As filed with the Securities and Exchange Commission on April 28, 2000
Registration No. 333-79169
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE 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: ING FUNDS DISTRIBUTOR, INC.
C. Complete address of depositor's principal executive offices:
ING FUNDS DISTRIBUTOR, INC.
1475 Dunwoody Drive
West Chester, Pennsylvania 19380
D. Name and complete address of agent for service:
PETER J. DeMARCO Copy of comments to:
Senior Vice President MICHAEL R. ROSELLA, ESQ.
ING Funds Distributor, Inc. Battle Fowler LLP
1475 Dunwoody Drive 75 East 55th Street
West Chester, Pennsylvania 19380 New York, NY 10022
(212) 856-6858
It is proposed that this filing become effective (check appropriate box)
|_| immediately upon filing pursuant to paragraph (b) of Rule 485
|x| on April 29, 2000 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)
|_| on ( date ) pursuant to paragraph (a) of Rule 485
================================================================================
The Registrant filed a Rule 24f-2 Notice for its fiscal year ended December 31,
1999 on or about March 29, 2000.
935908.1
<PAGE>
- --------------------------------------------------------------------------------
LOGO
- --------------------------------------------------------------------------------
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 ING Funds
Distributor, Inc., as successor to 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.
================================================================================
================================================================================
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 APRIL 30, 2000
933822.2
<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. 92.98% of the California Portfolio is listed on the New
York Stock Exchange and 7.02% 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. 94.85% of the New York
Portfolio is listed on the New York Stock Exchange and 5.15% 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:
o 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.
o 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.
o 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.
o 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.
o Unitholders will pay both Trust expenses and a share of each municipal
fund's expenses.
o 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.
- -------------------
* For changes in the Trust Portfolios from January 1, 2000 to March 15, 2000
see Schedule A on pages A-10 through A-11 which reflects the content or
"makeup" of the Trust Portfolio as of March 15, 2000.
933822.2
A-2
<PAGE>
o 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.
o 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.
o 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.
o 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:
o dividing the aggregate value of the underlying securities and cash
held in a Trust by the number of units outstanding;
o adding a sales charge of 4.50% (4.712% of the net amount invested);
and
o multiplying the result by 100.
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. 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's purchase price will be computed
as of the date the units are purchased.
DISTRIBUTIONS. Distributions of dividends received, less expenses, will be made
by the Trust 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 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 six years. At
that time investors may choose one of the following three options with respect
to their terminating distribution:
933822.2
A-3
<PAGE>
o receive the distribution in-kind if they own at least 2,500 Units;
o receive cash upon the liquidation of their pro rata share of the
Securities; or
o 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. Investors purchasing
additional units of the Trust by automatically reinvesting their distributions
will not be assessed a sales charge. See "Reinvestment Plan" in Part B for
details on how to enroll in the Reinvestment Plan.
933822.2
A-4
<PAGE>
FEE TABLE
FOR CALIFORNIA PORTFOLIO
As of December 31, 1999
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
- -------------------------------- Amount
(Fees paid directly from your investment) As a % of per
Offering Price 100 Units
-------------- ---------
<S> <C> <C>
Maximum Sales Charges Imposed on Purchase............................... 4.50% $ 36.75
Maximum Sales Charge Imposed Per Year on Reinvested Dividends........... 0% $ 0
Estimated Annual Fund Operating Expenses Amount
- ----------------------------------------- As a % of per
(Expenses that are deducted from Trust assets) Net Assets 100 Units
---------- ---------
Trustee's Fee........................................................... .103% $ .80
Other Operating Expenses................................................ .065% $ .51
Portfolio Supervision, Bookkeeping and Administrative Fees........... .039% $ .30
Underlying Closed-End Fund Expenses*.................................... 1.065% $ 8.30
------ -------
Total................................................................... 1.233% $ 9.61
</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 year 3 years 5 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 1.233% 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:....................................................................... $570 $824 $1,097
</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 an 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.
933822.2
A-5
<PAGE>
FEE TABLE
FOR NEW YORK PORTFOLIO
As of December 31, 1999
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
- -------------------------------- Amount
(Fees paid directly from your investment) As a % of per
Offering Price 100 Units
-------------- ---------
<S> <C> <C>
Maximum Sales Charges Imposed on Purchase............................... 4.50% $ 37.50
Maximum Sales Charge Imposed Per Year on Reinvested Dividends........... 0% $ 0
Estimated Annual Fund Operating Expenses Amount
- ----------------------------------------- As a % of per
(Expenses that are deducted from Trust assets) Net Assets 100 Units
---------- ---------
Trustee's Fee........................................................... .101% $ .80
Other Operating Expenses................................................ .055% $ .44
Portfolio Supervision, Bookkeeping and Administrative Fees........... .038% $ .30
Underlying Closed-End Fund Expenses*.................................... 1.164% $ 9.25
------ ------
Total................................................................... 1.320% $10.49
</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 year 3 years 5 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 1.320% 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:............. $578 $849 $1,141
</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 an 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.
933822.2
A-6
<PAGE>
SUMMARY OF ESSENTIAL INFORMATION
CALIFORNIA PORTFOLIO
As of December 31, 1999:
<TABLE>
<S> <C> <C>
Initial Date of Deposit: June 23, 1999 Minimum Value of Trust: The Trust may be
Aggregate Value of Securities: $7,048,023 terminated if the value of the Trust is less than 40% of
Number of Units: 907,371 the aggregate value of the Securities at the completion
Fractional Undivided Interest in Trust: 1 / 907,371 of the Deposit Period.
Public Offering Price per 100 Units: Mandatory Termination Date: The earlier of June 23,
Net Assets of the Trust................... $ 7,071,755 2006 or the disposition of the last Security in the Trust.
Divided By 907,371 Units (times 100) ..... $ 779.37 CUSIP Numbers: Cash: 294762 39 8
Plus Sales Charge of 4.50% of Public Reinvestment: 294762 47 1
Offering Price.......................... $ 36.75 Trustee: The Chase Manhattan Bank
Public Offering Price+.................... $ 816.12 Trustee's Fee: $.80 per 100 Units outstanding
Sponsor's Repurchase Price And Other Fees and Expenses: $.07 per 100 Units
Redemption Price Per 100 Units++: $ 779.37 outstanding
Evaluation Time: 4:00 p.m. New York Time. Sponsor: ING Funds Distributor, Inc.
Minimum Income or Principal Distribution: Sponsor's Supervisory Fee: Maximum of $.30 per 100
$1.00 per 100 Units Units outstanding (see "Trust Expenses and Charges"
Liquidation Period: Beginning five days prior to the in Part B).
Mandatory Termination Date. Portfolio Consultant: Riccardi Group LLC
Rollover Notification Date: June 13, 2006 or another Record Dates: Fifteenth day of each month
date as determined by the Sponsor. Distribution Dates: Last business day of each month
</TABLE>
- -----------------------
+ 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.
933822.2
A-7
<PAGE>
SUMMARY OF ESSENTIAL INFORMATION
NEW YORK PORTFOLIO
As of December 31, 1999:
<TABLE>
<S> <C> <C>
Initial Date of Deposit: June 23, 1999 Minimum Value of Trust: The Trust may be
Aggregate Value of Securities: $13,059,283 terminated if the value of the Trust is less than 40% of
Number of Units: 1,646,081 the aggregate value of the Securities at the completion
Fractional Undivided Interest in Trust: 1/1,646,081 of the Deposit Period.
Public Offering Price per 100 Units: Mandatory Termination Date: The earlier of June 23,
Net Assets of Trust.......................$ 13,080,451 2006 or the disposition of the last Security in the Trust.
Divided By 1,646,081 Units (times 100) ... $ 794.64 CUSIP Numbers: Cash: 294762 48 9
Plus Sales Charge of 4.50% of Public Reinvestment: 294762 49 7
Offering Price. ....................... $ 37.50 Trustee: The Chase Manhattan Bank
Public Offering Price+.................... $832.14 Trustee's Fee: $.80 per 100 Units outstanding
Sponsor's Repurchase Price Other Fees and Expenses: $.07 per 100 Units
And Redemption Price Per 100 Units++: $ 794.64 outstanding
Evaluation Time: 4:00 p.m. New York Time Sponsor: ING Funds Distributor, Inc.
Minimum Income or Principal Sponsor's Supervisory Fee: Maximum of $.30 per
Distribution: $1.00 per 100 Units 100 Units outstanding (see "Trust Expenses and
Liquidation Period: Beginning five days Charges" in Part B).
prior to the Mandatory Termination Date. Portfolio Consultant: Riccardi Group LLC
Rollover Notification Date: June 13, 2006 or Record Dates: Fifteenth day of each month
another date as determined by the Sponsor. Distribution Dates: Last business day of each month
</TABLE>
- ----------------------
+ 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.
