AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 2000
REGISTRATION NO. 33-58571
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------
POST-EFFECTIVE AMENDMENT NO. 5
TO
FORM S-6
-------------------------------------
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
-------------------------------------
A. EXACT NAME OF TRUST:
DEFINED ASSET FUNDS--
MUNICIPAL STATE SERIES
B. NAMES OF DEPOSITORS:
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
PAINEWEBBER INCORPORATED
C. COMPLETE ADDRESSES OF DEPOSITORS' PRINCIPAL EXECUTIVE OFFICES:
<TABLE>
<S> <C> <C>
MERRILL LYNCH, PIERCE,
FENNER & SMITH
INCORPORATED
DEFINED ASSET FUNDS
POST OFFICE BOX 9051
PRINCETON, NJ 08543-9051 PAINEWEBBER INCORPORATED
1285 AVENUE OF THE
AMERICAS
NEW YORK, NY 10019
</TABLE>
D. NAMES AND COMPLETE ADDRESSES OF AGENTS FOR SERVICE:
<TABLE>
<S> <C> <C>
TERESA KONCICK, ESQ.
P.O. BOX 9051
PRINCETON, NJ 08543-9051 ROBERT E. HOLLEY
1200 HARBOR BLVD.
WEEHAWKEN, NJ 07087
COPIES TO:
PIERRE DE SAINT PHALLE,
ESQ.
450 LEXINGTON AVENUE
NEW YORK, NY 10017
</TABLE>
The issuer has registered an indefinite number of Units under the Securities Act
of 1933 pursuant to Rule 24f-2 and filed the Rule 24f-2 Notice for the most
recent fiscal year on March 13, 2000.
Check box if it is proposed that this filing will become effective on June 16,
2000 pursuant to paragraph (b) of Rule 485. /X/
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
DEFINED ASSET FUNDS--REGISTERED TRADEMARK--
------------------------------
----------------------
MUNICIPAL STATE SERIES
(A UNIT INVESTMENT TRUST)
- CALIFORNIA AND PENNSYLVANIA PORTFOLIOS
- PORTFOLIOS OF INSURED LONG TERM MUNICIPAL BONDS
- DESIGNED TO BE FREE OF REGULAR FEDERAL INCOME TAX
- EXEMPT FROM SOME STATE TAXES
- MONTHLY DISTRIBUTIONS
-----------------------------------------------------
SPONSORS: The Securities and Exchange Commission has not
MERRILL LYNCH, approved or disapproved these Securities or passed
PIERCE, FENNER & SMITH upon the adequacy of this prospectus. Any
INCORPORATED representation to the contrary is a criminal offense.
PAINEWEBBER INCORPORATED Prospectus dated June 16, 2000.
<PAGE>
--------------------------------------------------------------------------------
Defined Asset Funds--Registered Trademark--
Defined Asset Funds-Registered Trademark- is America's oldest and largest family
of unit investment trusts, with over $160 billion sponsored over the last 28
years. Defined Asset Funds has been a leader in unit investment trust research
and product innovation. Our family of Funds helps investors work toward their
financial goals with a full range of quality investments, including municipal,
corporate and government bond portfolios, as well as domestic and international
equity portfolios.
Defined Asset Funds offer a number of advantages:
- A Disciplined strategy of buying and holding with a long-term view is the
cornerstone of Defined Asset Funds.
- Fixed portfolio: Defined Funds follow a buy and hold investment strategy;
funds are not managed and portfolio changes are limited.
- Defined Portfolios: We choose the stocks and bonds in advance, so you know
what you're investing in.
- Professional research: Our dedicated research team seeks out stocks or bonds
appropriate for a particular fund's objectives.
- Ongoing supervision: We monitor each portfolio on an ongoing basis.
No matter what your investment goals, tolerance for risk or time horizon,
there's probably a Defined Asset Fund that suits your investment style. Your
financial professional can help you select a Defined Asset Fund that works best
for your investment portfolio.
THE FINANCIAL INFORMATION IN THIS PROSPECTUS IS AS OF MARCH 31, 2000, THE
EVALUATION DATE.
<TABLE>
<S> <C>
CONTENTS
PAGE
---
California Insured Portfolio--
Risk/Return Summary................ 3
Pennsylvania Insured Portfolio--
Risk/Return Summary................ 6
What You Can Expect From Your
Investment......................... 10
Monthly Income..................... 10
Return Figures..................... 10
Records and Reports................ 10
The Risks You Face................... 11
Interest Rate Risk................. 11
Call Risk.......................... 11
Reduced Diversification Risk....... 11
Liquidity Risk..................... 11
Concentration Risk................. 11
State Concentration Risk........... 12
Bond Quality Risk.................. 14
Insurance Related Risk............. 14
Litigation and Legislation Risks... 14
Selling or Exchanging Units.......... 14
Sponsors' Secondary Market......... 14
Selling Units to the Trustee....... 14
Exchange Option.................... 15
How The Fund Works................... 15
Pricing............................ 15
Evaluations........................ 16
Income............................. 16
Expenses........................... 16
Portfolio Changes.................. 16
Fund Termination................... 17
Certificates....................... 17
Trust Indenture.................... 17
Legal Opinion...................... 18
Auditors........................... 18
Sponsors........................... 18
Trustee............................ 19
Underwriters' and Sponsors'
Profits.......................... 19
Public Distribution................ 19
Code of Ethics..................... 19
Year 2000 Issues................... 19
Taxes................................ 20
Supplemental Information............. 22
Financial Statements................. D-1
</TABLE>
2
<PAGE>
--------------------------------------------------------------------------------
CALIFORNIA INSURED PORTFOLIO--RISK/RETURN SUMMARY
<TABLE>
<C> <S>
1. WHAT IS THE FUND'S OBJECTIVE?
The Fund seeks interest income that is
exempt from regular federal income taxes
and some state and local taxes by
investing in a fixed portfolio
consisting primarily of insured, long
term municipal revenue bonds.
2. WHAT ARE MUNICIPAL REVENUE BONDS?
Municipal revenue bonds are bonds issued
by states, municipalities and public
authorities to finance the cost of
buying, building or improving various
projects intended to generate revenue,
such as airports, health care
facilities, housing and municipal
electric, water and sewer utilities.
Generally, payments on these bonds
depend solely on the revenues generated
by the projects, excise taxes or state
appropriations, and are not backed by
the government's taxing power.
3. WHAT IS THE FUND'S INVESTMENT STRATEGY?
- The Fund plans to hold to maturity 7
long-term tax-exempt municipal bonds
with an aggregate face amount of
$3,225,000. The Fund is a unit
investment trust which means that,
unlike a mutual fund, the Portfolio is
not managed.
- The bonds are rated AAA or Aaa by
Standard & Poor's, Moody's or Fitch.
- Many of the bonds can be called at a
premium declining over time to par
value. Some bonds may be called earlier
at par for extraordinary reasons.
- 100% of the bonds are insured by
insurance companies that guarantee
timely payments of principal and
interest on the bonds (but not Fund
units or the market value of the bonds
before they mature).
The Portfolio consists of municipal
bonds of the following types:
</TABLE>
<TABLE>
/ / General Obligation 23%
<S> <C>
/ / Hospitals/Health Care 20%
/ / Industrial Development Revenue 2%
/ / Municipal Water/Sewer Utilities 27%
/ / State Municipal Utilities 16%
/ / Universities/Colleges 12%
</TABLE>
<TABLE>
<C> <S>
4. WHAT ARE THE SIGNIFICANT RISKS?
YOU CAN LOSE MONEY BY INVESTING IN THE
FUND. THIS CAN HAPPEN FOR VARIOUS
REASONS, INCLUDING:
- Rising interest rates, an issuer's
worsening financial condition or a drop
in bond ratings can reduce the price of
your units.
- Because the Fund is concentrated in
municipal water/sewer utility bonds,
adverse developments in this sector may
affect the value of your units.
- Assuming no changes in interest rates,
when you sell your units, they will
generally be worth less than your cost
because your cost included a sales fee.
- The Fund will receive early returns of
principal if bonds are called or sold
before they mature. If this happens your
income will decline and you may not be
able to reinvest the money you receive at
as high a yield or as long a maturity.
ALSO, THE PORTFOLIO IS CONCENTRATED IN
BONDS OF CALIFORNIA SO IT IS LESS
DIVERSIFIED THAN A NATIONAL FUND AND IS
SUBJECT TO RISKS PARTICULAR TO CALIFORNIA
WHICH ARE BRIEFLY DESCRIBED UNDER STATE
CONCENTRATION RISKS LATER IN THIS
PROSPECTUS.
</TABLE>
3
<PAGE>
<TABLE>
<C> <S>
5. IS THIS FUND APPROPRIATE FOR YOU?
Yes, if you want federally tax-free
income. You will benefit from a
professionally selected and supervised
portfolio whose risk is reduced by
investing in insured bonds of several
different issuers.
The Fund is NOT appropriate for you if
you want a speculative investment that
changes to take advantage of market
movements, if you do not want a
tax-advantaged investment or if you
cannot tolerate any risk.
</TABLE>
<TABLE>
<C> <S>
DEFINING YOUR INCOME
</TABLE>
<TABLE>
<C> <S> <C>
WHAT YOU MAY EXPECT (Payable on the 25th day
of the month to holders of record on the 10th
day of the month):
Regular Monthly Income per unit $ 4.23
Annual Income per unit: $50.86
THESE FIGURES ARE ESTIMATES DETERMINED ON THE
EVALUATION DAY; ACTUAL PAYMENTS MAY VARY.
</TABLE>
<TABLE>
<C> <S>
6. WHAT ARE THE FUND'S FEES AND EXPENSES?
This table shows the costs and expenses you may pay,
directly or indirectly, when you invest in the Fund.
INVESTOR FEES
Maximum Sales Fee (Load) on new
purchases (as a percentage of
$1,000 invested) 2.90%
Employees of some of the Sponsors and their affiliates
may pay a reduced sales fee of no less than $5.00 per
unit.
The maximum sales fee is reduced if you invest at
least $100,000, as follows:
</TABLE>
<TABLE>
<CAPTION>
YOUR MAXIMUM
SALES FEE
IF YOU INVEST: WILL BE:
-------------- ------------
<C> <S> <C>
Less than $100,000 2.90%
$100,000 to $249,999 2.75%
$250,000 to $499,999 2.50%
$500,000 to $999,999 1.50%
$1,000,000 and over 1.50%
Maximum Exchange Fee 1.90%
</TABLE>
<TABLE>
<C> <S>
ESTIMATED ANNUAL FUND OPERATING EXPENSES
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
PER UNIT
--------
<C> <S> <C>
$0.70
Trustee's Fee
$0.55
Portfolio Supervision,
Bookkeeping and
Administrative Fees
(including updating
expenses)
$0.39
Evaluator's Fee
$0.70
Other Operating Expenses
-----
$2.34
TOTAL
</TABLE>
<TABLE>
<C> <S>
The Sponsors historically paid updating
expenses.
