File No. 2-69134
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
POST-EFFECTIVE
AMENDMENT NO. 13
TO
FORM S-6
For Registration Under the Securities Act of 1933 of Securities
of Unit Investment Trusts Registered on Form N-8B-2
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 58
(Exact Name of Trust)
NIKE SECURITIES L.P.
(Exact Name of Depositor)
1001 Warrenville Road
Lisle, Illinois 60532
(Complete address of Depositor's principal executive offices)
NIKE SECURITIES L.P. CHAPMAN AND CUTLER
Attn: James A. Bowen Attn: Eric F. Fess
1001 Warrenville Road 111 West Monroe Street
Lisle, Illinois 60532 Chicago, Illinois 60603
(Name and complete address of agents for service)
It is proposed that this filing will become effective (check
appropriate box)
: : immediately upon filing pursuant to paragraph (b)
: x : January 31, 1994
: : 60 days after filing pursuant to paragraph (a)
: : on (date) pursuant to paragraph (a) of rule (485 or 486)
Pursuant to Rule 24f-2 under the Investment Company Act of
1940, the issuer has registered an indefinite amount of
securities. A 24f-2 Notice for the offering was last filed on
November 9, 1993.
<PAGE>
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 58
11,311 UNITS
PROSPECTUS
Part One
Dated January 17, 1994
Note: Part One of this Prospectus may not be distributed unless accompanied by
Part Two.
In the opinion of Counsel, interest income to the Trust and to Unit holders,
with certain exceptions, is exempt under existing law from all Federal income
taxes, but may be subject to state and local taxes. Capital gains, if any,
are subject to tax.
The Trust
The First Trust of Insured Municipal Bonds, Series 58 (the "Trust") is an
insured and fixed portfolio of interest-bearing obligations issued by or on
behalf of municipalities and other governmental authorities, the interest on
which is, in the opinion of recognized bond counsel to the issuing
governmental authorities, exempt from all Federal income taxes under existing
law. At December 16, 1993, each Unit represented a 1/11,311 undivided
interest in the principal and net income of the Trust (see "The Fund" in Part
Two).
The Units being offered by this Prospectus are issued and outstanding Units
which have been purchased by the Sponsor in the secondary market or from the
Trustee after having been tendered for redemption. The profit or loss
resulting from the sale of Units will accrue to the Sponsor. No proceeds from
the sale of Units will be received by the Trust.
Public Offering Price
The Public Offering Price of the Units is equal to the aggregate value of the
Bonds in the Portfolio of the Trust divided by the number of Units
outstanding, plus a sales charge of 4.5% of the Public Offering Price (4.712%
of the amount invested). At December 16, 1993, the Public Offering Price per
Unit was $559.97 plus net interest accrued to date of settlement (five
business days after such date) of $11.63, $12.22 and $11.75 for the monthly,
quarterly and semi-annual distribution plans, respectively (see "Market for
Units" in Part Two).
Please retain both parts of this Prospectus for future reference.
_____________________________________________________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
_____________________________________________________________________________
NIKE SECURITIES L.P.
Sponsor
<PAGE>
Estimated Current Return and Estimated Long-Term Return
Estimated Current Return to Unit holders under the semi-annual distribution
plan was 7.99% per annum on December 16, 1993, and 7.91% and 7.95% under the
monthly and quarterly distribution plans, respectively. Estimated Long-Term
Return to Unit holders under the semi-annual distribution plan was 4.88% per
annum on December 16, 1993, and 4.80% and 4.84% under the monthly and
quarterly distribution plans, respectively. Estimated Current Return is
calculated by dividing the Estimated Net Annual Interest Income per Unit by
the Public Offering Price. Estimated Long-Term Return is calculated using a
formula which (1) takes into consideration and determines and factors in the
relative weightings of the market values, yields (which take into account the
amortization of premiums and the accretion of discounts) and estimated
retirements of all of the Bonds in the Trust; (2) takes into account the
expenses and sales charge associated with each Unit of the Trust; and
(3) takes into effect the tax-adjusted yield from potential capital gains at
the Date of Deposit. Since the market values and estimated retirements of the
Bonds and the expenses of the Trust will change, there is no assurance that
the present Estimated Current Return and Estimated Long-Term Return indicated
above will be realized in the future. Estimated Current Return and Estimated
Long-Term Return are expected to differ because the calculation of the
Estimated Long-Term Return reflects the estimated date and amount of principal
returned while the Estimated Current Return calculations include only Net
Annual Interest Income and Public Offering Price. The above figures are based
on estimated per Unit cash flows. Estimated cash flows will vary with changes
in fees and expenses, with changes in current interest rates, and with the
principal prepayment, redemption, maturity, call, exchange or sale of the
underlying Bonds. See "What are Estimated Current Return and Estimated Long-
Term Return?" in Part Two.
<PAGE>
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 58
SUMMARY OF ESSENTIAL INFORMATION AS OF DECEMBER 16, 1993
Sponsor: Nike Securities L.P.
Evaluator: Securities Evaluation Service, Inc.
Trustee: The Bank of New York
<TABLE>
<CAPTION>
GENERAL INFORMATION
<S> <C>
Principal Amount of Bonds in the Trust $5,325,000
Number of Units 11,311
Fractional Undivided Interest in the Trust per Unit 1/11,311
Public Offering Price:
Aggregate Value of Bonds in the Portfolio $6,048,819
Aggregate Value of Bonds per Unit $534.77
Sales Charge 4.712% (4.5% of Public Offering Price) $25.20
Public Offering Price per Unit $559.97*
Redemption Price and Sponsor's Repurchase Price per Unit
($25.20 less than the Public Offering Price per Unit) $534.77*
Discretionary Liquidation Amount of the Trust (20% of the
original principal amount of Bonds in the Trust) $2,500,000
</TABLE>
Date Trust Established October 28, 1980
Mandatory Termination Date December 31, 2029
Evaluator's Fee: $15 per evaluation. Evaluations for purposes of sale,
purchase or redemption of Units are made as of the close of trading (4:00 p.m.
Eastern time) on the New York Stock Exchange on each day on which it is open.
[FN]
*Plus net interest accrued to date of settlement (five business days after
purchase) (see "Public Offering Price" herein and "Redemption of Units" and
"Purchase of Units by Sponsor" in Part Two).
<PAGE>
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 58
SUMMARY OF ESSENTIAL INFORMATION AS OF DECEMBER 16, 1993
Sponsor: Nike Securities L.P.
Evaluator: Securities Evaluation Service, Inc.
Trustee: The Bank of New York
PER UNIT INFORMATION BASED ON VARIOUS DISTRIBUTION PLANS
<TABLE>
<CAPTION>
Semi-
Monthly Quarterly Annual
<S> <C> <C> <C>
Calculation of Estimated Net Annual Income:
Estimated Annual Interest Income $46.61 $46.61 $46.61
Less: Estimated Annual Expense
Excluding Insurance $1.82 $1.58 $1.35
Annual Premium on Portfolio
Insurance $.52 $.52 $.52
Estimated Net Annual Interest Income $44.27 $44.51 $44.74
Calculation of Interest Distribution:
Estimated Net Annual Interest Income $44.27 $44.51 $44.74
Divided by 12, 4 and 2, Respectively $3.69 $11.13 $22.37
Estimated Daily Rate of Net Interest Accrual $.1230 $.1236 $.1243
Estimated Current Return Based on Public
Offering Price 7.91% 7.95% 7.99%
Estimated Long-Term Return Based on Public
Offering Price 4.80% 4.84% 4.88%
</TABLE>
Trustee's Annual Fee: $1.24, $.98 and $.69 per $1,000 principal amount of
Bonds for those portions of the Trust under the monthly, quarterly and semi-
annual distribution plans, respectively.
Computation Dates: Fifteenth day of the month as follows: monthly--each
month; quarterly--March, June, September and December; semi-annual--June and
December.
Distribution Dates: First day of the month as follows: monthly--each month;
quarterly--January, April, July and October; semi-annual--January and July.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Unit Holders of The First Trust
of Insured Municipal Bonds, Series 58
We have audited the accompanying statement of assets and liabilities,
including the portfolio, of The First Trust of Insured Municipal Bonds, Series
58 as of September 30, 1993, and the related statements of operations and
changes in net assets for each of the three years in the period then ended.
These financial statements are the responsibility of the Trust's Trustee. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of September 30, 1993,
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 referred to above present fairly, in
all material respects, the financial position of the First Trust of Insured
Municipal Bonds, Series 58 at September 30, 1993, and the results of its
operations and changes in its net assets for each of the three years in the
period then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG
Chicago, Illinois
December 3, 1993
<PAGE>
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 58
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1993
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Municipal bonds, at value (cost $5,352,044)
(Notes 1 and 3) $6,103,782
Receivable from investment transaction 502,425
Accrued interest 211,235
Cash 44,950
__________
6,862,392
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND NET ASSETS
<S> <C> <C>
Liabilities:
Distributions payable and accrued to unit holders 101,850
Accrued liabilities 155
__________
102,005
__________
Net assets, applicable to 11,364 outstanding units
of fractional undivided interest:
Cost of Trust assets (Note 1) $5,352,044
Net unrealized appreciation (Note 2) 751,738
Distributable funds 656,605
__________
$6,760,387
==========
Net asset value per unit $594.90
==========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 58
PORTFOLIO - See notes to portfolio.
September 30, 1993
<TABLE>
<CAPTION>
Coupon Standard
interest Date of Redemption & Poor's Principal
Name of issuer and title of bond(e) rate maturity provisions(a) rating(b) amount Value
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
City of Santa Rosa, California, Hospital Revenue
(Santa Rosa Memorial Hospital), Series A (d) 10.30% 3/01/2011 1994 @ 100 S.F. AAA $100,000 145,889
Illinois Housing Development Authority, Multi- 1994 @ 101
Family Housing, 1979 Series A 7.125 7/01/2016 2005 @ 100 S.F. A+ 50,000 50,584
Minnesota Housing Finance Agency, Housing 1994 @ 101
Development, 1980 Series A 10.125 2/01/2013 2001 @ 101 S.F. A+ 1,580,000 1,611,600
City of Nevada, Vernon County, Missouri,
Waterworks System Revenue, Series of 1980
(AMBAC Insured) (c) (d) 10.00 10/01/2010 2000 @ 100 S.F. AAA 975,000 1,425,897
Shenandoah Valley School District (Schuylkill
County, Pennsylvania), General Obligation,
640 Series of 1980 (AMBAC Insured) (c) (d) 9.625 5/15/2018 1995 @ 100 AAA 1,640,000 1,844,672
Gulf Coast (Texas) Industrial Development
Authority, Industrial Development Revenue 1993 @ 101.5
(AMF Tuboscope, Inc. Project), Series 1980 10.00 10/01/2005 2002 @ 100 S.F. NR 1,000,000 1,025,140
______________________
$5,345,000 6,103,782
======================
</TABLE>
<PAGE>
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 58
NOTES TO PORTFOLIO
September 30, 1993
(a) Shown under this heading are the year in which each issue of Bonds is
initially redeemable and the redemption price in that year, or if
currently redeemable, the redemption price at September 30, 1993.
Unless otherwise indicated, each issue continues to be redeemable at
declining prices thereafter (but not below par value). "S.F." indicates
a sinking fund is established with respect to an issue of bonds. In
addition, certain bonds are sometimes redeemable in whole or in part
other than by operation of the stated redemption or sinking fund
provisions under specified unusual or extraordinary circumstances.
Approximately 82% of the aggregate principal amount of the Bonds is
subject to call within five years.
(b) The ratings shown are those effective at September 30, 1993 ("NR"
indicates no rating).
(c) Insurance has been obtained by the Bond issuer. No premium is payable
by the Trust.
(d) This issue of Bonds is secured by, and payable from, escrowed U.S.
Government securities.
(e) The Portfolio consists of six Bond issues from six states. One Bond
issue and one Bond issue, representing approximately 30% and 31% of the
aggregate principal amount of the Bonds in the Trust, are obligations of
issuers located in Minnesota and Pennsylvania, respectively. One of the
Bonds in the Trust, representing approximately 31% of the aggregate
principal amount of the Bonds in the Trust, is a general obligation of a
governmental entity. The remaining issues are revenue bonds payable
from the income of a specific project or authority and are divided by
purpose of issue as follows: Single Family Housing, 1; Industrial, 1;
Water, 1; Health Care, 1; and Other Housing, 1. Approximately 30% of
the aggregate principal amount of the Bond consists of single family
residential mortgage revenue bonds. Each of four Bond issues represents
10% or more of the aggregate principal amount of the Bonds in the Trust
or a total of approximately 97%. The largest such issue represents
approximately 31%.
[FN]
See accompanying notes to financial statements.
<PAGE>
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 58
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended September 30,
1993 1992 1991
<S> <C> <C> <C>
Interest income $584,606 613,133 722,044
Expenses:
Trustee's fees and related expenses (12,554) (11,062) (12,186)
Insurance expense (Note 3) (7,112) (7,597) (9,559)
Evaluator's fees (3,720) (3,810) (3,795)
________________________________
Investment income - net 561,220 590,664 696,504
Net gain (loss) on investments:
Net realized gain (loss) 72,466 10,810 157,262
Change in unrealized appreciation
or depreciation 7,972 (52,700) 71,720
________________________________
80,438 (41,890) 228,982
________________________________
Net increase in net assets resulting
from operations $641,658 548,774 925,486
================================
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 58
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year ended September 30,
1993 1992 1991
<S> <C> <C> <C>
Net increase in net assets resulting
from operations:
Investment income - net $561,220 590,664 696,504
Net realized gain (loss) on investments 72,466 10,810 157,262
Change in unrealized appreciation or
depreciation on investments 7,972 (52,700) 71,720
__________________________________
641,658 548,774 925,486
Distributions to unit holders:
Investment income - net (563,740) (588,574) (713,131)
Principal from investment transactions (269,119) (104,179) (3,920,255)
__________________________________
(832,859) (692,753) (4,633,386)
Unit redemptions (27, 143 and 145 in 1993,
1992 and 1991, respectively):
Principal portion (15,642) (86,474) (98,511)
Net interest accrued (536) (3,841) (2,423)
__________________________________
(16,178) (90,315) (100,934)
__________________________________
Total increase (decrease) in net assets (207,379) (234,294) (3,808,834)
Net assets:
At the beginning of the year 6,967,766 7,202,060 11,010,894
__________________________________
At the end of the year (including
distributable funds applicable to
Trust units of $656,605, $160,572
and $167,941 at September 30, 1993,
1992 and 1991, respectively) $6,760,387 $6,967,766 7,202,060
==================================
Trust units outstanding at the end of
the year 11,364 11,391 11,534
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 58
NOTES TO FINANCIAL STATEMENTS
1. Significant accounting policies
Security valuation -
Bonds are stated at values as determined by Securities Evaluation Service,
Inc. (the Evaluator), certain shareholders of which are officers of the
Sponsor. The bond values are based on (1) current bid prices for the bonds
obtained from dealers or brokers who customarily deal in bonds comparable to
those held by the Trust, (2) current bid prices for comparable bonds, (3)
appraisal or (4) any combination of the above (see Note 3).
Security cost -
The Trust's cost of its portfolio is based on the offering prices of the bonds
on the Date of Deposit, October 28, 1980. The premium or discount (including
original issue discount) existing at the Date of Deposit is not being
amortized. Realized gain (loss) from bond transactions is reported on an
identified cost basis.
Federal income taxes -
The Trust is not taxable for Federal income tax purposes. Each unit holder is
considered to be the owner of a pro rata portion of the Trust and,
accordingly, no provision has been made for Federal income taxes.
Expenses of the Trust -
In addition to insurance coverage acquired by the Trust (see Note 3), the
Trust pays a fee for Trustee services to The Bank of New York which is
currently based on $1.24, $.98 and $.69 per $1,000 principal amount of Bonds
for those portions of the Trust under the monthly, quarterly and semi-annual
distribution plans, respectively. Prior to January 1, 1991, the Trustee's
fees were based on $1.08, $.85 and $.60 per $1,000 principal amount of Bonds
for those portions of the Trust under the monthly, quarterly and semi-annual
distribution plans, respectively. Additionally, a fee of $15 per evaluation
is payable to the Evaluator and the Trust pays all related expenses of the
Trustee and recurring financial reporting costs.
2. Unrealized appreciation and depreciation
An analysis of net unrealized appreciation at September 30, 1993 follows:
<TABLE>
<S> <C>
Unrealized appreciation $751,738
Unrealized depreciation -
________
$751,738
========
</TABLE>
<PAGE>
3. Insurance
The issuers of two bond issues in the Trust acquired insurance coverage which
provides for the scheduled payments of principal and interest on those bonds
(see Note (c) to portfolio); the Trust has acquired similar insurance coverage
on all other bonds in its portfolio. While insurance coverage acquired by an
issuer of bonds continues in force so long as the bonds are outstanding and
the insurer remains in business, insurance coverage acquired by the Trust is
effective only while the bonds are owned by the Trust and, in the event of
disposition of such a bond by the Trustee, the insurance terminates as to such
bond on the date of disposition. Annual insurance premiums payable by the
Trust in future years, assuming no change in the portfolio, would be $5,932.
The valuation of bonds does not include any amount attributable to the
insurance acquired by the Trust as there has been no default in the payment of
principal or interest on the bonds in the portfolio as of the date of these
financial statements and, in the opinion of the Sponsor, the bonds are being
quoted in the market at a value which does not reflect a significant risk of
such default. If, in the future, the value of specific Bonds were to include
an amount attributable to the insurance acquired by the Trust, (a) it is the
present intent of the Sponsor to instruct the Trustee not to dispose of such
Bonds and (b) under certain extreme circumstances, the Sponsor may apply to
the Securities and Exchange Commission for an order permitting a full or
partial suspension of the rights of unit holders to redeem their units.
4. Other information
Cost to investors -
The cost to initial investors of units of the Trust was based on the aggregate
offering price of the bonds on the date of an investor's purchase, plus a
sales charge of 4.5% of the public offering price which is equivalent to
approximately 4.712% of the net amount invested.
Distributions of net interest income -
Distributions of net interest income to unit holders are made monthly,
quarterly or semi-annually. Such income distributions per unit, on an accrual
basis, were as follows:
<TABLE>
<CAPTION>
Type of Year ended September 30,
distribution
plan 1993 1992 1991
<S> <C> <C> <C>
Monthly $49.28 51.18 61.11
Quarterly 49.52 51.42 61.38
Semi-annual 49.74 51.63 61.63
</TABLE>
<PAGE>
Selected data for a unit of the Trust
outstanding throughout each year -
<TABLE>
<CAPTION>
Year ended September 30,
1993 1992 1991
<S> <C> <C> <C>
Interest income $51.34 53.33 62.24
Expenses (2.05) (1.95) (2.20)
__________________________
Investment income - net 49.29 51.38 60.04
Distributions to unit holders:
Investment income - net (49.52) (51.36) (61.49)
Principal from investment transactions (23.63) (9.14) (336.60)
Net gain (loss) on investments 7.07 (3.61) 19.68
__________________________
Total increase (decrease) in net assets (16.79) (12.73) (318.37)
Net assets:
Beginning of the year 611.69 624.42 942.79
__________________________
End of the year $594.90 611.69 624.42
==========================
</TABLE>
<PAGE>
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 58
PART ONE
Must be Accompanied by Part Two
____________________
P R O S P E C T U S
____________________
SPONSOR: Nike Securities L.P.
1001 Warrenville Road
Lisle, Illinois 60532
(800) 621-1675
TRUSTEE: The Bank of New York
Unit Investment Trust Division
101 Barclay Street, 20 West
New York, New York 10286
LEGAL COUNSEL Chapman and Cutler
TO SPONSOR: 111 West Monroe Street
Chicago, Illinois 60603
LEGAL COUNSEL Siller, Wilk, Mencher & Simkin
TO TRUSTEE: 767 Third Avenue
New York, New York 10017
INDEPENDENT Ernst & Young
AUDITORS: Sears Tower
233 South Wacker Drive
Chicago, Illinois 60606
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, securities in any jurisdiction to any person to whom it is not
lawful to make such offer in such jurisdiction.
This Prospectus does not contain all the information set forth in the
registration statement and exhibits relating thereto, which the Trust has
filed with the Securities and Exchange Commission, Washington, D.C., under the
Securities Act of 1933 and the Investment Company Act of 1940, and to which
reference is hereby made.
The First Trust of Insured Municipal Bonds
The First Trust of Insured Municipal Bonds-Multi-State
Supplement to the Part Two Propspectus Dated April 30, 1993
Subsequent to the date of this Part Two Prospectus, the Revenue
Reconciliation Act of 1993 (the "Tax Act") was enacted. The Tax
Act has altered the tax treatment of market discount received on
tax-exempt bonds. The Tax Act subjects tax-exempt bonds to the
market discount rules of the Code effective for bonds and/or
Units purchased after April 30, 1993. In general, market
discount is the amount (if any) by which the stated redemption
price at maturity exceeds an investor's purchase price (except to
the extent that such difference, if any, is attributable to
original issue discount not yet accrued). Accretion of market
discount, which is taxable as ordinary income under the Tax Act,
had been treated as capital gain under prior law. Market
discount that accretes while a Trust holds a Bond would be
recognized as ordinary income by the Unit holders when principal
payments are received on the Bond, upon sale or at redemption
(including early redemption) or upon the sale or redemption of
the Units, unless a Unit holder elects to include market discount
in taxable income as it accrues. The market discount rules are
complex and Unit holders should consult their tax advisers
regarding these rules and their application.
In addition, under the Tax Act, for taxable years beginning after
December 31, 1993, up to 85% of Social Security benefits are
includible in gross income to the extent that the sum of
"modified adjusted gross income" plus 50% of Social Security
benefits received exceeds an "adjusted base amount." The
adjusted base amount is $34,000 for unmarried taxpayers, $44,000
for married taxpayers filing a joint return, and zero for married
taxpayers who do not live apart at all times during the taxable
year and who file separate returns.
October 21, 1993
The First Trust of Insured Municipal Bonds
The First Trust of Insured Municipal Bonds-Multi-State
PROSPECTUS NOTE: THIS PART TWO PROSPECTUS MAY
Part Two ONLY BE USED WITH PART ONE
Dated April 30, 1993
The Fund. The First Trust of Insured Municipal Bonds and The First
Trust of Insured Municipal Bonds-Multi-State (collectively, the
"Fund") consist of underlying separate unit investment trusts
(the "Trusts"). Each Trust is an insured portfolio of interest-bearing
obligations (the "Bonds") issued by or on behalf of municipalities
and other governmental authorities within the state for which
the Trust is named, counties, municipalities, authorities and
political subdivisions thereof, the Commonwealth of Puerto Rico,
or its authorities, or other territories of the United States
or authorities thereof, the interest on which is, in the opinion
of recognized bond counsel to the respective issuing governmental
authorities, exempt from all Federal income taxes and, where applicable,
from state and local income taxes under existing law at the date
of issuance of such Bonds. The Bonds are referred to herein as
"Bonds" or "Securities". Each trust of the Fund owns an insured
portfolio of Bonds meeting the criteria described above. The objectives
of the Fund are Federal, state and local tax-exempt income and
conservation of capital through an investment in an insured portfolio
of tax-exempt Bonds. The payment of interest and the preservation
of principal are dependent upon the continuing ability of the
issuers and/or obligors of Bonds and of the insurers or reinsurers
to meet their respective obligations. Gain realized on the sale,
payment on maturity or redemption of the Securities by the Trustee
or on the sale or redemption of a Unit by a holder is included
in gross income for Federal income tax purposes as capital gain.
(See "What is the Federal Tax Status of Unit Holders?"). The Portfolio,
essential information based thereon and financial statements,
including a report of independent auditors relating to the series
of the Fund offered hereby, are contained in Part One to which
reference should be made for such information.
IN THE OPINION OF COUNSEL, INTEREST INCOME TO EACH SERIES OF THE
FUND AND TO THE RESPECTIVE UNIT HOLDERS THEREOF, WITH CERTAIN
EXCEPTIONS, IS EXEMPT UNDER EXISTING LAW FROM ALL FEDERAL INCOME
TAXES. IN ADDITION, THE INTEREST INCOME TO EACH SERIES OF THE
FUND IS, IN THE OPINION OF SPECIAL COUNSEL, EXEMPT TO THE EXTENT
INDICATED FROM STATE AND LOCAL TAXES WHEN HELD BY RESIDENTS OF
THE STATE IN WHICH THE ISSUERS OF THE BONDS IN SUCH SERIES ARE
LOCATED. CAPITAL GAINS, IF ANY, ARE SUBJECT TO TAX.
Distributions. Distributions of interest received by the Fund,
pro-rated on an annual basis, are made monthly, quarterly (if
applicable) or semi-annually as the Unit holder has elected. Except
as described herein, distributions of funds from the Principal
Account, if any, are made on the first day of each month to Unit
holders of record on the fifteenth day of the preceding month.
Information respecting the estimated current return and estimated
long-term return to Unit holders is contained in Part One.
Reinvestment. Distributions to Unit holders may be reinvested
as described herein (See "How Can Distributions to Unit Holders
be Reinvested?")
BOTH PARTS OF THE PROSPECTUS SHOULD BE RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Page 1
Portfolio Insurance. Insurance has been obtained from an independent
company, by each series of the Fund (except for The First Trust
of Insured Municipal Bonds-Multi-State: Pennsylvania Trust, Series
6) and/or by the issuer of the Bonds involved, guaranteeing the
payments of principal and interest on the Securities in the Portfolio
of each series of the Fund. Insurance obtained by each series
of the National Trust, prior to Series 112 and for each Series
of the New York and Pennsylvania Trust, applies only while Bonds
are retained in such Trust. For each Series of the Multi-State
Trust (except for Multi-State Trust: Pennsylvania Trust, Series
6) and for Series 112 and subsequent Series of the National Trust,
the Trustee, upon the sale of a Bond in any such Series, has the
right to obtain permanent insurance with respect to such Bond
(i.e., insurance to maturity of the Bonds regardless of the identity
of the holder thereof (the "Permanent Insurance"). For The First
Trust of Insured Municipal Bonds-Multi-State: Pennsylvania Trust,
Series 6 all of the Bonds are insured under policies of insurance
obtained by the issuers of the Bonds. See Part One for information
concerning Bonds insured by each series of the Fund and Bonds
insured by the issuers thereof. Insurance obtained by each series
of the Fund applies only while Bonds are retained in the Fund
while insurance obtained by a Bond issuer, if any, is effective
so long as such Bonds are outstanding. Such insurance relates
only to the Securities in the Fund and not to the Units. As a
result of such insurance, the Units have received a rating of
"AAA" by Standard & Poor's Corporation. (See "Why and How are
the Trusts Insured?") No representation is made as to any insurer's
or reinsurer's ability to meet its commitments. For Series 112
and subsequent Series of the National Trust and any Series of
The First Trust of Insured Municipal Bonds-Multi-State (except
for Multi-State Trust: Pennsylvania Trust, Series 6), pursuant
to an irrevocable commitment of Financial Guaranty Insurance Company,
in the event of a sale of a Bond insured by such Series of the
National Trust and Multi-State Trust, the Trustee has the right
to obtain permanent insurance for such Bond upon the payment of
a single predetermined insurance premium from the proceeds of
the sale of such Bond.
Offering. The Units offered hereby are issued and outstanding
Units which have been reacquired either by purchase from the Trustee
of Units tendered for redemption or by purchase in the open market.
The price paid in each instance was not less than the value of
the Securities per Unit, plus net interest accrued to the date
of settlement, determined as provided herein under "How is the
Public Offering Price Determined?" Any profit or loss resulting
from the sale of Units will accrue to the Sponsor or other dealers
selling the Units and no proceeds from any such sale will be received
by the Fund.
The Public Offering Price of the Units is equal to the value of
the Securities in the portfolio of the series of the Fund represented
by the Units being offered divided by the number of Units outstanding,
plus a sales charge as indicated in Part One for each Trust plus
net interest accrued to the date of settlement.
Market. The Sponsor, although not obligated to do so, intends
to maintain a market for Units in all series of the Fund at prices
based upon the value of the Securities in the related portfolio.
In the absence of such a market, a Unit holder will nonetheless
be able to dispose of Units by redemption at prices based upon
the value of the underlying Securities (see "How May Units be
Redeemed?"). The value of neither the underlying Bonds nor the
Units, absent situations in which Bonds are in default in payment
of principal or interest or, in the Sponsor's opinion, in significant
risk of such default, include value attributable to the portfolio
insurance obtained by each series of the Fund. (See "Why and How
are the Trusts Insured?")
Page 2
The First Trust of Insured Municipal Bonds
The First Trust of Insured Municipal Bonds-Multi-State
What are The First Trust of Insured Municipal Bonds and The First
Trust of Insured Municipal Bonds-Multi-State?
The Fund is a series of trusts of either The First Trust of Insured
Municipal Bonds (the "National Trust"), The First Trust of Insured
Municipal Bonds-New York Series (the "New York Trust"), The First
Trust of Insured Municipal Bonds-Pennsylvania Series (the "Pennsylvania
Trust") or The First Trust of Insured Municipal Bonds-Multi-State
(the "Multi-State Trust") all of which generally are similar but
each of which is separate and is designated by a different series
number. Each Series consists of underlying separate unit investment
trusts (such Trusts being collectively referred to herein as the
"Fund") created under the laws of the State of New York pursuant
to a Trust Agreement (the "Indenture") dated the Date of Deposit
with Nike Securities L.P., as Sponsor, Securities Evaluation Service,
Inc., as Evaluator, and The Bank of New York, as Trustee for Series
8 through 137 of the National Trust, all Series of the New York
Trust and Pennsylvania Trust and Series 1 through 9 of the Multi-State
Trust, and United States Trust Company of New York, as Trustee
for Series 138 and subsequent Series of the National Trust and
Series 10 and 11 of the Multi-State Trust.
The objectives of the Fund and each series thereof are income
exempt from Federal income tax and, additionally, for all Series
of the Fund other than the National Trust from state and local
income tax and conservation of capital through an investment in
an insured portfolio of interest-bearing obligations (the "Bonds")
(and in certain series, Existing Fund Units representing an undivided
interest in such obligations) issued by or on behalf of states,
counties, territories or municipalities of the United States or
authorities or political subdivisions thereof, the interest on
which is, in the opinion of recognized bond counsel to the issuing
governmental authorities, exempt from all Federal income tax under
existing law. The Bonds and the Existing Fund Units are collectively
referred to herein as "Securities." Insurance has been obtained
by each Series of the Fund and/or by the issuer of the Bonds involved
guaranteeing the payment of principal and interest on the Bonds
when such principal and interest shall become due for payment.
Insurance has been obtained by each Series of the Fund from either
AMBAC Indemnity Corporation ("AMBAC Indemnity") or Financial Guaranty
Insurance Company ("Financial Guaranty") (except for the Multi-State
Trust: Pennsylvania Trust, Series 6). For Series of the Multi-State
Trust (except for Multi-State Trust: Pennsylvania Trust, Series
6) and for Series 112 and subsequent Series of the National Trust,
the Trustee upon sale of a Bond in any such Series has the right
to obtain Permanent Insurance for the Bond which is sold. All
of the Bonds in the Multi-State Trust: Pennsylvania Trust, Series
6 are insured under policies of insurance obtained by the issuer
of the Bonds. Insurance obtained by Series 8-111 of the National
Trust, and all Series of the New York Trust and the Pennsylvania
Trust is applicable only while the Bonds thus insured are held
in the Fund. Insurance obtained by each series of the Fund from
Financial Guaranty covers all Bonds in such series. Insurance
obtained by each series of the Fund from AMBAC Indemnity covers
all Bonds in such series which were not insured by the issuer.
The underlying Bonds represented by the Existing Fund Units have
been insured under substantially identical policies with AMBAC
Indemnity at the time of creation of the respective series (or
in certain instances some of such Bonds have been insured by the
respective issuers of such bonds through insurance obtained from
AMBAC Indemnity). Thus, the Bonds underlying the Existing Fund
Units are not additionally insured by the respective series. There
is, of course, no guarantee that the Fund's objectives will be
achieved. An investment in the Fund should be made with an understanding
of the risks which an investment in fixed rate long-term debt
obligations may entail, including the risk that the value of the
Units will decline with increases in interest rates.
Neither the Public Offering Price nor any evaluation of Units
for purposes of repurchases or redemptions reflects any element
of value for the insurance obtained by the Fund unless Bonds are
in default in payment of principal or interest or, in the Sponsor's
opinion, are being quoted in the market at values which reflect
a significant risk of such default. See "Public Offering-How is
the Public Offering Price Determined?"
Page 3
On the other hand, the value of insurance obtained by the issuer
of the Bonds is reflected and included in the market value of
such Bonds.
Insurance is not a substitute for the basic credit of an issuer,
but supplements the existing credit and provides additional security
therefor. If an issue is accepted for insurance, a noncancellable
policy for the scheduled payment of interest and principal on
the Bonds is issued by the insurer. A single premium is paid for
any Bonds insured by an issuer and a monthly premium is paid by
each series of the Fund for the insurance obtained by it. All
Bonds insured by the issuer thereof by AMBAC Indemnity and Financial
Guaranty receive an "AAA" rating by Standard & Poor's Corporation
and an "Aaa" rating by Moody's Investors Service, Inc. See "Why
and How are the Trusts Insured?"
In selecting Bonds for the Fund, the following facts, among others,
were considered: (i) the Standard & Poor's Corporation rating
of the Bonds was in no case less than "BBB" or the Moody's Investors
Service, Inc. rating of the Bonds was in no case less than "Baa",
at the date the series was established, including provisional
or conditional ratings, respectively, or if not rated, the Bonds
had, in the opinion of the Sponsor, credit characteristics sufficiently
similar to the credit characteristics of interest-bearing tax-exempt
obligations that were so rated as to be acceptable for acquisition
by the Fund (see "Description of Bond Ratings"), (ii) the prices
of the Bonds relative to other bonds of comparable quality and
maturity, (iii) the availability and cost of insurance on the
principal and interest of the Bonds, and (iv) the diversification
of Bonds as to purpose of issue and location of issuer.
Subsequent to the Date of Deposit, a Bond may cease to be rated
or its rating may be reduced below the minimum required as of
the Date of Deposit. Neither event requires the elimination of
such Bond from the Portfolio, but may be considered in the Sponsor's
determination as to whether or not to direct the Trustee to dispose
of a Bond. See "Rights of Unit Holders-How May Bonds be Removed
from the Fund?" The Portfolio appearing in Part One contains Bond
ratings, if any, for the Bonds listed at the date shown.
Certain of the Bonds in certain series of the Fund may be general
obligations of governmental entities that are backed by the taxing
power of such entities. The number and percentage of the aggregate
principal amount of Bonds in the Portfolio of each series of the
Fund which are general obligations of governmental entities are
indicated in Part One. The remaining Bonds are revenue bonds payable
from the income of a specific project or authority and are not
supported by the issuer's power to levy taxes. General obligation
bonds are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. Revenue
bonds, on the other hand, are payable only from the revenues derived
from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific
revenue source. There are, of course, variations in the security
of the different Bonds in the Fund, both within a particular classification
and between classifications, depending on numerous factors.
Certain of the Bonds in certain series of the Fund may be health
care revenue bonds. Ratings of bonds issued for health care facilities
are sometimes based on feasibility studies that contain projections
of occupancy levels, revenues and expenses. A facility's gross
receipts and net income available for debt service may be affected
by future events and conditions including, among other things,
demand for services, the ability of the facility to provide the
services required, physicians' confidence in the facility, management
capabilities, competition with other hospitals, efforts by insurers
and governmental agencies to limit rates, legislation establishing
state rate-setting agencies, expenses, government regulation,
the cost and possible unavailability of malpractice insurance
and the termination or restriction of governmental financial assistance,
including that associated with Medicare, Medicaid and other similar
third party payor programs. Pursuant to recent Federal legislation
Medicare reimbursements are currently calculated on a prospective
basis utilizing a single nationwide schedule of rates. Prior to
such legislation Medicare reimbursements were based on the actual
costs incurred by the health facility. The current legislation
may adversely affect reimbursements to hospitals and other facilities
for services provided under the Medicare program.
