1933 ACT FILE NO.: 333-219539
1940 ACT FILE NO.: 811-21056
CIK NO.: 1710516
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
A. Exact name of trust: ADVISORS DISCIPLINED TRUST 1828
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
E. Title of securities being registered: Units of undivided beneficial
interest
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 ____________, 2017 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 trusts 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 SEPTEMBER 29, 2017
SUBJECT TO COMPLETION
DIVIDEND RULER COVERED CALL PORTFOLIO - 15 MONTH, SERIES 2017-4Q
(ADVISORS DISCIPLINED TRUST 1828)
A portfolio pursuing a covered
call option writing strategy
consisting of common stocks
of foreign and domestic companies
selected by applying a specialized
dividend-oriented criteria and
U.S. Treasury obligations. The stocks
are subject to call options.
PROSPECTUS
__________, ____
[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.
-------------------------------------------------------------------------------
[LOGO]
UBS
------------------
INVESTMENT SUMMARY
------------------
INVESTMENT OBJECTIVE
The trust seeks to provide income and limited capital appreciation. There is
no assurance the trust will achieve its objective.
PRINCIPAL INVESTMENT STRATEGY
The trust seeks to achieve its objective by investing in a portfolio
primarily consisting of certain common stock of foreign and domestic companies
identified by UBS Financial Services Inc. ("UBS") meeting its criteria for
"dividend ruler" stocks (the "Stocks") and U.S. Treasury obligations (the
"Treasury Obligations"). Each Stock is subject to a contractual right, in the
form of Long Term Equity AnticiPation Securities ("LEAPS(R)") which give the
holder of the LEAPS(R) the right to buy the corresponding Stock at a
predetermined price from the trust on any business day prior to the expiration
of the LEAPS(R). The writing of the LEAPS(R) generates premium income which is
used to purchase the Treasury Obligations. The Stocks selected for the trust do
not represent all of the UBS "dividend ruler" stocks. The trust only invests in
"dividend ruler" stocks with sufficiently liquid corresponding LEAPS(R) with
expiration dates of __________, ____.
UBS created its "dividend ruler" criteria in order to identify companies that
have had a history of consistently increasing dividends along with earnings.
Although past performance is no guarantee of future results, the Sponsor
believes that stocks issued by companies which meet the criteria set forth below
should benefit from recent increases in dividend pay out ratios and dividend per
share growth rates.
The UBS "dividend ruler" criteria selects domestic stocks and foreign stocks
held in the form of American Depositary Receipts ("ADRs")(excluding real estate
investment trusts) which, at the time of selection:
* Had a dividend yield greater than the yield of the Standard & Poor's 500
Index;
* For domestic stocks, were included on the Sector Outperform List by UBS
CIO Wealth Management Research ("CIO WMR");
* For ADRs, were rated "Buy" by UBS Investment Research;
* Had a 10-year compound average growth rate of dividends per share greater
than 4%;
* For any U.S.-based companies, the "R-Squared" (a measure of consistency)
of the last 40 quarters' dividends per share, relative to linear trend
line, was greater than 80%; and
* For any non-U.S.-based companies, the "R-Squared" of the last 10 years'
dividends per share in local currency, relative to linear trend line, was
greater than 85%.
For additional details regarding the UBS "dividend ruler" selection criteria,
see "Understanding Your Investment--UBS Dividend Rulers."
Each LEAPS(R) is issued by The Options Clearing Corporation ("OCC") in the
form of an American style option, which means that it will be exercisable at the
strike price on any business day prior to its expiration date. The expiration
date for each of the LEAPS(R) included in the trust is __________, ____. As
of the close of business on the business day preceding the inception date of the
trust, the strike price of the LEAPS(R) in the trust is equal to approximately
____% of the closing market price on that date of the Stocks deposited in the
trust. Because the Stocks are subject to LEAPS(R), the trust gives up any
appreciation in price of the Stocks above the strike price. See "Understanding
Your Investment--The Covered Call Strategy" for more information about how this
investment strategy operates.
UBS is a corporation organized under the laws of the State of Delaware and is
a member firm of the New York Stock Exchange, Inc. as well as other major
securities and commodities exchanges and is a member of the Financial Industry
Regulatory Authority, Inc. ("FINRA").
2 Investment Summary
Please note that the criteria was applied to select the portfolio at a
particular time. If we<F1>* create additional units of the trust after the
trust's inception date, the trust will purchase the securities originally
selected by applying the criteria. This is true even if a later application of
the criteria would have resulted in the selection of different securities. In
addition, companies which, based on publicly available information as of two
business days prior to the date of this prospectus, are the target of an
announced business acquisition which are expected to happen within six months of
the date of this prospectus have been excluded from the universe of securities
from which the trust's securities are selected.
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:
* SECURITY PRICES WILL FLUCTUATE. The value of your investment may fall over
time.
* THE ISSUER OF A SECURITY MAY BE UNWILLING OR UNABLE TO MAKE DIVIDEND PAYMENTS
IN THE FUTURE. This may reduce the level of dividends the trust receives
which would reduce your income and cause the value of your units to fall.
* 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.
* THE VALUE OF THE LEAPS(R) REDUCES THE VALUE OF YOUR UNITS. As the value of
the LEAPS(R) increases, it has a negative impact on the value of your units.
The value of a LEAPS(R) does not increase or decrease at the same rate as the
underlying Stock.
* AS THE WRITER (SELLER) OF LEAPS(R), THE TRUST FORGOES THE OPPORTUNITY TO
PROFIT FROM INCREASES IN THE MARKET VALUE OF THE STOCKS ABOVE THE SUM OF THE
PREMIUM AND THE STRIKE PRICE OF THE LEAPS(R), BUT RETAINS THE RISK OF LOSS
SHOULD THE PRICE OF THE STOCKS DECLINE.
* THE LEAPS(R) MAY BE EXERCISED ON ANY BUSINESS DAY PRIOR TO EXPIRATION
RESULTING IN THE STOCKS BEING SOLD TO THE OPTION HOLDERS OF THE LEAPS(R)
PRIOR TO THE TERMINATION OF THE TRUST WHICH COULD TRIGGER ADVERSE TAX
CONSEQUENCES.
* THE VALUE OF THE TREASURY OBLIGATIONS WILL GENERALLY FALL IF INTEREST RATES,
IN GENERAL, RISE. No one can predict whether interest rates will rise or
fall in the future.
* THE TRUST IS CONCENTRATED IN SECURITIES ISSUED BY CONSUMER PRODUCTS AND
SERVICES COMPANIES. Negative developments in this sector will affect the
value of your investment more than would be the case in a more diversified
investment.
* SECURITIES OF FOREIGN COMPANIES HELD BY THE TRUST PRESENT RISKS BEYOND THOSE
OF U.S. ISSUERS. These risks may include market and political factors
related to the company's foreign market, international trade conditions,
less regulation, smaller or less liquid markets, increased volatility,
differing accounting practices and changes in the value of foreign
currencies.
* WE DO NOT ACTIVELY MANAGE THE PORTFOLIO. Except in limited circumstances,
the trust will generally hold, and continue to buy, the same Stocks and
Treasury Obligations even if their market value declines and will generally
hold, and continue to write, the same call options, even if the market value
of the Stocks increases.
--------------------
<F1>* "AAM," "we" and related terms mean Advisors Asset Management, Inc., the
trust sponsor, unless the context clearly suggests otherwise.
Investment Summary 3
WHO SHOULD INVEST
You should consider this investment if you:
* want to own a defined portfolio of stocks selected by UBS using dividend-
oriented criteria subject to LEAPS(R) along with Treasury Obligations.
* want the potential to receive income and limited capital appreciation.
* are comfortable with a covered call option investment strategy.
You should not consider this investment if you:
* are uncomfortable with the risks of an unmanaged investment in common
stocks subject to LEAPS(R) along with Treasury Obligations.
* seek capital preservation or the potential for unlimited
capital appreciation.
* are uncomfortable with a covered call option investment strategy.
------------------------------------------------------------
ESSENTIAL INFORMATION
---------------------
UNIT PRICE AT INCEPTION $10.0000
INCEPTION DATE __________, ____
TERMINATION DATE __________, ____
LEAPS(R) expiration date __________, ____
DISTRIBUTION DATES 25th day of March, June,
September and December
RECORD DATES 10th day of March, June,
September and December
INITIAL DISTRIBUTION DATE __________, ____
INITIAL RECORD DATE __________, ____
CUSIP NUMBERS
Standard Accounts _________
Fee Based Accounts _________
TICKER SYMBOL ______
MINIMUM INVESTMENT $1,000/100 units
TAX STRUCTURE Regulated Investment Company
------------------------------------------------------------
FEES AND EXPENSES
The amounts below are estimates of the direct and indirect expenses that you
may incur based on a $10 unit price. Actual expenses may vary.
AS A % AMOUNT
OF $1,000 PER 100
SALES FEE INVESTED UNITS
------------------------
Initial sales fee 0.00% $0.00
Deferred sales fee 1.35 13.50
Creation & development fee 0.50 5.00
------- -------
Maximum sales fee 1.85% $18.50
======= =======
ORGANIZATION COSTS _.__% $____
======= =======
AS A % AMOUNT
ANNUAL OF NET PER 100
OPERATING EXPENSES ASSETS UNITS
------------------------
Trustee fee & expenses _.__% $____
Supervisory, evaluation
and administration fees _.__ ____
------- -------
Total _.__% $____
======= =======
The initial sales fee is the difference between the total sales fee (maximum
of 1.85% of the unit offering price) and the sum of the remaining deferred sales
fee and the total creation and development fee. The deferred sales fee is fixed
at $0.135 per unit and will be paid on __________, ____. The creation and
development fee is fixed at $0.05 per unit and is paid at the end of the
initial offering period (anticipated to be approximately ____ months). When the
public offering price per unit is less than or equal to $10, you will not pay an
initial sales fee. When the public offering price per unit is greater than $10
per unit, you will pay an initial sales fee.
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 $____
15 months (approximate life of trust) $____
These amounts are the same regardless of whether you sell your investment at
the end of a period or continue to hold your investment.
4 Investment Summary
DIVIDEND RULER COVERED CALL PORTFOLIO - 15 MONTH, SERIES 2017-4Q
(ADVISORS DISCIPLINED TRUST 1828)
PORTFOLIO
AS OF THE TRUST INCEPTION DATE, __________, ____
PERCENTAGE OF MARKET COST OF
NUMBER TICKER AGGREGATE OFFERING VALUE PER SECURITIES
OF SHARES SYMBOL ISSUER(1) PRICE SHARE(2) TO TRUST(2)
----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS -- ____%
Continued
Investment Summary 5
DIVIDEND RULER COVERED CALL PORTFOLIO - 15 MONTH, SERIES 2017-4Q
(ADVISORS DISCIPLINED TRUST 1828)
PORTFOLIO (CONTINUED)
AS OF THE TRUST INCEPTION DATE, __________, ____
PERCENTAGE OF MARKET COST OF
NUMBER TICKER AGGREGATE OFFERING VALUE PER SECURITIES
OF SHARES SYMBOL ISSUER(1) PRICE SHARE(2) TO TRUST(2)
----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
--------- ----------
TOTAL COMMON STOCKS ___.__% $_______
--------- ----------
PERCENTAGE OF COST OF
NAME OF ISSUER AND TITLE OF AGGREGATE OFFERING PAR SECURITIES
TREASURY OBLIGATION(1) PRICE VALUE TO TRUST(2)
----------------------------------------------------------------------------------------------------------------------------------
TREASURY OBLIGATIONS -- ____%
--------- ----------
TOTAL TREASURY OBLIGATIONS _.__% $______
--------- ----------
Continued
6 Investment Summary
DIVIDEND RULER COVERED CALL PORTFOLIO - 15 MONTH, SERIES 2017-4Q
(ADVISORS DISCIPLINED TRUST 1828)
PORTFOLIO (CONTINUED)
AS OF THE TRUST INCEPTION DATE, __________, ____
PERCENTAGE OF NUMBER MARKET MARKET
DESCRIPTION OF AGGREGATE OFFERING OF VALUE PER VALUE TO
CALL OPTIONS(1) PRICE CONTRACTS(3) CONTRACT(2) TRUST(2)
----------------------------------------------------------------------------------------------------------------------------------
LONG TERM EQUITY ANTICIPATION SECURITIES ("LEAPS(R)") -- (____)% (3)
--------- ----------
TOTAL LEAPS(R) (_.__)% $(______)
--------- ----------
--------- ----------
TOTAL 100.00% $_______
========= ==========
<FN>
See "Notes to Portfolio"
</FN>
Investment Summary 7
Notes to Portfolio
(1) Securities are represented by contracts to purchase securities.
(2) The value of common stocks is based on the most recent closing sale price
of each security as of the close of regular trading on the New York Stock
Exchange on the business day prior to the trust's inception date. The
value of U.S. Treasury obligations 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. The value of LEAPS(R) is based on
the most recent closing sale price (or current ask price if there is no
closing sale price) as of the close of the New York Stock Exchange on the
business day prior to the trust's inception date. The aggregate offering
or ask price is greater than the aggregate bid price of securities, which
is the basis on which redemption prices will be determined for purposes of
redemption of units after the initial offering period.
Accounting Standards Codification 820, "Fair Value Measurements"
establishes a framework for measuring fair value and expands disclosure
about fair value measurements in financial statements for the trust. The
framework under the standard is comprised of a fair value hierarchy, which
requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or
liabilities in active markets that the trust has the ability to access
as of the measurement date.
Level 2: Significant observable inputs other than Level 1 prices,
such as quoted prices for similar assets or liabilities, quoted prices
in markets that are not active, and other inputs that are observable
or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a trust's own
assumptions about the assumptions that market participants would use
in pricing an asset or liability.
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risk associated with investing those securities.
Changes in valuation techniques may result in transfers in or out of an
investment's assigned level as described above.
The following table summarizes the trust's investments as of the trust's
inception, based on inputs used to value them:
LEVEL 1 LEVEL 2 LEVEL 3
------------------------------------------------------------------------
Common Stocks $ $ $
Treasury Obligations
LEAPS(R)
------------------------------------------------------------------------
Total $ $ $
========================================================================
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.
(3) The LEAPS(R) can be exercised on any business day prior to their
expiration on __________, ____. Each contract entitles the holder
thereof to purchase 100 shares of the Stock at the strike price.
(4) This is a security issued by a foreign company that trades on a U.S.
securities exchange or an option related to such a security.
Common Stocks comprise approximately ____% of the investments in the
trust, broken down by country of organization as set forth below:
(5) A Treasury Obligation marked with this note was issued at an original
issue discount.
(6) This is a non-income producing security.
8 Investment Summary
-----------------------------
UNDERSTANDING YOUR INVESTMENT
-----------------------------
UBS DIVIDEND RULERS
UBS created its "dividend ruler" criteria in order to identify companies that
have had a history of consistently increasing dividends along with earnings.
The trust's portfolio is restricted to domestic stocks and ADRs meeting the
criteria described in detail under "Investment Summary--Principal Investment
Strategy". The Stocks selected for the trust do not represent all of the UBS
"dividend ruler" stocks. The trust only invests in "dividend ruler" stocks
with sufficiently liquid corresponding LEAPS(R) with expiration dates of
__________, ____.
To be included in the trust's portfolio, domestic stocks must be included on
CIO WMR's Sector Outperform List at the time of selection. To determine whether
a security is included on the Sector Outperform List, CIO WMR analysts provide a
relative rating of such security using the Industry Sector Relative Stock View
System, which is based on a stock's total return potential against the total
estimated return of the appropriate sector benchmark over the next 12 months.
The classifications for the Industry Sector Relative Stock View System are as
follows:
* Outperform. Expected to outperform the sector benchmark over the next 12
months.
* Marketperform. Expected to perform in line with the sector benchmark over
the next 12 months.
* Underperform. Expected to underperform the sector benchmark over the next
12 months.
* Under Review. Upon special events that require further analysis, the
stock rating may be flagged as "Under review" by the CIO WMR analyst.
* Restricted. Issuing of research on a company by CIO WMR can be restricted
due to legal, regulatory, contractual or best business practice obligations
which are normally caused by UBS Investment Bank's involvement in an
investment banking transaction in regard to the concerned company.
* Suspend. An outperform or underperform rating may be suspended when the
stock's performance materially diverges from the performance of its
respective benchmark.
Sector bellwethers, or stocks that are of high importance or relevance to the
sector, that are not placed on either the Sector Outperform List or the Sector
Underperform List (i.e., are not expected to either outperform or underperform
the sector benchmark) will be classified as Marketperform. Additionally, when
stocks that are not deemed to be of high importance or relevance to the sector
are not expected to outperform or underperform the sector benchmark, they will
simply be removed from the lists and will not be assigned a CIO WMR rating.
To be included in the trust's portfolio, ADRs must be rated "Buy" by UBS
Investment Research using their Stock Recommendation System at the time of
selection. The classifications for the UBS Investment Research Stock
Recommendation System are generally as follows:
* Buy. Forecast Stock Return is more than 6% above the Market Return
Assumption.
* Neutral. Forecast Stock Return is within 6% above or below the Market
Return Assumption.
Understanding Your Investment 9
* Sell. Forecast Stock Return is more than 6% below the Market Return
Assumption.
* Under Review. Stocks may be flagged as Under Review by the analyst,
indicating that the stock's price target and/or rating are subject to
possible change in the near term, usually in response to an event that may
affect the investment case or valuation.
* Core Banding Exception. Exceptions to the standard 6% bands may be
granted by the UBS Investment Research Investment Review Committee (the
"IRC"). Factors considered by the IRC include the stock's volatility and
the credit spread of the respective company's debt. As a result, stocks
deemed to be very high or low risk may be subject to higher or lower bands
as they relate to the rating.
For purposes of the classifications described above, "Forecast Stock Return"
is defined as expected percentage price appreciation plus gross dividend yield
over the next 12 months. "Market Return Assumption" is defined as the one-year
local market interest rate plus 5% (a proxy for, and not a forecast of, the
equity risk premiums).
THE COVERED CALL STRATEGY
The strategy followed by the trust is a covered call option writing strategy.
A writer (seller) of a covered call sells call options against a security
currently held by the writer. The writer of a call option receives a cash
premium for selling the call option but is obligated to sell the security at the
strike price, if the option is exercised. The payor of the option premium, the
option holder, has the right, but not the obligation, to purchase the security
at the strike price on any business day prior to the LEAPS(R) expiration date.
The option writer gives up any increase in the covered security above the strike
price. This strategy may be appropriate for an investor who is willing to limit
the upside potential on the security in return for receiving the option premium.
Future series of the trust may have different maturity lengths due to expiration
dates of the LEAPS(R) included therein.
On or before the trust's inception date, the sponsor entered into contracts
to buy the Stocks. The sponsor then wrote LEAPS(R) on each of the Stocks and
received an option premium. Using the option premium proceeds, the sponsor
entered into contracts to buy the Treasury Obligations. On the trust's
inception date, the sponsor deposited the Stocks subject to the LEAPS(R) and the
Treasury Obligations with the trustee on behalf of the trust. At such time the
sponsor also assigned the LEAPS(R) to the trust, giving the option holders the
right to purchase Stocks from the trust.
Each LEAPS(R) gives the option holder the right (but not the obligation) to
purchase the Stocks from the trust at the strike price on any business day prior
to the LEAPS(R) expiration. The strike price for a Stock held by the trust will
be adjusted downward (but not below zero) upon certain extraordinary
distributions made by the issuers of the Stocks to unitholders before the
LEAPS(R) expiration triggered by certain corporate events affecting such Stock.
See "Understanding Your Investment--Investment Risks--LEAPS(R)". In calculating
the net asset value of a trust unit, the price of a unit is reduced by the value
of the LEAPS(R).
As of the close of business on the business day preceding the inception date,
the capital appreciation on the Stocks held by the trust is
10 Understanding Your Investment
limited to a maximum of approximately ____%, because of the obligation of the
trust to the option holder with respect to each of the Stocks entitling the
option holder to purchase the Stocks at the strike price. The LEAPS(R) limit
the upside potential in the Stocks to an amount approximately equal to the
strike price. However, as the option premium received in return for writing the
LEAPS(R) was used to purchase Treasury Obligations, you will receive interest
from the Treasury Obligations during the life of the trust and your pro rata
portion of the principal from the Treasury Obligations after the Treasury
Obligations' maturity.
If the market price of a Stock held by the trust is greater than its strike
price, the trust will not participate in any appreciation in that Stock above
the strike price because it is expected that the holder of the related LEAPS(R)
will exercise its right to purchase that Stock from the trust at the strike
price. If the market price of a Stock held by the trust is less than its strike
price at the trust's mandatory termination date, it is expected that the
LEAPS(R) will expire without being exercised. To the extent particular Stocks
held by the trust decline in price or fail to appreciate to a price equal to the
related strike price, the trust will not achieve its maximum potential
appreciation.
The Treasury Obligations included in the trust are non-callable debt
obligations that are issued by and backed by the full faith and credit of the
U.S. Government, although units of the trust are not so backed. Additionally,
the U.S. Government assures the timely payment of principal and interest on the
underlying Treasury Obligations in the trust. Of course, this applies only to
the payment of principal and interest on the Treasury Obligations and not the
units themselves.