7. HOW HAVE SIMILAR FUNDS PERFORMED IN THE PAST?
IN THE FOLLOWING CHART WE SHOW PAST PERFORMANCE
OF PRIOR CALIFORNIA PORTFOLIOS, WHICH HAD
INVESTMENT OBJECTIVES, STRATEGIES AND TYPES OF
BONDS SUBSTANTIALLY SIMILAR TO THIS FUND. THESE
PRIOR SERIES DIFFERED IN THAT THEY CHARGED A
HIGHER SALES FEE. These prior California Series
were offered after 1987 and were outstanding on
March 31, 2000. OF COURSE, PAST PERFORMANCE OF
PRIOR SERIES IS NO GUARANTEE OF FUTURE RESULTS
OF THIS FUND.
AVERAGE ANNUAL COMPOUND TOTAL RETURNS
FOR PRIOR SERIES
REFLECTING ALL EXPENSES. FOR PERIODS ENDED
3/31/00.
</TABLE>
-------------------------------------------------------------------
<TABLE>
High 4.25% 5.45% 5.72% 4.66% 6.64% 6.31%
<S> <C> <C> <C> <C> <C> <C>
Average -1.28 4.42 5.52 0.59 5.47 6.11
Low -4.59 2.52 5.32 -1.89 3.28 5.91
</TABLE>
-----------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Average
Sales fee 1.93% 5.23% 5.83%
</TABLE>
-----------------------------------------------------------
NOTE: ALL RETURNS REPRESENT CHANGES IN UNIT PRICE WITH DISTRIBUTIONS REINVESTED
INTO THE MUNICIPAL FUND INVESTMENT ACCUMULATION PROGRAM.
<TABLE>
<C> <S>
8. IS THE FUND MANAGED?
Unlike a mutual fund, the Fund is not managed
and bonds are not sold because of market
changes. Rather, experienced Defined Asset Funds
financial analysts regularly review the bonds in
the Fund. The Fund may sell a bond if certain
adverse credit or other conditions exist.
</TABLE>
4
<PAGE>
<TABLE>
<C> <S>
9. HOW DO I BUY UNITS?
The minimum investment is one unit.
You can buy units from any of the
Sponsors and other broker-dealers. The
Sponsors are listed later in this
prospectus. Some banks may offer units
for sale through special arrangements
with the Sponsors, although certain
legal restrictions may apply.
UNIT PRICE PER UNIT $1,014.00
(as of March 31, 2000)
Unit price is based on the net asset
value of the Fund plus the sales fee.
An amount equal to any principal cash,
as well as net accrued but
undistributed interest on the unit, is
added to the unit price. An independent
evaluator prices the bonds at 3:30 p.m.
Eastern time every business day. Unit
price changes every day with changes in
the prices of the bonds in the Fund.
10. HOW DO I SELL UNITS?
You may sell your units at any time to
any Sponsor or the Trustee for the net
asset value determined at the close of
business on the date of sale. You will
not pay any other fee when you sell
your units.
11. HOW ARE DISTRIBUTIONS MADE AND TAXED?
The Fund pays income monthly.
In the opinion of bond counsel when
each bond was issued, interest on the
bonds in this Fund is generally 100%
exempt from regular federal income tax.
Your income may also be exempt from
some California state and local
personal income taxes if you live in
California.You will also receive
principal payments if bonds are sold or
called or mature, when the cash
available is more than $5.00 per unit.
You will be subject to tax on any gain
realized by the Fund on the disposition
of bonds.
12. WHAT OTHER SERVICES ARE AVAILABLE?
REINVESTMENT
You will receive your income in cash
unless you choose to compound your
income by reinvesting at no sales fee
in the Municipal Fund Investment
Accumulation Program, Inc. This program
is an open-end mutual fund with a
comparable investment objective, but
the bonds will generally not be
insured. Income from this program will
generally be subject to state and local
income taxes. FOR MORE COMPLETE
INFORMATION ABOUT THE PROGRAM,
INCLUDING CHARGES AND FEES, ASK THE
TRUSTEE FOR THE PROGRAM'S PROSPECTUS.
READ IT CAREFULLY BEFORE YOU INVEST.
THE TRUSTEE MUST RECEIVE YOUR WRITTEN
ELECTION TO REINVEST AT LEAST 10 DAYS
BEFORE THE RECORD DAY OF AN INCOME
PAYMENT.
EXCHANGE PRIVILEGES
You may exchange units of this Fund for
units of certain other Defined Asset
Funds. You may also exchange into this
Fund from certain other funds. We
charge a reduced sales fee on
exchanges.
</TABLE>
5
<PAGE>
--------------------------------------------------------------------------------
PENNSYLVANIA INSURED PORTFOLIO--RISK/RETURN SUMMARY
<TABLE>
<C> <S>
1. WHAT IS THE FUND'S OBJECTIVE?
The Fund seeks interest income that is
exempt from regular federal income taxes
and some state and local taxes by
investing in a fixed portfolio
consisting primarily of insured, long
term municipal revenue bonds.
2. WHAT ARE MUNICIPAL REVENUE BONDS?
Municipal revenue bonds are bonds issued
by states, municipalities and public
authorities to finance the cost of
buying, building or improving various
projects intended to generate revenue,
such as airports, health care
facilities, housing and municipal
electric, water and sewer utilities.
Generally, payments on these bonds
depend solely on the revenues generated
by the projects, excise taxes or state
appropriations, and are not backed by
the government's taxing power.
3. WHAT IS THE FUND'S INVESTMENT STRATEGY?
- The Fund plans to hold to maturity 7
long-term tax-exempt municipal bonds
with an aggregate face amount of
$2,430,000. The Fund is a unit
investment trust which means that,
unlike a mutual fund, the Portfolio is
not managed.
- The bonds are rated AAA or Aaa by
Standard & Poor's, Moody's or Fitch.
- Many of the bonds can be called at a
premium declining over time to par
value. Some bonds may be called earlier
at par for extraordinary reasons.
- The Fund is concentrated in refunded
bonds.
- 100% of the bonds are insured by
insurance companies that guarantee
timely payments of principal and
interest on the bonds (but not Fund
units or the market value of the bonds
before they mature).
The Portfolio consists of municipal
bonds of the following types:
</TABLE>
<TABLE>
/ / Hospitals/Health Care 50%
<S> <C>
/ / Municipal Water/Sewer Utilities 22%
/ / Refunded Bonds 28%
</TABLE>
<TABLE>
<C> <S>
4. WHAT ARE THE SIGNIFICANT RISKS?
YOU CAN LOSE MONEY BY INVESTING IN THE FUND.
THIS CAN HAPPEN FOR VARIOUS REASONS,
INCLUDING:
- Rising interest rates, an issuer's worsening
financial condition or a drop in bond
ratings can reduce the price of your units.
- Because the Fund is concentrated in
hospital/health care bonds, adverse
developments in this sector may affect the
value of your units.
- Assuming no changes in interest rates, when
you sell your units, they will generally be
worth less than your cost because your cost
included a sales fee.
- The Fund will receive early returns of
principal if bonds are called or sold before
they mature. If this happens your income
will decline and you may not be able to
reinvest the money you receive at as high a
yield or as long a maturity.
ALSO, THE PORTFOLIO IS CONCENTRATED IN BONDS
OF PENNSYLVANIA SO IT IS LESS DIVERSIFIED
THAN A NATIONAL FUND AND IS SUBJECT TO RISKS
PARTICULAR TO PENNSYLVANIA WHICH ARE BRIEFLY
DESCRIBED UNDER STATE CONCENTRATION RISKS
LATER IN THIS PROSPECTUS.
</TABLE>
6
<PAGE>
<TABLE>
<C> <S>
5. IS THIS FUND APPROPRIATE FOR YOU?
Yes, if you want federally tax-free
income. You will benefit from a
professionally selected and supervised
portfolio whose risk is reduced by
investing in insured bonds of several
different issuers.
The Fund is NOT appropriate for you if
you want a speculative investment that
changes to take advantage of market
movements, if you do not want a
tax-advantaged investment or if you
cannot tolerate any risk.
</TABLE>
<TABLE>
<C> <S>
DEFINING YOUR INCOME
</TABLE>
<TABLE>
<C> <S> <C>
WHAT YOU MAY EXPECT (Payable on
the 25th day of the month to
holders of record on the 10th
day of the month):
Regular Monthly Income per unit $ 4.17
Annual Income per unit: $50.07
THESE FIGURES ARE ESTIMATES DETERMINED ON
THE EVALUATION DAY; ACTUAL PAYMENTS MAY
VARY.
</TABLE>
<TABLE>
<C> <S>
6. WHAT ARE THE FUND'S FEES AND EXPENSES?
This table shows the costs and expenses you may pay,
directly or indirectly, when you invest in the Fund.
INVESTOR FEES
Maximum Sales Fee (Load) on new
purchases (as a percentage of
$1,000 invested) 2.90%
Employees of some of the Sponsors and their affiliates
may pay a reduced sales fee of no less than $5.00 per
unit.
The maximum sales fee is reduced if you invest at
least $100,000, as follows:
</TABLE>
<TABLE>
<CAPTION>
YOUR MAXIMUM
SALES FEE
IF YOU INVEST: WILL BE:
-------------- ------------
<C> <S> <C>
Less than $100,000 2.90%
$100,000 to $249,999 2.65%
$250,000 to $499,999 2.40%
$500,000 to $999,999 2.15%
$1,000,000 and over 1.90%
Maximum Exchange Fee 1.90%
</TABLE>
<TABLE>
<C> <S>
ESTIMATED ANNUAL FUND OPERATING EXPENSES
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
PER UNIT
--------
<C> <S> <C>
$0.70
Trustee's Fee
$0.55
Portfolio Supervision,
Bookkeeping and
Administrative Fees
(including updating
expenses)
$0.51
Evaluator's Fee
$0.96
Other Operating Expenses
-----
$2.72
TOTAL
</TABLE>
<TABLE>
<C> <S>
The Sponsors historically paid updating
expenses.
