1933 ACT FILE NO.: 192602
1940 ACT FILE NO.: 811-21056
CIK NO.: 1586149
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-6
AMENDMENT NO. 1
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: ADVISORS DISCIPLINED TRUST 1169
B. Name of depositor: ADVISORS ASSET MANAGEMENT, INC.
C. Complete address of depositor's principal executive offices:
18925 Base Camp Road
Monument, Colorado 80132
D. Name and complete address of agent for service:
WITH A COPY TO:
SCOTT COLYER SCOTT R. ANDERSON
Advisors Asset Management, Inc. Chapman and Cutler LLP
18925 Base Camp Road 111 West Monroe Street
Monument, Colorado 80132 Chicago, Illinois 60603-4080
in terest in the trust
F. Approximate date of proposed public offering:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT
[ ] Check box if it is proposed that this filing will become effective
on ____________, 2014 at _____ pursuant to Rule 487.
-------------------------------------------------------------------------------
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.
The information in this prospectus is not complete and may be changed. No one
may sell units of the trust until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell units and is not soliciting an offer to buy units in any state
where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS DATED JANUARY 14, 2013
SUBJECT TO COMPLETION
TAX EXEMPT SECURITIES TRUST, INTERMEDIATE DURATION NATIONAL TRUST 470
(ADVISORS DISCIPLINED TRUST 1169)
A portfolio of
municipal bonds seeking
federally tax exempt interest income
and capital preservation
PROSPECTUS
____________, 2014
[LOGO] As with any investment, the Securities
and Exchange Commission has not approved
AAM or disapproved of these securities or
passed upon the adequacy or accuracy of
ADVISORS this prospectus. Any contrary
ASSET MANAGEMENT representation is a criminal offense.
------------------
INVESTMENT SUMMARY
------------------
INVESTMENT OBJECTIVE
The trust seeks to provide interest income exempt from federal personal
income tax and to provide capital preservation. There is no assurance the trust
will achieve its objective.
PRINCIPAL INVESTMENT STRATEGY
The trust seeks to provide interest income exempt from federal personal
income tax and to provide capital preservation by investing in a portfolio
consisting of municipal bonds. In selecting bonds, we<F1>* considered the
following factors, among others:
* the Standard & Poor's rating of the bonds was not less than A- or the Moody's
Investor Service rating of the bonds was not less than A3 at trust inception
provided that if a bond is insured and Standard & Poor's or Moody's Investor
Services issues an underlying rating on the bond without insurance, such
rating must not be below investment grades (BBB- or Baa3);
* the prices of the bonds relative to other bonds of comparable quality and
maturity; and
* diversification of bonds as to purpose of issue and location of issuer.
The portfolio consists of debt obligations issued by or on behalf of states
and territories of the United States, and political subdivisions and authorities
thereof, the interest on which is excludable from gross income for United States
federal personal income tax purposes under existing law in the opinion of
recognized bond counsel to the issuer of the bonds. The trust portfolio is
structured to have a weighted average modified duration of between 3 and 8 years
as of the inception of the trust. Duration is a measure used to determine the
sensitivity of a security's price to changes in interest rates. The longer a
security or portfolio's duration, the more sensitive it will be to changes in
interest rates. The trust does not include bonds subject to the federal
alternative minimum tax for individuals. Interest may be subject to state and
local tax.
PRINCIPAL RISKS
As with all investments, you can lose money by investing in this trust. The
trust also might not perform as well as you expect. This can happen for reasons
such as these:
* BOND PRICES WILL FLUCTUATE. The value of your investment may fall over time.
* THE VALUE OF THE BONDS WILL GENERALLY FALL IF INTEREST RATES, IN GENERAL,
RISE. No one can predict whether interest rates will rise or fall in the
future.
* A BOND ISSUER OR INSURER MAY BE UNABLE TO MAKE INTEREST AND/OR PRINCIPAL
PAYMENT IN THE FUTURE.
* THE FINANCIAL CONDITION OF AN ISSUER MAY WORSEN OR ITS CREDIT RATINGS MAY
DROP, RESULTING IN A REDUCTION IN THE VALUE OF YOUR UNITS. This may occur
at any point in time, including during the primary offering period.
* A BOND ISSUER MIGHT PREPAY OR "CALL" A BOND BEFORE ITS STATED MATURITY. If
this happens, the trust will distribute the principal to you but future
interest distributions will fall. A bond's call price could be less than
the price the trust paid for the bond. If enough bonds are called, the
trust could terminate earlier than expected.
* THE TRUST MAY CONCENTRATE IN BONDS OF A PARTICULAR TYPE OF ISSUER. This
makes the trust less diversified and subject to greater risk than a more
diversified portfolio. The types of bond in the portfolio are listed under
"Types of Bonds" on page 8.
* WE DO NOT ACTIVELY MANAGE THE PORTFOLIO. Except in limited circumstances,
the trust will hold, and may continue to buy, the same bonds even if the
market value declines.
--------------------
<F1>* "AAM," "we" and related terms mean Advisors Asset Management, Inc., the
trust sponsor, unless the context clearly suggests otherwise.
2 Investment Summary
WHO SHOULD INVEST
You should consider this investment if you want:
* to own securities representing interests a variety of municipal bonds in a
single investment.
* the potential to receive monthly distributions of income exempt from
federal income tax
* capital preservation potential.
You should not consider this investment if you:
* are uncomfortable with the risks of an unmanaged investment in municipal
bonds.
* want capital appreciation.
------------------------------------------------------------
ESSENTIAL INFORMATION
---------------------
PRINCIPAL AMOUNT OF
SECURITIES PER UNIT AT INCEPTION* $1,000.00
PUBLIC OFFERING PRICE PER UNIT
AT INCEPTION* $__________
INCEPTION DATE ____________, 2014
ESTIMATED CURRENT RETURN* _____%
ESTIMATED LONG-TERM RETURN* _____%
ESTIMATED NET ANNUAL INTEREST
INCOME PER UNIT* $_____
ESTIMATED INITIAL DISTRIBUTION
PER UNIT* $_____
ESTIMATED NORMAL MONTHLY
DISTRIBUTION PER UNIT* $_____
WEIGHTED AVERAGE MATURITY
OF SECURITIES* _____ years
WEIGHTED AVERAGE MODIFIED
DURATION OF SECURITIES* _____ years
DISTRIBUTION DATES 25th day of each month
RECORD DATES 10th day of each month
INITIAL DISTRIBUTION DATE __________ 25, ____
INITIAL RECORD DATE __________ 10, ____
CUSIP NUMBER
Standard Accounts _________
Fee Based Accounts _________
TICKER SYMBOL ______
MINIMUM INVESTMENT 1 unit
------------------------------------------------------------
<FN>
*As of ____________, 2014 and may vary thereafter.
</FN>
FEES AND EXPENSES
The amounts below are estimates of the direct and indirect expenses that you
may incur based on the initial unit price. Actual expenses may vary.
AS A % AMOUNT
OF $1,000 PER
SALES FEE INVESTED UNIT
------------------------
Transactional sales fee _.__% $_____
Creation & development fee _.__ 7.50
-------- -------
Maximum sales fee 3.00% $_____
======== =======
ORGANIZATION COSTS _.__% $3.80
======== =======
AS A % AMOUNT
ANNUAL OF NET PER
OPERATING EXPENSES ASSETS UNIT
------------------------
Trustee fee & expenses _.__% $____
Supervisory, evaluation
and administration fees _.__ ____
-------- -------
Total _.__% $____
======== =======
The transactional sales fee is paid at the time of a unit purchase and is the
difference between the total sales fee (maximum of 3.00% of the unit offering
price) and the remaining creation and development fee. The creation and
development fee is fixed at $7.50 per unit and is paid at the end of the
initial offering period.
EXAMPLE
This example helps you compare the cost of this trust with other unit trusts
and mutual funds. In the example we assume that the expenses do not change and
that the trust's annual return is 5%. Your actual returns and expenses will
vary. Based on these assumptions, you would pay these expenses for every
$10,000 you invest in the trust:
1 year $_____
3 years $_____
5 years $_____
10 years $_____
These amounts are the same regardless of whether you sell your investment at
the end of a period or continue to hold your investment.
Investment Summary 3
ILLUSTRATION OF SALES FEE DISCOUNTS
We offer a variety of ways for you to reduce the sales fee you pay when you
buy units. The table below shows what the public offering price per unit,
estimated current return and estimated long-term return would have been as of
the close of business on the business day prior to the trust's inception date
based on certain sales fee levels. Please refer to "Understanding Your
Investment--How to Buy Units--Reducing Your Sales Fee" for details on the
applicability of and guidelines associated with all sales fee discounts.
Please refer to "Understanding Your Investment--How Your Trust Works--Estimated
Current and Long-Term Returns" for more information about estimated current and
long-term returns. The public offering price per unit and interest income
received by the trust will vary over time for various reasons. There is no
assurance that the estimated current returns or estimated long-term returns
will be realized in the future.
PUBLIC ESTIMATED
OFFERING ESTIMATED LONG-
PRICE PER CURRENT TERM
TRANSACTION: UNIT+ RETURN+ RETURN+
-------------------------------------------------------------------------------
Less than $100,000* $_____.__ _.__% _.__%
$100,000 - $249,999* _____.__ _.__ _.__
$250,000 - $499,999* _____.__ _.__ _.__
$500,000 - $999,999* _____.__ _.__ _.__
$1,000,000 - $4,999,999* _____.__ _.__ _.__
$5,000,000 - $9,999,999* _____.__ _.__ _.__
$10,000,000 or more* _____.__ _.__ _.__
"Fee Account" discount transaction _____.__ _.__ _.__
"Exchange Option" discount transaction _____.__ _.__ _.__
<FN>
+ As of ____________, 2014 and will vary thereafter.
* The breakpoints will be adjusted to take into consideration purchase orders
stated in dollars which cannot be completely fulfilled due to the requirement
that only whole units be issued as described under "Understanding
Your Investment--How to Buy Units--Reducing Your Sales Fee--Large Purchases".
</FN>
4 Investment Summary
TAX EXEMPT SECURITIES TRUST, INTERMEDIATE DURATION NATIONAL TRUST 470
(ADVISORS DISCIPLINED TRUST 1169)
PORTFOLIO
AS OF THE INITIAL DATE OF DEPOSIT, ____________, 2014
COST OF
PRINCIPAL NAME OF ISSUER, INTEREST RATE REDEMPTION SECURITIES
AMOUNT AND MATURITY DATE(1) FEATURE(2) TO TRUST(3)
-----------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS -- 100.00%
(Continued)
Investment Summary 5
TAX EXEMPT SECURITIES TRUST, INTERMEDIATE DURATION NATIONAL TRUST 470
(ADVISORS DISCIPLINED TRUST 1169)
PORTFOLIO (CONTINUED)
AS OF THE INITIAL DATE OF DEPOSIT, ____________, 2014
COST OF
PRINCIPAL NAME OF ISSUER, INTEREST RATE REDEMPTION SECURITIES
AMOUNT AND MATURITY DATE(1) FEATURE(2) TO TRUST(3)
-----------------------------------------------------------------------------------------------------------------------------------
------------- -------------
$__________ $__________
============= =============
<FN>
See "Notes to Portfolio"
</FN>
6 Investment Summary
Notes to Portfolio
(1) The securities are represented by contracts to purchase such securities the
performance of which is secured by an irrevocable letter of credit.
Contracts to acquire the securities were entered into during the period
from ____________, 2014 to ____________, 2014 and have expected settlement
dates during the period from ____________, 2014 to ____________, 2014.
(2) This is the year in which each bond is initially or currently callable and
the call price for that year. Each bond continues to be callable at
declining prices thereafter (but not below par value) except for original
issue discount bonds which are redeemable at prices based on the issue
price plus the amount of original issue discount accreted to redemption
date plus, if applicable, some premium, the amount of which will decline in
subsequent years. "S.F." indicates a sinking fund is established with
respect to an issue of bonds.
"[Dagger Symbol]" indicates that the bond is redeemable in whole or in part
at the option of the issuer at a redemption price that is generally equal
to the greater of (i) the amortized value of the bond (based upon the
bond's original reoffering yield), plus accrued and unpaid interest to the
date of redemption, or (ii) the sum of the present values of the remaining
unpaid payments of principal and interest on the bond, discounted to the
date of redemption based on a yield for comparable municipal bonds (which
discount rate may be increased by some additional amount for certain
bonds). These bonds may generally be redeemed at any time, however,
certain bonds may only be subject to redemption on certain dates.
The bonds may also be subject to redemption without premium at any time
pursuant to extraordinary optional or mandatory redemptions if certain
events occur.
(3) The cost of each security is based on the current offering side evaluation
as of the close of the New York Stock Exchange on the business day prior to
the trust's inception date. During the initial offering period,
evaluations of securities are made on the basis of current offering side
evaluations of the securities. The aggregate offering price is greater
than the aggregate bid price of the securities, which is the basis on which
redemption prices will be determined for purposes of redemption of units
after the initial offering period. In accordance with Accounting Standards
Codification 820, "Fair Value Measurements", the trust's investments are
classified as Level 2, which refers to security prices determined using
significant observable inputs when quoted prices in active markets for
identical securities are not available. Observable inputs are inputs such
as quoted prices for similar securities, quoted prices for identical
securities in markets that are not active, and other inputs that are
observable or can be corroborated by observable market data. The cost of
the securities to the sponsor and the sponsor's profit or (loss) (which is
the difference between the cost of the securities to the sponsor and the
cost of the securities to the trust) are $__________ and $__________,
respectively.
(4) Any bond marked with this note has been purchased on a "when, as and if
issued" or "delayed delivery" basis. Delivery of these bonds is expected
to take place at various dates after the first settlement date of the
trust, which is normally three business days following the trust's
inception date. Interest on these bonds begins accruing to the benefit of
unitholders on the related delivery dates for the bonds.
(5) Any bond marked with this note was issued at an original issue discount.
(6) This bond is covered by insurance issued by Ambac Assured Corporation
("AMBAC"). On November 8, 2010, Ambac Financial Group, Inc., the holding
company of AMBAC, announced that it had filed for Chapter 11 bankruptcy
protection. The impact that this event may have on the ability of AMBAC
to guarantee timely payment of principal and interests on these bonds when
they fall due is not known at this time.
Investment Summary 7
UNDERWRITING
The underwriters for the trust and the amounts of units to be distributed by
each underwriter are as follows:
UNITS
UNDERWRITER AND ADDRESS UNDERWRITTEN
-------------------------------------------------------
AAM/Advisors Asset Management, Inc. _____
18925 Base Camp Road
Monument, CO 80132
----------
TOTAL ______
==========
TYPES OF BONDS
The following table shows the types of bonds included in the portfolio as of
the trust's inception. For additional information about each of these issuer
types, see "Understanding Your Investment--Investment Risks".
PERCENT OF
PRINCIPAL AMOUNT
TYPE ISSUER OF BONDS
-------------------------------------------------------
General Obligation __.__%
Revenue Bonds:
Airport, Port & Highway __.__
Hospital & Health Care Facility __.__
Industrial Development __.__
Power __.__
Special Tax __.__
Transit Authority __.__
Water & Sewer __.__
---------
100.00%
=========
LOCATION OF ISSUERS
The following table shows the states or territories in which the issuers of
the bonds are located as of the trust's inception.
PERCENT OF
STATE PRINCIPAL AMOUNT
OR TERRITORY OF BONDS
-------------------------------------------
---------
100.00%
=========
INSURANCE ON THE BONDS
The following table shows the insurance companies that provide insurance as
of the trust's inception, if any. For additional information about bond
insurance, see "Understanding Your Investment--Bond Insurance".
PERCENT OF
PRINCIPAL AMOUNT
INSURANCE COMPANY OF BONDS
----------------------------------------------------
---------
__.__%
=========
8 Investment Summary
-----------------------------
UNDERSTANDING YOUR INVESTMENT
-----------------------------
HOW TO BUY UNITS
You can buy units of a trust on any business day the New York Stock Exchange
is open by contacting your financial professional. Unit prices are available
daily on the Internet at WWW.AAMPORTFOLIOS.COM. When you buy units, you pay the
public offering price of units plus accrued interest, if any. The public
offering price of units includes:
* the net asset value per unit plus
* cash to pay organization costs plus
* the sales fee.
The "net asset value per unit" is the value of the securities, cash and other
assets in a trust reduced by the liabilities of a trust divided by the total
units outstanding. We often refer to the public offering price of units as the
"offer price" or "purchase price." The offer price will be effective for all
orders received prior to the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. Eastern time). If we receive your order prior to
the close of regular trading on the New York Stock Exchange or authorized
financial professionals receive your order prior to that time and properly
transmit the order to us by the time that we designate, then you will receive
the price computed on the date of receipt. If we receive your order after the
close of regular trading on the New York Stock Exchange, if authorized financial
professionals receive your order after that time or if orders are received by
such persons and are not transmitted to us by the time that we designate, then
you will receive the price computed on the date of the next determined offer
price provided that your order is received in a timely manner on that date. It
is the responsibility of the authorized financial professional to transmit the
orders that they receive to us in a timely manner. Certain broker-dealers may
charge a transaction or other fee for processing unit purchase orders.
ORGANIZATION COSTS. During the initial offering period, part of the value of
the units represents an amount of cash deposited to pay the costs of creating
your trust. These costs include the costs of preparing the registration
statement and legal documents, federal and state registration fees, the initial
fees and expenses of the trustee and the initial audit. Your trust will
reimburse us for these costs at the end of the initial offering period or after
six months, if earlier. The value of your units will decline when the trust
pays these costs.
ACCRUED INTEREST. Accrued interest represents unpaid interest on a security
from the last day it paid interest. Accrued interest on the trust units
consists of two elements. The first element arises as a result of accrued
interest which is the accumulation of unpaid interest on bonds in the trust from
the last day on which interest was paid on the bonds. Interest on the bonds is
generally paid semi-annually, although the trust accrues such interest daily.
Because your trust always has an amount of interest earned but not yet
collected, the public offering price of units will have added to it the
proportionate share of accrued interest to the date of settlement. The second
element of accrued interest arises because of the structure of the trust's
interest account. The trustee has no cash for distribution to unitholders until
it receives interest payments on the bonds in the trust and may be required to
advance its own funds to make trust interest distributions. As a result,
interest account balances are established to limit the need for the trustee to
advance funds in connection with such interest distributions. If
Understanding Your Investment 9
you sell or redeem your units you will be entitled to receive your proportionate
share of the accrued interest from the purchaser of your units.
VALUE OF THE SECURITIES. We determine the value of the securities as of the
close of regular trading on the New York Stock Exchange on each day that
exchange is open. We generally determine the value of securities during the
initial offering period based on the aggregate offering side evaluations of the
securities determined (a) on the basis of current offering prices of the
securities, (b) if offering prices are not available for any particular
security, on the basis of current offering prices for comparable securities, (c)
by determining the value of securities on the offer side of the market by
appraisal, or (d) by any combination of the above. After the initial offering
period ends, we generally determine the value of the securities as described in
the preceding sentence based on the bid side evaluations rather than the
offering side evaluations. The offering side price generally represents the
price at which investors in the market are willing to sell a security and the
bid side evaluation generally represents the price that investors in the market
are willing to pay to buy a security. The bid side evaluation is lower than the
offering side evaluation. As a result of this pricing method, unitholders
should expect a decrease in the net asset value per unit on the day following
the end of the initial offering period equal to the difference between the
current offering side evaluation and bid side evaluation of the securities.
Capelogic, Inc., an independent pricing service, determined the initial
prices of the securities shown under "Portfolio" in this prospectus as described
above at the close of regular trading on the New York Stock Exchange on the
business day before the date of this prospectus. On the first day we sell units
we will compute the unit price as of the close of regular trading on the New
York Stock Exchange or the time the registration statement filed with the
Securities and Exchange Commission becomes effective, if later.
TRANSACTIONAL SALES FEE. You pay a fee in connection with purchasing units.
We refer to this fee as the "transactional sales fee." You pay the
transactional sales fee at the time you buy units. The maximum sales fee equals
3.00% of the public offering price per unit at the time of purchase. The
transactional sales fee is the difference between the total sales fee percentage
(maximum of 3.00% of the public offering price per unit) and the remaining fixed
dollar creation and development fee ($7.50 per unit during the initial offering
period). The transactional sales fee equals _____% of the public offering price
per unit during the initial offering period based on a $________ public offering
price per unit which is the unit price on the day before the trust's inception
date. Since the transactional sales fee actually equals the difference between
the total sales fee and the remaining creation and development fee, the
percentage and dollar amount of the transactional sales fee will vary as the
public offering price per unit varies. The transactional sales fee does not
include the creation and development fee which is described under "Expenses."
If you purchase units after the creation and development fee is paid, the
secondary market transactional sales fee is equal to 3.00% of the public
offering price per unit.
MINIMUM PURCHASE. The minimum amount you can purchase of the trust appears
on page 3 under "Essential Information", but such amounts may vary depending on
your selling firm.
REDUCING YOUR SALES FEE. We offer a variety of ways for you to reduce the
fee you pay. It is your financial professional's responsibility to alert
10 Understanding Your Investment
us of any discount when you order units. Except as expressly provided herein,
you may not combine discounts. Since the creation and development fee is a
fixed dollar amount per unit, your trust must charge this fee per unit
regardless of any discount. However, if you are eligible to receive a discount
such that your total sales fee is less than the fixed dollar amount of the
remaining creation and development fee, we will credit you the difference
between your total sales fee and the applicable fixed dollar creation and
development fee at the time you buy units.
Large Purchases. You can reduce your sales fee by increasing the size of
your investment:
IF YOU PURCHASE: YOUR FEE WILL BE:
------------------------------------------
Less than $100,000 3.00%
$100,000 - $249,999 2.75
$250,000 - $499,999 2.50
$500,000 - $999,999 2.25
$1,000,000 - $4,999,999 2.00
$5,000,000 - $9,999,999 1.75
$10,000,000 or more 1.50
We apply these fees as a percent of the public offering price per unit at the
time of purchase. The breakpoints will be adjusted to take into consideration
purchase orders stated in dollars which cannot be completely fulfilled due the
requirement that only whole units be issued.
You aggregate initial offering period unit orders submitted by the same
person for units of any of the trusts we sponsor on any single day from any one
broker-dealer to qualify for a purchase level. If you purchase initial offering
period units that qualify for the fee account or exchange discount described
below and also purchase additional initial offering period units on a single day
from the same broker-dealer that do not qualify for the fee account or exchange
discount, you aggregate all initial offering period units purchased for purposes
of determining the applicable breakpoint level in the table above on the
additional units, but such additional units will not qualify for the fee account
or exchange discount described below. Secondary market unit purchases are not
aggregated with initial offering period unit purchases for purposes of
determining the applicable breakpoint level. You can also include these orders
as your own for purposes of this aggregation:
* orders submitted by your spouse or children (including step-children)
under 21 years of age living in the same household and
* orders submitted by your trust estate or fiduciary accounts.
The discounts described above apply only to initial offering period
purchases.
Fee Accounts. Investors may purchase units through registered investment
advisers, certified financial planners or registered broker-dealers who in each
case either charge investor accounts ("Fee Accounts") periodic fees for
brokerage services, financial planning, investment advisory or asset management
services, or provide such services in connection with an investment account for
which a comprehensive "wrap fee" charge ("Wrap Fee") is imposed. You should
consult your financial professional to determine whether you can benefit from
these accounts. If units of the trust are purchased for a Fee Account and the
units are subject to a Wrap Fee in such Fee Account (i.e., the trust is "Wrap
Fee Eligible"), then investors may be eligible to purchase units of the trust in
these Fee Accounts at a reduced fee. During the initial offering period,
investors may be eligible to purchase
Understanding Your Investment 11
units of the trust in these Fee Accounts that are not subject to the
transactional sales fee but will be subject to the creation and development fee
that is retained by the sponsor. For example, this table illustrates the sales
fee you will pay as a percentage of a $__________ public offering price per unit
which is the unit price on the day before the trust's inception date (the
percentage will vary with the unit price).
Transactional sales fee 0.00%
=======
Creation and development fee _.__%
-------
Total sales fee _.__%
=======
For units purchased in the secondary market, investors may be eligible to
purchase units of the trust in these Fee Accounts at the public offering price
less the regular underwriter or dealer concession. This discount applies during
the initial offering period and in the secondary market. Certain Fee Account
investors may be assessed transaction or other fees on the purchase and/or
redemption of units by their broker-dealer or other processing organizations for
providing certain transaction or account activities. We reserve the right to
limit or deny purchases of units in Fee Accounts by investors or selling firms
whose frequent trading activity is determined to be detrimental to the trust.
Employees. We waive the transactional sales fee for purchases made by
officers, directors and employees (and immediate family members) of the sponsor
and its affiliates. We also waive a portion of the sales fee for purchases made
by officers, directors and employees (and immediate family members) of selling
firms. These purchases are not subject to the transactional sales fee but will
be subject to any remaining creation and development fee. These purchases are
made at the public offering price per unit less the applicable underwriter or
dealer concession. Immediate family members for the purposes of this section
include your spouse, children (including step-children) under the age of 21
living in the same household, and parents (including step-parents). These
discounts apply to initial offering period and secondary market purchases. All
employee discounts are subject to the policies of the related selling firm,
including but not limited to, householding policies or limitations. Only
officers, directors and employees (and their immediate family members) of
selling firms that allow such persons to participate in this employee discount
program are eligible for the discount.
Exchange Option. We waive a portion of the sales fee on units of the trust
offered in this prospectus if you buy your units with redemption or termination
proceeds from any unit investment trust (regardless of sponsor). The discounted
public offering price per unit for these transactions is equal to the regular
public offering price per unit less 0.50%. However, if you invest redemption or
termination proceeds of $500,000 or more in units of the trust, the maximum
sales fee on your units will be limited to the maximum sales fee for the
applicable amount invested in the table under "Large Purchases" above. To
qualify for this discount, the termination or redemption proceeds used to
purchase units of the trust offered in this prospectus must be derived from a
transaction that occurred within 30 calendar days of your purchase of units of
the trust offered in this prospectus. In addition, the discount will only be
available for investors that utilize the same broker-dealer (or a different
broker-dealer with appropriate notification) for both the unit purchase and the
transaction resulting in the receipt of the termination or redemption proceeds
used for the unit purchase. You may be required to provide appropriate
documentation or other
12 Understanding Your Investment
information to your broker-dealer to evidence your eligibility for this sales
fee discount.
Please note that if you purchase units of a trust in this manner using
redemption proceeds from trusts which assess the amount of any remaining
deferred sales fee at redemption, you should be aware that any deferred sales
fee remaining on these units will be deducted from those redemption proceeds.
These discounts apply only to initial offering period purchases.
RETIREMENT ACCOUNTS. The portfolio may be suitable for purchase in tax-
advantaged retirement accounts. You should contact your financial professional
about the accounts offered and any additional fees imposed.
HOW TO SELL YOUR UNITS
You can sell or redeem your units on any business day the New York Stock
Exchange is open by contacting your financial professional. Unit prices are
available daily on the Internet at WWW.AAMPORTFOLIOS.COM or through your
financial professional. The sale and redemption price of units is equal to the
net asset value per unit, provided that you will not pay any remaining creation
and development fee or organization costs if you sell or redeem units during the
initial offering period. The sale and redemption price is sometimes referred to
as the "liquidation price". Certain broker-dealers may charge a transaction or
other fee for processing unit redemption or sale requests.
SELLING UNITS. We may maintain a secondary market for units. This means
that if you want to sell your units, we may buy them at the current net asset
value, provided that you will not pay any remaining creation and development fee
or organization costs if you sell units during the initial offering period. We
may then resell the units to other investors at the public offering price or
redeem them for the redemption price. Our secondary market repurchase price is
the same as the redemption price. Certain broker-dealers might also maintain a
secondary market in units. You should contact your financial professional for
current repurchase prices to determine the best price available. We may
discontinue our secondary market at any time without notice. Even if we do not
make a market, you will be able to redeem your units with the trustee on any
business day for the current redemption price.
REDEEMING UNITS. You may also redeem your units directly with the trustee,
The Bank of New York Mellon, on any day the New York Stock Exchange is open.
The redemption price that you will receive for units is equal to the net asset
value per unit, provided that you will not pay any remaining creation and
development fee or organization costs if you redeem units during the initial
offering period. You will receive the net asset value for a particular day if
the trustee receives your completed redemption request prior to the close of
regular trading on the New York Stock Exchange. Redemption requests received by
authorized financial professionals prior to the close of regular trading on the
New York Stock Exchange that are properly transmitted to the trustee by the time
designated by the trustee, are priced based on the date of receipt. Redemption
requests received by the trustee after the close of regular trading on the New
York Stock Exchange, redemption requests received by authorized financial
professionals after that time or redemption requests received by such persons
that are not transmitted to the trustee until after the time designated by the
trustee, are priced based on the date of the next determined redemption price
provided they are received in a timely manner by the trustee on
Understanding Your Investment 13
such date. It is the responsibility of authorized financial professionals to
transmit redemption requests received by them to the trustee so they will be
received in a timely manner. If your request is not received in a timely manner
or is incomplete in any way, you will receive the next net asset value computed
after the trustee receives your completed request.