Below are sample illustrations of certain possible future market conditions:
* Stock prices increase above the LEAPS(R) strike price: The LEAPS(R) are
exercised and the underlying Stock shares are sold at the strike price.
Net proceeds received by the trust from the sale of the Stock will be
distributed to unitholders and will not be reinvested by the trust.
Profits are limited to the premium received from writing the LEAPS(R),
dividends received from the Stocks prior to their sale from the portfolio,
interest received from the Treasury Obligations, plus the difference
between each Stock's initial price and their strike price. Investors will
forgo any dividends paid on the Stocks subsequent to their sale from the
portfolio. It is important to note that writing covered calls limits the
appreciation potential of the underlying Stocks.
* Stock prices remain stable: The LEAPS(R) expire worthless and the trust
still owns the Stock shares. Profits are limited to the premium received
from writing the LEAPS(R), plus dividends from the Stocks, as well as
interest received from the Treasury Obligations.
* Stock prices decrease: The LEAPS(R) expire worthless and the trust still
owns the Stock shares. The break-even on the Stocks is lowered by the
premium received from writing the LEAPS(R). In addition, the trust will
receive dividends from the Stocks, and interest from the Treasury
Obligations.
Understanding Your Investment 11
HOW TO BUY UNITS
You can buy units of the 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.AAMLIVE.COM. The public offering price
of units includes:
* the net asset value per unit plus
* organization costs plus
* the sales fee plus
* accrued interest, if any.
The "net asset value per unit" is the value of the securities, cash and other
assets in the trust reduced by the liabilities of the trust divided by the total
units outstanding. In calculating the net asset value per unit, the value of
the Stocks are netted against the value of the LEAPS(R). 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.
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 the Stocks and LEAPS(R)
using the last sale price for securities traded on a national securities
exchange or a U.S. options exchange. For this purpose, the trustee provides us
closing prices from a reporting service approved by us. In some cases we will
price the Stocks and LEAPS(R) based on the last asked or bid price in the over-
the-counter market or by using other recognized pricing methods. We will do
this if a security is not principally traded on a national securities exchange
or a U.S. options exchange or if the market quotes are unavailable or
inappropriate.
We generally determine the value of the Treasury Obligations during the
initial offering period based on the aggregate offering side evaluations of the
Treasury Obligations determined (a) on the basis of current offering prices of
the Treasury Obligations, (b) if offering prices are not available for any
particular Treasury Obligation, on the basis of current offering prices for
comparable securities, (c) by determining the value of the Treasury Obligations
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 Treasury Obligations 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
12 Understanding Your Investment
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 Treasury
Obligations.
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.
ORGANIZATION COSTS. During the initial offering period, part of the value of
the securities represents an amount that will 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 bond 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 Treasury Obligations in the trust from
the last day on which interest was paid on the Treasury Obligations. Interest
on the Treasury Obligations 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 available
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 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.
SALES FEE. The maximum sales fee is shown under "Fees and Expenses" for your
trust and is 1.85% of the public offering price per unit at the time of
purchase.
You pay a fee in connection with purchasing units. We refer to this fee as
the "transactional sales fee". The transactional sales fee has both an initial
and a deferred component. The transactional sales fee equals 1.35% of the
public offering price per unit based on a $10 public offering price per unit.
The percentage amount of the transactional sales fee is based on the unit price
on your trust's inception date. The transactional sales fee equals the
difference between the total
Understanding Your Investment 13
sales fee and the creation and development fee. As a result, 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 "Fees and Expenses" for
your trust.
You pay the initial sales fee, if any, at the time you buy units. The
initial sales fee is the difference between the total sales fee percentage
(maximum of 1.85% of the public offering price per unit) and the sum of the
remaining fixed dollar deferred sales fee and the total fixed dollar creation
and development fee. The initial sales fee will be 0.00% of the public offering
price per unit at a public offering price per unit of $10. If the public
offering price per unit exceeds $10, you will be charged an initial sales fee
equal to the difference between the total sales fee percentage (maximum of 1.85%
of the public offering price per unit) and the sum of the remaining fixed dollar
deferred sales fee and total fixed dollar creation and development fee. The
deferred sales fee is fixed at $0.135 per unit. Your trust pays the deferred
sales fee in equal monthly installments as described under "Fees and Expenses"
for your trust. If you redeem or sell your units prior to collection of the
total deferred sales fee, you will pay any remaining deferred sales fee upon
redemption or sale of your units.
Since the deferred sales fee and creation and development fee are fixed
dollar amounts per unit, your trust must charge these amounts per unit
regardless of any decrease in net asset value. As a result, if the public
offering price per unit falls to less than $10 (resulting in the maximum sales
fee percentage being a dollar amount that is less than the combined fixed dollar
amounts of the deferred sales fee and creation and development fee) your initial
sales fee will be a credit equal to the amount by which these fixed dollar fees
exceed the sales fee at the time you buy units. In such a situation, the value
of securities per unit would exceed the public offering price per unit by the
amount of the initial sales fee credit and the value of those securities will
fluctuate, which could result in a benefit or detriment to unitholders that
purchase units at that price. The initial sales fee credit is paid by the
sponsor and is not paid by the trust.
If you purchase units after the last deferred sales fee payment has been
assessed, the secondary market sales fee is equal to 1.85% of the public
offering price and does not include deferred payments (i.e. unitholders who buy
in the secondary market after collection of the deferred sales fees are not
charged deferred sales fees).
MINIMUM PURCHASE. The minimum amount you can purchase of the trust appears
on page 4 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 us of
any discount when you order units. Except as expressly provided herein, you may
not combine discounts. Since the deferred sales fee and the creation and
development fee are fixed dollar amounts per unit, your trust must charge these
fees per unit regardless of any discounts. However, if you are eligible to
receive a discount such that your total sales fee is less than the fixed dollar
amounts of the deferred sales fee and the creation and development fee, we will
credit you the difference between your total sales fee and these fixed dollar
fees at the time you buy units.
14 Understanding Your Investment
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 advisor to determine whether you can benefit from these
accounts. To purchase units in these Fee Accounts, your financial advisor must
purchase units designated with one of the Fee Account CUSIP numbers, if
available. Please contact your financial advisor for more information. 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
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 the initial $10
public offering price per unit (the percentage will vary with the unit price).
Initial sales fee 0.00%
Deferred sales fee 0.00%
-------
Transactional sales fee 0.00%
=======
Creation and development fee 0.50%
-------
Total sales fee 0.50%
=======
This discount applies only during the initial offering period. 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. These purchases are not subject to the transactional sales
fee but will be subject to the creation and development fee. 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 made at
the public offering price per unit less the applicable regular 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.
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.AAMLIVE.COM or through your financial
Understanding Your Investment 15
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." You pay any remaining deferred sales fee when you
sell or redeem your units. 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 pay any remaining deferred sales fee at the time you
redeem units. 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 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.
16 Understanding Your Investment
DISTRIBUTIONS
DISTRIBUTIONS. Your trust generally pays distributions of its net investment
income along with any excess capital on each 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. For example, this could
happen as a result of a merger or similar transaction involving a company whose
stock is in your portfolio. The trust will also generally make required
distributions or distributions to avoid imposition of tax at the end of each
year because it is structured as a "regulated investment company" for federal
tax purposes. The amount of your distributions will vary from time to time as
companies change their dividends or trust expenses change.
Interest and dividends received by your trust, including that part of the
proceeds of any disposition of Treasury Obligations which represents accrued
interest, is credited by the trustee to your trust's "income account". Other
receipts are credited to the "capital 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, dividends and other income 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 capital 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 $0.01 per unit.
Because investment income payments are not received by your trust at a
constant rate throughout the year, income distributions may be more or less than
the amount credited to the income account as of the 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.
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 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. 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. 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.
DIVIDEND PAYMENT RISK. Dividend payment risk is the risk that an issuer of a
security in your
Understanding Your Investment 17
trust is unwilling or unable to pay income on a security. Stocks represent
ownership interests in the issuers and are not obligations of the issuers.
Common stockholders have a right to receive dividends only after the company has
provided for payment of its creditors, bondholders and preferred stockholders.
Common stocks do not assure dividend payments. Dividends are paid only when
declared by an issuer's board of directors and the amount of any dividend may
vary over time.
LEAPS(R). Although you may redeem your units at any time, if you redeem
before the LEAPS(R) are exercised or expire, the value of your units may be
adversely affected by the value of the LEAPS(R). However, if the LEAPS(R) are
not exercised and you hold your units until the trust's scheduled termination
date, the LEAPS(R) will expire and the trust's portfolio will consist of only
cash or securities or a combination of each.
If you sell or redeem your units before the LEAPS(R) are exercised, or if the
trust terminates prior to its scheduled termination date and the LEAPS(R) have
not been exercised, you may not realize any appreciation in the value of the
Stocks because even if the Stocks appreciate in value, that appreciation may be
more than fully, fully or partly offset by an increase in value in the LEAPS(R)
The value of the LEAPS(R) is deducted from the value of the trust's assets when
determining the value of a unit. If the Stocks decline in price, your loss may
be greater than it would be if there were no LEAPS(R) because the value of the
LEAPS(R) is a reduction to the value of the Stocks when calculating the value of
a unit. An increase in value of the LEAPS(R), an obligation of the trust to
sell or deliver the Stocks at the strike price if the LEAPS(R) are exercised by
the option holder, will reduce the value of the Stocks in the trust, below the
value of the Stocks that would otherwise be realizable if the Stocks were not
subject to the LEAPS(R). You should note that even if the price of a Stock does
not change, if the value of a LEAPS(R) increases (for example, based on
increased volatility of a Stock) your unit will lose value.
The value of the LEAPS(R) reduces the value of your units. As the value of
the LEAPS(R) increases, it has a more negative impact on the value of your
units. The value of the LEAPS(R) will also be affected by changes in the value
and dividend rates of the Stocks, an increase in interest rates, a change in the
actual and perceived volatility of the stock market and the Stocks and the
remaining time to expiration. Additionally, the value of a LEAPS(R) does not
increase or decrease at the same rate as the underlying Stocks (although they
generally move in the same direction). However, as a LEAPS(R) approaches its
expiration date, its value increasingly moves with the price of the Stock
subject to the LEAPS(R).
The strike price for each LEAPS(R) held by the trust may be adjusted downward
before the LEAPS(R) expiration triggered by certain corporate events affecting
that Stock. The OCC generally does not adjust option strike prices to reflect
ordinary dividends paid on the related stock but may adjust option strike prices
to reflect certain corporate events affecting the related stock such as
extraordinary dividends, stock splits, merger or other extraordinary
distributions or events. A reduction in the strike price of an option could
reduce the trust's capital appreciation potential on the related Stock.
If the value of the underlying Stocks exceeds the strike price of the
LEAPS(R), it is likely that the option holder will exercise their right to
purchase the Stock subject to the LEAPS(R) from the trust. As the LEAPS(R) may
be exercised on any business day prior to their expiration, Stocks may be sold
to the option holders of the LEAPS(R)
18 Understanding Your Investment
prior to the termination of the trust. If this occurs, distributions from the
trust will be reduced by the amount of the dividends which would have been paid
by Stocks sold from the trust. As discussed under "Understanding Your
Investment--Taxes", the sale of Stocks from the trust will likely result in
capital gains to unit holders, which may be short-term depending on the holding
period of the Stocks. In addition, the sale of Stocks may, in certain
circumstances, result in the early termination of the trust.
SECTOR CONCENTRATION RISK. Sector concentration risk is the risk that the
value of your trust is more susceptible to fluctuations based on factors that
impact a particular sector because the portfolio concentrates in companies
within that sector. A portfolio "concentrates" in a sector when securities
issued by companies in a particular sector make up 25% or more of the portfolio.
Refer to the "Principal Risks" in the "Investment Summary" section in this
prospectus for sector concentrations.
Your trust invests significantly in securities of CONSUMER PRODUCTS AND
SERVICES companies. These companies manufacture or sell various consumer
products and/or services. General risks of these companies include the general
state of the economy, intense competition and consumer spending trends. A
decline in the economy which results in a reduction of consumers' disposable
income can negatively impact spending habits. Competitiveness in the retail
industry will require large capital outlays for the installation of automated
checkout equipment to control inventory, track the sale of items and gauge the
success of sales campaigns. Retailers who sell their products and services over
the Internet have the potential to access more consumers, but will require
sophisticated technology to remain competitive.
U.S. TREASURY OBLIGATIONS. U.S. Treasury obligations are direct obligations
of the United States which are backed by the full faith and credit of the United
States. The value of the Treasury Obligations will be adversely affected by
decreases in bond prices and increases in interest rates. Certain Treasury
Obligations may have been purchased at prices of less than their par value at
maturity, indicating a market discount. Other Treasury Obligations may have
been purchased at prices greater than their par value at maturity, indicating a
market premium. The coupon interest rate of Treasury Obligations purchased at a
market discount was lower than current market interest rates of newly issued
bonds of comparable rating and type and the coupon interest rate of Treasury
Obligations purchased at a market premium was higher than current market
interest rates of newly issued bonds of comparable rating and type. Generally,
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.
FOREIGN ISSUER RISK. An investment in securities of foreign issuers involves
certain risks that are different in some respects from an investment in
securities of domestic issuers. These include risks associated with future
political and economic developments, international trade conditions, foreign
withholding taxes, liquidity concerns, currency fluctuations, volatility,
restrictions on foreign investments and exchange of securities, potential for
expropriation of assets, confiscatory taxation, difficulty in obtaining or
enforcing a court judgment, potential inability to collect when a company goes
bankrupt and economic, political or social instability. Moreover, individual
foreign economies may differ favorably or unfavorably
Understanding Your Investment 19
from the U.S. economy for reasons including differences in growth of gross
domestic product, rates of inflation, capital reinvestment, resources, self-
sufficiency and balance of payments positions. There may be less publicly
available information about a foreign issuer than is available from a domestic
issuer as a result of different accounting, auditing and financial reporting
standards. Some foreign markets are less liquid than U.S. markets which could
cause securities to be bought at a higher price or sold at a lower price than
would be the case in a highly liquid market.
Securities of certain foreign issuers may be denominated or quoted in
currencies other than the U.S. dollar. Foreign issuers also make payments and
conduct business in foreign currencies. Many foreign currencies have fluctuated
widely in value against the U.S. dollar for various economic and political
reasons. Changes in foreign currency exchange rates may affect the value of
foreign securities and income payments. Generally, when the U.S. dollar rises
in value against a foreign currency, a security denominated in that currency
loses value because the currency is worth fewer U.S. dollars. Conversely, when
the U.S. dollar decreases in value against a foreign currency, a security
denominated in that currency gains value because the currency is worth more U.S.
dollars. The U.S. dollar value of income payments on foreign securities will
fluctuate similarly with changes in foreign currency values.
Certain foreign securities may be held in the form of American Depositary
Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), or other similar
receipts. Depositary receipts represent receipts for foreign securities
deposited with a custodian (which may include the trustee of the trust).
Depository receipts may not be denominated in the same currency as the
securities into which they may be converted. ADRs typically trade in the U.S.
in U.S. dollars and are registered with the Securities and Exchange Commission.
GDRs are similar to ADRs, but GDRs typically trade outside of the U.S. and
outside of the country of the issuer in the currency of the country where the
GDR trades. Depositary receipts generally involve most of the same types of
risks as foreign securities held directly but typically also involve additional
expenses associated with the cost of the custodian's services. Some depositary
receipts may experience less liquidity than the underlying securities traded in
their home market. Certain depositary receipts are unsponsored (i.e. issued
without the participation or involvement of the issuer of the underlying
security). The issuers of unsponsored depositary receipts are not obligated to
disclose information that may be considered material in the U.S. Therefore,
there may be less information available regarding these issuers which can impact
the relationship between certain information impacting a security and the market
value of the depositary receipts.
LEGISLATION/LITIGATION. From time to time, various legislative initiatives
are proposed in the United States and abroad which may have a negative impact on
certain of the companies represented in the trust. In addition, litigation
regarding any of the issuers of the securities or of the industries represented
by these issuers may negatively impact the share prices of these securities. No
one can predict what impact any pending or threatened litigation will have on
the share prices of the securities.
LIQUIDITY RISK. 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.
20 Understanding Your Investment
NO FDIC GUARANTEE. An investment in the trust is not a deposit of any bank
and is not insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
HOW THE 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. At the
close of the New York Stock Exchange on the trust's inception date, the number
of units may be adjusted so that the public offering price per unit equals $10.
The number of units and fractional interest of each unit in the trust 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 the trust,
* to make required distributions or avoid imposition of taxes on the
trust, or
* as permitted by the trust agreement.
Stocks may also be called pursuant to the LEAPS(R) prior to the trust's
mandatory termination date. When your trust sells securities, the composition
and diversification of the securities in the portfolio may be altered. 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 unitholders. The trustee will
distribute any cash proceeds to unitholders. If an offer by the issuer of any
of the portfolio securities or any other party is made to issue new securities,
or to exchange securities, for trust portfolio securities, the trustee will at
the direction of the sponsor, vote for or against, or accept or reject, any
offer for new or exchanged securities or property in exchange for a trust
portfolio security. If any such issuance, exchange or substitution occurs
(regardless of any action or rejection by a trust), any securities and/or
property received will be deposited into the trust and will be promptly sold by
the trustee pursuant to the sponsor's direction, unless the sponsor advises the
trustee to keep such securities or property. If any contract for the purchase
of securities fails, the sponsor will refund the cash and sales fee attributable
to the failed contract to unitholders on or before the next distribution date
unless substantially all of the moneys held to cover the purchase are reinvested
in substitute securities in accordance with the trust agreement. 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
Understanding Your Investment 21
action necessary to ensure that the portfolio continues to satisfy the
qualifications of a regulated investment company.
We will increase the size of your trust as we sell units. When we create
additional units, we will seek to replicate the existing portfolio. Any
additional Stocks deposited will be subject to the LEAPS(R) with the same terms
as the LEAPS(R) initially deposited. 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.
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 us, your trust or the trustee.
Pursuant to an exemptive order, your trust may be able to purchase securities
from other trusts that we sponsor when we create additional units. Your trust
may also be able to sell securities to other trusts that we sponsor to satisfy
unit redemption, pay deferred sales charges or expenses, in connection with
periodic tax compliance or in connection with the termination of your trust.
The exemption may enable each trust to eliminate commission costs on these
transactions. The price for those securities will be the closing price on the
sale date on the exchange where the securities are principally traded as
certified by us to the trustee.
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 on the termination date
set forth under "Essential Information" in the "Investment Summary" section of
this prospectus. 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 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 this happens, we will refund any sales
charge that you paid.
The scheduled mandatory termination date set forth under "Essential
Information" in the "Investment Summary" section will be subsequent to the
expiration of the LEAPS(R). If the LEAPS(R) are exercised prior to the
expiration, the trust will receive cash; if the LEAPS(R) are not exercised, the
trust will continue to hold the Stocks in the portfolio. If the trust is
terminated early, the trustee will either sell the Stocks subject to LEAPS(R) or
enter into a closing purchase transaction as a result of which the LEAPS(R) will
be cancelled and then sell the underlying Stocks.
You will receive your final distribution 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.
22 Understanding Your Investment
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 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 sponsor or an affiliate may use the list of securities in the trust in
its independent capacity (which may include acting as an investment adviser or
broker-dealer) and distribute this information to various individuals and
entities. The sponsor or an affiliate may recommend or effect transactions in
the securities. This may also have an impact on the price your trust pays for
the securities and the price received upon unit redemption or trust termination.
The sponsor may act as agent or principal in connection with the purchase and
sale of securities, including those held by the trust, and may act as a
specialist market maker in the securities. The sponsor may also issue reports
and make recommendations on the securities in the trust. The sponsor or an
affiliate may have participated in a public offering of one or more of the
securities in the trust. The sponsor, an affiliate or their employees may have
a long or short position in these securities or related securities. An officer,
director or employee of the sponsor or an affiliate may be an officer or
director for the issuers of the securities.
THE TRUSTEE. The Bank of New York Mellon is the trustee of your trust. Its
principal unit investment trust division office is 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 broker-dealers
and other firms. These distribution firms each receive part of the sales fee
when they sell units. During the initial offering period, the broker-dealer
concession or agency commission for broker-dealers and other firms is 1.25% of
the public offering price per unit at the time of the transaction. The broker-
dealer concession or agency commission is 65% of the sales fee for secondary
market sales. No broker-dealer concession or agency commission is paid to
broker-dealers, investment advisers or other selling firms in connection with
unit sales in Fee Accounts subject to a Wrap Fee.
Broker-dealers and other firms that sell units of certain unit investment
trusts for which AAM acts as sponsor are eligible to receive additional
Understanding Your Investment 23
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 A trust. Broker-dealers and other firms that sell units
of any Volume Concession A 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 for sales in a calendar month is based on total
initial offering period sales of all Volume Concession A trusts during the 12-
month period through the end of the preceding calendar month as set forth in the
following table:
INITIAL OFFERING PERIOD SALES VOLUME
IN PRECEDING 12 MONTHS CONCESSION
---------------------------------------------------------
$25,000,000 but less than $100,000,000 0.035%
$100,000,000 but less than $150,000,000 0.050
$150,000,000 but less than $250,000,000 0.075
$250,000,000 but less than $1,000,000,000 0.100
$1,000,000,000 but less than $5,000,000,000 0.125
$5,000,000,000 but less than $7,500,000,000 0.150
$7,500,000,000 or more 0.175
We will pay these amounts out of our own assets within a reasonable time
following each calendar month.