7. HOW HAVE SIMILAR FUNDS PERFORMED IN THE PAST?
IN THE FOLLOWING CHART WE SHOW PAST PERFORMANCE
OF PRIOR PENNSYLVANIA PORTFOLIOS, WHICH HAD
INVESTMENT OBJECTIVES, STRATEGIES AND TYPES OF
BONDS SUBSTANTIALLY SIMILAR TO THIS FUND. THESE
PRIOR SERIES DIFFERED IN THAT THEY CHARGED A
HIGHER SALES FEE. These prior Pennsylvania
Series were offered after 1987 and were
outstanding on March 31, 2000. OF COURSE, PAST
PERFORMANCE OF PRIOR SERIES IS NO GUARANTEE OF
FUTURE RESULTS OF THIS FUND.
AVERAGE ANNUAL COMPOUND TOTAL RETURNS
FOR PRIOR SERIES
REFLECTING ALL EXPENSES. FOR PERIODS ENDED
3/31/00.
</TABLE>
-------------------------------------------------------------------
<TABLE>
High 3.53% 5.12% 5.74% 4.17% 6.30% 6.33%
<S> <C> <C> <C> <C> <C> <C>
Average -1.92 4.29 5.53 -0.05 5.35 6.12
Low -9.69 2.58 5.38 -6.80 3.48 5.97
</TABLE>
-----------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Average
Sales fee 1.95% 5.26% 5.82%
</TABLE>
-----------------------------------------------------------
NOTE: ALL RETURNS REPRESENT CHANGES IN UNIT PRICE WITH DISTRIBUTIONS REINVESTED
INTO THE MUNICIPAL FUND INVESTMENT ACCUMULATION PROGRAM.
<TABLE>
<C> <S>
8. IS THE FUND MANAGED?
Unlike a mutual fund, the Fund is not managed and
bonds are not sold because of market changes.
Rather, experienced Defined Asset Funds financial
analysts regularly review the bonds in the Fund.
The Fund may sell a bond if certain adverse
credit or other conditions exist.
</TABLE>
7
<PAGE>
<TABLE>
<C> <S>
9. HOW DO I BUY UNITS?
The minimum investment is one unit.
You can buy units from any of the Sponsors and
other broker-dealers. The Sponsors are listed
later in this prospectus. Some banks may offer
units for sale through special arrangements with
the Sponsors, although certain legal restrictions
may apply.
UNIT PRICE PER UNIT $982.00
(as of March 31, 2000)
Unit price is based on the net asset value of the
Fund plus the sales fee. An amount equal to any
principal cash, as well as net accrued but
undistributed interest on the unit, is added to
the unit price. An independent evaluator prices
the bonds at 3:30 p.m. Eastern time every
business day. Unit price changes every day with
changes in the prices of the bonds in the Fund.
10. HOW DO I SELL UNITS?
You may sell your units at any time to any
Sponsor or the Trustee for the net asset value
determined at the close of business on the date
of sale. You will not pay any other fee when you
sell your units.
11. HOW ARE DISTRIBUTIONS MADE AND TAXED?
The Fund pays income monthly.
In the opinion of bond counsel when each bond was
issued, interest on the bonds in this Fund is
generally 100% exempt from regular federal income
tax. Your income may also be exempt from some
state and local personal income taxes if
you live in .
You will also receive principal payments if bonds
are sold or called or mature, when the cash
available is more than $5.00 per unit. You will
be subject to tax on any gain realized by the
Fund on the disposition of bonds.
12. WHAT OTHER SERVICES ARE AVAILABLE?
REINVESTMENT
You will receive your income in cash unless you
choose to compound your income by reinvesting at
no sales fee in the Municipal Fund Investment
Accumulation Program, Inc. This program is an
open-end mutual fund with a comparable investment
objective, but the bonds generally will not be
insured. Income from this program will generally
be subject to state and local income taxes. FOR
MORE COMPLETE INFORMATION ABOUT THE PROGRAM,
INCLUDING CHARGES AND FEES, ASK THE TRUSTEE FOR
THE PROGRAM'S PROSPECTUS. READ IT CAREFULLY
BEFORE YOU INVEST. THE TRUSTEE MUST RECEIVE YOUR
WRITTEN ELECTION TO REINVEST AT LEAST 10 DAYS
BEFORE THE RECORD DAY OF AN INCOME PAYMENT.
EXCHANGE PRIVILEGES
You may exchange units of this Fund for units of
certain other Defined Asset Funds. You may also
exchange into this Fund from certain other funds.
We charge a reduced sales fee on exchanges.
</TABLE>
8
<PAGE>
--------------------------------------------------------------------------------
TAX-FREE VS. TAXABLE INCOME: A COMPARISON OF TAXABLE AND TAX-FREE YIELDS
FOR CALIFORNIA RESIDENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMBINED
EFFECTIVE
TAXABLE INCOME 2000* TAX RATE TAX-FREE YIELD OF
SINGLE RETURN JOINT RETURN % 3% 3.5% 4% 4.5% 5% 5.5%
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IS EQUIVALENT TO A TAXABLE YIELD OF
<CAPTION>
TAXABLE INCOME 2000* TAX-FREE YIELD OF
SINGLE RETURN 6% 6.5% 7% 7.5% 8%
<S> <C> <C> <C> <C> <C>
IS EQUIVALENT TO A
TAXABLE YIELD OF
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 $ $0- 43,050 20.10 3.75 4.38 5.01 5.63 6.26 6.88 7.51
$ 26,251- 63,550 $ 43,851-105,950 34.70 4.59 5.36 6.13 6.89 7.66 8.42 9.19
$ 63,551-132,600 $105,951-161,450 37.42 4.79 5.59 6.39 7.19 7.99 8.79 9.59
$132,601-288,350 $161,451-288,350 41.95 5.17 6.03 6.89 7.75 8.61 9.47 10.34
OVER $288,350 OVER $288,350 45.22 5.48 6.39 7.30 8.21 9.13 10.04 10.95
<S> <C> <C> <C> <C>
$ 0- 26,250 8.14 8.76 9.39 10.01
$ 26,251- 63,550 9.95 10.72 11.48 12.25
$ 63,551-132,600 10.39 11.19 11.98 12.78
$132,601-288,350 11.20 12.06 12.92 13.78
OVER $288,350 11.87 12.78 13.69 14.60
</TABLE>
FOR PENNSYLVANIA RESIDENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMBINED
EFFECTIVE
TAXABLE INCOME 2000* TAX RATE TAX-FREE YIELD OF
SINGLE RETURN JOINT RETURN % 3% 3.5% 4% 4.5% 5% 5.5%
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IS EQUIVALENT TO A TAXABLE YIELD OF
<CAPTION>
TAXABLE INCOME 2000* TAX-FREE YIELD OF
SINGLE RETURN 6% 6.5% 7% 7.5% 8%
<S> <C> <C> <C> <C> <C>
IS EQUIVALENT TO A
TAXABLE YIELD OF
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 26,250 $ 0- 43,850 17.38 3.63 4.24 4.84 5.45 6.05 6.66 7.26
$ 26,251- 63,550 $ 43,851-109,950 30.02 4.29 5.00 5.72 6.43 7.14 7.86 8.57
$ 63,551-132,600 $105,951-161,450 32.93 4.47 5.22 5.96 6.71 7.46 8.20 8.95
$132,601-288,350 $161,451-288,350 37.79 4.82 5.63 6.43 7.23 8.04 8.84 9.65
OVER $288,350 OVER $288,350 41.29 5.11 5.96 6.81 7.66 8.52 9.37 10.22
<S> <C> <C> <C> <C>
$ 0- 26,250 7.87 8.47 9.08 9.68
$ 26,251- 63,550 9.29 10.00 10.72 11.43
$ 63,551-132,600 9.69 10.44 11.18 11.93
$132,601-288,350 10.45 11.25 12.06 12.86
OVER $288,350 11.07 11.92 12.77 13.63
</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 2000
federal and applicable State income tax rates and assumes that all income would
otherwise be taxed at the investor's highest tax rate. Yield figures are for
example only.
*Based upon net amount subject to federal income tax after deductions and
exemptions. This table does not reflect the possible effect of other tax
factors, such as alternative minimum tax, personal exemptions, the phase out of
exemptions, itemized deductions or the possible partial disallowance of
deductions. Consequently, you should consult your own tax advisers in this
regard.
9
<PAGE>
WHAT YOU CAN EXPECT FROM YOUR INVESTMENT
MONTHLY INCOME
The Fund will pay you regular monthly income. Your monthly income may vary
because of:
- elimination of one or more bonds from the Fund's portfolio because of calls,
redemptions or sales;
- a change in the Fund's expenses; or
- the failure by a bond's issuer to pay interest.
Changes in interest rates generally will not affect your income because the
portfolio is fixed.
Along with your income, you will receive your share of any available bond
principal.
RETURN FIGURES
We cannot predict your actual return, which will vary with unit price, how long
you hold your investment and changes in the portfolio, interest income and
expenses.
ESTIMATED CURRENT RETURN equals the estimated annual cash to be received from
the bonds in the Fund less estimated annual Fund expenses, divided by the Unit
Price (including the maximum sales fee):
<TABLE>
<S> <C> <C>
Estimated Annual Estimated
Interest Income - Annual Expenses
-------------------------------------
Unit Price
</TABLE>
ESTIMATED LONG TERM RETURN is a measure of the estimated return over the
estimated life of the Fund. Unlike Estimated Current Return, Estimated Long Term
Return reflects maturities, discounts and premiums of the bonds in the Fund. It
is an average of the yields to maturity (or in certain cases, to an earlier call
date) of the individual bonds in the portfolio, adjusted to reflect the Fund's
maximum sales fee and estimated expenses. We calculate the average yield for the
portfolio by weighting each bond's yield by its market value and the time
remaining to the call or maturity date.
Yields on individual bonds depend on many factors including general conditions
of the bond markets, the size of a particular offering and the maturity and
quality rating of the particular issues. Yields can vary among bonds with
similar maturities, coupons and ratings.
These return quotations are designed to be comparative rather than predictive.
RECORDS AND REPORTS
You will receive:
- a monthly statement of income payments and any principal payments;
- a notice from the Trustee when new bonds are deposited in exchange or
substitution for bonds originally deposited;
- an annual report on Fund activity; and
- annual tax information. THIS WILL ALSO BE SENT TO THE IRS. YOU MUST REPORT THE
AMOUNT OF TAX-EXEMPT INTEREST RECEIVED DURING THE YEAR.
You may request:
- copies of bond evaluations to enable you to comply with federal and state tax
reporting requirements; and
- audited financial statements of the Fund.