If you redeem your units, the trustee will generally send you a payment for
your units no later than seven days after it receives all necessary
documentation (this will usually only take three business days). The only time
the trustee can delay your payment is if the New York Stock Exchange is closed
(other than weekends or holidays), the Securities and Exchange Commission
determines that trading on that exchange is restricted or an emergency exists
making sale or evaluation of the securities not reasonably practicable, and for
any other period that the Securities and Exchange Commission permits.
EXCHANGE OPTION. You may be able to exchange your units for units of our
other unit trusts at a reduced sales fee. You can contact your financial
professional for more information about trusts currently available for
exchanges. Before you exchange units, you should read the prospectus carefully
and understand the risks and fees. You should then discuss this option with
your financial professional to determine whether your investment goals have
changed, whether current trusts suit you and to discuss tax consequences. We
may discontinue this option upon sixty days notice.
DISTRIBUTIONS
MONTHLY DISTRIBUTIONS. Your trust generally pays interest from its net
investment income (pro-rated on an annual basis) along with any available
principal paid on the securities on each monthly distribution date to
unitholders of record on the preceding record date. The record and distribution
dates are shown under "Essential Information" in the "Investment Summary"
section of this prospectus. In some cases, your trust might pay a special
distribution if it holds an excessive amount of cash pending distribution. The
amount of your distributions will vary from time to time as interest and
principal payments change or trust expenses change.
Interest received by your trust, including that part of the proceeds of any
disposition of bonds which represents accrued interest, is credited by the
trustee to your trust's "interest account". Other receipts are credited to the
"principal account". After deduction of amounts sufficient to reimburse the
trustee, without interest, for any amounts advanced and paid to the sponsor as
the unitholder of record as of the first settlement date, interest received will
be distributed on each distribution date to unitholders of record as of the
preceding record date. All distributions will be net of estimated expenses.
Funds in the principal account will be distributed on each distribution date to
unitholders of record as of the preceding record date provided that the amount
available for distribution therein shall equal at least $1.00 per unit.
Because interest payments are not received by your trust at a constant rate
throughout the year and the interest rates on certain bonds in the trust may
adjust periodically, interest distributions may be more or less than the amount
credited to the interest account as of the record date. For the purpose of
minimizing fluctuations in interest distributions, the trustee is authorized to
advance amounts necessary to provide interest distributions of approximately
equal amounts. The trustee is reimbursed for these advances from
14 Understanding Your Investment
funds in the interest account on the next record date. Investors who purchase
units between a record date and a distribution date will receive their first
distribution on the second distribution date after the purchase.
ESTIMATED DISTRIBUTIONS. The estimated net annual interest income per unit,
estimated initial distribution per unit and estimated normal monthly
distribution per unit as of the close of business the day before your trust's
inception date are shown under "Essential Information" in the "Investment
Summary" section of this prospectus. We generally base these amounts on the
estimated cash flows of the bonds per unit based on the current interest rate
applicable to the bonds. Since certain of the bonds may be subject to potential
interest rate adjustments related to changes in the bonds' ratings provided by
certain ratings services, estimated distributions may fluctuate over time and
actual distributions may vary from estimated amounts. The actual distributions
that you receive will vary from these estimates with changes in expenses,
interest rates (including interest rate adjustments related to changes in the
bonds' ratings as provided by certain ratings services) and maturity, call,
default or sale of bonds. You may request the estimated cash flows from the
sponsor. The estimated cash flows are computed based on factors described under
"Understanding Your Investment--How Your Trust Works--Estimated Current and
Long-Term Returns".
REPORTS. The trustee or your financial professional will make available to
you a statement showing income and other receipts of your trust for each
distribution. Each year the trustee or your financial professional will also
provide an annual report on your trust's activity and certain tax information.
You can request copies of security evaluations to enable you to complete your
tax forms and audited financial statements for your trust, if available.
INVESTMENT RISKS
All investments involve risk. This section describes the main risks that can
impact the value of the securities in your portfolio. You should understand
these risks before you invest. If the value of the securities falls, the value
of your units will also fall. We cannot guarantee that your trust will achieve
its objective or that your investment return will be positive over any period.
MARKET RISK is the risk that the value of the securities in your trust will
fluctuate. This could cause the value of your units to fall below your original
purchase price or below the principal value. Market value fluctuates in
response to various factors. These can include changes in interest rates,
inflation, the financial condition of a security's issuer, perceptions of the
issuer, or ratings on a security. Even though we supervise your portfolio, you
should remember that we do not manage your portfolio. Your trust will not sell
a security solely because the market value falls as is possible in a managed
fund.
INTEREST RATE RISK is the risk that the value of securities will fall if
interest rates, in general, increase. The securities in your trust typically
fall in value when interest rates, in general, rise and rise in value when
interest rates, in general, fall. Securities with longer periods before
maturity are often more sensitive to general interest rate changes.
Certain bonds in the portfolio may be subject to interest rate adjustments if
either Moody's Investor Services or Standard & Poor's (or, in certain limited
circumstances, another ratings service) downgrades the rating for such bond (or
Understanding Your Investment 15
upgrades the rating after such a downgrade). The interest rates payable on
certain bonds in the portfolio may have already been increased due to past
ratings downgrades. Any future credit rating improvements on such bonds may
result in decreases to the interest rates payable on such bonds and,
consequently, may adversely affect both the income you receive from the
securities in your trust and the value of your units. On the other hand,
increases in a bond's interest rate related to decreases in such bond's credit
rating may place additional financial strain on the bond's issuer which could
result in further decreases in financial condition and further credit rating
decreases. Additionally, an increase in a bond's interest rate may increase the
risk that the bond's issuer will prepay or "call" the bond before its stated
maturity.
CREDIT RISK is the risk that a security's issuer or insurer is unable to meet
its obligation to pay principal or interest on the security.
CALL RISK is the risk that the issuer prepays or "calls" a bond before its
stated maturity. An issuer might call a bond if interest rates, in general fall
and the bond pays a higher interest rate or if it no longer needs the money for
the original purpose. If an issuer calls a bond, your trust will distribute the
principal to you but your future interest distributions will fall. You might
not be able to reinvest this principal at as high a yield. A bond's call price
could be less than the price your trust paid for the bond and could be below the
bond's par value. This means that you could receive less than the amount you
paid for your units. If enough bonds in your trust are called, your trust could
terminate early. Some or all of the bonds may also be subject to extraordinary
optional or mandatory redemptions if certain events occur, such as certain
changes in tax laws, the substantial damage or destruction by fire or other
casualty of the project for which the proceeds of the bonds were used, and
various other events. The call provisions are described in general terms in the
"Portfolio".
BOND QUALITY RISK is the risk that a bond will fall in value if a rating
agency decreases the bond's rating.
CONCENTRATION RISK is the risk that the value of your trust is more
susceptible to fluctuations based on factors that impact a particular type of
bond because the portfolio concentrates in bonds of that type. A portfolio
"concentrates" in a type of bond when bonds in a particular category make up 25%
or more of the portfolio. The table under "Types of Bonds" under the
"Investment Summary" section for your trust lists the type of bonds held by the
trust with the percentage that each type represents in the portfolio. The
following discusses various types of bonds. The information supplement contains
additional information on these types of bonds.
General Obligation Bonds. Certain of the bonds in your trust 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. The
taxing power of any governmental entity may be limited, however, by provisions
of state constitutions or laws. An entity's credit will depend on many factors:
tax base, reliance on federal or state aid, and factors which are beyond the
entity's control.
Revenue Bonds. Certain of the bonds in your trust may be "revenue bonds"
that are payable only from the revenue of a specific project or authority. They
not supported by the issuer's general power to levy taxes, if any. The risk of
16 Understanding Your Investment
default in payment of interest or principal increases if the income of the
related project or authority falters because that income is the only source of
payment. The following types of bonds are "revenue bonds".
Appropriations Bonds. Certain bonds in your trust may be bonds that are, in
whole or in part, subject to and dependent upon either the governmental entity
making appropriations from time to time or the continued existence of special
temporary taxes which require legislative action for their reimposition. The
availability of any appropriation is subject to the willingness or ability of
the governmental entity to continue to make such special appropriations or to
reimpose such special taxes. The obligation to make lease payments exists only
to the extent of the monies available to the governmental entity therefor, and
no liability is incurred by the governmental entity beyond the monies so
appropriated. Once an annual appropriation is made, the governmental entity's
obligation to make lease rental payments is absolute and unconditional
regardless of any circumstances or occurrences which might arise. In the event
of non-appropriation, certificateholders' or bondowners' sole remedy (absent
credit enhancement) generally is limited to repossession of the collateral for
resale or releasing. In the event of non-appropriation, the sponsor may
instruct the trustee to sell such bonds.
Airport, Port and Highway Bonds. Certain facility revenue bonds are payable
from and secured by the revenues from the ownership and operation of particular
facilities, such as airports, highways and port authorities. Airport operating
income may be affected by the ability of airlines to meet their obligations
under the agreements with airports. 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. Payment
may be adversely affected by reduction in revenues due to such factors and
increased cost of maintenance or decreased use of a facility. The sponsor
cannot predict what effect conditions may have on revenues which are dependent
for payment on these bonds.
Capital Improvement Facility Bonds. Your trust may contain bonds which are
in the capital improvement facilities category. Capital improvement bonds are
bonds issued to provide funds to assist political subdivisions or agencies of a
state through acquisition of the underlying debt of a state or local political
subdivision or agency. The risks of an investment in such bonds include the
risk of possible prepayment or failure of payment of proceeds on and default of
the underlying debt.
Convention Facility Bonds. Your trust may contain bonds of issuers in the
convention facilities category. Bonds in the convention facilities category
include special limited obligation bonds issued to finance convention and sports
facilities payable from rental payments and annual governmental appropriations.
The governmental agency is not obligated to make payments in any year in which
the monies have not been appropriated to make such payments. In addition, these
facilities are limited use facilities that may not be used for purposes other
than as convention centers or sports facilities.
Correctional Facility Bonds. Your trust may contain bonds of issuers in the
correctional facilities category. Bonds in the correctional facilities category
include special limited obligation bonds issued to construct, rehabilitate and
purchase correctional facilities payable from governmental rental payments
and/or appropriations.
Understanding Your Investment 17
Education, University and College Bonds. The ability of educational
institutions, including universities and colleges, to meet their obligations is
dependent upon various factors. Some of these factors include 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. Also, in the
case of public institutions, the financial condition of the relevant state or
other governmental entity and its policies with respect to education may affect
an institution's ability to make payment on its own.
Hospital and Health Care Facility Bonds. The ability of hospitals and other
health care facilities to meet their obligations with respect to revenue bonds
issued on their behalf is dependent on various factors. Some such factors are
the level of payments received from private third-party payors and government
programs and the cost of providing health care services. There can be no
assurance that payments under governmental programs will remain at levels
comparable to present levels or will be sufficient to cover the costs associated
with their bonds. It also 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 additionally subject to claims
and legal actions by patients and others in the ordinary course of business.
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.
Housing Bonds. Multi-family housing revenue bonds and single family mortgage
revenue bonds are state and local housing issues that have been issued to
provide financing for various housing projects. Multi-family housing revenue
bonds are payable primarily from mortgage loans to housing projects for low to
moderate income families. Single-family mortgage revenue bonds are issued for
the purpose of acquiring notes secured by mortgages on residences. The ability
of housing issuers to make debt service payments on their obligations may be
affected by various economic and non-economic factors. Such factors include:
occupancy levels, 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. 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. 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. Mortgage
loans are frequently partially or completely prepaid prior to their final stated
maturities. To the extent that these obligations were valued at a premium when
a unitholder purchased units, any prepayment at par would result in a loss of
capital to the unitholder and reduce the amount of income that would otherwise
have been paid to unitholders.
Industrial Development Revenue Bonds ("IDRs"). IDRs, including pollution
control revenue bonds, are tax-exempt bonds issued by states, municipalities,
public authorities or similar entities to finance the cost of acquiring,
constructing or improving various projects. These projects are usually operated
by corporate entities. 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 receipts or revenues of the issuer. Payment
of
18 Understanding Your Investment
IDRs is solely dependent upon the creditworthiness of the corporate operator of
the project or corporate guarantor. Such 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.
Lease Rental Bonds. Lease rental bonds are predominantly issued 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 or the purchase of equipment that will be used
by a state or local government. Thus, the bonds are subject to the ability and
willingness of the lessee government to meet its lease rental payments which
include debt service on the bonds. Lease rental bonds are subject to the risk
that the lessee government is not legally obligated to budget and appropriate
for the rental payments beyond the current fiscal year. These bonds are also
subject to the risk of abatement in many states as rental bonds cease in the
event that damage, destruction or condemnation of the project prevents its use
by the lessee. Also, in the event of default by the lessee government, there
may be significant legal and/or practical difficulties involved in the reletting
or sale of the project.
Moral Obligation Bonds. Your trust 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. Thus, such a
commitment generally requires appropriation by the state legislature and
accordingly does not constitute a legally enforceable obligation of debt of the
state. The agencies or authorities generally have no taxing power.
Power Bonds. The ability of utilities to meet their obligations with respect
to bonds they issue is dependent on various factors. These factors include the
rates they may charge their customers, the demand for a utility's services and
the cost of providing those services. Utilities may also be subject to
extensive regulations relating to the rates which they may charge customers.
Utilities can experience regulatory, political and consumer resistance to rate
increases. Utilities engaged in long-term capital projects are especially
sensitive to regulatory lags in granting rate increases. Utilities are
additionally subject to increased costs due to governmental environmental
regulation and decreased profits due to increasing competition. Any difficulty
in obtaining timely and adequate rate increases could adversely affect a
utility's results of operations. The sponsor cannot predict at this time the
ultimate effect of such factors on the ability of any issuers to meet their
obligations with respect to bonds.
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 party until
maturity or a predetermined redemption date. These obligations are generally
non-callable prior to maturity or the predetermined redemption date. In a few
isolated instances to date, however, bonds which were thought to be escrowed to
maturity have been called for redemption prior to maturity.
Solid Waste Disposal Bonds. Bonds issued for solid waste disposal facilities
are generally payable from tipping 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
Understanding Your Investment 19
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. Also, increasing environmental
regulation of the federal, state and local level has a significant impact on
waste disposal facilities. While regulation requires most waste producers to
use waste disposal facilities, it also imposes significant costs on the
facilities.
Special Tax Bonds. Special tax bonds are payable for and secured by the
revenues derived by a municipality from a particular tax. Examples of special
taxes are 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.
Payment on special tax bonds may be adversely affected by a reduction in
revenues realized from the underlying special tax. Also, should spending on the
particular goods or services that are subject to the special tax decline, the
municipality may be under no obligation to increase the rate of the special tax
to ensure that sufficient revenues are raised from the shrinking taxable base.
Tax Allocation Bonds. Tax allocation bonds are typically secured by
incremental tax revenues collected on property within the areas where
redevelopment projects, financed by bond proceeds are located. Bond payments
are expected to be made from projected increases in tax revenues derived from
higher assessed values of property resulting from development in the particular
project area and not from an increase in tax rates. Special risk considerations
include: variations in taxable values of property in the project area;
successful appeals by property owners of assessed valuations; substantial
delinquencies in the payment of property taxes; or imposition of any
constitutional or legislative property tax rate decrease.
Transit Authority Bonds. Mass transit is generally not self-supporting from
fare revenues. 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. 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.
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 a number of factors. Some such
factors are the failure of municipalities to utilize fully the facilities
constructed by these authorities, declines in revenue from user charges, the
possible inability to obtain rate increases, rising construction and maintenance
costs, impact of environmental requirements, the difficulty of obtaining or
discovering new supplies of fresh water, the effect of conservation programs,
the impact of "no growth" zoning ordinances and the continued availability of
federal and state financial assistance and of municipal bond insurance for
future bond issues.
LIQUIDITY RISK is the risk that the value of a security will fall if trading
in the security is limited or absent. No one can guarantee that a liquid
trading market will exist for any security because these securities generally
trade in the over-the-counter market (they are not listed on a securities
exchange). Certain bonds in the portfolio may
20 Understanding Your Investment
not have been registered by the issuer under the Securities Act of 1933.
LITIGATION AND LEGISLATION RISK is the risk that future litigation or
legislation could affect the value of your trust. Litigation could challenge an
issuer's authority to issue or make payments on securities.
"WHEN ISSUED" AND "DELAYED DELIVERY" BONDS. "When, as and if issued" bonds
are bonds that trade before they are actually issued. Bonds purchased on a
"when issued" basis have not yet been issued by the issuer on the trust's
inception date although such issuer has committed to issue such bonds. This
means that the sponsor can only deliver them to the trust "when, as and if" the
bonds are actually issued. In addition, other bonds may have been purchased by
the sponsor on a "delayed delivery" basis. These bonds are expected to be
delivered to the trust after the trust's first settlement date (normally three
business days after the trust's inception date).
Delivery of these bonds may be delayed or may not occur. Interest on these
bonds does not begin accruing to your trust until the bond is delivered to the
trust. The trust may have to adjust the tax basis of any bonds delivered after
the expected delivery date. Any adjustment would reflect interest that accrued
between the purchase and the delivery of the bonds to your trust. This could
lower your first year estimated current return. You may experience gains or
losses related to these bonds from the time you purchase units even though your
trust has not yet received them.
ORIGINAL ISSUE DISCOUNT BONDS. Original issue discount bonds were initially
issued at a price below their face (or par) value. These bonds typically pay a
lower interest rate than comparable bonds that were issued at or above their par
value. In a stable interest rate environment, the market value of these bonds
tends to increase more slowly in early years and in greater increments as the
bonds approach maturity. The issuers of these bonds may be able to call or
redeem a bond before its stated maturity date and at a price less than the
bond's par value. Under current law, the original issue discount, which is the
difference between the stated redemption price at maturity and the issue price
of the bonds, is deemed to accrue on a daily basis and the accrued portion is
treated as taxable interest income for U.S. federal income tax purposes.
Zero coupon bonds are a type of original issue discount bond. These bonds do
not pay any current interest during their life. If an investor owns this type
of bond, the investor has the right to receive a final payment of the bond's par
value at maturity. The price of these bonds often fluctuates greatly during
periods of changing market interest rates compared to bonds that make current
interest payments. The issuers of these bonds may be able to call or redeem a
bond before its stated maturity date and at a price less than the bond's par
value.
MARKET DISCOUNT. Your trust may consist of some bonds whose current market
values were below the principal value on the trust's inception date or your unit
purchase date. A primary reason for the market value of such bonds being less
than the principal value is that the interest rate of such bonds is at a lower
rate than the current market interest rates for comparable bonds. Bonds selling
at market discounts tend to increase in market value as they approach maturity.
PREMIUM BONDS. Your trust may consist of some bonds whose current market
values were above the principal value on the trust's inception
Understanding Your Investment 21
date or your unit purchase date. A primary reason for the market value of such
bonds being higher than the principal value is that the interest rate of such
bonds is at a higher rate than the current market interest rates for comparable
bonds. The current returns of bonds trading at a market premium are initially
higher than the current returns of comparable bonds issued at currently
prevailing interest rates because premium bonds tend to decrease in market value
as they approach maturity when the principal value becomes payable. Because
part of the purchase price is effectively returned not at maturity but through
current income payments, early redemption of a premium bond at par or any other
amount below the trust's purchase price will result in a reduction in yield.
Redemption pursuant to call provisions generally will, and redemption pursuant
to sinking fund provisions may, occur at times when the bonds have a market
value that represents a premium over par or for original issue discount
securities a premium over the accreted value.
BOND INSURANCE
Bonds are not required to be covered by insurance to be included in your
trust. Certain bonds may, however, be covered by insurance guaranteeing payment
of interest and principal, when due. The premium for any bond insurance is paid
by the issuer or by a prior owner of the bonds and any policy is non-cancelable
and will continue in force so long as the bonds so insured are outstanding and
the bond insurer remains in business. The bond insurers, if any, are listed in
the bond names in the "Portfolio" and a table following the "Portfolio". Bond
insurance, if any, guarantees the timely payment of principal and interest on
the bonds when they fall due. For this purpose, "when due" generally means the
stated payment or maturity date for the payment of principal and interest. The
insurance does not guarantee the market value of the bonds or the value of the
trust units. Each bond insurer is subject to regulation by the department of
insurance in the state in which it is qualified to do business. Such
regulation, however, is no guarantee that a bond insurer will be able to perform
on its contract of insurance in the event a claim should be made.
Most bond insurance companies have recently had their credit ratings
downgraded or placed on review for possible downgrade by recognized credit
rating agencies such as Standard & Poor's and Moody's Investor Services, Inc.
While many insurance companies have historically maintained a "AAA" credit
rating, most insurance companies are currently assigned a credit rating below
this level. To the extent that the issuer of a bond in your trust portfolio
does not independently maintain a credit rating equal to or higher than the
insurer of the bond, if any, a downgrade in the rating of a bond insurer will
result in a downgrade in the rating of the related bond. This could have a
material adverse effect on the value of the bonds and the value of your units.
HOW YOUR TRUST WORKS
YOUR TRUST. Your trust is a unit investment trust registered under the
Investment Company Act of 1940. We created the trust under a trust agreement
between Advisors Asset Management, Inc. (as depositor/sponsor, evaluator and
supervisor) and The Bank of New York Mellon (as trustee). To create your trust,
we deposited securities with the trustee (or contracts to purchase securities
along with an irrevocable letter of credit or other consideration to pay for the
securities). In exchange, the trustee delivered units of your trust to us.
Each unit represents an undivided interest in the assets of your trust. These
units remain outstanding until redeemed or until your trust terminates. The
number of units, fractional
22 Understanding Your Investment
interest of each unit in a trust, estimated interest distributions per unit and
estimated current and long-term returns will increase or decrease to the extent
of any adjustment.
CHANGING YOUR PORTFOLIO. Your trust is not a managed fund. Unlike a managed
fund, we designed your portfolio to remain relatively fixed. Your trust will
generally buy and sell securities:
* to pay expenses,
* to issue additional units or redeem units,
* in limited circumstances to protect a trust,
* to make required distributions or avoid imposition of taxes on a trust, or
* as permitted by the trust agreement.
When your trust sells securities, the composition and diversity of the
securities in the portfolio may be altered. Your trust will generally reject
any offer for securities or other property in exchange for the securities in its
portfolio. If your trust receives securities or other property, it will either
hold the securities or property in the portfolio or sell the securities or
property and distribute the proceeds.
We will increase the size of your trust as we sell units. When we create
additional units, we will seek to maintain a portfolio that replicates the
principal amounts of the securities in the portfolio. When your trust buys
securities, it may pay brokerage or other acquisition fees. You could
experience a dilution of your investment because of these fees and fluctuations
in security prices between the time we create units and the time your trust buys
the securities. Because the trusts pay the brokerage fees associated with the
creation of new units and with the sale of securities to meet redemption and
exchange requests, frequent redemption and exchange activity will likely result
in higher brokerage expenses. When your trust buys or sells securities, we may
direct that it place orders with and pay brokerage commissions to brokers that
sell units or are affiliated with your trust or the trustee.
In the event of a failure to deliver any bond that has been purchased for the
trust under a contract ("failed bonds"), the sponsor is authorized to purchase
other bonds ("replacement bonds"). The trustee shall pay for replacement bonds
out of funds held in connection with the failed bonds and will accept delivery
of such bonds to make up the original principal of a trust. The replacement
bonds must be purchased within 20 days after delivery of the notice of the
failed contract, and the purchase price (exclusive of accrued interest) may not
exceed the principal attributable to the failed bonds. Whenever a replacement
bond has been acquired for a trust, the trustee shall, within five days
thereafter, notify all unitholders of a trust of the acquisition of the
replacement bond and shall, on the next distribution date which is more than 30
days thereafter, make a pro rata distribution of the amount, if any, by which
the cost to a trust of the failed bond exceeded the cost of the replacement
bond. In addition, a replacement bond must (at the time of purchase):
* be a tax exempt bond;
* have a fixed maturity or disposition date comparable to that of the failed
bond it replaces;
* be purchased at a price that results in a yield to maturity and in a
current return which is approximately equivalent to the yield to maturity
and current return of the failed bond which it replaces; and
Understanding Your Investment 23
* be rated at least in the category of A- or the equivalent by a major
rating organization.
If the right of limited substitution described above shall not be used to
acquire replacement bonds in the event of a failed contract, the sponsor will
refund the sales charge attributable to such failed bonds to all unitholders of
the trust, and distribute the principal attributable to such failed bonds on the
next monthly distribution date which is more than 30 days thereafter. In the
event a replacement bond is not acquired by the trust, the estimated net annual
interest income per unit would be reduced and the estimated current and long-
term returns might be lowered.
ESTIMATED CURRENT AND LONG-TERM RETURNS. The estimated current return and
the estimated long-term return as of the business day before a trust's inception
date are shown under "Essential Information" and "Illustration of Sales Fee
Discounts" in the "Investment Summary" section for your trust. Estimated
current return is calculated by dividing the current estimated net annual
interest income per unit based on the interest rates currently applicable to the
bonds by the public offering price. The estimated net annual interest income
per unit will vary with changes in the interest rates applicable to the bonds
(some of which may be subject to adjustments related to changes in the bonds'
ratings as provided by certain ratings services), fees and expenses of your
trust and with the default, redemption, maturity, exchange or sale of bonds.
The public offering price will vary with changes in the price of the bonds.
Accordingly, there is no assurance that the present estimated current return
will be realized in the future. Estimated long-term return is calculated using
a formula which (1) takes into consideration, and determines and factors in the
relative weightings of, the market values, yields (which takes into account the
amortization of premiums and the accretion of discounts) and estimated
retirements of the bonds and (2) takes into account the expenses and sales
charge associated with units. The applicable sales charge associated with units
will vary based on sales fee reductions applicable to certain unitholders.
Since the interest rates, value and estimated retirements of the bonds and the
expenses of your trust may change, there is no assurance that the present
estimated long-term return will be realized in the future. The estimated
current return and estimated long-term return are expected to differ because the
calculation of estimated long-term return reflects the estimated date and amount
of principal returned while the estimated current return calculation includes
only net annual interest income and public offering price.
In order to acquire certain bonds, it may be necessary for the sponsor or
trustee to pay amounts covering accrued interest on the bonds which exceed the
amounts which will be made available through cash furnished by the sponsor on
the trust's inception date. This cash may exceed the interest which would
accrue to the first settlement date. The trustee has agreed to pay for any
amounts necessary to cover any excess and will be reimbursed when funds become
available from interest payments on the related bonds.
WEIGHTED AVERAGE MODIFIED DURATION. The weighted average modified duration
of the securities in the trust portfolio as of the business day before the
trust's inception date is shown under "Essential Information" in the "Investment
Summary" section for your trust. Modified duration is a calculation that
expresses the measurable change in the value of a security in response to a
change in interest rates. Modified
24 Understanding Your Investment
duration follows the concept that interest rates and bond prices move in
opposite directions. This formula is used to determine the effect that a 1%
change in interest rates might have on the price of a bond. For example, if a
portfolio has a duration of 3 years then that portfolio's value is estimated to
decline approximately 3% for each 1% increase in interest rates or rise
approximately 3% for each 1% decrease in interest rates. Weighted average
modified duration of the securities will vary with changes in the value and
yield of bonds and with the default, redemption, maturity, exchange, sale or
other liquidation of bonds. The weighted average modified duration of the
securities shown under "Essential Information" relates only to the bonds in the
trust and not to the trust itself or units. Modified duration does not account
for the trust sales charge or expenses and is not intended to predict or
guarantee future performance of the bonds or the trust.
AMENDING THE TRUST AGREEMENT. The sponsor and the trustee can change the
trust agreement without your consent to correct any provision that may be
defective or to make other provisions that will not materially adversely affect
your interest (as determined by the sponsor and the trustee). We cannot change
this agreement to reduce your interest in your trust without your consent.
Investors owning two-thirds of the units in your trust may vote to change this
agreement.
TERMINATION OF YOUR TRUST. Your trust will terminate upon the maturity,
payment, redemption, sale or other liquidation of all of the securities in the
portfolio. The trustee may terminate your trust early if the value of the trust
is less than 40% of the original value of the securities in the trust at the
time of deposit. At this size, the expenses of your trust may create an undue
burden on your investment. Investors owning two-thirds of the units in your
trust may also vote to terminate the trust early. The trustee will liquidate
the trust in the event that a sufficient number of units not yet sold to the
public are tendered for redemption so that the net worth of a trust would be
reduced to less than 40% of the value of the securities at the time they were
deposited in a trust. If this happens, we will refund any sales charge that you
paid.
The trustee will notify you of any termination and sell any remaining
securities. The trustee will send your final distribution to you within a
reasonable time following liquidation of all the securities after deducting
final expenses. Your termination distribution may be less than the price you
originally paid for your units.