The volume concessions will be paid on units of all Volume Concession A
trusts sold in the initial offering period, except as described below. For a
trust to be eligible for this additional Volume Concession A compensation, the
trust's prospectus must include disclosure related to the additional Volume
Concession A compensation; a trust is not eligible for additional Volume
Concession A compensation if the prospectus for such trust does not include
disclosure related to the additional Volume Concession A compensation. In
addition, dealer firms will not receive volume concessions 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 sales level breakpoints
for volume concessions subject to the policies of the related selling firm.
Secondary market sales of all unit trusts are excluded for purposes of these
volume concessions.
Any sales fee discount is borne by the broker-dealer or selling firm out of
the broker-dealer concession or agency commission. We reserve the right to
change the amount of compensation paid to selling firms from time to time. Some
broker-dealers and other selling firms may limit the compensation they or their
representatives receive in connection with unit sales. As a result, certain
broker-dealers and other selling firms may waive or refuse payment of all or a
portion of the regular concession or agency commission and/or volume concession
described above and instruct the sponsor to retain such amounts rather than pay
or allow the amounts to such firm.
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,
24 Understanding Your Investment
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 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. The amount of our profit or loss on the initial deposit of
securities into the trust is shown in the "Notes to Portfolio."
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 your 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. Your trust intends to qualify as a "regulated investment
company" under the federal tax laws. If your trust qualifies as a regulated
investment company and distributes its income as required by the tax law, your
trust generally will not pay federal income taxes. If your trust invests in a
partnership, an adverse federal income tax audit of that partnership could
result in the trust being required to pay federal income tax or pay a deficiency
dividend (without having received additional cash).
Understanding Your Investment 25
DISTRIBUTIONS. Trust distributions are generally taxable. After the end of
each year, you will receive a tax statement that separates your trust's
distributions into three categories, ordinary income distributions, capital gain
dividends and return of capital. Ordinary income distributions are generally
taxed at your ordinary tax rate, however, as further discussed below, certain
ordinary income distributions received from your trust may be taxed at the
capital gains tax rates. Generally, you will treat all capital gain dividends
as long-term capital gains regardless of how long you have owned your units. To
determine your actual tax liability for your capital gain 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. Note that the
presence of covered call options in the portfolio may reduce the amount of
dividends that would otherwise be treated as capital gain dividends. In
addition, your trust may make distributions that represent a return of capital
for tax purposes and thus will generally not be taxable to you. A return of
capital, although not initially taxable to you, will result in a reduction in
the basis in your units and subsequently result in higher levels of taxable
capital gains in the future. In addition, if the non-dividend distribution
exceeds your basis in your units, you will have long-term or short-term gain
depending upon your holding period. The tax status of your distributions from
your trust is not affected by whether you reinvest your distributions in
additional units 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
distributions made to you in January as if you had received them on December 31
of the previous year. Income from your trust may also be subject to a 3.8
percent "medicare tax." This tax generally applies 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.
OPTIONS. As part of its portfolio, your trust may write one or more call
options on certain stock or stock indexes. Generally premiums for writing
options are not taxable when received, but instead are taxed when the option
expires, is exercised or is deemed to be sold. Thus, the amounts of the
premiums will generally be taken into account at that time in determining the
amount of dividends to be paid to the unitholder. These amounts may be part of
the dividends taxed as ordinary income or those taxed as long-term capital gain,
depending on the circumstances. Further, the trust's transaction in options
will be subject to special provisions of the Internal Revenue Code that, among
other things, may affect the character of gains and losses realized by your
trust (i.e., may affect whether gains or losses are ordinary or capital, or
short-term or long-term), may affect the amount of dividends which may be taken
into account as a dividend which is eligible for the capital gains tax rates,
may accelerate recognition of income to the trust and may defer trust losses.
These rules could, therefore, affect the character, amount and timing of
distributions to unitholders. These provisions also (a) may require your trust
to mark-to-market certain types of the positions in its portfolio (i.e., treat
them as if they were closed out), and (b) may cause your trust to recognize
income without receiving cash with which to make distributions in amounts
necessary to satisfy the distribution requirements for qualifying to be taxed as
a regulated investment company and for avoiding excise taxes.
DIVIDENDS RECEIVED DEDUCTION. A corporation that owns units generally will
not be entitled to
26 Understanding Your Investment
the dividends received deduction with respect to many dividends received from
your trust because the dividends received deduction is generally not available
for distributions from regulated investment companies. However, certain
ordinary income dividends on units that are attributable to qualifying dividends
received by your trust from certain corporations may be reported by the trust as
being eligible for the dividends received deduction. The presence of covered
call options in the portfolio may reduce the amount of dividends that are
treated as qualifying dividends.
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.
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. Some portion of your capital gain dividends may be subject to
higher maximum marginal stated federal income tax rates. Some portion of your
capital gain dividends may be attributable to the trust's interest in a master
limited partnership which may be subject to a maximum marginal stated federal
income tax rate of 28%, rather than the rates set forth above. In addition,
capital gain received from assets held for more than one year that is considered
"unrecaptured section 1250 gain" (which may be the case, for example, with some
capital gains attributable to equity interests in real estate investment trusts
that constitute interests in entities treated as real estate investment trusts
for federal income tax purposes) is taxed at a maximum stated tax rate of 25%.
In the case of capital gain dividends, the determination of which portion of the
capital gain dividend, if any, is subject to the 28% tax rate or the 25% tax
rate, will be made based on rules prescribed by the United States Treasury.
Capital gains may also be subject to the "medicare tax" described 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. However, if you receive a
capital gain dividend from your trust and sell your unit at a loss after holding
it for six months or less, the loss will be recharacterized as long-term capital
loss to the extent of the 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.
Ordinary income dividends received by an individual unitholder from a
regulated investment company such as your trust are generally taxed at the same
rates that apply to net capital gain (as discussed above), provided certain
holding period requirements are satisfied and provided the dividends are
attributable to qualifying dividends received by your trust itself.
Distributions with respect to shares in real estate investment trusts are
qualifying dividends only in limited circumstances. Further, the presence
Understanding Your Investment 27
of covered call options in the portfolio may reduce the amount of dividends that
are eligible for capital gains tax rates. Your trust will provide notice to its
unitholders of the amount of any distribution which may be taken into account as
a dividend which is eligible for the capital gains tax rates.
IN-KIND DISTRIBUTIONS. Under certain circumstances, as described in this
prospectus, you may receive an in-kind distribution of trust securities when you
redeem units or when your trust terminates. This distribution will be treated
as a sale for federal income tax purposes and you will generally recognize gain
or loss, generally based on the value at that time of the securities and the
amount of cash received. The Internal Revenue Service could however assert that
a loss could not be currently deducted.
ROLLOVERS AND EXCHANGES. If you elect to have your proceeds from your trust
rolled over into a future 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 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.
FOREIGN TAX CREDIT. If your trust invests in any foreign securities, the tax
statement that you receive may include an item showing foreign taxes your trust
paid to other countries. In this case, dividends taxed to you will include your
share of the taxes your trust paid to other countries. You may be able to
deduct or receive a tax credit for your share of these taxes.
Investments in Certain Foreign Corporations. If your trust holds an equity
interest in any "passive foreign investment companies" ("PFICs"), which are
generally certain foreign corporations that receive at least 75% of their annual
gross income from passive sources (such as interest, dividends, certain rents
and royalties or capital gains) or that hold at least 50% of their assets in
investments producing such passive income, the trust could be subject to U.S.
federal income tax and additional interest charges on gains and certain
distributions with respect to those equity interests, even if all the income or
gain is timely distributed to its unitholders. Your trust will not be able to
pass through to its unitholders any credit or deduction for such taxes. Your
trust may be able to make an election that could ameliorate these adverse tax
consequences. In this case, your trust would recognize as ordinary income any
increase in the value of such PFIC shares, and as ordinary loss any decrease in
such value to the extent it did not exceed prior increases included in income.
Under this election, your trust might be required to recognize in a year income
in excess of its distributions from PFICs and its proceeds from dispositions of
PFIC stock during that year, and such income would nevertheless be subject to
the distribution requirement and would be taken into account for purposes of the
4% excise tax. Dividends paid by PFICs are not treated as qualified dividend
income.
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,
28 Understanding Your Investment
partnership, estate or trust), you should be aware that, generally, subject to
applicable tax treaties, distributions from your trust will be characterized as
dividends for federal income tax purposes (other than dividends which your trust
properly reports as capital gain dividends) and 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 your trust
that are properly reported by your trust as capital gain dividends may not be
subject to U.S. federal income taxes, including withholding taxes, provided that
your trust makes certain elections and certain other conditions are met.
Distributions from your 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 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,
2018. 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 $0.05 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 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
Understanding Your Investment 29
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 and expenses incurred in
contacting you. Your trust may pay the costs of updating its registration
statement each year. The trustee will generally pay trust expenses from
distributions 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 included 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).
30 Understanding Your Investment
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
UNITHOLDERS
ADVISORS DISCIPLINED TRUST 1828
We have audited the accompanying statement of financial condition, including the
trust portfolio on pages 5 through 8, of Advisors Disciplined Trust 1828, as of
__________, ____, 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. We were
not engaged to perform an audit of the trust's 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 __________, ____. 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 1828 as of __________, ____, in conformity with accounting principles
generally accepted in the United States of America.
Chicago, Illinois GRANT THORNTON LLP
__________, ____
ADVISORS DISCIPLINED TRUST 1828
STATEMENT OF FINANCIAL CONDITION AS OF __________, ____
-------------------------------------------------------------------------------------------------------------
INVESTMENT IN SECURITIES
Contracts to purchase underlying securities (1)(2) . . . . . . . . . . . . . . . . . . . . . . . $
Accrued interest to first settlement date (1) . . . . . . . . . . . . . . . . . . . . . . . . .
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
==========
LIABILITIES AND INTEREST OF INVESTORS
Liabilities:
Market value of call options (LEAPS(R)) (1) . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued interest payable to sponsor (1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Organization costs (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred sales fee (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Creation and development fee (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
----------
----------
Interest of investors:
Cost to investors (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: initial sales fee (4)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: deferred sales fee, creation and development fee and organization costs (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 closing sale price
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 sponsors as unitholders of record as of such date.
The liability for the LEAPS(R) are based on their aggregate underlying
value.
(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 and offering
the trust. These costs have been estimated at $____ 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 an initial sales fee, a deferred sales fee
and a creation and development fee. The initial sales fee is equal to the
difference between the maximum sales fee and the sum of the remaining
deferred sales fee and the total creation and development fee. On the
inception date, the total sales fee is 1.85% of the public offering price
per unit. The deferred sales fee is equal to $0.135 per unit and the
creation and development fee is equal to $0.05 per unit.
(5) The aggregate cost to investors includes the applicable sales fee assuming
no reduction of sales fees.
</FN>
Understanding Your Investment 31
CONTENTS
INVESTMENT SUMMARY
----------------------------------------------------------------------
A concise description 2 Investment Objective
of essential information 2 Principal Investment Strategy
about the portfolio 3 Principal Risks
4 Who Should Invest
4 Essential Information
4 Fees and Expenses
5 Portfolio
UNDERSTANDING YOUR INVESTMENT
----------------------------------------------------------------------
Detailed information to 9 UBS Dividend Rulers
help you understand 10 The Covered Call Strategy
your investment 12 How to Buy Units
15 How to Sell Your Units
17 Distributions
17 Investment Risks
21 How the Trust Works
25 Taxes
29 Expenses
30 Experts
30 Additional Information
31 Report of Independent Registered
Public Accounting Firm
31 Statement of Financial Condition
WHERE TO LEARN MORE
----------------------------------------------------------------------
You can contact us for VISIT US ON THE INTERNET
free information about http://www.AAMLIVE.com
this and other investments, BY E-MAIL
including the Information info@AAMLIVE.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 1828
Securities Act file number: 333-219539
Investment Company Act file number: 811-21056
DIVIDEND RULER
COVERED CALL
PORTFOLIO - 15 MONTH,
SERIES 2017-4Q
PROSPECTUS
__________, ____
[LOGO]
AAM
ADVISORS
ASSET MANAGEMENT
ADVISORS DISCIPLINED TRUST
INFORMATION SUPPLEMENT FOR TRUSTS IMPLEMENTING A COVERED CALL STRATEGY
OCTOBER 24, 2016
This Information Supplement provides additional information concerning each
trust described in the prospectus for the Advisors Disciplined Trust series that
have prospectuses dated on and after the date set forth above implementing a
covered call strategy. This Information Supplement should be read in conjunction
with the prospectus for a trust. 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 for each applicable trust. Investors should
obtain and read the prospectus prior to purchasing units of a trust. You can
obtain the prospectus without charge at aamlive.com or by contacting your
financial professional or 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 telephone at (877) 858-
1773.
CONTENTS
General Information 2
Investment Objective and Policies 2
Risk Factors 5
Administration of the Trust 42
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
initial date of deposit set forth in the prospectus for such trust 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 a 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. At the close of the New York Stock Exchange on a trust's initial date of
deposit or the first day units are offered to the public, the number of units
may be adjusted so that the public offering price per unit equals $10. The
number of units, fractional interest of each unit in a trust and any estimated
income distributions per unit will increase or decrease to the extent of any
adjustment. Additional units of a 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, 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 amounts, which will generally maintain
the existing relationship among the principal amount of each U.S. treasury
obligation (the "Treasury Obligation") per unit, number of contracts of the Long
Term Equity AnticiPation Securities ("LEAPS") per unit and number of shares of
the common stock (the "Common Stocks") per unit in such trust. Thus, although
additional units will be issued, each unit will generally continue to represent
the same principal amount, number of contracts and number of shares of each
security. 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 deposit and the purchase of the
securities and because a trust will pay any associated brokerage fees.
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,
refund the cash and sales charge attributable to such failed contract to all
unitholders on the next distribution date.
INVESTMENT POLICIES
Each 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
-2-
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 special circumstances as provided in the
applicable trust agreement. Thus, the assets of a trust will generally remain
unchanged under normal circumstances. Each trust agreement provides that the
sponsor may direct the trustee to sell, liquidate or otherwise dispose of
securities in the trust at such price and time and in such manner as shall be
determined by the sponsor, provided that the supervisor has determined, if
appropriate, that any one or more of the following conditions exist with respect
to such securities: (i) that there has been a default in the payment of
principal, interest or dividends, after declared and when due and payable; (ii)
that any action or proceeding has been instituted at law or equity seeking to
restrain or enjoin the payment of dividends on Common Stocks, or that there
exists any legal question or impediment affecting such Stocks or the payment of
dividends from the same; (iii) that there has occurred any breach of covenant or
warranty in any document relating to the issuer of the securities which would
adversely affect either immediately or contingently the payment of dividends
from the Common Stocks or the debt service on the Treasury Obligations, or the
general credit standing of the issuer or otherwise impair the sound investment
character of such securities; (iv) that there has been a default in the payment
of dividends, interest, principal of or income or premium, if any, on any other
outstanding obligations of the issuer or guarantor of such securities; (v) that
the price of the security has declined to such an extent or other such credit
factors exist so that in the opinion of the supervisor, as evidenced in writing
to the trustee, the retention of such securities would be detrimental to the
trust and to the interest of the unitholders; (vi) that all of the securities in
the trust will be sold pursuant to termination of the trust; (vii) that such
sale is required due to units tendered for redemption; (viii) that there has
been a public tender offer made for a security or a merger or acquisition is
announced affecting a security, and that in the opinion of the supervisor the
sale or tender of the security is in the best interest of the unitholders; (ix)
that such sale is necessary or advisable (a) to maintain the qualification of
the trust as a "regulated investment company" for federal income tax purposes or
(b) to provide funds to make any distribution for a taxable year in order to
avoid imposition of any income or excise taxes on the trust or on undistributed
income in the trust; (x) that as result of the ownership of the security, the
trust or its unitholders would be a direct or indirect shareholder of a passive
foreign investment company as defined in section 1297 (a) of the Internal
Revenue Code; (xi) that such sale is necessary for the trust to comply with such
federal and/or state securities laws, regulations and/or regulatory actions and
interpretations which may be in effect from time to time; (xii) that any action
or proceeding has been instituted in law or equity seeking to restrain or enjoin
the payment of principal or interest on any Treasury Obligations, attacking the
constitutionality of any enabling legislation or alleging and seeking to have
judicially determined the illegality of the issuing body or the constitution of
its governing body or officers, the illegality, irregularity or omission of any
necessary acts or proceedings preliminary to the issuance of such Treasury
Obligations, or seeking to restrain or enjoin the performance by the officers or
employees of any such issuing body of any improper or illegal act in connection
with the administration of funds necessary for debt service on such Treasury
Obligations or otherwise; or that there exists any other legal question or
impediment affecting such securities or the payment of debt service on the same;
(xiii) that any Treasury Obligations are the subject of an advanced refunding;
or (xiv) that as of any record date any of the Treasury Obligations are
scheduled to be redeemed and paid prior to
-3-
the next succeeding distribution date; provided, however, that as the result of
such redemption the trustee will receive funds in an amount sufficient to enable
the trustee to include in the next distribution from the trust's Capital Account
at least $1.00 per 100 units. The trustee may also sell securities, designated
by the supervisor, from a trust for the purpose of the payment of expenses. In
the event a security is sold as a direct result of serious adverse credit
factors affecting the issuer of such security, then the sponsor may, if
permitted by applicable law, but is not obligated, to direct the reinvestment of
the proceeds of the sale of such security in any other securities which meet the
criteria necessary for inclusion in such trust on the initial date of deposit.
If the trustee is notified at any time of any action to be taken or
proposed to be taken by holders of the portfolio securities, the trustee will
notify the sponsor and will take such action or refrain from taking any action
as the sponsor directs and, if the sponsor does not within five business days of
the giving of such notice direct the trustee to take or refrain from taking any
action, the trustee will take such reasonable action or refrain from taking any
action so that the securities are voted as closely as possible in the same
manner and the same general proportion, with respect to all issues, as are
shares of such securities that are held by owners other than the trust.
Notwithstanding the foregoing, in the event that the trustee shall have been
notified at any time of any action to be taken or proposed to be taken by
holders of shares of any registered investment company, the trustee will
thereupon take such reasonable action or refrain from taking any action with
respect to the fund shares so that the fund shares are voted as closely as
possible in the same manner and the same general proportion, with respect to all
issues, as are shares of such fund shares that are held by owners other than the
related trust.
In the event that an offer by the issuer of any of the securities or any
other party is made to issue new securities, or to exchange securities, for
trust portfolio securities, the trustee will reject such offer, provided that if
an offer by the issuer of any of the securities or any other party is made to
issue new securities, or to exchange securities, for trust portfolio securities,
the trustee will at the direction of the sponsor, vote for or against, or accept
or reject, any offer for new or exchanged securities or property in exchange for
a trust portfolio security. If any such issuance, exchange or substitution
occurs (regardless of any action or rejection by a trust), any securities, cash
and/or property received will be deposited into the trust and will be promptly
sold, if securities or property, by the trustee pursuant to the sponsor's
direction, unless the sponsor advises the trustee to keep such securities, cash
or property. The sponsor may rely on the supervisor in so advising the trustee.
If LEAPS have been written with respect to Common Stocks, such Common Stocks
cannot be sold or liquidated without also closing out the related LEAPS
positions.
Proceeds from the sale of securities (or any securities or other property
received by a trust in exchange for securities) are credited to the Capital
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 a
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, exercised, redeemed, will mature in
accordance with their terms or
-4-
otherwise liquidated 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
("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.
The Replacement Securities must be securities which the sponsor determines
to be similar in character as the securities originally selected for deposit in
the trust and the purchase of the Replacement Securities may not adversely
affect the federal income tax status of the trust. The Replacement Securities
must be purchased within thirty days after the deposit of the Failed Security.
Whenever a Replacement Security is acquired for a trust, the trustee shall
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
thirty 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. The trustee will not be liable or responsible in any way
for depreciation or loss incurred by reason of any purchase made pursuant to, or
any failure to make any purchase of Replacement Securities. The sponsor will
not be liable for any failure to instruct the trustee to purchase any
Replacement Securities, nor shall the trustee or sponsor be liable for errors of
judgment in connection with Failed Securities or Replacement Securities.
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 charge attributable to such Failed
Securities to all unitholders of the related trust and the trustee will
distribute the cash attributable to such Failed Securities not more than thirty
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 cash, they may not be able to reinvest such proceeds in
other securities at a return equal to or in excess of the return which such
proceeds would have earned for unitholders of a trust. In the event that a
Replacement Security is not acquired by a trust, the income for such trust may
be reduced.
RISK FACTORS
An investment in units of a trust, and/or shares of other registered
investment companies ("funds") held by a trust, if any, may be subject to some
or all of the risks described below. In addition, you should carefully review
the objective, strategy and risk of the trust as described in the prospectus and
consider your ability to assume the risks involved before making an investment
in a trust.