933822.2
A-8
<PAGE>
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each Unit outstanding for the periods listed below:
California Portfolio:
<TABLE>
<CAPTION>
Distributions of
Units Net Asset Value* Distributions of Income During Principal During the
Period Ended Outstanding Per 100 Units the Period (Per 100 Units) Period (Per 100 Units)
- ------------ ----------- ------------- -------------------------- ---------------------
<S> <C> <C> <C> <C>
December 31, 1999 907,371 $779.37 $25,21 $.14
</TABLE>
New York Portfolio:
<TABLE>
<CAPTION>
Distributions of
Units Net Asset Value* Distributions of Income During Principal During the
Period Ended Outstanding Per 100 Units the Period (Per 100 Units) Period (Per 100 Units)
- ------------ ----------- ------------- -------------------------- ---------------------
<S> <C> <C> <C> <C>
December 31, 1999 1,646,081 $794.64 $26.48 $.08
</TABLE>
- ------------------------
* Net Asset Value per Unit iscalculated by dividing net assets as disclosed
in the "Statement of Net Assets" by the number of Units outstanding as of
the date of the Statement of Net Assets. See Note 5 of Notes to Financial
Statements for a description of the components of Net Assets
933822.2
A-9
<PAGE>
Schedule A
<TABLE>
<CAPTION>
California Portfolio
# Shares Description Market Value % Portfolio
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 17,070 Dreyfus California Muni Income Fund $ 126,958.13 1.32%
2 40,113 Morgan Stanley Dean Witter Cal. Quality Mun. 481,356.00 5.00%
Securities Fund
3 112,331 Multiholdings California Insured Fund II 1,333,930.63 13.87%
4 87,045 Muniyield California Fund 1,017,338.44 10.57%
5 72,151 Muniyield California Insured Fund 825,227.06 8.58%
6 72,523 Muniyield California Insured Fund II 870,276.00 9.05%
7 54,262 Nuveen California Investment Quality Municipal Fund 783,407.63 8.14%
8 32,635 Nuveen California Municipal Market Opportunity Fund 487,485.31 5.07%
9 53,436 Nuveen California Performance Plus Municipal Fund 778,161.75 8.09%
10 15,566 Nuveen California Premium Income Municipal Fund 190,683.50 1.98%
11 74,545 Nuveen California Quality Income Municipal Fund 1,057,607.19 10.99%
12 75,669 Nuveen California Select Quality Municipal Fund 1,040,448.75 10.82%
13 18,560 Putnam California Investment Grade Municipal Trust 238,960.00 2.48%
14 10,631 Van Kampen California Municipal Income Trust 85,380.22 0.89%
15 20,730 Van Kampen Trust For Investment Grade California 303,176.25 3.15%
Municipals
------------- --------
TOTALS $9,620,396.84 100.00%
</TABLE>
933822.2
A-10
<PAGE>
Schedule A Cont'd
<TABLE>
<CAPTION>
New York Portfolio
# Shares Description Market Value % Portfolio
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 59,966 Dreyfus New York Municipal Income Fund $ 457,240.75 3.11%
2 40,925 Morgan Stanley Dean Witter N.Y. Quality Municipal 491,100.00 3.34%
Securities
3 188,845 Multiholdings New York Insured Fund 2,112,703.44 14.35%
4 239,831 Muniyield New York Insured Fund 2,743,067.06 18.63%
5 23,416 Nuveen Insured New York Premium Income Municipal 286,846.00 1.95%
Fund
6 112,610 Nuveen New York Investment Quality Municipal Fund 1,456,891.88 9.90%
7 109,647 Nuveen New York Performance Plus Municipal Fund 1,418,558.06 9.64%
8 129,050 Nuveen New York Quality Income Municipal Fund 1,653,453.13 11.23%
9 122,424 Nuveen New York Select Quality Municipal Fund 1,576,209.00 10.71%
10 38,682 Nuveen New York Municipal Value Fund 311,873.63 2.12%
11 26,382 Putnam New York Investment Grade Municipal Trust 311,637.38 2.12%
12 54,178 Van Kampen Trust For Investment Grade New York 797,432.44 5.42%
Municipals
13 45,663 Van Kampen New York Quality Municipal Trust 605,034.75 4.11%
14 37,491 Van Kampen New York Value Municipal Income Trust 499,098.94 3.39%
-------------------- ----------
TOTALS $14,721,146.44 100.00%
</TABLE>
933822.2
A-11
<PAGE>
Report of Independent Auditors
The Sponsor, Trustee and Certificateholders of
Equity Securities Trust Series 23, Municipal Symphony Series
We have audited the accompanying statements of net assets of Equity Securities
Trust Series 23, Municipal Symphony Series II (comprising, respectively, the
California Trust and New York Trust), including the portfolios, as of December
31, 1999 and the related statements of operations, and changes in net assets and
financial highlights for the period from June 23, 1999 (date of deposit) to
December 31, 1999. These financial statements and financial highlights are the
responsibility of the Trustee. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of the securities
owned by correspondence with the Trustee. An audit also includes assessing the
accounting principles used and significant estimates made by the Trustee, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Equity
Securities Trust Series 23, Municipal Symphony Series II at December 31, 1999,
the results of their operations, changes in their net assets and financial
highlights for the period from June 23, 1999 to December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
New York, New York
April 15, 2000
<PAGE>
<TABLE>
<CAPTION>
Equity Securities Trust
Series 23
Municipal Symphony Series II
California Trust
Portfolio
December 31, 1999
Number
Portfolio of Percentage Cost of Market
No. Shares Name of Issuer of Trust Securities Value (3)
(1) (2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 13,085 Dreyfus California Municipal Income Fund 1.50% $ 123,278 $ 105,498
2 30,747 Morgan Stanley Dean Witter California 4.80 406,162 338,217
Quality Municipal Securities Fund
3 25,646 Muniholdings California Insured Fund 4.30 336,010 302,943
4 33,109 Muniholdings California Insured Fund II 5.55 428,506 391,100
5 27,418 Muniholdings California Insured Fund III 4.39 340,838 308,453
6 66,722 Muniyield California Fund 11.36 916,933 800,663
7 55,304 Muniyield California Insured Fund 8.88 742,589 625,627
8 55,590 Muniyield California Insured Fund II 8.87 758,973 625,388
9 41,592 Nuveen California Investment Quality 7.56 656,137 532,898
Municipal Fund
10 25,015 Nuveen California Municipal Market 4.81 417,569 339,266
Opportunity Fund
11 40,959 Nuveen California Performance Plus 7.66 670,119 540,147
Municipal Fund
12 11,931 Nuveen California Premium Income 2.18 163,300 153,612
Municipal Fund
13 57,139 Nuveen California Quality Income 10.79 925,242 760,662
Municipal Fund
14 58,002 Nuveen California Select Quality 10.80 911,283 761,276
Municipal Fund
15 14,225 Putnam California Investment Grade 2.47 206,609 174,256
Municipal Trust
16 8,149 Van Kampen California Municipal 0.87 77,503 61,627
Income Trust
17 15,887 Van Kampen Trust For Investment Grade 3.21 250,649 226,390
California Municipals
--------------------------------------------
100.00% $8,331,700 $ 7,048,023
============================================
</TABLE>
See accompanying footnotes to portfolio and notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Equity Securities Trust
Series 23
Municipal Symphony Series II
New York Trust
Portfolio
December 31, 1999
Number
Portfolio of Percentage Cost of Market
No. Shares Name of Issuer of Trust Securities Value (3)
(1) (2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 52,784 Dreyfus New York Municipal Income Fund 3.13% $ 446,137 $ 409,076
2 36,025 Morgan Stanley Dean Witter New York 3.21 460,620 418,791
Quality Municipal Securities Fund
3 57,896 Muniholdings New York Fund 4.93 727,471 644,093
4 78,402 Muniholdings New York Insured Fund 7.28 1,043,380 950,624
5 36,751 Muniholdings New York Insured Fund II 3.01 442,776 392,776
6 95,680 Muniyield New York Insured Fund 8.65 1,308,785 1,130,220
7 114,631 Muniyield New York Insured Fund II 10.09 1,485,829 1,318,257
8 20,613 Nuveen Insured New York Premium Income 1.98 303,341 258,951
Municipal Fund
9 99,127 Nuveen New York Investment Quality 9.92 1,483,346 1,294,847
Municipal Fund
10 34,051 Nuveen New York Municipal Value Fund 2.04 303,062 266,023
11 96,521 Nuveen New York Performance Plus 9.61 1,776,970 1,254,773
Municipal Fund
12 113,599 Nuveen New York Quality Income 10.98 1,672,607 1,434,187
Municipal Fund
13 107,767 Nuveen New York Select Quality 10.73 1,641,830 1,400,971
Municipal Fund
14 23,223 Putnam New York Investment Grade 2.02 302,564 264,162
Municipal Trust
15 40,197 Van Kampen New York Quality 4.02 597,919 525,073
Municipal Trust
16 33,002 Van Kampen New York Value Municipal 3.24 453,779 422,838
Income Trust
17 47,690 Van Kampen Trust For Investment Grade 5.16 757,899 673,621
New York Municipals
--------------------------------------------
100.00% $15,208,315 $13,059,283
============================================
</TABLE>
See accompanying footnotes to portfolio and notes to financial statements.
<PAGE>
Equity Securities Trust
Series 23
Municipal Symphony Series II
Footnotes to Portfolio
1 Based on the market value of the securities in the Trust.
2. See "Tax Status" in Part B of this Prospectus for a statement of the Federal
tax consequences to a Certificateholder upon the sale or redemption of a
security.
3. At December 31, 1999, the net unrealized depreciation of all the securities
was comprised of the following:
<TABLE>
<CAPTION>
California Trust New York Trust
-------------------------------------
<S> <C> <C>
Gross unrealized appreciation $ - $ -
Gross unrealized depreciation (1,283,677) (2,149,032)
-------------------------------------
Net unrealized depreciation $ (1,283,677) $ (2,149,032)
=====================================
</TABLE>
The accompanying notes form an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Equity Securities Trust
Series 23
Municipal Symphony Series II
Statements of Net Assets
December 31, 1999
California New York
Trust Trust
-------------------------------------------
<S> <C> <C>
Investments in securities, at market value (cost $8,331,700 and
$15,208,315, respectively) $ 7,048,023 $ 13,059,283
Other assets
Dividends receivable 1,026 1,568
Cash 22,706 26,119
Receivable for units sold - 78,459
-------------------------------------------
Total other assets 23,732 106,146
-------------------------------------------
Liabilities
Payable for securities purchased - 84,978
-------------------------------------------
Total liabilities - 84,978
Excess of other assets over total liabilities 23,732 21,168
-------------------------------------------
Net assets (907,371 and 1,646,081 units of fractional undivided
interest outstanding, $7.79 and $7.95, respectively, per unit)
$ 7,071,755 $ 13,080,451
===========================================
</TABLE>
The accompanying notes form an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Equity Securities Trust
Series 23
Municipal Symphony Series II
Statements of Operations
For the period from June 23, 1999 (date of deposit)
to December 31, 1999
California New York
Trust Trust
-----------------------------------------
<S> <C> <C>
Investment income
Dividends $ 173,451 $ 298,806
Interest 7,695 15,317
-----------------------------------------
Total income 181,146 314,123
-----------------------------------------
Expenses
Trustee's fees 3,357 3,989
Sponsor's advisory fee 1,024 1,771
-----------------------------------------
Total expenses 4,381 5,760
-----------------------------------------
Net investment income 176,765 308,363
-----------------------------------------
Realized and unrealized (loss)
Realized gain on investments - -
Unrealized (depreciation) on investments (1,283,677) (2,149,032)
-----------------------------------------
Net (loss) on investments (1,283,677) (2,149,032)
-----------------------------------------
Net (decrease) in net assets resulting from operations $ (1,106,912) $ (1,840,669)
=========================================
</TABLE>
The accompanying notes form an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Equity Securities Trust
Series 23
Municipal Symphony Series II
Statements of Changes in Net Assets
For the period from June 23, 1999 (date of deposit)
to December 31, 1999
California New York
Trust Trust
-------------------------------------------
<S> <C> <C>
Operations
Net investment income $ 176,765 $ 308,363
Realized gain on investments - -
Unrealized (depreciation) on investments (1,283,677) (2,149,032)
-------------------------------------------
Net (decrease) in net assets resulting from operations (1,106,912) (1,840,669)
-------------------------------------------
Distributions to Certificateholders
Investment income 159,786 287,498
Principal 1,172 1,198
Redemptions
Interest - -
Principal - -
-------------------------------------------
Total distributions and redemptions 160,958 288,696
-------------------------------------------
Total (decrease) (1,267,870) (2,129,365)
Value of additional units acquired during the
offering period to Certificateholders 8,189,671 15,059,884
Net assets
Beginning of period (date of deposit) 149,954 149,932
-------------------------------------------
End of period (including undistributed net investment income of
$16,979 and $20,865, respectively) $ 7,071,755 $ 13,080,451
===========================================
</TABLE>
The accompanying notes form an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Equity Securities Trust
Series 23
Municipal Symphony Series II
California Trust
Financial Highlights
For the period from June 23, 1999 (date of deposit)
to December 31, 1999
Selected data for a unit of the Trust outstanding:*
<S> <C>
Net asset value, beginning of period** (date of deposit) $ 9.55
---------------
Income .39
Expenses (.01)
---------------
Net investment income .38
---------------
Net gain or loss on investments (1) (1.79)
---------------
Total from investment operations (1.41)
---------------
Less distributions
to Certificateholders
Income .35
---------------
Total distributions .35
---------------
Net asset value, end of period** $ 7.79
===============
</TABLE>
(1) Net gain or loss on investments is a result of changes in outstanding units
since June 23, 1999 and the dates of net gain and loss on investments.