Certain of the Bonds in certain series of the Fund may be single
family mortgage revenue bonds, which are issued for the purpose
of acquiring from originating financial institutions notes secured
by mortgages on residences
Page 4
located within the issuer's boundaries and owned by persons of
low or moderate income. Mortgage loans are generally partially
or completely prepaid prior to their final maturities as a result
of events such as sale of the mortgaged premises, default, condemnation
or casualty loss. Because these Bonds are subject to extraordinary
mandatory redemption in whole or in part from such prepayments
of mortgage loans, a substantial portion of such Bonds will probably
be redeemed prior to their scheduled maturities or even prior
to their ordinary call dates. The redemption price of such issues
may be more or less than the offering price of such Bonds. Extraordinary
mandatory redemption without premium could also result from the
failure of the originating financial institutions to make mortgage
loans in sufficient amounts within a specified time period or,
in some cases, from the sale by the Bond issuer of the mortgage
loans. Failure of the originating financial institutions to make
mortgage loans would be due principally to the interest rates
on mortgage loans funded from other sources becoming competitive
with the interest rates on the mortgage loans funded with the
proceeds of the single family mortgage revenue bonds. Additionally,
unusually high rates of default on the underlying mortgage loans
may reduce revenues available for the payment of principal of
or interest on such mortgage revenue bonds. Single family mortgage
revenue bonds issued after December 31, 1980 were issued under
Section 103A of the Internal Revenue Code, which Section contains
certain ongoing requirements relating to the use of the proceeds
of such Bonds in order for the interest on such bonds to retain
its tax-exempt status. In each case, the issuer of the bonds has
covenanted to comply with applicable ongoing requirements and
bond counsel to such issuer has issued an opinion that the interest
on the Bonds is exempt from Federal income tax under existing
laws and regulations. There can be no assurances that the ongoing
requirement will be met. The failure to meet these requirements
could cause the interest on the Bonds to become taxable, possibly
retroactively from the date of issuance.
Certain of the Bonds in certain series of the Fund may be obligations
of issuers whose revenues are primarily derived from mortgage
loans to housing projects for low to moderate income families.
The ability of such issuers to make debt service payments will
be affected by events and conditions affecting financed projects,
including, among other things, the achievement and maintenance
of sufficient occupancy levels and adequate rental income, increases
in taxes, employment and income conditions prevailing in local
labor markets, utility costs and other operating expenses, the
managerial ability of project managers, changes in laws and governmental
regulations, the appropriation of subsidies and social and economic
trends affecting the localities in which the projects are located.
The occupancy of housing projects may be adversely affected by
high rent levels and income limitations imposed under Federal
and state programs. Like single family mortgage revenue bonds,
multi-family mortgage revenue bonds are subject to redemption
and call features, including extraordinary mandatory redemption
features, upon prepayment, sale or non-origination of mortgage
loans as well as upon the occurrence of other events. Certain
issuers of single or multi-family housing bonds have considered
various ways to redeem bonds they have issued prior to the stated
first redemption dates for such bonds. In one situation the New
York City Housing Development Corporation, in reliance on its
interpretation of certain language in the indenture under which
one of its bond issues was created, redeemed all of such issue
at par in spite of the fact that such indenture provided that
the first optional redemption was to include a premium over par
and could not occur prior to 1992. In connection with the housing
Bonds held by the Fund, the Sponsor has not had any direct communications
with any of the issuers thereof, but at the date hereof it is
not aware that any of the respective issuers of such Bonds are
actively considering the redemption of such Bonds prior to their
respective stated initial call dates. However, there can be no
assurance that an issuer of a Bond in the Fund will not attempt
to so redeem a Bond in the Fund.
Certain of the Bonds in certain series of the Fund may be obligations
of issuers whose revenues are derived from the sale of water and/or
sewerage services. Water and sewerage bonds are generally payable
from user fees. Problems faced by such issuers include the ability
to obtain timely and adequate rate increases, population decline
resulting in decreased user fees, the difficulty of financing
large construction programs, the limitations on operations and
increased costs and delays attributable to environmental considerations
Page 5
the increasing difficulty of obtaining or discovering new supplies
of fresh water, the effect of conservation programs and the impact
of "no-growth" zoning ordinances. All of such issuers have been
experiencing certain of these problems in varying degrees.
Certain of the Bonds in certain series of the Fund may be obligations
of issuers whose revenues are primarily derived from the sale
of electric energy. Utilities are generally subject to extensive
regulation by state utility commissions which, among other things,
establish the rates which may be charged and the appropriate rate
of return on an approved asset base. The problems faced by such
issuers include the difficulty in obtaining approval for timely
and adequate rate increases from the governing public utility
commission, the difficulty of financing large construction programs,
increased competition, recent reductions in estimates of future
demand for electricity in certain areas of the country, the limitations
on operations and increased costs and delays attributable to environment
considerations, the difficulty of the capital market in absorbing
utility debt, the difficulty in obtaining fuel at reasonable prices
and the effect of energy conservation. All of such issuers have
been experiencing certain of these problems in varying degrees.
In addition, Federal, state and municipal governmental authorities
may from time to time review existing, and impose additional,
regulations governing the licensing, construction and operation
of nuclear power plants, which may adversely affect the ability
of the issuers of certain of the Bonds in the Fund to make payments
of principal and/or interest on such Bonds.
Certain of the Bonds in certain series of the Fund may be industrial
revenue bonds ("IRBs"), including pollution control revenue bonds,
which are tax-exempt securities issued by states, municipalities,
public authorities or similar entities to finance the cost of
acquiring, constructing or improving various industrial projects.
These projects are usually operated by corporate entities. Issuers
are obligated only to pay amounts due on the IRBs to the extent
that funds are available from the unexpended proceeds of the IRBs
or receipts or revenues of the issuer under an arrangement between
the issuer and the corporate operator of a project. The arrangement
may be in the form of a lease, installment sale agreement, conditional
sale agreement or loan agreement, but in each case the payments
to the issuer are designed to be sufficient to meet the payments
of amounts due on the IRBs. Regardless of the structure, payment
of IRBs is solely dependent upon the creditworthiness of the corporate
operator of the project or corporate guarantor. Corporate operators
or guarantors may be affected by many factors which may have an
adverse impact on the credit quality of the particular company
or industry. These include cyclicality of revenues and earnings,
regulatory and environmental restrictions, litigation resulting
from accidents or environmentally-caused illnesses, extensive
competition and financial deterioration resulting from leveraged
buy-outs or takeovers. The IRBs in a Fund may be subject to special
or extraordinary redemption provisions which may provide for redemption
at par or, with respect to original issue discount bonds, at issue
price plus the amount of original issue discount accreted to the
redemption date plus, if applicable, a premium. The Sponsor cannot
predict the causes or likelihood of the redemption of IRBs or
other Bonds in the Fund prior to the stated maturity of such Bonds.
Certain of the Bonds in certain series of the Fund may be obligations
which are payable from and secured by revenues derived from the
ownership and operation of facilities such as airports, bridges,
turnpikes, port authorities, convention centers and arenas. The
major portion of an airport's gross operating income is generally
derived from fees received from signatory airlines pursuant to
use agreements which consist of annual payments for leases, occupancy
of certain terminal space and service fees. Airport operating
income may therefore be affected by the ability of the airlines
to meet their obligations under the use agreements. The air transport
industry is experiencing significant variations in earnings and
traffic, due to increased competition, excess capacity, increased
costs, deregulation, traffic constraints and other factors, and
several airlines are experiencing severe financial difficulties.
The Sponsor cannot predict what effect these industry conditions
may have on airport revenues which are dependent for payment on
the financial condition of the airlines and their usage of the
particular airport facility. Similarly, payment on Bonds related
to other facilities is dependent on revenues from the projects,
such as user fees from ports, tolls on turnpikes and bridges and
rents from buildings. Therefore, payment may be adversely affected
by reduction
Page 6
in revenues due to such factors as increased cost of maintenance,
decreased use of a facility, lower cost of alternative modes of
transportation, scarcity of fuel and reduction or loss of rents.
Certain of the Bonds in certain series of the Fund may be obligations
of issuers which are, or which govern the operation of, schools,
colleges and universities and whose revenues are derived mainly
from ad valorem taxes or, for higher education systems, from tuition,
dormitory revenues, grants and endowments. General problems relating
to school bonds include litigation contesting the state constitutionality
of financing public education in part from ad valorem taxes, thereby
creating a disparity in educational funds available to schools
in wealthy areas and schools in poor areas. Litigation or legislation
on this issue may affect the sources of funds available for the
payment of school bonds in the Fund. General problems relating
to college and university obligations would include the prospect
of a declining percentage of the population consisting of "college"
age individuals, possible inability to raise tuitions and fees
sufficiently to cover increased operating costs, the uncertainty
of continued receipt of Federal grants and state funding and new
government legislation or regulations which may adversely affect
the revenues or costs of such issuers. All of such issuers have
been experiencing certain of these problems in varying degrees.
Existing Fund Units have been deposited with the Trustee in three
series of the Fund. These Units at the respective dates of deposit
represented approximately 4% of the principal amount of the respective
Trust's portfolio. The investment objectives of all of the series
of the Fund are similar, and the Sponsor and Trustee of the series
represented by the Existing Fund Units have responsibilities and
authority and receive fees substantially identical to those described
in this Prospectus. All Existing Fund Units were purchased by
the Sponsor in the secondary market for inclusion in the respective
Portfolio and were not taken from the Sponsor's inventory.
Investors should be aware that many of the Bonds in each Portfolio
are subject to continuing requirements such as the actual use
of Bond proceeds or manner of operation of the project financed
from Bond proceeds that may affect the exemption of interest on
such Bonds from Federal income taxation. Although at the time
of issuance of each of the Bonds in the Fund an opinion of bond
counsel was rendered as to the exemption of interest on such obligations
from Federal income taxation, there can be no assurance that the
respective issuers or other obligor on such obligations will fulfill
the various continuing requirements established upon issuance
of the Bonds. A failure to comply with such requirements may cause
a determination that interest on such obligations is subject to
Federal income taxation, perhaps even retroactively from the date
of issuance of such Bonds, thereby reducing the value of the Bonds
and subjecting Unit holders to unanticipated tax liabilities.
Because certain of the Bonds may from time to time under certain
circumstances be sold or redeemed or will mature in accordance
with their terms and because the proceeds from such events will
be distributed to Unit holders and will not be reinvested, no
assurance can be given that any series of the Fund will retain
for any length of time the size and composition which existed
at the date of the information in Part One. Neither the Sponsor
nor either Trustee shall be liable in any way for any default,
failure or defect in any Bond. Certain of the Bonds contained
in each series of the Fund may be subject to being called or redeemed
in whole or in part prior to their stated maturities pursuant
to the optional redemption provisions and sinking fund provisions
described in the "Portfolio" in Part One or pursuant to special
or extraordinary redemption provisions. A bond subject to optional
call 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 issue is redeemed, at or before maturity, by the
proceeds of a new bond issue. A bond subject to sinking fund redemption
is one which is subject to partial call from time to time at par
or, in the case of a zero coupon bond, at the accreted value from
a fund accumulated for the scheduled retirement of a portion of
an issue prior to maturity. Special or extraordinary redemption
provisions may provide for redemption at par (or for original
issue discount bonds at issue price plus the amount of original
issue discount accreted to redemption date plus, if applicable,
some premium) of all or a portion of an issue upon the occurrence
of certain circumstances. Generally, events that may permit the
extraordinary optional redemption of Bonds or may require mandatory
redemption
Page 7
of Bonds include, among others: a final determination that the
interest on the Bonds is taxable; the substantial damage or destruction
by fire or other casualty of the project for which the proceeds
of the Bonds were used; an exercise by a local, state or Federal
governmental unit of its power of eminent domain to take all or
substantially all of the project for which the proceeds of the
Bonds were used; changes in the economic availability of raw materials,
operating supplies or facilities or technological or other changes
which render the operation of the project, for which the proceeds
of the Bonds were used, uneconomic; changes in law or an administrative
or judicial decree which renders the performance of the agreement
under which the proceeds of the Bonds were made available to finance
the project impossible or which creates unreasonable burdens or
which imposes excessive liabilities, such as taxes, not imposed
on the date the Bonds are issued on the issuer of the Bonds or
the user of the proceeds of the Bonds; an administrative or judicial
decree which requires the cessation of a substantial part of the
operations of the project financed with the proceeds of the Bonds;
an overestimate of the costs of the project to be financed with
the proceeds of the Bonds resulting in excess proceeds of the
Bonds which may be applied to redeem Bonds; or an underestimate
of a source of funds securing the Bonds resulting in excess funds
which may be applied to redeem Bonds. See the discussion of single
family mortgage and multi-family mortgage revenue bonds above
for more information on the call provisions of such bonds. The
exercise of redemption or call provisions will (except to the
extent the proceeds of the called Bonds are used to pay for Unit
redemptions) result in the distribution of principal and may result
in a reduction in the amount of subsequent interest distributions;
it may also affect the estimated current return and estimated
long-term return on Units of the Fund. Redemption pursuant to
call provisions is more likely to occur, and redemption pursuant
to sinking fund provisions may occur, when the Bonds have an offering
side valuation which represents a premium over par, or for original
issue discount bonds, a premium over the par value or the accreted
value. Unit holders may recognize capital gain or loss upon any
redemption or call.
To the best knowledge of the Sponsor, there is no litigation other
than that which is described in this Prospectus or any supplement
thereto pending as of the date hereof in respect of any Bonds
which might reasonably be expected to have a material adverse
effect upon the Fund. At any time, litigation may be initiated
on a variety of grounds with respect to Bonds in the Fund. 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. While the outcome of litigation
of such nature can never be entirely predicted, the Fund has received
opinions of bond counsel to the issuing authority of each Bond
on the date of issuance to the effect that such Bonds have been
validly issued and that the interest thereon is exempt from Federal
income taxes and, where applicable, state and local taxes. In
addition, other factors may arise from time to time which potentially
may impair the ability of issuers to meet obligations undertaken
with respect to the Bonds.
To the extent that Units are redeemed by the Trustee, the fractional
undivided interest represented by each unredeemed Unit in the
related Fund will increase, although the actual interest represented
by such fraction will remain substantially unchanged. Units will
remain outstanding until redeemed upon tender to a Trustee by
any Unit holder, which may include the Sponsor, or until termination
of the related Trust Agreement.
What are Estimated Long-Term Return and Estimated Current Return?
At the date of this Prospectus, the Estimated Current Return and
the Estimated Long-Term Return, under the monthly, quarterly (if
applicable) and semi-annual distribution plans, are as set forth
in Part One attached hereto for each Fund. Estimated Current Return
is computed by dividing the Estimated Net Annual Interest Income
per Unit by the Public Offering Price. Any change in either the
Estimated Net Annual Interest Income per Unit or the Public Offering
Price will result in a change in the Estimated Current Return.
For each Fund, the Public Offering Price will vary in accordance
with fluctuations in the prices of the underlying Bonds and the
Net Annual Interest Income per Unit will change as Bonds are redeemed,
paid, sold or exchanged in certain refundings or as the expenses
of each Trust change. Therefore, there is no assurance that the
Estimated
Page 8
Current Return indicated in Part One for each Fund will be realized
in the future. Estimated Long-Term Return is calculated using
a formula which (1) takes into consideration and determines and
factors in the relative weightings of the market values, yields
(which takes into account the amortization of premiums and the
accretion of discounts) and estimated retirements of all of the
Bonds in the Trust; (2) takes into account the expenses and sales
charge associated with each Unit of a Trust; and (3) takes into
effect the tax-adjusted yield from potential capital gains at
the Date of Deposit. Since the market values and estimated retirements
of the Bonds and the expenses of the Fund will change, there is
no assurance that the Estimated Long-Term Return indicated in
Part One for each Fund will be realized in the future. Estimated
Current Return and Estimated Long-Term Return are expected to
differ because the calculation of Estimated Long-Term Return reflects
the estimated date and amount of principal returned while Estimated
Current Return calculations include only Net Annual Interest Income
and Public Offering Price. Neither rate reflects the true return
to Unit holders, which is lower, because neither includes the
effect of the delay in the first payment to Unit holders.
How is Accrued Interest Treated?
Accrued interest is the accumulation of unpaid interest on a bond
from the last day on which interest thereon was paid. Interest
on Bonds in the Fund generally is paid semi-annually to the Fund.
However, interest on the Bonds in the Fund is accounted for daily
on an accrual basis. Because of this, the Fund always has an amount
of interest earned but not yet collected by the Trustee because
of non-collected coupons. For this reason, the Public Offering
Price of Units will have added to it the proportionate share of
accrued and undistributed net interest to the date of settlement.
Except through an advance of its own funds, the Trustee has no
cash for distribution to Unit holders until it receives interest
payments on the Bonds in the Fund. The Trustee will recover its
advancements without interest or other costs to such Fund from
interest received on the Bonds in the Fund. When these advancements
have been recovered, regular distributions of interest to Unit
holders will commence. See "Rights of Unit Holders-How are Interest
and Principal Distributed?" Interest account balances are established
with generally positive cash balances so that it will not be necessary
on a regular basis for the Trustee to advance its own funds in
connection with interest distributions.
Because of the varying interest payment dates of the Bonds, accrued
interest at any point in time will be greater than the amount
of interest actually received by the Fund and distributed to Unit
holders. Therefore, there will always remain an item of accrued
interest that is added to the value of the Units. If a Unit holder
sells or redeems all or a portion of his Units, he will be entitled
to receive his proportionate share of the net interest accrued
from the purchaser of his Units. Since the Trustee has the use
of the net interest accrued held in the Interest Account for distributions
to Unit holders and since such Account is non-interest-bearing
to Unit holders, the Trustee benefits thereby.
Why and How are the Trusts Insured?
AMBAC Indemnity. The following discussion concerning AMBAC Indemnity
and insurance policies issued by AMBAC Indemnity applies to Series
8 through 111 of the National Trust and all Series of the New
York Trust and the Pennsylvania Trust.
In an effort to protect Unit holders against any delay in payment
of interest and against principal loss, insurance has been obtained
by each series of the Fund or by the Bond issuer guaranteeing
payment of interest and principal, when such shall become due
for payment, in respect of the Bonds (bonds underlying the Existing
Fund Units already being covered by insurance). The insurance
policy obtained by each series of the Fund is noncancellable and
will continue in force so long as each series of the Fund is in
existence, and the Bonds described in the policy continue to be
held by the Fund (see "Portfolio" in Part One). Nonpayment of
premiums on the policy obtained by each series of the Fund will
not result in the cancellation of insurance but will permit the
insurer to take action against the Trustee for the series involved
to recover premium payments due it. Premium rates for each issue
of Bonds protected by the policy obtained by each series
Page 9
of the Fund are fixed for the life of the respective series. The
underlying bonds represented by the Existing Fund Units have been
insured under substantially identical policies with AMBAC Indemnity
to those described herein at the time of creation of the respective
series (or in certain instances some of such bonds have been insured
by the respective issuers of such bonds through insurance obtained
from AMBAC Indemnity). Thus, the bonds underlying the Existing
Fund Units are not additionally insured by the series of the Fund
holding the Existing Fund Units. The premium for any insurance
policy or policies obtained by an Existing Fund or an issue of
bonds underlying such Existing Fund Units is payable on the same
terms as the Fund's insurance policy or has been paid in advance
by such issuer. Any such policy or policies are noncancellable
and will continue in force so long as the bonds so insured are
outstanding (in the case of issuer acquired insurance) or so long
as such bonds are held by the Existing Fund (in the case of insurance
acquired by the Existing Fund) and the insurers referred to below
remain in business.
The aforementioned insurance guarantees the payment of principal
and interest on the Bonds as they shall become due for payment.
It does not guarantee the market value of the Bonds or the value
of the Units. The insurance obtained by the Fund is effective
only as to Bonds owned by and held in the Fund. In the event of
a sale of any such Bond in Series 8 through 111 of the National
Trust and all Series of the New York Trust and the Pennsylvania
Trust by the Trustee, the insurance terminates as to such Bond
on the date of sale.
Except as indicated below, insurance obtained by a Trust has no
effect on the price or redemption value of Units. It is the present
intention of the Evaluator to attribute a value to such insurance
for the purpose of computing the price or redemption value of
Units only if the Bonds covered by such insurance are in default
in payment of principal or interest or in the Sponsor's opinion
are being quoted in the market at values which reflect a significant
risk of such default. The value of the insurance will be equal
to the difference between the market value of a Bond in default
in payment of principal or interest or in the Sponsor's opinion
is being quoted in the market at a value which reflects a significant
risk of default and the market value of comparable bonds which
are not in such situations. However, the Evaluator will not assign
a value greater than par value to Bonds in default or in significant
risk of default. Except under limited circumstances, it is also
the present intention of the Trustee not to sell such Bonds to
effect redemptions or for any other reason but rather to retain
them in the portfolio because the value attributable to the insurance
cannot be realized upon sale. See "Public Offering-How is the
Public Offering Price Determined?" herein for a more complete
description of the Evaluator's method of valuing Bonds which are
in default in payment of principal or interest or in significant
risk of such default. Insurance obtained by the issuer of a Bond
is effective so long as such Bond is outstanding. Therefore, any
such insurance may be considered to represent an element of market
value in regard to the Bonds thus insured, but the exact effect,
if any, of this insurance on such market value cannot be predicted.
The insurance policy obtained by Series 8 through 111 of the National
Trust and all Series of the New York Trust and the Pennsylvania
Trust originally issued by MGIC Indemnity Corporation ("MGIC Indemnity")
and any other policy obtained by a Bond issuer was originally
issued either by American Municipal Bond Assurance Corporation
("AMBAC") or MGIC Indemnity. MGIC Indemnity and AMBAC were each
subsidiaries of MGIC Investment Corporation. MGIC Indemnity and
AMBAC were merged as of March 31, 1984. The surviving corporation,
MGIC Indemnity Corporation, was renamed AMBAC Indemnity Corporation
("AMBAC Indemnity") as of June 1, 1984. AMBAC Indemnity is a Wisconsin-
domiciled stock insurance company regulated by the Office of the Commissioner
of Insurance of the State of Wisconsin, and licensed to do business
in fifty states, the District of Columbia and the Commonwealth
of Puerto Rico, with admitted assets of approximately $1,503,000,000
(unaudited) and statutory capital of approximately $862,000,000
(unaudited) as of September 30, 1992. Statutory capital consists
of AMBAC Indemnity's policyholders' surplus and statutory contingency
reserve. AMBAC Indemnity is a wholly-owned subsidiary of AMBAC,
Inc., a 100% publicly-held company. Moody's Investors Service,
Inc. and Standard & Poor's Corporation have both assigned a triple-A
claims-paying ability rating to AMBAC Indemnity.
Page 10
Copies of AMBAC Indemnity's financial statements prepared in accordance
with statutory accounting standards are available from AMBAC Indemnity.
The address of AMBAC Indemnity's administrative offices and its
telephone number are One State Street Plaza, 17th Floor, New York,
New York 10004 and (212) 668-0340.
The information relating to AMBAC Indemnity contained above has
been furnished by AMBAC Indemnity. No representation is made herein
as to the accuracy or adequacy of such information, or as to the
existence of any adverse changes in such information, subsequent
to the date hereof.
To be in the Portfolio of Series 8 through 111 of the National
Trust and of any Series of the New York Trust and the Pennsylvania
Trust, Bonds must have been insured by AMBAC Indemnity or have
been eligible for the insurance obtained from AMBAC Indemnity.
In determining eligibility for insurance, AMBAC Indemnity applied
its own standards which correspond generally to the standards
it normally uses in establishing the insurability of new issue
municipal bonds and which were not necessarily the same as the
criteria used in regard to the selection of Bonds by the Sponsor.
To the extent the standards of AMBAC Indemnity are more restrictive
than those of the Sponsor, the previously stated Fund investment
criteria have been limited with respect to the Bonds. This decision
was made prior to the Date of Deposit, as Bonds not eligible for
such insurance (or not already insured by the issuer thereof)
were not deposited in the Fund. Thus, all Bonds in each Portfolio
of Series 8-111 of the National Trust and any Series of the New
York Trust and the Pennsylvania Trust are insured, either by the
respective series of the Trust or by the issuer of the Bonds.
The contracts of insurance relating to the various Portfolios
and the negotiations in respect thereof represent the only significant
relationship between AMBAC Indemnity and the Sponsor or the Fund.
Otherwise neither AMBAC Indemnity nor its parent, AMBAC Inc.,
or any associate thereof has any significant relationship, direct
or indirect, with the Fund or the Sponsor, except that the Sponsor
has in the past and may from time to time in the future, in the
normal course of its business, participate as sole underwriter
or as manager or as a member of underwriting syndicates in the
distribution of new issues of municipal bonds for which a policy
of insurance guaranteeing the timely payment of interest and principal
has been obtained from AMBAC Indemnity.
Because the Bonds are insured by AMBAC Indemnity as to the timely
payment of principal and interest, when due, and on the basis
of the various reinsurance agreements in effect, Standard & Poor's
Corporation has assigned to Series 8 through 111 of the National
Trust and any Series of the New York Trust and the Pennsylvania
Trust its "AAA" investment rating. This is the highest rating
assigned to securities by Standard & Poor's Corporation (see "Description
of Bond Ratings"). The obtaining of this rating by the Fund should
not be construed as an approval of the offering of the Units by
Standard & Poor's Corporation or as a guarantee of the market
value of the Fund or the Units. Standard & Poor's has indicated
that this rating is not a recommendation to buy, hold or sell
Units nor does it take into account the extent to which expenses
of the Fund or sales by the Fund of Bonds for less than the purchase
price paid by such Trust will reduce payment to Unit holders of
the interest and principal required to be paid on such Bonds.
There is no guarantee that the "AAA" investment rating with respect
to the Units of an insured Trust will be maintained.
An objective of portfolio insurance obtained by the Fund is to
obtain higher yield on the Securities in the Portfolio than would
be available if all the Bonds in such Portfolio had the Standard
& Poor's Corporation "AAA" and/or Moody's Investors Service, Inc.
"Aaa" rating(s) and yet at the same time to have the protection
of insurance of prompt payment of interest and principal, when
due, on the Bonds. There is, of course, no certainty that this
result will be achieved. Bonds in the Fund which have been insured
by the issuer (all of which are rated "AAA" by Standard & Poor's
Corporation and/or "Aaa" by Moody's Investors Service, Inc.) may
or may not have a higher yield than uninsured bonds rated "AAA"
by Standard & Poor's Corporation or "Aaa" by Moody's Investors
Service, Inc. In selecting such Bonds for the Portfolio, the Sponsor
applied the criteria described above.
In the event of nonpayment of interest or principal, when due,
in respect of a Bond, the appropriate insurer shall make such
payment no later than 30 days after it has been notified that
such non-payment has occurred.
Page 11
The insurer, as regards any payment it may make, will succeed
to the rights of the Trustee in respect thereof. All policies
issued by AMBAC Indemnity are substantially identical insofar
as liability to the Trust is concerned.
Chapman and Cutler, Counsel for the Sponsor, has given an opinion
to the effect that the payment of insurance proceeds representing
maturing interest on defaulted municipal obligations paid by AMBAC
Indemnity or another insurer would be excludable from Federal
gross income if, and to the same extent as, such interest would
have been so excludable if paid by the issuer of the defaulted
obligations. See "What is the Federal Tax Status of Unit Holders?"
AMBAC Indemnity is subject to regulation by the department of
insurance in each state in which it is qualified to do business.
Such regulation, however, is no guarantee that it will be able
to perform its contract of insurance in the event a claim should
be made thereunder at some time in the future. At the date hereof,
it is reported that no claims have been submitted or are expected
to be submitted to AMBAC Indemnity which would materially impair
the ability of AMBAC Indemnity to meet its commitments pursuant
to any contract of bond or portfolio insurance.
To determine the Bonds in the Portfolio which are insured through
insurance obtained by the issuer thereof and the Bonds which are
insured under one of the Fund's portfolio insurance policies,
see "Portfolio" in Part One.
Financial Guaranty. The following discussions concerning Financial
Guaranty Insurance Company and insurance policies issued by Financial
Guaranty Insurance Company applies to Series 112 and subsequent
series of the National Trust and all Series of the Multi-State
Trust except the Multi-State Trust: Pennsylvania Trust, Series
6. All of the Bonds in the Multi-State Trust: Pennsylvania Trust,
Series 6 are insured under policies of insurance obtained by the
issuers of the Bonds from Financial Guaranty Insurance Company
("Financial Guaranty"), American Municipal Bond Assurance Corporation,
Municipal Bond Insurance Association and Bond Investors Guaranty
Insurance Company. The premiums for the insurance policies obtained
by the issuers of the Bonds in the Multi-State Trust: Pennsylvania
Trust, Series 6 have been paid in advance by such issuers and
such policies are noncancellable and will continue in force so
long as the Bonds so insured are outstanding. Because of the insurance
obtained by the issuers of the Bonds in the Multi-State Trust:
Pennsylvania Trust, Series 6, Standard & Poor's Corporation has
rated the Units of such Trust "AAA."
In an effort to protect Unit holders against any delay in payment
of interest and against principal loss, insurance has been obtained
for Series 112 and subsequent Series of the National Trust and
all Series of the Multi-State Trust (except the Multi-State Trust:
Pennsylvania Trust, Series 6) from Financial Guaranty Insurance
Company ("Financial Guaranty"), a New York stock insurance company,
guaranteeing the scheduled payment of interest and principal in
respect of the Bonds deposited in and delivered to each series
of the Trust. The insurance policy obtained by each such series
of the Trust is noncancellable and will continue in force so long
as such series of the Trust is in existence and the Bonds described
in the policy continue to be held by the Trust (see "Portfolio"
in Part One for each Trust). Nonpayment of premiums on the policies
obtained by the Trust will not result in the cancellation of insurance
but will permit Financial Guaranty to take action against the
Trustee to recover premium payments due it. Premium rates for
each issue of Bonds protected by the policy obtained by a Series
of the Fund are fixed for the life of the respective series. The
premium for any insurance policy or policies obtained by an issuer
of Bonds has been paid in advance by such issuer and any such
policy or policies are noncancellable and will continue in force
so long as the Bonds so insured are outstanding and the insurer
and/or insurers thereof remain in business.
Under the provisions of the aforementioned insurance, Financial
Guaranty unconditionally and irrevocably agrees to pay Citibank,
N.A. or its successor, as its agent (the "Fiscal Agent"), that
portion of the principal of and interest on the Bonds which shall
become due for payment but shall be unpaid by reason of nonpayment
by the issuer of the Bonds. The term "due for payment" means,
when referring to the principal of a Bond, its stated maturity
date or the date on which it shall have been called for mandatory
sinking fund redemption
Page 12
and does not refer to any earlier date on which payment is due
by reason of call for redemption (other than by mandatory sinking
fund redemption), acceleration or other advancement of maturity
and means, when referring to interest on a Bond, the stated date
for payment of interest, except that when the interest on a Bond
shall have been determined as provided in the underlying documentation
relating to such Bond, to be subject to Federal income taxation.
"Due for payment" also means, when referring to the principal
of such Bond, the date on which such Bond has been called for
mandatory redemption as a result of such determination of taxability,
and when referring to interest on such Bond, the accrued interest
at the rate provided in such documentation to the date on which
such Bond has been called for such mandatory redemption, together
with any applicable redemption premium. The term "due for payment"
will not include, when referring to either the principal of a
Bond or the interest on a Bond, any acceleration of payment unless
such acceleration is at the sole option of Financial Guaranty.
Financial Guaranty will make such payments to the Fiscal Agent
on the date such principal or interest becomes due for payment
or on the business day next following the day on which Financial
Guaranty shall have received notice of nonpayment, whichever is
later. The Fiscal Agent will disburse to the Trustee the face
amount of principal and interest which is then due for payment
but is unpaid by reason of nonpayment by the issuer but only upon
receipt by the Fiscal Agent of (i) evidence of the Trustee's right
to receive payment of the principal or interest due for payment
and (ii) evidence, including any appropriate instruments of assignment,
that all of the rights to payment of such principal or interest
due for payment shall thereupon vest in Financial Guaranty. Upon
such disbursement, Financial Guaranty shall become the owner of
the Bond, appurtenant coupon or right to payment of principal
or interest on such Bonds and shall be fully subrogated to all
of the Trustee's rights thereunder, including the right to payment
thereof.
Pursuant to an irrevocable commitment of Financial Guaranty, the
Trustee upon the sale of a Bond in Series 112 and subsequent Series
of the National Trust and all Series of the Multi-State Trust
(except the Multi-State Trust: Pennsylvania Trust, Series 6) has
the right to obtain permanent insurance with respect to such Bond
(i.e. insurance to maturity of the Bonds regardless of the identity
of the holder thereof) (the "Permanent Insurance") upon the payment
of a single predetermined insurance premium from the proceeds
of the sale of such Bond. Accordingly, any Bond in such Trust
is eligible to be sold on an insured basis. It is expected that
the Trustee will exercise the right to obtain Permanent Insurance
only if upon such exercise a Trust would receive net proceeds
(sale of Bond proceeds less the insurance premium attributable
to the Permanent Insurance) from such sale in excess of the sale
proceeds if such Bonds were sold on an uninsured basis. The insurance
premium with respect to each Bond is determined based upon the
insurability of each Bond as of the Date of Deposit and will not
be increased or decreased for any change in the creditworthiness
of such Bond.
The policies obtained by Series 112 and subsequent Series of the
National Trust and each Series of the Multi-State Trust (except
the Multi-State Trust: Pennsylvania Trust, Series 6) were issued
by Financial Guaranty. Financial Guaranty is a wholly-owned subsidiary
of FGIC Corporation (the "Corporation"), a Delaware holding company.
The Corporation is a wholly-owned subsidiary of General Electric
Capital Corporation ("GECC"). Neither the Corporation nor GECC
is obligated to pay the debts of or the claims against Financial
Guaranty. Financial Guaranty is domiciled in the State of New
York and is subject to regulation by the State of New York Insurance
Department. As of December 31, 1992, the total capital and surplus
of Financial Guaranty was approximately $621,000,000.
Financial Guaranty is currently authorized to write insurance
in 49 states and in the District of Columbia. Copies of Financial
Guaranty's financial statements, prepared on the basis of statutory
accounting principles, and the Corporation's financial statements,
prepared on the basis of generally accepted accounting principles,
may be obtained by writing to Financial Guaranty at 115 Broadway,
New York, New York 10006, Attention: Communications Department
(telephone number is (212) 312-3000) or to the New York State
Insurance Department at 160 West Broadway, 18th Floor, New York,
New York 10013, Attention: Property Companies Bureau (telephone
number (212) 602-0389).
Page 13
The information relating to Financial Guaranty contained above
has been furnished by such corporation. The financial information
contained herein with respect to such corporation is unaudited
but appears in reports or other materials filed with state insurance
regulatory authorities and is subject to audit and review by such
authorities. No representation is made herein as to the accuracy
or adequacy of such information or as to the absence of material
adverse changes in such information subsequent to the date thereof.
In order to be in Series 112 and subsequent Series of the National
Trust and any Series of the Multi-State Trust (except the Multi-State
Trust: Pennsylvania Trust, Series 6), Bonds must be covered by
the insurance obtained from Financial Guaranty by the Fund. In
determining whether to insure bonds, Financial Guaranty has applied
its own standards which are not necessarily the same as the criteria
used in regard to the selection of bonds by the Sponsor. The decision
was made prior to the Date of Deposit, as bonds not covered by
such insurance are not deposited in a Trust. The insurance obtained
by Series 112 and subsequent Series of the National Trust and
any Series of the Multi-State Trust (except the Multi-State Trust:
Pennsylvania Trust, Series 6) covers Bonds deposited in the respective
series and physically delivered to the Trustee in the case of
bearer bonds or registered in the name of the Trustee or its nominee
or delivered along with an assignment in the case of register
bonds or registered in the name of the Trustee or its nominee
in the case of Bonds held in book-entry form.
Insurance obtained by Series 112 and subsequent Series of the
National Trust and any Series of the Multi-State Trust or by the
Bond issuer does not guarantee the market value of the Bonds or
the value of the Units. The insurance obtained by each series
of a Trust is effective only as to Bonds owned by and held in
the respective series. In the event of a sale of any such Bond
by the Trustee, the insurance terminates as to such Bond on the
date of sale. In the event of a sale of a Bond held in Series
112 and subsequent Series of the National Trust and any Series
of the Multi-State Trust, the Trustee has the right to obtain
Permanent Insurance upon the payment of an insurance premium from
the proceeds of the sale of such Bond. Except as indicated below,
insurance obtained by a Trust has no effect on the price or redemption
value of Units. It is the present intention of the Evaluator to
attribute a value to the insurance obtained by a Trust (including
the right to obtain Permanent Insurance) for the purpose of computing
the price or redemption value of Units only if the Bonds covered
by such insurance are in default in payment of principal or interest
or, in the Sponsor's opinion, are being quoted in the market at
values which reflect a significant risk of such default. The value
of the insurance will be equal to the difference between (i) the
market value of a Bond assuming the exercise of the right to obtain
Permanent Insurance (less the insurance premium attributable to
the purchase of Permanent Insurance) which is in default in payment
of principal or interest or in significant risk of such default
and (ii) the market value of such Bonds not covered by Permanent
Insurance. See "Public Offering-How is the Public Offering Price
Determined?" herein for more complete description of the Evaluator's
method of valuing defaulted Bonds and Bonds which have a significant
risk of such default. Insurance obtained by the issuer of a Bond
is effective so long as such Bond is outstanding. Therefore, any
such insurance may be considered to represent an element of market
value in regard to the Bonds thus insured, but the exact effect,
if any, of this insurance on such market value cannot be predicted.