MARKET RISK. You should understand the risks of investing in securities
before purchasing units. These risks include the risk that the financial
condition of the company or the general condition of the stock market may worsen
and the value of the securities (and therefore units) will fall. Securities are
especially susceptible to general stock market movements. The value of
securities often rises or falls rapidly and unpredictably as market confidence
and perceptions of companies change. These perceptions are based on factors
including expectations regarding
-5-
government economic policies, inflation, interest rates, economic expansion or
contraction, political climates and economic or banking crises. The value of
units of a trust will fluctuate with the value of the securities in the trust
and may be more or less than the price you originally paid for your units. As
with any investment, no one can guarantee that the performance of a trust will
be positive over any period of time. Because each trust is unmanaged, the
trustee will not sell securities in response to market fluctuations as is common
in managed investments. In addition, because some trusts hold a relatively small
number of securities, you may encounter greater market risk than in a more
diversified investment.
EQUITY SECURITIES. Investments in securities representing equity ownership
of a company are exposed to risks associated with the companies issuing the
securities, the sectors and geographic locations they are involved in and the
markets that such securities are traded on among other risks as described in
greater detail below.
FIXED INCOME SECURITIES. Investments in fixed income and similar securities
involve certain unique risks such as credit risk and interest rate risk among
other things as described in greater detail below.
DIVIDENDS. Stocks represent ownership interests in a company and are not
obligations of the company. Common stockholders have a right to receive payments
from the company that is subordinate to the rights of creditors, bondholders or
preferred stockholders of the company. This means that common stockholders have
a right to receive dividends only if a company's board of directors declares a
dividend and the company has provided for payment of all of its creditors,
bondholders and preferred stockholders. If a company issues additional debt
securities or preferred stock, the owners of these securities will have a claim
against the company's assets before common stockholders if the company declares
bankruptcy or liquidates its assets even though the common stock was issued
first. As a result, the company may be less willing or able to declare or pay
dividends on its common stock.
LEAPS(R). Although you may redeem your units at any time, if you redeem
before the LEAPS(R) are exercised or expire, the value of your units may be
adversely affected by the value of the LEAPS(R). However, if LEAPS(R) are not
exercised and you hold your units until the trust's scheduled termination date,
the LEAPS(R) will have ceased to exist and the trust's portfolio will consist of
only cash or securities or a combination of each.
If you sell or redeem your units before the LEAPS(R) are exercised, or if
the trust terminates prior to its scheduled termination date and the LEAPS(R)
have not been exercised, you may not realize any appreciation in the value of
the Common Stocks because even if the Common Stocks appreciate in value, that
appreciation may be more than fully, fully or partly offset by an increase in
value in the LEAPS(R) The value of the LEAPS(R) is deducted from the value of
the trust's assets when determining the value of a unit. If the Common Stocks
decline in price, your loss may be greater than it would be if there were no
LEAPS(R) because the value of the LEAPS(R) is a reduction to the value of the
Common Stocks when calculating the value of a unit. An increase in value of the
LEAPS(R), an obligation of the trust to sell or deliver the Common Stocks at the
strike price if the LEAPS(R) are exercised by the option holder, will reduce the
value of the Common Stocks in the trust, below the value of the Common Stocks
that would
-6-
otherwise be realizable if the Common Stocks were not subject to the LEAPS(R).
You should note that even if the price of a Common Stock does not change, if the
value of a LEAPS(R) increases (for example, based on increased volatility of a
Common Stock) your unit will lose value.
The value of the LEAPS(R) reduces the value of your units. As the value of
the LEAPS(R) increases, it has a more negative impact on the value of your
units. The value of the LEAPS(R) will also be affected by changes in the value
and dividend rates of the Common Stocks, an increase in interest rates, a change
in the actual and perceived volatility of the stock market and the Common Stocks
and the remaining time to expiration. Additionally, the value of a LEAPS(R)
does not increase or decrease at the same rate as the underlying Common Stocks
(although they generally move in the same direction). However, as a LEAPS(R)
approaches its expiration date, its value increasingly moves with the price of
the Common Stock subject to the LEAPS(R).
The strike price for each LEAPS(R) held by the trust may be adjusted
downward before the LEAPS(R) expiration triggered by certain corporate events
affecting that Common Stock. The OCC generally does not adjust option strike
prices to reflect ordinary dividends paid on the related stock but may adjust
option strike prices to reflect certain corporate events affecting the related
stock such as extraordinary dividends, stock splits, merger or other
extraordinary distributions or events. A reduction in the strike price of an
option could reduce the trust's capital appreciation potential on the related
Common Stock.
If the value of the underlying Common Stocks exceeds the strike price of
the LEAPS(R), it is likely that the option holder will exercise their right to
purchase the Common Stock subject to the LEAPS(R) from the trust. As the
LEAPS(R) may be exercised on any business day prior to their expiration, Common
Stocks may be sold to the option holders of the LEAPS(R) prior to the
termination of the trust. If this occurs, distributions from the trust will be
reduced by the amount of the dividends which would have been paid by Common
Stocks sold from the trust. In addition, the sale of Common Stocks may, in
certain circumstances, result in the early termination of the trust.
BOND QUALITY RISK. Bond quality risk is the risk that a bond will fall in
value if a rating agency decreases or withdraws the bond's rating.
PREPAYMENT RISK. When interest rates fall, among other factors, the issuer
of a fixed income security may prepay its obligations earlier than expected.
Such amounts will result in early distributions to an investor who may be unable
to reinvest such amounts at the yields originally invested which could adversely
impact the value of your investment. Certain bonds include call provisions which
expose such an investor to call risk. 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, the holder of such bond will receive principal but will not
receive any future interest distributions on the bond. Such investor might not
be able to reinvest this principal at as high a yield. A bond's call price could
be less than the price paid for the bond and could be below the bond's par
value. Certain bonds may also be subject to extraordinary optional or mandatory
redemptions if certain events occur, such as certain changes
-7-
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.
EXTENSION RISK. When interest rates rise, among other factors, issuers of a
security may pay off obligations more slowly than expected causing the value of
such obligations to fall.
"WHEN ISSUED" AND "DELAYED DELIVERY" BONDS. Certain debt obligations may
have been purchased on a "when, as and if issued" or "delayed delivery" basis.
The delivery of any such bonds may be delayed or may not occur. Interest on
these bonds begins accruing to the benefit of investors on their respective
dates of delivery. Investors will be "at risk" with respect to all "when, as and
if issued" and "delayed delivery" bonds (i.e., may derive either gain or loss
from fluctuations in the values of such bonds) from the date they purchase their
investment.
PREMIUM SECURITIES. Certain securities may have been acquired at a market
premium from par value at maturity. The coupon interest rates on the premium
securities at the time they were purchased by the fund were higher than the
current market interest rates for newly issued securities of comparable rating
and type. If such interest rates for newly issued and otherwise comparable
securities decrease, the market premium of previously issued securities will be
increased, and if such interest rates for newly issued comparable securities
increase, the market premium of previously issued securities will be reduced,
other things being equal. The current returns of securities trading at a market
premium are initially higher than the current returns of comparable securities
of a similar type issued at currently prevailing interest rates because premium
securities tend to decrease in market value as they approach maturity when the
face amount becomes payable. Because part of the purchase price is thus returned
not at maturity but through current income payments, early redemption of a
premium security 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 securities have an offering side valuation which represents a premium
over par or for original issue discount securities a premium over the accreted
value.
MARKET DISCOUNT. Certain fixed income securities may have been acquired at
a market discount from par value at maturity. The coupon interest rates on
discount securities at the time of purchase are lower than the current market
interest rates for newly issued securities 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 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.
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
-8-
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. Certain 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.
HIGH-YIELD, HIGH-RISK SECURITIES ARE GENERALLY SUBORDINATED OBLIGATIONS.
The payment of principal (and premium, if any), interest and sinking fund
requirements with respect to subordinated obligations of an issuer is
subordinated in right of payment to the payment of senior obligations of the
issuer. Senior obligations generally include most, if not all, significant debt
obligations of an issuer, whether existing at the time of issuance of
subordinated debt or created thereafter. Upon any distribution of the assets of
an issuer with subordinated obligations upon dissolution, total or partial
liquidation or reorganization of or similar proceeding relating to the issuer,
the holders of senior indebtedness will be entitled to receive payment in full
before holders of subordinated indebtedness will be entitled to receive any
payment. Moreover, generally no payment with respect to subordinated
indebtedness may be made while there exists a default with respect to any senior
indebtedness. Thus, in the event of insolvency, holders of senior indebtedness
of an issuer generally will recover more, ratably, than holders of subordinated
indebtedness of that issuer.
CREDIT RISK. Credit risk is the risk that a borrower is unable to meet its
obligation to pay principal or interest on a security. This could cause the
value of an investment to fall and may reduce the level of dividends an
investment pays which would reduce income.
INTEREST RATE RISK. Interest rate risk is the risk that the value of fixed
income securities and similar securities will fall if interest rates increase.
Bonds and other fixed income securities typically fall in value when interest
rates rise and rise in value when interest rates fall. Securities with longer
periods before maturity are often more sensitive to interest rate changes.
-9-
LIQUIDITY RISK. 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.
INVESTMENT IN OTHER INVESTMENT COMPANIES. As with other investments,
investments in other investment companies are subject to market and selection
risk. In addition, when a trust acquires shares of investment companies,
unitholders bear both their proportionate share of fees and expenses in the
trust and, indirectly, the expenses of the underlying investment companies.
Investment companies' expenses are subject to the risk of fluctuation including
in response to fluctuation in a fund's assets. Accordingly, a fund's actual
expenses may vary from what is indicated at the time of investment by a trust.
There are certain regulatory limitations on the ability of a trust to hold other
investment companies which may impact the trust's ability to invest in certain
funds, the weighting of the fund in a trust's portfolio and the trust's ability
to issue additional units in the future.
CLOSED-END FUNDS. Closed-end investment companies ("closed-end funds") are
actively managed investment companies registered under the Investment Company
Act of 1940 that invest in various types of securities. Closed-end funds issue
shares of common stock that are generally traded on a securities exchange
(although some closed-end fund shares are not listed on a securities exchange).
Closed-end funds are subject to various risks, including management's ability to
meet the closed-end fund's investment objective, and to manage the closed-end
fund portfolio when the underlying securities are redeemed or sold during
periods of market turmoil and as investors' perceptions regarding closed-end
funds or their underlying investments change. If a trust invests in closed-end
funds, you will bear not only your share of the trust's expenses, but also the
expenses of the underlying funds. By investing in the other funds, a trust may
incur greater expenses than you would incur if you invested directly in the
closed-end funds.
The net asset value of closed-end fund shares will fluctuate with changes
in the value of the underlying securities that the closed-end fund owns. In
addition, for various reasons closed- end fund shares frequently trade at a
discount from their net asset value in the secondary market. This risk is
separate and distinct from the risk that the net asset value of closed-end fund
shares may decrease. The amount of such discount from net asset value is subject
to change from time to time in response to various factors.
Certain closed-end funds employ the use of leverage in their portfolios
through the issuance of preferred stock, debt or other borrowings. While
leverage often serves to increase the yield of a closed-end fund, this leverage
also subjects the closed-end fund to increased risks. These risks may include
the likelihood of increased volatility and the possibility that the closed- end
fund's common share income will fall if the dividend rate on the preferred
shares or the interest rate on any borrowings rises.
Closed-end funds' governing documents may contain certain anti-takeover
provisions that may have the effect of inhibiting a fund's possible conversion
to open-end status and limiting the ability of other persons to acquire control
of a fund. In certain circumstances, these provisions might also inhibit the
ability of stockholders (including a trust) to sell their shares at a premium
over prevailing market prices. This characteristic is a risk separate and
distinct from the risk that
-10-
a fund's net asset value will decrease. In particular, this characteristic would
increase the loss or reduce the return on the sale of those closed-end fund
shares that were purchased by a trust at a premium. In the unlikely event that a
closed-end fund converts to open- end status at a time when its shares are
trading at a premium there would be an immediate loss in value to a trust since
shares of open-end funds trade at net asset value. Certain closed-end funds may
have in place or may put in place in the future plans pursuant to which the fund
may repurchase its own shares in the marketplace. Typically, these plans are put
in place in an attempt by a fund's board of directors to reduce a discount on
its share price. To the extent that such a plan is implemented and shares owned
by a trust are repurchased by a fund, the trust's position in that fund will be
reduced and the cash will be distributed.
A trust may be prohibited from subscribing to a rights offering for shares
of any of the closed-end funds in which it invests. In the event of a rights
offering for additional shares of a fund, unitholders should expect that a trust
holding shares of the fund will, at the completion of the offer, own a smaller
proportional interest in such fund that would otherwise be the case. It is not
possible to determine the extent of this dilution in share ownership without
knowing what proportion of the shares in a rights offering will be subscribed.
This may be particularly serious when the subscription price per share for the
offer is less than the fund's net asset value per share. Assuming that all
rights are exercised and there is no change in the net asset value per share,
the aggregate net asset value of each shareholder's shares of common stock
should decrease as a result of the offer. If a fund's subscription price per
share is below that fund's net asset value per share at the expiration of the
offer, shareholders would experience an immediate dilution of the aggregate net
asset value of their shares of common stock as a result of the offer, which
could be substantial.
BUSINESS DEVELOPMENT COMPANIES. Business development companies ("BDCs") are
closed-end investment companies that have elected to be treated as business
development companies under the Investment Company Act of 1940. BDCs are
required to at least 70% of their investments in eligible assets which include,
among other things, (i) securities of eligible portfolio companies (generally,
domestic companies that are not investment companies and that cannot have a
class of securities listed on a national securities exchange or have securities
that are marginable that are purchased from that company in a private
transaction), (ii) securities received by the BDC in connection with its
ownership of securities of eligible portfolio companies, or (iii) cash, cash
items, government securities, or high quality debt securities maturing one year
or less from the time of investment.
BDCs' ability to grow and their overall financial condition is impacted
significantly by their ability to raise capital. In addition to raising capital
through the issuance of common stock, BDCs may engage in borrowing. This may
involve using revolving credit facilities, the securitization of loans through
separate wholly-owned subsidiaries and issuing of debt and preferred securities.
BDCs are less restricted than other closed-end funds as to the amount of debt
they can have outstanding. Generally, a BDC may not issue any class of senior
security representing an indebtedness unless, immediately after such issuance or
sale, it will have asset coverage of at least 200%. (Thus, for example, if a BDC
has $5 million in assets, it can borrow up to $5 million, which would result in
assets of $10 million and debt of $5 million.) These borrowings, also known as
leverage, magnify the potential for gain or loss on amounts invested
-11-
and, accordingly, the risks associated with investing in BDC securities. While
the value of a BDC's assets increases, leveraging would cause the net value per
share of BDC common stock to increase more sharply than it would have had such
BDC not leveraged. However, if the value of a BDC's assets decreases, leveraging
would cause net asset value to decline more sharply than it otherwise would have
had such BDC not leveraged. In addition to decreasing the value of a BDC's
common stock, it could also adversely impact a BDC's ability to make dividend
payments. A BDC's credit rating may change over time which could adversely
affect their ability to obtain additional credit and/or increase the cost of
such borrowing. Agreements governing BDC's credit facilities and related funding
and service agreements may contain various covenants that limit the BDC's
discretion in operating its business along with other limitations. Any defaults
may restrict the BDC's ability to manage assets securing related assets which
may adversely impact the BDC's liquidity and operations.
BDCs compete with other BDCs along with a large number of investment funds,
investment banks and other sources of financing to make their investments.
Competitors may have lower costs or access to funding sources that cause BDCs to
lose prospective investments if they do not match competitors' pricing, terms
and structure. As a result of this competition, there is no assurance that a BDC
will be able to identify and take advantage of attractive investment
opportunities or that they will fully be able to invest available capital.
BDC investments are frequently not publicly traded and, as a result, there
is uncertainty as to the value and liquidity of those investments. BDCs may use
independent valuation firms to value their investments and such valuations may
be uncertain, be based on estimates and/or differ materially from that which
would have been used if a ready market for those investments existed. The value
of a BDC could be adversely affected if its determinations regarding the fair
value of investments was materially higher than the value realized upon sale of
such investments. Due to the relative illiquidity of certain BDC investments, if
a BDC is required to liquidate all or a portion of its portfolio quickly, it may
realize significantly less than the value at which such investments are
recorded. Further restrictions may exist on the ability to liquidate certain
assets to the extent that subsidiaries or related parties have material non-
public information regarding such assets.
BDCs may enter into hedging transaction and utilize derivative instruments
such as forward contracts, options and swaps. Unanticipated movements and
improper correlation of hedging instruments may prevent a BDC from hedging
against exposure to risk of loss. BDCs are required to make available
significant managerial assistance to their portfolio companies. Significant
managerial assistance refers to any arrangement whereby a BDC provides
significant guidance and counsel concerning the management, operations, or
business objectives and policies of a portfolio company. Examples of such
activities include arranging financing, managing relationships with financing
sources, recruiting management personnel, and evaluating acquisition and
divestiture opportunities. BDCs are frequently externally managed by an
investment adviser which may also provide this external managerial assistance to
portfolio companies. Such investment adviser's liability may be limited under
their investment advisory agreement which may lead such investment adviser to
act in a riskier manner than it would were it investing for its own account.
Such investment advisers may be entitled to incentive compensation which may
cause such adviser to make more speculative and riskier investments
-12-
than it would if investing for its own account. Such compensation may be due
even in the case of declines to the value of a BDC's investments.
BDCs may issue options, warrants, and rights to convert to voting
securities to its officers, employees and board members. Any issuance of
derivative securities requires the approval of the company's board of directors
and authorization by the company's shareholders. A BDC may operate a profit-
sharing plan for its employees, subject to certain restrictions. BDCs frequently
have high expenses which may include, but are not limited to, the payment of
management fees, administration expenses, taxes, interest payable on debt,
governmental charges, independent director fees and expenses, valuation
expenses, and fees payable to third parties relating to or associated with
making investments. These expenses may fluctuate significantly over time.
If a BDC fails to maintain its status as a BDC it may be regulated as a
closed-end fund which would subject such BDC to additional regulatory
restrictions and significantly decrease its operating flexibility. In addition,
such failure could trigger an event of default under certain outstanding
indebtedness which could have a material adverse impact on its business.
EXCHANGE-TRADED FUNDS. Exchange-traded funds ("ETFs") are typically
investment companies registered under the Investment Company Act of 1940 that
have obtained exemptive relief from the Securities and Exchange Commission
allowing fund shares to trade on a securities exchange. Shares of ETFs may trade
at a discount from their net asset value in the secondary market. This risk is
separate and distinct from the risk that the net asset value of ETFs may
decrease. The amount of such discount from net asset value is subject to change
from time to time in response to various factors. ETFs are subject to various
risks, including management's ability to meet the ETF's investment objective,
and to manage the ETF portfolio when the underlying securities are redeemed or
sold during periods of market turmoil and as investors' perceptions regarding
ETFs or their underlying investments change. A trust and any underlying ETFs
have operating expenses. If a trust invests in ETFs, you will bear not only your
share of the trust's expenses, but also the expenses of the underlying funds. By
investing in the other funds, a trust may incur greater expenses than you would
incur if you invested directly in the funds.
Most ETFs replicate the composition or returns of a securities index. These
ETFs face index correlation risk which is the risk that the performance of an
ETF will vary from the actual performance of the fund's target index, known as
"tracking error." This can happen due to transaction costs, market impact,
corporate actions (such as mergers and spin-offs) and timing variances. Some
funds use a technique called "representative sampling," which means that the
fund invests in a representative sample of securities in its target index rather
than all of the index securities. This could increase the risk of tracking
error.
Some ETFs are open-end funds. Open-end funds of this type can be actively-
managed or passively-managed investment companies that are registered under the
Investment Company Act of 1940. These open-end funds have received orders from
the Securities and Exchange Commission exempting them from various provisions of
the Investment Company Act of 1940. Regular open-end funds generally issue
redeemable securities that are issued and redeemed at a price based on the
fund's current net asset value and are not traded on a securities exchange.
-13-
Exchange-traded open-end funds, however, issue shares of common stock that are
traded on a securities exchange based on negotiated prices rather than the
fund's current net asset value. These funds only issue new shares and redeem
outstanding shares in very large blocks, often called "creation units," in
exchange for an in-kind distribution of the fund's portfolio securities. Due to
a variety of cost and administrative factors, a trust that invests in ETFs will
generally buy and sell shares of its underlying open-end fund ETFs on securities
exchanges rather than engaging in transactions in creation units. Shares of
exchange-traded open-end funds frequently trade at a discount from their net
asset value in the secondary market. This risk is separate and distinct from the
risk that the net asset value of open-end fund shares may decrease. The amount
of such discount from net asset value is subject to change from time to time in
response to various factors.