THE SPONSOR. The sponsor of the trust is Advisors Asset Management, Inc. We
are a broker-dealer specializing in providing trading and support services to
broker-dealers, registered representatives, investment advisers and other
financial professionals. Our headquarters are located at 18925 Base Camp Road,
Monument, Colorado 80132. You can contact our unit investment trust division at
8100 East 22nd Street North, Building 800, Suite 102, Wichita, Kansas 67226 or
by using the contacts listed on the back cover of this prospectus. AAM is a
registered broker-dealer and investment adviser, a member of the Financial
Industry Regulatory Authority, Inc. (FINRA) and Securities Investor Protection
Corporation (SIPC) and a registrant of the Municipal Securities Rulemaking Board
(MSRB). If we fail to or cannot perform our duties as sponsor or become
bankrupt, the trustee may replace us, continue to operate your trust without a
sponsor, or terminate your trust.
We and your trust have adopted a code of ethics requiring our employees who
have access to
Understanding Your Investment 25
information on trust transactions to report personal securities transactions.
The purpose of the code is to avoid potential conflicts of interest and to
prevent fraud, deception or misconduct with respect to your trust.
THE TRUSTEE. The Bank of New York Mellon is the trustee of your trust with
its principal unit investment trust division offices located at 2 Hanson Place,
12th Floor, Brooklyn, New York 11217. You can contact the trustee by calling
the telephone number on the back cover of this prospectus or by writing to its
unit investment trust office. We may remove and replace the trustee in some
cases without your consent. The trustee may also resign by notifying us and
investors.
HOW WE DISTRIBUTE UNITS. We sell units to the public through underwriters
and other broker-dealers and other firms. We pay part of the sales fee to these
distribution firms when they sell units. Units will be distributed to the
public by these firms at the public offering price per unit as described under
"How to Buy Units".
Underwriter Compensation. The underwriters for your trust and the amounts of
units underwritten are listed under "Underwriting" in the "Investment Summary"
section for your trust. As sponsor and principal underwriter, we sell these
units to the underwriters at the regular public offering price per unit less a
concession per unit as set forth in the following table:
AGGREGATE AMOUNT UNDERWRITER
ORIGINALLY UNDERWRITTEN CONCESSION
------------------------------------------
$500,000 - $999,999 2.10%
$1,000,000 - $2,499,999 2.15
$2,500,000 - $4,999,999 2.20
$5,000,000 or more 2.25
The minimum underwriting commitment per trust is $500,000.
In addition, with respect to all subsequent unit purchases by an underwriter
above the original underwriting commitment, an underwriter will be allowed an
initial offering period broker-dealer concession equal to the original
underwriter concession applicable to the underwriter as set forth in the table
above if more favorable to the underwriter than the broker-dealer concessions
described below under "Broker-Dealer Compensation".
In addition to any other benefits underwriters may realize from the sale of
units, the sponsor will share on a pro rata basis among underwriters that
underwrite $500,000 or more of a single trust 50% of any gain (less deductions
for accrued interest and certain costs) represented by the difference between
the cost of the bonds in such trust to the sponsor and the valuation of the
bonds in such trust on the trust's inception date.
Broker-Dealer Compensation. During the initial offering period, the
distribution fee (the broker-dealer concession or agency commission) for non-
underwriter broker-dealers and other firms is as follows:
CONCESSION
OR AGENCY
TRANSACTION AMOUNT COMMISSION
-------------------------------------------
Less than $100,000 2.00%
$100,000 - $249,999 1.75%
$250,000 - $499,999 1.50%
$500,000 - $999,999 1.20%
$1,000,000 - $4,999,999 1.10%
$5,000,000 - $9,999,999 1.00%
$10,000,000 or more 0.90%
26 Understanding Your Investment
We apply these concessions as a percent of the public offering price per unit
at the time of the transaction. The breakpoints will be adjusted to take into
consideration purchase orders stated in dollars which cannot be completely
fulfilled due to the requirement that only whole units be issued.
For transactions involving unitholders of other unit investment trusts who
use their redemption or termination proceeds to purchase units of the trust
offered in this prospectus, the concession or agency commission is 1.50% of the
public offering price per unit.
No concession or agency commission is paid to broker-dealers, investment
advisers or other selling firms in connection with unit sales in Fee Accounts
that charge a Wrap Fee.
Underwriters other than the sponsor will sell units of the trusts to other
broker-dealers and selling agents at the public offering price per unit less a
concession or agency commission not in excess of the underwriter concession
allowed to the underwriter by the sponsor as described under "Underwriter
Compensation" above.
After the initial offering period, the broker-dealer concession or agency
commission for secondary market transactions is equal to 2.50% of the public
offering price.
Any sales fee discount is borne by the broker-dealer or selling firm out of
the concession or agency commission, except as stated above. We reserve the
right to change the amount of concessions or agency commissions from time to
time.
General. Broker-dealers and other firms that sell units of certain unit
investment trusts for which AAM acts as sponsor are eligible to receive
additional compensation for volume sales. The sponsor offers two separate
volume concession structures for certain trusts that are referred to as "Volume
Concession A" and "Volume Concession B." The trust offered in this prospectus
is a Volume Concession B trust. Broker-dealers and other firms that sell units
of any Volume Concession B trust are eligible to receive the additional
compensation described below. Such payments will be in addition to the regular
concessions paid to firms as set forth in the applicable trust's prospectus. The
additional concession is based on total initial offering period sales of all
Volume Concession B trusts during a calendar quarter as set forth in the
following table:
INITIAL OFFERING PERIOD SALES VOLUME
DURING CALENDAR QUARTER CONCESSION
---------------------------------------------------------
LESS THAN $100,000,000 0.000%
$100,000,000 BUT LESS THAN $250,000,000 0.050
$250,000,000 OR MORE 0.100
This volume concession will be paid on units of all Volume Concession B trust
units sold in the initial offering period, except as described below.
Currently, series of Advisors Corporate Trust High Yield Bond Portfolio,
Advisors Corporate Trust--Navellier/Dial High Income Opportunities Portfolio,
Build America Bond Limited Maturity Portfolio, Build America Bond Portfolio,
Insured Tax Exempt Municipal Portfolio, Municipal Opportunities Portfolio, Tax
Exempt Municipal Portfolio and Tax Exempt Securities Trust are classified as
Volume Concession B trusts; however, other trusts may be classified as Volume
Concession B trusts in the future and eligible for this additional compensation
for calendar quarter sales as disclosed in the applicable trust prospectus. For
a trust to be eligible for this additional Volume Concession B compensation for
calendar quarter sales, the trust's prospectus must include
Understanding Your Investment 27
disclosure related to this additional Volume Concession B compensation. A trust
is not eligible for this additional Volume Concession B compensation if the
prospectus for such trust does not include disclosure related to this additional
Volume Concession B compensation. Other trusts sponsored by AAM are eligible to
receive different categories of additional compensation for volume sales as set
forth in the applicable trust's prospectus. Broker dealer-firms will not
receive compensation unless they sell at least $100 million of units of Volume
Concession B trusts during a calendar quarter. For example, if a firm sells
$99.5 million of units of Volume Concession B trusts during a calendar quarter,
the firm will not receive any additional compensation with respect to such
trusts. Once a firm reaches a particular breakpoint during a quarter, the firm
will receive the stated volume concession on all initial offering period sales
of Volume Concession B trust units during the applicable quarter. For example,
if a firm sells $115 million of units of Volume Concession B trusts in the
initial offering period during a calendar quarter, the firm will receive
additional compensation of 0.05% of $115 million and if a firm sells $275
million of units of Volume Concession B trusts in the initial offering period
during a calendar quarter, the firm will receive additional compensation of
0.10% of $275 million. In addition, selling firms will not receive the
additional compensation on the sale of units which are not subject to a
transactional sales charge. However, such sales will be included in determining
whether a firm has met the volume sales concession breakpoints. Secondary
market sales of units are excluded for purposes of the additional compensation.
We will pay these amounts out of our own assets within a reasonable time
following each calendar quarter.
We currently provide, at our own expense and out of our own profits,
additional compensation and benefits to broker-dealers who sell units of this
trust and our other products. This compensation is intended to result in
additional sales of our products and/or compensate broker-dealers and financial
advisors for past sales. A number of factors are considered in determining
whether to pay these additional amounts. Such factors may include, but are not
limited to, the level or type of services provided by the intermediary, the
level or expected level of sales of our products by the intermediary or its
agents, the placing of our products on a preferred or recommended product list
and access to an intermediary's personnel. We may make these payments for
marketing, promotional or related expenses, including, but not limited to,
expenses of entertaining retail customers and financial advisors, advertising,
sponsorship of events or seminars, obtaining information about the breakdown of
unit sales among an intermediary's representatives or offices, obtaining shelf
space in broker-dealer firms and similar activities designed to promote the sale
of our products. We make such payments to a substantial majority of
intermediaries that sell our products. We may also make certain payments to, or
on behalf of, intermediaries to defray a portion of their costs incurred for the
purpose of facilitating unit sales, such as the costs of developing or
purchasing trading systems to process unit trades. Payments of such additional
compensation described in this paragraph and the volume concessions described
above, some of which may be characterized as "revenue sharing," may create an
incentive for financial intermediaries and their agents to sell or recommend our
products, including this trust, over other products. These arrangements will
not change the price you pay for your units.
We generally register units for sale in various states in the U.S. We do not
register units for sale in any foreign country. This prospectus does not
constitute an offer of units in any state or
28 Understanding Your Investment
country where units cannot be offered or sold lawfully. We may reject any order
for units in whole or in part.
We may gain or lose money when we hold units in the primary or secondary
market due to fluctuations in unit prices. The gain or loss is equal to the
difference between the price we pay for units and the price at which we sell or
redeem them. We may also gain or lose money when we deposit securities to
create units.
TAXES
This section summarizes some of the main U.S. federal income tax consequences
of owning units of the trust. This section is current as of the date of this
prospectus. Tax laws and interpretations change frequently, and these summaries
do not describe all of the tax consequences to all taxpayers. For example,
these summaries generally do not describe your situation if you are a
corporation, a non-U.S. person, a broker/dealer, or other investor with special
circumstances. In addition, this section does not describe your state, local or
foreign tax consequences.
This federal income tax summary is based in part on the advice of counsel to
the sponsor. The Internal Revenue Service could disagree with any conclusions
set forth in this section. In addition, our counsel was not asked to review,
and has not reached a conclusion with respect to the federal income tax
treatment of the assets to be deposited in the trust. This may not be
sufficient for you to use for the purpose of avoiding penalties under federal
tax law.
As with any investment, you should seek advice based on your individual
circumstances from your own tax advisor.
TRUST STATUS. The trust intends to qualify as a "regulated investment
company" under the federal tax laws. If the trust qualifies as a regulated
investment company and distributes its income as required by the tax law, the
trust generally will not pay federal income taxes.
DISTRIBUTIONS. After the end of each year, you will receive a tax statement
that separates your trust's distributions into four categories, exempt-interest
dividends, ordinary income distributions, capital gains dividends and return of
capital. Exempt-interest dividends generally are excluded from your gross
income for federal income tax purposes. Some or all of the exempt-interest
dividends, however, may be taken into account in determining your alternative
minimum tax and may have other tax consequences (e.g., they may affect the
amount of your social security benefits that are taxed).
Ordinary income distributions are generally taxed at your ordinary tax rate.
Generally, you will treat all capital gains dividends as long-term capital gains
regardless of how long you have owned your units. See "Capital Gains and
Losses" below for information about the capital gains tax rate. To determine
your actual tax liability for your capital gains dividends, you must calculate
your total net capital gain or loss for the tax year after considering all of
your other taxable transactions, as described below. In addition, the trust may
make distributions that represent a return of capital for tax purposes and thus
will generally not be taxable to you. The tax status of your distributions from
your trust is not affected by whether you reinvest your distributions in
additional shares or receive them in cash. The income from your trust that you
must take into account for federal income tax purposes is not reduced by amounts
used to pay a deferred sales fee, if any. The tax laws may require you to treat
Understanding Your Investment 29
certain distributions made to you in January as if you had received them on
December 31 of the previous year. Under the "Health Care and Education
Reconciliation Act of 2010," income from the trust may also be subject to a new
3.8 percent "medicare tax" imposed for taxable years beginning after 2012. This
tax will generally apply to your net investment income if your adjusted gross
income exceeds certain threshold amounts, which are $250,000 in the case of
married couples filing joint returns and $200,000 in the case of single
individuals. Interest that is excluded from gross income and exempt-interest
dividends from the trust are generally not included in your net investment
income for purposes of this tax.
DIVIDENDS RECEIVED DEDUCTION. A corporation that owns units generally will
not be entitled to the dividends received deduction with respect to dividends
received from the trust because the dividends received deduction is generally
not available for distributions from regulated investment companies.
SALE OR REDEMPTION OF UNITS. If you sell or redeem your units, you will
generally recognize a taxable gain or loss. To determine the amount of this
gain or loss, you must subtract your tax basis in your units from the amount you
receive in the transaction.
Your tax basis in your units is generally equal to the cost of your units,
generally including sales charges. In some cases, however, you may have to
adjust your tax basis after you purchase your units. Further, if you hold your
units for six months or less, any loss incurred by you related to the
disposition of such a unit will be disallowed to the extent of the exempt-
interest dividends you received, except as otherwise described in the next
section.
CAPITAL GAINS AND LOSSES AND CERTAIN ORDINARY INCOME DIVIDENDS. If you are
an individual, the maximum marginal stated federal tax rate for net capital gain
is generally 20% for taxpayers in the 39.6% tax bracket, 15% for taxpayers in
the 25%, 28%, 33% and 35% tax brackets and 0% for taxpayers in the 10% and 15%
tax brackets. Capital gains may also be subject to the "medicare tax" discussed
above.
Net capital gain equals net long-term capital gain minus net short-term
capital loss for the taxable year. Capital gain or loss is long-term if the
holding period for the asset is more than one year and is short-term if the
holding period for the asset is one year or less. You must exclude the date you
purchase your units to determine your holding period. If you hold a unit for
six months or less, any loss incurred by you related to the disposition of such
unit will be disallowed to the extent of the exempt-interest dividends you
received, except in the case of a regular dividend paid by the trust if the
trust declares exempt-interest dividends on a daily basis in an amount equal to
at least 90 percent of its net tax-exempt interest and distributes such
dividends on a monthly or more frequent basis. To the extent, if any, it is not
disallowed, it will be recharacterized as long-term capital loss to the extent
of any capital gain dividend received. The tax rates for capital gains realized
from assets held for one year or less are generally the same as for ordinary
income. The Internal Revenue Code treats certain capital gains as ordinary
income in special situations.
EXCHANGES. If you elect to have your proceeds from your trust rolled over
into a future series of the trust, the exchange would generally be considered a
sale for federal income tax purposes.
DEDUCTIBILITY OF TRUST EXPENSES. Expenses incurred and deducted by your
trust will generally
30 Understanding Your Investment
not be treated as income taxable to you. In some cases, however, you may be
required to treat your portion of these trust expenses as income. In these
cases you may be able to take a deduction for these expenses. However, certain
miscellaneous itemized deductions, such as investment expenses, may be deducted
by individuals only to the extent that all of these deductions exceed 2% of the
individual's adjusted gross income. Some individuals may also be subject to
further limitations on the amount of their itemized deductions, depending on
their income. Further, because the trust pays exempt-interest dividends, which
are treated as exempt interest for federal income tax purposes, you will not be
able to deduct some of your interest expense for debt that you incur or continue
to purchase or carry your shares.
FOREIGN INVESTORS. If you are a foreign investor (i.e., an investor other
than a U.S. citizen or resident or a U.S. corporation, partnership, estate or
trust), you should be aware that, generally, subject to applicable tax treaties,
distributions from the trust will be characterized as dividends for federal
income tax purposes (other than dividends which the trust properly reports as
capital gain dividends) and, other than exempt-interest dividends, will be
subject to U.S. income taxes, including withholding taxes, subject to certain
exceptions described below. However, distributions received by a foreign
investor from the trust that are properly reported by the trust as capital gain
dividends may not be subject to U.S. federal income taxes, including withholding
taxes, provided that the trust makes certain elections and certain other
conditions are met. In the case of dividends with respect to taxable years of
the trust beginning prior to 2014, distributions from the trust that are
properly reported by the trust as an interest-related dividend attributable to
certain interest income received by the trust or as a short-term capital gain
dividend attributable to certain net short-term capital gain income received by
the trust may not be subject to U.S. federal income taxes, including withholding
taxes when received by certain foreign investors, provided that the trust makes
certain elections and certain other conditions are met. In addition,
distributions in respect of units after June 30, 2014 may be subject to a U.S.
withholding tax of 30% in the case of distributions to (i) certain non-U.S.
financial institutions that have not entered into an agreement with the U.S.
Treasury to collect and disclose certain information and are not resident in a
jurisdiction that has entered into such an agreement with the U.S. Treasury and
(ii) certain other non-U.S. entities that do not provide certain certifications
and information about the entity's U.S. owners. Dispositions of units by such
persons may be subject to such withholding after December 31, 2016. You should
also consult your tax advisor with respect to other U.S. tax withholding and
reporting requirements.
EXPENSES
Your trust will pay various expenses to conduct its operations. The "Fees
and Expenses" section of the "Investment Summary" in this prospectus shows the
estimated amount of these expenses.
The sponsor will receive a fee from your trust for creating and developing
the trust, including determining the trust's objectives, policies, composition
and size, selecting service providers and information services and for providing
other similar administrative and ministerial functions. This "creation and
development fee" is a charge of $7.50 per unit. The trustee will deduct this
amount from your trust's assets as of the close of the initial offering period.
No portion of this fee is applied to the payment of distribution expenses or as
compensation for sales efforts. This fee will not be deducted from proceeds
received upon a repurchase, redemption
Understanding Your Investment 31
or exchange of units before the close of the initial public offering period.
Your trust will pay a fee to the trustee for its services. The trustee also
benefits when it holds cash for your trust in non-interest bearing accounts.
Your trust will reimburse us as supervisor, evaluator and sponsor for providing
portfolio supervisory services, for evaluating your portfolio and for providing
bookkeeping and administrative services. Our reimbursements may exceed the
costs of the services we provide to your trust but will not exceed the costs of
services provided to all of our unit investment trusts in any calendar year.
All of these fees may adjust for inflation without your approval.
Your trust will also pay its general operating expenses. Your trust may pay
expenses such as trustee expenses (including legal and auditing expenses),
various governmental charges, fees for extraordinary trustee services, costs of
taking action to protect your trust, costs of indemnifying the trustee and the
sponsor, legal fees and expenses, expenses incurred in contacting you and costs
incurred to reimburse the trustee for advancing funds to meet distributions.
Your trust may pay the costs of updating its registration statement each year.
The trustee will generally pay trust expenses from interest income and principal
payments received on the securities but in some cases may sell securities to pay
trust expenses.
EXPERTS
LEGAL MATTERS. Chapman and Cutler LLP acts as counsel for the trust and has
given an opinion that the units are validly issued. Dorsey & Whitney LLP acts
as counsel for the trustee.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. Grant Thornton LLP,
independent registered public accounting firm, audited the statement of
financial condition and the portfolio in this prospectus.
ADDITIONAL INFORMATION
This prospectus does not contain all the information in the registration
statement that your trust filed with the Securities and Exchange Commission.
The Information Supplement, which was filed with the Securities and Exchange
Commission, includes more detailed information about the securities in your
portfolio, investment risks and general information about your trust. You can
obtain the Information Supplement by contacting us or the Securities and
Exchange Commission as indicated on the back cover of this prospectus. This
prospectus incorporates the Information Supplement by reference (it is legally
considered part of this prospectus).
32 Understanding Your Investment
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
As of the date of the prospectus, the following table shows the approximate
taxable estimated current returns for individuals that are equivalent to tax-
exempt estimated current returns under United States federal taxes using the
published marginal federal tax rates scheduled to be in effect in 2014. The
table illustrates approximately what you would have to earn on taxable
investments to equal the tax-exempt estimated current return in your income tax
bracket. The table does not reflect any state or local taxes, any alternative
minimum taxes or any taxes other than federal personal income taxes. The table
does not show the approximate taxable estimated current returns for individuals
that are subject to the alternative minimum tax. The table does not reflect the
effect of federal or state limitations (if any) on the amount of allowable
itemized deductions, phase-outs of personal or dependant exemption credits or
any other credits. See "Understanding Your Investment--Taxes" for a more
detailed discussion of federal tax issues.
TAXABLE INCOME TAX-EXEMPT ESTIMATED CURRENT RETURN
3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00%
------------------------------------- FEDERAL -----------------------------------------------------------
SINGLE RETURN JOINT RETURN TAX RATE* EQUIVALENT TAXABLE ESTIMATED CURRENT RETURN
----------------------------------------------------------------------------------------------------------------
$0 - 9,075 $0 - 18,150 10.00% 3.33% 3.89% 4.44% 5.00% 5.56% 6.11% 6.67%
9,075 - 36,900 18,150 - 73,800 15.00% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06%
36,900 - 89,350 73,800 - 148,850 25.00% 4.00% 4.67% 5.33% 6.00% 6.67% 7.33% 8.00%
89,350 - 186,350 148,850 - 226,850 28.00% 4.17% 4.86% 5.56% 6.25% 6.94% 7.64% 8.33%
186,350 - 405,100 226,850 - 405,100 33.00% 4.48% 5.22% 5.97% 6.72% 7.46% 8.21% 8.96%
405,100 - 406,750 405,100 - 457,600 35.00% 4.62% 5.38% 6.15% 6.92% 7.69% 8.46% 9.23%
Over 406,750 Over 457,600 39.60% 4.97% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93%
Over 406,750 Over 457,600 43.40%** 5.30% 6.18% 7.07% 7.95% 8.83% 9.72% 10.60%
<FN>
* Please note that the table does not reflect (i) any federal limitations on
the amount of allowable itemized deductions, phase-outs of personal or
dependent exemption credits or any other credits, (ii) any alternative
minimum taxes or any taxes other than personal income taxes or (iii) state or
local taxes. In addition, note that certain investment income may also be
subject to a 3.8 percent "medicare tax" imposed for taxable years beginning
after 2012.
** This is the maximum stated regular tax rate of 39.60% plus the 3.80% medicare
tax imposed on the net investment income of certain taxpayers. The medicare
tax could also apply to taxpayers in other tax brackets. This tax generally
applies to net investment income if the taxpayer's adjusted gross income
exceeds certain threshold amounts, which are $250,000 in the case of married
couples filing joint returns and $200,000 in the case of single individuals.
Tax-exempt interest income is generally not included in net investment income
for purposes of this tax.
</FN>
Understanding Your Investment 33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
UNITHOLDERS
ADVISORS DISCIPLINED TRUST 1169
We have audited the accompanying statement of financial condition, including the
trust portfolio on pages 5 through 7, of Advisors Disciplined Trust 1169, as of
____________, 2014, the initial date of deposit. The statement of financial
condition is the responsibility of the trust's sponsor. Our responsibility is
to express an opinion on this statement of financial condition based on our
audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the statement of financial condition is free of material misstatement. The
trust is not required to have, nor were we engaged to perform an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the trust's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement of financial condition, assessing the accounting
principles used and significant estimates made by the sponsor, as well as
evaluating the overall statement of financial condition presentation. Our
procedures included confirmation with The Bank of New York Mellon, trustee, of
cash or an irrevocable letter of credit deposited for the purchase of securities
as shown in the statement of financial condition as of ____________, 2014. We
believe that our audit of the statement of financial condition provides a
reasonable basis for our opinion.
In our opinion, the statement of financial condition referred to above presents
fairly, in all material respects, the financial position of Advisors Disciplined
Trust 1169 as of ____________, 2014, in conformity with accounting principles
generally accepted in the United States of America.
Chicago, Illinois GRANT THORNTON LLP
____________, 2014
ADVISORS DISCIPLINED TRUST 1169
STATEMENT OF FINANCIAL CONDITION AS OF ____________, 2014
------------------------------------------------------------------------------------------
INVESTMENT IN SECURITIES
Contracts to purchase underlying securities (1)(2) . . . . . . . . . . . . . $
Accrued interest to first settlement date (1) . . . . . . . . . . . . . . .
Cash (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
===========
LIABILITIES AND INTEREST OF INVESTORS
Liabilities:
Accrued interest payable to sponsor (1) . . . . . . . . . . . . . . . . . $
Organization costs (3) . . . . . . . . . . . . . . . . . . . . . . . . . .
Creation and development fee (4) . . . . . . . . . . . . . . . . . . . . .
-----------
-----------
Interest of investors:
Cost to investors (5) . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: sales fee (4)(5) . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: organization costs and creation and development fee (3)(4)(5) . . .
-----------
Net interest of investors . . . . . . . . . . . . . . . . . . . . . . . .
-----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
===========
Number of units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
===========
Net asset value per unit . . . . . . . . . . . . . . . . . . . . . . . . . . $
===========
<FN>
(1) Aggregate cost of the securities is based on the offer side evaluations as
determined by the evaluator. The trustee will advance the amount of net
interest accrued to the first settlement date to the trust for distribution
to the sponsor as unitholder of record as of such date.
(2) Cash or an irrevocable letter of credit has been deposited with the trustee
covering the funds (aggregating $__________) necessary for the purchase of
securities in the trust represented by purchase contracts.
(3) A portion of the public offering price represents an amount sufficient to
pay for all or a portion of the costs incurred in establishing the trust.
These costs have been estimated at $3.80 per unit for the trust. A
distribution will be made as of the earlier of the close of the initial
offering period or six months following the trust's inception date to an
account maintained by the trustee from which this obligation of the
investors will be satisfied. To the extent the actual organization costs
are greater than the estimated amount, only the estimated organization
costs added to the public offering price will be reimbursed to the sponsor
and deducted from the assets of the trust.
(4) The total sales fee consists of a transactional sales fee and a creation
and development fee. The transactional sales fee is equal to the
difference between the maximum sales fee and the remaining creation and
development fee. The maximum sales fee is equal to 3.00% of the public
offering price. The creation and development fee is equal to $7.50 per
unit during the initial offering period. A portion of the public offering
price per unit consists of an amount of cash to pay this fee.
(5) The aggregate cost to investors includes the applicable sales fee assuming
no reduction of sales fees.
</FN>
34 Understanding Your Investment
CONTENTS
INVESTMENT SUMMARY
----------------------------------------------------------------------
A concise description 2 Investment Objective
of essential information 2 Principal Investment Strategy
about the portfolio 2 Principal Risks
3 Who Should Invest
3 Essential Information
3 Fees and Expenses
4 Illustration of Sales Fee Discounts
5 Portfolio
8 Underwriting
8 Types of Bonds
8 Location of Issuers
8 Insurance on the Bonds
UNDERSTANDING YOUR INVESTMENT
----------------------------------------------------------------------
Detailed information to 9 How to Buy Units
help you understand 13 How to Sell Your Units
your investment 14 Distributions
15 Investment Risks
22 Bond Insurance
22 How Your Trust Works
29 Taxes
31 Expenses
32 Experts
32 Additional Information
33 Taxable Equivalent Estimated
Current Return
34 Report of Independent Registered
Public Accounting Firm
34 Statement of Financial Condition
WHERE TO LEARN MORE
----------------------------------------------------------------------
You can contact us for VISIT US ON THE INTERNET
free information about http://www.AAMportfolios.com
this and other investments, BY E-MAIL
including the Information info@AAMportfolios.com
Supplement CALL ADVISORS ASSET
MANAGEMENT, INC.
(877) 858-1773
CALL THE BANK OF NEW YORK MELLON
(800) 848-6468
ADDITIONAL INFORMATION
----------------------------------------------------------------------
This prospectus does not contain all information filed with the
Securities and Exchange Commission. To obtain or copy this
information including the Information Supplement (a duplication
fee may be required):
E-MAIL: publicinfo@sec.gov
WRITE: Public Reference Section
Washington, D.C. 20549
VISIT: http://www.sec.gov
(EDGAR Database)
CALL: 1-202-551-8090
(only for information on the operation of the
Public Reference Section)
REFER TO:
ADVISORS DISCIPLINED TRUST 1169
Securities Act file number: 333-192602
Investment Company Act file number: 811-21056
TAX EXEMPT
SECURITIES TRUST,
INTERMEDIATE DURATION
NATIONAL TRUST 470
PROSPECTUS
____________, 2014
[LOGO]
AAM
ADVISORS
ASSET MANAGEMENT
ADVISORS DISCIPLINED TRUST 1169
TAX EXEMPT SECURITIES TRUST, INTERMEDIATE DURATION NATIONAL TRUST, SERIES 470
INFORMATION SUPPLEMENT
This Information Supplement provides additional information concerning
each trust described in the prospectus for the Advisors Disciplined Trust series
identified above. This Information Supplement should be read in conjunction
with the prospectus. It is not a prospectus. It does not include all of the
information that an investor should consider before investing in a trust. It
may not be used to offer or sell units of a trust without the prospectus. This
Information Supplement is incorporated into the prospectus by reference and has
been filed as part of the registration statement with the Securities and
Exchange Commission. Investors should obtain and read the prospectus prior to
purchasing units of a trust. You can obtain the prospectus without charge by
contacting your financial professional or by contacting the unit investment
trust division of Advisors Asset Management, Inc. at 18925 Base Camp Road, Suite
203, Monument, Colorado 80132, at 8100 East 22nd Street North, Building 800,
Suite 102, Wichita, Kansas 67226 or by calling (877) 858-1773. This Information
Supplement is dated as of the date of the prospectus.
