payable in
Australian dollars, taxable income
Canadian Dollar Bonds Series 3.75% $15 per unit short intermediate-term, fixed rate, payable in
Canadian dollars, taxable income
DEFINED ASSET FUNDS-- CORPORATE INCOME
FUND
Monthly Payment Series 5.50% $15 per unit long-term, fixed rate, taxable income
Intermediate Term Series 4.75% $15 per unit intermediate-term, fixed rate, taxable income
Cash or Accretion Bond Series and 3.50% $15 per 1,000 units intermediate-term, fixed rate, underlying
SELECT Series securities are collateralized compound interest
obligations, taxable income, appropriate for IRA's
or tax-deferred retirement plans
Insured Series 5.50% $15 per unit long-term, fixed rate, taxable income, underlying
securities are insured
DEFINED ASSET FUNDS-- GOVERNMENT
SECURITIES INCOME FUND
GNMA Series (other than those 4.25% $15 per unit long-term, fixed rate, taxable income, underlying
below) securities backed by the full faith and credit of
the United States
GNMA Series E or other GNMA Series 4.25% $15 per 1,000 units long-term, fixed rate, taxable income, underlying
having units with an initial face securities backed by the full faith and credit of
value of $1.00 the United States, appropriate for IRA's or
tax-deferred retirement plans
Freddie Mac Series 3.75% $15 per 1,000 units intermediate term, fixed rate, taxable income,
underlying securities are backed by Federal Home
Loan Mortgage Corporation but not by U.S.
Government.
DEFINED ASSET FUNDS--EQUITY INCOME FUND
Utility Common Stock Series 4.50% $15 per 1,000 units(d) dividends, taxable income, underlying securities
are common stocks of public utilities
Concept Series 4.00% $15 per 100 units underlying securities constitute a professionally
selected portfolio of common stocks consistent
with an investment idea or concept
Select Ten Portfolios (domestic and 2.75% $17.50 per 1,000 units 10 highest dividend yielding stocks in a
international) designated stock index; seeks higher total return
than that stock index; terminates after one year
</TABLE>
- ---------------
(a) As described in the prospectuses relating to certain Exchange Funds, this
sales charge for secondary market sales may be reduced on a graduated scale
in the case of quantity purchases.
(b) The reduced sales charge for Units acquired during their initial offering
period is: $20 per unit for Series for which the Reduced Sales Charge for
Secondary Market (above) is $15 per unit; $20 per 100 units for Series for
which the Reduced Sales Charge for Secondary Market (above) is $15 per 100
units and $20 per 1,000 units for Series for which the Reduced Sales Charge
for Secondary Market is $15 per 1,000 unit.
(c) Subject to reduction depending on the maturities of the underlying
Securities.
(d) The reduced sales charge for the Sixth Utility Common Stock Series of Equity
Income Fund is $15 per 2,000 units and for prior Utility Common Stock Series
is $7.50 per unit.
c-1
<PAGE>
Def ined
Asset FundsSM
SPONSORS: MUNICIPAL INVESTMENT
Merrill Lynch, TRUST FUND
Pierce, Fenner & Smith Inc. Investment Grade Portfolio
Defined Asset Funds Intermediate Term Series
P.O. Box 9051 A Unit Investment Trust
Princeton, N.J. 08543-9051 PROSPECTUS
(609) 282-8500 This Prospectus does not contain all of the
Smith Barney Inc. information with respect to the investment
Unit Trust Department company set forth in its registration
388 Greenwich Street statement and exhibits relating thereto which
23rd Floor have been filed with the Securities and
New York, N.Y. 10013 Exchange Commission, Washington, D.C. under
1-800-223-2532 the Securities Act of 1933 and the Investment
PaineWebber Incorporated Company Act of 1940, and to which reference
1200 Harbor Blvd. is hereby made.
Weehawken, N.J. 07087 No person is authorized to give any
(201) 902-3000 information or to make any representations
Prudential Securities Incorporated with respect to this investment company not
One Seaport Plaza contained in this Prospectus; and any
199 Water Street information or representation not contained
New York, N.Y. 10292 herein must not be relied upon as having been
(212) 776-1000 authorized. This Prospectus does not
Dean Witter Reynolds Inc. constitute an offer to sell, or a
Two World Trade Center solicitation of an offer to buy, securities
59th Floor in any state to any person to whom it is not
New York, N.Y. 10048 lawful to make such offer in such state.