The contract of insurance obtained by Series 112 and subsequent
Series of the National Trust and any Series of the Multi-State
Trust and the negotiations in respect thereof represent the only
relationship between Financial Guaranty and the Fund. Otherwise
neither Financial Guaranty nor its parent, FGIC Corporation, or
any affiliate thereof has any significant relationship, direct
or indirect, with the Fund or the Sponsor, except that the Sponsor
has in the past and may from time to time in the future, in the
normal course of its business, participate as sole underwriter
or as manager or as a member of underwriting syndicates in the
distribution of new issues of municipal bonds, or participate
in secondary market transactions involving municipal bonds, in
which the investors or the affiliates of FGIC Corporation have
or will be participants or for which a policy of insurance guaranteeing
the scheduled payment of interest and principal
Page 14
has been obtained from Financial Guaranty. Neither the Fund nor
the Units nor the Portfolio is insured directly or indirectly
by FGIC Corporation.
Because the Bonds are insured by Financial Guaranty as to the
scheduled payment of principal and interest and on the basis of
the financial condition and the method of operation of Financial
Guaranty, Standard & Poor's Corporation has assigned to Series
112 and subsequent Series of the National Trust and each Series
of the Multi-State Trust its "AAA" investment rating. This is
the highest rating assigned to securities by Standard & Poor's
Corporation. See "Description of Bond Ratings." The obtaining
of this rating by a Trust should not be construed as an approval
of the offering of the Units by Standard & Poor's Corporation
or as a guarantee of the market value of a Trust or the Units.
Standard & Poor's Corporation has indicated that this rating is
not a recommendation to buy, hold or sell units nor does it take
into account the extent to which expenses of a Trust or sales
by a Trust of Bonds for less than the purchase price paid by a
Trust will reduce payment to Unit holders of the interest and
principal required to be paid on such Bonds. There is no guaranty
that the "AAA" investment rating with respect to the Units will
be maintained.
An objective of portfolio insurance obtained by a Trust is to
obtain a higher yield on the Securities in the portfolio than
would be available if all the bonds in such portfolio had the
Standard & Poor's Corporation "AAA" and/or Moody's Investors Service,
Inc. "Aaa" rating(s) and at the same time to have the protection
of insurance of scheduled payment of interest and principal on
the Bonds. There is, of course, no certainty that this result
will be achieved. Bonds in a Trust for which insurance has been
obtained by the issuer (all of which were rated "AAA" by Standard
& Poor's Corporation and/or "Aaa" by Moody's Investors Service,
Inc.) may or may not have a higher yield than uninsured bonds
rated "AAA" by Standard & Poor's Corporation or "Aaa" by Moody's
Investors Service, Inc. In selecting Bonds for the portfolio of
each Trust, the Sponsor has applied the criteria hereinbefore
described.
Chapman and Cutler, Counsel for the Sponsor, have given an opinion
to the effect that such payment of insurance proceeds representing
maturing interest on defaulted municipal obligations paid by Financial
Guaranty would be excludable from Federal gross income if, and
to the same extent as, such interest would have been so excludable
if paid by the issuer of the defaulted obligations. See "What
is the Federal Tax Status of Unit Holders?"
Except for the Multi-State Trust: Pennsylvania Trust, Series 6,
all Bonds in the National Trust and the Multi-State Trust are
insured under one of the Trust's portfolio insurance policies.
Certain Bonds in the portfolio may also be insured through insurance
obtained by the issuer thereof. See "Portfolio" in Part One.
What is the Federal Tax Status of Unit Holders?
At the respective times of issuance of the Bonds, opinions relating
to the validity thereof and to the exclusion of interest thereon
from Federal income tax were rendered by bond counsel to the respective
issuing authorities. Neither the Sponsor, Chapman and Cutler nor
any of the Special Counsel to the Fund for State tax matters have
made any special review for the Fund of the proceedings relating
to the issuance of the Bonds or of their bases for such opinions.
Gain realized on the sale or redemption of the Securities by the
Trustee or of a Unit by a Unit holder is, however, includable
in gross income for Federal income tax purposes as a capital gain.
(It should be noted in this connection that such gain does not
include any amounts received in respect of accrued interest or
accrued original issue discount, if any.) Such gain may be long
or short term, depending on the facts and circumstances.
At the time of the closing for each Trust, Chapman and Cutler,
Counsel for the Sponsor, rendered an opinion under then existing
law, substantially to the effect that:
(1) the Trusts are not associations taxable as corporations for
Federal income tax purposes. Tax-exempt interest received by each
of the Trusts on Bonds deposited therein will retain its status
as tax-exempt interest, for Federal income tax purposes, when
distributed to the Unit holder except that the alternative minimum
tax and the environmental tax (the "Superfund Tax") applicable
to corporate Unit holders may in certain circumstances, include
in the amount on which such tax is calculated, 75% of
Page 15
the interest income received by the Trust. See "Certain Tax Matters
Applicable to Corporate Unit Holders";
(2) exemption of interest and accrued original issue discount
on any Securities for Federal income tax purposes does not necessarily
result in tax exemption under the laws of the several states as
such laws vary with respect to the taxation of such securities
and in many states all or part of such interest and accrued original
issue discount may be subject to tax;
(3) each Unit holder is considered to be the owner of a pro rata
portion of such Trust under subpart E, subchapter J of Chapter
1 of the Internal Revenue Code of 1986 (hereinafter the "Code")
and will have a taxable event when the Trust disposes of a Security,
or when the Unit holder redeems or sells his Units. Unit holders
must reduce the tax basis of their Units for their share of accrued
interest received, if any, on Bonds delivered after the date the
Unit holders pay for their Units and, consequently, such Unit
holders may have an increase in taxable gain or reduction in capital
loss upon the disposition of such Units. Gain or loss upon the
sale or redemption of Units is measured by comparing the proceeds
of such sale or redemption with the adjusted basis of the Units.
If the Trustee disposes of Securities (whether by sale, payment
on maturity, redemption or otherwise), gain or loss is recognized
to the Unit holder. The amount of any such gain or loss is measured
by comparing the Unit holder's pro rata share of the total proceeds
from such disposition with his basis for his fractional interest
in the asset disposed of. In the case of a Unit holder who purchases
his Units, such basis is determined by apportioning the tax basis
for the Units among each of the Trust assets ratably according
to value as of the date of acquisition of the Units. The basis
of each Unit and of each Bond which was issued with original issue
discount must be increased by the amount of accrued original issue
discount and the basis of each Unit and of each Bond which was
purchased by a Trust at a premium must be reduced by the annual
amortization of Bond premium. The tax cost reduction requirements
of said Code relating to amortization of bond premium may, under
some circumstances, result in the Unit holder realizing a taxable
gain when his Units are sold or redeemed for an amount equal to
or less than his original cost; and
(4) any proceeds paid under the insurance policy issued to a Trustee
by AMBAC Indemnity or by Financial Guaranty for a series of a
Trust which represent maturing interest on defaulted obligations
held by such Trustee in the Portfolio of such series will be excludable
from Federal gross income if, and to the same extent as, such
interest would have been so excludable if paid by the issuer of
the defaulted obligations.
Sections 1288 and 1272 of the Code provide a complex set of rules
governing the accrual of original issue discount. These rules
provide that original issue discount accrues either on the basis
of a constant compounded interest rate or ratably over the term
of the Bond, depending on the date the Bond was issued. In addition,
special rules apply if the purchase price of a Bond exceeds the
original issue price plus the amount of original issue discount
which accrued to prior owners. The application of these rules
will also vary depending on the value of the Bond on the date
a Unit holder acquires his Unit, and the price the Unit holder
pays for his Unit. Because of the complexity of these rules relating
to the accrual of original issue discount, Unit holders should
consult with their tax advisers as to how these rules apply to
their particular factual situation. See "Portfolio" in Part One
for information relating to Bonds, if any, issued at an original
issue discount.
Counsel for the Sponsor has also advised that under Section 265
of the Code, interest on indebtedness incurred or continued to
purchase or carry Units of a Trust is not deductible for Federal
income tax purposes. The Internal Revenue Service has taken the
position that such indebtedness need not be directly traceable
to the purchase or carrying of Units (however, these rules generally
do not apply to interest paid on indebtedness incurred to purchase
or improve a personal residence). Under Section 265 of the Code,
certain financial institutions that acquire Units would generally
not be able to deduct any of the interest expense
Page 16
attributable to ownership of Units. Investors with questions regarding
these issues should consult with their tax advisers.
In the case of certain of the Bonds in a Trust, the opinions of
bond counsel indicate that interest on such securities received
by a "substantial user" of the facilities being financed with
the proceeds of these securities, or persons related thereto,
for periods while such securities are held by such a user or related
person, will not be excludable from Federal gross income, although
interest on such securities received by others would be excludable
from Federal gross income. "Substantial user" and "related person"
are defined under U.S. Treasury Regulations. Any person who believes
he or she may be a substantial user or related person as so defined
should contact his or her tax adviser.
In general, Section 86 of the Code provides that Social Security
benefits are includable in gross income in an amount equal to
the lesser of (1) 50% of the Social Security benefits received
or (2) 50% of the excess of "modified adjusted gross income" plus
50% of the Social Security benefits received over the appropriate
"base amount." It should be noted that under recently proposed
legislation, the proportion of Social Security benefits subject
to inclusion in taxable income would be raised to 55% for taxable
years starting in 1992 and 1993, and 60% for taxable years starting
after 1993. No prediction is made as to the likelihood that this
legislation or other legislation with substantially similar effect
will be enacted. The base amount is $25,000 for unmarried taxpayers,
$32,000 for married taxpayers filing a joint return and zero for
married taxpayers who do not live apart at all times during the
taxable year and who file separate returns. Modified adjusted
gross income is adjusted gross income determined without regard
to certain otherwise allowable deductions and exclusions from
gross income and by including tax-exempt interest. To the extent
that Social Security benefits are includable in gross income,
they will be treated as any other item of gross income.
Although tax-exempt interest is included in modified adjusted
gross income solely for the purpose of determining what portion,
if any, of Social Security benefits will be included in gross
income, no tax-exempt interest, including that received from a
Trust, will be subject to tax. A taxpayer whose adjusted gross
income already exceeds the base amount must include 50% of his
Social Security benefits in gross income whether or not he receives
any tax-exempt interest. A taxpayer whose modified adjusted gross
income (after inclusion of tax-exempt interest) does not exceed
the base amount need not include any Social Security benefits
in gross income.
For purposes of computing the alternative minimum tax for individuals
and corporations and the Superfund Tax for corporations, interest
on certain private activity bonds (which includes most industrial
and housing revenue bonds) issued on or after August 8, 1986 is
included as an item of tax preference. THE FUND DOES NOT INCLUDE
ANY SUCH PRIVATE ACTIVITY BONDS ISSUED ON OR AFTER THAT DATE.
For taxpayers other than corporations, net capital gains are subject
to a maximum stated marginal tax rate of 28 percent. However,
it should be noted that legislative proposals are introduced from
time to time that affect tax rates and could affect relative differences
at which ordinary income and capital gains are taxed. All taxpayers
are presently required to disclose to the Internal Revenue Service
the amount of tax-exempt interest earned during the year.
Certain Tax Matters Applicable to Corporate Unit Holders. Present
Federal income tax law also provides for an alternative minimum
tax for corporations levied at a rate of 20% of alternative minimum
taxable income. The alternative minimum tax and the environmental
tax (the "Superfund Tax") depend upon the corporation's alternative
minimum taxable income ("AMTI"), which is the corporation's taxable
income with certain adjustments. One of the adjustment items used
in computing AMTI of a corporation (excluding an S Corporation,
Regulated Investment Company, Real Estate Investment Trust, or
REMIC) is an amount equal to 75% of the excess of such corporation's
"adjusted current earnings" over an amount equal to its AMTI (before
such adjustment item and the alternative tax net operating loss
deduction). Although tax-exempt interest received by the Trusts
on Bonds deposited therein will not be included in the gross income
of corporations for Federal income tax purposes, "adjusted current
earnings" includes all tax-exempt interest, including interest
on all Bonds in the Trusts.
Page 17
Unit holders are urged to consult their own tax advisers with
respect to the particular tax consequences to them, including
the corporate alternative minimum tax, the Superfund Tax and the
branch profits tax imposed by Section 884 of the Code.
LeBoeuf, Lamb, Leiby & MacRae have served as Special Counsel to
Series 8-81, inclusive, of the National Trust, Booth & Baron have
served as Special Counsel to Series 82-147 of the National Trust
and Series 1-9 of the Multi-State Trust, inclusive, and all Series
of the New York Trust and the Pennsylvania Trust, Winston & Strawn
(previously named Cole & Deitz) have served as Special Counsel
to Series 148 and subsequent Series of the National Trust and
Series 10 and 11 of the Multi-State Trust for New York tax matters.
In the opinion of such Special Counsels, under the existing income
tax laws of the State and City of New York, each Trust is not
an association taxable as a corporation and the income of each
such Trust will be treated as the income of the Unit holder.
For information with respect to exemption from state or other
local taxes, see the sections in this Prospectus pertaining to
each Trust.
All statements in the Prospectus concerning exemption from Federal,
state or other local taxes are the opinions of Counsel and are
to be so construed.
California Tax Status. At the time of the closing for each California
Trust, Special Counsel to the Fund for California tax matters
rendered an opinion under then existing California income and
property tax law applicable to taxpayers whose income is subject
to California income taxation substantially to the effect that:
Each California Trust is not an association taxable as a corporation
and the income of a California Trust will be treated as the income
of the Unit holders under the income tax laws of California.
Interest on the underlying securities (which may include bonds
or other obligations issued by the governments of Puerto Rico,
the Virgin Islands, Guam or the Northern Mariana Islands) which
is exempt from tax under California personal income tax and property
tax laws when received by a California Trust will, under such
laws, retain its status as tax-exempt interest when distributed
to Unit holders. However, interest on the underlying securities
attributed to a Unit holder which is a corporation subject to
a California franchise tax laws may be includable in its gross
income for purposes of determining its California franchise tax.
Under California income tax law, each Unit holder in a California
Trust will have a taxable event when a California Trust disposes
of a security (whether by sale, exchange, redemption or payment
at maturity) or when the Unit holder redeems or sells Units. Because
of the requirement that tax cost basis be reduced to reflect amortization
of bond premium, under some circumstances a Unit holder may realize
taxable gain when Units are sold or redeemed for an amount equal
to, or less than, their original cost. The total tax cost of each
Unit to a Unit holder is allocated among each of the bond issues
held in a California Trust (in accordance with the proportion
of a California Trust comprised by each bond issue) in order to
determine his per unit tax cost for each bond issue; and the
tax cost reduction requirements relating to amortization of bond
premium will apply separately to the per unit cost of each bond
issue. Unit holders' bases in their Units, and the bases for their
fractional interest in each California Trust asset, may have to
be adjusted for their pro rata share of accrued interest received,
if any, on securities delivered after the Unit holders' respective
settlement dates.
Any proceeds paid under an insurance policy with respect to the
bonds in a California Trust as well as "regular-way" and "when-issued"
contracts for the purchase of bonds which represent maturing interest
on defaulted obligations held by the Trustee will be exempt from
California personal income tax if, and to the same extent as,
such interest would have been so exempt if paid by the issuer
of the defaulted obligations.
Under a California personal property tax laws, bonds (including
the bonds in a California Trust as well as "regular-way" and "when-issued"
contracts for the purchase of bonds) or any interest thereon is
exempt from such tax.
Page 18
Under Section 17280(b)(2) of a California Revenue and Taxation
Code, interest on indebtedness incurred or continued to purchase
or carry Units of a California Trust is not deductible for the
purposes of the California personal income tax. While there presently
is no California authority interpreting this provision, Section
17280(b)(2) directs the California Franchise Tax Board to prescribe
regulations determining the proper allocation and apportionment
of interest costs for this purpose. The Franchise Tax Board has
not yet proposed or prescribed such regulations. In interpreting
the generally similar Federal provision, the Internal Revenue
Service has taken the position that such indebtedness need not
be directly traceable to the purchase or carrying of Units (although
the Service has not contended that a deduction for interest on
indebtedness incurred to purchase or improve a personal residence
or to purchase goods or services for personal consumption will
be disallowed). In the absence of conflicting regulations or other
California authority, the California Franchise Tax Board generally
has interpreted California statutory tax provisions in accord
with Internal Revenue Service interpretations of similar Federal
provisions.
Florida Tax Status. At the time of the closing for each Florida
Trust, Chapman and Cutler, Special Counsel to the Fund for Florida
tax matters, rendered an opinion under then existing Florida income
tax law applicable to taxpayers whose income is subject to Florida
income taxation substantially to the effect that:
Neither a Florida Trust nor Non-Corporate Unit holders will be
subject to the Florida income tax imposed by Chapter 220, Florida
Statutes. Any amounts paid to a Florida Trust or Non-Corporate
Unit Holders under an insurance policy issued to a Florida Trust,
the issuers, the underwriters, or the Sponsor thereof, or others,
which represent maturing interest on defaulted obligations held
by the Trustee will not be subject to the Florida income tax imposed
by Chapter 220, Florida Statutes.
Corporate Unit holders will be subject to Florida income taxation
under Chapter 220, Florida Statutes (a) on interest received by
a Florida Trust, (b) on payments of interest pursuant to any insurance
policy, (c) on gain realized when Bonds are sold, redeemed or
paid at maturity or when insurance payments with respect to principal
are received by a Florida Trust and (d) on gain on the sale or
redemption of Units, to the extent allocable to Florida as "adjusted
Federal income." Corporate Unit holders that have a commercial
domicile in Florida will also be subject to Florida income taxation
on 100% of the items of income described in clauses (a) through
(d) of the immediately preceding sentence to the extent that such
income constitutes "nonbusiness income."
Even if interest on indebtedness incurred or continued by a Unit
holder to purchase Units in a Florida Trust is not deductible
for Federal income tax purposes, it will reduce interest income
on the Bonds which is reportable by Corporate Unit holders for
Florida income tax purposes.
Where the application of Section 265 of the Code results in the
denial to a Unit holder of interest deductions, the interest may
also be nondeductible for Florida income tax purposes.
Trust Units held by a Florida resident will be includible in the
resident's estate for Florida estate tax purposes, but if such
estate is not subject to the Federal estate tax, the estate will
not be subject to the Florida estate tax. The Florida estate tax
is limited to the amount of the credit for state death taxes provided
for in section 2011 of the Code, less estate taxes paid to states
other than Florida.
Neither the Bonds nor the Units will be subject to the Florida
ad valorem tax, the Florida intangible personal property tax or
Florida sales or use tax.
Massachusetts Tax Status. At the time of the closing for each
Massachusetts Trust, Special Counsel to the Fund for Massachusetts
tax matters rendered an opinion under then existing Massachusetts
income tax law applicable to taxpayers whose income is subject
to Massachusetts income taxation and based on rulings of the Commissioner
of Revenue substantially to the effect that:
For Massachusetts income tax purposes, each Massachusetts Trust
will be treated as a corporate trust under Section 8 of Chapter
62 of the Massachusetts General Laws and not as a grantor trust
under Section 10(e) of Chapter 62 of the Massachusetts General
Laws.
Page 19
Each Massachusetts Trust will not be held to be engaging in business
in Massachusetts within the meaning of said Section 8 and will,
therefore, not be subject to Massachusetts income tax.
Massachusetts Unit holders who are subject to Massachusetts income
taxation under Chapter 62 of Massachusetts General Laws will not
be required to include their respective shares of the earnings
of or distributions from the Massachusetts Trust in their Massachusetts
gross income to the extent that such earnings or distributions
represent tax-exempt interest for Federal income tax purposes
received by such Massachusetts Trust on obligations issued by
Massachusetts, its counties, municipalities, authorities, political
subdivisions or instrumentalities, or issued by United States
territories or possessions ("Obligations").
Any proceeds of insurance obtained by the Trustee of the Fund
or by the issuer of an Obligation held by a Massachusetts Trust
which are paid to Massachusetts Unit holders and which represent
maturing interest on defaulted obligations held by the Trustee
will be excludable from Massachusetts gross income of a Massachusetts
Unit holder if, and to the same extent as, such interest would
have been so excludable if paid by the issuer of the defaulted
Obligation.
A Massachusetts Trust's capital gains and/or capital losses realized
upon disposition of Obligations held by it will be includable
pro rata in the Federal gross income of Massachusetts Unit holders
who are subject to Massachusetts income taxation under Chapter
62 of the Massachusetts General Laws, and such gains and/or losses
will be included as capital gains and/or losses in the Massachusetts
Unit holders' Massachusetts gross income, except where capital
gain is specifically exempted from income taxation under acts
authorizing issuance of said Obligations.
Gains or losses realized upon sale or redemption of Units by Massachusetts
Unit holders who are subject to Massachusetts income taxation
under Chapter 62 of the Massachusetts General Laws will be includable
in their Massachusetts gross income.
In determining such gain or loss Massachusetts Unit holders will,
to the same extent required for Federal tax purposes, have to
adjust their tax bases for their Units for accrued interest received,
if any, on Bonds delivered to the Trustee after the Unit holders
pay for their Units and for amortization of premiums, if any,
on obligations held by a Massachusetts Trust.
The Units of a Massachusetts Trust are not subject to any property
tax levied by Massachusetts or any political subdivision thereof,
nor to any income tax levied by any such political subdivision.
They are includable in the gross estate of a deceased Massachusetts
Unit holder who is a resident of Massachusetts for purposes of
the Massachusetts Estate Tax.
Michigan Tax Status. At the time of the closing for each Michigan
Trust, Special Counsel to the Fund for Michigan tax matters rendered
an opinion under then existing Michigan income tax law applicable
to taxpayers whose income is subject to Michigan income taxation
substantially to the effect that:
Each Michigan Trust and the owners of Units will be treated for
purposes of the Michigan income tax laws and the Single Business
Tax in substantially the same manner as they are for purposes
of the Federal income tax laws, as currently enacted. Accordingly,
Special Counsel has relied upon the opinion of Messrs. Chapman
and Cutler as to the applicability of Federal income tax laws
under the Internal Revenue Code of 1986, as currently amended,
to a Michigan Trust and the Unit holders.
Under the income tax laws of the State of Michigan, a Michigan
Trust is not an association taxable as a corporation; the income
of a Michigan Trust will be treated as the income of the Unit
holders of a Michigan Trust and be deemed to have been received
by them when received by a Michigan Trust. Interest on the Bonds
in a Michigan Trust which is exempt from tax under the Michigan
income tax laws when received by a Michigan Trust will retain
its status as tax-exempt interest to the Unit holders of a Michigan
Trust.
For purposes of the Michigan income tax laws, each Unit holder
of a Michigan Trust will be considered to have received his pro
rata share of interest on each Bond in a Michigan Trust when it
is received by a Michigan Trust, and each Unit holder will have
a taxable event when a Michigan Trust disposes of a Bond (whether
Page 20
by sale, exchange, redemption or payment at maturity) or when
the Unit holder redeems or sells his Unit, to the extent the transaction
constitutes a taxable event for Federal income tax purposes. The
tax cost of each Unit to a Unit holder will be established and
allocated for purposes of the Michigan income tax laws in the
same manner as such cost is established and allocated for Federal
income tax purposes.
Under the Michigan Intangibles Tax, a Michigan Trust is not taxable
and the pro rata ownership of the underlying bonds, as well as
the interest thereon, will be exempt to the Unit holders to the
extent a Michigan Trust consists of obligations of the State of
Michigan or its political subdivisions or municipalities, or of
obligations of possessions of the United States.
The Michigan Single Business Tax replaced the tax on corporate
and financial institution income under the Michigan Income Tax,
and the intangible tax with respect to those intangibles of persons
subject to the Single Business Tax the income from which would
be considered in computing the Single Business Tax. Persons are
subject to the Single Business Tax only if they are engaged in
"business activity," as defined in the Act. Under the Single Business
Tax, both interest received by a Michigan Trust on the underlying
Bonds and any amount distributed from a Michigan Trust to a Unit
holder, if not included in determining taxable income for Federal
income tax purposes, is also not included in the adjusted tax
base upon which the Single Business Tax is computed, of either
a Michigan Trust or the Unit holders. If a Michigan Trust or the
Unit holders have a taxable event for Federal income tax purposes
when a Michigan Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or the Unit holder redeems
or sells his Unit, an amount equal to any gain realized from such
taxable event which was included in the computation of taxable
income for Federal income tax purposes (plus an amount equal to
any capital gain of an individual realized in connection with
such event but excluded in computing that individual's Federal
taxable income) will be included in the tax base against which,
after allocation, apportionment and other adjustments, the Single
Business Tax is computed. The tax base will be reduced by an amount
equal to any capital loss realized from such a taxable event,
whether or not the capital loss was deducted in computing Federal
taxable income in the year the loss occurred. Unit holders should
consult their tax advisor as to their status under Michigan law.
Any proceeds paid under an insurance policy issued to the Trustee
of a Michigan Trust, or paid under individual policies obtained
by issuers of Bonds, or by the underwriter of the Bonds, or the
Sponsor or others which, when received by the Unit holders, represent
maturing interest on defaulted obligations held by the Trustee,
will be excludable from the Michigan income tax laws and the Single
Business Tax if, and to the same extent as, such interest would
have been so excludable if paid by the issuer of the defaulted
obligations. While treatment under the Michigan Intangibles Tax
is not premised upon the characterization of such proceeds under
the Internal Revenue Code, the Michigan Department of Treasury
should adopt the same approach as under the Michigan income tax
laws and the Single Business Tax.
As the Tax Reform Act of 1986 eliminates the capital gain deduction
for tax years beginning after December 31, 1986, the Federal adjusted
gross income, the computation base for the Michigan Income Tax,
of a Unit holder will be increased accordingly to the extent such
capital gains are realized when a Michigan Trust disposes of a
Bond or when the Unit holder redeems or sells a Unit, to the extent
such transaction constitutes a taxable event for Federal income
tax purposes.
Minnesota Tax Status. At the time of the closing for each Minnesota
Trust, Special Counsel to the Fund for Minnesota tax matters rendered
an opinion under then existing Minnesota income tax law applicable
to taxpayers whose income is subject to Minnesota income taxation
substantially to the effect that:
Each Minnesota Trust will have no income other than (i) interest
income on bonds issued by the State of Minnesota and its political
and governmental subdivisions, municipalities and governmental
agencies and instrumentalities and on bonds issued by possessions
of the United States which would be exempt from Federal and Minnesota
income taxation when paid directly to an individual, trust or
estate (and the term "Bonds" as used herein refers only to such
bonds), and (ii) gain on the disposition of such Bonds.
Page 21
Based on the foregoing, and in reliance upon the opinion of Chapman
and Cutler with respect to the Federal tax treatment of a Minnesota
Trust and its Unit holders, it is our opinion that Minnesota tax
law applies to a Minnesota Trust and its Unit holders in the following
manner:
"Taxable income" for Minnesota income tax purposes is the same
as "taxable income" for Federal income tax purposes with certain
modifications that (with one exception) do not apply to the present
circumstances. The exception is that corporations must add to
Federal taxable income the amount of any interest received on
the obligations of states and their agencies and instrumentalities,
political and governmental subdivisions, and municipalities. The
terms "trust" and "corporation" have the same meanings for Minnesota
income tax purposes, as relevant to the Minnesota tax status of
a Minnesota Trust, as for Federal income tax purposes.
In view of the relationship between Federal and Minnesota law
described in the preceding paragraph and the opinion of Chapman
and Cutler with respect to the Federal tax treatment of a Minnesota
Trust and its Unit holders, (1) each Minnesota Trust will be treated
as a trust rather than a corporation for Minnesota income tax
purposes and will not be deemed the recipient of any Minnesota
taxable income; (2) each Unit holder of a Minnesota Trust will
be treated as the owner of a pro rata portion of a Minnesota Trust
for Minnesota income tax purposes, and the income of a Minnesota
Trust will therefore be treated as the income of the Unit holders
under Minnesota law; (3) interest on the Bonds will be exempt
from Minnesota income taxation of Unit holders who are individuals,
trusts and estates when received by a Minnesota Trust and attributed
to such Unit holders and when distributed to such Unit holders
(except as hereinafter provided with respect to "industrial development
bonds" and "private activity bonds" held by "substantial users");
(4) interest on the Bonds will be includable in the Minnesota
taxable income (subject to allocation and apportionment) of Unit
holders that are corporations; (5) each Unit holder will realize
taxable gain or loss when a Minnesota Trust disposes of a Bond
(whether by sale, exchange, redemption or payment at maturity)
or when the Unit holder redeems or sells Units at a price that
differs from original cost as adjusted for amortization of bond
discount or premium and other basis adjustments (including any
basis reduction that may be required to reflect a Unit holder's
share of interest, if any, accruing on Bonds during the interval
between the Unit holder's settlement date and the date such Bonds
are delivered to a Minnesota Trust, if later); (6) tax cost reduction
requirements relating to amortization of bond premium may, under
some circumstances, result in Unit holders realizing taxable gain
when their Units are sold or redeemed for an amount equal to or
less than their original cost; (7) net capital gains of Unit holders
attributable to the Bonds will be fully includable in the Minnesota
taxable income of Unit holders (subject to allocation and apportionment
in the case of corporate Unit holders); and (8) interest on bonds
includable in the computation of "alternative minimum taxable
income" for Federal income tax purposes will also be includable
in the computation of "alternative minimum taxable income" for
Minnesota income tax purposes.
Interest income attributable to Bonds that are "industrial development
bonds" or "private activity bonds," as those terms are defined
in the Internal Revenue Code, will be taxable under Minnesota
law to a Unit holder who is a "substantial user" of the facilities
financed by the proceeds of such Bonds (or a "related person"
to such a "substantial user") to the same extent as if such Bonds
were held directly by such Unit holder.
New Jersey Tax Status. At the time of the closing for each New
Jersey Trust, Special Counsel to the Fund for New Jersey tax matters
rendered an opinion under then existing New Jersey income tax
law applicable to taxpayers whose income is subject to New Jersey
income taxation substantially to the effect that:
Each New Jersey Trust will be recognized as a trust and not an
association taxable as a corporation. The New Jersey Trusts will
not be subject to the New Jersey Corporation Business Tax or the
New Jersey Corporation Income Tax.
Page 22
With respect to the non-corporate Unit holders who are residents
of New Jersey, the income of a New Jersey Trust which is allocable
to each such Unit holder will be treated as the income of such
Unit holders under the New Jersey Gross Income Tax. Interest on
the underlying Bonds which would be exempt from New Jersey Gross
Income Tax if directly received by such Unit holder will retain
its status as tax-exempt interest when received by a New Jersey
Trust and distributed to such Unit holder. Any proceeds paid under
the insurance policy issued to the Trustee of a New Jersey Trust
with respect to the Bonds or under individual policies obtained
by issuers of Bonds, the Sponsor, the underwriters or others which
represent maturing interest on defaulted obligations held by the
Trustee will be exempt from New Jersey Gross Income Tax if, and
to the same extent as, such interest would have been so exempt
if paid by the issuer of the defaulted obligations.
A non-corporate Unit holder will not be subject to the New Jersey
Gross Income Tax on any gain realized either when a New Jersey
Trust disposes of a Bond (whether by sale, exchange, redemption,
or payment at maturity), when the Unit holder redeems or sells
his Units, or upon payment of any proceeds under the insurance
policy issued to the Trustee of a New Jersey Trust with respect
to the Bonds or under individual policies obtained by issuers
of Bonds, the Sponsor, the underwriters or others which represent
maturing principal on defaulted obligations held by the Trustee.
Any loss realized on such disposition may not be utilized to offset
gains realized by such Unit holder on the disposition of assets
the gain on which is subject to the New Jersey Gross Income Tax.
Units of a New Jersey Trust may be taxable on the death of a Unit
holder under the New Jersey Transfer Inheritance Tax Law or the
New Jersey Estate Tax Law.
If a Unit holder is a corporation subject to the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax, interest from
the Bonds in a New Jersey Trust which is allocable to such corporation
will be includable in its entire net income for purposes of the
New Jersey Corporation Business Tax or New Jersey Corporation
Income Tax, less any interest expense incurred to carry such investment
to the extent such interest expense has not been deducted in computing
Federal taxable income. Net gains derived by such corporation
on the disposition of the Bonds of a New Jersey Trust or on the
disposition of its Units will be included in its entire net income
for purposes of the New Jersey Corporation Business Tax or New
Jersey Corporation Income Tax.
New York Tax Status. At the time of the closing for all Series
of the New York Trust and Series 1-9 of the Multi-State Trust,
Booth & Baron, Special Counsel to all Series of the New York Trust
and Series 1-9 of the Multi-State Trust for New York tax matters,
rendered an opinion under then existing New York income tax law
applicable to taxpayers whose income is subject to New York income
taxation substantially to the effect that:
Each New York Trust is not an association taxable as a corporation
and the income of a New York Trust will be treated as the income
of the Unit holders under the existing income tax laws of the
State and City of New York;
Individuals who reside in New York State or City will not be subject
to State and City personal income tax on interest income which
is exempt from Federal income tax under section 103 of the Internal
Revenue Code of 1986 and derived from the Bonds, although they
will be subject to New York State and City tax with respect to
any gains realized when such obligations are sold, redeemed or
paid at maturity or when any such Units are sold or redeemed;
and
Any proceeds paid under the insurance policy to the Trustee of
a New York Trust which represent maturing interest on defaulted
obligations held by the Trustee will be excludable from New York
State or City personal income tax if, and to the same extent as,
such interest would have been so excludable if paid by the issuer
of the defaulted obligations.
New York Tax Status. At the time of the closing for Series 10
and Series 11 of the Multi-State Trust, Winston & Strawn (previously
named Cole & Deitz), New York, Special Counsel to Series 10 and
Series 11 of the
Page 23
Multi-State Trust for New York tax matters, rendered an opinion
under then existing New York income tax law applicable to taxpayers
whose income is subject to New York income taxation substantially
to the effect that:
Each New York Trust is not an association taxable as a corporation
and the income of a New York Trust will be treated as the income
of the Unit holders under the existing income tax laws of the
State and City of New York in the same manner as for Federal income
tax purposes (subject to differences in accounting for discount
and premium to the extent the State and/or City of New York do
not conform to current Federal law); and
Individuals who reside in New York State or City will not be subject
to State and City personal income tax on interest income which
is excludable from Federal gross income tax under section 103
of the Internal Revenue Code of 1986 and derived from the Bonds,
although they will be subject to New York State and City personal
income tax with respect to any gains realized when such obligations
are sold, redeemed or paid at maturity or when any such Units
are sold or redeemed; and
For individuals who reside in New York State or City, any proceeds
paid to the Trustee under the applicable insurance policies which
represent maturing interest on defaulted obligations held by the
Trustee will be excludable from New York State or City personal
income tax if, and to the same extent as, such interest would
have been so excludable from Federal gross income tax under section
103 of the Internal Revenue Code of 1986 if paid by the issuer
of the defaulted obligations.
Ohio Tax Status. Each Ohio Trust is comprised of interest-bearing
obligations issued by or on behalf of the State of Ohio, political
subdivisions thereof, or agencies or instrumentalities thereof
("Ohio Obligations"), or by the governments of Puerto Rico, the
Virgin Islands or Guam (collectively, "Territorial Obligations").
At the time of the closing for each Ohio Trust, Special Counsel
to the Fund for Ohio tax matters rendered an opinion under then
existing Ohio income tax law applicable to taxpayers whose income
is subject to Ohio income taxation substantially to the effect
that:
Each Ohio Trust is not taxable as a corporation or otherwise for
purposes of the Ohio personal income tax, Ohio school district
income taxes, the Ohio corporation franchise tax, or the Ohio
dealers in intangibles tax.
Income of an Ohio Trust will be treated as the income of the Unit
holders for purposes of the Ohio personal income tax, Ohio school
district income taxes, Ohio municipal income taxes and the Ohio
corporation franchise tax in proportion to the respective interest
therein of each Unit holder.
Interest on Ohio Obligations and Territorial Obligations held
by an Ohio Trust is exempt from the Ohio personal income tax,
Ohio municipal income taxes and Ohio school district income taxes
and is excluded from the net income base of the Ohio corporation
franchise tax when distributed or deemed distributed to Unit holders.
Proceeds paid under insurance policies, if any, to the Trustee
of an Ohio Trust, representing maturing interest on defaulted
obligations held by an Ohio Trust will be exempt from the Ohio
personal income tax, Ohio school district income taxes, Ohio municipal
income taxes and the net income base of the Ohio corporation franchise
tax if, and to the same extent as, such interest would be exempt
from such taxes if paid directly by the issuer of such obligations.
Gains and losses realized on the sale, exchange or other disposition
by an Ohio Trust of Ohio Obligations are excluded in determining
adjusted gross and taxable income for purposes of the Ohio personal
income tax, Ohio municipal income taxes and Ohio school district
income taxes and are excluded from the net income base of the
Ohio corporation franchise tax when distributed or deemed distributed
to Unit holders.