CONTENTS
General Information 2
Investment Objective and Policies 3
Risk Factors 7
Insurance on the Bonds 21
Administration of the Trust 33
Purchase, Redemption and Pricing of Units 41
Taxation 47
Performance Information 48
Description of Securities Ratings 49
GENERAL INFORMATION
Each trust is one of a series of separate unit investment trusts created
under the name Advisors Disciplined Trust and registered under the Investment
Company Act of 1940. Each trust was created as a common law trust on the
inception date described in the prospectus under the laws of the state of
New York. Each trust was created under a trust agreement among Advisors Asset
Management, Inc. (as sponsor, evaluator and supervisor) and The Bank of New York
Mellon (as trustee).
When your trust was created, the sponsor delivered to the trustee
securities or contracts for the purchase thereof for deposit in the trust and
the trustee delivered to the sponsor documentation evidencing the ownership of
units of the trust. The number of units, fractional interest of each unit in the
trust and estimated interest distributions per unit will increase or decrease to
the extent of any adjustment. Additional units of each trust may be issued from
time to time by depositing in the trust additional securities (or contracts for
the purchase thereof together with cash or irrevocable letters of credit) or
cash (including a letter of credit or the equivalent) with instructions to
purchase additional securities. As additional units are issued by a trust as a
result of the deposit of additional securities by the sponsor, the aggregate
value of the securities in the trust will be increased and the fractional
undivided interest in the trust represented by each unit will be decreased. The
sponsor may continue to make additional deposits of securities into a trust,
provided that such additional deposits will be in principal amounts which will
generally maintain the same original percentage relationship among the principal
amounts of the securities in such trust established by the initial deposit of
the securities. Thus, although additional units will be issued, each unit will
generally continue to represent the same principal amount of each security, and
the percentage relationship among the principal amount of each security in the
related trust will generally remain the same. If the sponsor deposits cash to
purchase additional securities, existing and new investors may experience a
dilution of their investments and a reduction in their anticipated income
because of fluctuations in the prices of the securities between the time of the
cash deposit and the purchase of the securities and because the trust will pay
any associated brokerage fees.
Each unit initially offered represents an undivided interest in the related
trust. To the extent that any units are redeemed by the trustee or additional
units are issued as a result of additional securities being deposited by the
sponsor, the fractional undivided interest in a trust represented by each
unredeemed unit will increase or decrease accordingly, although the actual
interest in such trust represented by such fraction will remain unchanged.
Units will remain outstanding until redeemed upon tender to the trustee by
unitholders, which may include the sponsor, or until the termination of the
trust agreement.
A trust consists of (a) the securities listed under "Portfolio" in the
prospectus as may continue to be held from time to time in the trust, (b) any
additional securities acquired and held by the trust pursuant to the provisions
of the trust agreement and (c) any cash held in the accounts of the trust.
Neither the sponsor nor the trustee shall be liable in any way for any failure
in any of the securities. However, should any contract for the purchase of any
of the securities initially deposited in a trust fail, the sponsor will, unless
substantially all of the moneys held in the trust to cover such purchase are
reinvested in substitute securities in accordance with the trust agreement,
-2-
refund the cash and sales fee attributable to such failed contract to all
unitholders on the next distribution date.
INVESTMENT OBJECTIVE AND POLICIES
The trust seeks to provide monthly distributions of interest income exempt
from United States federal personal income tax and to provide capital
preservation by investing in a portfolio primarily consisting of intermediate
duration municipal bonds. There is, of course, no guarantee that the trust will
achieve its objective. The trust portfolio consists of interest-bearing
obligations issued by or on behalf of states and territories of the United
States, and political subdivisions and authorities thereof, the interest on
which is excludable from gross income for United States federal personal income
tax purposes under existing law in the opinion of recognized bond counsel to the
issuer of the bonds. The prospectus provides additional information regarding
the trust's objective and investment strategy.
The trust is a unit investment trust and is not an "actively managed" fund.
Traditional methods of investment management for a managed fund typically
involve frequent changes in a portfolio of securities on the basis of economic,
financial and market analysis. The portfolio of a trust, however, will not be
actively managed and therefore the adverse financial condition of an issuer will
not necessarily require the sale of its securities from a portfolio.
The sponsor may not alter the portfolio of a trust by the purchase, sale or
substitution of securities, except in the special circumstances discussed herein
regarding the substitution of replacement securities for any failed securities.
Thus, with the exception of the redemption or maturity of securities in
accordance with their terms, the assets of a trust will remain unchanged under
normal circumstances.
The sponsor may direct the trustee to dispose of securities the value of
which has been affected by certain adverse events including institution of
certain legal proceedings or decline in price or the occurrence of other market
factors, including advance refunding, so that in the opinion of the sponsor the
retention of such securities in a trust would be detrimental to the interest of
the unitholders. The proceeds from any such sales, exclusive of any portion
which represents accrued interest, will be credited to the Principal Account of
such trust for distribution to the unitholders.
The sponsor is required to instruct the trustee to reject any offer made by
an issuer of securities to issue new securities, or to exchange securities, for
trust securities, the trustee shall reject such offer. However, should any
issuance, exchange or substitution be effected notwithstanding such rejection or
without an initial offer, any securities or property received shall be deposited
in the trust and shall be promptly sold by the trustee unless the sponsor
advises the trustee to keep such securities or properties. The excess cash
proceeds of any such sales will be distributed to unitholders.
If a public tender offer has been made for a security or a merger,
acquisition or similar transaction has been announced affecting a security, the
trustee may either sell the security or accept a tender offer if the supervisor
determines that the action is in the best interest of
-3-
unitholders. The trustee will distribute any excess cash proceeds to
unitholders. If your trust receives securities or other property, it will
either hold the securities or property in the portfolio or sell the securities
or property and distribute the proceeds. The sponsor may direct the
reinvestment of security sale proceeds if the sale is the direct result of
serious adverse credit factors which, in the opinion of the sponsor, would make
retention of the securities detrimental to the trust. In such a case, the
sponsor may, but is not obligated to, direct the reinvestment of sale proceeds
in any other securities that meet the criteria for inclusion in the trust on the
trust's inception date. The sponsor may also instruct the trustee to take action
necessary to ensure that the portfolio continues to satisfy the qualifications
of a regulated investment company for federal tax purposes if the trust has
elected to be taxed as a regulated investment company.
The trustee may sell securities, designated by the sponsor, from a trust
for the purpose of redeeming units of such trust tendered for redemption and the
payment of expenses.
In addition, if a trust has elected to be taxed as a regulated investment
company, the trustee may dispose of certain securities and take such further
action as may be needed from time to time to ensure that a trust continues to
satisfy the qualifications of a regulated investment company, including the
requirements with respect to diversification under Section 851 of the Internal
Revenue Code, and as may be needed from time to time to avoid the imposition of
any tax on a trust or undistributed income of a trust as a regulated investment
company.
Proceeds from the sale of securities (or any securities or other property
received by a trust in exchange for securities) are credited to the Principal
Account of a trust for distribution to unitholders or to meet redemptions.
Except for failed securities and as provided herein, in the prospectus or in the
trust agreement, the acquisition by a trust of any securities other than the
portfolio securities is prohibited.
Because certain of the securities in certain of the trusts may from time to
time under certain circumstances be sold or redeemed or will mature in
accordance with their terms and because the proceeds from such events will be
distributed to unitholders and will not be reinvested, no assurance can be given
that a trust will retain for any length of time its present size and
composition. Neither the sponsor nor the trustee shall be liable in any way for
any default, failure or defect in any security. In the event of a failure to
deliver any security that has been purchased for a trust under a contract,
including those securities purchased on a "when, as and if issued" basis
("Failed Securities"), the sponsor is authorized under the trust agreement to
direct the trustee to acquire other securities ("Replacement Securities") to
make up the original corpus of such trust.
Securities in certain of the trusts may have been purchased on a "when, as
and if issued" or delayed delivery basis with delivery expected to take place
after the first settlement date. Accordingly, the delivery of such securities
may be delayed or may not occur. Interest on these securities begins accruing
to the benefit of unitholders on their respective dates of delivery.
Unitholders of all trusts will be "at risk" with respect to any "when, as and if
issued" or "delayed delivery" securities included in their respective trust
(i.e., may derive either gain or loss from fluctuations in the evaluation of
such securities) from the date they commit for units.
-4-
The Replacement Securities must be purchased within 20 days after delivery
of the notice that a contract to deliver a security will not be honored and the
purchase price may not exceed the amount of funds reserved for the purchase of
the Failed Securities. The Replacement Securities (i) shall be bonds,
debentures, notes or other straight debt obligations (whether secured or
unsecured and whether senior or subordinated) without equity or other conversion
features, with fixed maturity dates substantially the same as those of the
Failed Securities, having no warrants or subscription privileges attached;
(ii) shall be payable in United States currency; (iii) shall not be "when, as
and if issued" obligations or restricted securities; (iv) shall be issued after
July 18, 1984 if interest thereon is United States source income; (v) shall be
issued or guaranteed by an issuer subject to or exempt from the reporting
requirements under Section 13 or 15(d) of the Securities Exchange Act of 1934
(or similar provisions of law) or in effect guaranteed, directly or indirectly,
by means by of a lease agreement, agreement to buy securities, services or
products, or other similar commitment of the credit of such an issuer to the
payment of the Replacement Securities; (vi) if the prospectus for the related
trust provides that an objective of such trust is to provide income exempt from
United States federal taxation, shall be securities issued by states or
territories of the United States or political subdivisions thereof which shall
have the benefit of an exemption from United States federal taxation of interest
to an extent equal to or greater than that of the Securities they replace and,
if the prospectus for the related trust provides that an objective of such trust
is to provide income exempt from state taxation, shall have the benefit of an
exemption from state taxation to an extent equal to or greater than that of the
Securities they replace; and (vii) shall not cause the units of the related
trust to cease to be rated "AAA" by Standard & Poor's, a division of The McGraw-
Hill Companies, Inc. if the units are so rated. The purchase price of the
Replacement Securities (exclusive of accrued interest) shall not exceed the
principal attributable to the Failed Securities. In addition, no substitution of
Replacement Securities will be made without an opinion of counsel that such
substitution will not adversely affect the federal income tax status of the
related trust, if such Replacement Securities when added to all previously
purchased Replacement Securities in the related trust exceed 15% of the
principal amount of Securities initially deposited in the related trust.
Whenever a Replacement Security is acquired for a trust, the trustee shall,
within five days thereafter, notify all unitholders of the trust of the
acquisition of the Replacement Security and shall, on the next monthly
distribution date which is more than 30 days thereafter, make a pro rata
distribution of the amount, if any, by which the cost to the trust of the Failed
Security exceeded the cost of the Replacement Security. Once all of the
securities in a trust are acquired, the trustee will have no power to vary the
investments of the trust, i.e., the trustee will have no managerial power to
take advantage of market variations to improve a unitholder's investment.
If the right of limited substitution described in the preceding paragraphs
is not utilized to acquire Replacement Securities in the event of a failed
contract, the sponsor will refund the sales fee attributable to such Failed
Securities to all unitholders of the trust and the trustee will distribute the
principal and accrued interest attributable to such Failed Securities not more
than 30 days after the date on which the trustee would have been required to
purchase a Replacement Security. In addition, unitholders should be aware that,
at the time of receipt of such principal, they may not be able to reinvest such
proceeds in other securities at a yield equal to or in excess of the yield which
such proceeds would have earned for unitholders of such trust.
-5-
Whether or not a Replacement Security is acquired, an amount equal to the
accrued interest (at the coupon rate of the Failed Securities) will be paid to
unitholders of the trust to the date the sponsor removes the Failed Securities
from the trust if the sponsor determines not to purchase a Replacement Security
or to the date of substitution if a Replacement Security is purchased. All such
interest paid to unitholders which accrued after the date of settlement for a
purchase of units will be paid by the sponsor. In the event a Replacement
Security could not be acquired by a trust, the net annual interest income per
unit for such trust would be reduced and the estimated current return and
estimated long-term return might be lowered.
Subsequent to the trust's inception, a security may cease to be rated or
its rating may be reduced below any minimum required as of the trust's
inception. Neither event requires the elimination of such investment from a
trust, but may be considered in the sponsor's determination to direct the
trustee to dispose of such investment.
The sponsor may not alter the portfolio of a trust except upon the
happening of certain extraordinary circumstances. Certain of the securities may
be subject to optional call or mandatory redemption pursuant to sinking fund
provisions, in each case prior to their stated maturity. A bond subject to
optional call is one which is subject to redemption or refunding prior to
maturity at the option of the issuer, often at a premium over par. A refunding
is a method by which a bond issue is redeemed, at or before maturity, by the
proceeds of a new bond issue. A bond subject to sinking fund redemption is one
which is subject to partial call from time to time at par with proceeds from a
fund accumulated for the scheduled retirement of a portion of an issue to
maturity. Special or extraordinary redemption provisions may provide for
redemption at par of all or a portion of an issue upon the occurrence of certain
circumstances. Redemption pursuant to optional call provisions is more likely
to occur, and redemption pursuant to special or extraordinary redemption
provisions may occur, when the securities have an offering side evaluation which
represents a premium over par, that is, when they are able to be refinanced at a
lower cost. The proceeds from any such call or redemption pursuant to sinking
fund provisions, as well as proceeds from the sale of securities and from
securities which mature in accordance with their terms from a trust, unless
utilized to pay for units tendered for redemption, will be distributed to
unitholders of such trust and will not be used to purchase additional securities
for such trust. Accordingly, any such call, redemption, sale or maturity will
reduce the size and diversity of a trust and the net annual interest income of
such trust and may reduce the estimated current return and the estimated long-
term return. The call, redemption, sale or maturity of securities also may have
tax consequences to a unitholder.
Certain of the securities in certain of the trusts may have been acquired
at a market discount from par value at maturity. The coupon interest rates on
the discount securities at the time they were purchased and deposited in the
trusts were lower than the current market interest rates for newly issued bonds
of comparable rating and type. If such interest rates for newly issued
comparable securities increase, the market discount of previously issued
securities will become greater, and if such interest rates for newly issued
comparable securities decline, the market discount of previously issued
securities will be reduced, other things being equal. Investors should also
note that the value of securities purchased at a market discount will increase
in value faster than securities purchased at a market premium if interest rates
decrease. Conversely, if interest rates increase, the value of securities
purchased at a market discount will
-6-
decrease faster than securities purchased at a market premium. In addition, if
interest rates rise, the prepayment risk of higher yielding, premium securities
and the prepayment benefit for lower yielding, discount securities will be
reduced. A discount security held to maturity will have a larger portion of its
total return in the form of taxable income and capital gain and loss in the form
of tax-exempt interest income than a comparable security newly issued at current
market rates. Market discount attributable to interest changes does not
indicate a lack of market confidence in the issue. Neither the sponsor nor the
trustee shall be liable in any way for any default, failure or defect in any of
the securities.
Certain of the securities in the trust may be "zero coupon" bonds, i.e., an
original issue discount bond that does not provide for the payment of current
interest. Zero coupon bonds are purchased at a deep discount because the buyer
receives only the right to receive a final payment at the maturity of the bond
and does not receive any periodic interest payments. The effect of owning deep
discount bonds which do not make current interest payments (such as the zero
coupon bonds) is that a fixed yield is earned not only on the original
investment but also, in effect, on all discount earned during the life of such
obligation. This implicit reinvestment of earnings at the same rate eliminates
the risk of being unable to reinvest the income on such obligation at a rate as
high as the implicit yield on the discount obligation, but at the same time
eliminates the holder's ability to reinvest at higher rates in the future. For
this reason, zero coupon bonds are subject to substantially greater price
fluctuations during periods of changing market interest rates than are
securities of comparable quality which pay interest currently.
To the best of the sponsor's knowledge, there is no litigation pending as
of the trust's inception in respect of any security which might reasonably be
expected to have a material adverse effect on the trust. At any time after the
trust's inception, litigation may be instituted on a variety of grounds with
respect to the securities. The sponsor is unable to predict whether any such
litigation may be instituted, or if instituted, whether such litigation might
have a material adverse effect on the trust. The sponsor and the trustee shall
not be liable in any way for any default, failure or defect in any security.
RISK FACTORS
MUNICIPAL BONDS. The trusts include certain types of bonds described below.
Accordingly, an investment in a trust should be made with an understanding of
the characteristics of and risks associated with such bonds. The types of bonds
included in each trust are described in the prospectus. Neither the sponsor nor
the trustee shall be liable in any way for any default, failure or defect in any
of the bonds.
Certain of the bonds may be general obligations of a governmental entity
that are backed by the taxing power of such entity. All other bonds in the
trusts are revenue bonds payable from the income of a specific project or
authority and are not supported by the issuer's power to levy taxes. General
obligation bonds are secured by the issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. Revenue bonds, on the
other hand, are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source. There are, of course,
-7-
variations in the security of the different bonds in a trust, both within a
particular classification and between classifications, depending on numerous
factors.
Certain of the bonds may be obligations which derive their payments from
mortgage loans. Certain of such housing bonds may be FHA insured or may be
single family mortgage revenue bonds issued for the purpose of acquiring from
originating financial institutions notes secured by mortgages on residences
located within the issuer's boundaries and owned by persons of low or moderate
income. Mortgage loans are generally partially or completely prepaid prior to
their final maturities as a result of events such as sale of the mortgaged
premises, default, condemnation or casualty loss. Because these bonds are
subject to extraordinary mandatory redemption in whole or in part from such
prepayments of mortgage loans, a substantial portion of such bonds will probably
be redeemed prior to their scheduled maturities or even prior to their ordinary
call dates. Extraordinary mandatory redemption without premium could also result
from the failure of the originating financial institutions to make mortgage
loans in sufficient amounts within a specified time period. Additionally,
unusually high rates of default on the underlying mortgage loans may reduce
revenues available for the payment of principal of or interest on such mortgage
revenue bonds. These bonds were issued under Section 103A of the Internal
Revenue Code, which Section contains certain requirements relating to the use of
the proceeds of such bonds in order for the interest on such bonds to retain its
tax-exempt status. In each case the issuer of the bonds has covenanted to comply
with applicable requirements and bond counsel to such issuer has issued an
opinion that the interest on the bonds is exempt from Federal income tax under
existing laws and regulations. Certain issuers of housing bonds have considered
various ways to redeem bonds they have issued prior to the stated first
redemption dates for such bonds. In connection with the housing bonds held by a
trust, the sponsor at the date of deposit is not aware that any of the
respective issuers of such bonds are actively considering the redemption of such
bonds prior to their respective stated initial call dates.
Certain of the bonds may be health care revenue bonds. Ratings of bonds
issued for health care facilities are often based on feasibility studies that
contain projections of occupancy levels, revenues and expenses. A facility's
gross receipts and net income available for debt service may be affected by
future events and conditions including, among other things, demand for services
and the ability of the facility to provide the services required, physicians'
confidence in the facility, management capabilities, competition with other
health care facilities, efforts by insurers and governmental agencies to limit
rates, legislation establishing state rate-setting agencies, expenses, the cost
and possible unavailability of malpractice insurance, the funding of Medicare,
Medicaid and other similar third party pay or programs, government regulation
and the termination or restriction of governmental financial assistance,
including that associated with Medicare, Medicaid and other similar third party
pay or programs.
Certain of the bonds may be obligations of public utility issuers,
including those selling wholesale and retail electric power and gas. General
problems of such issuers would include the difficulty in financing large
construction programs in an inflationary period, the limitations on operations
and increased costs and delays attributable to environmental considerations, the
difficulty of the capital market in absorbing utility debt, the difficulty in
obtaining fuel at reasonable prices and the effect of energy conservation. In
addition, Federal, state and municipal governmental authorities may from time to
time review existing, and impose additional,
-8-
regulations governing the licensing, construction and operation of nuclear power
plants, which may adversely affect the ability of the issuers of certain of the
bonds to make payments of principal and/or interest on such bonds.
Certain of the bonds may be obligations of issuers whose revenues are
derived from the sale of water and/or sewerage services. Such bonds are
generally payable from user fees. The problems of such issuers include the
ability to obtain timely and adequate rate increases, population decline
resulting in decreased user fees, the difficulty of financing large construction
programs, the limitations on operations and increased costs and delays
attributable to environmental considerations, the increasing difficulty of
obtaining or discovering new supplies of fresh water, the effect of conservation
programs and the impact of "no-growth" zoning ordinances.
Certain of the bonds may be industrial revenue bonds ("IRBs"). IRBs have
generally been issued under bond resolutions pursuant to which the revenues and
receipts payable under the arrangements with the operator of a particular
project have been assigned and pledged to purchasers. In some cases, a mortgage
on the underlying project may have been granted as security for the IRBs.
Regardless of the structure, payment of IRBs is solely dependent upon the
creditworthiness of the corporate operator of the project or corporate
guarantor. Corporate operators or guarantors 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 and financial
deterioration resulting from a corporate restructuring pursuant to a leveraged
buy-out, takeover or otherwise. Such a restructuring may result in the operator
of a project becoming highly leveraged which may impact on such operator's
creditworthiness which in turn would have an adverse impact on the rating and/or
market value of such bonds. Further, the possibility of such a restructuring may
have an adverse impact on the market for and consequently the value of such
bonds, even though no actual takeover or other action is ever contemplated or
effected.
Certain of the bonds may be obligations that are secured by lease payments
of a governmental entity (hereinafter called "lease obligations"). Lease
obligations are often in the form of certificates of participation. Although the
lease obligations do not constitute general obligations of the municipality for
which the municipality's taxing power is pledged, a lease obligation is
ordinarily backed by the municipality's covenant to appropriate for and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the municipality has no
obligation to make lease payments in future years unless money is appropriated
for such purpose on a yearly basis. A governmental entity that enters into such
a lease agreement cannot obligate future governments to appropriate for and make
lease payments but covenants to take such action as is necessary to include any
lease payments due in its budgets and to make the appropriations therefor. A
governmental entity's failure to appropriate for and to make payments under its
lease obligation could result in insufficient funds available for payment of the
obligations secured thereby. Although "non-appropriation" lease obligations are
secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult.
-9-
Certain of the bonds may be obligations of issuers which are, or which
govern the operation of, schools, colleges and universities and whose revenues
are derived mainly from ad valorem taxes or for higher education systems, from
tuition, dormitory revenues, grants and endowments. General problems relating to
school bonds include litigation contesting the state constitutionality of
financing public education in part from ad valorem taxes, thereby creating a
disparity in educational funds available to schools in wealthy areas and schools
in poor areas. Litigation or legislation on this issue may affect the sources of
funds available for the payment of school bonds in the trusts. General problems
relating to college and university obligations include the prospect of a
declining percentage of the population consisting of "college" age individuals,
possible inability to raise tuitions and fees sufficiently to cover increased
operating costs, the uncertainty of continued receipt of Federal grants and
state funding, and government legislation or regulations which may adversely
affect the revenues or costs of such issuers.
Certain of the bonds in certain of the trusts may be obligations which are
payable from and secured by revenues derived from the ownership and operation of
facilities such as airports, bridges, turnpikes, port authorities, convention
centers and arenas. The major portion of an airport's gross operating income is
generally derived from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for leases, occupancy of certain
terminal space and service fees. Airport operating income may therefore be
affected by the ability of the airlines to meet their obligations under the use
agreements. From time to time the air transport industry has experienced
significant variations in earnings and traffic, due to increased competition,
excess capacity, increased costs, deregulation, traffic constraints and other
factors, and several airlines have experienced severe financial difficulties.
Similarly, payment on bonds related to other facilities is dependent on revenues
from the projects, such as user 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 as increased cost of maintenance,
decreased use of a facility, lower cost of alternative modes of transportation,
scarcity of fuel and reduction or loss of rents.
Certain of the bonds may be obligations which are payable from and secured
by revenues derived from the operation of resource recovery facilities. Resource
recovery facilities are designed to process solid waste, generate steam and
convert steam to electricity. Resource recovery bonds may be subject to
extraordinary optional redemption at par upon the occurrence of certain
circumstances, including but not limited to: destruction or condemnation of a
project; contracts relating to a project becoming void, unenforceable or
impossible to perform; changes in the economic availability of raw materials,
operating supplies or facilities necessary for the operation of a project or
technological or other unavoidable changes adversely affecting the operation of
a project; and administrative or judicial actions which render contracts
relating to the projects void, unenforceable or impossible to perform or impose
unreasonable burdens or excessive liabilities. The sponsor cannot predict the
causes or likelihood of the redemption of resource recovery bonds in a trust
prior to the stated maturity of the bonds.
Certain of the bonds may have been acquired at a market discount from par
value at maturity. The coupon interest rates on discount bonds at the time they
were purchased and deposited in a trust were lower than the current market
interest rates for newly issued bonds of comparable rating and type. If such
interest rates for newly issued comparable bonds increase, the
-10-
market discount of previously issued bonds will become greater, and if such
interest rates for newly issued comparable bonds decline, the market discount of
previously issued bonds will be reduced, other things being equal. Investors
should also note that the value of bonds purchased at a market discount will
increase in value faster than bonds purchased at a market premium if interest
rates decrease. Conversely, if interest rates increase, the value of bonds
purchased at a market discount will decrease faster than bonds purchased at a
market premium. In addition, if interest rates rise, the prepayment risk of
higher yielding, premium bonds and the prepayment benefit for lower yielding,
discount bonds will be reduced. A bond purchased at a market discount and held
to maturity will have a larger portion of its total return in the form of
taxable income and capital gain and less in the form of tax-exempt interest
income than a comparable bond newly issued at current market rates. Market
discount attributable to interest changes does not indicate a lack of market
confidence in the issue. Neither the sponsor nor the trustee shall be liable in
any way for any default, failure or defect in any of the bonds.
Certain of the bonds held by the trust may have been acquired at a market
premium from par value at maturity. The coupon interest rates on the premium
bonds at the time they were purchased by the trust were higher than the current
market interest rates for newly issued bonds of comparable rating and type. If
such interest rates for newly issued and otherwise comparable bonds decrease,
the market premium of previously issued bonds will be increased, and if such
interest rates for newly issued comparable bonds increase, the market premium of
previously issued bonds will be reduced, other things being equal. The current
returns of bonds trading at a market premium are initially higher than the
current returns of comparable bonds of a similar type issued at currently
prevailing interest rates because premium bonds 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, early redemption of a premium bond at par or early prepayments of
principal will result in a reduction in yield. Redemption pursuant to call
provisions generally will, and redemption pursuant to sinking fund provisions
may, occur at times when the redeemed bonds have an offering side valuation
which represents a premium over par or for original issue discount bonds a
premium over the accreted value.
Certain of the bonds may be "zero coupon" bonds. Zero coupon bonds are
purchased at a deep discount because the buyer receives only the right to
receive a final payment at the maturity of the bond and does not receive any
periodic interest payments. The effect of owning deep discount bonds which do
not make current interest payments (such as the zero coupon bonds) is that a
fixed yield is earned not only on the original investment but also, in effect,
on all discount earned during the life of such obligation. This implicit
reinvestment of earnings at the same rate eliminates the risk of being unable to
reinvest the income on such obligation at a rate as high as the implicit yield
on the discount obligation, but at the same time eliminates the holder's ability
to reinvest at higher rates in the future. For this reason, zero coupon bonds
are subject to substantially greater price fluctuations during periods of
changing market interest rates than are securities of comparable quality which
pay interest.
Certain of the bonds may have been purchased on a "when, as and if issued"
or "delayed delivery" basis. See "Notes to Portfolio" in the prospectus. The
delivery of any such bonds may be delayed or may not occur. Interest on these
Bonds begins accruing to the benefit of unitholders
-11-
on their respective dates of delivery. To the extent any bonds are actually
delivered to a trust after their respective expected dates of delivery,
unitholders who purchase their unit prior to the date such bonds are actually
delivered to the trustee would be required to adjust their tax basis in their
unit for a portion of the interest accruing on such bonds during the interval
between their purchase of unit and the actual delivery of such bonds. As a
result of any such adjustment, the Estimated Current Returns during the first
year would be slightly lower than those stated in the Prospectus which would be
the returns after the first year, assuming the portfolio of a trust and
estimated annual expenses other than that of the trustee (which may be reduced
in the first year only) do not vary from that set forth in the prospectus.
