Securities and Exchange Commission
Washington, D. C. 20549-1004
Post-Effective
Amendment No. 7
to
Form S-6
For Registration under the Securities Act of 1933 of
Securities of Unit Investment Trusts Registered on
Form N-8B-2
Insured Municipals Income Trust and Investors' Quality Tax-Exempt Trust,
Multi-Series 54
(Exact Name of Trust)
Van Kampen Merritt Inc.
(Exact Name of Depositor)
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(Complete address of Depositor's principal executive offices)
Van Kampen Merritt Inc. Chapman and Cutler
Attention: John C. Merritt Attention: Mark J. Kneedy
One Parkview Plaza 111 West Monroe Street
Oakbrook Terrace, Illinois 60181 Chicago, Illinois 60603
(Name and complete address of agents for service)
( X ) Check if it is proposed that this filing will become effective
on September 26, 1994 pursuant to paragraph (b) of Rule 485.
IM-IT/20th Intermediate
Series
Michigan IM-IT/28
Minnesota IM-IT/18
Ohio IM-IT/29
Pennsylvania IM-IT/80
Oregon Quality/39
South Carolina Quality/34
MULTI-SERIES 54
PROSPECTUS PART ONE
NOTE: Part One of this Prospectus may not be distributed unless accompanied by
Part Two.Please retain both parts of this Prospectus for future reference.
In the opinion of counsel, interest to the Fund and to Unitholders, with
certain exceptions, is exempt under existing law from all Federal income
taxes. In addition the interest income of each State Trust is, in the opinion
of counsel, exempt to the extent indicated from state and local taxes, when
held by residents of the state where the issuer of Bonds in such Trust are
located. Capital gains, if any, are subject to Federal tax.
THE FUND
The above-named series of Insured Municipals Income Trust and Investors'
Quality Tax-Exempt Trust (the "Fund") consists of a number of underlying
separate unit investment trusts. The various trusts in the Fund are
collectively referred to herein as the "Trusts". Each Trust consists of a
portfolio of interest-bearing obligations (the "Bonds" or "Securities")
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 authority, exempt from all Federal income taxes under
existing law. In addition, the interest income of each State Trust is, in the
opinion of counsel, exempt to the extent indicated from state and local taxes,
when held by residents of the state where the issuers of Bonds in such Trust
are located. Each Unit represents a fractional undivided interest in the
principal and net income of the respective Trust (see "Summary of Essential
Information" in this Part One and "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 Fund.
PUBLIC OFFERING PRICE
The Public Offering Price of the Units of each Trust is equal to the
aggregate bid price of the Bonds in the portfolio of such Trust divided by the
number of Units of such Trust outstanding, plus a sales charge. The sales
charge is based upon the years to average maturity of the Bonds in the
portfolio. The sales charge ranges from 1.5% of the Public Offering Price
(1.523% of the aggregate bid price of the Bonds) for a Trust with a portfolio
with less than two years to average maturity to 5.7% of the Public Offering
Price (6.045% of the aggregate bid price of the Bonds) for a Trust with a
portfolio with sixteen or more years to average maturity. See "Summary of
Essential Information" in this Part One.
ESTIMATED CURRENT AND LONG-TERM RETURNS
Estimated Current and Long-Term Returns to Unitholders are indicated under
"Summary of Essential Information" in this Part One. The methods of
calculating Estimated Current Returns and Estimated Long-Term Return are set
forth in Part Two of this Prospectus.
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.
The Date of this Prospectus is September 15, 1994
Van Kampen Merritt
INSURED MUNICIPALS INCOME TRUST AND INVESTORS' QUALITY TAX-EXEMPT TRUST,
MULTI-SERIES 54
Summary of Essential Financial Information
As of July 8, 1994
Sponsor: Van Kampen Merritt Inc.
Evaluator: American Portfolio Evaluation Services
(A division of a subsidiary of the Sponsor)
Trustee: The Bank of New York
The income, expense and distribution data set forth below have been calculated
for Unitholders electing to receive monthly distributions. Unitholders
choosing distributions semi-annually will receive a slightly higher net annual
interest income because of the lower Trustee's fees and expenses under such
plan.
<TABLE>
<CAPTION>
IM-IT Michigan Minnesota
Intermediate IM-IT IM-IT
Trust Trust Trust
<S> <C> <C> <C>
General Information
Principal Amount (Par Value) of Securities
......................................................................... $ 4,180,000 $ 3,915,000 $ 2,940,000
Number of Units............................................................ 4,178 3,975 2,915
Fractional Undivided Interest in Trust per Unit............................ 1/4,178 1/3,975 1/2,915
Public Offering Price: ....................................................
Aggregate Bid Price of Securities in Portfolio............................ $ 4,319,693.40 $ 4,071,493.28 $ 3,050,101.70
Aggregate Bid Price of Securities per Unit................................ $ 1,033.91 $ 1,024.28 $ 1,046.35
Sales charge 2.041% (2.0% of Public Offering Price excluding principal
cash) for the IM-IT Intermediate Trust, 4.058% (3.9% of Public Offering
Price excluding principal cash) for the Michigan IM-IT Trust and 4.932%
(4.7% of Public Offering Price excluding principal cash) for the
Minnesota IM-IT Trust...................................................... $ 21.08 $ 41.44 $ 51.33
Principal Cash per Unit................................................... $ (.85) $ (3.20) $ (5.48)
Public Offering Price per Unit <F1>....................................... $ 1,054.14 $ 1,062.52 $ 1,092.20
Redemption Price per Unit.................................................. $ 1,033.06 $ 1,021.08 $ 1,040.87
Excess of Public Offering Price per Unit over Redemption Price per Unit.... $ 21.08 $ 41.44 $ 51.33
Minimum Value of the Trust under which Trust Agreement may be
terminated................................................................ $ 1,020,000 $ 797,000 $ 610,000
Annual Premium on Portfolio Insurance...................................... $ 8,061.60 $ 1,621.85 $ 5,506.21
Evaluator's Annual Fee <F4>................................................ $ 1,619 $ 1,478 $ 1,095
Special Information
Calculation of Estimated Net Annual Unit Income: ..........................
Estimated Annual Interest Income per Unit................................. $ 68.94 $ 75.98 $ 76.59
Less: Estimated Annual Expense excluding Insurance........................ $ 2.41 $ 2.38 $ 2.56
Less: Annual Premium on Portfolio Insurance............................... $ 1.93 $ .41 $ 1.89
Estimated Net Annual Interest Income per Unit............................. $ 64.60 $ 73.19 $ 72.14
Calculation of Estimated Interest Earnings per Unit: ......................
Estimated Net Annual Interest Income
.......................................................................... $ 64.60 $ 73.19 $ 72.14
Divided by 12............................................................. $ 5.38 $ 6.10 $ 6.01
Estimated Daily Rate of Net Interest Accrual per Unit...................... $ .17945 $ .20330 $ .20039
Estimated Current Return Based on Public Offering Price <F2><F3>........... 6.12% 6.87% 6.57%
Estimated Long-Term Return <F2><F3>........................................ 4.52% 5.12% 5.55%
</TABLE>
Plus accrued interest to the date of settlement (five business days after
purchase) of $13.92, $12.78 and $14.26 for the IM-IT Intermediate Trust, the
Michigan IM-IT Trust and the Minnesota IM-IT Trust, respectively.
The Estimated Current Returns and Estimated Long-Term Returns are increased
for transactions entitled to a reduced sales charge.
The Estimated Current Return and Estimated Long-Term Return on an identical
portfolio without the insurance obtained by the IM-IT Intermediate Trust,
Michigan IM-IT Trust and Minnesota IM-IT Trust would have been slightly
higher.
Notwithstanding information to the Contrary in Part Two of this Prospectus,
the Trust Indenture provides that as compensation for its services. the
Evaluator shall receive a fee of $.30 per $1,000 principal amount of Bonds per
Trust annually. This fee may be adjusted for increases in consumer prices for
services under the category "All Services Less Rent of Shelter" in the
Consumer Price Index.
INSURED MUNICIPALS INCOME TRUST AND INVESTORS' QUALITY TAX-EXEMPT TRUST,
MULTI-SERIES 54
Summary of Essential Financial Information
As of July 8, 1994
Sponsor: Van Kampen Merritt Inc.
Evaluator: American Portfolio Evaluation Services
(A division of a subsidiary of the Sponsor)
Trustee: The Bank of New York
The income, expense and distribution data set forth below have been calculated
for Unitholders electing to receive monthly distributions. Unitholders
choosing distributions semi-annually will receive a slightly higher net annual
interest income because of the lower Trustee's fees and expenses under such
plan.
<TABLE>
<CAPTION>
South
Ohio Pennsylvania Oregon Carolina
IM-IT IM-IT Quality Quality
Trust Trust Trust Trust
<S> <C> <C> <C> <C>
General Information
Principal Amount (Par Value) of Securities.............. $ 4,040,000 $ 5,915,000 $ 2,210,000 $ 2,960,000
Number of Units......................................... 3,962 5,796 2,042 2,929
Fractional Undivided Interest in Trust per Unit......... 1/3,962 1/5,796 1/2,042 1/2,929
Public Offering Price:
Aggregate Bid Price of Securities in Portfolio......... $ 4,109,008.40 $ 6,106,611.55 $ 2,203,047.90 $ 3,134,890.05
Aggregate Bid Price of Securities per Unit............. $ 1,037.10 $ 1,053.59 $ 1,078.87 $ 1,070.29
Sales charge 4.932% (4.7% of Public Offering Price
excluding principal cash) for the Ohio IM-IT and
Oregon Quality Trusts, 4.712% (4.5% of Public
Offering Price excluding principal cash) for the
Pennsylvania IM-IT Trust and 4.275% (4.1% of
Public Offering Price excluding principal cash) for
the South Carolina Quality Trust........................ $ 51.15 $ 49.53 $ 53.12 $ 45.57
Principal Cash per Unit................................ $ .04 $ (2.36) $ (1.79) $ (4.39)
Public Offering Price per Unit <F1>.................... $ 1,088.29 $ 1,100.76 $ 1,130.20 $ 1,111.47
Redemption Price per Unit............................... $ 1,037.14 $ 1,051.23 $ 1,077.08 $ 1,065.90
Excess of Public Offering Price per Unit over
Redemption Price per Unit.............................. $ 51.15 $ 49.53 $ 53.12 $ 45.57
Minimum Value of the Trust under which Trust
Agreement may be terminated............................ $ 830,000 $ 1,241,000 $ 463,000 $ 615,000
Annual Premium on Portfolio Insurance................... $ 4,263.21 $ 5,055.03 $ -- $ --
Evaluator's Annual Fee <F4>............................. $ 1,508 $ 2,209 $ 845 $ 1,123
Special Information
Calculation of Estimated Net Annual Unit Income:
Estimated Annual Interest Income per Unit.............. $ 75.82 $ 75.90 $ 69.90 $ 77.26
Less: Estimated Annual Expense......................... $ 2.42 $ 2.40 $ 2.80 $ 2.61
Less: Annual Premium on Portfolio Insurance............ $ 1.08 $ .87 $ -- $ --
Estimated Net Annual Interest Income per Unit.......... $ 72.32 $ 72.63 $ 67.10 $ 74.65
Calculation of Estimated Interest Earnings per Unit :
Estimated Net Annual Interest Income................... $ 72.32 $ 72.63 $ 67.10 $ 74.65
Divided by 12.......................................... $ 6.03 $ 6.05 $ 5.59 $ 6.22
Estimated Daily Rate of Net Interest Accrual per Unit... $ .20089 $ .20174 $ .18639 $ .20736
Estimated Current Return Based on Public Offering
Price <F2><F3>......................................... 6.65% 6.58% 5.93% 6.69%
Estimated Long-Term Return <F2><F3>..................... 5.32% 5.48% 5.42% 4.48%
<FN>
<F1>Plus accrued interest to the date of settlement (five business days after
purchase) of $13.67, $12.91, $14.92 and $15.67 for the Ohio IM-IT Trust,
Pennsylvania IM-IT Trust, Oregon Quality Trust and South Carolina Quality
Trust, respectively.
<F2>The Estimated Current Returns and Estimated Long-Term Returns are increased
for transactions entitled to a reduced sales charge.
<F3>The Estimated Current Return and Estimated Long-Term Return on an identical
portfolio without the insurance obtained by the Ohio IM-IT Trust and
Pennsylvania IM-IT Trust would have been slightly higher.
<F4>Notwithstanding information to the Contrary in Part Two of this Prospectus,
the Trust Indenture provides that as compensation for its services, the
Evaluator shall receive a fee of $.30 per $1,000 principal amount of Bonds per
Trust annually. This fee may be adjusted for increases in consumer prices for
services under the category "All Services Less Rent of Shelter" in the
Consumer Price Index.
</TABLE>
Summary of Essential Information (continued)
Evaluations for purpose of sales, purchase or redemption of Units are made as
of 4:00 P.M. Eastern time on days of trading on the New York Stock Exchange
next following receipt of an order for a sale or purchase of Units or receipt
by The Bank of New York of Units tendered for redemption.
<TABLE>
<CAPTION>
Minimum Principal Distribution.......$1.00 per Unit
<S> <C>
Date of Deposit......................June 4, 1987
Mandatory Termination Date...........December 31, 2036
Evaluator's Annual Supervisory Fee...Maximum of $0.25 per Unit
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
FIRST day of the month as follows: monthly - each month; quarterly - March, June,
September, and December for the IM-IT Intermediate Trust; semi-annual - June and
December for the IM-IT Intermediate Trust, January and July for the IM-IT State
Record and Computation Dates...Trusts and May and November for the State Quality Trusts.
FIFTEENTH day of the month as follows: monthly - each month; quarterly - March,
June, September, and December for the IM-IT Intermediate Trust; semi-annual -
June and December for the IM-IT Intermediate Trust, January and July for the IM-IT
Distribution Dates.............State Trusts and May and November for the State Quality Trusts.
$1.24, $0.98 and $0.69 per $1,000 principal amount of Bonds respectively, for those
portions of the Trusts under the monthly, quarterly and semi-annual distribution plans
for the IM-IT Intermediate Trust and $1.24 and $0.69 per $1,000 principal amount of
Bonds respectively, for those portions of the Trusts under the monthly and semi-
Trustee's Annual Fee...........annual distribution plans for the State Trusts.
</TABLE>
PORTFOLIO
In selecting Bonds for the Insured Municipals Income Trust, Intermediate
Series 20, the following facts, among others, were considered: (i) either 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", including provisional or conditional ratings,
respectively (see "Description of Securities Ratings" in Part Two), (ii) the
prices of the Bonds relative to other bonds of comparable quality and
maturity, (iii) the availability and cost of insurance for the prompt payment
of principal and interest on the Bonds and (iv) the diversification of Bonds
as to purpose of issue and location of issuer. As of May 31, 1994, the Trust
consists of 14 issues which are payable from the income of a specific project
or authority. The portfolio is divided by purpose of issue as follows: General
Obligation, 3 (39%); Health Care System, 5 (26%); Pre-refunded, 2 (16%);
Single Family, 1 (3%); Waste Disposal, 1 (10%); Water and Sewer, 1 (3%) and
Miscellaneous, 1 (3%). The portfolio consists of 14 Bond issues in 9 states.
See "Bond Portfolio" herein and "Description of Securities Ratings" in Part
Two.
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1988<F1> 1989 1990 1991
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period................ $ 965.64 $ 993.99 $ 1,009.89 $ 1,015.18
Net asset value per Unit at end of period...................... $ 993.99 $ 1,009.89 $ 1,015.18 $ 1,052.41
Distributions to Unitholders of investment income including
accrued interest to carry paid on Units redeemed (average
Units outstanding for entire period) <F2>. .................... $ 37.13 $ 66.17 $ 67.12 $ 67.43
Distributions to Unitholders from Bond redemption proceeds
(average Units outstanding for entire period)................... $ -- $ -- $ -- $ --
Unrealized appreciation (depreciation) of Bonds (per Unit
outstanding at end of period) .................................. $ .48 $ 15.21 $ 4.41 $ 36.24
Distributions of investment income by frequency of payment<F2>
Monthly ....................................................... $ 47.73 $ 66.12 $ 66.11 $ 66.06
Quarterly ..................................................... $ 36.89 $ 66.48 $ 66.52 $ 66.48
Semiannual..................................................... $ 20.33 $ 66.76 $ 66.79 $ 66.82
Units outstanding at end of period............................. 5,040 4,963 4,849 4,646
<FN>
<F1>For the period from June 4, 1987 (date of deposit) through May 31, 1988.
<F2>Unitholders may elect to receive distributions on a monthly, quarterly or
semi-annual basis.
</TABLE>
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Net asset value per Unit at beginning of period............................. $ 1,052.41 $ 1,074.35 $ 1,097.40
Net asset value per Unit at end of period................................... $ 1,074.35 $ 1,097.40 $ 1,064.19
Distributions to Unitholders of investment income including accrued
interest to carry paid on Units redeemed (average Units outstanding
for entire period) <F2>. ................................................... $ 67.23 $ 68.11 $ 65.73
Distributions to Unitholders from Bond redemption proceeds (average
Units outstanding for entire period)......................................... $ -- $ 1.88 $ 3.98
Unrealized appreciation (depreciation) of Bonds (per Unit outstanding at
end of period) .............................................................. $ 21.32 $ 23.94 $ (31.48)
Distributions of investment income by frequency of payment <F2>
Monthly .................................................................... $ 65.76 $ 65.60 $ 64.87
Quarterly................................................................... $ 66.30 $ 66.07 $ 65.26
Semiannual.................................................................. $ 66.82 $ 66.39 $ 65.70
Units outstanding at end of period.......................................... 4,534 4,306 4,188
<FN>
<F1>For the period from June 4, 1987 (date of deposit) through May 31, 1988.
<F2>Unitholders may elect to receive distributions on a monthly, quarterly or
semi-annual basis.
</TABLE>
PORTFOLIO
In selecting Bonds for the Michigan Insured Municipals Income Trust, Series
28, the following facts, among others, were considered: (i) either 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", including provisional or conditional ratings,
respectively (see "Description of Securities Ratings" in Part Two), (ii) the
prices of the Bonds relative to other bonds of comparable quality and
maturity, (iii) the availability and cost of insurance for the prompt payment
of principal and interest on the Bonds and (iv) the diversification of Bonds
as to purpose of issue and location of issuer. As of May 31, 1994, the Trust
consists of 10 issues which are payable from the income of a specific project
or authority. The portfolio is divided by purpose of issue as follows:
Pre-refunded, 7 (70%); Transportation, 1 (6%); Wholesale Electric, 1 (7%) and
Miscellaneous, 1 (17%). See "Bond Portfolio" herein and "Description of
Securities Ratings" in Part Two.
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1988<F1> 1989 1990 1991
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period................ $ 951.00 $ 963.02 $ 1,042.14 $ 1,024.02
Net asset value per Unit at end of period...................... $ 963.02 $ 1,042.14 $ 1,024.02 $ 1,038.60
Distributions to Unitholders of investment income including
accrued interest to carry paid on Units redeemed (average
Units outstanding for entire period) <F2>. .................... $ 43.05 $ 73.92 $ 73.95 $ 73.65
Distributions to Unitholders from Bond redemption proceeds
(average Units outstanding for entire period)................... $ -- $ -- $ -- $ --
Unrealized appreciation (depreciation) of Bonds (per Unit
outstanding at end of period) .................................. $ (16.97) $ 79.20 $ (18.02) $ 14.39
Distributions of investment income by frequency of payment<F2>
Monthly ....................................................... $ 55.14 $ 73.56 $ 73.45 $ 73.44
Semiannual .................................................... $ 30.80 $ 74.12 $ 74.10 $ 74.10
Units outstanding at end of period............................. 4,059 4,059 4,059 4,057
<FN>
<F1>For the period from June 4, 1987 (date of deposit) through May 31, 1988.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Net asset value per Unit at beginning of period ............................ $ 1,038.60 $ 1,049.49 $ 1,085.58
Net asset value per Unit at end of period................................... $ 1,049.49 $ 1,085.58 $ 1,055.72
Distributions to Unitholders of investment income including accrued
interest to carry paid on Units redeemed (average Units outstanding
for entire period) <F2>. ................................................... $ 73.81 $ 73.94 $ 74.21
Distributions to Unitholders from Bond redemption proceeds (average
Units outstanding for entire period)......................................... $ -- $ -- $ --
Unrealized appreciation (depreciation) of Bonds (per Unit outstanding at
end of period) .............................................................. $ 10.91 $ 36.45 $ (29.63)
Distributions of investment income by frequency of payment <F2>..............
Monthly .................................................................... $ 73.44 $ 73.44 $ 73.36
Semiannual.................................................................. $ 74.10 $ 74.10 $ 74.10
Units outstanding at end of period ......................................... 4,047 4,036 3,975
<FN>
<F1>For the period from June 4, 1987 (date of deposit) through May 31, 1988.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
PORTFOLIO
In selecting Bonds for the Minnesota Insured Municipals Income Trust, Series
18, the following facts, among others, were considered: (i) either 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", including provisional or conditional ratings,
respectively (see "Description of Securities Ratings" in Part Two), (ii) the
prices of the Bonds relative to other bonds of comparable quality and
maturity, (iii) the availability and cost of insurance for the prompt payment
of principal and interest on the Bonds and (iv) the diversification of Bonds
as to purpose of issue and location of issuer. As of May 31, 1994, the Trust
consists of 9 issues which are payable from the income of a specific project
or authority. The portfolio is divided by purpose of issue as follows: Health
Care System, 1 (17%); Pre-refunded, 4 (48%); Single Family, 3 (27%) and
Wholesale Electric, 1 (8%). See "Bond Portfolio" herein and "Description of
Securities Ratings" in Part Two.
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1988<F1> 1989 1990 1991
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period ............... $ 951.00 $ 965.17 $ 1,049.82 $ 1,030.05
Net asset value per Unit at end of period...................... $ 965.17 $ 1,049.82 $ 1,030.05 $ 1,044.77
Distributions to Unitholders of investment income including
accrued interest to carry paid on Units redeemed (average
Units outstanding for entire period) <F2>. .................... $ 42.10 $ 72.89 $ 72.74 $ 72.49
Distributions to Unitholders from Bond redemption proceeds
(average Units outstanding for entire period)................... $ -- $ -- $ -- $ --
Unrealized appreciation (depreciation) of Bonds (per Unit
outstanding at end of period) .................................. $ (14.44) $ 84.94 $ (20.56) $ 14.39
Distributions of investment income by frequency of payment<F2>
Monthly ....................................................... $ 52.73 $ 72.12 $ 72.09 $ 72.00
Semiannual .................................................... $ 28.92 $ 72.82 $ 72.88 $ 72.88
Units outstanding at end of period ............................ 3,042 3,006 2,958 2,933
<FN>
<F1>For the period from June 4, 1987 (date of deposit) through May 31, 1988.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Net asset value per Unit at beginning of period............................. $ 1,044.77 $ 1,063.51 $ 1,090.66
Net asset value per Unit at end of period................................... $ 1,063.51 $ 1,090.66 $ 1,073.68
Distributions to Unitholders of investment income including accrued
interest to carry paid on Units redeemed (average Units outstanding
for entire period) <F2>. ................................................... $ 72.41 $ 72.65 $ 72.13
Distributions to Unitholders from Bond redemption proceeds (average
Units outstanding for entire period)......................................... $ -- $ -- $ --
Unrealized appreciation (depreciation) of Bonds (per Unit outstanding at
end of period) .............................................................. $ 18.71 $ 27.58 $ (17.09)
Distributions of investment income by frequency of payment <F2>..............
Monthly .................................................................... $ 72.00 $ 72.00 $ 71.70
Semiannual.................................................................. $ 72.88 $ 72.88 $ 72.52
Units outstanding at end of period ......................................... 2,930 2,927 2,925
<FN>
<F1>For the period from June 4, 1987 (date of deposit) through May 31, 1988.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
PORTFOLIO
In selecting Bonds for the Ohio Insured Municipals Income Trust, Series 29,
the following facts, among others, were considered: (i) either 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", including provisional or conditional ratings, respectively (see
"Description of Securities Ratings" in Part Two), (ii) the prices of the Bonds
relative to other bonds of comparable quality and maturity, (iii) the
availability and cost of insurance for the prompt payment of principal and
interest on the Bonds and (iv) the diversification of Bonds as to purpose of
issue and location of issuer. As of May 31, 1994, the Trust consists of 8
issues which are payable from the income of a specific project or authority.
The portfolio is divided by purpose of issue as follows: Health Care System, 3
(32%); Pre-refunded, 3 (43%); Public Building, 1 (12%) and Water and Sewer, 1
(13%). See "Bond Portfolio" herein and "Description of Securities Ratings" in
Part Two.
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1988<F1> 1989 1990 1991
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period ............... $ 951.00 $ 964.51 $ 1,052.51 $ 1,033.81
Net asset value per Unit at end of period...................... $ 964.51 $ 1,052.51 $ 1,033.81 $ 1,050.19
Distributions to Unitholders of investment income including
accrued interest to carry paid on Units redeemed (average
Units outstanding for entire period) <F2>. .................... $ 41.92 $ 73.29 $ 73.77 $ 73.15
Distributions to Unitholders from Bond redemption proceeds
(average Units outstanding for entire period)................... $ -- $ -- $ -- $ --
Unrealized appreciation (depreciation) of Bonds (per Unit
outstanding at end of period) .................................. $ (15.79) $ 88.25 $ (18.61) $ 16.15
Distributions of investment income by frequency of payment
<F2>............................................................
Monthly ....................................................... $ 54.00 $ 72.60 $ 72.60 $ 72.60
Semiannual..................................................... $ 30.02 $ 73.30 $ 73.42 $ 73.42
Units outstanding at end of period ............................ 4,063 4,038 4,009 3,979
<FN>
<F1>For the period from June 4, 1987 (date of deposit) through May 31, 1988.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Net asset value per Unit at beginning of period ............................ $ 1,050.19 $ 1,069.06 $ 1,107.31
Net asset value per Unit at end of period................................... $ 1,069.06 $ 1,107.31 $ 1,075.58
Distributions to Unitholders of investment income including accrued
interest to carry paid on Units redeemed (average Units outstanding
for entire period) <F2>. ................................................... $ 73.12 $ 73.03 $ 72.44
Distributions to Unitholders from Bond redemption proceeds (average
Units outstanding for entire period)......................................... $ -- $ -- $ --
Unrealized appreciation (depreciation) of Bonds (per Unit outstanding at
end of period) .............................................................. $ 19.18 $ 38.19 $ (32.30)
Distributions of investment income by frequency of payment <F2>..............
Monthly .................................................................... $ 72.60 $ 72.51 $ 72.24
Semiannual ................................................................. $ 73.42 $ 73.42 $ 73.04
Units outstanding at end of period.......................................... 3,974 3,970 3,962
<FN>
<F1>For the period from June 4, 1987 (date of deposit) through May 31, 1988.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
PORTFOLIO
In selecting Bonds for the Pennsylvania Insured Municipals Income Trust,
Series 80, the following facts, among others, were considered: (i) either 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", including provisional or conditional ratings,
respectively (see "Description of Securities Ratings" in Part Two), (ii) the
prices of the Bonds relative to other bonds of comparable quality and
maturity, (iii) the availability and cost of insurance for the prompt payment
of principal and interest on the Bonds and (iv) the diversification of Bonds
as to purpose of issue and location of issuer. As of May 31, 1994, the Trust
consists of 9 issues which are payable from the income of a specific project
or authority. The portfolio is divided by purpose of issue as follows:
Escrowed, 1 (17%); Pre-refunded, 5 (56%); Single Family, 1 (8%);
Transportation, 1 (3%) and Water and Sewer, 1 (16%). See "Bond Portfolio"
herein and "Description of Securities Ratings" in Part Two.
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1988<F1> 1989 1990 1991
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period................ $ 951.00 $ 968.49 $ 1,048.58 $ 1,033.13
Net asset value per Unit at end of period...................... $ 968.49 $ 1,048.58 $ 1,033.13 $ 1,053.39
Distributions to Unitholders of investment income including
accrued interest to carry paid on Units redeemed (average
Units outstanding for entire period) <F2>. .................... $ 43.93 $ 73.62 $ 74.90 $ 73.49
Distributions to Unitholders from Bond redemption proceeds
(average Units outstanding for entire period)................... $ .15 $ -- $ -- $ --
Unrealized appreciation (depreciation) of Bonds (per Unit
outstanding at end of period) .................................. $ (9.73) $ 80.44 $ (15.90) $ 20.05
Distributions of investment income by frequency of payment<F2>
Monthly........................................................ $ 55.19 $ 72.96 $ 72.92 $ 72.84
Semiannual..................................................... $ 31.05 $ 73.52 $ 73.66 $ 73.66
Units outstanding at end of period ............................ 6,099 6,060 5,859 5,829
<FN>
<F1>For the period from June 4, 1987 (date of deposit) through May 31, 1988.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
<F3>In 1988, $.15 per Unit represents a return of principal to Unitholders on the
date of deposit due to inclusion of "when, as and if issued"Bonds on
the date of deposit.
</TABLE>
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Net asset value per Unit at beginning of period ............................ $ 1,053.39 $ 1,071.99 $ 1,122.13
Net asset value per Unit at end of period................................... $ 1,071.99 $ 1,122.13 $ 1,083.83
Distributions to Unitholders of investment income including accrued
interest to carry paid on Units redeemed (average Units outstanding
for entire period) <F2>. ................................................... $ 72.86 $ 72.99 $ 72.76
Distributions to Unitholders from Bond redemption proceeds (average
Units outstanding for entire period)......................................... $ -- $ -- $ --
Unrealized appreciation (depreciation) of Bonds (per Unit outstanding at
end of period) .............................................................. $ 18.54 $ 49.89 $ (38.52)
Distributions of investment income by frequency of payment <F2>..............
Monthly..................................................................... $ 72.48 $ 72.48 $ 72.48
Semiannual.................................................................. $ 73.30 $ 73.30 $ 73.30
Units outstanding at end of period ......................................... 5,821 5,816 5,806
<FN>
<F1>For the period from June 4, 1987 (date of deposit) through May 31, 1988.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
<F3>In 1988, $.15 per Unit represents a return of principal to Unitholders on the
date of deposit due to inclusion of "when, as and if issued"Bonds on
the date of deposit.
</TABLE>
PORTFOLIO
In selecting Bonds for the Oregon Investors' Quality Tax-Exempt Trust, Series
39, the following facts, among others, were considered: (i) either the
Standard & Poor's Corporation rating of the Bonds was in no case less than
"A-", or the Moody's Investors Service, Inc. rating of the Bonds was in no
case less than "A", including provisional or conditional ratings, respectively
(see "Description of Securities Ratings" in Part Two), (ii) the prices of the
Bonds relative to other bonds of comparable quality and maturity, (iii) the
availability and cost of insurance for the prompt payment of principal and
interest on the Bonds and (iv) the diversification of Bonds as to purpose of
issue and location of issuer. As of May 31, 1994, the Trust consists of 8
issues which are payable from the income of a specific project or authority.
The portfolio is divided by purpose of issue as follows: General Obligation, 4
(33%); Industrial Revenue, 1 (22%); Pre-refunded, 2 (23%) and Retail Electric,
1 (22%). See "Bond Portfolio" herein and "Description of Securities Ratings"
in Part Two.
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1988<F1> 1989 1990 1991
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period................ $ 951.00 $ 957.60 $ 1,044.90 $ 1,044.50
Net asset value per Unit at end of period...................... $ 957.60 $ 1,044.90 $ 1,044.50 $ 1,076.18
Distributions to Unitholders of investment income including
accrued interest to carry paid on Units redeemed (average
Units outstanding for entire period) <F2>. .................... $ 49.92 $ 70.07 $ 70.05 $ 69.91
Distributions to Unitholders from Bond redemption proceeds
(average Units outstanding for entire period)................... $ -- $ -- $ -- $ --
Unrealized appreciation (depreciation) of Bonds (per Unit
outstanding at end of period) .................................. $ (11.99) $ 87.29 $ (.67) $ 31.07
Distributions of investment income by frequency of payment<F2>
Monthly........................................................ $ 49.76 $ 69.84 $ 69.66 $ 69.60
Semiannual..................................................... $ 50.19 $ 70.50 $ 70.48 $ 70.48
Units outstanding at end of period ............................ 2,082 2,082 2,066 2,061
<FN>
<F1>For the period from June 4, 1987 (date of deposit) through May 31, 1988.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Net asset value per Unit at beginning of period............................. $ 1,076.18 $ 1,114.25 $ 1,147.49
Net asset value per Unit at end of period................................... $ 1,114.25 $ 1,147.49 $ 1,099.49
Distributions to Unitholders of investment income including accrued
interest to carry paid on Units redeemed (average Units outstanding
for entire period) <F2>. ................................................... $ 69.88 $ 69.91 $ 68.11
Distributions to Unitholders from Bond redemption proceeds (average
Units outstanding for entire period)......................................... $ -- $ -- $ 32.77
Unrealized appreciation (depreciation) of Bonds (per Unit outstanding at
end of period) .............................................................. $ 38.18 $ 33.30 $ (18.32)
Distributions of investment income by frequency of payment <F2>..............
Monthly .................................................................... $ 69.60 $ 69.60 $ 67.82
Semiannual.................................................................. $ 70.48 $ 70.48 $ 68.58
Units outstanding at end of period ......................................... 2,061 2,059 2,054
<FN>
<F1>For the period from June 4, 1987 (date of deposit) through May 31, 1988.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
PORTFOLIO
In selecting Bonds for the South Carolina Investors' Quality Tax-Exempt Trust,
Series 34, the following facts, among others, were considered: (i) either the
Standard & Poor's Corporation rating of the Bonds was in no case less than
"A-", or the Moody's Investors Service, Inc. rating of the Bonds was in no
case less than "A", including provisional or conditional ratings, respectively
(see "Description of Securities Ratings" in Part Two), (ii) the prices of the
Bonds relative to other bonds of comparable quality and maturity, (iii) the
availability and cost of insurance for the prompt payment of principal and
interest on the Bonds and (iv) the diversification of Bonds as to purpose of
issue and location of issuer. As of May 31, 1994, the Trust consists of 10
issues which are payable from the income of a specific project or authority.
The portfolio is divided by purpose of issue as follows: Higher Education, 1
(13%); Pre-refunded, 6 (70%); Single Family, 1 (7%) and Wholesale Electric, 2
(10%). See "Bond Portfolio" herein and "Description of Securities Ratings" in
Part Two.
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1988<F1> 1989 1990 1991
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period ............... $ 951.00 $ 958.56 $ 1,047.82 $ 1,034.85
Net asset value per Unit at end of period...................... $ 958.56 $ 1,047.82 $ 1,034.85 $ 1,063.59
Distributions to Unitholders of investment income including
accrued interest to carry paid on Units redeemed (average
Units outstanding for entire period) <F2>. .................... $ 54.78 $ 75.59 $ 75.73 $ 75.38
Distributions to Unitholders from Bond redemption proceeds
(average Units outstanding for entire period)................... $ -- $ -- $ -- $ --
Unrealized appreciation (depreciation) of Bonds (per Unit
outstanding at end of period) .................................. $ (11.48) $ 89.23 $ (13.34) $ 28.51
Distributions of investment income by frequency of payment<F2>
Monthly ....................................................... $ 54.64 $ 75.36 $ 75.41 $ 75.12
Semiannual..................................................... $ 55.06 $ 76.00 $ 76.18 $ 75.82
Units outstanding at end of period ............................ 3,058 3,051 3,038 3,026
<FN>
<F1>For the period from June 4, 1987 (date of deposit) through May 31, 1988.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Net asset value per Unit at beginning of period ............................ $ 1,063.59 $ 1,097.78 $ 1,126.57
Net asset value per Unit at end of period................................... $ 1,097.78 $ 1,126.57 $ 1,090.94
Distributions to Unitholders of investment income including accrued
interest to carry paid on Units redeemed (average Units outstanding
for entire period) <F2>. ................................................... $ 75.32 $ 75.56 $ 75.28
Distributions to Unitholders from Bond redemption proceeds (average
Units outstanding for entire period)......................................... $ -- $ -- $ --
Unrealized appreciation (depreciation) of Bonds (per Unit outstanding at
end of period) .............................................................. $ 34.28 $ 28.66 $ (36.14)
Distributions of investment income by frequency of payment <F2>..............
Monthly .................................................................... $ 75.12 $ 75.09 $ 74.64
Semiannual ................................................................. $ 75.82 $ 75.82 $ 75.51
Units outstanding at end of period ......................................... 3,026 2,984 2,929
<FN>
<F1>For the period from June 4, 1987 (date of deposit) through May 31, 1988.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of Van Kampen Merritt Inc. and the Unitholders of
Insured Municipals Income Trust and Investors' Quality Tax-Exempt Trust,
Multi-Series 54:
We have audited the accompanying statements of condition (including the
analyses of net assets) and the related portfolio of Insured Municipals Income
Trust and Investors' Quality Tax-Exempt Trust, Multi-Series 54 (IM-IT
Intermediate, Michigan IM-IT, Minnesota IM-IT, Ohio IM-IT, Pennsylvania IM-IT,
Oregon Quality and South Carolina Quality Trusts) as of May 31, 1994, and the
related statements of operations and changes in net assets for the three years
ended May 31, 1994. These statements are the responsibility of the Trustee and
the Sponsor. Our responsibility is to express an opinion on such statements
based on our audit.
We conducted our audit 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 tax-exempt securities owned at May 31,
1994 by correspondence with the Trustee. An audit also includes assessing the
accounting principles used and significant estimates made by the Trustee and
the Sponsor, as well as evaluating the overall financial statement
presentation. We believe our audit provides a reasonable basis for our
opinion.
In our opinion, the statements referred to above present fairly, in all
material respects, the financial position of Insured Municipals Income Trust
and Investors' Quality Tax-Exempt Trust, Multi-Series 54 (IM-IT Intermediate,
Michigan IM-IT, Minnesota IM-IT, Ohio IM-IT, Pennsylvania IM-IT, Oregon
Quality and South Carolina Quality Trusts) as of May 31, 1994, and the results
of operations and changes in net assets for the three years ended May 31,
1994, in conformity with generally accepted accounting principles.
GRANT THORNTON
Chicago, Illinois
July 22, 1994
INSURED MUNICIPALS INCOME TRUST AND
INVESTORS' QUALITY TAX-EXEMPT TRUST, MULTI-SERIES 54
Statements of Condition
May 31, 1994
<TABLE>
<CAPTION>
IM-IT Michigan Minnesota
Intermediate IM-IT IM-IT
Trust Trust Trust
<S> <C> <C> <C>
Trust property
Cash $ 23,435 $ -- $ 14,255
Tax-exempt securities at market value, (cost $4,006,138, $3,784,335 and $2,784,164,
respectively) (note 1) 4,341,745 4,095,641 3,062,522
Accrued interest 91,648 107,301 63,749
......................................................................................... $ 4,456,828 $ 4,202,942 $ 3,140,526
Liabilities and interest of Unitholders..................................................
Cash overdraft $ -- $ 6,463 $ --
Interest to Unitholders 4,456,828 4,196,479 3,140,526
......................................................................................... $ 4,456,828 $ 4,202,942 $ 3,140,526
Analyses of Net Assets
Interest of Unitholders (4,188, 3,975 and 2,925 Units, respectively of fractional
undivided interest outstanding)..........................................................
Cost to original investors of 5,100, 4,059 and 3,042 Units, respectively (note 1) $ 5,124,633 $ 4,059,000 $ 3,042,000
Less initial underwriting commission (note 3) 199,838 198,856 149,031
4,924,795 3,860,144 2,892,969
Less redemption of Units (912, 84 and 117 Units, respectively) 933,414 88,258 117,555
......................................................................................... 3,991,381 3,771,886 2,775,414
Undistributed net investment income
Net investment income 2,177,270 2,083,386 1,497,681
Less distributions to Unitholders 2,058,661 1,969,881 1,414,135
......................................................................................... 118,609 113,505 83,546
Realized gain (loss) on Bond sale or redemption 36,411 (218) 3,208
Unrealized appreciation (depreciation) of Bonds (note 2) 335,607 311,306 278,358
Distributions to Unitholders of Bond sale or redemption proceeds (25,180) -- --
Net asset value to Unitholders $ 4,456,828 $ 4,196,479 $ 3,140,526
Net asset value per Unit (Units outstanding of 4,188, 3,975 and 2,925, respectively) .... $ 1,064.19 $ 1,055.72 $ 1,073.68
</TABLE>
The accompanying notes are an integral part of these statements.
INSURED MUNICIPALS INCOME TRUST AND
INVESTORS' QUALITY TAX-EXEMPT TRUST, MULTI-SERIES 54
Statements of Condition
May 31, 1994
<TABLE>
<CAPTION>
South
Ohio Pennsylvania Oregon Carolina
IM-IT IM-IT Quality Quality
Trust Trust Trust Trust
<S> <C> <C> <C> <C>
Trust property
Cash $ 19,968 $ 28,420 $ -- $ --
Tax-exempt securities at market value, (cost $3,765,236,
$5,526,039, $1,897,139 and $2,784,765, respectively) (note 1) 4,146,922 6,152,375 2,226,166 3,151,033
Accrued interest 94,575 111,921 32,207 84,679
.......................................................................... $ 4,261,465 $ 6,292,716 $ 2,258,373 $ 3,235,712
Liabilities and interest of Unitholders...................................
Cash overdraft $ -- $ -- $ 15 $ 40,336
Interest to Unitholders 4,261,465 6,292,716 2,258,358 3,195,376
.......................................................................... $ 4,261,465 $ 6,292,716 $ 2,258,373 $ 3,235,712
Analyses of Net Assets
Interest of Unitholders (3,962, 5,806, 2,054 and 2,929 Units,
respectively of fractional undivided interest outstanding)................
Cost to original investors of 4,073, 6,099, 2,082 and 3,060 Units,
respectively (note 1) $ 4,073,000 $ 6,099,000 $ 2,082,000 $ 3,060,000
Less initial underwriting commission (note 3) 199,539 298,798 102,001 149,913
3,873,461 5,800,202 1,979,999 2,910,087
Less redemption of Units (111, 293, 28 and 131 Units,
respectively) 112,322 297,747 29,403 141,331
.......................................................................... 3,761,139 5,502,455 1,950,596 2,768,756
Undistributed net investment income
Net investment income 2,038,626 3,017,558 1,004,874 1,593,266
Less distributions to Unitholders 1,924,254 2,863,670 967,173 1,536,076
.......................................................................... 114,372 153,888 37,701 57,190
Realized gain (loss) on Bond sale or redemption 4,268 10,933 8,404 3,162
Unrealized appreciation (depreciation) of Bonds (note 2) 381,686 626,336 329,027 366,268
Distributions to Unitholders of Bond sale or redemption proceeds -- (896) (67,370) --
Net asset value to Unitholders $ 4,261,465 $ 6,292,716 $ 2,258,358 $ 3,195,376
Net asset value per Unit (Units outstanding of 3,962, 5,806, 2,054 and
2,929, respectively) .................................................... $ 1,075.58 $ 1,083.83 $ 1,099.49 $ 1,090.94
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
INSURED MUNICIPALS INCOME TRUST, INTERMEDIATE SERIES 20
Statements of Operations
Years ended May 31,
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Investment income.................................................
Interest income.................................................. $ 321,510 $ 309,037 $ 292,235
Expenses.........................................................
Trustee fees and expenses........................................ 6,478 6,232 5,902
Evaluator fees................................................... 1,167 2,183 1,619
Insurance expense................................................ 8,256 8,218 8,103
Supervisory fees................................................. 1,454 452 1,077
Total expenses................................................... 17,355 17,085 16,701
Net investment income............................................ 304,155 291,952 275,534
Realized gain (loss) from Bond sale or redemption.................
Proceeds......................................................... 121,838 264,714 126,161
Cost............................................................. 115,227 252,414 117,958
Realized gain (loss)............................................. 6,611 12,300 8,203
Net change in unrealized appreciation (depreciation) of Bonds..... 96,653 103,104 (131,835)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS... $ 407,419 $ 407,356 $ 151,902
</TABLE>
<TABLE>
Statements of Changes in Net Assets
Years ended May 31,
<CAPTION>
.............................................................................. 1992 1993 1994
<S> <C> <C> <C>
Increase (decrease) in net assets.............................................
Operations:...................................................................
Net investment income........................................................ $ 304,155 $ 291,952 $ 275,534
Realized gain (loss) on Bond sale or redemption.............................. 6,611 12,300 8,203
Net change in unrealized appreciation (depreciation) of Bonds................ 96,653 103,104 (131,835)
Net increase (decrease) in net assets resulting from operations.............. 407,419 407,356 151,902
Distributions to Unitholders from:............................................
Net investment income........................................................ (308,727) (302,531) (278,245)
Bonds sale or redemption proceeds............................................ -- (8,344) (16,836)
Redemption of Units (note 4).................................................. (117,098) (242,165) (125,413)
Total increase (decrease).................................................... (18,406) (145,684) (268,592)
Net asset value to Unitholders................................................
Beginning of period.......................................................... 4,889,510 4,871,104 4,725,420
End of period (including undistributed net investment income of $131,899,
$121,320 and $118,609, respectively).......................................... $ 4,871,104 $ 4,725,420 $ 4,456,828
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
MICHIGAN INSURED MUNICIPALS INCOME TRUST, SERIES 28
Statements of Operations
Years ended May 31,
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Investment income.................................................
Interest income.................................................. $ 308,253 $ 307,488 $ 305,396
Expenses.........................................................
Trustee fees and expenses........................................ 5,896 5,705 5,582
Evaluator fees................................................... 979 1,914 1,478
Insurance expense................................................ 1,622 1,622 1,622
Supervisory fees................................................. 1,256 429 1,002
Total expenses................................................... 9,753 9,670 9,684
Net investment income............................................ 298,500 297,818 295,712
Realized gain (loss) from Bond sale or redemption.................
Proceeds......................................................... 10,710 -- 64,881
Cost............................................................. 10,176 -- 65,633
Realized gain (loss)............................................. 534 -- (752)
Net change in unrealized appreciation (depreciation) of Bonds..... 44,153 147,105 (117,766)
Net increase (decrease) in net assets resulting from operations... $ 343,187 $ 444,923 $ 177,194
</TABLE>
<TABLE>
Statements of Changes in Net Assets
Years ended May 31,
<CAPTION>
.............................................................................. 1992 1993 1994
<S> <C> <C> <C>
Increase (decrease) in net assets.............................................
Operations:...................................................................
Net investment income........................................................ $ 298,500 $ 297,818 $ 295,712
Realized gain (loss) on Bond sale or redemption.............................. 534 -- (752)
Net change in unrealized appreciation (depreciation) of Bonds................ 44,153 147,105 (117,766)
Net increase (decrease) in net assets resulting from operations.............. 343,187 444,923 177,194
Distributions to Unitholders from:............................................
Net investment income........................................................ (299,358) (299,100) (297,721)
Bonds sale or redemption proceeds............................................ -- -- --
Redemption of Units (note 4).................................................. (10,165) (11,691) (64,405)
Total increase (decrease).................................................... 33,664 134,132 (184,932)
Net asset value to Unitholders................................................
Beginning of period.......................................................... 4,213,615 4,247,279 4,381,411
End of period (including undistributed net investment income of $116,796,
$115,514 and $113,505, respectively).......................................... $ 4,247,279 $ 4,381,411 $ 4,196,479
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
MINNESOTA INSURED MUNICIPALS INCOME TRUST, SERIES 18
Statements of Operations
Years ended May 31,
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Investment income.................................................
Interest income.................................................. $ 223,691 $ 223,263 $ 223,263
Expenses.........................................................
Trustee fees and expenses........................................ 4,860 4,704 4,588
Evaluator fees................................................... 725 1,412 1,095
Insurance expense................................................ 5,518 5,506 5,506
Supervisory fees................................................. 907 310 727
Total expenses................................................... 12,010 11,932 11,916
Net investment income............................................ 211,681 211,331 211,347
Realized gain (loss) from Bond sale or redemption.................
Proceeds......................................................... 10,567 -- --
Cost............................................................. 9,891 -- --
Realized gain (loss)............................................. 676 -- --
Net change in unrealized appreciation (depreciation) of Bonds..... 54,810 80,737 (49,986)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS... $ 267,167 $ 292,068 $ 161,361
</TABLE>
<TABLE>
Statements of Changes in Net Assets
Years ended May 31,
<CAPTION>
..................................................................................... 1992 1993 1994
<S> <C> <C> <C>
Increase (decrease) in net assets....................................................
Operations:..........................................................................
Net investment income............................................................... $ 211,681 $ 211,331 $ 211,347
Realized gain (loss) on Bond sale or redemption..................................... 676 -- --
Net change in unrealized appreciation (depreciation) of Bonds....................... 54,810 80,737 (49,986)
Net increase (decrease) in net assets resulting from operations..................... 267,167 292,068 161,361
Distributions to Unitholders from:...................................................
Net investment income............................................................... (212,300) (212,657) (211,061)
Bonds sale or redemption proceeds................................................... -- -- --
Redemption of Units (note 4)......................................................... (3,076) (3,134) (2,146)
Total increase (decrease)........................................................... 51,791 76,277 (51,846)
Net asset value to Unitholders.......................................................
Beginning of period................................................................. 3,064,304 3,116,095 3,192,372
End of period (including undistributed net investment income of $84,586, $83,260
and $83,546, respectively)........................................................... $ 3,116,095 $ 3,192,372 $ 3,140,526
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
OHIO INSURED MUNICIPALS INCOME TRUST, SERIES 29
Statements of Operations
Years ended May 31,
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Investment income.................................................
Interest income.................................................. $ 301,945 $ 301,470 $ 301,068
Expenses.........................................................
Trustee fees and expenses........................................ 5,939 5,763 5,631
Evaluator fees................................................... 998 1,950 1,508
Insurance expense................................................ 4,302 4,290 4,280
Supervisory fees................................................. 1,231 421 986
Total expenses................................................... 12,470 12,424 12,405
Net investment income............................................ 289,475 289,046 288,663
Realized gain (loss) from Bond sale or redemption.................
Proceeds......................................................... -- 11,026 10,644
Cost............................................................. -- 9,839 9,839
Realized gain (loss)............................................. -- 1,187 805
Net change in unrealized appreciation (depreciation) of Bonds..... 76,209 151,611 (127,975)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS... $ 365,684 $ 441,844 $ 161,493
</TABLE>
<TABLE>
Statements of Changes in Net Assets
Years ended May 31,
<CAPTION>
.............................................................................. 1992 1993 1994
<S> <C> <C> <C>
Increase (decrease) in net assets.............................................
Operations:...................................................................
Net investment income........................................................ $ 289,475 $ 289,046 $ 288,663
Realized gain (loss) on Bond sale or redemption.............................. -- 1,187 805
Net change in unrealized appreciation (depreciation) of Bonds................ 76,209 151,611 (127,975)
Net increase (decrease) in net assets resulting from operations.............. 365,684 441,844 161,493
Distributions to Unitholders from:............................................
Net investment income........................................................ (290,744) (290,063) (287,286)
Bonds sale or redemption proceeds............................................ -- -- --
Redemption of Units (note 4).................................................. (5,187) (4,230) (8,757)
Total increase (decrease).................................................... 69,753 147,551 (134,550)
Net asset value to Unitholders................................................
Beginning of period.......................................................... 4,178,711 4,248,464 4,396,015
End of period (including undistributed net investment income of $114,012,
$112,995 and $114,372, respectively).......................................... $ 4,248,464 $ 4,396,015 $ 4,261,465
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
PENNSYLVANIA INSURED MUNICIPALS INCOME TRUST, SERIES 80
Statements of Operations
Years ended May 31,
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Investment income.................................................
Interest income.................................................. $ 441,484 $ 441,346 $ 440,796
Expenses.........................................................