You may inspect records of Fund transactions at the Trustee's office during
regular business hours.
10
<PAGE>
THE RISKS YOU FACE
INTEREST RATE RISK
Investing involves risks, including the risk that your investment will decline
in value if interest rates rise. Generally, bonds with longer maturities will
change in value more than bonds with shorter maturities. Bonds in the Fund are
more likely to be called when interest rates decline. This would result in early
returns of principal to you and may result in early termination of the Fund. Of
course, we cannot predict how interest rates may change.
CALL RISK
Many bonds can be prepaid or "called" by the issuer before their stated
maturity.
For example, some bonds may be required to be called pursuant to mandatory
sinking fund provisions.
Also, an issuer might call its bonds during periods of falling interest rates,
if the issuer's bonds have a coupon higher than current market rates.
An issuer might call its bonds in extraordinary cases, including if:
- it no longer needs the money for the original purpose;
- the project is condemned or sold;
- the project is destroyed and insurance proceeds are used to redeem the
bonds;
- any related credit support expires and is not replaced; or
- interest on the bonds become taxable.
If the bonds are called, your income will decline and you may not be able to
reinvest the money you receive at as high a yield or as long a maturity. An
early call at par of a premium bond will reduce your return.
REDUCED DIVERSIFICATION RISK
If many investors sell their units, the Fund will have to sell bonds. This could
reduce the diversification of your investment and increase your share of Fund
expenses.
LIQUIDITY RISK
You can always sell back your units, but we cannot assure you that a liquid
trading market will always exist for the bonds in the portfolio, especially
since current law may restrict the Fund from selling bonds to any Sponsor. The
bonds will generally trade in the over-the-counter market. The value of the
bonds, and of your investment, may be reduced if trading in bonds is limited or
absent.
CONCENTRATION RISK
When a certain type of bond makes up 25% or more of the portfolio, it is said to
be "concentrated" in that bond type, which makes the Portfolio less diversified.
Here is what you should know about the California Portfolio's concentration in
municipal water and sewer revenue bonds. The payment of interest and principal
of these bonds depends on the rates the utilities may charge, the demand for
their services and the cost of operating their business which includes the
expense of complying with environmental and other energy and licensing laws and
regulations. The operating results of utilities are particularly influenced by:
- increases in operating and construction costs; and
- unpredicability of future usage requirements.
Here is what you should know about the Pennsylvania Portfolio's concentration in
hospital and health care bonds.
11
<PAGE>
- payment for these bonds depends on revenues from private third-party payors
and government programs, including Medicare and Medicaid, which have
generally undertaken cost containment measures to limit payments to health
care providers;
- hospitals face increasing competition resulting from hospital mergers and
affiliations;
- hospitals need to reduce costs as HMOs increase market penetration and
hospital supply and drug companies raise prices;
- hospitals and health care providers are subject to various legal claims by
patients and others and are adversely affected by increasing costs of
insurance; and
- many hospitals are aggressively buying physician practices and assuming risk
contracts to gain market share. If revenues do not increase accordingly,
this practice could reduce profits;
- Medicare is changing its reimbursement system for nursing homes. Many
nursing home providers are not sure how they will be treated. In many cases,
the providers may receive lower reimbursements and these would have to cut
expenses to maintain profitability; and
- most retirement/nursing home providers rely on entrance fees for operating
revenues. If people live longer than expected and turnover is lower than
budgeted, operating revenues would be adversely affected by less than
expected entrance fees.
Here is what you should know about the Pennsylvania Portfolio's concentration in
refunded bonds. Refunded bonds are typically:
- backed by direct obligations of the U.S. government; or
- in some cases, backed by obligations guaranteed by the U.S. government and
placed in escrow with an independent trustee;
- noncallable prior to maturity; but
- sometimes called for redemption prior to maturity.
STATE CONCENTRATION RISK
CALIFORNIA RISK
GENERALLY
From the late 1980s through the early 1990s, an economic recession eroded
California's revenue base. At the same time rapid population growth caused State
expenditures to exceed budget appropriations.
- As a result California experienced a period of sustained budget imbalance.
- Since that time the California economy has improved markedly and the extreme
budgetary pressures have begun to lessen.
STATE GOVERNMENT
The 1999-2000 Budget Act allocated a State budget of approximately $63.7 Billion
and contains no tax increases or reductions. Despite this somewhat improved
state, California's budget is still subject to certain unforeseeable events. For
example:
- In December, 1994, Orange County and its investment pool filed for
bankruptcy. While a settlement has been reached, the full impact on the
State and Orange County remains unknown.
- California faces constant fluctuations in other expenses (including health
and welfare caseloads, property tax receipts, federal funding and natural
disaster relief) that will undoubtedly create new
12
<PAGE>
budgetary pressure and reduce ability to pay their debts.
- California's general obligation bonds are currently rated AA3 by Moody's and
AA- by Standard & Poor's.
OTHER RISKS
Issuers' ability to make payments on bonds (and the remedies available to
bondholders) could also be adversely affected by the following constraints:
- Certain provisions of California's Constitution, laws and regulatory system
contain tax, spending and appropriations limits and prohibit certain new
taxes.
- Certain other California laws subject the users of bond proceeds to strict
rules and limits regarding revenue repayment.
- Bonds of healthcare institutions which are subject to the strict rules and
limits regarding reimbursement payments of California's Medi-Cal program for
health care services to welfare recipients and bonds secured by liens on
real property are two of the types of bonds that could be affected by these
provisions.
PENNSYLVANIA RISKS
GENERALLY
Pennsylvania and many of its municipalities (including Philadelphia) have
undergone an economic decline:
- coal, steel, railroads and other heavy industry historically associated with
the Commonwealth has given way to increased competition from foreign
producers.
- agriculture and related industries are still an important part of the
Commonwealth's economy.
- recently, however, service sector industries (trade, medical and health
services, education and financial services) have provided new sources of
growth.
STATE AND LOCAL GOVERNMENTS
Historically, both the Commonwealth and the City of Philadelphia have
experienced serious revenue shortfalls. At the same time, rising demands for
state and local programs and services (particularly medical assistance and cash
assistance programs) have led to increased spending.
- in recent years, both the Commonwealth and the City of Philadelphia have
tried to balance their budgets with a mix of tax increases and spending
cuts.
- Philadelphia has considered significant service cuts and privatization of
certain services which it has provided to date.
- In 1991, the Commonwealth created the Pennsylvania Inter-Governmental
Cooperation Authority ('PICA') which it authorized to issue debt to cover
Philadelphia's budget shortfalls, eliminate the City's projected deficits
and fund its capital spending. PICA issued approximately $1.76 billion of
Special Revenue Bonds on Philadelphia's behalf. Its power to issue bonds on
Philadelphia's behalf expired at the end of 1996; as of June 30, 1999,
approximately $1.0 billion in PICA Special Revenue Bonds were outstanding.
- Pennsylvania's general obligation bonds are currently rated Aa3 by Moody's
and
13
<PAGE>
AA- by Standard & Poor's. Philadelphia's general obligation bonds are rated
Baa2 by Moody's and BBB by Standard & Poor's. There can be no assurance that
these ratings will not be lowered.
BOND QUALITY RISK
A reduction in a bond's rating may decrease its value and, indirectly, the value
of your investment in the Fund.
INSURANCE RELATED RISK
Some bonds are backed by insurance companies (as shown under Portfolios).
Insurance policies generally make payments only according to a bond's original
payment schedule and do not make early payments when a bond defaults or becomes
taxable. Although the federal government does not regulate the insurance
business, various state laws and federal initiatives and tax law changes could
significantly affect the insurance business. The claims-paying ability of the
insurance companies is generally rated A or better by Standard & Poor's or
another nationally recognized rating organization. The insurance company ratings
are subject to change at any time at the discretion of the rating agencies.
LITIGATION AND LEGISLATION RISKS
We do not know of any pending litigation that might have a material adverse
effect upon the Fund.
Future tax legislation could affect the value of the portfolio by:
- limiting real property taxes,
- reducing tax rates,
- imposing a flat or other form of tax, or
- exempting investment income from tax.
SELLING OR EXCHANGING UNITS
You can sell your units at any time for a price based on net asset value. Your
net asset value is calculated each business day by:
- ADDING the value of the bonds, net accrued interest, cash and any other Fund
assets;
- SUBTRACTING accrued but unpaid Fund expenses, unreimbursed Trustee advances,
cash held to buy back units or for distribution to investors and any other
Fund liabilities; and
- DIVIDING the result by the number of outstanding units.
Your net asset value when you sell may be more or less than your cost because of
sales fees, market movements and changes in the portfolio.
SPONSORS' SECONDARY MARKET
While we are not obligated to do so, we will buy back units at net asset value
without any other fee or charge. We may resell the units to other buyers or to
the Trustee. You should consult your financial professional for current market
prices to determine if other broker-dealers or banks are offering higher prices.
We have maintained the secondary market continuously for over 28 years, but we
could discontinue it without prior notice for any business reason.
SELLING UNITS TO THE TRUSTEE
Regardless of whether we maintain a secondary market, you can sell your units to
the Trustee at any time by sending the Trustee a letter (with any outstanding
14
<PAGE>
certificates if you hold Unit certificates). You must properly endorse your
certificates (or execute a written transfer instrument with signatures
guaranteed by an eligible institution). Sometimes, additional documents are
needed such as a trust document, certificate of corporate authority, certificate
of death or appointment as executor, administrator or guardian.
Within seven days after your request and the necessary documents are received,
the Trustee will mail a check to you. Contact the Trustee for additional
information.
As long as we are maintaining a secondary market, the Trustee will sell your
units to us at a price based on net asset value. If there is no secondary
market, the Trustee may sell your units in the over-the-counter market for a
higher price, but it is not obligated to do so. In that case, you will receive
the net proceeds of the sale.
If the Fund does not have cash available to pay you for units you are selling,
the agent for the Sponsors will select bonds to be sold. Bonds will be selected
based on market and credit factors. These sales could be made at times when the
bonds would not otherwise be sold and may result in your receiving less than the
unit par value and also reduce the size and diversity of the Fund.
There could be a delay in paying you for your units:
- if the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
- if the SEC determines that trading on the New York Stock Exchange is
restricted or that an emergency exists making sale or evaluation of the
bonds not reasonably practicable; and
- for any other period permitted by SEC order.