(212) 392-2222
EVALUATOR:
Kenny Information Systems, a
Division
of J.J. Kenny Co. Inc.
65 Broadway
New York, N.Y. 10006-2511
INDEPENDENT ACCOUNTANTS:
Deloitte & Touche LLP
Two World Financial Center
9th Floor
New York, N.Y. 10281-1414
TRUSTEE:
The Chase Manhattan Bank, N.A.
Unit Trust Department
Box 2051
New York, N.Y. 10081
1-800-323-1500
-- /95
<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 indicated 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
Dean Witter Reynolds Inc........................ 2-60599
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
Dean Witter Reynolds Inc........................ 8-14172
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
Dean Witter Reynolds Inc........................ 2-60599, 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
Dean Witter Reynolds Inc........................ 94-1671384
The Chase Manhattan Bank, N.A., Trustee......... 13-2633612
UNDERTAKING
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>
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 (incorporated by reference to the Cross-Reference
Sheet to the Registration Statement of Municipal Investment Trust Fund,
Forty-Fourth Intermediate Term Series, 1933 Act File No. 2-88251).
The Prospectus.
Additional Information not included in the Prospectus (Part II).
Consent of independent accountants.
The following exhibits:
1.1 -- Form of Trust Indenture (incorporated by reference to Exhibit
1.1 to the Registration Statement of Municipal Investment Trust
Fund, Intermediate Term Series--217, 1933 Act File No. 33-
50343).
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 --Consent of the Evaluator.
5.1 -- Form of Bond Purchase Agreement used for purchases from
issuers (incorporated by reference to Exhibit 5.1 to the
Registration Statement of Municipal Investment Trust Fund,
Fifty-Fifth Intermediate Term Series, 1933 Act File No.
2-94809).
5.21 -- Form of Purchase Agreement for purchases in secondary market
with letter of credit backing (incorporated by reference to
Exhibit 5.21 to the Registration Statement of Municipal Invest-
ment Trust Fund, Fifty-Fifth Intermediate Term Series, 1933 Act
File No. 2-94809).
5.22 -- Form of Purchase Agreement for purchases in secondary market
with guarantees (incorporated by reference to Exhibit 5.22 to
the Registration Statement of Municipal Investment Trust Fund,
Fifty-Fifth Intermediate Term Series, 1933 Act File No.
2-94809).
5.23 -- Form of Purchase Agreement for purchases in secondary market
with collateralized backing (incorporated by reference to
Exhibit 5.23 to the Registration Statement of Municipal
Investment Trust Fund, Fifty-Fifth Intermediate Term Series,
1933 Act File No. 2-94809).
6.1 -- Form of Collateral Agreement (incorporated by reference to
Exhibit 6.1 to the Registration Statement of Municipal
Investment Trust Fund, Fifty-Fifth Intermediate Term Series,
1933 Act File No. 2-94809).
9.1 -- Form of Consultant's Agreement
- ------------------------------------
* To be filed by amendment.
R-1
<PAGE>
MUNICIPAL INVESTMENT TRUST FUND
INVESTMENT GRADE PORTFOLIO
INTERMEDIATE TERM SERIES
DEFINED ASSET FUNDS
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 1ST DAY OF
FEBRUARY, 1995.
SIGNATURES APPEAR ON PAGES R-3, R-4, R-5, R-6 AND R-7.
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.
A majority of the members of the Board of Directors of Dean Witter Reynolds
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.
R-2
<PAGE>
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
DEPOSITOR
By the following persons, who constitute a majority of Powers of Attorney
the Board of Directors of Merrill Lynch, Pierce, have been filed
Fenner & Smith Incorporated: under
Form SE and the
following 1933 Act
File
Number: 33-43466
and 33-51607
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:
33-55073 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 of PaineWebber Number: 33-55073
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 a majority of the Powers of Attorney
Board of Directors of Prudential Securities Incorporated: have been filed
under Form SE and
the following
1933 Act File
Number: 33-41631
ARTHUR H. BURTON, JR.