* Unless otherwise stated, based upon average units outstanding during the year
of 461,537 ([907,371 + 15,702]/2) for 1999.
** Based upon actual units outstanding.
The accompanying notes form an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Equity Securities Trust
Series 23
Municipal Symphony Series II
New York Trust
Financial Highlights
For the period from June 23, 1999 (date of deposit)
to December 31, 1999
Selected data for a unit of the Trust outstanding:*
<S> <C>
Net asset value, beginning of period** (date of deposit) $ 9.55
---------------
Income .38
Expenses (.01)
---------------
Net investment income .37
---------------
Net gain or loss on investments (1) (1.62)
---------------
Total from investment operations (1.25)
---------------
Less distributions
to Certificateholders
Income .35
---------------
Total distributions .35
---------------
Net asset value, end of period** $ 7.95
===============
</TABLE>
(1) Net gain or loss on investments is a result of changes in outstanding units
since June 23, 1999 and the dates of net gain and loss on investments.
* Unless otherwise stated, based upon average units outstanding during the year
of 830,891 ([1,646,081 + 15,700]/2) for 1999.
** Based upon actual units outstanding.
The accompanying notes form an integral part of the financial statements.
<PAGE>
Equity Securities Trust
Series 23
Municipal Symphony Series II
Notes to Financial Statements
December 31, 1999
1. Organization
Equity Securities Trust Series 23, Municipal Symphony Series (the "Trust")
(comprising, respectively, the California Trust and New York Trust) was
organized on June 23, 1999 by Reich & Tang Distributors, Inc. under the laws of
the State of New York by a Trust Indenture and Agreement, and is registered
under the Investment Company Act of 1940. The objective of the Trust is to
provide interest income which is generally exempt from regular Federal income
tax under existing law and to preserve capital.
Effective February 9, 2000, ING Funds Distributor, Inc. ("ING") has become the
successor sponsor to certain unit investment trusts previously sponsored by
Reich & Tang. As successor sponsor, ING has assumed all of the obligations and
rights of Reich & Tang, the previous sponsor.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Trust in preparation of its financial statements. The policies
are in conformity with generally accepted accounting principles ("GAAP"). The
preparation of financial statements in accordance with GAAP requires management
to make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual amounts could differ from those
estimates. Dividend income is recognized as of the ex-dividend date.
<PAGE>
Equity Securities Trust
Series 23
Municipal Symphony Series II
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Security Valuation
Investments are carried at market value which is determined by The Chase
Manhattan Bank. The market value of the portfolio is based upon the bid prices
for the stocks at the end of the year, which approximates the fair value of the
security at that date, except that the market value on the date of deposit
represents the cost to the Trust based on the offering prices for investments at
that date. The difference between cost and market value is reflected as
unrealized appreciation (depreciation) of investments. Securities transactions
are recorded on the trade date. Realized gains (losses) from securities
transactions are determined on the basis of average cost of the securities sold
or redeemed.
3. Income Taxes
No provision for federal income taxes has been made in the accompanying
financial statements because the Trust intends to continue to qualify for the
tax treatment applicable to Grantor Trusts under the Internal Revenue Code.
Under existing law, if the Trust so qualifies, it will not be subject to federal
income tax on net income and capital gains that are distributed to unitholders.
<PAGE>
Equity Securities Trust
Series 23
Municipal Symphony Series II
Notes to Financial Statements (continued)
4. Trust Administration (continued)
The Chase Manhattan Bank (the "Trustee") has custody of assets and
responsibility for the accounting records and financial statements of the Trust
and is responsible for establishing and maintaining a system of internal control
related thereto. The Trustee is also responsible for all estimates of expenses
and accruals reflected in the Trust's financial statements.
The Trust Indenture and Agreement provides for dividend distributions once a
month.
The Trust Indenture and Agreement further requires that proceeds received from
the disposition of securities, other than those securities sold in connection
with the redemption of units, be distributed to Certificateholders.
The Trust Indenture and Agreement also requires the Trust to redeem units
tendered. For the period ended December 31, 1999, 0 units were redeemed for the
California and New York Trusts, respectively.
The Trust pays an annual fee for trustee services rendered by the Trustee of
$.80 per 100 units outstanding. A maximum fee of $.30 per 100 units outstanding
is paid to the Sponsor. For the period ended December 31, 1999, the "Trustee's
Fees" are $3,357 and $3,989 for the California and New York Trusts,
respectively. Trustee fees also include other expenses of professional, printing
and miscellaneous fees.
<PAGE>
Equity Securities Trust
Series 23
Municipal Symphony Series II
Notes to Financial Statements (continued)
5. Net Assets
At December 31, 1999, the net assets of the Trust represented the interest of
Certificateholders as follows:
<TABLE>
<CAPTION>
California New York
Trust Trust
------------------------------------------
<S> <C> <C>
Original cost to Certificateholders $ 149,954 $ 149,932
Less initial gross underwriting commission (7,925) (1,501)
------------------------------------------
142,029 148,431
Cost of additional units acquired during the offering
period toCertificateholders 8,189,671 15,059,884
Accumulated cost of securities sold - -
Net unrealized depreciation (1,283,677) (2,149,032)
Undistributed net investment income 16,979 20,865
Undistributed proceeds from investments 6,753 303
------------------------------------------
Total $ 7,071,755 $ 13,080,451
==========================================
</TABLE>
The original cost to Certificateholders, less the initial gross underwriting
commission, represents the aggregate initial public offering price net of the
applicable sales charge on 15,702 and 15,700 units of fractional undivided
interest of the California Trust and New York Trust, respectively, as of the
date of deposit. An additional 891,669 and 1,630,381 units of fractional
undivided interest were issued during the offering period for the California
Trust and New York Trust, respectively.
Since the Trust invests a portion of its assets in funds that invest in muncipal
bonds, it may be affected by economic and political developments in the
municipalities. Certain debt obligations held by the funds may be entitled to
the benefit of insurance, standby letters of credit or other guarantees of banks
or other financial institutions.
<PAGE>
---------------------------------------------------------
LOGO
---------------------------------------------------------
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., the predecessor to ING Funds Distributor, 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 Period"), the Sponsor may
937766.2
B-1
<PAGE>
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 six 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 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.
937766.2
B-2
<PAGE>
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.
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.
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
937766.2
B-3
<PAGE>
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
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
937766.2
B-4
<PAGE>
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.
DISTRESSED SECURITIES. The Municipal Funds may invest a portion of their
total assets in "Distressed Securities" which are securities that are:
o 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,
o rated in the lower rating categories (Ca or lower by Moody's and CC or
lower by S&P), or
o 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
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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.
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
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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 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.
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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.
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.
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 high technology, trade, entertainment, agriculture,
manufacturing, tourism, construction and services.
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The State's July 1, 1999 population of over 34 million represented over 12
percent of the total United States population.
California's population is concentrated in metropolitan areas. As of the
April 1, 1990 census, 96 percent of population resided in the 23 Metropolitan
Statistical Areas in the State. As of July 1, 1998, the five-county Los Angeles
area accounted for 49 percent of the State's population, with 16.0 million
residents. The 10-county San Francisco Bay Area represented 21 percent, with a
population of 7.0 million.
Following a severe recession beginning in 1990, the State of California's
financial condition improved markedly during the fiscal years starting in
1995-96, with a combination of better than expected revenues, slowdown in growth
of social welfare programs, and continued spending restraint based on actions
taken in earlier years. California's cash position also improved, and no
external deficit borrowing occurred over the end of the last four fiscal years
(which begins on July 1 and ends on June 30).
The State's economy grew strongly during the Fiscal Years beginning in
1995-96, and as a result, the General Fund (which is the primary revenue account
of the State, holding all revenues received by the State Treasury that are not
required to be credited to a special fund and earnings from investments not
required to be allocated to another 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 and $1.7 billion in 1998-99) than were initially planned when
the budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, to make up shortfalls from reduced
federal health and welfare aid in 1995-96 and 1996-97 and particularly in
1998-99 to fund new program incentives. (See "Proposition 98" below.)
1998-99 Fiscal Year Budget
The following were major features of the 1998 Budget Act and certain
additional fiscal bills enacted before the end of the legislative session:
1. The most significant feature of the 1998-99 budget was agreement on
a total of $1.4 billion of tax cuts. The central element was a bill that
provided for a phased-in reduction of the Vehicle License Fee ("VLF") .
Since the VLF is transferred to cities and counties under existing law, the
bill provided for the General Fund to replace the lost revenues. Starting
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 annually thereafter.
In addition to the cut in VLF, the 1998-99 budget included both
temporary and permanent increases 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).
2. Proposition 98 funding for local schools and community colleges
("K-14") was increased by $1.7 billion in General Fund moneys over revised
1997-98 levels, over $300 million higher than the minimum Proposition 98
guarantee. (See also "Proposition 98" below.) Of the 1998-99 funds, major
new programs included 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. The Budget also included $250
million as repayment of prior years' loans to schools, as part of the
settlement of the California Teachers' Association v. Gould lawsuit. (See
"Proposition 98" below.)
3. Funding for higher education increased substantially above the
actual 1997-98 level. General Fund support was increased by $340 million
(15.6 percent) for the University of California and $267 million (14.1
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percent) for the California State University system. In addition, Community
Colleges funding increased by $300 million (6.6 percent).
4. The Budget included 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.
5. Funding for the judiciary and criminal justice programs increased by
about 11 percent over 1997-98, primarily to reflect increased State support
for local trial courts and rising prison population.
6. Major legislation enacted after the 1998 Budget Act included new
funding for resources projects, a share of the purchase of the Headwaters
Forest, funding for the Infrastructure and Economic Development Bank ($50
million) and funding for the construction of local jails. The State
realized savings of $433 million from a reduction in the State's
contribution to the State Teacher's Retirement System in 1998-99.
Final tabulation of revenues and expenditures contained in the 2000-01
Governor's Budget reveals that stronger than expected economic conditions in the
State produced total 1998-99 General Fund revenues of about $58.6 billion,
almost $1.6 billion above the 1998 Budget Act estimates. Actual General Fund
expenditures were $57.8 billion, the amount estimated at the 1998 Budget Act.
Some of this additional revenue will be directed to K-14 schools pursuant to
Proposition 98. The Governor's Budget projected a balance in the State's budget
reserve fund at June 30, 1999, of approximately $3.1 billion.
