<PAGE>
As filed with the Securities and Exchange Commission on June 23, 1999
Registration No. 333-79169
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-6
For Registration Under the Securities Act
of 1933 of Securities of Unit Investment
Trusts Registered on Form N-8B-2
----------------
A.EXACT NAME OF TRUST:
Equity Securities Trust, Series 23, Municipal Symphony Series II
B.NAME OF DEPOSITOR:
Reich & Tang Distributors, Inc.
C.COMPLETE ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES:
Reich & Tang Distributors, Inc.
600 Fifth Avenue
New York, New York 10020
D.NAME AND COMPLETE ADDRESS OF AGENT FOR SERVICE:
COPY OF COMMENTS TO:
PETER J. DEMARCO MICHAEL R. ROSELLA, Esq.
Reich & Tang Distributors, Inc. Battle Fowler LLP
600 Fifth Avenue 75 East 55th Street
New York, New York 10020 New York, New York 10022
(212) 856-6858
E.TITLE AND AMOUNT OF SECURITIES BEING REGISTERED:
An indefinite number of Units of Equity Securities Trust, Series 23,
Municipal Symphony Series II is being registered under the Securities Act
of 1933 pursuant to Section 24(f) of the Investment Company Act of 1940, as
amended, and Rule 24f-2 thereunder.
F. PROPOSED MAXIMUM AGGREGATE OFFERING PRICE TO THE PUBLIC OF THE SECURITIES
BEING REGISTERED:
Indefinite
G.AMOUNT OF FILING FEE:
No Filing Fee Required
H.APPROPRIATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of the Registration
Statement.
[_]Check if it is proposed that this filing will become effective immediately
upon filing pursuant to Rule 487.
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<PAGE>
[LOGO]
EST
EQUITY SECURITIES TRUST
SERIES 23
MUNICIPAL SYMPHONY SERIES II
Equity Securities Trust, Series 23, Municipal Symphony Series II consists of
two separate unit investment trusts designated as the California Portfolio and
the New York Portfolio. Each of the Trusts will consist of a fixed, diversified
portfolio of publicly traded common stock of closed-end investment companies,
the portfolios of which are concentrated in tax exempt municipal bonds issued
by the state for which the Trust portfolio is designated.The Sponsor is Reich &
Tang Distributors, Inc. These municipal funds and their weightings in each
Trust portfolio will be selected based upon the recommendations of the
portfolio consultant. The Trusts seek to preserve capital and to provide
interest income which is generally exempt from regular Federal income tax, and
from state and local taxes when received by residents of the state for which a
Trust portfolio is designated. The possibility of capital growth is a secondary
objective. The Sponsor cannot assure that the Trusts will achieve these
objectives. The minimum purchase is 100 Units.
This Prospectus consists of two parts. Part A contains the Summary of Essential
Information including summary material relating to the Trusts, the Portfolios
and the Statements of Financial Condition of the Trusts. Part B contains more
detailed information about the Trusts. Part A may not be distributed unless
accompanied by Part B. Please read and retain both parts of this Prospectus for
future reference.
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
PROSPECTUS DATED JUNE 23, 1999
<PAGE>
INVESTMENT SUMMARY
OBJECTIVES. The Trusts each seek to preserve capital and to provide investors
with interest income which is generally exempt from regular Federal income tax
and from state and local taxes when received by residents of the state for
which a portfolio is designated. The possibility of capital growth is a
secondary objective. There is no guarantee that the objectives of the Trusts
will be achieved.
PORTFOLIO SELECTION. Each Trust seeks to achieve its objectives by investing in
a portfolio of the common stock of closed-end investment companies, the
portfolios of which are concentrated in municipal bonds issued by the state for
which the portfolio is designated. As used herein, the term "Securities" means
the common stocks of the municipal funds initially deposited in a Trust and
contracts and funds for the purchase of such municipal funds, and any
additional securities acquired and held by such Trust pursuant to the
provisions of the Indenture.
DESCRIPTION OF PORTFOLIOS. The California Portfolio contains 17 issues of
domestic common stock. 100% of the issues are represented by the Sponsor's
contracts to purchase. 93.01% of the California Portfolio is listed on the New
York Stock Exchange and 6.99% is listed on the American Stock Exchange. The New
York Portfolio contains 17 issues of domestic common stock. 100% of the issues
are represented by the Sponsor's contracts to purchase. 94.99% of the New York
Portfolio is listed on the New York Stock Exchange and 5.01% is listed on the
American Stock Exchange.
RISK CONSIDERATIONS. Unitholders can lose money by investing in a Trust. The
value of the units, the Securities and the bonds held by the municipal funds
included in the portfolios can each decline in value. An investment in units of
a Trust should be made with an understanding of the following risks:
. The municipal funds which comprise the Securities invest in municipal
bonds. Municipal bonds are long-term fixed rate debt obligations that
decline in value with increases in interest rates, an issuer's worsening
financial condition or a drop in bond ratings. The longer the maturity of
a municipal bond the greater the risk of a decline in value with
increases in interest rates.
. The municipal funds will receive early returns of principal when bonds
are called or sold before they mature. The funds may not be able to
reinvest the money they receive at as high a yield or as long a maturity.
. The Securities are shares of common stock which are subject to the risk
that the financial condition of the issuers may become impaired or that
the general condition of the stock market may worsen.
. The high yield bonds held by the municipal funds will generally be rated
in lower rating categories (Baa or lower by Moody's and BBB or lower by
Standard & Poor's), or in comparable non-rated municipal securities.
While these lower rated securities offer a higher return potential than
higher rated securities, they also involve greater price volatility and
greater risk of loss of income and principal.
. Unitholders will pay both Trust expenses and a share of each municipal
fund's expenses.
. The Securities are shares of closed-end funds which frequently trade at a
discount from their net asset value in the secondary market. The amount
of such discount is subject to change from time to time in response to
various factors.
. Since the portfolios of the Trusts are fixed and "not managed", in
general the Sponsor can only sell securities at a Trust's termination or
in order to meet redemptions. As a result, the price at which each
security is sold may not be the highest price it attained during the life
of such Trust.
A-2
<PAGE>
. When cash or a letter of credit is deposited with instructions to
purchase securities in order to create additional units, an increase in
the price of a particular security between the time of deposit and the
time that securities are purchased will cause the units to be comprised
of less of that security and more of the remaining securities. In
addition, brokerage fees incurred in purchasing the Securities will be an
expense of the Trusts.
. A decline in the value of the Securities during the initial offering
period may require additional Securities to be sold in order to reimburse
the Sponsor for organization costs. This would result in a decline in
value of the units.
. Because of each Trust's concentration in state-specific municipal funds,
the safety of an investment in a Trust will depend substantially upon the
financial strength of a particular state and its political subdivisions.
Thus, investors should consider the greater risk of a Trust's
concentration versus the safety that comes with a less concentrated
investment portfolio.
PUBLIC OFFERING PRICE. The Public Offering Price per 100 units of each of the
Trusts is calculated by:
. dividing the aggregate value of the underlying securities and cash held
in a Trust by the number of units outstanding;
. adding a sales charge of 4.50% (4.712% of the net amount invested); and
. multiplying the result by 100.
In addition, during the initial offering period, an amount sufficient to
reimburse the Sponsor for the payment of all or a portion of the estimated
organization costs of a Trust will be added to the Public Offering Price per
100 units. The price of a single unit, or any multiple thereof, is calculated
by dividing the Public Offering Price per 100 units by 100 and multiplying by
the number of units. During the initial offering period, orders involving at
least 10,000 units will be entitled to a volume discount from the Public
Offering Price. The Public Offering Price per Unit may vary on a daily basis in
accordance with fluctuations in the aggregate value of the underlying
Securities and each investors purchase price will be computed as of the date
the units are purchased.
ESTIMATED NET ANNUAL DISTRIBUTIONS. The estimated net annual distributions to
unitholders per 100 units (based on the most recent monthly ordinary dividend
declared with respect to the Securities) was $54.38 for the California
Portfolio and $56.19 for the New York Portfolio. This estimate will vary with
changes in the Trusts' fees and expenses, actual dividends received, and with
the sale of Securities. In addition, because the issuers of common stock are
not obligated to pay dividends, there is no assurance that the estimated net
annual dividend distributions will be realized in the future.
DISTRIBUTIONS. The Trusts will distribute dividends received, less expenses,
every month. The first dividend distribution will be made on August 30, 1999 to
all Unitholders of record on August 15, 1999 and thereafter distributions will
be made on the last business day of every month. The final distribution will be
made within a reasonable period of time after each Trust terminates.
MARKET FOR UNITS. Unitholders may sell their units to the Sponsor or the
Trustee any time, without fee or penalty. However, the Sponsor intends to
repurchase units from unitholders throughout the life of each of each of the
Trusts at prices based upon the market value of the underlying Securities.
However, the Sponsor is not obligated to maintain a market and may stop doing
so without prior notice for any business reason. If a market
A-3
<PAGE>
is not maintained a unitholder will be able to redeem his units with the
Trustee at the same price. The existence of a liquid trading market for these
Securities may depend on whether dealers will make a market in these
Securities. There can be no assurance of the making or the maintenance of a
market for any of the Securities contained in the portfolios of the Trusts or
of the liquidity of the Securities in any markets made. The price at which the
Securities may be sold to meet redemptions and the value of the Units will be
adversely affected if trading markets for the Securities are limited or absent.
TERMINATION. Each of the Trusts will terminate in approximately seven years. At
that time investors may choose one of the following three options with respect
to their terminating distribution:
. receive the distribution in-kind if they own at least 2,500 Units;
. receive cash upon the liquidation of their pro rata share of the
Securities; or
. reinvest in a subsequent series of the Equity Securities Trust (if one is
offered) at a reduced sales charge.
REINVESTMENT PLAN. Unitholders may elect to automatically reinvest their
distributions, if any (other than the final distribution in connection with the
termination of a Trust) into additional units of a Trust at a reduced sales
charge of 1.00%. See "Reinvestment Plan" in Part B for details on how to enroll
in the Reinvestment Plan.
UNDERWRITING. The names and addresses of the Underwriters of the units of the
Trusts are as follows:
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
Reich & Tang
Distributors, Inc. .... 600 Fifth Avenue, New York, New York 10020
McLaughlin, Piven, Vogel
Securities, Inc. ...... 30 Wall Street, New York, New York 10020
M.L. Stern & Co.,
Inc. .................. 8350 Wilshire Boulevard, Beverly Hills, California 90211
David Lerner Associates,
Inc. .................. 477 Jericho Turnpike, Syosset, New York 11791
Gibraltar Securities
Co. ................... 25 Hanover Road, Florham Park, New Jersey 07932
Bear, Stearns & Co.,
Inc. .................. 245 Park Avenue, New York, New York 10167
CIBC Oppenheimer
Corp. ................. One World Financial Center, New York, New York 10281
First Montauk Securities
Corp. ................. 328 Newman Springs Road, Red Bank, New Jersey 07701
Raymond James &
Associates, Inc. ...... 880 Carillon Parkway, St. Petersburg, Florida 33716
Royal Alliance
Associates, Inc. ...... 733 Third Avenue, New York, New York 10017
Advest, Inc. ........... 90 State House Square, Hartford, Connecticut 06103
Fahnestock & Co.,
Inc. .................. 125 Broad Street, New York, New York 10004
Gruntal & Co., LLC...... One Liberty Plaza, New York, New York 10006
Nathan & Lewis
Securities Inc. ....... 260 Madison Avenue, New York, New York 10016
Ramirez & Co., Inc. .... 61 Broadway, Suite 2924, New York, New York 10006
R. Seelaus & Co.,
Inc. .................. 47 Maple Street, Summit, New Jersey 07901
Tucker Anthony
Incorporated........... One Beacon Street, Boston, Massachusetts 02108
Wheat First Union....... 901 East Byrd Street, Richmond, Virginia 23219
</TABLE>
A-4
<PAGE>
FEE TABLE
FOR CALIFORNIA PORTFOLIO
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This Fee Table is intended to help you to understand the costs and expenses
that you will bear directly or indirectly. See "Public Offering and Trust
Expenses and Charges." Although the Trust is a unit investment trust rather
than a mutual fund, this information is presented to permit a comparison of
fees.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unitholder Transaction Expenses As a % of Amount
(fees paid directly from your Initial per
investment) Offering Price 100 Units
- ------------------------------- -------------- ---------
<S> <C> <C> <C> <C>
Maximum Sales Charges Imposed on
Purchase............................... 4.50% $45.00
Maximum Sales Charge Imposed Per Year on
Reinvested Dividends................... 1.00% $10.00
Reimbursement to Sponsor for Estimated
Organization Expenses.................. .13% $ 1.30
<CAPTION>
Estimated Annual Fund Operating Expenses As a % of Amount
(Expenses that are deducted from Trust Initial per
assets) Net Assets 100 Units
- ---------------------------------------- -------------- ---------
<S> <C> <C> <C> <C>
Trustee's Fee........................... .080% $ .80
Other Operating Expenses................ .037% $ .37
Portfolio Supervision, Bookkeeping
and Administrative Fees.............. .030% $.30
Underlying Closed-End Fund Expenses*.... .830% $ 8.30
---- ------
Total................................... .947% $ 9.47
==== ======
</TABLE>
Example
This Example is intended to help you compare the cost of investing in the Trust
with the cost of investing in other unit trusts.
<TABLE>
<CAPTION>
1 3 5
year years years
<S> <C> <C> <C>
This Example assumes that you invest $10,000 in the Trust for
the time periods indicated, assuming the Trust's estimated
operating expense ratio of .947% and a
5% return on the investment throughout the period. Although
your actual costs may be higher or lower, based on these
assumptions, your costs would be:............................ $555 $752 $965
</TABLE>
The Example does not reflect sales charges on reinvested dividends. The
Example assumes reinvestment of all dividends and distributions and utilizes a
5% annual rate of return as mandated by Securities and Exchange Commission
regulations applicable to mutual funds. The Example should not be considered a
representation of past or future expenses or a annual rate of return; the
actual expenses and annual rate of return may be more or less than those
assumed for purposes of the Example.
- --------
* Although not an actual Trust operating expense, each Trust, and therefore
unitholders, will indirectly bear similar operating expenses of the closed-
end funds in which the Trust invests in the estimated amount set forth in the
table. The expenses are estimated based on the actual closed-end fund
expenses charged in a fund's most recent fiscal year but are subject to
change in the future. An investor in a Trust will therefore indirectly pay
higher expenses than if the underlying closed-end fund shares were held
directly.
A-5
<PAGE>
FEE TABLE
FOR NEW YORK PORTFOLIO
- --------------------------------------------------------------------------------
This Fee Table is intended to help you to understand the costs and expenses
that you will bear directly or indirectly. See "Public Offering and Trust
Expenses and Charges." Although the Trust is a unit investment trust rather
than a mutual fund, this information is presented to permit a comparison of
fees.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unitholder Transaction Expenses As a % of Amount
(fees paid directly from your Initial per
investment) Offering Price 100 Units
- ------------------------------- -------------- ---------
<S> <C> <C> <C> <C>
Maximum Sales Charges Imposed on
Purchase............................... 4.50% $45.00
Maximum Sales Charge Imposed Per Year on
Reinvested Dividends................... 1.00% $10.00
Reimbursement to Sponsor for Estimated
Organization Expenses.................. .13% $ 1.30
<CAPTION>
Estimated Annual Fund Operating Expenses As a % of Amount
(Expenses that are deducted from Trust Initial per
assets) Net Assets 100 Units
- ---------------------------------------- -------------- ---------
<S> <C> <C> <C> <C>
Trustee's Fee........................... .080% $ .80
Other Operating Expenses................ .037% $ .37
Portfolio Supervision, Bookkeeping
and Administrative Fees.............. .030% $.30
Underlying Closed-End Fund Expenses*.... .925% $ 9.25
----- ------
Total................................... 1.042% $10.42
===== ======
</TABLE>
Example
This Example is intended to help you compare the cost of investing in the Trust
with the cost of investing in other unit trusts.
<TABLE>
<CAPTION>
1 3 5
year years years
<S> <C> <C> <C>
This Example assumes that you invest $10,000 in the Trust for
the time periods indicated, assuming the Trust's estimated
operating expense ratio of 1.042% and a 5% return on the
investment throughout the period. Although your actual costs
may be higher or lower, based on these assumptions, your
costs would be:.............................................. $565 $781 $1,014
</TABLE>
The Example does not reflect sales charges on reinvested dividends. The
Example assumes reinvestment of all dividends and distributions and utilizes a
5% annual rate of return as mandated by Securities and Exchange Commission
regulations applicable to mutual funds. The Example should not be considered a
representation of past or future expenses or a annual rate of return; the
actual expenses and annual rate of return may be more or less than those
assumed for purposes of the Example.
- --------
* Although not an actual Trust operating expense, each Trust, and therefore
unitholders, will indirectly bear similar operating expenses of the closed-
end funds in which the Trust invests in the estimated amount set forth in the
table. The expenses are estimated based on the actual closed-end fund
expenses charged in a fund's most recent fiscal year but are subject to
change in the future. An investor in a Trust will therefore indirectly pay
higher expenses than if the underlying closed-end fund shares were held
directly.
A-6
<PAGE>
SUMMARY OF ESSENTIAL INFORMATION
CALIFORNIA PORTFOLIO
As of June 22, 1999:*
Initial Date of Deposit: June 23, 1999
<TABLE>
<S> <C>
Aggregate Value of Securities $ 149,750
Number of Units 15,702
Fractional Undivided Interest in Trust 1/15,702
Public Offering Price per 100 Units
Aggregate Value of Securities in
Trust............................................................... $ 149,750
Divided By 15,702 Units (times 100) ................................. $ 953.70
Plus Sales Charge of 4.50% of Public
Offering Price...................................................... $ 45.00
Plus Estimated Organization Costs**.................................. $ 1.30
Public Offering Price+............................................... $1,000.00
Sponsor's Repurchase Price And Redemption Price Per 100 Units++...... $ 955.00
</TABLE>
Evaluation Time: 4:00 p.m. New York Time.
Minimum Income or Principal Distribution: $1.00 per 100 Units
Liquidation Period: Beginning five days prior to the Mandatory Termination
Date.
Rollover Notification Date: June 13, 2006 or another date as determined by the
Sponsor.
Minimum Value of Trust: The Trust may be terminated if the value of the Trust
is less than 40% of the aggregate value of the Securities at the completion of
the Deposit Period.
Mandatory Termination Date: The earlier of June 23, 2006 or the disposition of
the last Security in the Trust.
CUSIP Numbers: Cash: 294762 39 8
Reinvestment: 294762 47 1
Trustee: The Chase Manhattan Bank
Trustee's Fee: $.80 per 100 Units outstanding
Other Fees and Expenses: $.07 per 100 Units outstanding
Sponsor: Reich & Tang Distributors, Inc.
Sponsor's Supervisory Fee: Maximum of $.30 per 100 Units outstanding (see
"Trust Expenses and Charges" in Part B).
Portfolio Consultant:
Riccardi Group LLC
Expected Settlement Date***: June 28, 1999
Record Dates: Fifteenth day of each month
Distribution Dates: Last business day of each month
- --------
* The business day prior to the Initial Date of Deposit. The Initial Date of
Deposit is the date on which the Trust Agreement was signed and the deposit of
securities with the Trustee made.
** This amount per 100 Units will be invested in Securities during, and sold at
the end of, the initial offering period, to reimburse the Sponsor for the
payment of all or a portion of the estimated costs incurred in organizing the
Trust. See "Risk Considerations" for a discussion of the impact of a decrease
in value of the Securities purchased with the Public Offering Price proceeds
intended to be used to reimburse the Sponsor.
*** The business day on which contracts to purchase securities in the Trust are
expected to settle.
+ On the Initial Date of Deposit there will be no cash in the Income or
Principal Accounts. Anyone purchasing Units after such date will have included
in the Public Offering Price a pro rata share of any cash in such Accounts.
++ As of the close of the initial offering period, the Sponsor's Repurchase
Price and Redemption Price per 100 Units for the Trust will be reduced to
reflect the payment of the organization costs to the Sponsor.
A-7
<PAGE>
SUMMARY OF ESSENTIAL INFORMATION
NEW YORK PORTFOLIO
As of June 22, 1999:*
Initial Date of Deposit: June 23, 1999
<TABLE>
<S> <C>
Aggregate Value of Securities $ 149,728
Number of Units 15,700
Fractional Undivided Interest in Trust 1/ 15,700
Public Offering Price per 100 Units
Aggregate Value of Securities in
Trust............................................................... $ 149,728
Divided By 15,700 Units (times 100) ................................. $ 953.70
Plus Sales Charge of 4.50% of Public
Offering Price...................................................... $ 45.00
Plus Estimated Organization Costs**.................................. $ 1.30
Public Offering Price+............................................... $1,000.00
Sponsor's Repurchase Price And Redemption Price Per 100 Units++...... $ 955.00
</TABLE>
Evaluation Time: 4:00 p.m. New York Time.
Minimum Income or Principal Distribution: $1.00 per 100 Units
Liquidation Period: Beginning five days prior to the Mandatory Termination
Date.
Rollover Notification Date: June 13, 2006 or another date as determined by the
Sponsor.
Minimum Value of Trust: The Trust may be terminated if the value of the Trust
is less than 40% of the aggregate value of the Securities at the completion of
the Deposit Period.
Mandatory Termination Date: The earlier of June 23, 2006 or the disposition of
the last Security in the Trust.
CUSIP Numbers: Cash: 294762 48 9
Reinvestment: 294762 49 7
Trustee: The Chase Manhattan Bank
Trustee's Fee: $.80 per 100 Units outstanding
Other Fees and Expenses: $.07 per 100 Units outstanding
Sponsor: Reich & Tang Distributors, Inc.
Sponsor's Supervisory Fee: Maximum of $.30 per 100 Units outstanding (see
"Trust Expenses and Charges" in Part B).
Portfolio Consultant:
Riccardi Group LLC
Expected Settlement Date***: June 28, 1999
Record Dates: Fifteenth day of each month
Distribution Dates: Last business day of each month
- --------
* The business day prior to the Initial Date of Deposit. The Initial Date of
Deposit is the date on which the Trust Agreement was signed and the deposit of
securities with the Trustee made.
** This amount per 100 Units will be invested in Securities during, and sold at
the end of, the initial offering period, to reimburse the Sponsor for the
payment of all or a portion of the estimated costs incurred in organizing the
Trust. See "Risk Considerations" for a discussion of the impact of a decrease
in value of the Securities purchased with the Public Offering Price proceeds
intended to be used to reimburse the Sponsor.
*** The business day on which contracts to purchase securities in the Trust are
expected to settle.
+ On the Initial Date of Deposit there will be no cash in the Income or
Principal Accounts. Anyone purchasing Units after such date will have included
in the Public Offering Price a pro rata share of any cash in such Accounts.
++ As of the close of the initial offering period, the Sponsor's Repurchase
Price and Redemption Price per 100 Units for the Trust will be reduced to
reflect the payment of the organization costs to the Sponsor.
A-8
<PAGE>
EQUITY SECURITIES TRUST
SERIES 23
MUNICIPAL SYMPHONY SERIES II
STATEMENTS OF FINANCIAL CONDITION AS OF OPENING OF BUSINESS, JUNE 23, 1999
ASSETS
<TABLE>
<CAPTION>
California New York
Portfolio Portfolio
---------- ---------
<S> <C> <C>
Investment in Securities--Sponsor's Contracts to Purchase
Underlying Securities Backed by Letter of Credit (cost
$149,954 for the California Portfolio and $149,932 for
the New York Portfolio) (Note 1)....................... $149,954 $149,932
-------- --------
Total..................................................... $149,954 $149,932
======== ========
LIABILITIES AND INTEREST OF UNITHOLDERS
Reimbursement to Sponsor for Organization Costs (Note 2) .. $ 204 $ 204
Interest of Unitholders--Units of Fractional Undivided
Interest Outstanding (15,702 Units of California
Portfolio; 15,700 Units of New York Portfolio)............ 149,954 149,932
Less: Reimbursement to Sponsor for Organization Costs
(Note 2)................................................ (204) (204)
-------- --------
Total...................................................... $149,954 $149,932
======== ========
Net Asset Value per Unit................................... $ 9.55 $ 9.55
======== ========
</TABLE>
- --------
Notes to Statement:
(1) The Trust consists of two separate unit investment trusts designated as
the California Portfolio and the New York Portfolio created under the laws of
the State of New York and registered under the Investment Company Act of 1940.
The Trusts, sponsored by Reich & Tang Distributors, Inc. (the "Sponsor"), seek
to preserve capital and to provide interest income which is generally exempt
from regular Federal income tax and from state and local taxes when received by
residents of the state for which a portfolio is designated. The possibility of
capital growth is a secondary objective. On June 23, 1999 (the "Date of
Deposit"), Portfolio deposits were received by The Chase Manhattan Bank, the
Trusts' Trustee, in the form of executed securities transactions, in exchange
for 15,702 units of the California Portfolio and 15,700 units of the New York
Portfolio. An irrevocable letter of credit issued by the BankBoston, N.A. in an
amount of $400,000 has been deposited with the Trustee for the benefit of the
Trusts to cover the purchases of such Securities as well as any outstanding
purchases of previously sponsored unit investment trusts of the Sponsor.