Trustee fees and expenses........................................ 8,659 8,544 8,353
Evaluator fees................................................... 1,461 2,852 2,209
Insurance expense................................................ 5,055 5,055 5,055
Supervisory fees................................................. 1,804 615 1,444
Total expenses................................................... 16,979 17,066 17,061
Net investment income............................................ 424,505 424,280 423,735
Realized gain (loss) from Bond sale or redemption.................
Proceeds......................................................... -- 10,811 --
Cost............................................................. -- 8,852 --
Realized gain (loss)............................................. -- 1,959 --
Net change in unrealized appreciation (depreciation) of Bonds..... 107,914 290,187 (223,620)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS... $ 532,419 $ 716,426 $ 200,115
</TABLE>
<TABLE>
Statements of Changes in Net Assets
Years ended May 31,
<CAPTION>
.............................................................................. 1992 1993 1994
<S> <C> <C> <C>
Increase (decrease) in net assets.............................................
Operations:...................................................................
Net investment income........................................................ $ 424,505 $ 424,280 $ 423,735
Realized gain (loss) on Bond sale or redemption.............................. -- 1,959 --
Net change in unrealized appreciation (depreciation) of Bonds................ 107,914 290,187 (223,620)
Net increase (decrease) in net assets resulting from operations.............. 532,419 716,426 200,115
Distributions to Unitholders from:............................................
Net investment income........................................................ (424,336) (424,713) (423,127)
Bonds sale or redemption proceeds............................................ -- -- --
Redemption of Units (note 4).................................................. (8,253) (5,449) (10,572)
Total increase (decrease).................................................... 99,830 286,264 (233,584)
Net asset value to Unitholders................................................
Beginning of period.......................................................... 6,140,206 6,240,036 6,526,300
End of period (including undistributed net investment income of $153,713,
$153,280 and $153,888, respectively).......................................... $ 6,240,036 $ 6,526,300 $ 6,292,716
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
OREGON INVESTORS' QUALITY TAX-EXEMPT TRUST, SERIES 39
Statements of Operations
Years ended May 31,
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Investment income.................................................
Interest income.................................................. $ 148,705 $ 148,705 $ 144,053
Expenses.........................................................
Trustee fees and expenses........................................ 3,824 3,732 3,628
Evaluator fees................................................... 461 941 845
Supervisory fees................................................. 638 218 511
Total expenses................................................... 4,923 4,891 4,984
Net investment income............................................ 143,782 143,814 139,069
Realized gain (loss) from Bond sale or redemption.................
Proceeds......................................................... -- -- 70,000
Cost............................................................. -- -- 62,825
Realized gain (loss)............................................. -- -- 7,175
Net change in unrealized appreciation (depreciation) of Bonds..... 78,688 68,565 (37,639)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS... $ 222,470 $ 212,379 $ 108,605
</TABLE>
<TABLE>
Statements of Changes in Net Assets
Years ended May 31,
<CAPTION>
..................................................................................... 1992 1993 1994
<S> <C> <C> <C>
Increase (decrease) in net assets....................................................
Operations:..........................................................................
Net investment income............................................................... $ 143,782 $ 143,814 $ 139,069
Realized gain (loss) on Bond sale or redemption..................................... -- -- 7,175
Net change in unrealized appreciation (depreciation) of Bonds....................... 78,688 68,565 (37,639)
Net increase (decrease) in net assets resulting from operations..................... 222,470 212,379 108,605
Distributions to Unitholders from:...................................................
Net investment income............................................................... (144,015) (143,937) (140,039)
Bonds sale or redemption proceeds................................................... -- -- (67,370)
Redemption of Units (note 4)......................................................... -- (2,227) (5,522)
Total increase (decrease)........................................................... 78,455 66,215 (104,326)
Net asset value to Unitholders.......................................................
Beginning of period................................................................. 2,218,014 2,296,469 2,362,684
End of period (including undistributed net investment income of $38,794, $38,671
and $37,701, respectively)........................................................... $ 2,296,469 $ 2,362,684 $ 2,258,358
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
SOUTH CAROLINA INVESTORS' QUALITY TAX-EXEMPT TRUST, SERIES 34
Statements of Operations
Years ended May 31,
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Investment income.................................................
Interest income.................................................. $ 234,375 $ 233,065 $ 228,686
Expenses.........................................................
Trustee fees and expenses........................................ 5,139 4,970 4,835
Evaluator fees................................................... 611 1,245 1,123
Supervisory fees................................................. 939 317 739
Total expenses................................................... 6,689 6,532 6,697
Net investment income............................................ 227,686 226,533 221,989
Realized gain (loss) from Bond sale or redemption.................
Proceeds......................................................... -- 39,448 55,275
Cost............................................................. -- 38,141 54,488
Realized gain (loss)............................................. -- 1,307 787
Net change in unrealized appreciation (depreciation) of Bonds..... 103,722 85,515 (105,849)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS... $ 331,408 $ 313,355 $ 116,927
</TABLE>
<TABLE>
Statements of Changes in Net Assets
Years ended May 31,
<CAPTION>
..................................................................................... 1992 1993 1994
<S> <C> <C> <C>
Increase (decrease) in net assets....................................................
Operations:..........................................................................
Net investment income............................................................... $ 227,686 $ 226,533 $ 221,989
Realized gain (loss) on Bond sale or redemption..................................... -- 1,307 787
Net change in unrealized appreciation (depreciation) of Bonds....................... 103,722 85,515 (105,849)
Net increase (decrease) in net assets resulting from operations..................... 331,408 313,355 116,927
Distributions to Unitholders from:...................................................
Net investment income............................................................... (227,929) (227,291) (222,751)
Bonds sale or redemption proceeds................................................... -- -- --
Redemption of Units (note 4)......................................................... -- (46,289) (60,471)
Total increase (decrease)........................................................... 103,479 39,775 (166,295)
Net asset value to Unitholders.......................................................
Beginning of period................................................................. 3,218,417 3,321,896 3,361,671
End of period (including undistributed net investment income of $58,710, $57,952
and $57,190, respectively)........................................................... $ 3,321,896 $ 3,361,671 $ 3,195,376
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
(IM-IT and QUALITY MULTI-SERIES 54)
INSURED MUNICIPALS INCOME TRUST
INTERMEDIATE
PORTFOLIO as of May 31, 1994
_________________________________________________________________________________________________________________________________
<CAPTION>
May 31,
1994
Port- Redemption Market
folio Aggregate Name of Issuer, Title, Interest Rate snd Maturity Rating Feature Value
Item Principal Date (Note 2) (Note 2) (Note 1)
<S> <C> <C> <C> <C> <C>
A $ 590,000 County of Cass, North Dakota Hospital
FacilitiesRevenue Bonds (St. Luke's Hospitals of
Fargo Project) Series 1986 100M-6.600% Due 06/01/96 A+ 102,080
490M-6.800% Due 06/01/97 A+ $ 507,880
B 260,000 County of Montgomery, Ohio Hospital FacilitiesRevenue
Refunding Bonds, Series1987 (Dayton Osteopathic
Hospital Project) 6.800% Due 06/01/96 BBB 266,136
C 110,000 City of Athens, Texas Water and Sewer RevenueBonds
(AMBAC Indemnity Insured) 7.500% Due 07/01/96 AAA 115,584
D - 0 - City of Loveland, Colorado Health Care
FacilityRefunding Revenue Bonds (The Evangelical
Lutheran Good Samaritan Society Project) Series 1987
(AMBAC Indemnity Insured) 7.300% Due 09/01/96 - 0 -
E - 0 - The Hospital Authority of Hall County and The City
ofGainesville (Georgia) Revenue Anticipation
Certificates, Series 1985 (BIG Insured) 8.400% Due
10/01/96 - 0 -
F - 0 - City of Wichita, Kansas Hospital
FacilitiesImprovement and Refunding Revenue Bonds
(St. Francis Regional Medical Center Inc.) MBIA
Insured 7.200% Due 10/01/96 - 0 -
G 450,000 Michigan State General Obligation Bonds (Water
Resources Series III) 0.050% Due 01/01/97 AA 378,405
H 260,000 Denton, Texas Health Facilities Development
Corporation, Health Facilities Refunding Revenue
Bonds (The Evangelical Lutheran Good Samaritan
Society Project) Series 1987 (AMBAC Indemnity
Insured) 125M-7.600% Due 03/01/97 135M-7.800% Due AAA 133,121
03/01/98 AAA 1997 @ 100 143,559
I 400,000 Palm Beach County (Florida) Solid Waste
AuthorityRevenue Bonds, Series 1984 7.900% Due
07/01/97 A 431,020
J 700,000 Municipality of Anchorage, Alaska 1985B
GeneralObligation General Purpose Bonds 8.700% Due
08/01/97 A 1995 @ 102.5 739,088
K 500,000 City of New Orleans, Louisiana Public
ImprovementBonds, Issue of 1987 7.000% Due 10/01/97 A- 529,930
L 200,000 Cameron County, Texas Fresh Water Supply DistrictNo.
1 Unlimited Tax Refunding Series 1985 B (BIG Insured)
9.250% Due 03/01/98 AAA 1997 @ 100 222,240
M 145,000 Wisconsin Housing and Economic Development Authority
Home Ownership Revenue Bonds, 1987 Series A 7.700%
Due 03/01/98 AA 1997 @ 103 146,072
N $ 455,000 State of Louisiana General Obligation Bonds, Series
1987 8.000% Due 05/01/98 A 1997 @ 102 $ 500,054
O 120,000 Metropolitan Fair and Exposition Authority
(Illinois)Dedicated State Tax Revenue Bonds 7.600%
Due 06/01/98 A+ 1996 @ 102 126,576
$ 4,190,000 $ 4,341,745
</TABLE>
The accompanying notes are an integral part of this statement.
<TABLE>
(IM-IT and QUALITY MULTI-SERIES 54)
MICHIGAN INSURED MUNICIPALS INCOME TRUST
PORTFOLIO as of May 31, 1994
________________________________________________________________________________________________________________________________
<CAPTION>
May 31,
1994
Port- Redemption Market
folio Aggregate Name of Issuer, Title, Interest Rate and Maturity Rating Feature Value
Item Principal Date (Note 2) (Note 2) (Note 1)
<S> <C> <C> <C> <C> <C> <C>
A $ 500,000 City of Detroit, Michigan Sewage Disposal
SystemRevenue Refunding Bonds, Series 1987 A- 1997 @ 102 $ 277,720
250M-8.250% Due 07/01/05 250M-8.000% Due 07/01/08 A- 1997 @ 102 275,943
B 250,000 Michigan South Central Power Agency Power Supply
System Revenue Refunding Bonds, 1986 Series (AMBAC 1996 @ 100
Indemnity Insured) 5.000% Due 11/01/09 AAA 2007 @ 100 S.F. 220,652
C 100,000 Michigan State Hospital Finance Authority Hospital
Revenue Refunding Bonds, (Sisters of Mercy Health
Corporation) Series G (FGIC Insured) 7.000% Due
07/01/10 AAA 1996 @ 102 106,126
D 700,000 Michigan State Hospital Finance Authority
HospitalRevenue Refunding Bonds (Edward W. Sparrow
Hospital) Series 1985 (MBIA Insured) 8.750% Due
06/01/11 AAA 1995 @ 102 741,433
E 350,000 The City of Grand Haven, Michigan, ElectricSystem
Revenue Refunding Bonds, 1986 Series (BIG Insured)
6.500% Due 07/01/11 AAA 1995 @ 101 360,455
F 600,000 Michigan Public Power Agency Belle River Project
Refunding Revenue Bonds, 1986 Series (AMBAC
Indemnity Insured) 7.250% Due 01/01/12 AAA 1996 @ 102 631,848
G 675,000 Michigan Municipal Bond Authority 1987 Local
Government Refunding Bonds, Series A (AMBAC 1997 @ 102
Indemnity Insured) 8.100% Due 11/01/12 AAA 1999 @ 100 S.F. 716,802
H 250,000 State of Michigan Comprehensive
TransportationRefunding Bonds, Series1986-II 1996 @ 100
6.000% Due 02/01/14 AA- 2012 @ 100 S.F. 241,773
I 490,000 City of Kalamazoo (Michigan) Hospital
FinanceAuthority Hospital Revenue Improvement and
Refunding Bonds (Borgess Medical Center), Series
1985 (FGIC Insured) 9.125% Due 01/01/16 AAA 1995 @ 102 522,889
$ 3,915,000 $ 4,095,641
</TABLE>
The accompanying notes are an integral part of this statement.
<TABLE>
(IM-IT and QUALITY MULTI-SERIES 54)
MINNESOTA INSURED MUNICIPALS INCOME TRUST
PORTFOLIO as of May 31, 1994
__________________________________________________________________________________________________________________________________
<CAPTION>
May 31,
1994
Port- Redemption Market
folio Aggregate Name of Issuer, Title, Interest Rate and Maturity Rating Feature Value
Item Principal Date (Note 2) (Note 2) (Note 1)
<S> <C> <C> <C> <C> <C>
A $ 250,000 Minneapolis Community Development Agency and The
Housing and Redevelopment Authority of The City
of Saint Paul, Minnesota Home Ownership Mortgage
Revenue Bonds (Family Housing Program Phase II) 1996 @ 102
7.750% Due 07/01/06 A+ 2000 @ 100 S.F. $ 259,285
B 190,000 Regents of The University of Minnesota
GeneralObligation Refunding Bonds, Series1986 A
7.750% Due 02/01/10 AAA 1996 @ 102 202,008
C 450,000 City of Minneapolis, Minnesota, Convention
CenterSales Tax Revenue Bonds, Series1986 (AMBAC
Indemnity Insured) 7.750% Due 04/01/11 AAA 1996 @ 102 480,758
D 250,000 Western Minnesota Municipal Power Agency,
PowerSupply Revenue Refunding Bonds, 1987 Series 1997 @ 102
A 7.000% Due 01/01/13 A 2008 @ 100 S.F. 254,290
E 520,000 City of Minneapolis, Minnesota, General
ObligationTax Increment Refunding Bonds of 1987
6.500% Due 03/01/13 AAA 1997 @ 101 545,844
F 250,000 Southern Minnesota Municipal Power Agency
PowerSupply System Revenue Bonds, Series1986 B
7.000% Due 01/01/16 AAA 1996 @ 102 262,322
G 500,000 Minnesota Housing Finance Agency Single
FamilyMortgage Bonds, 1987 Series A 8.500% Due 1997 @ 102
02/01/17 AA+ 2015 @ 100 S.F. 498,910
H 500,000 City of Minneapolis, Minnesota, Hospital
FacilitiesRevenue Bonds (Lifespan Inc Issue) 1997 @ 102
Series1987-A 8.125% Due 04/01/17 A+ 2008 @ 100 S.F. 528,550
I 30,000 Minneapolis Community Development Agency and
Housing and Redevelopment Authority of The City
of Saint Paul, Minnesota Home Ownership Mortgage
Revenue Bonds (Family Housing Program Phase II) 1996 @ 102
7.875% Due 07/01/17 AA 2007 @ 100 S.F. 30,555
$ 2,940,000 $ 3,062,522
</TABLE>
The accompanying notes are an integral part of this statement.
<TABLE>
(IM-IT and QUALITY MULTI-SERIES 54)
OHIO INSURED MUNICIPALS INCOME TRUST
PORTFOLIO as of May 31, 1994
__________________________________________________________________________________________________________________________________
<CAPTION>
May 31,
1994
Port- Redemption Market
folio Aggregate Name of Issuer, Title, Interest Rate and Maturity Rating Feature Value
Item Principal Date (Note 2) (Note 2) (Note 1)
<S> <C> <C> <C> <C> <C>
A $ 500,000 County of Richland, Ohio Hospital Refunding
Revenue Bonds, Series 1985 (Mansfield General
Hospital) AMBAC Indemnity Insured 9.375% Due 1995 @ 102
12/01/09 AAA 2001 @ 100 S.F. $ 529,755
B 350,000 Ohio Water Development Authority, State of Ohio
Water Development Revenue Bonds, Series 1986 A
(AMBAC Indemnity Insured) 7.750% Due 12/01/09 AAA 1996 @ 103 378,959
C 640,000 City of Columbus, Ohio General Obligation
Refunding Bonds, Series B 7.700% Due 05/01/10 AA+ 1996 @ 102 683,590
D 500,000 State of Ohio, Ohio Building Authority State
Correctional Facilities Refunding Bonds, 1986 1996 @ 100
Series B 5.000% Due 09/01/12 A+ 2010 @ 100 S.F. 428,625
E 750,000 County of Clermont, Ohio, Waterworks System
Funding and Refunding Revenue Bonds, Series 1987,
Clermont County Sewer District (AMBAC Indemnity
Insured) 8.200% Due 12/01/12 AAA 1997 @ 102 844,088
F 700,000 County of Miami, Ohio, Hospital Facilities
Revenue Refunding Bonds, Series 1987 A (Upper 1997 @ 102
Valley Medical Center, Inc.) 8.375% Due 05/01/13 A- 1997 @ 100 S. F. 744,534
G 100,000 County of Lucas, Ohio, Hospital Refunding Revenue
Bonds, Series 1986 (The Toledo Hospital) MBIA 1996 @ 102
Insured 7.000% Due 10/01/14 AAA 2002 @ 100 S.F. 102,786
H 500,000 City of Cleveland, Ohio, Waterworks
ImprovementFirst Mortgage Refunding Revenue
Bonds, Series D, 1986 (AMBAC Indemnity Insured) 1997 @ 100
5.000% Due 01/01/15 AAA 2013 @ 100 S.F. 434,585
$ 4,040,000 $ 4,146,922
</TABLE>
The accompanying notes are an integral part of this statement.
<TABLE>
(IM-IT and QUALITY MULTI-SERIES 54)
PENNSYLVANIA INSURED MUNICIPALS INCOME TRUST
PORTFOLIO as of May 31, 1994
_________________________________________________________________________________________________________________________________
<CAPTION>
May 31,
1994
Port- Redemption Market
folio Aggregate Name Of Issuer, Title, Interest Rate And Rating Feature Value
Item Principal Maturity Date (Note 2) (Note 2) (Note 1)
<S> <C> <C> <C> <C> <C>
A $ 490,000 Pennsylvania Housing Finance Agency Single
Family Mortgage Revenue Bonds, Series K 1996 @ 102
7.375% Due 04/01/11 AA 1996 @ 100 S.F. $ 493,214
B 170,000 The Erie Parking Authority Erie County,
Pennsylvania Guaranteed Parking Revenue
Refunding Bonds, 1987 Series (AMBAC
Indemnity Insured) 1997 @ 100
6.875% Due 09/01/11 AAA 2006 @ 100 S.F. 173,705
C 955,000 City of Coatesville Authority Chester County,
Pennsylvania Water Revenue Bonds Series A of
1987 (AMBAC Indemnity Insured) 1995 @ 100
5.000% Due 10/01/11 AAA 2003 @ 100 S.F. 820,784
D 510,000 Allegheny County Hospital Development
Authority (Pennsylvania) Hospital Revenue
Bonds, Series 1985 (St. Francis Medical
Center Project) AMBAC Indemnity Insured
8.125% Due 06/01/13 AAA 1996 @ 102 551,142
E 1,000,000 Lehigh County General Purpose Authority
(Commonwealth of Pennsylvania) Hospital
Revenue Refunding Bonds, Series of 1987
(Horizon Health System, Inc.)
8.250% Due 07/01/13 NR 1997 @ 101 1,102,190
F 1,000,000 The Pittsburgh (Pennsylvania) Water and
Sewer Authority, Water and Sewer System
Revenue Refunding Bonds, Series of 1986
(FGIC Insured)
7.250% Due 09/01/14** AAA 1,085,610
G 950,000 City of Philadelphia, Pennsylvania Gas Works
Revenue Bonds, Eighth Series (AMBAC
Indemnity Insured)
8.750% Due 05/15/15 AAA 1995 @ 102.5 1,008,738
H 385,000 Pennsylvania Turnpike Commission, Pennsylvania
Turnpike Revenue Bonds, Series A of 1986
7.875% Due 12/01/15 AAA 1996 @ 102 S.F. 420,270
I 465,000 Warwick Township Municipal Authority (Lancaster
County, Pennsylvania) Guaranteed Sewer
Revenue Bonds -- Series of 1986 (AMBAC
Indemnity Insured)
7.600% Due 05/01/20 AAA 1996 @ 102 496,722
$ 5,925,000 $ 6,152,375
</TABLE>
The accompanying notes are an integral part of this statement.
**The issuer of these Bonds has placed funds or securities in escrow against
payment of the issue on the date or dates indicated.
<TABLE>
(IM-IT and QUALITY MULTI-SERIES 54)
OREGON INVESTORS' QUALITY TAX-EXEMPT TRUST
PORTFOLIO as of May 31, 1994
_________________________________________________________________________________________________________________________________
<CAPTION>
May 31,
1994
Port- Redemption Market
folio Aggregate Name of Issuer, Title, Interest Rate and Maturity Rating Feature Value
Item Principal Date (Note 2) (Note 2) (Note 1)
<S> <C> <C> <C> <C> <C>
A $ 100,000 Oregon State Higher Education Facility
GeneralObligation Bonds, Series 1968 0.100% Due
10/15/98 AA- 1993 @ 100 $ 75,656
B 245,000 City of Tigard, Washington County, Oregon
GeneralObligation City Building Bonds 6.000% Due
06/01/04 NR 1996 @ 100 249,915
C 250,000 Marion County School District No. 24J(SalemKeizer)
Marion and Polk Counties, Oregon Advance Refunding
General Obligation Bonds, Series 1987 6.000% Due
11/01/04 AAA 1994 @ 100 250,665
D 90,000 School District No. 1J, Multnomah County,
Oregon,The Portland Public Schools Limited Tax
General Obligation Refunding Bonds, Series 1987
6.800% Due 12/15/04 AA- 1997 @ 100 92,435
E 500,000 Port of Umpqua Oregon Annual Tender
PollutionControl Revenue Bonds 1985 Series A
International Paper Company Project 6.600% Due
03/15/05 A- 1997 @ 102 512,195
F 500,000 City of Eugene, Oregon, Trojan Nuclear
ProjectRevenue Bonds, Series of 1977 5.900% Due 1994 @ 100.5
09/01/09 AA 1999 @ 100 S.F. 486,490
G 200,000 City of Albany, Linn and Benton Counties,
Oregon,Advance Refunding General Obligation Water
Bonds, Series 1987 (MBIA Insured) 6.625% Due 1995 @ 100
11/01/09 AAA 2001 @ 100 S.F. 200,556
H - 0 - State of Oregon Housing Finance Revenue
Bonds(Assisted or Insured Multi-Unit Program) 1978
Series A 7.250% Due 07/01/10 - 0 -
I 340,000 State of Oregon General Obligation VeteransWelfare 1995 @ 102
Bonds, Series 72 9.400% Due 10/01/15 AA- 2012 @ 100 S.F. 358,254
$ 2,225,000 $ 2,226,166
</TABLE>
The accompanying notes are an integral part of this statement.
<TABLE>
(IM-IT and QUALITY MULTI-SERIES 54)
SOUTH CAROLINA INVESTORS' QUALITY TAX-EXEMPT TRUST
PORTFOLIO as of May 31, 1994
____________________________________________________________________________________________________________________________________
<CAPTION>
May 31,
1994
Port- Redemption Market
folio Aggregate Name of Issuer, Title, Interest Rate and Maturity Rating Feature Value
Item Principal Date (Note 2) (Note 2) (Note 1)
<S> <C> <C> <C> <C> <C>
A $ 500,000 Berkeley County, South Carolina, Water and Sewer
System Refunding and Improvement Revenue Bonds,
Series of 1987 (MBIA Insured) 8.200% Due 06/01/10 AAA 1997 @ 102 $ 555,000
B 150,000 Pickens County and Richland County, South Carolina
Hospital Revenue Refunding Bonds, South Carolina
Baptist Hospital Issue, Series 1986 7.250% Due
08/01/10 A+ 1996 @ 102 159,923
C 200,000 South Carolina State Housing Authority
SingleFamily Mortgage Purchase Bonds (Federally
Insured or Guaranteed Mortgage Loans) 1979 Series 1994 @ 102
B 7.000% Due 07/01/11 AA 1999 @ 100 S.F. 201,996
D 385,000 Orangeburg and Calhoun Counties (South
Carolina)Hospital Facilities Refunding Revenue
Bonds, Series 1985 (Orangeburg-Calhoun Regional
Hospital Project) 9.500% Due 10/01/11 AAA 1995 @ 102 417,671
E 100,000 Piedmont Municipal Power Agency (South
Carolina)Electric Revenue Bonds 1986 Refunding 1996 @ 102
Series A (FGIC Insured) 7.000% Due 01/01/13 AAA 2006 @ 100 S.F. 102,125
F 400,000 City of Charleston, South Carolina, Waterworks
andSewer System Refunding Revenue Bonds, Series
1986 7.500% Due 01/01/14 AAA 1996 @ 102 422,748
G 375,000 The University of South Carolina Student and
Faculty Housing Revenue Bonds, Series 1987 7.150%
Due 06/01/16 A* 1997 @ 102 385,972
H 400,000 Charleston County, South Carolina,
HospitalFacilities Revenue Parity Bonds, Series
1986 (Roper Hospital Project) 6.750% Due 10/01/16 . AAA 1997 @ 102 430,332
I 250,000 Town of Mount Pleasant, South Carolina,
SewerSystem Improvement and Refunding
RevenueBonds, Series 1987 (MBIA Insured) 7.375%
Due 12/01/17 AAA 1996 @ 102 269,970
J 200,000 South Carolina Public Service Authority (Santee
Cooper) Electric System Expansion Revenue Bonds, 1996 @ 102
1986 Refunding Series C 7.300% Due 07/01/21 A+ 2013 @ 100 S.F. 205,296
$ 2,960,000 $ 3,151,033
</TABLE>
The accompanying notes are an integral part of this statement.
INSURED MUNICIPALS INCOME TRUST AND INVESTORS' QUALITY TAX-EXEMPT TRUST,
MULTI-SERIES 54 Notes to Financial Statements May 31, 1992, 1993 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Security Valuation - Tax-exempt municipal securities are stated at the value
determined by the Evaluator, American Portfolio Evaluation Services (a
division of a subsidiary of the Sponsor). The Evaluator may determine the
value of the Bonds (1) on the basis of current bid prices of the Bonds
obtained from dealers or brokers who customarily deal in Bonds comparable to
those held by each of the Trusts, (2) on the basis of bid prices for
comparable Bonds, (3) by determining the value of the Bonds by appraisal or
(4) by any combination of the above. The IM-IT Intermediate, Michigan IM-IT,
Minnesota IM-IT, Ohio IM-IT and Pennsylvania IM-IT Trusts maintain insurance
which provides for the timely payment when due, of all principal and interest
on Bonds owned by it. Except in cases in which Bonds are in default, or
significant risk of default, the valuation of the Bonds in such Trusts does
not include any value attributable to this insurance feature since the
insurance terminates as to any Bond at the time of its disposition.
Security Cost - The original cost to each of the Trusts (IM-IT Intermediate,
Michigan IM-IT, Minnesota IM-IT, Ohio IM-IT, Pennsylvania IM-IT, Oregon
Quality and South Carolina Quality) was based on the determination by
Interactive Data Services, Inc. of the offering prices of the Bonds on the
date of deposit (June 4, 1987). Since the valuation is based upon the bid
prices, such Trusts (IM-IT Intermediate, Michigan IM-IT, Minnesota IM-IT, Ohio
IM-IT, Pennsylvania IM-IT, Oregon Quality and South Carolina Quality)
recognized downward adjustments of $46,539, $38,819, $29,894, $41,711,
$62,846, $22,274 and $30,274, respectively, on the date of deposit resulting
from the difference between the bid and offering prices. These downward
adjustments were included in the aggregate amount of unrealized appreciation
(depreciation) reported in the financial statements for each Trust for the
period ended May 31, 1988.
Unit Valuation - The redemption price per Unit is the pro rata share of each
Unit in each Trust based upon (1) the cash on hand in such Trust or monies in
the process of being collected, (2) the Bonds in such Trust based on the value
determined by the Evaluator and (3) interest accrued thereon, less accrued
expenses of the Trust, if any.
Federal Income Taxes - The Trust is not taxable for Federal income tax
purposes. Each Unitholder is considered to be the owner of a pro rata portion
of such Trust and, accordingly, no provision has been made for Federal income
taxes.
Other - The financial statements are presented on the accrual basis of
accounting. Any realized gains or losses from securities transactions are
reported on an identified cost basis.
NOTE 2 - PORTFOLIO
Ratings - The source of all ratings, exclusive of those designated N/R or * is
Standard & Poor's Corporation. Ratings marked * are by Moody's Investors
Service, Inc. as these Bonds are not rated by Standard & Poor's Corporation.
N/R indicates that the Bond is not rated by Standard & Poor's Corporation or
Moody's Investors Service, Inc. The ratings shown represent the latest
published ratings of the Bonds. For a brief description of rating symbols and
related meanings, see "Description of Securities Ratings"in Part Two.
Redemption Feature - There is shown under this heading the year in which each
issue of Bonds is initially or currently callable and the call price for that
year. Each issue of Bonds continues to be callable at declining prices
thereafter (but not below par value) except for original issue discount Bonds
which are redeemable at prices based on the issue price plus the amount of
original issue discount accreted to redemption date plus, if applicable, some
premium, the amount of which will decline in subsequent years. "S.F."
indicates a sinking fund is established with respect to an issue of Bonds.
Redemption pursuant to call provisions generally will, and redemption pursuant
to sinking fund provisions may, occur at times when the redeemed Bonds have an
offering side evaluation which represents a premium over par. To the extent
that the Bonds were deposited in the Trust at a price higher than the price at
which they are redeemed, this will represent a loss of capital when compared
with the original Public Offering Price of the Units. Conversely, to the
extent that the Bonds were acquired at a price lower than the redemption
price, this will represent an increase in capital when compared with the
original Public Offering Price of the Units. Distributions will generally be
reduced by the amount of the income which would otherwise have been paid with
respect to redeemed Bonds and there will be distributed to Unitholders the
principal amount in excess of $1 per Unit semi-annually and any premium
received on such redemption. However, should the amount available for
distribution in the Principal Account exceed $10.00 per Unit, the Trustee will
make a special distribution from the Principal Account on the next succeeding
monthly distribution date to holders of record on the related monthly record
date. The Estimated Current Return in this event may be affected by such
redemptions. For the Federal tax effect on Unitholders of such redemptions and
resultant distributions, see paragraph (3) under "Federal Tax Status of
the Trusts"and "Annual Unit Income and Estimated Current Returns"
in Part Two.
NOTE 2--PORTFOLIO (continued)
Insurance - Insurance coverage providing for the timely payment when due of
all principal and interest on the Bonds in IM-IT Intermediate, Michigan IM-IT,
Minnesota IM-IT, Ohio IM-IT and Pennsylvania IM-IT Trusts has been obtained by
the Trusts or by one of the Preinsured Bond Insurers (as indicated in the Bond
name). Such insurance does not guarantee the market value of the Bonds or the
value of the Units. For Bonds covered under the Trust's insurance policy the
insurance is effective only while Bonds thus insured are held in the Trust and
the insurance premium, which is a Trust obligation, is paid on a monthly
basis. The premium for insurance which has been obtained from various
insurance companies by the issuer of the Bond involved is payable by the
issuer. Insurance expense for the period reflects adjustments for redeemed or
sold Bonds.
An Accounting and Auditing Guide issued by the American Institute of Certified
Public Accountants states that, for financial reporting purposes, insurance
coverage of the type acquired by the Trust does not have any measurable value
in the absence of default of the underlying Bonds or indication of the
probability of such default. In the opinion of the Evaluator, there is no
indication of a probable default of Bonds in the portfolio as of the date of
these financial statements.
Unrealized Appreciation and Depreciation - An analysis of net unrealized
appreciation (depreciation) at May 31, 1994 is as follows:
<TABLE>
<CAPTION>
IM-IT Michigan Minnesota
Intermediate IM-IT IM-IT
Trust Trust Trust
<S> <C> <C> <C>
Unrealized Appreciation $ 355,435 $ 333,000 $ 284,448
Unrealized Depreciation (19,828) (21,694) (6,090)
$ 335,607 $ 311,306 $ 278,358
</TABLE>
<TABLE>
<CAPTION>
Ohio Pennsylvania South Carolina
IM-IT IM-IT Oregon Quality Quality
Trust Trust Trust Trust
<S> <C> <C> <C> <C>
Unrealized Appreciation $ 407,811 $ 639,352 $ 347,112 $ 368,151
Unrealized Depreciation (26,125) (13,016) (18,085) (1,883)
$ 381,686 $ 626,336 $ 329,027 $ 366,268
</TABLE>
NOTE 3 - OTHER
Marketability - Although it is not obligated to do so, the Sponsor intends to
maintain a market for Units and to continuously 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. If the supply of Units exceeds demand, or for other business
reasons, the Sponsor may discontinue purchases of Units at such prices. In the
event that a market is not maintained for the Units, a Unitholder desiring to
dispose of his Units may be able to do so only by tendering such Units to the
Trustee for redemption at the redemption price.
Cost to Investors - The cost to original investors was based on the
Evaluator's determination of the aggregate offering price of the Bonds per
Unit on the date of an investor's purchase, plus a sales charge of 4.9% of the
public offering price which is equivalent to 5.152% of the aggregate offering
price of the Bonds for the State Trusts and 3.9% of the public offering price
which is equivalent to 4.058% of the aggregate offering price of the Bonds for
the IM-IT Intermediate Trust. The secondary market cost to investors is based
on the Evaluator's determination of the aggregate bid price of the Bonds per
Unit on the date of an investor's purchase plus a sales charge based upon the
years to average maturity of the Bonds in the portfolio. The sales charge
ranges from 1.5% of the public offering price (1.523% of the aggregate bid
price of the Bonds) for a Trust with a portfolio with less than two years to
average maturity to 5.7% of the public offering price (6.045% of the aggregate
bid price of the Bonds) for a Trust with a portfolio with sixteen or more
years to average maturity.
Compensation of Evaluator - The Evaluator receives a fee for providing
portfolio supervisory services for each of the Trusts ($.25 per Unit, not to
exceed the aggregate cost of the Evaluator for providing such services to all
applicable Trusts). In addition, the Evaluator receives an annual fee for
regularly evaluating each of the Trust's portfolios. Both fees may be adjusted
for increases under the category "All Services Less Rent of Shelter" in the
Consumer Price Index.
NOTE 4 - REDEMPTION OF UNITS
Units were presented for redemption as follows:
<TABLE>
<CAPTION>
Years Ended May 31,
<S> <C> <C> <C>
1992 1993 1994
IM-IT Intermediate Trust 112 228 118
Michigan IM-IT Trust 10 11 61
Minnesota IM-IT Trust 3 3 2
Ohio IM-IT Trust 5 4 8
Pennsylvania IM-IT Trust 8 5 10
Oregon Quality Trust -- 2 5
South Carolina Quality Trust -- 42 55
</TABLE>
NATIONAL AND STATE QUALITY TRUSTS
INVESTORS' QUALITY
TAX-EXEMPT TRUST
PROSPECTUS
Part Two
In the opinion of counsel, interest to each Trust and to Unitholders, with
certain exceptions, is excludable under existing law from gross income for
Federal income taxes. In addition, except for the National Trust, the interest
income of each Trust is, in the opinion of counsel, exempt to the extent
indicated from state and local taxes, when held by residents of the state
where the issuers of Bonds in such Trust are located. Capital gains, if any,
are subject to Federal tax.
INTRODUCTION
The Fund. The objectives of the Fund are Federal and, in the case of a State
Trust, state tax-exempt income and conservation of capital through an
investment in a diversified portfolio of tax-exempt bonds. There is, of
course, no guarantee that the Fund's objectives will be achieved.The Fund
consists of a series of separate National and State unit investment trusts,
some of which may be included in various series of Investors' Quality
Tax-Exempt Trust, Multi-State or Multi-Series. The various trusts collectively
are referred to hereinas the "Trusts". The "National Trusts" include various
series of The First National Dual Series Tax-Exempt Bond Trust (Income Trust),
Investors' Municipal-Yield Trust and Investors' Quality Tax-Exempt Trust and
the other Trusts are collectively referred to herein as the "State Trusts".
Each Trust consists of interest-bearing obligations (the "Bonds" or
"Securities") 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 authority, exempt from all Federal income
tax under existing law. In addition, the interest income of each State Trust
is, in the opinion of counsel, exempt to the extent indicated from state and
local taxes, when held by residents of the state where the issuers of Bonds in
such Trust are located. All the Securities deposited in each Trust were rated
"A" or better by Standard & Poor's Corporation or "A" or better by Moody's
Investors Service, Inc.
Public Offering Price. Units are offered at the Public Offering Price. The
Public Offering Price for "secondary market" sales will be equal to the
aggregate bid price of the Securities in each Trust and cash, if any, in the
Principal Account held or owned by such Trust plus the sales charge referred
to under "Public Offering" plus an amount equal to the accrued interest from
the most recent record date of the Trust to the date of settlement (five
business days after order) less distributions from the Interest Account
subsequent to the most recent record date, if any. In addition, for Insured
Municipals Income Trust and Investors' Quality Tax-Exempt Trust, Multi-Series
213 and subsequent series the Public Offering Price will include Purchased
Interest. If the Securities in each Trust were available for direct purchase
by investors, the purchase price of the Securities would not include the sales
charge included in the Public Offering Price of the Units.
Estimated Current Return and Estimated Long-Term Return. The Estimated Current
Return is calculated by dividing the Estimated Net Annual Interest Income per
Unit by the Public Offering Price. The Estimated Net Annual Interest Income
per Unit will vary with changes in fees and expenses of the Trustee and the
Evaluator and with the principal prepayment, redemption, maturity, exchange or
sale of Securities while the Public Offering Price will vary with changes in
the bid price of the underlying Securities; therefore, there is no assurance
that the present Estimated Current Returns 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
Securities in the Trust and (2) takes into account the expenses and sales
charge associated with each Trust Unit. Since the market values and estimated
retirements of the Securities and the expenses of the Trust will change, there
is no assurance that the present Estimated Long-Term Return will be realized
in the future. Estimated Current Return and Estimated Long-Term Return are
expected to differ because the calculation of Estimated Long-Term Return
reflects the estimated date and amount of principal returned while Estimated
Current Return calculations include only Net Annual Interest Income and Public
Offering Price. Neither rate reflects the true return to Unitholders which is
lower because neither includes the effect of the delay in the first payment to
Unitholders.
NOTE: THIS PROSPECTUS MAY BE USED ONLY WHEN ACCOMPANIED BY PART ONE
Both parts of this 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.
This Prospectus is dated as of the date of the Prospectus Part I accompanying
this Prospectus Part II.
Van Kampen Merritt
DESCRIPTION OF THE FUND
Each series of the Fund was created under the laws of the State of New York
pursuant to a Trust Indenture and Agreement (the "Trust Agreement"), dated the
Date of Deposit, between Van Kampen Merritt Inc., as Sponsor, American
Portfolio Evaluation Services, a division of Van Kampen Merritt Investment
Advisory Corp., as Evaluator, and, except for certain Pennsylvania Trusts (see
"The Trustee"), The Bank of New York, as Trustee, or their respective
predecessors.
The Fund consists of the various series of the National Trust and the State
Trusts, each of which contains a portfolio of interest-bearing obligations
issued by or on behalf of states and territories of the United States, and
political subdivisions and authorities thereof, the interest on which is, in
the opinion of recognized bond counsel to the issuing authorities, excludable
from gross income for Federal income tax under existing law but may be subject
to state and local taxes. All issuers of Securities in a State Trust are
located in the state for which such Trust is named or in United States
territories or possessions and their public authorities; consequently, in the
opinion of recognized bond counsel to such issuers, the related interest
earned on such Securities is exempt to the extent indicated from state and
local taxes of such State. Interest on certain Bonds in the National Quality
AMT Trust will be a preference item for purposes of the alternative minimum
tax. Accordingly, the National Quality AMT Trust may be appropriate only for
investors who are not subject to the alternative minimum tax. Unless otherwise
terminated as provided therein, the Trust Agreement for each Trust will
terminate at the end of the calendar year prior to the fiftieth anniversary of
its execution (except for the Short Term Trusts in which case the termination
date is at the end of the calendar year prior to the sixth anniversary of its
execution). The portfolio of any State Trust or National Quality Trust
consists of Bonds maturing approximately 15 to 40 years from the Date of
Deposit.
Certain of the Bonds in certain of the Trusts are "zero coupon" bonds. Zero
coupon bonds are purchased at a deep discount because the buyer receives only
the right to receive a final payment at the maturity of the bond and does not
receive any periodic interest payments. The effect of owning deep discount
bonds which do not make current interest payments (such as the zero coupon
bonds) is that a fixed yield is earned not only on the original investment but
also, in effect, on all discount earned during the life of such obligation.
This implicit reinvestment of earnings at the same rate eliminates the risk of
being unable to reinvest the income on such obligation at a rate as high as
the implicit yield on the discount obligation, but at the same time eliminates
the holder's ability to reinvest at higher rates in the future. For this
reason, zero coupon bonds are subject to substantially greater price
fluctuations during periods of changing market interest rates than are
securities of comparable quality which pay interest currently. See note (6) in
"Notes to Portfolio" in Part One of this Prospectus.
Each Unit of each Trust represents a fractional undivided interest in the
principal and net income of such Trust. To the extent that any Units of a
Trust are redeemed by the Trustee, the fractional undivided interest in such
Trust represented by each unredeemed Unit will increase, although the actual
interest in such Trust represented by such fraction will remain unchanged.
Units will remain outstanding until redeemed upon tender to the Trustee by
Unitholders, which may include the Sponsor, or until the termination of the
Trust Agreement.
SECURITIES SELECTION
In selecting Securities for the Trusts the following facts, among others, were
considered by the Sponsor: (a) either the Standard & Poor's Corporation rating
of the Securities was in no case less than "A" or the Moody's Investors
Service, Inc. rating of the Securities was in no case less than "A" including
provisional or conditional ratings, respectively, or, if not rated, the
Securities 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 a Trust (see "Description of Securities Ratings"), (b) the prices of the
Securities relative to other bonds of comparable quality and maturity and (c)
the diversification of Securities as to purpose of issue and location of
issuer. Subsequent to the Date of Deposit, a Security may cease to be rated or
its rating may be reduced below the minimum required as of the Date of
Deposit. Neither event requires elimination of such Security from the
portfolio of a Trust but may be considered in the Sponsor's determination as
to whether or not to direct the Trustee to dispose of the Security (see
"Portfolio Administration").
To the best knowledge of the Sponsor, there is no litigation pending as of the
Date of Deposit in respect of any Securities which might reasonably be
expected to have a material adverse effect upon the Fund or any of the Trusts.
At any time after the Date of Deposit, litigation may be initiated on a
variety of grounds with respect to Securities in the Fund. Such litigation,
as, for ex ample, suits challenging the issuance of pollution control revenue
bonds under environmental protection statutes, may affect the validity of such
Securities 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 or will receive opinions of bond counsel to the issuing authorities
of each Security on the date of issuance to the effect that such Securities
have been validly issued and that the interest thereon is exempt from Federal
income tax. In addition, other factors may arise from time to time which
potentially may impair the ability of issuers to meet obligations undertaken
with respect to the Securities.
PORTFOLIO CONCENTRATIONS
Certain of the Bonds in certain of the Trusts may be general obligations of a
governmental entity that are backed by the taxing power of such entity. In
view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. All other Bonds in the Trusts are revenue bonds
payable from the income of a specific project or authority and are not
supported by the issuer's power to levy taxes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Revenue bonds, on the other hand, are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source. There are, of course, 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 of the Trusts are obligations which derive
their payments from mortgage loans. Certain of such housing bonds may be FHA
insured or may be single family mortgage revenue bonds issued for the purpose
of acquiring from originating financial institutions notes secured by
mortgages on residences located within the issuer's boundaries and owned by
persons of low or moderate income. In view of this an investment in such a
Trust should be made with an understanding of the characteristics of such
issuers and the risks which such an investment may entail. Mortgage loans are
generally partially or completely prepaid prior to their final maturities as a
result of events such as sale of the mortgaged premises, default, condemnation
or casualty loss. Because these bonds are subject to extraordinary mandatory
redemption in whole or in part from such prepayments of mortgage loans, a
substantial portion of such bonds will probably be redeemed prior to their
scheduled maturities or even prior to their ordinary call dates. Extraordinary
mandatory redemption without premium could also result from the failure of the
originating financial institutions to make mortgage loans in sufficient
amounts within a specified time period. Additionally, unusually high rates of
default on the underlying mortgage loans may reduce revenues available for the
payment of principal of or interest on such mortgage revenue bonds. These
bonds were issued under Section 103A of the Internal Revenue Code, which
Section contains certain requirements relating to the use of the proceeds of
such bonds in order for the interest on such bonds to retain its tax-exempt
status. In each case the issuer of the bonds has covenanted to comply with
applicable requirements and bond counsel to such issuer has issued an opinion
that the interest on the bonds is exempt from Federal income tax under
existing laws and regulations. Certain issuers of housing bonds have
considered various ways to redeem bonds they have issued prior to the stated
first redemption dates for such bonds. In connection with the housing bonds
held by the Trust, the Sponsor has not had any direct communications with any
of the issuers thereof, but at the Date of Deposit it was not aware that any
of the respective issuers of such Bonds were actively considering the
redemption of such Bonds prior to their respective stated initial call dates.
Certain of the Bonds in certain of the Trusts are health care revenue bonds.
In view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. Ratings of bonds issued for health care facilities
are often based on feasibility studies that contain projections of occupancy
levels, revenues and expenses. A facility's gross receipts and net income
available for debt service will be affected by future events and conditions
including, among other things, demand for services and the ability of the
facility to provide the services required, physicians' confidence in the
facility, management capabilities, competition with other health care
facilities, efforts by insurers and governmental agencies to limit rates,
legislation establishing state rate-setting agencies, expenses, the cost and
possible unavailability of malpractice insurance, the funding of Medicare,
Medicaid and other similar third party payor programs, government regulation
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. Such
adverse changes also may adversely affect the ratings of Securities held in
the portfolios of the Fund.
Certain of the Bonds in certain of the Trusts are obligations of public
utility issuers, including those selling wholesale and retail electric power
and gas. In view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. General problems of such issuers would include the
difficulty in financing large construction programs in an inflationary period,
the limitations on operations and increased costs and delays attributable to
environmental considerations, the difficulty of the capital market in
absorbing utility debt, the difficulty in obtaining fuel at reasonable prices
and the effect of energy conservation. 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 portfolio to make
payments of principal and/or interest on such Bonds.
Certain of the Bonds in certain of the Trusts are industrial revenue bonds
("IRBs"). In view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. IRBs have generally been issued under bond
resolutions pursuant to which the revenues and receipts payable under the
arrangements with the operator of a particular project have been assigned and
pledged to purchasers. In some cases, a mortgage on the underlying project may
have been granted as security for the IRBs. Regardless of the structure,
payment of IRBs is solely dependent upon the creditworthiness of the corporate
operator of the project or corporate guarantor. Corporate operators or
guarantors may be affected by many factors which may have an adverse impact on
the credit quality of the particular company or industry. These include
cyclicality of revenues and earnings, regulatory and environmental
restrictions, litigation resulting from accidents or environmentally-caused
illnesses, extensive competition and financial deterioration resulting from a
corporate restructuring pursuant to a leveraged buy-out, takeover or
otherwise. Such a restructuring may result in the operator of a project
becoming highly leveraged which may impact on such operator's creditworthiness
which in turn would have an adverse impact on the rating and/or market value
of such Bonds. Further, the possibility of such a restructuring may have an
adverse impact on the market for and consequently the value of such Bonds,
even though no actual takeover or other action is ever contemplated or
effected.
Certain of the Bonds in certain of the Trusts may be obligations of issuers
whose revenues are derived from the sale of water and/or sewerage services. In
view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. Such bonds are generally payable from user fees. The
problems of such issuers include the ability to obtain timely and adequate
rate increases, population decline resulting in decreased user fees, the
difficulty of financing large construction programs, the limitations on
operations and increased costs and delays attributable to environmental
considerations, the increasing difficulty of obtaining or discovering new
supplies of fresh water, the effect of conservation programs and the impact of
"no-growth" zoning ordinances. All of such issuers have been experiencing
certain of these problems in varying degrees.
Certain of the Bonds in certain of the Trusts may be obligations that are
secured by lease payments of a governmental entity (hereinafter called "lease
obligations"). In view of this an investment in such a Trust should be made
with an understanding of the characteristics of such issuers and the risks
which such an investment may entail. Although the lease obligations do not
constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation lease is ordinarily
backed by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the municipality has no
obligation to make lease payments in future years unless money is appropriated
for such purpose on a yearly basis. A governmental entity that enters into
such a lease agreement cannot obligate future governments to appropriate for
and make lease payments but covenants to take such action as is necessary to
include any lease payments due in its budgets and to make the appropriations
therefor. A governmental entity's failure to appropriate for and to make
payments under its lease obligation could result in insufficient funds
available for payment of the obligations secured thereby. Although "non-
appropriation" lease obligations are secured by the leased property,
disposition of the property in the event
of foreclosure might prove difficult.
Certain of the Bonds in certain of the Trusts 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. In view of this an investment in such a Trust should be made with
an understanding of the characteristics of such issuers and the risks which
such an investment may entail. General problems relating to school bonds
include litigation contesting the State constitutionality of financing public
education in part from ad valorem taxes, thereby creating a disparity in
educational funds available to schools in wealthy areas and schools in poor
areas. Litigation or legislation on this issue may affect the sources of funds
available for the payment of school bonds in the Trusts. General problems
relating to college and university obligations include the prospect of a
declining percentage of the population consisting of "college" age
individuals, possible inability to raise tuitions and fees sufficiently to
cover increased operating costs, the uncertainty of continued receipt of
Federal grants and state funding, and government legislation or regulations
which may adversely affect the revenues or costs of such issuers. All of such
issuers have been experiencing certain of these problems in varying degrees.
Certain of the Bonds in certain of the Trusts may be obligations which are
payable from and secured by revenues derived from the ownership and operation
of facilities such as airports, bridges, turnpikes, port authorities,
convention centers and arenas. In view of this an investment in such a Trust
should be made with an understanding of the characteristics of such issuers
and the risks which such an investment may entail. 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 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 of the Trusts may be obligations which are
payable from and secured by revenues derived from the operation of resource
recovery facilities. In view of this an investment in such a Trust should be
made with an understanding of the characteristics of such issuers and the
risks which such an investment may entail. Resource recovery facilities are
designed to process solid waste, generate steam and convert steam to
electricity. Resource recovery bonds may be subject to extraordinary optional
redemption at par upon the occurrence of certain circumstances, including but
not limited to: destruction or condemnation of a project; contracts relating
to a project becoming void, unenforceable or impossible to perform; changes in
the economic availability of raw materials, operating supplies or facilities
necessary for the operation of a project or technological or other unavoidable
changes adversely affecting the operation of a project; administrative or
judicial actions which render contracts relating to the projects void,
unenforceable or impossible to perform; or impose unreasonable burdens or
excessive liabilities. The Sponsor cannot predict the causes or likelihood of
the redemption of resource recovery bonds in such a Trust prior to the stated
maturity of the Bonds.
BOND REDEMPTIONS
Because certain of the Bonds in certain of the Trusts may from time to time
under certain circumstances be sold or redeemed or will mature in accordance
with their terms and because the proceeds from such events will be distributed
to Unitholders and will not be reinvested, no assurance can be given that any
Trust will retain for any length of time its present size and composition.
Neither the Sponsor nor the Trustee shall be liable in any way for any
default, failure or defect in any Bond.