1999-00 Fiscal Year Budget
On January 8, 1999, Governor Davis released his proposed budget for Fiscal
Year 1999-00 (the "January Governor's Budget"). The January Governor's Budget
generally reported that General Fund revenues for Fiscal Year 1998-99 and Fiscal
Year 1999-00 would be lower than earlier projections (primarily due to weaker
overseas economic conditions perceived in late 1998), while some welfare
caseloads would be higher than earlier projections. The January Governor's
Budget proposed $60.5 billion of General Fund expenditures in Fiscal Year
1999-00, with a $415 million budget reserve at June 30, 2000.
The 1999 Governor's May Revision of the Budget (the "May Revision") showed
an additional $4.3 billion of revenues for combined Fiscal Years 1998-99 and
1999-00. The completion of the 1999 Budget Act occurred in a timely fashion. The
final Budget Bill was adopted by the Legislature on June 16, 1999, and was
signed by the Governor on June 29, 1999 (the "1999 Budget Act"), meeting the
Constitutional deadline for budget enactment for only the second time in the
1990's.
The final 1999 Budget Act estimated General Fund revenues and transfers of
$63.0 billion, and contained expenditures totaling $63.7 billion after the
Governor used his line-item veto to reduce the legislative Budget Bill
expenditures by $581 million (both General Fund and special fund). The 1999
Budget Act also contained expenditures of $16.1 billion from special funds and
$1.5 billion from bond funds. The Administration estimated that the State's
budget reserve fund would have a balance at June 30, 2000, of about $880
million. Not included in this amount was an additional $300 million that (after
the Governor's vetoes) was "set aside" to provide funds for employee salary
increases (to be negotiated in bargaining with employee unions), and for
litigation reserves. The 1999 Budget Act anticipated normal cash flow borrowing
during the Fiscal Year.
The principal features of the 1999 Budget Act include the following:
1. Proposition 98 funding for K-12 schools was increased by $1.6
billion in General Fund moneys over revised 1998-99 levels, $108.6 million
higher than the minimum Proposition 98 guarantee. Of the 1999-00 funds,
major new programs included money for reading improvement, new textbooks,
school safety, improving
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teacher quality, funding teacher bonuses, providing greater accountability
for school performance, increasing preschool and after school care programs
and funding deferred maintenance of school facilities. The Budget also
includes $310 million as repayment of prior years' loans to schools, as
part of the settlement of the California Teachers' Association v. Gould
lawsuit. (See also "Proposition 98" below.)
2. Funding for higher education increased substantially above the
actual 1998-99 level. General Fund support was increased by $184 million
(7.3 percent) for the University of California ("UC") and $126 million (5.9
percent) for the California State University system ("CSU"). In addition,
Community Colleges funding increased by $324.3 million (6.6 percent). As a
result, undergraduate fees at UC and CSU will be reduced for the second
consecutive year, and the per-unit charge at Community Colleges was reduced
by $1.
3. The Budget included increased funding of nearly $600 million for
health and human services.
4. About $800 million from the General Fund will be directed toward
infrastructure costs, including $425 million in additional funding for the
Infrastructure Bank, initial planning costs for the new prison in the
Central Valley, additional equipment for train and ferry service, and
payment of deferred maintenance for state parks.
5. The Legislature enacted a one-year additional reduction of 10
percent of the VLF for calendar year 2000, at a General Fund cost of about
$250 million in each of Fiscal Year 1999-00 and 2000-01 to make up lost
funding to local governments. Conversion of this one-time reduction to a
permanent cut will remain subject to the revenue tests in the legislation
adopted previously. Several other targeted tax cuts, primarily for
businesses, were also approved, at a cost of $54 million in 1999-00.
6. A one-time appropriation of $150 million, to be split between cities
and counties, was made to offset property tax shifts during the early
1990's. Additionally, an ongoing $50 million was appropriated as a
subvention to cities for jail booking or processing fees charged by
counties when an individual arrested by city personnel is taken to a county
detention facility.
Proposed 2000-01 Fiscal Year Budget
On January 10, 2000, Governor Davis released his proposed budget for Fiscal
Year 2000-01. The 2000-01 Governor's Budget generally reflects that General Fund
revenues for Fiscal Year 1999-00 will be higher than projections made at the
time of the 1999 Budget Act.
The revised 1999-00 budget included in the 2000-01 Governor's Budget also
reflects the latest estimated costs or savings as provided in various pieces of
legislation passed and signed after the 1999 Budget Act. The revised budget
includes $730 million for various departments for enrollment, caseload and
population changes and $562 million for Smog Impact Fee refunds. (See discussion
of the Jordan case under "Pending Litigation" below.) Revised 1999-00 revenues
are $65.2 billion or $2.2 billion higher than projections at the 1999 Budget
Act. Revised 1999-00 expenditures are $65.9 billion or $2.1 billion higher than
projections at the 1999 Budget Act.
The State's Legislative Analyst (LAO) issued a report in February 2000. The
LAO report indicates General Fund revenues for the 18-month period (January 2000
through June 2001) could be as much as $4.2 billion higher than the 2000-01
Governor's Budget estimates. The LAO estimate was issued after analyzing actual
revenues for December 1999 and January 2000, which were not available at the
time the Governor's Budget estimates were prepared. The LAO report assumed the
continuation of strong economic growth in the State during this period.
The Governor's Budget projects General Fund revenues and transfers in
2000-01 of $68.2 billion. This includes anticipated payments from the tobacco
litigation settlement of $387.9 million and the receipt of one-time revenue
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from the sale of assets. (See "Tobacco Litigation: and "Pending Litigation"
below.) More accurate revenue estimates will be available in May and June before
the adoption of the Budget. The Governor has proposed $167 million in tax
reduction initiatives.
The Governor's Budget proposes General Fund expenditures of $68.8 billion.
Included in the Budget are set-asides of $500 million for legal contingencies
and $100 million for various one-time legislative initiatives. At the time of
the release of the 2000-01 Governor's Proposed Budget, on January 10, 2000, the
Department of Finance projected the State's budget reserve fund would have a
balance of about $2.420 billion at June 30, 2000, compared to the amount of $880
million projected at the time the 1999 Budget Act was signed on June 29, 1999.
Based on the proposed revenues and expenditures, the Governor's Budget projects
the June 30, 2001 balance in the State budget reserve fund will be $1.238
billion.
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.
State Indebtedness
General Obligation Bonds. As of January 1, 2000, the State had outstanding
$20,506,076,000 aggregate principal amount of long-term general obligation
bonds, and unused voter authorizations for the future issuance of
$11,827,414,000 of long-term general obligation bonds. This latter figure
consists of $4,123,734,000 of authorized commercial paper notes, described below
(of which $681,065,000 was outstanding), which had not yet been refunded by
general obligation bonds, and $7,703,680,000 of other authorized but unissued
general obligation debt.
In its 1999 session, the Legislature passed and the Governor signed five
bond acts, totaling $4.69 billion in new authorizations. Of these five bond
measures, voters in the March 7, 2000 election passed four, totaling $4.47
billion in new authorizations.
Commercial Paper Program. Pursuant to the terms of the bank credit
agreement presently in effect supporting the general obligation commercial paper
program, not more than $1.5 billion of general obligation commercial paper notes
May be outstanding at any time; this amount May be increased or decreased in the
future. Commercial paper notes are deemed issued upon authorization by the
respective Finance Committees, whether or not such notes are actually issued. As
of January 1, 2000, the Finance Committees had authorized the issuance of up to
$4,123,734,000 of commercial paper notes; as of that date $681,065,000 aggregate
principal amount of general obligation commercial paper notes was outstanding.
Lease-Purchase Debt. In addition to general obligation bonds, the State
builds and acquires capital facilities through the use of lease-purchase
borrowing. Under these arrangements, the State Public Works Board, another State
or local agency or a joint powers authority issues bonds to pay for the
construction of facilities such as office buildings, university buildings or
correctional institutions. These facilities are leased to a State agency or the
University of California under a long-term lease that provides the source of
payment of the debt service on the lease-purchase bonds. In some cases, there is
not a separate bond issue, but a trustee directly creates certificates of
participation in the State's lease obligation, which are marketed to investors.
Under applicable court decisions, such lease arrangements do not constitute the
creation of "indebtedness" within the meaning of the Constitutional provisions
that require voter approval. The State had $6,719,629,434 General Fund-supported
lease-purchase debt outstanding at January 1, 2000. The State Public Works
Board, which is authorized to sell lease revenue bonds, had $1,836,518,000
authorized and unissued as of January 1, 2000.
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Non-Recourse Debt. Certain State agencies and authorities issue revenue
obligations for which the General Fund has no liability. Revenue bonds represent
obligations payable from State revenue-producing enterprises and projects, which
are not payable from the General Fund, and conduit obligations payable only from
revenues paid by private users of facilities financed by the revenue bonds. The
enterprises and projects financed include transportation projects, various
public works projects, public and private educational facilities (including the
California State University and University of California systems), housing,
health facilities and pollution control facilities. There are 17 agencies and
authorities authorized to issue revenue obligations (excluding lease-purchase
debt). State agencies and authorities had $26,008,006,628 aggregate principal
amount of revenue bonds and notes that are non-recourse to the General Fund
outstanding as of June 30, 1999.
Cash Flow Borrowings. As part of its cash management program, the State has
regularly issued short-term obligations to meet cash flow needs. The State
issued $1.0 billion of revenue anticipation notes for the 1999-00 Fiscal Year to
mature on June 30, 2000.
Ratings
In February 2000, the following ratings for California debt issues have
been received from Moody's Investors Service ("Moody's"), Standard & Poor's
Ratings Services ("S&P") and Fitch IBCA, Inc. ("Fitch"):
Fitch Moody's S&P
Insured General Obligation Bonds AAA Aaa AAA
General Obligation Bonds AA Aa3 AA-
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.
State Appropriations Limit
The State is subject to an annual appropriations limit imposed by Article
XIII B of the State Constitution (the "Appropriations Limit"). The
Appropriations Limit does not restrict appropriations to pay debt service on
voter-authorized bonds.
Article XIII B prohibits the State from spending "appropriations subject to
limitation" in excess of the Appropriations Limit. "Appropriations subject to
limitation," with respect to the State, are authorizations to spend "proceeds of
taxes," which consist of tax revenues and certain other funds, including
proceeds from regulatory licenses, user charges or other fees to the extent that
such proceeds exceed "the cost reasonably borne by that entity in providing the
regulation, product or service," but "proceeds of taxes" exclude most State
subventions to local governments, tax refunds and some benefit payments such as
unemployment insurance. No limit is imposed on appropriations of funds that are
not "proceeds of taxes," such as reasonable user charges or fees and certain
other non-tax funds.
Not included in the Appropriations Limit are appropriations for the debt
service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase in
gasoline taxes and motor vehicle weight fees above January 1, 1990 levels, and
appropriation of certain special taxes imposed by initiative (e.g., cigarette
and tobacco taxes). The Appropriations Limit May also be exceeded in cases of
emergency.