Aggregate cost to the Trusts of the Securities listed in the Portfolio is
determined by the Trustee on the basis set forth under "Public Offering--
Offering Price" as of 4:00 p.m. on June 22, 1999. The Trusts will each
terminate on June 23, 2006, or earlier under certain circumstances as further
described in the Prospectus.
(2) A portion of the Public Offering Price consists of an amount sufficient
to reimburse the Sponsor for all or a portion of the costs of establishing the
Trusts. These costs have been estimated at $1.30 per 100 Units for the
California Portfolio and $1.30 per 100 Units for the New York Portfolio. A
payment will be made as of the close of the initial public offering period to
an account maintained by the Trustee from which the obligation of the investors
to the Sponsor will be satisfied. To the extent that actual organization costs
are greater than the estimated amount, only the estimated organization costs
included in the Public Offering Price will be reimbursed to the Sponsor and
deducted from the assets of the Trusts.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
A-9
<PAGE>
EQUITY SECURITIES TRUST
SERIES 23
MUNICIPAL SYMPHONY SERIES II
CALIFORNIA PORTFOLIO
AS OF OPENING OF BUSINESS, JUNE 23, 1999
<TABLE>
<CAPTION>
Market
Value of
Stocks as a
Number Percentage Market Cost of
Portfolio of Ticker of the Value Per Securities to
No. Shares Name of Issuer (1) Symbol Trust(2) Share the Trust(3)
--------- ------ ------------------ ------ ----------- --------- -------------
<C> <C> <S> <C> <C> <C> <C>
1 228 Dreyfus California Muni DCM 1.50% $ 9.8750 $ 2,252
Income Fund
2 536 Morgan Stanley Dean IQC 5.00 14.0000 7,504
Witter California
Quality Municipal
Securities Fund
3 447 Muniholdings California CLH 3.99 13.3750 5,979
Insured Fund
4 577 Muniholdings California MUC 5.03 13.0625 7,537
Insured Fund II
5 478 Muniholdings California MCF 3.95 12.3750 5,915
Insured Fund III
6 1,163 Muniyield California MYC 11.00 14.1875 16,500
Fund
7 964 Muniyield California MIC 8.92 13.8750 13,375
Insured Fund
8 969 Muniyield California MCA 9.21 14.2500 13,808
Insured Fund II
9 725 Nuveen California NQC 7.98 16.5000 11,963
Investment Quality
Municipal Fund
10 436 Nuveen California NCO 4.98 17.1250 7,466
Municipal Market
Opportunity Fund
11 714 Nuveen California NCP 8.03 16.8750 12,049
Performance Plus
Municipal Fund
12 208 Nuveen California NCU 1.99 14.3750 2,990
Premium Income
Municipal Fund
13 996 Nuveen California NUC 10.92 16.4375 16,372
Quality Income
Municipal Fund
14 1,011 Nuveen California Select NVC 11.00 16.3125 16,492
Quality Municipal Fund
15 248 Putnam California PCA 2.50 15.1250 3,751
Investment Grade
Municipal Trust
16 142 Van Kampen California VKC 1.00 10.5625 1,500
Municipal Income Trust
17 277 Van Kampen Trust For VIC 3.00 16.2500 4,501
Investment Grade
California Municipals
------ ---------
100.00% $ 149,954
====== =========
</TABLE>
FOOTNOTES TO PORTFOLIO
(1) Contracts to purchase the Securities were entered into on June 22, 1999.
All such contracts are expected to be settled on or about the First
Settlement Date of the Trust which is expected to be June 28, 1999.
(2) Based on the cost of the Securities to the Trust.
(3) Evaluation of Securities by the Trustee was made on the basis of closing
sales prices at the Evaluation Time on the day prior to the Initial Date of
Deposit. The Sponsor's Purchase Price is $150,778. The Sponsor's loss on
the Initial Date of Deposit is $824.
A-10
<PAGE>
EQUITY SECURITIES TRUST
SERIES 23
MUNICIPAL SYMPHONY SERIES II
NEW YORK PORTFOLIO
AS OF OPENING OF BUSINESS, JUNE 23, 1999
<TABLE>
<CAPTION>
Market
Value of
Stocks as a
Number Percentage Market Cost of
Portfolio of Ticker of the Value Per Securities to
No. Shares Name of Issuer (1) Symbol Trust(2) Share the Trust(3)
--------- ------ ------------------ ------ ----------- --------- -------------
<C> <C> <S> <C> <C> <C> <C>
1 507 Dreyfus New York DNM 3.00% $8.8750 $ 4,500
Municipal Income Fund
2 346 Morgan Stanley Dean IQN 3.00 13.0000 4,498
Witter New York Quality
Municipal Securities
3 556 Muniholdings New York MUN 4.98 13.4375 7,471
Fund
4 753 Muniholdings New York MHN 6.87 13.6875 10,307
Insured Fund
5 353 Muniholdings New York MNU 2.93 12.4375 4,390
Insured Fund II
6 919 Muniyield New York MYN 9.00 14.6875 13,498
Insured Fund
7 1,101 Muniyield New York MYT 10.10 13.7500 15,139
Insured Fund II
8 198 Nuveen Insured New York NNF 1.99 15.0625 2,982
Premium Income
Municipal Fund
9 952 Nuveen New York NQN 10.04 15.8125 15,053
Investment Quality
Municipal Fund
10 327 Nuveen New York NNY 2.02 9.2500 3,025
Municipal Value Fund
11 927 Nuveen New York NNP 10.01 16.1875 15,006
Performance Plus
Municipal Fund
12 1,091 Nuveen New York Quality NUN 11.05 15.1875 16,570
Income Municipal Fund
13 1,035 Nuveen New York Select NVN 10.96 15.8750 16,431
Quality Municipal Fund
14 223 Putnam New York PMN 2.01 13.5000 3,010
Investment Grade
Municipal Trust
15 386 Van Kampen New York VNM 4.01 15.5625 6,007
Quality Municipal Trust
16 317 Van Kampen New York VNV 3.01 14.2500 4,517
Value Municipal
Income Trust
17 458 Van Kampen Trust For VTN 5.02 16.4375 7,528
Investment Grade
New York Municipals
------ --------
100.00% $149,932
====== ========
</TABLE>
FOOTNOTES TO PORTFOLIO
(1) Contracts to purchase the Securities were entered into on June 22, 1999.
All such contracts are expected to be settled on or about the First
Settlement Date of the Trust which is expected to be June 28, 1999.
(2) Based on the cost of the Securities to the Trust.
(3) Evaluation of Securities by the Trustee was made on the basis of closing
sales prices at the Evaluation Time on the day prior to the Initial Date of
Deposit. The Sponsor's Purchase Price is $150,455. The Sponsor's loss on
the Initial Date of Deposit is $523.
A-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEE AND UNITHOLDERS,
EQUITY SECURITIES TRUST, SERIES 23,
MUNICIPAL SYMPHONY SERIES II
In our opinion, the accompanying Statements of Financial Condition, including
the Portfolios, present fairly, in all material respects, the financial
position of Equity Securities Trust, Series 23, Municipal Symphony Series II
(the "Trusts") at opening of business, June 23, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Trusts' management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit, which included confirmation of the contracts for the securities at
opening of business, June 23, 1999, by correspondence with the Sponsor,
provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, MA
June 23, 1999
A-12
<PAGE>
[LOGO]
EST
EQUITY SECURITIES TRUST
SERIES 23
MUNICIPAL SYMPHONY SERIES II
PROSPECTUS PART B
PART B OF THIS PROSPECTUS MAY NOT BE
DISTRIBUTED UNLESS ACCOMPANIED BY
PART A
THE TRUSTS
ORGANIZATION. Equity Securities Trust, Series 23, Municipal Symphony Series
II consists of two separate unit investment trusts designated as the California
Portfolio and the New York Portfolio. Each Trust was created under the laws of
the State of New York pursuant to a Trust Indenture and Agreement (the "Trust
Agreement"), dated the Initial Date of Deposit, between Reich & Tang
Distributors, Inc., as Sponsor, and The Chase Manhattan Bank, as Trustee.
On the Initial Date of Deposit, the Sponsor deposited securities with the
Trustee, including common stock and funds and delivery statements relating to
contracts for the purchase of certain such securities (collectively, the
"Securities") with an aggregate value as set forth in Part A and cash or an
irrevocable letter of credit issued by a major commercial bank in the amount
required for such purchases. Thereafter the Trustee, in exchange for the
Securities so deposited, has registered on the registration books of the Trusts
evidence of the Sponsor's ownership of all Units of the Trusts. The Sponsor has
a limited right to substitute other securities in each of the Trusts'
portfolios in the event of a failed contract. See "The Trusts--Substitution of
Securities." The Sponsor may also, in certain circumstances, direct the Trustee
to dispose of certain Securities if the Sponsor believes that, because of
market or credit conditions, or for certain other reasons, retention of the
Security would be detrimental to Unitholders. See "Trust Administration
Portfolio--Supervision."
As of the Initial Date of Deposit, a "Unit" represents an undivided interest
or pro rata share in the Securities and cash of a Trust in the ratio of one
hundred Units for the indicated amount of the aggregate market value of the
Securities initially deposited in such Trust as is set forth in the "Summary of
Essential Information." As additional Units are issued by a Trust as a result
of the deposit of Additional Securities, as described below, the aggregate
value of the Securities in that Trust will be increased and the fractional
undivided interest in that Trust represented by each Unit will be decreased. To
the extent that any Units are redeemed by the Trustee, the fractional undivided
interest or pro rata share in such Trust represented by each unredeemed Unit
will increase, although the actual interest in such Trust represented by such
fraction will remain unchanged. Units will remain outstanding until redeemed
upon tender to the Trustee by Unitholders, which may include the Sponsor, or
until the termination of the Trust Agreement.
DEPOSIT OF ADDITIONAL SECURITIES. With the deposit of the Securities in each
Trust on the Initial Date of Deposit, the Sponsor established a proportionate
relationship among the initial aggregate value of specified Securities in each
Trust. During the 90 days subsequent to the Initial Date of Deposit (the
"Deposit
B-1
<PAGE>
Period"), the Sponsor may deposit additional Securities in a Trust that are
substantially similar to the Securities already deposited in such Trust
("Additional Securities"), contracts to purchase Additional Securities or cash
with instructions to purchase Additional Securities, in order to create
additional Units, maintaining to the extent practicable the original
proportionate relationship of the number of shares of each Security in a
Trust's portfolio on the Initial Date of Deposit. These additional Units, which
will result in an increase in the number of Units outstanding, will each
represent, to the extent practicable, an undivided interest in the same number
and type of securities of identical issuers as are represented by Units issued
on the Initial Date of Deposit. It may not be possible to maintain the exact
original proportionate relationship among the Securities deposited on the
Initial Date of Deposit because of, among other reasons, purchase requirements,
changes in prices, unavailability of Securities or the fact that a Trust is
prohibited from acquiring more than 3% of the outstanding voting stock of any
Municipal Fund. The composition of a Trust portfolio may change slightly based
on certain adjustments made to reflect the disposition of Securities and/or the
receipt of a stock dividend, a stock split or other distribution with respect
to such Securities, including Securities received in exchange for shares or the
reinvestment of the proceeds distributed to Unitholders. Deposits of Additional
Securities in each Trust subsequent to the Deposit Period must replicate
exactly the existing proportionate relationship among the number of shares of
Securities in each Trust's portfolio. Substitute Securities may be acquired
under specified conditions when Securities originally deposited in the Trust
are unavailable (see "The Trusts--Substitution of Securities" below).
OBJECTIVES. The primary objective of each of the Trusts is to seek to
preserve capital and to provide interest income which is generally exempt from
regular Federal income tax and from state and local taxes when received by
residents of the state for which a portfolio is designated. The possibility of
capital growth is a secondary objective. Each Trust seeks to achieve its
objectives by investing in a portfolio of the common stock of closed-end tax-
exempt municipal bond funds, each of which has been recommended based upon the
review of the Portfolio Consultant as able, in its view, to maintain consistent
dividend distributions generally exempt from regular Federal income tax and
from state and local taxes when received by residents of the state for which a
portfolio is designated. As used herein, the term "Securities" means the stocks
initially deposited in a Trust and described in "Portfolios" in Part A and any
additional stocks acquired and held by the Trusts pursuant to the provisions of
the Indenture. All of the Securities in the Trusts are listed on the New York
Stock Exchange, the American Stock Exchange or the National Association of
Securities Dealers Automated Quotations ("NASDAQ") National Quotation Market
System.
The Trusts will each terminate in approximately seven years, at which time
investors may choose to either receive the distributions in kind (if they own
at least 2,500 Units), in cash or reinvest in a subsequent series of Equity
Securities Trust (if offered) at a reduced sales charge. The Trusts are
intended to be investments which should be held by investors for their full
terms and not be used as a trading vehicle. Since the Sponsor may deposit
additional Securities in connection with the sale of additional Units, the
yields on these Securities may change subsequent to the Initial Date of
Deposit. Further, the Securities may appreciate or depreciate in value,
dependent upon the full range of economic and market influences affecting
corporate profitability, the financial condition of issuers (including non-U.S.
issuers) and the prices of equity securities in general and the Securities in
particular. Therefore, there is no guarantee that the objectives of the Trusts
will be achieved.
THE SECURITIES. Each of the Securities in the Portfolios of the Trusts is a
closed-end municipal bond fund (the "Municipal Funds") that is able in the view
of the Portfolio Consultant to maintain consistent dividend distributions
exempt from regular Federal income taxes and from state and local taxes when
received by residents of the state for which a portfolio is designated. Each
Municipal Fund is analyzed by the Portfolio
B-2
<PAGE>
Consultant based on the underlying characteristics of its individual holdings.
Individual bond research is vital to the success of any municipal bond fund.
Careful attention has been paid to the individual municipal bond investments
that each Municipal Fund has under management in order to reduce the Trusts'
exposure to early bond calls and under-performing securities that would have
the effect of diluting the Trusts' current income. Each security within a
potential bond fund is evaluated by the Portfolio Consultant for its credit
quality and call risk probability. In addition, all potential investments are
evaluated based upon the experience of each funds' portfolio manager in various
economic and interest rate cycles.
Out of the universe of state specific closed-end municipal bond funds, the
selection process narrows the field to a group of 15 to 25 funds that meet the
criteria of tax-exempt income, stable performance, and are consistent with each
of the Trusts' objectives. By employing an investment strategy that will
require the Trusts to invest in a series of funds, investors will be
diversified across a wide spectrum of bond issues, thereby reducing the
exposure to any single issuer of municipal debt or any single portfolio
manager.
The Trustee has not participated and will not participate in the selection of
Securities for the Trusts, and neither the Sponsor, the Portfolio Consultant
nor the Trustee will be liable in any way for any default, failure or defect in
any Securities.
The contracts to purchase Securities deposited initially in the Trusts are
expected to settle in three business days, in the ordinary manner for such
Securities. Settlement of the contracts for Securities is thus expected to take
place prior to the settlement of purchase of Units on the Initial Date of
Deposit.
SUBSTITUTION OF SECURITIES. 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 ("Substitute Securities") to make up the original
corpus of such Trust.
The Substitute Securities must be purchased within 20 days after the delivery
of the notice of the failed contract. Where the Sponsor purchases Substitute
Securities in order to replace Failed Securities, the purchase price may not
exceed the purchase price of the Failed Securities and the Substitute
Securities must be substantially similar to the Securities originally
contracted for and not delivered.
Whenever a Substitute Security has been acquired for a Trust, the Trustee
shall, within five days thereafter, notify all Unitholders of such Trust of the
acquisition of the Substitute Security and the Trustee shall, on the next
Distribution Date which is more than 30 days thereafter, make a pro rata
distribution of the amount, if any, by which the cost to the Trust of the
Failed Security exceeded the cost of the Substitute Security plus accrued
interest, if any.
In the event no substitution is made, the proceeds of the sale of Securities
will be distributed to Unitholders as set forth under "Rights of Unitholders --
Distributions." In addition, if the right of substitution shall not be utilized
to acquire Substitute Securities in the event of a failed contract, the Sponsor
will cause to be refunded the sales charge attributable to such Failed
Securities to all Unitholders, and distribute the principal and dividends, if
any, attributable to such Failed Securities on the next Distribution Date.
B-3
<PAGE>
RISK CONSIDERATIONS
CLOSED-END FUNDS. The value of your units may increase or decrease depending
on the value of the underlying shares of the Municipal Funds in a Trust's
portfolio. The Municipal Funds are closed-end investment companies with managed
portfolios. Shares of closed-end funds frequently trade at a discount from net
asset value. However, a fund's articles of incorporation may contain certain
anti-takeover provisions that may have the effect of inhibiting the fund's
possible conversion to open-end status and limiting the ability of other
persons to acquire control of the fund. In certain circumstances, these
provisions might also inhibit the ability of stockholders (including the
Trusts) to sell their shares at a premium over prevailing market prices. This
characteristic is a risk separate and distinct from the risk that the fund's
net asset value will decrease. In particular, this characteristic would
increase the loss or reduce the return on the sale of those Municipal Funds
whose shares were purchased by the Trusts at a premium. As of the business day
prior to the initial date of deposit, 47.5% of the Municipal Funds included in
the California Portfolio and 53% of the Municipal Funds included in the New
York Portfolio were trading at a premium. Should any of the Municipal Funds
convert to open-end status, a Trust will retain such shares unless a
determination is made that the retention of such shares would be detrimental to
the Trust. In the unlikely event that a 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. In
addition, to the extent that the converted Fund creates additional shares when
interest rates have declined and invests in lower yielding securities, a Trust
may experience a reduction of the average yield of its retained shares in that
Fund caused by the acquisition of lower coupon investments. Certain of the
Municipal 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 the Fund's board to
reduce a discount on its share price. To the extent such a plan was implemented
and shares owned by a Trust are repurchased by the Fund, such Trust's position
in that Fund would be reduced and the cash would be deposited in the Trust's
Principal Account and distributed to Unitholders at the next applicable
Distribution Date. Similarly, in the event that a Trust does not retain shares
of a Fund which converted to open-end status, the Trust position in that Fund
would be eliminated and the cash distributed to Unitholders.
Shares of many Municipal Funds are thinly traded, and therefore may be more
volatile and subject to greater price fluctuations because of the Sponsor's
buying and selling securities than shares with greater liquidity. Investors
should be aware that there can be no assurance that the value of the Securities
in the Trusts' Portfolios will increase or that the issuers of those Securities
will pay dividends on outstanding shares. Any distributions of income to
Unitholders will generally depend on the declaration of dividends by the
issuers of the underlying stocks, and the declaration of dividends depends on
several factors including the financial condition of the issuers included in
the portfolios of those Securities and general economic conditions.
LOWER GRADE SECURITIES. The Municipal Funds in each of the Trusts' portfolios
may invest primarily in lower grade securities. There are certain risks
associated with the Municipal Funds' investments in such securities that could
cause the value of these funds to decrease. This, in turn, could cause the
value of your Units to decrease. The risks are outlined below.
Lower grade securities are regarded as being predominately speculative as to
the issuer's ability to make payments of principal and interest. Investment in
such securities involves substantial risk. Lower grade securities are commonly
referred to as "junk bonds." Issuers of lower grade securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risks associated with acquiring the securities of
such issuers generally are greater than is the case with higher-rated
securities. For
B-4
<PAGE>
example, during an economic downturn or a sustained period of rising interest
rates, issuers of lower grade securities may be more likely to experience
financial stress, especially if such issuers are highly leveraged. During
periods of economic downturn, such issuers may not have sufficient revenues to
meet their interest payment obligations. The issuer's ability to make payments
on its debt obligations also may be adversely affected by specific issuer
developments, the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. Therefore, there can
be no assurance that in the future there will not exist a higher default rate
relative to the rates currently existing in the market for lower grade
securities.
The risk of loss due to default by the issuer is significantly greater for
the holders of lower grade securities because such securities may be unsecured
and may be subordinate to other creditors of the issuer. Generally, the lower
grade securities in which the Municipal Funds may invest do not include
instruments which, at the time of investment, are in default or the issuers of
which are in bankruptcy. However, there can be no assurance that such events
will not occur after a Municipal Fund purchases a particular security, in which
case the Municipal Fund and a Trust may experience losses and incur costs.
Lower grade securities frequently have call or redemption features that would
permit an issuer to repurchase the security from one of the Municipal Funds
which holds it. If a call were exercised by the issuer during a period of
declining interest rates, the particular Municipal Fund is likely to have to
replace such called security with a lower yielding security, thus decreasing
the net investment income to the Municipal Fund and a Trust and dividends to
Unitholders.
Lower grade securities tend to be more volatile than higher-rated fixed-
income securities, so that adverse economic events may have a greater impact on
the prices of lower grade securities than on higher-rated fixed-income
securities. Factors adversely affecting the market value of such securities are
likely to adversely affect a Municipal Fund's net asset value which, in turn,
may adversely affect the value of your Units. Recently, demand for lower grade
securities has increased significantly and the difference between the yields
paid by lower grade securities and investment grade bonds (i.e., the "spread")
has narrowed. To the extent this differential increases, the value of lower
grade securities in a Municipal Fund's portfolio could be adversely affected
along with the value of your Units.
Like higher-rated fixed-income securities, lower grade securities generally
are purchased and sold through dealers who make a market in such securities for
their own accounts. However, there are fewer dealers in the lower grade
securities market, which market may be less liquid than the market for higher-
rated fixed-income securities, even under normal economic conditions. Also,
there may be significant disparities in the prices quoted for lower grade
securities by various dealers. As a result, during periods of high demand in
the lower grade securities market, it may be difficult to acquire lower grade
securities appropriate for investment by the Municipal Funds. Adverse economic
conditions and investor perceptions thereof (whether or not based on economic
reality) may impair liquidity in the lower grade securities market and may
cause the prices a Municipal Fund receives for its lower grade securities to be
reduced. In addition, a Municipal Fund may experience difficulty in liquidating
a portion of its portfolio when necessary to meet its liquidity needs or in
response to a specific economic event such as deterioration in the
creditworthiness of the issuers. Under such conditions, judgment may play a
greater role in valuing certain of a Municipal Fund's portfolio instruments
than in the case of instruments trading in a more liquid market. Moreover, a
Municipal Fund may incur additional expenses to the extent that it is required
to seek recovery upon a default on a portfolio holding or to participate in the
restructuring of the obligation.
B-5
<PAGE>
DISTRESSED SECURITIES. The Municipal Funds may invest a portion of their
total assets in "Distressed Securities" which are securities that are:
. the subject of bankruptcy proceedings or otherwise in default as to the
repayment of principal and/or payment of interest at the time of
acquisition
. rated in the lower rating categories (Ca or lower by Moody's and CC or
lower by S&P), or
. if unrated, are in the opinion of the Municipal Fund's investment advisor
of equivalent quality.
An investment in Distressed Securities is speculative and involves significant
risk. Distressed Securities frequently do not produce income while they are
outstanding and may require the Fund to bear certain extraordinary expenses in
order to protect and recover its investment. Therefore, to the extent a Trust
pursues its secondary objective of capital growth through a Municipal Fund's
investment in Distressed Securities, such Trust's ability to achieve current
income for you may be diminished.
DILUTION. The Trusts are prohibited from subscribing to a rights offering for
shares of any of the Municipal Funds. In the event of a rights offering for
additional shares of a Municipal Fund, Unitholders should expect that the
Trusts 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 Municipal 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 Municipal 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.
The Trusts may transfer or sell their rights to purchase additional shares of
a Municipal Fund to the extent permitted by the terms of that Fund's rights
offering. The cash a Trust receives from transferring your rights might serve
as partial compensation for any possible dilution of such Trust's interest in
the Fund. There can be no assurance, however, that the rights will be
transferable or that a market for the rights will develop or the value, if any,
that such rights will have.
LEVERAGE. The use of leverage by the Municipal Funds creates an opportunity
for increased net income and capital growth for their shares, but, also creates
special risks. There can be no assurance that a leveraging strategy will be
successful during any period in which it is employed. The Municipal Funds may
use leverage to provide their shareholders with a potentially higher return.
Leverage creates risks for shareholders including the likelihood of greater
volatility of net asset value and market price of the shares and the risk that
fluctuations in interest rates on borrowing and debt or in the dividend rates
on any preferred shares may affect the return to shareholders.
To the extent the income or capital growth derived from securities purchased
with funds received from leverage exceeds the cost of leverage, a Municipal
Fund's return will be greater than if leverage had not been used. Conversely,
if the income or capital growth from the securities purchased with such funds
is not sufficient to cover the cost of leverage, the return to a Municipal Fund
will be less than if leverage had not been used, and therefore the amount
available for distribution to shareholders as dividends and other distributions
will be reduced. This would, in turn, reduce the amount available for
distribution to you as a Unitholder.