Unitholders will be "at risk" with respect to all bonds in the portfolios
including "when, as and if issued" and "delayed delivery" bonds (i.e., may
derive either gain or loss from fluctuations in the evaluation of such bonds)
from the date they commit for unit.
Certain of the bonds may be subject to redemption prior to their stated
maturity date pursuant to sinking fund provisions, call provisions or
extraordinary optional or mandatory redemption provisions or otherwise. A
sinking fund is a reserve fund accumulated over a period of time for retirement
of debt. A callable debt obligation is one which is subject to redemption or
refunding prior to maturity at the option of the issuer. A refunding is a method
by which a debt obligation is redeemed, at or before maturity, by the proceeds
of a new debt obligation. In general, call provisions are more likely to be
exercised when the offering side valuation is at a premium over par than when it
is at a discount from par. The exercise of redemption or call provisions will
(except to the extent the proceeds of the called bonds are used to pay for unit
redemptions) result in the distribution of principal and may result in a
reduction in the amount of subsequent interest distributions; it may also affect
the current return on unit of the trust involved. Each trust portfolio contains
a listing of the sinking fund and call provisions, if any, with respect to each
of the debt obligations. Extraordinary optional redemptions and mandatory
redemptions result from the happening of certain events. Generally, events that
may permit the extraordinary optional redemption of bonds or may require the
mandatory redemption of bonds include, among others: a final determination that
the interest on the bonds is taxable; the substantial damage or destruction by
fire or other casualty of the project for which the proceeds of the bonds were
used; an exercise by a local, state or Federal governmental unit of its power of
eminent domain to take all or substantially all of the project for which the
proceeds of the bonds were used; changes in the economic availability of raw
materials, operating supplies or facilities or technological or other changes
which render the operation of the project for which the proceeds of the bonds
were used uneconomic; changes in law or an administrative or judicial decree
which renders the performance of the agreement under which the proceeds of the
bonds were made available to finance the project impossible or which creates
unreasonable burdens or which imposes excessive liabilities, such as taxes, not
imposed on the date the bonds are issued on the issuer of the bonds or the user
of the proceeds of the bonds; an administrative or judicial decree which
requires the cessation of a substantial part of the operations of the project
financed with the proceeds of the bonds; an overestimate of the costs of the
project to be financed with the proceeds of the bonds resulting in excess
proceeds of the bonds which may be applied to redeem bonds; or an underestimate
of a source of funds securing the bonds resulting in excess funds which may be
applied to redeem bonds. The issuer of certain bonds in a trust may have sold or
reserved the right to sell, upon the satisfaction of certain conditions, to
third parties all or any portion of its rights to call bonds in accordance with
the stated redemption provisions of such
-12-
bonds. In such a case the issuer no longer has the right to call the bonds for
redemption unless it reacquires the rights from such third party. A third party
pursuant to these rights may exercise the redemption provisions with respect to
a bond at a time when the issuer of the bond might not have called a bond for
redemption had it not sold such rights. The sponsor is unable to predict all of
the circumstances which may result in such redemption of an issue of bonds. See
also the discussion of single family mortgage and multi-family revenue bonds
above for more information on the call provisions of such bonds.
To the best knowledge of the sponsor, there is no litigation pending as of
the date of deposit in respect of any bonds which might reasonably be expected
to have a material adverse effect upon any of the trusts. At any time after the
trust's inception date, litigation may be initiated on a variety of grounds with
respect to bonds in a trust. Such litigation, as, for example, suits challenging
the issuance of pollution control revenue bonds under environmental protection
statutes, may affect the validity of such bonds or the tax-free nature of the
interest thereon. While the outcome of litigation of such nature can never be
entirely predicted, each trust has received or will receive opinions of bond
counsel to the issuing authorities of each bond on the date of issuance to the
effect that such bonds have 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 meet obligations
undertaken with respect to the bonds.
PUERTO RICO. Your trust may significantly invest in bonds issued by
issuers located in Puerto Rico. Accordingly, an investment in such a trust
should be made with an understanding of the general risks associated with the
Commonwealth of Puerto Rico.
Economic Conditions and Outlook. As of 2013, Puerto Rico's economy had
experienced five straight years of recession, which started earlier, was deeper,
and lasted longer than the U.S. national recession. For fiscal year 2012,
preliminary reports indicate that the real gross national product grew by only
0.1%. The Puerto Rico Planning Board has projected a decrease in real gross
national product of 0.4% for fiscal year 2013 and an increase of 0.2% for fiscal
year 2014.
Puerto Rico has a diversified economy with manufacturing and services
comprising its principal sectors. Manufacturing is the largest sector in terms
of gross domestic product. Manufacturing in Puerto Rico is now more diversified
than during the earlier phases of its industrial development and includes
several industries less prone to business cycles. In the last three decades,
industrial development has tended to be more capital intensive and more
dependent on skilled labor. The services sector, which includes finance,
insurance, real estate, wholesale and retail trade, tourism, and other services,
has shown a strong interaction with manufacturing, tourism, construction, and
agriculture.
Per capita income in fiscal year 2012 was $16, 934; in 2011 was $17, 259;
and in 2010 was $15,203. According to the Government Development Bank for
Puerto Rico, the labor force was 1.28 million in fiscal year 2012 compared to
1.25 million in 2011, 1.31 million in 2010, and 1.35 million in fiscal year
2009. The unemployment rate for 2012 fiscal year was 15.2% and 14.2% for the
first 9 months of the 2013 fiscal year.
-13-
Financial Information. Since 2000, the commonwealth has faced a number of
fiscal challenges, including an imbalance between its general fund revenues and
expenditures. This imbalance reached its highest historical level of $3.306
billion in fiscal year 2009, when revenues were $7.583 billion and expenditures
were $10.890 billion. Through various measures designed to increase revenues and
reduce expenses, the commonwealth reduced the deficit during fiscal years 2010,
2011 and 2012. For fiscal year 2013, however, the deficit was projected to
increase to $1.602 billion.
Puerto Rico's economy is closely linked to the United States economy. In
recent fiscal years, however, the performance of Puerto Rico's economy has not
been consistent with the performance of the United States economy. Puerto Rico's
economy entered a recession in the fourth quarter of fiscal year 2006. For
fiscal years 2007 through 2011, Puerto Rico's real gross national product
contracted by 1.2%, 2.9%, 3.8%, 3.6% and 1.6%, respectively, while the United
States real gross national product grew at rates of 1.7% and 2.5% during fiscal
years 2007 and 2008, respectively, contracted by 3.4% during fiscal year 2009,
and grew by 0.5% and 2.5% during fiscal years 2010 and 2011. For fiscal year
2012 Puerto Rico's gross national product grew by 0.1%, while the United States'
gross national product grew by 2.1%. According to the Puerto Rico Planning
Board's projections made in April 2013, which took into account the preliminary
results for fiscal year 2012, the estimated effects on the Puerto Rico economy
of the United States' budget sequestration, the end of the American Recovery
Reinvestment Act funds, the impact of the initial phase of the tax reform, the
recent initiatives to promote private employment creation, the end of the local
stimulus plan, and other economic factors, it was projected that Puerto Rico's
real gross national product for fiscal year 2013 would decrease by 0.4%. Puerto
Rico's real gross national product for fiscal year 2014 was forecasted to grow
by 0.2%.
On April 4, 2013, the Governor of Puerto Rico signed into law Act 3 of 2013
("Act 3"), which adopted a comprehensive reform of the Employees Retirement
System of the Commonwealth (the "Employees Retirement System"), the largest of
three commonwealth retirement systems that are funded primarily with budget
appropriations from the commonwealth's general fund.
Act 3, which is effective as of July 1, 2013, (i) freezes and grandfathers
the benefits that have accrued through June 30, 2013 of those participants who
are covered by the Employees Retirement System's defined benefit formula; (ii)
provides that, beginning July 1, 2013, the retirement benefits will be
calculated based on a defined contribution formula, similar to the formula
currently applicable to certain employees; (iii) provides that defined
contribution benefits will also be paid in the form of a lifetime annuity rather
than a lump sum payment; (iv) eliminates the so called "merit pension" that
provided to participants who joined the Employees Retirement System prior to
April 1, 1990, after attaining 30 years of service, a retirement benefit of 65%
(if less than 55 years of age) or 75% (if age 55 or greater) of the average
salary earned during the highest 36 months of employment; (v) increases the
retirement age for various groups of participants; (vi) increases the employee
contribution to the Employees Retirement System from 8.275% to 10%; (vii)
eliminates or reduces various retirement benefits previously granted
-14-
by special laws; (viii) increases the minimum pension from $400 to $500 per
month for current retirees; and (ix) eliminates or modifies other benefits, such
as disability and survivor benefits.
For many years, the financial condition of the three commonwealth
retirement systems has been one of the principal fiscal challenges facing Puerto
Rico. Although certain measures had been implemented in recent years, in an
effort to address the recurring solvency issue, the funding ratios of the
retirement systems were projected to continue to decline and the retirement
systems were projected to run out of cash within the next ten years unless a
more comprehensive reform was adopted.
The constitutionality of Act 3 is currently being challenged in several
lawsuits brought by participants of the Employees Retirement System. The
commonwealth of Puerto Rico believes that Act 3 is constitutional and intends to
forcefully defend its constitutionality in all forums.
Since January 2013, the administration has implemented the following
measures to increase revenues and reduce the deficit: (i) an initiative that
resulted in the collection of $280 million in advance payments of non-resident
withholding tax related to manufacturing patents; and (ii) the transfer of $240
million in excess funds in the redemption fund to the general fund. These and
other measures have reduced the projected deficit for fiscal year 2013 from
$2.213 billion to $1.602 billion as of March 31, 2013. In addition, the
government has implemented a tax amnesty program, designed to encourage
taxpayers with older tax liabilities to pay them, and is considering additional
measures such as the sale of tax accounts receivable to further reduce the
deficit for the current fiscal year. Prior administrations have also sought to
address the budget deficit through expense reduction measures and various
temporary and permanent revenue raising measures.
The initiative previously adopted included (i) a reduction in payroll,
which is the main component of government expenditures, and other expenses, and
the reorganization of the executive branch; (ii) a combination of temporary and
permanent revenue raising measures and additional tax enforcement measures; and
(iii) certain financial measures.
In fiscal year 2009, the commonwealth allocated a portion of its sales and
use tax to the Puerto Rico Sales Tax Financing Corporation ("COFINA"), which was
able to issue revenue bonds at favorable interest rates. The proceeds from these
bonds were deposited in a "Stabilization Fund" managed by Government Development
Bank ("GDB") and used to repay debt, finance operating expenses, including costs
related to the implementation of a workforce reduction plan, and fund an
economic stimulus plan. As of March 31, 2013, COFINA has $15.223 billion of
revenue bonds outstanding.
The government has also taken advantage of the low interest rate
environment in recent years to restructure a significant amount of its debt and
that of its public corporations and to finance its cash shortfalls. The
commonwealth refinanced $353.3 million of interest due on its general obligation
bonds during fiscal year 2010, $490.9 million of interest and principal due in
fiscal year 2011, and $686.0 million of interest and principal due in fiscal
year 2012, and it refinanced $164.5 million of interest due on Public Building
Authority ("PBA") bonds
-15-
guaranteed by the commonwealth during 2010, $147.8 million due in 2011, and
$153.8 million due in 2012. On July 2012, the GDB granted a loan to the
Secretary of the Treasury in the amount of $600.4 million for the purpose of
providing funds to make monthly principal and interest deposits during fiscal
year 2013 to pay for a portion of certain outstanding Public Improvement and
Public Refunding Bonds. The transaction was done in order to complete the
funding for the commonwealth's operating budget for fiscal year 2013. The loan
is expected to be repaid from the issuance of General Obligation ("GO")
refunding bonds, subject to market conditions, during fiscal year 2014. On the
same date, a loan of $175 million was granted to PBA providing funds to make
monthly interest deposits during fiscal year 2013 to pay interest on a portion
of certain outstanding PBA bonds. The loan is expected to be repaid from the
issuance of PBA refunding bonds, subject to market conditions, during fiscal
year 2014.
The deficit for fiscal years ending June 30, 2012 were of the following
amounts: $7.9 billion in revenues, $10.9 billion in expenditures, and $3.3
deficit in 2009; 7.6 billion in revenues, $10.7 billion in expenditures, and
$2.8 billion deficit in 2010; $8.1 billion in total revenues, $9.9 billion in
expenditures, and $1.8 billion deficit in 2011; and $8.7 billion in revenues,
$10.1 in expenditures, and $1.5 billion deficit in 2012.
The budget for fiscal year 2013 originally provided for general fund total
revenues of $8.750 billion and total expenditures of $9.083 billion, with the
difference between revenues and expenditures to be covered with $333 million
from COFINA bond proceeds. These expenditures excluded approximately $775
million of debt service payments on the commonwealth's GO bonds and commonwealth
guaranteed PBA bonds which were expected to be refinanced (but which are
included in the projected deficit of $1.602 billion). Projected revenues were
revised to take into consideration a $965 million reduction in base revenues (to
$7,785 billion) as of January 31, 2013, which mainly resulted from the
continuing contraction of the economy, and a $520 million increase in revenues
from the special measures implemented by the current administration, described
above, which result in revised projected revenues of $8,305 billion as of March
21, 2013. Preliminary general fund revenues for the first nine months of fiscal
year 2013 (from July 1, 2012 to March 30, 2013) were $5.811 billion, an increase
of $172 million, or 3%, from the same period in the prior fiscal year.
Expenditures for the fiscal year were expected to be approximately $9.907
billion (including the $775 million of debt service payments), resulting in a
projected deficit of $1.602 billion for fiscal year 2013.
During fiscal year 2012, the government originally expected to refinance
approximately $537.7 million of debt service on the commonwealth's general
obligation bonds, consisting of approximately $449.9 million of interest to
accrue during such fiscal year and approximately $87.8 million of principal due
in such fiscal year. Given favorable market conditions, the Government
refinanced an additional $148.3 million of principal due in such fiscal year to
provide additional budgetary relief, allowing the government to redirect the use
of moneys that would have been used for such principal payments.
The Government also refinanced during fiscal year 2012 approximately $153.8
million of interest to be accrued for that fiscal year on commonwealth
guaranteed PBA bonds.
-16-
Cash Management. The commonwealth maintains a cash pool for its cash and
cash equivalents. The balance in the pooled cash accounts is available to meet
current operating requirements and any excess is invested in various interest-
bearing accounts in the government Development Bank for Puerto Rico, a
discretely presented component unit. In addition, the Puerto Rico Government
Investment Trust Fund was created by the commonwealth as a no-load diversified
collective investment trust for the purpose of providing eligible investors with
a convenient and economical way to invest in a professionally managed money
market portfolio. The deposits on hand and the investments purchased are not
collateralized, secured, or guaranteed by the commonwealth or any of its
agencies, instrumentalities, or political subdivisions.
The commonwealth's investment policy is to minimize credit and market risk
while maintaining a competitive yield on its portfolio. The cash temporarily
idle during the year was invested mainly in U.S. government securities, stocks,
corporate bonds, repurchase agreements, commonwealth securities other trading
securities and short-term investments. These are primary government investments
that are restricted and unrestricted.
Budgetary Policy. The fiscal year of the commonwealth begins each July 1.
The Governor is constitutionally required to submit to the Legislature an annual
balanced budget of capital improvements and operating expenses of the
commonwealth for the ensuing fiscal year.
The annual budget is prepared by the Puerto Rico Office of Management and
Budget working with the Puerto Rico Planning Board, the Puerto Rico Department
of the Treasury, and other government offices and agencies. Section 7 of Article
6 of the Constitution provides that "The appropriations made for any fiscal year
shall not exceed the total revenue, including available surplus, estimated for
the said fiscal year unless the imposition of taxes sufficient to cover the said
appropriations is provided by law".
The commonwealth maintains extensive budgetary controls. The objective of
these controls is to ensure compliance with legal provisions embodied in the
annual appropriated budget approved by the Legislature. Activities of the
general fund are included in the annual appropriated budget. Budgetary control
resides at the department level. The commonwealth also maintains an encumbrance
accounting system as one method of maintaining budgetary control. The annual
budget, which is developed using elements of program budgeting, includes an
estimate of revenue and other resources for the ensuing fiscal year under laws
existing at the time the budget is submitted and legislative measures proposed
by the Governor and submitted with the proposed budget, as well as the
Governor's recommendations as to appropriations that in his judgment are
necessary, convenient, and in conformity with the four-year investment plan
prepared by the Puerto Rico Planning Board.
The Legislature may amend the budget submitted by the Governor, but may not
increase items that would cause a deficit without imposing additional taxes to
cover such deficit. Once approved by the Legislature, the budget is referred to
the Governor, who may decrease or eliminate any item, but may not increase or
insert new items in the budget. The Governor may also veto the budget in its
entirety and return it to the Legislature with his objections. The
-17-
Legislature, by a two-thirds majority in each house, may override the Governor's
veto. If a budget is not adopted prior to the end of the fiscal year, as
originally approved by the Legislature and the Governor, it is automatically
renewed for the ensuing fiscal year until a new budget is approved by the
Legislature and the Governor. This allows the commonwealth to continue to pay
operating and other expenses until a new budget is approved.
Assets. In 2011, the commonwealth reported a deficit in net assets at
year-end of $33.7 billion, comprised of $15.1 billion in total assets offset by
$48.8 billion in total liabilities, compared to a $30.4 billion net deficit at
the beginning of 2011. A portion of the commonwealth's net assets (deficit)
reflects its investment in capital assets such as land, buildings, and
equipment, less any related debt used to acquire those assets that are still
outstanding. The commonwealth uses these capital assets to provide services to
its residents; consequentially, these assets are not available for future
spending. Although the commonwealth's investment in its capital assets is
reported net of related debt, it should be noted that the resources needed to
repay this debt must be provided from other sources, since the capital assets
themselves cannot be used to liquidate these liabilities.
An additional portion of the commonwealth's net assets (deficit) represents
resources that are subject to external restrictions on how they may be used. An
otherwise positive remaining balance would be used to meet the commonwealth's
ongoing obligations to its residents and creditors. Internally imposed
designations of resources are not presented as restricted net assets.
The net deficit of the primary government primarily results from the
commonwealth's practice of issuing debt and transferring such funds to the
component units so that they can carry out the construction projects. The
primary government retains the debt while the component units report the
corresponding asset financed by such debt. Total primary government assets
decreased by $1.1 billion during fiscal year 2011 when compared to the prior
fiscal year. This decrease was mainly due to the decrease of $1.1 billion in
restricted investments.
Debt Administration. General obligation bonds are backed by the full faith
and credit of the commonwealth, including its power to levy additional taxes to
help ensure repayment of the debt.
The Constitution of the Commonwealth of Puerto Rico provides that direct
obligations of the commonwealth evidenced by bonds or notes and backed by the
full faith, credit, and taxing power of the commonwealth are not to be issued if
the amount of the principal of, and interest on, such bonds and notes and on all
such bonds and notes issued thereafter, which are payable in any fiscal year,
together with any amount paid by the commonwealth in the preceding fiscal year
on account of bonds or notes guaranteed by the commonwealth, exceeds 15 percent
of the average annual revenue raised under the provisions of commonwealth
legislation and conveyed into the treasury in the two fiscal years preceding the
then current fiscal year. Section 2, Article VI of the Constitution of the
Commonwealth of Puerto Rico does not limit the amount of debt that the
commonwealth may guarantee as long as the 15 percent limitation is not exceeded.
For the 2010 fiscal year, the commonwealth was in compliance with the debt
limitation requirement.
-18-
Ratings. As of June 11, 2013, the commonwealth of Puerto Rico has a BBB-
with a negative outlook credit rating from Standard & Poor's Corporation and a
Baa3 with a negative outlook from Moody's Investors Service, Inc. on general
obligation bond issues.
Local Issuances. It should be noted that the creditworthiness of
obligations issued by local issuers may be unrelated to the creditworthiness of
obligations issued by the commonwealth of Puerto Rico, and there is no
obligation on the part of the commonwealth to make payments on such local
obligations in the event of default.
Miscellaneous. The foregoing information constitutes only a brief summary
of some of the general factors which may impact certain issuers of bonds
contained in the Puerto Rico IM-IT and does not purport to be a complete or
exhaustive description of all adverse conditions to which the issuers of such
obligations are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which are not within
the control of the issuers of such bonds, could affect or could have an adverse
impact on the financial condition of the commonwealth and various agencies and
political subdivisions thereof. The Sponsor is unable to predict whether or to
what extent such factors or other factors may affect the issuers of the bonds
contained in the Puerto Rico IM-IT, the market value or marketability of such
bonds or the ability of the respective issuers of such bonds acquired by the
Puerto Rico IM-IT to pay interest on or principal of such bonds.
The Puerto Rico IM-IT is susceptible to political, economic or regulatory
factors affecting issuers of Puerto Rico municipal obligations (the "Puerto Rico
Municipal Obligations"). These include the possible adverse effects of certain
Puerto Rico constitutional amendments, legislative measures, voter initiatives
and other matters that are described. The information provided above is only a
brief summary of the complex factors affecting the financial situation in Puerto
Rico and is derived from sources that are generally available to investors and
are believed to be accurate. No independent verification has been made of the
accuracy or completeness of any of the following information. It is based in
part on information obtained from the Financial Information and Operating Data
Report from the Government Development Bank dated May 17, 2013.
MARKET DISCOUNT. Certain of the bonds may have been acquired at a market
discount from par value at maturity. The coupon interest rates on discount bonds
at the time they were purchased and deposited in a trust were lower than the
current market interest rates for newly issued bonds of comparable rating and
type. If such interest rates for newly issued comparable bonds increase, the
market discount of previously issued bonds will become greater, and if such
interest rates for newly issued comparable bonds decline, the market discount of
previously issued bonds will be reduced, other things being equal. Investors
should also note that the value of bonds purchased at a market discount will
increase in value faster than bonds purchased at a market premium if interest
rates decrease. Conversely, if interest rates increase, the value of bonds
purchased at a market discount will decrease faster than bonds purchased at a
market premium. In addition, if interest rates rise, the prepayment risk of
higher yielding, premium bonds and the prepayment benefit for lower yielding,
discount bonds will be reduced. Market discount attributable to interest changes
does not indicate a lack of market confidence in the
-19-
issue. Neither the sponsor nor the trustee shall be liable in any way for any
default, failure or defect in any of the bonds.
PREMIUM BONDS. Certain of the bonds held by the trust may have been
acquired at a market premium from par value at maturity. The coupon interest
rates on the premium bonds at the time they were purchased by the trust were
higher than the current market interest rates for newly issued bonds of
comparable rating and type. If such interest rates for newly issued and
otherwise comparable bonds decrease, the market premium of previously issued
bonds will be increased, and if such interest rates for newly issued comparable
bonds increase, the market premium of previously issued bonds will be reduced,
other things being equal. The current returns of bonds trading at a market
premium are initially higher than the current returns of comparable bonds of a
similar type issued at currently prevailing interest rates because premium bonds
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, early redemption of a premium bond
at par or early prepayments of principal will result in a reduction in yield.
Redemption pursuant to call provisions generally will, and redemption pursuant
to sinking fund provisions may, occur at times when the redeemed bonds have an
offering side valuation which represents a premium over par or for original
issue discount bonds a premium over the accreted value.
ORIGINAL ISSUE DISCOUNT BONDS. Certain of the bonds may be "zero coupon"
bonds. Zero coupon bonds are purchased at a deep discount because the buyer
receives only the right to receive a final payment at the maturity of the bond
and does not receive any periodic interest payments. The effect of owning deep
discount bonds which do not make current interest payments (such as the zero
coupon bonds) is that a fixed yield is earned not only on the original
investment but also, in effect, on all discount earned during the life of such
obligation. This implicit reinvestment of earnings at the same rate eliminates
the risk of being unable to reinvest the income on such obligation at a rate as
high as the implicit yield on the discount obligation, but at the same time
eliminates the holder's ability to reinvest at higher rates in the future. For
this reason, zero coupon bonds are subject to substantially greater price
fluctuations during periods of changing market interest rates than are
securities of comparable quality which pay interest.
"WHEN ISSUED" AND "DELAYED DELIVERY" BONDS. Certain of the bonds may have
been purchased on a "when, as and if issued" or "delayed delivery" basis. See
"Notes to Portfolio" in the prospectus. The delivery of any such bonds may be
delayed or may not occur. Interest on these Bonds begins accruing to the benefit
of unitholders on their respective dates of delivery. To the extent any bonds
are actually delivered to a trust after their respective expected dates of
delivery, unitholders who purchase their unit prior to the date such bonds are
actually delivered to the trustee would be required to adjust their tax basis in
their unit for a portion of the interest accruing on such bonds during the
interval between their purchase of unit and the actual delivery of such bonds.
As a result of any such adjustment, the Estimated Current Returns during the
first year would be slightly lower than those stated in the Prospectus which
would be the returns after the first year, assuming the portfolio of a trust and
estimated annual expenses other than that of the trustee (which may be reduced
in the first year only) do not vary from that set forth in the prospectus.
Unitholders will be "at risk" with respect to all bonds in the portfolios
including
-20-
"when, as and if issued" and "delayed delivery" bonds (i.e., may derive either
gain or loss from fluctuations in the evaluation of such bonds) from the date
they commit for unit.
ADDITIONAL DEPOSITS. The trust agreement authorizes the sponsor to
increase the size of a trust and the number of units thereof by the deposit of
additional securities, or cash (including a letter of credit or the equivalent)
with instructions to purchase additional securities, in such trust and the
issuance of a corresponding number of additional units. In connection with
these deposits, existing and new investors may experience a dilution of their
investments and a reduction in their anticipated income because of fluctuations
in the prices of the securities between the time of the cash deposit and the
purchase of the securities and because a trust will pay the associated brokerage
fees and other acquisition costs.
INSURANCE ON THE BONDS
Insurance has been obtained on certain bonds guaranteeing prompt payment of
interest and principal, when due, in respect of the bonds. See "Bond Insurance"
in the prospectus. There have been a number of recent developments with respect
to ratings actions impacting insurance companies by the rating agencies,
Standard & Poor's, a Division of The McGraw-Hill Companies, Inc. ("Standard &
Poor's"), Moody's Investors Service, Inc. ("Moody's") and Fitch Ratings Ltd.
("Fitch"). In light of the ongoing nature of ratings actions or announcements
by the rating agencies, you should consult announcements by the rating agencies,
the websites of the rating agencies, and the websites of the portfolio insurers
for the current publicly available information. These ratings actions have had
a significant impact on the portfolio insurers', and other bond insurers',
ability to compete in the financial guarantee business. A brief description of
potential insurers is contained below.
ACA Financial Guaranty Corporation ("ACA Financial Guaranty"). ACA
Financial Guaranty is an insurance subsidiary of ACA Capital Holding, Inc.,
organized in the State of Maryland. ACA Financial Guaranty assumes credit risk
through the issuance of financial guaranty insurance policies across all of its
business lines. Their insured risk portfolio contains exposures of various
credit qualities.
On December 15, 2008, Standard & Poor's withdrew its ratings of ACA
Financial Guaranty at the company's request, which remains in effect as of June
5, 2013. On December 15, 2008, Standard & Poor's had raised its financial
strength, financial enhancement, and issuer credit ratings on ACA Financial
Guaranty to B from CCC and removed the company from its CreditWatch developing
status. The outlook was developing. The upgraded rating reflected the positive
effects of the restructuring transaction completed in August 2008 that settled
all outstanding collateralized debt obligations ("CDO") and reinsurance
exposures of the company, including the significantly deteriorated CDO of asset-
backed securities ("ABS") transactions, eliminating a requirement to post a
significant amount of collateral to the CDO of ABS counterparties. The
settlement required that ACA Financial Guaranty make a $209 million cash payment
and a distribution of surplus notes. The surplus notes provided the former CDO
counterparties and certain other counterparties with what amounted to a 95%
economic interest in the company. As a result of the transaction, the company's
$7 billion risk portfolio was comprised almost exclusively of U.S. public
finance exposure predominantly of BBB and BB
-21-
credit quality with above-average concentrations in the health care and higher
education sectors. The developing outlook reflected the following
possibilities: that the company could run off in an orderly fashion with capital
adequacy improving due to low losses and effective expense management; or that
capital adequacy could deteriorate through a combination of meaningful losses
precipitated by weak credits and/or a soft economy, poor expense management,
and/or excessive distributions to surplus noteholders as allowed by the Maryland
Insurance Administration. On August 8, 2008, ACA Financial Guaranty and
counterparties to its structured finance products reached an agreement on a
restructuring plan. The plan, approved by the Maryland Insurance
Administration, provided for settlement of the structured finance obligations
and protection for ACA Financial Guaranty's municipal policyholders. ACA
Financial Guaranty has since operated as a runoff insurance company and focused
on monitoring its remaining insured municipal obligations.
As of March 31, 2013, ACA Financial Guaranty had net admitted assets of
approximately $423.9 million and total liabilities of approximately $318.6
million, as compared to approximately $424.6 million and $315.4 million,
respectively, as of December 31, 2012. The statutory surplus was approximately
$105.3 million as of March 31, 2013, and $109.2 million as of December 31, 2012.