JAMES T. GAHAN
ALAN D. HOGAN
HOWARD A. KNIGHT
LELAND B. PATON
HARDWICK SIMMONS
By
WILLIAM W. HUESTIS
(As authorized signatory for Prudential Securities
Incorporated and Attorney-in-fact for the persons
listed above)
R-6
<PAGE>
DEAN WITTER REYNOLDS INC.
DEPOSITOR
By the following persons, who constitute a majority of Powers of Attorney
the Board of Directors of Dean Witter Reynolds Inc.: have been filed
under Form SE and
the following
1933 Act File
Number: 33-17085
NANCY DONOVAN
CHARLES A. FIUMEFREDDO
JAMES F. HIGGINS
STEPHEN R. MILLER
PHILIP J. PURCELL
THOMAS C. SCHNEIDER
WILLIAM B. SMITH
By
MICHAEL D. BROWNE
(As authorized signatory for
Dean Witter Reynolds Inc.
and Attorney-in-fact for the persons listed above)
R-7
Exhibit 9.1
, 1995
----------
Fitch Investors Service, Inc.
One State Street Plaza
New York, New York 10004
CONSULTANT'S AGREEMENT
----------------------
Dear Sirs:
The undersigned, Unit Investment Trust Division of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (together
with its affiliates, "Merrill Lynch"), as agent for the
sponsors of Defined Asset FundsSM - Municipal Investment
Trust Fund - Investment Grade Portfolio - Intermediate Term
Series (the "Fund"), hereby engages your research services
as described below, in connection with Merrill Lynch's
sponsorship and supervision of the Fund. The Fund is a
series of unit investment trusts which will invest in
various fixed rate securities which you have rated BBB- or
better ("Investment Grade") or have, in your opinion, credit
characteristics comparable to the characteristics of bonds
rated Investment Grade ("Investment Grade Credit
Characteristics"), as more fully described in the attached
draft registration statement on Form S-6 (the "Registration
Statement") as filed with the Securities and Exchange
Commission.
Merrill Lynch hereby agrees with you as follows:
1. Review of Securities. You will review on a timely
--------------------
basis, in connection with the filing of each Registration
Statement relating to a series, certain securities
identified to you by Merrill Lynch (the "Identified
Securities"). Whether or not an Identified Security is
publicly rated by another nationally recognized statistical
rating organization, you shall either issue a public rating
of that Identified Security or you shall provide Merrill
Lynch with an opinion on whether that Identified Security
has, in your view, Investment Grade Credit Characteristics.
Merrill Lynch shall receive all information regarding
Identified Securities publicly rated by Fitch by press
release faxed by you to Merrill Lynch within 15 minutes of
the time such information is released to the general public.
In the event that you provide Merrill Lynch with an opinion,
<PAGE>
Fitch Investors 2 , 1995
-------
Service, Inc.
the opinion shall be based exclusively on publicly available
information. If you do not have adequate information on any
Identified Security to enable you to render an opinion you
will promptly notify Merrill Lynch. With respect to unrated
Identified Securities, your opinion regarding Investment
Grade Credit Characteristics shall be based exclusively on
information provided to you by Merrill Lynch and other
publicly available information in your possession, and you
shall have no obligation to collect information from any
other source, including from any issuer or investment
banker.
Merrill Lynch shall determine, in its sole discretion
and based upon all information available to it, whether, in
the interest of the Fund, to deposit any particular
Identified Security in the portfolio.
2. Provision of Information. You will provide
------------------------
Merrill Lynch with adequate information about your business
and operations and the performance of your services under
this Agreement for use by Merrill Lynch in preparing updated
prospectus disclosure and marketing materials for the Fund.