Pennsylvania Tax Status. At the time of the closing for each Pennsylvania
Trust, Special Counsel to the Fund for Pennsylvania tax matters
rendered an opinion under then existing Pennsylvania income tax
law applicable
Page 24
to taxpayers whose income is subject to Pennsylvania income taxation
substantially to the effect that:
Units evidencing fractional undivided interests in a Pennsylvania
Trust, which are represented by obligations issued by the Commonwealth
of Pennsylvania, any public authority, commission, board or other
agency created by the Commonwealth of Pennsylvania, any political
subdivision of the Commonwealth of Pennsylvania or any public
authority created by any such political subdivision, are not taxable
under any of the personal property taxes presently in effect in
Pennsylvania;
Distributions of interest income to Unit holders are not subject
to personal income tax under the Pennsylvania Tax Reform Code
of 1971; nor will such interest be taxable under the Philadelphia
School District Investment Income Tax imposed on Philadelphia
resident individuals;
A Unit holder may have a taxable event under the Pennsylvania
state and local income taxes referred to in the preceding paragraph
upon the redemption or sale of his Units but not upon the disposition
of any of the Securities in a Pennsylvania Trust to which the
holder's Units relate. Units will be taxable under the Pennsylvania
inheritance and estate taxes;
A Unit holder which is a corporation may have a taxable event
under the Pennsylvania Corporate Net Income Tax when it redeems
or sells its Units. Interest income distributed to Unit holders
which are corporations is not subject to Pennsylvania Corporate
Net Income Tax or Mutual Thrift Institutions Tax. However, banks,
title insurance companies and trust companies may be required
to take the value of the Units into account in determining the
taxable value of their shares subject to tax; and
Any proceeds paid under insurance policies issued to the Trustee
or obtained by issuers of the Bonds with respect to the Bonds
which represent maturing interest on defaulted obligations held
by the Trustee will be excludable from Pennsylvania gross income
if, and to the same extent as, such interest would have been so
excludable if paid by the issuer of the defaulted obligations.
Certain Considerations.
The California Trusts. Economic Factors. The California Trusts
are susceptible to political, economic or regulatory factors affecting
issuers of California municipal obligations (the "California Municipal
Obligations"). These include the possible adverse effects of certain
California constitutional amendments, legislative measures, voter
initiatives and other matters that are described below. The following
information provides only a brief summary of the complex factors
affecting the financial situation in California (the "State")
and is derived from sources that are generally available to investors
and are believed to be accurate. No independent verification has
been made of the accuracy or completeness of any of the following
information. It is based in part on information obtained from
various State and local agencies in California or contained in
Official Statements for various California Municipal Obligations.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local governmental
finances generally, will not adversely affect the market value
of California Municipal Obligations held in the portfolio of the
Trusts or the ability of particular obligors to make timely payments
of debt service on (or relating to) those obligations.
Economic Overview. California's economy is the largest among the
50 states and one of the largest in the world. The State's population
of over 31 million represents 12.3% of the total United States
population and grew by 27% in the 1980s. Total personal income
in the State, at an estimated $640 billion in 1991, accounts for
13% of all personal income in the nation. Total employment is
almost 14 million, the majority of which is in the service, trade
and manufacturing sectors.
Reports issued by the State Department of Finance and the Commission
on State Finance (the "COSF") indicate that the State's economy
is suffering its worst recession since the 1930s, with prospects
for recovery slower than for the nation as a whole. The State
has lost over 800,000 jobs since the start of the recession and
additional significant job losses are expected before an upturn
begins. The largest job losses have been in Southern California,
led by declines in the aerospace and construction industries.
Weakness statewide
Page 25
occurred in manufacturing, construction, services and trade. Unemployment
was 7.5% for 1991 (compared to 6.7% nationally), and is expected
to be around 10% in 1993. The State's economy is only expected
to pull out of the recession slowly, once the national recovery
has begun. The Department and the COSF project a stagnant economy
in California until 1994. Delay in recovery will exacerbate shortfalls
in State revenues.
Limitation on Taxes. Certain California municipal obligations
may be obligations of issuers which rely in whole or in part,
directly or indirectly, on ad valorem property taxes as a source
of revenue. The taxing powers of California local governments
and districts are limited by Article XIIIA of the California Constitution,
enacted by the voters in 1978 and commonly known as "Proposition
13." Briefly, Article XIIIA limits to 1% of full cash value the
rate of ad valorem property taxes on real property and generally
restricts the reassessment of property to 2% per year, except
upon new construction or change of ownership (subject to a number
of exemptions). Taxing entities may, however, raise ad valorem
taxes above the 1% limit to pay debt service on voter-approved
bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied
against the assessed value of property as of the owner's date
of acquisition (or as of March 1, 1975, if acquired earlier),
subject to certain adjustments. This system has resulted in widely
varying amounts of tax on similarly situated properties. Several
lawsuits have been filed challenging the acquisition-based assessment
system of Proposition 13 and on June 18, 1992 the U.S. Supreme
Court announced a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues
through ad valorem property taxes above the 1% limit; it also
requires voters of any governmental unit to give two-thirds approval
to levy any "special tax." Court decisions, however, allowed non-voter
approved levy of "general taxes" which were not dedicated to a
specific use. In response to these decisions, the voters of the
State in 1986 adopted an initiative statute which imposed significant
new limits on the ability of local entities to raise or levy general
taxes,except by receiving majority local voter approval. Significant
elements of this initiative, "Proposition 62," have been overturned
in recent court cases. An initiative proposed to re-enact the
provisions of Proposition 62 as a constitutional amendment was
defeated by the voters in November 1990, but such a proposal may
be renewed in the future.
Appropriations Limits. California and its local governments are
subject to an annual "appropriations limit" imposed by Article
XIIIB of the California Constitution, enacted by the voters in
1979 and significantly amended by Propositions 98 and 111 in 1988
and 1990, respectively. Article XIIIB prohibits the State or any
covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed.
"Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consist of tax revenues, and certain
other funds, including proceeds from regulatory licenses, user
charges or other fees, to the extent that such proceeds exceed
the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No
limit is imposed on appropriations of funds which are not "proceeds
of taxes," such as reasonable user charges or fees, and certain
other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized
prior to January 1, 1979, or subsequently authorized by the voters,
(2) appropriations arising from certain emergencies declared by
the Governor, (3) appropriations for certain capital outlay projects,
(4) appropriations by the State of post-1989 increases in gasoline
taxes and vehicle weight fees, and (5) appropriations made in
certain cases of emergency.
The appropriations limit for each year is adjusted annually to
reflect changes in cost of living and population, and any transfers
of service responsibilities between government units. The definitions
for such adjustments were liberalized in 1990, to follow more
closely growth in California's economy.
"Excess" revenues are measured over a two-year cycle. Local governments
must return any excess to taxpayers by rate reduction. The State
must refund 50% of any excess, with the other 50% paid to schools
and
Page 26
community colleges. With more liberal annual adjustment factors
since 1988, and depressed revenues since 1990 because of the recession,
few governments are currently operating near their spending limits,
but this condition may change over time. Local governments may
by voter approval exceed their spending limits for up to four
years. During fiscal year 1986-87, State receipts from proceeds
of taxes exceeded its appropriations limit by $1.1 billion, which
was returned to taxpayers. Appropriations subject to limitation
were under the State limit by $1.2 billion, $259 million, $1.6
billion, $7.5 billion and $5.2 billion for the five most recent
years ending with 1991-92. State appropriations are expected to
be $4.2 billion under the limit for fiscal year 1992-93.
Because of the complex nature of Articles XIIIA and XIIIB of the
California Constitution, the ambiguities and possible inconsistencies
in their terms, and the impossibility of predicting future appropriations
or changes in population and cost of living, and the probability
of continuing legal challenges, it is not currently possible to
determine fully the impact of Article XIIIA or Article XIIIB on
California Municipal Obligations or on the ability of California
or local governments to pay debt service on such California Municipal
Obligations. It it not presently possible to predict the outcome
of any pending litigation with respect to the ultimate scope,
impact or constitutionality of either Article XIIIA or Article
XIIIB, or the impact of any such determinations upon State agencies
or local governments, or upon their ability to pay debt service
on their obligations. Future initiative or legislative changes
in laws or the California Constitution may also affect the ability
of the State or local issuers to repay their obligations.
Obligations of the State of California. As of February 12, 1993,
California had approximately $17.0 billion of general obligation
bonds outstanding, and $8.3 billion remained authorized but unissued.
In addition, at June 30, 1992, the State had lease-purchase obligations,
payable from the State's General Fund, of approximately $2.9 billion.
Of the State's outstanding general obligation debt, 26% is presently
self-liquidating (for which program revenues are anticipated to
be sufficient to reimburse the General Fund for debt service payments).
Three general obligation bond propositions, totaling $3.7 billion
were approved by voters in1992. In fiscal year 1991-92, debt service
on general obligation bonds and lease-purchase debt was approximately
3.2% of General Fund revenues. The State has paid the principal
of and interest on its general obligations bonds, lease-purchase
debt and short-term obligations when due.
Recent Financial Results. The principal sources of General Fund
revenues are the California personal income tax (42% of total
revenues), the sales tax (39%), bank and corporation taxes (11%),
and the gross premium tax on insurance (3%). California maintains
a Special Fund for Economic Uncertainties (the "Economic Uncertainties
Fund"), derived from General Fund revenues, as a reserve to meet
cash needs of the General Fund, but which is required to be replenished
as soon as sufficient revenues are available. Year-end balances
in the Economic Uncertainties Fund are included for financial
reporting purposes in the General Fund balance. In most recent
years, California has budgeted to maintain the Economic Uncertainties
Fund at around 3% of General Fund expenditures but essentially
no reserve is budgeted for 1992-93.
Throughout the 1980s, State spending increased rapidly as the
State population and economy also grew rapidly, including increased
spending for many assistance programs to local governments, which
were constrained by Proposition 13 and other laws. The largest
State program is assistance to local public school districts.
In 1988, an initiative (Proposition 98) was enacted which (subject
to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college
districts a minimum share of State General Fund revenues (generally
about 37%).
Since the start of 1990-91 Fiscal Year, the State has faced adverse
economic, fiscal, and budget conditions. The economic recession
seriously affected State tax revenues. It also caused increased
expenditures for health and welfare programs. The State is also
facing a structural imbalance in its budget with the largest programs
supported by the General Fund (education, health, welfare and
corrections) growing at rates significantly higher than the growth
rates for the principal revenue sources of the General Fund. As
a result, the State entered a period of budget imbalance, with
expenditures exceeding revenues for
Page 27
four of the last five fiscal years. Revenues declined in 1990-91
over 1989-90, the first time since the 1930s. By June 30, 1992,
the State's General Fund had an accumulated deficit, on a budget
basis, of approximately $2.2 billion.
1991-92 Fiscal Year. As the 1990-91 fiscal year ended in the midst
of a continuing recession and very weak revenues, the Governor
estimated that a "budget gap" of $14.3 billion would have to be
resolved in order to reconcile the excess of projected expenditures
for existing programs, at currently mandated growth rates, over
expected revenues, the need to repay the 1990-91 budget deficit,
and the need to restore a budget reserve. This budget gap was
closed through a combination of temporary and permanent changes
in laws and one-time budget adjustments. The major features of
the budget compromise were program funding reductions totalling
$5.0 billion; a total of $5.1 billion of increased State revenues;
savings of $2.1 billion from transferring certain health and welfare
programs to counties to be funded by increased sales tax and vehicle
license fees to be given directly to counties; and additional
miscellaneous savings and revenue gains and one time accounting
changes totalling $2.1 billion.
The 1991-92 Budget Act was based on economic forecasts that recovery
from the recession would begin in the summer or fall of 1991,
but as the severity of the recession increased, revenues lagged
significantly and continually behind projections from the start
of the fiscal year. As a result, revenues for the 1991-92 Fiscal
Year were more than $4 billion lower than originally projected
and expenditures were higher than originally projected.
As a consequence of the large budget imbalances built up over
two consecutive years, the State used up all of its available
cash resources. In late June, 1992, the State was required to
issue $475 million of short-term revenue anticipation warrants
to cover obligations coming due on June 30 and July 1. These warrants
were repaid on July 24, 1992.
1992-93 Fiscal Year. At the outset of the 1992-93 Fiscal Year,
the State estimated that approximately $7.9 billion of budget
actions would be required to end the 1992-93 Fiscal Year without
a budget deficit. The difficulty of taking these actions delayed
enactment of a budget for more than two months past the start
of the 1992-93 Fiscal Year. With the failure to enact a budget
by July 1, 1992, the State had no legal authority to pay many
of its vendors until the budget was passed; nevertheless, certain
obligations (such as debt service, school apportionments, welfare
payments, and employee salaries) were payable because of continuing
or special appropriations, or court orders. However, the State
Controller did not have enough cash to pay as they came due all
of these ongoing obligations, as well as valid obligations incurred
in the prior fiscal year.
Starting on July 1, 1992, the Controller was required to issue
"registered warrants" in lieu of normal warrants backed by cash
to pay many State obligations. Available cash was used to pay
constitutionally mandated and priority obligations. Between July
1 and September 3, 1992, the Controller issued an aggregate of
approximately $3.8 billion of registered warrants, all of which
were called for redemption by September 4, 1992 following enactment
of the 1992-93 Budget Act and issuance by the State of $3.3 billion
of Interim Notes.
The Legislature enacted the 1992-93 Budget Bill on August 29,
1992, and it was signed by the Governor on September 2, 1992.
The 1992-93 Budget Act provides for expenditures of $57.4 billion
and consists of General Fund expenditures of $40.8 billion and
Special Fund and Bond Fund expenditures of $16.6 billion. The
Department of Finance estimated there would be a balance in the
Special Fund for Economic Uncertainties of $28 million on June
30, 1993.
The $7.9 billion budget gap was closed through a combination of
increased revenues and transfers and expenditure cuts. The principle
reductions were in health and welfare, K-12 schools and community
colleges, State aid to local governments, higher education (partially
offset by increased student fees), and various other programs.
In addition, funds were transferred from special funds, collections
of State revenues were accelerated, and other adjustments were
made.
Page 28
As in the prior year, the economic and fiscal assumptions on which
the 1992-93 Budget Act was based proved to be too optimistic.
As the recession in the State entered its third year, with no
real upturn predicted until 1994, State revenues again lagged
projections. The Governor's Budget Proposal for 1993-94, released
in January 1993, projects current-year revenues will be about
$2.5 billion below projections. As a result, the Governor predicts
the General Fund will end at June 30, 1993 with a deficit of about
$2.1 billion; however, this prediction assumes that the Legislature
will take about $900 million of cost-saving actions in the current
fiscal year, which may not all occur, and would thereby increase
the deficit. The Governor's Budget also predicts that the State's
cash resources will be depleted by May, 1993, which will necessitate
additional short-term cash flow borrowing.
1993-94 Budget. The Governor's Budget Proposal for 1993-94 recognizes
that the State will face a third consecutive year of extremely
difficult budget choices. Because several temporary revenue-raising
steps taken in 1991 are scheduled to expire on June 30, 1993,
which the Governor does not propose to extend, revenues for 1993-94
are projected to be about $1 billion lower than revenues in 1992-93
(the second consecutive year of actual decline). With the need
to repay a projected $2.1 billion accumulated deficit, the Governor
indicates that total General Fund expenditures must be limited
to about $37.3 billion, an 8.5% reduction from the prior year.
To achieve the necessary cost reductions, the Governor has proposed
cuts in may programs, a shift of about $2.5 billion of city,county,
and special district property taxes to school districts (which
offsets State funding requirements to the schools), and reliance
on receipt of about $1.5 billion in aid from the federal government
to pay for costs associated with foreign immigrants to the State.
If some of the Governor's proposals and assumptions are not achieved,
he proposed even greater cuts in health, welfare and higher education
funding. For the second year in a row, the Governor's Budget did
not propose to fund any reserve against adverse budgetary developments,
and projected an ending balance in the General Fund at June 30,
1994 of less than $50 million.
The Commission on State Finance, reviewing the Governor's Budget,
agreed with its pessimistic economic projections, but disagreed
with some of its budgetary estimates and assumptions. Assuming
that all of the Governor's proposals and assumptions were enacted
or occurred, the Commission projected the 1993-94 budget would
still be about $1 billion out of balance because of lower revenues
and higher expenditures than the Governor's predictions. The Commission
also indicated this estimate could vary by up to $2.5-$3 billion
in either direction if economic conditions in the State were significantly
worse or better than the current basic projection.
The State's severe financial difficulties for the current and
upcoming budget years will result in continued pressure upon almost
all local governments, particularly school districts and counties
which depend on State aid. Despite efforts in recent years to
increase taxes and reduce governmental expenditures, there can
be no assurance that the State will not face budget gaps in the
future.
Bond Rating. State general obligation bonds are currently rated
"Aa" by Moody's and "A+" by S&P. Both of these ratings were recently
reduced from"AAA" levels which the State held until late 1991.
There can be no assurance that such ratings will be maintained
in the future. It should be noted that the creditworthiness of
obligations issued by local California issuers may be unrelated
to the creditworthiness of obligations issued by the State of
California, and that there is no obligation on the part of the
State to make payment on such local obligations in the event of
default.
Legal Proceedings. The State is involved in certain legal proceedings
(described in the State's recent financial statements) that, if
decided against the State, may require the State to make significant
future expenditures or may substantially impair revenues.
Page 29
Obligations of Other Issuers State Assistance. Property tax revenues
received by local governments declined more than 50% following
passage of Proposition 13. Subsequently, the California Legislature
enacted measures to provide for the redistribution of the State's
General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain
governmental functions by the State to assist municipal issuers
to raise revenues. Total local assistance from the State's General
Fund was budgeted at approximately $33.0 billion in fiscal year
1991-92 (about 75% of General Fund expenditures) and has been
budgeted at $31.1 billion for fiscal 1992-93, including the effect
of implementing reductions in certain aid programs. To reduce
State General Fund support for school districts, the 1992-93 Budget
Act caused local governments to transfer $1.3 billion of property
tax revenues to school districts, representing loss of almost
half the post-Proposition 13 "bail-out" aid. The Governor has
proposed in his 1993-94 Budget that local governments transfer
a further $2.5 billion of property taxes to school districts,
with the possibility that they could raise taxes at the local
level to make up some of the shortfall. To the extent the State
should be constrained by its Article XIIIB appropriations limit,
or its obligation to conform to Proposition 98, or other fiscal
considerations, the absolute level, or the rate of growth, of
State assistance to local governments may be reduced. Any such
reductions in State aid could compound the serious fiscal constraints
already experienced by many local governments, particularly counties.
At least one rural county (Butte) publicly announced that it might
enter bankruptcy proceedings in August 1990, although such plans
were put off after the Governor approved legislation to provide
additional funds for the county. Other counties have also indicated
that their budgetary condition is extremely grave. The Richmond
Unified School District (Contra Costa County) entered bankruptcy
proceedings in May 1991 but the proceedings have been dismissed.
Assessment Bonds. California Municipal Obligations which are assessment
bonds may be adversely affected by a general decline in real estate
values or a slowdown in real estate sales activity. In many cases,
such bonds are secured by land which is undeveloped at the time
of issuance but anticipated to be developed within a few years
after issuance. In the event of such reduction or slowdown, such
development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments
or taxes securing these bonds are not the personal liability of
the owners of the property assessed, the lien on the property
is the only security for the bonds. Moreover, in most cases the
issuer of these bonds is not required to make payments on the
bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established
for the bonds.
California Long Term Lease Obligations. Certain California long
term lease obligations, though typically payable from the general
fund of the municipality, are subject to "abatement" in the event
the facility being leased is unavailable for beneficial use and
occupancy by the municipality during the term of the lease. Abatement
is not a default, and there may be no remedies available to the
holders of the certificates evidencing the lease obligation in
the event abatement occurs. The most common cases of abatement
are failure to complete construction of the facility before the
end of the period during which lease payments have been capitalized
and uninsured casualty losses to the facility (e.g., due to earthquake).
In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance
proceeds and reserves are exhausted) and the certificates may
not be paid when due.
Several years ago the Richmond Unified School District (the "District")
entered into a lease transaction in which certain existing properties
of the District were sold and leased back in order to obtain funds
to cover operating deficits. Following a fiscal crisis in which
the District's finances were taken over by a State receiver (including
a brief period under bankruptcy court protection), the District
failed to make rental payments on this lease, resulting in a lawsuit
by the Trustee for the Certificate of Participation holders, in
which the State was named defendant (on the grounds that it controlled
the District's finances). One of the defenses raised in answer
to this lawsuit was the invalidity of the original lease transaction.
The case is still in very preliminary stages
Page 30
and it is not known how it will be resolved. If the case goes
to trial, a judgement against the Trustee may have adverse implications
for lease transactions of a similar nature by other California
entities.
Other Issuers of California Municipal Obligations. There are a
number of state agencies, instrumentalities and political subdivisions
of the State that issue Municipal Obligations, some of which may
be conduit revenue obligations payable from payments from private
borrowers. These entities are subject to various economic risks
and uncertainties, and the credit quality of the securities issued
by them may vary considerably from the credit quality of obligations
backed by the full faith and credit of the State.
Other Considerations. The repayment of industrial development
securities secured by real property may be affected by California
laws limiting foreclosure rights of creditors. Securities backed
by health care and hospital revenues may be affected by changes
in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including
risks related to the policy of awarding exclusive contracts to
certain hospitals.
Limitations on ad valorem property taxes may particularly affect
"tax allocation" bonds issued by California redevelopment agencies.
Such bonds are secured solely by the increase in assessed valuation
of a redevelopment project area after the start of redevelopment
activity. In the event that assessed values in the redevelopment
project decline (e.g., because of a major natural disaster such
as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's
and S&P suspended ratings on California tax allocation bonds after
the enactment of Articles XIIIA and XIIIB, and only resumed such
ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires
that all revenues produced by a tax rate increase go directly
to the taxing entity which increased such tax rate to repay that
entity's general obligation indebtedness. As a result, redevelopment
agencies (which, typically, are the issuers of tax allocation
securities) no longer receive an increase in tax increment when
taxes on property in the project area are increased to repay voter-approved
bonded indebtedness.
The effect of these various constitutional and statutory changes
upon the ability of California municipal securities issuers to
pay interest and principal on their obligations remains unclear.
Furthermore, other measures affecting the taxing or spending authority
of California or its political subdivisions may be approved or
enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue-raising measures
or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes
or increase existing taxes. It is not presently possible to determine
the impact of any such legislation on California Municipal Obligations
in which the Trust may invest, future allocations of state revenues
to local governments or the abilities of state or local governments
to pay the interest on, or repay the principal of, such California
Municipal Obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Any California Municipal Obligation
in the California Insured Trust could be affected by an interruption
of revenues because of damaged facilities, or, consequently, income
tax deductions for casualty losses or property tax assessment
reductions. Compensatory financial assistance could be constrained
by the inability of (i) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (ii) an insurer to perform
on its contracts of insurance in the event of widespread losses;
or (iii) the Federal or State government to appropriate sufficient
funds within their respective budget limitations.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the California
Trusts are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which
are not within the control of the issuers of Bonds, could have
an adverse impact on the financial condition to predict whether
or to what extent such factors or other factors may affect the
issuers of Bonds, the market value or marketability
Page 31
of the Bonds or the ability of the respective issuers of the Bonds
acquired by the California Trusts to pay interest on or principal
of the Bonds.
The Florida Trusts. Florida's economy has in the past been highly
dependent on the construction industry and construction related
manufacturing. This dependency has declined in recent years and
continues to do so as a result of continued diversification of
the State's economy. For example, in 1980 total contract construction
employment as a share of total non-farm employment was just over
seven percent and in 1990 the share had edged downward to six
percent. This trend is expected to continue as Florida's economy
continues to diversify. Florida, nevertheless, has a dynamic construction
industry with single and multi-family housing starts accounting
for 9.48% of total U.S. housing starts in 1991 while the State's
population is 5.3% of the U.S. total population.
A driving force behind the State's construction industry has been
the State's rapid rate of population growth. Although Florida
currently is the fourth most populous state, its annual population
growth is now projected to decline as the number of people moving
into the State is expected to hover near the mid 200,000 range
annually well into the 1990s. This population trend should provide
plenty of fuel for business and home builders to keep construction
activity lively in Florida for some time to come. However, other
factors do influence the level of construction in the State. For
example, Federal tax reform in 1986 and other changes to the Federal
income tax code have eliminated tax deductions for owners of two
or more residential real estate properties and have lengthened
depreciation schedules on investment and commercial properties.
Economic growth and existing supplies of commercial buildings
and homes also contribute to the level of construction activity
in the State.
Since 1980, the State's job creation rate is well over twice the
rate for the nation as a whole, and its growth rate in new non-agricultural
jobs is the fastest of the 11 most populous states and second
only to California in the absolute number of new jobs created.
Contributing to the State's rapid rate of growth in employment
and income is international trade. Since 1980, the State's unemployment
rate has generally been below that of the U.S. Only in the last
two years has the State's unemployment rate moved ahead of the
national average. According to the U.S. Department of Commerce,
the Florida Department of Labor and Employment Security, and the
Florida Consensus Economic Estimating Conference (together the
"Organization") the State's unemployment rate was 5.9% during
1990. As of April 1992, the Organization forecasts that when final
numbers are in, the unemployment rate for 1991 will be 7.3% and
estimates that it will be 8.1% for 1992. The State's non-farm
employment is expected to decline 1.5% in 1991-92 and rise 1.8%
in 1992-93, mirroring the path of employment growth nationally.
The State's two largest and fastest growing private employment
categories are the service and the trade sectors. Together, they
account for more than 50% of the total non-farm employment growth
between 1991-92 and 1992-93. Employment in these sectors is expected
to decline 3.6% for trade and growth and 1.5% for services in
1991-92 and are expected to grow 0.7% and 3.7% in 1992-93, respectively.
The service sector has overtaken the trade sector and is now the
State's largest employment category.
Tourism is one of the State's most important industries. By the
end of 1991-92, 38.8 million domestic and international tourists
are expected to have visited the State, a decrease of 4.9% from
the 40.8 million who visited in 1990-91. During 1992-93 tourist
arrivals are expected to approximate 40 million.
The State's per capita personal income in 1990 of $18,539 was
slightly below the national average of $18,696 and significantly
ahead of that for the southeast United States, which was $16,514.Growth
in real personal income in the State follows a course similar
to that of the nation, increasing 0.3% in 1991-92 and increasing
2.7% in 1992-93. Between 1990-91 and 1992-93, real personal income
per capita in the State is expected to average 0.5% less than
its 1990-91 level.
Compared to other states, Florida has a proportionately greater
retirement age population which comprises 18.3% (as of April 1,
1991) of the State's population and is forecast to grow at an
average annual rate of over 1.96% through the 1990s. Thus, property
income (dividends, interest, and rent) and transfer payments
Page 32
(Social Security and pension benefits, among other sources of
income) are a relatively more important source of income. For
example, Florida's total wages and salaries and other labor income
in 1990 was 54.9% of total income, while a similar figure for
the nation for 1990 was 64.8%. Transfer payments are typically
less sensitive to the business cycle than employment income and,
therefore, act as stabilizing forces in weak economic periods.
While many of the U.S.'s senior citizens choose the State as their
place of retirement, the State is also recognized as attracting
a significant number of working age people. Since 1980, the prime
working age population (18-44) has grown at an average annual
rate of 3.6%.
In fiscal year 1990-91, approximately 64% of the State's total
direct revenue to its three operating funds will be derived from
State taxes, with Federal grants and other special revenue accounting
for the balance. State sales and use tax, corporate income tax,
and beverage tax amounted to 66%, 7%, and 5%, respectively, of
total receipts by the General Revenue Fund during fiscal 1990-91.
In that same year, expenditures for education, health and welfare,
and public safety amounted to 55%, 27% and 8%, respectively, of
total expenditures from the General Revenue Fund. At the end of
fiscal 1991, approximately $4.45 billion in principal amount of
debt secured by the full faith and credit of the State was outstanding.
In addition, since July 1, 1991, since July 1, 1991 through August
1992, the State issued about $965 million in principal amount
of full faith and credit bonds.
On August 24, 1992, the State was hit with a major hurricane,
Hurricane Andrew. Published speculation estimates total damage
to the southern portion of the State to be $20 billion or more.
The actual economic impact to the State is unknown at this time,
but, in published reports, the director of economic and demographic
research for the Joint Legislative Management Committee of the
State's Legislature estimates that the State's revenues from sales
tax collection will exceed the estimates prior to Andrew. The
director said that the State is expecting $7 to $8 billion of
insurance, and $10 billion in federal disaster assistance, and
up to $1 billion from other sources to repair the damage caused
by Andrew. The director estimates that a substantial portion,
maybe even half, of those monies will be spent over the next year
or two on items subject to the State's sales tax. In addition,
the director estimates that the State will collect documentary
stamp taxes in excess of the amount currently projected. The director
foresees property owners using insurance money to pay off mortgages
on buildings that have been destroyed and then borrowing to rebuild
or remodel a home. The director estimates that the additional
spending will more than offset losses from tax revenues as a result
of the decline in sales in areas where businesses have been destroyed
and closed. In addition, a senior advisor to the State's governor
in published reports has said that the State's nearly $30 billion
budget may end up having to absorb an additional $82 million as
a result of Andrew.
The State Constitution and statutes mandate that the State budget,
as a whole, and each separate fund within the State budget, be
kept in balance from currently available revenues each fiscal
year. If the Governor or Comptroller believes a deficit will occur
in any State fund, by statute, he must certify his opinion to
the Administrative Commission, which then is authorized to reduce
all State agency budgets and releases by a sufficient amount to
prevent a deficit in any fund. Additionally, the State Constitution
prohibits issuance of State obligations to fund State operations.
Estimated fiscal year 1991-92 General Revenue plus Working Capital
funds available total $11,228.1 million. Compared to 1991-92 Estimated
General Revenues of $11,138.6 million, the State was left with
unencumbered reserves of $89.5 million at the end of its fiscal
year. Estimated fiscal year 1992-93 General Revenue plus Working
Capital funds available total $11,980.1 million, a 6.7% increase
over 1991-92. The $11,859.2 million in combined Estimated Revenues
and revenue generating measures represent an increase of 9.5%
over the previous year's Estimated Revenues. In a June 1992 Special
Session of the State Legislature, the Legislature passed a number
of tax rate and base increases to raise an additional $378.5 million
in the State's 1992-93 fiscal year. With effective General Revenue
appropriations at $11,861.9 million, unencumbered reserves at
the end of the fiscal year are estimated at $118.2 million. Current
estimates make it likely that this figure will increase when revenue
collections for 1991-92 are finalized.
Page 33
The State's sales and use tax (6%) currently accounts for the
State's single largest source of tax receipts. Slightly less than
10% of the State's sales and use tax is designated for local governments
and is distributed to the respective counties in which collected
for such use by such counties and the municipalities therein.
In addition to this distribution, local governments may (by referendum)
assess a 0.5% or a 1.0% discretionary sales tax within their county.
Proceeds from this local option sales tax are earmarked for funding
local infrastructure programs and acquiring land for public recreation
or conservation or protection of natural resources as provided
under Florida law. Certain charter counties have other taxing
powers in addition, and non-consolidated counties with a population
in excess of 800,000 may levy a local option sales tax to fund
indigent health care. It alone cannot exceed 0.5% and when combined
with the infrastructure surtax cannot exceed 1.0%. For the fiscal
year ended June 30, 1991, sales and use tax receipts (exclusive
of the tax on gasoline and special fuels) totalled $8,152.0 million,
a decline of 0.9% over fiscal year 1989-90.
The State imposes an alcoholic beverage wholesale tax (excise
tax) on beer, wine, and liquor. This tax is one of the State's
major tax sources, with revenues totalling $445.4 million in fiscal
year ending June 30, 1991. Alcoholic beverage tax receipts declined
1.0% over the previous year. The revenues collected from this
tax are deposited into the State's General Revenue Fund.
The second largest source of State tax receipts is the tax on
motor fuels. However, these revenues are almost entirely dedicated
trust funds for specific purposes and are not included in the
State's General Revenue Fund.
The second largest source of State tax receipts is the tax on
motor fuels. However, these revenues are almost entirely dedicated
trust funds for specific purposes and are not included in the
State's General Fund.
The State's alcoholic beverage wholesale tax is an excise tax
on beer, wine and liquor. This tax is one of the State's major
tax sources, with revenues totalling $445.4 million in fiscal
year 1990-91. Alcohol beverage receipts declined by 1.0% over
the previous year.
The State imposes a corporate income tax. All receipts of the
corporate income tax are credited to the General Revenue Fund.
For the fiscal year ended June 30, 1990, receipts from this source
were $701.6 million, a decrease of 13.2% from fiscal year 1989-90.
The State also imposes a stamp tax on deeds and other documents
relating to realty, corporate shares, bonds, certificates of indebtedness,
promissory notes, wage assignments, and retail charge accounts.
The documentary stamp tax collections totaled $470.0 million during
fiscal year 1990-91, a 9.4% increase from the previous fiscal
year. For the fiscal year 1990-91, 70.4% of the documentary stamp
tax revenues were deposited to the General Revenue Fund. Beginning
in fiscal year 1991-92, 76.21% of these taxes are to be deposited
to the General Revenue Fund.
On January 12, 1988, the State began its own lottery. State law
requires that lottery revenues be distributed 50% to the public
in prizes, 38.0% for use in enhancing education and the balance,
12.0% for costs of administering the lottery. Fiscal year 1990-91
lottery commissions for ticket sales totalled $2.19 billion, providing
education with $833.5 million.
Currently under litigation are several issues relating to State
actions or State taxes that put at risk substantial amounts of
General Revenue Fund monies. Accordingly, there is no assurance
that any of such matters, individually or in the aggregate, will
not have a material adverse effect on Florida's financial position.
In the wake of the U.S. Supreme Court decision holding that a
Hawaii law unfairly discriminated against out-of-state liquor
producers, suits have been filed in the State's courts contesting
a similar State law (in effect prior to 1985) that seek $384 million
in tax refunds. A trial court, in a ruling that was subsequently
upheld by the State's Supreme Court, found the State law in question
to be unconstitutional but made its ruling operate prospectively,
thereby denying any tax refunds. The issue of whether the unconstitutionality
of the tax should be applied retroactively was recently decided
by the United States Supreme Court. The Supreme
Page 34
Court found in favor of the taxpayers. On remand from the U.S.
Supreme Court, the Florida Supreme Court, on January 15, 1991,
mandated further proceedings to fashion a "clear and certain remedy"
consistent with constitutional restrictions and the opinion of
the U.S. Supreme Court. The Florida Department of Revenue has
proposed to the Florida Supreme Court that the Department be allowed
to collect back tax from those who received a tax preference under
the prior law. If the Department's proposal is rejected and tax
refunds are ordered to all potential claimants, a liability of
approximately $298 million could result. The case is now before
the Florida Circuit Court, Second Judicial District. That court
will hear the affected parties' response to the Department's proposed
collection of the tax at the higher rate charged to out-of-staters.
Florida law provides preferential tax treatment to insurers who
maintain a home office in the State. Certain insurers challenged
the constitutionality of this tax preference and sought a refund
of taxes paid. Recently, the State Supreme Court ruled in favor
of the State. Similar issues have been raised in other cases where
insurers have challenged taxes imposed on premiums received for
certain motor vehicle service agreements. These four cases and
pending refund claims total about $200 million.
Florida maintains a bond rating of Aa and AA from Moody's Investors
Service and Standard & Poor's Corporation, respectively, on the
majority of its general obligation bonds, although the rating
of a particular series of revenue bonds relates primarily to the
project, facility, or other revenue sources from which such series
derives funds for repayment. While these ratings and some of the
information presented above indicate that Florida is in satisfactory
economic health, there can be no assurance that there will not
be a decline in economic conditions or that particular Florida
Municipal Obligations purchased by the Trusts will not be adversely
affected by any such changes.
The sources for the information presented above include official
statements and financial statements of the State of Florida. While
the Sponsor has not independently verified this information, the
Sponsor has no reason to believe that the information is not correct
in all material respects.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Florida
Trusts are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which
are not within the control of the issuers of Bonds, could affect
or could have an adverse impact on the financial condition of
the State and various agencies and political subdivisions located
in the State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
Bonds, the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the Florida
Trusts to pay interest on or principal of the Bonds.
The Massachusetts Trusts. There has been a significant slowdown
in the Commonwealth's economy, as indicated by a rise in unemployment,
a slowing of its per capita income growth and the four-year trend
in declining state revenues. In fiscal 1991, the Commonwealth's
expenditures for state government programs exceeded current revenues.
Continuing a four-year trend of lower than expected tax revenues
in the face of growing state expenditures, actual fiscal 1991
revenues were less than estimated revenues.
Total expenditures for fiscal 1991 totalled approximately $13.899
billion, as against revenues of approximately $13.878 billion.