EXCHANGE OPTION
You may exchange units of certain Defined Asset Funds for units of this Fund at
a maximum exchange fee of 1.90%. You may exchange units of this Fund for units
of certain other Defined Asset Funds at a reduced sales fee if your investment
goals change. To exchange units, you should talk to your financial professional
about what funds are exchangeable, suitable and currently available.
Normally, an exchange is taxable and you must recognize any gain or loss on the
exchange. However, the IRS may try to disallow a loss if the portfolios of the
two funds are not materially different; you should consult your own tax adviser.
We may amend or terminate this exchange option at any time without notice.
HOW THE FUND WORKS
PRICING
The price of a unit includes interest accrued on the bonds, less expenses, from
the initial most recent Record Day up to, but not including, the settlement
date, which is usually three business days after the purchase date of the unit.
A portion of the price of a unit consists of cash so that the Trustee can
provide you with regular monthly income. When you sell your units you will
receive your share of this cash.
15
<PAGE>
EVALUATIONS
An independent Evaluator values the bonds on each business day (excluding
Saturdays, Sundays and the following holidays as observed by the New York Stock
Exchange: New Year's Day, Presidents' Day, Martin Luther King, Jr. Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas).
Bond values are based on current bid or offer prices for the bonds or comparable
bonds. In the past, the difference between bid and offer prices of publicly
offered tax-exempt bonds has ranged from 0.5% of face amount on actively traded
issues to 3.5% on inactively traded issues; the difference has averaged between
1 and 2%.
INCOME
The Trustee credits interest to an Income Account and other receipts to a
Capital Account. The Trustee may establish a Reserve Account by withdrawing from
these accounts amounts it considers appropriate to pay any material liability.
These accounts do not bear interest.
EXPENSES
The Trustee is paid monthly. It also benefits when it holds cash for the Fund in
non-interest bearing accounts. The Trustee may also receive additional amounts:
- to reimburse the Trustee for the Fund's operating expenses;
- for extraordinary services and costs of indemnifying the Trustee and the
Sponsors;
- costs of actions taken to protect the Fund and other legal fees and
expenses;
- expenses for keeping the Fund's registration statement current; and
- Fund termination expenses and any governmental charges.
The Sponsors are currently reimbursed up to 55 CENTS per $1,000 face amount
annually for providing portfolio supervisory, bookkeeping and administrative
services and for any other expenses properly chargeable to the Fund. Legal,
typesetting, electronic filing and regulatory filing fees and expenses
associated with updating the Portfolio's registration statement yearly are also
now chargeable to the Portfolio. While this fee may exceed the amount of these
costs and expenses attributable to this Fund, the total of these fees for all
Series of Defined Asset Funds will not exceed the aggregate amount attributable
to all of these Series for any calendar year. The Fund also pays the Evaluator's
fees.
The Trustee's, Sponsors' and Evaluator's fees may be adjusted for inflation
without investors' approval.
The Sponsors will pay advertising and selling expenses at no charge to the Fund.
If Fund expenses exceed initial estimates, the Fund will owe the excess. The
Trustee has a lien on Fund assets to secure reimbursement of Fund expenses and
may sell bonds if cash is not available.
PORTFOLIO CHANGES
The Sponsors and Trustee are not liable for any default or defect in a bond; if
a contract to buy any bond.
Unlike a mutual fund, the portfolio is designed to remain intact and we may keep
16
<PAGE>
bonds in the portfolio even if their credit quality declines or other adverse
financial circumstances occur. However, we may sell a bond in certain cases if
we believe that certain adverse credit conditions exist or if a bond becomes
taxable.
If we maintain a secondary market in units but are unable to sell the units that
we buy in the secondary market, we will redeem units, which may affect the
composition of the portfolio. Units offered in the secondary market may not
represent the same face amount of bonds that they did originally.
We decide whether or not to offer units for sale that we acquire in the
secondary market after reviewing:
- diversity of the portfolio;
- size of the Fund relative to its original size;
- ratio of Fund expenses to income;
- current and long-term returns;
- degree to which units may be selling at a premium over par; and
- cost of maintaining a current prospectus.
FUND TERMINATION
The Fund will terminate following the stated maturity or sale of the last bond
in the portfolio. The Fund may also terminate earlier with the consent of
investors holding 51% of the units or if total assets of the Fund have fallen
below 40% of the face amount of bonds deposited. We will decide whether to
terminate the Fund early based on the same factors used in deciding whether or
not to offer units in the secondary market.
When the Fund is about to terminate you will receive a notice, and you will be
unable to sell your units after that time. On or shortly before termination, we
will sell any remaining bonds, and you will receive your final distribution. Any
bond that cannot be sold at a reasonable price may continue to be held by the
Trustee in a liquidating trust pending its final sale.
You will pay your share of the expenses associated with termination, including
brokerage costs in selling bonds. This may reduce the amount you receive as your
final distribution.
CERTIFICATES
Certificates for units are issued on request. You may transfer certificates by
complying with the requirements for redeeming certificates, described above. You
can replace lost or mutilated certificates by delivering satisfactory indemnity
and paying the associated costs.
TRUST INDENTURE
The Fund is a "unit investment trust" governed by a Trust Indenture, a contract
among the Sponsors, the Trustee and the Evaluator, which sets forth their duties
and obligations and your rights. A copy of the Indenture is available to you on
request to the Trustee. The following summarizes certain provisions of the
Indenture.
The Sponsors and the Trustee may amend the Indenture without your consent:
- to cure ambiguities;
- to correct or supplement any defective or inconsistent provision;
17
<PAGE>
- to make any amendment required by any governmental agency; or
- to make other changes determined not to be materially adverse to your best
interest (as determined by the Sponsors).
Investors holding 51% of the units may amend the Indenture. Every investor must
consent to any amendment that changes the 51% requirement. No amendment may
reduce your interest in the Fund without your written consent.
The Trustee may resign by notifying the Sponsors. The Sponsors may remove the
Trustee without your consent if:
- it fails to perform its duties and the Sponsors determine that its
replacement is in your best interest; or
- it becomes incapable of acting or bankrupt or its affairs are taken over by
public authorities.
Investors holding 51% of the units may remove the Trustee. The Evaluator may
resign or be removed by the Sponsors and the Trustee without the consent of
investors. The resignation or removal of either becomes effective when a
successor accepts appointment. The Sponsors will try to appoint a successor
promptly; however, if no successor has accepted within 30 days after notice of
resignation, the resigning Trustee or Evaluator may petition a court to appoint
a successor.
Any Sponsor may resign as long as one Sponsor with a net worth of $2 million
remains and agrees to the resignation. The remaining Sponsors and the Trustee
may appoint a replacement. If there is only one Sponsor and it fails to perform
its duties or becomes bankrupt the Trustee may:
- remove it and appoint a replacement Sponsor;
- liquidate the Fund; or
- continue to act as Trustee without a Sponsor.
Merrill Lynch, Pierce, Fenner & Smith Incorporated acts as agent for the
Sponsors.
The Trust Indenture contains customary provisions limiting the liability of the
Trustee, the Sponsors and the Evaluator.
LEGAL OPINION
Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York 10017, as
counsel for the Sponsors, has given an opinion that the units are validly
issued. Special counsel located in the relevant states have given state and
local tax opinions.
AUDITORS
Deloitte & Touche LLP, 2 World Financial Center, New York, New York 10281,
independent accountants, audited the Statements of Condition included in this
prospectus.
SPONSORS
The Sponsors are:
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED (a wholly-owned subsidiary of
Merrill Lynch & Co., Inc.)
P.O. Box 9051,
Princeton, NJ 08543-9051
PAINEWEBBER INCORPORATED (a wholly-owned subsidiary of PaineWebber Group Inc.)
1285 Avenue of the Americas,
New York, NY 10019
18
<PAGE>
Each Sponsor is a Delaware corporation and it, or its predecessor, has acted as
sponsor to many unit investment trusts. As a registered broker-dealer each
Sponsor buys and sells securities (including investment company shares) for
others (including investment companies) and participates as an underwriter in
various selling groups.
TRUSTEE
The Chase Manhattan Bank, Unit Investment Trust Department, 4 New York
Plaza--6th Floor, New York, New York 10004, is the Trustee. It is supervised by
the Federal Deposit Insurance Corporation, the Board of Governors of the Federal
Reserve System and New York State banking authorities.
UNDERWRITERS' AND SPONSORS' PROFITS
Underwriters receive sales charges when they sell units. The Sponsors also
realized a profit or loss on the initial date of deposit of the bonds. Any cash
made available by you to the Sponsors before the settlement date for those units
may be used in the Sponsors' businesses to the extent permitted by federal law
and may benefit the Sponsors.
A Sponsor or Underwriter may realize profits or sustain losses on bonds in the
Fund which were acquired from underwriting syndicates of which it was a member.
In maintaining a secondary market, 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 or redeem them.
PUBLIC DISTRIBUTION
The Sponsors do not intend to qualify units for sale in any foreign countries.
This prospectus does not constitute an offer to sell units in any country where
units cannot lawfully be sold.
CODE OF ETHICS
The Fund and the Agent for the Sponsors have each adopted a code of ethics
requiring reporting of personal securities transactions by its employees with
access to information on Fund transactions. Subject to certain conditions, the
codes permit employees to invest in Fund securities for their own accounts. The
codes are designed to prevent fraud, deception and misconduct against the Fund
and to provide reasonable standards of conduct. These codes are on file with the
Commission and you may obtain a copy by contacting the Commission at the address
listed on the back cover of this prospectus.
YEAR 2000 ISSUES
Many computer systems were designed in such a way that they may be unable to
distinguish between the year 2000 and the year 1900 (commonly known as the "Year
2000 Problem"). To date we are not aware of any major operational difficulties
resulting from the computer system changes necessary to prepare for the Year
2000. However, there can be no assurance that the Year 2000 Problem will not
adversely affect the issuers of the bonds contained in the Portfolio. We cannot
predict whether any impact will be material to the Fund as a whole.
19
<PAGE>
TAXES
The following summary describes some of the important income tax consequences of
holding units. It assumes that you are not a dealer, financial institution,
insurance company or other investor with special circumstances or subject to
special rules. You should consult your own tax adviser about your particular
circumstances.
At the date of issue of each bond, counsel for the issuer delivered an opinion
to the effect that interest on the bond is exempt from regular federal income
tax. However, interest may be subject to state and local taxes and may be taken
into account in determining your preference items for alternative minimum tax
purposes. Neither we nor our counsel have reviewed the issuance of the bonds,
related proceedings or the basis for the opinions of counsel for the issuers. We
cannot assure you that the issuer (or other users of bond proceeds) have
complied or will comply with any requirements necessary for a bond to be
tax-exempt. If any of the bonds were determined not to be tax-exempt, you could
be required to pay income tax for current and prior years, and if the Fund were
to sell the bond, it might have to sell it at a substantial discount.