Some ETFs are unit investment trusts ("UITs"). UITs of this type are
passively-managed investment companies that are registered under the Investment
Company Act of 1940. ETFs that are UITs differ significantly from your trust in
certain respects, even though the UITs that may be held in the trust's portfolio
and the trust itself are registered unit investment trusts. UITs that are ETFs
have received orders from the Securities and Exchange Commission exempting them
from various provisions of the Investment Company Act of 1940. Regular UITs,
such as your trust, generally issue redeemable securities that are issued and
redeemed at a price based on the UIT's current net asset value and are not
traded on a securities exchange. ETFs that are UITs, however, issue units that
are traded on a securities exchange based on negotiated prices rather than the
UIT's current net asset value. These UITs only issue new shares and redeem
outstanding shares in very large blocks, often called "creation units," in
exchange for an in-kind distribution of the UIT's portfolio securities. Due to a
variety of cost and administrative factors, a trust that invests in ETFs will
generally buy and sell shares of its underlying ETFs on securities exchanges
rather than engaging in transactions in creation units. Units of exchange-traded
UITs frequently trade at a discount from their net asset value in the secondary
market. This risk is separate and distinct from the risk that the net asset
value of UIT units may decrease. The amount of such discount from net asset
value is subject to change from time to time in response to various factors.
INVERSE ETFS. Certain ETFs may be "inverse" ETFs. An inverse ETF, sometimes
referred to as a "bear ETF" or "short ETF," is a special type of index ETF that
is designed to provide investment results that move in the opposite direction of
the daily price movement of the index to which it is benchmarked. Put another
way, an inverse ETF is designed to go up in value when its benchmark index goes
down in value, and go down in value when its benchmark index goes up in value.
Inverse ETFs can be used to establish a hedge position within an investment
portfolio to attempt to protect its value during market declines. Though inverse
ETFs may reduce downside risk and volatility in a down market, they are not
suitable for all investors. The value of an inverse investment may tend to
increase on a daily basis by the amount of any decrease in the index, but the
converse is also true that the value of the investment will also tend to
decrease on a daily basis by the amount of any increase in the index.
Investing in inverse ETFs involves certain risks, which may include
increased volatility due to the ETFs' possible use of short sales of securities
and derivatives such as options and futures. Inverse ETFs are subject to active
trading risks that may increase volatility and impact the ETFs' ability to
achieve their investment objectives. The use of leverage by an ETF increases
-14-
the risk to the ETF. The more an ETF invests in leveraged instruments, the more
the leverage will magnify any gains or losses on those investments. Most inverse
ETFs "reset" daily, meaning that they are designed to achieve their stated
objectives on a daily basis only and not over any longer time period. Due to the
effect of compounding, the performance of these ETFs over longer periods of time
can differ significantly from the inverse of the performance of the ETF's
underlying index or benchmark during the same period of time. This effect can be
magnified in volatile markets. Inverse ETFs typically are not suitable for
retail investors who plan to hold them for more than one trading session,
particularly in volatile markets.
LEVERAGED ETFS. Certain ETFs may be "leveraged" ETFs. These ETFs seek to
match a multiple or multiples of the performance, or the inverse of the
performance, of a benchmark index on a given day and not for greater periods of
time. This means that the return of a leveraged ETF for a period longer than a
single day will be the result of each day's returns compounded over the period
and not the point-to-point return of the index over the entire time period. As a
result, the use of leverage will very likely cause the performance of such an
ETF to be either greater than, or less than, the index performance times the
stated multiple in an ETF's investment objective. Investors should recognize
that the degree of volatility of the underlying index can have a dramatic effect
on an ETF's longer-term performance. The greater the volatility, given a
particular index return, the greater the downside deviation will be of the ETF's
longer-term performance from a simple multiple of its index's longer-term
return. Leveraged ETFs use investment techniques that may be considered
aggressive, including the use of futures contracts, options on futures
contracts, securities and indexes, forward contracts, swap agreements and
similar instruments. Leveraged ETFs are typically unsuitable for investors who
plan to hold them for longer than one trading session, particularly in volatile
markets.
NON-DIVERSIFICATION RISK. Certain funds held by a trust may be classified
as "non-diversified." Such funds may be more exposed to the risks associated
with and developments affecting an individual issuer, industry and/or asset
class than a fund that invests more widely.
FOREIGN ISSUERS. An investment in securities of non-U.S. issuers involves
certain investment risks that are different in some respects from an investment
in the securities of domestic issuers. These investment risks include future
political or governmental restrictions which might adversely affect the payment
or receipt of payment of dividends on the relevant securities, the possibility
that the financial condition of the issuers of the securities may become
impaired or that the general condition of the relevant stock market may worsen
(both of which would contribute directly to a decrease in the value of foreign
securities), the limited liquidity and relatively small market capitalization of
the relevant securities market, expropriation or confiscatory taxation, economic
uncertainties and foreign currency devaluations and fluctuations. In addition,
for foreign issuers that are not subject to the reporting requirements of the
Securities Exchange Act of 1934, there may be less publicly available
information than is available from a domestic issuer. In addition, foreign
issuers are not necessarily subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic issuers. The securities of many foreign issuers are less
liquid and their prices more volatile than securities of comparable domestic
issuers. In addition, fixed brokerage commissions and other transaction costs in
foreign securities markets are generally higher than in
-15-
the United States and there is generally less government supervision and
regulation of exchanges, brokers and issuers in foreign countries than there is
in the United States.
Securities issued by non-U.S. issuers generally pay income in foreign
currencies and principally trade in foreign currencies. Therefore, there is a
risk that the U.S. dollar value of these securities will vary with fluctuations
in the U.S. dollar foreign exchange rates for the various securities.
There can be no assurance that exchange control regulations might not be
adopted in the future which might adversely affect payment to a trust or a fund
held by a trust. The adoption of exchange control regulations and other legal
restrictions could have an adverse impact on the marketability of foreign
securities and on the ability to liquidate securities. In addition, restrictions
on the settlement of transactions on either the purchase or sale side, or both,
could cause delays or increase the costs associated with the purchase and sale
of the foreign securities and correspondingly could affect the price of trust
units.
Investors should be aware that it may not be possible to buy all securities
at the same time because of the unavailability of any security, and restrictions
applicable to a trust relating to the purchase of a security by reason of the
federal securities laws or otherwise.
Foreign securities generally have not been registered under the Securities
Act of 1933 and may not be exempt from the registration requirements of such
Act. Sales of non-exempt securities in the United States securities markets are
subject to severe restrictions and may not be practicable. Accordingly, sales of
these securities will generally be effected only in foreign securities markets.
Investors should realize that the securities might be traded in foreign
countries where the securities markets are not as developed or efficient and may
not be as liquid as those in the United States. The value of securities will be
adversely affected if trading markets for the securities are limited or absent.
EMERGING MARKETS. Compared to more mature markets, some emerging markets
may have a low level of regulation, enforcement of regulations and monitoring of
investors' activities. Those activities may include practices such as trading on
material non-public information. The securities markets of developing countries
are not as large as the more established securities markets and have
substantially less trading volume, resulting in a lack of liquidity and high
price volatility. There may be a high concentration of market capitalization and
trading volume in a small number of issuers representing a limited number of
industries as well as a high concentration of investors and financial
intermediaries. These factors may adversely affect the timing and pricing of the
acquisition or disposal of securities. In certain emerging markets, registrars
are not subject to effective government supervision nor are they always
independent from issuers. The possibility of fraud, negligence, undue influence
being exerted by the issuer or refusal to recognize ownership exists, which,
along with other factors, could result in the registration of a shareholding
being completely lost. Investors could suffer loss arising from these
registration problems. In addition, the legal remedies in emerging markets are
often more limited than the remedies available in the United States.
-16-
Practices pertaining to the settlement of securities transactions in
emerging markets involve higher risks than those in developed markets, in large
part because of the need to use brokers and counterparties who are less well
capitalized, and custody and registration of assets in some countries may be
unreliable. As a result, brokerage commissions and other fees are generally
higher in emerging markets and the procedures and rules governing foreign
transactions and custody may involve delays in payment, delivery or recovery of
money or investments. Delays in settlement could result in investment
opportunities being missed if a trust or a fund held by a trust is unable to
acquire or dispose of a security. Certain foreign investments may also be less
liquid and more volatile than U.S. investments, which may mean at times that
such investments are unable to be sold at desirable prices.
Political and economic structures in emerging markets often change rapidly,
which may cause instability. In adverse social and political circumstances,
governments have been involved in policies of expropriation, confiscatory
taxation, nationalization, intervention in the securities market and trade
settlement, and imposition of foreign investment restrictions and exchange
controls, and these could be repeated in the future. In addition to withholding
taxes on investment income, some governments in emerging markets may impose
different capital gains taxes on foreign investors. Foreign investments may also
be subject to the risks of seizure by a foreign government and the imposition of
restrictions on the exchange or export of foreign currency. Additionally, some
governments exercise substantial influence over the private economic sector and
the political and social uncertainties that exist for many developing countries
are considerable.
Another risk common to most developing countries is that the economy is
heavily export oriented and, accordingly, is dependent upon international trade.
The existence of overburdened infrastructures and obsolete financial systems
also presents risks in certain countries, as do environmental problems. Certain
economies also depend to a large degree upon exports of primary commodities and,
therefore, are vulnerable to changes in commodity prices which, in turn, may be
affected by a variety of factors.
DEPOSITARY RECEIPTS. Certain of the securities in a trust may be in
depositary receipt form, including American Depositary Receipts ("ADRs") or
Global Depositary Receipts ("GDRs"). Depositary receipts represent stock
deposited with a custodian in a depositary. Depositary receipts are issued by a
bank or trust company to evidence ownership of underlying securities issued by a
foreign corporation. These instruments may not necessarily be denominated in the
same currency as the securities into which they may be converted.
Depositary receipts may be sponsored or unsponsored. In an unsponsored
facility, the depositary initiates and arranges the facility at the request of
market makers and acts as agent for the depositary receipts holder, while the
company itself is not involved in the transaction. In a sponsored facility, the
issuing company initiates the facility and agrees to pay certain administrative
and shareholder-related expenses. Sponsored facilities use a single depositary
and entail a contractual relationship between the issuer, the shareholder and
the depositary; unsponsored facilities involve several depositaries with no
contractual relationship to the company. The depositary bank that issues
depositary receipts generally charges a fee, based on the price of the
depositary receipts, upon issuance and cancellation of the depositary receipts.
-17-
This fee would be in addition to the brokerage commissions paid upon the
acquisition or surrender of the security. In addition, the depositary bank
incurs expenses in connection with the conversion of dividends or other cash
distributions paid in local currency into U.S. dollars and such expenses are
deducted from the amount of the dividend or distribution paid to holders,
resulting in a lower payout per underlying shares represented by the depositary
receipts than would be the case if the underlying share were held directly.
Certain tax considerations, including tax rate differentials and withholding
requirements, arising from the application of the tax laws of one nation to
nationals of another and from certain practices in the depositary receipts
market may also exist with respect to certain depositary receipts. In varying
degrees, any or all of these factors may affect the value of the depositary
receipts compared with the value of the underlying shares in the local market.
In addition, the rights of holders of depositary receipts may be different than
those of holders of the underlying shares, and the market for depositary
receipts may be less liquid than that for the underlying shares. Depositary
receipts are registered securities pursuant to the Securities Act of 1933 and
may be subject to the reporting requirements of the Securities Exchange Act of
1934.
For the securities that are depositary receipts, currency fluctuations will
affect the United States dollar equivalent of the local currency price of the
underlying domestic share and, as a result, are likely to affect the value of
the depositary receipts and consequently the value of the securities. The
foreign issuers of securities that are depositary receipts may pay dividends in
foreign currencies which must be converted into dollars. Most foreign currencies
have fluctuated widely in value against the United States dollar for many
reasons, including supply and demand of the respective currency, the soundness
of the world economy and the strength of the respective economy as compared to
the economies of the United States and other countries. Therefore, for any
securities of issuers (whether or not they are in depositary receipt form) whose
earnings are stated in foreign currencies, or which pay dividends in foreign
currencies or which are traded in foreign currencies, there is a risk that their
United States dollar value will vary with fluctuations in the United States
dollar foreign exchange rates for the relevant currencies.
CURRENCY RISK. A trust that invests in securities of non-U.S. issuers will
be subject to currency risk, which is the risk that an increase in the U.S.
dollar relative to the non-U.S. currency will reduce returns or portfolio value.
Generally, when the U.S. dollar rises in value relative to a non-U.S. currency,
a trust's investment in securities denominated in that currency will lose value
because its currency is worth fewer U.S. dollars. On the other hand, when the
value of the U.S. dollar falls relative to a non-U.S. currency, a trust's
investments denominated in that currency will tend to increase in value because
that currency is worth more U.S. dollars. The exchange rates between the U.S.
dollar and non-U.S. currencies depend upon such factors as supply and demand in
the currency exchange markets, international balance of payments, governmental
intervention, speculation and other economic and political conditions. A trust
may incur conversion costs when it converts its holdings to another currency.
Non-U.S. exchange dealers may realize a profit on the difference between the
price at which a trust buys and sells currencies. A trust may engage in non-U.S.
currency exchange transactions in connection with its portfolio investments. A
trust may also be subject to currency risk through investments in ADRs, GDRs and
other non-U.S. securities denominated in U.S. dollars.
-18-
FOREIGN GOVERNMENT SECURITIES RISK. The ability of a government issuer,
especially in an emerging market country, to make timely and complete payments
on its debt obligations will be strongly influenced by the government issuer's
balance of payments, including export performance, its access to international
credits and investments, fluctuations of interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. If a
government issuer cannot generate sufficient earnings from foreign trade to
service its external debt, it may need to depend on continuing loans and aid
from foreign governments, commercial banks, and multinational organizations.
There are no bankruptcy proceedings similar to those in the United States by
which defaulted government debt may be collected. Additional factors that may
influence a government issuer's ability or willingness to service debt include,
but are not limited to, a country's cash flow situation, the ability of
sufficient foreign exchange on the date a payment is due (where applicable), the
relative size of its debt burden to the economy as a whole, and the issuer's
policy towards the International Monetary Fund, the International Bank for
Reconstruction and Development and other international agencies to which a
government debtor may be subject.
SUPRANATIONAL ENTITIES' SECURITIES. Certain securities are obligations
issued by supranational entities such as the International Bank for
Reconstruction and Development (the World Bank). The government members, or
"stockholders," usually make initial capital contributions to supranational
entities and in many cases are committed to make additional capital
contributions if a supranational entity is unable to repay its borrowings. There
is no guarantee that one or more stockholders of a supranational entity will
continue to make any necessary additional capital contributions. If such
contributions are not made, the entity may be unable to pay interest or repay
principal on its debt securities, and an investor in such securities may lose
money on such investments.
SMALL-CAP AND MID-CAP COMPANIES. Smaller company stocks customarily involve
more investment risk than larger company stocks. Small-capitalization and mid-
capitalization companies may have limited product lines, markets or financial
resources; may lack management depth or experience; and may be more vulnerable
to adverse general market or economic developments than large companies. Some of
these companies may distribute, sell or produce products which have recently
been brought to market and may be dependent on key personnel.
The prices of small or mid-size company securities are often more volatile
than prices associated with large company issues, and can display abrupt or
erratic movements at times, due to limited trading volumes and less publicly
available information. Also, because small-cap and mid-cap companies normally
have fewer shares outstanding and these shares trade less frequently than large
companies, it may be more difficult for a trust which contains these securities
to buy and sell significant amounts of such shares without an unfavorable impact
on prevailing market prices.
REAL ESTATE INVESTMENT TRUSTS. Real estate investment trusts ("REITs") may
be exposed to the risks associated with the ownership of real estate which
include, among other factors, changes in general U.S., global and local economic
conditions, declines in real estate values,
-19-
changes in the financial health of tenants, overbuilding and increased
competition for tenants, oversupply of properties for sale, changing
demographics, changes in interest rates, tax rates and other operating expenses,
changes in government regulations, faulty construction and the ongoing need for
capital improvements, regulatory and judicial requirements including relating to
liability for environmental hazards, changes in neighborhood values and buyer
demand, and the unavailability of construction financing or mortgage loans at
rates acceptable to developers.
Many factors can have an adverse impact on the performance of a REIT,
including its cash available for distribution, the credit quality of the REIT or
the real estate industry generally. The success of a REIT depends on various
factors, including the occupancy and rent levels, appreciation of the underlying
property and the ability to raise rents on those properties. Economic recession,
overbuilding, tax law changes, higher interest rates or excessive speculation
can all negatively impact REITs, their future earnings and share prices.
Variations in rental income and space availability and vacancy rates in terms of
supply and demand are additional factors affecting real estate generally and
REITs in particular. Properties owned by a REIT may not be adequately insured
against certain losses and may be subject to significant environmental
liabilities, including remediation costs. You should also be aware that REITs
may not be diversified and are subject to the risks of financing projects. The
real estate industry may be cyclical, and, if REIT securities are acquired at or
near the top of the cycle, there is increased risk of a decline in value of the
REIT securities. At various points in time, demand for certain types of real
estate may inflate the value of real estate. This may increase the risk of a
substantial decline in the value of such real estate and increase the risk of a
decline in the value of the securities. REITs are also subject to defaults by
borrowers and the market's perception of the REIT industry generally. Because of
their structure, and a current legal requirement that they distribute at least
90% of their taxable income to shareholders annually, REITs require frequent
amounts of new funding, through both borrowing money and issuing stock. Thus,
REITs historically have frequently issued substantial amounts of new equity
shares (or equivalents) to purchase or build new properties. This may adversely
affect REIT equity share market prices. Both existing and new share issuances
may have an adverse effect on these prices in the future, especially if REITs
issue stock when real estate prices are relatively high and stock prices are
relatively low.
Mortgage REITs engage in financing real estate, purchasing or originating
mortgages and mortgage-backed securities and earning income from the interest on
these investments. Such REITs face risks similar to those of other financial
firms, such as changes in interest rates, general market conditions and credit
risk, in addition to risks associated with an investment in real estate.
MASTER LIMITED PARTNERSHIPS. Master limited partnerships ("MLPs") are
limited partnerships or limited liability companies that are generally taxed as
partnerships whose interests are traded on securities exchanges. MLP ownership
generally consists of a general partner and limited partners. The general
partner manages the partnership, has an ownership stake in the partnership and
is eligible to receive an incentive distribution. The limited partners provide
capital to the partnership, have a limited (if any) role in the operation and
management of the partnership and receive cash distributions. Most MLPs
generally operate in the energy, natural resources or real estate sectors and
are subject to the risks generally applicable to companies in those sectors.
MLPs are also subject to the risk that authorities could challenge the
-20-
tax treatment of MLPs for federal income tax purposes which could have a
negative impact on the after-tax income available for distribution by the MLPs.
RESTRICTED SECURITIES. Certain securities may only be resold pursuant to
Rule 144A under the Securities Act of 1933 (the "Securities Act"). Such
securities may not be readily marketable. Restricted securities may be sold only
to purchasers meeting certain eligibility requirements in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act. Where registration of such
securities under the Securities Act is required, an owner may be obligated to
pay all or part of the registration expenses and a considerable period may
elapse between the time of the decision to sell and the time an owner may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, an owner might
obtain a less favorable price than that which prevailed when it decided to sell.
PREFERRED SECURITY RISKS. Preferred securities include preferred stocks,
trust preferred securities, subordinated or junior notes and debentures and
other similarly structured securities. Preferred securities combine some of the
characteristics of common stocks and bonds. Preferred securities generally pay
fixed or adjustable rate income in the form of dividends or interest to
investors. Preferred securities generally have preference over common stock in
the payment of income and the liquidation of a company's assets. However,
preferred securities are typically subordinated to bonds and other debt
instruments in a company's capital structure and therefore will be subject to
greater credit risk than those debt instruments. Because of their subordinated
position in the capital structure of an issuer, the ability to defer dividend or
interest payments for extended periods of time without triggering an event of
default for the issuer, and certain other features, preferred securities are
often treated as equity-like instruments by both issuers and investors, as their
quality and value are heavily dependent on the profitability and cash flows of
the issuer rather than on any legal claims to specific assets. Most retail-
available preferred securities have a $25 par (or "face") value but can also
have par values of $50 or $1,000. Preferred securities are often callable at
their par value at some point in time after their original issuance date. Income
payments on preferred securities are generally stated as a percentage of these
par values although certain preferred securities provide for variable or
additional participation payments.
While some preferred securities are issued with a final maturity date,
others are perpetual in nature. In certain instances, a final maturity date may
be extended and/or the final payment of principal may be deferred at the
issuer's option for a specified time without triggering an event of default for
the issuer. Preferred securities generally may be subject to provisions that
allow an issuer, under certain conditions, to skip ("non-cumulative" preferred
securities) or defer ("cumulative" preferred securities) distributions. The
issuer of a non-cumulative preferred security does not have an obligation to
make up any arrearages to holders of such securities and non-cumulative
preferred securities can defer distributions indefinitely. Cumulative preferred
securities typically contain provisions that allow an issuer, at its discretion,
to defer distributions payments for up to 10 years. If a preferred security is
deferring its distribution, investors may be required to recognize income for
tax purposes while they are not receiving any income. In certain circumstances,
an issuer of preferred securities may redeem the securities during their life.