The Commonwealth suffered an operating loss of approximately $21.2
million. Application of the adjusted fiscal 1990 fund balances
of $258.3 billion resulted in a fiscal 1991 budgetary surplus
of $237.1 million. State law requires that approximately $59.2
million of the fiscal year ending balances of $237.1 million be
placed in the Stabilization Fund, a reserve from which funds can
be appropriated (i) to make up any difference between actual state
revenues in any fiscal year in which actual revenues fall below
the allowable amount, (ii) to replace state and local losses by
federal funds or (iii) for any event, as determined by the legislature,
which threatens the health, safety or welfare of the people or
the fiscal stability of the Commonwealth or any of its political
subdivisions.
Page 35
In July 1989, the Governor vetoed certain provisions included
in the budget legislation for fiscal 1990, including approximately
$273 million of the fiscal 1990 appropriations, including $100
million for local aid to the Commonwealth's cities and towns ("Local
Aid"). One of the Governor's vetoes occasioned a default by the
Commonwealth on a September 1, 1989 payment of $2.5 million on
a general obligation contract with the Massachusetts Community
Development Finance Corporation to which its full faith and credit
had been pledged, which payment was made on September 17, 1990
after a supplemental appropriation was proposed by the Governor
and passed by the legislature. The legislature overrode the Governor's
veto of $100 million of Local Aid and the Governor then indicated
that he was withholding the allotment for such expenditure. The
Supreme Judicial Court invalidated the Governor's withholding
of $210 million of appropriated funds for certain Local Aid purposes
in May 1990.
The budget for fiscal 1991 was signed into law by the Governor
on August 1, 1990 and included estimated spending of $13.922 billion,
representing an increase of 3.3% or $448.3 million above fiscal
1990 spending. Estimated tax revenues at the time of the budget's
enactment were $9.748 billion including $1.162 billion expected
to result from recently enacted tax legislation. Actual revenues,
however, for the first two months of fiscal 1991 were lower than
anticipated and revenue estimates for the remainder of the fiscal
year were subsequently revised downward twice during September,
1990.
Upon taking office in January, 1991, the new Governor proposed
a series of legislative and administrative actions, including
withholding of allotments under Section 9C of Chapter 29 of the
General Laws, intended to eliminate the projected deficits. The
new Governor's review of the Commonwealth's budget indicated projected
spending of $14.105 billion with an estimated $850 million in
budget balancing measures that would be needed prior to the close
of fiscal 1991. At that time, estimated tax revenues were revised
to $8.845 billion, $903 million less than was estimated at the
time the fiscal 1991 budget was adopted. The Legislature adopted
a number of the Governor's recommendations and the Governor took
certain administrative actions not requiring legislative approval,
including $65 million in savings from the adoption of a state
employee furlough program. It is estimated by the Commonwealth
that spending reductions achieved through savings initiatives
and withholding of allotments total approximately $484.3 million
in aggregate for fiscal 1991. However, these savings and reductions
may be impacted negatively by litigation pursued by third-parties
concerning the Governor's actions under Section 9C of Chapter
29 of the General Laws and with regard to the state employee furlough
program.
In addition, the new administration in May, 1991 filed an amendment
to its Medicaid state plan that enables it to claim 50% Federal
reimbursement on uncompensated care payments for certain hospitals
in the Commonwealth. As a result, in fiscal 1991, the Commonwealth
obtained additional non-tax revenues in the form of federal reimbursements
equal to approximately $513 million on account of uncompensated
care payments. This reimbursement claim was based upon recent
amendments of federal law contained in the Omnibus Budget Reconciliation
Act of 1990 and, consequently, on relatively undeveloped federal
laws, regulations and guidelines. At the request of the federal
Health Care Financing Administration, the Office of Inspector
General of the United States Department of Health and Human Services
has commenced an audit of the reimbursement. The administration,
which had reviewed the matter with the Health Care Financing Administration
prior to claiming the reimbursement, believes that the Commonwealth
will prevail in the audit. If the Commonwealth does not prevail,
the Commonwealth would have the right to contest an appeal, but
could be required to repay all or part of Medicaid reimbursements
with interest and to have such amount deducted from future reimbursement
payments.
After payment in full of the Local Aid distribution of $1.018
billion due on June 28, 1991, retirement of all the Commonwealth's
outstanding commercial paper and repayment of certain other short-term
borrowings, as of June 30, 1991, the end of fiscal 1991, the Commonwealth
had a cash balance of $182.3 million, as compared with the Commonwealth's
cash position at the end of the prior fiscal year, June 30, 1990
Page 36
when the Commonwealth's cash shortfall would have exceeded $1.1
billion had payment of Local Aid not been postponed.
As signed by the Governor on July 10, 1991, the budget for fiscal
1992 was based on estimated total revenue of $13.032 billion (including
estimated tax revenues of $8.292 billion) and total estimated
expenditures of $13.177 billion (including certain anticipated
supplemental appropriations). In the first five months of fiscal
1992, actual tax revenues have exceeded estimates, however, the
ability of the Commonwealth to achieve certain asset sales, expenditure
reductions and levels of non-tax revenues assumed in July 1991
have come to appear less certain. The Executive Office for Administration
and Finance revised its projections of budgetary revenues and
expenditures most recently on May 21, 1992. The estimate of the
fiscal 1992 budget is now based on projected total revenue of
$13.579 billion, including projected tax revenues of $9.225 billion,
and projected budgetary expenditures of $13.707 billion (which
does not include $15 million of the $30 million in yet to be enacted
supplemental appropriations). Overall, fiscal 1992 is expected
to end with an operating loss of $127.5 million.
Expenditures for fiscal 1988, 1989 and 1990 totalled approximately
$11.8 billion, $12.9 billion and $13.5 billion, respectively.
Revenues for fiscal 1988, 1989 and 1990 totalled approximately
$11.5 billion, $12.2 billion and $12.2 billion respectively.
The unemployment rate in Massachusetts has been steadily decreasing
over the past few years. The rates in 1991 and 1992 were 9.0%
and 8.5%, respectively. The seasonally adjusted rate for January
1993 was 8.2%.
As of the date hereof, Standard & Poor's Corporation ("S&P") has
rated the Commonwealth's uninsured general obligation bonds at
BBB having downgraded the rating from A on December 13, 1989 citing
the Commonwealth's "poor financial operations" and "a paralyzing
budget process." At the same time, S&P lowered the rating of state
and agency notes from SP1 to SP2. On November 7, 1990, S&P removed
the Commonwealth's general obligation bonds from S&P CreditWatch,
where they were placed in June, 1990, citing the defeat of the
Citizens for Limited Taxation voter initiative petition (the "Petition").
If enacted, the Petition would have, among other things, repealed
the tax increases enacted in July 1990.
Prior to these actions by S&P, the Commonwealth had experienced
a steady decline in its S&P rating. In May 1989, S&P lowered its
rating on the State's general obligation bonds and other State
obligations from AA+ to AA. On June 27, 1989, S&P reduced the
Commonwealth's general obligation bonds and various agency issues
from AA to AA-. On July 14, 1989, S&P reduced the Commonwealth's
general obligation bonds and various agency issues from AA- to
A.
As of the date hereof, Moody's Investors Service ("Moody's") rating
of the Commonwealth's uninsured general obligation bonds was at
Baa. The Commonwealth has experienced a steady decline in its
rating by Moody's since May 1989. In May 1989, Moody's Investors
Service lowered its rating on the State's notes from MIG-1 to
MIG-2, and its rating on the State's commercial paper from P-1
to P-2. On June 21, 1989 Moody's reduced the Commonwealth's general
obligation rating from Aa to A. On November 15, 1989, Moody's
reduced the rating of the Commonwealth's general obligations from
A to Baa1, citing the state's lowering of revenue estimates, its
fiscal year 1990 deficit and the legislature's apparent lack of
consensus on how to deal with it. On March 19, 1990, Moody's reduced
the rating of the Commonwealth's general obligation bonds from
Baa1 to Baa, citing "extended inaction" in resolving the Commonwealth's
growing budget deficit.
In recent years, the Commonwealth of Massachusetts and certain
of its public bodies and municipalities have faced serious financial
difficulties which have affected the credit standing and borrowing
abilities of Massachusetts and the respective entities and may
have contributed to higher interest rates on debt obligations.
The continuation of, or and increase in such financial difficulties,
could result in declines in the market values of, or a default
on, existing obligations including Bonds deposited in the Trusts.
Should there be during the term of a Trust a financial crisis
relating to Massachusetts, its public bodies
Page 37
or municipalities, the market value and marketability of all outstanding
bonds issued by the Commonwealth and its public authorities or
municipalities including the Bonds in such Trust and interest
income to such Trust could be adversely affected.
The total general obligation bond indebtedness of the Commonwealth
as of May 1, 1992 was approximately $7.8 billion. There were also
outstanding approximately $491 million in general obligation notes.
The total bond and note liabilities of the Commonwealth as of
May 1, 1992, including guaranteed debt and contingent liabilities,
was approximately $12.2 billion.
During the 1980s, capital expenditures were increased substantially,
which has had a short term impact on the cash needs of the Commonwealth
and also accounts for a significant rise in debt service during
that period. Payments for debt service on Commonwealth general
obligation bonds and notes have risen at an average annual rate
of 15.9% from $524.1 million in fiscal 1987 to an estimated $942.3
million in fiscal 1991. Debt service payments in fiscal 1992 are
projected to be $935.4 million. Debt service payments for fiscal
1992 reflect a $261 million one-time reduction achieved as a result
of the issuance of the refunding bonds in September and October
1991. The amounts represented do not include debt service on notes
issued to finance the fiscal 1989 deficit and certain Medicaid
related liabilities, certain refunding bonds in September and
October 1991. The amounts represented do not include debt service
contract assistance to the Massachusetts Bay Transportation Authority,
the Massachusetts Convention Center Authority and the Massachusetts
Government Land Bank, as well as grants to municipalities under
the school building assistance program to defray a portion of
the debt service costs on local school bonds.
In January 1990, legislation was passed to impose a limit on debt
service beginning in fiscal 1991, providing that no more than
10% of the total appropriations in any fiscal year may be expended
for payment of interest and principal on general obligation debt
(excluding the Fiscal Recovery Bonds). The percentage of total
appropriations estimated to be expended from the budgeted operating
funds for debt service (excluding debt service on Fiscal Recovery
bonds) for fiscal 1992 is 4.6%.
Among the material future liabilities of the Commonwealth are
significant unfunded general liabilities of its retirement systems
and a program to fund such liabilities; a program whereby, starting
in 1978, the Commonwealth began assuming full financial responsibility
for all costs of the administration of justice within the state;
continuing demands to raise aggregate aid to cities, towns, schools
and other districts and transit authorities above current levels;
and Medicaid expenditures which have increased each year since
the program was initiated. The Commonwealth has signed consent
decrees to continue improving mental health care and programs
for the mentally retarded in order to meet federal standards,
including those governing receipt of federal reimbursements under
various programs, and the parties in those cases have worked cooperatively
to resolve the disputed issues.
As a result of comprehensive legislation approved in January,
1988, the Commonwealth is required, beginning in fiscal 1989 to
fund future pension liabilities currently and to amortize the
Commonwealth's unfunded liabilities over 40 years. Total pension
costs from fiscal 1987 to fiscal 1991 increased at an average
annual rate of 3.3%. The projected pension costs (inclusive of
current benefits and reserves) for fiscal 1992 are $746.2 million,
representing an increase of 6.0% over the $703.9 million cost
in fiscal 1991.
Litigation. The Commonwealth is engaged in various lawsuits involving
environmental and related laws, including an action brought on
behalf of the U.S. Environmental Protection Agency alleging violations
of the Clean Water Act and seeking to enforce the clean-up of
Boston Harbor. The Massachusetts Water Resource Authority ("MWRA"),
successor in liability to the Metropolitan District Commission,
has assumed primary responsibility for developing and implementing
a court-approved plan for the construction of the treatment facilities
necessary to achieve compliance with federal requirements. Under
the Clean Water Act, the Commonwealth may be liable for costs
of compliance in these or any other Clean Water cases if the MWRA
or a municipality is prevented from raising revenues necessary
to comply with a judgement. The MWRA
Page 38
currently projects that the total cost of construction of the
treatment facilities required under the court's order is approximately
$3.5 billion in current dollars.
There are also actions pending in which recipients of human services
benefits, such as welfare recipients, the mentally retarded, the
elderly, the handicapped, children, residents of state hospitals
and inmates of corrections institutions, seek expanded levels
of services and benefits and in which providers of services to
such recipients challenge the rates at which they are reimbursed
by the Commonwealth. To the extent that such actions result in
judgments requiring the Commonwealth to provide expanded services
or benefits or pay increased rates, additional operating and capital
expenditures might be needed to implement such judgments.
In December, 1988, nine municipalities of the Commonwealth which
claim to own substantial interests in a nuclear power plant in
Seabrook, New Hampshire, filed suit against the Commonwealth,
the Governor, the Attorney General and other state officials claiming
damages arising from their opposition to licensure of the plant.
The municipalities allege damages in the amount of $1 billion.
In addition there are several tax matters in litigation which
could result in significant refunds to taxpayers if decisions
unfavorable to the Commonwealth are rendered. The amount of taxes
and interest at issue in those cases is approximately $195 million.
A variety of other civil suits pending against the Commonwealth
may also affect its future liabilities. These include challenges
to the Commonwealth's allocation of school aid and to the Governor's
authority to withhold or reduce allotments of appropriated funds
under Section 9C of Chapter 29 of the General Laws and to adopt
a state employee furlough program. No prediction is possible as
to the ultimate outcome of these proceedings.
Many factors, in addition to those cited above do or may have
a bearing upon the financial condition of the Commonwealth, including
social and economic conditions, many or which are not within the
control of the Commonwealth.
Expenditure and Tax Limitation Measures. Limits have been established
on state tax revenues by legislation approved by the Governor
on October 25, 1986, and by an initiative petition approved by
the voters on November 4, 1986. The Executive Office for Administration
and Finance currently estimates that state tax revenues will not
reach the limit imposed by either the initiative petition or the
legislative enactment in fiscal 1991.
Proposition 2 1/2, passed by the voters in 1980, led to large
reductions in property taxes, the major source of income for cities
and towns, and large increases in state aid to offset such revenue
losses. According to the Executive Office for Administration and
Finance, all of the 351 cities and towns have now achieved a property
tax levy of no more than 2.5% of full property values. Under the
terms of Proposition 2 1/2, the property tax levy can now be increased
annually for all cities and towns, almost all by 2.5% of the prior
fiscal year's tax levy plus 2.5% of the value of new properties
and of significant improvements to property. Legislation has also
been enacted providing for certain local option taxes. A voter
initiative petition approved at the statewide general election
in November, 1990, further regulates the distribution of Local
Aid and, among other matters, requires, subject to appropriation,
the distribution as Local Aid of no less than 40% of collections
from individual income taxes, sales and use taxes, corporate excise
taxes, and the balance of the state lottery fund. If implemented
in accordance with its terms (including appropriation of the necessary
funds), the petition as approved would shift several hundred million
dollars to direct Local Aid.
To provide revenue to pay debt service on both the deficit and
Medicaid related borrowings and to fund certain direct Medicaid
expenditures, legislation was enacted imposing an additional tax
on certain types of personal income for 1989 and 1990 taxable
years at rates of 0.375% and 0.75% respectively, effectively raising
the tax rate of 1989 from 5% to 5.375% and for 1990 from 5% to
5.75%. Recent legislation has effectively further increased tax
rates to 5.95% for tax year 1990 to 6.25% for tax year 1991 and
returning to 5.95% for tax year 1992 and subsequent tax years.
The tax is applicable to all personal income except income derived
from dividends, capital gains, unemployment compensation, alimony,
rent, interest, pensions
Page 39
annuities and IRA/Keough distributions. The income tax rate on
other interest (excluding interest on obligations of the United
States and of the Commonwealth and its subdivisions), dividends
and net capital gains (after a 50% reduction) was increased from
10% to 12% for tax year 1990 and subsequent years, by recently
enacted legislation.
The sources of information presented above are the official statements
of issuers located in the Commonwealth of Massachusetts as well
as other publicly available documents, and statements of public
officials. The Sponsor has not independently verified any of the
information contained in such statements and documents but the
Sponsor is not aware of facts which would render such information
inaccurate.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Massachusetts
Trusts are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which
are not within the control of the issuers of Bonds, could affect
or could have an adverse impact on the financial condition of
the State and various agencies and political subdivisions located
in the State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
Bonds, the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the Massachusetts
Trusts to pay interest on or principal of the bonds.
The Michigan Trusts. Investors should be aware that the economy
of the State of Michigan has, in the past, proven to be cyclical,
due primarily to the fact that the leading sector of the State's
economy is the manufacturing of durable goods. While the State's
efforts to diversify its economy have proven successful, as reflected
by the fact that the share of employment in the State in the durable
goods sector has fallen from 33.1 percent in 1960 to 17.9 percent
in 1990, durable goods manufacturing still represents a sizable
portion of the State's economy. As a result, any substantial national
economic downturn is likely to have an adverse effect on the economy
of the State and on the revenues of the State and some of its
local governmental units.
In May 1986, Moody's Investors Service raised the State's general
obligation bond rating to "A1." In October 1989, Standard & Poor's
Corporation raised its rating on the State's general obligations
bonds to "AA."
The State's economy could continue to be affected by changes in
the auto industry, notably consolidation and plant closings resulting
from competitive pressures and overcapacity. Such actions could
adversely affect State revenues and the financial impact on the
local units of government in the areas in which plants are closed
could be more severe.
General Motors Corporation has announced the scheduled closing
of several of its plants in Michigan in 1993 and 1994. The impact
these closures will have on the State's revenues and expenditures
is not currently known. The impact on the financial condition
of the municipalities in which the plants are located may be more
severe than the impact on the State itself.
In recent years, the State has reported its financial results
in accordance with generally accepted accounting principles. For
the five fiscal years ending with the fiscal year ended September
30, 1989, the State reported positive year-end General Fund balances
and positive cash balances in the combined General Fund/School
Aid Fund. For the fiscal years ending September 30, 1990 and 1991,
the State reported negative year-end General Fund balances of
$310.4 million and $169.4 million, respectively. A positive cash
balance in the combined General Fund/School Aid Fund was recorded
at September 30, 1990. Since 1991 the State has experienced deteriorating
cash balances which have necessitated short-term borrowing and
the deferral of certain scheduled cash payments. The State borrowed
$700 million for cash flow purposes in the 1992 fiscal year. The
State has a Budget Stabilization Fund which, after a transfer
of $230 million to the General Fund for the 1991 State fiscal
year, had an accrued balance of $182 million as of September 30,
1991.
Page 40
In the 1991-92 State fiscal year, mid-year actions were taken
to avoid a State General Fund budget deficit, including expenditure
reductions, deferrals of scheduled payment dates of various types
of State aid into the 1992-93 State fiscal year, a $150 million
transfer from the State's Budget Stabilization Fund, and accounting
and retirement funding changes. While current estimates indicate
the State may have ended the 1991-92 fiscal year with a General
Fund deficit in the range of $50 million to $100 million, the
State has not yet produced its year-end financial reports and
the actual results are not known.
While the 1992-93 State budget has been adopted, current projections
indicate a deficit may occur without additional actions being
taken, and ongoing reviews of spending patterns will be conducted
in departments (such as Corrections, Social Services and Military
Affairs) that have been identified as possibly underfunded. If
later estimates match the initial assessments, additional actions
will be required to be taken to address any projected negative
balance in the 1992-93 fiscal year.
The Michigan Constitution of 1963 limits the amount of total revenues
that the State can raise from taxes and certain other sources
to a level for each fiscal year equal to a percentage of the State's
personal income for the prior calendar year. In the event that
the State's total revenues exceed the limit by 1 percent or more,
the Michigan Constitution of 1963 requires that the excess be
refunded to taxpayers.
In April 1991, the State enacted legislation which temporarily
froze assessed values on existing real property in 1992 by requiring
that the assessment as equalized for the 1991 tax year be used
on the 1992 assessment roll and be adjusted only to reflect additions,
losses, splits and combinations. Additional property tax relief
measures have been proposed, some of which could adversely affect
either the amount or timing of the receipt of property tax revenue
by local units of government.
Although all or most of the Bonds in the Michigan Trusts are revenue
obligations or general obligations of local governments or authorities
rather than general obligations of the State of Michigan itself,
there can be no assurance that any financial difficulties the
State may experience will not adversely affect the market value
or marketability of the Bonds or the ability of the respective
obligors to pay interest on or principal of the Bonds, particularly
in view of the dependency of local governments and other authorities
upon State aid and reimbursement programs and, in the case of
bonds issued by the State Building Authority, the dependency of
the State Building Authority on the receipt of rental payments
from the State to meet debt service requirements upon such bonds.
In the 1991 fiscal year, the State deferred certain scheduled
cash payments to municipalities, school districts, universities
and community colleges. While such deferrals were made up at specified
later dates, similar future deferrals could have an adverse impact
on the cash position of some local governmental units. Additionally,
the State reduced revenue sharing payments to municipalities below
that level provided under formulas by $10.9 million in the 1991
fiscal year and $34.4 million in the 1992 fiscal year.
The Michigan Trusts may contain general obligation bonds of local
units of government pledging the full faith and credit of the
local unit which are payable from the levy of ad valorem taxes
on taxable property within the jurisdiction of the local unit.
Such bonds issued prior to December 22, 1978, or issued after
December 22, 1978 with the approval of the electors of the local
unit, are payable from property taxes levied without limitation
as to rate or amount. With respect to bonds issued after December
22, 1978, and which were not approved by the electors of the local
unit, the tax levy of the local unit for debt service purposes
is subject to constitutional, statutory and charter tax rate limitations.
In addition, several major industrial corporations have instituted
challenges of their ad valorem property tax assessments in a number
of local municipal units in the State. If successful, such challenges
could have an adverse impact on the ad valorem tax bases of such
units which could adversely affect their ability to raise funds
for operation and debt service requirements.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Michigan
Trusts are subject. Additionally, many factors including
Page 41
national economic, social and environmental policies and conditions,
which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition
of the State and various agencies and political subdivisions located
in the State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
Bonds, the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the Michigan
Trusts to pay interest on or principal of the bonds.
The Minnesota Trusts. In the early 1980s, the State of Minnesota
experienced financial difficulties due to a downturn in the State's
economy resulting from the national recession. As a consequence,
the State's revenues were significantly lower than anticipated
in the July 1, 1979 to June 30, 1981 biennium and the July 1,
1981 to June 30, 1983 biennium.
In response to revenue shortfalls, the legislature broadened and
increased the State sales tax, increased income taxes (by increasing
rates and eliminating deductions), reduced appropriations and
deferred the payment of State aid, including appropriations for
and aid to local governmental units. The State's fiscal problems
affected other governmental units within the State, such as local
governments, school districts and state agencies, which, in varying
degrees, also faced cash flow difficulties. In certain cases,
revenues of local governmental units and agencies were reduced
by the recession.
Because of the State's fiscal problems, Standard & Poor's Corporation
reduced its rating on the State's outstanding general obligation
bonds from AAA to AA+ in August 1981 and to AA in March 1982.
Moody's Investors Service, Inc. lowered its rating on the State's
outstanding general obligation bonds from Aaa to Aa in April 1982.
The State's economy recovered in the July 1, 1983 to June 30,
1985 biennium, and substantial reductions in the individual income
tax were enacted in 1984 and 1985. Standard & Poor's raised its
rating on the State's outstanding general obligation bonds to
AA+ in January 1985. In 1986, 1987 and 1991 legislation was required
to eliminate projected budget deficits by raising additional revenue,
reducing expenditures, including aid to political subdivisions
and higher education, and making other budgetary adjustments.
A budget forecast released by the Minnesota Department of Finance
on February 27, 1992 projected a $569 million budget shortfall,
primarily attributable to reduced income tax receipts, for the
biennium ending June 30, 1993. Planning estimates for the 1994-95
biennium projected a budget shortfall of $1.75 billion (less a
$300 million reserve). (The projections generally do not include
increases for inflation or operating costs, except where Minnesota
law requires them.) The State responded by enacting legislation
that made substantial accounting changes, reduced the budget reserve
by $160 million to $240 million, reduced appropriations for state
agencies and higher education, and imposed a sales tax on purchases
by local governmental units. A revised forecast released by the
Department of Finance on November 24, 1992 reflects these legislative
changes and projects a $217 million General Fund surplus at the
end of the current biennium, June 30, 1993, plus a $240 million
cash flow account, against a total budget for the biennium of
approximately $14.6 billion, and planning estimates for the 1994-95
biennium project a budget shortfall of $986 million (less the
$217 million balance carried forward and the $240 million cash
flow account). Although Standard & Poor's affirmed its rating
on the State's general obligation bonds in connection with a July
1992 issue, it revised its outlook for the rating to "negative."
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota.
Even with respect to bonds that are revenue obligations and not
general obligations of the issuer, there can be no assurance that
the fiscal problems referred to above will not adversely affect
the market value or marketability of the bonds or the ability
of the respective obligors to pay interest on and principal of
the bonds.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Minnesota
Trusts are subject. Additionally, many factors including
Page 42
national economic, social and environmental policies and conditions,
which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition
of the State and various agencies and political subdivisions located
in the State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
Bonds, the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the Minnesota
Trusts to pay interest on or principal of the bonds.
The New Jersey Trusts. The New Jersey Trusts consist of a portfolio
of New Jersey Bonds. The Trusts are therefore susceptible to political,
economic or regulatory factors affecting issuers of the New Jersey
Bonds. The following information provides only a brief summary
of some of the complex factors affecting the financial situation
in New Jersey (the "State") and is derived from sources that are
generally available to investors and is believed to be accurate.
It is based in part on information obtained from various State
and Local agencies in New Jersey. No independent verification
has been made of any of the following information. New Jersey
is the ninth largest state in population and the fifth smallest
in land area. With an average of 1,034 people per square mile,
it is the most densely populated of all the states. The State's
economic base is diversified, consisting of a variety of manufacturing,
construction and service industries, supplemented by rural areas
with selective commercial agriculture. Historically, New Jersey's
average per capita income has been well above the national average,
and in 1991 the State ranked second among the states in per capita
personal income ($25,372).
The New Jersey Economic Policy Council, a statutory arm of the
New Jersey Department of Commerce and Economic Development, has
reported in New Jersey Economic Indicators, a monthly publication
of the New Jersey Department of Labor, Division of Labor Market
and Demographic Research, that in 1988 and 1989 employment in
New Jersey's manufacturing sector failed to benefit from the export
boom experienced by many Midwest states and the State's service
sectors, which had fueled the State's prosperity since 1982, lost
momentum. In the meantime, the prolonged fast growth in the State
in the mid 1980s resulted in a tight labor market situation, which
has led to relatively high wages and housing prices. This means
that, while the incomes of New Jersey residents are relatively
high, the State's business sector has become more vulnerable to
competitive pressures. New Jersey is currently experiencing a
recession and, as a result of the factors described above, such
recession could last longer than the national recession, although
signs of a slow recovery both on the national and state levels
have been reported.
The onset of the national recession (which officially began in
July 1990 according to the National Bureau of Economic Research)
caused an acceleration of New Jersey's job losses in construction
and manufacturing. In addition, the national recession caused
an employment downturn in such previously growing sectors as wholesale
trade, retail trade, finance, utilities and trucking and warehousing.
Reflecting the downturn, the rate of unemployment in the State
rose from a low of 3.6% during the first quarter of 1989 to an
estimated 8.0% in December 1992, which is above the national average
of 7.3% in December 1992. Economic recovery is likely to be slow
and uneven in New Jersey, with unemployment receding at a correspondingly
slow pace, due to the fact that some sectors may lag due to continued
excess capacity. In addition, employers even in rebounding sectors
can be expected to remain cautious about hiring until they become
convinced that improved business will be sustained. Also, certain
firms will continue to merge or downsize to increase profitability.
Debt Service. The primary method for State financing of capital
projects is through the sale of the general obligation bonds of
the State. These bonds are backed by the full faith and credit
of the State tax revenues and certain other fees are pledged to
meet the principal and interest payments and if provided, redemption
premium payments, if any, required to repay the bonds. As of June
30, 1992, there was a total authorized bond indebtedness of approximately
$6.96 billion, of which $3.32 billion was issued and outstanding,
$2.36 billion was retired (including bonds for which provision
for payment has been made through
Page 43
the sale and issuance of refunding bonds) and $1.04 billion was
unissued. The debt service obligation for such outstanding indebtedness
is $444.3 billion for Fiscal Year 1993.
New Jersey's Budget and Appropriation System. The State operates
on a fiscal year beginning July 1 and ending June 30. At the end
of Fiscal Year 1989, there was a surplus in the State's general
fund (the fund into which all State revenues not otherwise restricted
by statute are deposited and from which appropriations are made)
of $411.2 million. At the end of Fiscal Year 1990, there was a
surplus in the general fund of $1 million. It is estimated that
New Jersey closed its Fiscal Year 1991 with a surplus of $1.4
million. It is estimated that New Jersey closed its Fiscal Year
1992 with a surplus of $762.9 million.
In order to provide additional revenues to balance future budgets,
to redistribute school aid and to contain real property taxes,
on June 27, 1990, and July 12, 1990, Governor Florio signed into
law legislation which was estimated to raise approximately $2.8
billion in additional taxes (consisting of $1.5 billion in sales
and use taxes and $1.3 billion in income taxes), the biggest tax
hike in New Jersey history. There can be no assurance that receipts
and collections of such taxes will meet such estimates.
The first part of the tax hike took effect on July 1, 1990, with
the increase in the State's sales and use tax rate from 6% to
7% and the elimination of exemptions for certain products and
services not previously subject to the tax, such as telephone
calls, paper products (which has since been reinstated), soaps
and detergents, janitorial services, alcoholic beverages and cigarettes.
At the time of enactment, it was projected that these taxes would
raise approximately $1.5 billion in additional revenue. Projections
and estimates of receipts from sales and use taxes, however, have
been subject to variance in recent fiscal years.
The second part of the tax hike took effect on January 1, 1991
in the form of an increased state income tax on individuals. At
the time of enactment, it was projected that this increase would
raise approximately $1.3 billion in additional income taxes to
fund a new school aid formula, a new homestead rebate program
and state assumption of welfare and social service costs. Projections
and estimates of receipts from income taxes, however, have also
been subject to variance in recent fiscal years. Under the legislation,
income tax rates increased from their previous range of 2% to
3.5% to a new range of 2% to 7%, with the higher rates applying
to married couples with incomes exceeding $70,000 who file joint
returns, and for individuals filing single returns with incomes
of more than $35,000.
The Florio administration has contended that the income tax package
will help reduce local property tax increases by providing more
state aid to municipalities. Under the income tax legislation
the State will assume approximately $289 million in social services
costs that previously were paid by counties and municipalities
and funded by property taxes. In addition, under the new formula
for funding school aid, an extra $1.1 billion is proposed to be
sent by the State to school districts beginning in 1991, thus
reducing the need for property tax increases to support education
programs.
Effective July 1, 1992, the State's sales and use tax rate decreased
from 7% to 6%.
On June 30, 1992, the New Jersey legislature adopted a $14.0 billion
State budget for fiscal year 1993 by overriding Governor Florio's
veto of the spending plan. The budget reflected a $1.1 billion
cut from Governor Florio's proposed $16 billion budget, including
a $385 million reduction in the State homestead rebate program
and $421 million in cuts in salaries and other spending by the
State bureaucracy and including the prospect of 1,400 to 6,300
layoffs of State employees. The budget also reflects the loss
of revenues, projected at $608 million, as a result of the reduction
in the sales and use tax rate from 7% to 6% effective July 1,
1992, and the use of $1.3 billion in pension savings to balance
the budget, with $770 million available only in fiscal 1993 and
$569 million that will recur annually in the future.
Litigation. The State is a party in numerous legal proceedings
pertaining to matters incidental to the performance of routine
governmental operations. Such litigation includes, but is not
limited to, claims asserted against the State arising from alleged
torts, alleged breaches of contracts, condemnation proceedings
and other alleged violations of State and Federal laws. Included
in the State's outstanding litigation
Page 44
are cases challenging the following: the formula relating to State
aid to public schools, the method by which the State shares with
its counties maintenance recoveries and costs for residents in
State institutions, unreasonably low Medicaid payment rates for
long-term facilities in New Jersey, the obligation of counties
to maintain Medicaid or Medicare eligible residents of institutions
and facilities for the developmentally disabled, taxes paid into
the Spill Compensation Fund (a fund established to provide money
for use by the State to remediate hazardous waste sites and to
compensate other persons for damages incurred as a result of hazardous
waste discharge) based on Federal preemption, various provisions,
and the constitutionality, of the Fair Automobile Insurance Reform
Act of 1990, the State's method of funding the judicial system,
certain provisions of New Jersey's hospital rate-setting system,
recently enacted legislation calling for a revaluation of several
New Jersey public employee pension funds in order to provide additional
revenues for the State's general fund, and the exercise of discretion
by State agencies in making certain personnel reductions. Adverse
judgments in these and other matters could have the potential
for either a significant loss of revenue or a significant unanticipated
expenditure by the State.
At any given time, there are various numbers of claims and cases
pending against the State, State agencies and employees seeking
recovery of monetary damages that are primarily paid out of the
fund created pursuant to the New Jersey Tort Claims Act. In addition,
at any given time, there are various numbers of contract claims
against the State and State agencies seeking recovery of monetary
damages. The State is unable to estimate its exposure for these
claims.
Debt Ratings. For many years prior to 1991, both Moody's Investors
Service, Inc. and Standard and Poor's Corporation have rated New
Jersey general obligation bonds "Aaa" and "AAA", respectively.
On July 3, 1991, however, Standard and Poor's Corporation downgraded
New Jersey general obligation bonds to "AA+". On June 4, 1992,
Standard and Poor's Corporation placed New Jersey general obligation
bonds on Credit Watch with negative implications, citing as its
principal reason for its caution the unexpected denial by the
Federal Government of New Jersey's request for $450 million in
retroactive Medicaid payments for psychiatric hospitals. These
funds were critical to closing a $1 billion gap in the State's
$15 billion budget for fiscal year 1992 which ended on June 30,
1992. Under New Jersey state law, the gap in the current budget
must be closed before the new budget year begins on July 1, 1992.
Standard and Poor's Corporation suggested the State could close
fiscal 1992's budget gap and help fill fiscal 1993's hole by a
reversion of $700 million of pension contributions to its general
fund under a proposal to change the way the State calculates its
pension liability. On July 6, 1992, Standard and Poor's Corporation
reaffirmed its "AA+" rating for New Jersey general obligation
bonds and removed the debt from its Credit Watch list, although
it stated that New Jersey's long-term financial outlook is negative.
Standard and Poor's Corporation is concerned that the State is
entering the 1993 fiscal year that began July 1, 1992, with a
slim $26 million surplus and remains concerned about whether the
sagging State economy will recover quickly enough to meet lawmakers'
revenue projections. It also remains concerned about the recent
federal ruling leaving in doubt how much the State is due in retroactive
Medicaid reimbursements and a ruling by a federal judge, now on
appeal, of the State's method for paying for uninsured hospital
patients.
On August 24, 1992, Moody's Investors Service, Inc. downgraded
New Jersey general obligations bonds to "Aa1", stating that the
reduction reflects a developing pattern of reliance on nonrecurring
measures to achieve budgetary balance, four years of financial
operations marked by revenue shortfalls and operating deficits,
and the likelihood that serious financial pressures will persist.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete description of
all adverse conditions to which the issuers in the New Jersey
Trusts are subject. Additionally, many factors, including national
economic, social and environmental policies and conditions which
are not within the control of the issuers of Bonds, could affect
or could have an adverse impact on the financial condition of
the State, various
Page 45
agencies and political subdivisions and private businesses located
in the State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
Bonds, the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the New Jersey
Trusts to pay interest on or principal of the Bonds.
The New York Trusts. The New York Trusts include obligations issued
by New York State (the "State"), by its various public bodies
(the "Agencies"), and/or by other entities located within the
State, including the City of New York (the "City").
Some of the more significant events relating to the financial
situation in New York are summarized below. This section provides
only a brief summary of the complex factors affecting the financial
situation in New York and is based in part on Official Statements
issued by, and on other information reported by the State, the
City, and their agencies in connection with the issuance of their
respective securities.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value
of New York Municipal Obligations held in the portfolio of the
Trusts or the ability of particular obligors to make timely payments
of debt service on (or relating to) those obligations.
The State. The State has historically been one of the wealthiest
states in the nation. For decades, however, the State economy
has grown more slowly than that of the nation as a whole, gradually
eroding the State's 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 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.
Slowdown of Regional Economy. A national recession commenced in
mid-1990. The downturn continued throughout the State's 1990-91
fiscal year and was followed by a period of weak economic growth
during the 1991 calendar year. For calendar year 1992, the national
economy continued to recover, although at a rate below all post-war
recoveries. For calendar year 1993, the economy is expected to
continue to grow faster than in 1992, but still at a very moderate
rate of growth. The national recession has been more severe in
the State because of factors such as significant retrenchment
in the financial services industry, cutbacks in defense spending,
and an overbuilt real estate market.