Certain of the Bonds in certain of the Trusts may be subject to redemption
prior to their stated maturity date pursuant to sinking fund provisions, call
provisions or extraordinary optional or mandatory redemption provisions or
otherwise. A sinking fund is a reserve fund accumulated over a period of time
for retirement of debt. A callable debt obligation is one which is subject to
redemption or refunding prior to maturity at the option of the issuer. A
refunding is a method by which a debt obligation is redeemed, at or before
maturity, by the proceeds of a new debt obligation. In general, call
provisions are more likely to be exercised when the offering side valuation is
at a premium over par than when it is at a discount from par. The exercise of
redemption or call provisions will (except to the extent the proceeds of the
called Bonds are used to pay for Unit redemptions) result in the distribution
of principal and may result in a reduction in the amount of subsequent
interest distributions; it may also affect the current return on Units of the
Trust involved. Each Trust portfolio contains a listing of the sinking fund
and call provisions, if any, with respect to each of the debt obligations.
Extraordinary optional redemptions and mandatory redemptions result from the
happening of certain events. Generally, events that may permit the
extraordinary optional redemption of Bonds or may require the mandatory
redemption of Bonds include, among others: a final determination that the
interest on the Bonds is taxable; the substantial damage or destruction by
fire or other casualty of the project for which the proceeds of the Bonds were
used; an exercise by a local, state or Federal governmental unit of its power
of eminent domain to take all or substantially all of the project for which
the proceeds of the Bonds were used; changes in the economic availability of
raw materials, operating supplies or facilities or technological or other
changes which render the operation of the project for which the proceeds of
the Bonds were used uneconomic; changes in law or an administrative or
judicial decree which renders the performance of the agreement under which the
proceeds of the Bonds were made available to finance the project impossible or
which creates unreasonable burdens or which imposes excessive liabilities,
such as taxes, not imposed on the date the Bonds are issued on the issuer of
the Bonds or the user of the proceeds of the Bonds; an administrative or
judicial decree which requires the cessation of a substantial part of the
operations of the project financed with the proceeds of the Bonds; an
overestimate of the costs of the project to be financed with the proceeds of
the Bonds resulting in excess proceeds of the Bonds which may be applied to
redeem Bonds; or an underestimate of a source of funds securing the Bonds
resulting in excess funds which may be applied to redeem Bonds. The Sponsor is
unable to predict all of the circumstances which may result in such redemption
of an issue of Bonds. See "Trust Portfolio" and note (3) in "Notes to
Portfolio" in Part One of this Prospectus. See also the discussion of single
family mortgage and multi-family revenue bonds above for more information on
the call provisions of such bonds.
DISTRIBUTIONS
General. Distributions of interest received by a Trust, pro rated on an annual
basis, will be made semi-annually unless the Unitholder has elected to receive
them monthly or quarterly, if applicable. Distributions of funds from the
Principal Account, if any, will be made on a semi-annual basis, except under
certain special circumstances. See "Distributions of Interest and Principal"
below. Record dates for monthly distributions for each Trust are the first day
of each month and record dates for quarterly and semi-annual distributions for
each Trust are the first day of the months indicated under "Per Unit
Information" in Part One of this Prospectus. Distributions are made on the
fifteenth day of the month subsequent to the respective record dates.
Unitholders of the Short Term Trusts will only receive distributions
semi-annually with record dates being May 1 and November 1 of each year.
Unitholders of Insured Municipals Income Trust and Investors' Quality
Tax-Exempt Trust, Multi-Series 213 and subsequent series will receive
distributions of income and principal, if any, on a monthly basis.
Change of Distribution Option. The plan of distribution selected by a
Unitholder of Insured Municipals Income Trust and Investors' Quality Tax-
Exempt Trust, Multi-Series 212 and prior series remains in effect until
changed. Unitholders purchasing Units in the secondary market will initially
receive distributions in accordance with the election of the prior owner.
Unitholders may change the plan of distribution in which they are
participating. For the convenience of Unitholders, the Trustee will furnish a
card for this purpose; cards may also be obtained upon request from the
Trustee. Unitholders desiring to change their plan of distribution may so
indicate on the card and return it, together with their certificate and such
other documentation that the Trustee may then require, to the Trustee.
Certificates should only be sent by registered or certified mail to minimize
the possibility of their being lost or stolen. If the card and certificate are
properly presented to the Trustee, the change will become effective for all
subsequent distributions.
Distributions of Interest and Principal. Interest received by each Trust,
including that part of the proceeds of any disposition of Securities which
represents Purchased Interest, if any, and/or accrued interest, is credited by
the Trustee to the Interest Account for the appropriate Trust. Other receipts
are credited to the Principal Account for the appropriate Trust. All
distributions will be net of applicable expenses. The pro rata share of cash
in the Principal Account of a Trust will be computed as of the semi-annual
record date and distributions to the Unitholders as of such record date will
be made on or shortly after the fifteenth day of such month. For Insured
Municipals Income Trust and Investors' Quality Tax-Exempt Trust, Multi-Series
213 and subsequent series such computation and distribution will occur
monthly. Proceeds received from the disposition of any of the Securities after
such 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 any Principal or
Interest Account (but may itself earn interest thereon and therefore benefits
from the use of such funds) nor to make a distribution from the Principal
Account unless the amount available for distribution therein shall equal at
least $1.00 per Unit.
The distribution to the Unitholders of a Trust as of each record date will be
made on the following distribution date or shortly thereafter and shall
consist of an amount substantially equal to such portion of the Unitholder's
prorata share of the Estimated Net Annual Interest Income in the Interest
Account of such Trust after deducting estimated expenses attributable as is
consistent with the distribution plan chosen. Only monthly distributions will
be available for Insured Municipals Income Trust and Investors' Quality
Tax-Exempt Trust, Multi-Series 213 and subsequent series. Because interest
payments are not received by a Trust at a constant rate throughout the year,
such interest distribution may be more or less than the amount credited to
such Interest Account as of the record date. For the purpose of minimizing
fluctuations in the distributions from an 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 applicable 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. Only monthly distributions will be available for Insured
Municipals Income Trust and Investors' Quality Tax-Exempt Trust, Multi-Series
213 and subsequent series. As of the first day of each month, the Trustee will
deduct from the Interest Account and, to the extent funds are not sufficient
therein, from the Principal Account, amounts necessary to pay the expenses of
each Trust. The Trustee also may withdraw from said accounts such amounts, if
any, as it deems necessary to establish a reserve for any governmental charges
payable out of each Trust. Amounts so withdrawn shall not be considered a part
of each Trust's assets until such time as the Trustee shall return all or any
part of such amounts to the appropriate Accounts. In addition, the Trustee may
withdraw from the Interest and Principal Accounts such amounts as may be
necessary to cover redemptions of Units by the Trustee.
CERTIFICATES
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 of the Trust is evidenced by separate registered certificates executed
by the Trustee and the Sponsor. Certificates are transferable by presentation
and surrender to the Trustee properly endorsed or accompanied by a written
instrument or instruments of transfer. A Unitholder must sign exactly as his
name appears on the face of the certificate with the signature guaranteed by a
participant in the Securities Transfer Agents Medallion Program ("STAMP") or
such other signature guaranty program in addition to or in substitution for,
STAMP, as may be 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.
Although no such charge is now made or contemplated, the Trustee may require a
Unitholder to pay a reasonable fee for each certificate re-issued (other than
as a result of a change in plan of distribution) or transferred and to pay any
governmental charge that may be imposed in connection with each such transfer
or interchange. Destroyed, stolen, mutilated or lost certificates will be
replaced upon delivery to the Trustee of satisfactory indemnity, evidence of
ownership and payment of expenses incurred. Mutilated certificates must be
surrendered to the Trustee for replacement.
ESTIMATED CURRENT RETURNS AND ESTIMATED LONG-TERM RETURNS
As of the opening of business on the date indicated therein, the Estimated
Current Returns, and the Estimated Long-Term Returns for each Trust under the
monthly, quarterly, if applicable, and semi-annual distribution plans were as
set forth under "Per Unit Information" for the applicable Trust in Part One of
this Prospectus. Estimated Current Return is calculated by dividing the
Estimated Net Annual Interest Income per Unit by the Public Offering Price.
The Estimated Net Annual Interest Income per Unit will vary with changes in
fees and expenses of the Trustee and the Evaluator and with the principal
prepayment, redemption, maturity, exchange or sale of Securities while the
Public Offering Price will vary with changes in the offering price of the
underlying Securities and with changes in Purchased Interest for those series
which contain Purchased Interest; therefore, there is no assurance that the
present Estimated Current Return will be realized in the future. Estimated
Long-Term Return is calculated using a formula which (1) takes into
consideration, and determines and factors in the relative weightings of, the
market values, yields (which takes into account the amortization of premiums
and the accretion of discounts) and estimated retirements of all of the
Securities in the Trust and (2) takes into account the expenses and sales
charge associated with each Trust Unit. Since the market values and estimated
retirements of the Securities and the expenses of the Trust will change, there
is no assurance that the present Estimated Long-Term Return will be realized
in the future. Estimated Current Return and Estimated Long-Term Return are
expected to differ because the calculation of Estimated Long-Term Return
reflects the estimated date and amount of principal returned while Estimated
Current Return calculations include only Net Annual Interest Income and Public
Offering Price.
THE FOLLOWING SECTION "ACCRUED INTEREST (ACCRUED INTEREST TO CARRY)" APPLIES
TO INSURED MUNICIPALS INCOME TRUST AND INVESTORS' QUALITY TAX-EXEMPT TRUST,
MULTI-SERIES 212 AND PRIOR SERIES ONLY.
ACCRUED INTEREST (ACCRUED INTEREST TO CARRY)
Accrued interest to carry consists of two elements. The first element arises
as a result of accrued interest which is the accumulation of unpaid interest
on a bond from the last day on which interest thereon was paid. Interest on
Securities in each Trust is actually paid either monthly, quarterly, if
applicable, or semi-annually to such Trust. However, interest on the
Securities in each Trust is accounted for daily on an accrual basis. Because
of this, each Trust always has an amount of interest earned but not yet
collected by the Trustee because of coupons that are not yet due. For this
reason, the Public Offering Price will have added to it the proportionate
share of accrued and undistributed interest to the date of settlement.
The second element of accrued interest to carry arises because of the
structure of the Interest Account. The Trustee has no cash for distribution to
Unitholders of a Trust until it receives interest payments on the Securities
in such Trust. The Trustee is obligated to provide its own funds, at times, in
order to advance interest distributions. The Trustee will recover these
advancements when such interest is received. Interest Account balances are
established so that it will not be necessary on a regular basis for the
Trustee to advance its own funds in connection with such interest
distributions. The Interest Account balances are also structured so that there
will generally be positive cash balances and since the funds held by the
Trustee may be used by it to earn interest thereon, it benefits thereby. If a
Unitholder sells or redeems all or a portion of his Units or if the Bonds in a
Trust are sold or otherwise removed or if a Trust is liquidated, he will
receive at that time his proportionate share of the accrued interest to carry
computed to the settlement date in the case of sale or liquidation and to the
date of tender in the case of redemption.
THE FOLLOWING SECTION "PURCHASED AND ACCRUED INTEREST" APPLIES TO INSURED
MUNICIPALS INCOME TRUST AND INVESTORS' QUALITY TAX-EXEMPT TRUST, MULTI- SERIES
213 AND SUBSEQUENT SERIES ONLY.
PURCHASED AND ACCRUED INTEREST
Purchased Interest. Purchased Interest is a portion of the unpaid interest
that has accrued on the Securities from the later of the last payment date on
the Securities or the date of issuance thereof through the First Settlement
Date and is included in the calculation of the Public Offering Price.
Purchased Interest will be distributed to Unitholders as Units are redeemed or
Securities mature or are called. See "Summary of Essential Financial
Information" in Part One of this Prospectus for the amount of Purchased
Interest per Unit for each Trust. Purchased Interest is an element of the
price Unitholders will receive in connection with the sale or redemption of
Units prior to the termination of a Trust.
Accrued Interest. Accrued Interest is an accumulation of unpaid interest on
securities which generally is paid semi-annually, although a Trust accrues
such interest daily. Because of this, a Trust always has an amount of interest
earned but not yet collected by the Trustee. For this reasons, the Public
Offering Price of Units will have added to it the proportionate share of
accrued interest to the date of settlement. Unitholders will receive on the
next distribution date of a Trust the amount, if any, of accrued interest paid
on their Units.
As indicated in "Purchased Interest", accrued interest as of the First
Settlement Date includes Purchased Interest. In an effort to reduce the amount
of Purchased Interest which would otherwise have to be paid by Unitholders,
the Trustee may advance a portion of such accrued interest to the Sponsor as
the Unitholder of record as of the First Settlement Date. Consequently, the
amount of accrued interest to be added to the Public Offering Price of Units
will include only accrued interest from the First Settlement Date to the date
of settlement (other than the Purchased Interest already included therein),
less any distributions from the Interest Account subsequent to the First
Settlement Date. See "DistributionsDistribution of Interest and Principal."
Because of the varying interest payment dates of the Securities, accrued
interest at any point in time will be greater than the amount of interest
actually received by a Trust and distributed to Unitholders. If a Unitholder
sells or redeems all or a portion of his Units, he will be entitled to receive
his proportionate share of the Purchased Interest and accrued interest from
the purchaser of his Units. Since the Trustee has the use of the funds
(including Purchased Interest) held in the Interest Account for distributions
to Unitholders and since such Account is non-interest-bearing to Unitholders,
the Trustee benefits thereby.
PUBLIC OFFERING PRICE
Units are offered at the Public Offering Price plus accrued undistributed
interest to the settlement date. For secondary market sales the Public
Offering Price will be equal to the aggregate bid price of the Securities
determined in accordance with the table set forth below, which is based upon
the dollar weighted average maturity of each Trust. In addition, for Insured
Municipals Income Trust and Investors' Quality Tax-Exempt Trust, Multi-Series
213 and subsequent series the Public Offering Price will also include
Purchased Interest. 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 Trust based upon the dollar
weighted average maturity of such Trust's Portfolio, in accordance with the
following schedule:
Years To Maturity Sales Charge Years To Maturity Sales Charge
1 1.523% 9 4.712%
2 2.041 10 4.932
3 2.564 11 4.932
4 3.199 12 4.932
5 3.842 13 5.374
6 4.058 14 5.374
7 4.275 15 5.374
8 4.493 16 to 30 6.045
The sales charges in the above table are expressed as a percentage of the
aggregate bid prices of the Securities in a Trust. Expressed as a percent of
the Public Offering Price (excluding Purchased Interest for those Trusts which
contain Purchased Interest), the sales charge on a Trust consisting entirely
of a portfolio of Bonds with 15 years to maturity would be 5.10%.
As indicated above, the price of the Units as of the opening of business on
the date of Part One of this Prospectus was determined by adding to the
determination of the aggregate bid price of the Securities an amount equal to
the applicable sales charge expressed as a percentage of the aggregate bid
price of the Securities plus Purchased Interest for those trusts which contain
Purchased Interest and dividing the sum so obtained by the number of Units
outstanding. This computation produced a gross commission equal to such sales
charged expressed as a percentage of the Public Offering Price.
For secondary market purposes an appraisal and adjustment with respect to a
Trust will be made by the Evaluator as of 4:00 P.M. Eastern time on days in
which the New York Stock Exchange is open for each day on which any Unit of
such Trust is tendered for redemption, and it shall determine the aggregate
value of any Trust as of 4:00 P.M. Eastern time at such other times as may be
necessary.
The aggregate price of the Securities in each Trust has been and will be
determined on the basis of bid prices as follows: (a) on the basis of current
market prices for the Securities obtained from dealers or brokers who
customarily deal in bonds comparable to those held by the Trust; (b) if such
prices are not available for any particular Securities, on the basis of
current market prices for comparable bonds; (c) by causing the value of the
Securities to be determined by others engaged in the practice of evaluation,
quoting or appraising comparable bonds; or (d) by any combination of the
above. Market prices of the Securities will generally fluctuate with changes
in market interest rates.
Although payment is normally made five business days following the order for
purchase, payment may be made prior thereto. A person will become the owner of
Units on the date of settlement provided payment has been received. Cash, if
any, made available to the Sponsor prior to the date of settlement for the
purchase of Units may be used in the Sponsor's business and may be deemed to
be a benefit to the Sponsor, subject to the limitations of the Securities
Exchange Act of 1934. Delivery of certificates representing Units so ordered
will be made five business days following such order or shortly thereafter.
See "Redemption of Units" below for information regarding the ability to
redeem Units ordered for purchase.
MARKET FOR UNITS
Although they are not obligated to do so, the Sponsor intends to, and certain
of the dealers may, maintain a market for the Units offered hereby and to
offer continuously to purchase such Units at prices, subject to change at any
time, based upon the aggregate bid prices of the Securities in the portfolio
of each Trust plus Purchased Interest, if any, plus interest accrued to the
date of settlement and plus any principal cash on hand, less any amounts
representing taxes or other governmental charges payable out of the Trust and
less any accrued Trust expenses. If the supply of Units exceeds demand or if
some other business reason warrants it, the Sponsor and/or the dealers may
either discontinue all purchases of Units or discontinue purchases of Units at
such prices. In the event that a market is not maintained for the Units and
the Unitholder cannot find another purchaser, a Unitholder of any Trust
desiring to dispose of his Units may be able to dispose of such Units only by
tendering them to the Trustee for redemption at the Redemption Price, which is
based upon the aggregate bid price of the Securities in the portfolio of such
Trust plus Purchased Interest, if any, and any accrued interest. The aggregate
bid prices of the underlying Securities in a Trust are expected to be less
than the related aggregate offering prices. See "Redemption of Units" below. A
Unitholder who wishes to dispose of his Units should inquire of his broker as
to current market prices in order to determine whether there is in existence
any price in excess of the Redemption Price and, if so, the amount thereof.
REINVESTMENT OPTION
Unitholders of the Trust may elect to have each distribution of interest
income, capital gains and/or principal on their Units automatically reinvested
in shares of any of the open-ended mutual funds listed under "The Sponsor"
which are registered in the Unitholder's state of residence. Such mutual funds
are hereinafter collectively referred to as the "Reinvestment Funds."
Each Reinvestment Fund has investment objectives which differ in certain
respects from those of the Trust. The prospectus relating to each Reinvestment
Fund describes the investment policies of such fund and sets forth the
procedures to follow to commence reinvestment. A Unitholder may obtain a
prospectus for the respective Reinvestment Funds from Van Kampen Merritt Inc.
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181. Texas residents who
desire to reinvest may request that a broker-dealer registered in Texas send
the prospectus relating to the respective fund.
After becoming a participant in a reinvestment plan, each distribution of
interest income, capital gains and/or principal on the participant's Units
will, on the applicable distribution date, automatically be applied, as
directed by such person, as of such distribution date by the Trustee to
purchase shares (or fractions thereof) of the applicable Reinvestment Fund at
a net asset value as computed as of the close of trading on the New York Stock
Exchange on such date, plus a sales charge of $1.00 per $100 of reinvestment
except if the participant selects the First Investors New York Insured Tax
Free Fund, Inc., in which case the sales charge will be $1.50 per $100 of
reinvestment, or except if the participant selects the Van Kampen Merritt
Money Market Fund or the Van Kampen Merritt Tax Free Money Fund in which case
no sales charge applies. A minimum of one-half of such sales charge would be
paid to Van Kampen Merritt Inc. for all Reinvestment Funds except First
Investors New York Insured Tax Free Fund, Inc., in which case such sales
charge would be paid to First Investors Management Company, Inc.
Confirmations of all reinvestments by a Unitholder into a Reinvestment Fund
will be mailed to the Unitholder by such Reinvestment Fund.
A participant may at any time prior to five days preceding the next succeeding
distribution date, by so notifying the Trustee in writing, elect to terminate
his or her reinvestment plan and receive future distributions on his or her
Units in cash. There will be no charge or other penalty for such termination.
Each Reinvestment Fund, its sponsor and investment adviser shall have the
right to terminate at any time the reinvestment plan relating to such Fund.
REDEMPTION OF UNITS
A Unitholder may redeem all or a portion of his Units by tender to the Trustee
at its Unit Investment Trust Division, 101 Barclay Street, 20th Floor, New
York, New York 10286 of the certificates representing the Units to be
redeemed, duly endorsed or accompanied by proper instruments of transfer with
signature guaranteed (or by providing satisfactory indemnity, as in connection
with lost, stolen or destroyed certificates) and by payment of applicable
governmental charges, if any. Thus, redemption of Units cannot be effected
until certificates representing such Units have been delivered to the person
seeking redemption or satisfactory indemnity provided. No redemption fee will
be charged. On the seventh calendar day following such tender, or if the
seventh calendar day is not a business day, on the first business day prior
thereto, the Unitholder 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
Trustee of such tender of Units. The "date of tender" is deemed to be the date
on which Units are received by the Trustee, except that as regards Units
received after 4:00 P.M. Eastern time on days of trading on the New York Stock
Exchange, the date of tender is the next day on which such Exchange is open
for trading and such Units will be deemed to have been tendered to the Trustee
on such day for redemption at the Redemption Price computed on that day.
Under regulations issued by the Internal Revenue Service, the Trustee will be
required to withhold 20% of the principal amount of a Unit redemption if the
Trustee has not been furnished the redeeming Unitholder's tax identification
number in the manner required by such regulations. Any amount so withheld is
transmitted to the Internal Revenue Service and may be recovered by the
Unitholder only when filing a return. Under normal circumstances the Trustee
obtains the Unitholder's tax identification number from the selling broker.
However, at any time a Unitholder elects to tender Units for redemption, such
Unitholder should provide a tax identification number to the Trustee in order
to avoid this possible "back-up withholding" in the event the Trustee has not
been previously provided such number.
Purchased Interest, if any, and accrued interest paid on redemption shall be
withdrawn from the Interest Account of such Trust or, if the balance therein
is insufficient, from the Principal Account of such Trust. All other amounts
will be withdrawn from the Principal Account of such Trust. The Trustee is
empowered to sell underlying Securities of a Trust in order to make funds
available for redemption. Units so redeemed shall be cancelled.
The Redemption Price per Unit will be determined on the basis of the bid price
of the Securities in each Trust as of 4:00 P.M. Eastern time on days of
trading on the New York Stock Exchange on the date such determination is made.
While the Trustee has the power to determine the Redemption Price per Unit
when Units are tendered for redemption, such authority has been delegated to
the Evaluator which determines the price per Unit on a daily basis. The
Redemption Price per Unit is the pro rata share of each Unit in each Trust on
the basis of (i) the cash on hand in such Trust or moneys in the process of
being collected, (ii) the value of the Securities in such Trust based on the
bid prices of the Securities therein, (iii) Purchased Interest, if any,
included in Insured Municipals Income Trust and Investors' Quality Tax- Exempt
Trust, Multi-Series 213 and subsequent series and (iv) 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. The
Evaluator may determine the value of the Securities in each Trust by employing
any of the methods set forth in "Public Offering Price."
The price at which Units may be redeemed could be less than the price paid by
the Unitholder. As stated above, the Trustee may sell Securities to cover
redemptions. When Securities are sold, the size and diversity of the affected
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.
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 in a Trust 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 Unitholders to redeem their Units.
REPORTS PROVIDED
The Trustee shall furnish Unitholders of a Trust in connection with each
distribution a statement of the amount of interest and, if any, the amount of
other receipts (received since the preceding distribution) being distributed
expressed in each case as a dollar amount representing the pro rata share of
each Unit of a Trust outstanding. For as long as the Trustee deems it to be in
the best interests of the Unitholders, the accounts of each Trust shall be
audited, not less frequently than annually, by independent certified public
accountants and the report of such accountants shall be furnished by the
Trustee to Unitholders of the respective Trusts upon request. Within a
reasonable period of time after the end of each calendar year, the Trustee
shall furnish to each person who at any time during the calendar year was a
registered Unitholder of a Trust a statement (i) as to the Interest Account:
interest received (including amounts representing interest received upon any
disposition of Securities) and the percentage of such interest by states in
which the issuers of the Securities are located, the amount of Purchased
Interest, if any, deductions for applicable taxes and for fees and expenses of
such Trust, for redemptions of Units, if any, and the balance remaining after
such distributions and deductions, expressed in each case both as a total
dollar amount and as a dollar amount representing the pro rata share of each
Unit outstanding on the last business day of such calendar year; (ii) as to
the Principal Account: the dates of disposition of any Securities and the net
proceeds received therefrom (excluding any portion representing accrued
interest), the amount paid for redemptions of Units, if any, deductions for
payment of applicable taxes and fees and expenses of the Trustee 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; (iii) a
list of the Securities held and the number of Units outstanding on the last
business day of such calendar year; (iv) the Redemption Price per Unit based
upon the last computation thereof made during such calendar year; and (v)
amounts actually distributed during such calendar year from the Interest and
Principal Accounts, separately stated, expressed both as total dollar amounts
and as dollar amounts representing the pro rata share of each Unit
outstanding.
In order to comply with Federal and state tax reporting requirements,
Unitholders will be furnished, upon request to the Trustee, evaluations of the
Securities in the Trust furnished to it by the Evaluator.
Each distribution statement will reflect pertinent information in respect of
the other plan or plans of distribution so that Unitholders may be informed
regarding the results of such other distribution option or options. Only
monthly distributions are available for Insured Municipals Income Trust and
Investors' Quality Tax-Exempt Trust, Multi-Series 213 and subsequent series.
FEDERAL TAX STATUS OF EACH TRUST
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:
Each Trust is not an association taxable as a corporation for Federal income
tax purposes and interest and accrued original issue discount on Bonds which
is excludable from gross income under the Internal Revenue Code of 1986 (the
"Code") will retain its status when distributed to Unitholders. A Unitholder's
share of the interest on certain Bonds in the National Quality AMT Trust will
be included as an item of tax preference for both individuals and corporations
subject to the alternative minimum tax ("AMT Bonds"). In the case of certain
corporations owning Units, interest and accrued original issue discount with
respect to Bonds other than AMT Bonds held by a Trust (including the National
Quality AMT Trust) may be subject to the alternative minimum tax, an
additional tax on branches of foreign corporations and the environmental tax
(the "Superfund Tax");
Each Unitholder is considered to be the owner of a pro rata portion of the
respective Trust under subpart E, subchapter J of chapter 1 of the Internal
Revenue Code of 1986 and will have a taxable event when such Trust disposes of
a Security, or when the Unitholder redeems or sells his Units. Unitholders
must reduce the tax basis of their Units for their share of accrued interest
received by the respective Trust, if any, on Securities delivered after the
Unitholders pay for their Units to the extent that such interest accrued on
such Securities during the period from the Unitholder's settlement date to the
date such Securities are delivered to the respective Trust and, consequently,
such Unitholders 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
Bonds (whether by sale, payment on maturity, redemption or otherwise), gain or
loss is recognized to the Unitholder. The amount of any such gain or loss is
measured by comparing the Unitholder's pro rata share of the total proceeds
from such disposition with the Unitholder's basis for his or her fractional
interest in the asset disposed of. In the case of a Unitholder who purchases
Units, such basis (before adjustment for earned original issue discount and
amortized bond premium, if any) is determined by apportioning the cost of the
Units among each of the Trust assets ratably according to value as of the date
of acquisition of the Units. The tax cost reduction requirements of said Code
relating to amortization of bond premium may, under some circumstances, result
in the Unitholder realizing a taxable gain when his Units are sold or redeemed
for an amount equal to his original cost.
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 such as the AMT Bonds, is included as
an item of tax preference. With the exception of certain Bonds in the National
Quality AMT Trust, the Trusts do not include any such AMT Bonds.
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 compound 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 would have previously accrued based upon its issue price (its "adjusted
issue price") to prior owners. The application of these rules will also vary
depending on the value of the Bond on the date a Unitholder acquires his Units
and the price the Unitholder pays for his Units. Investors with questions
regarding these Code sections should consult with their tax advisers.
"The Revenue Reconciliation Act of 1993" (the "Tax Act") subjects tax- exempt
bonds to the market discount rules of the Code effective for bonds 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). Market discount can arise based on
the price a Trust pays for Bonds or the price a Unitholder pays for his or her
Units. Under the Tax Act, accretion of market discount is taxable as ordinary
income; under prior law the accretion had been treated as capital gain. Market
discount that accretes while a Trust holds a Bond would be recognized as
ordinary income by the Unitholders when principal payments are received on the
Bond, upon sale or at redemption (including early redemption), or upon the
sale or redemption of his or her Units, unless a Unitholder elects to include
market discount in taxable income as it accrues. The market discount rules are
complex and Unitholders should consult their tax advisers regarding these
rules and their application.
In the case of certain corporations, the alternative minimum tax and the
Superfund Tax for taxable years beginning after December 31, 1986 depends upon
the corporation's alternative minimum taxable income, which is the
corporation's taxable income with certain adjustments. One of the adjustment
items used in computing the alternative minimum taxable income and the
Superfund Tax of a corporation (other than 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 alternative minimum taxable income (before such adjustment
item and the alternative tax net operating loss deduction). "Adjusted current
earnings" includes all tax exempt interest, including interest on all of the
Bonds in the Trust. Unitholders are urged to consult their 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.
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 o purchase or improve a
personal residence). Also, under Section 265 of the Code, certain financial
institutions that acquire Units would generally not be able to deduct any of
the interest expense attributable to ownership of such Units. Investors with
questions regarding this issue should consult with their tax advisers.
In the case of certain of the Securities in the Fund, 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 that he or she may be
a "substantial user" or a "related person" as so defined should contact his or
her tax adviser.
At the time of closing for each Trust, Special Counsel to the Fund for New
York tax matters have rendered opinions substantially to the effect that under
then existing law, the Fund and each Trust are not associations taxable as
corporations and the income of each Trust will be treated as the income of the
Unitholders under the income tax laws of the State and City of New York.
All statements of law in the Prospectus concerning exclusion from gross income
for Federal, state or other tax purposes are the opinions of counsel and are
to be so construed.
At the respective times of issuance of the Securities, opinions relating to
the validity thereof and to the exclusion of interest thereon from Federal
gross income are rendered by bond counsel to the respective issuing
authorities. Neither the Sponsor nor Chapman and Cutler has made any special
review for the Fund of the proceedings relating to the issuance of the
Securities or of the basis for such opinions.
Section 86 of the Internal Revenue Code provides, in general, that fifty
percent of Social Security benefits are includable in gross income to the
extent that the sum of "modified adjusted gross income" plus fifty percent of
the Social Security benefits received exceeds a "base amount". The base amount
is $25,000 for unmarried taxpayers, $32,000for 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 includible in
gross income, they will be treated as any other item of gross income.
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.
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 the Fund, will be subject to tax. A taxpayer whose adjusted
gross income already exceeds the base amount or the adjusted base amount must
include fifty percent or eighty-five percent, respectively, 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.
In the case of corporations, the alternative tax rate applicable to long-term
capital gains is 35%, effective for long-term capital gains realized on or
after January 1, 1993. For taxpayers other than corporations, net capital
gains are subject to a maximum 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. Under the Code, taxpayers must disclose to
the Internal Revenue Service the amount of tax-exempt interest earned during
the year.
For a discussion of the state tax status of income earned on Units of a State
Trust, see "Tax Status" for the applicable Trust. Except as noted therein, the
exemption of interest on state and local obligations for Federal income tax
purposes discussed above does not necessarily result in exemption under the
income or other tax laws of any State or City. The laws of the several States
vary with respect to the taxation of such obligations.
DESCRIPTION AND STATE TAX STATUS OF STATE TRUSTS
The information below describes some of the more significant events relating
to the various State Trusts and sets forth the tax status of each State Trust
under applicable state law. The Sponsor makes no representation regarding the
accuracy or completion of the information, but believes it to be complete and
has itself relied upon such information. The portfolio of each State Trust
consists of obligations issued by entities located in such state or in the
Commonwealth of Puerto Rico.
Prospective investors should study with care the portfolio of Bonds in a Trust
and should consult with their investment advisors as to the merits of
particular issues in a portfolio.
Alabama Trusts
Alabama's economy has experienced a major trend toward industrialization over
the past two decades. By 1990, manufacturing accounted for 26.7% of Alabama's
Real Gross State Product (the total value of goods and services produced in
Alabama). During the 1960s and 1970s the State's industrial base became more
diversified and balanced, moving away from primary metals into pulp and paper,
lumber, furniture, electrical machinery, transportation equipment, textiles
(including apparel), chemicals, rubber and plastics. Since the early 1980s,
modernization of existing facilities and an increase in direct foreign
investments in the State has made the manufacturing sector more competitive in
domestic and international markets.
Among several leading manufacturing industries have been pulp and papers and
chemicals. In recent years Alabama has ranked as the fifth largest producer of
timber in the nation. The State's growing chemical industry has been the
natural complement of production of wood pulp and paper. Mining, oil and gas
production and service industries are also important to Alabama's economy.
Coal mining is by far the most important mining activity.
Major service industries that are deemed to have significant growth potential
include the research and medical training and general health care industries,
most notably represented by the University of Alabama medical complex in
Birmingham and the high technology research and development industries
concentrated in the Huntsville area.
Real Gross State Product. Real Gross State Product (RGSP) is a comprehensive
measure of economic performance for the State of Alabama. Alabama's RGSP is
defined as the total value of all final goods and services produced in the
State in constant dollar terms. Hence, changes in RGSP reflect changes in
final output. From 1984 to 1990 RGSP originating in manufacturing increased by
22.99% whereas RGSP originating in all the non-manufacturing sectors grew by
17.88%.
Those non-manufacturing sectors exhibiting large percentage increases in RGSP
originating between 1984 and 1990 were 1) Services; 2) Trade; 3) Farming; and
4) Finance, Insurance and Real Estate. From 1984 to 1990 RGSP originating in
services increased by 35.07%; Trade grew by 21.53%; Farming increased by
19.78%; and the gain in Finance, Insurance and Real Estate was 19.19%. The
present movement toward diversification of the State's manufacturing base and
a similar present trend toward enlargement and diversification of the service
industries in the State are expected to lead to increased economic stability.
Employment. The recent national economic recession was felt severely in
Alabama. The manufacturing growth described above reached a peak in 1979, and
was followed by a decrease in activity. The national economic recession was
principally responsible for this decline. The State's industrial structure is
particularly sensitive to high interest rates and monetary policy, and the
resulting unemployment during 1981-1984 was acute. Unemployment rates have
improved as the impact of the national economic recovery has benefited the
State. The economic recovery experienced on the national level since 1982 has
been experienced in Alabama as well, but to a different degree and with a time
lag.
Among other risks, the State of Alabama's economy depends upon cyclical
industries such as iron and steel, natural resources, and timber and forest
products. As a result, economic activity may be more cyclical than in certain
other Southeastern states. The national economic recession in the early 1980s
caused a decline in manufacturing activity and natural resource consumption,
and Alabama's unemployment rate was 14.4% in 1982, significantly higher than
the national average. Unemployment remains high in some rural areas of the
State. A trend towards diversification of the State's economic base and an
expansion of service industries may lead to improved economic stability in the
future, although there is no assurance of this.
Political subdivisions of the State of Alabama have limited taxing authority.
In addition, the Alabama Supreme Court has held that a governmental unit may
first use its taxes and other revenues to pay the expenses of providing
governmental service before paying debt service on its bonds, warrants or
other indebtedness. The State has statutory budget provisions which result in
a proration procedure in the event estimated budget resources in a fiscal year
are insufficient to pay in full all appropriations for that year. Proration
has a materially adverse effect on public entities that are dependent upon
State funds subject to proration.
Deterioration of economic conditions could adversely affect both tax and other
governmental revenues, as well as revenues to be used to service various
revenue obligations, such as industrial development obligations. Such
difficulties could affect the market value of the bonds held by the Alabama
Trust and thereby adversely affect Unitholders.
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 Alabama Trust 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 Alabama Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Alabama Trust, Special Counsel to the Fund
for Alabama tax matters rendered an opinion under then existing Alabama income
tax law applicable to taxpayers whose income is subject to Alabama income
taxation substantially to the effect that:
The Alabama Trust is not taxable as a corporation for purposes of the Alabama
income tax;
Income of the Alabama Trust, to the extent it is taxable, will be taxable to
the Unitholders, not the Alabama Trust;
Each Unitholder's distributive share of the Alabama Trust's net income will be
treated as the income of the Unitholder for purposes of the Alabama income
tax;
Interest on obligations held by the Alabama Trust which is exempt from the
Alabama income tax will retain its tax-exempt character when the distributive
share thereof is distributed or deemed distributed to each Unitholder;
Any proceeds paid to the Alabama Trust under insurance policies issued to the
Sponsor or under individual policies obtained by the Sponsor, the issuer or
underwriter of the respective obligations which represent maturing interest on
defaulted obligations held by the Trustee will be exempt from Alabama income
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;
Each Unitholder will, for purposes of the Alabama income tax, treat his
distributive share of gains realized upon the sale or other disposition of the
Bonds held by the Alabama Trust as though the Bonds were sold or disposed of
directly by the Unitholders; and
Gains realized on the sale or redemption of Units by Unitholders, who are
subject to the Alabama income tax will be includable in the Alabama income of
such Unitholders.
Arizona Trusts
Arizona is the nation's sixth largest state in terms of area and ranks among
the leading states in three economic indices of growth. For the ten year
period 1978-88, Arizona ranked second nationally in both population growth and
growth in employment and third in growth of personal income.
According to figures reported by the Arizona Department of Economic Security,
Arizona has been one of the fastest growing states in the nation. While the
United States' population increased 11 percent between 1970 and 1980, Arizona
realized a 53 percent growth rate. More recently this growth has slowed to a
more manageable rate. The population of Arizona has grown consistently at a
rate between 2.2% and 2.4% annually during the years 1988 through 1990, and is
predicted to remain in that range through 1992. The 1990 census results
indicate that the population of Arizona rose 35% between 1980 and 1990, a rate
exceeded only in Nevada and Alaska. Nearly 950,000 residents were added during
this period.
General Economic Conditions. The following brief summary regarding the economy
of Arizona is based upon information drawn from publicly available sources and
is included for the purpose of providing the information about general
economic conditions that may or may not affect issuers of the Arizona
Municipal Obligations. The Sponsor has not independently verified any of the
information contained in such publicly available documents.
Arizona is the nation's sixth largest state in terms of area. Arizona's main
economic/employment sectors include services, tourism and manufacturing.
Mining and agriculture are also significant, although they tend to be more
capital than labor intensive. Services is the single largest economic sector.
Many of these jobs are directly related to tourism.
According to Arizona economic indicators released as of June 1992,
unemployment figures show 7.2 percent of Arizona's population are unemployed,
compared to a national level of 7.5 percent unemployment at the same time.
Maricopa County reported 6.1 percent unemployment and Pima County reported 5.0
percent unemployment. Significant employers in the state include the
government, the service industry and the trade industry. Building permits were
down in all areas of the state except for Pima County. In addition, home sales
were down approximately 28 percent from the previous year, and retail sales
were down approximately 7 percent from the previous year.
On June 27, 1991, America West Airlines filed a Chapter 11 reorganization
petition in bankruptcy. America West was at one time the sixth largest
employer in Maricopa County, employing approximately 10,000 persons within the
county, and 15,000 nationwide. The airline now employs close to 7,000
employees nationwide. The effect of the America West bankruptcy on the state
economy and, more particularly, the Phoenix economy, is uncertain.
Similarly, jobs will be lost by the anticipated closing of Williams Air Force
Base in Chandler, Arizona, in 1993. Williams Air Force Base was selected as
one of the military installations to be closed as a cost-cutting measure by
the Defense Base Closure and Realignment Commission, whose recommendations
were subsequently approved by the President and the United States House of
Representatives. Williams Air Force Base injects approximately $340 million in
the local economy annually, and employs 1,851 civilians.
In 1986, the value of Arizona real estate began a steady decline, reflecting a
market which had been overbuilt in the previous decade with a resulting
surplus of completed inventory. This decline adversely affected both the
construction industry and those Arizona financial institutions which had
aggressively pursued many facets of real estate lending. In the near future,
Arizona's financial institutions are likely to continue to experience problems
until the excess inventories of commercial and residential properties are
absorbed. The problems of the financial institutions have adversely affected
unemployment and economic activity. Longer-term prospects are brighter, since
population growth is still strong by most standards, and Arizona's climate and
tourist industry still continue to stimulate the State's economy. However, the
previously robust pace of growth by financial institutions is not likely to be
repeated over an extended period.
Arizona operates on a fiscal year beginning July 1 and ending June 30. Fiscal
year 1992 refers to the year ending June 30, 1992.
Total General Fund revenues of $3.4 billion are expected during fiscal year
1992. Approximately 45.8% of this budgeted revenue comes from sales and use
taxes, 38.9% from income taxes (both individual and corporate) and 5.3% from
property taxes. All taxes total approximately $3.3 billion, or 93% of the
General Fund revenues. Non-tax revenue includes items such as income from the
state lottery, licenses, fees and permits, and interest. Lottery income totals
approximately 34.6% of non-tax revenue.
For fiscal year 1992, the budget calls for expenditures of $2.7 billion. These
expenditures fell into the following major categories: education (51.3%),
health and welfare (29.3%), protection and safety (9.8%), general government
(7.6%) and inspection and regulation, natural resources and transportation
(2.0%). The State's general fund revenues for fiscal year 1993 are budgeted at
$3.6 billion and total general fund expenditures for fiscal year 1993 are
budgeted at $3.65 billion. Fiscal year 1993's proposed expenditures fall into
the following major categories: education (55.4%), health and welfare (27.8%),
protection and safety (9.0%), general government (6.2%) and inspection and
regulation and natural resources (1.6%).
Most or all of the Bonds of the Arizona Trust are not obligations of the State
of Arizona, and are not supported by the State's taxing powers. The particular
source of payment and security for each of the Bonds is detailed in the
instruments themselves and in related offering materials. There can be no
assurances, however, with respect to whether the market value or marketability
of any of the Bonds issued by an entity other than the State of Arizona will
be affected by the financial or other condition of the State or of any entity
located within the State. In addition, it should be noted that the State of
Arizona, as well as counties, municipalities, political subdivisions and other
public authorities of the state, are subject to limitations imposed by
Arizona's constitution with respect to ad valorem taxation, bonded
indebtedness and other matters. For example, the legislature cannot
appropriate revenues in excess of 7% of the total personal income of the state
in any fiscal year. These limitations may affect the ability of the issuers to
generate revenues to satisfy their debt obligations.
Local governments have experienced many of the same fiscal difficulties for
many of the same reasons and, in several cases, have been prevented by
Constitutional limitations on bonded indebtedness from securing necessary
funds to undertake street, utility and other infrastructure expansions,
improvements and renovations in order to meet the needs of rapidly increasing
populations. In this regard, the voters of the cities of Phoenix and Tucson in
1984 authorized the issuance of general obligation and revenue bonds
aggregating $525 million and $330 million, respectively, and in May 1986, the
voters of Maricopa County, in which the City of Phoenix is located, and Pima
County, in which the City of Tucson is located, authorized the issuance of
bonds aggregating $261 million and $219.4 million, respectively, to finance
various short- and long-term capital projects, including infrastructure
expansions, improvements and replacements. Also, in 1986, the voters in
Maricopa and Pima Counties voted a 1/2% increase in the State sales taxes to
pay for highway construction in those counties. In April 1988 the voters of
the City of Phoenix authorized the issuance of general obligation bonds
aggregating $1.1 billion.
Although most of the Bonds in the Arizona Trust are revenue obligations of
local governments or authorities in the State, there can be no assurance that
the fiscal and economic conditions referred to above will not affect the
market value or marketability of the Bonds or the ability of the respective
obligors to pay principal of and interest on the Bonds when due.
The State of Arizona was recently sued by four named school districts with an
additional fifty school districts within the state participating in the suit,
claiming that the State's funding system for school buildings and equipment is
unconstitutional. The lawsuit does not seek damages, but requests that the
court order the State to create a new financing system that sets minimum
standards for buildings and furnishings that apply on a statewide basis. A
superior court ruling has upheld the constitutionality of the State's school
funding system. This decision has been appealed and is currently in the State
Court of Appeals. It is unclear, at this time, what affect any judgment would
have on state finances or school district budgets. The U.S. Department of
Education recently determined that Arizona's educational funding system did
not meet federal requirements of equity. This determination could mean a loss
in federal funds of approximately $50 million.
Certain other circumstances are relevant to the market value, marketability
and payment of any hospital and health care revenue bonds in the Arizona
Trust. The Arizona Legislature attempted unsuccessfully in its 1984 regular
and special sessions to enact legislation designed to control health care
costs, ultimately adopting three referenda measures placed on the November
1984 general election ballot which in various ways would have regulated
hospital and health care facility expansions, rates and revenues. At the same
time, a coalition of Arizona employers proposed two initiatives voted on in
the November 1984 general election which would have created a State agency
with power to regulate hospital and health care facility expansions and rates
generally. All of these referenda and initiative propositions were rejected by
the voters in the November 1984 general election. Pre-existing State
certificate-of-need laws regulating hospital and health care facilities'
expansions and services have expired, and a temporary moratorium prohibiting
hospital bed increases and new hospital construction projects and a temporary
freeze on hospital rates and charges at June 1984 levels has also expired.
Because of such expirations and increasing health care costs, it is expected
that the Arizona Legislature will at future sessions continue to attempt to
adopt legislation concerning these matters. The effect of any such legislation
or of the continued absence of any legislation restricting hospital bed
increases and limiting new hospital construction on the ability of Arizona
hospitals and other health care providers to pay debt service on their revenue
bonds cannot be determined at this time.
Arizona does not participate in the federally administered Medicaid program.
Instead, the state administers an alternative program, AHCCCS, which provides
health care to indigent persons meeting certain financial eligibility
requirements, through managed care programs. In fiscal year 1992, AHCCCS will
be financed approximately 52.7% by federal funds, 33.1% by state funds, and
13.6% by county funds.
Under state law, hospitals retain the authority to raise rates with
notification and review by, but not approval from, the Department of Health
Services. Hospitals in Arizona have experienced profitability problems along
with those in other states. At least two Phoenix based hospitals have
defaulted on or reported difficulties in meeting their bond obligations during
the past three years.
Insofar as tax-exempt Arizona public utility pollution control revenue bonds
are concerned, the issuance of such bonds and the periodic rate increases
needed to cover operating costs and debt service are subject to regulation by
the Arizona Corporation Commission, the only significant exception being the
Salt River Project Agricultural Improvement and Power District which, as a
Federal instrumentality, is exempt from rate regulation. On July 15, 1991,
several creditors of Tucson Electric Power Company ("Tucson Electric") filed
involuntary petitions under Chapter 11 of the U.S. Bankruptcy Code to force
Tucson Electric to reorganize under the supervision of the bankruptcy court.
On December 31, 1991, the Bankruptcy Court approved the utility's motion to
dismiss the July petition after five months of negotiations between Tucson
Electric and its creditors to restructure the utility's debts and other
obligations. In January 1993, Tucson Electric asked the Arizona Corporation
Commission for a 9.6% average rate increase. Tucson Electric serves
approximately 270,000 customers, primarily in the Tucson area. Inability of
any regulated public utility to secure necessary rate increases could
adversely affect, to an indeterminable extent, its ability to pay debt service
on its pollution control revenue bonds.
At the time of the closing for each Arizona Trust, Special Counsel to the Fund
for Arizona tax matters rendered an opinion under then existing Arizona income
tax law applicable to taxpayers whose income is subject to Arizona income
taxation substantially to the effect that:
For Arizona income tax purposes, each Unitholder will be treated as the owner
of a pro rata portion of the Arizona Trust, and the income of the Trust
therefore will be treated as the income of the Unitholder under State law;
For Arizona income tax purposes, interest on the Bonds which is excludable
from Federal gross income and which is exempt from Arizona income taxes when
received by the Arizona Trust, and which would be excludable from Federal
gross income and exempt from Arizona income taxes if received directly by a
Unitholder, will retain its status as tax-exempt interest when received by the
Arizona Trust and distributed to the Unitholders;
To the extent that interest derived from the Arizona Trust by a Unitholder
with respect to the Bonds is excludable from Federal gross income, such
interest will not be subject to Arizona income taxes;
Each Unitholder will receive taxable gain or loss for Arizona income tax
purposes when Bonds held in the Arizona Trust are sold, exchanged, redeemed or
paid at maturity, or when the Unitholder 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 Unitholder's share of interest, if any, accruing on
Bonds during the interval between the Unitholder's settlement date and the
date such Bonds are delivered to the Arizona Trust, if later;
Amounts paid by the Insurer under an insurance policy or policies issued to
the Trust, if any, with respect to the Bonds in the Trust which represent
maturing interest on defaulted obligations held by the Trustee will be exempt
from State income taxes if, and to the same extent as, such interest would
have been so exempt if paid by the issuer of the defaulted obligations;
Arizona law does not permit a deduction for interest paid or incurred on
indebtedness incurred or continued to purchase or carry Units in the Arizona
Trust, the interest on which is exempt from Arizona income taxes; and
Neither the Bonds nor the Units will be subject to Arizona property taxes,
sales tax or use tax.
Arkansas Trusts
The Constitution of Arkansas specifically prohibits the creation of any State
general obligation debt unless authorized in a Statewide general election.
Although the State of Arkansas defaulted on some of its general obligation
debt during the depression in the later 1930's, it has not failed to pay the
principal and interest on any of its general obligations when due since that
time.
Act 496 of 1981, as amended, the "Arkansas Water Resources Development Act of
1981," ("Act 496") authorized the issuance of State Water Resources
Development General Obligation Bonds by the State of Arkansas, acting by and
through the Arkansas Soil and Water Conservation Commission. The issuance of
bonds pursuant to Act 496 was approved by the electors of the State at the
general election on November 2, 1982. The total principal amount of bonds
issued during any fiscal biennium may not exceed $15,000,000, and the total
principal of all bonds issued under Act 496 may not exceed $100,000,000. All
Bonds to be issued under Act 496 shall be direct general obligations of the
State, the principal and interest of which are payable from the general
revenues of the State. Pursuant to Act 496, the State of Arkansas has issued
and outstanding two series of bonds in the aggregate principal amount of
$28,075,000 under Act 496.
Deficit spending has been prohibited by statute in Arkansas since 1945. The
Revenue Stabilization Law requires that before any State spending can take
place, there must be an appropriation by the General Assembly and there must
be funds available in the fund from which the appropriation has been made. The
State is prohibited from borrowing money to put into any State fund from which
appropriations can be paid.
Information regarding the financial condition of the State is included for the
purpose of providing information about general economic conditions that may
affect issuers of the Bonds in Arkansas. The Arkansas economy represents
approximately 2.0% of the total United States' economy. Its small size causes
the Arkansas economy to follow the national economy. Fluctuations in the
national economy are often mirrored by coinciding or delayed fluctuations in
the Arkansas economy.
Arkansas' economy is both agricultural and manufacturing based. Only five
states generate a larger proportion of earnings from agriculture, and only 17
states generate a larger proportion of earnings from manufacturing. Similarly,
only 10 states have a larger proportion of employment in agriculture and only
18 states have a larger proportion of employment in manufacturing. Thus, the
State of Arkansas feels the full force of the business cycle and also sees the
growth swing from positive to negative as conditions in agriculture change.
Agriculture has had a depressant effect on the Arkansas economy regardless of
the phase the business cycle was in. In recent years, agricultural employment
in Arkansas has been on the decline. In both 1987 and 1988, agricultural
employment declined by 1.6%. Agriculture employment also declined in 1989 by
1.6%and should continue to decline according to State forecasters as labor
intensive production is shifted to less labor intensive production.
Employment in Arkansas' construction industry decreased 2.3%in 1988. This
followed a 5.6% decline in 1987. In 1989, State forecasters anticipated a
decline in growth rate of 2.5%. A further decline of 0.7%is expected in 1990.
During the past two decades, Arkansas' economic base has shifted from
agriculture to light manufacturing. In 1986, Arkansas ranked fifth in the
United States with a 2.1% growth of new manufacturing jobs. The
diversification of economic interest shares lessened Arkansas' cyclical
sensitivity to impact by any single sector. During 1988, total employment
increased by 3.4% and total nonagricultural wage and salary employment
increased by 2.8%. Total employment growth in Arkansas exceeded the growth
rate of total employment in the United States. The average unemployment rate
declined from 8.1% in 1987 to 7.7% in 1988. The increase in earnings along
with the rise in employment generated a 6.9% increase in total personal income
in 1988.