B-6
<PAGE>
VOTING. In regard to the voting of all proxies with respect to a Municipal
Fund, the Sponsor has instructed the Trustee to vote the shares held by each of
the Trusts in the same proportion as the vote of all other holders of the
shares of such Municipal Fund. With respect to rights offering, as described in
the Dilution section above, the Trusts may not accept any additional securities
of the Municipal Funds.
FIXED PORTFOLIO. The value of the Units will fluctuate depending on all of
the factors that have an impact on the economy and the equity markets. These
factors similarly impact the ability of an issuer to distribute dividends.
Unlike a managed investment company in which there may be frequent changes in
the portfolio of securities based upon economic, financial and market analyses,
securities of unit investment trusts, such as the Trusts, are not subject to
such frequent changes based upon continuous analysis. All the Securities in the
Trusts are liquidated or distributed during the Liquidation Period. Since each
of the Trusts will not sell Securities in response to ordinary market
fluctuation, and only at a Trust's termination, the amount realized upon the
sale of the Securities may not be the highest price attained by an individual
Security during the life of a Trust. Some of the Securities in the Trusts may
also be owned by other clients of the Sponsor and their affiliates. However,
because these clients may have differing investment objectives, the Sponsor may
sell certain Securities from those accounts in instances where a sale by a
Trust would be impermissible, such as to maximize return by taking advantage of
market fluctuations. Investors should consult with their own financial advisers
prior to investing in a Trust to determine its suitability. (See "Trust
Administration--Portfolio Supervision" below.)
ADDITIONAL SECURITIES. Investors should be aware that in connection with the
creation of additional Units subsequent to the Initial Date of Deposit, the
Sponsor may deposit Additional Securities, contracts to purchase Additional
Securities or cash with instructions to purchase Additional Securities, in each
instance maintaining the original proportionate relationship, subject to
adjustment under certain circumstances, of the numbers of shares of each
Security in a Trust. Subject to regulatory approval, to the extent the price of
a Security increases or decreases between the time cash is deposited with
instructions to purchase the Security and the time the cash is used to purchase
the Security, Units may represent less or more of that Security and more or
less of the other Securities in a Trust. In addition, brokerage fees (if any)
incurred in purchasing Securities with cash deposited with instructions to
purchase the Securities will be an expense of a Trust.
Price fluctuations between the time of deposit and the time the Securities
are purchased, and payment of brokerage fees, will affect the value of every
Unitholder's Units and the Income per Unit received by a Trust. In particular,
Unitholders who purchase Units during the initial offering period would
experience a dilution of their investment as a result of any brokerage fees
paid by a Trust during subsequent deposits of Additional Securities purchased
with cash deposited. In order to minimize these effects, the Trusts will try to
purchase Securities as near as possible to the Evaluation Time or at prices as
close as possible to the prices used to evaluate Trust Units at the Evaluation
Time.
In addition, subsequent deposits to create such additional Units will not be
covered by the deposit of a bank letter of credit. In the event that the
Sponsor does not deliver cash in consideration for the additional Units
delivered, a Trust may be unable to satisfy its contracts to purchase the
Additional Securities without the Trustee selling underlying Securities.
Therefore, to the extent that the subsequent deposits are not covered by a bank
letter of credit, the failure of the Sponsor to deliver cash to a Trust, or any
delays in the Trust receiving such cash, would have significant adverse
consequences for the Trust.
COMMON STOCK. Since the Trusts contain primarily common stocks of domestic
issuers, an investment in Units of a Trust should be made with an understanding
of the risks inherent in any investment in
B-7
<PAGE>
common stocks including the risk that the financial condition of the issuers of
the Securities may become impaired. Additional risks include risks associated
with the right to receive payments from the issuer which is generally inferior
to the rights of creditors of, or holders of debt obligations or preferred
stock issued by the issuer. Holders of common stocks have a right to receive
dividends only when, if, and in the amounts declared by the issuer's board of
directors and to participate in amounts available for distribution by the
issuer only after all other claims on the issuer have been paid or provided
for. By contrast, holders of preferred stocks usually have the right to receive
dividends at a fixed rate when and as declared by the issuer's board of
directors, normally on a cumulative basis. Dividends on cumulative preferred
stock must be paid before any dividends are paid on common stock and any
cumulative preferred stock dividend which has been omitted is added to future
dividends payable to the holders of such cumulative preferred stock. Preferred
stocks are also usually entitled to rights on liquidation which are senior to
those of common stocks. For these reasons, preferred stocks generally entail
less risk than common stocks.
Moreover, common stocks do not represent an obligation of the issuer and
therefore do not offer any assurance of income or provide the degree of
protection of debt securities. The issuance of debt securities or even
preferred stock by an issuer will create prior claims for payment of principal,
interest and dividends which could adversely affect the ability and inclination
of the issuer to declare or pay dividends on its common stock or the economic
interest of holders of common stock with respect to assets of the issuer upon
liquidation or bankruptcy. Further, unlike debt securities which typically have
a stated principal amount payable at maturity (which value will be subject to
market fluctuations prior thereto), common stocks have neither fixed principal
amount nor a maturity and have values which are subject to market fluctuations
for as long as the common stocks remain outstanding. Common stocks are
especially susceptible to general stock market movements and to volatile
increases and decreases in value as market confidence in and perceptions of the
issuers change. These perceptions are based on unpredictable factors including
expectations regarding government, economic, monetary and fiscal policies,
inflation and interest rates, economic expansion or contraction, and global or
regional political, economic or banking crises. The value of the common stocks
in the Trusts thus may be expected to fluctuate over the life of each of the
Trusts to values higher or lower than those prevailing on the Initial Date of
Deposit.
MUNICIPAL BONDS. Private Activity Bonds. The portfolios of the Municipal
Funds may contain other bonds which are "private activity bonds" (often called
Industrial Revenue Bonds ("IRBs") if issued prior to 1987) which would be
primarily of two types: (1) bonds for a publicly owned facility which a private
entity may have a right to use or manage to some degree, such as an airport,
seaport facility or water system and (2) facilities deemed owned or
beneficially owned by a private entity but which were financed with tax-exempt
bonds of a public issuer, such as a manufacturing facility or a pollution
control facility. In the case of the first type, bonds are generally payable
from a designated source of revenues derived from the facility and may further
receive the benefit of the legal or moral obligation of one or more political
subdivisions or taxing jurisdictions. In most cases of project financing of the
first type, receipts or revenues of the issuer are derived from the project or
the operator or from the unexpended proceeds of the bonds. Such revenues
include user fees, service charges, rental and lease payments, and mortgage and
other loan payments.
The second type of issue will generally finance projects which are owned by
or for the benefit of, and are operated by, corporate entities. Ordinarily,
such private activity bonds are not general obligations of governmental
entities and are not backed by the taxing power of such entities, and are
solely dependent upon the creditworthiness of the corporate user of the project
or corporate guarantor.
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The private activity bonds in the funds have generally been issued under bond
resolutions, agreements or trust indentures pursuant to which the revenues and
receipts payable under the issuer's arrangements with the users or the
corporate operator of a particular project have been assigned and pledged to
the holders of the private activity bonds. In certain cases a mortgage on the
underlying project has been assigned to the holders of the private activity
bonds or a trustee as additional security. In addition, private activity bonds
are frequently directly guaranteed by the corporate operator of the project or
by another affiliated company.
Litigation. Litigation challenging the validity under state constitutions of
present systems of financing public education has been initiated in a number of
states. Decisions in some states have been reached holding such school
financing in violation of state constitutions. In addition, legislation to
effect changes in public school financing has been introduced in a number of
states. The Sponsor is unable to predict the outcome of the pending litigation
and legislation in this area and what effect, if any, resulting change in the
sources of funds, including proceeds from property taxes applied to the support
of public schools, may have on the school bonds in the Municipal Funds.
Legal Proceedings Involving the Funds. The Sponsor has not been notified or
made aware of any litigation pending with respect to any bonds which might
reasonably be expected to have a material effect on the Municipal Funds other
than that which is discussed herein. Such litigation as, for example, suits
challenging the issuance of pollution control revenue bonds under recently
enacted environmental protection statutes may affect the validity of such bonds
or the tax-free nature of the interest thereon. At any time after the date of
this Prospectus, litigation may be instituted on a variety of grounds with
respect to the bonds in the Municipal Funds. The Sponsor is unable to predict
whether any such litigation may be instituted or, if instituted, whether it
will have a material adverse effect on a Municipal Fund.
Other Factors. The bonds in the Municipal Funds, despite their optional
redemption provisions which generally do not take effect until 10 years after
the original issuance dates of such bonds (often referred to as "ten year call
protection"), do contain provisions which require the issuer to redeem such
obligations at par from unused proceeds of the issue within a stated period. In
recent periods of declining interest rates there have been increased
redemptions of bonds, particularly housing bonds, pursuant to such redemption
provisions. In addition, the bonds in the Municipal Funds are also subject to
mandatory redemption in whole or in part at par at any time that voluntary or
involuntary prepayments of principal on the underlying collateral are made to
the trustee for such bonds or that the collateral is sold by the bond issuer.
Prepayments of principal tend to be greater in periods of declining interest
rates; it is possible that such prepayments could be sufficient to cause a bond
to be redeemed substantially prior to its stated maturity date, earliest call
date or sinking fund redemption date.
The bonds may also be subject to other calls, which may be permitted or
required by events which cannot be predicted (such as destruction,
condemnation, or termination of a contract).
In 1976 the federal bankruptcy laws were amended so that an authorized
municipal debtor could more easily seek federal court protection to assist in
reorganizing its debts so long as certain requirements were met. Historically,
very few financially troubled municipalities have sought court assistance for
reorganizing their debts; notwithstanding, the Sponsor is unable to predict to
what extent financially troubled municipalities may seek court assistance in
reorganizing their debts in the future and, therefore, what effect, if any, the
applicable federal bankruptcy law provisions will have on the Municipal Funds.
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The Municipal Funds may also include "moral obligation" bonds. Under statutes
applicable to such bonds, if an issuer is unable to meet its obligations, the
repayment of such bonds becomes a moral commitment but not a legal obligation
of the state or municipality in question.
Certain of the bonds in the Municipal Funds are subject to redemption prior
to their stated maturity dates pursuant to sinking fund or call provisions. A
sinking fund is a reserve fund appropriated specifically toward the retirement
of a debt. A callable bond 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 bond is redeemed at or before maturity from the proceeds of a new issue of
bonds. In general, call provisions are more likely to be exercised when the
offering side evaluation of a bond is at a premium over par than when it is at
a discount from par. Shareholders of the funds (including the Trust), will
realize a gain or loss on the early redemption of such bonds, depending upon
whether the price of such bonds is at a discount from or at a premium over par
at the time the Trust purchases its shares.
Discount and Zero Coupon Bonds. The Municipal Funds' portfolios may contain
original issue discount bonds. The original issue discount, which is the
difference between the initial purchase price of the bonds and the face value,
is deemed to accrue on a daily basis and the accrued portion will be treated as
tax-exempt interest income for regular federal income tax purposes. Upon sale
or redemption, any gain realized that is in excess of the earned portion of
original issue discount will be taxable as ordinary income or capital gain. See
"Tax Status." The current value of an original issue discount bond reflects the
present value of its face amount at maturity. The market value tends to
increase more slowly in early years and in greater increments as the bonds
approach maturity. Of these original issue discount bonds, a portion of the
aggregate principal amount of the bonds in each municipal fund may be zero
coupon bonds. Zero coupon bonds do not provide for the payment of any current
interest and provide for payment at maturity at face value unless sooner sold
or redeemed. The market value of zero coupon bonds is subject to greater
fluctuations than coupon bonds in response to changes in interest rates. Zero
coupon bonds generally are subject to redemption at compound accredited value
based on par value at maturity. Because the issuer is not obligated to make
current interest payments, zero coupon bonds may be less likely to be redeemed
than coupon bonds issued at a similar interest rate.
The Municipal Funds' portfolios may also contain bonds that were purchased at
"market" discount from their par value payable at maturity. The discount
results from the fact that the coupon interest rates on the discount bonds at
the time they were purchased and deposited in the Municipal Funds were lower
than the current market interest rates for newly issued bonds of comparable
rating and type, even though at the time of issuance the discount bonds were
for the most part issued at then current coupon interest rates. Discount bonds
with a longer term to maturity tend to have a higher current yield and a lower
current market value than otherwise comparable bonds with a shorter term to
maturity. If interest rates rise, the value of the bonds will decrease; and if
interest rates decline, the value of the bonds will increase. The discount does
not necessarily indicate a lack of market confidence in the issuer. The current
returns (coupon interest income as a percentage of market price) of discount
bonds will be lower than the current returns of comparably rated bonds of
similar type newly issued at current interest rates. Because discount bonds
tend to increase in market value as they approach maturity and the full
principal amount becomes payable, a discount bond held to maturity will have a
larger portion of its total return in the form of taxable income and gain and
less in the form of tax-exempt interest income than a comparable bond newly
issued at current market rates. Gain on the disposition of a bond purchased at
a market discount generally will be treated as ordinary income, rather than
capital gain, to the extent of accrued market discount.
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CALIFORNIA PORTFOLIO. General Economic Conditions. The economy of the State
of California (sometimes referred to herein as the "State") is the largest
among the 50 states and one of the largest in the world. This diversified
economy has major components in agriculture, manufacturing, high technology,
trade, entertainment, tourism, construction and services.
California's July 1, 1998 population of over 33.2 million represented over
13% of the total United States population. As of July 1, 1990, the population
of 29,944,000 represented an increase of over 6 million persons, or 26%, during
the decade of the 1980s.
California's population is concentrated in metropolitan areas. As of the
April 1, 1990 census, 96% of the State's population resided in the 23
Metropolitan Statistical Areas in the State. As of July 1, 1997, the five-
county Los Angeles area accounted for 49%, with 16.0 million residents. The 10-
county San Francisco Bay Area represented 21%, with a population of 6.9
million.
From 1990-1993, the State suffered through a severe recession, the worst
since the 1930s, heavily influenced by large cutbacks in defense/aerospace
industries and military base closures and by a major drop in real estate
construction. California's economy has been recovering and growing steadily
since the start of 1994. The current economic expansion is marked by strong
growth in high technology manufacturing and services, including computer
software, electronic manufacturing and motion picture/television production;
growth is also strong in other business services, both nonresidential and
residential construction and local education.
In the Governor's Budget released on January 8, 1999, the Department of
Finance projected that the California economy will show moderate growth through
2000, at a slower pace than in 1998. The economic expansion has been marked by
strong growth in high technology business services (including computer
software), construction, and computer and electronic components manufacturing.
The Asian economic crisis, which began in 1997, has had some dampening effects
on the State's economy, particularly in high technology manufacturing. The
widening trade deficit, continuing weakness in Asia, initial signs of economic
weakness in Latin America, and uncertainty in stock prices worldwide all
support moderating growth in 1999. Other impacts of the international situation
may help California, such as the reduction in long-term interest rates.
California Economy. Pressures on the State's budget in the late 1980's and
early 1990's were caused by a combination of external economic conditions
(including a recession which began in 1990) and growth of the largest General
Fund Programs--K-14 education, health, welfare and corrections--at rates faster
than the revenue base. During this period, expenditures exceeded revenues in
four out of six years up to 1992-93, and the State accumulated and sustained a
budget deficit approaching $2.8 billion at its peak at June 30, 1993. Between
the 1991-92 and 1994-95 Fiscal Years, each budget required multibillion dollar
actions to bring projected revenues and expenditures into balance, including
significant cuts in health and welfare program expenditures; transfers of
program responsibilities and funding from the State to local governments;
transfer of about $3.6 billion in annual local property tax revenues from other
local governments to local school districts, thereby reducing state funding for
schools under Proposition 98; and revenue increases (particularly in the 1991-
92 Fiscal Year budget), most of which were for a short duration.
Despite these budget actions, the effects of the recession led to large,
unanticipated budget deficits. By the 1993-94 Fiscal Year, the accumulated
deficit was so large that it was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, again using cross-fiscal year
revenue anticipation warrants to partly finance the deficit into the 1995-96
fiscal year.
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Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish its cash reserves,
the State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
For several fiscal years during the recession, the State was forced to rely
on external debt markets to meet its cash needs, as a succession of notes and
revenue anticipation warrants, often needed to pay previously maturing notes or
warrants, were issued in the period from June 1992 to July 1994. These
borrowings were used also in part to spread out the repayment of the
accumulated budget deficit over the end of a fiscal year, as noted earlier. The
last and largest of these borrowings was $4.0 billion of revenue anticipation
warrants which were issued in July, 1994 and matured on April 25, 1996.
1995-96 through 1997-98 Fiscal Years
The State's financial condition improved markedly during the 1995-96, 1996-97
and 1997-98 fiscal years, with a combination of better than expected revenues,
slowdown in growth of social welfare programs, and continued spending restraint
based on the actions taken in earlier years. The State's cash position also
improved, and no external deficit borrowing has occurred over the end of these
three fiscal years.
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (around $2.2 billion in
1995-96, $1.6 billion in 1996-97 and $2.4 billion in 1997-98) than were
initially planned when the budgets were enacted. These additional funds were
largely directed to school spending as mandated by Proposition 98, and to make
up shortfalls from reduced federal health and welfare aid in 1995-96 and 1996-
97. The accumulated budget deficit from the recession years was finally
eliminated.
1998-99 Fiscal Year Budget
When the Governor released his proposed 1998-99 Fiscal Year Budget on January
9, 1998, he projected General Fund revenues for the 1998-99 Fiscal Year of
$55.4 billion, and proposed expenditures in the same amount. By the time the
Governor released the May Revision to the 1998-99 Budget ("May Revision") on
May 14, 1998, the Administration projected that revenues for the 1997-98 and
1998-99 Fiscal Years combined would be more than $4.2 billion higher than was
projected in January. The Governor proposed that most of this increased revenue
be dedicated to fund a 75 percent cut in the Vehicle License Fee ("VLF").
The Legislature passed the 1998-99 Budget Bill on August 11, 1998, and the
Governor signed it on August 21, 1998. Some 33 companion bills necessary to
implement the budget were also signed. In signing the Budget Bill, the Governor
used his line-item veto power to reduce expenditures by $1.360 billion from the
General Fund, and $160 million from special funds. Of this total, the Governor
indicated that about $250 million of vetoed funds were "set aside" to fund
programs for education. Vetoed items included education funds, salary increases
and many individual resources and capital projects.
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The 1998-99 Budget Act was based on projected General Fund revenues and
transfers of $57.0 billion (after giving effect to various tax reductions
enacted in 1997 and 1998), a 4.2 percent increase from the then revised 1997-98
figures. Special Fund revenues were estimated at $14.3 billion. The revenue
projections were based on the May Revision. Economic problems overseas since
that time may affect the May Revision projections.
After giving effect to the Governor's vetoes, the Budget Act provided
authority for expenditures of $57.3 billion from the General Fund (a 7.3
percent increase from 1997-98), $14.7 billion from Special Funds, and $3.4
billion from bond funds. The Budget Act projected a balance in the Special Fund
for Economic Uncertainty ("SFEU") at June 30, 1999 (but without including the
"set aside" veto amount) of $1.255 billion, a little more than 2 percent of
General Fund revenues. The Budget Act assumed the State will carry out its
normal intra-year cash flow borrowing in the amount of $1.7 billion of revenue
anticipation notes, which were issued on October 1, 1998.
Revenues and expenditures for 1998-99 as updated in the 1999-00 Governor's
Budget are $56.3 billion and $58.3 billion, respectively. As a result, the
projected balance in the SFEU at June 30, 1999 has been reduced to $617
million.
The most significant feature of the 1998-99 budget was agreement on a total
of $1.4 billion tax cuts. The central element is a bill which provides for a
phased-in reduction of the VLF. Since the VLF is currently transferred to
cities and counties, the bill provides for the General Fund to replace the lost
revenues. Started on January 1, 1999, the VLF has been reduced by 25 percent,
at a cost to the General Fund of approximately $500 million in the 1998-99
Fiscal Year and about $1 billion annual thereafter.
In addition to the cut in VLF, the 1998-99 budget includes both temporary and
permanent increase in the personal income tax dependent credit ($612 million
General Fund cost in 1998-99, but less in future years), a nonrefundable
renters tax credit ($133 million), and various targeted business tax credits
($106 million).
Other significant elements of the revised 1998-99 Budget are as follows:
1. Proposition 98 funding for K-12 schools is increased by $2.2 billion
in General Fund moneys over the latest revised 1997-98 levels, over $1
billion higher than the minimum Proposition 98 guarantee. Of the 1998-99
funds, major new programs include money for instructional and library
materials, deferred maintenance, support for increasing the school year to
180 days and reduction of class sizes in Grade 9. Overall, per-pupil
spending for K-12 schools under Proposition 98 is increased to $5,752,
which is $478 over the 1997-98 level. The Budget also includes $250 million
as repayment of prior years' loans to schools, as part of the settlement of
the CTA v. Gould lawsuit.
2. Funding for higher education increased substantially above the actual
1997-98 level. General Fund support was increased by $339 million (15.6
percent) for the University of California and $271 million (14.5 percent)
for the California State University system. In addition, Community Colleges
increased by $183 million (9.0 percent).
3. The Budget includes increased funding for health, welfare and social
services programs. A 4.9 percent grant increase was included in the basic
welfare grants, the first increase in those grants in 9 years. Future
increases will depend on sufficient General Fund revenue to trigger the
phased cuts in VLF described above.
4. Funding for the judiciary and criminal justice programs increased by
about 15 percent over 1997-98, primarily to reflect increased state support
for local trial courts and rising prison population.
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5. Various other highlights of the revised Budget included new funding
for resources projects, dedication of $240 million of General Fund moneys
for capital outlay projects, funding of a state employee salary increase,
funding of 2,000 new Department of Transportation positions to accelerate
transportation construction projects, and funding of the Infrastructure and
Economic Development Bank ($50 million).
6. The State of California received approximately $167 million of federal
reimbursements to offset costs related to the incarceration of undocumented
alien felons for federal fiscal year 1997. The state anticipates receiving
approximately $173 million in federal reimbursements attributable to
federal fiscal year 1998.
The revised 1998-99 budget as reported in the 1999-00 Governor's Budget, also
reflects the latest estimated costs or savings as provided in various pieces of
legislation passed and signed after the 1998 Budget Act. Major budget items
include costs for the All-American Canal, state's share of purchase of
Headwaters Forest, and additional funds for state prisons and juvenile
facilities. The revised budget reflects a $433 million reduction in the State's
obligation to contribute to State Teachers' Retirement System in 1998-99.
Proposed 1999-00 Budget
On January 8, 1999, Governor Davis released his proposed budget for Fiscal
Year 1999-2000 (the "Governor's Budget"). The Governor's Budget generally
reported that General Fund revenues for FY 1998-99 and FY 1999-00 would be
lower than earlier projections (primarily due to the overseas economic
downturn), while some caseloads would be higher than earlier projections. The
Governor's Budget was designed to meet ongoing caseloads and basic inflation
adjustments, and included certain new programs.
The Governor's Budget projects General Fund revenues and transfers in 1999-00
of $60.3 billion. This includes anticipated initial payments from the tobacco
litigation settlement of about $560 million, and receipt of one-time revenue
from sale of assets. The Governor also assumes receipt of about $400 million of
federal aid for certain health and welfare programs and reimbursement for costs
for incarceration of undocumented felons, above the amount presently received
by California from the federal government. The Governor's Budget notes that
more accurate revenue estimates will be available in May and June before
adoption of the budget. Among other things, the amount of realized capital
gains for 1998 is still unknown, given the large fluctuations in the stock
market last year. The Governor has not proposed any tax cuts or increases.
The Governor's Budget proposes General Fund expenditures of $63.2 billion.
The Governor's Budget gives highest priority to education, with Proposition 98
funding increasing by almost 5 percent. The Governor proposed certain new
education initiatives focused on improving reading skills, teacher quality and
school accountability. The Governor proposed modest increase in funding for
higher education, and an 8 percent increase in SSP payments (a State-funded
welfare program), while assuming decreases in Medi-Cal and CalWORKs grant costs
due to lowering caseloads. The Governor also proposes to reduce expenditures by
deferring certain previously budgeted expenditures totaling about $170 million.
On May 14, 1999, the revision to the proposed State Budget for Fiscal Year
1999-2000 (the "May Revision") was released by Governor Gray Davis. The May
Revision projects that a surplus in the approximate amount of $3.1 billion will
be available compared to the January Governor's Budget. The key components
proposed by Governor Davis include:
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Tax Relief: A total of $78 million by eliminating the minimum franchise tax
paid by new businesses during the first two years of the businesses' life and
excluding 50 percent of capital gains from State taxes for small-business
stocks held longer than five years.
K-12 Education: an increase of $972.7 million, including $100 million for
school safety programs; $100 million for teacher performance bonuses; $144
million for new textbooks; and $40 million to encourage parential involvement.
Higher Education: A 5 percent reduction in the annual fees paid by University
of California ("UC") and California State University ("CSU") undergraduates. UC
annual fees would fall to $3,429. CSU annual fees would fall to $1,428.
Graduate student annual fees will also decrease by a 5 percent at CSU and UC.
Community college fees would also fall, to $1 to $11 per unit.