1993-94 Fiscal Year. The Governor released on January 19, 1993,
the recommended Executive Budget for the 1993-94 fiscal year which
commences on April 1, 1993 ("the Recommended 1993-94 State Financial
Plan"), which plan projects a balanced General Fund. General Fund
receipts and transfers from other funds are projected at $31.563
billion, including $184 million carried over from the 1992-93
fiscal year.
To achieve General Fund budgetary balance in the 1993-94 State
fiscal year, the Governor has recommended various actions requiring
legislative approval. These include: proposed spending reductions
and other actions that would reduce General Fund spending ($1.6
billion); continuing the freeze on personal income and corporate
tax reductions and on hospital assessments ($1.3 billion); retaining
moneys in the General Fund that would otherwise have been deposited
in dedicated highway and transportations funds ($516 million);
a 21-cent increase in the cigarette tax ($180 million); and new
revenues from miscellaneous sources ($91 million).
There can be no assurance that the Legislature will enact the
Recommended 1993-94 State Financial Plan as proposed nor can there
be any assurance that the Legislature will enact a budget for
the 1993-94 fiscal
Page 46
year prior to the beginning of the fiscal year. In recent fiscal
years, the State has failed to enact a budget prior to the beginning
of the State's fiscal year. Because the Recommended 1993-94 State
Financial Plan contains proposed spending cuts from baseline projections
that are greater than in most recent fiscal years, delay in enactment
of the 1993-94 fiscal year budget could have greater consequences
than similar delays in recent years. Delay in legislative enactment
of the 1993-94 fiscal year budget may reduce the effectiveness
of many of the actions proposed to close the potential gap. The
1993-94 State Financial Plan, when formulated after enactment
of the budget, would have to take into account any reduced savings
arising from any late budget enactment.
The Recommended 1993-94 State Financial Plan would result in sharp
reductions in aid to all levels of local government units, from
amounts expected. To offset a portion of such reduction, the Recommended
1993-94 State Financial Plan contains a package of mandate relief,
cost containment and other proposals to reduce the costs of many
programs for which local governments provide funding. There can
be no assurance, however, that localities that suffer cuts will
not be adversely affected, leading to further requests for State
financial assistance.
There can be no assurance that the State will not face substantial
potential budget gaps in the future resulting from a significant
disparity between tax revenues projected from a lower recurring
receipts base and the spending required to maintain State programs
at current levels. To address any potential budgetary imbalance,
the State may need to take significant actions to align recurring
receipts and disbursements.
1992-93 Fiscal Year. On January 21, 1992, the Governor released
the recommended 1992-93 Executive Budget which included the revised
1991-92 State Financial Plan (the "Revised 1991-92 State Financial
Plan") indicating a projected $531 million General Fund cash basis
operating deficit in the 1991-92 fiscal year. The projected $531
million deficit was met through tax and revenue anticipation notes
(the "1992 Deficit Notes") which were issued on March 30, 1992
and are required by law to be repaid in the State's 1992-93 fiscal
year. The $531 million projected deficit follows $407 million
in administrative actions taken by the governor to reduce 1991-92
disbursements and to increase revenues.
The recommended 1992-93 Executive Budget contained projections
for the 1992-93 State fiscal year which began on April 1, 1992.
The governor indicated that, for the 1992-93 fiscal year, the
State faced a $4.8 billion budget gap, including the $531 million
needed in the 1992-93 fiscal year to repay the 1992 Deficit Notes.
The recommended 1992-93 Executive Budget reflects efforts to achieve
budgetary balance by reducing disbursements by $3.5 billion and
increasing revenues by $1.3 billion, from levels previously anticipated.
The 1992-93 State budget was enacted by the Legislature on April
2, 1992 and was balanced through a variety of spending cuts and
revenue increases, as reflected in the State Financial Plan for
the 1992-93 fiscal year (the "1992-93 State Financial Plan") announced
on April 13, 1992. The 1992-93 State Financial Plan projects that
General Fund receipts and transfers from other funds will total
$31.382 billion, after provision to repay the 1992 Deficit Notes.
The 1992-93 State Financial Plan includes increased taxes and
other revenues, deferral of scheduled personal income and corporate
tax reductions, significant reductions from previously projected
levels in aid to localities and State operations and other budgetary
actions that limit the growth in General Fund disbursements.
Pursuant to Statute, the State updates the State Financial Plan
at least on a quarterly basis. The first quarterly revision to
the State Financial Plan for the State's 1992-93 fiscal year was
issued on July 30, 1992 (the "Revised 1992-93 State Financial
Plan").
In February 1992, the Division of the Budget estimated the potential
budget imbalance for the State's 1993-94 fiscal year at approximately
$1.6 billion.
For a number of years the State has encountered difficulties in
achieving a balance of expenditures and revenues. The 1991-92
fiscal year was the fourth consecutive year in which the State
incurred a cash-basis operating deficit in the General Fund and
issued deficit notes. There can be no assurance that the
Page 47
State will not continue to face budgetary difficulties in the
future, due to a number of factors including economic, fiscal
and political factors, and that such difficulties will not lead
to further adverse consequences for the State.
As a result of changing economic conditions and information, public
statements or reports may be released by the Governor, members
of the State Legislature, and their respective staffs, as well
as others involved in the budget negotiation process from time
to time. Those statements or reports may contain predictions,
projections or other items of information relating to the State's
financial condition, as reflected in the Recommended 1993-94 State
Financial Plan, that may vary materially and adversely from the
information provided herein.
Indebtedness. As of December 31, 1992, the total amount of long-term
State general obligation debt authorized but unissued stood at
$2.6 billion, of which approximately $1.5 billion was part of
a general obligation bond authorization for highway and bridge
construction and rehabilitation. As of the same date, the State
had approximately $5.1 billion in general obligation bonds and
$293 million in bond anticipation notes outstanding. The State
issued $3.9 billion in tax and revenue anticipation notes ("TRANs")
on June 21, 1991, $531 million in 1992 Deficit Notes on March
30, 1992 and $2.3 billion in TRANs on April 28, 1992. The Division
of the Budget also projects the issuance of $1.4 billion in TRANs
during the first quarter of the State's 1993-94 fiscal year.
The Governor has recommended the issuance of $761 million in borrowings
for capital purposes during the State's 1993-94 fiscal year. In
addition, the State expects to issue $140 million in bonds for
the purpose of redeeming outstanding bond anticipation notes.
The Governor has also recommended the issuance of up to $85 million
in certificates of participation during the State's 1993-94 fiscal
year for personal and real property acquisitions. The projection
of the State regarding its borrowings for the 1993-94 fiscal year
may change if actual receipts fall short of State projections
or if other circumstances require.
In June 1990, legislation was enacted creating the New York Local
Government Assistance Corporation ("LGAC"), a public benefit corporation
empowered to issue long-term obligations to fund certain payments
to local governments traditionally funded through the State's
annual seasonal borrowing. To date, LGAC has issued its bonds
to provide net proceeds of $3.02 billion. LGAC has been authorized
to issue additional bonds to provide net proceeds of $975 million
during the State's 1992-93 fiscal year, of which $621 million
has been issued to date.
Ratings. The $2.3 billion in TRANs issued by the State in April
1992 were rated SP-1 by S&P and MIG-2 by Moody's. The $3.9 billion
in TRANs issued by the State in June 1991 were rated the same.
S&P in so doing stated that the outlook has changed to "negative"
from "stable." The $4.1 billion in TRANs issued by the State in
June 1990 and the $775 million in TRANs issued by the State in
March 1990 were rated the same. In contrast, the $3.9 billion
of TRANs issued by the State in May 1989 had been rated SP-1+
by S&P and MIG-1 by Moody's.
As of the date of this Prospectus, Moody's rating of the State's
general obligation bonds stood at A, but under review for possible
downgrade and S&P's rating stood at A- with a negative outlook.
Moody's placed the bonds under review on January 6, 1992. Previously,
Moody's lowered its rating to A on June 6, 1990, its rating having
been A1 since May 27, 1986. S&P lowered its rating from A to A-
on January 13, 1992. S&P's previous ratings were A from March
1990 to January 1992, AA- from August 1987 to March 1990 and A+
from November 1982 to August 1987.
On September 18, 1992, Moody's, in placing the bonds under review
for possible downgrade, stated:
Chronic financial problems weigh most heavily in the evaluation
of New York State's credit. In the past five years, the State
has been unable to maintain a balanced budget and has had to issue
deficit notes in each of the past four years. The budget for the
fiscal year which began April 1, 1992 was adopted nearly on time,
relies somewhat less on non-recurring actions, and provides for
some expenditure reductions, mainly due to a planned reduction
in the size of the State workforce. However, although
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growth in major aid programs to local governments is modest, major
structural reform of State programs which would provide enduring
budget relief has not been enacted. The State budget is still
narrowly balanced and the State could face additional fiscal pressure
if the economy performs worse than anticipated or cost-reduction
programs fail to generate anticipated savings.
On November 16, 1992, S&P, in affirming its A- rating and negative
outlook of the State's general obligation bonds, stated:
The rating reflects ongoing weakness, four years of operating
deficits and a large accumulated deficit position.
The current economic environment and the State's financial complexion
still contain a significant amount of risk.
The ratings outlook is "negative," as the budget balance remains
fragile.
The City and the Municipal Assistance Corporation ("MAC"). 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.
In February 1975, the New York State Urban Development Corporation
("UDC"), which had approximately $1 billion of outstanding debt,
defaulted on certain of its short-term notes. Shortly after the
UDC default, the City entered a period of financial crisis. Both
the State Legislature and the United States Congress enacted legislation
in response to this crisis. During 1975, the State Legislature
(i) created MAC to assist with long-term financing for the City's
short-term debt and other cash requirements and (ii) created the
State Financial Control Board (the "Control Board") to review
and approve the City's budgets and the City's four-year financial
plans (the financial plans also apply to certain City-related
public agencies (the "Covered Organizations")).
Over the past three years, the rate of economic growth in the
City has slowed substantially, and the City's economy is currently
in recession. The City projects, and its current four-year financial
plan assumes, a continuation of the recession in the New York
City region in the1992 calendar year with a recovery early in
the 1993 calendar year. The Mayor is responsible for preparing
the City's four-year financial plan, including the City's current
financial plan. The City Comptroller has issued reports concluding
that the recession of the City's economy will be more severe and
last longer than is assumed in the financial plan.
For each of the 1981 through 1991 fiscal years, the City achieved
balanced operating results as reported in accordance with generally
accepted accounting principles ("GAAP"), and expects to achieve
balanced operating results for the 1992 fiscal year. During its
1991 fiscal year, as a result of the recession, the City experienced
significant shortfalls from its July 1990 projections in virtually
every major category of tax revenues. The City was required to
close substantial budget gaps in its 1990 and 1991 fiscal years
in order to maintain balanced operating results. There can be
no assurance that the City will continue to maintain a balanced
budget, or that it can maintain a balanced budget without additional
tax or other revenue increases or reductions in City services,
which could adversely affect the City's economic base. The City
Comptroller has issued reports that have warned of the adverse
effects on the City's economy of the tax increases that were imposed
during fiscal years 1991 and 1992.
Pursuant to State 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.
The City is required to submit its financial plans to review bodies,
including the Control Board. If the City were to experience certain
adverse financial circumstances, including the occurrence or the
substantial likelihood of the occurrence of an annual operating
deficit of more than $100 million or the loss of access to the
public credit markets to satisfy the City's capital and seasonal
financial requirements, the Control Board would be required by
State law to exercise certain powers, including prior approval
of City financial plans, proposed borrowings and certain contracts.
Page 49
The City depends on the State for State aid both to enable the
City to balance its budget and to meet its cash requirements.
As a result of the national and regional economic recession, the
State's projections of tax revenues for its 1991 and 1992 fiscal
years were substantially reduced. For its 1993 fiscal year, the
State, before taking any remedial action reflected in the State
budget enacted by the State Legislature on April 2, 1992 reported
a potential budget deficit of $4.8 billion. If the State experiences
revenue shortfalls or spending increases beyond its projections
during its 1992-93 fiscal year or subsequent years, such developments
could result in reductions in projected State aid to the City.
In addition, there can be no assurance that State budgets in future
fiscal years will be adopted by the April 1 statutory deadline
and that there will not be adverse effects on the City's cash
flow and additional City expenditures as a result of such delays.
The City projections set forth in its financial plan are based
on various assumptions and contingencies which are uncertain and
which may not materialize. Changes in major assumptions could
significantly affect the City's ability to balance its budget
as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include
the timing of any regional and local economic recovery, the absence
of wage increases in excess of the increases assumed in such financial
plan, employment growth, provision of State and Federal aid and
mandate relief, State legislative approval of future State budgets,
levels of education expenditures as may be required by State law,
adoption of future City budgets by the New York City Council,
and approval by the Governor or the State Legislature and the
cooperation of MAC with respect to various other actions proposed
in such financial plan.
The City's ability to maintain a balanced operating budget is
dependent on whether it can implement necessary service and personnel
reduction programs successfully. The financial plan submitted
to the Control Board on June 11, 1992 contains substantial proposed
expenditure cuts for the 1993 through 1996 fiscal years. The proposed
expenditure reductions will be difficult to implement because
of their size and the substantial expenditure reductions already
imposed on City operations in the past two years.
Attaining a balanced budget is also dependent upon the City's
ability to market its securities successfully in the public credit
markets. The City's financing program for fiscal years 1993 through
1996 contemplates issuance of $13.3 billion of general obligation
bonds primarily to reconstruct and rehabilitate the City's infrastructure
and physical assets and to make capital investments. A significant
portion of such bond financing is used to reimburse the City's
general fund for capital expenditures already incurred. In addition,
the City issues revenue and tax anticipation notes to finance
its seasonal working capital requirements. The terms and success
of projected public sales of City general obligation bonds and
notes will be subject to prevailing market conditions at the time
of the sale, and no assurance can be given that the credit markets
will absorb the projected amounts of public bond and note sales.
In addition, future developments concerning the City and public
discussion of such developments, the City's future financial needs
and other issues may affect the market for outstanding City general
obligation bonds and notes. If the City were unable to sell its
general obligation bonds and notes, it would be prevented from
meeting its planned operating and capital expenditures.
The City Comptroller, the staff of the Control Board, the Office
of the State Deputy Comptroller for the City of New York (the
"OSDC") and other agencies and public officials have issued reports
and made public statements which, among other things, state that
projected revenues may be less and future expenditures may be
greater than those forecast in the financial plan. In addition,
the Control Board and other agencies have questioned whether the
City has the capacity to generate sufficient revenues in the future
to meet the costs of its expenditure increases and to provide
necessary services. It is reasonable to expect that such reports
and statements will continue to be issued and engender public
comment.
Fiscal Years 1991 and 1992. The City achieved balanced operating
results as reported in accordance with GAAP for the 1991 fiscal
year. During the 1990 and 1991 fiscal years, the City implemented
various actions to offset a projected budget deficit of $3.2 billion
for the 1991 fiscal year, which resulted from declines
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in City revenue sources and increased public assistance needs
due to the recession. Such actions included $822 million of tax
increases and substantial expenditure reductions.
The quarterly modification to the City's financial plan submitted
to the Control Board on May 7, 1992 (the "1992 Modification")
projected a balanced budget in accordance with GAAP for the 1992
fiscal year after taking into account a discretionary transfer
of $455 million to the 1993 fiscal year as the result of a 1992
fiscal year surplus. In order to achieve a balanced budget for
the 1992 fiscal year, during the 1991 fiscal year, the City proposed
various actions for the 1992 fiscal year to close a projected
gap of $3.3 billion in the 1992 fiscal year.
1993-96 Financial Plan. On June 11, 1992, the City submitted to
the Control Board the Financial Plan for the 1993 through 1996
fiscal years, which relates to the City, the Board of Education
("BOE") and the City University of New York ("CUNY") and is based
on the City's expenses and capital budgets for the City's 1993
fiscal year. The 1993-96 Financial Plan projects revenues and
expenditures for the 1993 fiscal year balanced in accordance with
GAAP.
The 1993-96 Financial Plan sets forth actions to close a previously
projected gap of approximately $1.2 billion in the 1993 fiscal
year. The gap-closing actions for the 1993 fiscal year include
$489 million of discretionary transfers from a City surplus in
the 1992 fiscal year.
The 1993-96 Financial Plan also sets forth projections and outlines
a proposed gap-closing program for the 1994 through 1996 fiscal
years to close projected budget gaps. On August 26, 1992, the
City modified the 1993-96 Financial Plan. As modified, the Financial
Plan projects a balanced budget for fiscal year 1993 based upon
revenues of $29.6 billion but projects budget gaps of $1.3 billion,
$1.2 billion and $1.7 billion, respectively, in the 1994 through
1996 fiscal years.
On February 9, 1993, the City issued a modification to the 1993-96
Financial Plan (the "February Modification"). The February Modification
projects budget gaps for fiscal years 1994, 1995 and 1996 of $2.1
billion, $3.1 billion and $3.8 billion, respectively.
Various actions proposed in the Financial Plan are subject to
approval by the Governor and approval by the State Legislature,
and the proposed increase in Federal aid is subject to approval
by Congress and the President. In addition, MAC has set conditions
upon its cooperation in the City's realization of the proposed
transitional funding contained in the Financial Plan for the 1994
fiscal year. If these actions cannot be implemented, the City
will be required to take other actions to decrease expenditures
or increase revenues to maintain a balanced financial plan.
The City is a defendant in a significant number of lawsuits. Such
litigation includes, but is not limited to, actions commenced
and claims asserted against the City arising out of alleged constitutional
violations, torts, breaches of contracts, and other violations
of law and condemnation proceedings. While the ultimate outcome
and fiscal impact, if any, on the proceedings and claims are not
currently predictable, adverse determinations in certain of them
might have a material adverse effect upon the City's ability to
carry out its financial plan. As of June 30, 1991, legal claims
in excess of $322 billion were outstanding against the City for
which the City estimated its potential future liability to be
$2.1 billion.
Ratings. As of the date of this prospectus, Moody's rating of
the City's general obligation bonds stood at Baa1 and S&P's rating
stood at A-. On February 11, 1991, Moody's had lowered its rating
from A.
On October 19, 1992, in confirming the Baa1 rating, Moody's noted
that:
Financial operations continue to be satisfactorily maintained[.]
. . . Nevertheless, significant gaps in the later years of the
[four year financial] plan remain and have not changed from prior
projections. The ability of the City to successfully close those
gaps, as well as fully implement all currently planned gap closing
measures without slippage will be a politically and financially
complex task.
On October 19, 1992, S&P affirmed its A- rating, with a negative
outlook stating that:
Per capita debt remains high, and debt service as a portion of
total spending will continue to grow above 10% as the City issues
$3-$4 billion of new bonds for the next several years. Economically,
the City
Page 51
is in one of its deepest recessions, with additional job losses
this year expected to approach 130,000 before moderating in 1993.
Long-term job growth is expected to be slow.
City financial plans will continue to be burdened by weak economic
factors, and continued risks to State and federal actions that
the City is relying on to balance future budgets.
The outlook remains negative. Labor negotiations also present
some risk, given City assumptions of no wage increase in 1993-94.
Previously, Moody's had raised its rating to A in May 1988, to
Baa1 in December 1985, to Baa in November 1983 and to Ba1 in November
1981. S&P had raised its rating to A- in November 1987, to BBB+
in July 1985 and to BBB in March 1981.
On May 9, 1990, Moody's revised downward its rating on outstanding
City revenue anticipation notes from MIG-1 to MIG-2 and rated
the $900 million Notes then being sold MIG-2. On April 30, 1991
Moody's confirmed its MIG-2 rating for the outstanding revenue
anticipation notes and for the $1.25 billion in notes then being
sold. On April 29, 1991, S&P revised downward its rating on City
revenue anticipation notes from SP-1 to SP-2.
As of June 30, 1992, the City and MAC had, respectively, $19.5
billion and $5.9 billion of outstanding net long-term indebtedness.
The State Agencies. Certain Agencies of the State have faced substantial
financial difficulties which could adversely affect the ability
of such Agencies to make payments of interest on, and principal
amounts of, their respective bonds. The difficulties have in certain
instances caused the State (under so-called "moral obligation"
provisions which are non-binding statutory provisions for State
appropriations to maintain various debt service reserve funds)
to appropriate funds on behalf of the Agencies. Moreover, it is
expected that the problems faced by these Agencies will continue
and will require increasing amounts of State assistance in future
years. Failure of the State to appropriate necessary amounts or
to take other action to permit those Agencies having financial
difficulties to meet their obligations could result in a default
by one or more of the Agencies. Such default, if it were to occur,
would be likely to have a significant adverse effect on investor
confidence in, and therefore the market price of, obligations
of the defaulting Agencies. In addition, any default in payment
on any general obligation of any Agency whose bonds contain a
moral obligation provision could constitute a failure of certain
conditions that must be satisfied in connection with Federal guarantees
of City and MAC obligations and could thus jeopardize the City's
long-term financing plans.
As of September 30, 1992, the State reported that there were eighteen
Agencies that each had outstanding debt of $100 million or more.
These eighteen Agencies had an aggregate of $62.2 billion of outstanding
debt, including refunding bonds, of which the State was obligated
under lease-purchase, contractual obligation or moral obligation
provisions on $25.3 billion.
State Litigation. The State is a defendant in numerous legal proceedings
pertaining to matters incidental to the performance of routine
governmental operations. Such litigation includes, but is not
limited to, claims asserted against the State arising from alleged
torts, alleged breaches of contracts, condemnation proceedings,
and other alleged violations of State and Federal laws. Included
in the State's outstanding litigation are a number of cases challenging
the constitutionality or the adequacy and effectiveness of a variety
of significant social welfare programs primarily involving the
State's mental hygiene programs. Adverse judgments in these matters
generally could result in injunctive relief coupled with prospective
changes in patient care which would require substantial increased
financing of the litigated programs in the future.
The State is also engaged in a variety of claims wherein significant
monetary damages are sought. Actions commenced by several Indian
nations claim that significant amounts of land were unconstitutionally
taken from the Indians in violation of various treaties and agreements
during the eighteenth
Page 52
and nineteenth centuries. The claimants seek recovery of approximately
six million acres of land as well as compensatory and punitive
damages.
Adverse developments in the foregoing proceedings or new proceedings
could adversely affect the financial condition of the State in
the 1992-93 fiscal year or thereafter.
Other Municipalities. Certain localities in addition to New York
City could have financial problems leading to requests for additional
State assistance. The Recommended 1993-94 State Financial Plan
includes significant reductions in State aid to localities in
such programs as revenue sharing and aid to education from projected
base-line growth in such programs. It is expected that such reductions
will result in the need for localities to reduce their spending
or increase their revenues. The potential impact on the State
of such actions by localities is not included in projections of
State revenues and expenditures in the State's 1993-94 fiscal
year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the
City of Yonkers (the "Yonkers Board") by the State in 1984. The
Yonkers Board is charged with oversight of the fiscal affairs
of Yonkers. Future actions taken by the Governor or the State
Legislature to assist Yonkers could result in allocation of State
resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1990, the total indebtedness
of all localities in the State was approximately $26.9 billion,
of which $13.5 billion was debt of New York City (excluding $7.1
billion in MAC debt). State law requires the Comptroller to review
and make recommendations concerning the budgets of those local
government units other than New York City authorized by State
law to issue debt to finance deficits during the period that such
deficit financing is outstanding. Seventeen localities had outstanding
indebtedness for state financing at the close of their fiscal
year ending in 1990. In 1992, an unusually large number of local
government units requested authorization for deficit financings.
According to the Comptroller, ten local government units have
been authorized to issue deficit financing in the aggregate amount
of $131.1 million.
Certain proposed Federal expenditure reductions could reduce,
or in some cases eliminate, Federal funding of some local programs
and accordingly might impose substantial increased expenditure
requirements on affected localities. If the State, New York City
or any of the Agencies were to suffer serious financial difficulties
jeopardizing their respective access to the public credit markets,
the marketability of notes and bonds issued by localities within
the State, including notes or bonds in the New York Trust, could
be adversely affected. Localities also face anticipated and potential
problems resulting from certain pending litigation, judicial decisions,
and long-range economic trends. The longer-range potential problems
of declining urban population, increasing expenditures, and other
economic trends could adversely affect localities and require
increasing State assistance in the future.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the New York
Trusts are subject. Additionally, many factors including national
economic, social, and environmental policies and conditions, which
are not within the control of the issuers of Bonds, could affect
or could have an adverse impact on the financial condition of
the State and various agencies and political subdivisions located
in the State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
Bonds, the market value or marketability of the Bonds, or the
ability of the respective issuers of the Bonds acquired by the
New York Trusts to pay interest on or principal of the Bonds.
The Ohio Trusts. The Ohio Trusts will invest substantially all
of its net assets in securities issued by or on behalf of (or
in certificates of participation in lease purchase obligations
of) the State of Ohio, political subdivisions thereof, or agencies
or instrumentalities of the State or its political subdivisions
(Ohio Obligations). The Ohio Trusts are therefore susceptible
to general or particular political, economic or regulatory
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factors that may affect issuers of Ohio Obligations. The following
information constitutes only a brief summary of some of the many
complex factors that may have an effect. The information does
not apply to "conduit" obligations on which the public issuer
itself has no financial responsibility. This information is derived
from official statements of certain Ohio issuers published in
connection with their issuance of securities and from other publicly
available documents, and is believed to be accurate. No independent
verification has been made of any of the following information.
The creditworthiness of Ohio Obligations of local issuers is generally
unrelated to that of obligations of the State itself, and the
State has no responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in
connection with investment in particular Ohio Obligations or in
those obligations of particular Ohio issuers. It is possible that
the investment may be in particular Ohio Obligations, or in those
of particular issuers, as to which those factors apply. However,
the information below is intended only as a general summary, and
is not intended as a discussion of any specific factors that may
affect any particular obligation or issuer.
The timely payment of principal of and interest on Ohio Obligations
has been guaranteed by bond insurance purchased by the issuers,
the Ohio Trusts or other parties. The timely payment of debt service
on Ohio Obligations that are so insured may not be subject to
the factors referred to in this section of the Prospectus.
Ohio is the seventh most populous state. Its 1990 Census count
of 10,847,000 indicates a 0.5% population increase from 1980.
While diversifying more into the service and other non-manufacturing
areas, the Ohio economy continues to rely in part on durable goods
manufacturing largely concentrated in motor vehicles and equipment,
steel, rubber products and household appliances. As a result,
general economic activity, as in many other industrially-developed
states, tends to be more cyclical than in some other states and
in the nation as a whole. Agriculture is an important segment
of the economy, with over half the State's area devoted to farming
and approximately 20% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported
1990 average monthly State rate was 5.7%, compared to the 5.5%
national figure. However, for both 1991 and 1992 that State rate
was below the national rate; the State rates were 6.4% and 7.2%,
and the national rates 6.7% and 7.4%. The unemployment rate and
its effects vary among particular geographic areas of the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local
government finances generally, will not adversely affect the market
value of Ohio Obligations held in a Trust's portfolio or the ability
of particular obligors to make timely payments of debt service
on (or lease payments relating to) those Obligations.
The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July
1 to June 30 fiscal year (FY) or fiscal biennium in a deficit
position. Most State operations are financed through the General
Revenue Fund (GRF), for which personal income and sales-use taxes
are the major sources. Growth and depletion of GRF ending fund
balances show a consistent pattern related to national economic
conditions, with the ending FY balance reduced during less favorable
and increased during more favorable economic periods. The State
has well-established procedures for, and has timely taken, necessary
actions to ensure a resource/expenditure balance during less favorable
economic periods. These procedures include general and selected
reductions in appropriations spending.
Key biennium ending fund balances at June 30, 1989 were $475.1
million in the GRF and $353 million in the Budget Stabilization
Fund (BSF, a cash and budgetary management fund). In FYs 1990-91,
the latest complete biennium, necessary corrective steps were
taken to respond to lower receipts and higher expenditures in
certain categories than earlier estimated. Those steps included,
in FY 1991, selected reductions
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in appropriations spending and the transfer of $64 million from
the BSF to the GRF. The State reported June 30, 1991 ending fund
balances of $135.3 million (GRF) and $300 million (BSF).
To allow time to resolve certain Senate and House differences
in the budget and appropriations for the current biennium that
began July 1, 1991, an interim appropriations act was enacted
effective July 1, 1991; it included debt service and lease rental
appropriations for the entire 1992-93 biennium, while continuing
most other appropriations for 31 days at 97% of FY 1991 monthly
levels. The general appropriations act for the entire biennium
was passed on July 11, 1991 and signed by the Governor. Pursuant
to it, $200 million was transferred from the BSF to the GRF in
FY 1992.
Based on the updated FY financial results and economic forecast
in the course of FY 1992, both in light of the continuing uncertain
nationwide economic situation, there was projected and timely
addressed an FY 1992 imbalance in GRF resources and expenditures.
GRF receipts, significantly below original forecasts, resulted
primarily from lower collections of certain taxes, particularly
sales and use taxes. Higher expenditure levels resulted from higher
spending in certain areas, particularly human services, including
Medicaid. As an initial action, the Governor ordered most State
agencies to reduce GRF spending in the last six months of FY 1992
by a total of approximately $196 million. As authorized by the
General Assembly, the $100.4 million BSF balance and additional
amounts from certain other funds were transferred late in the
FY to the GRF, and adjustments in the timing of certain tax payments
made. Other administrative revenue and spending actions resolved
the remaining GRF imbalance.
A significant GRF shortfall (approximately $520 million) was projected
for FY 1993. It has been addressed by appropriate legislative
and administrative actions. As a first step, the Governor ordered,
effective July 1, 1992, $300 million in selected GRF spending
reductions. Executive and legislative action in December 1992,
a combination of tax revisions and additional appropriation spending
reductions, is projected by OBM to balance GRF resources and expenditures
in this biennium. No spending reductions have been applied to
appropriations needed for debt service or lease rentals on any
State obligations.
The State's incurrence or assumption of debt without a vote of
the people is, with limited exceptions, prohibited by current
State Constitutional provisions. The State may incur debt, limited
in amount to $750,000, to cover casual deficits or failures in
revenues or to meet expenses not otherwise provided for. The Constitution
expressly precludes the State from assuming the debts of any local
government or corporation. (An exception is made in both cases
for any debt incurred to repel invasion, suppress insurrection
or defend the State in war.)
By 12 constitutional amendments, the last adopted in 1987, Ohio
voters have authorized the incurrence of State debt to the payment
of which taxes or excises were pledged. At January 1, 1993, $516
million (excluding certain highway bonds payable primarily from
highway use charges) of this debt was outstanding. The only such
State debt then still authorized to be incurred are portions of
the highway bonds, and the following: (a) up to $100 million of
obligations for coal research and development may be outstanding
at any one time ($38.6 million outstanding); and (b) of $1.2 billion
of obligations authorized for local infrastructure improvements,
no more than $120 million may be issued in any calendar year ($432.5
million outstanding, $720 million remaining to be issued).
The Constitution also authorizes the issuance of State obligations
for certain purposes, the owners of which do not have the right
to have excises or taxes levied to pay debt service. Those special
obligations include obligations issued by the Ohio Public Facilities
Commission and the Ohio Building Authority, $3.7 billion of which
were outstanding at January 2, 1993.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision
of housing. The General Assembly may for that purpose authorize
the issuance of State obligations secured by a pledge of all or
such portion as it authorizes of State revenues or receipts (but
not by a pledge of the State's full faith and credit).
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State and local agencies issue revenue obligations that are payable
from revenues from or relating to certain facilities (but not
from taxes). By judicial interpretation, these obligations are
not "debt" within constitutional provisions. In general, payment
obligations under lease-purchase agreements of Ohio public agencies
(in which certificates of participation may be issued) are limited
in duration to the agency's fiscal period, and are renewable only
upon appropriations being made available for the subsequent fiscal
period.
Local school districts in Ohio receive a major portion (on a state-wide
basis, recently approximately 46%) of their operating moneys from
State subsidies, but are dependent on local property taxes, and
in 94 districts from voter-authorized income taxes, for significant
portions of their budgets. Litigation similar to that in other
states is pending questioning the constitutionality of Ohio's
system of school funding. A small number of the State's 612 local
school districts have in any year required special assistance
to avoid year-end deficits. A current program provides for school
district cash need borrowing directly from commercial lenders,
with diversion of State subsidy distributions to repayment if
needed; in FY 1991, under this program, 26 districts borrowed
a total of $41.8 million (including over $27 million by one district)
and in FY 1992 borrowings totalled $61.9 million (including $46.6
million for one district).
Ohio's 943 incorporated cities and villages rely primarily on
property and municipal income taxes for their operations, and,
with other local governments, receive local government support
and property tax relief moneys distributed by the State. For those
few municipalities that on occasion have faced significant financial
problems, there are statutory procedures for a joint State/local
commission to monitor the municipality's fiscal affairs, and for
development of a financial plan to eliminate deficits and cure
any defaults. Since inception in 1979, these procedures have been
applied to 22 cities and villages; for 16 of them the fiscal situation
was resolved and the procedures terminated.
At present the State itself does not levy ad valorem taxes on
real or tangible personal property. Those taxes are levied by
political subdivisions and other local taxing districts. The Constitution
has since 1934 limited the amount of the aggregate levy (including
a levy for unvoted general obligations) of property taxes by all
overlapping subdivisions, without a vote of the electors or a
municipal charter provision, to 1% of true value in money, and
statutes limit the amount of that aggregate levy to 10 mills per
$1 of assessed valuation (commonly referred to as the "ten-mill
limitation"). Voted general obligations of subdivisions are payable
from property taxes unlimited as to amount or rate.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Ohio Trusts
are subject. Additionally, many factors including national economic,
social, and environmental policies and conditions, which are not
within the control of the issuers of Bonds, could affect or could
have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the
State. The Sponsor is unable to predict whether or to what extent
such factors or other factors may affect the issuers of Bonds,
the market value or marketability of the Bonds, or the ability
of the respective issuers of the Bonds acquired by the Ohio Trusts
to pay interest on or principal of the Bonds.
The Pennsylvania Trusts. Investors should be aware of certain
factors that might affect the financial conditions of the Commonwealth
of Pennsylvania. Pennsylvania historically has been identified
as a heavy industry state although that reputation has changed
recently as the industrial composition of the Commonwealth diversified
when the coal, steel and railroad industries began to decline.
The major new sources of growth in Pennsylvania are in the service
sector, including trade, medical and the health services, education
and financial institutions. Pennsylvania's agricultural industries
are also an important component of the Commonwealth's economic
structure, accounting for more than $3.6 billion in crop and livestock
products annually, while agribusiness and food related industries
support $38 billion in economic activity annually.
Page 56
Non-agricultural employment in the Commonwealth declined by 5.1
percent during the recessionary period from 1980 to 1983. In 1984,
the declining trend was reversed as employment grew by 2.9 percent
over 1983 levels. Since 1984, Commonwealth employment has continued
to grow each year, increasing an additional 9.1 percent from 1984
to 1991. The growth in employment experienced in Pennsylvania
is comparable to the growth in employment in the Middle Atlantic
Region which has occurred during this period. As a percentage
of total non-agricultural employment within the Commonwealth,
non-manufacturing employment has increased steadily since 1980
to its 1991 level of 80.8 percent of total employment. Consequently,
manufacturing employment constitutes a diminished share of total
employment within the Commonwealth. In 1991 the service sector
accounted for 28.6 percent of all non-agricultural employment
while the trade sector accounted for 22.8 percent.
While economic indicators in Pennsylvania have generally matched
or exceeded national averages since 1983, the Commonwealth is
currently facing a slowdown in its economy. Moreover, economic
strengths and weaknesses vary in different parts of the Commonwealth.
In November 1992 the seasonally adjusted unemployment rate for
the Commonwealth was 7.1 percent compared to 7.2 percent for the
United States.
It should be noted that the creditworthiness of obligations issued
by local Pennsylvania issuers may be unrelated to the creditworthiness
of obligations issued by the Commonwealth of Pennsylvania, and
there is no obligation on the part of the Commonwealth to make
payment on such local obligations in the event of default.
Financial information for the General Fund is maintained on a
budgetary basis of accounting. A budgetary basis of accounting
is used for the purpose of ensuring compliance with the enacted
operating budget and is governed by applicable statues of the
Commonwealth and by administrative procedures. The Commonwealth
also prepares annual financial statements in accordance with generally
accepted accounting principles ("GAAP"). The budgetary basis financial
information maintained by the Commonwealth to monitor and enforce
budgetary control is adjusted at fiscal year-end to reflect appropriate
accruals for financial reporting in conformity with GAAP.