Statutory net income/(loss) as of March 31, 2013 was approximately $(1.3)
million, compared to net income/(loss) of approximately $(5.2) million as of
March 31, 2012.
The parent company of ACA Financial Guaranty maintains a website at
www.aca.com where it makes available, free of charge and as soon as reasonably
practicable after they file with, or furnish to, the Securities and Exchange
Commission (the "SEC"), copies of their most recently filed Annual Report on
Form 10-K, all Quarterly Reports on Form 10-Q and all Current Reports on Form 8-
K, including all amendments to those reports.
The information relating to ACA Financial Guaranty and its affiliates
contained above has been furnished by ACA Financial Guaranty. No representation
is made herein as to the accuracy or adequacy of such information, or as to the
existence of any adverse changes in such information subsequent to the date
hereof.
Ambac Assurance Corporation ("Ambac Assurance"). Ambac Financial Group,
Inc. ("Ambac"), headquartered in New York City, is a holding company
incorporated on April 29, 1991 with activities divided into two business
segments: (i) financial guarantee and (ii) financial services. Ambac Assurance
provides financial guarantee insurance for public and structured finance
obligations. Ambac Assurance is the successor to the founding financial
guarantee insurance company, which wrote the first bond insurance policy in
1971. The holding company is largely dependent on dividends from Ambac
Assurance to pay dividends on its common stock, to pay principal and interest on
its indebtedness and to pay its operating expenses.
On November 8, 2010, Ambac announced that it filed for Chapter 11
bankruptcy protection and intends to continue to operate in the ordinary course
of business as "debtor-in-possession" under the jurisdiction of the United
States Bankruptcy Court for the Southern District of New York. The court entered
an order confirming the company's plan of reorganization on March 14, 2012.
Until the plan of reorganization was consummated and the
-22-
company emerged from bankruptcy, Ambac operated in the ordinary course of
business as "debtor-in-possession" in accordance with the applicable provisions
of the United States Bankruptcy Code and the orders of the bankruptcy court. On
May 1, 2013 Ambac completed its financial restructuring and emerged from Chapter
11 bankruptcy projection. Under the terms of the restructuring all allowed
claims of Ambac's former creditors were discharged and they received new common
stock, and in certain instances, new warrants, issued by the reorganized
company.
On April 7, 2011, Moody's withdrew its Caa2 rating of Ambac Assurance for
business reasons, which withdrawal remains in effect as of June 5, 2013. On
November 29, 2010, Ambac Assurance requested that Standard & Poor's withdraw its
ratings, which withdrawal remains in effect as of June 5, 2013. Standard and
Poor's previously changed Ambac Assurance's rating on March 25, 2010, from CC to
R to reflect the level of regulatory intervention at Ambac Assurance following a
directive by the Commissioner of Insurance of the State of Wisconsin. Ratings
are an essential part of Ambac Assurance's ability to provide credit enhancement
and are essential to Ambac Assurance's ability to compete in the financial
guarantee business. Considering the high levels of delinquencies and defaults
within residential mortgage loans, each of these rating agencies began a review
of the capital adequacy of the financial guarantee industry in the fall of 2007.
In late December 2007, following the rating agency reviews, Ambac Assurance's
AAA rating was affirmed by both Standard & Poor's (with a negative outlook) and
Moody's; however, Fitch placed Ambac Assurance's triple-A rating on "rating
watch negative" and stated that Ambac Assurance had a modeled $1 billion capital
shortfall. On June 18, 2008, Ambac announced its decision to terminate its
ratings contract with Fitch. By July 2008, Ambac Assurance was rated AA with a
negative outlook by Standard & Poor's and Aa3 with a negative outlook by
Moody's.
On July 28, 2009, Ambac Assurance announced a large estimated increase in
loss reserve for the second quarter of 2009 which would reduce regulatory
capital to levels below the regulatory-required minimum threshold. Moody's
cautioned in late January 2010 that Ambac Assurance's capitalization remained
stressed due to mortgage-related exposures and high operating leverage that
could result in relatively modest changes in mortgage loss estimates to have
substantial effects on capital adequacy. On November 8, 2010, Ambac announced
that it filed for a voluntary petition for relief under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of New York. The company announced that it was unable to raise
additional capital as an alternative to seeking bankruptcy protection and was
also unable to agree to terms with an ad-hoc committee of certain senior debt
holders in order to restructure its outstanding debt through a prepackaged
bankruptcy proceeding. As of June 30, 2010, Ambac had debt outstanding
amounting to approximately $1.6 billion. Under the terms of the restructuring,
all allowed claims of the former creditors of Ambac were discharged and such
creditors received new common stock, and in certain instances, new warrants,
issued by the reorganized company.
Ratings actions have had a significant impact on Ambac Assurance's ability
to compete in the financial guarantee business. As a result of the rating
agency actions described above, as well as significant disruption in the capital
markets and investor concern, Ambac Assurance has been able to write only a
limited amount of new financial guarantee business since November
-23-
2007. Ambac Assurance had been working with rating agencies and regulators to
launch Everspan Financial Guarantee Corp. (doing business as Connie Lee
Insurance Company in all states except Wisconsin), a wholly-owned but insulated
subsidiary of Ambac Assurance. The new company had been designed to have
segregated capital, separate risk management and a separate board of directors.
On June 1, 2009, however, management announced that it postponed its plan to
establish the municipal-only financial guarantee company. On January 25, 2011,
the Wisconsin Office of the Commissioner of Insurance announced confirmation of
its plan of rehabilitation for the segregated account of Ambac Assurance. The
segregated account was established by Ambac Assurance on March 24, 2010, to
segregate certain liabilities that presented serious financial hazards to the
company and its policyholders. As of December 2011, approximately 500 in-force
policies covering a net par outstanding amount of approximately $27 billion were
held in the segregated account.
On April 8, 2013 Ambac reached an agreement with the United States of
America with respect to the terms of a settlement that resolved claims filed
against Ambac by the Internal Revenue Service and related litigation. Under the
terms of the settlement Ambac will pay the United States $1.9 million, and Ambac
Assurance and/or the segregated account of Ambac Assurance will pay the United
States $100.0 million. The IRS settlement also limits the amount of net
operating loss carry-forwards Ambac is entitled to claim relating to its credit
default swap contracts for the tax years covered by the settlement to the extent
such net operating loss carry-forwards exceed $3.4 billion. As a result, Ambac
will experience a net reduction in its aggregate net operating loss carry-
forwards of approximately $1.1 billion.
As of March 31, 2013, Ambac Assurance had net admitted assets of
approximately $5.8 billion and total liabilities of approximately $5.6 billion,
as compared to approximately $5.8 billion and $5.7 billion, respectively, as of
December 31, 2012. Statutory surplus was approximately $159.5 million and
$100.0 million at March 31, 2013 and December 31, 2012, respectively. The
statutory net income/(loss) as of March 31, 2013 was approximately $39.1
million, compared to net income/(loss) of approximately $(168.4) million as of
March 31, 2012.
On September 20, 2012, in accordance with certain rules published by the
rehabilitator of the segregated account, the segregated account commenced paying
25% of each permitted policy claim that arose since the commencement of the
claims payment moratorium period, which lasted from March 24, 2010 through July
31, 2012. Claims in the first quarter of 2013 were $418.6 million, including
$89.5 million relating to the moratorium period. On March 31, 2013, a total of
$3.6 billion of presented claims remain unpaid because of the segregated account
rehabilitation proceedings and related court orders.
Ambac Assurance is subject to insurance regulatory requirements of the
States of Wisconsin and New York, and the other jurisdictions in which it is
licensed to conduct business. Ambac is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and in
accordance therewith files reports, proxy statements and other information with
the SEC. These reports, proxy statements and other information can be read at
the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York, 10005. Copies of Ambac Assurance's financial statements prepared in
accordance with statutory accounting standards are available from Ambac
Assurance. The address of Ambac Assurance's
-24-
administrative offices and its telephone number are One State Street Plaza, 19th
Floor, New York, New York, 10004 and (212) 668-0340. Ambac maintains a website
at www.ambac.com.
The information relating to Ambac Assurance and its affiliates contained
above has been furnished by Ambac Assurance. No representation is made herein
as to the accuracy or adequacy of such information, or as to the existence of
any adverse changes in such information subsequent to the date hereof.
Assured Guaranty Corp. ("AGC"). AGC is a Maryland-domiciled insurance
company regulated by the Maryland Insurance Administration and licensed to
conduct financial guaranty insurance business in all fifty states of the United
States, the District of Columbia and Puerto Rico. AGC commenced operations in
1988. AGC is a wholly owned, indirect subsidiary of Assured Guaranty Ltd.
("AGL"), a Bermuda-based holding company whose shares are publicly traded and
are listed on the New York Stock Exchange under the symbol "AGO." AGL, through
its operating subsidiaries, provides credit enhancement products to the U.S. and
global public finance, infrastructure and structured finance markets. Neither
AGL nor any of its shareholders is obligated to pay any debts of AGC or any
claims under any insurance policy issued by AGC.
On January 17, 2013, Moody's downgraded AGC's financial strength from "Aa3"
(review for possible downgrade) to A3 (stable outlook). As of June 5, 2013
AGC's financial strength was rated "Aa-" (stable outlook) by Standard & Poor's.
On February 24, 2010, Fitch, at the request of AGL, withdrew its "AA-" (Negative
Outlook) insurer financial strength rating of AGC at the then current rating
level.
AGC's net admitted assets and total liabilities as of March 31, 2013, were
approximately $2.9 billion and $2.0 billion, respectively, as compared to
approximately $2.0 billion and $2.1 billion, respectively, as of December 31,
2012. The total surplus as regards policyholders was approximately $912.6
million as of March 31, 2013 and $905.4 million as of December 31, 2012. The
statutory net income/(loss) as of March 31, 2013 was approximately $41.7
million, compared to net income/(loss) of approximately $(1.9) million as of
March 31, 2012.
Assured Guaranty, parent company of AGC, maintains a website at
http://assuredguaranty.com/.
The information relating to AGC and its affiliates contained above has been
furnished by AGC. No representation is made herein as to the accuracy or
adequacy of such information, or as to the existence of any adverse changes in
such information subsequent to the date hereof.
Assured Guaranty Municipal Corp. ("AGM"). AGM is a New York domiciled
financial guaranty insurance company and a wholly owned subsidiary of Assured
Guaranty Municipal Holdings Inc. ("Holdings"). Holdings is an indirect
subsidiary of AGL. No shareholder of AGL, Holdings or AGM is liable for the
obligations of AGM. Effective November 9, 2009, Financial Security Assurance
Inc. changed its name to Assured Guaranty Municipal Corp.
On January 17, 2013, Moody's downgraded AGM's financial strength from "Aa3"
(review for possible downgrade) to A2 (stable outlook). As of June 5, 2013
AGM's financial
-25-
strength was rated "Aa-" (stable outlook) by Standard & Poor's. On February 24,
2010, Fitch, at the request of AGL, withdrew its "AA" (Negative Outlook) insurer
financial strength rating of AGM. Fitch has not reinstated its rating as of
January 7, 2013.
AGM's net admitted assets and total liabilities as of March 31, 2013 were
approximately $4.5 billion and $2.7 billion, respectively, as compared to
approximately $4.5 billion and $2.7 billion, respectively, as of December 31,
2012. The total surplus as regards policyholders was approximately $1.86
billion as of March 31, 2013, and $1.8 billion as of December 31, 2012. The net
income/(loss) as of March 31, 2013 was approximately $97.2 million, compared to
net income/(loss) of approximately $43.2 million as of March 31, 2012.
Assured Guaranty, parent company of AGM, maintains a website at
http://assuredguaranty.com/.
The information relating to AGM and its affiliates contained above has been
furnished by AGM. No representation is made herein as to the accuracy or
adequacy of such information, or as to the existence of any adverse changes in
such information subsequent to the date hereof.
Berkshire Hathaway Assurance Corporation ("BHAC"). BHAC is a bond
insurance company that is an indirect, wholly-owned subsidiary of Berkshire
Hathaway Inc. BHAC is a New York stock insurance corporation that writes
financial guaranty insurance. BHAC was organized on December 21, 2007, and
received its New York Certificate of Authority on December 28, 2007. BHAC is
licensed in New York to write financial guaranty insurance, surety insurance and
credit insurance. As of April 11, 2008, BHAC was licensed to write financial
guaranty insurance in 47 additional states and the District of Columbia.
BHAC's shareholders and their respective percentage of outstanding common
stock are as follows: Columbia Insurance Company ("Columbia"), a Nebraska
corporation (51%), and National Indemnity Company, a Nebraska corporation (49%).
Columbia and National Indemnity Company are each indirect, wholly owned
subsidiaries of Berkshire Hathaway Inc.
BHAC is subject to the insurance laws and regulations of the State of New
York, BHAC's state of domicile. Pursuant to New York's financial guaranty
insurance law, financial guaranty insurers are limited to writing financial
guaranty insurance and related lines, including surety and credit insurance. In
addition, New York's financial guaranty insurance law (i) requires such insurers
to maintain a minimum surplus as regards policyholders, (ii) establishes limits
on the aggregate net amount of exposure that may be retained in respect of a
particular issuer or revenue source and on the aggregate net amount of exposure
that may be retained in respect of particular types of risk as a percentage of
surplus as regards policyholders; and (iii) establishes contingency, loss and
unearned premium reserve requirements. BHAC is also subject to the applicable
insurance laws and regulations of all other jurisdictions in which it is
licensed to transact insurance business. The insurance laws and regulations
vary by jurisdiction.
At March 31, 2008, BHAC had surplus as regards policyholders of slightly
less than $1,000,000,000, determined in accordance with statutory accounting
practices ("SAP") prescribed or permitted by the New York Department of
Insurance.
-26-
Copies of BHAC's most recently published SAP Annual Statement is available
upon request to: Berkshire Hathaway Assurance Corporation, 100 First Stamford
Place, Stamford, CT 06902, Attention: General Counsel. BHAC's telephone number
is (203) 363-5200.
The policies issued by BHAC are not covered by the Property/Casualty
Insurance Security Fund specified in Article 76 of the New York Insurance Laws.
Standard & Poor's has assigned its "AA+" financial strength and financial
enhancement ratings to BHAC. Standard & Poor's has assigned its "AA+" financial
enhancement rating to Columbia. The ratings on BHAC are based on a guaranty
from Columbia in favor of BHAC. The guaranty issued by Columbia applies to
BHAC's policy issued with respect to the bonds. Any explanation of these
ratings may only be obtained from Standard & Poor's. The ratings are not a
recommendation to buy, sell or hold the bonds, and are subject to revision or
withdrawal at any time by Standard & Poor's. Any downward revision or withdrawal
of a rating may have an adverse effect on the market price of the bonds.
In addition, Moody's has assigned its "Aa1" insurance financial strength
ratings to BHAC and Columbia. Any explanation of these ratings may only be
obtained from Moody's. The ratings are not a recommendation to buy, sell or
hold the bonds, and are subject to revision or withdrawal at any time by
Moody's. Any downward revision or withdrawal of a rating may have an adverse
effect on the market price of the bonds. On April 8, 2009, the date that
Moody's Investor Services, Inc. assigned its rating to BHAC, BHAC's ultimate
parent company, Berkshire Hathaway Inc., maintained an investment in Moody's
Investor Services, Inc.'s parent company of approximately 19.6% of the common
shares then outstanding. BHAC does not guarantee the market price or investment
value of the bonds nor does it guarantee that the ratings on the bonds will not
be revised or withdrawn.
The information relating to BHAC and its affiliates contained above has
been furnished by BHAC. No representation is made herein as to the accuracy or
adequacy of such information, or as to the existence of any adverse changes in
such information subsequent to the date hereof.
CIFG Assurance North America, Inc. ("CIFG"). CIFG, a New York corporation,
and CIFG Europe provide financial guarantees for transactions in the public
finance, structured finance, and infrastructure finance markets in the United
States, Europe and around the world.
On November 11, 2009, Moody's downgraded its rating of CIFG to Ca from Caa2
with a developing outlook and simultaneously withdrew any future ratings for
business reasons. Moody's stated that material deterioration in CIFG's insured
portfolio adversely affected the guarantor's capital adequacy profile and that
CIFG may no longer have sufficient financial resources to pay all insurance
claims. CIFG reported a $298 million statutory deficit in its second quarter
2009 financial statements, increasing its gross loss reserves by $339 million
due to worsening performance trends. Moody's added that the risk of regulatory
intervention is meaningful given CIFG's failure to meet minimum regulatory
capital requirements. This could influence the pace of commutations with
counterparties, potentially on terms that imply a distressed exchange, Moody's
cautioned. On June 15, 2009, Standard & Poor's lowered its rating on CIFG from
BB to CC with a negative outlook. The ratings actions were prompted by
significant deterioration in the company's remaining insured portfolio since
January 2009 when
-27-
CIFG initiated a broad restructuring. Standard & Poor's withdrew its rating of
CIFG at the request of CIFG on February 16, 2010. None of these reporting
agencies had reinstated their ratings of CIFG as of January 10, 2013.
In February 2013, CIFG entered into a transaction terminating its financial
guaranty insurance policies in connection with seven student loan asset backed
transactions with an outstanding par balance of approximately $845 million. As
a result of the transaction, CIFG released approximately $245 million in loss
reserves associated with the student loan asset backed transactions exposure,
resulting in an increase to statutory capital of $120 million.
As of March 31, 2013, CIFG had net admitted assets and total liabilities of
approximately $643.7 million and $133.8 million, respectively as compared to
approximately $757.9 million and $380.8 million, respectively, as of December
31, 2012. Surplus as regards policyholders was approximately $509.9 million as
of March 31, 2013 and $377.1 million as of December 31, 2012. The statutory net
income/(loss) as of March 31, 2013 was approximately $129.4 million, compared to
net income/(loss) of approximately $173,363 as of March 31, 2012.
CIFG maintains a website at www.cifg.com.
The information relating to CIFG and its affiliates contained above has
been furnished by CIFG. No representation is made herein as to the accuracy or
adequacy of such information, or as to the existence of any adverse changes in
such information subsequent to the date hereof.
Financial Guaranty Insurance Company ("FGIC"). FGIC is a wholly owned
subsidiary of FGIC Corporation. The company provides financial guaranty
insurance and other forms of credit enhancement for public finance and
structured finance obligations. FGIC typically guarantees the scheduled
payments of principal and interest on an issuer's obligations when due. FGIC is
licensed to write financial guaranty insurance in all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, and, through
a branch, the United Kingdom.
The deterioration in the U.S. housing and mortgage markets and the global
credit markets adversely affected FGIC's business, results of operations, and
financial condition. During 2008, FGIC's financial strength and credit ratings
were downgraded by various rating agencies. The financial strength ratings
downgrades have adversely impacted the company's ability to generate new
business and, unless restored, will impact the future business, operations and
financial results. As a result of these developments, the company ceased
writing new business to preserve capital. On September 30, 2008, FGIC entered
into a reinsurance agreement with MBIA under which MBIA reinsured certain
policies covering approximately $166 billion of FGIC's U.S. public finance
insured par outstanding. The reinsurance provided by MBIA was to enable covered
policyholders to make claims for payment directly against MBIA in accordance
with the terms of the reinsurance agreement.
On November 24, 2009, the New York Insurance Department issued an order
requiring FGIC to cease writing new policies and suspend paying any and all
claims because of ongoing surplus to policyholders deficits and impairment of
required minimum surplus to policyholders.
-28-
The order required FGIC to provide a detailed and final restructuring plan no
later than January 5, 2010. To satisfy this requirement, FGIC provided to the
New York Insurance Department FGIC's proposed surplus restoration plan, which,
as of February 1, 2010, was under review. The order further required FGIC to
return to compliance with regulatory requirements by March 25, 2010, which was
subsequently extended to June 15, 2010. FGIC announced on May 14, 2010, as part
of its surplus restoration plan, its plans to participate in an offer to
exchange certain residential mortgage-backed securities and asset-backed
securities insured by FGIC for cash and uninsured securities by Sharps SP I LLC.
On October 25, 2010, Sharps SP I LLC announced that it did not receive
sufficient participation from eligible holders in its offer to exchange certain
residential mortgage-backed securities and asset-backed securities insured by
FGIC to satisfy the conditions necessary to complete the exchange offer. As a
result, the conditions for successfully effectuating FGIC's surplus restoration
plan had not been satisfied. On December 2, 2010, FGIC announced that investors
holding securities guaranteed by FGIC formed a policyholder group in light of
the unsuccessful exchange offer. The purpose of the policyholder group was to
negotiate a proposed restructuring plan with FGIC, which FGIC would submit to
the New York Superintendent of Insurance by January 31, 2011.
On August 4, 2010, FGIC Corporation, FGIC's parent company, announced it
had filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code in the Southern District of New York. On March 25, 2010, FGIC
and its subsidiary, FGIC Credit Products LLC, entered into a commitment and
support agreement with seven counterparties to their credit default swaps. This
agreement would enable FGIC to mitigate its potential existing exposure to
material claims based on mark-to-market termination payments under such credit
default swaps. Under this agreement, the counterparties have agreed to forbear
from exercising certain acceleration, termination, and assessment rights under
their credit default swap contracts for a period of time. This agreement also
involves FGIC forming a new wholly owned subsidiary licensed as a New York
financial guaranty insurance corporation that would assume FGIC's rights,
obligations, and liabilities under the specified credit default swap policies.
On June 11, 2012, FGIC announced that the Superintendent of the New York
State Department of Financial Services filed a verified petition with the
Supreme Court of the State of New York for an order of rehabilitation (i)
appointing the Superintendent as rehabilitator of FGIC; (ii) directing the
rehabilitator to take possession of the property and assets of FGIC and to
conduct its business; and (iii) directing the rehabilitator to take steps toward
removing the causes and conditions which have made the rehabilitation proceeding
necessary. FGIC has consented to the commencement of the rehabilitation
proceeding.
On September 27, 2012, the rehabilitator filed a proposed Plan of
Rehabilitation for FGIC and the First Amended Plan of Rehabilitation for FGIC.
The rehabilitator filed a revised First Amended Plan of Rehabilitation for FGIC,
dated June 4, 2013, and the court approved the plan on June 11, 2013.
On April 22, 2009, Standard and Poor's lowered its rating of FGIC to CC
from CCC with a negative outlook, and subsequently withdrew its ratings because
of an expectation that timely financial information would no longer be
available. On March 24, 2009, FGIC was downgraded to Caa3 from Caa1 with a
negative outlook by Moody's, which also announced that it was
-29-
withdrawing the ratings of FGIC and FGIC Corporation for business reasons.
Effective November 24, 2008, Fitch no longer provides a rating for FGIC, citing
its belief that FGIC's financial guaranty franchise was effectively in run-off
and, as a result, that there was limited investor interest in continued coverage
of the rating. Prior to January 2008, FGIC was rated AAA, Aaa and AAA by
Standard & Poor's, Moody's, and Fitch, respectively. None of these reporting
agencies had reinstated their ratings of FGIC as of June 5, 2013.
As of March 31, 2013, FGIC had total admitted assets of approximately $2.1
billion and total liabilities of approximately $4.8 billion. At year end 2012,
FGIC had net admitted assets of approximately $2.0 billion and total liabilities
of approximately $4.6 billion. As of March 13, 2013, FGIC's statutory
surplus/(deficit) was approximately $(2.7) billion compared to a statutory
surplus/(deficit) of approximately $(2.6) billion on December 31, 2012. The net
income/(loss) as of March 31, 2013 was approximately $(86.5) million, compared
to net income/(loss) of approximately $(146.7) million as of March 31, 2012. As
discussed above, due to this statutory deficit, FGIC is suspended by the New
York State Insurance Department from writing new policies and paying all claims.
Copies of FGIC's most recent generally accepted accounting principles and
statutory accounting practices financial statements are available upon request
to: Financial Guaranty Insurance Company, 125 Park Avenue, New York, NY 10017,
Attention: Corporate Communications Department. Financial Guaranty's telephone
number is (212) 312-3000. FGIC maintains a website at www.FGIC.com.
The information relating to FGIC and its affiliates contained above has
been furnished by FGIC. No representation is made herein as to the accuracy or
adequacy of such information, or as to the existence of any adverse changes in
such information subsequent to the date hereof.
National Public Finance Guarantee Corporation ("National"). National is an
insurance subsidiary of MBIA, Inc., a Connecticut corporation. On February 25,
2008, MBIA Insurance Corporation ("MBIA") announced a plan to implement several
initiatives in connection with the restructuring of its business over the next
few years. A significant aspect of the plan was the creation of separate legal
operating entities for MBIA's public, structured, and asset management
businesses as soon as feasible, with a goal of within five years. As part of
that plan, on February 18, 2009, MBIA announced it had formed a new public
finance-only financial guarantee insurance company which would conduct business
only in the United States. The new company initially did business as MBIA
Illinois, but changed its name to National Public Finance Guarantee Corporation
officially on March 19, 2009. Its initial portfolio of approximately $537
billion in net par outstanding as of February 18, 2009 consisted of both the
U.S. public finance policies originally insured by MBIA and those reinsured as
part of a 2008 portfolio transaction with FGIC. All of the existing affected
policyholders were to have reinsurance provided by National through the cut-
through provision in the reinsurance agreement and second-to-pay policies, which
gave MBIA and FGIC policyholders the ability to make a claim for payment
directly against National.
On May 21, 2013, Moody's raised its rating on National to Baa1 with a
positive outlook. As of June 5, 2013, National has maintained this rating. On
May 10, 2013, Standard and Poor's
-30-
raised its rating on National to A with a stable outlook. As of June 5, 2013,
National has maintained this rating.
As of March 31, 2013, National's total net admitted assets were
approximately $5.8 billion and its total liabilities were approximately $5.7
billion, as compared to approximately $5.7 billion and $3.7 billion,
respectively, as of December 31, 2012. The surplus as regards policyholders was
approximately $2.1 billion as of March 31, 2013, and $2.0 billion as of December
31, 2012. As of March 31, 2013, National had a statutory net income/(loss) of
approximately $100.1 million, compared with a net income/(loss) of approximately
$39.3 million as of March 31, 2012.
National maintains a website at www.nationalpfg.com/#/home.
The information relating to MBIA, National and their affiliates contained
above has been furnished by MBIA and/or National. No representation is made
herein as to the accuracy or adequacy of such information, or as to the
existence of any adverse changes in such information subsequent to the date
hereof.
Radian Asset Assurance, Inc. ("Radian"). Radian Group Inc. is a global
credit risk management company headquartered in Philadelphia with significant
operations in New York and London.
On February 28, 2013, Standard & Poor's maintained its rating on Radian as
B+ and revised its outlook to stable, which remains its rating as of June 5,
2013. On April 17, 2012, Moody's affirmed its Ba1 rating with a negative
outlook, which remains its rating as of June 5, 2103. Radian Group Inc.'s
management has stated that it has discontinued, for the foreseeable future,
writing any new financial guaranty business in light of current market
conditions, and that it intends to utilize Radian's available capital to support
its mortgage insurance operations. Radian has also announced that it and
Assured Guaranty Corp. ("Assured") entered into a transaction whereby Radian
reinsured a group of public finance policies with Assured. As part of that
reinsurance transaction, Radian has appointed Assured to service those insurance
policies, effective as of January 24, 2012.
Radian's total net admitted assets and total liabilities as of March 31,
2013 were approximately $1.6 billion and $442.5 million, respectively, as
compared to approximately $1.7 million and $531.9 million, respectively, as of
December 31, 2012. The surplus as regards policyholders was approximately $1.2
billion as of March 31, 2013, and $1.1 billion as of December 31, 2012. As of
March 31, 2013, Radian had a statutory net income/(loss) of approximately 2.4
million, compared with a net income/(loss) of approximately 25.2 million as of
March 31, 2012.
Radian Group, Inc., parent company of Radian, maintains a website at
http://www.radian.biz.
-31-
The information relating to Radian and its affiliates contained above has
been furnished by Radian. No representation is made herein as to the accuracy
or adequacy of such information, or as to the existence of any adverse changes
in such information subsequent to the date hereof.
Syncora Guarantee Inc. (formerly XL Capital Assurance Inc.) ("Syncora").
Syncora is the sole subsidiary of Syncora Holdings Ltd., a holding company
domiciled in Bermuda, and provides financial guarantee insurance and other
credit enhancement for debt obligations in the U.S. and international capital
markets, including municipal bonds, asset-backed securities, debt backed by
utilities and selected infrastructure projects, future flow securitizations,
bank deposit insurance and collateralized debt obligations.
On November 8, 2012, Moody's withdrew its rating of Syncora, citing a lack
of adequate information to support the maintenance of a rating. Syncora had
previously been rated Ca by Moody's. On July 28, 2010, Standard & Poor's
withdrew its rating of Syncora. A press release stated that this was due to a
lack of sufficient information to judge the company's claims paying ability.