3. Provision of Securities Research. In addition to
--------------------------------
your review of the Identified Securities, you will
continuously monitor information pertaining to the
Identified Securities actually deposited in the portfolio
("Portfolio Securities") on an ongoing basis and advise
Merrill Lynch in the event of any significant unfavorable
changes in your opinion of the credit quality of any
Portfolio Security not rated by Fitch, and if, in your
opinion, Portfolio Security not rated by Fitch ceases to
have Investment Grade Credit Characteristics. Such
reporting shall be based exclusively on publicly available
information provided to you by Merrill Lynch or in your
possession. You will notify promptly Merrill Lynch if at
any time you have insufficient information to enable you to
monitor any Portfolio Security.
Merrill Lynch shall determine, in its sole discretion
and based upon all information available to it, whether, in
the interest of the Fund, to retain, sell, redeem, liquidate
or dispose of particular Portfolio Securities. A change in
credit quality will not necessarily result in the sale of a
Portfolio Security from the Portfolio unless, in the opinion
of Merrill Lynch, retention of the Portfolio Security would
be detrimental to the Fund's investors.
4. Exclusive Service. You hereby agree, for a period
-----------------
of one year from the date of deposit of securities in the
<PAGE>
Fitch Investors 3 , 1995
-------
Service, Inc.
first series of the Fund (the "Exclusive Period"), not to
provide the services in Sections 1, 2 and 3 of this
Agreement to any sponsor of unit investment trusts (as
defined in Section 4(2) of the Investment Company Act of
1940) other than Merrill Lynch; provided, that nothing
--------
herein shall prohibit or limit your issuance of credit
ratings in the ordinary course of business or your
discussions with unit investment trusts or their sponsors in
the ordinary course of business intended to create investor
demand for your credit ratings.
Merrill Lynch hereby agrees, for the Exclusive Period,
to employ you to provide the services in Sections 1, 2 and 3
of this Agreement on the same terms (including fees) as
provided herein with respect to any series of the Fund
initially sponsored by Merrill Lynch during the Exclusive
Period.
5. Consultant's Fees. Merrill Lynch hereby agrees to
-----------------
pay you or cause each series of the Fund to pay you for your
services described in Sections 1, 2 and 3 of this Agreement
an annual fee of $0.80 per $1,000 Face Amount of Portfolio
Securities (as defined below), payable quarterly.
"Face Amount of Portfolio Securities" shall be computed
on the basis of the average face amount of Portfolio
Securities in the Fund during a calendar quarter.
6. Expenses. You shall be responsible for all of
--------
your own expenses incurred in connection with this
Agreement.
7. Independent Contractor. For all purposes hereof,
----------------------
you shall be deemed to be an independent contractor and
shall be fully responsible for any personnel performing work
for Merrill Lynch on your behalf, including insurance,
benefits and tax liability. Except as otherwise expressly
provided herein or authorized by Merrill Lynch, you shall
have no authority to act for or represent Merrill Lynch or
the Fund or the Fund's sponsors or underwriters in any way
or otherwise be deemed the agent of either. Neither the
sponsors of the Fund nor the Fund are partners or joint
venturers with you and nothing herein shall be construed so
as to make them partners or joint venturers or impose any
liability as such on any one of them or you.
8. Publicity and Confidentiality. You shall not use
-----------------------------
the name Merrill Lynch or the names of any of the sponsors
or underwriters of the Fund identified in the Registration
Statement, or any affiliate of Merrill Lynch or any of the
<PAGE>
Fitch Investors 4 , 1995
-------
Service, Inc.
sponsors or underwriters, in any publicity release or
advertising without the prior written consent of Merrill
Lynch, which consent may be withheld in its sole discretion.
You agree to receive and maintain as confidential all
Non-Public Information (as defined below) received in
connection with this Agreement and the Fund and you shall
not use or disclose such information for your benefit or the
benefit of any of your other clients. It is expressly
understood that all Non-Public Information furnished by
Merrill Lynch pursuant to this Agreement remains the
property of Merrill Lynch and that all such information and
copies thereof will be returned to Merrill Lynch upon
request. You shall restrict circulation and communications
of such Non-Public Information within your organization to
only those persons and only to the extent necessary to
provide the services under this Agreement.