In the opinion of our counsel, under existing law:
GENERAL TREATMENT OF THE FUND AND YOUR INVESTMENT
The Fund will not be taxed as a corporation for federal income tax purposes, and
you will be considered to own directly your share of each bond in the Fund.
GAIN OR LOSS UPON DISPOSITION
When all or part of your share of a bond is disposed of (for example, when the
Fund sells, exchanges or redeems a bond or when you sell or exchange your
units), you will generally recognize capital gain or loss. Your gain, however,
will generally be ordinary income to the extent of any accrued "market
discount". Generally you will have market discount to the extent that your basis
in a bond when you purchase a unit is less than its stated redemption price at
maturity (or, if it is an original issue discount bond, the issue price
increased by original issue discount that has accrued on the bond before your
purchase). You should consult your tax adviser in this regard.
If your net long-term capital gains exceed your net short-term capital losses,
the excess may be subject to tax at a lower rate than ordinary income. Any
capital gain from the Fund will be long-term if you are considered to have held
your investment on each bond for more than one year and short-term otherwise. If
you are an individual and sell your units after holding them for more than one
year, you may be entitled to a 20% maximum federal tax rate on any resulting
gains. Consult your tax adviser in this regard. Because the deductibility of
capital losses is subject to limitations, you may not be able to deduct all of
your capital losses.
YOUR BASIS IN THE BONDS
Your aggregate basis in the bonds will be equal to the cost of your units,
including any sales charges you pay, adjusted to reflect any accruals of
"original issue discount," "acquisition premium" and "bond
20
<PAGE>
premium". You should consult your tax adviser in this regard.
EXPENSES
If you are not a corporate investor, you will not be entitled to a deduction for
your share of fees and expenses of the Fund. Also, if you borrowed money in
order to purchase or carry your units, you will not be able to deduct the
interest on this borrowing for federal income tax purposes. The IRS may treat
your purchase of units as made with borrowed money even if the money is not
directly traceable to the purchase of units.
NEW YORK TAXES
Under the income tax laws of the State and City of New York, the Fund will not
be taxed as a corporation. If you are a New York taxpayer, your income from the
Fund will not be tax-exempt in New York except to the extent that the income is
earned on bonds that are tax-exempt for New York purposes. Depending on where
you live, your income from the Fund may be subject to state and local taxation.
You should consult your tax adviser in this regard.
CALIFORNIA TAXES
In the opinion of O'Melveny & Myers LLP, Los Angeles, California, special
counsel on California tax matters:
Under the income tax laws of the State of California, the Trust will not be
taxed as a corporation and you will be considered to own directly your share of
each bond of the Trust. If you are a California taxpayer, your share of the
income from the bonds of the Trust will not be tax-exempt in California except
for California personal income tax purposes and only to the extent that the
income is earned on bonds that are exempt for such purposes. If you are a
California taxpayer and all or part of your share of a bond is disposed of (for
example, when a bond is sold, exchanged or redeemed at maturity or you sell or
exchange your units), you will recognize gain or loss for California tax
purposes. Depending on where you live, your income from the Trust may be subject
to state and local taxation. You should consult your tax advisor in this regard.
PENNSYLVANIA TAXES
In the opinion of Drinker Biddle & Reath LLP, Philadelphia, Pennsylvania,
special counsel on Pennsylvania tax matters:
The Pennsylvania Trust will not be taxed as a corporation under the current
income tax laws of Pennsylvania. Your income from the Trust may be subject to
taxation depending on where you live. If you are a Pennsylvania taxpayer your
interest income from the Trust will be tax-exempt to the extent that income is
earned on bonds that are tax-exempt for Pennsylvania purposes. However, gains on
the sale of bonds by the Trust or on the sale of your units will be subject to
Pennsylvania income tax. If you are a Philadelphia resident you may be subject
to the Philadelphia school district tax on any gains realized from the sale of
bonds by the Trust or the sale of units by you to the extent either the bonds or
units have been held for six months or less. You should consult your tax adviser
as to the consequences to you with respect to any investment you make in the
Trust.
21
<PAGE>
SUPPLEMENTAL INFORMATION
You can receive at no cost supplemental information about the Fund by calling
the Trustee. The supplemental information includes more detailed risk disclosure
about the types of bonds that may be in the Fund's portfolios, general risk
disclosure concerning any insurance securing certain bonds, and general
information about the structure and operation of the Fund. The supplemental
information is also available from the SEC.
22
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL STATE SERIES - 1,
(CALIFORNIA INSURED SERIES AND
PENNSYLVANIA INSURED SERIES)
REPORT OF INDEPENDENT ACCOUNTANTS
The Sponsors, Trustee and Holders
of Defined Asset Funds - Municipal State Series - 1 (California
Insured Series and Pennsylvania Insured Series):
We have audited the accompanying statements of condition of Defined
Asset Funds - Municipal State Series - 1, (California Insured Series
and Pennsylvania Insured Series), including the portfolios, as of
March 31, 2000 and the related statements of operations and of changes
in net assets for the years ended March 31, 2000, 1999 and 1998. These
financial statements are the responsibility of the Trustee. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Securities owned at March 31, 2000, as shown in such portfolios, were
confirmed to us by The Chase Manhattan Bank, 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Defined
Asset Funds - Municipal State Series - 1 (California Insured Series
and Pennsylvania Insured Series) at March 31, 2000 and the results of
their operations and changes in their net assets for the above-stated
years in accordance with accounting principles generallly accepted in
the United States of America.
DELOITTE & TOUCHE LLP
New York, N.Y.
May 23, 2000
D - 1.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL STATE SERIES - 1,
CALIFORNIA INSURED SERIES
STATEMENT OF CONDITION
As of March 31, 2000
<TABLE>
<S> <C> <C>
TRUST PROPERTY:
Investment in marketable securities -
at value (cost $ 3,032,138) (Note 1)......... $ 3,149,876
Proceeds receivable from sale of securities .... 46,521
Accrued interest ............................... 51,026
Acrrued interest on Segregated Bond (Note 5) ... 3,027
Income payments receivable (Segregated Bond) ... 1,738
Principal payments receivable .................. 53
Cash - principal ............................... 35,433
-----------
Total trust property ......................... 3,287,674
LESS LIABILITIES:
Income advance from Trustee..................... $ 40,786
Other advace from Trustee ...................... 1,175
Deferred sales charge (Note 5) ................. 8,280
Principal payments payable (Segregated Bond) ... 688
Income payments payable (Segregated Bond) ...... 53
Redemption payable ............................. 46,521
Accrued Sponsors' fees ......................... 452 97,955
----------- -----------
NET ASSETS, REPRESENTED BY:
3,214 units of fractional undivided
interest outstanding (Note 3)................ 3,180,097
Undistributed net investment income ............ 9,622 $ 3,189,719
----------- ===========
UNIT VALUE ($ 3,189,719 / 3,214 units )........... $ 992.45
===========
</TABLE>
See Notes to Financial Statements.
D - 2.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL STATE SERIES - 1,
CALIFORNIA INSURED SERIES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended March 31,
2000 1999 1998
---- ---- ----
<S> <C> <C>
INVESTMENT INCOME:
Interest income ........................ $ 188,094 $ 224,581 $ 279,359
Interest income on Segregated
Bond (Note 5) ........................ 11,060 11,480 13,372
Trustee's fees and expenses ............ (5,985) (6,158) (7,634)
Sponsors' fees ......................... (1,880) (1,930) (2,578)
------------------------------------------------
Net investment income .................. 191,289 227,973 282,519
------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain on
securities sold or redeemed .......... 17,313 87,757 44,953
Unrealized appreciation (depreciation)
of investments ....................... (240,740) (58,257) 367,670
------------------------------------------------
Net realized and unrealized
gain (loss) on investments .......... (223,427) 29,500 412,623
------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS .............. $ (32,138) $ 257,473 $ 695,142
================================================
</TABLE>
See Notes to Financial Statements.
D - 3.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL STATE SERIES - 1,
CALIFORNIA INSURED SERIES
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Years Ended March 31,
2000 1999 1998
---- ---- ----
<S> <C> <C>
OPERATIONS:
Net investment income .................. $ 191,289 $ 227,973 $ 282,519
Realized gain
securities sold or redeemed .......... 17,313 87,757 44,953
Unrealized appreciation (depreciation)
of investments ....................... (240,740) (58,257) 367,670
------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ............ (32,138) 257,473 695,142
------------------------------------------------
DISTRIBUTIONS TO HOLDERS (Note 2):
Income ................................ (180,665) (217,096) (269,599)
Principal .............................. (4,315) (16,378) (2,861)
------------------------------------------------
Total distributions .................... (184,980) (233,474) (272,460)
------------------------------------------------
SHARE TRANSACTIONS:
Deferred sales charge (Note 5):
Income ............................... (12,617) (7,729) (2,363)
Principal ............................ (26,056) (37,985) (52,904)
REDEMPTION AMOUNTS:
Income ................................. (1,207) (2,471) (2,270)
Income on Segregated Bond .............. (497)
Principal .............................. (468,686) (1,020,794) (790,667)
------------------------------------------------
Net share transactions ................. (509,063) (1,068,979) (848,204)
------------------------------------------------
NET DECREASE IN NET ASSETS ............... (726,181) (1,044,980) (425,522)
NET ASSETS AT BEGINNING OF YEAR........... 3,915,900 4,960,880 5,386,402
------------------------------------------------
NET ASSETS AT END OF YEAR................. $ 3,189,719 $ 3,915,900 $ 4,960,880
================================================
PER UNIT:
Income distributions during
year.................................. $ 51.38 $ 52.36 $ 53.45
================================================
Principal distributions during
year.................................. $ 1.24 $ 4.22 $ 0.57
================================================
Net asset value at end of
yaer.................................. $ 992.45 $ 1,062.37 $ 1,068.69
================================================
TRUST UNITS:
Redeemed during year.................... 472 956 758
Outstanding at end of year.............. 3,214 3,686 4,642
================================================
</TABLE>
See Notes to Financial Statements.
D - 4.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL STATE SERIES - 1,
CALIFORNIA INSURED SERIES
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940 as a
Unit Investment Trust. The following is a summary of significant
accounting policies consistently followed by the Fund in the
preparation of its financial statements. The policies are in
accordance with accounting principles generally accepted in the United
States of America.