Syncora had previously been given an "R" rating due to being under regulatory
supervision. Neither reporting agency had reinstated its ratings of Syncora as
of June 5, 2013.
In its year-end 2008 annual statement, Syncora reported a statutory
policyholders' deficit of approximately $2.4 billion, which would permit the New
York Insurance Department to intervene in Syncora's operations and seek court
appointment as rehabilitator or liquidator of the company. Syncora then engaged
in settlement negotiations with its counterparties and launched a tender offer
for insured residential mortgage-backed securities as part of a broader
restructuring initiative. On July 17, 2009, Syncora announced that it completed
substantially all of the steps of its comprehensive restructuring contemplated
by the master transaction agreement between Syncora and certain financial
counterparties to its credit default swap and financial guarantee policies and
accepted the tender offer for certain residential mortgage-backed securities
insured by Syncora. As a result, the company expected to remediate its
policyholders' surplus deficit in the range of $3.9 and $4.1 billion. The
restructuring was to relieve the company of approximately $6.0 billion in losses
and loss reserves. The company expected that the successful remediation of its
policyholders' surplus deficit would allow it to return to compliance with the
New York State Insurance Department's minimum policyholders' surplus requirement
of $65 million. Syncora is not currently writing new insurance business and,
along with its newly formed financial guarantee insurance subsidiary, Syncora
Capital Assurance Inc., will not resume writing new insurance business. The New
York State Insurance Department approved the transactions relating to the
restructuring and directed that, upon the completion of each of the transactions
so approved, the company would confirm that such closings have occurred and the
impairment to its policyholders' surplus had been removed.
On April 12, 2010, Syncora reported that it had closed the outstanding
transaction that was part of its restructuring that was announced on July 17,
2007. On July 20, 2010, Syncora announced that it completed its remediation
plan sufficient to meet its minimum statutory policyholder surplus requirements
and address previously announced short and medium term liquidity issues. The
remediation plan included purchases of certain of the company's guaranteed
exposures, monetization of certain of its illiquid assets, receipt of a partial
prepayment of a surplus note from its wholly owned subsidiary Syncora Capital
Assurance Inc. and various other
-32-
loss remediation and restructuring actions. Syncora also announced that, as
required by a supplemental order issued by the New York Insurance Department on
June 17, 2010, the company provided, and the New York Insurance Department
approved, Syncora's plan for the payment of new claims as they become due in the
ordinary course of business and for the payment of claims accrued and unpaid
since April 26, 2009. On October 25, 2010, Syncora announced that it would
record a decrease in its statutory policyholders' surplus of approximately $25
million to $40 million for the third quarter of 2010, principally as a result of
adverse development with respect to residential mortgage backed securities and
other guaranteed transactions. In connection with the adverse development of
its reserves, Syncora identified a potential mismatch of future long-term claim
payments and reimbursement of such claim payments and warned that such mismatch
might impact liquidity at that time. If not mitigated, the company warned,
these issues could materially impair Syncora's ability to satisfy its future
obligations. In addition, Syncora announced that it expected the discount rate
used in the calculation of its reserves and loss adjustment expenses at December
31, 2010 to be lower, as compared to that used in prior periods during 2010 and
as of December 31, 2009. The company warned that a decrease in this rate will
cause Syncora's reserves and loss adjustment expenses to increase and such
increase may have a material adverse effect on the company's policyholders'
surplus.
Syncora's total admitted assets and total liabilities as of March 31, 2013
were approximately $1.17 billion and $657.9 million, respectively, as compared
to approximately $1.2 million and $589.2 million, respectively, as of December
31, 2012. The surplus as regards policyholders was approximately $516.8 million
as of March 31, 2013, and $510. 6 million as of December 31, 2012. As of March
31, 2013, Syncora had a statutory net income/(loss) of approximately 4.1
million, compared with a net income/(loss) of approximately (1.5) million as of
March 31, 2012.
The company's website address is www.syncora.com.
The information relating to Syncora and its affiliates contained above has
been furnished by Syncora. No representation is made herein as to the accuracy
or adequacy of such information, or as to the existence of any adverse changes
in such information subsequent to the date hereof.
The public can read and copy any materials the above referenced companies
file with the SEC at the SEC's Public Reference Room at 100 F Street, NE,
Washington, DC 20549. The public can obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains
an internet site that contains reports, proxy and information statements, and
other information regarding issuers, which may include the companies listed
above, that file electronically with the SEC. The address of the SEC's website
is www.sec.gov.
ADMINISTRATION OF THE TRUST
DISTRIBUTIONS TO UNITHOLDERS. Interest received by a trust, including any
portion of the proceeds from a disposition of securities which represents
accrued interest, is credited by the
-33-
trustee to the Interest Account for the trust. All other receipts are credited
by the trustee to a separate Principal Account for the trust. The trustee
normally has no cash for distribution to unitholders until it receives interest
payments on the securities in the trust. On the dates set forth under
"Essential Information" in the prospectus, the trustee will commence
distributions, in part from funds advanced by the trustee.
Thereafter, assuming the trust retains its original size and composition,
after deduction of the fees and expenses and reimbursements (without interest)
to the trustee for any amounts advanced to a trust, the trustee will normally
distribute any income and principal received by the trust on each distribution
date or shortly thereafter to unitholders of record on the preceding Record
Date. Unitholders will receive an amount substantially equal to their pro rata
share of the balance of the Interest Account. However, interest earned at any
point in time will generally be greater than the amount actually received by the
trustee. Therefore, there will generally remain an item of accrued interest
that is added to the daily value of the units. If unitholders sell or redeem
all or a portion of their units, they will be paid their proportionate share of
the accrued interest to, but not including, the third business day after the
date of a sale or to the date of tender in the case of a redemption.
Unitholders of record on the first record date will receive an interest
distribution on the first distribution date. Because the period of time between
the first distribution date and the regular distribution dates may not be a full
period, the first regular distributions may be partial distributions.
Persons who purchase units between a record date and a distribution date
will receive their first distribution on the second distribution date following
their purchase of units. Since interest on securities in the trust is payable
at varying intervals and distributions are made to unitholders at different
intervals from receipt of interest, the interest accruing to a trust may not be
equal to the amount of money received and available for distribution from the
Interest Account. Therefore, on each distribution date the amount of interest
actually deposited in the Interest Account and available for distribution may be
slightly more or less than the interest distribution made. In order to
eliminate fluctuations in interest distributions resulting from such variances,
the trustee is authorized by the trust agreement to advance such amounts as may
be necessary to provide interest distributions of approximately equal amounts.
The trustee will be reimbursed, without interest, for any such advances from
funds available in the Interest Account.
The trustee will distribute on each distribution date or shortly
thereafter, to each unitholder of record on the preceding record date, an amount
substantially equal to such holder's pro rata share of the available cash
balance, if any, in the Principal Account computed as of the close of business
on the preceding record date. However, no distribution will be required if the
balance in the Principal Account is less than $1.00 per unit.
STATEMENTS TO UNITHOLDERS. With each distribution, the trustee will
furnish to each unitholder a statement of the amount of income and the amount of
other receipts, if any, which are being distributed, expressed in each case as a
dollar amount per unit.
-34-
The accounts of a trust are required to be audited annually, at the related
trust's expense, by independent public accountants designated by the sponsor,
unless the sponsor determines that such an audit would not be in the best
interest of the unitholders of the trust. The accountants' report will be
furnished by the trustee to any unitholder upon written request. Within a
reasonable period of time after the end of each calendar year, the trustee shall
furnish to each person who at any time during the calendar year was a unitholder
of a trust a statement, covering the calendar year, setting forth for the trust:
(A) As to the Interest Account:
(1) Income received;
(2) Deductions for applicable taxes and for fees and expenses of the trust
and for redemptions of units, if any; and
(3) The balance remaining after such distributions and deductions,
expressed in each case both as a total dollar amount and as a dollar
amount representing the pro rata share of each unit outstanding on the
last business day of such calendar year; and
(B) As to the Principal Account:
(1) The dates of disposition of any securities and the net proceeds
received therefrom;
(2) Deductions for payment of applicable taxes and fees and expenses of
the trust and for redemptions of units, if any; and
(3) The balance remaining after such distributions and deductions expressed
both as a total dollar amount and as a dollar amount representing the
pro rata share of each unit outstanding on the last business day of
such calendar year; and
(C) The following information:
(1) A list of the securities as of the last business day of such calendar
year;
(2) The number of units outstanding on the last business day of such
calendar year;
(3) The redemption price based on the last evaluation made during such
calendar year;
(4) The amount actually distributed during such calendar year from the
Interest and Principal Accounts separately stated, expressed both as
total dollar amounts and as dollar amounts per unit outstanding on the
record dates for each such distribution.
RIGHTS OF UNITHOLDERS. A unitholder may at any time tender units to the
trustee for redemption. The death or incapacity of any unitholder will not
operate to terminate a trust nor entitle legal representatives or heirs to claim
an accounting or to bring any action or proceeding in any court for partition or
winding up of a trust. No unitholder shall have the right to control
-35-
the operation and management of a trust in any manner, except to vote with
respect to the amendment of the trust agreement or termination of a trust.
AMENDMENT AND TERMINATION. The trust agreement may be amended from time to
time by the sponsor and trustee or their respective successors, without the
consent of any of the unitholders, (i) to cure any ambiguity or to correct or
supplement any provision which may be defective or inconsistent with any other
provision contained in the trust agreement, (ii) to make such other provision in
regard to matters or questions arising under the trust agreement as shall not
materially adversely affect the interests of the unitholders or (iii) to make
such amendments as may be necessary (a) for the trust to continue to qualify as
a regulated investment company for federal income tax purposes if the trust has
elected to be taxed as such under the United States Internal Revenue Code of
1986, as amended, or (b) to prevent the trust from being deemed an association
taxable as a corporation for federal income tax purposes if the trust has not
elected to be taxed as a regulated investment company under the United States
Internal Revenue Code of 1986, as amended. The trust agreement may not be
amended, however, without the consent of all unitholders then outstanding, so as
(1) to permit, except in accordance with the terms and conditions thereof, the
acquisition hereunder of any securities other than those specified in the
schedules to the trust agreement or (2) to reduce the percentage of units the
holders of which are required to consent to certain of such amendments. The
trust agreement may not be amended so as to reduce the interest in a trust
represented by units without the consent of all affected unitholders. Except
for the amendments, changes or modifications described above, neither the
sponsor nor the trustee may consent to any other amendment, change or
modification of the trust agreement without the giving of notice and the
obtaining of the approval or consent of unitholders representing at least 66
2/3% of the units then outstanding of the affected trust. No amendment may
reduce the aggregate percentage of units the holders of which are required to
consent to any amendment, change or modification of the trust agreement without
the consent of the unitholders of all of the units then outstanding of the
affected trust and in no event may any amendment be made which would (1) alter
the rights to the unitholders as against each other, (2) provide the trustee
with the power to engage in business or investment activities other than as
specifically provided in the trust agreement, (3) adversely affect the tax
status of the trust for federal income tax purposes or result in the units being
deemed to be sold or exchanged for federal income tax purposes or (4) unless the
trust has elected to be taxed as a regulated investment company for federal
income tax purposes, result in a variation of the investment of unitholders in
the trust. The trustee will notify unitholders of the substance of any such
amendment.
The trust agreement provides that a trust shall terminate upon the
maturity, liquidation, redemption or other disposition of the last of the
securities held in the trust but in no event is it to continue beyond the
mandatory termination date. If the value of a trust shall be less than the
applicable minimum value stated in the prospectus (generally 40% of the total
value of securities deposited in the trust during the initial offering period),
the trustee may, in its discretion, and shall, when so directed by the sponsor,
terminate the trust. A trust may be terminated at any time by the holders of
units representing 66 2/3% of the units thereof then outstanding. A trust
will be liquidated by the trustee in the event that a sufficient number of units
of the trust not yet sold are tendered for redemption by the sponsor, so that
the net worth of the trust would be reduced to less than 40% of the value of the
securities at the time they were deposited in the trust. If a trust
-36-
is liquidated because of the redemption of unsold units by the sponsor, the
sponsor will refund to each purchaser of units the entire sales fee paid by such
purchaser.
Within a reasonable period after termination, the trustee will sell any
securities remaining in a trust and, after paying all expenses and charges
incurred by the trust, will distribute to unitholders thereof their pro rata
share of the balances remaining in the Interest and Principal Accounts of the
trust.
THE TRUSTEE. The trustee is The Bank of New York Mellon, a trust company
organized under the laws of New York. The Bank of New York Mellon has its
principal unit investment trust division offices at 2 Hanson Place, 12th Floor,
Brooklyn, New York 11217, (800) 848-6468. The Bank of New York Mellon is subject
to supervision and examination by the Superintendent of Banks of the State of
New York and the Board of Governors of the Federal Reserve System, and its
deposits are insured by the Federal Deposit Insurance Corporation to the extent
permitted by law.
The trustee, whose duties are ministerial in nature, has not participated
in selecting the portfolio of any trust. In accordance with the trust
agreement, the trustee shall keep records of all transactions at its office.
Such records shall include the name and address of, and the number of units held
by, every unitholder of a trust. Such books and records shall be open to
inspection by any unitholder at all reasonable times during usual business
hours. The trustee shall make such annual or other reports as may from time to
time be required under any applicable state or federal statute, rule or
regulation. The trustee shall keep a certified copy or duplicate original of
the trust agreement on file in its office available for inspection at all
reasonable times during usual business hours by any unitholder, together with a
current list of the securities held in each trust. Pursuant to the trust
agreement, the trustee may employ one or more agents for the purpose of custody
and safeguarding of securities comprising a trust.
Under the trust agreement, the trustee or any successor trustee may resign
and be discharged of a trust created by the trust agreement by executing an
instrument in writing and filing the same with the sponsor.
The trustee or successor trustee must mail a copy of the notice of
resignation to all unitholders then of record, not less than sixty days before
the date specified in such notice when such resignation is to take effect. The
sponsor upon receiving notice of such resignation is obligated to appoint a
successor trustee promptly. If, upon such resignation, no successor trustee has
been appointed and has accepted the appointment within thirty days after
notification, the retiring trustee may apply to a court of competent
jurisdiction for the appointment of a successor. In case at any time the
trustee shall not meet the requirements set forth in the trust agreement, or
shall become incapable of acting, or if a court having jurisdiction in the
premises shall enter a decree or order for relief in respect of the trustee in
an involuntary case, or the trustee shall commence a voluntary case, under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or any receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) for the trustee or for any substantial part of its
property shall be appointed, or the trustee shall generally fail to pay its
debts as they become due, or shall fail to meet such written standards for the
trustee's performance as shall be established from time to time by the
-37-
sponsor, or if the sponsor determines in good faith that there has occurred
either (1) a material deterioration in the creditworthiness of the trustee or
(2) one or more grossly negligent acts on the part of the trustee with respect
to a trust, the sponsor, upon sixty days' prior written notice, may remove the
trustee and appoint a successor trustee, as hereinafter provided, by written
instrument, in duplicate, one copy of which shall be delivered to the trustee so
removed and one copy to the successor trustee. Notice of such removal and
appointment shall be mailed to each unitholder by the sponsor. Upon execution
of a written acceptance of such appointment by such successor trustee, all the
rights, powers, duties and obligations of the original trustee shall vest in the
successor. The trustee must be a corporation organized under the laws of the
United States, or any state thereof, be authorized under such laws to exercise
trust powers and have at all times an aggregate capital, surplus and undivided
profits of not less than $5,000,000.
THE SPONSOR. The sponsor of the trust is Advisors Asset Management, Inc.
The sponsor is a broker-dealer specializing in providing services to broker-
dealers, registered representatives, investment advisers and other financial
professionals. The sponsor's headquarters are located at 18925 Base Camp Road,
Monument, Colorado 80132. You can contact the unit investment trust division at
8100 East 22nd Street North, Building 800, Suite 102, Wichita, Kansas 67226 or
by using the contacts listed on the back cover of the prospectus. The sponsor is
a registered broker-dealer and investment adviser and a member of the Financial
Industry Regulatory Authority, Inc. (FINRA) and the Securities Investor
Protection Corporation (SIPC), and a registrant of the Municipal Securities
Rulemaking Board (MSRB).
If at any time the sponsor shall fail to perform any of its duties under
the trust agreement or shall become incapable of acting or shall be adjudged a
bankrupt or insolvent or shall have its affairs taken over by public
authorities, then the trustee may (a) appoint a successor sponsor at rates of
compensation deemed by the trustee to be reasonable and not exceeding such
reasonable amounts as may be prescribed by the Securities and Exchange
Commission, (b) terminate the trust agreement and liquidate any trust as
provided therein, or (c) continue to act as trustee without terminating the
trust agreement.
THE EVALUATOR AND SUPERVISOR. Advisors Asset Management, Inc., the
sponsor, also serves as evaluator and supervisor. The evaluator and supervisor
may resign or be removed by the sponsor and trustee in which event the sponsor
and trustee is to use its best efforts to appoint a satisfactory successor.
Such resignation or removal shall become effective upon acceptance of
appointment by the successor evaluator. If upon resignation of the evaluator no
successor has accepted appointment within thirty days after notice of
resignation, the evaluator may apply to a court of competent jurisdiction for
the appointment of a successor. Notice of such resignation or removal and
appointment shall be mailed by the trustee to each unitholder.
LIMITATIONS ON LIABILITY. The sponsor, evaluator, and supervisor are
liable for the performance of their obligations arising from their
responsibilities under the trust agreement but will be under no liability to the
unitholders for taking any action or refraining from any action in good faith
pursuant to the trust agreement or for errors in judgment, except in cases of
its own gross negligence, bad faith or willful misconduct or its reckless
disregard for its duties thereunder. The sponsor shall not be liable or
responsible in any way for depreciation or loss incurred by reason of the sale
of any securities.
-38-
The trust agreement provides that the trustee shall be under no liability
for any action taken in good faith in reliance upon prima facie properly
executed documents or for the disposition of moneys, securities or certificates
except by reason of its own gross negligence, bad faith or willful misconduct,
or its reckless disregard for its duties under the trust agreement, nor shall
the trustee be liable or responsible in any way for depreciation or loss
incurred by reason of the sale by the trustee of any securities. In the event
that the sponsor shall fail to act, the trustee may act and shall not be liable
for any such action taken by it in good faith. The trustee shall not be
personally liable for any taxes or other governmental charges imposed upon or in
respect of the securities or upon the interest thereof. In addition, the trust
agreement contains other customary provisions limiting the liability of the
trustee.
The trustee and unitholders may rely on any evaluation furnished by the
evaluator and shall have no responsibility for the accuracy thereof. The trust
agreement provides that the determinations made by the evaluator shall be made
in good faith upon the basis of the best information available to it, provided,
however, that the evaluator shall be under no liability to the trustee or
unitholders for errors in judgment, but shall be liable for its gross
negligence, bad faith or willful misconduct or its reckless disregard for its
obligations under the trust agreement.
EXPENSES OF THE TRUST. The sponsor will not charge a trust any fees for
services performed as sponsor. The sponsor will receive a portion of the sale
commissions paid in connection with the purchase of units and will share in
profits, if any, related to the deposit of securities in the trust.
The sponsor may receive a fee from your trust for creating and developing
the trust, including determining the trust's objectives, policies, composition
and size, selecting service providers and information services and for providing
other similar administrative and ministerial functions. The amount, if any, of
this "creation and development fee" is set forth in the prospectus. The trustee
will deduct this amount from your trust's assets as of the close of the initial
offering period. No portion of this fee is applied to the payment of
distribution expenses or as compensation for sales efforts. This fee will not be
deducted from proceeds received upon a repurchase, redemption or exchange of
units before the close of the initial public offering period.
The trustee receives for its services that fee set forth in the prospectus.
The trustee's fee which is calculated and paid monthly is based on the total
number of units of the related trust outstanding as of January 1 for any annual
period, except during the initial offering period the fee will be based on the
units outstanding at the end of each month. The trustee benefits to the extent
there are funds for future distributions, payment of expenses and redemptions in
the Principal and Interest Accounts since these Accounts are non-interest
bearing and the amounts earned by the trustee are retained by the trustee. Part
of the trustee's compensation for its services to a trust is expected to result
from the use of these funds.
The supervisor will charge a trust a surveillance fee for services
performed for the trust in an amount not to exceed that amount set forth in the
prospectus but in no event will such compensation, when combined with all
compensation received from other unit investment trusts for which the sponsor
both acts as sponsor and provides portfolio surveillance, exceed the aggregate
cost to the sponsor for providing such services. Such fee shall be based on the
total
-39-
number of units of the related trust outstanding as of January 1 for any annual
period, except during the initial offering period the fee will be based on the
units outstanding at the end of each month.
For evaluation of the securities in a trust, the evaluator shall receive an
evaluation fee in an amount not to exceed that amount set forth in the
prospectus but in no event will such compensation, when combined with all
compensation from other unit investment trusts for which the sponsor acts as
sponsor and provides evaluation services, exceed the aggregate cost of providing
such services. Such fee shall be based on the total number of units of the
related trust outstanding as of January 1 for any annual period, except during
the initial offering period the fee will be based on the units outstanding at
the end of each month.
For providing bookkeeping and administrative services to a trust, the
sponsor shall receive an administration fee in an amount not to exceed that
amount set forth in the prospectus but in no event will such compensation, when
combined with all compensation from other unit investment trusts for which the
sponsor acts as sponsor and provides evaluation services, exceed the aggregate
cost of providing such services. Such fee shall be based on the total number of
units of the related trust outstanding as of January 1 for any annual period,
except during the initial offering period the fee will be based on the units
outstanding at the end of each month.
The trustee's fee, sponsor's fee for providing bookkeeping and
administrative services to the trust, supervisor's fee and evaluator's fee are
deducted from the Interest Account of the related trust to the extent funds are
available and then from the Principal Account. Each such fee (other than any
creation and development fee) may be increased without approval of unitholders
by amounts not exceeding a proportionate increase in the Consumer Price Index or
any equivalent index substituted therefor.
The following additional charges are or may be incurred by the trust:
(a) fees for the trustee's extraordinary services; (b) expenses of the trustee
(including legal and auditing expenses and reimbursement of the cost of advances
to the trust for payment of expenses and distributions, but not including any
fees and expenses charged by an agent for custody and safeguarding of
securities) and of counsel, if any; (c) various governmental charges;
(d) expenses and costs of any action taken by the trustee to protect the trust
or the rights and interests of the unitholders; (e) indemnification of the
trustee for any loss, liability or expense incurred by it in the administration
of the trust not resulting from negligence, bad faith or willful misconduct on
its part or its reckless disregard of its obligations under the trust agreement;
(f) indemnification of the sponsor for any loss, liability or expense incurred
in acting in that capacity without gross negligence, bad faith or willful
misconduct or its reckless disregard for its obligations under the trust
agreement; and (g) expenditures incurred in contacting unitholders upon
termination of the trust. The fees and expenses set forth herein are payable
out of a trust and, when owing to the trustee, are secured by a lien on the
trust. If the balances in the Interest and Principal Accounts are insufficient
to provide for amounts payable by the trust, the trustee has the power to sell
securities to pay such amounts. These sales may result in capital gains or
losses to unitholders. A trust may pay the costs of updating its registration
statement each year.
-40-
PURCHASE, REDEMPTION AND PRICING OF UNITS
PUBLIC OFFERING PRICE. Units of a trust are offered at the public offering
price thereof. During the initial offering period, the public offering price
per unit is equal to the net asset value per unit (generally based on the
offering side evaluations of the securities) plus the applicable sales fee
referred to in the prospectus plus cash deposited to pay organization costs. The
transactional sales fee is equal to the difference between the maximum sales fee
and the total remaining creation and development fee, if any. The public
offering price for secondary market transactions, on the other hand, is based on
the net asset value per unit (generally based on the bid side evaluations of the
securities) plus a sales fee. The sales fee as a percentage of the public
offering price and the net amount invested is set forth in the prospectus. The
creation and development fee, if any, is a fixed dollar amount and will be
collected at the end of the initial offering period as described in the
prospectus. Units sold or redeemed prior to such time as the entire applicable
creation and development fee has been collected will not be assessed the
remaining creation and development fee at the time of such sale or redemption.
During the initial offering period, a portion of the public offering price
includes an amount of cash or securities to pay for all or a portion of the
costs incurred in establishing a trust. These costs include the cost of
preparing the registration statement, the trust indenture and other closing
documents, registering units with the Securities and Exchange Commission and
states, the initial audit of the trust portfolio, legal fees and the initial
fees and expenses of the trustee. These costs will be deducted from a trust as
of the end of the initial offering period or after six months, if earlier.
Following the end of the initial offering period, the public offering price for
secondary market transactions is based on the net asset value per unit
(generally based on the bid side evaluations of the securities) plus a sales
fee. The cost to investors of units of the trust for secondary market
transactions is the public offering price of units plus accrued interest, if
any. Certain broker-dealers may charge a transaction or other fee for processing
unit purchases.
As indicated above, the initial public offering price of the units was
established by dividing the aggregate underlying value of the securities by the
number of units outstanding. Such price determination as of the opening of
business on the date a trust was created was made on the basis of an evaluation
of the securities in the trust prepared by the evaluator. After the opening of
business on this date, the evaluator will appraise or cause to be appraised
daily the value of the underlying securities as of the close of regular trading
on the New York Stock Exchange on days the New York Stock Exchange is open and
will adjust the public offering price of the units commensurate with such
valuation. Such public offering price will be effective for all orders received
at or prior to the close of regular trading on the New York Stock Exchange on
each such day as discussed in the prospectus. Orders received by the trustee,
sponsor or any authorized financial professionals for purchases, sales or
redemptions after that time, or on a day when the New York Stock Exchange is
closed, will be held until the next determination of price as discussed in the
prospectus.
Had units of a trust been available for sale at the close of business on
the business day before the inception date of the trust, the public offering
price would have been as shown under "Essential Information" in the prospectus.
The public offering price per unit of a trust on the date of the prospectus or
on any subsequent date will vary from the amount stated under "Essential
Information" in the prospectus in accordance with fluctuations in the prices of
the
-41-
underlying securities and the amount of accrued interest on the units. Net
asset value per unit is determined by dividing the value of a trust's portfolio
securities (including any accrued interest), cash and other assets, less all
liabilities (including accrued expenses), by the total number of units
outstanding. The portfolio securities are valued at their current market value
or their fair value as determined in good faith by the Evaluator. The aggregate
bid and offering side evaluations of the securities shall be determined (a) on
the basis of current bid or offering prices of the securities, (b) if bid or
offering prices are not available for any particular security, on the basis of
current bid or offering prices for comparable securities, (c) by determining the
value of securities on the bid or offer side of the market by appraisal, or
(d) by any combination of the above.
The foregoing evaluations and computations shall be made as of the close of
regular trading on the New York Stock Exchange, on each business day commencing
with the trust's inception date of the securities, effective for all sales made
during the preceding 24-hour period.
The interest on the securities deposited in a trust, less the related
estimated fees and expenses, will accrue daily. The amount of net interest
income which accrues per unit may change as securities mature or are redeemed,
exchanged or sold, or as the expenses of a trust change or the number of
outstanding units of a trust changes.
Although payment is normally made three business days following the order
for purchase, payments may be made prior thereto. A person will become the
owner of units on the date of settlement provided payment has been received.
Cash, if any, made available to the sponsor prior to the date of settlement for
the purchase of units may be used in the sponsor's business and may be deemed to
be a benefit to the sponsor, subject to the limitations of the Securities
Exchange Act of 1934.
ACCRUED INTEREST. Accrued interest consists of two elements. The first
element arises as a result of accrued interest which is the accumulation of
unpaid interest on a security from the last day on which interest thereon was
paid. Interest on securities generally is paid monthly or semi-annually
although a trust accrues such interest daily. Because of this, a trust always
has an amount of interest earned but not yet collected by the trustee. For this
reason, with respect to sales settling subsequent to the first settlement date,
the public offering price of units of a trust will have added to it the
proportionate share of accrued interest to the date of settlement.
In an effort to reduce the amount of accrued interest which would otherwise
have to be paid in addition to the public offering price in the sale of units to
the public, the trustee will advance the amount of accrued interest as of the
first settlement date and the same will be distributed to the sponsor as the
unitholder of record as of the first settlement date. Consequently, the amount
of accrued interest to be added to the public offering price of units will
include only accrued interest arising after the first settlement date to the
date of settlement, less any distributions from the Interest Account subsequent
to the first settlement date.
The second element of accrued interest arises because of the structure of
the Interest Account. The trustee has no cash for distribution to unitholders
until it receives interest payments on the bonds in a trust. The trustee is
obligated to provide its own funds, at times, in order to advanced interest
distributions. The trustee will recover these advancements when such
-42-
interest is received. Interest Account balances are established to limit the
extent to which it may be necessary for the trustee to advance its own funds in
connection with such interest distributions. The Interest Account balances are
also structured so that there will generally be positive cash balances.