Counties and municipalities may issue general obligation bonds (pledging an ad
valorem tax), special obligation bonds (pledging other specific tax revenues)
and revenue bonds (pledging only specific revenues from sources other than tax
revenues). School districts may issue general obligation bonds (pledging ad
valorem taxes). Revenue bonds may also be issued by agencies and
instrumentalities of counties, municipalities and the State of Arkansas but as
in all cases of revenue bonds, neither the full faith and credit nor the
taxing power of the State of Arkansas or any municipality or county thereof is
pledged to the repayment of those bonds. Revenue bonds can be issued only for
public purposes, including, but not limited to, industry, housing, health care
facilities, airports, port facilities and water and sewer projects.
At the time of the closing for each Arkansas Trust, Special Counsel to each
Arkansas Trust for Arkansas tax matters rendered an opinion under then
existing Arkansas income tax law applicable to taxpayers whose income is
subject to Arkansas income taxation substantially to the effect that:
The opinion of Chapman and Cutler, counsel for Van Kampen Merritt Inc.,
concludes that each Trust, including the Arkansas Trust, will be governed for
Federal tax purposes by the provisions of Subchapter J of Chapter 1 of the
Code. Although there are no Arkansas income tax statutes similar to Subchapter
J of Chapter 1 of the Code, Arkansas statutory provisions operate to reach the
same result that is reached under the Federal system. Arkansas law defines
Arkansas gross income for residents similarly to the definition of Federal
gross income, and that definition of Arkansas gross income specifically
excludes interest on obligations of the State of Arkansas or any political
subdivision thereof.
Based upon the foregoing and, in reliance upon the opinion of Chapman and
Cutler, counsel to Van Kampen Merritt Inc., the Sponsor, and upon an
examination of such other documents and an investigation of such other matters
of law as we have deemed necessary, it is our opinion that the application of
existing Arkansas income tax law to Arkansas Unitholders would be as follows:
The Arkansas Trust is not taxable as a corporation or otherwise for purposes
of Arkansas income taxation;
Each Arkansas Unitholder will be treated as the owner of a pro rata portion of
the Arkansas Trust for Arkansas income tax purposes, and the income of the
Arkansas Trust will therefore be treated as the income the Arkansas
Unitholders under Arkansas law;
Interest on bonds, issued by the State of Arkansas, or by or on behalf of
political subdivisions, agencies or instrumentalities thereof, that would be
exempt from Federal income taxation when paid directly to an Arkansas
Unitholder will be exempt from Arkansas income taxation when received by the
Arkansas Trust and attributed to such Arkansas Unitholder and when distributed
to such Arkansas Unitholder; and
Distribution of income to Arkansas Unitholders consisting of gains realized
upon the sale or other disposition of obligations held by the Arkansas Trust
will be subject to Arkansas income taxation to the extent that such income
would be subject to Arkansas income taxation if the obligations were held or
sold or otherwise disposed of directly by the Arkansas Unitholders.
California Trusts
The Trust will invest substantially all of its assets in California Municipal
Obligations. The Trust is therefore susceptible to political, economic or
regulatory factors affecting issuers of 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 Fund or the ability of particular
obligors to make timely payments of debt service on (or related to) those
obligations.
California's economy is the largest among the 50 states and one of the largest
in the world. The State's population of almost 32 million represents 12.8% 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 1992, 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 experienced the worst job losses of any
post-war recession and employment levels are not expected to stabilize until
late 1994 or 1995. The largest job losses have been in Southern California,
led by declines in the aerospace and construction industries. Weaknesses
statewide occurred in manufacturing, construction, services and trade.
Additional military base closures will have further adverse effects on the
State's economy later in the decade. Unemployment is expected to average 9% in
1993, and is expected to remain high in 1994. The State's economy is only
expected to pull out of the recession slowly once the national recovery has
begun. Delay in recovery will exacerbate shortfalls in State revenues.
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 allowed non-voter approved levy of "general taxes "which were not
dedicated to a specific use. In response to these decisions, however, 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.
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 consists 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" excludes most State
subventions to local governments. No limit is imposed on appropriations or
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 by Proposition 111 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 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 million, $7.5 billion and $5.2 billion for the
five most recent fiscal 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 the
State or local governments to pay debt service on such California Municipal
Obligations. It is 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.
As of January 1, 1994, California had approximately $17.7 billion of general
obligation bonds outstanding, and $6.3 billion remained authorized but
unissued. In addition, at June 30, 1993, the State had lease-purchase
obligations, payable from the State's General Fund, of approximately $4.0
billion. In Fiscal Year 1992-93, debt service on general obligation bonds and
lease-purchase debt was approximately 4.1% of General Fund revenues. The State
has paid the principal of and interest on its general obligation bonds,
lease-purchase debt and short-term obligations when due.
The principal sources of General Fund revenues in 1992-93 were the California
personal income tax (44% of total revenues), the sales tax (38%), bank and
corporation taxes (12%), and the gross premium tax on insurance (3%).
California maintains a Special Fund for Economic Uncertainties (the "Economic
Uncertainties Fund"), derived from General Fund.
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 (currently about
33%).
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
four of the five fiscal years ending in 1991-92; revenues were about equal in
1992-93. By June 30, 1993, the State's General Fund had an accumulated
deficit, on a budget basis, of approximately $2.2 billion.
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.
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 those
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 all of these ongoing
obligations as they came due, as well as valid obligations incurred in the
prior fiscal year.
Because of the delay in enacting the budget, the State could not carry out its
normal cash flow borrowing, and 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.
The1992-93 Budget Bill was signed 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.
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 continued for a third year, State revenues again lagged projections. The
Department of Finance projected revenues in 1992-93 $2.4 billion below
projections and expenditures $300 million higher. As a result, the Department
predicted the General Fund ended at June 30, 1993 with a fund balance deficit
of about $2.2 billion, almost unchanged from June 30, 1992. The projected
negative balance of the Special Fund for Economic Uncertainties were $2
billion.
1993-94 Budget. The 1993-94 Budget represents the third consecutive year of
extremely difficult budget choices for the State, in view of the continuing
recession. The Budget Act, signed on June 30, 1993, provides for General Fund
expenditures of $38.5 billion, a 6.3% decline from the prior year. Revenues
are projected at $40.6 billion, about $400 million below the prior year. To
bring the budget into balance, the Budget Act and related legislation provided
for transfer of $2.6 billion of local property taxes to school districts, thus
relieving State support obligations; reductions in health and welfare
expenditures; reductions in support for higher education institutions; a
two-year suspension of the renters' tax credit; and miscellaneous cuts in
general government spending and certain one-time and accounting adjustments.
There were no general state tax increases, but a 0.5% temporary state sales
tax scheduled to expire on June 30 was extended for six months, and dedicated
to support local government public safety costs.
As part of the 1993-94 Budget, the Governor implemented a plan to repay the
accumulated $2.8 billion deficit in the Special Fund for Economic
Uncertainties over 18 months, funding the deficit with external borrowing
maturing not later than December 31, 1994. About $1.6 billion of the deficit
was repaid by December 1993, with the balance to be paid by December 31, 1994.
Taking this borrowing into account, the Department of Finance projected in
July, 1993 that the Special Fund for Economic Uncertainties would have a
balance of about $600 million at June 30, 1994, and about $100 million at June
30, 1995.
The 1994-95 Governor's Budget Proposal, released January 7, 1994, projects
that because of the continuation of the recession, the 1993-94 fiscal year
will end with a negative fund balance $1.7 billion worse than originally
planned, even though state revenues have been close to projections through the
first six months of the 1993-94 fiscal year.
To produce a balanced budget in 1994-95, the Governor proposes further cuts in
health and welfare costs, and requests additional federal aid of over $3
billion for costs associated with undocumented foreign immigrants and for
health and welfare programs. These is no assurance these funds will be
appropriated by the Congress.
On January 17, 1994 a major earthquake struck Los Angeles, causing widespread
property damage in public and private structures and facilities, estimated
preliminarily at in excess of $15 billion. Large amounts of federal aid are
expected, and additional state resources will be made available. It is too
soon to assess the short or long term impacts of the earthquake on the
regional and state economies, and on the fiscal condition of local and state
government.
The State's severe financial difficulties for the current and upcoming budget
years will result in continued pressure upon various 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.
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.
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.
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.
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. Through 1990-91, local assistance
(including public schools) accounted for around 75% of General Fund spending.
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
"bailout" aid. The 1993-94 Budget Act transfers about $2.6 billion of local
property taxes to school districts, the largest share ($2 billion) coming from
counties, and the balance from cities ($288 million), special districts ($244
million) and redevelopment agencies ($65 million). In order to make up this
shortfall to cities and counties, the Legislature has dedicated 0.5% sales tax
to local public safety purposes through December 31, 1993. Voters at a
statewide election in November, 1993 will vote on a permanent extension of
this sales tax for local public safety. In addition, the Legislature has
changed laws to relieve local governments of certain mandates, allowing them
to reduce costs.
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 continue to 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.
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.
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 a 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 trial
court upheld the validity of the lease, and the case is expected to be
settled, but if it is not, further appeals may occur. Any ultimate judgment
against the Trustee may have adverse implications for lease transactions of a
similar nature by other California entities.
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 (for example, 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 Article XIIIA and Article 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 Fund 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 Portfolio
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.
At the time of the closing for each California Trust, Special Counsel to each
California Trust for California tax matters, rendered an opinion under then
existing California income tax law applicable to taxpayers whose income is
subject to California income taxation substantially to the effect that:
the California Trust is not an association taxable as a corporation and the
income of the California Trust will be treated as the income of the
Unitholders under the income tax laws of California;
amounts treated as interest on the underlying Securities in the California
Trust which are exempt from tax under California personal income tax and
property tax laws when received by the California Trust will, under such laws,
retain their status as tax-exempt interest when distributed to Unitholders.
However, interest on the underlying Securities attributed to a Unitholder
which is a corporation subject to the California franchise tax laws may be
includable in its gross in come for purposes of determining its California
franchise tax. Further, certain interest which is attributable to a Unitholder
subject to the California personal income tax and which is treated as an item
of tax preference for purposes of the federal alternative minimum tax pursuant
to Section 57(a)(5) of the Internal Revenue Code of 1986 may also be treated
as an item of tax preference that must be taken into account in computing such
Unitholder's alternative minimum taxable income for purposes of the California
alternative minimum tax enacted by 1987 California Statutes, chapter 1138.
However, because of the provisions of the California Constitution exempting
the interest on bonds issued by the State of California, or by local
governments within the state, from taxes levied on income, the application of
the new California alternative minimum tax to interest otherwise exempt from
the California personal income tax in some cases may be unclear;
under California income tax law, each Unitholder in the California Trust will
have a taxable event when the California Trust disposes of a Security (whether
by sale, exchange, redemption, or payment at maturity) or when the Unitholder
redeems or sells Units. Because of the requirement that tax cost basis be
reduced to reflect amortization of bond premium, under some circumstances a
Unitholder may realize taxable gains when Units are sold or redeemed for an
amount equal to, or less than, their original cost. The total cost of each
Unit in the California Trust to a Unitholder is allocated among each of the
Bond issues held in the California Trust (in accordance with the proportion of
the 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
tax cost of each Bond issue. Unitholders' bases in their Units, and the bases
for their fractional interest in each Trust asset, may have to be adjusted for
their pro rata share of accrued interest received, if any, on Securities
delivered after the Unitholders' respective settlement dates;
under the California personal property tax laws, bonds (including the
Securities in the California Trust) or any interest therein is exempt from
such tax; and
any proceeds paid under the insurance policy issued to the California Trust
with respect to the Securities 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; and
under Section 17280(b)(2) of the California Revenue and Taxation Code,
interest on indebtedness incurred or continued to purchase or carry Units of
the 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.
At the respective times of issuance of the Securities, opinions relating to
the validity thereof and to the exemption of interest thereon from Federal
income tax and California personal income tax are rendered by bond counsel to
the respective issuing authorities. Except in certain instances in which
Special Counsel acted as bond counsel to issuers of Securities, and as such
made a review of proceedings relating to the issuance of certain Securities at
the time of their issuance, Special Counsel has not made any special review
for the California Trusts of the proceedings relating to the issuance of the
Securities or of the basis for such opinions.
Colorado Trust
The State Constitution requires that expenditures for any fiscal year not
exceed revenues for such fiscal year. By statute, the amount of General Fund
revenues available for appropriation is based upon revenue estimates which,
together with other available resources, must exceed annual appropriations by
the amount of the unappropriated reserve (the "Unappropriated Reserve"). The
Unappropriated Reserve requirement for fiscal year 1991, 1992 and 1993 was set
at 3%. For fiscal year 1992 and thereafter, General Fund appropriations are
also limited to an amount equal to the cost of performing certain required
reappraisals of taxable property plus an amount equal to the lesser of (i)
five percent of Colorado personal income or (ii) 106% of the total General
Fund appropriations for the previous fiscal year. This restriction does not
apply to any General Fund appropriations which are required as a result of a
new federal law, a final state or federal court order or moneys derived from
the increase in the rate or amount of any tax or fee approved by a majority of
the registered electors of the State voting at any general election. In
addition, the limit on the level of General Fund appropriations may be
exceeded for a given fiscal year upon the declaration of a State fiscal
emergency by the State General Assembly.
The 1991 fiscal year end fund balance was $16.3 million, which was $62.8
million below the 3% Unappropriated Reserve requirement. As of the end of the
1992 fiscal year, the fund balance was $133.3 million, which was $49.1 million
over the 3% Unappropriated Reserve requirement. Based on June 20, 1993
estimates, the 1993 fiscal year ending fund balance is expected to be $281.8
million, or $189.7 million over the 3% required Unappropriated Reserve.
On November 3, 1992, voters in Colorado approved a constitutional amendment
(the "Amendment") which, in general became effective December 31, 1992, and
which could restrict the ability of the State and local governments to
increase revenues and impose taxes. The Amendment applies to the State and all
local governments, including home rule entities ("Districts"). Enterprises,
defined as government-owned businesses authorized to issue revenue bonds and
receiving under 10% of annual revenue in grants from all Colorado state and
local governments combined, are excluded
from the provisions of the Amendment.
The provisions of the Amendment are unclear and would probably require
judicial interpretation. Among other provisions, beginning November 4, 1992,
the Amendment requires voter approval prior to tax increases, creation of
debt, or mill levy or valuation for assessment ratio increases. The Amendment
also limits increases in government spending and property tax revenues to
specified percentages. The Amendment requires that District property tax
revenues yield no more than the prior year's revenues adjusted for inflation,
voter approved changes and (except with regard to school districts) local
growth in property values according to a formula set forth in the Amendment.
School districts are allowed to adjust tax levies for changes in student
enrollment. Pursuant to the Amendment, local government spending is to be
limited by the same formula as the limitation for property tax revenues. The
Amendment limits increases in expenditures from the State general fund and
program revenues (cash funds) to the growth in inflation plus the percentage
change in State population in the prior calendar year. The basis for spending
and revenue limits for fiscal year 1994 and later years will be the prior
fiscal year's spending and property taxes collected in the prior calendar
year. Debt service changes, reductions and voter-approved revenue changes are
excluded from the calculation bases. The Amendment would also prohibit new or
increased real property transfer tax rates, new State real property taxes and
local District income taxes.
According to the Colorado Economic Perspective, Fourth Quarter, FY 1992-93,
June 20, 1993 (the "Economic Report"), inflation for 1992 was 3.7% and
population grew at the rate of 2.7% in Colorado. Accordingly, under the
Amendment, increases in State expenditures during the 1994 fiscal year will be
limited to 6.4% over expenditures during the 1993 fiscal year. The 1993 fiscal
year is the base year for calculating the limitation for the 1994 fiscal year.
For the 1993 fiscal year, the Office of State Planning and Budgeting estimates
that general fund revenues will total $3,341.7 million and that program
revenues (cash funds) will total $1,753.4 million, or total estimated base
revenues of $5,095.1 million. Expenditures for the 1994 fiscal year,
therefore, cannot exceed $5,421.2 million. However, the 1994 fiscal year
general fund and program revenues (cash funds) are projected to be only
$5,220.4 million, or $200.8 million less than expenditures allowed under the
spending limitation.
There is also a statutory restriction on the amount of annual increases in
taxes that the various taxing jurisdictions in Colorado can levy without
electoral approval. This restriction does not apply to taxes levied to pay
general obligation debt.
As the State experienced revenue shortfalls in the mid-1980s, it adopted
various measures, including impoundment of funds by the Governor, reduction of
appropriations by the General Assembly, a temporary increase in the sales tax,
deferral of certain tax reductions and inter-fund borrowings. On a GAAP basis,
the State had unrestricted General Fund balances at June 30 of approximately
$100.3 million in fiscal year 1988, $134.8 million in fiscal year 1989, $116.6
million in fiscal year 1990, $16.3 million in fiscal year 1991 and $133.3
million in fiscal year 1992. The fiscal year 1993 unrestricted general fund is
currently estimated to be $281.8 million.
For fiscal year 1992, the following tax categories generated the following
respective revenue percentages of the State's $2,995.8 million total gross
receipts: individual income taxes represented 53.7% of gross fiscal year 1992
receipts; excise taxes represented 33.4% of gross fiscal year 1992 receipts;
and corporate income taxes represented 3.7% of gross fiscal year 1992
receipts. The final budget for fiscal year 1993 projects general fund revenues
of approximately $3,341.7 million and appropriations of approximately $3,046.7
million. The percentages of general fund revenue generated by type of tax for
fiscal year 1993 are not expected to be significantly different from fiscal
year 1992 percentages.
Under its constitution, the State of Colorado is not permitted to issue
general obligation bonds secured by the full faith and credit of the State.
However, certain agencies and instrumentalities of the State are authorized to
issue bonds secured by revenues from specific projects and activities. The
State enters into certain lease transactions which are subject to annual
renewal at the option of the State. In addition, the State is authorized to
issue short-term revenue anticipation notes. Local governmental units in the
State are also authorized to incur indebtedness. The major source of financing
for such local government indebtedness is an ad valorem property tax. In
addition, in order to finance public projects, local governments in the State
can issue revenue bonds payable from the revenues of a utility or enterprise
or from the proceeds of an excise tax, or assessment bonds payable from
special assessments. Colorado local governments can also finance public
projects through leases which are subject to annual appropriation at the
option of the local government. Local governments in Colorado also issue tax
anticipation notes. The Amendment requires prior voter approval for the
creation of any multiple fiscal year debt or other financial obligation
whatsoever, except for refundings at a lower rate or obligations of an
enterprise.
Based on data published by the State of Colorado, Office of State Planning and
Budgeting as presented in the Economic Report, over 50% of non-agricultural
employment in Colorado in 1992 was concentrated in the retail and wholesale
trade and service sectors, reflecting the importance of tourism to the State's
economy and of Denver as a regional economic and transportation hub. The
government and manufacturing sectors followed as the fourth and fifth largest
employment sectors in the State, representing approximately 18.3% and 11.5%,
respectively, of non-agricultural employment in the State in 1992.
According to the Economic Report, during the first quarter of 1993, 45,900 net
new jobs were generated in the Colorado economy, an increase of 24.4% over the
first quarter of 1992. However, the unemployment rate rose from an average of
5.5% during the first quarter of 1992 to 5.8% during the first quarter of
1993. Total retail sales increased by 9.8% during the first quarter of 1993 as
compared to the same period in 1992.
Personal income rose 6.6% in Colorado during 1992 and 5.5% in 1991. In 1992,
Colorado was the twelfth fastest growing state in terms of personal income
growth. However, because of heavy migration into the state and a large
increase in low-paying retail sector jobs, per capita personal income in
Colorado increased by only 3.8% in 1992, 0.1% below the increase in per capita
personal income for the nation as a whole.
Economic conditions in the State may have continuing effects on other
governmental units within the State (including issuers of the Bonds in the
Colorado Trust), which, to varying degrees, have also experienced reduced
revenues as a result of recessionary conditions and other factors.
At the time of the closing for each Colorado Trust, Special Counsel to the
Fund for Colorado tax matters rendered an opinion under then existing Colorado
income tax law applicable to taxpayers whose income is subject to Colorado
income taxation substantially to the effect that:
Because Colorado income tax law is based upon the Federal law, the Colorado
Trust is not an association taxable as a corporation for purposes of Colorado
income taxation.
With respect to Colorado Unitholders, in view of the relationship between
Federal and Colorado tax computations described above:
Each Colorado Unitholder will be treated as owning a pro rata share of each
asset of the Colorado Trust for Colorado income tax purposes in the proportion
that the number of Units of such Trust held by the Unitholder bears to the
total number of outstanding Units of the Colorado Trust, and the in come of
the Colorado Trust will therefore be treated as the income of each Colorado
Unitholder under Colorado law in the proportion described;
Interest on Bonds that would not be includable in income for Colorado income
tax purposes when paid directly to a Colorado Unitholder will be exempt from
Colorado income taxation when received by the Colorado Trust and attributed to
such Colorado Unitholder and when distributed to such Colorado Unitholder;
Any proceeds paid under an insurance policy or policies issued to the Colorado
Trust with respect to the Bonds in the Colorado Trust which represent maturing
interest on defaulted obligations held by the Trustee will be excludable from
Colorado adjusted gross income if, and to the same extent as, such interest
would have been so excludable if paid in the normal course by the issuer of
the defaulted obligations;
Any proceeds paid under individual policies obtained by issuers of Bonds in
the Colorado Trust which represent maturing interest on defaulted obligations
held by the Trustee will not be includable in income for Colorado income tax
purposes if, and to the same extent as, such interest would have been so
excludable if paid in the normal course by the issuer of the defaulted
obligations;
Each Colorado Unitholder will realize taxable gain or loss when the Colorado
Trust disposes of a Bond (whether by sale, exchange, redemption, or payment at
maturity) or when the Colorado Unitholder 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 Colorado Unitholder's share of interest, if any,
accruing on Bonds during the interval between the Colorado Unitholder's
settlement date and the date such Bonds are delivered to the Colorado Trust,
if later);
Tax cost reduction requirements relating to amortization of bond premium may,
under some circumstances, result in Colorado Unitholders realizing taxable
gain when their Units are sold or redeemed for an amount equal to or less than
their original cost; and
If interest on indebtedness incurred or continued by a Colorado Unitholder to
purchase Units in the Colorado Trust is not deductible for federal income tax
purposes, it also will be non-deductible for Colorado income tax purposes.
Unitholders should be aware that all tax-exempt interest, including their
share of interest on the Bonds paid to the Colorado Trust, is taken into
account for purposes of determining eligibility for the Colorado Property
Tax/Rent/Heat Rebate.
Connecticut Trusts
Investors should be aware that manufacturing was historically the most
important economic activity within the State of Connecticut but, in terms of
number of persons employed, manufacturing has declined in the last ten years
while both trade and service-related industries have become more important,
and in 1992 manufacturing accounted for only 20.1% of total non-agricultural
employment in Connecticut. Defense-related business represents a relatively
high proportion of the manufacturing sector; reductions in defense spending
have already had a substantial adverse effect on Connecticut's economy, and
the State's largest defense contractors have announced substantial planned
labor force reductions scheduled to occur over the next four years.
Connecticut is now in a recession, the depth and duration of which are
uncertain. Moreover, while unemployment in the State as a whole has generally
remained below the national level, as of May 1993, the estimated rate of
unemployment in Connecticut on a seasonally adjusted basis was 7.4%, compared
to 6.9% for the United States as a whole, and certain geographic areas in the
State have been affected by high unemployment and poverty. The State derives
over 70% of its revenues from taxes imposed by it, the most important of which
have been the sales and use taxes and the corporation business tax, each of
which is sensitive to changes in the level of economic activity in the State,
but the Connecticut income tax on individuals, trusts, and estates enacted in
1991 is expected to supersede each of them in importance. There can be no
assurance that general economic difficulties or the financial circumstances of
the State or its towns and cities will not adversely affect the market value
of the Bonds in the Connecticut Trust or the ability of the obligors to pay
debt service on such Bonds.
The General Fund budget adopted by Connecticut for the 1986-87 fiscal year
contemplated both revenues and expenditures of $4,300,000,000. The General
Fund ended the 1986-87 fiscal year with a surplus of $365,200,000. The General
Fund budget for the 1987-88 fiscal year contemplated General Fund revenues and
expenditures of $4,915,800,000. However, the General Fund ended the 1987-88
fiscal year with a deficit of $115,600,000. The General Fund budget adopted
for the 1988-89 fiscal year anticipated that General Fund expenditures of
$5,551,000,000 and certain educational expenses of $206,700,000 not previously
paid through the General Fund would be funded in part from surpluses of prior
years and in part from higher tax revenues projected to result from tax laws
in effect for the 1987-88 fiscal year and stricter enforcement thereof; a
substantial deficit was projected during the third quarter of the 1988-89
fiscal year, but largely because of tax law changes that took effect before
the end of the fiscal year, the deficit was kept to $28,000,000. The General
Fund budget adopted for the 1989-90 fiscal year anticipated expenditures of
approximately $6,224,500,000 and, by virtue of tax increase legislation
enacted to take effect generally at the beginning of the fiscal year, revenues
slightly exceeding such amount. However, largely because of tax revenue
shortfalls, the General Fund ended the 1989-90 fiscal year with a deficit for
the year of $259,500,000, wiping out reserves for such events built up in
prior years. The General Fund budget adopted for the 1990-91 fiscal year
anticipated expenditures of $6,433,000,000, but no significant new or
increased taxes were enacted. Primarily because of significant declines in tax
revenues and unanticipated expenditures reflective of economic adversity, the
General Fund ended the 1990-91 fiscal year alone with a further deficit of
$809,000,000.
A General Fund budget for the 1991-92 fiscal year was not enacted until August
22, 1991. This budget anticipates General Fund expenditures of $7,007,861,328
and revenues of $7,426,390,000. Projected decreases in revenues resulting from
a 25% reduction in the sales tax rate effective October 1, 1991, the repeal of
the taxes on the capital gains and interest and dividend income of resident
individuals for years starting after 1991, and the phase-out of the
corporation business tax surcharge over two years commencing with taxable
years starting after 1991 were expected to be more than offset by a new
general income tax imposed at effective rates not to exceed 4.5% on the
Connecticut taxable income of resident and non-resident individuals, trusts
and estates. The General Fund ended the 1991-92 Fiscal year with an operating
surplus of $110,000,000. The General Fund budget for the 1992-93 fiscal year
anticipated General Fund expenditures of $7,372,062,859 and revenues of
$7,372,210,000. The General Fund ended the 1992-93 fiscal year with an
operating surplus of $113,500,000. Balanced General Fund budgets for the
biennium ending June 30, 1995, have been adopted appropriating expenditures of
$7,828,900,000 for the 1993-94 fiscal year and $8,266,000,000 for the 1994-95
fiscal year. In addition, expenditures of Federal, State and local funds in
the ten years started July 1, 1984 for repair of the State's roads and bridges
now projected at $9,500,000,000 are anticipated, the State's share of which
would be financed by bonds expected to total $3,700,000,000 and by direct
payments both of which would be supported by a Special Transportation Fund
first created by the General Assembly for the 1984-85 fiscal year.
To fund operating cash requirements, prior to the 1991-92 fiscal year the
State borrowed up to $750,000,000 pursuant to authorization to issue
commercial paper and on July 29, 1991, it issued $200,000,000 of General
Obligation Temporary Notes, none of which temporary borrowings are currently
outstanding. To fund the cumulative General Fund deficit for the 1989-90 and
1990-91 fiscal years, the legislation enacted August 22, 1991, authorized the
State Treasurer to issue Economic Recovery Notes up to the aggregate amount of
such deficit, which must be payable no later than June 30, 1996; at least
$50,000,000 of such Notes, but not more than a cap amount, is to be retired
each fiscal year commencing with the 1991-92 fiscal year, and any
unappropriated surplus up to $205,000,000 in the General Fund at the end of
each of the three fiscal years commencing with the 1991-92 fiscal year must be
applied to retire such Notes as may remain outstanding at those times. On
September 25, 1991, and October 24, 1991, the State issued $640,710,000 and
$325,002,000, respectively, of such Economic Recovery Notes, of which
$705,610,000 was outstanding as of October 1, 1993.
As a result of the State's budget problems, the ratings of its general
obligation bonds were reduced by Standard & Poor's from AA+ to AA on March 29,
1990, and by Moody's from Aa1 to Aa on April 9, 1990. Moreover, because of
these problems, on September 13, 1991, Standard & Poor's reduced its ratings
of the State's general obligation bonds and certain other obligations that
depend in part on the creditworthiness of the State to AA. On March 7, 1991,
Moody's downgraded its ratings of the revenue bonds of four Connecticut
hospitals because of the effects of the State's restrictive controlled
reimbursement environment under which they have been operating.
General obligation bonds issued by Connecticut municipalities are payable
primarily only from ad valorem taxes on property subject to taxation by the
municipality. Certain Connecticut municipalities have experienced severe
fiscal difficulties and have reported operating and accumulated deficits in
recent years. The most notable of these is the City of Bridgeport, which filed
a bankruptcy petition on June 7, 1991. The State opposed the petition. The
United States Bankruptcy Court for the District of Connecticut has held that
Bridgeport has authority to file such a petition but that its petition should
be dismissed on the grounds that Bridgeport was not insolvent when the
petition was filed. Regional economic difficulties, reductions in revenues,
and increased expenses could lead to further fiscal problems for the State and
its political subdivisions, authorities, and agencies. Difficulty in payment
of debt service on borrowings could result in declines, possibly severe, in
the value of their outstanding obligations and increases in their future
borrowing costs.
The assets of the Connecticut Trust will consist of obligations (the "Bonds");
certain of the Bonds have been issued by or on behalf of the State of
Connecticut or its political subdivisions or other public instrumentalities,
state or local authorities, districts, or similar public entities created
under the laws of the State of Connecticut ("Connecticut Bonds") and the
balance of the Bonds have been issued by or on behalf of entities classified
for the relevant purposes as territories or possessions of the United States,
including one or more of Puerto Rico, Guam, or the Virgin Islands, the
interest on the obligations of which Federal law would prohibit Connecticut
from taxing if received directly by the Unitholders. Certain Connecticut Bonds
in the Connecticut Trust were issued prior to the enactment of the Connecticut
income tax on the Connecticut taxable income of individuals, trusts, and
estates (the "Connecticut Income Tax"); therefore, bond counsel to the issuers
of such Bonds did not opine as to the exemption of the interest on such Bonds
from such tax. However, the Sponsor and special counsel to the Trusts for
Connecticut tax matters believe that such interest will be so exempt. Interest
on Bonds in the Connecticut Trust issued by other issuers, if any, is, in the
opinion of bond counsel to such issuers, exempt from state taxation.
The Connecticut income tax was enacted in August, 1991. Generally, a
Unitholder recognizes gain or loss for purposes of this tax to the same extent
as he recognizes gain or loss for Federal income tax purposes. Ordinarily this
would mean that gain or loss would be recognized by a Unitholder upon the
maturity, redemption, sale, or other disposition by the Connecticut Trust of a
Bond held by it, or upon the redemption, sale, or other disposition of a Unit
of a Connecticut Trust held by the Unitholder.
However, on June 19, 1992, Connecticut legislation was adopted that provides
that gains and losses from the sale or exchange of Connecticut Bonds held as
capital assets will not be taken into account for purposes of the Connecticut
Income Tax for taxable years starting on or after January 1, 1992. It is not
clear whether this provision would apply to gain or loss recognized by a
Unitholder upon the maturity or redemption of a Connecticut Bond held by the
Connecticut Trust or, to the extent attributable to Connecticut Bonds held by
the Connecticut Trust, to gain or loss recognized by a Unitholder upon the
redemption, sale, or other disposition of a Unit of the Connecticut Trust held
by the Unitholder. Unitholders are urged to consult their own tax advisors
concerning these matters.
At the time of the closing for each Connecticut Trust, Special Counsel to the
Fund for Connecticut tax matters rendered an opinion under then existing
Connecticut income tax law applicable to taxpayers whose income is subject to
Connecticut income taxation substantially to the effect that:
The Connecticut Trust is not liable for any tax on or measured by net income
imposed by the State of Connecticut.
Interest income of the Connecticut Trust from a Bond issued by or on behalf of
the State of Connecticut, any political subdivision thereof, or public
instrumentality, state or local authority, district, or similar public entity
created under the laws of the State of Connecticut (a "Connecticut Bond"), or
from a Bond issued by United States territories or possessions the interest on
which Federal law would prohibit Connecticut from taxing if received directly
by a Unitholder from the issuer thereof, is not taxable under the Connecticut
tax on the Connecticut taxable income of individuals, trusts, and estates (the
"Connecticut Income Tax"), when any such interest is received by the
Connecticut Trust or distributed by it to such a Unitholder.
Insurance proceeds received by the Connecticut Trust representing maturing
interest on defaulted Bonds held by the Connecticut Trust is not taxable under
the Connecticut Income Tax if, and to the same extent as, such interest would
not be taxable thereunder if paid directly to the Connecticut Trust by the
issuer of such Bonds.
Gains and losses recognized by a Unitholder for Federal income tax purposes
upon the maturity, redemption, sale, or other disposition by the Connecticut
Trust of a Bond held by the Connecticut Trust or upon the redemption, sale, or
other disposition of a Unit of the Connecticut Trust held by a Unitholder are
taken into account as gains or losses, respectively, for purposes of the
Connecticut Income Tax, except that, in the case of a Unitholder holding a
Unit of the Connecticut Trust as a capital asset, such gains and losses
recognized upon the sale or exchange of a Connecticut Bond held by the
Connecticut Trust are excluded from gains and losses taken into account for
purposes of such tax and no opinion is expressed as to the treatment for
purposes of such tax of gains and losses recognized upon the maturity or
redemption of a Connecticut Bond held by the Connecticut Trust or, to the
extent attributable to Connecticut Bonds, of gains and losses recognized upon
the redemption, sale, or other disposition by a Unitholder of a Unit of the
Connecticut Trust held by him.
The portion of any interest income or capital gain of the Connecticut Trust
that is allocable to a Unitholder that is subject to the Connecticut
corporation business tax is includable in the gross income of such Unitholder
for purposes of such tax. An interest in a Unit of the Connecticut Trust that
is owned by or attributable to a Connecticut resident at the time of his death
is includable in his gross estate for purposes of the Connecticut succession
tax and the Connecticut estate tax.
Delaware Trusts
The State ended fiscal 1989 with a cumulative cash balance of $185.4 million,
more than 15% of total expenditures for the year. The Budgetary Reserve Fund
was fully funded at the 5% level or $62.5 million during the fiscal year.
General Fund revenue grew by 8.9% during fiscal 1989. General fund
expenditures were $1,092.2 million in fiscal 1989, an increase of 5.1% over
fiscal1988. The increase funded additional spending in welfare programs,
teacher compensation, and a salary increase for State employees.
Projected General Fund revenue of $1,139.4 million for fiscal 1990 is 5.3%
higher than fiscal 1989. This growth reflects the continuing strength of the
Delaware economy, although this estimate, issued March 19, 1990, is $18.7
million less than an estimate issued in December, 1989, reflecting a cooling
of the Delaware economy and decreased franchise taxes because of mergers and
acquisitions. Taken with the unencumbered balance from the previous year,
$1,324.8 million is available for expenditure in fiscal 1990. Projected
General Fund expenditures of $1,176.7 million are 9.7% greater than spending
in fiscal 1989.
The State Constitution was amended in May 1980 to limit tax increases. Any tax
increase or the imposition of any new tax must be passed by a three-fifths
vote of each house of the General Assembly, rather than by a simple majority
vote, except for tax increases to meet debt service on outstanding obligations
of the State for which insufficient revenue is available when such debt
service is due. The intended impact of this amendment is to make it easier to
lower expenditures than to increase taxes. The amendment also provides that
the State shall appropriate, prior to each fiscal year of the State, sums
sufficient to meet debt service in the following fiscal year, a practice the
State has always followed.
The State Constitution limits annual appropriations by majority vote of both
houses of the General Assembly to 98% of estimated General Fund revenue plus
the unencumbered General Fund balance from the previous fiscal year. Any
appropriation exceeding this limit may be made in the event of certain
emergencies with the approval of a three-fifths vote of the members of each
house of the General Assembly, but no appropriation may be made exceeding 100%
of estimated General Fund revenue plus the unencumbered General Fund balance
from the previous fiscal year.
The State Constitution also provides that the excess of any unencumbered
General Fund revenue at the end of a fiscal year must be placed in a reserve
account ("Budgetary Reserve Account") within 45 days following the end of the
fiscal year. The Budgetary Reserve Account is designed to provide a cushion
against unanticipated deficits. The money in the Budgetary Reserve Account
accumulates until the fund reaches a maximum of 5% of the General Fund
estimated revenue (including tax money that may be refunded) for the ensuing
fiscal year. Transfers of $9.2 million were made to fund the Budgetary Reserve
Account for fiscal 1989. Transfers are made in August based on June
projections. Access to these monies is authorized with the approval of the
three-fifths vote of the members of each house of the General Assembly for use
only in the event of the necessity to fund an unanticipated General Fund
deficit or to provide funds required as a result of the enactment of
legislation reducing taxes.
There is no Constitutional debt limit of the State. The Delaware Code
presently provides that the total amount of authorized bonds issued and
unissued for the payment of which the full faith and credit of the State may
be pledged shall not exceed 1.5 times the total gross revenue deposited in the
State's General Fund for the preceding fiscal year. Applying that calculation,
the current debt limit is $1,799 million. As of May 1, 1990, the amount of
general obligation debt outstanding will be $398.4 million, and the amount of
authorized, but unissued general obligation bonds was approximately $72.0
million. Bonds or bond anticipation notes issued by the State to provide the
local share of the cost of school construction are not included in the
calculation of the aforesaid debt limit, no rare revenue anticipation notes of
the State. There is no debt limit applicable to the issuance of revenue
anticipation notes; however there has not been a State issue of revenue notes
since fiscal 1977 and the State does not plan to issue revenue notes in fiscal
1990.
Under Delaware Code, the authorization of general obligation debt of the State
is limited in any State fiscal year to an amount equal to (a) 75% of the
principal retirement of general obligations debt of the State in the prior
State fiscal year plus (b) the amount of previously authorized and unissued
general obligation debt and/or guaranteed debt the authorization for which is
repealed in such fiscal year. This law can be supplemented, amended or
repealed by subsequently enacted legislation.
Since the employment impact of the Financial Center Development Act was
initially felt in 1982, the Delaware unemployment rate has been below the
national and regional average. For calendar 1989, Delaware unemployment was
3.5% compared to 4.4% in the region and 5.3% in the United States. Delaware
per capita personal income has been above the national level since 1980. For
1987, the latest year for which figures are available, Delaware per capita
personal income was 106% of the national average.
General obligation debt of Delaware is rated AA by Moody's and AA+ by Standard
and Poor's.
There is no pending litigation attacking the constitutionality of any Delaware
revenue source or the method of collection from that source.
At the time of the closing for each Delaware Trust, Special Counsel to each
Delaware Trust for Delaware tax matters rendered an opinion under then
existing Delaware income tax law applicable to taxpayers whose income is
subject to Delaware income taxation substantially to the effect that:
Distributions of interest income to Unitholders that would not be taxable if
received directly by a Delaware resident are not subject to personal income
tax under the Delaware personal income tax imposed by 30 Del. C. et seq.;
Distributions of interest income to Unitholders which are estates or trusts
that would not be taxable if received directly by a Delaware resident estate
or trust are not subject to the personal income tax imposed by 30 Del. C. et
seq.;
Distributions of interest income to Unitholders which are corporations that
would not be taxable for Delaware income tax purposes if received directly by
a corporation will not be subject to the Delaware corporate income tax imposed
by 30 Del. C. 1 et seq.;
To the extent that any gain or loss from the sale of obligations held by the
Fund or from the sale of a Unit by a Unitholder is includable or deductible in
the calculation of a resident individual's, estate's or trust's adjusted gross
income for federal income tax purposes, any such gain or loss will be
includable or deductible in the calculation of taxable income for the purposes
of Delaware resident personal income taxes;
To the extent that any gain or loss from the sale of obligations held by the
Fund or from the sale of a Unit by a Unitholder is includable or deductible in
the calculation of taxable income for purposes of federal income tax imposed
upon a corporation, such gain or loss shall not be includable or deductible in
the calculation of taxable income for purposes of the Delaware corporate
income tax since gains or losses from the sale or other disposition of
securities issued by the State of Delaware or political subdivisions thereof
are not included in computing the taxable income of a corporation for Delaware
corporate income tax purposes.
Any proceeds paid under insurance policies issued to the Trustee or obtained
by issuers or underwriters of the Bonds, the Sponsor, or others which
represent interest on defaulted obligations held by the Trustee will be
excludable from Delaware gross income for individuals, trusts and estates, or
corporations, if, and to the same extent as, such proceeds would have been so
excludable from federal income taxation;
Interest income received by a Unitholder is not exempt from the franchise tax
imposed on banking organizations under 5 Del. C. et seq. and the franchise tax
imposed on building and loan associates imposed under 5 Del. C. et seq.; and
The Units are not exempt from Delaware inheritance, estate and gift tax.
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.
Florida's housing starts since 1980 have represented an average of 11.5% of
the U.S.'s total annual starts, and except for the recession years 1980-82,
and the recession beginning in 1990, starts have exceeded 160,000 a year.
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 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 Florida's most important industries. Approximately 39.3
million tourists visited the State in 1991, as reported by the Florida
Department of Commerce. In terms of business activities and state tax
revenues, tourists in Florida in 1991 represented an estimated 4.4 million
additional residents. Visitors to the State tend to arrive equally by air and
car. The State's tourism industry over the years has become more
sophisticated, attracting visitors year-round and, to a degree, reducing its
seasonality. Tourist arrivals should be slightly negatively impacted as a
result of Hurricane Andrew, but should recover and approximate in 1993-94 the
number expected prior to the storm. When the final numbers are in, it is
expected that by the end of the State's current fiscal year, 41.9 million
domestic and international tourists will have visited the State, up 7.8% from
the 39 million tourists that visited Florida in 1991-92. In 1993-94, tourist
arrivals should approximate 43.2 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 is expected to follow a course similar to that of the nation,
growing at 0.3% in 1991-92 and 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 the 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 (Social Security and pension benefits, among other sources
of income) are relatively more important sources 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 1991-92, 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 68%, 7% and 5%,
respectively, of total receipts by the General Revenue Fund during fiscal
1991-92. In that same year, expenditures for education, health and welfare,
and public safety amounted to 53%, 30% and 13.3%, respectively, of total
expenditures from the General Revenue Fund.
Hurricane Andrew left some parts of south Florida devastated. Post-Hurricane
Andrew clean up and rebuilding have changed the outlook for the State's
economy. Single and multi-family housing starts in 1992-93 are projected to
reach a combined level of 116,800, and to increase to 148,100 in 1993-94.
Lingering recessionary effects on consumers and tight credit are two of the
reasons for relatively slow core construction activity, as well as lingering
effects from the 1986 tax reform legislation discussed above. However,
construction is one of the sectors most severely affected by Hurricane Andrew.
The construction figures above include, over the two year period, more than
20,000 additional housing starts as a result of destruction by Hurricane
Andrew. Total construction expenditures are forecasted to increase 11.1% this
year and increase 23.7% next year.
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 1991-1992. The $11,859.2 million in combined Estimated
Revenues and revenue generating measures represents 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.
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, 1992, sales and use tax receipts (exclusive of
the tax on gasoline and special fuels) totalled $8,375.5 million, an increase
of 2.7% over fiscal year 1990-91.
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 $435.2 million in fiscal year ending June 30, 1992.
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 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, 1992, receipts from this source were $801.3 million, an increase of 14.2%
from fiscal year 1990-91.
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 $472.4 million during fiscal year 1991-92, a 0.5% increase
from the previous fiscal year. For the fiscal year 1990-91, 76.21% of the
documentary stamp tax revenues was deposited to the General Revenue Fund.
Beginning in fiscal year 1992-93, 71.29% 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% for use in
enhancing education, and the balance, 12.0% for costs of administering the
lottery. Fiscal year 1991-92 lottery ticket sales totalled $2.19 billion,
providing education with $835.4 million.
The State's severance tax applies to oil, gas, and sulphur production, as well
as the severance of phosphate rock and other solid minerals. Total collections
from severance taxes total $67.2 million during fiscal year 1991-92, down 6.9%
from the previous year. Beginning in fiscal year 1989-90, 60.0% of this amount
was transferred to the General Revenue Fund. The 60.0% allocation is expected
to continue.
At the end of fiscal 1992, approximately $4.52 billion in principal amount of
debt secured by the full faith and credit of the State was outstanding. In
addition, since July 1, 1992, the State issued about $274 million in principal
amount of full faith and credit bonds.
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
believe 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.
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 affect 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 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 Municipal Obligations
purchased by the Fund will not be adversely affected by any such changes.
The sources for the information 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.
At the time of the closing for each Florida Trust, Chapman and Cutler, Counsel
to each Florida Trust 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:
For Florida state income tax purposes, the Florida Trust will not be subject
to the Florida income tax imposed by Chapter 220, Florida Statutes. In
addition, Florida does not impose any income taxes at the local level.
Because Florida does not impose an income tax on individuals, non- corporate
Unitholders residing in Florida will not be subject to any Florida income
taxation on income realized by the Florida Trust. Any amounts paid to the
Florida Trust or to non-corporate Unitholders residing in Florida under an
insurance policy issued to the Florida Trust or the Sponsor 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 Unitholders with commercial domiciles in Florida will be subject to
Florida income or franchise taxation on income realized by the Florida Trust
and on payments of interest pursuant to any insurance policy. Other corporate
Unitholders will be subject to Florida income or franchise taxation on income
realized by the Florida Trust (or on payments of interest pursuant to any
insurance policy) only to the extent that the income realized does not
constitute "non-business income" as defined by Chapter 220.
Units will be subject to Florida estate tax only if held by Florida residents.
However, the Florida estate tax is limited to the amount of the credit for
state death taxes provided for in Section 2011 of the Internal Revenue Code.
Neither the Bonds nor the Units will be subject to the Florida ad valorem
property tax, the Florida intangible personal property tax or Florida sales or
use tax.
Georgia Trusts
Georgia ended its 1992 fiscal year on June 30, 1992 with four straight months
of strong revenue collections, enabling the State to avoid spending cuts or
worker layoffs. Georgia's revenues in June 1992 were 6.3% above those in June
1991. This performance followed three previous months with revenue collections
of more than 6% over the 1991 period. With final figures in for the 1992
fiscal year, Georgia fell only $10 million, or 0.1%, short of revenue expected
to cover 1992 expenditures. This difference was made up from money allocated
for but not used by State agencies. The Governor plans to reduce the budget
for fiscal 1993 by $75 million, to $8.10 billion, with the cuts based on a new
revenue estimate for fiscal 1994. These reductions combined with $44 million
collected from a tax-annuity program would give the state a surplus of about
$120 million for fiscal 1993.
The Georgia economy has performed relatively well during recent years and
generally has expanded at a rate greater than the national average during that
period. However, growth in 1988 and 1989 through 1992 has slowed somewhat and
was modest compared to the robust pace of the early 1980s. Georgia's leading
economic indicators currently suggest that the rate of growth of the Georgia
economy will continue at the pace of 1988 and 1989 and more closely match the
national economy. According to November 1992 figures, the seasonably adjusted
unemployment rate in Georgia is 6.4%. Although many areas of the economy are
expected to continue to perform strongly, some areas such as the primary
metals, carpet and apparel industries are still experiencing periods of
weakness, and others, such as construction and construction-related
manufacturing activities (e.g., lumber, furniture and stone/clay products),
currently show signs of weakening. In addition, aircraft manufacturers located
within the State are in a tenuous position due to reductions in the Federal
Defense budget. Presently, Georgia continues to lead the nation in the
production of pulp, pulpwood and paper. Other industries show potential for
great expansion, but policy considerations, tax reform laws, foreign
competition, and other factors may render these industries less productive.
Since Bonds in the Georgia Trust (other than general obligation bonds issued
by the state) are payable from revenue derived from a specific source or
authority, the impact of a pronounced decline in the national economy or
difficulties in significant industries within the state could result in a
decrease in the amount of revenues realized from such source or by such
authority and thus adversely affect the ability of the respective issuers of
the Bonds in the Georgia Trust to pay the debt service requirements on the
Bonds. Similarly, such adverse economic developments could result in a
decrease in tax revenues realized by the State and thus could adversely affect
the ability of the state to pay the debt service requirements of any Georgia
general obligation bonds in the Georgia Trust.
Currently Moody's rates Georgia general obligation bonds Aaa and Standard &
Poor's rates such bonds AA+.
Several lawsuits have been filed against the State asserting that the decision
in Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989), invalidates
the State's tax treatment of Federal Retirement Benefits for years prior to
1989. Under the State's applicable 3 year statute of limitation the maximum
potential liability under these suits calculated to April 1,1992 would appear
to be no greater than 128 million dollars. The plaintiffs in these suits,
however, have requested refunds for a period from 1980 which could result in a
maximum potential liability in the range of 591 million dollars. Any such
liability would be predicated on a holding by a State of Georgia court or the
United States Supreme Court that the Davis decision is applicable to the
State's prior method of taxing Federal Retirement Benefits, that the Davis
decision is to be given a retroactive effect, i.e.,that the decision affects
prior tax years and that a refund remedy is appropriate. A trial court
decision in Georgia's "test case" has held that no refunds are due; the
Georgia Supreme Court has the case under consideration. In this "test case"
the plaintiff has dropped his claims for 1980-1984 refunds.
At the time of the closing for each Georgia Trust, Special Counsel to the Fund
for Georgia tax matters rendered an opinion under then existing Georgia income
tax law applicable to taxpayers whose income is subject to Georgia income
taxation substantially to the effect that:
For Georgia income tax purposes, the Georgia Trust is not an association
taxable as a corporation, and the income of the Georgia Trust will be treated
as the income of the Unitholders. Interest on the Georgia Bonds which is
exempt from Georgia income tax when received by the Georgia Trust, and which
would be exempt from Georgia income tax if received directly by a Unitholder,
will retain its status as tax-exempt interest when distributed by the Georgia
Trust and received by the Unitholders.
f the Trustee disposes of a Georgia Bond (whether by sale, exchange, payment
on maturity, retirement or otherwise) or if a Unitholder redeems or sells his
Unit, the Unitholder will recognize gain or loss for Georgia income tax
purposes to the same extent that gain or loss would be recognized for federal
income tax purposes (except in the case of Georgia Bonds issued before March
11, 1987 issued with original issue discount owned by the Georgia Trust in
which case gain or loss for Georgia income tax purposes would be determined by
accruing said original issue discount on a ratable basis.) Due to the
amortization of bond premium and other basis adjustments required by the
Internal Revenue Code, a Unitholder, under some circumstances, may realize
taxable gain when his or her Units are sold or redeemed for an amount equal to
their original cost.
Because obligations or evidences of debt of Georgia, its political
subdivisions and public institutions and bonds issued by the Government of
Puerto Rico are exempt from the Georgia intangible personal property tax, the
Georgia Trust will not be subject to such tax as the result of holding such
obligations, evidences of debt or bonds. Although there currently is no
published administrative interpretation or opinion of the Attorney General of
Georgia dealing with the status of bonds issued by a political subdivision of
Puerto Rico, we have in the past been advised orally by representatives of the
Georgia Department of Revenue that such bonds would also be considered exempt
from such tax. Based on that advice, and in the absence of a published
administrative interpretation to the contrary, we are of the opinion that the
Georgia Trust would not be subject to such tax as the result of holding bonds
issued by a political subdivision of Puerto Rico.