(A) Securities are stated at value as determined by the
Evaluator based on bid side evaluations for the securities.
(B) The Fund is not subject to income taxes. Accordingly, no
provision for such taxes is required.
(C) Interest income is recorded as earned.
2. DISTRIBUTIONS
A distribution of net investment income is made to Holders each month.
Receipts other than interest, after deductions for redemptions and
applicable expenses, are also distributed periodically.
3. NET CAPITAL
<TABLE>
<S> <C>
Cost of 3,214 units at Date of Deposit ..................... $ 3,210,416
Transfer to capital of interest on Segregated Bonds (Note 5) 69,447
Transfer to capital of interest ............................ 6,095
Redemptions of units - net cost of 2,589 units redeemed
less redemption amounts (principal)....................... (105,864)
Income on Segregated Bond paid upon redemption ............. (497)
Principal distributions .................................... (26,165)
Deferred sales charge (Note 5) ............................. (251,360)
Realized gain on securities sold or redeemed ............... 160,287
Unrealized appreciation of investments...................... 117,738
-----------
Net capital applicable to Holders .......................... $ 3,180,097
===========
</TABLE>
4. INCOME TAXES
As of March 31, 2000, unrealized appreciation of investments, based on
cost for Federal income tax purposes, aggregated $117,738, all of
which related to appreciated securities. The cost of investment
securities for Federal income tax purposes was $3,032,138 at March 31,
2000.
D - 5.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL STATE SERIES - 1,
CALIFORNIA INSURED SERIES
NOTES TO FINANCIAL STATEMENTS
5. DEFERRED SALES CHARGE
$ 171,325 face amount of Oakland, Alameda Cnty., CA, G.O. Bonds, Ser.
1992, have been segregated to fund the deferred sales charges. The
sales charges are being paid for with the interest received and by
periodic sales or maturity of these bonds, as well as with principal
proceeds received in conjunction with the disposition on the
unsegregated bonds. A deferred sales charge of $2.75 per Unit is
charged on a quarterly basis, and paid to the Sponsors annually by the
Trustee on behalf of the Holders, up to an aggregate of $55 per Unit
over the first three years of the life of the Fund. Should a Holder
redeem Units prior to the end of the third anniversary of the Fund,
the remaining balance of the deferred sales charge will be charged.
D - 6.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL STATE SERIES - 1,
CALIFORNIA INSURED SERIES
PORTFOLIO
As of March 31, 2000
<TABLE>
<CAPTION>
Rating of Optional
Portfolio No. and Title of Issues Face Redemption
Securities (1) (4) Amount Coupon Maturities(3) Provisions(3) Cost Value(2)
---------- --------- ----------- ----------- ------------ ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 California Educl. Fac. Auth., Rfdg. Rev. AAA $ 395,000 5.750 % 2018 06/01/05 $ 375,621 $ 400,285
Bonds (College of Osteopathic Medicine of @ 102.000
the Pacific), Ser. 1995 (Connie Lee Ins.)
2 California Hlth. Fac. Fin. Auth., Ins. AAA 635,000 6.125 2022 08/01/02 636,035 644,690
Hosp. Assoc. Rev. Bonds (San Diego Hosp. @ 102.000
Assoc.), Ser. 1992 B (MBIA Ins.)
3 Department of Wtr. and Pwr. of the City AAA 85,000 6.000 2032 07/15/02 83,745 89,120
of Los Angeles, Ca, Wtr. Works Rev. Bonds, @ 102.000
Second Iss. of 1992 (Financial Guaranty
Ins.)
4 Lynwood Pub. Fin. Auth., CA, Rev. Bonds, AAA 65,000 5.750 2018 09/01/03 62,967 65,658
1993 Ser. A (AMBAC Ins.) @ 102.000
5 City of Oakland, Alameda Cnty., CA, Gen. AAA 750,000 6.000 2022 06/15/02 744,960 760,185
Oblig. Bonds, Ser. 1992 (Financial @ 102.000
Guaranty Ins.) (5)
6 Sacramento muni. Util. Dist., CA, Elec. AAA 515,000 5.250 2020 11/15/03 464,818 490,064
Rev. Rfdg. Bonds, 1993 Ser. D (MBIA Ins.) @ 102.000
7 Public Fac. Fin. Auth. of the City of AAA 735,000 5.250 2020 05/15/03 663,992 699,874
San Diego, CA, Swr. Rev. Bonds, Ser. 1993 @ 102.000
(AMBAC Ins.)
--------- --------- ---------
TOTAL $ 3,180,000 $ 3,032,138 $ 3,149,876
========= ========= =========
See Notes to Portfolios on page D - 14.
</TABLE>
D - 7.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL STATE SERIES - 1,
PENNSYLVANIA INSURED SERIES
STATEMENT OF CONDITION
As of March 31, 2000
<TABLE>
<S> <C> <C>
TRUST PROPERTY:
Investment in marketable securities -
at value (cost $ 2,289,372)(Note 1) ......... $ 2,335,145
Accrued interest ............................... 38,694
Accrued interest on Segregated Bond (Note 5) ... 3,200
Cash - principal ............................... 28,608
-----------
Total trust property ......................... 2,405,647
LESS LIABILITIES:
Income advance from Trustee..................... $ 31,292
Other advance from Trustee ..................... 478
Deferred sales charge (Note 5) ................. 6,666
Accrued Sponsors' fees ......................... 338 38,774
----------- -----------
NET ASSETS, REPRESENTED BY:
2,424 units of fractional undivided
interest outstanding (Note 3) ............... 2,359,809
Undistributed net investment income ............ 7,064 $ 2,366,873
----------- ===========
UNIT VALUE ($ 2,366,873 / 2,424 units ) .......... $ 976.43
===========
</TABLE>
See Notes to Financial Statements.
D - 8.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL STATE SERIES - 1,
PENNSYLVANIA INSURED SERIES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 31,
2000 1999 1998
---- ---- ----
<S> <C> <C>
INVESTMENT INCOME:
Interest income ........................ $ 141,222 $ 176,046 $ 242,144
Interest income on Segregated
Bond (Note 5) ........................ 8,288 9,597 12,116
Trustee's fees and expenses ............ (5,379) (5,539) (7,071)
Sponsors' fees ......................... (1,473) (1,728) (2,052)
------------------------------------------------
Net investment income .................. 142,658 178,376 245,137
------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain on
securities sold or redeemed .......... 27,692 80,173 12,089
Unrealized appreciation (depreciation)
of investments ....................... (213,404) (67,387) 295,345
------------------------------------------------
Net realized and unrealized
gain (loss) on investments ........... (185,712) 12,786 307,434
------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS .............. $ (43,054) $ 191,162 $ 552,571
================================================
</TABLE>
See Notes to Financial Statements.
D - 9.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL STATE SERIES - 1,
PENNSYLVANIA INSURED SERIES
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Years Ended March 31,
2000 1999 1998
---- ---- ----
<S> <C> <C>
OPERATIONS:
Net investment income .................. $ 142,658 $ 178,376 $ 245,137
Realized gain on
securities sold or redeemed .......... 27,692 80,173 12,089
Unrealized appreciation (depreciation)
of investments ....................... (213,404) (67,387) 295,345
------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ............ (43,054) 191,162 552,571
------------------------------------------------
DISTRIBUTIONS TO HOLDERS (Note 2):
Income ................................ (134,731) (169,029) (233,329)
Principal .............................. (6,927) (4,009) (3,822)
------------------------------------------------
Total distributions .................... (141,658) (173,038) (237,151)
------------------------------------------------
SHARE TRANSACTIONS:
Deferred sales charge (Note 5):
Income ............................... (9,185) (4,422) (2,952)
Principal ............................ (19,820) (30,525) (45,299)
REDEMPTION AMOUNTS:
Income ................................. (1,418) (4,020) (995)
Income on Segregated Bond .............. (1,424)
Principal .............................. (529,406) (1,352,655) (372,237)
------------------------------------------------
Net share transactions ................. (561,253) (1,391,622) (421,483)
------------------------------------------------
NET DECREASE IN NET ASSETS ............... (745,965) (1,373,498) (106,063)
NET ASSETS AT BEGINNING OF YEAR........... 3,112,838 4,486,336 4,592,399
------------------------------------------------
NET ASSETS AT END OF YEAR................. $ 2,366,873 $ 3,112,838 $ 4,486,336
================================================
PER UNIT:
Income distributions during
year.................................. $ 50.72 $ 51.98 $ 53.13
================================================
Principal distributions during
year.................................. $ 2.80 $ 1.30 $ 0.88
================================================
Net asset value at end of
year.................................. $ 976.43 $ 1,052.70 $ 1,055.11
================================================
TRUST UNITS:
Redeemed during year.................... 533 1,295 364
Outstanding at end of year.............. 2,424 2,957 4,252
================================================
</TABLE>
See Notes to Financial Statements.
D - 10.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL STATE SERIES - 1,
PENNSYLVANIA INSURED SERIES
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940 as a
Unit Investment Trust. The following is a summary of significant
accounting policies consistently followed by the Fund in the
preparation of its financial statements. The policies are in
accordance with accounting principles generally accepted in the United
States of America.
(A) Securities are stated at value as determined by the
Evaluator based on bid side evaluations for the securities.
(B) The Fund is not subject to income taxes. Accordingly, no
provision for such taxes is required.
(C) Interest income is recorded as earned.
2. DISTRIBUTIONS
A distribution of net investment income is made to Holders each month.
Receipts other than interest, after deductions for redemptions and
applicable expenses, are also distributed periodically.
3. NET CAPITAL
<TABLE>
<S> <C>
Cost of 2,424 units at Date of Deposit
(net of initial sales charge) ........................... $ 2,421,311
Transfer to capital of interest on Segregated Bond (Note 5) 58,538
Transfer to capital of interest ............................ 5,093
Redemptions of units - net cost of 2,453 units redeemed
less redemption amounts (principal)....................... (69,023)
Income paid on Segregated Bond upon redemption ............. (1,424)
Principal distributions .................................... (17,763)
Deferred sales charge (Note 5) ............................. (205,174)
Realized gain on securities sold or redeemed ............... 122,478
Net unrealized appreciation of investments.................. 45,773
-----------
Net capital applicable to Holders .......................... $ 2,359,809
===========
</TABLE>
4. INCOME TAXES
As of March 31, 2000, net unrealized appreciation of investments,
based on cost for Federal income tax purposes, aggregated $45,773, of
which $747 related to depreciated securities and $46,520 related to
appreciated securities. The cost of investment securities for Federal
income tax purposes was $2,289,372 at March 31, 2000.