For certain types of preferred securities, a redemption may be triggered by a
change in federal income
-21-
tax or securities laws. As with call provisions, a redemption by the issuer may
negatively impact the return of the security. Preferred security holders
generally have no voting rights with respect to the issuing company except in
very limited situations, such as if the issuer fails to make income payments for
a specified period of time or if a declaration of default occurs and is
continuing. Preferred securities may be substantially less liquid than many
other securities, such as U.S. government securities or common stock. The
federal income tax treatment of preferred securities may not be clear or may be
subject to recharacterization by the Internal Revenue Service. Issuers of
preferred securities may be in industries that are heavily regulated and that
may receive government funding. The value of preferred securities issued by
these companies may be affected by changes in government policy, such as
increased regulation, ownership restrictions, deregulation or reduced government
funding.
Preferred stocks are a category of preferred securities that are typically
considered equity securities and make income payments from an issuer's after-tax
profits that are treated as dividends for tax purposes. While they generally
provide for specified income payments as a percentage of their par value, these
payments generally do not carry the same set of guarantees afforded to
bondholders and have higher risks of non-payment or deferral.
Certain preferred securities may be issued by trusts or other special
purpose entities established by operating companies, and are therefore not
direct obligations of operating companies. At the time a trust or special
purpose entity sells its preferred securities to investors, the trust or special
purpose entity generally purchases debt of the operating company with terms
comparable to those of the trust or special purpose entity securities. The trust
or special purpose entity, as the holder of the operating company's debt, has
priority with respect to the operating company's earnings and profits over the
operating company's common shareholders, but is typically subordinated to other
classes of the operating company's debt. Distribution payments of trust
preferred securities generally coincide with interest payments on the underlying
obligations. Distributions from trust preferred securities are typically treated
as interest rather than dividends for federal income tax purposes and therefore,
are not eligible for the dividends-received deduction or the lower federal tax
rates applicable to qualified dividends. Trust preferred securities generally
involve the same risks as traditional preferred stocks but are also subject to
unique risks, including risks associated with income payments only being made if
payments on the underlying obligations are made. Typically, a trust preferred
security will have a rating that is below that of its corresponding operating
company's senior debt securities due to its subordinated nature.
Subordinated or junior notes or debentures are securities that generally
have priority to common stock and other preferred securities in a company's
capital structure but are subordinated to other bonds and debt instruments in a
company's capital structure. As a result, these securities will be subject to
greater credit risk than those senior debt instruments and will not receive
income payments or return of principal in the event of insolvency until all
obligations on senior debt instruments have been made. Distributions from these
securities are typically treated as interest rather than dividends for federal
income tax purposes and therefore, are not eligible for the dividends-received
deduction or the lower federal tax rates applicable to qualified dividends.
Investments in subordinated or junior notes or debentures also generally involve
risks similar to risks of other preferred securities described above.
-22-
MUNICIPAL BONDS. Certain municipals bonds are "general obligation bonds"
and are general obligations of a governmental entity that are backed by the
taxing power of such entity. Other municipals bonds 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, variations in the security of the different bonds,
both within a particular classification and between classifications, depending
on numerous factors.
Certain municipal 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 provisions of the Internal Revenue
Code, which include 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.
Certain municipal 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 municipal bonds may be obligations of public utility issuers,
including those selling wholesale and retail electric power and gas. General
problems of such issuers would
-23-
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, regulations governing the licensing,
construction and operation of nuclear power plants, which may adversely affect
the ability of the issuers of certain bonds to make payments of principal and/or
interest on such bonds.
Certain municipal 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 municipal 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 municipal bonds may be obligations that are secured by lease
payments of a governmental entity ("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
-24-
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.
Certain municipal 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. 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 municipal bonds 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 municipal 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. No one can predict the causes or
likelihood of the redemption of resource recovery bonds prior to the stated
maturity of the bonds.
-25-
Certain municipal bonds may have been acquired at a market discount from
par value at maturity. A "tax-exempt" municipal 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.
Certain municipal 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. 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 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 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. No one can 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.
-26-
CONVERTIBLE SECURITIES. Convertible securities are generally debt
obligations or preferred stock of a company that are convertible into another
security of the company, typically common stock. Convertible securities
generally offer lower interest or dividend yields than non- convertible fixed-
income securities of similar credit quality because of the potential for capital
appreciation. The market values of convertible securities tend to decline as
interest rates increase and, conversely, to increase as interest rates decline.
However, a convertible security's market value also tends to reflect the market
price of the common stock of the issuing company, particularly when the stock
price is greater than the convertible security's conversion price. The
conversion price is defined as the predetermined price or exchange ratio at
which the convertible security can be converted or exchanged for the underlying
common stock. As the market price of the underlying common stock declines below
the conversion price, the price of the convertible security tends to be
increasingly influenced more by the yield of the convertible security than by
the market price of the underlying common stock. Thus, it may not decline in
price to the same extent as the underlying common stock, and convertible
securities generally have less potential for gain or loss than common stocks.
However, mandatory convertible securities (as discussed below) generally do not
limit the potential for loss to the same extent as securities convertible at the
option of the holder. In the event of a liquidation of the issuing company,
holders of convertible securities would be paid before that company's common
stockholders. Consequently, an issuer's convertible securities generally entail
less risk than its common stock. However, convertible securities generally fall
below other debt obligations of the same issuer in order of preference or
priority in the event of a liquidation and are typically unrated or rated lower
than such debt obligations. In addition, contingent payment, convertible
securities allow the issuer to claim deductions based on its nonconvertible cost
of debt, which generally will result in deduction in excess of the actual cash
payments made on the securities (and accordingly, holders will recognize income
in amounts in excess of the cash payments received).
Mandatory convertible securities are distinguished as a subset of
convertible securities because the conversion is not optional and the conversion
price at maturity is based solely upon the market price of the underlying common
stock, which may be significantly less than par or the price (above or below
par) paid. For these reasons, the risks associated with investing in mandatory
convertible securities most closely resemble the risks inherent in common
stocks. Mandatory convertible securities customarily pay a higher coupon yield
to compensate for the potential risk of additional price volatility and loss
upon conversion. Because the market price of a mandatory convertible security
increasingly corresponds to the market price of its underlying common stock as
the convertible security approaches its conversion date, there can be no
assurance that the higher coupon will compensate for the potential loss.
SENIOR LOANS. Senior loans may be issued by banks, other financial
institutions, and other investors to corporations, partnerships, limited
liability companies and other entities to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, debt refinancings
and, to a lesser extent, for general operating and other purposes. Senior loans
generally are of below investment grade credit quality and may be unrated at the
time of investment. They generally are not registered with the Securities and
Exchange Commission or any state securities commission and generally are not
listed on any securities exchange.
-27-
An investment in senior loans involves risk that the borrowers under senior
loans may default on their obligations to pay principal or interest when due.
Although senior loans may be secured by specific collateral, there can be no
assurance that liquidation of collateral would satisfy the borrower's obligation
in the event of non-payment or that such collateral could be readily liquidated.
Senior loans are typically structured as floating rate instruments in which the
interest rate payable on the obligation fluctuates with interest rate changes.
As a result, the yield on an investment in senior loans will generally decline
in a falling interest rate environment and increase in a rising interest rate
environment.
The amount of public information available on senior loans generally will
be less extensive than that available for other types of assets. No reliable,
active trading market currently exists for many senior loans, although a
secondary market for certain senior loans does exist. Senior loans are thus
relatively illiquid. If a fund held by a trust invests in senior loans,
liquidity of a senior loan refers to the ability of the fund to sell the
investment in a timely manner at a price approximately equal to its value on the
fund's books. The illiquidity of senior loans may impair a fund's ability to
realized the full value of its assets in the event of a voluntary or involuntary
liquidation of such assets. Because of the lack of an active trading market,
illiquid securities are also difficult to value and prices provided by external
pricing services may not reflect the true value of the securities. However, many
senior loans are of a large principal amount and are held by financial
institutions. To the extent that a secondary market does exist for certain
senior loans, the market may be subject to irregular trading activity, wide
bid/ask spreads and extended trade settlement periods. The market for senior
loans could be disrupted in the event of an economic downturn or a substantial
increase or decrease in interest rates. This could result in increased
volatility in the market and in a trust's net asset value.
If legislation or state or federal regulators impose additional
requirements or restrictions on the ability of financial institutions to make
loans that are considered highly leveraged transactions, the availability of
senior loans for investment may be adversely affected. In addition, such
requirements or restrictions could reduce or eliminate sources of financing for
certain borrowers. This would increase the risk of default. If legislation or
federal or state regulators require financial institutions to dispose of senior
loans that are considered highly leveraged transactions or subject such senior
loans to increased regulatory scrutiny, financial institutions may determine to
sell such senior loans. Such sales could result in depressed prices. The price
for the senior loan may be adversely affected if sold at a time when a financial
institution is engaging in such a sale.
Some senior loans are subject to the risk that a court, pursuant to
fraudulent conveyance or other similar laws, could subordinate the senior loans
to presently existing or future indebtedness of the borrower or take other
action detrimental to lenders. Such court action could under certain
circumstances include invalidation of senior loans. Any lender, which could
include a fund held by a trust, is subject to the risk that a court could find
the lender liable for damages in a claim by a borrower arising under the common
laws of tort or contracts or anti- fraud provisions of certain securities laws
for actions taken or omitted to be taken by the lenders under the relevant terms
of a loan agreement or in connection with actions with respect to the collateral
underlying the senior loan.
-28-
FLOATING RATE INSTRUMENTS. A floating rate security is an instrument in
which the interest rate payable on the obligation fluctuates on a periodic basis
based upon changes in a benchmark, often related to interest rates. As a result,
the yield on such a security will generally decline with negative changes to the
benchmark, causing an investor to experience a reduction in the income it
receives from such securities. A sudden and significant increase in the
applicable benchmark may increase the risk of payment defaults and cause a
decline in the value of the security.
ASSET-BACKED SECURITIES. Asset-backed securities ("ABS") are securities
backed by pools of loans or other receivables. ABS are created from many types
of assets, including auto loans, credit card receivables, home equity loans, and
student loans. ABS are issued through special purpose vehicles that are
bankruptcy remote from the issuer of the collateral. The credit quality of an
ABS transaction depends on the performance of the underlying assets. To protect
ABS investors from the possibility that some borrowers could miss payments or
even default on their loans, ABS include various forms of credit enhancement.
Some ABS, particularly home equity loan transactions, are subject to interest
rate risk and prepayment risk. A change in interest rates can affect the pace of
payments on the underlying loans, which in turn, affects total return on the
securities. ABS also carry credit or default risk. If many borrowers on the
underlying loans default, losses could exceed the credit enhancement level and
result in losses to investors in an ABS transaction. Finally, ABS have structure
risk due to a unique characteristic known as early amortization, or early
payout, risk. Built into the structure of most ABS are triggers for early
payout, designed to protect investors from losses. These triggers are unique to
each transaction and can include: a big rise in defaults on the underlying
loans, a sharp drop in the credit enhancement level, or even the bankruptcy of
the originator. Once early amortization begins, all incoming loan payments
(after expenses are paid) are used to pay investors as quickly as possible based
upon a predetermined priority of payment.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are a type of ABS
representing direct or indirect participations in, or are secured by and payable
from, mortgage loans secured by real property and can include single- and multi-
class pass-through securities and collateralized mortgage obligations. Mortgage-
backed securities are based on different types of mortgages, including those on
commercial real estate or residential properties. These securities often have
stated maturities of up to thirty years when they are issued, depending upon the
length of the mortgages underlying the securities. In practice, however,
unscheduled or early payments of principal and interest on the underlying
mortgages may make the securities' effective maturity shorter than this. Rising
interest rates tend to extend the duration of mortgage-backed securities, making
them more sensitive to changes in interest rates, and may reduce the market
value of the securities. In addition, mortgage-backed securities are subject to
prepayment risk, the risk that borrowers may pay off their mortgages sooner than
expected, particularly when interest rates decline.
SOVEREIGN DEBT. Sovereign debt instruments are subject to the risk that a
governmental entity may delay or refuse to pay interest or repay principal on
its sovereign debt, due, for example, to cash flow problems, insufficient
foreign currency reserves, political considerations, the relative size of the
governmental entity's debt position in relation to the economy or the failure to
put in place required economic reforms. If a governmental entity defaults, it
may ask for more time in which to pay or for further loans. There is no legal
process for collecting
-29-
sovereign debt that a government does not pay nor are there bankruptcy
proceedings through which all or part of the sovereign debt that a governmental
entity has not repaid may be collected.
U.S. GOVERNMENT OBLIGATIONS RISK. Obligations of U.S. government agencies,
authorities, instrumentalities and sponsored enterprises have historically
involved little risk of loss of principal if held to maturity. However, not all
U.S. government securities are backed by the full faith and credit of the United
States. Obligations of certain agencies, authorities, instrumentalities and
sponsored enterprises of the U.S. government are backed by the full faith and
credit of the United States (e.g., the Government National Mortgage
Association); other obligations are backed by the right of the issuer to borrow
from the U.S. Treasury (e.g., the Federal Home Loan Banks) and others are
supported by the discretionary authority of the U.S. government to purchase an
agency's obligations. Still others are backed only by the credit of the agency,
authority, instrumentality or sponsored enterprise issuing the obligation. No
assurance can be given that the U.S. government would provide financial support
to any of these entities if it is not obligated to do so by law.
MONEY MARKET SECURITIES. Certain funds held by a trust may invest in money
market securities. If market conditions improve while a fund has temporarily
invested some or all of its assets in high quality money market securities, this
strategy could result in reducing the potential gain from the market upswing,
thus reducing a fund's opportunity to achieve its investment objective.
DERIVATIVES RISK. Certain funds held by a trust may engage in transactions
in derivatives. Derivatives are subject to counterparty risk which is the risk
that the other party in a transaction may be unable or unwilling to meet
obligations when due. Use of derivatives may increase volatility of a fund and
reduce returns. Fluctuations in the value of derivatives may not correspond with
fluctuations of underlying exposures. Unanticipated market movements could
result in significant losses on derivative positions including greater losses
than amounts originally invested and potentially unlimited losses in the case of
certain derivatives. There are no assurances that there will be a secondary
market available in any derivative position which could result in illiquidity
and the inability of a fund to liquidate or terminate positions as valued.
Valuation of derivative positions may be difficult and increase during times of
market turmoil. Certain derivatives may be used as a hedge against other
securities positions, however, hedging can be subject to the risk of imperfect
alignment and there are no assurances that a hedge will be achieved as intended
which can pose significant loss to a fund. Recent legislation has called for
significant increases to the regulation of the derivatives market. Regulatory
changes and rulemaking is ongoing and the full impact may not be known for some
time. This increased regulation may make derivatives more costly, limit the
availability of derivatives or otherwise adversely affect the value or
performance of derivatives. Examples of increased regulation include, but are
not limited to, the imposition of clearing and reporting requirements on
transactions that fall within the definition of "swap" and "security-based
swap," increased recordkeeping and reporting requirements, changing definitional
and registration requirements, and changes to the way that funds' use of
derivatives is regulated. No one can predict the effects of any new governmental
regulation that may be implemented on the ability of a fund to use any financial
derivative product, and there can be no assurance that any new governmental
regulation will not adversely affect a fund's ability to achieve its investment
objective. The federal income
-30-
tax treatment of a derivative may not be as favorable as a direct investment in
the asset that a derivative provides exposure to, which may adversely impact the
timing, character and amount of income a fund realizes from its investment. The
tax treatment of certain derivatives is unsettled and may be subject to future
legislation, regulation or administrative pronouncements.
OPTIONS. A trust may hold a fund or funds that write (sell) or purchase
options as part of its investment strategy. In addition to general risks
associated with derivatives described above, options are considered speculative.
When a fund purchases an option, it may lose the premium paid for it if the
price of the underlying security or other assets decreases or remains the same
(in the case of a call option) or increases or remains the same (in the case of
a put option). If a put or call option purchased by a fund were permitted to
expire without being sold or exercised, its premium would represent a loss to a
fund. To the extent that a fund writes or sells an option, if the decline or
increase in the underlying asset is significantly below or above the exercise
price of the written option, a fund could experience substantial and potentially
unlimited losses.
There can be no assurance that a liquid market for the options will exist
when a fund seeks to close out an option position. Reasons for the absence of a
liquid secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options; (iv) unusual or unforeseen
of an exchange or The Options Clearing Corporation ("OCC") may not at all times
be adequate to handle current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options). If trading were discontinued, the secondary market on that exchange
(or in that class or series of options) would cease to exist. However,
outstanding options on that exchange that had been issued by the OCC as a result
of trades on that exchange would continue to be exercisable in accordance with
their terms. A fund's ability to terminate over-the-counter options is more
limited than with exchange-traded options and may involve the risk that broker-
dealers participating in such transactions will not fulfill their obligations.
If a fund were unable to close out a covered call option that it had written
(sold) on a security, it would not be able to sell the underlying security
unless the option expired without exercise.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the options markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the options markets. Additionally, the exercise price of an option may be
adjusted downward before the option's expiration as a result of the occurrence
of certain corporate events affecting the underlying equity security, such as
extraordinary dividends, stock splits, merger or other extraordinary
distributions or events. In certain circumstances, a reduction in the exercise
price of an option could reduce a fund's capital appreciation potential on the
underlying security.
To the extent that a fund purchases options pursuant to a hedging strategy,
the fund will be subject to the following additional risks. If a put or call
option purchased by a fund is not sold when it has remaining value, and if the
market price of the underlying security remains equal to
-31-
or greater than the exercise price (in the case of a put), or remains less than
or equal to the exercise price (in the case of a call), the fund will lose its
entire investment in the option. Also, where a put or call option on a
particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security. If restrictions on exercise were imposed, a fund
might be unable to exercise an option it had purchased. If a fund were unable to
close out an option that it had purchased on a security, it would have to
exercise the option in order to realize any profit or the option may expire
worthless.
The writing (selling) and purchase of options is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. The successful use
of options depends in part on the ability of a fund's adviser to predict future
price fluctuations and, for hedging transactions, the degree of correlation
between the options and securities or currency markets.
If a fund employs a covered call strategy, a fund will generally write
(sell) call options on a significant portion of the fund's managed assets. These
call options will give the option holder the right, but not the obligation, to
purchase a security from the fund at the strike price on or prior to the
option's expiration date. The ability to successfully implement the fund's
investment strategy depends on the fund adviser's ability to predict pertinent
market movements, which cannot be assured. Thus, the use of options may require
a fund to sell portfolio securities at inopportune times or for prices other
than current market values, may limit the amount of appreciation the fund can
realize on an investment, or may cause the fund to hold a security that it might
otherwise sell. The writer (seller) of an option has no control over the time
when it may be required to fulfill its obligation as a writer (seller) of the
option. Once an option writer (seller) has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying security at the
exercise price. As the writer (seller) of a covered call option, a fund forgoes,
during the option's life, the opportunity to profit from increases in the market
value of the security underlying the call option above the sum of the premium
and the strike price of the call option, but has retained the risk of loss
should the price of the underlying security decline. The value of the options
written (sold) by a fund will be affected by changes in the value and dividend
rates of the underlying equity securities, an increase in interest rates,
changes in the actual or perceived volatility of securities markets and the
underlying securities and the remaining time to the options' expirations. The
value of the options may also be adversely affected if the market for the
options becomes less liquid or smaller.
An option is generally considered "covered" if a fund owns the security
underlying the call option or has an absolute and immediate right to acquire
that security without additional cash consideration (or, if required, liquid
cash or other assets are segregated by the fund) upon conversion or exchange of
other securities held by the fund. In certain cases, a call option may also be
considered covered if a fund holds a call option on the same security as the
call option written (sold) provided that certain conditions are met. By writing
(selling) covered call options, a fund generally seeks to generate income, in
the form of the premiums received for writing (selling) the call options.
Investment income paid by a fund to its shareholders (such as a trust) may be
derived primarily from the premiums it receives from writing (selling) call
options and,
-32-
to a lesser extent, from the dividends and interest it receives from the equity
securities or other investments held in the fund's portfolio and short-term
gains thereon. Premiums from writing (selling) call options and dividends and
interest payments made by the securities in a fund's portfolio can vary widely
over time.
SWAPS. Certain funds held by a trust may invest in swaps. In addition to
general risks associated with derivatives described above, swap agreements
involve the risk that the party with whom a fund has entered into the swap will
default on its obligation to pay a fund and the risk that a fund will not be
able to meet its obligations to pay the other party to the agreement. Swaps
entered into by a fund may include, but are not limited to, interest rate swaps,
total return swaps and/or credit default swaps. In an interest rate swap
transaction, two parties exchange rights to receive interest payments, such as
exchanging the right to receive floating rate payments based on a reference
interest rate for the right to receive fixed rate payments. In addition to the
general risks associated with derivatives and swaps described above, interest
rate swaps are subject to interest rate risk and credit risk. In a total return
swap transaction, one party agrees to pay another party an amount equal to the
total return on a reference asset during a specified period of time in return
for periodic payments based on a fixed or variable interest rate or on the total
return from a different reference asset. In addition to the general risks
associated with derivatives and swaps described above, total return swaps could
result in losses if the reference asset does not perform as anticipated and
these swaps can have the potential for unlimited losses. In a credit default
swap transaction, one party makes one or more payments over the term of the
contract to the counterparty, provided that no event of default with respect to
a specific obligation or issuer has occurred. In return, upon any event of
default, such party would receive from the counterparty a payment equal to the
par (or other agreed-upon) value of such specified obligation. In addition to
general risks associated with derivatives and swaps described above, credit
default swaps involve special risks because they are difficult to value, are
highly susceptible to liquidity and credit risk, and generally pay a return to
the party that has paid the premium only in the event of an actual default by
the issuer of the underlying obligation (as opposed to a credit downgrade or
other indication of financial difficulty).