Amounts paid under an insurance policy or policies issued to the Georgia
Trust, if any, with respect to the Georgia Bonds in the Georgia Trust which
represent maturing interest on defaulted obligations held by the Trustee will
be exempt from State income taxes if, and to the extent as, such interest
would have been so exempt if paid by the issuer of the defaulted obligations.
We express no opinion regarding whether a Unitholder's ownership of an
interest in the Georgia Trust is subject to the Georgia intangible personal
property tax. Although the application of the Georgia intangible property tax
to the ownership of the Units by the Unitholders is not clear, representatives
of the Georgia Department of Revenue have in the past advised us orally that,
for purposes of the intangible property tax, the Department considers a
Unitholder's ownership of an interest in the Georgia Trust as a whole to be
taxable intangible property separate from any ownership interest in the
underlying tax-exempt Bonds.
Neither the Georgia Bonds nor the Units will be subject to Georgia sales or
use tax.
Kansas Trusts
Since the Kansas Trust will invest substantially all of its assets in Kansas
municipal securities, the Kansas Trust is susceptible to political and
economic factors affecting issuers of Kansas municipal securities. As of 1991,
2,494,566 people lived in Kansas, representing a 0.69% increase in population
since the 1990 census. Based on these numbers, Kansas ranked thirty-second in
the nation in population size. According to the Kansas Department of Commerce,
in 1991 Kansas ranked twenty-first in the nation in terms of per capita
income. Historically, agriculture and mining constituted the principal
industries in Kansas. Since the 1950s, however, manufacturing, governmental
services and the services industry have steadily grown, and as of 1993
approximately 15.7% of Kansas workers were in the manufacturing sector, 20.8%
in the government sector and 23.3% in the services sector (not including
transportation, public utilities, trade, finance, insurance, and real estate),
while the farming and mining sectors combined for approximately 5.0% of the
work force. The 1991 unemployment rate was 4.4%, and the seasonally adjusted
rate for December 1992 was 4.2%. By constitutional mandate, Kansas must
operate within a balanced budget and public debt may only be incurred for
extraordinary purposes and then only to a maximum of $1 million. As of
November 12, 1992, Kansas had no general obligation bonds outstanding.
At the time of the closing for each Kansas Trust, Special Counsel to each
Kansas Trust for Kansas tax matters, rendered an opinion under then existing
Kansas income tax law applicable to taxpayers whose income is subject to
Kansas income taxation substantially to the effect that:
The Trust is not an association taxable as a corporation for Kansas income tax
purposes;
Each Unitholder of the Trust will be treated as the owner of a pro rata
portion of the Trust, and the income and deductions of the Trust will
therefore be treated as income of the Unitholder under Kansas law;
Interest on Bonds issued after December 31, 1987 by the State of Kansas or any
of its political subdivisions will be exempt from income taxation imposed on
individuals, corporations and fiduciaries (other than insurance companies,
banks, trust companies or savings and loan associations) however, interest on
Bonds issued prior to January 1, 1988 by the State of Kansas or any of its
political subdivisions will not be exempt from income taxation imposed on
individuals, corporations and fiduciaries (other than insurance companies,
banks, trust companies or savings and loan associations) unless the laws of
the State of Kansas authorizing the issuance of such Bonds specifically exempt
the interest on the Bonds from income taxation by the State of Kansas;
Interest on Bonds issued by the State of Kansas or any of its political
subdivisions will be subject to the tax imposed on banks, trust companies and
savings and loan associations under Article 11, Chapter 79 of the Kansas
statutes;
Interest on Bonds issued by the State of Kansas or any of its political
subdivisions will be subject to the tax imposed on insurance companies under
Article 40, Chapter 28 of the Kansas statutes unless the laws of the State of
Kansas authorizing the issuance of such Bonds specifically exempt the interest
on the Bonds from income taxation by the State of Kansas; interest on the
Bonds which is exempt from Kansas income taxation when received by the Trust
will continue to be exempt when distributed to a Unitholder (other than a
bank, trust company or savings and loan association);
Each Unitholder of the Trust will recognize gain or loss for Kansas income tax
purposes if the Trustee disposes of a Bond (whether by sale, exchange, payment
on maturity, retirement or otherwise) or if the Unitholder redeems or sells
Units of the Trust to the extent that such transaction results in a recognized
gain or loss for federal income tax purposes;
Interest received by the Trust on the Bonds is exempt from intangibles
taxation imposed by any counties, cities and townships pursuant to present
Kansas law; and
No opinion is expressed regarding whether the gross earnings derived from the
Units is subject to intangibles taxation imposed by any counties, cities and
townships pursuant to present Kansas law.
Kentucky Trusts
The Commonwealth of Kentucky leads the nation in total tonnage of coal
produced and ranks among the top 10 states in the value of all minerals
produced. Tobacco is the dominant agricultural crop and Kentucky ranks second
among the states in the total cash value of tobacco raised. The manufacturing
mix in the state reflects a significant diversification. In addition to the
traditional concentration of tobacco processing plants and bourbon
distilleries, there is considerable durable goods production, such as
automobiles, heavy machinery, consumer appliances, and office equipment. The
State's parks system and the horse breeding and racing industry, symbolized by
the Kentucky Derby, play an important role in an expanding tourist business in
the state.
Current economic problems, including particularly the continuing high
unemployment rate, have had varying effects on the differing geographic areas
of the State and the political subdivisions located within such geographic
areas. Although revenue obligations of the State or its political subdivisions
may be payable from a specific source or project, there can be no assurance
that further economic difficulties and the resulting impact on State and local
governmental finances will not adversely affect the market value of the Bonds
in the Kentucky Trust or the ability of the respective obligors to pay debt
service of such Bonds.
Prospective investors should study with care the portfolio of Bonds in the
Kentucky Trust and should consult with their investment advisors as to the
merits of particular issues in the portfolio.
At the time of the closing for each Kentucky Trust, Special Counsel to each
Kentucky Trust for Kentucky tax matters rendered an opinion under then
existing Kentucky income tax law applicable to taxpayers whose income is
subject to Kentucky income taxation substantially to the effect that:
Because Kentucky income tax law is based upon the Federal law and in explicit
reliance upon the opinion of Chapman and Cutler referred to above, and in
further reliance on the determination letter to us of the Revenue Cabinet of
Kentucky dated May 10, 1984, it is our opinion that the application of
existing Kentucky income tax law would be as follows:
Each Kentucky Unitholder will be treated as the owner of a pro rata portion of
the Kentucky Trust for Kentucky income tax purposes, and the income of the
Kentucky Trust will therefore be treated as the income of the Kentucky
Unitholders under Kentucky law;
Interest on Bonds that would be exempt from Federal income taxation when paid
directly to a Kentucky Unitholder will be exempt from Kentucky income taxation
when: (i) received by the Kentucky Trust and attributed to such Kentucky
Unitholder; and (ii) when distributed to such Kentucky Unitholder;
Each Kentucky Unitholder will realize taxable gain or loss when the Kentucky
Trust disposes of a Bond (whether by sale, exchange, redemption or payment of
maturity) or when the Kentucky Unitholder redeems or sells Units at a price
that differs from original cost as adjusted for amortization or accrual, as
appropriate, of bond discount or premium and other basis adjustments including
any basis reduction that may be required to reflect a Kentucky Unitholder's
share of interest, if any, accruing on Bonds during the interval between the
Kentucky Unitholder's settlement date and the date such Bonds are delivered to
the Kentucky Trust, if later);
Tax cost reduction requirements relating to amortization of bond premium may,
under some circumstances, result in Kentucky Unitholders realizing taxable
gain when their Units are sold or redeemed for an amount equal to or less than
their original cost;
Units of the Kentucky Trust, to the extent the same represent an ownership in
obligations issued by or on behalf of the Commonwealth of Kentucky or
governmental units of the Commonwealth of Kentucky, the interest on which is
exempt from Federal and Kentucky income taxation will not be subject to ad
valorem taxation by the Commonwealth of Kentucky or any political subdivision
thereof; and
If interest on indebtedness incurred or continued by a Kentucky Unitholder to
purchase Units in the Kentucky Trust is not deductible for Federal income tax
purposes, it also will be nondeductible for Kentucky income tax purposes.
MaIne
The State of Maine, which includes nearly one-half of the total land area of
the six New England states, currently has a population of 1,213,000. The
structure of the Maine economy is quite similar to that of the nation as a
whole, except that Maine has proportionately more activity in manufacturing
and tourism, and less activity in finance and services.
During the 1980s Maine's economy grew rapidly. However, due largely to an
overheating of the New England construction/real estate markets in 1987-88,
the New England and Maine economies were much softer in 1989 and the first
portion of 1990. The last quarter of strong growth in Maine was the first
quarter in 1988. The Maine Economic Growth Index, a broad measure of overall
growth corrected for inflation, rose only 0.7% in 1989. The United States
Economic Growth Index reflected an increase of 2. 7% during the same period.
During the period 1980 through 1988 state employment increased by 23%,
resulting in an unemployment rate of 3.8% in 1988. The unemployment rate for
1989 rose to 4.1%. Income growth exceeded national averages for the period
1982 through 1986, with per capita income increasing 36010, while the national
average was a 28% increase. The latest information available from the Maine
State Planning Office shows personal income growth remained strong for 1989,
although it was weakened substantially to 79%. Adjusted for inflation, real
income growth in 1989 is approximately 24% which is well below the 1988 figure
of 5.3%.
The regional economic slowdown in the northeast is expected to continue for
the near to intermediate term. Prospects for some of Maine's moor industries
are not optimistic in light of the regional slowdown. The value of Maine
construction contract awards in 1989 was $260,000,000 below the awards for
calendar year 1988, off some 21%. This slowdown diminishes prospects for the
wood products industry, as well as construction employment.
As indicated above, the real estate market continues to be extremely soft.
Data collected by the Maine Real Estate Institute indicated a shrinkage of
roughly $230,000,000 in real estate sales volume for calendar year 1989 from
the previous year. Continued unavailability of credit continues to affect this
sector of the economy.
The economic slowdown has had resulting impact upon consumer spending and the
retail sector. Maine's retail sales declined by 1% in 1989, although that
decline is attributable in its entirety to two retail sectors suffering
significant declines. The building supply sector suffered a decline of 7.6%
and the auto transportation group suffered a decline of 6.5%.
The Constitution of the State of Maine provides that the Legislature shall not
create any debt which exceeds $2,000,000 except to suppress insurrection, to
repel invasion or for purposes of war except when two-thirds of the
Legislature and a minority of the voters authorize the issuance of debt. The
Constitution also provides that tax anticipation loans must be repaid during
the fiscal year of issuance. Constitutional amendments have been adopted which
also allow the Legislature to authorize the issuance of bonds: to insure
payments on revenue bonds of up to $4,800,000 for local public school building
projects; in the amount of up to $4,000,000 to guarantee student loans; to
insure payments on up to $1,000,000 of mortgage loans for Indian housing; to
insure payments on up to $4,000,000 of mortgage loans or small business loans
to war veterans; and to insure payments on up to $90,000,000 of mortgage loans
for industrial, manufacturing, fishing, agricultural, and recreational
enterprises. This last authorization has been limited statutorily to a maximum
of $87,500,000 available for issue through the Finance Authority of Maine.
The State operates under a biennial budget which is formulated in
even-numbered years and presented for approval to the Legislature In
odd-numbered years. The economic strength evidenced during the 1 980s enabled
the State to accumulate high levels of general fund unappropriated surpluses.
As of its fiscal year ended December 51, 1989, the State had an unappropriated
general fund surplus of $161,000,000. In order to balance the fiscal 1990
budget, the State will draw down on the total balance to about $60,000,000 of
general fund expenditures during 1990. Further, the State projects a continued
decrease in sales tax revenues. Since proposal of its 1990-91 budget the State
has reduced estimates for sales tax twice for the biennium. The estimates were
reduced by $89,000,000 in June 1989 and $105,000,000 in January 1990.
Corresponding reductions were made in individual and corporate income tax
projections. The State's revenue and expenditure package established as of the
close of the most recent legislative session closed a $210,000,000 revenue
shortfall projected in January 1990 and allows for a 1% surplus ar fiscal year
end. As of August 1990, State revenues were 0.1% ahead of new budget
estimates.
Maine's outstanding general obligations are currently rated AAA by Standard &
Poor's Corporation and Aa1 by Moody's Investors Service, Inc. Maine has
currently slowed its issuance of general obligation debt as a result of the
State's fiscal situation. Maine has $555,500,000 of outstanding general
obligation debt and $155,200,000 in authorized unissued debt. Nevertheless,
due in large part to the State's low debt burden and rapid debt amortization,
the public rating agencies do not consider debt burden a negative factor.
The Portfolio may contain obligations of the Maine Municipal Bond Bank. All
Maine Municipal Bond Bank debt is secured by loan repayments of borrowing
municipalities and the State's moral obligation pledge. The state of the
economy in Maine could impact the ability of municipalities to pay debt
service on their obligations. Maine Municipal Bond Bank debt continues to
carry a AA rating from Standard & Poor's Corporation and a Aa rating from
Moody's Investors Service, Inc.
The Portfolio may contain obligations issued by Regional Waste Systems, Inc.,
a quasi-municipal corporation organized pursuant to an interlocal agreement
among approximately 20 Southern Maine communities ("RWS") or other
quasi-municipal solid waste disposal facilities. RWS and other similar solid
waste disposal projects operate regional solid waste disposal facilities and
process the solid waste of the participating municipalities as well as the
solid waste of other non-municipal users. The continued viability of such
facilities is dependent, in part, upon the approach taken by the State of
Maine with respect to solid waste disposal generally. Pursuant to a Public Law
1989 Chapter 585, the newly formed Maine Waste Management Agency is charged
with preparation and adoption by rule of an analysis and a plan for the
management, reduction and recycling of solid waste for the State of Maine. The
plan to be developed by the Maine Waste Management Agency is based on the
waste management priorities and recycling goals established by State law.
Pursuant to State law, Maine has established minimum goals for recycling and
composting requiring that a minimum of 25% of the municipal solid waste stream
be recycled or composted by 1992 and 50% be recycled or composted by 1994.
Although RWS may participate in the mandated recycling activities, its
principal existing facility consists of a mass burn 250 ton per day furnace
boiler with associated equipment for production of electric energy. Thus, the
source material for the RWS' primary facility could be substantially reduced
as a result of implementation of the State's recycling goals. Other mass burn
solid waste disposal facilities in the State have experienced seasonal
shortages in waste fuel.
Revenue bonds are issued by the Maine Health and Higher Education Facilities
Authority to finance hospitals and other health care facilities. The revenues
of such facilities consist, in varying but typically material amounts, of
payment from insurers and third-party reimbursement programs, including
Medicaid, Medicare and Blue Cross. The health care industry in Maine is
becoming increasingly competitive. The utilization of new programs and
modified benefits by third-party reimbursement programs and the advent of
alternative health care delivery systems such as health maintenance
organizations contribute to the increasingly competitive nature of the health
care industry. This increase in competition could adversely impact the ability
of health care facilities in Maine to satisfy their financial obligations.
Further, health care providers are subject to regulatory actions, changes in
law and policy changes by agencies that administer third-party reimbursement
programs and regulate the health care industry. Any such changes could
adversely impact the financial condition of such facilities.
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 Maine Trust 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 Maine Quality Trust to pay interest on or principal of the Bonds.
The assets of the Maine Trust will consist of interest-bearing obligations
issued by or on behalf of the State of Maine (the "State) or counties,
municipalities, authorities or political subdivisions thereof (the "Maine
Bonds") or by the Commonwealth of Puerto Rico, Ouam and the United States
Virgin Islands (the "Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Maine Quality Trust. However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i)
the Bonds were validly issued, (ii) the interest thereon is excludible from
gross income for Federal income tax purposes, (iii) interest on the Maine
Bonds, if received directly by a Unitholder, would be exempt from the Maine
income tax applicable to individuals, trusts and estates and corporations
("Maine Income Tax"), and (iv) interest on the Bonds will not be taken into
account by individuals and corporations in computing an additional tax ("Maine
Minimum Tax") or in the case of corporations, a surcharge ("Maine Corporate
Income Tax Surcharge") imposed under the Maine Income Tax. The opinion set
forth below does not address the taxation of persons other than full time
residents of Maine.
In the opinion of Chapman and Cutler, special counsel to the Fund for Maine
tax matters, under existing law as of the date of this prospectus and based
upon the assumptions set forth above:
the Maine Quality Trust is not an association taxable as a corporation, thus
each Unitholder of the Trust will be essentially treated as the owner of a pro
rag portion of the Maine Trust and the income of such portion of the Maine
Trust will be treated as the income of the Unitholder for Maine Income Tax
purposes;
interest on the Bonds which is exempt from the Maine Income Tax when received
by the Maine Trust, and which would be exempt from the Maine Income Tax and
the Maine Minimum Tax if received directly by a Unitholder, will retain its
status as exempt from the Maine Income Tax and the Maine Minimum Tax when
received by the Maine Trust \xd4 and distributed to the Unitholder;
to the extent that interest derived from the Maine Trust by a Unitholder with
respect to the Possession Bonds is excludible from gross income for Federal
income tax purposes pursuant to 48 U.S.C. \xa7 745, 48 U.S.C. \xa7 1423a and
48 U.S.C. \xa7 1403, such interest will not be subject to the Maine Income
Tax;
each Unitholder of the Maine ~ Trust will recognize gain or loss for Maine
Income Tax purposes if the Trustee disposes of a bond (whether by redemption,
sale or otherwise) or if the Unitholder redeems or sells Units of the Maine
Trust to the extent that such a transaction results in a recognized gain or
loss to such Unitholder for Federal income tax purposes; and
the Maine Income Tax does not permit a deduction of interest paid or incurred
on indebtedness incurred or continued to purchase or carry Units in the Maine
Trust, the interest on which is exempt from the Tax.
Prospective Purchasers subject to the Maine Franchise Tax should be advised
that for purposes of the Maine Franchise Tax, interest on the Bonds received
by the Trust and distributed to a Unitholder subject to such tax will be added
to the Unitholder's Federal taxable income and therefore will be taxable.
Maryland Trusts
The public indebtedness of the State of Maryland, its instrumentalities and
its local governments is divided into three basic types. The State, and the
counties and municipalities of the State, issue general obligation bonds for
capital improvements and for various projects to the payment of which an ad
valorem property tax is exclusively pledged.
Certain authorities of the State and certain local governments issue
obligations payable solely from specific non-tax, enterprise fund revenues and
for which the issuer has no liability and has given no moral obligation
assurance. The principal of and interest on bonds issued by these bodies are
payable solely from various sources, principally fees generated from use of
the facilities or enterprises financed by the bonds.
The special authorities of the State and local government entities have
outstanding bonds backed exclusively by revenues derived from projects and
facilities financed by the bond issue. The holders of these bonds have no
claim against the general credit of the State or any governmental unit for the
payment of those bonds.
There is no general debt limit imposed on the State of Maryland by the State
Constitution or public general laws, but a special committee created by
statute annually makes an estimate of the maximum amount of new general
obligation debt that the State may prudently authorize.
There can be no assurance that particular bond issues may not be adversely
affected by changes in State or local economic or political conditions.
Investors are, therefore, advised to study with care the Portfolio for the
Maryland Trust appearing elsewhere in this Prospectus and consult their own
investment advisers as to the merits of particular issues in that Portfolio.
At the time of the closing for each Maryland Trust, Special Counsel to each
Maryland Trust for Maryland tax matters rendered an opinion under then
existing Maryland income tax law applicable to taxpayers whose income is
subject to Maryland income taxation substantially to the effect that:
For Maryland State and local income tax purposes, the Maryland Trust will not
be recognized as an association taxable as a corporation, but rather as a
fiduciary whose income will not be subject to Maryland State and local income
taxation;
To the extent that interest derived from the Maryland Trust by a Unitholder
with respect to the obligations of the State of Maryland and its political
subdivisions is excludable from Federal gross income, such interest will not
be subject to Maryland State or local income taxes. Interest paid to a
"financial institution" will be subject to the Maryland State franchise tax on
financial institutions;
In the case of taxpayers who are individuals, Maryland presently imposes an
income tax on items of tax preference with reference to such items as defined
in the Internal Revenue Code, as amended from time to time, for purposes of
calculating the federal alternative minimum tax. Interest paid on certain
private activity bonds constitutes a tax preference item for the purpose of
calculating the federal alternative minimum tax. Accordingly, if the Maryland
Trust holds such bonds, 50% of the interest on such bonds in excess of a
threshold amount is taxable in Maryland; and
Capital gain, including gain realized by a Unitholder from the redemption,
sale or other disposition of a Unit, will be included in the Maryland taxable
base of Unitholders for Maryland State and local income taxation purposes.
However, Maryland defines the taxable net income of individuals as Federal
adjusted gross income with certain modifications. Likewise, the Maryland
taxable net income of corporations is Federal taxable income with certain
modifications. There is available to Maryland income taxpayers a modification
which allows those taxpayers to subtract from the Maryland taxable base the
gain included in Federal adjusted gross income or Federal taxable income, as
the case may be, which is realized from the disposition of Securities by the
Maryland Trust. Consequently, by making that modification, a Unitholder who is
entitled to make the subtraction modification will not be subject to Maryland
State or local income tax with respect to gain realized upon the disposition
of Securities by the Maryland Trust. Profit realized by a "financial
institution" from the sale or exchange of Bonds will be subject to the
Maryland Franchise Tax.
These opinions relate only to the treatment of the Maryland Trust and the
Units under the Maryland State and local income tax laws and Maryland
franchise tax laws. Unitholders should consult tax counsel as to other
Maryland tax consequences not specifically considered in these opinions. For
example, no opinion is expressed as to the treatment of the Units under the
Maryland inheritance and estate tax laws.
Massachusetts Trusts
The Massachusetts Economy. At the present time, the Massachusetts economy is
experiencing a slowdown. While Massachusetts had benefitted from an annual job
growth rate of approximately 2% since the early 1980s, by 1989 employment had
started to decline. Nonagricultural employment declined 0.7% in fiscal 1989,
4.0% in fiscal 1990, 5.5% in fiscal 1991,1.5% in fiscal 1992, and 0.8% in
fiscal 1993. A comparison of total, nonagricultural employment in August 1992
with that in August 1993 indicates a decline of 0.4%.
From 1980 to 1989, Massachusetts' unemployment rate was significantly lower
than the national average. By 1990, however, unemployment reached 6.0%,
exceeding the national average for the first time since 1977. Massachusetts'
unemployment rate averaged 9.0% in fiscal 1991 and 8.5% in fiscal 1992. The
Massachusetts unemployment rate was 8.2% as of January 1993, and 6.8% as of
July 1993.
In recent years, per capita personal income growth in Massachusetts has
slowed, after several years during which it was among the highest in the
nation. Between the first quarter of fiscal 1991 and the first quarter of
fiscal 1992, aggregate personal income in Massachusetts increased 2.6% as
compared to 4.1% for the nation as a whole. Between the second quarter of 1991
and the second quarter of 1992, aggregate personal income in Massachusetts
increased 3.9% as compared to 4.7% for the nation as a whole.
The Commonwealth, while the third most densely populated state according to
the 1990 census, has experienced only a modest increase in population from
1980 to 1990 at a rate equal to approximately one-half the rate of increase in
the United States population as a whole. Preliminary information compiled by
the Commonwealth suggests that out-migration has increased in recent years.
Massachusetts possesses a diversified economic base which includes traditional
manufacturing, high technology and service industries, served by an extensive
transportation system and related facilities. The Massachusetts service
sector, at approximately 33.5% of the state work force in August of 1993, is
the largest sector in the Massachusetts economy. Government employment is
below the national average, representing less that 14% of the Massachusetts
work force. In recent years, the construction, manufacturing and trade sectors
have experienced the greatest decreases in employment in Massachusetts, with
more modest declines taking place in the government, finance, insurance and
real estate, and service sectors. From 1990 to December of 1992, manufacturing
employment in Massachusetts declined by some 12.5%, and more recently, from
August 1992 to August 1993, declined by about 4.2%. At the same time, there
has occurred a reversal of the dramatic growth which occurred during the
1980's in the finance, insurance and real estate sector and in the
construction sector of the Massachusetts economy.
Over the next decade, Massachusetts has a very full public construction agenda
which is expected not only to improve mobility, but to provide a substantial
number of construction and related employment opportunities, including the six
billion dollar Central Artery Tunnel project involving the construction of a
third tunnel under Boston Harbor linking the MassPike and downtown Boston with
Logan International Airport, and the depression into tunnels of the Central
Artery that traverses the City of Boston. Federal funds are expected to cover
approximately 90% of the cost of this project. The Central Artery/Tunnel
project is expected to employ approximately 5,000 on-site workers and 10,000
auxiliary workers during the peak years of construction in the mid-1990s.
State Finances. In fiscal years 1987 through 1991, Commonwealth spending
exceeded revenues. Spending in five major expenditure categories Medicaid,
debt service, public assistance, group health insurance and transit
subsidies-grew at rates well in excess of the rate of inflation for the
comparable period. During the same period, the Commonwealth's tax revenues
repeatedly failed to meet official forecasts. That revenue shortfall combined
with steadily escalating costs contributed to serious budgetary and financial
difficulties which have affected the credit standing and borrowing abilities
of Massachusetts and certain of its public bodies and municipalities, and
which may have contributed to higher interest rates on debt obligations issued
by them.
More conservative revenue forecasting for fiscal 1992 together with
significant efforts to restrain spending during fiscal 1991 and reductions in
budgeted program expenditures for fiscal 1992 and fiscal 1993 have moderated
these difficulties. Significant spending commitments for public education are
contained in recent education reform legislation enacted in June of 1993. In
July and August of 1993, the Executive Office for Administration and Finance
announced a series of actions affecting state workers (including a hiring
freeze, layoffs and the elimination of positions) intended to keep expected
fiscal 1994 expenditures with current appropriations. Notwithstanding these
actions, a continuation, or worsening, of the present slowdown and its effect
on the financial condition of the Commonwealth and its public authorities and
municipalities could result in a decline in the market values of, or default
on existing obligations including the Bonds deposited in the Massachusetts
Trust.
The foregoing information constitutes only a brief summary of some of the
general factors 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 obligations held by the Massachusetts Trust 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 Commonwealth and various agencies and political
subdivisions located in the Commonwealth. The Sponsor is unable to predict
whether or to what extent such factors or other factors may affect the issuers
of the Bonds, the market value or marketability of the Bonds or the ability of
the respective issuers of the Bonds acquired by the Massachusetts Trust to pay
interest on or principal of the Bonds.
At the time of the closing for each Massachusetts Trust Special Counsel to
each Massachusetts Trust 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 substantially to the effect
that:
For Massachusetts income tax purposes, a 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.
A 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 Unitholders 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 a
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 a Massachusetts Trust on obligations issued by
Massachusetts, its counties, municipalities, authorities, political
subdivisions or instrumentalities, or issued by United States territories or
possessions.
Any proceeds of insurance obtained by the Trustee of the Trust or by the
issuer of a Bond held by a Massachusetts Trust which are paid to Massachusetts
Unitholders and which represent maturing interest on defaulted obligations
held by the Trustee will be excludable from Massachusetts gross income of a
Massachusetts Unitholder if, and to the same extent as, such interest would
have been so excludable if paid by the issuer of the defaulted Bond.
A Massachusetts Trust's capital gains and/or capital losses realized upon
disposition of Bonds held by it will be includable pro rata in the federal
gross income of Massachusetts Unitholders 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 Unitholder's Massachusetts gross income, except where capital
gain is specifically exempted from income taxation under acts authorizing
issuance of said Bonds.
Gains or losses realized upon sale or redemption of Units by Massachusetts
Unitholders 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 Unitholders 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 Unitholders 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 Unitholder who is a resident of
Massachusetts for purposes of the Massachusetts Estate Tax.
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 obligation 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 over-capacity. 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 each of 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, but ended the 1992 fiscal
year with its general fund in balance. In the 1993 fiscal year, the State took
actions to eliminate a projected year-end general fund deficit of $370
million, but the results of such actions are not yet known, since the state's
final Financial Reports for the 1993 year have not yet been released. A
positive cash balance in the combined General Fund/School Aid Fund was
recorded at September 30, 1990. In the 1991 thru 1993 fiscal years, the State
experienced deteriorating cash balances which have necessitated short term
borrowing and the deferral of certain scheduled cash payments. The State
borrowed $900 million for cash flow purposes in the 1993 fiscal year, which
was repaid on September 30, 1993. The State's Budget Stabilization Fund was
nearly depleted with a $168 million transfer to the General Fund for the 1992
State fiscal year.
The Michigan Constitution of 1963 limits the amount of total revenues of the
State raised 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 exceeds the limit
by 1 percent or more, the Michigan Constitution of 1963 requires that the
excess be refunded to taxpayers.
On March 15, 1994, Michigan voters approved a school finance reform amendment
to the State's Constitution which, among other things, increases the State
sales tax rate from 4% to 6% and places a cap on property assessment increases
for all property taxes. Such approval triggers the effectiveness of
legislation under which, the State's income tax rate will be cut from 4.6% to
4.4%. Some property taxes will be reduced and school funding will be provided
from a combination of property taxes and state revenues, some of which will be
provided from other new or increased State taxes. The legislation also
contains other proposals that may reduce or alter the revenues of local units
of government, and tax increment bonds could be particularly affected. While
the ultimate impact of the constitutional amendment and related legislation
cannot yet be accurately predicted, investors should be alert to the potential
effect of such measures upon the operations and revenues of Michigan local
units of government.
Although all or most of the Bonds in each Michigan Trust 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 n
the 1992 fiscal year and froze the 1993 revenue sharing payments at the 1992
level.
The Michigan Trust 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
operating and debt service requirements.
At the time of the closing for each Michigan Trust, Special Counsel to each
Michigan Trust 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:
The 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, we have relied upon the opinion of Chapman and Cutler as
to the applicability of Federal income tax under the Internal Revenue Code of
1986 to the Michigan Trust and the Holders of Units.
Under the income tax laws of the State of Michigan, the Michigan Trust is not
an association taxable as a corporation; the income of a Michigan Trust will
be treated as the income of the Unitholders and be deemed to have been
received by them when received by a Michigan Trust. Interest on the underlying
Bonds which is exempt from tax under these laws when received by a Michigan
Trust will retain its status as tax exempt interest to the Unitholders.
For purposes of the foregoing Michigan tax laws, each Unitholder will be
considered to have received his pro rata share of Bond interest when it is
received by a Michigan Trust, and each Unitholder will have a taxable event
when the Michigan Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or when the Unitholder redeems or sells his
Certificate to the extent the transaction constitutes a taxable event for
Federal income tax purposes. The tax cost of each unit to a Unitholder will be
established and allocated for purposes of these Michigan 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 Unitholders to the extent the 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 Unitholder, 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 the Michigan Trust or the Unitholders. If the Michigan
Trust or the Unitholders 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 Unitholder redeems or sells his
Certificate, 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.
Unitholders 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 Trust,
or paid under individual policies obtained by issuers of Bonds, which, when
received by the Unitholders, 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 Unitholder will be
increased accordingly to the extent such capital gains are realized when the
Michigan Trust disposes of a Bond or when the Unitholder redeems or sells a
Unit, to the extent such transaction constitutes a taxable event for Federal
income tax purposes.
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) and reduced appropriations and deferred payment of State aid,
including appropriations for and aids to local governmental units. The State's
fiscal problems affected other governmental units within the State, such as
local government, 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 biennium ending June 30, 1995 projected a
budget shortfall of $1.75 billion (less a $400 million reserve). The State
responded by enacting legislation in 1992 that made substantial accounting
changes, reduced the budget reserve (cash flow account) by $160 million to
$240 million, reduced appropriations for state agencies and higher education,
imposed a sales tax on purchases by local governmental units and adopted other
tax and spending changes. The 1993 legislature enacted further tax and
spending changes. An end-of-legislative- session budget forecast released by
the Department of Finance on June 15, 1993 for the biennium ending June 30,
1995 projects a General Fund surplus of $16 million at the end of the
biennium, after applying a projected $297 million surplus from June 30, 1993
and after reserving $360 million for the cash flow account. Total budgeted
expenditures and transfers for the biennium are $16.5 billion.
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 of the State 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.
At the time of the closing for each Minnesota Trust, Special Counsel to each
Minnesota Trust 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:
We understand that the 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), (ii) gain on the disposition of such Bonds,
and (iii) proceeds paid under certain insurance policies issued to the Trustee
or to the issuers of the Bonds which represent maturing interest or principal
payments on defaulted Bonds held by the Trustee.
"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 the
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
Federal tax treatment of the Minnesota Trust and its Unitholders:
the 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;
each Unitholder of a Minnesota Trust will be treated as the owner of a pro
rata portion of the Minnesota Trust for Minnesota income tax purposes and the
income of the Minnesota Trust will therefore be treated as the income of the
Unitholders under Minnesota law;
interest on the Bonds will be exempt from Minnesota income taxation of
Unitholders who are individuals, trusts and estates when received by the
Minnesota Trust and attributed to such Unitholders and when distributed to
such Unitholders (except as hereinafter provided with respect to "industrial
development bonds" and "private activity bonds" held by "substantial users");
interest on the Bonds will be includible in the Minnesota taxable income
(subject to allocation and apportionment) of Unitholders that are
corporations;
each Unitholder will realize taxable gain or loss when the Minnesota Trust
disposes of a Bond (whether by sale, exchange, redemption or payment at
maturity) or when the Unitholder redeems or sells Units at a price which
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 Unitholder's share of interest, if any, accruing on
Bonds during the interval between the Unitholder's settlement date and the
date such Bonds are delivered to the Minnesota Trust, if later);
tax cost reduction requirements relating to amortization of bond premium may,
under some circumstances, result in Unitholders realizing taxable gain when
their Units are sold or redeemed for an amount equal to or less than their
original cost;
any proceeds paid under the insurance policy issued to the Trustee with
respect to the Bonds which represent maturing interest on defaulted
obligations held by the Trustee will be excludible from Minnesota gross income
if, and to the same extent as, such interest would have been so excludible if
paid by the issuer of the defaulted obligations;
any proceeds paid under individual insurance policies obtained by issuers of
Bonds which represent maturing interest on defaulted obligations held by the
Trustee will be excludible from Minnesota gross income if, and to the same
extent as, such interest would have been so excludible if paid in the normal
course by the issuer of the defaulted obligations;
net capital gains of Unitholders attributable to the Bonds will be fully
includible in the Minnesota taxable income of Unitholders (subject to
allocation and apportionment in the case of corporate Unitholders); and
interest on Bonds includible in the computation of "alternative minimum
taxable income" for Federal income tax purposes will also be includible 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 Unitholder 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 by such Unitholder.
Missouri Trusts
The following discussion regarding constitutional limitations and the economy
of the State of Missouri is included for the purpose of providing general
information that may or may not affect issuers of the Bonds in Missouri.
In November 1981, the voters of Missouri adopted a tax limitation amendment to
the constitution of the State of Missouri (the "Amendment"). The Amendment
prohibits increases in local taxes, licenses, or fees by political
subdivisions without approval of the voters of such political subdivision. The
Amendment also limits the growth in revenues and expenditures of the State to
the rate of growth in the total personal income of the citizens of Missouri.
The limitation may be exceeded if the General Assembly declares an emergency
by a two-thirds vote. The Amendment did not limit revenue growth at the state
level in fiscal 1982 through 1988 with the exception of fiscal 1984.
Management Report No. 85-20, which was issued on March 5, 1985 by State
Auditor Margaret Kelly, indicates that state revenues exceeded the allowable
increase by $30.52 million in fiscal 1984, and a taxpayer lawsuit has been
filed pursuant to the Amendment seeking a refund of the revenues in excess of
the limit.
The economy of Missouri is diverse and includes manufacturing, retail and
wholesale trade, services, agriculture, tourism and mining. In recent years,
growth in the wholesale and retail trade had offset the more slowly growing
manufacturing and agricultural sectors of the economy. In 1991, the
unemployment rate in Missouri was 6.6%, and according to preliminary
seasonally adjusted figures, the rate dropped to 5.4% in December 1992. There
can be no assurance that general economic conditions or the financial
circumstances of Missouri or its political subdivisions will not adversely
affect the market value of the Bonds or the ability of the obligor to pay debt
service on such Bonds.
Currently, Moody's Investors Service rates Missouri general obligation bonds
"Aaa" and Standard & Poor's Corporation rates Missouri general obligation
bonds "AAA". Although these ratings indicate that the State of Missouri is in
relatively good economic health, there can be, of course, no assurance that
this will continue or that particular bond issues may not be adversely
affected by changes in the State or local economic or political conditions.
The foregoing information constitutes only a brief summary of some of the
general factors 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 obligations held by the Missouri Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of the 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 the
Bonds, the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Missouri Trust to pay interest
on or principal of the Bonds.
At the time of the closing for each Missouri Trust, Special Counsel for
Missouri tax matters rendered an opinion under then existing Missouri income
tax law applicable to taxpayers whose income is subject to Missouri income
taxation substantially to the effect that:
The assets of the Missouri Trust will consist of debt obligations issued by or
on behalf of the State of Missouri (the "State") or counties, municipalities,
authorities or political subdivisions thereof (the "Missouri Bonds") or by the
Commonwealth of Puerto Rico, Guam and the United States Virgin Islands (the
"Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Missouri Trust. However, although no opinion
is expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludable from gross income
for Federal income tax purposes and (iii) interest on the Missouri Bonds, if
received directly by a Unitholder, would be exempt from the Missouri income
tax applicable to individuals and corporations ("Missouri state income tax").
The opinion set forth below does not address the taxation of persons other
than full time residents of Missouri.
In the opinion of Chapman and Cutler, counsel to the Sponsor under existing
law:
The Missouri Trust is not an association taxable as a corporation for Missouri
income tax purposes, and each Unitholder of the Missouri Trust will be treated
as the owner of a pro rata portion of the Missouri Trust and the income of
such portion of the Missouri Trust will be treated as the income of the
Unitholder for Missouri state income tax purposes.
Interest paid and original issue discount, if any, on the Bonds which would be
exempt from the Missouri state income tax if received directly by a Unitholder
will be exempt from the Missouri state income tax when received by the
Missouri Trust and distributed to such Unitholder; however, no opinion is
expressed herein regarding taxation of interest paid and original issue
discount, if any, on the Bonds received by the Missouri Trust and distributed
to Unitholders under any other tax imposed pursuant to Missouri law, including
but not limited to the franchise tax imposed on financial institutions
pursuant to Chapter 148 of the Missouri Statutes.
To the extent that interest paid and original issue discount, if any, derived
from the Missouri Trust by a Unitholder with respect to Possession Bonds is
excludable from gross income for Federal income tax purposes pursuant to 48
U.S.C. S745, 48 U.S.C. S1423a, and 48 U.S.C. S1403, such interest paid and
original issue discount, if any, will not be subject to the Missouri state
income tax; however, no opinion is expressed herein regarding taxation of
interest paid and original issue discount, if any, on the Bonds received by
the Missouri Trust and distributed to Unitholders under any other tax imposed
pursuant to Missouri law, including but not limited to the franchise tax
imposed on financial institutions pursuant to Chapter 148 of the Missouri
Statutes.
Each Unitholder of the Missouri Trust will recognize gain or loss for Missouri
state income tax purposes if the Trustee disposes of a bond (whether by
redemption, sale, or otherwise) or if the Unitholder redeems or sells Units of
the Missouri Trust to the extent that such a transaction results in a
recognized gain or loss to such Unitholder for Federal income tax purposes.
Due to the amortization of bond premium and other basis adjustments required
by the Internal Revenue Code, a Unitholder under some circumstances, may
realize taxable gain when his or her Units are sold or redeemed for an amount
equal to their original cost.
Any insurance proceeds paid under policies which represent maturing interest
on defaulted obligations which are excludable from gross income for Federal
income tax purposes will be excludable from Missouri state income tax to the
same extent as such interest would have been paid by the issuer of such Bonds
held by the Missouri Trust; however, no opinion is expressed herein regarding
taxation of interest paid and original issue discount, if any, on the Bonds
received by the Missouri Trust and distributed to Unitholders under any other
tax imposed pursuant to Missouri law, including but not limited to the
franchise tax imposed on financial institutions pursuant to Chapter 148 of the
Missouri Statutes.
The Missouri state income tax does not permit a deduction of interest paid or
incurred on indebtedness incurred or continued to purchase or carry Units in
the Trust, the interest on which is exempt from such Tax.
The Missouri Trust will not be subject to the Kansas City, Missouri Earnings
and Profits Tax and each Unitholder's share of income of the Bonds held by the
Missouri Trust will not generally be subject to the Kansas City, Missouri
Earnings and Profits Tax or the City of St. Louis Earnings Tax (except in the
case of certain Unitholders, including corporations, otherwise subject to the
St. Louis City Earnings Tax).
Nebraska Trusts
The assets of the Nebraska Trust will consist of interest-bearing obligations
issued by or on behalf of the State of Nebraska (the "State") or counties,
municipalities, authorities or political subdivisions thereof (the "Nebraska
Bonds") or by the Commonwealth of Puerto Rico, Guam and the United States
Virgin Islands (the "Possession Bonds") (collectively, the "Bonds");
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Nebraska Trust. With respect to certain
Nebraska Bonds which may be held by the Nebraska Trust, the opinions of bond
counsel to the issuing authorities for such bonds have indicated that the
interest on such Bonds is included in computing the Nebraska Alternative
Minimum Tax imposed by Section 77-2715(2) of the Revised Nebraska Statutes
(the "Nebraska Minimum Tax") (the "Nebraska AMT Bonds"). However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i)
the Bonds were validly issued, (ii) the interest thereon is excludible from
gross income for Federal income tax purposes, (iii) none of the Bonds (other
than the Nebraska AMT Bonds, if any) are "specified private activity bonds"
the interest on which is included as an item of tax preference in the
computation of the Alternative Minimum Tax for federal income tax purposes,
(iv) interest on the Nebraska Bonds (other than the Nebraska AMT Bonds, if
any), if received directly by a Unitholder, would be exempt from both the
Nebraska income tax, imposed by Section 77-2714 et seq. of the Revised
Nebraska Statutes (other than the Nebraska Minimum Tax) (the "Nebraska State
Income Tax") and the Nebraska Minimum Tax imposed by Section 77-2715(2) of the
Revised Nebraska Statutes (the "Nebraska Minimum Tax"), and (v) interest on
the Nebraska AMT Bonds, if any, if received directly by a Unitholder, would be
exempt from the Nebraska State Income Tax. The opinion set forth below does
not address the taxation of persons other than full time residents of
Nebraska;
At the time of closing for each Nebraska Trust, Special Counsel to each
Nebraska Trust for Nebraska tax matters, rendered an opinion under then
existing Nebraska income tax law applicable to taxpayers whose income is
subject to Nebraska income taxation substantially to the effect that:
The Nebraska Trust is not an association taxable as a corporation, each
Unitholder of the Nebraska Trust will be treated as the owner of a pro rata
portion of the Nebraska Trust, and the income of such portion of the Nebraska
Trust will therefore be treated as the income of the Unitholder for both
Nebraska State Income Tax and the Nebraska Minimum Tax purposes;
Interest on the Bonds which is exempt from both the Nebraska State Income Tax
and the Nebraska Minimum Tax when received by the Nebraska Trust, and which
would be exempt from both the Nebraska State Income Tax and the Nebraska
Minimum Tax if received directly by a Unitholder, will retain its status as
exempt from such taxes when received by the Nebraska Trust and distributed to
a Unitholder;
Interest on the Nebraska AMT Bonds, if any, which is exempt from the Nebraska
State Income Tax but is included in the computation of the Nebraska Minimum
Tax when received by the Nebraska Trust, and which would be exempt from the
Nebraska State Income Tax but would be included in the computation of the
Nebraska Minimum Tax if received directly by a Unitholder, will retain its
status as exempt from the Nebraska State Income Tax but included in the
computation of the Nebraska Minimum Tax when received by the Nebraska Trust
and distributed to a Unitholder;
To the extent that interest derived from the Nebraska Trust by a Unitholder
with respect to the Possession Bonds is excludable from gross income for
Federal income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a and 48 U.S.C. Section 1403, such interest will not be subject to
either the Nebraska State Income Tax or the Nebraska Minimum Tax.
Each Unitholder of the Nebraska Trust will recognize gain or loss for both
Nebraska State Income Tax and Nebraska Minimum Tax purposes if the Trustee
disposes of a Bond (whether by redemption, sale or otherwise) or if the
Unitholder redeems or sells Units of the Nebraska Trust to the extent that
such a transaction results in a recognized gain or loss to such Unitholder for
Federal income tax purposes.
The Nebraska State Income Tax does not permit a deduction for interest paid or
incurred on indebtedness incurred or continued to purchase or carry Units in
the Nebraska Trust, the interest on which is exempt from such Tax.
In the case of a Unitholder subject to the State financial institutions
franchise tax, the income derived by such Unitholder from his pro rata portion
of the Bonds held by the Nebraska Trust may affect the determination of such
Unitholder's maximum franchise tax.
Neither the Sponsor nor its counsel have examined any of the Bonds to be
deposited and held in the Nebraska Trust or the proceedings for the issuance
thereof or the opinions of bond counsel with respect thereto, and therefore
express no opinion as to the exemption from either the Nebraska State Income
Tax or the Nebraska Minimum Tax of interest on the Nebraska Bonds if received
directly by a Unitholder.
New Jersey Trusts
Each New Jersey Trust consists of a portfolio of Bonds. The Trust is therefore
susceptible to political, economic or regulatory factors affecting issuers of
the 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 1,050 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 States in per
capita personal income ($26,457).
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.
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 7.1%
in December 1993, which is higher than the national average of 6.4% in
December 1993. 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 down size 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, 1993, there was a total authorized bond indebtedness of
approximately $8.98 billion, of which $3.6 billion was issued and outstanding,
$4.0 billion was retired (including bonds for which provision for payment has
been made through the sale and issuance of refunding bonds) and $1.38 billion
was unissued. The debt service obligation for such outstanding indebtedness is
$119.9 million for fiscal year 1994.
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, t
here was a surplus in the general fund of $1 million. At the end of fiscal
year 1991, there was a surplus in the general fund of $1.4 million. New Jersey
closed its fiscal year 1992 with a surplus of $760.8 million. It is estimated
that New Jersey closed its fiscal year 1993 with a surplus of $361.3 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 services 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 to 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 29, 1993, Governor Florio signed the New Jersey Legislature's $15.9
billion budget for Fiscal Year 1994. The balanced budget does not rely on any
new taxes, college tuition increases or any commuter fare increases, while
providing a surplus of more than $400 million. Whether the State can achieve a
balanced budget depends on its ability to enact and implement expenditure
reductions and to collect the estimated tax revenues. The Fiscal Year 1994
Appropriations Act forecasts sales and use tax collections of $3.920 billion,
a 7.5% increase from receipts estimated in the Revised Revenue Estimates for
Fiscal Year 1993. It also forecasts gross income tax collections of $4.748
billion, a 10.6% increase from receipts estimated for Fiscal Year 1993, and
corporation business tax collections of $1.1 billion, a 15.4% increase from
receipts estimated for Fiscal Year 1993. However, projections and estimates of
receipts from taxes have been subject to variance in recent years as a result
of several factors, most recently a significant slowdown in the national,
regional and State economies, sluggish employment and uncertainties in
taxpayer behavior as a result of actual and proposed changeS in Federal tax
laws.
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 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, the adequacy of Medicaid reimbursement
for services rendered by doctors and dentists to Medicaid eligible children,
the Commissioner of Health's calculation of the hospital assessment required
by the Health Care Cost Reduction Act of 1991, refusal of the State to share
with Camden County federal funding the State recently received for
disproportionate share hospital payments made to county psychiatric
facilities, and 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. 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, both Moody's Investors Service, Inc. and
Standard and Poor's Corporation 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 budget must be closed before
the new budget year begins on July 1, 1992. Standard and Poor's 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
was negative. Standard and Poor's Corporation was concerned that the State was
entering fiscal 1993 with only a $26 million surplus and remained concerned
about whether the sagging State economy would recover quickly enough to meet
lawmakers' revenue projections. It also remained concerned about the recent
federal ruling leaving in doubt how much the State was 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. There can be no
assurance that these ratings will continue or that particular bond issues may
not be adversely affected by changes in the State or local economic or
political conditions.
On August 24, 1992, Moody's Investors Service, Inc. downgraded New Jersey
general obligation 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.
Although New Jersey recently received $412 million in settlement of its $450
million dispute with the federal government for retroactive Medicaid
reimbursements, neither Moody's nor Standard and Poor's has revised its rating
for New Jersey general obligation bonds.
At the time of the closing for each New Jersey Trust, Special Counsel to each
New Jersey Trust 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:
The New Jersey Trust will be recognized as a trust and not an association
taxable as a corporation. The New Jersey Trust will not be subject to the New
Jersey Corporation Business Tax or the New Jersey Corporation Income Tax.
With respect to the non-corporate Unitholders who are residents of New Jersey,
the income of the New Jersey Trust which is allocable to each such Unitholder
will be treated as the income of such Unitholder 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 Unitholder will retain
its status as tax- exempt interest when received by the New Jersey Trust and
distributed to such Unitholder. 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 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 Unitholder will not be subject to the New Jersey Gross Income
Tax on any gain realized either when the New Jersey Trust disposes of a Bond
(whether by sale, exchange, redemption, or payment at maturity), when the
Unitholder 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 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 Unitholder on the disposition of assets the gain on which is subject
to the New Jersey Gross Income Tax.
Units of the New Jersey Trust may be taxable on the death of a Unitholder
under the New Jersey Transfer Inheritance Tax Law or the New Jersey Estate Tax
Law.
If a Unitholder 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 by 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. Any proceeds paid under the insurance policy issued to the Trustee
of the New Jersey Trust with respect to the Bonds or under individual policies
obtained by issuers of Bonds which represent maturing interest or maturing
principal on defaulted obligations held by the Trustee will be included in its
entire net income for purposes of the New Jersey Corporation Business Tax or
New Jersey Corporation Income Tax if, and to the same extent as, such interest
or proceeds would have been so included if paid by the issuer of the defaulted
obligations.
New York Trusts
A resident of New York State (or New York City) will be subject to New York
State (or New York City) personal income tax with respect to gains realized
when New York Obligations held in the New York Trust are sold redeemed or paid
at maturity or when his Units are sold or redeemed, such gain will equal the
proceeds of sale, redemption or payment less the tax basis of the New York
Obligation or Unit (adjusted to reflect (a) the amortization of premium or
discount, if any, on New York Obligations held in the Trust, (b) accrued
original issue discount, with respect to each New York Obligation which, at
the time the New York Obligation was issued had original issue discount, and
(c) the deposit of New York Obligations with accrued interest in the Trust
after the Unitholder's settlement date).
Interest or gain from the New York Trust derived by a Unitholder who is not a
resident of New York State (or New York City) will not be subject to New York
State (or New York City) personal income tax, unless the Units are property
employed in a business, trade, profession or occupation carried on in New York
State (or New York City).
Amounts paid on defaulted New York Obligations held by the Trustee under
policies of insurance issued with respect to such New York Obligations will be
excludable from income for New York State and New York City income tax
purposes, if and to the same extent as, such interest would have been
excludable if paid by the respective issuer.
For purposes of the New York State and New York City franchise tax on
corporations, Unitholders which are subject to such tax will be required to
include in their entire net income any interest or gains distributed to them
even though distributed in respect of New York obligations.
If borrowed funds are used to purchase Units in the Trust, all (or part) of
the interest on such indebtedness will not be deductible for New York State
and New York City tax purposes. The purchase of Units may be considered to
have been made with borrowed funds even though such funds are not directly
traceable to the purchase of Units in any New York Trust.
The Portfolio of the New York Trust includes certain 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 the 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 Trust or the ability of particular
obligors to make timely payments of debt service on (or relating to) those
obligations.
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.