The preceding paragraph shall be inoperative as to any
Non-Public Information that (i) becomes generally available
to the public other than as a result of a disclosure by you,
(ii) was available to you on a non-confidential basis prior
to the disclosure of such Non-Public Information to you
pursuant to this Agreement, or (iii) becomes available to
you on a non-confidential basis from a source other than
Merrill Lynch or its agents or advisors provided that the
source of such Non-Public Information was not known by you
to have a fiduciary or contractual relationship with Merrill
Lynch or to be prohibited from making such disclosure to
you.
In the event that you are requested or required (by
deposition, interrogatories, requests for information or
documents in legal proceedings, subpoenas, civil
investigative demand or similar process), in connection with
any proceeding or investigation, to disclose any Non-Public
Information received in connection with this Agreement, you
will give Merrill Lynch prompt notice of such request or
requirement, to the extent practicable, so that Merrill
Lynch may seek an appropriate protective order or other
remedy and/or waive compliance with the provisions of this
Agreement, and you will cooperate with Merrill Lynch, to the
extent practicable, to obtain such protective order. In the
event that such protective order or other remedy is not
obtained or Merrill Lynch waives compliance with the
relevant provisions of this Agreement, you will furnish only
that portion of the information which, in the opinion of
your counsel, is legally required to be disclosed. It is
further agreed that, if in the absence of a protective order
you are nonetheless legally compelled to disclose such
<PAGE>
Fitch Investors 5 , 1995
-------
Service, Inc.
information, you may make such disclosure without liability
hereunder, provided, that you give Merrill Lynch notice of
--------
the information to be disclosed as far in advance of its
disclosure as is practicable and, upon Merrill Lynch's
request, use your best efforts to obtain assurances that
confidential treatment will be accorded to such information
and, provided further, that such disclosure was not caused
--------
by and did not result from a previous disclosure by you not
permitted hereunder.
For the purposes of this Agreement, "Non-Public
Information" means this Agreement and all other information
concerning Merrill Lynch, its affiliates and subsidiaries
including, without limitation, information regarding the
Fund, the Identified Securities and the Portfolio
Securities, which is not available to the general public.
9. Limited Liability. Except where you have been
-----------------
grossly negligent, have engaged in willful misconduct or
have acted in bad faith or in reckless disregard of your
duties hereunder and except as otherwise provided in Section
13 below, you shall not be liable to Merrill Lynch or the
Fund or any unitholders of the Fund for any loss or damage
hereunder resulting from your actions or omissions to act or
otherwise.
10. Assignment. Neither party to this Agreement shall
----------
assign this Agreement without the other party's consent.
11. Amendment. No provision of this Agreement may be
---------
amended or waived except by an instrument in writing
executed by the parties hereto.
12. Termination. This Agreement shall continue in
-----------
full force and effect with respect to any new series of the
Fund until the earliest of (i) termination by one of the
parties hereto, to take effect at any time subsequent to the
date that is six months from the date of deposit of
securities in the first series of the Fund, by giving 30
days prior written notice to the other party, (ii)
termination by one of the parties hereto, to take effect at
any time subsequent to the closing date of the fourth series
of the Fund, by giving 30 days prior written notice to the
other party, or (iii) termination of the last series of the
Fund offered pursuant to this Agreement; provided that
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Merrill Lynch may terminate this Agreement effective at any
time on 30 days' notice in the event of your willful
misconduct, bad faith or negligence in the performance of
your duties, or by reason of your disregard of your
obligations and duties hereunder, or if, in Merrill Lynch's
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Fitch Investors 6 , 1995
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Service, Inc.
sole opinion, your professional reputation is materially
damaged as a result of wrongdoing or alleged wrongdoing by
your directors, officers or employees in any matter
unrelated to this Agreement. The effective date of the
termination of this Agreement shall be the "Termination
Date". Upon termination of this Agreement, any fees due to
you under Section 5 shall be prorated.
You further agree to perform the duties provided for in
Sections 2 and 3 of this Agreement for the life of any
series of the Fund that is initially sponsored by Merrill
Lynch during the period beginning on the date of this
Agreement and ending on the Termination Date. Such
performance shall be governed by this Agreement on the same
terms (including fees) as provided for herein.