Welfare: No additional money provided for welfare recipients, meaning that
they will receive only a 2.36 percent cost of living increase. A family of
three will have their benefits rise on average from $611 to $625.
Social Security Insurance (SSI): $25 million to increase the cost-of-living
adjustment from 2.08 to 2.36 percent. Individuals would see their monthly
benefit rise from $676 to $692 and couples from $1,201 to $1,229.
Prisons: $335 million to build a new maximum-security prison in Delano. It
would be the 34th State prison.
Environment: $137 million for maintenance needed to clean up the State's
parks, plus $20 million for other cultural and natural heritage needs.
Transportation: $75 million for extra regional transit systems, including
commuter trains and bay ferries for the Bay Area.
Reserves: $900 million for emergencies, an increase of $570 million over the
January budget; $300 million to give raises to State employees and cover costs
from litigation; $248 million in the event that a 10 percent cut in vehicle
license fees is made in 2001.
The budget has been passed and has been forwarded to the Governor for
consideration.
The Governor's Budget includes a proposal to implement changes in law to make
"midcourse corrections" in the State's budget if ongoing revenues fall short of
projections during a fiscal year or expenditures increase significantly. The
proposals include two components: restoring authority for the Director of
Finance to reduce expenditures in certain circumstances, and an automatic
"trigger" mechanism which would produce spending cuts if certain conditions
were met. These proposals will require legislative action.
Future Budgets
It cannot be predicted what actions will be taken in the future by the State
Legislature and the Governor to deal with changing State revenues and
expenditures. The State budget will be affected by national and state economic
conditions and other factors.
THE FOREGOING DISCUSSION IS BASED ON OFFICIAL STATEMENTS AND OTHER
INFORMATION PROVIDED BY THE STATE OF CALIFORNIA. THE STATE HAS INDICATED THAT
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ITS DISCUSSION OF BUDGETARY INFORMATION IS BASED ON ESTIMATES AND PROJECTIONS
OF REVENUES AND EXPENDITURES FOR THE CURRENT FISCAL YEAR AND MUST NOT BE
CONSTRUED AS STATEMENTS OF FACT; THE ESTIMATES AND PROJECTIONS ARE BASED UPON
VARIOUS ASSUMPTIONS WHICH MAY BE AFFECTED BY NUMEROUS FACTORS, INCLUDING FUTURE
ECONOMIC CONDITIONS IN THE STATE AND THE NATION, AND THERE CAN BE NO ASSURANCE
THAT THE ESTIMATES WILL BE ACHIEVED.
Voter Initiative
"Proposition 218" or the "Right to Vote on Taxes Act" (the "Proposition") was
approved by the California electorate at the November, 1996 general election.
Officially titled "Voter Approval For Local Government Taxes, Limitation on
Fees, Assessments and Charges Initiative Constitutional Amendment," the Act was
approved by a majority of the voters voting at the election and adds Articles
XIIIC and XIIID to the California Constitution.
The Proposition, among other things, requires local governments to follow
certain procedures in imposing or increasing any fee or charge as defined.
"Fee" or "charge" is defined to mean "any levy other than an ad valorem tax, a
special tax or an assessment imposed by an agency upon a parcel or upon a
person as an incident of property ownership, including user fees or charges for
a property related service."
The procedure required by the Proposition to impose or increase any fee or
charge include a public hearing upon the proposed fee or charge and the
opportunity to present written protests by the owners of the parcels subject to
the proposed fee or charge. If written protests against the proposed fee or
charge are presented by a majority of owners of the identified parcels, the
local government shall not impose the fee or charge.
The Proposition further provides as follows:
"Except for fees or charges for sewer, water, and refuse collection
services, no property related fee or charge shall be imposed or increased
unless and until such fee or charge is submitted and approved by a majority
vote of the property owners of the property subject to the fee or charge
or, at the option of the agency, by a two-thirds vote of the electorate
residing in the affected area."
Additionally, the Proposition provides, with respect to standby charges, as
follows:
"No fee or charge may be imposed for a service unless that service is
actually used by, or immediately available to, the owner of the property in
question. Fees or charges based on potential or future use of a service are
not permitted. Standby charges, whether characterized as charges or
assessments, shall be classified as assessments and shall not be imposed
without compliance with Section 4 of this Article."
The Proposition provides that beginning July 1, 1997, all fees or charges
shall comply with the Proposition's requirements.
The Proposition is silent with respect to future increases of pre-existing
fees or charges which are pledged to payment of indebtedness or obligations
previously incurred by the local government. Presumably, the Proposition cannot
preempt outstanding contractual obligations protected by the contract
impairment clause of the federal constitution. However, with respect to any
given situation or case, litigation may be the method
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which will settle any question concerning the authority of a local government
to increase fees or charges outside of the strictures of the Proposition in
order to meet contractual obligations.
Proposition 218 also contains a new provision subjecting "matters of reducing
or repealing any local tax, assessments and charges" to the initiative power.
This means that no city or local agency revenue source is safe from reduction
or repeal pursuant to the initiative process.
Litigation concerning various elements of the Proposition may ultimately
ensue and clarifying legislation may be enacted.
Future Initiatives
Articles XIIIA, XIIIB, XIIIC and XIIID were each adopted as measures that
qualified for the ballot pursuant to the State's initiative process. From time
to time, other initiative measures could be adopted which could affect revenues
of the State or public agencies within the State.
State Appropriations Limit
The State is subject to an annual appropriations limit imposed by Article
XIIIB of the State Constitution (the "Appropriations Limit"), and is prohibited
from spending "appropriations subject to limitation" in excess of the
Appropriations Limit. Article XIIIB, originally adopted in 1979, was modified
substantially by Propositions 98 and 111 in 1988 and 1990, respectively.
"Appropriations subject to limitation" are authorizations to spend "proceeds of
taxes," which consist of tax revenues and certain other funds, including
proceeds from regulatory licenses, user charges or the other fees to the extent
that such proceeds exceed the reasonable cost of providing the regulation,
product or service. The Appropriations Limit is based on the limit for the
prior year, adjusted annually for certain changes, and is tested over
consecutive two-year periods. Any excess of the aggregate proceeds of taxes
received over such two-year period above the combined Appropriation Limits for
those two years is divided equally between transfers to K-12 districts and
refunds to taxpayers.
Exempted from the Appropriations Limit are debt Service costs of certain
bonds, court or federally mandated costs, and, pursuant to Proposition 111,
qualified capital outlay projects and appropriations or revenues derived from
any increase in gasoline taxes and motor vehicle weight fees above January 1,
1990 levels. Some recent initiatives were structured to create new tax revenues
dedicated to specific uses and expressly exempted from the Article XIIIB
limits. The Appropriations Limit may also be exceeded in cases of emergency
arising from civil disturbance or natural disaster declared by the Governor and
approved by two-thirds of the Legislature. If not so declared and approved, the
Appropriations Limit for the next three years must be reduced by the amount of
the excess.
Article XIIIB, as amended by Proposition 98 on November 8, 1988, also
establishes a minimum level of state funding for school and community college
districts and requires that excess revenues up to a certain limit be
transferred to schools and community college districts instead of returned to
the taxpayers. Determination of the minimum level of funding is based on
several tests set forth in Proposition 98. During fiscal year 1991-1992
revenues were smaller than expected, thus reducing the payment owed to schools
in 1991-1992 under alternate "test" provisions. In response to the changing
revenue situation, and to fully fund the Proposition 98 guarantee in the 1991-
1992 and 1992-1993 fiscal years without exceeding it, the Legislature enacted
legislation to reduce 1991-92 appropriations. The amount budgeted to schools,
but which exceeded the reduced
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appropriation, was treated as a non-Proposition 98 short-term loan in 1991-92.
As part of the 1992-93 Budget, $1.083 billion of the amount budgeted to K-12
schools was designated to "repay" the prior year loan, thereby reducing cash
outlays in 1992-93 by that amount. To maintain per-average daily attendance
("ADA") funding, the 1992-93 Budget included loans to schools and to community
colleges, to be repaid from future Proposition 98 entitlements. The 1993-94
Budget also provided new loans to K-12 schools and community colleges to
maintain ADA funding. These loans have been combined with the 1992-93 fiscal
year loans into one loan of $1.760 billion, to be repaid from future years'
Proposition 98 entitlements, and conditioned upon maintaining current funding
levels per pupil at K-12 schools.
A Sacramento County Superior Court in California Teachers' Association, et
al. v Gould, et al., ruled that the 1992-93 loans to K-12 schools and community
colleges violate Proposition 98. As part of the negotiations leading to the
1995-96 Budget Act, an oral agreement was reached to settle this case. The
parties reached a conditional final settlement of the case in April, 1996. The
settlement required adoption of legislation satisfactory to the parties to
implement its terms.
The settlement provided, among other things, that both the State and K-12
schools share in the repayment of prior years' emergency loans to schools. Of
the total $1.76 billion in loans, the State was obligated to repay $935 million
by forgiveness of the amount owed, while schools were required to repay $825
million. The State's share of the repayment is reflected as expenditures above
the current Proposition 98 base circulation. The schools' share of the
repayment counts as appropriations toward satisfying the Proposition 98
guarantee, or from "below" the current base. Repayments are spread over the
eight-year period beginning 1994-95 through 2002-03.
Because of the complexities of Article XIIIB, the ambiguities and possible
inconsistencies in its terms, the applicability of its exceptions and
exemptions and the impossibility of predicting future appropriations, the
Sponsor cannot predict the impact of this or related legislation on the bonds
in the Municipal Funds which are included in the California Portfolio. Other
Constitutional amendments affecting state and local taxes and appropriations
have been proposed from time to time. If any such initiatives are adopted, the
state could be pressured to provide additional financial assistance to local
governments or appropriate revenues as mandated by such initiatives.
Propositions such as Proposition 98 and others that may be adopted in the
future, may place increasing pressure on the State's budget over future years,
potentially reducing resources available for other State programs, especially
to the extent that the Article XIIIB spending limit would restrain the State's
ability to fund other such programs by raising taxes.
State Indebtedness
As of August 1, 1998, the State had over $15.9 billion aggregate amount of
its general obligation bonds outstanding. General obligation bond
authorizations in an aggregate amount of approximately $4.8 billion remained
unissued as of August 1, 1998. As of April 1, 1998 the State Finance Committee
had authorized the issuance of approximately $2.6 billion of general obligation
commercial paper notes, but as of that date only $1.3 billion aggregate
principal amount of which was issued and outstanding. The State also builds and
acquires capital facilities through the use of lease purchase borrowing. As of
April 1, 1998, the State had approximately $6.5 billion of outstanding General
Fund-supported Lease-Purchase Debt.
In addition to the general obligation bonds, State agencies and authorities
had approximately $22.49 billion aggregate principal amount of revenue bonds
and notes outstanding as of April 1, 1998. Revenue bonds represent both
obligations payable from State revenue-producing enterprises and projects,
which are not
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payable from the General Fund, and conduit obligations payable only from
revenues paid by private users of facilities financed by such revenue bonds.
Such enterprises and projects include transportation projects, various public
works and exposition projects, educational facilities (including the California
State University and University of California systems), housing, health
facilities and pollution control facilities.
Litigation
The State is a party to numerous legal proceedings. In addition, the State is
involved in certain other legal proceedings that, if decided against the State,
might require the State to make significant future expenditures or impair
future revenue sources. Examples of such cases include challenges to certain
vehicle license fees and challenges to the State's use of Public Employee
Retirement System funds to offset future State and local pension contributions.
Other cases which could significantly impact revenue or expenditures involve
challenges of payments of wages under the Fair Labor Standards Act, the method
of determining gross insurance premiums involving health insurance, property
tax challenges, and challenges of transfer of moneys from State Treasury
special fund accounts to the State's General Fund pursuant to its Budget Acts
for certain fiscal years. Because of the prospective nature of these
proceedings, it is not presently possible to predict the outcome of such
litigation or estimate the potential impact on the ability of the State to pay
debt service on its obligation.
Ratings
During 1996, the ratings of California's general obligation bonds were
upgraded by the following rating agencies. Standard & Poor's Ratings Group
upgraded its rating of such debt to A+; the same rating has been assigned to
such debt by Fitch Investors Service. Moody's Investors Service has assigned
such debt an A1 rating. Any explanation of the significance of such ratings may
be obtained only from the rating agency furnishing such ratings. There is no
assurance that such ratings will continue for any given period of time or that
they will not be revised downward or withdrawn entirely if, in the judgment of
the particular rating agency, circumstances so warrant.
Local Governments
The primary units of local government in California are the counties, ranging
in population from 1,200 in Alpine County to over 9,600,000 in Los Angeles
County. Counties are responsible for the provision of many basic services,
including indigent health care, welfare, jails and public safety in
unincorporated areas. There are also about 470 incorporated cities, and
thousands of other special districts formed for education, utility and other
services. The fiscal condition of local governments has been constrained since
the enactment of "Proposition 13" in 1978, which reduced and limited the future
growth of property taxes, and limited the ability of local governments to
impose "special taxes" (those devoted to a specific purpose) without two-thirds
voter approval. Counties, in particular, have had fewer options to raise
revenues than many other local government entities, and have been required to
maintain many services.
In the aftermath of Proposition 13, the State provided aid to local
governments from the General Fund to make up some of the loss of property tax
moneys, including taking over the principal responsibility for funding K-12
schools and community colleges. During the recession, the Legislature
eliminated most of the remaining components of post-Proposition 13 aid to local
government entities other than K-14 education districts by requiring cities and
counties to transfer some of their property tax revenues to school districts.
However, the Legislature also provided additional funding sources (such as
sales taxes) and reduced certain mandates for local services. Since then the
State has also provided additional funding to counties and cities through such
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programs as health and welfare realignment, welfare reform, trial court
restructuring, the COPs program supporting local public safety departments, and
various other measures. In his 1999-00 Budget Proposal, the Governor has
proposed a review and "accounting" of state--local fiscal relationships, with
the goal of ultimately restoring local government finances to an equivalent
fiscal condition to the period prior to the 1991-93 recession--induced tax
shifts. Litigation has been brought challenging the legality of the property
tax shifts from counties to schools.
Historically, funding for the State's trial court system was divided between
the State and the counties. However, Chapter 850, Statutes of 1997, implemented
a restructuring of the State's trial court funding system. Funding for the
courts, with the exception of costs for facilities, local judicial benefits,
and revenue collection, was consolidated at the State level. The county
contribution for both their general fund and fine and penalty amounts is capped
at the 1994-95 level and becomes part of the Trial Court Trust Fund, which
supports all trial court operations. The State assumed responsibility future
growth in trial court funding. The consolidation of funding is intended to
streamline the operation of the courts, provide a dedicated revenue source, and
relieve fiscal pressure on the counties. Beginning in 1998-99, the county
general fund contribution for court operations is reduced by $300 million, and
cities will retain $62 million in fine and penalty revenue previously remitted
to the State; the General Fund reimbursed the $362 million revenue loss to the
Trial Court Trust Fund. The 1999-00 Governor's Budget would further reduce the
county general fund contribution by an additional $48 million to reduce by 50
percent the contributions of the next 18 smallest counties and reduce by 5
percent the general fund contribution of the remaining 21 counties.
The entire statewide welfare system has been changed in response to the
change in federal welfare law enacted in 1996. Under the CalWORKs program,
counties are given flexibility to develop their own plans, consistent with the
state law, to implement the program and to administer many of its elements, and
their costs for administrative and supportive services are capped at the 1996-
97 levels. Counties are also given financial incentives if, at the individual
county level or statewide, the CalWORKs program produces savings associated
with specified standards. Counties will still be required to provide "general
assistance" aid to certain persons who cannot obtain welfare from other
programs.
The Sponsor believes the information summarized above describes some of the
more significant aspects relating to the California Portfolio. The sources of
such information are Preliminary Official Statements and Official Statements
relating to the State's general obligation bonds and the State's revenue
anticipation notes, or obligations of other issuers located in the State of
California, or other publicly available documents. Although the Sponsor has not
independently verified this information, it has no reason to believe that such
information is not correct in all material respects.
NEW YORK PORTFOLIO. The information set forth below is derived from the
official statements and/or preliminary drafts of official statements prepared
in connection with the issuance of New York State and New York City municipal
bonds. The Sponsor has not independently verified this information.
Economic Trends. Over the long term, the State of New York (the "State") and
the City of New York (the "City") face serious potential economic problems. The
City accounts for approximately 41% of the State's population and personal
income, and the City's financial health affects the State in numerous ways. The
State historically has been one of the wealthiest states in the nation. For
decades, however, the State has grown more slowly than the nation as a whole,
gradually eroding its relative economic affluence. Statewide, urban centers
have experienced significant changes involving migration of the more affluent
to the suburbs and an influx of generally less affluent residents. Regionally,
the older Northeast cities have suffered because of the
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relative success that the South and the West have had in attracting people and
business. The City has also had to face greater competition as other major
cities have developed financial and business capabilities which make them less
dependent on the specialized services traditionally available almost
exclusively in the City.
The State has for many years had a very high State and local tax burden
relative to other states. The State and its localities have used these taxes to
develop and maintain their transportation networks, public schools and
colleges, public health systems, other social services and recreational
facilities. Despite these benefits, the burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
Notwithstanding the numerous initiatives that the State and its localities
may take to encourage economic growth and achieve balanced budgets, reductions
in Federal spending could materially and adversely affect the financial
condition and budget projections of the State and its localities.
New York City. The City, with a population of approximately 7.4 million, is
an international center of business and culture. Its non-manufacturing economy
is broadly based, with the banking and securities, life insurance,
communications, publishing, fashion design, retailing and construction
industries accounting for a significant portion of the City's total employment
earnings. Additionally, the City is the nation's leading tourist destination.
Manufacturing activity in the City is conducted primarily in apparel and
printing.
For each of the 1981 through 1998 fiscal years, the City had an operating
surplus, before discretionary transfers, and achieved balanced operating
results as reported in accordance with then applicable generally accepted
accounting principles ("GAAP"), after discretionary transfers. The City has
been required to close substantial gaps between forecast revenues and forecast
expenditures in order to maintain balanced operating results. There can be no
assurance that the City will continue to maintain balanced operating results as
required by State law without tax or other revenue increases or reductions in
City services or entitlement programs, which could adversely affect the City's
economic base.
As required by law, the City prepares a four-year annual financial plan,
which is reviewed and revised on a quarterly basis and which includes the
City's capital, revenue and expense projections and outlines proposed gap-
closing programs for years with projected budget gaps. The City's current
financial plan projects a surplus in the 1999 fiscal year, before discretionary
transfers, and budget gaps for each of the 2000, 2001 and 2002 fiscal years.
This pattern of current year surplus operating results and projected subsequent
year budget gaps has been consistent through the entire period since 1982,
during which the City has achieved surplus operating results, before
discretionary transfers, for each fiscal year.
The City depends on aid from the State both to enable the City to balance its
budget and to meet its cash requirements. There can be no assurance that there
will not be reductions in State aid to the City from amounts currently
projected; that State budgets will be adopted by the April 1 statutory
deadline, or interim appropriations enacted; or that any such reductions or
delays will not have adverse effects on the City's cash flow or expenditures.
In addition, the Federal budget negotiation process could result in a reduction
in or a delay in the receipt of Federal grants which could have additional
adverse effects on the City's cash flow or revenues.
The Mayor is responsible for preparing the City's financial plan, including
the City's current financial plan for the 1999 through 2002 fiscal years (the
"1999-2002 Financial Plan" or "Financial Plan"). The City's
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projections set forth in the Financial Plan are based on various assumptions
and contingencies which are uncertain and which may not materialize. Such
assumptions and contingencies include the condition of the regional and local
economies, the provision of State and Federal aid and the impact on City
revenues and expenditures of any future Federal or State policies affecting the
City.
Implementation of the Financial Plan is dependent upon the City's ability to
market its securities successfully. The City's financing program for fiscal
years 1999 through 2002 contemplates the issuance of $5.2 billion of general
obligation bonds and $5.4 billion of bonds to be issued by the New York City
Transitional Finance Authority (the "Finance Authority") to finance City
capital projects. The Finance Authority was created as part of the City's
effort to assist in keeping the City's indebtedness within the forecast level
of the constitutional restrictions on the amount of debt the City is authorized
to incur. In addition, the City issues revenue and tax anticipation notes to
finance its seasonal working capital requirements. The success of projected
public sales of City bonds and notes, New York City Municipal Water Finance
Authority ("Water Authority") bonds and Finance Authority bonds will be subject
to prevailing market conditions. The City's planned capital and operating
expenditures are dependent upon the sale of its general obligation bonds and
notes, and the Water Authority and Finance Authority bonds. Future developments
concerning the City and public discussion of such developments, as well as
prevailing market conditions, may affect the market for outstanding City
general obligation bonds and notes.
For the 1998 fiscal year, the City had a operating surplus, before
discretionary and other transfers, and achieved balanced operating results,
after discretionary and other transfers, in accordance with GAAP. The 1998
fiscal year is the eighteenth year that the City has achieved an operating
surplus, before discretionary and other transfers, and balanced operating
results, after discretionary and other transfers.
On November 18, 1998, the City released the Financial Plan for the 1999
through 2002 fiscal years, which relates to the City and certain entities which
receive funds from the City. The Financial Plan is a modification to the
financial plan submitted to the Control Board on June 26, 1998 (the "June
Financial Plan"). The Financial Plan projects revenues and expenditures for the
1999 fiscal year balanced in accordance with GAAP, and projects gaps of $2.2
billion and $2.4 billion for the 2000 through 2002 fiscal years, respectively,
after implementation of a gap closing program to reduce agency expenditures by
$200 million in the 1999 fiscal year and approximately $80 million in each of
fiscal years 2000 through 2002.
Changes since the June Financial Plan include: (i) an increase in projected
tax revenues of $288 million and $8 million in fiscal years 1999 and 2000,
respectively, and a decrease in projected tax revenues of $23 million and $66
million in fiscal years 2001 and 2002, respectively; (ii) an increase in
planned expenditures for health insurance of approximately $60 million in each
of fiscal years 1999 through 2002; (iii) a decrease in projected pension
expenditures due to higher than planned increases in the value of the assets of
the retirement systems of $67 million, $171 million, $264 million and $372
million in the fiscal years 1999 through 2002, respectively; (iv) other agency
spending increases of $76 million, $101 million, $78 million, and $70 million
in fiscal years 1999 through 2002, respectively; and (v) an increase in agency
expenditures of $227 million, $295 million, $295 million and $294 million in
fiscal years 1999 through 2002, respectively, due to a reduction in the agency
gap closing program.
The 1999-2002 Financial Plan includes a proposed discretionary transfer in
the 1999 fiscal year of $465 million to pay debt service due in fiscal year
2000. In addition, the Financial Plan reflects enacted and proposed tax
reduction programs totaling $429 million, $604 million and $606 million in
fiscal years 2000 through 2002, respectively, including the elimination of the
city sales tax on all clothing as of December 1, 1999, the
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extension of current tax reductions for owners of cooperative and condominium
apartments starting in fiscal year 2000 and a personal income tax credit for
child care and for resident holders of Subchapter S corporations starting in
fiscal year 2000, which are subject to State legislative approval, and
reduction of the commercial rent tax commencing in fiscal year 2000.
The Financial Plan assumes (i) approval by the Governor and the State
Legislature of the extension of the 14% personal income tax surcharge, which is
scheduled to expire on December 31, 1999, and which is projected to provide
revenue of $183 million, $524 million and $544 million in the 2000, 2001 and
2002 fiscal years, respectively; and (ii) collection of the projected rent
payments for the City's airports, totaling $6 million, $365 million, $155
million and $185 million in the 1999 through 2002 fiscal years, respectively, a
substantial portion of which may depend on the successful completion of
negotiations with The Port Authority of New York and New Jersey (the "Port
Authority") or the enforcement of the city's rights under the existing leases
through pending legal actions. The Financial Plan provides no additional wage
increases for City employees after their contracts expire in fiscal years 2000
and 2001. In addition, the economic and financial condition of the City may be
affected by various financial, social, economic and political factors which
could have a material effect on the City.
In January, the mayor is expected to publish a Modification (the "January
Modification") to the Financial Plan for the City's 1999 through 2003 fiscal
years and a preliminary budget for the City's fiscal year 2000. The January
Modification will include changes since the Financial Plan and the City's
program to address the currently forecast $2.2 billion gap in fiscal year 2000.
As in prior years, the City's gap-closing program could include a program to
substantially reduce projected agency spending and City proposals for increased
Federal and State aid and other non-tax revenues.
The 1998 modification of the City's financial plan and the 1999-2002
Financial Plan include a proposed discretionary transfer in the 1998 fiscal
year of approximately $2.0 billion to pay debt service due in the 1999 fiscal
year, and a proposed discretionary transfer in the 1999 fiscal year of $416
million to pay debt service due in fiscal year 2000, included in the Budget
Stabilization Accounts for the 1998 and 1999 fiscal years, respectively. In
addition, the Financial Plan reflects proposed tax reduction programs totaling
$237 million, $537 million, $657 million and $666 million in fiscal years 1999
through 2002, respectively, including the elimination of the City sales tax on
all clothing as of December 1, 1999, a City-funded acceleration of the State
funded personal income tax reduction for the 1999 through 2001 fiscal years,
the extension of current tax reductions for owners of cooperative and
condominium apartments starting in fiscal year 2000 and a personal income tax
credit for child care and for resident holders of Subchapter S corporations,
which are subject to State legislative approval, and reduction of the
commercial rent tax commencing in fiscal year 2000.