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The State's Appropriations Limit in each year is based on the limit for the
prior year, adjusted annually for changes in State per capita personal income
and changes in population, and adjusted, when applicable, for any transfer of
financial responsibility of providing services to or from another unit of
government or any transfer of the financial source for the provisions of
services from tax proceeds to non tax proceeds. The measurement of change in
population is a blended average of statewide overall population growth, and
change in attendance at K-14 districts. The Appropriations Limit is tested over
consecutive two-year periods. Any excess of the aggregate "proceeds of taxes"
received over such two-year period above the combined Appropriations Limits for
those two years is divided equally between transfers to K-14 districts and
refunds to taxpayers.
The Legislature has enacted legislation to implement Article XIII B that
defines certain terms used in Article XIII B and sets forth the methods for
determining the Appropriations Limit. California Government Code Section 7912
requires an estimate of the Appropriations Limit to be included in the
Governor's Budget, and thereafter to be subject to the budget process and
established in the Budget Act.
The following table shows the State's Appropriations Limit for the past
three Fiscal Years, the current Fiscal Year and the proposed budget year. As of
the release of the 2000-01 Governor's Budget, the Department of Finance projects
the State's appropriations subject to limitations will be $3.8 billion under the
State's Appropriations Limit in Fiscal Year 1999-00 and $4.0 billion in Fiscal
Year 2000-01.
<TABLE>
<CAPTION>
State Appropriations Limit
(Millions)
Fiscal Years
1996-97 1997-98 1998-99* 1990-00* 2000-01*
<S> <C> <C> <C> <C> <C>
State Appropriations Limit $42,002 $44,778 $47,573 $50,673 $53,419
Appropriations Subject to Limit (35,103) (40,743) (43,695) (46,896) (49,444)
Amount (Over)/Under Limit $6,899 $4,035 $3,878 $3,777 $3,975
</TABLE>
- --------------
*Estimated/Projected
Source: State of California, Department of Finance.
Proposition 98
Article XIII B, 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.
Proposition 98 changed State funding of public education below the
university level and the operation of the State appropriations funding,
primarily by guaranteeing K-14 schools a minimum share of General Fund revenues.
(See "State Appropriations Limit" above.) Under Proposition 98 (as modified by
Proposition 111, which was enacted on June 5, 1990), K-14 schools are guaranteed
the greater of (a) in general, a fixed percent of General Fund revenues ("Test
1"), (b) the amount appropriated to K-14 schools in the prior year, adjusted for
changes in the cost of living (measured as in California Constitution Article
XIII B by reference to State per capita personal income) and enrollment ("Test
2"), or (c) a third test, which would replace Test 2 in any year when the
percentage growth in per capita General Fund revenues from the prior year plus
one half of one percent is less than the percentage growth in State per capita
personal income ("Test 3"). Under Test 3, schools would receive the amount
appropriated in the prior year adjusted for changes in enrollment and per capita
General Fund revenues, plus an additional small adjustment factor. If Test 3 is
used in any year, the difference between Test 3 and Test 2 would become a
"credit" to schools that would be the basis of payments in future years when per
capita General Fund
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<PAGE>
revenue growth exceeds per capita personal income growth. Legislation adopted
prior to the end of the 1988-89 Fiscal Year, implementing Proposition 98,
determined the K-14 schools' funding guarantee under Test 1 to be 40.3 percent
of the General Fund tax revenues, based on 1986-87 appropriations. However, that
percentage has been adjusted to approximately 35 percent to account for a
subsequent redirection of local property taxes, since such redirection directly
affects the share of General Fund revenues to schools.
Proposition 98 permits the Legislature by two-thirds vote of both houses,
with the Governor's concurrence, to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.
During the recession in the early 1990's, General Fund revenues for several
years were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlement. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from Fiscal Year
1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, that challenged the validity of these off-budget loans. The settlement of
this case, finalized in July 1996, provides, among other things, that both the
State and K-14 schools share in the repayment of prior years' emergency loans to
schools. Of the total $1.76 billion in loans, the State will repay $935 million
by forgiveness of the amount owed, while schools will repay $825 million. The
State's share of the repayment will be reflected as an appropriation above the
current Proposition 98 base calculation. The schools' share of the repayment
will count as appropriations that count toward satisfying the Proposition 98
guarantee, or from "below" the current base. Repayments are spread over the
eight-year period of 1994-95 through 2001-02 to mitigate any adverse fiscal
impact.
Substantially increased General Fund revenues, above initial budget
projections, in the 1994-95 through 1999-00 Fiscal Years have resulted in
retroactive increases in Proposition 98 appropriations from subsequent Fiscal
Years' budgets. Because of the State's increasing revenues, per-pupil funding at
the K-12 level has increased by about 50 percent from the level in place in
1991-92, and is estimated at about $6,313 per average daily attendance in
2000-01. A significant amount of the "extra" Proposition 98 monies in the last
few years has been allocated to special programs, including an initiative to
increase the number of computers in schools throughout the State. Furthermore,
since General Fund revenue growth is expected to continue in 2000-01, the
Governor has also proposed new initiatives to improve student achievement,
provide better teacher recruitment and training, and provide schools with
advanced technology and the opportunity to form academic partnerships to help
them meet increased expectations.
Because of the complexities of Article XIII B, 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 California
Trust 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 the Article XIII B spending limit would restrain the
State's ability to fund such other programs by raising taxes.
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<PAGE>
Constitutional and Statutory Limitations
Article XIII A of the California Constitution (which resulted from the
voter-approved Proposition 13 in 1978) limits the taxing powers of California
public agencies. Article XIII A provides that the maximum ad valorem tax on real
property cannot exceed one percent of the "full cash value" of the property and
effectively prohibits the levying of any other ad valorem tax on real property
for general purposes. However, on May 3, 1986, Proposition 46, an amendment to
Article XIII A, was approved by the voters of the State of California, creating
a new exemption under Article XIII A permitting an increase in ad valorem taxes
on real property in excess of one percent for bonded indebtedness approved by
two-thirds of the voters voting on the proposed indebtedness. "Full cash value"
is defined as "the county assessor's valuation of real property as shown on the
1975-76 tax bill under 'full cash value' or, thereafter, the appraised value of
real property when purchased, newly constructed, or a change in ownership has
occurred after the 1975 assessment." The "full cash value" is subject to annual
adjustment to reflect increases (not to exceed two percent) or decreases in the
consumer price index or comparable local data, or to reflect reductions in
property value caused by damage, destruction or other factors.
At the November 1998 election, voters approved Proposition 2. This
Proposition required the General Fund to repay loans made from certain
transportation special accounts (such as the State Highway Account) at least
once per Fiscal Year, or up to 30 days after adoption of the annual Budget Act.
Since the General Fund May reborrow from the transportation accounts soon after
the annual repayment is made, the Proposition is not expected to have any
adverse impact on the State's cash flow.
Future Initiatives
Articles XIII A, XIII B, XIII C and XIII D 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 that could affect
revenues of the State or public agencies within the State.
Local Government
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 healthcare, welfare, courts, 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 of the early 1990's, 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 programs as health and welfare realignment, welfare reform, trial
court restructuring, the Citizens' Option for Public Safety Program supporting
local public safety departments and various other measures.
B-17
<PAGE>
The 1999 Budget Act includes a $150 million one-time subvention from the
General Fund to local agencies for relief from the 1992 and 1993 property tax
shifts. Legislation has been passed, subject to voter approval at the election
in November 2000, to provide a more permanent payment to local governments to
offset the property tax shift. In addition, legislation was enacted in 1999 to
provide approximately $35.8 million annual relief to cities based on 1997-98
costs of jail booking and processing fees paid to counties.
The entire Statewide welfare system has been changed in response to the
change in federal welfare law enacted in 1996. The federal block grant formula
established in 1996 is operative through federal fiscal year 2002. Under the new
basic State welfare system, California Work Opportunity and Responsibility to
Kids ("CalWORKs"), counties are given flexibility to develop their own plans,
consistent with State law, to implement Welfare-to-Work and to administer many
of its elements and their costs for administrative and support services are
capped at 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 Welfare-to-Work outcomes; counties May also suffer
penalties for failing to meet federal standards. Under CalWORKs, counties will
still be required to provide "general assistance" aid to certain persons who
cannot obtain welfare from other programs.
Counties have been successful in earning performance incentive payments and
have earned amounts in excess of the available appropriation for 1998-99 and, it
is estimated, for 1999-00 as well. The Administration proposes to repeal or
modify the current incentive structure in 2000-01 to permit adequate funding for
other CalWORKs program demands in the future.
To date, the implementation of the CalWORKs program has continued the trend
of declining welfare caseloads. The CalWORKs caseload is projected to be 589,000
in 1999-00 and 557,000 in 2000-01, down from a high of 921,000 cases in 1994-95.
The longer-term impact of the new federal law and CalWORKs is being evaluated by
the RAND Corporation, with a series of reports to be furnished and the final
report due October 2001.
The 2000-01 CalWORKs budget reflects that California has met the
federally-mandated work participation requirements for federal fiscal year 1998.
With that goal being met, the federally-imposed maintenance-of-effort (MOE)
level for California is reduced from 80 percent of the federal fiscal year 1994
baseline expenditures for the former Aid to Families with Dependent Children
("AFDC") program ($2.9 billion) to 75 percent ($2.7 billion). It is still
uncertain if the State will meet the work participation requirements for federal
fiscal year 1999; however, due to program changes, it is expected that
California will meet the work participation goal in federal fiscal year 2000 and
beyond. In addition, California will receive a Temporary Assistance for Needy
Families ("TANF") High Performance Bonus award of $45.5 million. This one-time
bonus is awarded to states for their successes in moving welfare recipients to
work and sustaining their participation in the workforce.
The 2000-01 Governor's Budget proposes expenditures that will continue to
meet, but not exceed, the federally-required $2.7 billion combined State and
county MOE requirement. Total CalWORKs-related expenditures are estimated to be
$7.2 billion for 1999-00 and $6.9 billion for 2000-01, including child care
transfer amounts for the Department of Education.
Historically, funding for the State's trial court system was divided
between the State and the counties. However, Chapter 850, Statutes of 1997,
implements 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 for
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 was reduced by $290 million, and
cities retained $62 million in fine and penalty revenue previously remitted to
the State. The
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<PAGE>
General Fund reimbursed the $352 million revenue loss to the Trial Court Trust
Fund. The 1999 Budget Act included funds to further reduce the county general
fund contribution by an additional $96 million.
On November 5, 1996, voters approved Proposition 218, entitled the "Right
to Vote on Taxes Act," which incorporates new Articles XIII C and XIII D into
the California Constitution. These new provisions enact limitations on the
ability of local government agencies to impose or raise various taxes, fees,
charges and assessments without voter approval. Certain "general taxes" imposed
after January 1, 1995 must be approved by voters in order to remain in effect.
In addition, Article XIII C clarifies the right of local voters to reduce taxes,
fees, assessments or charges through local initiatives. There are a number of
ambiguities concerning the Proposition and its impact on local governments and
their bonded debt that will require interpretation by the courts or the State
Legislature. Proposition 218 does not affect the State or its ability to levy or
collect taxes.