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Certain funds held by a trust
may engage in forward foreign currency exchange transactions. Forward foreign
exchange transactions are contracts to purchase or sell a specified amount of a
specified currency or multinational currency unit at a price and future date set
at the time of the contract. Forward foreign currency exchange contracts do not
eliminate fluctuations in the value of non-U.S. securities but rather allow a
fund to establish a fixed rate of exchange for a future point in time. This
strategy can have the effect of reducing returns and minimizing opportunities
for gain.
INDEXED AND INVERSE SECURITIES. Certain funds held by a trust may invest in
indexed and inverse securities. In addition to general risks associated with
derivatives described above, indexed and inverse securities are subject to risk
with respect to the value of the particular index. These securities are subject
to leverage risk and correlation risk. Certain indexed and inverse securities
have greater sensitivity to changes in interest rates or index levels than other
securities, and a fund's investment in such instruments may decline
significantly in value if interest rates or index levels move in a way a fund's
management does not anticipate.
-33-
FUTURES. Certain funds held by a trust may engage in futures transactions.
In addition to general risks associated with derivatives described above, the
primary risks associated with the use of futures contracts and options are (a)
the imperfect correlation between the change in market value of the instruments
held by a fund and the price of the futures contract or option; (b) possible
lack of a liquid secondary market for a futures contract and the resulting
inability to close a futures contract when desired; (c) losses caused by
unanticipated market movements, which are potentially unlimited; (d) the
investment adviser's inability to predict correctly the direction of securities
prices, interest rates, currency exchange rates and other economic factors; and
(e) the possibility that the counterparty will default in the performance of its
obligations. While futures contracts are generally liquid instruments, under
certain market conditions they may become illiquid. Futures exchanges may impose
daily or intra-day price change limits and/or limit the volume of trading.
Additionally, government regulation may further reduce liquidity through similar
trading restrictions.
REPURCHASE AGREEMENT RISK. A repurchase agreement is a form of short-term
borrowing where a dealer sells securities to investors (usually on an overnight
basis) and buys them back the following day. If the other party to a repurchase
agreement defaults on its obligation under such agreement, a fund held by a
trust may suffer delays and incur costs or lose money in exercising its rights
under the agreement. If the seller fails to repurchase the security under a
repurchase agreement and the market value of such security declines, such fund
may lose money.
SHORT SALES RISK. Certain funds held by a trust may engage in short sales.
Because making short sales in securities that it does not own exposes a fund to
the risks associated with those securities, such short sales involve speculative
exposure risk. A fund will incur a loss as a result of a short sale if the price
of the security increases between the date of the short sale and the date on
which such fund replaces the security sold short. A fund will realize a gain if
the security declines in price between those dates. As a result, if a fund makes
short sales in securities that increase in value, it will likely underperform
similar funds that do not make short sales in securities they do not own. There
can be no assurance that a fund will be able to close out a short sale position
at any particular time or at an acceptable price. Although a fund's gain is
limited to the amount at which it sold a security short, its potential loss is
limited only by the maximum attainable price of the security, less the price at
which the security was sold. Short sale transactions involve leverage because
they can provide investment exposure in an amount exceeding the initial
investment. A fund may also pay transaction costs and borrowing fees in
connection with short sales.
COMMODITIES. Certain funds held by a trust may have exposure to the
commodities market. This exposure could expose such funds and to greater
volatility than investment in other securities. The value of investments
providing commodity exposure may be affected by changes in overall market
movements, commodity index volatility, changes in interest rates, or factors
affecting a particular industry or commodity, such as drought, floods, weather,
embargoes, tariffs and international economic, political and regulatory
developments.
CONCENTRATION RISK. Concentration risk is the risk that the value of a
trust may be more susceptible to fluctuations based on factors that impact a
particular sector because the trust provides exposure to investments
concentrated within a particular sector or sectors.
-34-
CONSUMER DISCRETIONARY AND CONSUMER STAPLES SECTORS. The profitability of
companies that manufacture or sell consumer products or provide consumer
services will be affected by various factors including the general state of the
economy and consumer spending trends. In the past, there have been major changes
in the retail environment due to the declaration of bankruptcy by some of the
major corporations involved in the retail industry, particularly the department
store segment. The continued viability of the retail industry will depend on the
industry's ability to adapt and to compete in changing economic and social
conditions, to attract and retain capable management, and to finance expansion.
Weakness in the banking or real estate industry, a recessionary economic climate
with the consequent slowdown in employment growth, less favorable trends in
unemployment or a marked deceleration in real disposable personal income growth
could result in significant pressure on both consumer wealth and consumer
confidence, adversely affecting consumer spending habits. In addition,
competitiveness of the retail industry will require large capital outlays for
investment in the installation of automated checkout equipment to control
inventory, to track the sale of individual items and to gauge the success of
sales campaigns. Increasing employee and retiree benefit costs may also have an
adverse effect on the industry. In many sectors of the retail industry,
competition may be fierce due to market saturation, converging consumer tastes
and other factors. Many retailers are involved in entering global markets which
entail added risks such as sudden weakening of foreign economies, difficulty in
adapting to local conditions and constraints and added research costs.
ENERGY SECTOR. Energy companies may include but are not limited to
companies involved in: production, generation, transmission, marketing, control,
or measurement of energy; the provision of component parts or services to
companies engaged in the above activities; energy research or experimentation;
and environmental activities related to the solution of energy problems, such as
energy conservation and pollution control.
The securities of companies in the energy field are subject to changes in
value and dividend yield which depend, to a large extent, on the price and
supply of energy fuels. Swift price and supply fluctuations may be caused by
events relating to international politics, energy conservation, the success of
exploration projects, and tax and other regulatory policies of various
governments. As a result of the foregoing, the securities issued by energy
companies may be subject to rapid price volatility.
Any future scientific advances concerning new sources of energy and fuels
or legislative changes relating to the energy sector or the environment could
have a negative impact on the petroleum products sector. While legislation has
been enacted to deregulate certain aspects of the oil sector, no assurances can
be given that new or additional regulations will not be adopted. Each of the
problems referred to could adversely affect the financial stability of the
issuers of any petroleum sector securities.
FINANCIALS SECTOR. Companies in the financials sector may include banks and
their holding companies, finance companies, investment managers, broker-dealers,
insurance and reinsurance companies and mortgage REITs. Banks and their holding
companies are especially subject to the adverse effects of economic recession;
volatile interest rates; portfolio concentrations in geographic markets and in
commercial and residential real estate loans; and
-35-
competition from new entrants in their fields of business. In addition, banks
and their holding companies are extensively regulated at both the federal and
state level and may be adversely affected by increased regulations. Banks face
increased competition from nontraditional lending sources as regulatory changes
permit new entrants to offer various financial products. Technological advances
allow these nontraditional lending sources to cut overhead and permit the more
efficient use of customer data. Banks are already facing tremendous pressure
from mutual funds, brokerage firms and other providers in the competition to
furnish services that were traditionally offered by banks.
Companies engaged in investment management and broker-dealer activities are
subject to volatility in their earnings and share prices that often exceeds the
volatility of the equity market in general. Adverse changes in the direction of
the stock market, investor confidence, equity transaction volume, the level and
direction of interest rates and the outlook of emerging markets could adversely
affect the financial stability, as well as the stock prices, of these companies.
Additionally, competitive pressures, including increased competition with new
and existing competitors, the ongoing commoditization of traditional businesses
and the need for increased capital expenditures on new technology could
adversely impact the profit margins of companies in the investment management
and brokerage industries. Companies involved in investment management and
broker-dealer activities are also subject to extensive regulation by government
agencies and self-regulatory organizations, and changes in laws, regulations or
rules, or in the interpretation of such laws, regulations and rules could
adversely affect the stock prices of such companies.
Companies involved in the insurance, reinsurance and risk management
industry underwrite, sell or distribute property, casualty and business
insurance. Many factors affect insurance, reinsurance and risk management
company profits, including but not limited to interest rate movements, the
imposition of premium rate caps, a misapprehension of the risks involved in
given underwritings, competition and pressure to compete globally, weather
catastrophes or other natural or man-made disasters and the effects of client
mergers. Individual companies may be exposed to material risks including reserve
inadequacy and the inability to collect from reinsurance carriers. Insurance
companies are subject to extensive governmental regulation, including the
imposition of maximum rate levels, which may not be adequate for some lines of
business. Proposed or potential tax law changes may also adversely affect
insurance companies' policy sales, tax obligations and profitability. In
addition to the foregoing, profit margins of these companies continue to shrink
due to the commoditization of traditional businesses, new competitors, capital
expenditures on new technology and the pressure to compete globally.
In addition to the normal risks of business, companies involved in the
insurance and risk management industry are subject to significant risk factors,
including those applicable to regulated insurance companies, such as: the
inherent uncertainty in the process of establishing property-liability loss
reserves, and the fact that ultimate losses could materially exceed established
loss reserves, which could have a material adverse effect on results of
operations and financial condition; the fact that insurance companies have
experienced, and can be expected in the future to experience, catastrophic
losses, which could have a material adverse impact on their financial
conditions, results of operations and cash flow; the inherent uncertainty in the
process
-36-
of establishing property-liability loss reserves due to changes in loss payment
patterns caused by new claim settlement practices; the need for insurance
companies and their subsidiaries to maintain appropriate levels of statutory
capital and surplus, particularly in light of continuing scrutiny by rating
organizations and state insurance regulatory authorities, and in order to
maintain acceptable financial strength or claims-paying ability ratings; the
extensive regulation and supervision to which insurance companies are subject,
and various regulatory and other legal actions; the adverse impact that
increases in interest rates could have on the value of an insurance company's
investment portfolio and on the attractiveness of certain of its products; and
the uncertainty involved in estimating the availability of reinsurance and the
collectability of reinsurance recoverables.
The state insurance regulatory framework has, during recent years, come
under increased federal scrutiny, and certain state legislatures have considered
or enacted laws that alter and, in many cases, increase state authority to
regulate insurance companies and insurance holding company systems. Further, the
National Association of Insurance Commissioners ("NAIC") and state insurance
regulators are re-examining existing laws and regulations, specifically focusing
on insurance companies, interpretations of existing laws and the development of
new laws. In addition, Congress and certain federal agencies have investigated
the condition of the insurance industry in the United States to determine
whether to promulgate additional federal regulation. The Sponsor is unable to
predict whether any state or federal legislation will be enacted to change the
nature or scope of regulation of the insurance industry, or what effect, if any,
such legislation would have on the industry.
All insurance companies are subject to state laws and regulations that
require diversification of their investment portfolios and limit the amount of
investments in certain investment categories. Failure to comply with these laws
and regulations would cause non- conforming investments to be treated as non-
admitted assets for purposes of measuring statutory surplus and, in some
instances, would require divestiture.
Mortgage REITs engage in financing real estate, purchasing or originating
mortgages and mortgage-backed securities and earning income from the interest on
these investments. Such REITs face risks similar to those of other financial
firms, such as changes in interest rates, general market conditions and credit
risk, in addition to risks associated with an investment in real estate. Risk
associated with real estate investments include, among other factors, changes in
general U.S., global and local economic conditions, declines in real estate
values, changes in the financial health of tenants, overbuilding and increased
competition for tenants, oversupply of properties for sale, changing
demographics, changes in interest rates, tax rates and other operating expenses,
changes in government regulations, faulty construction and the ongoing need for
capital improvements, regulatory and judicial requirements including relating to
liability for environmental hazards, changes in neighborhood values and buyer
demand, and the unavailability of construction financing or mortgage loans at
rates acceptable to developers.
The financial services sector was adversely affected by global developments
over the last several years stemming from the financial crisis including
recessionary conditions, deterioration in the credit markets and recurring
concerns over sovereign debt. These events led to considerable write-downs in
the values of many assets held by financial services companies and a
-37-
tightening of credit markets that was marked by a general unwillingness of many
entities to extend credit. These factors caused a significant need for many
financial services companies to raise capital to meet obligations and to satisfy
regulatory and contractual capital requirements. Many well-established financial
services companies were forced to seek additional capital through issuances of
new preferred or common equity and certain companies were forced to agree to be
acquired by other companies (or sell some or all of their assets to other
companies). In some cases government assistance, guarantees or direct
participation in investments or acquisitions were necessary to facilitate these
transactions. In addition, concerns regarding these issues and their potential
negative impact to the U.S. and global economies resulted in extreme volatility
in securities prices and uncertain market conditions.
In response to these issues, government authorities in the U.S. and other
countries have initiated and may continue to engage in administrative and
legislative action, including the Dodd-Frank Wall Street Reform and Consumer
Protection Act and resulting rulemaking. These government actions include, but
are not limited to, restrictions on investment activities; increased oversight,
regulation and involvement in financial services company practices; adjustments
to capital requirements; the acquisition of interests in and the extension of
credit to private entities; and increased investigation efforts into the actions
of companies and individuals in the financial service industry. No one can
predict any action that might be taken or the effect any action or inaction will
have. It is possible that any actions taken by government authorities will not
address or help improve the state of these difficulties as intended. No one can
predict the impact that these difficulties will have on the economy, generally
or financial services companies. These difficulties and corresponding government
action or inaction may have far reaching consequences and your investment may be
adversely affected by such developments.
HEALTH CARE SECTOR. Healthcare companies involved in advanced medical
devices and instruments, drugs and biotech, managed care, hospital
management/health services and medical supplies have potential risks unique to
their sector of the healthcare field. These companies are subject to
governmental regulation of their products and services, a factor which could
have a significant and possibly unfavorable effect on the price and availability
of such products or services. Furthermore, such companies face the risk of
increasing competition from new products or services, generic drug sales,
termination of patent protection for drug or medical supply products and the
risk that technological advances will render their products obsolete. The
research and development costs of bringing a drug to market are substantial, and
include lengthy governmental review processes with no guarantee that the product
will ever come to market. Many of these companies may have losses and not offer
certain products for several years. Such companies may also have persistent
losses during a new product's transition from development to production, and
revenue patterns may be erratic. In addition, healthcare facility operators may
be affected by events and conditions including, among other things, demand for
services, the ability of the facility to provide the services required,
physicians' confidence in the facility, management capabilities, competition
with other hospitals, efforts by insurers and governmental agencies to limit
rates, legislation establishing state rate-setting agencies, expenses,
government regulation, the cost and possible unavailability of malpractice
insurance and the termination or restriction of governmental financial
assistance, including that associated with Medicare, Medicaid and other similar
third-party payor programs. Legislative proposals concerning healthcare are
proposed in Congress from time to time. These proposals span a wide range of
-38-
topics, including cost and price controls (which might include a freeze on the
prices of prescription drugs), national health insurance incentives for
competition in the provision of healthcare services, tax incentives and
penalties related to healthcare insurance premiums and promotion of prepaid
healthcare plans.
INDUSTRIALS SECTOR. General risks of industrials companies include the
general state of the economy, intense competition, consolidation, domestic and
international politics, excess capacity and consumer spending trends. In
addition, capital goods companies may also be significantly affected by overall
capital spending levels, economic cycles, technical obsolescence, delays in
modernization, limitations on supply of key materials, labor relations,
government regulations, government contracts and ecommerce initiatives.
Furthermore, certain companies involved in the industry have also faced scrutiny
for alleged accounting irregularities that may have led to the overstatement of
their financial results, and other companies in the industry may face similar
scrutiny.
Industrials companies may also be affected by factors more specific to
their individual industries. Industrial machinery manufacturers may be subject
to declines in commercial and consumer demand and the need for modernization.
Aerospace and defense companies may be influenced by decreased demand for new
equipment, aircraft order cancellations, disputes over or ability to obtain or
retain government contracts, or changes in government budget priorities, changes
in aircraft-leasing contracts and cutbacks in profitable business travel.
INFORMATION TECHNOLOGY SECTOR. Information technology companies generally
include companies involved in the development, design, manufacture and sale of
computers and peripherals, software and services, data networking and
communications equipment, internet access and information providers,
semiconductors and semiconductor equipment and other related products, systems
and services. The market for these products, especially those specifically
related to the internet, may be characterized by rapidly changing technology,
product obsolescence, cyclical markets, evolving industry standards and frequent
new product introductions. The success of companies in this sector depends, in
substantial part, on the timely and successful introduction of new products. An
unexpected change in one or more of the technologies affecting a company's
products or in the market for products based on a particular technology could
have a material adverse effect on an issuer's operating results. Furthermore,
there can be no assurance that any particular company will be able to respond in
a timely manner to compete in the rapidly developing marketplace.
Factors such as announcements of new products or development of new
technologies and general conditions of the industry have caused and are likely
to cause the market price of high- technology common stocks to fluctuate
substantially. In addition, technology company stocks have experienced extreme
price and volume fluctuations that often have been unrelated to the operating
performance of such companies. Such market volatility may adversely affect the
market price of shares of these companies. Some key components of certain
products of technology issuers are currently available only from single sources.
There can be no assurance that in the future suppliers will be able to meet
the demand for components in a timely and cost effective manner. Accordingly, an
issuer's operating results and
-39-
customer relationships could be adversely affected by either an increase in
price for, or an interruption or reduction in supply of, any key components.
Additionally, many technology issuers are characterized by a highly concentrated
customer base consisting of a limited number of large customers who may require
product vendors to comply with rigorous industry standards. Any failure to
comply with such standards may result in a significant loss or reduction of
sales. Because many products and technologies of technology companies are
incorporated into other related products, such companies are often highly
dependent on the performance of the personal computer, electronics and
telecommunications industries. There can be no assurance that these customers
will place additional orders, or that an issuer will obtain orders of similar
magnitude as past orders from other customers. Similarly, the success of certain
technology companies is tied to a relatively small concentration of products or
technologies. Accordingly, a decline in demand of such products, technologies or
from such customers could have a material adverse impact on companies in this
sector.
Many technology companies rely on a combination of patents, copyrights,
trademarks and trade secret laws to establish and protect their proprietary
rights in their products and technologies. There can be no assurance that the
steps taken to protect proprietary rights will be adequate to prevent
misappropriation of technology or that competitors will not independently
develop technologies that are substantially equivalent or superior to an
issuer's technology. In addition, due to the increasing public use of the
internet, it is possible that other laws and regulations may be adopted to
address issues such as privacy, pricing, characteristics, and quality of
internet products and services. The adoption of any such laws could have a
material adverse impact on the issuers of securities in the information
technology sector.
Like many areas of technology, the semiconductor business environment is
highly competitive, notoriously cyclical and subject to rapid and often
unanticipated change. Recent industry downturns have resulted, in part, from
weak pricing, persistent overcapacity, slowdown in Asian demand and a shift in
retail personal computer sales toward the low-end segment. Industry growth is
dependent upon several factors, including: the rate of global economic
expansion; demand for products such as personal computers and networking and
communications equipment; excess productive capacity and the resultant effect on
pricing; and the rate of growth in the market for low-priced personal computers.
MATERIALS SECTOR. Companies in the basic materials sector are engaged in
the manufacture, mining, processing, or distribution of raw materials and
intermediate goods used in the industrial sector. These may include materials
and products such as chemicals, commodities, forestry products, paper products,
copper, iron ore, nickel, steel, aluminum, precious metals, textiles, cement,
and gypsum. Basic materials companies may be affected by the volatility of
commodity prices, exchange rates, import controls, worldwide competition,
depletion of resources, and mandated expenditures for safety and pollution
control devices. In addition, they may be adversely affected by technical
progress, labor relations, and governmental regulation. These companies are also
at risk for environmental damage and product liability claims. Production of
industrial materials often exceeds demand as a result of over-building or
economic downturns, which may lead to poor investment returns.
-40-
REAL ESTATE SECTOR. Real estate companies include REITs and real estate
management and development companies. Companies in the real estate sector may
be exposed to the risks associated with the ownership of real estate which
include, among other factors, changes in general U.S., global and local economic
conditions, declines in real estate values, changes in the financial health of
tenants, overbuilding and increased competition for tenants, oversupply of
properties for sale, changing demographics, changes in interest rates, tax rates
and other operating expenses, changes in government regulations, faulty
construction and the ongoing need for capital improvements, regulatory and
judicial requirements including relating to liability for environmental hazards,
changes in neighborhood values and buyer demand, and the unavailability of
construction financing or mortgage loans at rates acceptable to developers.
Many factors can have an adverse impact on the performance of a REIT,
including its cash available for distribution, the credit quality of the REIT or
the real estate industry generally. The success of a REIT depends on various
factors, including the occupancy and rent levels, appreciation of the underlying
property and the ability to raise rents on those properties. Economic recession,
overbuilding, tax law changes, higher interest rates or excessive speculation
can all negatively impact REITs, their future earnings and share prices.