On June 5, 1998, the City Council adopted a budget which re-allocated
expenditures from those provided in the Executive Budget in the amount of $409
million. The re-allocated expenditures, which include $116 million from the
Budget Stabilization Account, $82 million from debt service, $45 million from
pension contributions, $54 million from social services spending and $112
million from other spending, were re-allocated to uses set forth in the City
Council's adopted budget. Such uses include a revised tax reduction program at
a revenue cost in the 1999 fiscal year of $45 million, additional expenditures
for various programs of $199 million and provision of $165 million to retire
high interest debt. The revised tax reduction program in the City Council's
adopted budget assumes the expiration of the 12.5% personal income tax
surcharge, rather than the implementation of the personal income tax reduction
program proposed in the Executive Budget. The changes reflected in the City
Council's adopted budget would increase the gaps forecast between revenues and
expenditures in the future years of the Financial Plan.
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On June 5, 1998, in accordance with the City Charter, the Mayor certified to
the City Council revised estimates of the City's revenues (other than property
tax) for fiscal year 1999. Consistent with this certification, the property tax
levy was estimated by the Mayor to require an increase to realize sufficient
revenue from this source to produce a balanced budget within generally accepted
accounting principles. On June 8, 1998, the City Council adopted a property tax
levy that was $237.7 million lower than the levy estimated to be required by
the Mayor. The City Council, however, maintained that the revenue to be derived
from the levy it adopted would be sufficient to achieve a balanced budget
because the property tax reserve for uncollectibles could be reduced. Property
tax bills for fiscal year 1999 are expected to be mailed in the near future by
the City's Department of Finance at the rates adopted by the City Council for
fiscal year 1998, subject to later adjustment.
On July 10, 1995, Standard & Poor's revised its rating of City bonds downward
to BBB+. On February 3, 1998, Standard & Poor's placed its BBB+ rating of City
bonds on CreditWatch with positive implications. Moody's rating of City bonds
was revised in February 1998 to A3 from Baa1. Moody's, Standard & Poor's and
Fitch currently rate the City's outstanding general obligation bonds A3, BBB+
and A-, respectively.
New York State and its Authorities. The State Financial Plan for the 1998-
1999 fiscal year projects balance on a cash basis for the 1998-1999 fiscal
year, as modified on July 30, 1998, with a closing balance in the General Fund
of $1.67 billion. The State Financial Plan contains projections of a potential
imbalance in the 1999-2000 fiscal year of $1.3 billion, assuming implementation
of unspecified efficiency actions, the receipt of funds from the tobacco
settlement and the application of certain reserves established in the 1998-1999
State Financial Plan. The Executive Budget submitted in February 1998 contained
projections at that time of a potential imbalance in the 2000-2001 fiscal year
of $3.72 billion, assuming implementation of unspecified efficiency initiatives
and other actions in the 2000-2001 fiscal year.
The 1999-2002 Financial Plan is based on numerous assumptions, including the
condition of the City's and the region's economy and a modest employment
recovery and the concomitant receipt of economically sensitive tax revenues in
the amounts projected. The 1999-2002 Financial Plan is subject to various other
uncertainties and contingencies relating to, among other factors, the extent,
if any, to which wage increases for City employees exceed the annual wage costs
assumed for the 1999 through 2002 fiscal years; continuation of projected
interest earnings assumptions for pension fund assets and current assumptions
with respect to wages for City employees affecting the City's required pension
fund contributions; the willingness and ability of the State to provide the aid
contemplated by the Financial Plan and to take various other actions to assist
the City; the ability of State agencies to maintain balanced budgets; the
willingness of the Federal government to provide the amount of Federal aid
contemplated in the Financial Plan; the impact on City revenues and
expenditures of Federal and State welfare reform and any future legislation
affecting Medicare or other entitlement programs; adoption of the City's
budgets by the City Council in substantially the forms submitted by the Mayor;
the ability of the City to implement cost reduction initiatives, and the
success with which the City controls expenditures; the impact of conditions in
the real estate market on real estate tax revenues; the City's ability to
market its securities successfully in the public credit markets; and
unanticipated expenditures that may be incurred as a result of the need to
maintain the City's infrastructure. Certain of these assumptions have been
questioned by the City Comptroller and other public officials.
The Legislature passed a State budget for the 1998-1999 fiscal year on April
18, 1998, and on April 26, 1998 the Governor vetoed certain of the increased
spending in the State budget passed by the Legislature. The Legislature did not
override any of the Governor's vetoes. The State Financial Plan for the 1998-
1999 fiscal year, as modified on July 30, 1998, projects balance on a cash
basis for the 1998-1999 fiscal year, with a closing balance in the General Fund
of $1.67 billion. The State Financial Plan contains projections of a
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potential imbalance in the 1999-2000 fiscal year of $1.3 billion, assuming
implementation of $600 million of unspecified efficiency actions, the receipt
of $250 million in funds from the tobacco settlement and the application of
certain reserves established in the 1998-1999 State Financial Plan. The
Executive Budget submitted in February 1998 contained projections at that time
of a potential imbalance in the 2000-2001 fiscal year of $3.72 billion,
assuming implementation of $800 million of unspecified efficiency initiatives
in the 2000-2001 fiscal year and $250 million in funds from the tobacco
settlement. The State Financial Plan for the 1998-1999 fiscal year includes
multi-year tax reductions and significant increases in spending which will
affect the 2000-2001 fiscal year. The various elements of the State and local
tax and assessments reductions enacted during the last several fiscal years
will reduce projected revenues by more than $4 billion in the 2002-2003 fiscal
year as measured from the current 1998-1999 base.
On July 23, 1998, the New York State Comptroller issued a report which noted
that a significant cause for concern is the budget gaps in the 1999-2000 and
2000-2001 fiscal years, which the State Comptroller projected at $1.8 billion
and $5.5 billion, respectively, after excluding the uncertain receipt by State
of $250 million of funds from the tobacco settlement assumed for each of such
fiscal years, as well as the unspecified actions assumed in the State's
projections. The State Comptroller also stated that if the securities industry
or economy slows, the size of the gaps would increase.
Standard & Poor's rates the State's general obligation bonds A, and Moody's
rates the State's general obligation bonds A2. On August 28, 1997, Standard &
Poor's revised its rating on the State's general obligation bonds from A- to A.
Litigation. The court actions in which the State is a defendant generally
involve State programs and miscellaneous tort, real property, and contract
claims. While the ultimate outcome and fiscal impact, if any, on the State of
those proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
State's ability to carry out the 1999-2002 Financial Plan. The City has
estimated that its potential future liability on account of outstanding claims
against it as of June 30, 1998 amounted to approximately $3.5 billion.
YEAR 2000 ISSUE. Many existing computer programs use only two digits to
identify a year in the date field and were designed and developed without
considering the impact of the upcoming change in the century. Therefore, for
example, the year "2000" would be incorrectly identified as the year "1900". If
not corrected, many computer applications could fail or create erroneous
results by or at the Year 2000, requiring substantial resources to remedy. The
Sponsor and Trustee believe that the "Year 2000" problem is material to their
business and operations and could have a material adverse effect on the
Sponsor's and the Trustee's results of operations and, in turn, cash available
for distribution by the Trustee. Although the Sponsor and the Trustee are
addressing the problem with respect to their business operations, there can be
no assurance that the Year 2000 problem will be properly or timely resolved.
The Year 2000 problem may also adversely affect the Municipal Funds contained
in the Trusts, as well as the issuers of the Bonds contained in the Municipal
Funds, to varying degrees based upon various factors. The Sponsor is unable to
predict what effect, if any, the Year 2000 problem will have on such issuers.
LEGISLATION. At any time after the Initial Date of Deposit, legislation may
be enacted, affecting the Securities in the Trusts or the issuers of the
Securities. Changing approaches to regulation, particularly with respect to the
environment or with respect to the petroleum industry, may have a negative
impact on certain companies represented in the Trusts. There can be no
assurance that future legislation, regulation or deregulation will not have a
material adverse effect on a Trust or will not impair the ability of the
issuers of the Securities to achieve their business goals.
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LEGAL PROCEEDINGS AND LITIGATION. At any time after the Initial Date of
Deposit, legal proceedings may be initiated on various grounds, or legislation
may be enacted, with respect to the Securities in the Trusts or to matters
involving the business of the issuer of the Securities. There can be no
assurance that future legal proceedings or legislation will not have a material
adverse impact on the Trusts or will not impair the ability of the issuers of
the Securities to achieve their business and investment goals.
ORGANIZATION COSTS. The Securities purchased with the portion of the Public
Offering Price intended to be used to reimburse the Sponsor for the Trusts'
organization costs will be purchased in the same proportionate relationship as
all the Securities contained in the Trusts. Securities will be sold to
reimburse the Sponsor for the Trusts' organization costs at the completion of
the initial offering period, which is expected to be 90 days from the Initial
Date of Deposit (a significantly shorter time period than the life of the
Trusts). During the initial offering period, there may be a decrease in the
value of the Trusts' Securities. To the extent the proceeds from the sale of
these Securities are insufficient to repay the Sponsor for the Trusts'
organization costs, the Trustee will sell additional Securities to allow the
Trusts to fully reimburse the Sponsor. In that event, the net asset value per
Unit will be reduced by the amount of additional Securities sold. Although the
dollar amount of the reimbursement due to the Sponsor will remain fixed and
will never exceed $1.30 per 100 Units for the California Portfolio and $1.30
per 100 Units for the New York Portfolio, this will also result in a greater
effective cost per Unit to Unitholders for the reimbursement to the Sponsor.
When Securities are sold to reimburse the Sponsor for organization costs, the
Trustee will sell such Securities to an extent which will maintain the same
proportionate relationship among the Securities contained in the Trusts as
existed prior to such sale.
PUBLIC OFFERING
OFFERING PRICE. In calculating the Public Offering Price, the aggregate value
of the Securities is determined in good faith by the Trustee on each "Business
Day" as defined in the Indenture in the following manner: because the
Securities are listed on a national securities exchange, this evaluation is
based on the closing sale prices on that exchange as of the Evaluation Time
(unless the Trustee deems these prices inappropriate as a basis for valuation).
If the Trustee deems these prices inappropriate as a basis for evaluation, then
the Trustee may utilize, at the Trusts' expense, an independent evaluation
service or services to ascertain the values of the Securities. The independent
evaluation service shall use any of the following methods, or a combination
thereof, which it deems appropriate: (a) on the basis of current bid prices for
comparable securities, (b) by appraising the value of the Securities on the bid
side of the market or by such other appraisal deemed appropriate by the Trustee
or (c) by any combination of the above, each as of the Evaluation Time.
VOLUME AND OTHER DISCOUNTS. Units are available at a volume discount from the
Public Offering Price during the initial public offering based upon the number
of Units purchased. This volume discount will result in a reduction of the
sales charge applicable to such purchases. The approximate reduced sales charge
on the Public Offering Price applicable to such purchases is as follows:
<TABLE>
<CAPTION>
APPROXIMATE
REDUCED
SALES
NUMBER OF UNITS CHARGE
--------------- -----------
<S> <C>
10,000 but less than 25,000................ 4.25%
25,000 but less than 50,000................ 4.00%
50,000 but less than 75,000................ 3.50%
75,000 but less than 100,000............... 3.00%
</TABLE>
B-26
<PAGE>
For transactions of 100,000 Units or more, the Sponsor intends to negotiate
the applicable sales charge and such charge will be disclosed to any such
purchaser. The Sponsor reserves the right to change the discounts from time to
time.
These discounts will apply to all purchases of Units by the same purchaser
during the initial public offering period. Units purchased by the same
purchasers in separate transactions during the initial public offering period
will be aggregated for purposes of determining if such purchaser is entitled to
a discount provided that such purchaser must own at least the required number
of Units at the time such determination is made. Units held in the name of the
spouse of the purchaser or in the name of a child of the purchaser under 21
years of age are deemed for the purposes hereof to be registered in the name of
the purchaser. The discount is also applicable to a trustee or other fiduciary
purchasing securities for a single trust estate or single fiduciary account.
The holders of units of prior series of Equity Securities Trusts (the "Prior
Series") may "rollover" into a Trust by exchanging units of the Prior Series
for Units of a Trust at their relative net asset values, subject to a reduced
sales charge of 3.50%. An exchange of a Prior Series for Units of a Trust will
generally be a taxable event. The rollover option described herein will also be
available to investors in the Prior Series who elect to purchase Units of a
Trust within 60 days of their liquidation of units in the Prior Series (see
"Trust Termination").
Employees (and their immediate families) of Reich & Tang Distributors, Inc.
(and its affiliates), the Portfolio Consultant and of the special counsel to
the Sponsor, may, pursuant to employee benefit arrangements, purchase Units of
a Trust at a price equal to the aggregate value of the underlying securities in
the Trust during the initial offering period, divided by the number of Units
outstanding (without a sales charge). Such arrangements result in less selling
effort and selling expenses than sales to employee groups of other companies.
Resales or transfers of Units purchased under the employee benefit arrangements
may only be made through the Sponsor's secondary market, so long as it is being
maintained, and not through other broker-dealers.
Investors in any open-end management investment company or unit investment
trust that have purchased their investment within a five-year period prior to
the date of this Prospectus can purchase Units of a Trust in an amount not
greater in value than the amount of said investment made during this five-year
period at a reduced sales charge of 3.50% of the public offering price.
Units may be purchased in the primary or secondary market (including
purchases by Rollover Unitholders) at the Public Offering Price (for purchases
which do not qualify for a volume discount) less the concession the Sponsor
typically allows to brokers and dealers for purchases (see "Public Offering--
Distribution of Units") by (1) investors who purchase Units through registered
investment advisers, certified financial planners and registered broker-dealers
who in each case either charge periodic fees for financial planning, investment
advisory or asset management service, or provide such services in connection
with the establishment of an investment account for which a comprehensive "wrap
fee" charge is imposed, (2) bank trust departments investing funds over which
they exercise exclusive discretionary investment authority and that are held in
a fiduciary, agency, custodial or similar capacity, (3) any person who, for at
least 90 days, has been an officer, director or bona fide employee of any firm
offering Units for sale to investors or their immediate family members (as
described above) and (4) officers and directors of bank holding companies that
make Units available directly or through subsidiaries or bank affiliates.
Notwithstanding anything to the contrary in this
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<PAGE>
Prospectus, such investors, bank trust departments, firm employees and bank
holding company officers and directors who purchase Units through this program
will not receive the volume discount.
DISTRIBUTION OF UNITS. During the initial offering period and thereafter to
the extent additional Units continue to be offered by means of this Prospectus,
Units will be distributed by the Sponsor and dealers at the Public Offering
Price. The initial offering period is thirty days after each deposit of
Securities in each of the Trusts and the Sponsor may extend the initial
offering period for successive thirty day periods. Certain banks and thrifts
will make Units of each Trust available to their customers on an agency basis.
A portion of the sales charge paid by their customers is retained by or
remitted to the banks. Under the Glass-Steagall Act, banks are prohibited from
underwriting Units; however, the Glass-Steagall Act does permit certain agency
transactions and the banking regulators have indicated that these particular
agency transactions are permitted under such Act. In addition, state securities
laws on this issue may differ from the interpretations of federal law expressed
herein and banks and financial institutions may be required to register as
dealers pursuant to state law.
The Sponsor intends to qualify the Units for sale in a limited number of
States through dealers who are members of the National Association of
Securities Dealers, Inc. Units may be sold to dealers at prices which represent
a concession of up to 4.0% per Unit, subject to the Sponsor's right to change
the dealers' concession from time to time. Such Units may then be distributed
to the public by the dealers at the Public Offering Price then in effect. The
Sponsor reserves the right to reject, in whole or in part, any order for the
purchase of Units.
Broker-dealers of the Trusts, banks and/or others are eligible to participate
in a program in which such firms receive from the Sponsor a nominal award for
each of their registered representatives who have sold a minimum number of
units of unit investment trusts created by the Sponsor during a specified time
period. In addition, at various times the Sponsor may implement other programs
under which the sales forces of brokers, dealers, banks and/or others may be
eligible to win other nominal awards for certain sales efforts or under which
the Sponsor will allow to any such brokers, dealers, banks and/or others that
sponsor sales contests or recognition programs conforming to criteria
established by the Sponsor, or participate in sales programs sponsored by the
Sponsor, an amount not exceeding the total applicable sales charges on the
sales generated by such person at the public offering price during such
programs. Also, the Sponsor in its discretion may from time to time pursuant to
objective criteria established by the Sponsor pay fees to qualifying brokers,
dealers, banks and/or others for certain services or activities which are
primarily intended to result in sales of Units of the Trusts. Such payments are
made by the Sponsor out of its own assets and not out of the assets of the
Trusts. These programs will not change the price Unitholders pay for their
Units or the amount that the Trusts will receive from the Units sold.
SPONSOR'S AND UNDERWRITER'S PROFITS. The Sponsor and the Underwriters will
receive a combined gross underwriting commission equal to up to 4.50% of the
Public Offering Price per 100 Units (equivalent to 4.712% of the net amount
invested in the Securities). Additionally, the Sponsor may realize a profit on
the deposit of the Securities in the Trusts representing the difference between
the cost of the Securities to the Sponsor and the cost of the Securities to the
Trusts (See "Portfolio"). The Sponsor may realize profits or sustain losses
with respect to Securities deposited in the Trusts which were acquired from
underwriting syndicates of which they were a member. All or a portion of the
Securities initially deposited in the Trusts may have been acquired through the
Sponsor.
During the initial offering period and thereafter to the extent additional
Units continue to be offered by means of this Prospectus, the Underwriter may
also realize profits or sustain losses as a result of fluctuations
B-28
<PAGE>
after the Initial Date of Deposit in the aggregate value of the Securities and
hence in the Public Offering Price received by the Sponsor for the Units. Cash,
if any, made available to the Sponsor prior to settlement date for the purchase
of Units may be used in the Sponsor's business subject to the limitations of 17
CFR 240.15c3-3 under the Securities Exchange Act of 1934 and may be of benefit
to the Sponsor.
Both upon acquisition of Securities and termination of each of the Trusts,
the Trustee may utilize the services of the Sponsor for the purchase or sale of
all or a portion of the Securities in the Trusts The Sponsor may receive
brokerage commissions from the Trusts in connection with such purchases and
sales in accordance with applicable law.
In maintaining a market for the Units (see "Sponsor Repurchase") the Sponsor
will realize profits or sustain losses in the amount of any difference between
the price at which it buys Units and the price at which it resells such Units.
TAX STATUS
This is a general discussion of some of the Federal income tax consequences
of ownership of Units in the Trusts. It applies only to investors who hold
their Units as capital assets. It does not discuss special rules that apply to
investors subject to special treatment, such as securities dealers, financial
institutions and insurance companies.
OPINION OF COUNSEL. In the opinion of Battle Fowler LLP:
1. The IRS will classify the Trusts as grantor trusts for Federal income
tax purposes. The Trusts will not owe Federal income tax. Each Unitholder
will be treated as the owner of a pro rata portion of the assets of a
Trust. The income received by the Trusts will be treated as income of the
Unitholders.
2. The Trusts will not be subject to the New York Franchise Tax on
Business Corporations or the New York City General Corporation Tax.
However, Unitholders who are New York residents must treat their pro rata
portion of the income of a Trust as their income under New York State and
City income tax laws. Residents of other states may have to do the same
thing in their states.
3. The Sponsor has the right to create additional Units for 90 days after
the original issuance date by depositing Additional Securities in a Trust.
The Additional Securities must be substantially similar to the securities
initially deposited in the Trust. The IRS will treat the Trusts as grantor
trusts even though the Sponsor has this power.
Battle Fowler LLP is special counsel to the Sponsor. Its opinion is based on
existing law. Battle Fowler LLP has relied on the validity of the Trust
Agreement and the Prospectus and on the accuracy and completeness of the facts
they contain.
TAXATION OF UNITHOLDERS. The IRS will tax each Unitholder the same way it
would if the Unitholder owned directly its pro rata share of the securities
held by a Trust. Each Unitholder will determine its tax cost for its share of
the securities held by a Trust by allocating its cost of the Units (including
sales charges) among its share of the securities held by the Trust in
proportion to the fair market values of those securities on the date the
Unitholder purchases its Units. See "Fractional Undivided Interest in Trust" in
the "Summary of Essential Information" in order to determine a Unitholder's
share of each security on the date of
B-29
<PAGE>
Deposit, and see "Cost of Securities to Trust" under "Portfolio" in order to
determine the fair market value of each security on that date.
The Trust will own shares of regulated investment companies (referred to
herein as the "Municipal Funds") that own municipal bonds. The interest on the
Municipal Bonds is exempt from regular Federal income tax but may be subject to
the alternative minimum tax. The Municipal Funds can distribute exempt-interest
dividends to the Trust. The IRS will treat each Unitholder as receiving its
share of the exempt-interest dividends, ordinary dividends and capital gain
dividends on the shares of the Municipal Funds held by Trust, when the Trust
receives those items, unless the Unitholder has an accounting method that
requires an earlier accrual. The Unitholders will not have to pay regular
Federal income tax on the exempt-interest dividends but may have to pay
alternative minimum tax on them. Similarly, a Unitholder may treat its share of
capital gains dividends received by the Trust as capital gains dividends
received by it.
Each Unitholder will generally have to calculate its gain or loss when the
Trust sells, exchanges or redeems shares in a Municipal Fund or when the
Unitholder sells, exchanges or redeems Units. Any gain will generally be a
capital gain and will be long-term if the Unitholder has held its Units for
more than one year and the Trust has held the shares in the Municipal Funds for
more than one year. A Unitholder's share of capital gains dividends received by
a Trust from the Municipal Funds will also be long-term capital gain,
regardless of the period of time for which the Unitholder has held its Units or
the period of time for which the Trust has held the shares in the Municipal
Funds. Capital gains are generally taxed at the same rates applicable to
ordinary income, although non-corporate Unitholders may be subject to a reduced
tax rate of 20% on long-term capital gains. Tax rates may increase before a
Trust sells shares in the Municipal Funds or the Unitholders sell Units.
Any loss on the sale or redemption of Units or share in the Municipal Funds
will generally be a capital loss, and will be long-term for Unitholders who
have held their Units for more than one year if the Trust has also held the
shares in the Municipal Funds for more than one year and short-term capital
gain or loss if the Trust has held the shares, or the Unitholder has held the
Units for one year or less. Capital losses are deductible to the extent of
capital gains; in addition, Unitholders that are not corporations may deduct up
to $3,000 of capital losses (married individuals filing separately may only
deduct $1,500) against ordinary income. However,
if the Trust buys shares and sells them at a loss within six months (or if the
Unitholder buys Units and sells them at a loss within six months), the loss
cannot be deducted if (and to the extent that) the Trust received any exempt-
interest dividends on the shares. Any remaining loss will be treated as long-
term, rather than short-term capital loss if (and to the extent that) the Trust
received any capital gains dividends with respect to those shares.
Unitholders will also not be able to deduct losses resulting from the sale of
shares or the sale of Units if (and to the extent that) the Unitholder
purchases other shares or other Units within 30 days before or after the sale.
This rule could also apply to a transaction in which a Unitholder sells Units
or a Trust sells shares of a Municipal Fund, and the Unitholder purchases
shares of that same Municipal Fund directly within the 61 day period. If this
disallowance rule applies, the basis of the newly purchased Units and shares
will be adjusted to reflect the disallowed loss.
Under Section 67 of the Code and the accompanying Regulations, a Unitholder
who itemizes its deductions may also deduct its pro rata share of the fees and
expenses of a Trust, but only to the extent that such amounts, together with
the Unitholder's other miscellaneous deductions, exceed 2% of its adjusted
gross income. The deduction of fees and expenses may also be limited by Section
68 of the Code, which reduces the amount of itemized deductions that are
allowed for individuals with incomes in excess of certain thresholds.
B-30
<PAGE>
The Trustee will give each Unitholder an annual statement showing the
dividends, exempt-interest dividends and capital gains dividends received by
the Trusts, the gross proceeds received by the Trusts from the disposition of
any shares in the Municipal Funds, and any other income and fees and expenses
of the Trusts. The Trustee will also give an annual information return to each
Unitholder and send copies of those returns to the Internal Revenue Service.
Each Unitholder may have three choices when a Trust terminates. First, a
Unitholder who owns at least 2,500 units may have a Trust distribute its share
of the shares of the Municipal Funds in kind (plus cash in lieu of fractional
shares). Second, a Unitholder can have a Trust sell its share of the shares of
the Municipal Funds and distribute the cash. Third, a Unitholder can reinvest
the cash it would have received in units of a future series of a Trust (if
offered). A Unitholder who asks a Trust to distribute its share of the shares
of the Municipal Funds (plus cash for fractional shares) should not be taxed
when the shares of the Municipal Funds are distributed to it, although the cash
should be taxable. However, there is no specific authority covering this issue.