D - 11.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL STATE SERIES - 1,
PENNSYLVANIA INSURED SERIES
NOTES TO FINANCIAL STATEMENTS
5. DEFERRED SALES CHARGE
$123,884 face amount of the North PA Wtr. Auth., (Montgomery Cnty.,
PA), Wtr. Rev. Bonds, Ser. of 1992 have been segregated to fund the
deferred sales charges. The sales charges are being paid for with the
interest received and by periodic sales or maturity of these bonds, as
well as with principal proceeds received in conjunction with the
disposition on the unsegregated bonds. A deferred sales charge of
$2.75 per Unit is charged on a quarterly basis, and paid to the
Sponsors annually by the Trustee on behalf of the Holders, up to an
aggregate of $55 per Unit over the first three years of the life of
the Fund. Should a Holder redeem Units prior to the end of the third
anniversary of the Fund, the remaining balance of the deferred sales
charge will be charged.
D - 12.
<PAGE>
3 DEFINED ASSET FUNDS - MUNICIPAL STATE SERIES - 1,
PENNSYLVANIA INSURED SERIES
PORTFOLIO
As of March 31, 2000
<TABLE>
<CAPTION>
Rating of Optional
Portfolio No. and Title of Issues Face Redemption
Securities (1) (4) Amount Coupon Maturities(3) Provisions(3) Cost(2) Value(2)
---------- --------- ----------- ----------- ------------ ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Pennsylvania Intergovernmental Coop. AAA $ 250,000 5.750 % 2015(6) 06/15/03 $ 244,155 $ 257,123
Auth., Spec. Tax Rev. Bonds (City of @ 100.000
Philadelphia Funding Prog.) Ser. of 1993
(MBIA Ins.)
2 Bucks Cnty. Ind. Dev. Auth., PA, Hosp. AAA 500,000 5.250 2021 07/01/03 450,750 456,925
Rev. Rfdg. Bonds (Grand View Hosp.), Ser. @ 102.000
A of 1993 (AMBAC Ins.)
3 Cambria Cnty. Hosp. Dev. Auth., PA, Hosp. AAA 100,000 6.375 2018(6) 07/01/02 101,900 105,164
Rev. Rfdg. and Imp. Bonds (Conemaugh @ 102.000
Valley Mem. Hosp. Proj.), Ser. B of 1992
(Connie Lee Ins.)
4 Montgomery Cnty. Higher Educ. and Hlth. AAA 715,000 5.125 2024 06/01/04 629,357 633,991
Auth., PA, Hosp. Rev. Bonds (Abington @ 102.000
Mem. Hosp.), Ser. A of 1994 (AMBAC Ins.)
5 The Erie Parking Auth., PA, Guaranteed AAA 60,000 5.800 2020(6) 09/01/05 58,824 62,539
Parking Rev. Bonds, Ser. of 1995 @ 100.000
(Financial Guaranty Ins.)
6 City of Philadelphia, PA, Wtr. and AAA 230,000 5.600 2018 08/01/05 219,905 227,900
Wastewater Rev. Bonds, Ser. 1995 (MBIA @ 102.000
Ins.)
7 North PA Wtr. Auth. (Montgomery Cnty., AAA 300,000 6.200 2022 11/01/02 304,947 304,200
PA), Wtr. Rev. Bonds, Ser. of 1992 @ 101.000
(Financial Guaranty Ins.) (5)
275,000 6.200 2022(6) 11/01/02 279,534 287,303
@ 101.000
--------- --------- ---------
TOTAL $ 2,430,000 $ 2,289,372 $ 2,335,145
========= ========= =========
</TABLE>
See Notes to Portfolios on page D - 14.
D - 13.
<PAGE>
DEFINED ASSET FUNDS - MUNICIPAL STATE SERIES - 1,
(CALIFORNIA INSURED SERIES AND
PENNSYLVANIA INSURED SERIES)
NOTES TO PORTFOLIOS
As of March 31, 2000
(1) The ratings of the bonds are by Standard & Poor's Ratings Group, or by
Moody's Investors Service, Inc. if followed by "(m)", or by Fitch
Investors Service, Inc. if followed by "(f)"; "NR" indicates that this
bond is not currently rated by any of the above-mentioned rating
services. These ratings have been furnished by the Evaluator but not
confirmed with the rating agencies.
(2) See Notes to Financial Statements.
(3) Optional redemption provisions, which may be exercised in whole or in
part, are initially at prices of par plus a premium, then subsequently
at prices declining to par. Certain securities may provide for
redemption at par prior or in addition to any optional or mandatory
redemption dates or maturity, for example, through the operation of a
maintenance and replacement fund, if proceeds are not able to be used
as contemplated, the project is condemned or sold or the project is
destroyed and insurance proceeds are used to redeem the securities.
Many of the securities are also subject to mandatory sinking fund
redemption commencing on dates which may be prior to the date on which
securities may be optionally redeemed. Sinking fund redemptions are at
par and redeem only part of the issue. Some of the securities 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 offering side
evaluation which represents a premium over par. To the extent that the
securities were acquired at a price higher than the redemption price,
this will represent a loss of capital when compared with the Public
Offering Price of the Units when acquired. 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 for Units
received by the Fund. The estimated current return may be affected by
redemptions.
(4) Insured by AAA-rated insurance companies that guarantee timely
payments of principal and interest on the bonds (but not Fund units or
the market value of the bonds before they mature).
(5) A portion of this bond is segregated to fund the deferred sales charge.
(6) Bonds with an aggregate face amount of $685,000 of the Pennsylvania
Insured Trust have been pre-refunded and are expected to be called for
redemption on the optional redemption provision dates shown.
D - 14.
<PAGE>
DEFINED ASSET FUNDS--REGISTERED TRADEMARK--
<TABLE>
<S> <C>
HAVE QUESTIONS ? MUNICIPAL STATE SERIES
Request the most (A Unit Investment Trust)
recent free Information ---------------------------------------
Supplement that gives more This Prospectus does not contain
details about the Fund, complete information about the
by calling: investment company filed with the
The Chase Manhattan Bank Securities and Exchange Commission in
1-800-323-1508 Washington, D.C. under the:
- Securities Act of 1933 (file no.
33-58571) and
- Investment Company Act of 1940 (file
no. 811-2537).
TO OBTAIN COPIES AT PRESCRIBED RATES--
WRITE: Public Reference Section of the
Commission
450 Fifth Street, N.W., Washington,
D.C. 20549-6009
CALL: 1-800-SEC-0330.
VISIT: http://www.sec.gov.
---------------------------------------
No person is authorized to give any
information or representations about
this Fund not contained in this
Prospectus or the Information
Supplement, and you should not rely on
any other information.
---------------------------------------
When units of this Fund are no longer
available, this Prospectus may be used
as a preliminary prospectus for a
future series, but some of the
information in this Prospectus will be
changed for that series.
UNITS OF ANY FUTURE SERIES MAY NOT BE
SOLD NOR MAY OFFERS TO BUY BE ACCEPTED
UNTIL THAT SERIES HAS BECOME EFFECTIVE
WITH THE SECURITIES AND EXCHANGE
COMMISSION. NO UNITS CAN BE SOLD IN ANY
STATE WHERE A SALE WOULD BE ILLEGAL.
15097--6/00
</TABLE>
<PAGE>
DEFINED ASSET FUNDS--
MUNICIPAL STATE SERIES
CONTENTS OF REGISTRATION STATEMENT
This Post-Effective Amendment to 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 Defined Asset Funds Municipal Insured
Series, 1933 Act File No. 33-54565).
The Prospectus.
The Signatures.
The following exhibits:
1.1.1 -- Form of Standard Terms and Conditions of Trust Effective as of
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).
1.11.1-- Merrill Lynch Code of Ethics (incorporated by reference to Exhibit
1.11.1 to the Post Effective Amendment No. 8 to the Registration
Statement of Municipal Investment Trust Fund, Insured Series 186,
1933 Act File No. 33-49159).
1.11.2-- Municipal Investment Trust Fund Code of Ethics (incorporated by
reference to Exhibit 1.11.2 to the Post Effective Amendment No. 8 to
the Registration Statement of Municipal Investment Trust Fund,
Insured Series 186, 1933 Act File No. 33-49159).
4.1 --Consent of the Evaluator.
5.1 --Consent of independent accountants.
9.1 -- Information Supplement (incorporated by reference to Post-Effective
Amendment No. 1 to Exhibit 9.1 to the Registration Statement of
Municipal Investment Trust Fund, Multistate Series--409, 1933 Act
File No. 333-81777).
R-1
<PAGE>
DEFINED ASSET FUNDS--
MUNICIPAL STATE SERIES
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT,
DEFINED ASSET FUNDS--MUNICIPAL STATE SERIES, CERTIFIES THAT IT MEETS ALL OF THE
REQUIREMENTS FOR EFFECTIVENESS OF THIS REGISTRATION STATEMENT PURSUANT TO RULE
485(B) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS 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 7TH DAY OF JUNE, 2000.
SIGNATURES APPEAR ON PAGES R-3 AND R-4.
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 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.
R-2
<PAGE>
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
DEPOSITOR
<TABLE>
<S> <C>
By the following persons, who constitute Powers of Attorney have been filed
a majority of under
the Board of Directors of Merrill Form SE and the following 1933 Act
Lynch, Pierce, File
Fenner & Smith Incorporated: Number: 333-70593
</TABLE>
GEORGE A. SCHIEREN
JOHN L. STEFFENS
By JAY M. FIFE
(As authorized signatory for Merrill Lynch, Pierce,
Fenner & Smith Incorporated and
Attorney-in-fact for the persons listed above)
R-3
<PAGE>
PAINEWEBBER INCORPORATED
DEPOSITOR
<TABLE>
<S> <C>
By the following persons, who constitute Powers of Attorney have been filed
the Board of Directors of PaineWebber under
Incorporated: the following 1933 Act File
Number: 33-55073
</TABLE>
MARGO N. ALEXANDER
TERRY L. ATKINSON
BRIAN M. BAREFOOT
STEVEN P. BAUM
MICHAEL CULP
REGINA A. DOLAN
JOSEPH J. GRANO, JR.
EDWARD M. KERSCHNER
JAMES P. MacGILVRAY
DONALD B. MARRON
ROBERT H. SILVER
MARK B. SUTTON
By ROBERT E. HOLLEY
(As authorized signatory for
PaineWebber Incorporated
and Attorney-in-fact for the persons listed above)
R-4