Tobacco Litigation
In late 1998, the State signed a settlement agreement with the four major
cigarette manufacturers. The State agreed to drop its lawsuit and not to sue in
the future. Tobacco manufacturers agreed to billions of dollars in payments and
restrictions in marketing activities. Under the settlement, the manufacturers
will pay California governments a total of approximately $25 billion over a
period of 25 years. In addition, payments of approximately $1 billion per year
will continue in perpetuity. Under the settlement, half of the moneys will be
paid to the State and half to local governments (all counties and the cities of
San Diego, Los Angeles, San Francisco and San Jose). The State's revised 1999-00
Budget includes receipt of $517 million of settlement money to the General Fund.
The Governor's Budget for 2000-01 projects receipt of $388 million of settlement
money to the General Fund.
The specific amount to be received by the State and local governments is
subject to adjustment. Details in the settlement allow reduction of the
companies' payments because of federal government actions, or reductions in
cigarette sales. Settlement payments can increase due to inflation or increases
in cigarette sales. The "second initial" payment, received in December 1999, was
14 percent lower than the base settlement amount due to reduced sales. Future
payment estimates have been reduced by a similar percentage. In the event that
any of the companies goes into bankruptcy, the State could seek to terminate the
agreement with respect to those companies filing bankruptcy actions, thereby
reinstating all claims against those companies. The State May then pursue those
claims in the bankruptcy litigation, or as otherwise provided by law. Also,
several parties have brought a lawsuit challenging the settlement and seeking
damages. (See "Pending Litigation" below.)
Pending Litigation
The State is a party to numerous legal proceedings, many of which normally
occur in governmental operations. 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.
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 costs on its obligations.
Some of the more significant lawsuits pending against the State are described
below.
On December 24, 1997, a consortium of California counties filed a test
claim with the Commission on State Mandates (the "Commission") asking the
Commission to determine whether the property tax shift from counties to school
districts beginning in 1993-94, is a reimbursable state-mandated cost. The test
claim was heard on October 29, 1998, and the Commission found in favor of the
State. In October 1999, the Superior Court of Sonoma County overturned the
Commission's decision. The State has appealed. Should the final decision on this
matter be in favor of the counties, the impact to the State General Fund could
be as high as $10.0 billion. In addition, there would be an annual Proposition
98 General Fund cost of at least $3.75 billion. This cost would grow in
accordance with the annual assessed value growth rate.
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<PAGE>
In January of 1997, California experienced major flooding in six different
areas with preliminary estimates of property damage of approximately $1.6 to
$2.0 billion. In McMahon v. the State of California, a substantial number of
plaintiffs have joined suit against the State, local agencies, and private
companies and contractors seeking compensation for the damages they suffered as
a result of the 1997 flooding. The State is defending the action.
The State is a defendant in Ceridian Corporation v. Franchise Tax Board, a
suit that challenges the constitutionality of a Revenue & Taxation Code section
that limits deductions for insurance dividends to those dividends paid from
earnings previously subject to California taxation. On August 13, 1998, the
trial court issued a judgment against the Franchise Tax Board. The Franchise Tax
Board has appealed the judgment. Briefing has been completed. The State has
taken the position that, if the challenged section of the Revenue & Taxation
Code is struck down, all deductions relating to dividends would be eliminated
and the result would be additional income to the State. Plaintiffs, however,
contend that if they prevail, the deduction should be extended to all dividends,
which would result in a one-time liability for open years of approximately $60
million, including interest, and an annual revenue loss of approximately $10
million.
The State is also a defendant in First Credit Bank etc. v. Franchise Tax
Board, which challenges a Revenue & Taxation Code section similar to the one
challenged in the Ceridian case, but applicable to a different group of
corporate taxpayers. The State's motion for summary judgment is currently
pending and a trial date has been set in April 2000. A decision in the Ceridian
case could impact the outcome of this case. The State has taken the position
that, if the challenged section of the Revenue & Taxation Code is struck down,
all deductions relating to dividends would be eliminated and the result would be
additional income to the State. Plaintiffs, however, contend that if they
prevail, the deduction should be extended to all dividends that would result in
a one-time liability for open years of approximately $385 million, including
interest, and an annual revenue loss of approximately $60 million.
Plaintiffs in County of San Bernardino v. Barlow Respiratory Hospital and
related actions seek mandamus relief requiring the State to retroactively
increase out-patient Medi-Cal reimbursement rates. Plaintiffs have estimated the
damages to be several hundred million dollars. The State is defending these
cases, as well as related federal cases addressing the calculation of Medi-Cal
reimbursement rates in the future.
The State is involved in a lawsuit, Thomas Hayes v. Commission on State
Mandates, related to state-mandated costs. The action involves an appeal by the
Director of Finance from a 1984 decision by the State Board of Control (now
succeeded by the Commission on State Mandates). The Board of Control decided in
favor of local school districts' claims for reimbursement for special education
programs for handicapped students. The case was then brought to the trial court
by the State and later remanded to the Commission for redetermination. The
Commission expanded the claim to include supplemental claims filed by several
other educational institutions. To date, the Legislature has not appropriated
funds. The Commission issued a decision in December 1998 determining that a
small number of components of the State's special education program are
state-mandated local costs. The administrative proceeding is in the "parameters
and guidelines" stage where the Commission is considering whether and to what
extent the costs associated with the state-mandated components of the special
education program are offset by funds that the State already allocates to that
program. The State's position is that all costs are offset by existing funding.
The State has the option to seek judicial review of the mandate finding.
Potential liability of the State, if all potentially eligible school districts
pursue timely claims, has been estimated by the Department of Finance to be in
excess of $1.5 billion, if the State is not credited for its existing funding of
the program.
The State is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In United States, People of the State of
California v. J.B. Stringfellow, Jr., et al., the State is seeking recovery for
past costs of cleanup of the site, a declaration that the defendants are jointly
and severally liable for future costs, and an injunction ordering completion of
the cleanup. The defendants, however, have filed a counterclaim against the
State for alleged negligent acts, resulting in significant findings of liability
against the State as owner, operator, and
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<PAGE>
generator of wastes taken to the site. The State has appealed the rulings.
Present estimates of the cleanup range from $400 million to $600 million.
Potential State liability falls within this same range. However, all or a
portion of any judgment against the State could be satisfied by recoveries from
the State's insurance carriers. The State has filed a suit against certain of
these carriers. The trial is expected to begin in early 2001.
The State is a defendant in a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The appellate court affirmed the trial court finding of liability in inverse
condemnation and awarded damages of $500,000 to a sample of plaintiffs.
Potential liability to the remaining plaintiffs, from claims filed, ranges from
$800 million to $1.5 billion. In 1992, the State and plaintiffs filed appeals.
In August 1999, the court of appeal issued a decision reversing the trial
court's judgment against the State and remanded the case for retrial on the
inverse condemnation cause of action. The California Supreme Court denied
plaintiffs' petition for review.
On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers Association et al.
v. Kathleen Connell filed a complaint for certain declaratory and injunctive
relief challenging the authority of the State Controller to make payments from
the State Treasury in the absence of a State budget. On July 21, 1998, the trial
court issued a preliminary injunction prohibiting the State Controller from
paying moneys from the State Treasury for Fiscal Year 1998-99, with certain
limited exceptions, in the absence of a State budget. The preliminary
injunction, among other things, prohibited the State Controller from making any
payments pursuant to any continuing appropriation. On July 22 and 27, 1998,
various employee unions that had intervened in the case appealed the trial
court's preliminary injunction and asked the court of appeal to stay the
preliminary injunction. On July 28, 1998, the court of appeal granted the
unions' requests and stayed the preliminary injunction pending the court of
appeal's decision on the merits of the appeal. On August 5, 1998, the court of
appeal denied the plaintiffs' request to reconsider the stay. Also on July 22,
1998, the State Controller asked the California Supreme Court to immediately
stay the trial court's preliminary injunction and to overrule the order granting
the preliminary injunction on the merits. On July 29, 1998, the Supreme Court
transferred the State Controller's request to the court of appeal. The matters
are now pending before the court of appeal. Briefs have been submitted; no date
has yet been set for oral argument.
The State is involved in two refund actions, Cigarettes Cheaper!, et al. v.
Board of Equalization, et al. and California Assn. of Retail Tobacconists
(CART), et al. v. Board of Equalization, et al., that challenge the
constitutionality of Proposition 10, approved by the voters in 1998. Plaintiffs
allege that Proposition 10, which increases the excise tax on tobacco products,
violates 11 sections of the California Constitution and related provisions of
law. Plaintiffs Cigarettes Cheaper! seek declaratory and injunctive relief and a
refund of over $4 million. The CART case, filed by retail tobacconists in San
Diego, seeks a refund of $5 million. The State is contesting these cases. If the
statute is declared unconstitutional, exposure May include the entire $750
million collected annually with interest.
The State is involved in two cases challenging the constitutionality of the
interest offset provisions of the Revenue and Taxation Code: Hunt-Wesson, Inc.,
v. Franchise Tax Board and F.W. Woolworth Co. and Kinney Shoe Corporation v.
Franchise Tax Board. In both cases, the Franchise Tax Board prevailed in the
California court of appeal and the California Supreme Court denied taxpayers'
petitions for review. In both cases, the United States Supreme Court granted
certiorari. On February 22, 2000, the United States Supreme Court reversed and
remanded the Hunt-Wesson case to the California court of appeal for further
proceedings. Although the Court did not take similar action in the Woolworth Co.
case, it is anticipated that it will do so. The Franchise Tax Board recently
estimated that the adverse decisions in these cases will result in a reduction
in state revenues of approximately $15 million annually, with past year
collection and interest exposure of approximately $95 million.
Guy F. Atkinson Company of California v. Franchise Tax Board is a
corporation tax refund action involving the solar energy system tax credit
provided for under the Revenue & Taxation Code. The case went to trial in May
1998 and the trial court entered judgment in favor of the Franchise Tax Board.
The taxpayer has filed
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an appeal to the California Court of Appeal and briefing is completed. The
Franchise Tax Board estimates that the cost would be $150 million annually, if
the plaintiff prevails. Allowing refunds for all open years would entail a
refund of at least $500 million.
Jordan, et al. v. Department of Motor Vehicles, et al., challenges the
validity of the Vehicle Smog Impact Fee, a $300 fee that is collected by the
Department of Motor Vehicles from vehicle registrants when a vehicle without a
California new-vehicle certification is first registered in California. The
plaintiffs contend that the fee violates the interstate commerce and equal
protection clauses of the United States Constitution as well as Article XIX of
the State Constitution. In October 1999, the court of appeal upheld a trial
court judgment for the plaintiffs and the State has declined to appeal further.
Although refunds through the court actions could be limited by a three-year
statute of limitations, with a potential liability of about $350 million, the
Governor has proposed refunding fees collected back to the initiation of these
fees in 1990. The 2000-01 Governor's Budget proposes expenditures of $562
million as a supplemental appropriation in 1999-00 to pay these claims.