TAXATION OF THE MUNICIPAL FUNDS. The Municipal Funds intend to qualify to be
treated as regulated investment companies for Federal income tax purposes. If
they qualify, the Municipal Funds will not be subject to Federal income tax on
the income they distribute to their shareholders, including the Trusts.
When the Bonds owned by the Municipal Funds were issued, bond counsel issued
opinions that the interest on their Bonds is not subject to regular Federal
income tax (except in the limited circumstances referred to below). Payments
that a Municipal Funds receives on a bank letter of credit, guarantee or
insurance policy because the Bond issuer has defaulted will be treated as
payments on the Bond, namely as payments of principal or interest that are not
subject to regular Federal income tax or taxable market discount or capital
gain. The Sponsor and Battle Fowler LLP have not made, and will not make, any
review of the basis for these opinions. The tax exempt status of the interest
depends on compliance by the issuer and others with ongoing requirements, and
the opinions of bond counsel assume that these requirements will be met.
However, no one can guarantee that the issuers (and other users) will comply
with these requirements.
In order to qualify as a regulated investment company, a Municipal Fund must
distribute each year at least 90% of its net investment income (including,
generally, taxable interest, dividends, net short-term capital gains, and
certain other income, less certain expenses), and at least 90% of its net
exempt interest income, and must meet several additional requirements. A
Municipal Fund that does not qualify as a regulated investment company will be
taxed on its taxable income and capital gains; and all distributions to its
shareholders, including distributions of net exempt interest income and long-
term capital gains, will be taxable as ordinary income.
The Municipal Funds may have to accrue and distribute income not yet received
if they invest in Bonds issued at a discount. The Municipal Funds may be
required to sell Bonds that they otherwise would have continued to hold in
order to generate sufficient cash to make this distribution.
The Municipal Funds intend to distribute enough of their income to avoid the
4% excise tax imposed on regulated investment companies that do not distribute
at least 98% of their taxable income.
TAXATION OF THE TRUSTS AS SHAREHOLDERS OF THE MUNICIPAL FUNDS. The Municipal
Funds expect to be able to pay "exempt-interest dividends" to their
shareholders, including the Trusts, to the extent of their exempt interest
income (less applicable expenses). Unitholders will not have to pay
B-31
<PAGE>
regular Federal income tax on exempt-interest dividends. However, they may have
to pay Federal alternative minimum tax.
The interest on some private activity bonds is a preference item included in
alternative minimum taxable income. Each year the Municipal Funds will give to
shareholders, including the Trusts, a report showing the percentage of fund
income that is a preference item. The Trusts will give the same information to
Unitholders. In addition, alternative minimum taxable income of a Unitholder
that is a corporation is increased by part of the excess of its "adjusted
current earnings" (an alternative measure of income that includes interest on
all tax exempt securities) over the amount otherwise determined to be
alternative minimum taxable income. Therefore, the exempt-interest dividends
may cause a Unitholder to have to pay the Federal alternative minimum tax or
may increase the amount of that tax payable by a Unitholder already subject to
Federal alternative minimum tax.
The Municipal Funds may own Bonds originally issued at a discount. In
general, original issue discount is the difference between the price at which a
Bond was issued and its stated redemption price at maturity. Original issue
discount on tax-exempt Bonds accrues as tax-exempt interest over the life of
the Bond. A Municipal Fund's adjusted tax basis for a Bond issued with original
issue discount will include original issue discount accrued during the period
it held the Bond. A Municipal Fund can also pay a premium when it buys a Bond,
even a Bond issued with original issue discount. A Municipal Fund would be
required to amortize the premium over the term of the Bond, and reduce its
basis for the Bond even though it does not get any deduction for the
amortization. Therefore, sometimes a Municipal Fund may have a taxable gain
when it sells a Bond for an amount equal to or less than its original tax
basis.
A Unitholder will generally have a taxable gain or loss when it sell Units,
when a Trust sells shares of the Municipal Funds, and when the Municipal Funds
sell Bonds and distribute capital gains dividends. The gain or loss will
generally be capital gain or capital loss if the Units are capital assets for
the Unitholders. Unitholders will also generally have ordinary income if the
Municipal Funds sell or redeem Bonds that were acquired at a market discount,
or sell Bonds at a short term capital gain, and distribute ordinary dividends.
In general, the IRS will treat Bonds as market discount Bonds when the cost of
the Bond, plus any original issue discount that has not yet accrued, is less
than the amount due to be paid at the maturity of the Bond. The IRS taxes all
or a portion of the gain on the sale of a market discount Bond as ordinary
income when the Bond is sold, redeemed or paid. The portion of the gain taxed
by the IRS as ordinary income is equal to the portion of the market discount
that has accrued since the seller purchased the Bond.
Some of the Bonds held by the Municipal Funds will lose their tax exempt
status while they are owned by a "substantial user" of the facilities being
financed with the proceeds of those Bonds, or by persons related to a
substantial user. A "substantial user" is a person whose gross revenue derived
with respect to the facilities financed by the Bonds is more than 5% of the
total revenue derived by all users of those facilities, or who occupies more
than 5% of the usable area of the facilities or for whom the facilities or a
part thereof were specifically constructed, reconstructed or acquired. "Related
persons" are certain related individuals, affiliated corporations, partners and
partnerships. This rule would not change the tax exempt status of interest on
Bonds held by other persons. These rules will apply to Unitholders who receive
exempt-interest dividends attributable to interest on Bonds that financed
facilities for which the Unitholders or related persons are "substantial
users".
Individuals must take exempt-interest dividends into consideration in
computing the portion, if any, of social security benefits that will be
included in their gross income and subject to Federal income tax.
B-32
<PAGE>
Corporate Unitholders that are subject to the 0.12% environmental tax on
their alternative minimum taxable income in excess of $2,000,000 must take
account of the exempt-interest dividends in calculating that tax.
Any distributions made by the Municipal Funds that do not qualify as exempt-
interest dividends or capital gains dividends will be taxable to Unitholders as
ordinary income, and will not qualify for the corporate dividends- received
deduction.
If the Municipal Funds declare dividends in October, November or December
that are payable to shareholders of record on a date during those months,
Unitholders must take the dividends into account for tax purposes in the
current year, if the dividend is paid either in the current year, or in January
or February of the following year.
Ordinary, exempt-interest and capital gain dividends will be taxable as
described above whether received in cash or reinvested in additional Units
under the Reinvestment Plan. A Shareholder whose distributions are reinvested
in additional Units under the Reinvestment Plan will be treated as having
received the amount of cash allocated to the Unitholder for the purchase of
those Units.
BACKUP WITHHOLDING. The Trusts generally must withhold and pay over to the
U.S. Treasury 31% of the taxable dividends and other distributions paid to any
individual Unitholder who either does not supply its taxpayer identification
number, has not reported all of its dividends and interest income, or does not
certify to a Trust that he or she is not subject to withholding. The social
security number of an individual is its taxpayer identification number.
TAX-EXEMPT ENTITIES. Entities that generally qualify for an exemption from
Federal income tax, such as many pension trusts, are nevertheless taxed under
Section 511 of the Code on "unrelated business taxable income." Unrelated
business taxable income is income from a trade or business regularly carried on
by the tax-exempt entity that is unrelated to the entity's exempt purpose.
Unrelated business taxable income generally does not include dividend or
interest income or gain from the sale of investment property, unless such
income is derived from property that is debt-financed or is dealer property. A
tax-exempt entity's dividend income from a Trust and gain from the sale of
Units in the Trust or from the Trusts' sale of Securities is not expected to
constitute unrelated business taxable income to such tax-exempt entity unless
the acquisition of the Unit itself is debt-financed or constitutes dealer
property in the hands of the tax-exempt entity.
Before investing in a Trust, the trustee or investment manager of an employee
benefit plan (e.g., a pension or profit-sharing retirement plan) should
consider among other things (a) whether the investment is prudent under the
Employee Retirement Income Security Act of 1974 ("ERISA"), taking into account
the needs of the plan and all of the facts and circumstances of the investment
in the Trust, including the fact that the Trusts is intended to generate tax
exempt income; (b) whether the investment satisfies the diversification
requirement of Section 404(a)(1)(C) of ERISA; and (c) whether the assets of the
Trust are deemed "plan assets" under ERISA and the Department of Labor
regulations regarding the definition of "plan assets."
Prospective tax-exempt investors are urged to consult their own tax advisers
concerning the Federal, state, local and any other tax consequences of the
purchase, ownership and disposition of Units prior to investing in a Trust.
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<PAGE>
CALIFORNIA TAXES. When the Bonds owned by the Municipal Funds included in the
California Portfolio were issued, bond counsel issued opinions that interest on
the Bonds is exempt from California personal income taxation.
In the opinion of Brown & Wood LLP, special counsel to the Sponsor for
California tax matters, under existing California law applicable to
individuals who are California residents and in reliance, among other
things, on the aforementioned opinion of Battle Fowler LLP that the IRS
will classify the California Portfolio as a grantor trust for federal
income tax purposes, the California Portfolio will not be treated for
California personal income tax purposes as an association taxable as a
corporation, and the income of the California Portfolio will therefore be
treated as the income of the Unitholders in the same manner as if the
Unitholders held the securities of the California Portfolio directly. Each
Unitholder will recognize gain or loss upon the sale or other disposition
of the securities held by the California Portfolio or upon the Unitholder's
sale or other disposition of a Unit. The amount of gain or loss for
California income tax purposes will generally be determined pursuant to the
Internal Revenue Code of 1986, as amended, certain provisions of which are
incorporated by reference under California law.
NEW YORK TAXES. When the Bonds owned by the Municipal Funds included in the
New York Portfolio were issued, bond counsel issued opinions that interest on
the Bonds is exempt from New York State and City personal income taxes, except
where such interest is subject to Federal income taxes, as is described in
"Taxation of the Trust as a Shareholder of the Municipal Funds."
In the opinion of Battle Fowler LLP, counsel for the Sponsor, under existing
law:
Under the income tax laws of the State and City of New York, the New York
Portfolio is not an association taxable as a corporation and income
received by the New York Portfolio will be treated as the income of the
Unitholder in the same manner as for Federal income tax purposes.
Accordingly, each Unitholder will be considered to have received the
interest on its pro rata portion of each Bond when interest on the Bond is
received by the New York Portfolio or on earlier accrual, depending on the
Unitholder's method of accounting, and depending on the existence of any
original issue discount. A noncorporate Unitholder who is a New York State
(and City) resident will be subject to New York State (and City) personal
income taxes on any gain or market discount income recognized when it
disposes of all or part of its pro rata portion of a Bond. A noncorporate
Unitholder who is not a New York State resident will not be subject to New
York State or City personal income taxes on any such income on gain unless
the Units are attributable to a business, trade, profession or occupation
carried on in New York. A New York State (and City) resident should
determine its tax basis for its pro rata portion of each Bond for New York
State (and City) income tax purposes in the same manner as for Federal
income tax purposes. Interest income on, as well as any income or gain
recognized on the disposition of, a Unitholder's pro rata portion of the
Bonds is generally not excludable from income in computing New York State
and City franchise taxes on corporations or financial institutions.
STATE AND LOCAL TAXES. Unitholders may have to pay state and local tax on
their share of ordinary dividends and capital gain dividends paid by the
Municipal Funds.
POSSIBLE CHANGES IN THE LAW. From time to time proposals are introduced in
Congress and state legislatures that could have an adverse impact on the tax-
exempt status of the Bonds. We cannot predict whether any legislation like this
will be enacted.
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RIGHTS OF UNITHOLDERS
OWNERSHIP OF UNITS. Ownership of Units of each Trust will not be evidenced by
certificates. All evidence of ownership of the Units will be recorded in book-
entry form at the Depository Trust Company ("DTC") through an investor's
brokerage account. Units held through DTC will be deposited by the Sponsor with
DTC in the Sponsor's DTC account and registered in the nominee name CEDE &
COMPANY. Individual purchases of beneficial ownership interest in each of the
Trusts may be made in book-entry form through DTC. Ownership and transfer of
Units will be evidenced and accomplished directly and indirectly by book-
entries made by DTC and its participants. DTC will record ownership and
transfer Units among DTC participants and forward all notices and credit all
payments received in respect of the Units held by the DTC participants.
Beneficial owners of Units will receive written confirmation of their purchases
and sales from the broker-dealer or bank from whom their purchase was made.
Units are transferable by making a written request property accompanied by a
written instrument or instruments of transfer which should be sent registered
or certified mail for the protection of the Unitholder. Holders must sign such
written request exactly as their names appear on the records of a Trust. Such
signatures must be guaranteed by a commercial bank or trust company, savings
and loan association or by a member firm of a national securities exchange.
DISTRIBUTIONS. Dividends received by each of the Trusts are credited by the
Trustee to an Income Account for such Trust. Other receipts, including the
proceeds of Securities disposed of, are credited to a Principal Account for
such Trust.
Distributions to each Unitholder from the Income Account are computed as of
the close of business on each Record Date for the following payment date and
consist of an amount substantially equal to such Unitholder's pro rata share of
the income credited to the Income Account, less expenses. Distributions from
the Principal Account of a Trust (other than amounts representing failed
contracts, as previously discussed) will be computed as of each Record Date,
and will be made to the Unitholders of such Trust on or shortly after the
Distribution Date. Proceeds representing principal received from the
disposition of any of the Securities between a Record Date and a Distribution
Date which are not used for redemptions of Units will be held in the Principal
Account and not distributed until the next Distribution Date. Persons who
purchase Units between a Record Date and a Distribution Date will receive their
first distribution on the Distribution Date after such purchase.
As of each Record Date, the Trustee will deduct from the Income Account of
each Trust, and, to the extent funds are not sufficient therein, from the
Principal Account of such Trust, amounts necessary to pay the expenses of such
Trust (as determined on the basis set forth under "Trust Expenses and
Charges"). The Trustee also may withdraw from said accounts such amounts, if
any, as it deems necessary to establish a reserve for any applicable taxes or
other governmental charges that may be payable out of such Trust. Amounts so
withdrawn shall not be considered a part of such 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 Principal
Accounts such amounts as may be necessary to cover redemptions of Units by the
Trustee.
The dividend distribution per 100 Units, if any, cannot be anticipated and
may be paid as Securities are redeemed, exchanged or sold, or as expenses of
each Trust fluctuate. No distribution need be made from the Income Account or
the Principal Account until the balance therein is an amount sufficient to
distribute $1.00 per 100 Units.
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RECORDS. The Trustee shall furnish Unitholders in connection with each
distribution a statement of the amount of dividends and interest, if any, and
the amount of other receipts, if any, which are being distributed, expressed in
each case as a dollar amount per 100 Units. Within a reasonable time after the
end of each calendar year, the Trustee will furnish to each person who at any
time during the calendar year was a Unitholder of record, a statement showing
(a) as to the Income Account: dividends, interest and other cash amounts
received, amounts paid for purchases of Substitute Securities and redemptions
of Units, if any, deductions for applicable taxes and fees and expenses of such
Trust, and the balance remaining after such distributions and deductions,
expressed both as a total dollar amount and as a dollar amount representing the
pro rata share of each 100 Units outstanding on the last business day of such
calendar year; (b) as to the Principal Account: the dates of disposition of any
Securities and the net proceeds received therefrom, deductions for payments of
applicable taxes and fees and expenses of such Trust, amounts paid for
purchases of Substitute Securities and redemptions of Units, if any, and the
balance remaining after such distributions and deductions, expressed both as a
total dollar amount and as a dollar amount representing the pro rata share of
each 100 Units outstanding on the last business day of such calendar year; (c)
a list of the Securities held, a list of Securities purchased, sold or
otherwise disposed of during the calendar year and the number of Units
outstanding on the last business day of such calendar year; (d) the Redemption
Price per 100 Units based upon the last computation thereof made during such
calendar year; and (e) amounts actually distributed to Unitholders during such
calendar year from the Income and Principal Accounts, separately stated, of
such Trust, expressed both as total dollar amounts and as dollar amounts
representing the pro rata share of each 100 Units outstanding on the last
business day of such calendar year.
The Trustee shall keep available for inspection by Unitholders at all
reasonable times during usual business hours, books of record and account of
its transactions as Trustee, including records of the names and addresses of
Unitholders, a current list of Securities in the portfolio and a copy of the
Trust Agreement.
LIQUIDITY
SPONSOR REPURCHASE. Unitholders who wish to dispose of their Units should
inquire of the Sponsor as to current market prices prior to making a tender for
redemption. The aggregate value of the Securities will be determined by the
Trustee on a daily basis and computed on the basis set forth under "Trustee
Redemption." The Sponsor does not guarantee the enforceability, marketability
or price of any Securities in either of the Portfolios or of the Units. The
Sponsor may discontinue the repurchase of Units if the supply of Units exceeds
demand, or for other business reasons. The date of repurchase is deemed to be
the date on which redemption requests are received in proper form by Reich &
Tang Distributors, Inc., 600 Fifth Avenue, New York, New York 10020. Redemption
requests received after 4 P.M., New York Time, will be deemed to have been
repurchased on the next business day. In the event a market is not maintained
for the Units, a Unitholder may be able to dispose of Units only by tendering
them to the Trustee for redemption.
Units purchased by the Sponsor in the secondary market may be reoffered for
sale by the Sponsor at a price based on the aggregate value of the Securities
in that Trust plus a 4.50% sales charge (or 4.712% of the net amount invested)
plus a pro rata portion of amounts, if any, in the Income Account. Any Units
that are purchased by the Sponsor in the secondary market also may be redeemed
by the Sponsor if it determines such redemption to be in its best interest.
The Sponsor may, under certain circumstances, as a service to Unitholders,
elect to purchase any Units tendered to the Trustee for redemption (see
"Trustee Redemption"). Factors which the Sponsor will consider
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in making a determination will include the number of Units of all Trusts which
it has in inventory, its estimate of the salability and the time required to
sell such Units and general market conditions. For example, if in order to meet
redemptions of Units the Trustee must dispose of Securities, and if such
disposition cannot be made by the redemption date (three calendar days after
tender), the Sponsor may elect to purchase such Units. Such purchase shall be
made by payment to the Unitholder not later than the close of business on the
redemption date of an amount equal to the Redemption Price on the date of
tender.
TRUSTEE REDEMPTION. At any time prior to the Evaluation Time on the business
day preceding the commencement of the Liquidation Period (approximately seven
years from the Initial Date of Deposit), Units may also be tendered to the
Trustee for redemption upon payment of any relevant tax by contacting the
Sponsor, broker, dealer or financial institution holding such Units in street
name. In certain instances, additional documents may be required, such as trust
instrument, certificate of corporate authority, certificate of death or
appointment as executor, administrator or guardian. At the present time there
are no specific taxes related to the redemption of Units. No redemption fee
will be charged by the Sponsor or the Trustee. Units redeemed by the Trustee
will be canceled.
Within three business days following a tender for redemption, the Unitholder
will be entitled to receive an amount for each Unit tendered equal to the
Redemption Price per Unit computed as of the Evaluation Time on the date of
tender. The "date of tender" is deemed to be the date on which Units are
received by the Trustee, except that with respect to Units received after the
close of trading on the New York Stock Exchange (4:00 p.m. Eastern Time), the
date of tender is the next day on which such Exchange is open for trading, and
such Units will be deemed to have been tendered to the Trustee on such day for
redemption at the Redemption Price computed on that day.
A Unitholder will receive his or her redemption proceeds in cash and amounts
paid on redemption shall be withdrawn from the Income Account, or, if the
balance therein is insufficient, from the Principal Account. All other amounts
paid on redemption shall be withdrawn from the Principal Account. The Trustee
is empowered to sell Securities in order to make funds available for
redemptions. Such sales, if required, could result in a sale of Securities by
the Trustee at a loss. To the extent Securities are sold, the size and
diversity of a Trust will be reduced. The Securities to be sold will be
selected by the Trustee in order to maintain, to the extent practicable, the
proportionate relationship among the number of shares of each Security.
Provision is made in the Indenture under which the Sponsor may, but need not,
specify minimum amounts in which blocks of Securities are to be sold in order
to obtain the best price for a Trust. While these minimum amounts may vary from
time to time in accordance with market conditions, the Sponsor believes that
the minimum amounts which would be specified would be approximately 100 shares
for readily marketable Securities.
The Redemption Price per Unit is the pro rata share of the Unit in a Trust
determined by the Trustee on the basis of (i) the cash on hand in the Trust or
moneys in the process of being collected, (ii) the value of the Securities in
the Trust as determined by the Trustee, less (a) amounts representing taxes or
other governmental charges payable out of the Trust, (b) the accrued expenses
of the Trust and (c) cash allocated for the distribution to Unitholders of
record as of the business day prior to the evaluation being made. As of the
close of the initial offering period the Redemption Price per 100 Units will be
reduced to reflect the payment of the per 100 Unit organization costs to the
Sponsor. Therefore, the amount of the Redemption Price per 100 Units received
by a Unitholder will include the portion representing organization costs only
when such Units are tendered for redemption prior to the close of the initial
offering period. Because the Securities are listed on a national securities
exchange, the Trustee may determine the value of the Securities in the Trusts
based on the closing sale prices on that exchange. Unless the Trustee deems
these prices inappropriate as a basis for
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evaluation or if there is no such closing purchase price, then the Trustee may
utilize, at such Trust's expense, an independent evaluation service or services
to ascertain the values of the Securities. The independent evaluation service
shall use any of the following methods, or a combination thereof, which it
deems appropriate: (a) on the basis of current bid prices for comparable
securities, (b) by appraising the value of the Securities on the bid side of
the market or (c) by any combination of the above.
Any Unitholder tendering 2,500 Units or more of a Trust for redemption may
request by written notice submitted at the time of tender from the Trustee in
lieu of a cash redemption a distribution of shares of Securities and cash in an
amount and value equal to the Redemption Price Per Unit as determined as of the
evaluation next following tender. To the extent possible, in kind distributions
("In Kind Distributions") shall be made by the Trustee through the distribution
of each of the Securities in book-entry form to the account of the Unitholder's
bank or broker-dealer at The Depository Trust Company. An In Kind Distribution
will be reduced by customary transfer and registration charges. The tendering
Unitholder will receive his pro rata number of whole shares of each of the
Securities comprising a Trust's portfolio and cash from the Principal Accounts
equal to the balance of the Redemption Price to which the tendering Unitholder
is entitled. If funds in the Principal Account are insufficient to cover the
required cash distribution to the tendering Unitholder, the Trustee may sell
Securities in the manner described above.
The Trustee is irrevocably authorized in its discretion, if the Sponsor does
not elect to purchase a Unit tendered for redemption or if the Sponsor tenders
a Unit for redemption, in lieu of redeeming such Unit, to sell such Unit in the
over-the-counter market for the account of the tendering Unitholder at prices
which will return to the Unitholder an amount in cash, net after deducting
brokerage commissions, transfer taxes and other charges, equal to or in excess
of the Redemption Price for such Unit. The Trustee will pay the net proceeds of
any such sale to the Unitholder on the day he would otherwise be entitled to
receive payment of the Redemption Price.
The Trustee reserves the right to suspend the right of redemption and to
postpone the date of payment of the Redemption Price per Unit for any period
during which the New York Stock Exchange is closed, other than customary
weekend and holiday closings, or trading on that Exchange is restricted or
during which (as determined by the Securities and Exchange Commission) an
emergency exists as a result of which disposal or evaluation of the Securities
is not reasonably practicable, or for such other periods as the Securities and
Exchange Commission may by order permit. The Trustee and the Sponsor are not
liable to any person or in any way for any loss or damage which may result from
any such suspension or postponement.
A Unitholder who wishes to dispose of his Units should inquire of his bank or
broker in order to determine if there is a current secondary market price in
excess of the Redemption Price.
TRUST ADMINISTRATION
PORTFOLIO SUPERVISION. The Trusts are unit investment trusts and are not
managed funds. 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 analyses. The Portfolios of the Trusts, however,
will not be managed and therefore the adverse financial condition of an issuer
will not necessarily require the sale of its Securities from the portfolio. It
is unlikely that either of the Trusts will sell any of the Securities other
than to satisfy redemptions of Units, or cease buying Additional Securities in
connection with the issuance of additional Units. However, the Trust Agreement
provides that the Sponsor may direct the
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disposition of Securities upon the occurrence of certain events including: (1)
default in payment of amounts due on any of the Securities; (2) institution of
certain legal proceedings; (3) default under certain documents materially and
adversely affecting future declaration or payment of amounts due or expected;
(4) determination of the Sponsor that the tax treatment of a Trust as a grantor
trust would otherwise be jeopardized; or (5) decline in price as a direct
result of serious adverse credit factors affecting the issuer of a Security
which, in the opinion of the Sponsor, would make the retention of the Security
detrimental to the Trust or the Unitholders.
In addition, the Trust Agreement provides as follows:
(a) If a default in the payment of amounts due on any Security occurs
pursuant to provision (1) above and if the Sponsor fails to give
immediate instructions to sell or hold that Security, the Trustee,
within 30 days of that failure by the Sponsor, shall sell the Security.