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 grow faster
than 1992, but still at a very moderate rate, as compared to other recoveries.
The national recession has been more severe in the State because of factors
such as a significant retrenchment in the financial services industry,
cutbacks in defense spending, and an overbuilt real estate market.
1993-94 Fiscal Year. On April 5,1993, the State Legislature approved a $32.08
billion budget. Following enactment of the budget the 1993-94 State Financial
Plan was formulated on April 16,1993. This Plan projects General Fund receipts
and transfers from other funds at $32.367 billion and disbursements and
transfers to other funds at $32.300 billion. In comparison to the Governor's
recommended Executive Budget for the 1993-94 fiscal year as revised on
February 18, 1993, the 1993-94 State Financial Plan reflects increases in both
receipts and disbursements in the General Fund of $811 million.
While a portion of the increased receipts was the result of a $487 million
increase in the State's 1992-93 positive year-end margin at March 31, 1993 to
$671 million, the balance of such increased receipts is based upon (i) a
projected $269 million increase in receipts resulting from improved 1992-93
results and the expectation of an improving economy, (ii) Projected additional
payments of $200 million from the Federal government as reimbursements for
indigent medical care, (iii) the early payment of $50 million of personal tax
returns in 1992-93 which otherwise would have been paid in 1993-94; offset by
(iv) the State Legislature's failure to enact $195 million of additional
revenue-raising recommendations proposed by the Governor. There can be no
assurances that all of the projected receipts referred to above will be
received.
Despite the $811 million increase in disbursements included in the 1993-94
State Financial Plan, a reduction in aid to some local government units can be
expected. To offset a portion of such reductions, the 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. Before giving effect to a 1992-93 year-end deposit to the
refund reserve account of $671 million, General Fund receipts in 1992-93 would
have been $716 million higher than originally projected. This year- end
deposit effectively reduced 1992-93 receipts by $671 million and made those
receipts available for 1993-94.
The State's favorable performance primarily resulted from income tax
collections that were $700 million higher than projected which reflected both
stronger economic activity and tax-induced one-time acceleration of income
into 1992. In other areas larger than projected business tax collections and
unbudgeted receipts offset the loss of $200 million of anticipated Federal
reimbursement and losses of, or shortfalls in, other projected revenue
sources.
For 1992-93, disbursements and transfers to other funds (including the deposit
to the refund reserve account discussed above) totalled $30.829 billion, an
increase of $45 million above projections in April 1992.
Fiscal year 1992-93 was the first time in four years that the State did not
incur a cash-basis operating deficit in the General Fund requiring the
issuance of deficit notes or other bonds, spending cuts or other revenue
raising measures.
Indebtedness. As of March 31,1993, the total amount of long-term State general
obligation debt authorized but unissued stood at $2.4 billion. As of the same
date, the State had approximately $5.4 billion in general obligation bonds.
The State issued $850 million in tax and revenue anticipation notes ("TRANS")
on April 28,1993. The State does not project the need to issue additional
TRANS during the State's 1993-94 fiscal year.
The State projects that its borrowings for capital purposes during the State's
1993-94 fiscal year will consist of $460 million in general obligation bonds
and $140 million in new commercial paper issuances. In addition, the State
expects to issue $140 million in bonds for the purpose of redeeming
outstanding bond anticipation notes. The Legislature has authorized 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 during
the State's 1993-94 fiscal year. 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 \xd4 \xd4 New York Local
Government Assistance Corporation'' (\xd2 LGAC\xd3 ), 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 $3.28
billion. LGAC has been authorized to issue additional bonds to provide net
proceeds of $703 million during the State's 1993-94 fiscal year.
Ratings. The $850 million in TRANS issued by the State in April 1993 were
rated 5P-1-Plus by S&P on April 26, 1993, and MlG-1 by Moody's on April
23,1993, which represents the highest ratings given by such agencies and the
first time the State's TRANS have received these ratings since its May 1989
TRANS issuance. Both agencies cited the State's improved fiscal position as a
significant factor in the upgrading of the April 1993 TRANS.
Moody's rating of the State's general obligation bonds stood at A on April
23,1993, and S&P's rating stood at A- with a stable outlook on April 26, 1993,
an improvement from S&P's negative outlook prior to April 1993. Previously,
Moody's lowered its rating to A on June 6,1990, its rating having been Al
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 A1 from November1982 to August 1987.
Moody's, in confirming its rating of the State's general obligation bonds, and
S&P, in improving its outlook on such bonds from negative to stable, noted the
State's improved fiscal condition and reasonable revenue assumptions contained
in the 1993-94 State budget.
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 response to the City's fiscal crisis in 1975, the State took a number of
steps to assist the City in returning to fiscal stability. Among other
actions, 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 \xd4 \xd4 Control Board'') to
review and approve the City's budgets and City four-year financial plans (the
financial plans also apply to certain City-related public agencies (the
"Covered Organizations")).
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 \xd4 \xd4 Control Board'') to review and approve
the City's budgets and City four-year financial plans (the financial plans
also apply to certain City- related public agencies (the \xd4 \xd4 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 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.
Fiscal Year 1993 and 1993-1996 Financial Plan. The City's 1993 fiscal year
results are projected to be balanced in accordance with generally accepted
accounting principles (\xd4 \xd4 OAAP''). The City was required to close
substantial budget gaps in its 1990,1991 and 1992 fiscal years in order to
maintain balanced operating results.
The City's modified Financial Plan dated February 9,1993 covering fiscal years
1993-1996 projects budget gaps for 1994 through 1996. The Office of the State
Deputy Controller for the City of New York has estimated that under the
modified Financial Plan budget gaps will be $102 million for fiscal year 1994,
$196 million for fiscal year 1995 and $354 million for fiscal year 1996,
primarily due to anticipated higher spending on labor costs.
However, the City's modified Plan is dependent upon a gap-closing program,
certain elements of which the staff of Control Board identified on March
25,1993 to be at risk due to projected levels of State and Federal aid and
revenue and expenditures estimates which may not be achievable. The Control
Board indicated that the City's modified Financial Plan does not make progress
towards establishing a balanced budget process. The Control Board's report
identified budget gap risks of $1.0 billion, $1.9 billion, $2.3 billion and
$2.6 billion in fiscal years 1994 through 1997, respectively.
On June 3,1993, the Mayor announced that State and federal aid for Fiscal Year
1993-1994 would be $280 million less than projected and that in order to
balance the City's budget $176 million of previously announced contingent
budget cuts would be imposed. The Mayor indicated that further savings would
entail serious reductions in services. The State Comptroller on June 14,1993
criticized efforts by the Mayor and City Council to balance the City's budget
which rely primarily on one-shot revenues. The Comptroller added that the
City's budget should be based on \xd4 \xd4 recurring revenues that fund
recurring expenditures.'' Given the foregoing factors, 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.
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 and imminence 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
financing 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.
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 1993 fiscal year or
subsequent years, such developments could also 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's 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 its
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. As discussed above, the City must identify additional
expenditure reductions and revenue sources to achieve balanced operating
budgets for fiscal years 1994 and thereafter. And such 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
$15.7 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 to engender public comment.
The City achieved balanced operating results as reported in accordance with
GAAP for the 1992 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 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.
On November 19, 1992, the City submitted to the Control Board the Financial
Plan for the 1993 through 1996 fiscal years, which is a modification to a
financial plan submitted to the Control Board on June 11, 1992 (the "June
Financial Plan"), and which relates to the City, the Board of Education
("BOE") and the City University of New York ("CUNY"). The 1993-1996 Financial
Plan projects revenues and expenditures of $29.9 billion each for the 1993
fiscal year balanced in accordance with GAAP.
During the 1992 fiscal year, the City proposed various actions to close a
previously projected gap of approximately $1.2 billion for the 1993 fiscal
year. The gap-closing actions for the 1993 fiscal year proposed during the
1992 fiscal year and outlined in the City's June Financial Plan included $489
million of discretionary transfers from the 1992 fiscal year. The 1993-1996
City Financial Plan includes additional gap-closing actions to offset an
additional potential $81 million budget gap.
The 1993-1996 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 1993-1996 Financial Plan also sets forth projections and outlines a
proposed gap-closing program for the 1993 through 1996 fiscal years to close
projected budget gaps of $1.7 billion, $2.0 billion and $2.6 billion,
respectively, in the 1994 through 1996 fiscal years. On February 9, 1993, the
City issued a modification to the 1993-1996 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 1993-1996 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. The State Legislature has in the past failed to approve certain
proposals similar to those that the 1993-1996 Financial Plan assumes will be
approved by the State Legislature during the 1993 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.
On March 9, 1993, OSDC issued a report on the February Modification. The
report expressed concern that the budget gaps projected for fiscal years 1994
through 1996 are the largest the City has faced at this point in the financial
planning cycle in at least a decade, and concluded that the February
Modification represented a step backward in the City's efforts to bring
recurring revenues into line with recurring expenditures.
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, 1992, legal claims in excess of $341 billion
were outstanding against the City for which the City estimated its potential
future liability to be $2.3 billion.
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 March 30,1993, in confirming its Baa rating, Moody's noted that:
The financial plan for fiscal year 1994 and beyond shows an ongoing imbalance
between the City's expenditures and revenues. The key indication of this
structural imbalance is not necessarily the presence of sizable out-year
budget gaps, but the recurring use of one-shot actions to close gaps.
One-shots constitute a significant share of the proposed gap-closing program
for fiscal year 1994, and they represent an even larger share of those
measures which the City seems reasonably certain to attain. Several major
elements of the program, including certain state actions, federal counter
cyclical aid and part of the city's tax package, remain uncertain. However,
the gap closing plan may be substantially altered when the executive budget is
offered later this spring.
On March 30,1993, S&P affirmed its A- rating with a negative outlook, stating
that:
The City's key credit factors are marked by a high and growing debt burden,
and taxation levels that are relatively high, but stable. The City's economy
is broad-based and diverse, but currently is in prolonged recession, with slow
growth prospects for the foreseeable future.
The rating outlook is negative, reflecting the continued fiscal pressure
facing the City, driven by continued weakness in the local economy, rising
spending pressures for education and labor costs of city employees, and
increasing costs associated with rising debt for capital construction and
repair.
The current financial plan for the City assumes substantial increases in aid
from national and state governments. Maintenance of the current rating, and
stabilization of the rating outlook, will depend on the City's success in
realizing budgetary aid from these governments, or replacing those revenues
with ongoing revenue- raising measures or spending reductions under the City's
control. However, increased reliance on non-recurring budget balancing
measures that would support current spending, but defer budgetary gaps to
future years, would be viewed by S&P as detrimental to New York City's
single-A-' rating.
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 December 31, 1992, the City and MAC had, respectively, $20.3 billion and
$4.7 billion of outstanding net long-term indebtedness.
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.
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 could
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 and
nineteenth centuries. The claimants seek recovery of approximately six million
acres of land as well as compensatory and punitive damages.
The U.S. Supreme Court on March 30,1993 referred to a Special Master for
determination of damages in an action by the State of Delaware to recover
certain unclaimed dividends, interest and other distributions made by issuers
of securities held by New York based-brokers incorporated in Delaware. (State
of Delaware v. State of New York.) The State had taken such unclaimed property
under its Abandoned Property Law. The State expects that it may pay a
significant amount in damages during fiscal year 1993-94 but it has indicated
that it has sufficient funds on hand to pay any such award, including funds
held in contingency reserves. The State's 1993-94 Financial Plan includes the
establishment of a $100 million contingency reserve fund which would be
available to fund such an award which some reports have estimated at $100-$800
million.
In Schulz v. State of New York, commenced May 24,1993 ("Schulz 1993"),
petitioners have challenged the constitutionality of mass transportation
bonding programs of the New York State Thruway Authority and the Metropolitan
Transportation Authority. On May 24,1993, the Supreme Court, Albany County,
temporarily enjoined the State from implementing those bonding programs. In
previous actions Mr. Schulz and others have challenged on similar grounds
bonding programs for the New York State Urban Development Corporation and the
New York Local Government Assistance Corporation. While there have been no
decisions on the merits in such previous actions, by an opinion dated May 11,
1993, the New York Court of Appeals held in a proceeding commenced on April
29,1991 in the Supreme Court, Albany County (Schulz v. State of New York),
that petitioners had standing as voters under the State Constitution to bring
such action.
Petitioners in Schulz 1993 have asserted that issuance of bonds by the two
Authorities is subject to approval by statewide referendum. At this time there
can be no forecast of the likelihood of success on the merits by the
petitioners, but a decision upholding this constitutional challenge could
restrict and limit the ability of the State and its instrumentalities to
borrow funds in the future. The State has not indicated that the temporary
injunction issued by the Supreme Court in this action will have any immediate
impact on its financial condition or interfere with projects requiring
immediate action.
Adverse developments in the foregoing proceedings or new proceedings could
adversely affect the financial condition of the State in the future.
Certain localities in addition to New York City could have financial problems
leading to requests for additional State assistance. Both the Revised 1992-93
State Financial Plan and the recommended 1993-94 State Financial Plan include
a significant reduction 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 1991, the total indebtedness of all localities in
the State was approximately $31.6 billion, of which $16.8 billion was debt of
New York City (excluding $6.7 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. Fifteen localities had outstanding indebtedness for State
financing at the close of their fiscal year ending in 1991. 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.
At the time of the closing for each New York Trust, Special Counsel to each
New York 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:
The New York Trust is not an association taxable as a corporation and the
income of the New York Trust will be treated as the income of the Unitholders
under the 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 tax on
interest income which is exempt from Federal income tax under section 103 of
the Internal Revenue Code of 1986 and derived from obligations of New York
State or a political subdivision thereof, 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.
North Carolina Trust
General obligations of a city, town or county in North Carolina are payable
from the general revenues of the entity, including ad valorem tax revenues on
property within the jurisdiction. Revenue bonds issued by North Carolina
political subdivisions include (1) revenue bonds payable exclusively from
revenue-producing governmental enterprises and (2) industrial revenue bonds,
college and hospital revenue bonds and other "private activity bonds" which
are essentially non-governmental debt issues and which are payable exclusively
by private entities such as non-profit organizations and business concerns of
all sizes. State and local governments have no obligation to provide for
payment of such private activity bonds and in many cases would be legally
prohibited from doing so. The value of such private activity bonds may be
affected by a wide variety of factors relevant to particular localities or
industries, including economic developments outside of North Carolina.
Section 23-48 of the North Carolina General Statutes appears to permit any
city, town, school district, county or other taxing district to avail itself
of the provisions of Chapter 9 of the United States Bankruptcy Code, but only
with the consent of the Local Government Commission of the State and of the
holders of such percentage or percentages of the indebtedness of the issuer as
may be required by the Bankruptcy Code (if any such consent is required).
Thus, although limitations apply, in certain circumstances political
subdivisions might be able to seek the protection of the Bankruptcy Code.
State Budget and Revenues. The North Carolina State Constitution requires that
the total expenditures of the State for the fiscal period covered by each
budget not exceed the total of receipts during the fiscal period and the
surplus remaining in the State Treasury at the beginning of the period. The
State's fiscal year runs from July 1st through June 30th.
In 1990 and 1991, the State had difficulty meeting its budget projections.
Lower than anticipated revenues coupled with increases in State spending
requirements imposed by the federal government led to projected budget
deficits for fiscal 1989-1990 and fiscal 1990-1991. Consequently, the Governor
ordered cuts in budgeted State expenditures for both fiscal years.
When similar budget deficits were projected for the next two fiscal years, the
General Assembly addressed the problem through a broad array of State spending
reductions in existing programs or previously budgeted increases and tax
increases. The taxes include a one-cent increase in the sales tax, a
three-cent increase in the excise tax on cigarettes, an increase in the
corporate tax rate (from 7 to 7.75 percent, as well as a four-year surtax,
starting at 4% of the regular income tax for tax year 1991 and reducing by 1%
for each of the following three years), an increase in the individual income
tax rate for married couples with income of more than $100,000 and individuals
with income over $60,000, and other taxes.
The effect of the budget reductions and tax increases resulted in a small
budget surplus (approximately $160 million) for the 1991-1992 fiscal year
(ended June 30, 1992). The State netted a larger budget surplus (approximately
$342 million) for the 1992-1993 fiscal year (ended June 30, 1993). The $9
billion budget for 1993-1994 adopted by the General Assembly did not include
any new tax measures. The 1993-1994 budget does not include new spending cuts
and estimated increased revenues totalling $30.6 million.
Both the nation and the State have experienced a modest economic recovery in
recent months. However, it is unclear what effect these developments, as well
as the reduction in government spending or increase in taxes may have on the
value of the Debt Obligations in the North Carolina Trust. No clear upward
trend has developed, and both the State and the national economies must be
watched carefully.
The fiscal condition of the State might be affected adversely by litigation
concerning the legality of certain State tax provisions following the decision
of the United States Supreme Court in Davis v. Michigan Dept. of Treasury
(decided March 28, 1989). In Davis, the United States Supreme Court held
unconstitutional a Michigan statute exempting from state income taxation
retirement benefits paid by the state of Michigan or its local governments,
but not exempting retirement benefits paid by the federal government.
Subsequent to Davis, certain federal retirees and federal military personnel
plaintiffs brought an action in North Carolina state court seeking refund of
the illegal taxes. Swanson, et al. v. State of North Carolina, et al.(Wake
County, North Carolina Superior Court, No. 90 CVS 3127) ("Swanson State").
The amount of refunds claimed by federal retirees in the Swanson action has
not been calculated. Plaintiffs have asserted that the plaintiff class
contains about 100,000 taxpayers; the State has asserted that the claims would
aggregate at least $140 million (which might not include interest).
In a 4-3 decision, the North Carolina Supreme Court found for the defendants,
declaring the State would not be required to refund taxes illegally collected
prior to the decision in Davis.Because of this determination, the Court did
not need to decide what remedies would be available if Davis were held to
apply retroactively. The Court reaffirmed its decision following
reconsideration.
Plaintiffs in Swanson State applied for review by the U.S. Supreme Court. The
U.S. Supreme Court vacated the judgment and remanded the case to the North
Carolina Supreme Court for reconsideration in light of the U.S. Supreme
Court's holding in Harper v. Virginia Dept. of Taxation (No.91-794) "Harper").
In Harper, which also involved the disparate income tax treatment of retired
state and federal employees and the question of retroactive application of the
decision in Davis, the Supreme Court held that the Commonwealth of Virginia
must provide "meaningful backward-looking relief" to the plaintiffs, if the
Commonwealth did not have a predeprivation process adequate to satisfy due
process requirements. The case was remanded to the Supreme Court of Virginia
to determine whether a remedy was required and, if so, what form it would
take.
The impact of Harper on the estimated $140 million of refund claims in Swanson
State has yet to be determined. The North Carolina Supreme Court must
determine whether North Carolina law provides an adequate predeprivation
process, and, if not, what remedy should be fashioned to satisfy due process
requirements.
General. The population of the State has increased 13% from 1980, from
5,880,095 to 6,647,351 as reported by the 1990 federal census. Although North
Carolina is the tenth largest State in population, it is primarily a rural
state, having only five municipalities with populations in excess of 100,000.
The labor force has undergone significant change during recent years. The
State has moved from an agricultural to a service and goods producing economy.
Those persons displaced by farm mechanization and farm consolidations have, in
large measure, sought and found employment in other pursuits. Due to the wide
dispersion of non-agricultural employment, the people have been able to
maintain, to a large extent, their rural habitation practices. During the
period 1980 to 1990, the State labor force grew about 19% (from2,855,200 to
3,401,000), and per capita income grew from $7,999 to $16,203, an increase of
102.6%.
The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of May 1991, the State was reported to
rank tenth among the states in non-agricultural employment and eighth in
manufacturing employment. Employment indicators have fluctuated somewhat in
the annual periods since June of1989. The following table reflects the
fluctuations in certain key employment categories.
Category (All Seasonally Adjusted) June 1989 June 1990 June 1991 June 1992
Civilian Labor Force 3,286,000 3,312,000 3,228,000 3,275,000
Nonagricultural Employment 3,088,000 3,129,000 3,059,000 3,077,000
Goods Producing Occupations (mining,
construction and manufacturing) 1,042,200 1,023,100 973,600 974,600
Service Occupations 2,045,800 2,106,300 2,085,400 2,103,100
Wholesale/Retail Occupations 713,900 732,500 704,100 694,700
Government Employees 482,200 496,400 496,700 502,000
Miscellaneous Services 563,900 587,300 596,300 615,300
Agricultural Employment 54,900 58,900 88,700 102,800
The unemployment rate in June 1993 was 5.4% of the labor force, as compared
with an unemployment rate of 7.0% nationwide.
The diversity of agriculture in North Carolina and a continuing push in
marketing efforts have protected farm income from some of the wide variations
that have been experienced in other states where most of the agricultural
economy is dependent on a small number of agricultural commodities.
Gross agricultural income in 1991 was $4.98 billion, including approximately
$4,924,071,000 income from commodities. As of 1991, the State was tenth in the
nation in gross agricultural income. Tobacco production is a leading source of
agricultural income in the State, accounting for 21.4% of gross agricultural
income. Tobacco farming in North Carolina has been and is expected to continue
to be affected by major Federal legislation and regulatory measures regarding
tobacco production and marketing and by international competition. Measures
adverse to tobacco farming could have negative effects on farm income and the
North Carolina economy generally. Eggs and poultry products accounted for
revenues of approximately $1.5 billion in 1991.
According to the State Commissioner of Agriculture, based on 1991 figures, the
State ranked first in the nation in the production of flue-cured tobacco,
total tobacco, turkeys and sweet potatoes; second in the production of
cucumbers for pickles; third in the value of poultry products and trout;
fourth in commercial broilers and peanuts; sixth in barley tobacco, greenhouse
and nursery receipts, hogs and strawberries; and seventh in the number of
chickens (excluding broilers), peaches and apples. The number of farms has
been decreasing; in 1992 there were approximately 60,000 farms in the State
(down from approximately 72,000 in 1987, a decrease of about 17% in five
years). However, a strong agribusiness sector also supports farmers with farm
inputs (fertilizer, insecticide, pesticide and farm machinery) and processing
of commodities produced by farmers (vegetable canning and cigarette
manufacturing).
The State Department of Commerce, Travel and Tourism Division, has reported
that in 1991 approximately $7 billion was spent on tourism in the State with
1992 revenues from tourism expected to exceed $7.3 billion. In 1990, traveler
expenditures directly generated more than 141,000 jobs within the State, 4.5
percent of total nonagricultural employment in that year.
Bond Ratings. Currently, Moody's rates North Carolina general obligation bonds
as Aaa and Standard & Poor's rates such bonds as AAA. Standard & Poor's placed
North Carolina general obligation bonds on "credit watch" in June of 1990 and
continued to monitor the State's economy closely through 1990 and 1991.
In June of 1992 Standard & Poor's revised its outlook on the State's AAA-rated
general obligation bonds to stable from negative. Among the reasons for the
revision were the revenue spending measures adopted since 1991.
The rating agencies presumably will monitor the results of the legislative
approach to the fiscal difficulties.
Thus, although both rating agencies have reaffirmed the AAA rating of North
Carolina's outstanding general obligation bonds for the present time, there
can be no assurance that these ratings will continue, that local government
bond ratings will not decline or that particular bond issues may not be
adversely affected by changes in economic, political or other conditions that
do not affect the ratings.
The Sponsor believes the information summarized above describes some of the
more significant events relating to the North Carolina Trust. The sources of
this information are the official statements of issuers located in North
Carolina, State agencies, publicly available documents, publications of rating
agencies and news reports of statements by State officials and employees and
by rating agencies. The Sponsor and its counsel have not independently
verified any of the information contained in the official statements and other
sources and counsel have not expressed any opinion regarding the completeness
or materiality of any matters contained in this Prospectus other than the tax
opinions set forth below under North Carolina Taxes.
At the time of the closing for each North Carolina Trust, Special Counsel to
each North Carolina Trust for North Carolina tax matters rendered an opinion
under then existing North Carolina income tax law applicable to taxpayers
whose income is subject to North Carolina income taxation substantially to the
effect that.
Upon the establishing of the North Carolina Trust and the Units thereunder:
The North Carolina Trust is not an "association" taxable as a corporation
under North Carolina law with the result that income of the North Carolina
Trust will be deemed to be income of the Unitholders;
Interest on the Bonds that is exempt from North Carolina income tax when
received by the North Carolina Trust will retain its tax-exempt status when
received by the Unitholders;
Unitholders will realize a taxable event when the North Carolina Trust
disposes of a Bond (whether by sale, exchange, redemption or payment at
maturity) or when a Unitholder redeems or sells his Units (or any of them),
and taxable gains for Federal income tax purposes may result in gain taxable
as ordinary income for North Carolina income tax purposes. However, when a
bond has been issued under an act of the North Carolina General Assembly that
provides that all income from such Bond, including any profit made from the
sale thereof, shall be free from all taxation by the State of North Carolina,
any such profit received by the North Carolina Trust will retain its
tax-exempt status in the hands of the Unitholders;
Unitholders must amortize their proportionate shares of any premium on a Bond.
Amortization for each taxable year is accomplished by lowering the
Unitholder's basis (as adjusted) in his Units with no deduction against gross
income for the year; and
The Units are exempt from the North Carolina tax on intangible personal
property so long as the corpus of the North Carolina Trust remains composed
entirely of Bonds or, pending distribution, amounts received on the sale,
redemption or maturity of the Bonds and the Trustee periodically supplies to
the North Carolina Department of Revenue at such times as required by the
Department of Revenue a complete description of the North Carolina Trust and
also the name, description and value of the obligations held in the corpus of
the North Carolina Trust.
The opinion of Special Counsel is based, in part, on the opinion of Chapman
and Cutler regarding Federal tax status.
Ohio Trusts
The Ohio Trust 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 of the
State, or agencies or instrumentalities of the State or its political
subdivisions (Ohio Obligations). The Ohio Trust is therefore susceptible to
general or particular political, economic or regulatory factors that may
affect issuers of Ohio Obligations. The following information constitutes only
a brief summary of some of the complex factors that may have an effect. This
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 issued by 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 in connection with investment in
particular Ohio Obligations or in those obligations of particular Ohio
issuers. It is possible 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 issue or issuer.
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 also is an important
segment of the economy, with over half the State's area devoted to farming and
approximately 20% of total employment is 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 the State rate below the nationals (6.4% and 7.2%) were
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 the Ohio Trust 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 FY-ending 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 balances 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, necessary corrective steps were
taken to respond to lower receipts and higher expenditures in certain
categories than earlier estimated. Those steps included selected reductions 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 certain Senate and House budget differences for the latest
complete biennium that began July 1, 1991, an interim appropriations act was
enacted effective July 1, 1991; it included State debt service and lease
rental GRF appropriations for the entire 1992-93 biennium, while continuing
most other appropriations for a month. 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 updated FY financial results and the 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 primarily from lower collections of certain taxes, particularly
sales and use taxes and personal income 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 appropriations spending in the final six months of the
FY 1992 by a total of approximately $184 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 then projected
for FY 1993. It was 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 appropriations
spending reductions--resulted in a balance of GRF resources and expenditures
in the 1992-93 biennium. The State reported an ending GRF fund balance at June
30, 1993 of approximately $111 million, and, as a first step to BSF
replenishment, OBM has deposited $21 million in the BSF.
No spending reductions were applied to appropriations needed for debt service
or lease rentals on any State obligations.
The GRF appropriations act for the current 1994-95 biennium was passed and
signed by the Governor on July 1, 1993. It includes all necessary GRF
appropriations for biennial State debt service and lease rental payments.
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 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 in both cases is for any debt incurred to repel
invasion, suppress insurrection or defend the State in war).
By 13 constitutional amendments, the last adopted in 1993, Ohio voters have
authorized the incurrence of State debt to which taxes or excises were
pledged. At December 7, 1993, $596.6 million (excluding certain highway bonds
payable primarily from highway use charges) of this debt was outstanding or
awaiting delivery. 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 ($47.1 million outstanding); (b) $1.2 billion of obligations
authorized for local infrastructure improvements, no more than $120 million
may be issued in any calendar year ($525.2 million outstanding, $600 million
remaining to be issued); and (c) up to $200 million in general obligation
bonds for parks and recreation purposes may be outstanding at any one time (no
more than $50 million to be issued in any one year, and none have been
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; $4.14 billion of were outstanding or awaiting delivery at December
7, 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).
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 issuer'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 97 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 totaled $68.6 million
(including $46.6 mil lion for one district). FY 1993 loans totalled $94.5
million for 43 districts (including $75 million for one).
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 23
cities and villages; for 18 of them the fiscal situation was resolved and the
procedures terminated.
At present the State itself does not levy any 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.
Commencing in 1985, Ohio municipalities may be permitted under Ohio law to
subject interest on certain of the obligations held by the Ohio Trust to
income Taxes imposed on their residents and entities doing business therein.
At the time of the closing for each Ohio Trust, Special Council to each Ohio
Trust 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:
The Ohio Trust is not taxable as a corporation or otherwise for purposes of
the Ohio personal income tax, 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 Unitholders for
purposes of the Ohio personal income tax, Ohio municipal income taxes and the
Ohio corporation franchise tax in proportion to the respective interest
therein of each Unitholder.
Interest on 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 ("Territorial Obligations") held by the 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 Unitholders.
Proceeds paid to the Ohio Trust under insurance policies representing maturing
interest on defaulted obligations held by the Ohio Trust will be exempt from
Ohio income tax, 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 the
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 Unitholders.
Oregon Trusts
Oregon's nonagricultural employment growth in 1988 exceeded the United States'
rate for the third consecutive year. While the decade of 1970 to 1980 marked a
time of rapid growth, the early years of the 1980s were a period of
retrenchment and job losses. Oregon finally regained prerecessionary
nonagricultural employment levels (compared to 1979) in 1986, and continued
growing quickly through 1988.
The service and retail and wholesale trade sectors have contributed most of
the job gains. In 1979, services comprised 18 percent and retail and wholesale
trade 24 percent of total nonagricultural employment. Manufacturing
contributed 22 percent. By 1988, services grew to 23 percent, retail and
wholesale trade rose to 25 percent, but manufacturing shrank to 19 percent.
During the period 1979 to 1988, services and retail and wholesale trade added
110,000 jobs while manufacturing jobs dropped by 14,000.
Total state population and personal income followed similar trends. From 1975
to 1980, both population and personal income exceeded national growth rates.
In the late 1970s, Oregon's population grew at a rate of two to three times
the national average. The early 1980s marked a reversal of this trend, and
population and personal income growth slowed to rates below the national
average.
Recent economic trends have been favorable. In early 1987, the State's
unemployment rate dipped below the national rate, and State employment growth
exceeded the national average. Increased demand for wood products, primary
metals, and machinery and rapidly growing nonmanufacturing sectors helped push
the growth rates upward.
A mild climate, varied topography and rich soil support the nearly 100
agricultural commodities grown in Oregon and valued in terms of gross farm
sales at over $2.3 billion in 1988. Much of this agricultural activity occurs
in the Willamette River Valley in the western portion of the State. This
valley also contains most of the State's population and much of the
manufacturing activity.
Portland, located at the confluence of the Columbia and Willamette Rivers,
remains Oregon's largest city and the hub of economic activity. The greater
Portland area is a highly diversified manufacturing center. It is also the
home of the Port of Portland, a significant seaport for trade between the
western United States and the Pacific Rim nations.
Outside the Willamette Valley, those areas not devoted primarily to
agriculture rely on the wood products industry and tourism. Although the wood
products industry is still sensitive to economic fluctuations, increased
automation and improved management are enabling the industry to reach all-time
high production levels with fewer workers.
Oregon's economy grew moderately in the two decades immediately following
World War II. From 1950 to 1970, nonagricultural employment growth averaged
2.7 percent per year. In the 1970s, however, the State experienced rapid
growth as population increased and economic diversification continued.
Oregon's growth significantly outpaced the national average: from 1975 to 1980
nonagricultural employment growth averaged 6.1 percent per year and per capita
income rose above the U.S. average.
The early 1980s recessions hit Oregon hard. In 1982, nonagricultural
employment fell by 5.7 percent with much of the loss from the wood products
industry. Oregon remains slightly more sensitive to economic cycles than the
national average due to the forest products component of its economy. Although
recessionary periods continue to be somewhat more pronounced in Oregon than in
the nation as a whole, the higher proportion of nonmanufacturing jobs and
restructuring of the lumber and wood industry has provided more stability.
While the high technology industries added a significant number of jobs in the
late 1970s and early 1980s, the State has followed national trends and lost
jobs as a result of a slump in the semi-conductor, electronics and instruments
industries. In recent years, these industries have stabilized and started
adding workers.
The high interest rates experienced early in the 1980s had a significant
impact on certain sectors of the Oregon economy. The recession-sensitive wood
products, housing, and construction industries were particularly hard hit.
Rural counties of eastern and southern Oregon which depend on one or a
combination of these industries experienced the greatest impact. Many of these
counties have since diversified more and have benefited significantly from
improved tourism traffic. In urban areas generally, and in Portland in
particular, the diverse economic base has given a measure of insulation from
the impacts of the recession.
By 1984, the State began to recover and experienced a higher employment growth
rate at 4.2 percent, but this rate was still lower than the U.S. rate. The
State finally surpassed prerecessionary employment levels in 1986 and has
recently been growing faster than the U.S. average.
Tourism has been strong throughout the 1980s, due in part to the plentiful
supplies of relatively low-cost automobile fuel and improved national economy.
Oregon's wood products industry is undergoing a permanent restructuring, as
many mills have automated and improved their productivity greatly. The State
has committed itself to greater diversification of the economy by pursuing
more foreign trade in the considerable markets of the Pacific Rim countries.
Between 1979 and 1988, total nonagricultural wage and salary employment in
Oregon rose from 1,056,200 to 1,152,300, an increase of 9.1 percent. During
this period, however, employment exhibited three different trends.
In 1979, a dramatic rise in interest rates severely hurt credit-sensitive
industries such as construction and lumber and wood products and plunged the
Nation into the worst recession since the 1930s. Oregon's housing-dependent
economy was especially hard hit. Between 1979 and 1982, wage and salary
employment plummeted by 9 percent to 960,000, a loss of 95,400 jobs.
While the severity of the recession eliminated many jobs, both in
manufacturing (42,800) and non-manufacturing (52,600), it also caused interest
rates and the inflation rate eventually to drop significantly. This
improvement, plus more stimulative federal monetary and fiscal policies, set
the stage for another period of economic expansion beginning in early 1983. In
the six year period between 1982 and 1988, Oregon's wage and salary employment
increased by 20 percent to reach a new all-time high of 1,152,300, a gain of
191,500 jobs.
The current expansion differs from previous recovery periods. During the last
six years, manufacturing employment has risen by 28,600 jobs but is still
about 14,200 below its 1979 pre-recession peak of 228,500. This slow rate of
recovery largely reflects increased competition from foreign imports,
automation and increased productivity. In the first half of the 1980s, the
rising foreign exchange value of the dollar made U.S. exported goods more
expensive overseas, while foreign imports became cheaper to U.S. consumers.
Although the dollar's exchange value has been falling since 1985, imports have
captured a greater share of U.S. markets. Manufacturing firms in Oregon and
the Nation have responded by reducing their costs, restructuring their
operations and automating production processes wherever possible. In some
cases, these efficiencies have resulted in few jobs even though production
volumes have recovered and reached new all-time highs. Oregon's primary
industry, lumber and wood products, is one such example.
About 85 percent of the 191,500 new wage and salary jobs added in the
1982-1988 period came in non-manufacturing. Although every non-manufacturing
industrial category except mining, communications and utilities increased
employment, the service and trade industries accounted for eight out of every
ten new non-manufacturing jobs. Job growth was especially strong in food
stores, eating and drinking places, health care and business services.
In its 1989 Regular Session, the Oregon Legislature approved General Fund
appropriations totaling $4,585,476,617 for the 1989-1991 biennium. This is a
22 percent increase compared to estimated 1987-1989 expenditures.
A complete analysis of State General Fund finances for 1989-1991 will not be
available until after the impact of all legislative actions affecting
expenditures are compiled.
The following is a summary of the September 1, 1989 quarterly Economic and
Revenue Forecast required by ORS 291.342.
The much heralded "soft landing" scenario appears the most likely course for
the U.S. economy over the short term. Such a scenario implies an extended
period of lower growth, an easing of inflationary pressures, and little
improvement in the unemployment rate. The greatest short-term risk to the soft
landing is overreaction by the Federal Reserve in easing credit. Easing would
stimulate growth and a rise in inflation in the shortrun, which would later
induce Federal tightening and plunge the economy into a recession.
In late 1989 and early 1990, the anticipated soft landing will reduce
employment growth in Oregon and the U.S. Overall, Oregon employment is
expected to increase by 13,600 over the next year (second quarter to second
quarter), and 7,700 over the following year. This means that, relative to the
May forecast, 3,100 fewer jobs will be generated in the next year. Still,
employment growth in Oregon is expected to exceed gains nationwide in 1989.
The primary reasons for the slowdown in Oregon are: (1) expected timber supply
reductions, which will directly reduce lumber and wood products and
transportation employment; (2) a gradual slowdown in construction, as
apartment vacancy rates begin to rise and Oregon's population growth rate
begins to slow; and (3) the ending of Oregon's retail trade boom, which
brought increased competition in the form of many new retail chains and stores
to Oregon.
Total Oregon employment increased by 8,400 in the second quarter, 1,200 less
than anticipated in the May 1989 forecast. Manufacturing employment increased
by 700, while non-manufacturing employment increased by 7,700.
Total General Fund collections in 1987-1989 were $49.4 million above the May
15 forecast and $211.4 million above the estimate made at the close of the
1987 Regular Session. Both Corporate Excise and Income Tax receipts and all
other General Fund revenues exceeded the close of Regular Session estimate by
more than two percent. Therefore, ORS 291.349 (known as the "two percent
kicker" law) requires that all unanticipated revenues be returned to the
taxpayers. Corporate income taxpayers will receive a 19.7 percent credit on
their tax year 1989 liabilities to return the $36.2 million in unanticipated
Corporate Excise and Income Tax revenues. Personal income taxpayers will
receivea9.8 percent credit on their tax year 1989 liabilities to return
unanticipated receipts of $175.2 million from all noncorporate General Fund
revenue sources.
More than 40 bills passed by the 1989 Legislature changed expected General
Fund revenue receipts. Altogether, these bills raised expected 1989-1991
receipts by $25.4 million, with expected Personal Income Taxes increasing
$29.9 million, Corporate Excise and Income Taxes increasing by $4.9 million,
and all other General Fund revenues decreasing by $9.4 million. The
Legislature appropriated $4,585.5 million for the 1989-1991 period, leaving an
ending balance of $121.7 million.
The September General Fund revenue forecast anticipates that the State will
receive $9.6 million more during 1989-1991 than was anticipated at the close
of the 1989 Regular Session. This, combined with the surge in 1987-1989
revenues, pushes the expected1989-1991 ending balance to $181.0 million.
The September Personal Income Tax forecast for 1989-1991 has been increased by
$39.8 million because the high final payments individuals made during the 1989
filing season are expected to continue. The Corporate Excise and Income Tax
forecast has been lowered by $10.2 million, again reflecting receipts during
the critical April filing season. Expected Insurance Tax receipts have been
decreased by $21.4 million because of an unanticipated weakening in commercial
insurance premiums.
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 Oregon Trust 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 Oregon Trust to pay interest on or principal of the Bonds.
The assets of the Oregon Trust will consist of interest-bearing obligations
issued by or on behalf of the State of Oregon (the "State") or counties,
municipalities, authorities or political subdivisions thereof (the "Oregon
Bonds") or by the Commonwealth of Puerto Rico, Guam and the United States
Virgin Islands (the "Possession Bonds") (collectively, the "Bonds"). Neither
the Sponsor nor its counsel have independently examined the Bonds to be
deposited in and held in the Oregon Quality Trust. However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i)
the Bonds were validly issued; (ii) the interest thereon is excludible from
gross income for federal income tax purposes; and (iii) interest on the Bonds,
if received directly by an Oregon Unitholder, would be exempt from the Oregon
income tax applicable to individuals (the "Oregon Personal Income Tax").
At the time of the closing for each Oregon Trust, Special Counsel to each
Oregon Trust for Oregon tax matters rendered an opinion under then existing
Oregon income tax law applicable to taxpayers whose income is subject to
Oregon income taxation substantially to the effect that:
The Oregon Trust is not an association taxable as a corporation and based upon
an administrative rule of the Oregon State Department Revenue, each Oregon
Unitholder of the Oregon Trust will be essentially treated as the owner of a
pro rata portion of the Oregon Trust and the income of such portion of the
Oregon Trust will be treated as the income of the Oregon Unitholder for Oregon
Personal Income Tax purposes;
Interest on the Bonds which is exempt from the Oregon Personal Income Tax when
received by the Oregon Trust, and which would be exempt from the Oregon
Personal Income Tax if received directly by an Oregon Unitholder, will retain
its status as exempt from such tax when received by the Oregon Trust and
distributed to an Oregon Unitholder;
To the extent that interest derived from the Oregon Trust by a Unitholder with
respect to the Possession Bonds is excludable from gross income for Federal
income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C. Section 1423a
and 48 U.S.C. Section 1403, such interest will not be subject to the Oregon
Personal Income Tax. Each Unitholder of the Oregon Trust will recognize gain
or loss for Oregon Personal Income Tax purposes if the Trustee disposes of a
bond (whether by redemption, sale or otherwise) or if the Unitholder redeems
or sells Units of the Oregon Trust to the extent that such a transaction
results in a recognized gain or loss to such Unitholder for Federal income tax
purposes; and
The Oregon Personal Income Tax does not permit a deduction of interest paid or
incurred on indebtedness incurred or continued to purchase or carry Units in
the Oregon Trust, the interest on which is exempt from such Tax.
Investors should consult their tax advisors regarding collateral tax
consequences under Oregon law relating to the ownership of the Units,
including, but not limited to, the calculation of "net pension income" tax
credits for retirees and the applicability of other Oregon taxes.
We have not examined any of the Bonds to be deposited and held in the Oregon
Trust or the proceedings for the issuance thereof or the opinions of bond
counsel with respect thereto and therefore express no opinion as to the
exemption from the Oregon Personal Income Tax of interest on the Bonds if
received directly by an Oregon Unitholder. In addition, prospective purchasers
subject to the Oregon corporate income tax should be advised that for purposes
of the Oregon Corporate Income (Excise) Tax, interest on the Bonds received by
the Trust and distributed to a Unitholder subject to such tax will be added to
the corporate Unitholder's federal taxable income and therefore will be
taxable.
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.
Back to back recessions in the early 1980's reduced the manufacturing sector's
employment levels moderately during 1980 and 1981, sharply during 1982, and
even further in 1983. Non-manufacturing employment has increased steadily
since 1980 to its 1992 level of 81.3 percent of total Commonwealth employment.
Consequently, manufacturing employment constitutes a diminished share of total
employment within the Commonwealth. Manufacturing, contributing 18.7 percent
of 1992 non-agricultural employment, has fallen behind both the services
sector and the trade sector as the largest single source of employment within
the Commonwealth. In 1992 the services sector accounted for 29.3 percent of
all non-agricultural employment while the trade sector accounted for 22.7
percent.
From 1983 to 1989, Pennsylvania's annual average unemployment rate dropped
from 11.8 percent to 4.5 percent, falling below the national rate in 1986 for
the first time in over a decade. Pennsylvania's annual average unemployment
rate remained below the national average from 1986 until 1990. Slower economic
growth caused the unemployment rate in the Commonwealth to rise to 6.9 percent
in 1991 and 7.5 percent in 1992. In April 1993 the seasonally adjusted
unemployment rate for the Commonwealth was 6.6 percent compared to 7.0 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 statutes 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 ResultsGAAP 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 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 latest budget estimates project expenditures from
Commonwealth funds for fiscal 1993 to be $13.857 billion, representing only a
$5.2 million increase over fiscal 1992 expenditures. The 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 Fiscal 1993 budget was amended on May 28,1993, through the enactment
of $165.1 million of supplemental appropriations. This small increase in
expenditures is 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 the receipt of Federal funds for expenditures previously paid
out of Commonwealth funds. The amended fiscal 1993 budget restored partial
funding for private educational institutions that normally receive state
appropriations but whose appropriations were item-vetoed by the Governor from
the originally adopted fiscal 1993 budget. Also restored by the amended budget
were certain grants to the counties to help pay operating costs of the local
judicial system.
Commonwealth revenue sources are estimated for the fiscal 1993 budget to total
$14.592 billion, a $74.9 million increase over actual fiscal 1992 revenues,
representing an increase of approximately one-half of one percent. 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 percent to 2.8 percent on July1, 1992. In addition, tax refund
reserves were increased $209.0 million to $548.0 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. In January 1993, the
refund estimate was reduced to $530 million.
Through May 1993, fiscal 1993 total General Fund revenue collections were $7.1
million (0.05 percent) above estimate, as fiscal year-to-date shortfalls in
receipts of corporation taxes ($30.3 million) and personal income tax ($37.2
million) were offset mainly by above estimate sales tax and miscellaneous
revenue collections.
Fiscal 1994 Budget (Budgetary Basis). The enacted 1994 fiscal year budget
provides for $14.999 billion of appropriations of Commonwealth funds. The
largest increase in appropriations is for the Department of Public Welfare-
$235 million-to meet the increasing costs of medical care and rising case
loads. Other large increases are education $196 million-including $130 million
to increase state educational subsidies for the most needy school districts
and $104 million for correctional institutions to pay operating costs and
lease payments for five new prisons and to expand the capacity of two existing
facilities.
The budget estimates revenue growth of 4.0 percent over revised fiscal 1993
estimates. The revenue estimate is based on an expectation of continued
economic recovery, but at a slow rate. Sale tax receipts are projected to rise
5.1 percent over the fiscal 1993 estimate while personal income tax receipts
are projected to increase by 2.4 percent, a rate that is low because of the
tax rate reduction in July 1992.
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 plan approved
by PICA on April 6, 1992. Full implementation of the five-year 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. The Mayor and his
Administration have amended the plan to bring it back in balance and their
plan is presently being considered by PICA and City Council.
In June 1992, PlCA issued $474,555,000 of its Special lax Revenue Bonds to
provide financial assistance to Philadelphia and to liquidate the cumulative
General Fund balance deficit. In March 1993, Philadelphia filed an amended
five-year plan with PlCA, in which the General Fund balance deficit for the
Fiscal Year ended June 30,1993, is projected to be $6.6 million. The fiscal
1994 budget, approved by City Council, projects no deficit and a balanced
budget for the year ending June 30,1994. PlCA approved the fiscal 1994 budget
plan on April 14,1993.
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 Ba 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 Trust 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 Trust to pay interest on or principal of
the Bonds.
At the time of the closing for each Pennsylvania Trust, Special Counsel to
each Pennsylvania Trust for Pennsylvania tax matters rendered an opinion under
then existing Pennsylvania income tax law applicable to taxpayers whose income
is subject to Pennsylvania income taxation substantially to the effect that:
Units evidencing fractional undivided interest in the 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 Unitholders 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 Unitholder 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 Unitholder's Units relate; Units will be
taxable under the Pennsylvania inheritance and estate taxes;
Units are subject to Pennsylvania inheritance and estate taxes;
a Unitholder 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 Unitholders 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 Shares Tax;
any proceeds paid under the insurance policy issued to the Trustee or obtained
by the 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;
and
the Fund is not taxable as a corporation under Pennsylvania tax laws
applicable to corporations.
In rendering its opinion, Special Counsel has not, for timing reasons, made an
independent review of proceedings related to the issuance of the Bonds. It has
relied on Van Kampen Merritt Inc. for assurance that the Bonds have been
issued by the Commonwealth of Pennsylvania or by or on behalf of
municipalities or other governmental agencies within the Commonwealth.
South Carolina Trusts
Although all or most of the Bonds in the South Carolina Trust are revenue
obligations or general obligations of local governments or authorities rather
than general obligations of the State of South Carolina 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. The
information regarding the financial condition of the State is included for the
purpose of providing information about general economic conditions that may
affect issuers of the Bonds in South Carolina.
From the early 1920's to the present time, the State's economy has been
dominated by the textile industry with over one out of every three
manufacturing workers directly or indirectly related to the textile industry.
While the textile industry is still the major industrial employer in the
State, since 1950 the State's economy has undergone a gradual transition. The
economic base of the State has diversified as the trade and service sectors
developed and with the added development of the durable goods manufacturing
industries, South Carolina's economy now resembles more closely that of the
United States.
Personal income in the State increased by 4.2% in the fiscal year ended June
30, 1992, while that of the U.S. increased by 4.0%. For this same fiscal year,
unemployment in South Carolina was 6.1%, compared with the national rate of
7.1%.
The State Constitution requires the General Assembly to provide a balanced
budget and requires that if there be a deficit, such deficit shall be provided
for in the succeeding fiscal year. The State Constitution also provides that
the State Budget and Control Board may, if a deficit appears likely, effect
such reductions in appropriations as may be necessary to prevent a deficit. At
the November 6, 1984 general election there was approved a constitutional
amendment providing that annual increases in State appropriations may not
exceed the average growth rate of the economy of the State and that the annual
increase in the number of State employees may not exceed the average growth of
population of the State. The State Constitution also establishes a General
Reserve Fund to be maintained in an amount equal to 4% of General Fund revenue
for the latest fiscal year. Despite the efforts of the State Budget and
Control Board, deficits were experienced in each of the fiscal years ended
June 30, 1981, June 30, 1982, June 30, 1985 and June 30, 1986. All deficits
have been funded out of the General Reserve Fund. For the fiscal years ending
June 30, 1983 and 1984, the State had cash surpluses. As of June30, 1985 the
balance in the General Fund reserve was $89,100,000.
At its July 1985 meeting the State Budget and Control Board, acting upon
advice that a shortfall in General Fund revenues for the fiscal year ending
June 30, 1985 might develop, froze all supplemental appropriations pending the
final accounting of the General Fund for fiscal year 1985. On August 8, 1985,
the Office of the Comptroller General advised the State Budget and Control
Board that General Fund expenditures for the fiscal year ended June 30, 1985
did exceed General Fund revenues by $11,936,636. Obedient to the
constitutional mandate that a casual deficit shall be provided for in the
succeeding fiscal year, the State Budget and Control Board delayed certain
hiring and capital improvements scheduled to be made in fiscal year 1986 in an
amount sufficient to meet the fiscal year 1985 budget shortfall. In January of
the fiscal year ended June 30, 1986 the State Budget and Control Board was
advised of a possible shortfall of $46,346,968. The Board immediately reduced
State agency appropriations by the amount of the anticipated shortfall.
Notwithstanding this action, at the end of fiscal year 1986, it became
apparent that a shortfall would result. In August of 1986, the State Budget
and Control Board voted to fund the deficit by transferring $37,353,272 from
the Reserve Fund to the General Fund, bringing the balance in the Reserve Fund
to $51.8 million.
At the November 5, 1986 meeting of the Budget and Control Board, the Board of
Economic Advisors advised that it had reduced its revenue estimate for the
current fiscal year by $87,434,452. As required by the provisions of the
Capital Expenditure Fund, the Board applied $27,714,661 budgeted for this fund
to the anticipated shortfall. This action left a remaining shortfall of
$59,719,791 which the Budget and Control Board funded by imposing a 2.6% cut
in expenditures. In a February 1987 meeting of the Board, a further cut in
expenditures of 0.8% was ordered.
After net downward revisions of $122 million in estimated revenues during the
year, the actual revenue collections exceeded the final estimate by $37
million, resulting in a surplus for the fiscal year ending June 30, 1987, of
$20.5 million. The General Reserve Fund received $6.6 million during the year
in accordance with the Appropriation Act, and $17 million of the year-end
surplus was transferred to the General Reserve Fund, bringing the balance in
the General Reserve Fund to $75.4 million at June 30, 1987.