PTI, Inc., et al. v. Philip Morris, et al. was filed by five distributors
in the cigarette import-/re-entry business, seeking to overturn the tobacco
Master Settlement Agreement (MSA) entered between 46 states and the tobacco
industry in November 1998. The primary focus of the complaint is the provision
of the MSA encouraging participating states to adopt a statute requiring
nonparticipating manufacturers to either become participating manufacturers and
share the financial obligations under the MSA or pay money into an escrow
account. Plaintiffs seek compensatory and punitive damages against the State and
State officials and an order placing tobacco settlement funds into a trust to be
administered by the court for the treatment of medical expenses of persons
injured by tobacco products. A motion to dismiss the complaint is currently
scheduled for hearing on May 8, 2000. The potential fiscal impact of an adverse
ruling is largely unknown, but could exceed the full amount of the settlement
(estimated to be $1 billion annually, of which 50 percent will go directly to
the State's General Fund and the other 50 percent directly to the State's 58
counties and 4 largest cities).
In FORCES Action Project, et al. v. State of California, et al., various
smokers' rights groups challenge the tobacco settlement as it pertains to
California, Utah and the City and County of San Francisco. Plaintiffs assert a
variety of constitutional challenges, including that the settlement represents
an unlawful tax on smokers. Motions to dismiss by all defendants, including the
tobacco companies, were eventually converted to summary judgment motions by the
court and heard on September 17, 1999. On January 5, 2000, the court dismissed
the complaint for lack of subject matter jurisdiction because the plaintiffs
lacked standing to sue. The court also concluded that the plaintiffs' claims
against the State and its officials are barred by the 11th Amendment. Plaintiffs
have filed a timely appeal.
Louis Bolduc, et al. v. State of California, et al. is a class action filed
on July 13, 1999 by six Medi-Cal beneficiaries who have received medical
treatment for smoking-related diseases. Plaintiffs allege the State owes them an
unspecified portion of the tobacco settlement monies under a federal regulation
that requires a state to turn over to an injured Medicaid beneficiary any monies
the State recovers from a third-party tortfeasor in excess of the costs of the
care provided. The State moved to dismiss the complaint on September 8, 1999.
Arnett v. California Public Employees Retirement System, et. al. was
filed by seven former employees of the State of California and local agencies,
seeking back wages, damages and injunctive relief. Plaintiffs are former public
safety members who began employment after the age of 40 and are recipients of
Industrial Disability Retirement ("IDR") benefits. Plaintiffs contend that the
formula that determines the amount of IDR benefits violates the federal Age
Discrimination in Employment Act of 1967 ("ADEA"). Plaintiffs contend that, but
for their ages at hire, they would receive increased monthly IDR benefits
similar to their younger counterparts who began employment before the age of 40.
The California Public Employees' Retirement System has estimated the liability
to the State as approximately $315.5 million, if plaintiffs prevail. The
district court dismissed the complaint for failure to state a claim. On August
17, 1999, the Ninth Circuit Court of Appeals reversed the district court's
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dismissal of the complaint. The State sought further review in the United States
Supreme Court. On January 11, 2000, the United States Supreme Court in Kimel v.
Florida Board of Regents, held that Congress did not abrogate the sovereign
immunity of the states when it enacted the ADEA. Thereafter, on January 18,
2000, the Supreme Court granted the petition for writ of certiorari in Arnett,
vacated the judgment of the Ninth Circuit, and remanded the case to the Ninth
Circuit for further proceedings consistent with Kimel. It now appears that the
District Court will dismiss the State defendants from the lawsuit.
The Sponsor believes the information summarized above describes some of the
more significant aspects relating to the California Trust. 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. The State has indicated that 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 that
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. 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 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.
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For each of the 1981 through 1999 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 2000 fiscal year, before discretionary transfers, and
budget gaps for each of the 2001, 2002 and 2003 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, in future years, State budgets will be adopted by the April 1
statutory deadline, or interim appropriations will be 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 2000 through 2003 fiscal years (the
"2000-2003 Financial Plan" or "Financial Plan"). The City's 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 program for financing capital
projects for fiscal years 2000 through 2003 contemplates the issuance of $7.449
billion of general obligation bonds and $3.35 billion of bonds to be issued by
the New York City Transitional Finance Authority (the "Finance Authority"). In
addition, the Financial Plan anticipates access to approximately $2.4 billion in
financing capacity of Tobacco Settlement Asset Securitization Corporation, Inc.
("TSASC"), which will issue debt secured by revenues derived from the settlement
of litigation with tobacco companies selling cigarettes in the United States.
The Finance Authority and TSASC were created to assist the City in financing its
capital program while 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, New York City Municipal Water Finance Authority ("Water
Authority"), Finance Authority, TSASC and other bonds and notes will be subject
to prevailing market conditions. The City's planned capital and operating
expenditures are dependent upon the sale of its general obligation debt, as well
as debt of the Water Authority, Finance Authority and TSASC. 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.
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The City Comptroller and other agencies and public officials, from time to
time, issue reports and make public statements which, among other things, state
that projected revenues and expenditures may be different from those forecast in
the City's financial plans.
For the 1999 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 1999
fiscal year is the nineteenth year that the City has achieved an operating
surplus, before discretionary and other transfers, and balanced operating
results, after discretionary and other transfers.
Changes since adoption of the City's Expense Budget for the 1999 fiscal
year in June 1998, prior to the financial plan submitted to the Control Board on
June 26, 1998 include: (i) an increase in projected tax revenues of $762
million, $558 million, $417 million and $1.4 billion in fiscal years 2000
through 2003, respectively; (ii) $300 million, $250 million, $300 million and
$300 million of projected resources in fiscal years 2000 through 2003,
respectively, from the receipt by the City of funds from the settlement of
litigation with the leading cigarette companies; (iii) a reduction in the
assumed collection of $350 million of projected rent payments for the City's
airports to $210 million and a delay in the receipt of such payments from fiscal
year 2000 to fiscal year 2001; (iv) anticipated proceeds from the proposed sale
of the Coliseum in fiscal year 2001 totaling $345 million; and (v) net increases
in spending of $817 million, $739 million, $713 million and $1.05 billion in
fiscal years 2000 through 2003, including spending for Medicaid, education
initiatives, anti-smoking programs, employee fringe benefit costs, and other
agency programs. The Financial Plan includes a discretionary transfer in the
1999 fiscal year of $2.6 billion primarily to pay debt service due in fiscal
year 2000, for budget stabilization purposes, a discretionary transfer in fiscal
year 2000 to pay debt service due in fiscal year 2001 totaling $429 million, and
a proposed discretionary transfer in fiscal year 2001 to pay debt service due in
fiscal year 2002 totaling $345 million.
On June 14, 1999, the City released the Financial Plan for the 2000 through
2003 fiscal years, which relates to the City and certain entities which receive
funds from the City. The Financial Plan reflects changes as a result of the
City's expense and capital budgets for fiscal year 2000, which were adopted on
June 7, 1999. The Financial Plan projects revenues and expenditures for the 2000
fiscal year balanced in accordance with GAAP and projects gaps of $1.8 billion,
$1.9 billion and $1.8 billion for fiscal years 2001 through 2003, respectively.
In addition, the Financial Plan sets forth gap-closing actions to eliminate
a previously projected gap for the 2000 fiscal year and to reduce projected gaps
for fiscal years 2001 through 2003. The gap-closing actions for the 2000 through
2003 fiscal years include: (i) additional agency actions totaling $502 million,
$371 million, $293 million and $283 million for fiscal years 2000 through 2003,
respectively; (ii) additional Federal aid of $75 million in each of fiscal years
2000 through 2003, which include the proposed restoration of $25 million of
Federal revenue sharing and $50 million of increased Federal Medicaid aid; and
(iii) additional State actions totaling approximately $125 million in each of
fiscal years 2000 through 2003. The Financial Plan also reflects a tax reduction
program, which includes the elimination of the City's non-residents earning tax,
the proposed extension of current tax reductions for owners of cooperative and
condominium apartments and a proposed income tax credit for low income wage
earners.
The Financial Plan is based on numerous assumptions, including the
condition of the City's and the region's economies and modest employment growth
and the concomitant receipt of economically sensitive tax revenues in the
amounts projected. The 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
2000 through 2003 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 City agencies
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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. 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.
On June 7, 1999, the City Council adopted a budget for fiscal year 2000.
The adopted budget includes lower estimated debt service expenditures in fiscal
year 2000 resulting from a $456 million increase, from $2.1 billion to $2.6
billion, in the proposed discretionary transfer in the 1999 fiscal year to pay
debt service due in fiscal year 2000. The $456 million increase in the
discretionary transfer reflects increased tax revenues and decreased
expenditures in the 1999 fiscal year. The adopted budget also includes $220
million of spending initiatives proposed by the City Council, other increased
spending and the net cost of revised tax reduction proposals, which reflect the
repeal of all of the City non-resident earnings tax and the elimination of
certain of the previously proposed tax reduction initiatives.
On July 16, 1998, Standard & Poor's revised its rating of City bonds upward
from BBB+ to A-. Moody's rating of City bonds was revised in February 1998 to A3
from Baa1. On March 8, 1999, Fitch revised its rating of City bonds upward to A.
Moody's, Standard & Poor's and Fitch currently rate the City's outstanding
general obligation bonds A3, A- and A, respectively.
New York State and its Authorities. The State ended the 1998-1999 fiscal
year in balance on a cash basis for the 1998-1999 fiscal year, with a reported
closing balance in the General Fund of $892 million, after reserving a projected
$1.8 billion surplus for use in future years. The State ended the 1998-1999
fiscal year in balance on a cash basis, with a reported closing balance in the
General Fund of $892 million, after reserving a projected $1.8 billion surplus
for use in future years. The State Financial Plan for the 1999-2000 fiscal year,
which was released on August 20, 1999, projects balance on a cash basis for the
1999-2000 fiscal year, with a closing balance in the General Fund of $2.85
billion, including a projected tax reduction reserve of $1.82 billion for use in
future fiscal years. The State Division of the Budget ("DOB") has projected a
potential imbalance in the 2000-2001 fiscal year of approximately $1.9 billion.
DOB's estimate includes an assumption for the projected costs of new collective
bargaining agreements, $500 million in assumed unspecified operating
efficiencies and the planned application of approximately $615 million of the
$1.82 billion tax reduction reserve in fiscal year 2000-2001. DOB has noted
that, despite recent budgetary surpluses recorded by the State, actions
affecting the level of receipts and disbursements, the relative strength of the
State and regional economy and actions by the Federal government could impact
projected budget gaps of the State.
The State revised the cash-basis 1999-2000 State Financial Plan on January
11, 2000, with the release of the 2000-01 Executive Budget. The State updated
the Financial Plan on January 31, 2000 to reflect the Governor's amendments to
his Executive Budget. After these changes, the DOB now expects the State to
close the 1999-2000 fiscal year with an available cash surplus of $758 million
in the General Fund, an increase of $733 million over the surplus estimate in
the Mid-Year Update. The larger projected surplus derives from $499 million in
net higher projected receipts and $259 million in net lower estimated
disbursements. DOB revised both its projected receipts and disbursements based
on a review of actual operating results through December 1999, as well as an
analysis of underlying economic and programmatic trends it believes may affect
the Financial Plan for the balance of the year.