(b) It is the responsibility of the Sponsor to instruct the Trustee to
reject any offer made by an issuer of any of the Securities to issue
new securities in exchange and substitution for any Security pursuant
to a recapitalization or reorganization. If any exchange or
substitution is effected notwithstanding such rejection, any securities
or other property received shall be promptly sold unless the Sponsor
directs that it be retained.
(c) Any property received by the Trustee after the Initial Date of Deposit
as a distribution on any of the Securities in a form other than cash or
additional shares of the Securities, shall be promptly sold unless the
Sponsor directs that it be retained by the Trustee. The proceeds of any
disposition shall be credited to the Income or Principal Account of
such Trust.
(d) The Sponsor is authorized to increase the size and number of Units of a
Trust by the deposit of Additional Securities, contracts to purchase
Additional Securities or cash or a letter of credit with instructions
to purchase Additional Securities in exchange for the corresponding
number of additional Units from time to time subsequent to the Initial
Date of Deposit, provided that the original proportionate relationship
among the number of shares of each Security established on the Initial
Date of Deposit is maintained to the extent practicable. The Sponsor
may specify the minimum numbers in which Additional Securities will be
deposited or purchased. If a deposit is not sufficient to acquire
minimum amounts of each Security, Additional Securities may be acquired
in the order of the Security most under-represented immediately before
the deposit when compared to the original proportionate relationship.
If Securities of an issue originally deposited are unavailable at the
time of the subsequent deposit, the Sponsor may (i) deposit cash or a
letter of credit with instructions to purchase the Security when it
becomes available, or (ii) deposit (or instruct the Trustee to
purchase) either Securities of one or more other issues originally
deposited or a Substitute Security.
TRUST AGREEMENT AND AMENDMENT. The Trust Agreement may be amended by the
Trustee and the Sponsor without the consent of Unitholders: (1) to cure any
ambiguity or to correct or supplement any provision which may be defective or
inconsistent; (2) to change any provision thereof as may be required by the
Securities and Exchange Commission or any successor governmental agency; or (3)
to make such other provisions in regard to matters arising thereunder as shall
not adversely affect the interests of the Unitholders.
The Trust Agreement may also be amended in any respect, or performance of any
of the provisions thereof may be waived, with the consent of investors holding
66 2/3% of the Units then outstanding for the purpose of modifying the rights
of Unitholders; provided that no such amendment or waiver shall reduce any
Unitholder's interest in a Trust without his consent or reduce the percentage
of Units required to consent to any
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<PAGE>
such amendment or waiver without the consent of the holders of all Units. The
Trust Agreement may not be amended, without the consent of the holders of all
Units in a Trust then outstanding, to increase the number of Units issuable or
to permit the acquisition of any Securities in addition to or in substitution
for those initially deposited in such Trust, except in accordance with the
provisions of the Trust Agreement. The Trustee shall promptly notify
Unitholders, in writing, of the substance of any such amendment.
TRUST TERMINATION. The Trust Agreement provides that a Trust shall terminate
as of the Evaluation Time on the business day preceding the Liquidation Period
or upon the earlier maturity, redemption or other disposition, as the case may
be, of the last of the Securities held in such Trust and in no event is it to
continue beyond the Mandatory Termination Date. If the value of a Trust shall
be less than the minimum amount set forth under "Summary of Essential
Information" in Part A, the Trustee may, in its discretion, and shall, when so
directed by the Sponsor, terminate such Trust. A Trust may also be terminated
at any time with the consent of the investors holding 100% of the Units then
outstanding. The Trustee may utilize the services of the Sponsor for the sale
of all or a portion of the Securities in a Trust, and in so doing, the Sponsor
will determine the manner, timing and execution of the sales of the underlying
Securities. Any brokerage commissions received by the Sponsor from the Trust in
connection with such sales will be in accordance with applicable law. In the
event of termination, written notice thereof will be sent by the Trustee to all
Unitholders. Such notice will provide Unitholders with the following three
options by which to receive their pro rata share of the net asset value of the
Trust and requires their election of one of the three options by notifying the
Trustee by returning a properly completed election request (to be supplied to
Unitholders of at least 2,500 Units prior to the commencement of the
Liquidation Period) (see Part A--"Summary of Essential Information" for the
date of the commencement of the Liquidation Period):
1. A Unitholder who owns at least 2,500 Units and whose interest in a Trust
would entitle it to receive at least one share of each underlying
Security will have its Units redeemed on commencement of the Liquidation
Period by distribution of the Unitholder's pro rata share of the net
asset value of such Trust on such date distributed in kind to the extent
represented by whole shares of underlying Securities and the balance in
cash within three business days next following the commencement of the
Liquidation Period. Unitholders subsequently selling such distributed
Securities will incur brokerage costs when disposing of such Securities.
Unitholders should consult their own tax adviser in this regard;
2. to receive in cash such Unitholder's pro rata share of the net asset
value of a Trust derived from the sale by the Sponsor as the agent of
the Trustee of the underlying Securities during the Liquidation Period.
The Unitholder's pro rata share of its net assets of such Trust will be
distributed to such Unitholder within three days of the settlement of
the trade of the last Security to be sold; or
3. to invest such Unitholder's pro rata share of the net assets of a Trust
derived from the sale by the Sponsor as agent of the Trustee of the
underlying Securities during the Liquidation Period, in units of a
subsequent series of Equity Securities Trust (the "New Series"),
provided one is offered. It is expected that a special redemption and
liquidation will be made of all Units of such Trust held by a Unitholder
(a "Rollover Unitholder") who affirmatively notifies the Trustee on or
prior to the Rollover Notification Date set forth in the "Summary of
Essential Information" for each of the Trusts in Part A. The Units of a
New Series will be purchased by the Unitholder within three business
days of the settlement of the trade for the last Security to be sold.
Such purchaser will be entitled to a reduced sales charge upon the
purchase of units of the New Series. It is expected that the terms of
the New Series will be substantially the same as the terms of each of
the Trusts described in
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this Prospectus, and that similar options with respect to the
termination of such New Series will be available. The availability of
this option does not constitute a solicitation of an offer to purchase
Units of a New Series or any other security. A Unitholder's election to
participate in this option will be treated as an indication of interest
only. At any time prior to the purchase by the Unitholder of units of a
New Series such Unitholder may change his investment strategy and
receive, in cash, the proceeds of the sale of the Securities. An
election of this option will not prevent the Unitholder from recognizing
taxable gain or loss (except in the case of a loss, if and to the extent
the New Series is treated as substantially identical to a Trust) as a
result of the liquidation, even though no cash will be distributed to
pay any taxes. Unitholders should consult their own tax advisers in this
regard.
Unitholders who do not make any election will be deemed to have elected to
receive the termination distribution in cash (option number 2).
The Sponsor has agreed that to the extent they effect the sales of
underlying securities for the Trustee in the case of the second and third
options during the Liquidation Period such sales will be free of brokerage
commissions. The Sponsor, on behalf of the Trustee, will sell, unless
prevented by unusual and unforeseen circumstances, such as, among other
reasons, a suspension in trading of a Security, the close of a stock exchange,
outbreak of hostilities and collapse of the economy, by the last business day
of the Liquidation Period. The Redemption Price per 100 Units, upon the
settlement of the last sale of Securities during the Liquidation Period, will
be distributed to Unitholders in redemption of such Unitholders' interest in
such Trust.
Depending on the amount of proceeds to be invested in Units of the New
Series and the amount of other orders for Units in the New Series, the Sponsor
may purchase a large amount of securities for the New Series in a short period
of time. The Sponsor's buying of securities may tend to raise the market
prices of these securities. The actual market impact of the Sponsor's
purchases, however, is currently unpredictable because the actual amount of
securities to be purchased and the supply and price of those securities is
unknown. A similar problem may occur in connection with the sale of Securities
during the Liquidation Period; depending on the number of sales required, the
prices of and demand for Securities, such sales may tend to depress the market
prices and thus reduce the proceeds of such sales. The Sponsor believes that
the sale of underlying Securities over the Liquidation Period as described
above is in the best interest of a Unitholder and may mitigate the negative
market price consequences stemming from the trading of large amounts of
Securities. The Securities may be sold in fewer than five days if, in the
Sponsor's judgment, such sales are in the best interest of Unitholders. The
Sponsor, in implementing such sales of securities on behalf of the Trustee,
will seek to maximize the sales proceeds and will act in the best interests of
the Unitholders. There can be no assurance, however, that any adverse price
consequences of heavy trading will be mitigated.
The Sponsor may for any reason, in its sole discretion, decide not to
sponsor any subsequent series of one or both of the Trusts, without penalty or
incurring liability to any Unitholder. If the Sponsor so decides, the Sponsor
will notify the Trustee of that decision, and the Trustee will notify the
Unitholders. All Unitholders will then elect either option 1, if eligible, or
option 2.
By electing to "rollover" into the New Series, the Unitholder indicates his
interest in having his terminating distribution from a Trust invested only in
the New Series created following termination of such Trust; the Sponsor
expects, however, that a similar rollover program will be offered with respect
to all subsequent series of each of the Trusts, thus giving Unitholders an
opportunity to elect to roll their terminating distributions into a New
Series. The availability of the rollover privilege does not constitute a
solicitation of offers to purchase units of a New Series or any other
security. A Unitholder's election to participate in the
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rollover program will be treated as an indication of interest only. The Sponsor
intends to coordinate the date of deposit of a future series so that the
terminating trust will terminate contemporaneously with the creation of a New
Series. The Sponsor reserves the right to modify, suspend or terminate the
rollover privilege at any time.
THE SPONSOR. The Sponsor, Reich & Tang Distributors, Inc., a Delaware
corporation, is engaged in the brokerage business and is a member of the
National Association of Securities Dealers, Inc. Reich & Tang is also a
registered investment advisor. Reich & Tang maintains its principal business
offices at 600 Fifth Avenue, New York, New York 10020. The sole shareholder of
the Sponsor, Reich & Tang Asset Management, Inc. ("RTAM Inc.") is wholly owned
by NEIC Holdings, Inc. which, effective December 29, 1997, was wholly owned by
NEIC Operating Partnership, L.P. ("NEICOP"). Subsequently, on March 31, 1998,
NEICOP changed its name to Nvest Companies, L.P. ("Nvest"). The general
partners of Nvest are Nvest Corporation and Nvest L.P. As of March 31, 1998,
Metropolitan Life Insurance Company ("MetLife") owned approximately 47% of the
partnership interests of Nvest. Nvest, with a principal place of business at
399 Boylston Street, Boston, MA 02116, is a holding company of firms engaged in
the securities and investment advisory business. These affiliates in the
aggregate are investment advisors or managers to over 80 registered investment
companies. Reich & Tang is Sponsor for numerous series of unit investment
trusts, including New York High Yield Trust, Series 1 (and Subsequent Series),
High Yield Securities Trust, Series 1 (and Subsequent Series), 1st Discount
Series (and Subsequent Series), Multi-State Series 1 (and Subsequent Series),
Mortgage Securities Trust, Series 1 (and Subsequent Series), Insured High Yield
Securities Trust, Series 1 (and Subsequent Series) and 5th Discount Series (and
Subsequent Series), Equity Securities Trust, Series 1, Signature Series,
Gabelli Communications Income Trust (and Subsequent Series), Schwab Trusts and
McLaughlin, Piven, Vogel Family of Trusts.
The information included herein is only for the purpose of informing
investors as to the financial responsibility of the Sponsor and its ability to
carry out its contractual obligations. The Sponsor will be under no liability
to Unitholders for taking any action, or refraining from taking any action, in
good faith pursuant to the Trust Agreement, or for errors in judgment except in
cases of its own willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
The Sponsor may resign at any time by delivering to the Trustee an instrument
of resignation executed by the Sponsor. If at any time the Sponsor shall resign
or fail to perform any of its duties under the Trust Agreement or becomes
incapable of acting or becomes bankrupt or its affairs are taken over by public
authorities, then the Trustee may either (a) appoint a successor Sponsor; (b)
terminate the Trust Agreement and liquidate the Trusts; or (c) continue to act
as Trustee without terminating the Trust Agreement. Any successor Sponsor
appointed by the Trustee shall be satisfactory to the Trustee and, at the time
of appointment, shall have a net worth of at least $1,000,000.
THE TRUSTEE. The Trustee is The Chase Manhattan Bank with its principal
executive office located at 270 Park Avenue, New York, New York 10017 (800)
428-8890 and its unit investment trust office at Four New York Plaza, New York,
New York 10004. The Trustee is subject to supervision by the Superintendent of
Banks of the State of New York, the Federal Deposit Insurance Corporation and
the Board of Governors of the Federal Reserve System.
The Trustee shall not be liable or responsible in any way for taking any
action, or for refraining from taking any action, in good faith pursuant to the
Trust Agreement, or for errors in judgment; or for any disposition of any
moneys, Securities or Units in accordance with the Trust Agreement, except in
cases of its own willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties;
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provided, however, that the Trustee shall not in any event be liable or
responsible for any evaluation made by any independent evaluation service
employed by it. In addition, the Trustee shall not be liable for any taxes or
other governmental charges imposed upon or in respect of the Securities or the
Trusts which it may be required to pay under current or future law of the
United States or any other taxing authority having jurisdiction. The Trustee
shall not be liable for depreciation or loss incurred by reason of the sale by
the Trustee of any of the Securities pursuant to the Trust Agreement.
For further information relating to the responsibilities of the Trustee under
the Trust Agreement, reference is made to the material set forth under "Rights
of Unitholders."
The Trustee may resign by executing an instrument in writing and filing the
same with the Sponsor, and mailing a copy of a notice of resignation to all
Unitholders. In such an event the Sponsor is obligated to appoint a successor
Trustee as soon as possible. In addition, if the Trustee becomes incapable of
acting or becomes bankrupt or its affairs are taken over by public authorities,
the Sponsor may remove the Trustee and appoint a successor as provided in the
Trust Agreement. Notice of such removal and appointment shall be mailed to each
Unitholder by the Sponsor. If upon resignation of the Trustee no successor 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. The resignation or removal of
the Trustee becomes effective only when the successor Trustee accepts its
appointment as such or when a court of competent jurisdiction appoints a
successor Trustee. 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.
Any corporation into which the Trustee may be merged or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which the Trustee shall be a party, shall be the successor Trustee. The Trustee
must always be a banking corporation organized under the laws of the United
States or any State and have at all times an aggregate capital, surplus and
undivided profits of not less than $2,500,000.
THE PORTFOLIO CONSULTANT. The Portfolio Consultant is Riccardi Group LLC, a
Delaware limited liability corporation with offices at 340 Sunset Drive, Fort
Lauderdale, Florida 33301. Cynthia M. Brown, an officer and director of
Riccardi Group LLC will be primarily responsible for selecting which Municipal
Funds to recommend to the Sponsor. Ms. Brown is a former Senior Vice President
and portfolio manager at Massachusetts Financial Services. She was responsible
for a number of portfolios totaling over $2 billion which were comprised of
primarily non-rated as well as investment grade tax-exempt securities.
The Portfolio Consultant is not a sponsor of the Trusts. The Portfolio
Consultant has been retained by the Sponsor, at its expense. The Portfolio
Consultant's only responsibility with respect to the Trusts, in addition to its
role in Portfolio selection, is to monitor the Securities of the Portfolios and
make recommendations to the Sponsor regarding the disposition of the Securities
held by the Trusts. The responsibility of monitoring the Securities of the
Portfolios means that if the Portfolio Consultant's view materially changes
regarding the appropriateness of an investment in any Security then held in the
Trusts based upon the investment objectives, guidelines, terms, parameters,
policies and restrictions supplied to the Portfolio Consultant by the Sponsor,
the Portfolio Consultant will notify the Sponsor of such change to the extent
consistent with applicable legal requirements. The Sponsor is not obligated to
adhere to the recommendations of the Portfolio Consultant
B-43
<PAGE>
regarding the disposition of Securities. The Sponsor has the sole authority to
direct a Trust to dispose of Securities under the Trust Agreement. The
Portfolio Consultant has no other responsibilities or obligations to either of
the Trusts or the Unitholders.
The Portfolio Consultant may resign or may be removed by the Sponsor at any
time on sixty days' prior written notice. The Sponsor shall use its best
efforts to appoint a satisfactory successor in the event that the
Portfolio Consultant resigns or is removed. Such resignation or removal shall
become effective upon the acceptance of appointment by the successor Portfolio
Consultant. If upon resignation of the Portfolio Consultant no successor has
accepted appointment within sixty days after notice of resignation, the Sponsor
has agreed to perform this function.
EVALUATION OF THE TRUSTS. The value of the Securities in a Trust portfolio is
determined in good faith by the Trustee on the basis set forth under "Public
Offering--Offering Price." The Sponsor and the Unitholders may rely on any
evaluation furnished by the Trustee and shall have no responsibility for the
accuracy thereof. Determinations by the Trustee under the Trust Agreement shall
be made in good faith upon the basis of the best information available to it,
provided, however, that the Trustee shall be under no liability to the Sponsor
or Unitholders for errors in judgment, except in cases of its own willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties. The Trustee, the Sponsor and the Unitholders may rely
on any evaluation furnished to the Trustee by an independent evaluation service
and shall have no responsibility for the accuracy thereof.
TRUST EXPENSES AND CHARGES
Investors will reimburse the Sponsor on a per 100 Units basis, for all or a
portion of the estimated costs incurred in organizing the Trusts, including the
cost of the initial preparation, printing and execution of the registration
statement and the indenture, Federal and State registration fees, the initial
fees and expenses of the Trustee, legal expenses and any other out-of-pocket
costs. The estimated organization costs will be paid from the assets of the
Trusts as of the close of the initial public offering period. To the extent
that actual organization costs are less than the estimated amount, only the
actual organization costs will be deducted form the assets of the Trusts. To
the extent that actual organization costs are greater than the estimated
amount, only the estimated organization costs included in the Public Offering
Price will be reimbursed to the Sponsor. Any balance of the costs incurred in
establishing the Trusts, as well as advertising and selling costs, will be paid
by the Sponsor at no cost to the Trusts.
The Sponsor will receive for portfolio supervisory services to the Trusts an
Annual Fee in the amount set forth under "Summary of Essential Information" in
Part A. The Sponsor's fee may exceed the actual cost of providing portfolio
supervisory services for the Trusts, but at no time will the total amount
received for portfolio supervisory services rendered to all series of the
Equity Securities Trust in any calendar year exceed the aggregate cost to the
Sponsor of supplying such services in such year. (See "Portfolio Supervision.")
The Trustee will receive, for its ordinary recurring services to the Trusts,
an annual fee in the amount set forth under "Summary of Essential Information"
in Part A. For a discussion of the services performed by the Trustee pursuant
to its obligations under the Trust Agreement, see "Trust Administration" and
"Rights of Unitholders."
B-44
<PAGE>
The Trustee's fees applicable to a Trust are payable as of each Record Date
from the Income Account of such Trust to the extent funds are available and
then from the Principal Account. Both fees may be increased without approval of
the Unitholders by amounts not exceeding proportionate increases in consumer
prices for services as measured by the United States Department of Labor's
Consumer Price Index entitled "All Services Less Rent."
The following additional charges are or may be incurred by the Trusts: all
expenses (including counsel fees) of the Trustee incurred and advances made in
connection with its activities under the Trust Agreement, including the
expenses and costs of any action undertaken by the Trustee to protect the
Trusts and the rights and interests of the Unitholders; fees of the Trustee for
any extraordinary services performed under the Trust Agreement; 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 its acceptance or administration of the Trusts; indemnification
of the Sponsor for any losses, liabilities and expenses incurred in acting as
sponsors of the Trusts without gross negligence, bad faith or willful
misconduct on its part; and all taxes and other governmental charges imposed
upon the Securities or any part of the Trusts (no such taxes or charges are
being levied, made or, to the knowledge of the Sponsor, contemplated) The above
expenses, including the Trustee's fees, when paid by or owing to the Trustee
are secured by a first lien on the Trust to which such expenses are charged. In
addition, the Trustee is empowered to sell the Securities in order to make
funds available to pay all expenses.
Unless the Sponsor otherwise directs, the accounts of the Trusts shall be
audited not less than annually by independent public accountants selected by
the Sponsor. The expenses of the audit shall be an expense of the Trusts. So
long as the Sponsor maintains a secondary market, the Sponsor will bear any
audit expense which exceeds $.50 Cents per 100 Units. Unitholders covered by
the audit during the year may receive a copy of the audited financial
statements upon request.
REINVESTMENT PLAN
Income and principal distributions on Units (other than the final
distribution in connection with the termination of a Trust) may be reinvested
by participating in the Trust's reinvestment plan. Under the plan, the Units
acquired for participants will be either Units already held in inventory by the
Sponsor or new Units created by the Sponsor's deposit of Additional Securities
as described in "The Trusts-Organization" in this Part B. Units acquired by
reinvestment will be subject to a reduced sales charge of 1.00%. Investors
should inform their broker, dealer or financial institution when purchasing
their Units if they wish to participate in the reinvestment plan. Thereafter,
Unitholders should contact their broker, dealer or financial institution if
they wish to modify or terminate their election to participate in the
reinvestment plan. In order to enable a Unitholder to participate in the
reinvestment plan with respect to a particular distribution on their Units,
such notice must be made at least three business days prior to the Record Day
for such distribution. Each subsequent distribution of income or principal on
the participant's Units will be automatically applied by the Trustee to
purchase additional Units of a Trust. The Sponsor reserves the right to modify
or terminate the reinvestment plan at any time without prior notice. The
reinvestment plan for the Trusts may not be available in all states.
B-45
<PAGE>
EXCHANGE PRIVILEGE AND CONVERSION OFFER
Unitholders will be able to elect to exchange any or all of their Units of
these Trusts for Units of one or more of any available series of Equity
Securities Trust, Insured Municipal Securities Trust, Municipal Securities
Trust, New York Municipal Trust or Mortgage Securities Trust (the "Exchange
Trusts") subject to a reduced sales charge as set forth in the prospectus of
the Exchange Trust (the "Exchange Privilege"). Unit owners of any registered
unit investment trust for which there is no active secondary market in the
units of such trust (a "Redemption Trust") will be able to elect to redeem such
units and apply the proceeds of the redemption to the purchase of available
Units of one or more series of an Exchange Trust (the "Conversion Trusts") at
the Public Offering Price for units of the Conversion Trust subject to a
reduced sales charge as set forth in the prospectus of the Conversion Trust
(the "Conversion Offer"). Under the Exchange Privilege, the Sponsor's
repurchase price during the initial offering period of the Units being
surrendered will be based on the market value of the Securities in a Trust's
portfolio or on the aggregate offer price of the Bonds in the other Trust
Portfolios; and, after the initial offering period has been completed, will be
based on the aggregate bid price of the securities in the particular Trust
portfolio. Under the Conversion Offer, units of the Redemption Trust must be
tendered to the trustee of such trust for redemption at the redemption price
determined as set forth in the relevant Redemption Trust's prospectus. Units in
an Exchange or Conversion Trust will be sold to the Unitholder at a price based
on the aggregate offer price of the securities in the Exchange or Conversion
Trust portfolio (or for units of Equity Securities Trust, based on the market
value of the underlying securities in the trust portfolio) during the initial
public offering period of the Exchange or Conversion Trust; and after the
initial public offering period has been completed, based on the aggregate bid
price of the securities in the Exchange or Conversion Trust Portfolio if its
initial offering has been completed plus accrued interest (or for units of
Equity Securities Trust, based on the market value of the underlying securities
in the trust portfolio) and a reduced sales charge.
Except for Unitholders who wish to exercise the Exchange Privilege or
Conversion Offer within the first five months of their purchase of Units of the
Exchange or Redemption Trust, any purchaser who purchases Units under the
Exchange Privilege or Conversion Offer will pay a lower sales charge than that
which would be paid for the Units by a new investor. For Unitholders who wish
to exercise the Exchange Privilege or Conversion Offer within the first five
months of their purchase of Units of the Exchange or Redemption Trust, the
sales charge applicable to the purchase of units of an Exchange or Conversion
Trust shall be the greater of (i) the reduced sales charge or (ii) an amount
which when coupled with the sales charge paid by the Unitholder upon his
original purchase of Units of the Exchange or Redemption Trust would equal the
sales charge applicable in the direct purchase of units of an Exchange or
Conversion Trust.
In order to exercise the Exchange Privilege the Sponsor must be maintaining a
secondary market in the units of the available Exchange Trust. The Conversion
Offer is limited only to unit owners of any Redemption Trust. Exercise of the
Exchange Privilege and the Conversion Offer by Unitholders is subject to the
following additional conditions (i) at the time of the Unitholder's election to
participate in the Exchange Privilege or the Conversion Offer, there must be
units of the Exchange or Conversion Trust available for sale, either under the
initial primary distribution or in the Sponsor's secondary market, (iii)
exchanges will be effected in whole units only, (iv) Units of the Mortgage
Securities Trust may only be acquired in blocks of 1,000 Units and (v) Units of
the Equity Securities Trust may only be acquired in blocks of 100 Units.