On August 5, 1988, it was announced that for the fiscal year ending June 30,
1988, the Budgetary General Fund had a surplus of $107.5 million. The surplus
resulted from a $117.3 million excess of revenues over expenditures. The State
will use $52.6 million of the surplus to fund supplemental appropriations,
$28.3 million to fund the Capital Reserve, and $20.5 million for an early
buy-out of a school bus lease agreement. The General Assembly will decide how
the State will spend the remaining $6.1 million.
The General Reserve Fund received $25.1 million during the 1987-88 fiscal year
in accordance with the Appropriation Act. During the year, the General
Assembly reduced the required funding of the General Reserve Fund from 4% to
3% of the latest completed fiscal year's actual revenue. The General Assembly
used $14.4 million of the resulting excess to fund the 1987-1988 Supplemental
Appropriation Act, leaving $86.1 million in the General Reserve Fund at June
30, 1988. The full-funding amount at that date, however, was only $80.8
million. In accordance with the 1988-1989 Appropriation Act, the excess of
$5.3 million will help fund 1988-1989 appropriations.
At the November 8, 1988 general election there was approved a constitutional
amendment reducing from 4% to 3% the amount of General Fund revenue which must
be kept in the General Reserve Fund, and removing the provisions requiring a
special vote to adjust this percentage. The amendment also created a Capital
Reserve Fund equal to 2% of General Fund revenue. Before March 1 of each year,
the Capital Reserve Fund must be used to offset mid-year budget reductions
before mandating cuts in operating appropriations, and after March 1, the
Capital Reserve Fund may be appropriated by a special vote in separate
legislation by the General Assembly to finance in cash previously authorized
capital improvement bond projects, retire bond principal or interest on bonds
previously issued, and for capital improvements or other nonrecurring purposes
which must be ranked in order of priority of expenditure. Monies in the
Capital Reserve Fund not appropriated or any appropriation for a particular
project or item which has been reduced due to application of the monies to
year-end deficit must go back to the General Fund.
For the fiscal year ended June 30, 1989, the State had a surplus of
$129,788,135. At June 30, 1989, the balance in the General Reserve Fund was
$87,999,428.
Because of anticipated revenue shortfalls for the fiscal year 1989-1990, the
State Budget and Control Board committed $42.4 million of the $58.7 million
Capital Reserve Fund in April, 1990. Lack of sufficient funding at year end
resulted in an additional use of $4.5 million from the Capital Reserve Fund.
After the above reductions, the State had a fiscal year 1989- 1990 surplus of
$13,159,892 which was used to fund supplemental appropriations of $1,325,000
and the Capital Reserve Fund at $11,834,892. At June 30, 1990, the balance in
the General Reserve Fund was $94,114,351.
During 1990-91 fiscal year, the State Budget and Control Board has approved
mid-year budget changes in November of 1990 and again in February of 1991, to
offset lower revenue estimates. Those changes included committing the Capital
Reserve Fund appropriation ($62,742,901) and reducing agency appropriations in
an additional amount necessary to offset (together with automatic expenditure
reductions that are tied to revenue levels) what would otherwise be a
projected deficit of approximately $132.6 million. On May 14 and May 21, 1991,
the Budget and Control Board, responding to April revenue figures and
unofficial estimates indicating an additional shortfall of $30 to $50 million,
ordered an immediate freeze on all personnel activities, from hiring to
promotions; a freeze on purchasing, with limited exceptions; and an indefinite
halt to new contracts and contract renewals. The Board also asked the General
Assembly for the power to furlough government workers periodically during the
next fiscal year.
In the past, the State's budgetary accounting principles allowed revenue to be
recorded only when the State received the related cash. On July 30, 1991, the
Budget and Control Board approved a change in this principle for sales tax
revenue beginning with the fiscal year ended June 30, 1991. The Board's
resolution requires that sales taxes collected by merchants in June and
received by the State in July be reported as revenue in June rather than in
July. This change resulted in a $5.2 million decrease in reported 1990-91
sales tax revenue and a one-time $83.1 million addition to fund balance. The
one-time adjustment increases the fund balance to the level it would be if the
new principle had been in effect in years before 1990-91. Following such
action, the year-end balance in the General Reserve Fund was $33.4 million.
At its July 30, 1991, meeting the Budget and Control Board also took action
with respect to the 1991-92 fiscal year. On July 26, 1991, the Board of
Economic Advisors advised the Budget and Control Board that it projected a
revenue shortfall of $148 million for the fiscal year 1991-92 budget of $3.581
billion. In response, the Budget and Control Board eliminated the two percent
(2%) Capital Reserve Fund appropriation of $65.9 million and reduced other
expenditures across the board by three percent (3%). On February 10, 1992, the
Board of Economic Advisers advised the Budget and Control Board that it had
revised its estimate of revenues for the current fiscal year downward by an
additional $55 million. At its February 11, 1992 meeting, the Budget and
Control Board responded by imposing an additional one percent (1%) across the
board reduction of expenditures (except with respect to approximately $10
million for certain agencies.) At its February 13, 1992 meeting, the Budget
and Control Board restored a portion of the one percent (1%) reduction to four
(4) education-related agencies totalling approximately $5.7 million. These
expenditure reduction measures, when coupled with revenue increases projected
by the Budget and Control Board, resulted in an estimated balance of
approximately $1.4 million in the General Fund for the fiscal year 1991- 92.
Subsequently, the Budget and Control Board announced that the State had
incurred a $54 million deficit for fiscal year 1991-92. This deficit will be
offset by the General Reserve Fund and a small amount saved by state agencies
and local government, leaving the State with an estimated $7.5 million balance
for the 1991-92 fiscal year.
Responding to these recurrent operating deficits, Standard & Poor's Corp. has
placed the State's AAA-rated general debt on its Credit Watch, and on January
29, 1993, this rating was reduced to AA+.
On August 22, 1992, the Budget and Control Board adopted a plan to reduce
appropriations under the 1992 Appropriations Act because of revenue shortfall
projections of approximately $200 million for the 1992-93 fiscal year. These
reductions were based on the rate of growth in each agency's budget over the
past year. On September 15, 1992, the Supreme Court of South Carolina enjoined
the Budget and Control Board from implementing its proposed plan for budget
reductions on the grounds that the Board had authority to make budget
reductions only across the board based on total appropriations. In response to
this decision, the Board instituted a 4% across the board reduction which,
together with funds from the Capital Reserve Fund, was sufficient to balance
the budget for the current fiscal year.
Prospective investors should study with care the portfolio of Bonds in the
South Carolina Trust and should consult with their investment advisers as to
the merits of particular issues in the portfolio.
At the time of the closing for each South Carolina Trust, Special Counsel for
each South Carolina Trust for South Carolina tax matters rendered an opinion
under then existing South Carolina income tax law applicable to taxpayers
whose income is subject to South Carolina income taxation substantially to the
effect that:
By the provision of paragraph (j) of Section 3 of Article 10 of the South
Carolina Constitution (revised 1977) intangible personal property is
specifically exempted from any and all ad valorem taxation;
Pursuant to the provisions of Section 12-1-60 the interest of all bonds, notes
or certificates of indebtedness issued by or on behalf of the State of South
Carolina and any authority, agency, department or institution of the State and
all counties, school districts, municipalities, divisions and subdivisions of
the State and all agencies thereof are exempt from income taxes and that the
exemption so granted extends to all recipients of interest paid thereon
through the Trust. (This opinion does not extend to so-called 63-20
obligations);
The income of the Trust would be treated as income to each Unitholder of the
Trust in the proportion that the number of Units of the Trust held by the
Unitholder bears to the total number of Units of the Trust outstanding. For
this reason, interest derived by the Trust that would not be includable in
income for South Carolina income tax purposes when paid directly to a South
Carolina Unitholder will be exempt from South Carolina income taxation when
received by the Trust and attributed to such South Carolina Unitholder;
Each Unitholder will recognize gain or loss for South Carolina state income
tax purposes if the Trustee disposes of a Bond (whether by sale, payment on
maturity, retirement or otherwise) or if the Unitholder redeems or sells his
Unit; and
The Trust would be regarded, under South Carolina law, as a common trust fund
and therefore not subject to taxation under any income tax law of South
Carolina.
The above described opinion of Special Counsel has been concurred in by an
informal ruling of the South Carolina Tax Commission pursuant to Section
12-3-170 of the South Carolina Code.
Virginia Trusts
The Commonwealth's financial condition is supported by a broad-based economy,
including manufacturing, tourism, agriculture, ports, mining and fisheries.
Manufacturing continues to be a major source of employment, ranking behind
only services, wholesale and retail trade, and government (Federal, state and
local). The Federal government is a major employer in Virginia due to the
heavy concentration of Federal employees in the metropolitan Washington, D.C.
segment of Northern Virginia and the military employment in the Hampton Roads
area, which houses the nation's largest concentration of military
installations. However, the expected retrenchment of the military sector as a
consequence of the end of the Cold War remains a cloud on the economic
horizon.
In recent years per capita personal income in Virginia has consistently been
above the national average. However, while total personal income has continued
to rise during the current recession, it has not always kept pace with both
inflation and the population, either nationally or in Virginia. Real personal
income in Virginia fell for seven consecutive quarters, ending with the last
quarter of 1991, with a slow recovery being evidenced in 1992. The annualized
rate of growth in real personal income in Virginia for the second quarter of
1992 was 0.5 percent compared to a national rate of 0.3 percent. Virginia's
real per capita income has exceeded that for both the nation and the southeast
region since the early 1980s, although the differentials have decreased since
1989. Virginia's nonagricultural employment figures mirror the national
economy although the recent recession has hit Virginia harder than the nation
as a whole with employment declining at an average annual rate of 1.6 percent
since 1990 in Virginia, compared to 0.7 percent nationally. With respect to
unemployment, Virginia's unemployment rate has consistently been below that of
the nation. For the decade of 1980 to 1990, the differential has been two
percentage points, although it decreased to below one percentage point in 1991
and the first six months of 1992.
Employment trends in Virginia have varied from sector to sector and from
region to region. For example, manufacturing and trade sectors in 1980 each
employed more workers than the service sector. Now the service sector is the
largest employer in Virginia and mining and manufacturing are now at lower
levels than in 1980. Highest rates of unemployment are concentrated in
southwest Virginia where mining jobs have been lost and the lowest
unemployment rates are seen in Northern Virginia where much federally related
employment is concentrated. Not surprisingly, there is great overlap between
areas of lowest unemployment and those of highest per capita income. Economic
recovery from the recent recession is expected to be long and slow in
Virginia, although in the long term, a growing and more diversified export
sector holds promise that should mitigate current concerns.
The Commonwealth of Virginia has historically operated on a fiscally
conservative basis and is required by its Constitution to have a balanced
biennial budget. At the end of the June 30, 1992, fiscal year, the General
Fund had an ending fund balance computed on a budgetary cash basis of $195.2
million, of which $15 million was in required reserve; $142.3 million thereof
was designated for expenditure during the next fiscal year, leaving an
undesignated, unreserved fund balance of $52.8 million, the first such
undesignated fund balance since 1988. Computed on a modified accrual basis in
accordance with generally accepted accounting principles, the General Fund
balance at the end of the fiscal year ended June 30, 1992, was minus $121.8
million, compared with a General Fund balance at the end of the fiscal year
ended June 30, 1991, of-$265.1 million. Contributing to the reduction were
$256.4 million in deferred credits, representing estimated tax refunds
associated with income taxes withheld for the period January through June,
1992, and an accrual for estimated medicaid claims of $155.8 million.
As of June 30, 1992, total debt of the Commonwealth aggregated $7.3 billion.
Of that amount, $1.5 billion was tax-supported. Outstanding general obligation
debt backed by the full faith and credit of the Commonwealth was $582.7
million at June 30, 1992. Of that amount, $544.4 million was also secured by
revenue-producing capital projects. Debt service on the balance equaled 0.2%
of total General Fund expenditures in fiscal year 1992.
The Virginia Constitution contains limits on the amount of general obligation
bonds which the Commonwealth can issue. These limits are substantially in
excess of current levels of outstanding bonds, and at June 30, 1992 would
permit an additional total of approximately $5.00 billion of bonds secured by
revenue-producing projects and approximately $5.50 billion of unsecured
general obligation bonds, with not more than approximately $1.39 billion of
the latter to be issued in any four-year period. Bonds which are not secured
by revenue-producing projects must be approved in a state-wide election.
In November of 1992 the Constitution of Virginia was amended to establish a
permanent Revenue Stabilization Fund. This Fund will go into effect in the
1994-96 biennium. In anticipation of the first required deposit ($40.5
million) to the fund, the Governor included, and the General Assembly
approved, a $30.0 million down payment.
The current biennium started on July 1,1992 and will end on June 30, 1994. The
amended biennial budget appropriated a total of $29,090.6 million: $6,416.0
million in general funds and $7,907.1 million in nongeneral funds in fiscal
1993, and $6,852.1 million in general funds and $7,915.3 million in nongeneral
funds in fiscal 1994.
The amended Appropriations Act assumed that general fund revenues would
increase by 7.1 percent in fiscal 1993 and 6.0 percent in fiscal 1994.
Currently, year-to-date general fund growth for the 11 months of fiscal 1993
is 9.7 percent. When general fund revenues are adjusted for one-time corporate
payments, the year-to-date growth declines to 7.9 percent.
The Commonwealth of Virginia maintains ratings of AAA by Standard & Poor's and
Aaa by Moody's on its general obligation indebtedness, reflecting in part its
sound fiscal management, diversified economic base and low debt ratios. There
can be no assurance that these conditions will continue. Nor are these same
conditions necessarily applicable to securities which are not general
obligations of the Commonwealth. Securities issued by specific municipalities,
governmental authorities or similar issuers may be subject to economic risks
or uncertainties peculiar to the issuers of such securities or the sources
from which they are to be paid.
At the time of the closing for each Virginia Trust, Special Counsel to each
Virginia Trust for Virginia tax matters rendered an opinion under then
existing Virginia income tax law applicable to taxpayers whose income is
subject to Virginia income taxation substantially to the effect that:
The assets of the Trust will consist of interest-bearing obligations issued by
or on behalf of the Commonwealth of Virginia ("Virginia") or counties,
municipalities, authorities or political subdivisions thereof (the "Bonds").
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludible from gross income
for federal income tax purposes and (iii) the interest thereon is exempt from
income tax imposed by Virginia that is applicable to individuals and
corporations (the "Virginia Income Tax"). The opinion set forth below does not
address the taxation of persons other than full time residents of Virginia.
The Virginia Trust is not an association taxable as a corporation for purposes
of the Virginia Income Tax and each Unitholder of the Trust will be treated as
the owner of a pro rata portion of the assets held by the Trust and the income
of such portion of the Virginia Trust will be treated as income of the
Unitholder for purposes of the Virginia Income Tax;
Income on the Bonds which is exempt from Virginia Income Tax when received by
the Virginia Trust, and which would be exempt from Virginia Income Tax if
received directly by a Unitholder, will retain its status as exempt from such
tax when received by the Trust and distributed to such Unitholder;
Each Unitholder will recognize gain or loss for purposes of the Virginia
Income Tax if the Trustee disposes of a bond (whether by redemption, sale or
otherwise) or if the Unitholder redeems or sells Units of the Trust to the
extent that such a transaction results in a recognized gain or loss to such
Unitholder for federal income tax purposes, except as described in this
paragraph. Virginia has by law provided that all income from certain
tax-exempt obligations issued under the laws of Virginia, including any
profits made from the sale of such Bonds, shall be exempt from all taxation by
Virginia, Although we express no opinion, the Virginia Department of Taxation
has indicated that the gain on the sale of such tax-exempt obligations,
recognized for federal income tax purposes, would not be subject to Virginia
income taxation. Accordingly, any such gain relating to the disposition of any
Bond that would not be subject to Virginia Income Tax if the Bond was held
directly by a Unitholder will retain its tax- exempt status for purposes of
the Virginia Income Tax when the Bond is disposed of by the Virginia Trust or
when the Unitholder is deemed to have disposed of his pro rata portion of such
Bond upon the disposition of his Unit, provided that such gain can be
determined with reasonable certainty and substantiated; and
The Virginia Income Tax does not permit a deduction of interest paid on
indebtedness incurred or continued to purchase or carry Units in the Virginia
Trust to the extent that interest income related to the ownership of Units is
exempt from the Virginia Income Tax.
In the case of Unitholders subject to the Virginia Bank Franchise Tax, the
income derived by such a Unitholder from his pro rata portion of the Bonds
held by the Virginia Trust may affect the determination of such Unitholder's
Bank Franchise Tax. Prospective investors subject to the Virginia Bank
Franchise Tax should consult their tax advisors.
THE SPONSOR
Van Kampen Merritt Inc., a Delaware corporation, is the Sponsor of the Fund.
Van Kampen Merritt Inc. is primarily owned by Clayton, Dubilier & Rice, Inc.,
a New York-based private investment firm. Van Kampen Merritt, Inc. management
owns a significant minority equity position. Van Kampen Merritt Inc.
specializes in the underwriting and distribution of unit investment trusts and
mutual funds. The Sponsor is a member of the National Association of
Securities Dealers, Inc. and has its principal office at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181 (708-684-6000). It maintains a branch office
in Philadelphia and has regional representatives in Atlanta, Dallas, Los
Angeles, New York, San Francisco, Seattle and Tampa. As of September 30, 1993,
the total stockholders' equity of Van Kampen Merritt Inc. was $200,885,000
(unaudited). (This paragraph relates only to the Sponsor and not to the Trusts
or to any other person. 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.) As of November 30, 1993, the Sponsor and its affiliates managed or
supervised approximately $38.5 billion of investment products, of which over
$25 billion is invested in municipal securities. The Sponsor and its
affiliates managed $23 billion of assets consisting of $8.2 billion for 19
mutual funds, $8.3 billion for 33 closed-end funds and $6.5 billion for 51
institutional accounts. The Sponsor has also deposited over $23.5 billion of
unit investment trusts. Based on cumulative assets deposited, the Sponsor
believes that it is the largest sponsor of insured municipal unit investment
trusts, primarily through the success of its Insured Municipal Income Trust or
the IM-IT trust. The Sponsor also provides surveillance and evaluation
services at cost for approximately $15.5 billion of unit investment trust
assets outstanding. Since 1976, the Sponsor has opened over one million retail
investor accounts through retail distribution firms. Van Kampen Merritt Inc.
is the sponsor of the various series of the trusts listed below and the
distributor of the mutual funds and closed-end funds listed below. Unitholders
may only invest in the trusts, mutual funds and closed-end funds which are
registered for sale in the state of residence of such Unitholder. Van Kampen
Merritt Inc. is the sponsor of the various series of the following unit
investment trusts: Investors' Quality Tax-Exempt Trust; Investors' Quality
Tax-Exempt Trust, Multi-Series; Investors' Quality Municipals Trust, AMT
Series; Insured Municipals Income Trust; Insured Municipals Income Trust,
lnsured Multi-Series; California Insured Municipals Income Trust; New York
Insured Municipals Income Trust; Pennsylvania Insured Municipals Income Trust;
Insured Tax Free Bond Trust; Insured Tax Free Bond Trust, Insured
Multi-Series; Investors' Corporate Income Trust; Investors' Governmental
Securities-Income Trust; Van Kampen Merritt International Bond Income Trust;
Van Kampen Merritt Utility Income Trust; Van Kampen Merritt Insured Income
Trust; Van Kampen Merritt Blue Chip Opportunity Trust; Van Kampen Merritt Blue
Chip Opportunity and Treasury Trust; Van Kampen Merritt Emerging Markets
Income Trust; Van Kampen Merritt Global Telecommunications Trust; and Van
Kampen Merritt Global Energy Trust. Van Kampen Merritt Inc. is the distributor
of the following mutual funds: Van Kampen Merritt U.S. Government Fund; Van
Kampen Merritt California Insured Tax Free Fund; Van Kampen Merritt Tax-Free
High Income Fund; Van Kampen Merritt Insured Tax-Free Income Fund; Van Kampen
Merritt High Yield Fund; Van Kampen Merritt Growth and Income Fund; Van Kampen
Merritt Pennsylvania Tax-Free Income Fund; Van Kampen Merritt Money Market
Fund; Van Kampen Merritt Tax Free Money Fund; Van Kampen Merritt Municipal
Income Fund; Van Kampen Merritt Short-Term Global Income Fund; Van Kampen
Merritt Adjustable Rate U.S. Government Fund; Van Kampen Merritt Value
Municipal Income Trust; Van Kampen Merritt California Value Municipal Income
Trust; Van Kampen Merritt Massachusetts Value Municipal Income Trust; Van
Kampen Merritt New Jersey Value Municipal Income Trust; Van Kampen Merritt New
York Value Municipal Income Trust; Van Kampen Merritt Ohio Value Municipal
Income Trust; and Van Kampen Merritt Pennsylvania Value Municipal Income
Trust. Van Kampen Merritt Inc. is the distributor of the following closed-end
funds: Van Kampen Merritt Municipal Income Trust; Van Kampen Merritt
California Municipal Trust; Van Kampen Merritt Intermediate Term High Income
Trust; Van Kampen Merritt Limited Term High Income Trust; Van Kampen Merritt
Prime Rate Income Trust; Van Kampen Merritt Investment Grade Municipal Trust;
Van Kampen Merritt Municipal Trust; Van Kampen Merritt California Quality
Municipal Trust; Van Kampen Merritt Florida Quality Municipal Trust; Van
Kampen Merritt New York Quality Municipal Trust; Van Kampen Merritt Ohio
Quality Municipal Trust; Van Kampen Merritt Pennsylvania Quality Municipal
Trust; Van Kampen Merritt Trust for Investment Grade Municipals; Van Kampen
Merritt Trust for Insured Municipals; Van Kampen Merritt Trust for Investment
Grade CA Municipals; Van Kampen Merritt Trust for Investment Grade FL
Municipals; Van Kampen Merritt Trust for Investment Grade NJ Municipals; Van
Kampen Merritt Trust for Investment Grade NY Municipals; Van Kampen Merritt
Trust for Investment Grade PA Municipals; Van Kampen Merritt Municipal
Opportunity Trust; Van Kampen Merritt Advantage Municipal Income Trust; Van
Kampen Merritt Advantage Pennsylvania Municipal Income Trust; Van Kampen
Merritt Strategic Sector Municipal Trust; and Van Kampen Merritt Limited Term
Municipal Income Fund.
If the Sponsor shall fail to perform any of its duties under the Trust
Agreement or become incapable of acting or become bankrupt or its affairs are
taken over by public authorities, then the Trustee may (i) appoint a successor
Sponsor at rates of compensation deemed by the Trustee to be reasonable and
not exceeding amounts prescribed by the Securities and Exchange Commission,
(ii) terminate the Trust Agreement and liquidate the Trust as provided therein
or (iii) continue to act as Trustee without terminating the Trust Agreement.
All costs and expenses incurred in creating and establishing the Fund,
including the cost of the initial preparation, printing and execution of the
Trust Agreement and the certificates, legal and accounting expenses,
advertising and selling expenses, expenses of the Trustee, initial evaluation
fees and other out-of-pocket expenses have been borne by the Sponsor at no
cost to the Fund.
THE TRUSTEE
Except for the various series of the Pennsylvania Trusts referred to in the
next paragraph, the Trustee is The Bank of New York, a trust company organized
under the laws of New York. The Bank of New York has its offices at 101
Barclay Street, New York, New York 10286 (800-221-7668). 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. The duties of the Trustee are primarily
ministerial in nature. It did not participate in the selection of Bonds for
the portfolios of any of the Trusts.
In the case of the various series of Investors' Municipal Pennsylvania Unit
Trusts and Tax-Exempt Trusts for Pennsylvania Residents, First Combined Series
(Investors' Municipal Pennsylvania Unit Trust, 3rd Series), the Trustee is
United States Trust Company of New York, with its principal place of business
at 45 Wall Street, New York, New York 10005 and its corporate trust office at
770 Broadway, New York, New York 10003. United States Trust Company of New
York, established in 1853, has, since its organization, engaged primarily in
the management of trust and agency accounts for individuals and corporations.
The Trustee is a member of the New York Clearing Housing Association and is
subject to supervision and examination by the Superintendent of Banks of the
State of New York, the Federal Deposit Insurance Corporation and the Board of
Governors of the Federal Reserve System.
In accordance with the Trust Agreement, the Trustee shall keep proper books of
record and account of all transactions at its office for the Trust. Such
records shall include the name and address of, and the certificates issued by
the Trust to, every Unitholder of the Trust. Such books and records shall be
open to inspection by any Unitholder at all reasonable times during the usual
business hours. The Trustee shall make such annual or other reports as may
from time to time be required under any applicable state or Federal statute,
rule or regulation (see "Unitholder Explanations-Public Offering Reports
Provided"). The Trustee is required to keep a certified copy or duplicate
original of the Trust Agreement on file in its office available for inspection
at all reasonable times during the usual business hours by any Unitholder,
together with a current list of the Securities held in the Trust.
Under the Trust Agreement, the Trustee or any successor trustee may resign and
be discharged of the Trusts created by the Trust Agreement by executing an
instrument in writing and filing the same with the Sponsor. The Trustee or
successor trustee must mail a copy of the notice of resignation to all Fund
Unitholders then of record, not less than 60 days before the date specified in
such notice when such resignation is to take effect. The Sponsor upon
receiving notice of such resignation is obligated to appoint a successor
trustee promptly. If, upon the Trustee's resignation, no successor trustee has
been appointed and has accepted the appointment within 30 days after
notification, the retiring Trustee may apply to a court of competent
jurisdiction for the appointment of a successor. The Sponsor may remove the
Trustee and appoint a successor trustee as provided in the Trust Agreement at
any time with or without cause. Notice of such removal and appointment shall
be mailed to each Unitholder by the Sponsor. Upon execution of a written
acceptance of such appointment by such successor trustee, all the rights,
powers, duties and obligations of the original trustee shall vesting the
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.
EXPENSES OF THE TRUST
The Sponsor will not receive any fees in connection with its activities
relating to a Trust. However, in connection with certain series of the Trusts
American Portfolio Evaluation Services, a division of Van Kampen Merritt
Investment Advisory Corp., a wholly-owned subsidiary corporation of the
Sponsor, will receive an annual supervisory fee as indicated under "Summary of
Essential Financial Information" in Part One of this Prospectus for providing
portfolio supervisory services for such series of such Trusts. Such fee (which
is based on the number of Units outstanding on January 1 of each year) may
exceed the actual costs of providing such supervisory services for such series
of such Trust, but at no time will the total amount received for portfolio
supervisory services rendered to all such series of such Trusts in any
calendar year exceed the aggregate cost to the Evaluator of supplying such
services in such year. In addition, for regularly evaluating Trust portfolios,
the Evaluator shall receive an annual evaluation fee as also indicated under
"Summary of Essential Financial Information". For its services the Trustee
receives a fee based on the aggregate outstanding principal amount of
Securities in each Trust as of the opening of business on January 2 and July 2
of each year as set forth under "Per Unit Information" in Part I of this
Prospectus. The Trustee's fees are payable monthly on or before the fifteenth
day of each month from the Interest Account of each Trust to the extent funds
are available and then from the Principal Account of each Trust, with such
payments being based on each Trust's portion of such expenses. The Trustee's
fees will not be increased in future years in order to make up for any
reduction in the Trustee's fees described in Part I of this Prospectus under
"Per Unit Information" for the applicable Trust. Since the 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 Unitholders, the Trustee benefits thereby. Part of the
Trustee's compensation for its services to each Trust is expected to result
from the use of these funds. For a discussion of the services rendered by the
Trustee pursuant to its obligations under the Trust Agreement, see "Public
Offering Reports Provided" and "Trust Administration and Expenses".
Both the Evaluator's fees and the Trustee's fees may be increased without
approval of the Unitholders by amounts not exceeding proportionate increases
under the category "All Services Less Rent of Shelter" in the Consumer Price
Index published by the United States Department of Labor or, if such category
is no longer published, in a comparable category. The Sponsor and the dealers
will receive sales commissions and may realize other profits (or losses) in
connection with the sale of Units as described under "Public Offering".
The following additional charges may be incurred by the Trusts: (a) fees of
the Trustee for extraordinary services, (b) expenses of the Trustee (including
legal and auditing expenses) and of counsel designated by the Sponsor, (c)
various governmental charges, (d) expenses and costs of any action taken by
the Trustee to protect the Trusts and the rights and interests of Unitholders,
(e) indemnification of the Trustee for any loss, liability or expenses
incurred by it in the administration of the Fund without negligence, bad faith
or willful misconduct on its part and (f) expenditures incurred in contacting
Unitholders upon termination of the Trust.
The fees and expenses set forth herein are payable out of the respective
Trusts. When such fees and expenses are paid by or owing to the Trustee, they
are secured by a lien on the portfolio of the applicable Trust. If the
balances in the Interest and Principal Accounts are insufficient to provide
for amounts payable by a Trust, the Trustee has the power to sell Securities
to pay such amounts.
PORTFOLIO ADMINISTRATION
The Trustee is empowered to sell, for the purpose of redeeming Units tendered
by any Unitholder, and for the payment of expenses for which funds may not be
available, such of the Bonds designated by the Evaluator as the Trustee in its
sole discretion may deem necessary. The Evaluator, in designating such
Securities, will consider a variety of factors, including (a)interest rates,
(b) market value and (c) marketability. The Sponsor, in connection with the
respective Trusts, may direct the Trustee to dispose of Bonds upon default in
payment of principal or interest, institution of certain legal proceedings,
default under other documents adversely affecting debt service, default in
payment of principal or interest on other obligations of the same issuer,
decline in projected income pledged for debt service on revenue bonds or
decline in price or the occurrence of other market or credit factors,
including advance refunding (i.e., the issuance of refunding securities and
the deposit of the proceeds thereof in trust or escrow to retire the refunded
securities on their respective redemption dates), so that in the opinion of
the Sponsor the retention of such Bonds would be detrimental to the interest
of the Unitholders. Because of such restrictions on the Trustee under certain
circumstances the Sponsor may seek a full or partial suspension of the right
of Unitholders to redeem their Units. See "Public Offering Redemption of
Units". The Sponsor is empowered, but not obligated, to direct the Trustee to
dispose of Bonds in the event of an advanced refunding.
The Sponsor is required to instruct the Trustee to reject any offer made by an
issuer of any of the Securities to issue new obligations in exchange or
substitution for any Security pursuant to a refunding or refinancing plan,
except that the Sponsor may instruct the Trustee to accept or reject such an
offer or to take any other action with respect thereto as the Sponsor may deem
proper if (1) the issuer is in default with respect to such Security or (2) in
the written opinion of the Sponsor the issuer will probably default with
respect to such Security in the reasonably foreseeable future. Any obligation
so received in exchange or substitution will be held by the Trustee subject to
the terms and conditions of the Trust Agreement to the same extent as
Securities originally deposited thereunder. Within five days after the deposit
of obligations in exchange or substitution for underlying Securities, the
Trustee is required to give notice thereof to each Unitholder of the Trust
thereby affected, identifying the Securities eliminated and the Securities
substituted therefor. Except as provided herein, the acquisition by a Trust of
any securities other than the Securities
initially deposited is not permitted.
If any default in the payment of principal or interest on any Security occurs
and no provision for payment is made therefor within 30 days, the Trustee is
required to notify the Sponsor thereof. If the Sponsor fails to instruct the
Trustee to sell or to hold such Security within 30 days after notification by
the Trustee to the Sponsor of such default, the Trustee may in its discretion
sell the defaulted Security and not be liable for any depreciation or loss
thereby incurred.
PURCHASE OF UNITS 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 the close of business on the second succeeding business day and by
making payment therefor to the Unitholder 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 as any other Units.
The offering price of any Units acquired by the Sponsor will be in accord with
the Public Offering Price described in the then currently effective prospectus
describing such Units. Any profit resulting from the resale of such Units will
belong to the Sponsor which likewise will bear any loss resulting from a lower
offering or Redemption Price subsequent to its acquisition of such Units.
AMENDMENT OR TERMINATION
The Sponsor and the Trustee have the power to amend the Trust Agreement
without the consent of any of the Unitholders when such an amendment is (a) to
cure an ambiguity or to correct or supplement any provision of the Trust
Agreement which may be defective or inconsistent with any other provision
contained therein or (b) to make such other provisions as shall not adversely
affect the interest of the Unitholders (as determined in good faith by the
Sponsor and the Trustee), provided that the Trust Agreement may not be amended
to increase the number of Units 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, the Trustee is obligated to notify promptly all Unitholders of the
substance of such amendment.
A Trust may be terminated by the Trustee when the value of such Trust, as
shown by any semi-annual evaluation, is less than that indicated under
"Summary of Essential Financial Information" in Part One of this Prospectus.
In addition, all Trusts other than those indicated in the next sentence may be
terminated at any time by the consent of the holders representing 100% of the
Units of such Trust then outstanding. Each Trust in Investors' Quality Tax-
Exempt Trust, 6th Multi-State, 7th Multi-State, 8th Multi-Series and
subsequent series may be terminated at any time by consent of the holders
representing 51% of the Units of such Trust then outstanding. The Trust
Agreement provides that each Trust shall terminate upon the redemption, sale
or other disposition of the last Security held in such Trust, but in no event
shall it continue beyond the end of the year preceding the fiftieth
anniversary of the Trust Agreement. In the event of termination of the Fund or
any Trust, written notice thereof will be sent by the Trustee to each
Unitholder of such Trust at his address appearing on the registration books of
the Fund maintained by the Trustee. Within a reasonable time thereafter, the
Trustee shall liquidate any Securities then held in such Trust and shall
deduct from the funds of such Trust any accrued costs, expenses or indemnities
provided by the Trust Agreement, including estimated compensation of the
Trustee and costs of liquidation and any amounts required as a reserve to
provide for payment of any applicable taxes or other governmental charges. The
sale of Securities in the Trust upon termination may result in a lower amount
than might otherwise be realized if such sale were not required at such time.
For this reason, among others, the amount realized by a Unitholder upon
termination may be less than the principal amount of Securities represented by
the Units held by such Unitholder. The Trustee shall then distribute to each
Unitholder his share of the balance of the Interest and Principal Accounts.
With such distribution, the Unitholder shall be furnished a final distribution
statement of the amount distributable. At such time as the Trustee in its sole
discretion shall determine that any amounts held in reserve are no longer
necessary, it shall make distribution thereof to Unitholders in the same
manner.
LIMITATION ON LIABILITIES
The Sponsor, the Evaluator and the Trustee shall be under no liability to
Unitholders for taking any action or for refraining from taking any action in
good faith pursuant to the Trust Agreement, or for errors in judgment, but
shall be liable only for their own willful misfeasance, bad faith or gross
negligence in the performance of their duties or by reason of their reckless
disregard of their obligations and duties hereunder. The Trustee shall not be
liable for depreciation or loss incurred by reason of the sale by the Trustee
of any of the Securities. In the event of the failure of the Sponsor to act
under the Trust Agreement, the Trustee may act thereunder and shall not be
liable for any action taken by it in good faith under the Trust Agreement.
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 Trust Agreement or upon or in respect of a Trust
which the 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 Trust Agreement contains other customary
provisions limiting the liability of the Trustee.
The Trustee, Sponsor and Unitholders may rely on any evaluation furnished by
the Evaluator and shall have no responsibility for the accuracy thereof.
Determinations by the Evaluator under the Trust Agreement 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 Unitholders 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.
UNIT DISTRIBUTION
Units repurchased in the secondary market, if any, may be offered by this
Prospectus at the secondary Public Offering Price (which includes Purchased
Interest in those Trusts which contain Purchased Interest) plus accrued
undistributed interest to the settlement date. Broker-dealers or others will
be allowed a concession or agency commission in connection with secondary
market transactions in the amount of70% of the applicable sales charge as
determined using the table found in "Public Offering". Certain commercial
banks are making Units of the Trust available to their customers on an agency
basis. A portion of the sale charge (equal to the agency commission referred
to above) is retained by or remitted to the banks. Under the Glass-Steagall
Act, banks are prohibited from underwriting Trust 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 addition, state securities laws on this issue
may differ from the interpretations of federal law expressed herein and banks
and financial institutions may be required to register as dealers pursuant to
state law. The minimum purchase in the secondary market will be one Unit.
Broker-dealers of the Trust may be eligible to participate in a program in
which such firms receive from the Sponsor a nominal award for each of their
registered representatives who have sold a minimum number of units of unit
investment trusts created by the Sponsor during a specified time period. In
addition, at various times the Sponsor may implement other programs under
which the sales force of a broker or dealer may be eligible to win other
nominal awards for certain sales efforts, or under which the Sponsor will
reallow to any such broker 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 brokers or dealers for
certain services or activities which are primarily intended to result in sales
of Units of the Trust. Such payments are made by the Sponsor out of its own
assets, and not out of the assets of the Trust. These programs will not change
the price Unitholders pay for their Units or the amount that the Trust will
receive from the Units sold.
The Sponsor reserves the right to reject, in whole or in part, any order for
the purchase of Units and to change the amount of the concession or agency
commission to dealers and others from time to time.
SPONSOR AND DEALER COMPENSATION
Dealers will receive the gross sales commission as described under "Public
Offering Price".
As stated under "Market for Units", the Sponsor intends to, and certain of the
dealers may, maintain a secondary market for the Units of the Trust. In so
maintaining a market, such person or persons will realize profits or sustain
losses in the amount of any difference between the price at which Units are
purchased and the price at which Units are resold (which price is based on the
bid prices of the Securities in such Trust and includes a sales charge). In
addition, such person or persons will also realize profits or sustain losses
resulting from a redemption of such repurchased Units at a price above or
below the purchase price for such Units, respectively.
LEGAL OPINIONS
The legality of the Units offered hereby has been passed upon by Chapman and
Cutler, 111 West Monroe Street, Chicago, Illinois 60603, as counsel for the
Sponsor. The counsel which has provided a state tax opinion to the respective
State Trust under "Description and State Tax Status of State Trusts" has acted
as special counsel to the Fund for the tax matters of such State. Various
Counsel have acted as counsel for the Trustee and as special counsel for the
Fund for New York tax matters. None of the special counsel for the Fund has
expressed any opinion regarding the completeness or materiality of any matters
contained in this Prospectus other than the tax opinion set forth by such
special counsel.
AUDITORS
The statements of condition and the related securities portfolio for each
Trust included in Part One of this Prospectus have been audited at the date
indicated therein by Grant Thornton, independent certified public accountants,
as set forth in their report in Part One of this Prospectus, and are included
herein in reliance upon the authority of said firm as experts in accounting
and auditing.
DESCRIPTION OF SECURITIES RATINGS*
*As published by the rating companies.
Standard & Poor's Corporation. A Standard & Poor's Corporation ("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 of creditworthiness may take into consideration obligors such
as guarantors, insurers or lessees.
The bond rating is not a recommendation to purchase or sell a security,
inasmuch as it does not comment as to market price.
The ratings are based on current information furnished to Standard & Poor's by
the issuer and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information.
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 arrangements under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA
This is the highest rating assigned by Standard & Poor's to a debt obligation
and indicates an extremely strong capacity to pay principal and interest.
AA
Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A
Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
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 (-): To provide more detailed indications of credit quality,
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: A provisional rating "p" assumes the successful
completion of the project being financed by the issuance of 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, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion. Accordingly, the investor should exercise his own
judgment with respect to such likelihood and risk. Moody's Investors Service,
Inc. A brief description of the applicable Moody's Investors Service, Inc.
("Moody's") rating symbols and their meanings follow:
Aaa
Bonds which are rated Aaa are judged to be 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. With the occasional
exception of oversupply in a few specific instances, the safety of obligations
of this class is so absolute that 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 fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities. These Aa bonds are high grade, their market value 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 higher 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 maybe influenced to some degree by credit
circumstances during a sustained period of depressed business conditions.
During periods of normalcy, bonds of this quality frequently move in parallel
with Aaa and Aa obligations, with the occasional exception of oversupply in a
few specific instances.
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.
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 operating 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.
No person is authorized to give any information or to make any representations
not contained in this Prospectus, and any information or representation not
contained herein must not be relied upon as having been authorized by the
Fund, the Sponsor or any dealer. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, securities in any state to any
person to whom it is not lawful to make such offer in such state.
Table Of Contents
Introduction 1
Description of The Funds 2
Securities Selection 2
Portfolio Concentrations 3
Replacement Bonds 6
Bond Redemptions 6
Distributions 7
Certificates 8
Estimated Current Returns and
Estimated Long-Term Returns 8
Accrued Interest (Accrued Interest To Carry) 9
Purchased and Accrued Interest 9
Public Offering Price 9
Market for Units 10
Reinvestment Option 11
Redemption of Units 11
Reports Provided 13
Federal Tax Status of Each Trust 13
Description and State Tax Status of State Trust 16
Alabama Trusts 16
Arizona Trusts 18
Arkansas Trusts 22
California Trusts 23
Colorado Trusts 30
Connecticut Trusts 33
Delaware Trusts 36
Florida Trusts 38
Georgia Trusts 42
Kansas Trusts 44
Kentucky Trusts 45
Maine Trusts 46
Maryland Trusts 49
Massachusetts Trusts 50
Michigan Trusts 52
Minnesota Trusts 55
Missouri Trusts 57
Nebraska Trusts 59
New Jersey Trusts 60
New York Trusts 64
North Carolina Trusts 72
Ohio Trusts 76
Oregon Trusts 79
Pennsylvania Trusts 83
South Carolina Trusts 88
Virginia Trusts 91
The Sponsor 94
The Trustee 95
Expenses of the Trust 96
Portfolio Administration 97
Purchase of Units by The Sponsor 97
Amendment or Termination 98
Limitation on Liabilities 98
Unit Distribution 99
Sponsor and Dealer Compensation 99
Legal Opinions 101
Auditors 101
Description of Securities Ratings 101
This Prospectus contains information concerning the Fund and the Sponsor, but
does not contain all of 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.
National and State Quality Trusts
INVESTORS' QUALITY
TAX-EXEMPT TRUST
PROSPECTUS PART TWO
Note: This Prospectus May Be Used Only When Accompanied by Part One.
Both Parts of this Prospectus should be retained for future reference.
Dated as of the date of the Prospectus Part I accompanying this Prospectus
Part II.
Sponsor: Van Kampen Merritt
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
and
Mellon Bank Center
1735 Market Street Suite 1300
Philadelphia, Pennsylvania 19103
Please retain this Prospectus for future reference.
FIRST FAMILY
OF TRUSTS
STATE INSURED TRUSTS
INSURED MUNICIPALS
INCOME TRUST
PROSPECTUS
PART TWO
In the opinion of counsel, interest to the Fund and to Unitholders, with
certain exceptions, is excludable under existing law from gross income for
Federal income taxes. In addition, the interest income of each Trust is, in
the opinion of counsel, exempt to the extent indicated from state and local
taxes, when held by residents of the state where the issuers of Bonds in such
Trust are located. Capital gains, if any, are subject to Federal tax.
The Fund. The objectives of the Fund are Federal and state tax-exempt income
(to the extent indicated) and conservation of capital through an investment in
a diversified, insured portfolio of tax-exempt bonds. The Fund consists of a
series of separate unit investment trusts. The various trusts collectively are
referred to herein as the "Trusts". Each Trust consists of such securities as
may continue to be held (the "Bonds" or "Securities"). Such Securities are
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 authority, exempt from all
Federal income taxes under existing law. In addition, the interest income of
each Trust is, in the opinion of counsel, exempt to the extent indicated from
state and local taxes, when held by residents of the state where the issuers
of Bonds in such Trust are located. See "Description and State Tax Status of
the Trusts".
The Fund and "AAA" Rating. Insurance guaranteeing the payments of principal
and interest, when due, on the Securities in the portfolio of each Trust has
been obtained from a municipal bond insurance company either by the Trust, by
a prior owner of the Bonds, by the issuer of the Bonds involved or by the
Sponsor prior to the deposit of the Bonds in the Fund. Bonds for which
insurance has been obtained by the issuer thereof or by the Sponsor prior to
the deposit of such Bonds in the Fund are referred to herein as "Preinsured
Bonds". All issues of a Trust are insured under one or more insurance policies
obtained by the Trust, if any, except for certain issues of certain Trusts
which are Preinsured Bonds. Insurance obtained by a Trust, if any, applies
only while Bonds are retained in such Trust while insurance obtained on
Preinsured Bonds is effective so long as such Bonds are outstanding. The
Trustee, upon sale of a Bond insured under an insurance policy obtained by a
Trust, has a right to obtain from the insurer involved permanent insurance for
such Bond upon the payment of a single predetermined insurance premium and any
expenses related thereto from the proceeds of the sale of such Bond. Insurance
relates only to the Bonds in the respective Trust and not to the Units offered
hereby or to the market value thereof. As a result of such insurance, the
Units of each Trust received a rating of "AAA" by Standard & Poor's
Corporation on the date the Trust was created. 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 each Trust
or sales by each Trust of Bonds for less than the purchase price by such Trust
will reduce payment to Unitholders of the interest and principal required to
be paid on such Bonds. See "lnsurance on the Bonds". No representation is made
as to any insurer's ability to meet its commitments.
Public Offering Price. Units are offered at the Public Offering Price. The
secondary market Public Offering Price of each Trust will be equal to the
aggregate bid price of the Securities in such Trust and cash, if any, in the
Principal Account held or owned by such Trust plus the sales charge referred
to under "Public Offering General" plus an amount equal to the accrued
interest from the most recent record date of the Trust to the date of
settlement (five business days after order) less distributions from the
Interest Account subsequent to the most recent record date, if any. In
addition, for Insured Municipals Income Trust, 152nd Insured Multi-Series and
subsequent series and Insured Municipals Income Trust and Investors' Quality
Tax-Exempt Trust, Multi-Series 213 and subsequent series the Public Offering
Price will include Purchased Interest. If the Securities in each Trust were
available for direct purchase by investors, the purchase price of the
Securities would not include the sales charge included in the Public Offering
Price of the Units.
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 COMMISSIONOR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
NOTE: THIS PROSPECTUS MAY BE USED ONLY WHEN ACCOMPANIED BY PART ONE.
Both parts of this Prospectus should be retained for future reference.
This Prospectus is dated as of the date of the Prospectus Part I accompanying
this Prospectus Part II.
Van Kampen Merritt
DESCRIPTION OF THE FUND
Each series of the Fund was created under the laws of the State of New York
pursuant to a Trust Indenture and Agreement (the "Trust Agreement"), dated the
Date of Deposit, between Van Kampen Merritt Inc., as Sponsor, American
Portfolio Evaluation Services, a division of Van Kampen Investment Advisory
Corp., as Evaluator, and The Bank of New York, as Trustee, or their respective
predecessors.
The Fund consists of various Trusts, each of which contains a portfolio of
interest bearing obligations issued by or on behalf of states and territories
of the United States, and political subdivisions and authorities thereof, the
interest on which is, in the opinion of recognized bond counsel to the issuing
authorities, excludable from gross income for Federal income tax under
existing law. All issuers of Securities in a Trust, are located in the State
for which such Trust is named, in the Commonwealth of Puerto Rico or in
certain territories of the United States; consequently, in the opinion of
recognized bond counsel to such State issuers, the related interest earned on
such Securities is exempt to the extent indicated from state and local taxes
of such State. Unless otherwise terminated as provided therein, the Trust
Agreement for each Trust (other than a State Intermediate Laddered Maturity
Trust) will terminate at the end of the calendar year prior to the fiftieth
anniversary of its execution and the Trust Agreement for any State
Intermediate Laddered Maturity Trust will terminate at the end of the calendar
year prior to the twentieth anniversary of its execution.
The portfolio of any Trust (other than a State Intermediate Laddered Maturity
Trust) consists of Bonds maturing approximately 15 to 40 years from the Date
of Deposit. The approximate range of maturities from the Date of Deposit for
Bonds in any State Intermediate Laddered Maturity Trust is 5 to 10 years. The
portfolio of any State Intermediate Laddered Maturity Trust is structured so
that approximately 20% of the Bonds contained in such portfolio will mature
each year, commencing in approximately the fifth year of the Trust, entitling
each Unitholder to a return of principal. This return of principal may offer
Unitholders the opportunity to respond to changing economic conditions and to
specific financial needs that may arise between the fifth and tenth years of a
State Intermediate Laddered Maturity Trust. However, the flexibility provided
by the return of principal may at the same time eliminate a Unitholders's
ability to reinvest the amount returned at a rate as high as the implicit
yield on the obligations which matured.
Certain of the Bonds in the Fund are "zero coupon" bonds. Zero coupon bonds
are purchased at a deep discount because the buyer receives only the right to
receive a final payment at the maturity of the bond and does not receive any
periodic interest payments. The effect of owning deep discount bonds which do
not make current interest payments (such as the zero coupon bonds) is that a
fixed yield is earned not only on the original investment but also, in effect,
on all discount earned during the life of such obligation. This implicit
reinvestment of earnings at the same rate eliminates the risk of being unable
to reinvest the income on such obligation at a rate as high as the implicit
yield on the discount obligation, but at the same time eliminates the holder's
ability to reinvest at higher rates in the future. For this reason, zero
coupon bonds are subject to substantially greater price fluctuations during
periods of changing market interest rates than are securities of comparable
quality which pay interest currently. See note (6) in "Notes to Portfolio" in
Part One of this Prospectus.
Each Unit of each Trust represents a fractional undivided interest in the
principal and net income of such Trust. To the extent that any Units are
redeemed by the Trustee, the fractional undivided interest in a Trust
represented by each unredeemed Unit will increase, although the actual
interest in such Trust represented by such fraction will remain unchanged.
Units will remain outstanding until redeemed upon tender to the Trustee by
Unitholders, which may include the Sponsor, or until the termination of the
Trust Agreement.
OBJECTIVES AND SECURITIES SELECTION
The objectives of the Fund are income exempt from Federal and state (to the
extent indicated) income taxation and conservation of capital through an
investment in diversified, insured portfolios of Federal and state (to the
extent indicated) tax-exempt obligations. A State Intermediate Laddered
Maturity Trust has additional objectives of providing protection against
changes in interest rates and investment flexibility through an investment in
a laddered portfolio of intermediate-term interest-bearing obligations with
maturities ranging approximately 5 to 10 years in which roughly 20% of the
obligations contained in such portfolio will mature each year commencing in
approximately the fifth year of the Trust. There is, of course, no guarantee
that the Fund will achieve its objectives. The Fund may be an appropriate
investment vehicle for investors who desire to participate in a portfolio of
tax-exempt fixed income securities with greater diversification than they
might be able to acquire individually. In addition, securities of the type
deposited in the Fund are often not available in small amounts.
Insurance guaranteeing the timely payment, when due, of all principal and
interest on the Bonds in each Trust has been obtained by such Trust from
either AMBAC Indemnity Corporation ("AMBAC Indemnity"), Financial Guaranty
Insurance Company ("Financial Guaranty" or "FGIC") or a combination thereof
(collectively, the "Portfolio Insurers") or by the issuer of such Bonds, a
prior owner of such Bonds, or the Sponsor prior to the deposit of such Bonds
in such Trust from (1) AMBAC Indemnity or one of its subsidiaries, American
Municipal Bond Assurance Corporation ("AMBAC") or MGIC Indemnity Corporation
("MGIC Indemnity"), (2) Financial Guaranty, (3) Municipal Bond Investors
Assurance Corporation ("MBIA"), (4) Bond Investors Guaranty Insurance Company
("BIG"), (5) National Union Fire Insurance Company of Pittsburgh, PA.
("National Union"), (6) Capital Guaranty Insurance Company ("Capital
Guaranty"), (7) Capital Markets Assurance Corporation ("CapMAC") and/or (8)
Financial Security Assurance Inc. ("Financial Security" or "FSA")
(collectively, the "Preinsured Bond Insurers") (see "lnsurance on the Bonds").
Insurance obtained by a Trust is effective only while the Bonds thus insured
are held in such Trust. The Trustee has the right to acquire permanent
insurance from a Portfolio Insurer with respect to each Bond insured by the
respective Portfolio Insurer under a Trust portfolio insurance policy.