Fiscal 1991 Financial Results:
GAAP Basis. During fiscal 1991 the General Fund experienced an
$861.2 million operating deficit resulting in a fund balance deficit
of $980.9 million at June 30, 1991. The operating deficit was
a consequence of the effect of a national recession that restrained
budget revenues and pushed expenditures above budgeted levels.
At June 30, 1991, a negative unreserved-undesignated balance of
$1,146.2 million was reported. During fiscal 1991 the balance
in the Tax Stabilization Reserve Fund was used to maintain vital
state spending and only a minimal balance remains in that fund.
Budgetary Basis. A deficit of $453.6 million was recorded by the
General Fund at June 30, 1991. The deficit was a consequence of
higher than budgeted expenditures and lower than estimated revenues
during the fiscal year brought about by the national economic
recession that began during the fiscal year. A number of actions
were taken throughout the fiscal year by the Commonwealth to mitigate
the effects of the recession on budget revenues and expenditures.
Actions taken, together with normal appropriation lapses, produced
$871 million in expenditure reductions and revenue increases for
the fiscal year. The most significant of these actions were a
$214 million transfer from the Pennsylvania Industrial Development
Authority, a $134 million transfer from the Tax Stabilization
Reserve Fund, and a pooled financing program to match federal
Medicaid funds replacing $145 million of state funds.
Fiscal 1992 Financial Results:
GAAP Basis. During fiscal 1992 the General Fund reported a $1.1
billion operating surplus. This operating surplus was achieved
through legislated tax rate increases and tax base broadening
measures enacted in August 1991 and by controlling expenditures
through numerous cost reduction measures implemented throughout
the fiscal year. As a result of the fiscal 1992 operating surplus,
the fund balance has
Page 57
increased to $87.5 million and the unreserved-undesignated deficit
has dropped to $138.6 million from its fiscal 1991 level of $1,146.2
million.
Budgetary Basis. Eliminating the budget deficit carried into fiscal
1992 from fiscal 1991 and providing revenues for fiscal 1992 budgeted
expenditures required tax revisions that are estimated to have
increased receipts for the 1992 fiscal year by over $2.7 billion.
Total revenues for the fiscal year were $14,516.8 million, a $2,654.5
million increase over cash revenues during fiscal 1991. Originally
based on forecasts for an economic recovery, the budget revenue
estimates were revised downward during the fiscal year to reflect
continued recessionary economic activity. Largely due to the tax
revisions enacted for the budget, corporate tax receipts totalled
$3,761.2 million, up from $2,656.3 million in fiscal 1991, sales
tax receipts increased by $302 million to $4,499.7 million, and
personal income tax receipts totalled $4,807.4 million, an increase
of $1,443.8 million over receipts in fiscal 1991.
As a result of the lowered revenue estimate during the fiscal
year, increased emphasis was placed on restraining expenditure
growth and reducing expenditure levels. A number of cost reductions
were implemented during the fiscal year and contributed to $296.8
million of appropriation lapses. These appropriation lapses were
responsible for the $8.8 million surplus at fiscal year-end, after
accounting for the required ten percent transfer of the surplus
to the Tax Stabilization Reserve Fund.
Spending increases in the fiscal 1992 budget were largely accounted
for by increases for education, social services and corrections
programs. Commonwealth funds for the support of public schools
were increased by 9.8 percent to provide a $438 million increase
to $4.9 billion for fiscal 1992. The fiscal 1992 budget provided
additional funds for basic and special education and included
provisions designed to help restrain the annual increase of special
education costs, an area of recent rapid cost increases. Child
welfare appropriations supporting county operated child welfare
programs were increased $67 million, more than 31.5 percent over
fiscal 1991. Other social service areas such as medical and cash
assistance also received significant funding increases as costs
have risen quickly as a result of the economic recession and high
inflation rates of medical care costs. The costs of corrections
programs, reflecting the marked increase in the prisoner population,
increased by 12 percent. Economic development efforts, largely
funded from bond proceeds in fiscal 1991, were continued with
General Fund appropriations for fiscal 1992.
The budget included the use of several Medicaid pooled financing
transactions. These pooling transactions replaced $135 million
of Commonwealth funds, allowing total spending under the budget
to increase by an equal amount.
Fiscal 1993 Budget.
The adopted fiscal 1993 budget is balanced within the official
revenue estimate and a planned draw-down of the $8.8 million beginning
budgetary basis surplus carried forward from fiscal 1992. The
budget appropriates $14.046 billion for spending during fiscal
1993, an increase of $32.1 million, or less than one-quarter of
one percent over total appropriations for fiscal 1992. This small
increase in expenditures was the result of revenues being constrained
by a personal income tax rate reduction effective July 1, 1992,
a low rate of economic growth, higher tax refund reserves to cushion
against adverse decisions on pending tax litigations, and $71.3
million of appropriation line-item vetoes by the Governor. The
appropriation line-item vetoes made by the Governor prior to approving
the fiscal 1993 budget were made to meet the constitutional requirement
for a balanced budget by reducing spending in several programs
from amounts authorized by the General Assembly to amounts the
Governor originally recommended in his budget proposal, and by
eliminating certain grants that could not be funded within available
resources. In approving the fiscal 1993 budget, the Governor indicated
that authorized spending approved by the General Assembly for
some programs was below his recommendation and may be insufficient
to carry costs for the full fiscal year. Several of the Governor's
cost containment proposals, particularly those to contain expenditure
increases in the medical assistance and cash assistance programs
Page 58
were not enacted by the General Assembly. Many of the cost containment
efforts now are being implemented through the regulatory process
potentially reducing budgeted current fiscal year savings.
The adopted fiscal 1993 budget eliminated funding for a number
of private educational institutions that normally receive state
appropriations. Also eliminated were certain grants to the counties
to help pay operating costs of the local judicial system. The
counties will need to replace these grant funds with other revenue
sources in order to pay judicial system costs. Any restoration
of these appropriations for the fiscal year or funding increases
to cover program cost shortfalls require action by the General
Assembly.
In December 1992, the Governor gave the General Assembly preliminary
estimates of projected fiscal 1993 supplemental appropriations
and proposed restorations of selective appropriations vetoed when
the fiscal 1993 budget was adopted. The projected supplemental
appropriations generally represent budget adjustments necessary
to offset amounts of savings included in the budget but not enacted
when the budget was adopted and to restore operating appropriations
to full year funding. These potential supplemental appropriations
and restorations total approximately $149 million and would be
funded, when enacted, by lapses of current and prior appropriation
balances and reductions of reserves for refunds due to revisions
to estimated refunds payable.
Commonwealth revenue sources are estimated for the fiscal 1993
budget to total $14.587 billion, a $69.9 million increase over
actual fiscal 1992 revenues, representing less than one-half of
one percent increase. The projected low revenue growth for fiscal
1993 is caused by the Commonwealth's expectation that current
weak growth in employment, consumer income, and retail sales will
continue, and by the reduction in the personal income tax rate
from 3.1% to 2.8% on July 1, 1992. In addition, tax refund reserves
were increased by $209 million to $548 million for fiscal 1993
to allow for potential tax refunds that might be payable from
any adverse judicial decision in a number of pending tax litigations.
Some of those reserves are believed to be in excess of amounts
that will be paid during fiscal 1993 and may be used to fund supplemental
appropriations for the fiscal year described above. Through November
1992, total General Fund collections of revenue were below estimated
revenues by one-third of one percent ($16.6 million). Small revenue
shortages were recorded from the sales tax and from the personal
income tax, but were mostly offset by higher collections from
corporation and liquor taxes and by higher miscellaneous revenue
collections. The Commonwealth believes its current fiscal 1993
General Fund revenue estimate is appropriate and does not expect
to substantially revise its estimate based on economic factors.
All outstanding general obligation bonds of the Commonwealth are
rated AA- by S&P and A1 by Moody's.
Any explanation concerning the significance of such ratings must
be obtained from the rating agencies. There is no assurance that
any ratings will continue for any period of time or that they
will not be revised or withdrawn.
The City of Philadelphia is the largest city in the Commonwealth
with an estimated population of 1,585,577 according to the 1990
Census. Philadelphia functions both as a City and a first-class
County for the purpose of administering various governmental programs.
Legislation providing for the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA") to assist first-class
cities in remedying fiscal emergencies was enacted by the General
Assembly and approved by the Governor in June 1991. PICA is designed
to provide assistance through the issuance of funding debt to
liquidate budget deficits and to make factual findings and recommendations
to the assisted city concerning its budgetary and fiscal affairs.
An intergovernmental cooperation agreement between Philadelphia
and PICA was approved by City Counsel on January 3, 1992, and
approved by the PICA Board and signed by the Mayor on January
8, 1992. At this time, Philadelphia is operating under a revised
five-year fiscal plan approved by PICA on May 18, 1992. The five-year
plan is designed to produce a balanced budget over a five-year
period through a combination of personnel and budget initiatives,
productivity improvements, cost containments and revenue enhancements.
Full implementation of the five-year
Page 59
plan was delayed due to labor negotiations that were not completed
until October 1992, three months after the expiration of the old
labor contracts. The terms of the new labor contracts are estimated
to cost approximately $144.0 million more than what was budgeted
in the original five-year plan. Philadelphia is presently amending
the plan to bring it back in balance.
Philadelphia experienced a series of operating deficits in its
General Fund beginning in fiscal year 1987. For the fiscal year
ended June 30, 1991, Philadelphia experienced a cumulative General
Fund balance deficit of $153.5 million. Philadelphia received
a grant from PICA in June 1992 which eliminated the deficit through
June 30, 1991. Philadelphia experienced a deficit through June
30, 1992 of $71.4 million (unaudited). Philadelphia is receiving
additional grants from PICA to eliminate the General Fund balance
deficit at June 30, 1992, $64.3 million, which is ninety percent
of the 71.4 million, was paid to Philadelphia on October 30, 1992,
and the remaining ten percent is expected to be paid to Philadelphia
once the final audit for the fiscal year ended June 30, 1992 has
been completed. Philadelphia is projecting a budget deficit for
fiscal year 1993 of $1.8 million.
As of the date hereof, the ratings on the City's long-term obligations
supported by payments from the City's General Fund are rated B
by Moody's and B by S & P. Any explanation concerning the significance
of such ratings must be obtained from the rating agencies. There
is no assurance that any ratings will continue for any period
of time or that they will not be revised or withdrawn.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers of the Bonds in
the Pennsylvania Trusts are subject. Additionally, many factors
including national economic, social and environmental policies
and conditions, which are not within the control of the issuers
of Bonds, could have an adverse impact on the financial condition
of the State and various agencies and political subdivisions located
in the State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
Bonds, the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the Pennsylvania
Trusts to pay interest on or principal of the Bonds.
Puerto Rico. Trusts of the Fund may contain Bonds of issuers which
will be affected by general economic conditions in Puerto Rico.
Puerto Rico's unemployment rate remains significantly higher than
the U.S. unemployment rate. Furthermore, the economy is largely
dependent for its development upon U.S. policies and programs
that are being reviewed and may be eliminated.
The Puerto Rican economy consists principally of manufacturing
(pharmaceuticals, scientific instruments, computers, microprocessors,
medical products, textiles and petrochemicals), agriculture (largely
sugar) and tourism. Most of the island's manufacturing output
is shipped to the mainland United States, which is also the chief
source of semi-finished manufactured articles on which further
manufacturing operations are performed in Puerto Rico. Since World
War II the economic importance of agriculture for Puerto Rico,
particularly in the dominance of sugar production, has declined.
Nevertheless, the Commonwealth-controlled sugar monopoly remains
an important economic factor and is largely dependent upon Federal
maintenance of sugar prices, the discontinuation of which could
severely affect Puerto Rico sugar production. The level of tourism
is affected by various factors including the strength of the U.S.
dollar. During periods when the dollar is strong, tourism in foreign
countries becomes relatively more attractive.
The Puerto Rican economy is affected by a number of Commonwealth
and Federal investment incentive programs. For example, Section
936 of the Internal Revenue Code provides for a credit against
Federal income taxes for U.S. companies operating on the island
if certain requirements are met. From time to time proposals are
introduced in Congress which, if enacted into law, would eliminate
some or all of the benefits of Section 936. Although no assessment
can be made at this time of the precise effect of the elimination
Page 60
or limitation of any of these programs, it is expected that the
elimination of Section 936 would have an adverse impact on Puerto
Rico's economy.
Aid for Puerto Rico's economy has traditionally depended heavily
on Federal programs, and current Federal budgetary policies suggest
that an expansion of aid to Puerto Rico is unlikely. An adverse
effect on the Puerto Rican economy could result from other U.S.
policies, including a reduction of tax benefits for distilled
products, further reduction in transfer payment programs such
as food stamps, curtailment of military spending and policies
which could lead to a stronger dollar.
Congress is currently considering legislation which provides for
a referendum in which the Puerto Rican electorate would decide
whether Puerto Rico continues in its current Commonwealth status,
becomes a state or gains independence from the United States.
Previously proposed legislation, which was not enacted, would
have preserved the federal tax exempt status of the outstanding
debts of Puerto Rico and its public corporations regardless of
the outcome of the referendum, to the extent that similar obligations
issued by the states are so treated and subject to the provisions
of the Internal Revenue Code currently in effect. There can be
no assurance that any pending or future legislation finally enacted
will include the same or a similar protection against loss of
tax exemption. Depending on its result, such a referendum can
be expected to have both direct and indirect consequences on such
matters as the basic characteristics of future Puerto Rico debt
obligations, the markets for these obligations, and the types,
levels and quality of revenue sources pledged for the payment
of existing and future debt obligations, including, without limitation,
the status of Section 936 benefits that Puerto Rico enjoys under
the existing Internal Revenue Code. However, no assessment can
be made at this time of the economic and other effects of a change
in federal laws affecting Puerto Rico as a result of a change
in status.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers of the Bonds are
subject. Additionally, many factors including national economic,
social and environmental policies and conditions, which are not
within the control of the issuers of Bonds, could affect or could
have an adverse impact on the financial condition of Puerto Rico
and various agencies and political subdivisions located in Puerto
Rico. The Sponsor is unable to predict whether or to what extent
such factors or other factors may affect the issuers of Bonds,
the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the Trusts
to pay interest on or principal of the Bonds.
Guam. The Trusts of the Fund may contain Bonds of issues which
may be affected by economic conditions in Guam. Guam is an unincorporated
territory of the United States; legislation currently being considered
in the U.S. Congress would make Guam a U.S. commonwealth.
Guam's economy is heavily dependent on tourism and U.S. military
activity. Tourism is affected by general economic conditions and
by the value of the U.S. dollar. Since over 80% of Guam's tourists
in recent years have been from Japan, Guam's economy may be significantly
affected by a decline in the value of the Japanese yen relative
to the U.S. dollar and any decline in the Japanese economy.
The U.S. military, which accounts for 20% of all employment in
Guam and occupies approximately one-third of Guam's land area,
affects Guam's economy through the spending of military personnel
and their dependents, the employment of civilian personnel, construction
contracts and other purchases of materials and services and the
refunding to the government of Guam of Federal income taxes paid
by military personnel. Any reduction in U.S. military spending
generally or any reallocation of that spending away from Guam
could, therefore have a substantial effect on Guam's economy.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers of the Bonds are
subject. Additionally, many factors including national economic,
social and environmental policies and conditions, which are not
within the control of the issuers of Bonds, could affect or could
have an adverse impact on the financial condition of Guam and
various
Page 61
agencies and political subdivisions located in Guam. The Sponsor
is unable to predict whether or to what extent such factors or
other factors may affect the issuers of Bonds, the market value
or marketability of the Bonds or the ability of the respective
issuers of the Bonds acquired by the Trusts to pay interest on
or principal of the Bonds.
What are the Expenses and Charges?
The Sponsor does not charge the Fund any advisory fee. At no cost
to the Trusts, the Sponsor has borne all the expenses of creating
and establishing the Fund, including the cost of the initial preparation,
printing and execution of the Indenture and the certificates for
the Units, legal and accounting expenses, expenses of the Trustee
and other out-of-pocket expenses.
For valuations of Bonds in Series 8 through 44 of the Fund, the
Evaluator receives from each series of the Fund a weekly fee of
$35 plus $.25 for each issue of Bonds in excess of 50 issues (treating
separate maturities as separate issues and excluding Existing
Fund Units). For Series 45 and subsequent Series of the National
Trust and for all Series of the Multi-State Trust, New York Trust
and Pennsylvania Trust, the Evaluator receives the fee indicated
under "Summary of Essential Information" in Part One. The fees
of the Trustee for ordinary recurring services to the respective
series of a Trust which they serve are computed at $1.61, $1.12
and $.86 for Series 8 through 13 of the National Trust, $1.24,
$.98 and $.69 for Series 14 through Series 137 of the National
Trust; $1.05, $.80 and $.55 for Series 138 and series subsequent
thereto of the National Trust; $1.24, $.98 and $.69 for all Series
of the New York Trust and the Pennsylvania Trust; $1.24 and $.69
for Series 1-9 of the Multi-State Trust and $1.05 and $.55 for
Series 10 and 11 of the Multi-State Trust per annum per $1,000
principal amount of underlying Bonds, for those portions of a
Trust representing monthly, quarterly (if applicable) and semi-annual
distribution plans, respectively. The Trustee for Series 41, 42
and 43 of the National Trust also receives fees of $.54, $.425
and $.30 per annum per $1,000 face amount of Existing Fund Units
for those portions of the Fund represented by the respective plans.
The Trustee's and Evaluator's fees are payable monthly on or before
each Distribution Date from the Interest Account to the extent
funds are available and then from the Principal Account. Since
a Trustee has the use of the funds being held in the Principal
and Interest Accounts for future distributions, payment of expenses
and redemptions and since such Accounts are non-interest bearing
to Unit holders, the Trustee benefits thereby. Part of the Trustee's
compensation for its services to a Trust is expected to result
from the use of these funds. Both fees may be increased without
approval of the Unit holders by amounts not to exceed to proportionate
increases under the category "All Services Less Rent Shelter"
in the Consumer Price Index published by the United States Department
of Labor.
The annualized cost of portfolio insurance is set forth in Part
One for each series of the Fund other than the Multi-State Trust:
Pennsylvania Trust, Series 6. The portfolio insurance continues
so long as a Trust retains the Bonds thus insured. Premiums are
payable monthly in advance by the Trustee on behalf of the Trust.
As Bonds in the Portfolio are redeemed by their respective issuers
or sold by the Trustee, the amount of the premium will be reduced
in respect of those Bonds no longer owned by or held in a series
of the Trust which were insured by insurance obtained by the Trust.
Except with respect to the Multi-State Trust: Pennsylvania Trust,
Series 6, Bonds for which insurance has been obtained by the issuer
from Financial Guaranty are also insured by the Multi-State Trust
but no premium is charged for the insurance obtained by the Multi-State
Trust on such Bonds. Bonds for which insurance has been obtained
by the issuer from insurance companies other than Financial Guaranty
are also insured by the Multi-State Trust (except with respect
to the Multi-State Trust: Pennsylvania Trust, Series 6) but the
premiums for insurance obtained by the Multi-State Trust on such
Bonds reflect the existence of the insurance obtained by the issuer
from such other insurance companies. In the case of Bonds for
which insurance has been obtained by the issuer, the Trust either
incurs no cost (because such Bonds were not additionally insured
under the policy obtained by the Trust) or a cost which reflects
the existence of such insurance if the Bonds are covered by the
policy obtained by the Trust. The Fund does not incur any cost
for insurance which relates to bonds underlying Existing
Page 62
Fund Units, since the premium or premiums for such insurance has
been paid either by the Existing Funds or by the respective issuer
of such bonds. Bonds insured by the issuer, for Series 111 and
prior series of the National Trust, and all Series of the New
York and Pennsylvania Trust, and Existing Fund Units are not additionally
insured by the series of the Fund. For Series 112 and subsequent
series of the National Trust and all series of the Multi-State
Trust (except Multi-State Trust: Pennsylvania Trust, Series 6),
the premium payable for Permanent Insurance will be paid solely
from the proceeds of the sale of a Bond in the event the Trustee
exercises the right to obtain Permanent Insurance on the Bond.
The premiums for such Permanent Insurance with respect to each
Bond will decline over the life of the Bond.
The following additional charges are or may be incurred by a Trust:
all expenses (including legal and auditing expenses) of the Trustee
incurred in connection with its responsibilities under the Indenture,
except in the event of negligence, bad faith or willful misconduct
on its part; the expenses and costs of any action undertaken by
the Trustee to protect the Trust and the rights and interests
of the Unit holders; fees of the Trustee for any extraordinary
services perform under the Indenture; indemnification of the Trustee
for any loss, liability or expense incurred by it without negligence,
bad faith or willful misconduct on its part, arising out of, or
in connection with, its acceptance or administration of the Trust;
indemnification of the Sponsor for any loss, of liability or expense
incurred without gross negligence, bad faith or willful misconduct
in acting as Depositor of the Trust; all taxes and other governmental
charges imposed upon the Securities or any part of the Trust (no
such taxes or charges are being levied or made or, to the knowledge
of the Sponsor, contemplated); and expenditures incurred in contacting
Unit holders upon termination of the Trust. The above expenses
and the Trustee's annual fee, when paying or owing to the Trustee,
are secured by a lien on the Trust. In addition, the Trustee is
empowered to sell Securities in order to make funds available
to pay all these amounts if funds are not otherwise available
in the Interest and Principal Accounts of the Trust. The Trust
will be audited on an annual basis at the expense of the Trust
by independent auditors selected by the Sponsor. The Trustee shall
not be required, however, to cause such an audit to be performed
if its cost to a Trust shall exceed $.50 per Unit on an annual
basis. Unit holders of a Trust covered by an audit may obtain
a copy of the audited financial statements upon request.
Public Offering
How is the Public Offering Price Determined?
Although it is not obligated to do so, the Sponsor intends to
maintain a market for the Units and continuously to offer to purchase
Units at prices, subject to change at any time, based upon the
aggregate bid price of the Bonds in the portfolio of each Trust
plus interest accrued to the date of settlement. All expenses
incurred in maintaining a market, other than the fees of the Evaluator
and the costs of the Trustee in transferring and recording the
ownership of Units, will be borne by the Sponsor. If the supply
of Units exceeds demand, or for some other business reason, the
Sponsor may discontinue purchases of Units at such prices. If
a Unit holder wishes to dispose of his Units, he should inquire
of the Sponsor as to current market prices prior to making a tender
for redemption to the Trustee. Prospectuses relating to certain
other bond funds indicate an intention, subject to change, on
the part of the respective sponsors of such funds to repurchase
units of those funds on the basis of a price higher than the bid
prices of the securities in the funds. Consequently, depending
upon the prices actually paid, the repurchase price of other sponsors
for units of their funds may be computed on a somewhat more favorable
basis than the repurchase price offered by the Sponsor for Units
of a Trust in secondary market transactions. The purchase price
per unit of such bond funds will depend primarily on the value
of the securities in the Portfolio of the applicable Trust.
The Public Offering Price of Units of a Trust will be determined
by adding to the Evaluator's determination of the aggregate bid
price of the Bonds in a Trust the appropriate sales charge determined
in accordance with the schedule set forth below, based upon the
number of years remaining to the maturity of each Bond in the
portfolio of the Trust, adjusting the total to reflect the amount
of any cash held in or advanced to the principal account of the
Trust and dividing the result by the number of Units of such trust
then
Page 63
outstanding. The minimum sales charge on Units will be 3% of the
Public Offering Price (equivalent to 3.093% of the net amount
invested). For purposes of computation, Bonds will be deemed to
mature on their expressed maturity dates unless: (a) the Bonds
have been called for redemption or funds or securities have been
placed in escrow to redeem them on an earlier call date, in which
case such call date will be deemed to be the date upon which they
mature; or (b) such Bonds are subject to a "mandatory tender,"
in which case such mandatory tender will be deemed to be the date
upon which they mature.
The effect of this method of sales charge computation will be
that different sales charge rates will be applied to each of the
various Bonds in the Trusts based upon the maturities of such
bonds, in accordance with the following schedule:
<TABLE>
<CAPTION>
Secondary Offering Period
Sales Charge
________________________________
Percentage Percentage
of Public of Net
Offering Amount
Years to Maturity Price Invested
_________________ __________ __________
<S> <C> <C>
0 Months to 1 Year 1.00% 1.010%
1 but less than 2 1.50 1.523
2 but less than 3 2.00 2.041
3 but less than 4 2.50 2.564
4 but less than 5 3.00 3.093
5 but less than 6 3.50 3.627
6 but less than 7 4.00 4.167
7 but less than 8 4.50 4.712
8 but less than 9 5.00 5.263
9 but less than 10 5.50 5.820
10 or more 5.80 6.157
</TABLE>
There will be no reduction of the sales charges for volume purchases.
A dealer will receive from the Sponsor a dealer concession of
70% of the total sales charges for Units sold by such dealer and
dealers will not be eligible for additional concessions for Units
sold pursuant to the above schedule.
An investor may aggregate purchases of Units of two consecutive
series of a particular State, National, Discount, Intermediate,
Long Intermediate or Short Intermediate Trust for purposes of
calculating the discount for volume purchases listed above. Additionally,
with respect to the employees, officers and directors (including
their immediate families and trustees, custodians or a fiduciary
for the benefit of such person) of Nike Securities L.P. and its
subsidiaries the sales charge is reduced by 2% of the Public Offering
Price for purchases of Units during the initial and secondary
offering periods.
Any such reduced sales charge shall be the responsibility of the
selling Underwriter or dealer except that with respect to purchases
of Units of $500,000 or more, the Sponsor will reimburse the selling
Underwriter or dealer in an amount equal to $2.50 per Unit (in
the case of a Discount Trust, .25% of the Public Offering Price).
The reduced sales charge structure will apply on all purchases
of Units in a Trust by the same person on any one day from any
one Underwriter or dealer and, for purposes of calculating the
applicable sales charge, purchases of Units in the Fund will be
aggregated with concurrent purchases by the same person from such
Underwriter or dealer of units in any series of tax-exempt unit
investment trusts sponsored by Nike Securities L.P. Additionally,
Units purchased in the name of the spouse of a purchaser or in
the name of a child of such purchaser under 21 years of age will
be deemed, for the purpose of calculating the applicable sales
charge, to be additional purchases by the purchaser. The reduced
sales charges will also be applicable to a trustee or other fiduciary
purchasing securities for a single trust estate or single fiduciary
account.
Underwriters, dealers and others who, in a single month, sell
Units of any Series of The First Trust GNMA, The First Trust of
Insured Municipal Bonds, The First Trust Combined Series or any
other unit investment
Page 64
trust of which Nike Securities L.P. is the Sponsor (the "UIT Units"),
which sale of UIT Units are in the aggregate following dollar
amounts, will receive additional concessions as indicated in the
following table:
<TABLE>
<CAPTION>
Aggregate Monthly
Dollar Amount of
UIT Units Sold at Additional Concession
Public Offering Price (per $1,000 sold)
_____________________ _____________________
<S> <C>
$1,000,000 - $2,499,999 $ .50
$2,500,000 - $4,999,999 $1.00
$5,000,000 - $7,499,999 $1.50
$7,500,000 - $9,999,999 $2.00
$10,000,000 - or more $2.50
</TABLE>
Aggregate Monthly Dollar Amount of UIT Units Sold at Public Offering
Price is based on settled trades for a month, net of redemptions,
and excludes trades without a sales charge at net asset value.
From time to time the Sponsor may implement programs under which
Underwriters and dealers of the Fund may receive nominal awards
from the Sponsor for each of their registered representatives
who have sold a minimum number of UIT Units during a specified
time period. In addition, at various times the Sponsor may implement
other programs under which the sales force of an Underwriter or
dealer may be eligible to win other nominal awards for certain
sales efforts, or under which the Sponsor will allow to any such
Underwriter or dealer that sponsors sales contests or recognition
programs conforming to criteria established by the Sponsor, or
participates in sales programs sponsored by the Sponsor, an amount
not exceeding the total applicable sales charges on the sales
generated by such person at the public offering price during such
programs. Also, the Sponsor in its discretion may from time to
time pursuant to objective criteria established by the Sponsor
pay fees to qualifying Underwriters or dealers 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 Unit holders pay for
their Units or the amount that the Trusts will receive from the
Units sold.
A comparison of tax-free and equivalent taxable estimated current
returns and estimated long-term returns with the returns on various
taxable investments is one element to consider in making an investment
decision. The Sponsor may from time to time in its advertising
and sales materials compare the then current estimated returns
on the Trust and returns over specified periods on other similar
Trusts sponsored by Nike Securities L.P. with returns on taxable
investments such as corporate or U.S. Government bonds, bank CDs
and money market accounts or money market funds, each of which
has investment characteristics that may differ from those of the
Trust. U.S. Government bonds, for example, are backed by the full
faith and credit of the U.S. Government and bank CDs and money
market accounts are insured by an agency of the federal government.
Money market accounts and money market funds provide stability
of principal, but pay interest at rates that vary with the condition
of the short-term debt market. The investment characteristics
of the Trust are described more fully elsewhere in this Prospectus.
The aggregate price of the Securities in each Trust is determined
by whoever from time to time is acting as evaluator (the "Evaluator"),
on the basis of bid prices, as of the close of trading on the
New York Stock Exchange on each day on which it is open, (1) on
the basis of current market prices for the Bonds obtained from
dealers or brokers who customarily deal in bonds comparable to
those held by the Trust; (2) if such prices are not available
for any of the Bonds, on the basis of current market prices for
comparable bonds; (3) by determining the value of the Bonds by
appraisal; or (4) by any combination of the above. For purposes
of such determinations, the close of trading on the New York Stock
Exchange is 4:00 p.m. Eastern time. Unless Bonds are in default
in payment of principal or interest or, in the Sponsor's opinion,
are being quoted in the market at values which reflect a significant
risk of such default, the Evaluator will not attribute any value
to
Page 65
the insurance obtained by the Trust. On the other hand, the value
of insurance obtained by the issuer of Bonds is reflected and
included in the market value of such Bonds.
The Evaluator will consider in its evaluation of Bonds deposited
in a Series of the National Trust prior to Series 112 and Bonds
deposited in any Series of the New York Trust and the Pennsylvania
Trust which are, in the Sponsor's opinion, being quoted in the
market at values which reflect a significant risk of such default
(the "Defaulted Bonds") and which are covered by insurance obtained
by such series of the Trust, the value of the insurance guaranteeing
interest and principal payments as well as the market value of
the Defaulted Bonds and the market value of bonds of issuers whose
bonds, if identifiable, are of the same purpose of issue as the
Defaulted Bonds, carry identical interest rates and maturities
and are of a creditworthiness comparable to the Defaulted Bonds
before the Defaulted Bonds went into default or became subject
to a significant risk of such default. If such other bonds are
not identifiable, the Evaluator will compare prices of bonds not
subject to a significant risk of default that have, to the extent
possible, similar characteristics as to purpose of issue, interest
rates, maturities and creditworthiness. In any case the Evaluator
will consider the ability of an insurer to meet its commitments
under the Trust's insurance policy. For example, if the Trust
were to hold the defaulted Bonds of a municipality, the Evaluator
would first consider in its evaluation the market price of the
defaulted Bonds. The Evaluator would also attribute a value to
the insurance feature of the defaulted Bonds which would be equal
to the difference between the market value of the Defaulted Bonds
insured by the Trust and the market value of comparable bonds
which were not in default in payment of principal or interest
or in significant risk of such default. The Evaluator intends
to use a similar valuation method with respect to Bonds insured
by such series of the Trust if there is a significant risk of
default and a resulting decrease in the market value. However,
the Evaluator will not assign a value greater than par value to
Bonds in default or in significant risk of default.
The Evaluator will consider in its evaluation of Bonds, deposited
in Series 112 and subsequent Series of the National Trust and
all Series of the Multi-State Trust, which are in default in payment
of principal or interest or, in the Sponsor's opinion, in significant
risk of such default and which are covered by insurance obtained
by Series 112 and subsequent Series of the National Trust and
all Series of the Multi-State Trust, the value of the insurance
guaranteeing interest and principal payments. The value of the
insurance will be equal to the difference between (i) the market
value of Defaulted Bonds assuming the exercise of the right to
obtain Permanent Insurance (less the insurance premium attributable
to the purchase of Permanent Insurance) and (ii) the market value
of such Defaulted Bonds not covered by Permanent Insurance. In
addition, the Evaluator will consider the ability of Financial
Guaranty to meet its commitments under the Trust's insurance policy,
including the commitments to issue Permanent Insurance. It is
the position of the Sponsor that these methods are fair methods
of valuing the Bonds and the insurance obtained by the Trust and
reflect a proper valuation method in accordance with the provisions
of the Investment Company Act of 1940.
The Evaluator may be attributing value to insurance for the purpose
of computing the price or redemption value of Units for certain
series of the Fund. See Part One for further information as to
whether value is being attributed to insurance in determining
the value of Units for that series of the Trust. For a description
of the circumstances under which a full or partial suspension
of the right of Unit holders to redeem their Units may occur,
see "How May Units be Redeemed?"
The Evaluator shall determine daily the valuation of the Securities
as of the close of trading on the New York Stock Exchange (4:00
p.m. Eastern time) on each day on which the Exchange is open.
For transactions occurring prior to the close of trading on the
New York Stock Exchange, the Public Offering Price will be computed
as of the close of trading on the Exchange on that day. For transactions
occurring after the close of trading on the New York Stock Exchange
(4:00 p.m. Eastern time), or on a day when the New York Stock
Exchange is closed, the Public Offering Price will be computed
as of the close of trading on the Exchange on the next day that
such Exchange is open for trading. The price so determined will
be the basis for purchases or sales of outstanding Units during
the period of time any such price is effective.
Page 66
The secondary market Public Offering Price of the Units will be
equal to the bid price per Unit of the Bonds in the Trust, plus
(less) any balance (overdraft) in the principal cash account of
such Trust, plus the applicable sales charge.
Although payment is normally made five business days following
the order for purchase, payment may be made prior thereto. Cash,
if any, made available to the Sponsor prior to the date of settlement
for the purchase of Units may be used in the Sponsor's business
and may be deemed to be a benefit to the Sponsor, subject to the
limitations of the Securities Exchange Act of 1934. Delivery of
Certificates representing Units so ordered will be made five business
days following such order or shortly thereafter. See "Rights of
Unit Holders-How may Units be Redeemed?" for information regarding
the ability to redeem Units ordered for purchase.
How are Units Distributed?
It is he intention of the Sponsor to qualify Units of the Fund
for sale in a number of states. Sales will be made to dealers
and others at prices which represent a concession or agency commission
of 4.0% of the Public Offering Price per Unit for each State,
Discount or National Trust, 3.0% of the Public Offering Price
for an Intermediate or Long Intermediate Trust, and 2.5% of the
Public Offering Price per Unit for a Short Intermediate Trust,
but the Sponsor reserves the right to change the amount of the
concession to dealers and others from time to time. Certain commercial
banks are making Units of the Trust available to their customers
on an agency basis. A portion of the sales charge paid by these
customers is retained by or remitted to the banks in the amounts
indicated in the second preceding sentence. Under the Glass-Steagall
Act, banks are prohibited from underwriting Fund Units, however,
the Glass-Steagall Act does permit certain agency transactions
and the banking regulators have not indicated that these particular
agency transactions are not permitted under such Act. In Texas
and in certain other states, any banks making Units available
must be registered as broker-dealers under state law.
What are the Sponsor's Profits?
The Sponsor and participating dealers will receive a gross sales
commission as indicated in Part One for each Trust less any reduced
sales charge for quantity purchases as described under "How is
the Public Offering Price Determined?"
In maintaining a market for the Units, the Sponsor will also realize
profits or sustain losses in the amount of any difference between
the price at which Units are purchased (based on the bid prices
of the Securities in each Trust) and the price at which Units
are resold (which price includes the sales charge) or redeemed
(based on the bid prices of the Securities in each Trust). The
secondary market public offering price of Units may be greater
or less than the cost of such Units to the Sponsor.
RIGHTS OF UNIT HOLDERS
How are Certificates Issued and Transferred?
The Trustee is authorized to treat as the record owner of Units
that person who is registered as such owner on the books of the
Trustee. Ownership of Units is evidenced by registered certificates
executed by the Trustee and the Sponsor. Delivery of certificates
representing Units ordered for purchase is normally made five
business days following such order or shortly thereafter. Certificates
are transferable by presentation and surrender to the Trustee
properly endorsed or accompanied by written instrument or instruments
of transfer. Certificates to be redeemed must be properly endorsed
or accompanied by a written instrument or instruments of transfer.
A Unit holder must sign exactly as his name appears on the face
of the certificate with the signature guaranteed by an officer
of a commercial bank or trust company, a member firm of either
the New York, American, Midwest or Pacific Stock Exchange, or
in such other manner as may be acceptable to the Trustee. In certain
instances the Trustee may require additional documents such as,
but not limited to, trust instruments, certificates of death,
appointments as executor or administrator or certificates of corporate
authority. Record ownership may occur before settlement.