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The State plans to use the entire $758 million surplus to make additional
deposits to reserve funds. At the close of the current fiscal year, the State
expects to deposit $75 million from the surplus into the State's Tax
Stabilization Reserve Fund -- the fifth consecutive annual deposit. In the
2000-01 Executive budget, as amended, the Governor is proposing to use the
remaining $683 million from the 1999-2000 surplus to fully finance the estimated
2001-02 and 2002-03 costs of his proposed tax reduction package ($433 million)
and to increase the Debt Reduction Reserve Fund ($250 million).
Through the first nine months of 1999-2000, General Fund receipts,
including transfers from other funds, have totaled $30.07 billion. General fund
disbursements, including transfers to other funds, totaled $25.19 billion over
the same period. The updated Financial Plan projections incorporate these
results to date.
Standard & Poor's rates the State's general obligation bonds A+, and
Moody's rates the State's general obligation bonds A2. On November 9, 1999,
Standard & Poor's revised its rating on the State's general obligation bonds
from A to A+.
Litigation. A number of court actions have been brought involving State
finances. 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 Modification and 2000-2003 Financial Plan.
The City has estimated that its potential future liability on account of
outstanding claims against it as of June 30, 1999 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.
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.
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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 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:
APPROXIMATE
REDUCED
NUMBER OF UNITS SALES
---------------
CHARGE
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%
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.
Units purchased by the same purchasers in separate transactions 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 ING Funds Distributor, 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, 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
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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 (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 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. On November 16, 1999, President
Clinton signed the Gramm-Leach-Bliley Act, repealing certain provisions of the
Glass-Steagall Act which have restricted affiliation between banks and
securities firms and amending the Bank Holding Company Act thereby removing
restrictions on banks and insurance companies. The new legislation grants banks
new authority to conduct certain authorized activity through financial
institutions. 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 presently maintains and intends to continue 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
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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 "Portfolios"). 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 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 Trusts will be classified as grantor trusts for Federal income
tax purposes and not as a partnership or association taxable as a
corporation. Classification of the Trusts as grantor trusts will cause the
Trusts not to be subject to Federal income tax and will cause the
Unitholders of the Trusts to be treated for Federal income tax purposes 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.
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3. The Sponsor has reserved 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. This retained
right falls within guidelines promulgated by the IRS and should not affect
the taxable status of the Trusts.
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 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 Federal 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 Federal
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 in the Municipal
Funds 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
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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.
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 is subject to
limitations for individuals with incomes in excess of certain thresholds.
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 have elected regulated
investment company status for Federal income tax purposes and intend to continue
to qualify as regulated investment companies as long as it is in the best
interest of their shareholders. 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 investment company taxable 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.
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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 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. 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.
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.
Interest on some of the Bonds held by the Municipal Funds will not be
exempt from regular Federal income tax for any period during which such Bonds
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.
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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 are 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.
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 California counsel to the
Sponsor for California tax matters, under existing California Law
applicable to individuals who are California residents:
The California Trust will not be treated as an association taxable as a
corporation, and the income of the California Trust will be treated as the
income of the Certificateholders. Accordingly, interest on Bonds received
by the California Trust that is exempt from personal income taxes imposed
by or under the authority of the State
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of California will be treated for California income tax purposes in the
same manner as if received directly by the Certificateholders.
Each Certificateholder of the California Trust will recognize gain or loss
when the California Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or upon the Certificateholder'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 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.
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
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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.
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
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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 ING Funds
Distributor, Inc., 1475 Dunwoody Drive, West Chester, Pennsylvania 19380.
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 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.
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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 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
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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 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
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available, or (ii) deposit (or instruct the Trustee to purchase) either
Securities of one or more other issues originally deposited or a Substitute
Security.
In determining whether to dispose of or hold Securities, new securities or
property, the Sponsor may be advised by the Portfolio Supervisor.
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 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
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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 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
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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 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. Effective February 9, 2000, ING Funds Distributor, Inc. has
become the successor to Reich & Tang Distributors, Inc., as Sponsor to the
Trusts. ING Funds Distributor, Inc., an Iowa corporation, is a wholly owned
indirect subsidiary of ING Group. ING Group, among the leading global financial
services organizations, is engaged in asset management, banking and insurance
activities in 60 countries worldwide with over 82,000 employees. The Sponsor is
a member of the National Association of Securities Dealers, Inc.
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; 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
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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 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
ING Mutual Funds Management Co., LLC, an affiliate of ING Funds
Distributor, Inc., will receive for portfolio supervisory services to the Trusts
an Annual Fee in the amount set forth under "Summary of Essential Information"
in
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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."
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 not be subject to any sales charge. 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.
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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.
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 ING Funds
Distributor, Inc. or a sponsor controlled by or under common control with
B-45
<PAGE>
ING Funds Distributor, Inc., 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.
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/AUDITORS. The financial statements of the Trust
for the period ended December 31, 1999 included in Part A of this Prospectus
have been examined by Ernst & Young LLP, independent auditors. The financial
statements have been so included in reliance on their report given upon the
authority of said firm as experts in accounting and auditing.
PORTFOLIO SUPERVISOR. ING Mutual Funds Management Co. LLC, a Delaware
limited liability company, is a wholly-owned indirect subsidiary of ING Group
and is an affiliate of the Sponsor.
B-46
<PAGE>
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-47
<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
Title Page
PART A
Investment Summary............................ A-2
Fee Table...................................... A-5
Summary of Essential Information.............. A-7
Financial and Statistical Information......... A-9
Audit and Financial Information............... A-12
PART B
The Trusts.................................... B-1
Risk Considerations........................... B-3
Public Offering............................... B-28
Tax Status.................................... B-30
Rights of Unitholders......................... B-35
Liquidity..................................... B-37
Trust Administration.......................... B-39
Trust Expenses and Charges.................... B-43
Reinvestment Plan............................. B-44
Exchange Privilege and Conversion Offer....... B-45
Other Matters................................. B-46
B-48
<PAGE>
LOGO
EQUITY SECURITIES TRUST
SERIES 23
MUNICIPAL SYMPHONY SERIES II
(A UNIT INVESTMENT TRUST)
PROSPECTUS
DATED: April 30, 2000
SPONSOR:
ING FUNDS DISTRIBUTOR, INC.
1475 Dunwoody Drive
West Chester, Pennsylvania 19380
1-877-463-6464
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.
Information may be reviewed and copied at the Commission's Public Reference
Room, and information on the Public Reference Room may be obtained by calling
the SEC at 1-202-942-8090. Copies may be obtained from the SEC by:
o visiting the SEC Internet address: http://www.sec.gov
o electronic request (after paying a duplicating fee) at the following E-mail
address: [email protected]
o 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
CONTENTS OF REGISTRATION STATEMENT
This Post-Effective Amendment to the Registration Statement on Form S-6
comprises the following papers and documents:
The facing sheet on Form S-6.
The Cross-Reference Sheet (incorporated by reference to the Registration
Statement of Equity Securities Trust, Series 12, 1997 Triple Strategy Trust
II.
The Prospectus consisting of pages.
Signatures.
Consent of Independent Auditors.
Consent of Counsel (included in Exhibit 99.3.1).
Consent of Portfolio Consultant
The following exhibits:
99.1.1 -- Reference Trust Agreement including certain amendments to the
Trust Indenture and Agreement (filed as Exhibit 99.1.1 to
Amendment No. 2 to Form S-6 Registration Statement No. 333-69255
of Equity Securities Trust, Series 22 on March 11, 1999 and
incorporated herein by reference).
99.1.1.1 -- Form of Trust Indenture and Agreement (filed as Exhibit 99.1.1.1
to Amendment No. 1 to Form S-6 Registration Statement No.
33-62627 of Equity Securities Trust, Series 6 on November 16,
1995 and incorporated herein by reference).
99.1.3.4 -- Articles of Incorporation and Articles of Amendment of ING Funds
Distributor, Inc. (filed as Exhibit 99.1.3.5 to Amendment No. 2
to Form S-6 Registration Statement No. 333-31048 on March 28,
2000 and incorporated herein by reference).
99.1.3.5 -- By-Laws of ING Funds Distributor, Inc. (filed as Exhibit
99.1.3.6 to Amendment No. 2 to Form S-6 Registration Statement
No. 333-31048 on March 28, 2000 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 references).
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 (filed
as Exhibit 99.3.1 to Amendment No. 1 to Form S-6 Registration
Statement No. 333-79169 of Equity Securities Trust, Series 23 on
June 23, 1999 and incorporated herein by reference).
99.3.2 -- Opinion of Special California Counsel (filed as Exhibit 99.3.2
to Amendment No. 1 to Form S-6 Registration Statement No.
333-79169 of Equity Securities Trust, Series 23 on June 23, 1999
and incorporated herein by reference).
99.6.0 -- Powers of Attorney of ING Funds Distributor, Inc., by its
officers and a majority of its Directors (filed as Exhibit
99.6.0 to Form S-6 Registration Statement No. 333-31048 on
February 24, 2000 and incorporated herein by reference).
II-1
935908.1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant, Equity Securities Trust, Series 23, Municipal Symphony Series II
certifies that it has met all of the requirements for effectiveness of this
Post-Effective Amendment to the Registration Statement pursuant to Rule 485(b)
under the Securities Act of 1933. The registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York on the 19th day of April, 2000.
EQUITY SECURITIES TRUST, SERIES 23, MUNICIPAL SYMPHONY SERIES II
(Registrant)
ING FUNDS DISTRIBUTOR, INC.
(Depositor)
By: /S/ PETER J. DEMARCO
---------------------
Peter J. DeMarco
(Senior Vice President)
Pursuant to the requirements of the Securities Act of 1933, this
Post- Effective 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 ING Funds Distributor, Inc., the Depositor, in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
JOHN J. PILEGGI Chief Executive Officer and Director )
MITCHELL J. MELLEN President and Director ) April 19, 2000
DONALD E. BROSTROM Chief Financial Officer, Treasurer )
and Director )
ERIC M. RUBIN Director ) By:/S/PETER J. DeMARCO
-------------------
Peter J. DeMarco
as Senior Vice
President and
Attorney-in-Fact*
</TABLE>
- --------
* Executed copies of Powers of Attorney were filed as Exhibit 99.6.0 to Form
S-6 Registration Statement No. 333-31048 on February 24, 2000.
II-2
935908.1
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Independent Auditors"
and to the use of our report dated April 15, 2000, in the Registration Statement
and related Prospectus of Equity Securities Trust, Series 23, Municipal Symphony
Series II.
ERNST & YOUNG LLP
New York, New York
April 25, 2000
<PAGE>
II-3
935908.1
<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
April 2000
II-4
935908.1