13. Indemnification. Merrill Lynch shall indemnify
---------------
you and hold you and each of your officers, employees and
agents harmless from and against any and all liability
arising out of (i) any actual or alleged inaccuracy or
omission in any prospectus or supplement thereto,
registration statement of the Fund or annual post-effective
amendment updating the information in such registration
statement or any advertising or promotional material
generated by the Fund or Merrill Lynch, and (ii) any breach
by Merrill Lynch of any representation, warranty, covenant
or agreement contained in this Agreement, and (iii) any
violation or alleged violation by Merrill Lynch or its
employees of any law or regulation applicable to Merrill
Lynch, its employees or the Fund or to this Agreement,
except (i) as stated in the following paragraphs and (ii) to
the extent such liability results from your breach of this
Agreement, your willful misconduct, bad faith, reckless
disregard of your duties or your gross negligence.
You shall indemnify and hold harmless Merrill
Lynch, and any sponsor or underwriter, their affiliates and
each of their officers, directors, employees and agents from
and against any and all liability arising out of (i) any
actual or alleged inaccuracy or omission in any prospectus
or supplement thereto, registration statement of the Fund or
annual post-effective amendment updating the information in
such registration statement or any advertising or
promotional material generated by the Fund or Merrill Lynch
but in each case only to the extent that the inaccuracy or
omission or alleged inaccuracy or omission was made in
reliance upon and in conformity with written information you
have furnished to Merrill Lynch specifically for inclusion
in the Registration Statement or any of the other above -
referenced documents, (ii) any breach by you of any
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representation, warranty, covenant or agreement contained in
this Agreement and (iii) any violation or alleged violation
by you or your employees of any law or regulation applicable
to you, your employees or the Fund or to this Agreement,
except to the extent such liability results from Merrill
Lynch's breach of this Agreement, willful misconduct, bad
faith, reckless disregard of its duties or gross negligence.
You confirm that the statements relating to you in the
fourth, sixth and seventh sentences under the caption
"Portfolio at a Glance -- Investment Quality;" the first
sentence under the caption "Portfolio at a Glance -- Credit
Consultant's Annual Fee;" the fourth paragraph under the
caption "Portfolio at a Glance -- Risk Factors;" the second,
third and fourth sentences under the caption "Investor's
Guide -- Professional Selection and Supervision;" the
second, third, fourth and fifth sentences of the third
paragraph, the second, third and fourth sentences of the
fourth paragraph, and all four paragraphs of "-- The Credit
Consultant" under the caption "Description of Fund
Investments -- Portfolio Selection;" the fourth sentence of
the first paragraph under the caption "Description of Fund
Investments -- Portfolio Supervision;" the fifth paragraph
under the caption "Risk Factors;" and all statements in
Appendix A under the caption "Description of Ratings --
Fitch Investors Service, Inc." in the Registration Statement
are correct and were furnished by you to Merrill Lynch in
writing specifically for inclusion in the Registration
Statement and that, to date, no other information has been
furnished by you to Merrill Lynch for such purposes.
Notwithstanding the previous paragraphs, you shall
indemnify and hold harmless Merrill Lynch and each of its
officers, directors, employees and agents from and against
(i) any out-of-pocket loss incurred by Merrill Lynch or any
sponsor, underwriter or dealer to a holder of units of any
series of the Fund resulting directly from one or more
Negligent Acts (as defined below); (ii) the reasonable fees
and expenses of outside counsel and accountants retained by
Merrill Lynch in connection with the investigation,
mitigation and resolution of any Negligent Act; and (iii)
any penalties and interest required to be paid by the
Securities and Exchange Commission or any state securities
commission or otherwise under the Federal or any State
securities laws in connection with any Negligent Act. A
"Negligent Act" shall mean any act of ordinary negligence or
negligent failure to act by you in the performance of your
duties with respect to credit opinions (as opposed to credit
ratings) under this Agreement; provided, that you shall not
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be deemed to have committed a Negligent Act if you followed
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the procedures described in the fifth paragraph under the
caption "Risk Factors" in the Prospectus and exercised
reasonable judgment in issuing a credit opinion.