Because of the varying interest payment dates of securities, accrued
interest at any point in time will be greater than the amount of interest
actually received by the applicable trusts and distributed to unitholders.
Therefore, there will always remain an item of accrued interest that is added to
the value of the units. If a unitholder sells or redeems all or a portion of
his units, he will be entitled to receive his proportionate share of the accrued
interest from the purchaser of his units. Since the trustee has the use of the
funds held in the Interest Account for distributions to unitholders and since
such account is non-interest-bearing to unitholders, the trustee benefits
thereby.
COMPARISON OF PUBLIC OFFERING PRICE AND REDEMPTION PRICE. While the net
asset value of units during the initial offering period will generally be
determined on the basis of the current offering prices of the securities in a
trust, after the initial offering period the net asset value of units will
generally be determined on the basis of the current bid prices of the
securities. As of the close of business on the business day before the trust's
inception date, the public offering price per unit exceeded the redemption price
at which units could have been redeemed by the amount of the sales fee. The bid
prices for on securities similar to those in the trust are lower than the
offering prices thereof. For this reason, among others (including fluctuations
in the market prices of the securities and the fact that the public offering
price includes a sales fee), the amount realized by a unitholder upon any
redemption of units may be less than the price paid for such units.
PUBLIC DISTRIBUTION OF UNITS. The sponsor intends to qualify the units for
sale in a number of states. Units will be sold through dealers who are members
of the Financial Industry Regulatory Authority, Inc. and through others. Sales
may be made to or through dealers at prices which represent discounts from the
public offering price as set forth in the prospectus. Certain commercial banks
may be making units available to their customers on an agency basis. The
sponsor reserves the right to change the discounts from time to time.
We may provide, at our own expense and out of our own profits, additional
compensation and benefits to broker-dealers who sell shares of units of this
trust and our other products. This compensation is intended to result in
additional sales of our products and/or compensate broker-dealers and financial
advisors for past sales. We may make these payments for marketing, promotional
or related expenses, including, but not limited to, expenses of entertaining
retail customers and financial advisors, advertising, sponsorship of events or
seminars, obtaining shelf space in broker-dealer firms and similar activities
designed to promote the sale of the our products. These arrangements will not
change the price you pay for your units.
The sponsor reserves the right to reject, in whole or in part, any order
for the purchase of units.
-43-
PROFITS OF SPONSOR. The sponsor will receive gross sales fees equal to the
percentage of the offering price of the units of such trusts stated in the
prospectus and will pay a portion of such sales fees to dealers and agents. In
addition, the sponsor may realize a profit or a loss resulting from the
difference between the purchase prices of the securities to the sponsor and the
cost of such securities to a trust, which is based on the offering side
evaluation of the securities. The sponsor may also realize profits or losses
with respect to securities deposited in a trust which were acquired from
underwriting syndicates of which the sponsor was a member. An underwriter or
underwriting syndicate purchases securities from the issuer on a negotiated or
competitive bid basis, as principal, with the motive of marketing such
securities to investors at a profit. The sponsor may realize additional profits
or losses during the initial offering period on unsold units as a result of
changes in the daily evaluation of the securities in a trust.
MARKET FOR UNITS. After the initial offering period, while not obligated
to do so, the sponsor may, subject to change at any time, maintain a market for
units of the trust offered hereby and to continuously offer to purchase said
units at the net asset value, determined by the evaluator based on the aggregate
bid prices of the underlying securities in the trust, together with any accrued
interest to the expected dates of settlement, provided that the repurchase price
will not be reduced by any remaining creation and development fee or
organization costs during the initial offering period. While the sponsor may
repurchase units from time to time, it does not currently intend to maintain an
active secondary market for units. To the extent that a market is maintained
during the initial offering period, the prices at which units will be
repurchased will be based upon the aggregate offering side evaluation of the
securities in the trust. The aggregate bid prices of the underlying securities
in each trust are expected to be less than the related aggregate offering prices
(which is generally the evaluation method used during the initial public
offering period). Accordingly, unitholders who wish to dispose of their units
should inquire of their broker as to current market prices in order to determine
whether there is in existence any price in excess of the redemption price and,
if so, the amount thereof.
The offering price of any units resold by the sponsor will be in accord
with that described in the currently effective prospectus describing such units.
Any profit or loss resulting from the resale of such units will belong to the
sponsor. If the sponsor decides to maintain a secondary market, it may suspend
or discontinue purchases of units of the trust if the supply of units exceeds
demand, or for other business reasons.
REDEMPTION. A unitholder who does not dispose of units in the secondary
market described above may cause units to be redeemed by the trustee by making a
written request to the trustee at its unit investment trust division office.
Unitholders must sign the request exactly as their names appear on the records
of the trustee. If the amount of the redemption is $500 or less and the
proceeds are payable to the unitholder(s) of record at the address of record, no
signature guarantee is necessary for redemptions by individual account owners
(including joint owners). Additional documentation may be requested, and a
signature guarantee is always required, from corporations, executors,
administrators, trustees, guardians or associations. The signatures must be
guaranteed by a participant in the Securities Transfer Agents Medallion Program
("STAMP") or such other signature guaranty program in addition to, or in
substitution for, STAMP, as may be accepted by the trustee.
-44-
Redemption shall be made by the trustee no later than the seventh day
following the day on which a tender for redemption is received (the "Redemption
Date") by payment of cash equivalent to the redemption price, determined as set
forth below under "Computation of Redemption Price," as of the close of regular
trading on the New York Stock Exchange next following such tender, multiplied by
the number of units being redeemed. Any units redeemed shall be canceled and
any undivided fractional interest in the related trust extinguished. The price
received upon redemption might be more or less than the amount paid by the
unitholder depending on the value of the securities in the trust at the time of
redemption. Certain broker-dealers may charge a transaction fee for processing
redemption requests.
Under regulations issued by the Internal Revenue Service, the trustee is
required to withhold a specified percentage of the principal amount of a unit
redemption if the trustee has not been furnished the redeeming unitholder's tax
identification number in the manner required by such regulations. Any amount so
withheld is transmitted to the Internal Revenue Service and may be recovered by
the unitholder only when filing a tax return. Under normal circumstances the
trustee obtains the unitholder's tax identification number from the selling
broker. However, any time a unitholder elects to tender units for redemption,
such unitholder should make sure that the trustee has been provided a certified
tax identification number in order to avoid this possible "back-up withholding."
In the event the trustee has not been previously provided such number, one must
be provided at the time redemption is requested. Any amounts paid on redemption
representing interest shall be withdrawn from the Interest Account of a trust to
the extent that funds are available for such purpose. All other amounts paid on
redemption shall be withdrawn from the Principal Account for a trust.
The trustee is empowered to sell securities in order to make funds
available for the redemption of units. To the extent that securities are sold,
the size of a trust will be, and the diversity of a trust may be, reduced but
each remaining unit will continue to represent approximately the same
proportional interest in each security. Sales may be required at a time when
securities would not otherwise be sold and may result in lower prices than might
otherwise be realized. The price received upon redemption may be more or less
than the amount paid by the unitholder depending on the value of the securities
in the portfolio at the time of redemption.
The trustee is irrevocably authorized in its discretion, if the sponsor
does not elect to purchase any unit tendered for redemption, in lieu of
redeeming such units, to sell such units in the over-the-counter market for the
account of tendering unitholders at prices which will return to the unitholders
amounts in cash, net after brokerage commissions, transfer taxes and other
charges, equal to or in excess of the redemption price for such units. In the
event of any such sale, the trustee shall pay the net proceeds thereof to the
unitholders on the day they would otherwise be entitled to receive payment of
the redemption price.
The right of redemption may be suspended and payment postponed (1) for any
period during which the New York Stock Exchange is closed, other than customary
weekend and holiday closings, or during which (as determined by the Securities
and Exchange Commission) trading on the New York Stock Exchange is restricted;
(2) for any period during which an emergency exists as a result of which
disposal by the trustee of securities is not reasonably practicable or it is not
reasonably practicable to fairly determine the value of the underlying
-45-
securities in accordance with the trust agreement; or (3) for such other period
as the Securities and Exchange Commission may by order permit. The trustee is
not liable to any person in any way for any loss or damage which may result from
any such suspension or postponement.
COMPUTATION OF REDEMPTION PRICE. The redemption price for units (the net
asset value) of each trust is computed by the evaluator as of the evaluation
time stated in the prospectus next occurring after the tendering of a unit for
redemption and on any other business day desired by it, by:
A. adding: (1) the cash on hand in the trust other than cash deposited in the
trust to purchase securities not applied to the purchase of such
securities; (2) the aggregate value of each issue of the securities
(including "when issued" contracts, if any) held in the trust as determined
by the evaluator on the basis of bid prices therefor; and (3) interest
accrued and unpaid on the securities in the trust as of the date of
computation;
B. deducting therefrom (1) amounts representing any applicable taxes or
governmental charges payable out of the trust and for which no deductions
have been previously made for the purpose of additions to the Reserve
Account; (2) an amount representing estimated accrued expenses of the
trust, including but not limited to fees and expenses of the trustee
(including legal and auditing fees and any insurance costs), the evaluator,
the sponsor and bond counsel, if any; (3) cash held for distribution to
unitholders of record as of the business day prior to the evaluation being
made; and (4) other liabilities incurred by the trust, provided that the
redemption price will not be reduced by any creation and development fee or
organization costs during the initial offering period; and
C. finally dividing the results of such computation by the number of units of
the trust outstanding as of the date thereof.
RETIREMENT PLANS. A trust may be suited for purchase by Individual
Retirement Accounts, Keogh Plans, pension funds and other qualified retirement
plans. Generally, capital gains and income received under each of the foregoing
plans are deferred from Federal taxation. All distributions from such plans are
generally treated as ordinary income but may, in some cases, be eligible for
special income averaging or tax-deferred rollover treatment. Investors
considering participation in any such plan should review specific tax laws
related thereto and should consult their attorneys or tax advisers with respect
to the establishment and maintenance of any such plan. Such plans are offered
by brokerage firms and other financial institutions. The trust may lower the
minimum investment requirement for IRA accounts. Fees and charges with respect
to such plans may vary.
OWNERSHIP OF UNITS. Ownership of units will not be evidenced by
certificates. Units may be purchased in denominations of one unit or any
multiple thereof, subject to the minimum investment requirement. Fractions of
units, if any, will be computed to three decimal places.
-46-
TAXATION
The prospectus contains a discussion of certain U.S. federal income tax
issues concerning your trust and the purchase, ownership and disposition of
trust units. The discussion below supplements the prospectus discussion and is
qualified in its entirety by the prospectus discussion. Prospective investors
should consult their own tax advisors with regard to the federal tax
consequences of the purchase, ownership, or disposition of trust units, as well
as the tax consequences arising under the laws of any state, locality, non-U.S.
country, or other taxing jurisdiction.
The federal income tax summary below and in the prospectus is based in part
on the advice of counsel to your trust. The Internal Revenue Service could
disagree with any conclusions set forth in these discussions. In addition, our
counsel was not asked to review, and has not reached a conclusion with respect
to the federal income tax treatment of the assets to be held by your trust. This
may not be sufficient for prospective investors to use for the purpose of
avoiding penalties under federal tax law.
If so indicated in the prospectus, your trust intends (i) to elect and (ii)
to qualify annually as a regulated investment company under the Code and to
comply with applicable distribution requirements so that it will not pay federal
income tax on income and capital gains distributed to its unitholders.
To qualify for the favorable U.S. federal income tax treatment generally
accorded to regulated investment companies, your trust must, among other things,
(a) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock, securities or foreign currencies or other income
derived with respect to its business of investing in such stock, securities or
currencies, and net income from certain publicly traded partnerships; (b)
diversify its holdings so that, at the end of each quarter of the taxable year,
(i) at least 50% of the market value of the trust's assets is represented by
cash and cash items (including receivables), U.S. government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer generally limited for the purposes of
this calculation to an amount not greater than 5% of the value of the trust's
total assets and not greater than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities (other than U.S. government securities or the
securities of other regulated investment companies) of any one issuer, or two or
more issuers which the trust controls and are engaged in the same, similar or
related trades or businesses, or the securities of certain publicly traded
partnerships; and (c) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest and net short-
term capital gains in excess of net long-term capital losses but excludes net
capital gain, if any) and at least 90% of its net tax-exempt interest income
each taxable year.
As a regulated investment company, your trust generally will not be subject
to U.S. federal income tax on its investment company taxable income (as that
term is defined in the Code, but without regard to the deduction for dividends
paid) and net capital gain (the excess of net long-term capital gain over net
short term capital loss), if any, that it distributes to
-47-
unitholders. The trusts intend to distribute to its unitholders, at least
annually, substantially all of its investment company taxable income and net
capital gain. If your trust retains any net capital gain or investment company
taxable income, it will generally be subject to federal income tax at regular
corporate rates on the amount retained. In addition, amounts not distributed on
a timely basis in accordance with a calendar year distribution requirement are
subject to a nondeductible 4% excise tax unless, generally, your trust
distributes during each calendar year an amount equal to the sum of (1) at least
98% of its ordinary income (not taking into account any capital gains or losses)
for the calendar year, (2) at least 98% of its capital gains in excess of its
capital losses (adjusted for certain ordinary losses) for the one-year period
ending October 31 of the calendar year, and (3) any ordinary income and capital
gains for previous years that were not distributed during those years. To
prevent application of the excise tax, your trust intends to make its
distributions in accordance with the calendar year distribution requirement.
Further, if your trust retains any net capital gain, the trust may designate the
retained amount as undistributed capital gains in a notice to unitholders who,
if subject to federal income tax on long-term capital gains (i) will be required
to include in income for federal income tax purposes, as long-term capital gain,
their share of such undistributed amount, and (ii) will be entitled to credit
their proportionate share of the tax paid by the trust against their federal
income tax liabilities if any, and to claim refunds to the extent the credit
exceeds such liabilities. A distribution will be treated as paid on December 31
of the current calendar year if it is declared by your trust in October,
November or December with a record date in such a month and paid by your trust
during January of the following calendar year. These distributions will be
taxable to unitholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
If your trust failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the trust would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its unitholders) and all distributions out of earnings and
profits would be taxed to unitholders as ordinary dividend income.
PERFORMANCE INFORMATION
INTEREST, ESTIMATED LONG-TERM RETURN AND ESTIMATED CURRENT RETURN. As of
the close of business on the business day before the trust's inception date, the
estimated long-term return and the estimated current return, if applicable, for
each trust were as set forth in the "Essential Information" for each trust in
the prospectus. Estimated current return is calculated by dividing the current
estimated net annual interest income per unit based on the interest rates
currently applicable to the bonds by the public offering price. The estimated
net annual interest income per unit will vary with changes in the interest rates
applicable to the bonds (some of which may be subject to adjustments related to
changes in the bonds' ratings as provided by certain ratings services) fees and
expenses of the trustee, the sponsor and the evaluator and with the principal
prepayment, redemption, maturity, exchange or sale of the securities while the
public offering price will vary with changes in the offering price of the
underlying securities and accrued interest; therefore, there is no assurance
that the present estimated current return will be realized in the future.
Estimated long-term return is calculated using a formula which (1) takes into
consideration, and determines and factors in the relative weightings of, the
market values, yields
-48-
(which takes into account the amortization of premiums and the accretion of
discounts) and estimated retirements or average life of all of the securities in
a trust and (2) takes into account the expenses and sales fee associated with
each trust unit. Since the interest rates, market values and estimated
retirements of the securities and the expenses of a trust may change, there is
no assurance that the present estimated long-term return will be realized in the
future. Estimated current return and estimated long-term return are expected to
differ because the calculation of estimated long-term return reflects the
estimated date and amount of principal returned while estimated current return
calculations include only net annual interest income and public offering price.
GENERAL. Information contained in this Information Supplement or in the
prospectus, as it currently exists or as further updated, may also be included
from time to time in other prospectuses or in advertising material. Information
on the performance of a trust strategy or the actual performance of a trust may
be included from time to time in other prospectuses or advertising material and
may reflect sales fees and expenses of a trust. The performance of a trust may
also be compared to the performance of money managers as reported in SEI Fund
Evaluation Survey or of mutual funds as reported by Lipper Analytical Services
Inc. (which calculates total return using actual dividends on ex-dates
accumulated for the quarter and reinvested at quarter end), Money Magazine Fund
Watch (which rates fund performance over a specified time period after sales fee
and assuming all dividends reinvested) or Wiesenberger Investment Companies
Service (which states fund performance annually on a total return basis) or of
the New York Stock Exchange Composite Index, the American Stock Exchange Index
(unmanaged indices of stocks traded on the New York and American Stock
Exchanges, respectively), the Dow Jones Industrial Average (an index of 30
widely traded industrial common stocks) or the Standard & Poor's 500 Index (an
unmanaged diversified index of 500 stocks) or similar measurement standards
during the same period of time.
DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES. A Standard &
Poor's issue credit rating is a current opinion of the creditworthiness of an
obligor with respect to a specific financial obligation, a specific class of
financial obligations, or a specific financial program (including ratings on
medium-term note programs and commercial paper programs). It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation and takes into account the currency in
which the obligation is denominated. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.
-49-
Issue credit ratings can be either long term or short term. Short-term
ratings are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days, including commercial paper. Short-
term ratings are also used to indicate the creditworthiness of an obligor with
respect to put features on long-term obligations. The result is a dual rating,
in which the short-term rating addresses the put feature, in addition to the
usual long-term rating. Medium-term notes are assigned long-term ratings.
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
* Likelihood of payment capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation;
* Nature of and provisions of the obligation;
* Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.
AAA--An obligation rated 'AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA--An obligation rated 'AA' differs from the highest-rated obligations only to
a small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A--An obligation rated 'A' is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher-
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB--An obligation rated 'BBB' exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC, and C
Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest.
-50-
While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
BB--An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B--An obligation rated 'B' is more vulnerable to nonpayment than obligations
rated 'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC--An obligation rated 'CCC' is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC--An obligation rated 'CC' is currently highly vulnerable to nonpayment.
C--A subordinated debt or preferred stock obligation rated 'C' is currently
highly vulnerable to nonpayment. The 'C' rating may be used to cover a situation
where a bankruptcy petition has been filed or similar action taken, but payments
on this obligation are being continued. A 'C' also will be assigned to a
preferred stock issue in arrears on dividends or sinking fund payments, but that
is currently paying.
D--An obligation rated 'D' is in payment default. The 'D' rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or minus (-)--The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within the
major rating categories.
N.R.--This 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 obligation as a matter of policy.
Active Qualifiers (Currently applied and/or outstanding)
i--This subscript is used for issues in which the credit factors, terms, or
both, that determine the likelihood of receipt of payment of interest are
different from the credit factors, terms or both that determine the likelihood
of receipt of principal on the obligation. The 'i' subscript indicates that the
rating addresses the interest portion of the obligation only. The 'i' subscript
will always be
-51-
used in conjunction with the 'p' subscript, which addresses likelihood of
receipt of principal. For example, a rated obligation could be assigned ratings
of "AAAp N.R.i" indicating that the principal portion is rated "AAA" and the
interest portion of the obligation is not rated.
L--Ratings qualified with 'L' apply only to amounts invested up to federal
deposit insurance limits.
p--This subscript is used for issues in which the credit factors, the terms, or
both, that determine the likelihood of receipt of payment of principal are
different from the credit factors, terms or both that determine the likelihood
of receipt of interest on the obligation. The 'p' subscript indicates that the
rating addresses the principal portion of the obligation only. The 'p' subscript
will always be used in conjunction with the 'i' subscript, which addresses
likelihood of receipt of interest. For example, a rated obligation could be
assigned ratings of "AAAp N.R.i" indicating that the principal portion is rated
"AAA" and the interest portion of the obligation is not rated.
pi--Ratings with a 'pi' subscript are based on an analysis of an issuer's
published financial information, as well as additional information in the public
domain. They do not, however, reflect in-depth meetings with an issuer's
management and are therefore based on less comprehensive information than
ratings without a 'pi' subscript. Ratings with a 'pi' subscript are reviewed
annually based on a new year's financial statements, but may be reviewed on an
interim basis if a major event occurs that may affect the issuer's credit
quality.
pr--The letters 'pr' indicate that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful, 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. The investor should exercise his own judgment
with respect to such likelihood and risk.
t--This symbol indicates termination structures that are designed to honor their
contracts to full maturity or, should certain events occur, to terminate and
cash settle all their contracts before their final maturity date.
MOODY'S INVESTORS SERVICE, INC. Long-Term Obligation Ratings
Moody's long-term obligation ratings are opinions of the relative credit
risk of fixed-income obligations with an original maturity of one year or more.
They address the possibility that a financial obligation will not be honored as
promised. Such ratings reflect both the likelihood of default and any financial
loss suffered in the event of default.
Long-Term Rating Definitions:
Aaa--Obligations rated Aaa are judged to be of the highest quality, with minimal
credit risk.
Aa--Obligations rated Aa are judged to be of high quality and are subject to
very low credit risk.
-52-
A--Obligations rated A are considered upper-medium grade and are subject to low
credit risk.
Baa--Obligations rated Baa are subject to moderate credit risk. They are
considered medium-grade and as such may possess certain speculative
characteristics.
Ba--Obligations rated Ba are judged to have speculative elements and are subject
to substantial credit risk.
B--Obligations rated B are considered speculative and are subject to high credit
risk.
Caa--Obligations rated Caa are judged to be of poor standing and are subject to
very high credit risk.
Ca--Obligations rated Ca are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and interest.
C--Obligations rated C are the lowest rated class of bonds and are typically in
default, with little prospect for recovery of principal or interest.
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
FITCH RATINGS LTD., International Long-Term Credit Ratings
A Fitch International Long-Term Credit Ratings ("LTCR") may also be
referred to as long-term ratings. When assigned to most issuers, it is used as a
benchmark measure of probability of default and is formally described as an
issuer default rating ("IDR"). The major exception is within public finance,
where IDRs will not be assigned as market convention has always focused on
timeliness and does not draw analytical distinctions between issuers and their
underlying obligations. When applied to issues or securities, the LTCR may be
higher or lower than the IDR to reflect relative differences in recovery
expectations. The following rating scale applies to foreign currency and local
currency ratings:
Investment Grade Ratings
AAA--Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA--Very high credit quality. "AA" ratings denote expectations of very low
credit risk. They indicate very strong capacity for payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
-53-
A--High credit quality. "A" ratings denote expectations of low credit risk. The
capacity for payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB--Good credit quality. "BBB" ratings indicate that there are currently
expectations of low credit risk. The capacity for payment of financial
commitments is considered adequate but adverse changes in circumstances and
economic conditions are more likely to impair this capacity. This is the lowest
investment grade category.
Speculative Grade
BB--Speculative. "BB" ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B--Highly speculative. For issuers and performing obligations, "B" ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment. For individual obligations, may indicate distressed or
defaulted obligations with potential for extremely high recoveries. Such
obligations would possess a Recovery Rating of "RR1" (outstanding).
CCC--For issuers and performing obligations, default is a real possibility.
Capacity for meeting financial commitments is solely reliant upon sustained,
favorable business or economic conditions. For individual obligations, may
indicate distressed or defaulted obligations with potential for average to
superior levels of recovery. Differences in credit quality may be denoted by
plus/minus distinctions. Such obligations typically would possess a Recovery
Rating of "RR2" (superior), "RR3" (good) or "RR4" (average).
CC--For issuers and performing obligations, default of some kind appears
probable. For individual obligations, may indicate distressed or defaulted
obligations with a Recovery Rating of "RR4" (average) or "RR5" (below average).
C--For issuers and performing obligations, default is imminent. For individual
obligations, may indicate distressed or defaulted obligations with potential for
below-average to poor recoveries. Such obligations would possess a Recovery
Rating of "RR6" (poor).
RD--Indicates an entity that has failed to make due payments (within the
applicable grace period) on some but not all material financial obligations, but
continues to honor other classes of obligations. .
D--Indicates an entity or sovereign that has defaulted on all of its financial
obligations. Default generally is defined as one of the following: a) failure
of an obligor to make timely payment of principal and/or interest under the
contractual terms of any financial obligation; b) the
-54-
bankruptcy filings, administration, receivership, liquidation or other winding-
up or cessation of business of an obligor; or c) the distressed or other
coercive exchange of an obligation, where creditors were offered securities with
diminished structural or economic terms compared with the existing obligation.
Default ratings are not assigned prospectively; within this context, non-payment
on an instrument that contains a deferral feature or grace period will not be
considered a default until after the expiration of the deferral or grace period.
Issuers will be rated "D" upon a default. Defaulted and distressed
obligations typically are rated along the continuum of "C" to "B" ratings
categories, depending upon their recovery prospects and other relevant
characteristics. Additionally, in structured finance transactions, where
analysis indicates that an instrument is irrevocably impaired such that it is
not expected to meet pay interest and/or principal in full in accordance with
the terms of the obligation's documentation during the life of the transaction,
but where no payment default in accordance with the terms of the documentation
is imminent, the obligation may be rated in the "B" or "CCC-C" categories.
Default is determined by reference to the terms of the obligations'
documentation. Fitch will assign default ratings where it has reasonably
determined that payment has not been made on a material obligation in accordance
with the requirements of the obligation's documentation, or where it believes
that default ratings consistent with Fitch's published definition of default are
the most appropriate ratings to assign.
Note: The modifiers "+" or "-" may be appended to a rating to denote
relative status within major rating categories. Such suffixes are not added to
the "AAA" Long-term rating category, to categories below "CCC", or to Short-term
ratings other than "F1". (The +/- modifiers are only used to denote issues
within the CCC category, whereas issuers are only rated CCC without the use of
modifiers.)
-55-
CONTENTS OF REGISTRATION STATEMENT
This amendment to the Registration Statement comprises the following papers
and documents:
The facing sheet
The prospectus
The signatures
The consents of the initial evaluator, independent public accountants and
legal counsel
The following exhibits:
1.1 Trust Agreement (to be filed by amendment).
1.1.1 Standard Terms and Conditions of Trust (to be filed by amendment).
1.2 Certificate of Amendment of Certificate of Incorporation and Certificate
of Merger of Advisors Asset Management, Inc. Reference is made to
Exhibit 1.2 to the Registration Statement on Form S-6 for Advisors
Disciplined Trust 647 (File No. 333-171079) as filed on January 6, 2011.
1.3 Bylaws of Advisors Asset Management, Inc. Reference is made to
Exhibit 1.3 to the Registration Statement on Form S-6 for Advisors
Disciplined Trust 647 (File No. 333-171079) as filed on January 6, 2011.
1.5 Form of Dealer Agreement. Reference is made to Exhibit 1.5 to the
Registration Statement of Form S-6 for Advisors Disciplined Trust 262
(File No. 333-150575) as filed of June 17, 2008.
2.2 Form of Code of Ethics. Reference is made to Exhibit 2.2 to the
Registration Statement on Form S-6 for Advisor's Disciplined Trust 73
(File No. 333-131959) as filed on March 16, 2006.
3.1 Opinion of counsel as to legality of securities being registered (to be
filed by amendment).
3.3 Opinion of counsel as to the Trustee and the Trust. (to be filed by
amendment).
4.1 Consent of evaluator (to be filed by amendment).
4.2 Consent of independent auditors (to be filed by amendment).
6.1 Directors and Officers of Advisors Asset Management, Inc. Reference is
made to Exhibit 6.1 to the Registration Statement on Form S-6 for
Advisors Disciplined Trust 1112 (File No. 333-190165) as filed on
December 11, 2013.
7.1 Power of Attorney. Reference is made to Exhibit 7.1 to the Registration
Statement on Form S-6 for Advisors Disciplined Trust 933
(File No. 333-186716) as filed on May 3, 2013.
S-1
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Advisors Disciplined Trust 1169 has duly caused this Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Wichita and State of Kansas on the 14th day of
January, 2014.
ADVISORS DISCIPLINED TRUST 1169
By ADVISORS ASSET MANAGEMENT, INC., DEPOSITOR
By /s/ ALEX R MEITZNER
-----------------------------
Alex R. Meitzner
Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on January 14, 2014 by the
following persons in the capacities indicated:
SIGNATURE TITLE
Scott I. Colyer Director of Advisors Asset )
Management, Inc. )
Lisa A. Colyer Director of Advisors Asset )
Management, Inc. )
James R. Costas Director of Advisors Asset )
Management, Inc. )
Christopher T. Genovese Director of Advisors Asset )
Management, Inc. )
Randy J. Pegg Director of Advisors Asset )
Management, Inc. )
R. Scott Roberg Director of Advisors Asset )
Management, Inc. )
S-2
Jack Simkin Director of Advisors Asset )
Management, Inc. )
Andrew Williams Director of Advisors Asset )
Management, Inc. )
By /s/ ALEX R MEITZNER
-----------------------------
Alex R. Meitzner
Attorney-in-Fact*
-------------------------------------------------------------------------------
*An executed copy of each of the related powers of attorney is filed
herewith or incorporated herein by reference as Exhibit 7.1.
S-3