Page 67
Certificates will be issued in fully registered form, transferable
only on the books of the applicable Trustee in denominations of
one Unit or any multiple thereof, numbered serially for purposes
of identification. Certificates for Units will bear an appropriate
notation on their face indicating which plan of distribution has
been selected in respect thereof. When a change is made, the existing
certificate must be surrendered to the appropriate Trustee and
a new certificate issued to reflect the then effective plan of
distribution. There is no charge for this service.
Although no such charge is now made or contemplated, a Unit holder
may be required to pay $2.00 to the Trustee per certificate reissued
or transferred for reasons other than to change the plan of distribution,
and to pay any governmental charge that may be imposed in connection
with each such transfer or exchange. For new certificates issued
to replace destroyed, stolen or lost certificates, the Unit holder
may be required to furnish indemnity satisfactory to the Trustee
and pay such expenses as the Trustee may incur. Mutilated certificates
must be surrendered to the appropriate Trustee for replacement.
How are Interest and Principal Distributed?
Interest from each Trust will be distributed on or shortly after
the first day of each month on a pro rata basis to Unit holders
of record as of the preceding Record Date who are entitled to
distributions at that time under the plan of distribution chosen.
All distributions will be net of applicable expenses for such
Trust.
The pro rata share of cash in the Principal Account of each Trust
will be computed monthly as of the fifteenth day of each month,
and distributions to the Unit holders as of the applicable Record
Date will be made on or shortly after the first day of the following
month. Proceeds received from the disposition of any of the Securities
(less any premiums due with respect to Bonds in Series 112 and
subsequent Series of the National Trust and any Series of the
Multi-State Trust (except for the Multi-State Trust: Pennsylvania
Trust, Series 6) for which the Trustee has exercised the right
to obtain Permanent Insurance) after a Record Date and prior to
the following Distribution Date will be held in the Principal
Account and not distributed until the next Distribution Date.
The Trustee is not required to pay interest on funds held in the
Principal or Interest Accounts of a Trust (but may itself earn
interest thereon and therefore benefit from the use of such funds),
nor to make a distribution from the Principal Account unless the
amount available for distribution shall equal at least $1.00 per
Unit.
The Trustee will credit to the Interest Account of each Trust
all interest received by such Trust, including that part of the
proceeds (including insurance proceeds) of any disposition of
Securities which represents accrued interest. Other receipts will
be credited to the Principal Account of such Trust. The distribution
to the Unit holders as of each applicable Record Date will be
made on the following Distribution Date or shortly thereafter
and shall consist of an amount substantially equal to such portion
of the holder's pro rata share of the estimated annual income
after deducting estimated expenses as is consistent with the distribution
plan chosen. Because interest payments are not received by the
Fund at a constant rate throughout the year, such interest distribution
may be more or less than the amount credited to the Interest Account
as of the Record Date. For the purpose of minimizing fluctuations
in the distributions from the Interest Account, the Trustee is
authorized to advance such amounts as may be necessary to provide
interest distributions of approximately equal amounts. The Trustee
shall be reimbursed, without interest, for any such advances from
funds in the Interest Account on the ensuing Record Date. Persons
who purchase Units between a Record Date and a Distribution Date
will receive their first distribution on the second Distribution
Date after the purchase under the applicable plan of distribution.
The Trustee is not required to pay interest on Funds held in the
Principal or Interest Account of a Trust (but may itself earn
interest thereon and therefore benefits from the use of such funds).
As of the fifteenth of each month, the applicable Trustee will
deduct from the Interest Account of each Trust and, to the extent
funds are not sufficient therein, from the Principal Account of
each Trust, amounts necessary to pay the expenses of such Trust.
A Trustee also may withdraw from said accounts such amounts, if
any, as it deems necessary to establish a reserve for any governmental
charges payable out of the
Page 68
Trust. Amounts so withdrawn shall not be considered a part of
the Trust's assets until such time as the Trustee shall return
all or any part of such amounts to the appropriate account. In
addition, a Trustee may withdraw from the Interest Account and
the Principal Account of a Trust such amounts as may be necessary
to cover redemption of Units of such Trust by the Trustee.
Record Dates for monthly distributions will be the fifteenth day
of each month, Record Dates for quarterly distributions (if applicable)
will be the fifteenth day of March, June, September and December
and Record Dates for semi-annual distributions will be the fifteenth
day of June and December. Distributions will be made on the first
day of the month subsequent to the respective Record Dates.
The plan of distribution selected by a Unit holder will remain
in effect until changed. Unit holders purchasing Units in the
secondary market will initially receive distributions in accordance
with the election of the prior owner. Each year, approximately
six weeks prior to the end of May, the applicable Trustee will
furnish each Unit holder a card to be returned to such Trustee
not more than 30 nor less than 10 days before the end of such
month. Unit holders desiring to change the plan of distribution
in which they are participating may so indicate on the card and
return same, together with their certificate, to the Trustee.
If the card and certificate are returned to the Trustee, the change
will become effective as of June 16 of that year. If the card
and certificate are not returned to the Trustee, the Unit holder
will be deemed to have elected to continue with the same plan
for the following twelve months.
How Can Distributions to Unit Holders be Reinvested?
Universal Distribution Option. Unit holders may elect participation
in a Universal Distribution Option which permits a Unit holder
to direct the Trustee to distribute principal and interest payments
to any other investment vehicle of which the Unit holder has an
existing account. For example, at a Unit holder's direction, the
Trustee would distribute automatically on the applicable distribution
date interest income, capital gains or principal on the participant's
Units to, among other investment vehicles, a Unit holder's checking,
bank savings, money market, insurance, reinvestment or any other
account. All such distributions, of course, are subject to the
minimum investment and sales charges, if any, of the particular
investment vehicle to which distributions are directed. The Trustee
will notify the participant of each distribution pursuant to the
Universal Distribution Option. The Trustee will distribute directly
to the Unit holder any distributions which are not accepted by
the specified investment vehicle. A participant may at any time,
by so notifying the Trustee in writing, elect to terminate his
participation in the Universal Distribution Option and receive
directly future distributions on his Units.
Distribution Reinvestment Option. The Sponsor has entered into
an arrangement with First Trust Tax-Free Bond Fund (the "Tax-Free
Bond Fund"), which permits any Unit holder of a Trust to elect
to have each distribution of interest income or principal, including
capital gains, on his Units automatically reinvested in shares
of the Tax-Free Bond Fund. Oppenheimer Management Corporation
is the investment adviser of the Tax-Free Bond Fund. The Tax-Free
Bond Fund is an open-end, diversified management investment company
which currently offers shares of two series. The investment objective
of First Trust Tax-Free Bond Fund-Income Series is to provide
a high level of current interest income exempt from Federal income
tax through the purchase of investment grade securities. The investment
objective of First Trust Tax-Free Bond Fund-Insured Series is
to provide as high a level of current interest income exempt from
Federal income tax as is consistent with the assurance of the
scheduled record of interest and principal through insurance and
the preservation of capital (the income of either series may constitute
an item of preference for determining the Federal alternative
minimum tax). The objectives and policies of each Series of the
Tax-Free Bond Fund are presented in more detail in the Tax-Free
Bond Fund prospectus.
Each person who purchases Fund Units may use the card attached
to this prospectus to request a prospectus describing the Tax-Free
Bond Fund and a form by which such person may elect to become
a participant in Distribution Reinvestment Option with respect
to the Tax-Free Bond Fund. Each distribution of interest income
or principal, including capital gains, on the participant's Units
will automatically be applied
Page 69
by the Trustee to purchase shares (or fractions thereof) of the
Tax-Free Bond Fund without a sales charge and with no minimum
investment requirements.
The shareholder service agent for the Tax-Free Bond Fund will
mail to each participant in the Distribution Reinvestment Option
confirmations of all transactions undertaken for such participant
in connection with the receipt of distributions from any of the
Trusts and the purchase of shares (or fractions thereof) of the
Tax-Free Bond Fund.
A participant may at any time, by so notifying the Trustee in
writing, elect to terminate his participation in the Distribution
Reinvestment Option and receive future distributions on his Units
in cash. There will be no charge or other penalty for such termination.
The Sponsor and the Tax-Free Bond Fund each have the right to
terminate the Distribution Reinvestment Option, in whole or in
part.
It should be remembered that even if distributions are reinvested
through the Universal Distribution Option or the Distribution
Reinvestment Option they are still treated as distributions for
income tax purposes.
What Reports will Unit Holders Receive?
The Trustee shall furnish Unit holders of each Trust in connection
with each distribution a statement of the amount of interest,
if any, and the amount of other receipts, if any, which are being
distributed, expressed in each case as a dollar amount per Unit.
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 Unit holder of record, a statement as
to (1) the Interest Account: interest received (including amounts
representing interest received upon any disposition of Securities
of such Trust), the amount of such interest representing insurance
proceeds, deductions for payment of applicable taxes and fees
and expenses of the Fund, redemption of Units 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 Unit outstanding on the last business day
of such calendar year; (2) the Principal Account: the dates of
disposition of any Securities of such Trust and the net proceeds
received therefrom (excluding any portion representing interest,
and in the case of Series 112 and subsequent Series of the National
Trust and any Series of the Multi-State Trust (except for the
Multi-State Trust: Pennsylvania Trust, Series 6), the premium
attributable to the exercise of the right to obtain Permanent
Insurance), deductions for payment of applicable taxes and for
fees and expenses of the Trust, redemptions of Units, 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 Unit outstanding on the last business
day of such calendar year; (3) the Securities held and the number
of Units of such Trust outstanding on the last business day of
such calendar year; (4) the Redemption Price per Unit based upon
the last computation thereof made during such calendar year; and
(5) the amounts actually distributed during such calendar year
from the Interest Account and from the Principal Account of such
Trust, separately stated, expressed both as total dollar amounts
and as dollar amounts per Unit outstanding on the Record Date
for such distributions.
In order to comply with Federal and state tax reporting requirements,
Unit holders will be furnished, upon request to the applicable
Trustee, evaluations of the Bonds in their Trust furnished to
it by the Evaluator.
Each distribution statement will reflect pertinent information
in respect of all plans of distribution so that Unit holders may
be informed regarding the results of other plan or plans of distribution.
How May Units be Redeemed?
A Unit holder may redeem all or a portion of his Units by tender
to the applicable Trustee at its corporate trust office in the
City of New York of the certificates representing the Units to
be redeemed, duly endorsed or accompanied by proper instruments
of transfer with signature guaranteed as explained above (or by
providing satisfactory indemnity, as in connection with lost,
stolen or destroyed certificates), and payment of applicable governmental
charges, if any. No redemption fee will be charged. On the seventh
calendar day following
Page 70
such tender, or if the seventh calendar day is not a business
day, on the first business day prior thereto, the Unit holder
will be entitled to receive in cash an amount for each Unit equal
to the Redemption Price per Unit next computed after receipt by
the applicable Trustee of such tender of Units. The "date of tender"
is deemed to be the date on which Units are received by the applicable
Trustee, except that as regards 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 applicable Trustee on such day for redemption at the redemption
price computed on that day. Units so redeemed shall be canceled.
Accrued interest to the settlement date paid on redemption shall
be withdrawn from the Interest Account of the Trust or, if the
balance therein is insufficient, from the Principal Account of
such Trust. All other amounts paid on redemption shall be withdrawn
from the Principal Account of the Trust.
The Redemption Price per Unit (and the Public Offering Price of
Unit will be determined on the basis of the bid price of the Securities
in the Trust, as of the close of trading on the New York Stock
Exchange on the date any such determination is made. The Redemption
Price per Unit is the pro rata share of each Unit determined by
the applicable Trustee on the basis of (1) the cash on hand in
the Trust or moneys in the process of being collected, (2) the
value of the Securities in the Trust based on the bid prices of
the Bonds in such Trust, except for those cases in which the value
of insurance has been added, and (3) interest accrued thereon,
less (a) amounts representing taxes or other governmental charges
payable out of such Trust and (b) the accrued expenses of such
Trust, and (c) cash held for distribution to Unit holders of record
as of a date prior to the evaluation then being made. The Evaluator
may determine the value of the Securities in the Trust (1) on
the basis of current bid prices of the Bonds (and bonds underlying
Existing Fund Units) obtained from dealers or brokers who customarily
deal in bonds comparable to those held by such Trust, (2) on the
basis of bid prices for bonds comparable to any Bonds for which
bid prices are not available, (3) by determining the value of
the Securities by appraisal, or (4) by any combination of the
above. In determining the Redemption Price per Unit no value will
be attributed to the portfolio insurance obtained by each series
of the Trust unless the Bonds insured by such portfolio insurance
are in default in payment of principal or interest or, in the
Sponsor's opinion, in significant risk of such default. On the
other hand, any Bonds insured under a policy obtained by the issuer
thereof are entitled to the benefits of such insurance at all
times and such benefits are reflected and included in the market
value of such Bonds. See "Why and How are the Trusts Insured?"
For a description of the situation in which the Evaluator may
value the insurance obtained by the Trust, see "How is the Public
Offering Price Determined?"
The difference between the bid and offering prices of such Bonds
may be expected to average 1-2% of the principal amount. In the
case of actively traded bonds, the difference may be as little
as 1/2 of 1% and, in the case of inactively traded bonds, such
difference usually will not exceed 3%. Therefore, the price at
which Units may be redeemed could be less than the price paid
by the Unit holder.
The Trustee is empowered to sell underlying Securities in a Trust
in order to make funds available for redemption. To the extent
that Securities are sold, the size and diversity of such Trust
will be reduced. Such sales may be required at a time when Securities
would not otherwise be sold and might result in lower prices than
might otherwise be realized. Under the provisions for insurance
obtained by each series of the National Trust prior to Series
112 and each series of the New York Trust and the Pennsylvania
Trust the insurance may not be transferred by any such Trust.
For Series 112 and subsequent Series of the National Trust and
all Series of the Multi-State Trust (except for the Multi-State
Trust: Pennsylvania Trust, Series 6), the Trustee may obtain Permanent
Insurance on the Bonds. Accordingly, any Bonds in a series of
the Fund prior to Series 112 of the National Trust and any Series
of the New York Trust and the Pennsylvania Trust must be sold
on an uninsured basis, while Bonds sold from Series 112 and subsequent
Series of the National Trust and all Series of the Multi-State
Trust (except for the Multi-State Trust: Pennsylvania Trust, Series
6) for which Permanent Insurance has been obtained will be sold
on an insured basis (as will Bonds on which insurance has been
obtained by the issuer thereof).
Page 71
The right of redemption may be suspended and payment postponed
for any period during which the New York Stock Exchange is closed,
other than for customary weekend and holiday closings, or during
which the Securities and Exchange Commission determines that trading
on that Exchange is restricted or an emergency exists, as a result
of which disposal or evaluation of the Securities is not reasonably
practicable or for such other periods as the Securities and Exchange
Commission may by order permit. Under certain extreme circumstances,
the Sponsor may apply to the Securities and Exchange Commission
for an order permitting a full or partial suspension of the right
of Unit holders to redeem their Units.
How May Units be Purchased by the Sponsor?
The Trustee shall notify the Sponsor of any tender of Units for
redemption. If the Sponsor's bid in the secondary market at that
time equals or exceeds the Redemption Price per Unit, it may purchase
such Units by notifying the Trustee before 12:00 p.m. Eastern
time on the next succeeding business day and by making payment
therefor to the Unit holder not later than the day on which the
Units would otherwise have been redeemed by the Trustee. Units
held by the Sponsor may be tendered to the Trustee for redemption
in the same manner as any other Units.
The offering price of any Units acquired by the Sponsor will be
determined in accordance with the Public Offering Price described
in the then currently effective prospectus describing such Units.
Any profit or loss resulting from the resale or redemption of
such Units will belong to the Sponsor.
How May Bonds be Removed from the Fund?
The Trustee is empowered to sell, for the purpose of redeeming
Units tendered by any Unit holder and for the payment of expenses
for which funds may not be available, such of the Bonds in each
Trust on a list furnished by the Sponsor as the Trustee in its
sole discretion may deem necessary. As described in the following
paragraph and in certain other unusual circumstances for which
it is determined by the Trustee to be in the best interests of
the Unit holders or if there is no alternative, the Trustee is
empowered to sell Bonds in a Trust which are in default in payment
of principal or interest or, in the Sponsor's opinion, in significant
risk of such default and for which value has been attributed to
the insurance obtained by the Trust. See "Rights of Unit Holders-How
May Units be Redeemed?" The Sponsor is empowered, but not obligated,
to direct the Trustee to dispose of Bonds in a Trust in the event
of advanced refunding. The Sponsor may from time to time act as
agent for a Trust with respect to selling Bonds out of a Trust.
From time to time, the Trustee may retain and pay compensation
to the Sponsor subject to the restrictions under the Investment
Company Act of 1940, as amended.
If any default in the payment of principal or interest on any
Bond occurs and no provision for payment is made therefor either
pursuant to the portfolio insurance or otherwise, within thirty
days, the Trustee is required to notify the Sponsor thereof. If
the Sponsor fails to instruct the Trustee to sell or to hold such
Bond within thirty days after notification by the Trustee to the
Sponsor of such default, the Trustee may, in its discretion, sell
the defaulted Bond and not be liable for any depreciation or loss
thereby incurred.
The Sponsor shall instruct the Trustee to reject any offer made
by an issuer of any of the Bonds to issue new obligations in exchange
and substitution for any Bonds pursuant to a refunding or refinancing
plan except that the Sponsor may instruct the Trustee to accept
such an offer or to take any other action with respect thereto
as the Sponsor may deem proper if the issuer is in default with
respect to such Bonds or in the written opinion of the Sponsor
the issuer will probably default in respect to such Bonds in the
foreseeable future. Any obligations so received in exchange or
substitution will be held by the Trustee subject to the terms
and conditions in the Indenture to the same extent as Bonds originally
deposited thereunder. Within five days after the deposit of obligations
in exchange or substitution for underlying Bonds, the Trustee
is required to give notice thereof to each Unit holder of the
affected Trust, identifying the Bonds eliminated and the Bonds
substituted therefor. Except as stated in this paragraph, the
acquisition by a Trust of any securities other than the Securities
initially deposited is prohibited.
Page 72
INFORMATION AS TO SPONSOR, TRUSTEES AND EVALUATOR
Who is the Sponsor?
Nike Securities L.P., the Sponsor, specializes in the underwriting,
trading and distribution of unit investment trusts and other securities.
Nike Securities L.P., an Illinois limited partnership formed in
1991, acts as Sponsor for successive series of The First Trust
Combined Series, The First Trust Special Situations Trust, The
First Trust Insured Corporate Trust, The First Trust of Insured
Municipal Bonds, The First Trust GNMA, Templeton Growth and Treasury
Trust, Templeton Foreign Fund & U.S. Treasury Securities Trust
and The Advantage Growth and Treasury Securities Trust. First
Trust introduced the first insured unit investment trust in 1974
and to date more than $7 billion in First Trust unit investment
trusts have been deposited. The Sponsor's employees include a
team of professionals with many years of experience in the unit
investment trust industry. The Sponsor is a member of the National
Association of Securities Dealers, Inc. and Securities Investor
Protection Corporation and has its principal offices at 1001 Warrenville
Road, Lisle, Illinois 60532; telephone number (708) 241-4141.
As of January 31, 1993, the total partners' capital of Nike Securities
L.P. was $12,256,319 (unaudited). (This paragraph relates only
to the Sponsor and not to the Trust or to any series thereof or
to any other Underwriter. The information is included herein only
for the purpose of informing investors as to the financial responsibility
of the Sponsor and its ability to carry out its contractual obligations.
More detailed financial information will be made available by
the Sponsor upon request.)
Who are the Trustees?
The Trustee for Series 8 through 137 of the National Trust and
Series 1-9 of the Multi-State Trust, and all Series of the New
York Trust and the Pennsylvania Trust is The Bank of New York,
a trust company organized under the banking laws of New York.
The Bank of New York has its offices at 101 Barclay Street, 20
West, New York, New York 10286 (212) 530-7900. The Bank of New
York is subject to supervision and examination by the Superintendent
of Banks of the State of New York and the Board of Governors of
the Federal Reserve System, and its deposits are insured by the
Federal Deposit Insurance Corporation to the extent permitted
by law. The Trustee commenced operations on February 3, 1986 when
it acquired the unit investment trust division of Fidata Trust
Company New York and assumed the position as Trustee of Series
8-137 of the National Trust, Series 1-9 of the Multi-State Trust,
and all Series of the New York Trust and the Pennsylvania Trust
on June 16, 1986 following the resignation of Fidata Trust Company
New York on such date.
The Trustee for Series 138 and subsequent Series of the National
Trust and Series 10 and 11 of the Multi-State Trust is United
States Trust Company of New York with its principal place of business
at 45 Wall Street, New York 10005 and its unit investment offices
at 770 Broadway, New York, New York 10003. Unit holders who have
questions regarding the Fund may call the Customer Service Help
Line at 1-800-682-7520. The Trustee is a member of the New York
Clearing House Association and is subject to supervision and examination
by the comptroller of the Currency, the Federal Deposit Insurance
Corporation and the Board of Governors of The Federal Reserve
System.
The Trustees, whose duties are ministerial in nature, did not
participate in the selection of the portfolio of each series of
the Fund. For information relating to the responsibilities of
the Trustees under the Indenture, reference is made to the material
set forth under "Rights of Unit Holders-How are Certificates Issued
and Transferred?" and subsequent sections.
A Trustee or any successor 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 Unit holders.
Upon receipt of such notice, the Sponsor is obligated to appoint
a successor trustee promptly. If a Trustee becomes incapable of
acting or becomes bankrupt or its affairs are taken over by public
authorities, the Sponsor may remove such Trustee and appoint a
successor as provided in the Indenture. If upon resignation of
a trustee no successor has accepted the appointment within 30
days after notification, the retiring trustee may apply to a court
of competent
Page 73
jurisdiction for the appointment of a successor. The resignation
or removal of a trustee becomes effective only when the successor
trustee accepts its appointment as such or when a court of competent
jurisdiction appoints a successor trustee.
Any corporation into which a Trustee may be merged or with which
it may be consolidated, or any corporation resulting from any
merger or consolidation to which a Trustee shall be a party, shall
be the successor Trustee. The Trustee must be a banking corporation
organized under the laws of the United States or any state and
having at all times an aggregate capital, surplus and undivided
profits of not less than $5,000,000.
United States Trust Company of New York and the Bank of New York
are collectively referred to herein as the "Trustees"and each
is separately referred to as the Trustee.
Limitations on Liabilities of Sponsor and Trustees
The Sponsor and the Trustees shall be under no liability to Unit
holders for taking any action or for refraining from taking any
action in good faith pursuant to the Indenture, or for errors
in judgment, but shall be liable only for their own willful misfeasance,
bad faith, gross negligence (ordinary negligence in the case of
the Trustee) or reckless disregard of their obligations and duties.
A Trustee shall not be liable for depreciation or loss incurred
by reason of the sale by such Trustee of any of the Securities.
In the event of the failure of the Sponsor to act under the Indenture,
a Trustee may act thereunder and shall not be liable for any action
taken by it in good faith under the Indenture.
The Trustee shall not be liable for any taxes or other governmental
charges imposed upon or in respect of the Securities or upon the
interest thereon or upon it as Trustee under the Indenture or
upon or in respect of the Trust which a Trustee may be required
to pay under any present or future law of the United States of
America or of any other taxing authority having jurisdiction.
In addition, the Indenture contains other customary provisions
limiting the liability of a Trustee.
If the Sponsor shall fail to perform any of its duties under the
Indenture or become incapable of acting or become bankrupt or
its affairs are taken over by public authorities, then the applicable
Trustee may (a) appoint a successor Sponsor at rates of compensation
deemed by the applicable Trustee to be reasonable and not exceeding
amounts prescribed by the Securities and Exchange Commission,
(b) terminate the Indenture and liquidate the Trust as provided
therein or (c) continue to act as Trustee without terminating
the Indenture.
Who is the Evaluator?
The Evaluator is Securities Evaluation Service, Inc., 531 East
Roosevelt Road, Suite 200, Wheaton, Illinois 60187. The Evaluator
may resign or may be removed by the Sponsor and the Trustee, in
which event the Sponsor and the Trustee are to use their best
efforts to appoint a satisfactory successor. Such resignation
or removal shall become effective upon the acceptance of appointment
by the successor Evaluator. If upon resignation of the Evaluator
no successor has accepted appointment within 30 days after notice
of resignation, the Evaluator may apply to a court of competent
jurisdiction for the appointment of a successor.
The Trustee, Sponsor and Unit holders may rely on any evaluation
furnished by the Evaluator and shall have no responsibility for
the accuracy thereof. Determinations by the Evaluator under the
Indenture shall be made in good faith upon the basis of the best
information available to it, provided, however, that the Evaluator
shall be under no liability to the Trustee, Sponsor or the Unit
holders for errors in judgment. This provision shall not protect
the Evaluator in any case of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
OTHER INFORMATION
Page 74
How May the Indenture be Amended or Terminated?
The Sponsor and the Trustee have the power to amend an Indenture
without the consent of any of the Unit holders when such an amendment
is (1) to cure an ambiguity or to correct or supplement any provision
of the Indenture which may be defective or inconsistent with any
other provision contained therein, or (2) to make such other provisions
as shall not adversely affect the interest of the Unit holders
(as determined in good faith by the Sponsor and the Trustee),
provided that the Indenture is not amended to increase the number
of Units of any Trust issuable thereunder or to permit the deposit
or acquisition of securities either in addition to or in substitution
for any of the Securities initially deposited in a Trust, except
for the substitution of certain refunding securities for such
Securities. In the event of any amendment, a Trustee is obligated
to notify promptly all Unit holders of the substance of such amendment.
A Series of each Trust may be liquidated at any time by consent
of 100% of the Unit holders of such Trust or by the Trustee when
the aggregate principal amount of the Securities in the Fund is
less than 20% of the aggregate principal amount of the Securities
initially deposited in the Trust. The Indenture will terminate
upon the redemption, sale or other disposition of the last Securities
held thereunder, but in no event shall it continue beyond the
end of the calendar year preceding the fiftieth anniversary of
its execution. In the event of termination written notice thereof
will be sent by the Trustee to all Unit holders of such Trust.
Within a reasonable period after termination, the Trustee will
sell any Securities remaining in the Trust, and after paying all
expenses and charges incurred by the Trust, will distribute to
each Unit holder of such Trust (including the Sponsor if it then
holds any Units), upon surrender for cancellation of his Certificate
for Units, his pro rata share of the balances remaining in the
Interest and Principal Accounts of the Fund, all as provided in
the Indenture. Because the portfolio insurance obtained by each
Series of the National Trust prior to Series 112 and each series
of the New York Trust and the Pennsylvania Trust is applicable
only while Bonds (or bonds underlying Existing Fund Units) so
insured are held by each Series of the National Trust prior to
Series 112 and any series of the New York Trust and the Pennsylvania
Trust (and does not apply to Bonds or bonds underlying Existing
Fund Units which are disposed of), the price to be received by
any series of the National Trust prior to Series 112 and any Series
of the New York Trust or the Pennsylvania Trust upon the disposition
of any Bond which is in default in payment of principal or interest
or whose market value has deteriorated because of a significant
risk of such default will not reflect any value based on such
insurance. Therefore, in connection with any liquidation of the
National Trust prior to Series 112 or the New York Trust or the
Pennsylvania Trust, it shall not be necessary for the Trustee
to dispose of any Securities, if retention of such Securities,
until due, shall be deemed to be in the best interests of Unit
holders including, but not limited to, situations in which Bond
or Bonds so insured are in default in payment of principal or
interest and situations in which a Bond or Bonds so insured reflect
deteriorated market price resulting from a significant risk of
such default. Since the Bonds which are insured by insurance obtained
by the Bond issuer will reflect the value of the related insurance,
it is the present intention of the Sponsor not to direct the Trustee
to hold any of such Bonds after the date of termination. All proceeds
received, less applicable expenses, from insurance on Bonds which
are in default in payment of principal or interest not disposed
of at the date of termination will ultimately be distributed to
Unit holders of record as of such date of termination as soon
as practicable after the date such defaulted Bonds (or bonds underlying
Existing Fund Units) become due and applicable insurance proceeds
have been received by the Trustee of each Trust.
Legal Opinions
The legality of the Units offered hereby was passed upon at the
time of closing for each series of each Trust, by Chapman and
Cutler, 111 West Monroe Street, Chicago, Illinois 60603, as counsel
for the Sponsor.
LeBoeuf, Lamb, Leiby & MacRae, 520 Madison Avenue, New York, New
York 10022, acts as counsel for Fidata Trust Company New York
and as Special Counsel for Series 8 through 81 of the National
Trust for New York tax matters. Booth & Baron, 122 East 42nd Street,
Suite 1507, New York, New York 10168, acts as counsel for The
Bank of New York and as Special Counsel for Series 82-137 of the
National Trust, Series 1 through 9
Page 75
of the Multi-State Trust and all Series of the New York Trust
and the Pennsylvania Trust for New York tax matters. Carter, Ledyard
& Milburn, 2 Wall Street, New York, New York 10005, acts as counsel
for United States Trust Company of New York. Winston & Strawn
(previously named Cole & Deitz) acted as Special Counsel for Series
138 and subsequent Series of the National Trust and Series 10
and 11 of the Multi-State Trust for New York tax matters.
For information with respect to state and local tax matters, including
the special counsel to the Fund for such matters, see the section
of the Prospectus describing the state tax status of Unit holders
appearing therein.
Experts
The financial statements, including the portfolio of each Trust
appearing in Part One of the Prospectus and Registration Statement
have been audited by Ernst & Young, independent auditors, as set
forth in their reports thereon appearing therein, and in the Registration
Statement, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
Description of Bond Ratings*
Standard & Poor's Corporation. A brief description of the applicable
Standard & Poor's Corporation rating symbols and their meanings
follow:
A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect
to a specific debt obligation. This assessment may take into consideration
obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase, sell or hold
a security, inasmuch as it does not comment as to market price
or suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such
information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default - capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal
in accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement
under the laws of bankruptcy and other laws affecting creditor's
rights.
AAA - Bonds rated AAA have the highest rating assigned by Standard
& Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.**
AA - Bonds rated AA have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues only
in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
bonds in higher rated categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for bonds in this category
than for bonds in higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "BBB" may be modified
by the addition of a plus or minus sign to show relative standing
within the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating
is provisional. A provisional rating assumes the successful completion
of the project being financed by the bonds being rated and indicates
that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood
of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such
likelihood and risk.
___________________________
* As published by the rating companies.
** Bonds insured by Financial Guaranty Insurance Company, AMBAC
Indemnity Corporation, Municipal Bond Investors Assurance Corporation,
Financial Security Assurance and Capital Guaranty Insurance Company
are automatically rated "AAA" by Standard & Poor's Corporation.
Page 76
Credit Watch: Credit Watch highlights potential changes in ratings
of bonds and other fixed income securities. It focuses on events
and trends which place companies and government units under special
surveillance by S & P's 180-member analytical staff. These may
include mergers, voter referendums, actions by regulatory authorities,
or developments gleaned from analytical reviews. Unless otherwise
noted a rating decision will be made within 90 days. Issues appear
on Credit Watch where an event, situation, or deviation from trends
occurred and needs to be evaluated as to its impact on credit
rating. A listing, however, does not mean a rating change is inevitable.
Since S & P continuously monitors all of its ratings, Credit Watch
is not intended to include all issues under review. Thus, rating
changes will occur without issues appearing on Credit Watch.
Moody's Investors Service, Inc. A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings
follow:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by
a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues. Their safety
is so absolute that with the occasional exception of oversupply
in a few specific instances, characteristically, their market
value is affected solely by money market fluctuations.
Aa - Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat large than in Aaa
securities. Their market value is virtually immune to all but
money market influences, with the occasional exception of oversupply
in a few specific instances.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future. The market value of A-rated
bonds may be influenced to some degree by economic performance
during a sustained period of depressed business conditions, but,
during periods of normalcy, A-rated bonds frequently move in parallel
with Aaa and Aa obligations, with the occasional exception of
oversupply in a few specific instances.
A 1 and Baa 1 - Bonds which are rated A 1 and Baa 1 offer the
maximum in security within their quality group, can be bought
for possible upgrading in quality, and additionally, afford the
investor an opportunity to gauge more precisely the relative attractiveness
of offerings in the market place.
Baa - Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length
of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well. The market
value of Baa-rated bonds is more sensitive to changes in economic
circumstances, and aside from occasional speculative factors applying
to some bonds of this class, Baa market
Page 77
valuations will move in parallel with Aaa, Aa, and A obligations
during periods of economic normalcy, except in instances of oversupply.
Moody's bond rating symbols may contain numerical modifiers of
a generic rating classification. The modifier 1 indicates that
the bond ranks at the high end of its category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
Con.(---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under construction,
(b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments
to which some other limiting condition attaches. Parenthetical
rating denotes probable credit stature upon completion of construction
or elimination of basis of condition.
Page 78
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Page 79
<TABLE>
<CAPTION>
CONTENTS:
<S> <C>
The First Trust of Insured Municipal Bonds
The First Trust of Insured Municipal Bonds-Multi-State:
What are The First Trust of Insured Municipal
Bonds and The First Trust of Insured Municipal
Bonds-Multi-State? 3
What are Estimated Long-Term Return and
Estimated Current Return? 8
How is Accrued Interest Treated? 9
Why and How are the Trusts Insured? 9
What is the Federal Tax Status of Unit Holders? 15
Certain Considerations 25
What are the Expenses and Charges? 62
Public Offering:
How is the Public Offering Price Determined? 63
How are Units Distributed? 67
What are the Sponsor's Profits? 67
Rights of Unit Holders:
How are Certificates Issued and Transferred? 67
How are Interest and Principal Distributed? 68
How Can Distributions to Unit Holders be
Reinvested? 69
What Reports will Unit Holders Receive? 70
How May Units be Redeemed? 70
How May Units be Purchased by the Sponsor? 72
How May Bonds be Removed from the Fund? 72
Information as to Sponsor, Trustees and Evaluator:
Who is the Sponsor? 72
Who are the Trustees? 73
Limitations on Liabilities of Sponsor and Trustees 74
Who is the Evaluator? 74
Other Information:
How May the Indenture be Amended or
Terminated? 74
Legal Opinions 75
Experts 76
Description of Bond Ratings 76
</TABLE>
________________________
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICIATION
OF AN OFFER TO BUY, SECURITIES IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
THIS PROSPECTUS DOES NOT CONTAIN ALL THE INFORMATION SET FORTH
IN THE REGISTRATION STATEMENTS AND EXHIBITS RELATING THERETO,
WHICH THE FUND HAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
WASHINGTON, D.C. UNDER THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, AND TO WHICH REFERENCE IS HEREBY MADE.
FIRST TRUST
The First Trust
of Insured Municipal Bonds
The First Trust
of Insured Municipal
Bonds-Multi-State
Prospectus
Part Two
April 30, 1993
First Trust
1001 Warrenville Road, Suite 300
Lisle, Illinois 60532
1-708-241-4141
Trustee:
United States Trust Company
of New York
770 Broadway
New York, New York 10003
1-800-682-7520
This Part Two Must Be
Accompanied by Part One
PLEASE RETAIN THIS PROSPECTUS
FOR FUTURE REFERENCE
Page 80
CONTENTS OF POST-EFFECTIVE AMENDMENT
OF REGISTRATION STATEMENT
This Post-Effective Amendment of Registration Statement comprises
the following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Auditors
S-1
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the Registrant, The First Trust of Insured Municipal Bonds,
Series 58, certifies that it meets all of the requirements for
effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment of its Registration Statement to be
signed on its behalf by the undersigned thereunto duly authorized
in the Village of Lisle and State of Illinois on January 31,
1994.
THE FIRST TRUST OF INSURED MUNICIPAL
BONDS, SERIES 58
(Registrant)
By NIKE SECURITIES L.P.
(Depositor)
By Carlos E. Nardo
Senior Vice President
Pursuant to the requirements of the Securities Act of 1933,
this Post-Effective Amendment of Registration Statement has been
signed below by the following person in the capacity and on the
date indicated:
Signature Title* Date
Robert D. Van Kampen Sole Director of )
Nike Securities )
Corporation, ) January 31, 1994
the General Partner )
of Nike Securities L.P. )
)
) Carlos E. Nardo
) Attorney-in-Fact**
*The title of the person named herein represents his capacity in
and relationship to Nike Securities L.P., Depositor.
**An executed copy of the related power of attorney was filed wi
th the Securities and Exchange Commission in connection with
the Amendment No. 1 to Form S-6 of The First Trust Special
Situations Trust, Series 18 (File No. 33-42683) and the same
is hereby incorporated herein by this reference.
S-2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption
"Experts" and to the use of our report dated December 3, 1993 in
this Post-Effective Amendment to the Registration Statement and
related Prospectus of The First Trust Insured Municipal Bonds
dated January 17, 1994.
ERNST & YOUNG
Chicago, Illinois
January 14, 1994