Unitholders will not be permitted to advance any funds in excess of their
redemption in order to complete the exchange. Any excess proceeds received from
a Unitholder for exchange, or from units being redeemed for conversion, will be
remitted to such Unitholder.
B-46
<PAGE>
The Sponsor reserves the right to suspend, modify or terminate the Exchange
Privilege and/or the Conversion Offer. The Sponsor will provide Unitholders of
the Trusts with 60 days' prior written notice of any termination or material
amendment to the Exchange Privilege or the Conversion Offer, provided that, no
notice need be given if (i) the only material effect of an amendment is to
reduce or eliminate the sales charge payable at the time of the exchange, to
add one or more series of the Trust eligible for the Exchange Privilege or the
Conversion Offer, to add any new unit investment trust sponsored by Reich &
Tang or a sponsor controlled by or under common control with Reich & Tang, or
to delete a series which has been terminated from eligibility for the Exchange
Privilege or the Conversion Offer, (ii) there is a suspension of the redemption
of units of an Exchange or Conversion Trust under Section 22(e) of the
Investment Company Act of 1940, or (iii) an Exchange Trust temporarily delays
or ceases the sale of its units because it is unable to invest amounts
effectively in accordance with its investment objectives, policies and
restrictions. During the 60-day notice period prior to the termination or
material amendment of the Exchange Privilege described above, the Sponsor will
continue to maintain a secondary market in the units of all Exchange Trusts
that could be acquired by the affected Unitholders. Unitholders may, during
this 60-day period, exercise the Exchange Privilege in accordance with its
terms then in effect.
To exercise the Exchange Privilege, a Unitholder should notify the Sponsor of
his desire to exercise his Exchange Privilege. To exercise the Conversion
Offer, a unit owner of a Redemption Trust should notify his retail broker of
his desire to redeem his Redemption Trust Units and use the proceeds from the
redemption to purchase Units of one or more of the Conversion Trusts. If Units
of a designated, outstanding series of an Exchange or Conversion Trust are at
the time available for sale and such Units may lawfully be sold in the state in
which the Unitholder is a resident, the Unitholder will be provided with a
current prospectus or prospectuses relating to each Exchange or Conversion
Trust in which he indicates an interest. He may then select the Trust or Trusts
into which he desires to invest the proceeds from his sale of Units. The
exchange transaction will operate in a manner essentially identical to a
secondary market transaction except that units may be purchased at a reduced
sales charge. The conversion transaction will be handled entirely through the
unit owner's retail broker. The retail broker must tender the units to the
trustee of the Redemption Trust for redemption and then apply the proceeds to
the redemption toward the purchase of units of a Conversion Trust at a price
based on the aggregate offer or bid side evaluation per Unit of the Conversion
Trust, depending on which price is applicable, plus accrued interest and the
applicable sales charge. The certificates must be surrendered to the broker at
the time the redemption order is placed and the broker must specify to the
Sponsor that the purchase of Conversion Trust Units is being made pursuant to
the Conversion Offer. The unit owner's broker will be entitled to retain a
portion of the sales charge.
TAX CONSEQUENCES OF THE EXCHANGE PRIVILEGE AND THE CONVERSION OFFER. A
surrender of Units pursuant to the Exchange Privilege or the Conversion Offer
will constitute a "taxable event" to the Unitholder under the Internal Revenue
Code. The Unitholder will realize a tax gain or loss that will be of a long- or
short-term capital or ordinary income nature depending on the length of time
the units have been held and other factors. (See "Tax Status".) A Unitholder's
tax basis in the Units acquired pursuant to the Exchange Privilege or
Conversion Offer will be equal to the purchase price of such Units. Investors
should consult their own tax advisors as to the tax consequences to them of
exchanging or redeeming units and participating in the Exchange Privilege or
Conversion Offer.
B-47
<PAGE>
OTHER MATTERS
LEGAL OPINIONS. The legality of the Units offered hereby and certain matters
relating to federal tax law have been passed upon by Battle Fowler LLP, 75 East
55th Street, New York, New York 10022 as counsel for the Sponsor. Brown & Wood
llp have acted as special California counsel for the Sponsor. Carter, Ledyard &
Milburn, Two Wall Street, New York, New York 10005 have acted as counsel for
the Trustee.
INDEPENDENT ACCOUNTANTS. The Statements of Financial Condition, including the
Portfolios, are included herein in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, and upon the authority of
said firm as experts in accounting and auditing.
PERFORMANCE INFORMATION. Total returns, average annualized returns or
cumulative returns for various periods of the Municipal Funds and the Trusts
may be included from time to time in advertisements, sales literature and
reports to current or prospective investors. Total return shows changes in Unit
price during the period plus reinvestment of dividends and capital gains,
divided by the maximum public offering price as of the date of calculation.
Average annualized returns show the average return for stated periods of longer
than a year. Figures for actual portfolios will reflect all applicable expenses
and, unless otherwise stated, the maximum sales charge. No provision is made
for any income taxes payable. Similar figures may be given for the Trusts.
Trust performance may be compared to performance on a total return basis of the
Dow Jones Industrial Average, the S&P 500 Composite Price Stock Index, or
performance data from Lipper Analytical Services, Inc. and Morningstar
Publications, Inc. or from publications such as Money, The New York Times, U.S.
News and World Report, Business Week, Forbes or Fortune. As with other
performance data, performance comparisons should not be considered
representative of a Trust's relative performance for any future period.
B-48
<PAGE>
No person is authorized to give any information or to make any
representations with respect to the Trusts not contained in Parts A and B of
this Prospectus and you should not rely on any other information. The Trusts
are registered as unit investment trusts under the Investment Company Act of
1940. Such registration does not imply that the Trusts or any of their Units
have been guaranteed, sponsored, recommended or approved by the United States
or any state or any agency or officer thereof.
---------------
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, securities in any state to any person to whom it is not
lawful to make such offer in such state.
Table of Contents
<TABLE>
<CAPTION>
Title Page
- ----- ----
<S> <C>
PART A
</TABLE>
Investment Summary........................................................
A-2
<TABLE>
<S> <C>
Fee Table.................................................................. A-5
Summary of Essential Information........................................... A-7
Statements of Financial Condition.......................................... A-9
Portfolios................................................................. A-10
Report of Independent Accountants.......................................... A-12
PART B
The Trusts................................................................. B-1
Risk Considerations........................................................ B-4
Public Offering............................................................ B-26
Tax Status................................................................. B-29
Rights of Unitholders...................................................... B-35
Liquidity.................................................................. B-36
Trust Administration....................................................... B-38
Trust Expenses and Charges................................................. B-44
Reinvestment Plan.......................................................... B-45
Exchange Privilege and Conversion Offer.................................... B-46
Other Matters.............................................................. B-48
</TABLE>
[LOGO]
EST
EQUITY SECURITIES TRUST
SERIES 23
MUNICIPAL SYMPHONY SERIES II
(A UNIT INVESTMENT TRUST)
PROSPECTUS
DATED: JUNE 23, 1999
SPONSOR:
REICH & TANG DISTRIBUTORS, INC.
600 Fifth Avenue
New York, New York 10020
212-830-5400
TRUSTEE:
THE CHASE MANHATTAN BANK
4 New York Plaza
New York, New York 10004
This Prospectus does not contain all of the information with respect to the
Trusts set forth in its registration statements filed with the Securities and
Exchange Commission, Washington, D.C. under the Securities Act of 1933 (file
no. 333-79169) and the Investment Company Act of 1940 (file no. 811-2868), and
to which reference is hereby made. Copies may be reviewed at the Commission or
on the internet, or obtained from the Commission at prescribed rates by:
.calling: 1-800-SEC-0330
. visiting the SEC internet address: http://www.sec.gov
. writing: Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549-6009
<PAGE>
PART II ADDITIONAL INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM A--BONDING ARRANGEMENTS
The employees of Reich & Tang Distributors, Inc. are covered under Brokers'
Blanket Policy, Standard Form 14, in the amount of $11,000,000 (plus
$196,000,000 excess coverage under Brokers' Blanket Policies, Standard Form 14
and Form B Consolidated). This policy has an aggregate annual coverage of $15
million.
ITEM B--CONTENTS OF REGISTRATION STATEMENT
This Registration Statement on Form S-6 comprises the following papers and
documents:
The facing sheet on Form S-6.
The Cross-Reference Sheet (incorporated by reference to the Cross-
Reference Sheet to the Registration Statement of Equity Securities
Trust, Series 12, 1997 Triple Strategy Trust II).
The Prospectus consisting of pages.
Undertakings.
Signatures.
Written consents of the following persons:
Battle Fowler LLP (included in Exhibit 3.1)
Opinion of Special California Counsel (included in Exhibit 3.2)
PricewaterhouseCoopers LLP
Portfolio Consultants
The following exhibits:
<TABLE>
<CAPTION>
<C> <C> <S>
99.1.1 -- Reference Trust Agreement including certain amendments to the
Trust Indenture and Agreement referred to under Exhibit
99.1.1.1 below (filed as Exhibit 99.1.1 to Amendment No. 2 to
the Form S-6 Registration Statement No. 333-69255 of Equity
Securities Trust, Series 22, High Yield Symphony Series on
March 11, 1999 and incorporated herein by reference).
99.1.1.1 -- Form of Trust Indenture and Agreement (filed as Exhibit 1.1.1
to Amendment No. 1 to Form S-6 Registration Statement No. 33-
62627 of Equity Securities Trust, Series 6, Signature Series,
Gabelli Entertainment and Media Trust on November 16, 1995
and incorporate herein by reference).
99.1.3.5 -- Certificate of Incorporation of Reich & Tang Distributors,
Inc. (filed as Exhibit 99.1.3.5 to Form S-6 Registration
Statement No. 333-44301 on January 15, 1998 and incorporated
herein by reference).
99.1.3.6 -- By-Laws of Reich & Tang Distributors, Inc. (filed as Exhibit
99.1.3.6 to Form S-6 Registration Statement No. 333-44301 on
January 15, 1998 and incorporated herein by reference).
99.1.4 -- Form of Agreement Among Underwriters (filed as Exhibit 1.4 to
Amendment No. 1 to Form S-6 Registration Statement No. 33-
62627 of Equity Securities Trust, Series 6, Signature Series,
Gabelli Entertainment and Media Trust on November 16, 1995
and incorporated herein by reference).
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <C> <S>
*99.3.1 -- Opinion of Battle Fowler LLP as to the legality of the
securities being registered, including their consent to the
filing thereof and to the use of their name under the headings
"Tax Status" and "Legal Opinions" in the Prospectus, and to the
filing of their opinion regarding tax status of the Trust.
<CAPTION>
<C> <C> <S>
*99.3.2 -- Opinion of Special California Counsel.
<CAPTION>
<C> <C> <S>
99.6.0 -- Power of Attorney of Reich & Tang Distributors, Inc., the
Depositor, by its officers and a majority of its Directors
(filed as Exhibit 99.6.0 to Form S-6 Registration Statement No.
333-44301 on January 15, 1998 and incorporated herein by
reference).
</TABLE>
- --------
* Filed herewith.
II-2
<PAGE>
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Equity Securities Trust, Series 23, Municipal Symphony Series II, has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, hereunto duly authorized, in the City of New York and State
of New York on the 23rd day of June, 1999.
EQUITY SECURITIES TRUST, SERIES 23, MUNICIPAL
SYMPHONY SERIES II
(Registrant)
REICH & TANG DISTRIBUTORS, INC.
(Depositor)
By /s/ Peter J. DeMarco
__________________________________________
Peter J. DeMarco
(Authorized Signator)
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed below by the following persons, who
constitute the principal officers and a majority of the directors of Reich &
Tang Distributors, Inc., the Depositor, in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<C> <S> <C>
Richard E. Smith, III President and Director
Peter S. Voss Director June 23, 1999
G. Neal Ryland Director
Steven W. Duff Director
/s/ Peter J. DeMarco
By _____________________
Peter J. DeMarco Executive Vice President Peter J. DeMarco
Richard I. Weiner Vice President Attorney-In-Fact*
Bernadette N. Finn Vice President
Lorraine C. Hysler Secretary
Richard De Sanctis Treasurer
Edward N. Wadsworth Executive Officer
</TABLE>
- --------
* Executed copies of Powers of Attorney were filed as Exhibit 99.6.0 to Form S-
6 to Registration Statement No. 333-44301 on January 15, 1998.
II-3
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
registration statement on Form S-6 (the "Registration Statement") of our report
dated June 23, 1999, relating to the Statements of Financial Condition,
including the Portfolios, of Equity Securities Trust, Series 23, Municipal
Symphony Series II which appears in such Prospectus. We also consent to the
reference to us under the heading "Independent Accountants" in such Prospectus.
PricewaterhouseCoopers LLP
Boston, MA
June 23, 1999
II-4
<PAGE>
CONSENT OF PORTFOLIO CONSULTANT
THE SPONSOR, TRUSTEE AND UNITHOLDERS
EQUITY SECURITIES TRUST, SERIES 23,
MUNICIPAL SYMPHONY SERIES II
We hereby consent to the use of the name "Riccardi Group LLC" included herein
and to the reference to our firm in the Prospectus.
RICCARDI GROUP LLC
Fort Lauderdale, Florida
June 23, 1999
II-5
<PAGE>
EXHIBIT 3.1
BATTLE FOWLER LLP
PARK AVENUE TOWER
75 EAST 55TH STREET
NEW YORK, N.Y. 10022-3205
2049 CENTURY PARK EAST CABLE ADDRESS
SUITE 2350 "COUNSELLOR"
LOS ANGELES, CA 90057-3101 -----
TELEPHONE:(310) 778-3000 FACSIMILE
FAX: (310) 277-0336 (212) 339-9150
www. battlefowler.com
(212)856-7000
(212)856-7816
June 23, 1999
Reich & Tang Distributors, Inc.
600 Fifth Avenue
New York, New York 10020
Re: Equity Securities Trust, Series 23,
Municipal Symphony Series II
---------------------------------
Dear Sirs:
We have acted as special counsel for Reich & Tang Distributors, Inc., as
Depositor, Sponsor and Principal Underwriter (collectively, the "Depositor") of
Equity Securities Trust, Series 23, Municipal Symphony Series II, consisting of
the California Portfolio and the New York Portfolio (the "Trusts") in connection
with the issuance by the Trusts of units of fractional undivided interest (the
"Units") in each Trust. Pursuant to the Trust Agreements referred to below, the
Depositor has transferred to each Trust certain securities and contracts to
purchase certain securities together with an irrevocable letter of credit to be
held by the Trustee upon the terms and conditions set forth in the Trust
Agreement. (All securities to be acquired by a Trust are collectively referred
to as the "Securities").
In connection with our representation, we have examined copies of the
following documents relating to the creation of the Trusts and the issuance and
sale of the Units: (a) the Trust Indenture and Agreement and related Reference
Trust Agreements, each of even date herewith, relating to the Trusts
(collectively the "Trust Agreements") among the Depositor and The Chase
Manhattan Bank, as Trustee; (b) the Notification of Registration on Form N-8A
and the Registration Statement on Form N-8B-2, as amended, relating to the
Trusts, as filed with the Securities and Exchange Commission (the "Commission")
pursuant to the Investment Company Act of 1940 (the "1940 Act"); (c) the
Registration Statement on Form S-6 (Registration No. 333-79169) filed with the
Commission pursuant to the Securities Act of 1933 (the "1933 Act"), and all
Amendments thereto (said Registration Statement, as amended by said Amendment(s)
being herein called the "Registration
<PAGE>
2
Reich & Tang Distributors, Inc.
June 23, 1999
Statement"); (d) the proposed form of final Prospectus (the "Prospectus")
relating to the Units, which is expected to be filed with the Commission this
day; (e) certified resolutions of the Board of Directors of the Depositor
authorizing the execution and delivery by the Depositor of the Trust Agreements
and the consummation of the transactions contemplated thereby; (f) the
Certificate of Incorporation of the Depositor; and (g) a certificate of an
authorized officer of the Depositor with respect to certain factual matters
contained therein.
We have examined the Order of Exemption from certain provisions of
Sections 11(a) and 11(c) of the 1940 Act, filed on behalf of Reich & Tang
Distributors L.P. (the predecessor to Reich & Tang Distributors, Inc.); Equity
Securities Trust (Series 1, Signature Series and Subsequent Series), Mortgage
Securities Trust (CMO Series 1 and Subsequent Series), Municipal Securities
Trust, Series 1 (and Subsequent Series) (including Insured Municipal Securities
Trust, Series 1 (and Subsequent Series and 5th Discount Series and Subsequent
Series)); New York Municipal Trust (Series 1 and Subsequent Series); and A
Corporate Trust (Series 1 and Subsequent Series) granted on October 9, 1996. In
addition, we have examined the Order of Exemption from certain provisions of
Sections 2(a)(32), 2(a)(35), 22(d) and 26(a)(2) of the 1940 Act and Rule 22c-1
thereunder, filed on behalf of Reich & Tang Distributors L.P.; Equity Securities
Trust; Mortgage Securities Trust; Municipal Securities Trust (including Insured
Municipal Securities Trust); New York Municipal Trust; A Corporate Trust; Schwab
Trusts; and all presently outstanding and subsequently issued series of these
trusts and all subsequently issued series of unit investment trusts sponsored by
Reich & Tang Distributors L.P. granted on October 29, 1997.
We have not reviewed the financial statements, compilation of the
Securities held by the Trusts, or other financial or statistical data contained
in the Registration Statement and the Prospectus, as to which you have been
furnished with the reports of the accountants appearing in the Registration
Statement and the Prospectus.
In addition, we have assumed the genuineness of all agreements,
instruments and documents submitted to us as originals and the conformity to
originals of all copies thereof submitted to us. We have also assumed the
genuineness of all signatures and the legal capacity of all persons executing
agreements, instruments and documents examined or relied upon by us.
Statements in this opinion as to the validity, binding effect and
enforceability of agreements, instruments and documents are subject: (i) to
limitations as to enforceability imposed by bankruptcy, reorganization,
moratorium, insolvency and other laws of general application relating to or
affecting the enforceability of creditors' rights, and (ii) to limitations under
equitable principles governing the availability of equitable remedies.
We are not admitted to the practice of law in any jurisdiction but the
State of New York and we do not hold ourselves out as experts in or express any
opinion as to the laws of other states or jurisdictions except as to matters of
Federal and Delaware corporate law.
<PAGE>
3
Reich & Tang Distributors, Inc.
June 23, 1999
Based exclusively on the foregoing, we are of the opinion that under
existing law:
(1) The Trust Agreements have been duly authorized and entered into by an
authorized officer of the Depositor and are valid and binding obligations of the
Depositor in accordance with their respective terms.
(2) The registration of the Units on the registration books of the Trusts
by the Trustee has been duly authorized by the Depositor in accordance with the
provisions of the respective Trust Agreements and issued for the consideration
contemplated therein, will constitute fractional undivided interests in the
Trusts, will be entitled to the benefits of the Trust Agreements, will conform
in all material respects to the description thereof for the Units as provided in
the Trust Agreements and the Registration Statement, and the Units will be fully
paid and non-assessable by the Trusts.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Registration Statement
and in the Prospectus under the headings "Tax Status" and "Legal Opinions". We
authorize you to deliver copies of this opinion to the Trustee and the Trustee
may rely on this opinion as fully and to the same extent as if it had been
addressed to it.
This opinion is intended solely for the benefit of the addressees and the
Trustee in connection with the issuance of the Units of the Trusts and may not
be relied upon in any other manner or by any other person without our express
written consent.
Very truly yours,
Battle Fowler LLP
<PAGE>
BROWN & WOOD LLP
555 California Street
San Francisco, Ca. 94104-1715
TELEPHONE: 415-772-1200
FACSMILE: 415-397-4621
June 23, 1999
EXHIBIT 3.2
Reich & Tang Distributors, Inc.
600 Fifth Avenue
10th Floor
New York, New York 10020
Re: Equity Securities Trust
Series 23, Municipal Symphony Series II
California Portfolio
Ladies and Gentlemen:
You have requested our opinion as to certain California personal income tax
issues relating to the California Portfolio (the "California Portfolio") of the
Equity Securities Trust, Series 23, Municipal Symphony Series II (the "Trust"),
sponsored by Reich & Tang Distributors, Inc. Our opinion relates solely to the
California tax matters described herein. It is our understanding that Battle
Fowler LLP has rendered an opinion, effective as of the date hereof, as to
certain federal income tax matters pertaining to the Trust and each of the
separate unit investment trusts therein, including the California Portfolio.
In rendering our opinion, we have examined and relied upon, among other
things, (1) Amendment No. 1 to the Form S-6 Registration Statement filed with
the Securities and Exchange Commission on June 23, 1999 (the "Registration
Statement"), pursuant to which you will offer to a limited number of investors
(the "Unitholders") the opportunity to purchase fractional undivided interests
in the California Portfolio ("Units"); (2) a copy of the Trust Indenture and
Agreement, dated November 16, 1995, between Reich & Tang Distributors, L.P.,
(predecessor to Reich & Tang Distributors, Inc.), as Depositor, and The Chase
Manhattan Bank, N.A. (predecessor to Chase Manhattan Bank), as Trustee; (3) a
draft of the Reference Trust Agreement for Series 23, Municipal Symphony Series
II, California Portfolio, dated June 23, 1999, between Reich & Tang
Distributors, L.P., as Depositor and The Chase Manhattan Bank, as Trustee,
incorporating by reference the aforementioned Trust Indenture and Agreement and
amending and supplementing the same (said Trust Indenture and Agreement and
Reference Trust Agreement being herein referred to collectively as the "Trust
Agreement"); and (4) the opinion of Battle Fowler LLP, effective as of the date
hereof, that (i) the IRS will classify the California Portfolio as a grantor
trust for federal income tax purposes, (ii) the California Portfolio will not
owe federal income tax, (iii) each Unitholder will be treated as the owner of a
pro rata portion of the assets of the California Portfolio, (iv) the income
received by the California Portfolio will be treated as income of the
Unitholders, and (v) the right of the Sponsor to create additional Units for 90
days after the Initial Date of Deposit by depositing additional securities in
the California Portfolio, as described below, will not affect the IRS'
conclusion that the California Portfolio will be
<PAGE>
Reich & Tang Distributors, Inc.
June 23, 1999
Page 2
treated as a grantor trust for federal income tax purposes. Except as otherwise
defined herein, capitalized terms used herein shall have the respective meanings
ascribed to them in the Registration Statement.
The Trust consists of separate unit investment trusts designated the
California Portfolio and the New York Portfolio (each trust a "State Trust" and
collectively the "State Trusts"). Each State Trust was created under the laws of
the State of New York pursuant to the Trust Agreement. Each State Trust will be
administered in accordance with the Trust Agreement as a distinct entity with
separate certificates, expenses, books and records, and the assets of one State
Trust may not be commingled with the assets of any other. Under the terms and
conditions of the Trust Agreement, the California Portfolio will have a fixed,
diversified portfolio of publicly traded common stock of closed-end funds (the
"Municipal Funds") the portfolios of which consist primarily of bonds issued by
the State of California or by the cities, counties and other political
subdivisions thereof. The Trustee will not have the power to vary the investment
of the California Portfolio nor the power to take advantage of market variations
to improve a Unitholder's investment, and there will be no discretion to retain
and reinvest the securities in the California Portfolio. The Sponsor will have
the right to create additional Units in the California Portfolio for 90 days
after the Initial Date of Deposit, but only by depositing additional securities
of Municipal Funds substantially similar; to the securities of the Municipal
Funds initially deposited in the California Portfolio.
Based on the foregoing, under existing California law applicable to
individuals who are California residents, we are of the opinion that:
1. The California Portfolio will not be treated as an association taxable
as a corporation. Accordingly, the income of the California Portfolio will be
treated as the income of the Unitholders in the same manner as if the
Unitholders held the securities of the California Portfolio directly.
2. Each Unitholder of the California Portfolio will recognize gain or
loss upon the sale or other disposition of the securities held by the California
Portfolio or upon the Unitholder's sale or other disposition of a unit. The
amount of gain or loss for California income tax purposes will generally be
calculated pursuant to the Code, certain provisions of which are incorporated by
reference under California law.
We have not addressed, and render no opinion with respect to, the exclusion
from gross income for federal income tax purposes of the interest on the bonds
held by the Municpal Funds in the California Portfolio and the exemption of such
interest from California income taxation, nor have we addressed the federal or
State of California tax treatment of the income earned by and distributions made
by the Municipal Funds. Further, we have not addressed, and render no opinion
with respect to, any federal income tax aspects of the California Portfolio and,
other than as specifically set forth herein, we have not addressed, and render
no opinion with respect to, any state or local tax aspects relating to the
California Portfolio.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement under the Securities Act of 1933, as amended, covering
the issuance of Units in the California Trust, and to the reference to our firm
in the Registration Statement under the heading "Tax Status - California Taxes."
This letter is furnished by us solely for your benefit, and the benefit of
The Chase Manhattan Bank, as Trustee for the California Portfolio, in connection
with the Registration Statement for the public offering of interests in the
Equity Securities Trust, and this letter may not be relied upon by any other
person without our prior written consent.
Very truly yours,
Brown & Wood LLP