Variations in rental income and space availability and vacancy rates in terms of
supply and demand are additional factors affecting real estate generally and
REITs in particular. Properties owned by a REIT may not be adequately insured
against certain losses and may be subject to significant environmental
liabilities, including remediation costs. You should also be aware that REITs
may not be diversified and are subject to the risks of financing projects. The
real estate industry may be cyclical, and, if REIT securities are acquired at or
near the top of the cycle, there is increased risk of a decline in value of the
REIT securities. At various points in time, demand for certain types of real
estate may inflate the value of real estate. This may increase the risk of a
substantial decline in the value of such real estate and increase the risk of a
decline in the value of the securities. REITs are also subject to defaults by
borrowers and the market's perception of the REIT industry generally. Because of
their structure, and a current legal requirement that they distribute at least
90% of their taxable income to shareholders annually, REITs require frequent
amounts of new funding, through both borrowing money and issuing stock. Thus,
REITs historically have frequently issued substantial amounts of new equity
shares (or equivalents) to purchase or build new properties. This may adversely
affect REIT equity share market prices. Both existing and new share issuances
may have an adverse effect on these prices in the future, especially if REITs
issue stock when real estate prices are relatively high and stock prices are
relatively low.
Real estate management and development companies often are dependent upon
specialized management skills, have limited diversification and are subject to
risks inherent in operating and financing a limited number of projects. To the
extent such companies focus their business on a particular geographic region of
a country, they may be subject to greater risks of adverse developments in that
area. These companies may also be subject to heavy cash flow dependency and
defaults by borrowers. Certain real estate management and development companies
have a relatively small market capitalization, which may tend to increase the
volatility of the market price of these securities.
TELECOMMUNICATION SERVICES SECTOR. General risks of telecommunication
services companies include rapidly changing technology, rapid product
obsolescence, loss of patent
-41-
protection, cyclical market patterns, evolving industry standards and frequent
new product introductions. Certain communications/bandwidth companies are
subject to substantial governmental regulation, which among other things,
regulates permitted rates of return and the kinds of services that a company may
offer. Such companies can also be negatively impacted by any failure to obtain,
or delays in obtaining, financial or regulatory approval for new products or
services. Companies in this sector are subject to fierce competition for market
share from existing competitors and new market entrants. Such competitive
pressures are intense and communications stocks can experience extreme
volatility. Companies in the telecommunications sector may encounter distressed
cash flows and heavy debt burdens due to the need to commit substantial capital
to meet increasing competition, particularly in formulating new products and
services using new technology. Technological innovations may also make the
existing products and services of telecommunications companies obsolete. In
addition, companies in this sector can be impacted by a lack of investor or
consumer acceptance of new products, changing consumer preferences and lack of
standardization or compatibility with existing technologies making
implementation of new products more difficult.
UTILITIES SECTOR. General problems of utility companies include risks of
increases in fuel and other operating costs; restrictions on operations and
increased costs and delays as a result of environmental, nuclear safety and
other regulations; regulatory restrictions on the ability to pass increasing
wholesale costs along to the retail and business customer; energy conservation;
technological innovations which may render existing plants, equipment or
products obsolete; the effects of local weather, maturing markets and difficulty
in expanding to new markets due to regulatory and other factors; natural or
manmade disasters; difficulty obtaining adequate returns on invested capital;
the high cost of obtaining financing during periods of inflation; difficulties
of the capital markets in absorbing utility debt and equity securities; and
increased competition. In addition, taxes, government regulation, international
politics, price and supply fluctuations, and volatile interest rates and energy
conservation may cause difficulties for utilities. All of such issuers
experience certain of these problems to varying degrees.
ADDITIONAL DEPOSITS. Each 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 deposit and the purchase
of the securities and because the trust will pay the associated brokerage fees
and other acquisition costs.
ADMINISTRATION OF THE TRUST
DISTRIBUTIONS TO UNITHOLDERS. Income received by a trust, including that
part of the proceeds of any disposition of Treasury Obligations which represent
accrued interest, is credited by the trustee to the Income Account for the
trust. All other receipts are credited by the trustee to a separate Capital
Account for the trust. The trustee will normally distribute any income received
by a trust on each distribution date or shortly thereafter to unitholders of
record on the preceding record date. A trust will also generally make required
distributions or distributions to avoid
-42-
imposition of tax at the end of each year. Unitholders will receive an amount
substantially equal to their pro rata share of the available balance of the
Income Account of the related trust. All distributions will be net of applicable
expenses. There is no assurance that any actual distributions will be made since
all dividends received may be used to pay expenses. In addition, excess amounts
from the Capital Account of a trust, if any, will be distributed on each
distribution date or shortly thereafter to unitholders of record on the
preceding record date, provided that the trustee is not required to make a
distribution from the Capital Account unless the amount available for
distribution is at least $1.00 per 100 units. Proceeds received from the
disposition of any of the securities after a record date and prior to the
following distribution date will be held in the Capital Account and not
distributed until the next distribution date applicable to the Capital Account.
The trustee is not required to pay interest on funds held in the Capital or
Income Accounts (but may itself earn interest thereon and therefore benefits
from the use of such funds).
The distribution to the unitholders of a trust as of each record date will
be made on the following distribution date or shortly thereafter and shall
consist of an amount substantially equal to the unitholders' pro rata share of
the available balance of the Income Account of the trust after deducting
estimated expenses. Because dividends are not received by a trust at a constant
rate throughout the year, such distributions to unitholders are expected to
fluctuate.
Persons who purchase units will commence receiving distributions only after
such person becomes a record owner. A person will become the owner of units,
and thereby a unitholder of record, on the date of settlement provided payment
has been received. Notification to the trustee of the transfer of units is the
responsibility of the purchaser, but in the normal course of business the
selling broker-dealer provides such notice.
The trustee will periodically deduct from the Income Account of a trust
and, to the extent funds are not sufficient therein, from the Capital Account of
a trust amounts necessary to pay the expenses of the trust. The trustee also
may withdraw from said accounts such amounts, if any, as it deems necessary to
establish a reserve for any governmental charges payable out of a trust.
Amounts so withdrawn shall not be considered a part of a trust's assets until
such time as the trustee shall return all or any part of such amounts to the
appropriate accounts. In addition, the trustee may withdraw from the Income and
Capital Accounts of a trust such amounts as may be necessary to cover
redemptions of units.
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.
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 is not required. The
accountants' report for any audit 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:
-43-
(A) As to the Income Account:
(1) the amount of income received on the securities (including income
received as a portion of the proceeds of any disposition of
securities);
(2) the amounts paid for purchases of replacement securities or for
purchases of securities otherwise pursuant to the applicable
trust agreement, if any, and for redemptions;
(3) the deductions, if any, from the Income Account for payment into
the Reserve Account;
(4) the deductions for applicable taxes and fees and expenses of the
trustee, the sponsor, the evaluator, the supervisor, counsel,
auditors and any other expenses paid by the trust;
(5) the amounts reserved for purchases of contract securities, for
purchases made pursuant to replace failed contract securities or
for purchases of securities otherwise pursuant to the applicable
trust agreement, if any;
(6) the deductions for payment of the sponsor's expenses of
maintaining the registration of the trust units, if any;
(7) the aggregate distributions to unitholders; and
(8) the balance remaining after such deductions and distributions,
expressed both as a total dollar amount and as a dollar amount
per unit outstanding on the last business day of such calendar
year;
(B) As to the Capital Account:
(1) the net proceeds received due to sale, maturity, redemption,
liquidation or disposition of any of the securities, excluding
any portion thereof credited to the Income Account;
(2) the amount paid for purchases of replacement securities or for
purchases of securities otherwise pursuant to the applicable
trust agreement, if any, and for redemptions;
(3) the deductions, if any, from the Capital Account for payments
into the Reserve Account;
(4) the deductions for payment of applicable taxes and fees and
expenses of the trustee, the sponsor, the evaluator, the
supervisor, counsel, auditors and any other expenses paid by the
trust;
-44-
(5) the deductions for payment of the sponsor's expenses of
organizing the trust;
(6) the amounts reserved for purchases of contract securities, for
purchases made pursuant to replace failed contract securities or
for purchases of securities otherwise pursuant to the trust
agreement, if any;
(7) the deductions for payment of deferred sales charge and creation
and development fee, if any;
(8) the deductions for payment of the sponsor's expenses of
maintaining the registration of the trust units, if any;
(9) the aggregate distributions to unitholders; and
(10) the balance remaining after such distributions and deductions,
expressed both as a total dollar amount and as a dollar amount
per unit outstanding on the last business day of such calendar
year; and
(C) the following information:
(1) a list of the securities held as of the last business day of such
calendar year and a list which identifies all securities sold or
other securities acquired during such calendar year, if any;
(2) the number of units outstanding on the last business day of such
calendar year;
(3) the unit value based on the last trust evaluation of such trust
made during such calendar year; and
(4) the amounts actually distributed during such calendar year from
the Income and Capital Accounts, separately stated, expressed
both as total dollar amounts and as dollar amounts per unit
outstanding on the record dates for such distributions.
RIGHTS OF UNITHOLDERS. 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 the trust, nor otherwise affect the rights, obligations and
liabilities of the parties to the applicable trust agreement. By purchasing
units of a trust, each unitholder expressly waives any right he may have under
any rule of law, or the provisions of any statute, or otherwise, to require the
trustee at any time to account, in any manner other than as expressly provided
in the applicable trust agreement, in respect of the portfolio securities or
moneys from time to time received, held and applied by the trustee under the
trust agreement. No unitholder shall have the right to control the operation and
management
-45-
of a trust in any manner, except to vote with respect to the amendment of the
related trust agreement or termination of the trust.
AMENDMENT. Each 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 change provision required by the
Security Exchange Commission or any successor governmental agency and (iii) 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 (iv) to make such amendments as may be necessary for a trust to
continue to qualify as a "regulated investment company" (a "RIC") for federal
income tax purposes if the trust has elected to be taxed as such under the
United States Internal Revenue Code of 1986. A trust agreement may not be
amended, however, without the consent of all unitholders of the related trust
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. A trust agreement may not be amended so as to reduce the
interest in the 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 a 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 a 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 of the trust 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 related 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 a 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 a trust of the
substance of any such amendment to the trust agreement for such trust.
TERMINATION. Each trust agreement provides that the related trust shall
terminate upon the maturity, liquidation, redemption, sale or other disposition
of the last of the securities held in the trust but in no event is it to
continue beyond the trust's mandatory termination date. If the value of a trust
shall be less than 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 is liquidated
-46-
because of the redemption of unsold units by the sponsor, the sponsor will
refund to each purchaser of units of the trust the entire sales charge paid by
such purchaser.
Beginning nine business days prior to, but no later than, the scheduled
termination date described in the prospectus for a trust, the trustee may begin
to sell all of the remaining underlying securities on behalf of unitholders in
connection with the termination of the trust. The sponsor may assist the trustee
in these sales and receive compensation to the extent permitted by applicable
law. The sale proceeds will be net of any incidental expenses involved in the
sales.
The sponsor will generally instruct the trustee to sell the securities as
quickly as practicable during the termination proceedings without in its
judgment materially adversely affecting the market price of the securities, but
it is expected that all of the securities will in any event be disposed of
within a reasonable time after a trust's termination. The sponsor does not
anticipate that the period will be longer than one month, and it could be as
short as one day, depending on the liquidity of the securities being sold. The
liquidity of any security depends on the daily trading volume of the security
and the amount that the sponsor has available for sale on any particular day. Of
course, no assurances can be given that the market value of the securities will
not be adversely affected during the termination proceedings.
Within a reasonable period after termination, the trustee will sell any
securities remaining in a trust. After paying all expenses and charges incurred
by a trust, the trustee will distribute to unitholders thereof their pro rata
share of the balances remaining in the Income and Capital Accounts of the trust.
The sponsor may, but is not obligated to, offer for sale units of a
subsequent series of a trust at approximately the time of the mandatory
termination date. If the sponsor does offer such units for sale, unitholders may
be given the opportunity to purchase such units at a public offering price that
includes a reduced sales charge. There is, however, no assurance that units of
any new series of a trust will be offered for sale at that time, or if offered,
that there will be sufficient units available for sale to meet the requests of
any or all unitholders.
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.
Under each trust agreement, the trustee or any successor trustee may resign
and be discharged of the trust created by the trust agreement by executing an
instrument in writing and filing the same with the sponsor. If the trustee
merges or is consolidated with another entity, the resulting entity shall be the
successor trustee without the execution or filing of any paper instrument or
further act.
-47-
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 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, by written instrument, in duplicate, one copy of
which shall be delivered to the trustee so removed and one copy to the sponsor.
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 each 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 Advisors Asset Management 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 Authority, Inc. (FINRA) and the
Securities Investor Protection Corporation (SIPC), and a registrant of the
Municipal Securities Rulemaking Board (MSRB).
Under each trust agreement, the sponsor may resign and be discharged of the
trust created by the trust agreement by executing an instrument in writing and
filing the same with the trustee. If the sponsor merges or is consolidated with
another entity, the resulting entity shall be the successor sponsor without the
execution or filing of any paper instrument or further act.
If at any time the sponsor shall resign or fail to undertake or perform any
of the duties which by the terms of a trust agreement are required by it to be
undertaken or performed, or the sponsor shall become incapable of acting or
shall be adjudged a bankrupt or insolvent, or a receiver of the sponsor or of
its property shall be appointed, or any public officer shall take charge or
control of the sponsor or of its property or affairs for the purpose of
rehabilitation,
-48-
conservation or liquidation, 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 the related
trust as provided therein, or (c) continue to act as trustee without appointing
a successor sponsor and receive additional compensation deemed by the trustee to
be reasonable and not exceeding such reasonable amounts as may be prescribed by
the Securities and Exchange Commission.
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
or 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
delivered 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 any
trust or unitholders for taking any action or refraining from any action in good
faith pursuant to the trust agreement or for errors in judgment, or for
depreciation or loss incurred by reason of the purchase or sale of securities,
provided, however, that such parties will not be protected against any liability
to which they would otherwise be subjected by reason of their own willful
misfeasance, bad faith or gross negligence in the performance of their duties or
its reckless disregard for their duties under the trust agreement. Each trust
will indemnify, defend and hold harmless each of the sponsor, supervisor and
evaluator from and against any loss, liability or expense incurred in acting in
such capacity (including the cost and expenses of the defense against such loss,
liability or expense) other than by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties under the applicable trust agreement.
Such parties are not under any obligation to appear in, prosecute or defend any
legal action which in their opinion may involve them in any expense or
liability. The trustee will be indemnified by each trust and held harmless
against any loss or liability accruing to it without gross negligence, bad faith
or willful misconduct on its part, arising out of or in connection with the
acceptance or administration of the trust, including the costs and expenses
(including counsel fees) of defending itself against any claim of liability in
the premises.
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,
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
-49-
addition, the trust agreement contains other customary provisions limiting the
liability of the trustee.
EXPENSES OF 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 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.
For services performed under a trust's trust agreement the trustee shall be
paid a fee at an annual rate in the amount per unit set forth in such trust
agreement. The trustee shall charge a pro rated portion of its annual fee at the
times specified in such trust agreement, which pro rated portion shall be
calculated on the basis of the largest number of units in such trust at any time
during the primary offering period. After the primary offering period has
terminated, the fee shall accrue daily and be based on the number of units
outstanding on the first business day of each calendar year in which the fee is
calculated or the number of units outstanding at the end of the primary offering
period, as appropriate. The annual trustee fee shall be prorated for any
calendar year in which the trustee provides services during less than the whole
of such year. The trustee may from time to time adjust its compensation as set
forth above provided that total adjustment upward does not, at the time of such
adjustment, exceed the percentage of the total increase in consumer prices for
services as measured by the United States Department of Labor Consumer Price
Index entitled "All Services Less Rent of Shelter" or similar index, if such
index should no longer be published. The consent or concurrence of any
unitholder shall not be required for any such adjustment or increase. Such
compensation shall be calculated and paid in installments by the trustee against
the Income and Capital Accounts of each trust; provided, however, that such
compensation shall be deemed to provide only for the usual, normal and proper
functions undertaken as trustee pursuant to the trust agreement. The trustee
shall also charge the Income and Capital Accounts of each trust for any and all
expenses and disbursements incurred as provided in the trust agreement.
As compensation for portfolio supervisory services in its capacity as
supervisor, evaluation services in its capacity as evaluator and for providing
bookkeeping and other administrative services of a character described in
Section 26(a)(2)(C) of the Investment Company Act of 1940, as amended, the
sponsor shall be paid an annual fee in the amount per unit set forth in the
trust agreement for a trust. The sponsor shall receive a pro rated portion of
its annual fee from the trustee upon receipt of an invoice by the trustee from
the sponsor, upon which, as to the cost incurred by the sponsor of providing
such services the trustee may rely. Such fee shall be calculated on the basis of
the largest number of units in such trust at any time during the primary
offering period. After the primary offering period has terminated, the fee shall
accrue daily and be based on the number of units outstanding on the first
business day of each calendar year in which the fee is calculated or the number
of units outstanding at the end of the primary offering period, as appropriate.
Such annual fee shall be pro rated for any calendar year
-50-
in which the sponsor provides services during less than the whole of such year,
but in no event shall such compensation when combined with all compensation
received from a trust for providing such services in any calendar year exceed
the aggregate cost to the sponsor for providing such services, in the aggregate.
Such compensation may, from time to time, be adjusted provided that the total
adjustment upward does not, at the time of such adjustment, exceed the
percentage of the total increase in consumer prices for services as measured by
the United States Department of Labor Consumer Price Index entitled "All
Services Less Rent of Shelter" or similar index, if such index should no longer
be published. The consent or concurrence of any unitholder shall not be required
for any such adjustment or increase. Such compensation shall be charged against
the Income and/or Capital Accounts of a trust.
The following additional charges are or may be incurred by a trust in
addition to any other fees, expenses or charges described in the prospectus:
(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 or liability accruing to it without gross negligence, bad faith or
willful misconduct on its part arising out of or in connection with the
acceptance or administration of the trust; (f) indemnification of the sponsor
for any loss, liability or expense incurred in acting in that capacity other
than by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties or its reckless disregard of its obligations and
duties under the trust agreement; (g) indemnification of the supervisor for any
loss, liability or expense incurred in acting as supervisor of the trust other
than by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligations and duties under the trust agreement; (h) indemnification of the
evaluator for any loss, liability or expense incurred in acting as evaluator of
the trust other than by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties under the trust agreement; (i)
expenditures incurred in contacting unitholders upon termination of the trust;
and (j) license fees for the right to use trademarks and trade names,
intellectual property rights or for the use of databases and research owned by
third party licensors. The sponsor is authorized to obtain from Mutual Fund
Quotation Service (or similar service operated by The Nasdaq Stock Market, Inc.
or its successor) a unit investment trust ticker symbol for each trust and to
contract for the dissemination of the unit prices through that service. A trust
will bear any cost or expense incurred in connection with the obtaining of the
ticker symbol and the dissemination of unit prices. A trust may pay the costs of
updating its registration statement each year. All fees and expenses 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 Income and Capital 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.
Each trust will pay the costs of organizing the trust. These costs may
include, but are not limited to, the cost of the initial preparation and
typesetting of the registration statement, prospectuses (including preliminary
prospectuses), the trust agreement and other documents
-51-
relating to the applicable trust, Securities and Exchange Commission and state
blue sky registration fees, the costs of the initial valuation of the portfolio
and audit of a trust, the costs of a portfolio consultant, if any, one-time
license fees, if any, the initial fees and expenses of the trustee, and legal
and other out-of-pocket expenses related thereto but not including the expenses
incurred in the printing of prospectuses (including preliminary prospectuses),
expenses incurred in the preparation and printing of brochures and other
advertising materials and any other selling expenses. A trust will sell
securities to reimburse the sponsor for these costs at the end of the initial
offering period or after six months, if earlier. The value of the units will
decline when a trust pays these costs.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION. When a trust sells or
otherwise liquidates securities, the composition and diversity of the securities
in the trust may be altered. In order to obtain the best price for a trust, it
may be necessary for the sponsor to specify minimum amounts in which blocks of
securities are to be sold. In effecting purchases and sales of a trust's
portfolio securities, the sponsor may direct that orders be placed with and
brokerage commissions be paid to brokers, including the sponsor or brokers which
may be affiliated with the trust, the sponsor, the trustee or dealers
participating in the offering of units.
-52-
CONTENTS OF REGISTRATION STATEMENT
This Amendment to the Registration Statement comprises the following:
The facing sheet
The prospectus and information supplement
The signatures
The consents of evaluator, independent auditors 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 on 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 Advisors Disciplined Trust 1737
(File No. 333-213361) as filed on November 3, 2016.
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 1701 (File No. 333-211573) as filed on
August 5, 2016.
7.1 Power of Attorney. Reference is made to Exhibit 7.1 to the Registration
Statement on Form S-6 for Advisors Disciplined Trust 1485
(File No. 333-203629) as filed on May 15, 2015.
S-1
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, Advisors Disciplined Trust 1828 has duly caused this Amendment 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
September 29, 2017.
ADVISORS DISCIPLINED TRUST 1828
By ADVISORS ASSET MANAGEMENT, INC., DEPOSITOR
By /s/ ALEX R MEITZNER
-----------------------------
Alex R. Meitzner
Senior Vice President
S-2
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below on September 29, 2017 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. )
Jack Simkin Director of Advisors Asset )
Management, Inc. )
Andrew Williams Director of Advisors Asset )
Management, Inc. )
Bart P. Daniel 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