In case any proceeding (including any governmental
investigation) shall be instituted involving any person in
respect of which indemnity may be sought pursuant to this
Section 13, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may
be sought (the "indemnifying party") in writing and the
indemnifying party shall retain counsel reasonably
satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may
designate in such proceeding and shall pay the reasonable
fees and disbursements of such counsel related to such
proceeding. For purposes of assuring that such fees are
reasonable the parties will consult with each other
regarding the conduct of the litigation. In any such
proceeding, any indemnified party shall have the right to
retain its own counsel, but the fees and expenses of such
counsel shall be at the expense of such indemnified party
unless (i) the indemnifying party and the indemnified party
shall have mutually agreed to the retention of such counsel
or (ii) the named parties to any such proceeding (including
any impleaded parties) include both the indemnifying party
and the indemnified party and representation of both parties
by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is
understood that the indemnifying party shall not, in respect
of the legal expenses of any indemnified party in connection
with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more
than one separate firm (in addition to any local counsel)
for all such indemnified parties. Such firm shall be
designated in writing by the indemnified party. The
indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment
for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an
indemnified party shall have requested an indemnifying party
to reimburse the indemnified party for fees and expenses of
counsel as contemplated by the second and third sentences of
this paragraph, the indemnifying party agrees that it shall
be liable for any settlement of any proceeding effected
without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such
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Fitch Investors 9 , 1995
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indemnifying party shall not have reimbursed the indemnified
party in accordance with such request prior to the date of
such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in
respect of which any indemnified party is or could have been
a party and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all
liability on claims that are the subject matter of such
proceeding.
14. Authorization. You hereby represent that all
-------------
corporate action on your part and on the part of your
officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement has
been taken, that all corporate action necessary for the
performance of all of your obligations hereunder has been
taken, and that this Agreement constitutes a valid and
legally binding obligation of yours, enforceable in
accordance with its terms.
You further represent that no consent, approval,
order or authorization of, or registration, qualification,
designation, declaration or filing with, any federal, state,
local or foreign governmental authority is required on your
part in connection with the consummation of the transactions
contemplated by this Agreement.
You further represent that you will maintain
certain insurance, including all insurance required under
applicable federal, state and local statutes including, but
not limited to, workers compensation, disability insurance
and general liability insurance in the minimum amount of $2
million.
15. Entire Agreement and Governing Law. This
----------------------------------
Agreement incorporates the entire understanding of the
parties and (except as otherwise provided herein) supersedes
all previous agreements, and shall be governed by and
construed in accordance with the laws of the State of New
York.
16. Notices. All notices and other written
-------
communications specified herein shall be in writing (which
term shall at the option of the notifying party include fax)
and shall be (i) personally delivered, (ii) transmitted by
first class mail, postage prepaid (airmail if
international), or (iii) transmitted by fax to the parties
as follows:
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Fitch Investors 10 , 1995
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Service, Inc.
If to you: Fitch Investors Service, Inc.
One State Street Plaza
33rd Floor
New York, NY 10004
Fax: (212) 480-4438
Attention: Neil D. Baron, Esq.
If to Merrill Merrill Lynch, Pierce, Fenner &
Lynch: Smith Incorporated
Unit Investment Trusts
P.O. Box 9051
Princeton, NJ 08543-9051
Fax: (609) 282-8972
Attention: James J. King, Jr.
17. Severability. The illegality, invalidity or
------------
unenforceability of any provision of this Agreement under
the law of any jurisdiction shall not affect its legality,
validity or enforceability under the law of any other
jurisdiction nor the legality, validity or enforceability of
any other provision hereof.
This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the
same effect as if the signatures were upon the same
instrument.
If the foregoing is in accordance with your
understanding, kindly sign and return the enclosed copy of
this letter whereupon it shall become a binding agreement
between us.
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Fitch Investors 11 , 1995
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Service, Inc.
Very truly yours,
MERRILL LYNCH, PIERCE,
FENNER & SMITH INCORPORATED,
UNIT INVESTMENT TRUST
DIVISION,
as agent for the sponsors of
the Fund
By:
----------------------
Agreed and accepted:
FITCH INVESTORS SERVICE, INC.
By:
---------------------
Date: , 1994
--------------------