Insurance relating to Preinsured Bonds is effective so long as such Bonds are
outstanding. Bonds insured under a policy of insurance obtained by the issuer,
a prior owner, or the Sponsor from one of the Preinsured Bond Issuers are not
additionally insured by a Trust. There is, of course, no guarantee that the
Fund's objectives will be achieved. No representation is made as to any
insurer's ability to meet its commitments.
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 a Trust, if any, unless Bonds are in default in payment of
principal or interest or in significant risk of such default. See "Public
Offering - Offering Price". On the other hand, the value, if any, of insurance
obtained on Preinsured Bonds is reflected and included in the market value of
such Bonds.
In order for bonds to be eligible for insurance, they must have credit
characteristics which would qualify them for at least the Standard & Poor's
Corporation rating of "BBB" or at least the Moody's Investors Service, Inc.
rating of "Baa", which in brief represent the lowest ratings for securities of
investment grade (see "Description of Securities Ratings"). Insurance is not a
substitute for the basic credit of an issuer, but supplements the existing
credit and provides additional security therefor. lf an issue is accepted for
insurance, a non-cancellable policy for the prompt payment of interest and
principal on the bonds, when due, is issued by the insurer. Any premium or
premiums relating to Preinsured Bond insurance in paid by the issuer, a prior
owner of such Bonds or the Sponsor and a monthly premium is paid by a Trust
for the portfolio insurance, if any, obtained by such Trust. The Trustee has
the right to obtain permanent insurance from a Portfolio Insurer in connection
with the sale of a Bond insured under the insurance policy obtained from the
respective Portfolio Insurer by a Trust upon the payment of a single
predetermined insurance premium from the proceeds of the sale of such Bond.
Accordingly, any Bond in a Trust is eligible to be sold on an insured basis.
All bonds insured by the Portfolio Insurers and the Preinsured Bond Insurers
received a "AAA" rating by Standard & Poor's Corporation on the date such
bonds were deposited into the Fund. See "lnsurance on the Bonds".
In selecting Securities for a Trust the following facts, among others, were
considered by the Sponsor: (a) either the Standard & Poor's Corporation rating
of the Securities was in no case less than "BBB", or the Moody's Investors
Service, Inc. rating the Securities was in no case less than "Baa" including
provisional or conditional ratings, respectively, or, if not rated, the
Securities 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 Trust (see "Description of Securities Ratings"), (b) the prices of the
Securities relative to other bonds of comparable quality and maturity, (c) the
diversification of Securities as to purpose of issue and location of issuer
and (d) the availability and cost of insurance for the prompt payment of
principal and interest, when due, on the Securities. Subsequent to the Date of
Deposit, a Security may cease to be rated or its rating may be reduced below
the minimum required as of the Date of Deposit. Neither event requires
elimination of such Security from the portfolio of a Trust but may be
considered in the Sponsor's determination as to whether or not to direct the
Trustee to dispose of the Security (see "Trust Administration and Expenses
Portfolio Administration").
To the best knowledge of the Sponsor, there is no litigation pending as of the
date hereof in respect of any Securities which might reasonably be expected to
have a material adverse effect upon any Trust. At any time after the date
hereof, litigation may be initiated on a variety of grounds with respect to
Securities in a Trust. Such litigation, as, for example, suits challenging the
issuance of pollution control revenue bonds under environmental protection
statutes, may affect the validity of such Securities 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 or will receive opinions of bond
counsel to the issuing authorities of each Security on the date of issuance to
the effect that such Securities have been validly issued and that the interest
thereon is exempt from Federal income tax. In addition, other factors may
arise from time to time which potentially may impair the ability of issuers to
meet obligations undertaken with such respect to the Securities.
TRUST PORTFOLIO
Portfolio Concentrations. Certain of the Bonds in certain of the Trusts may be
general obligations of a governmental entity that are backed by the taxing
power of such entity. In view of this an investment in such a Trust should be
made with an understanding of the characteristics of such issuers and the
risks which such an investment may entail. All other Bonds in the Trusts are
revenue bonds payable from the income of a specific project or authority and
are not supported by the issuer's power to levy taxes. General obligation
bonds are secured by the issuer's pledge of its faith, credit and taxing power
for the payment of principal and interest. Revenue bonds, on the other hand,
are payable only from the revenues derived from a particular facility or class
of facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source. There are, of course, 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 of the Trusts are obligations which derive
their payments from mortgage loans. Included among such Bonds may be bonds
which are single family mortgage revenue bonds issued for the purpose of
acquiring from originating financial institutions notes secured by mortgages
on residences located within the issuer's boundaries and owned by persons of
low or moderate income and mortgage revenue bonds which are FHA insured. In
view of this an investment in the Fund should be made with an understanding of
the characteristics of such issuers and the risks which such an investment may
entail. Mortgage loans are generally partially or completely prepaid prior to
their final maturities as a result of events such as sale of the mortgaged
premises, default, condemnation or casualty loss. Because these bonds are
subject to extraordinary mandatory redemption in whole or in part from such
prepayments of mortgage loans, a substantial portion of such bonds will
probably be redeemed prior to their scheduled maturities or even prior to
their ordinary call dates. Extraordinary mandatory redemption without premium
could also result from the failure of the originating financial institutions
to make mortgage loans in sufficient amounts within a specified time period.
Additionally, unusually high rates of default on the underlying mortgage loans
may reduce revenues available for the payment of principal of or interest on
such mortgage revenue bonds. These bonds were issued under Section 103A of the
Internal Revenue Code, which Section contains certain requirements relating to
the use of the proceeds of such bonds in order for the interest on such bonds
to retain its tax-exempt status. In each case the issuer of the bonds has
covenanted to comply with applicable requirements and bond counsel to such
issuer has issued an opinion that the interest on the bonds is exempt from
Federal income tax under existing laws and regulations. Certain issuers of
housing bonds have considered various ways to redeem bonds they have issued
prior to the stated first redemption dates for such bonds. In connection with
the housing Bonds held by the Trust, the Sponsor has not had any direct
communications with any of the issuers thereof, but at the Date of Deposit it
was not aware that any of the respective issuers of such Bonds were actively
considering the redemption of such Bonds prior to their respective stated
initial call dates.
Certain of the Bonds in certain of the Trusts are health care revenue bonds.
In view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. Ratings of bonds issued for health care facilities
are often based on feasibility studies that contain projections of occupancy
levels, revenues and expenses. A facility's gross receipts and net income
available for debt service will be affected by future events and conditions
including, among other things, demand for services and the ability of the
facility to provide the services required, physicians' confidence in the
facility, management capabilities, economic developments in the service area,
competition, efforts by insurers and governmental agencies to limit rates,
legislation establishing state rate-setting agencies, expenses, the cost and
possible unavailability of malpractice insurance, the funding of Medicare,
Medicaid and other similar third party payor programs, and government
regulation 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. Such adverse changes also may adversely affect the ratings of
Securities held in the portfolio of a Trust; however, because of the insurance
obtained by each Trust, the "AAA" rating of the Units of each Trust would not
be affected.
Certain of the Bonds in certain of the Trusts are obligations of public
utility issuers, including those selling wholesale and retail electric power
and gas. In view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. General problems of such issuers would include the
difficulty in financing large construction programs in an inflationary period,
the limitations on operations and increased costs and delays attributable to
environmental considerations, the difficulty of the capital market in
absorbing utility debt, the difficulty in obtaining fuel at reasonable prices
and the effect of energy conservation. 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 portfolio to make
payments of principal and/or interest on such Bonds.
Certain of the Bonds in certain of the Trusts are industrial revenue bonds
("IRBs"). In view of this an investment in such a Trust should be made with an
understanding of the characteristic of such issuers and the risks which such
an investment may entail. IRBs have generally been issued under bond
resolutions pursuant to which the revenues and receipts payable under the
arrangements with the operator of a particular project have been assigned and
pledged to purchasers. In some cases, a mortgage on the underlying project may
have been granted as security for the IRBs. Regardless of the structure,
payment of IRBs is solely dependent upon the creditworthiness of the corporate
operator of the project or corporate guarantor. Corporate operators or
guarantors may be affected by many factors which may have an adverse impact on
the credit quality of the particular company or industry. These include
cyclicality of revenues and earnings, regulatory and environmental
restrictions, litigation resulting from accidents or environmentally-caused
illnesses, extensive competition and financial deterioration resulting from a
corporate restructuring pursuant to a leveraged buy-out, takeover or
otherwise. Such a restructuring may result in the operator of a project
becoming highly leveraged which may impact on such operator's creditworthiness
which in turn would have an adverse impact on the rating and/or market value
of such Bonds. Further, the possibility of such a restructuring may have an
adverse impact on the market for and consequently the value of such Bonds,
even though no actual takeover or other action is ever contemplated or
effected.
Certain of the Bonds in certain of the Trusts may be obligations of issuers
whose revenues are derived from the sale of water and/or sewerage services. In
view of this an investment in such Trust should be made with an understanding
of the characteristics of such issuers and the risks which such an investment
may entail. Such bonds are generally payable from user fees. The problems of
such issuers include the ability to obtain timely and adequate rate increases,
population decline resulting in decreased user fees, the difficulty of
financing large construction programs, the limitations on operations and
increased costs and delays attributable to environmental considerations, the
increasing difficulty of obtaining or discovering new supplies of fresh water,
the effect of conservation programs and the impact of "no-growth" zoning
ordinances. All of such issuers have been experiencing certain of these
problems in varying degrees.
Certain of the Bonds in certain of the Trusts may be obligations that are
secured by lease payments of a governmental entity (hereinafter called "lease
obligations"). In view of this an investment in such a Trust should be made
with an understanding of the characteristics of such issuers and the risks
which such an investment may entail. Although the lease obligations do not
constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation is ordinarily
backed by the municipality's covenant to appropriate for and make the payments
due under the lease obligation. However, certain lease obligations contain
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease payments in future years unless money is appropriated
for such purpose on a yearly basis. A governmental entity that enters into
such a lease agreement cannot obligate future governments to appropriate for
and make lease payments but covenants to take such action as is necessary to
include any lease payments due in its budgets and to make the appropriations
therefor. A governmental entity's failure to appropriate for and to make
payments under its lease obligation could result in insufficient funds
available for payment of the obligations secured thereby. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event
of foreclosure might prove difficult.
Certain of the Bonds in certain of the Trusts may be obligations of issuers
which are, or which govern the operation of, schools, colleges and
universities and whose revenues are derived mainly ad valorem taxes or for
higher education systems, from tuition, dormitory revenues, grants and
endowments. In view of this an investment in such a Trust should be made with
an understanding of the characteristics of such issuers and the risks which
such an investment may entail. General problems relating to school bonds
include litigation contesting the State constitutionality of financing public
education in part from ad valorem taxes, thereby creating a disparity in
educational funds available to schools in wealthy areas and schools in poor
areas. Litigation or legislation on this issue may affect the sources of funds
available for the payment of school bonds in the Trusts. General problems
relating to college and university obligations include the prospect of a
declining percentage of the population consisting of "college" age
individuals, possible inability to raise tuitions and fees sufficiently to
cover increased operating costs, the uncertainty of continued receipt of
Federal grants and state funding, and government legislation or regulations
which may adversely affect the revenues or costs of such issuers. All of such
issuers have been experiencing certain of these problems in varying degrees.
Certain of the Bonds in certain of the Trusts may be obligations which are
payable from and secured by revenues derived from the ownership and operation
of facilities such as airports, bridges, turnpikes, port authorities,
convention centers and arenas. In view of this an investment in such a Trust
should be made with an understanding of the characteristics of such issuers
and the risks which such an investment may entail. 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 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 of the Trusts may be obligations which are
payable from and secured by revenues derived from the operation of resource
recovery facilities. In view of this an investment in such a Trust should be
made with an understanding of the characteristics of such issuers and the
risks which such an investment may entail. Resource recovery facilities are
designed to process solid waste, generate steam and convert steam to
electricity. Resource recovery bonds may be subject to extraordinary optional
redemption at par upon the occurrence of certain circumstances, including but
not limited to: destruction or condemnation of a project; contracts relating
to a project becoming void, unenforceable or impossible to perform; changes in
the economic availability of raw materials, operating supplies or facilities
necessary for the operation of a project or technological or other unavoidable
changes adversely affecting the operation of a project; administrative or
judicial actions which render contracts relating to the projects void,
unenforceable or impossible to perform; or impose unreasonable burdens or
excessive liabilities. The Sponsor cannot predict the causes or likelihood of
the redemption of resource recovery bonds in such a Trust prior to the stated
maturity of the Bonds.
Bond Redemptions. Because certain of the Bonds in certain of the Trusts may
from time to time under certain circumstances be sold or redeemed or will
mature in accordance with their terms and because the proceeds from such
events will be distributed to Unitholders and will not be reinvested, no
assurance can be given that any Trust will retain for any length of time its
present size and composition. Neither the Sponsor nor the Trustee shall be
liable in any way for any default, failure or defect in any Bond.
Certain of the Bonds in certain of the Trusts may be subject to redemption
prior to their stated maturity date pursuant to sinking fund provisions, call
provisions or extraordinary optional or mandatory redemption provisions or
otherwise. A sinking fund is a reserve fund accumulated over a period of time
for retirement of debt. A callable debt obligation is one which is subject to
redemption or refunding prior to maturity at the option of the issuer. A
refunding is a method by which a debt obligation is redeemed, at or before
maturity, by the proceeds of a new debt obligation. In general, call
provisions are more likely to be exercised when the offering side valuation is
at a premium over par than when it is at a discount from par. The exercise of
redemption or call provisions will (except to the extent the proceeds of the
called Bonds are used to pay for Unit redemptions) result in the distribution
of principal and may result in a reduction in the amount of subsequent
interest distributions and it may also offset the current return on Units of a
Trust. Each Trust portfolio contains a listing of the sinking fund and call
provisions, if any, with respect to each of the debt obligations.
Extraordinary optional redemptions and mandatory redemptions result from the
happening of certain events including, but not limited to, a final
determination that the interest on the Bonds is taxable; the substantial
damage or destruction by fire or other casualty of the project for which the
proceeds of the Bonds were used; an exercise by a local, state or Federal
governmental unit of its power of eminent domain to take all or substantially
all of the project for which the proceeds of the Bonds were used; changes in
the economic availability of raw materials, operating supplies or facilities
or technological or other changes which render the operation of the project
for which the proceeds of the Bonds were used uneconomic; changes in law or an
administrative or judicial decree which renders the performance of the
agreement under which the proceeds of the Bonds were made available to finance
the project impossible or which creates unreasonable burdens or which imposes
excessive liabilities, such as taxes, not imposed on the date the Bonds are
issued on the issuer of the Bonds or the user of the proceeds of the Bonds; an
administrative or judicial decree which requires the cessation of a
substantial part of the operations of the project financed with the proceeds
of the Bonds; an overestimate of the costs of the project to be financed with
the proceeds of the Bonds resulting in excess proceeds of the Bonds which may
be applied to redeem Bonds; or an underestimate of a source of funds securing
the Bonds resulting in excess funds which may be applied to redeem Bonds. The
issuer of certain Bonds in a Trust may have sold or reserved the right to
sell, upon the satisfaction of certain conditions, to third parties all or any
portion of its rights to call Bonds in accordance with the stated redemption
provisions of such Bonds. In such a case the issuer no longer has the right to
call the Bonds for redemption unless it reacquires the rights from such third
party. A third party pursuant to these rights may exercise the redemption
provisions with respect to a Bond at a time when the issuer of the Bond might
not have called a Bond for redemption had it not sold such rights. The Sponsor
is unable to predict all of the circumstances which may result in such
redemption of an issue of Bonds. See "Trust Portfolio" and note (3) in "Notes
to Portfolio" in Part One of this Prospectus. See also the discussion of
single family mortgage and multi-family revenue bonds above for more
information on the call provisions of such Bonds.
Distributions. Distributions of interest received by a Trust, pro-rated on an
annual basis, will be made semi-annually unless the Unitholder elects to
receive them monthly. Distributions of funds from the Principal Account, if
any, will be made on a semi-annual basis, except under certain special
circumstances (see "Public Offering Distributions of Interest and Principal").
Record dates for monthly distributions for each Trust are the first day of
each month and record dates for semi-annual distributions for each Trust are
the first day of the months indicated under "Per Unit Information" in Part One
of this Prospectus. Distributions are made on the fifteenth day of the month
subsequent to the respective record dates. Unitholders of Insured Municipals
Income Trust, 152nd Insured Multi-Series and subsequent series and Insured
Municipals Income Trust and Investors' Quality Tax-Exempt Trust, Multi-Series
213 and subsequent series will receive distributions of income and principal,
if any, on a monthly basis.
Change of Distribution Option. The plan of distribution selected by a
Unitholder of Insured Municipals Income Trust, 151st Insured Multi-Series and
prior series and Insured Municipals Income Trust and Investors' Quality
Tax-Exempt Trust, Multi-Series 212 and prior series remains in effect until
changed. Unitholders purchasing Units in the secondary market will initially
receive distributions in accordance with the election of the prior owner.
Unitholders may change the plan of distribution in which they are
participating. For the convenience of Unitholders, the Trustee will furnish a
card for this purpose; cards may also be obtained upon request from the
Trustee. Unitholders desiring to change their plan of distribution may so
indicate on the card and return it, together with their certificate and such
other documentation that the trustee may then require, to the Trustee.
Certificates should be sent only by registered or certified mail to minimize
the possibility of their being lost or stolen. If the card and certificate are
properly presented to the Trustee, the change will become effective for all
subsequent distributions.
Certificates. 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 of each Trust is evidenced by separate registered
certificates executed by the Trustee and the Sponsor. Certificates are
transferable by presentation and surrender to the Trustee properly endorsed or
accompanied by a written instrument or instruments of transfer. A Unitholder
must sign exactly as his name appears on the face of the certificate with the
signature guaranteed by a participant in the Securities Transfer Agents
Medallion Program ("STAMP") or such other signature guaranty program in
addition to, or in substitution for, STAMP, as may be 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. Certificates will be issued in denominations of one Unit or any
multiple thereof.
Although no such charge is now made or contemplated, the Trustee may require a
Unitholder to pay a reasonable fee for each certificate re-issued (other than
as a result of a change in plan of distribution) or transferred and to pay any
governmental charge that may be imposed in connection with each such transfer
or interchange. Destroyed, stolen, mutilated or lost certificates will be
replaced upon delivery to the Trustee of satisfactory indemnity, evidence of
ownership and payment of expenses incurred. Mutilated certificates must be
surrendered to the Trustee for replacement.
ESTIMATED CURRENT RETURNS AND ESTIMATED LONG-TERM RETURNS
As of the opening of business on the date indicated therein, the Estimated
Current Returns and the Estimated Long-Term Returns for each Trust under the
monthly and semi-annual distribution plans were as set forth under "Per Unit
Information" for the applicable Trust in Part One of this Prospectus.
Estimated Current Return is calculated by dividing the Estimated Net Annual
Interest Income per Unit by the Public Offering Price. The Estimated Net
Annual Interest Income per Unit will vary with changes in fees and expenses of
the Trustee and the Evaluator and with the principal prepayment, redemption,
maturity, exchange or sale of Securities while the Public Offering Price will
vary with changes in the offering price of the underlying Securities and with
changes in Purchased Interest for those series which contain Purchased
Interest; therefore, there is no assurance that the present Estimated Current
Return will be realized in the future. Estimated Long-Term Return is
calculated using a formula which (1) takes into consideration, and determines
and factors in the relative weightings of, the market values, yields (which
takes into account the amortization of premiums and the accretion of
discounts) and estimated retirements of all of the Securities in the Trust and
(2) takes into account the expenses and sales charge associated with each
Trust Unit. Since the market values and estimated retirements of the
Securities and the expenses of the Trust will change, there is no assurance
that the present Estimated Long-Term Return will be realized in the future.
Estimated Current Return and Estimated Long-Term Return are expected to differ
because the calculation of Estimated Long-Term Return reflects the estimated
date and amount of principal returned while Estimated Current Return
calculations include only Net Annual
Interest Income and Public Offering Price.
PUBLIC OFFERING
General. Units are offered at the Public Offering Price which in the secondary
market is based on the bid prices of the Securities and includes a sales
charge determined in accordance with the table set forth below, which is based
upon the dollar weighted average maturity of each Trust. In addition, for
Insured Municipals Income Trust, 152nd Insured Multi-Series and subsequent
series and Insured Municipals Income Trust and Investors' Quality Tax-Exempt
Trust, Multi-Series 213 and subsequent series the Public Offering Price will
also include Purchased Interest. 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
Trust based upon the dollar weighted average maturity of such Trust's
Portfolio, in accordance with the following schedule:
Years To Maturity Sales Charge Years To Maturity Sales Charge
1 1.523% 9 4.712%
2 2.041 10 4.932
3 2.564 11 4.932
4 3.199 12 4.932
5 3.842 13 5.374
6 4.058 14 5.374
7 4.275 15 5.374
8 4.493 16 to 30 6.045
The sales charges in the above table are expressed as a percentage of the
aggregate bid prices of the Securities in a Trust. Expressed as a percent of
the Public Offering Price (excluding Purchased Interest for those Trusts which
contain Purchased Interest), the sales charge on a Trust consisting entirely
of a portfolio of Bonds with 15 years to maturity would be 5.10%.
THE FOLLOWING SECTION "ACCRUED INTEREST (ACCRUED INTEREST TO CARRY)" APPLIES
TO INSURED MUNICIPALS INCOME TRUST, 152nd INSURED MULTI-SERIES AND PRIOR
SERIES AND INSURED MUNICIPALS INCOME TRUST AND INVESTORS' QUALITY TAX-EXEMPT
TRUST, MULTI-SERIES 212 AND PRIOR SERIES ONLY.
ACCRUED INTEREST (ACCRUED INTEREST TO CARRY)
Accrued interest to carry consists of two elements. The first element arises
as a result of accrued interest which is the accumulation of unpaid interest
on a bond from the last day on which interest thereon was paid. Interest on
Securities in each Trust is actually paid either monthly, quarterly, if
applicable, or semi-annually to such Trust. However, interest on the
Securities in each Trust is accounted for daily on an accrual basis. Because
of this, each Trust always has an amount of interest earned but not yet
collected by the Trustee because of coupons that are not yet due. For this
reason, the Public Offering Price will have added to it the proportionate
share of accrued and undistributed interest to the date of settlement.
The second element of accrued interest to carry arises because of the
structure of the Interest Account. The Trustee has no cash for distribution to
Unitholders of a Trust until it receives interest payments on the Securities
in such Trust. The Trustee is obligated to provide its own funds, at times, in
order to advance interest distributions. The Trustee will recover these
advancements when such interest is received. Interest Account balances are
established so that it will not be necessary on a regular basis for the
Trustee to advance its own funds in connection with such interest
distributions. The Interest Account balances are also structured so that there
will generally be positive cash balances and since the funds held by the
Trustee may be used by it to earn interest thereon, it benefits thereby. If a
Unitholder sells or redeems all or a portion of his Units or if the Bonds in a
Trust are sold or otherwise removed or if a Trust is liquidated, he will
receive at that time his proportionate share of the accrued interest to carry
computed to the settlement date in the case of sale or liquidation and to the
date of tender in the case of redemption.
THE FOLLOWING SECTION "PURCHASED AND ACCRUED INTEREST" APPLIES TO INSURED
MUNICIPALS INCOME TRUST, 152nd INSURED MULTI-SERIES 213 AND SUBSEQUENT SERIES
AND INSURED MUNICIPALS INCOME TRUST AND INVESTORS' QUALITY TAX-EXEMPT TRUST,
MULTI-SERIES AND SUBSEQUENT SERIES ONLY.
PURCHASED AND ACCRUED INTEREST
Purchased Interest. Purchased Interest is a portion of the unpaid interest
that has accrued on the Securities from the later of the last payment date on
the Securities or the date of issuance thereof through the First Settlement
Date and is included in the calculation of the Public Offering Price.
Purchased Interest will be distributed to Unitholders as Units are redeemed or
Securities mature or are called. See "Summary of Essential Financial
Information" in Part One of this Prospectus for the amount of Purchased
Interest per Unit for each Trust. Purchased Interest is an element of the
price Unitholders will receive in connection with the sale or redemption of
Units prior to the termination of a Trust.
Accrued Interest. Accrued Interest is an accumulation of unpaid interest on
securities which generally is paid semi-annually, although a Trust accrues
such interest daily. Because of this, a Trust always has an amount of interest
earned but not yet collected by the Trustee. For this reasons, the Public
Offering Price of Units will have added to it the proportionate share of
accrued interest to the date of settlement. Unitholders will receive on the
next distribution date of a Trust the amount, if any, of accrued interest paid
on their Units.
As indicated in "Purchased Interest", accrued interest as of the First
Settlement Date includes Purchased Interest. In an effort to reduce the amount
of Purchased Interest which would otherwise have to be paid by Unitholders,
the Trustee may advance a portion of such accrued interest to the Sponsor as
the Unitholder of record as of the First Settlement Date. Consequently, the
amount of accrued interest to be added to the Public Offering Price of Units
will include only accrued interest from the First Settlement Date to the date
of settlement (other than the Purchased Interest already included therein),
less any distributions from the Interest Account subsequent to the First
Settlement Date. See "DistributionsDistribution of Interest and Principal."
Because of the varying interest payment dates of the Securities, accrued
interest at any point in time will be greater than the amount of interest
actually received by a Trust and distributed to Unitholders. If a Unitholder
sells or redeems all or a portion of his Units, he will be entitled to receive
his proportionate share of the Purchased Interest and accrued interest from
the purchaser of his Units. Since the Trustee has the use of the funds
(including Purchased Interest) held in the Interest Account for distributions
to Unitholders and since such Account is non-interest-bearing to Unitholders,
the Trustee benefits thereby.
Offering Price. The Public Offering Price of the Units will vary from the
amounts stated under "Summary of Essential Financial Information" in Part One
of this Prospectus in accordance with fluctuations in the prices of the
underlying Securities in each Trust.
As indicated above, the price of the Units as of the opening of business on
the date of Part One of this Prospectus was determined by adding to the
determination of the aggregate bid price of the Securities an amount equal to
the applicable sales charge expressed as a percentage of the aggregate bid
price of the securities plus Purchased Interest for those Trusts which contain
Purchased Interest and dividing the sum so obtained by the number of Units
outstanding. This computation produced a gross commission equal to such sales
charge expressed as a percentage of the Public Offering Price (excluding
Purchased Interest).
For secondary market purposes an appraisal and adjustment with respect to a
Trust will be made by the Evaluator as of 4:00 P.M. Eastern time on days in
which the New York Stock Exchange is open for each day on which any Unit of
such Trust is tendered for redemption, and it shall determine the aggregate
value of any Trust as of 4:00 P.M. Eastern time at such other times as may be
necessary.
The aggregate price of the Securities in each Trust has been and will be
determined on the basis of bid prices as follows: (a) on the basis of current
market prices for the Securities obtained from dealers or brokers who
customarily deal in bonds comparable to those held by the Trust; (b) if such
prices are not available for any particular Securities, on the basis of
current market prices for comparable bonds; (c) by causing the value of the
Securities to be determined by others engaged in the practice of evaluation,
quoting or appraising comparable bonds; or (d) by any combination of the
above. Market prices of the Securities will generally fluctuate with changes
in market interest rates. Unless Bonds are in default in payment of principal
or interest or in significant risk of such default, the Evaluator will not
attribute any value to the insurance obtained by the Trust.
The Evaluator will consider in its evaluation of Bonds which are in default in
payment of principal or interest or, in the Sponsor's opinion, in significant
risk of such default (the "Defaulted Bonds") 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 premiums and related expenses 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 the affected Portfolio to meet its commitments under any Trust
insurance policy, including the commitments to issue Permanent Insurance. It
is the position of the Sponsor that this is a fair method of valuing insured
Bonds and reflects a proper valuation method in accordance with the provisions
of the Investment Company Act of 1940.
Although payment is normally made five business days following the order for
purchase, payment may be made prior thereto. A person will become the owner of
Units on the date of settlement provided payment has been received. Cash, if
any, made available to the Sponsor prior to the date of settlement for the
purchase of Units may be used in the Sponsor's business and may be deemed to
be a benefit to the Sponsor, subject to the limitations of the Securities
Exchange Act of 1934. Delivery of certificates representing Units so ordered
will be made five business days following such order or shortly thereafter.
See "Redemption of Units" below for information regarding the ability to
redeem Units ordered for purchase.
Market for Units. Although they are not obligated to do so, the Sponsor
intends to, and certain of the dealers may, maintain a market for the Units
offered hereby and to offer continuously to purchase such Units at prices,
subject to change at any time, based upon the aggregate bid prices of the
Securities in the portfolio of each Trust plus Purchased Interest, if any,
plus interest accrued to the date of settlement and plus any principal cash on
hand, less any amounts representing taxes or other governmental charges
payable out of the Trust and less any accrued Trust expenses. lf the supply of
Units exceeds demand or if some other business reason warrants it, the Sponsor
and/or the dealers may either discontinue all purchases of Units or
discontinue purchases of Units at such prices. In the event that a market is
not maintained for the Units and the Unitholder cannot find another purchaser,
a Unitholder of any Trust desiring to dispose of his Units may be able to
dispose of such Units only by tendering them to the Trustee for redemption at
the Redemption Price, which is based upon the aggregate bid price of the
Securities in the portfolio of such Trust plus Purchased Interest, if any, and
any accrued interest. The aggregate bid prices of the underlying Securities in
a Trust are expected to be less than the related aggregate offering prices.
See "Redemption of Units" below. A Unitholder who wishes to dispose of his
Units should inquire of his broker as to current market prices in order to
determine whether there is in existence any price in excess of the Redemption
Price and, if so, the amount thereof.
Distributions of Interest and Principal. Interest received by a Trust,
including that part of the proceeds of any disposition of Securities which
represents Purchased Interest, if any, and/or accrued interest, is credited by
the Trustee to the Interest Account for the Trust. Other receipts are credited
to the Principal Account for the Trust. All distributions will be net of
applicable expenses. The pro rata share of cash in the Principal Account of a
Trust will be computed as of the semi-annual record date and distributions to
the Unitholders as of such record date will be made on or shortly after the
fifteenth day of such month. For Insured Municipals Income Trust, 152nd
Insured Multi-Series and subsequent series1 and Insured Municipals Income
Trust and Investors' Quality Tax-Exempt Trust, Multi-Series 213 and subsequent
series1 such computation and distribution will occur monthly. Proceeds
received from the disposition of any of the Securities after such 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 any Principal or Interest
Account (but may itself earn interest thereon and therefore benefits from the
use of such funds) nor to make a distribution from the Principal Account
unless the amount available for distribution therein shall equal at least
$1.00 per Unit.
The distribution to the Unitholders of a Trust as of each record date will be
made on the following distribution date or shortly thereafter and shall
consist of an amount substantially equal to such portion of the Unitholder's
pro rata share of the Estimated Net Annual Interest Income in the Interest
Account of such Trust after deducting estimated expenses attributable as is
consistent with the distribution plan chosen. Only monthly distributions are
available for Insured Municipals Income Trust, 152nd Insured Multi-Series and
subsequent series and Insured Municipals Income Trust and Investors' Quality
Tax-Exempt Trust, Multi-Series 213 and subsequent series. Because interest
payments are not received by a Trust at a constant rate throughout the year,
such interest distribution may be more or less than the amount credited to
such Interest Account as of the record date. For the purpose of minimizing
fluctuations in the distributions from an Interest Account, the Trustee is
authorized to advance such amounts as may be necessary to provide interest
distributions of approximately equal amounts. The Trustee will be reimbursed
without interest for any such advances from funds in the applicable 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. Only monthly distributions are available for Insured Municipals
Income Trust, 152nd Insured Multi-Series and subsequent series and Insured
Municipals Income Trust and Investors' Quality Tax-Exempt Trust, Multi-Series
213 and subsequent series.
As of the first day of each month, the Trustee will deduct from the Interest
Account and, to the extent funds are not sufficient therein, from the
Principal Account, amounts necessary to pay the expenses of the Trust (as
determined on the basis set forth under "Trust Administration and Expenses").
The Trustee also may withdraw from said accounts such amounts, if any, as it
deems necessary to establish a reserve for any governmental charges payable
out of the Trust. Amounts so withdrawn will 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 proper Accounts. In addition, the Trustee may withdraw
from the Interest and Principal Accounts such amounts as may be necessary to
cover redemptions of Units by the Trustee.
Reinvestment Option. Unitholders of the Fund (except Unitholders of a New York
IM-IT Trust or New York IM-IT Intermediate Laddered Maturity Trust) may elect
to have each distribution of interest income, capital gains and/or principal
on their Units automatically reinvested in shares of any of the open ended
mutual funds (except for B shares) listed under "Trust Administration and
Expenses Sponsor" which are registered in the Unitholder's state of residence.
New York IM-IT Trust and New York IM-IT Intermediate Laddered Maturity Trust
Unitholders, other than those residing in the Commonwealth of Massachusetts,
may elect to have each distribution of interest income, capital gains and/or
principal on their Units automatically reinvested in shares of First Investors
New York Insured Tax Free Fund, Inc., a fund which invests primarily in
securities exempt from federal and New York state and city income tax. Such
mutual funds are hereinafter collectively referred to as the "Reinvestment
Funds".
Each Reinvestment Fund has investment objectives which differ in certain
respects from those of the Trust. The prospectus relating to each Reinvestment
Fund describes the investment policies of such fund and sets forth the
procedures to follow to commence reinvestment. A Unitholder may obtain a
prospectus for the respective Reinvestment Funds from Van Kampen Merritt at
One Parkview Plaza, Oakbrook Terrace, Illinois 60181. Texas residents who
desire to reinvest may request that a broker-dealer registered in Texas send
the prospectus relating to the respective fund.
After becoming a participant in a reinvestment plan, each distribution of
interest income, capital gains and/or principal on the participant's Units
will, on the applicable distribution date, automatically be applied, as
directed by such person, as of such distribution date by the Trustee to
purchase shares (or fractions thereof) of the applicable Reinvestment Fund at
a net asset value as computed as of the close of trading on the New York Stock
Exchange on such date, plus a sales charge of $1.00 per $100 of reinvestment
except if the participant selects the First Investors New York Insured Tax
Free Fund, Inc., in which case the sales charge will be $1.50 per $100 of
reinvestment, or except if the participant selects the Van Kampen Merritt
Money Market Fund or the Van Kampen Merritt Tax Free Money Fund in which case
no sales charge applies. A minimum of one-half of such sales charge would be
paid to Van Kampen Merritt Inc. for all Reinvestment Funds except First
Investors New York Insured Tax Free Fund, Inc., in which case such sales
charge would be paid to First Investors Management Company, Inc.
Confirmations of all reinvestments by a Unitholder into a Reinvestment Fund
will be mailed to the Unitholder by such Reinvestment Fund.
A participant may at any time prior to five days preceding the next succeeding
distribution date, by so notifying the Trustee in writing, elect to terminate
his or her reinvestment plan and receive future distributions on his or her
Units in cash. There will be no charge or other penalty for such termination.
Each Reinvestment Fund, its sponsor and investment adviser shall have the
right to terminate at any time the reinvestment plan relating to such fund.
Redemption of Units. A Unitholder may redeem all or a portion of his Units by
tender to the Trustee at its Unit Investment Trust Division, 101 Barclay
Street, New York, New York 10286, of the certificates representing the Units
to be redeemed, duly endorsed or accompanied by proper instruments of transfer
with signature guaranteed (or by providing satisfactory indemnity, as in
connection with lost, stolen or destroyed certificates) and by payment of
applicable governmental charges, if any. Thus, redemption of Units cannot be
effected until certificates representing such Units have been delivered to the
person seeking redemption or satisfactory indemnity provided. No redemption
fee will be charged. On the seventh calendar day following such tender, or if
the seventh calendar day is not a business day, on the first business day
prior thereto, the Unitholder 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 Trustee of such tender of Units. The "date of tender" is deemed
to be the date on which Units are received by the Trustee, except that as
regards Units received after 4:00 P.M. Eastern time on days of trading on the
New York Stock Exchange, the date of tender is the next day on which such
Exchange is open for trading and such Units will be deemed to have been
tendered to the Trustee on such day for redemption at the Redemption Price
computed on that day.
Under regulations issued by the Internal Revenue Service, the Trustee will be
required to withhold a specified percentage of the principal amount of a Unit
redemption if the Trustee has not been furnished the redeeming Unitholder's
tax identification number in the manner required by such regulations. Any
amount so withheld is transmitted to the Internal Revenue Service and may be
recovered by the Unitholder only when filing a return. Under normal
circumstances the Trustee obtains the Unitholder's tax identification number
from the selling broker. However, at any time a Unitholder elects to tender
Units for redemption, such Unitholder should provide a tax identification
number to the Trustee in order to avoid this possible "back-up withholding" in
the event the Trustee has not been previously provided such number.
Purchased Interest, if any, and accrued interest paid on redemption shall be
withdrawn from the Interest Account or, if the balance therein is
insufficient, from the Principal Account. All other amounts will be withdrawn
from the Principal Account. The Trustee is empowered to sell underlying
Securities of a Trust in order to make funds available for redemption. Units
so redeemed shall be cancelled. The Redemption Price per Unit will be
determined on the basis of the bid price of the Securities in each Trust as of
4:00 P.M. Eastern time on days of trading on the New York Stock Exchange on
the date any such determination is made. While the Trustee has the power to
determine the Redemption Price per Unit when Units are tendered for
redemption, such authority has been delegated to the Evaluator which
determines the price per Unit on a daily basis.
The Redemption Price per Unit is the pro rata share of each Unit in each Trust
on the basis of (i) the cash on hand in such Trust or moneys in the process of
being collected, (ii) the value of the Securities in such Trust based on the
bid prices of the Securities therein, except for cases in which the value of
insurance has been included, (iii) Purchased Interest, if any, included in
Insured Municipals Income Trust, 152nd Insured Multi-Series and subsequent
series and Insured Municipals Income Trust and Investor's Quality Tax-Exempt
Trust, Multi-Series 213 and subsequent series and (iv) 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. The
Evaluator may determine the value of the Securities in each Trust by employing
any of the methods set forth in "Public Offering Price." In determining the
Redemption Price per Unit no value will be assigned to the portfolio insurance
maintained on the Bonds in a Trust unless such Bonds are in default in payment
of principal or interest or in significant risk of such default. On the other
hand, 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. For a description of the
situations in which the Evaluator may value the insurance obtained by the
Trust, see "Public Offering Price".
The price at which Units may be redeemed could be less than the price paid by
the Unitholder. As stated above, the Trustee may sell Securities to cover
redemptions. When Securities are sold, the size and diversity of the 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.
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 in the Trust 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 Unitholders to redeem their Units.
Reports Provided. The Trustee shall furnish Unitholders of a Trust in
connection with each distribution a statement of the amount of interest and
the amount of other receipts (received since the preceding distribution), if
any, being distributed expressed in each case as a dollar amount representing
the pro rata share of each Unit of a Trust outstanding. For as long as the
Trustee deems it to be in the best interests of the Unitholders the accounts
of each Trust shall be audited, not less frequently than annually, by
independent certified public accountants and the report of such accountants
shall be furnished by the Trustee to Unitholders upon request. Within a
reasonable period of time after the end of each calendar year, the Trustee
shall furnish to each person who at any time during the calendar year was a
registered Unitholder of a Trust a statement (i) as to the Interest Account:
interest received (including amounts representing interest received upon any
disposition of Securities) and the percentage of such interest by states in
which the issuers of the Securities are located, the amount of Purchased
Interest, if any, deductions for applicable taxes and for fees and expenses of
the Trust, for redemptions of Units, if any, and the balance remaining after
such distributions and deductions, expressed in each case both as a total
dollar amount and as a dollar amount representing the pro rata share of each
Unit outstanding on the last business day of such calendar year; (ii) as to
the Principal Account: the dates of disposition of any Securities and the net
proceeds received therefrom (excluding any portion representing accrued
interest), the amount paid for redemptions of Units, if any, deductions for
payment of applicable taxes and fees and expenses of the Trustee, the amount
of "when issued" interest treated as a return of capital, if any, and the
balance remaining after such distributions and deductions expressed both as a
total dollar amount and as a dollar amount representing the pro rata share of
each Unit outstanding on the last business day of such calendar year; (iii) a
list of the Securities held and the number of Units outstanding on the last
business day of such calendar year; (iv) the Redemption Price per Unit based
upon the last computation thereof made during such calendar year; and (v)
amounts actually distributed during such calendar year from the Interest and
Principal Accounts, separately stated, expressed both as total dollar amounts
and as dollar amounts representing the pro rata share of each Unit
outstanding.
In order to comply with Federal and state tax reporting requirements,
Unitholders will be furnished, upon request to the Trustee, evaluations of the
Securities in a Trust furnished to it by the Evaluator.
Each distribution statement will reflect pertinent information in respect of
the other plan of distribution so that Unitholders may be informed regarding
the results of such other plan of distribution. Only monthly distributions are
available for Insured Municipals Income Trust, 152nd Insured Multi-Series and
subsequent series and Insured Municipals Income Trust and Investor's Quality
Tax-Exempt Trust, Multi-Series 213 and subsequent series.
INSURANCE ON THE BONDS
Insurance has been obtained by each Trust or by a prior owner or by the Bond
issuer or by the Sponsor prior to the deposit of such Bonds in a Trust
guaranteeing prompt payment of interest and principal, when due, in respect of
the Bonds in such Trust. See "Objectives and Securities Selection". An
insurance policy obtained by a Trust is non-cancellable and will continue in
force so long as such Trust is in existence, the respective Portfolio Insurer
is still in business and the Bonds described in the policy continue to be held
by such Trust. Any portfolio insurance premium for a Trust, which is an
obligation of such Trust, is paid by each Trust on a monthly basis. Nonpayment
of premiums on the policy obtained by a Trust will not result in the
cancellation of insurance but will force the insurer to take action against
the Trustee to recover premium payments due it. The Trustee in turn will be
entitled to recover such payments from such Trust. Premium rates for each
issue of Bonds protected by the policy obtained by a Trust are fixed for the
life of the Trust. The premium for any insurance policy or policies obtained
on Preinsured Bonds has been paid in advance by such issuer by a prior owner
of such Bonds or the Sponsor and any such policy or policies are
non-cancellable and will continue in force so long as the Bonds so insured are
outstanding and the insurer referred to below remains in business. If the
provider of an original issuance insurance policy is unable to meet its
obligations under such policy or if the rating assigned to the claims-paying
ability of any such insurer deteriorates, the Portfolio Insurers have no
obligation to insure any issue adversely affected by either of the above
described events.
The aforementioned portfolio insurance obtained by a Trust guarantees the
timely payment of principal and interest on the Bonds as they fall due. For
the purposes of insurance obtained by a Trust, "when due" generally means the
stated maturity date for the payment of principal and interest. However, in
the event (a) an issuer of a Bond defaults in the payment of principal or
interest on such Bond, (b) such issuer enters into a bankruptcy proceeding or
(c) the maturity of such Bond is accelerated, the affected Portfolio Insurer
has the option, in its sole discretion, after receiving notice of the earliest
to occur of such a default, bankruptcy proceeding or acceleration to pay the
outstanding principal amount of such Bond plus accrued interest to the date of
such payment and thereby retire the Bond from the affected Trust prior to such
Bond's stated maturity date. The insurance does not guarantee the market value
of the Bonds or the value of the Units. Insurance obtained by a Trust, if any,
is only effective as to Bonds owned by and held in such Trust. In the event of
a sale of any such Bond by the Trustee, such insurance terminates as to such
Bond on the date of sale.
Pursuant to an irrevocable commitment of the Portfolio Insurers, the Trustee,
upon the sale of a Bond covered under a portfolio insurance policy obtained by
a Trust, 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 and any expenses related thereto from the
proceeds of the sale of such Bond. Accordingly, any Bond in a Trust is
eligible to be sold on an insured basis. It is expected that the Trustee would
exercise the right to obtain Permanent Insurance only if upon such exercise
the affected Trust would receive net proceeds (sale of Bond proceeds less the
insurance premium and related expenses 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
eligible for Permanent Insurance would be determined based upon the
insurability of each Bond as of the Date of Deposit and would not be increased
or decreased for any change in the creditworthiness of each Bond.
The Sponsor believes that the Permanent Insurance option provides an advantage
to a Trust in that each Bond insured by a Trust insurance policy may be sold
out of the affected Trust with the benefits of the insurance attaching
thereto. Thus, the value of the insurance, if any, at the time of sale, can be
realized in the market value of the Bond so sold (which is not the case in
connection with any value attributable to a Trust's portfolio insurance). See
"Public Offering-Offering Price". Because any such insurance value may be
realized in the market value of the Bond upon the sale thereof upon exercise
of the Permanent Insurance option, the Sponsor anticipates that (a) in the
event a Trust were to be comprised of a substantial percentage of Bonds in
default or significant risk of default, it is much less likely that such Trust
would need at some point in time to seek a suspension of redemptions of Units
than if such Trust were to have no such option (see "Public
Offering-Redemption of Units") and (b) at the time of termination of a Trust,
if such Trust were holding defaulted Bonds or Bonds in significant risk of
default such Trust would not need to hold such Bonds until their respective
maturities in order to realize the benefits of such Trust's portfolio
insurance (see "General-Amendment or Termination").
Except as indicated below, insurance obtained by a Trust, if any, has no
effect on the price or redemption value of Units. lt is the present intention
of the Evaluator to attribute a value for such insurance for the purpose of
computing the price or redemption value of Units if the Bonds covered by such
insurance are in default in payment of principal or interest or in significant
risk of such default. The value of the insurance will be the difference
between the market value of a Bond in default in payment of principal or
interest or in significant risk of such default and the market value of
similar bonds which are not in such situation as determined in accordance with
the Trust's method of valuing defaulted Bonds. See "Public OfferingOffering
Price". 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 value attributable to the insurance cannot be realized upon
sale. See "Public OfferingOffering Price" herein for a more complete
description of a Trust's method of valuing defaulted Bonds and Bonds which
have a significant risk of default. Insurance obtained on a Preinsured 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.
Any policy obtained by a Trust with respect to the Bonds in such Trust and any
policy obtained on a Preinsured Bond was issued by one of the Portfolio
Insurers or one of the Preinsured Bond Insurers.
AMBAC Indemnity Corporation ("AMBAC Indemnity") is a Wisconsin-domiciled stock
insurance corporation regulated by the Office of the Commissioner of Insurance
of the State of Wisconsin and licensed to do business in all 50 states, the
District of Columbia and the Commonwealth of Puerto Rico with admitted assets
of approximately $1,936,000,000 (unaudited) and statutory capital of
approximately $1,096,000,000 (unaudited) as of September 30, 1993. 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.
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.
AMBAC Indemnity has entered into a quota share reinsurance agreement under
which a percentage of the insurance underwritten pursuant to certain municipal
bond insurance programs of AMBAC Indemnity has been and will be assumed by a
number of foreign and domestic unaffiliated reinsurers.
Municipal Bond Investors Assurance Corporation ("MBIA") is the principal
operating subsidiary of MBIA Inc., a New York Stock Exchange listed company.
MBIA, Inc. is not obligated to pay the debts of or claims against MBIA. MBIA
is a limited liability corporation rather than a several liability
association. MBIA Corporation is domiciled in the State of New York and
licensed to do business in all fifty states, the District of Columbia and the
Commonwealth of Puerto Rico. As of December 31, 1992, MBIA had admitted assets
of $2.6 billion (audited), total liabilities of $1.7 billion (audited), and
total capital and surplus of $896 million (audited) prepared in accordance
with statutory accounting practices prescribed or permitted by insurance
regulatory authorities. As of September 30, 1993, MBIA had admitted assets of
$3.0 billion (unaudited), total liabilities of $2.0 billion (unaudited), and
total capital and policyholders' surplus of $951 million (unaudited)
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities. Copies of MBIA's financial
statements prepared in accordance with statutory accounting practices are
available from MBIA. The address of MBIA is 113 King Street, Armonk, New York
10504.
Effective December 31, 1989, MBIA Inc. acquired Bond Investors Group, Inc. On
January 5, 1990, MBIA acquired all of the outstanding stock of Bond Investors
Group, Inc., the parent of Bond Investors Guaranty Insurance Company (BIG),
now known as MBIA Insurance Corp. of Illinois. Through a reinsurance
agreement, BIG has ceded all of its net insured risks, as well as it unearned
premium and contingency reserves, to MBIA and MBIA has reinsured BIG's net
outstanding exposure.
Moody's Investors Service rates all bond issues insured by MBIA "Aaa" and
short term loans "MIG 1," both designated to be of the highest quality.
Standard & Poor's Corporation rates all new issues insured by MBIA "AAA" Prime
Grade.
The Moody's Investors Service rating of MBIA should be evaluated independently
of the Standard & Poor's Corporation rating of MBIA. No application has been
made to any other rating agency in order to obtain additional ratings on the
Bonds. The ratings reflect the respective rating agency's current assessment
of the creditworthiness of MBIA and its ability to pay claims on its policies
of insurance. Any further explanation as to the significance of the above
ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Bonds, and
such ratings may be subject to revision or withdrawal at any time by the
rating agencies. Any downward revision or withdrawal of either or both ratings
may have an adverse effect on the market price of the Bonds.
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 September 30,
1993, the total capital and surplus of Financial Guaranty was approximately
$744,722,000. 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. Financial Guaranty's
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.
Financial Guaranty is currently authorized to write insurance in all 50 states
and the District of Columbia.
Financial Security Assurance ("Financial Security" or "FSA") is a monoline
insurance company incorporated on March 16, 1984 under the laws of the State
of New York. The operations of Financial Security commenced on July 25, 1985,
and Financial Security received its New York State insurance license on
September 23, 1985. Financial Security and its two wholly owned subsidiaries
are licensed to engage in surety business in 49 states, the District of
Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged exclusively in the
business of writing financial guaranty insurance, principally in respect of
asset-backed and other collateralized securities offered in domestic and
foreign markets. Financial Security and its subsidiaries also write financial
guaranty insurance in respect of municipal and other obligations and reinsure
financial guaranty insurance policies written by other leading insurance
companies. In general, financial guaranty insurance consists of the issuance
of a guaranty of scheduled payments of an issuer's securities, thereby
enhancing the credit rating of those securities, in consideration for payment
of a premium to the insurer.
Financial Security is approximately 91.6% owned by US WEST, Inc. and 8.4%
owned by the Tokio Marine and Fire Insurance Co., Ltd. ("Tokio Marine").
Neither US WEST, Inc. nor Tokio Marine is obligated to pay the debts of or the
claims against Financial Security. Financial Security is domiciled in the
State of New York and is subject to regulation by the State of New York
Insurance Department. As of March 31, 1993, the total policyholders' surplus
and contingency reserves and the total unearned premium reserve, respectively,
of Financial Security and its consolidated subsidiaries were, in accordance
with generally accepted accounting principles, approximately $479,110,000
(unau dited) and $220,078,000 (unaudited), and the total shareholders' equity
and the total unearned premium reserve, respectively, of Financial Security
and its consolidated subsidiaries were, in accordance with generally accepted
accounting principles, approximately $628,119,000 (unaudited) and $202,493,000
(unaudited). Copies of Financial Security's financial statements may be
obtained by writing to Financial Security at 350 Park Avenue, New York, New
York, 10022, Attention: Communications Department. Its telephone number is
(212) 826-0100.
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written by Financial Security of either of its subsidiaries are
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, Financial Security
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with unaffiliated reinsurers under various quota share
treaties and on a transaction-by-transaction basis. Such reinsurance is
utilized by Financial Security as a risk management device and to comply with
certain statutory and rating agency requirements; it does not alter or limit
Financial Security's obligations under any financial guaranty insurance
policy.
Financial Security's claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc. and "AAA" by Standard & Poor's Corporation, Nippon Investors
Service Inc., Duff & Phelps Inc. and Australian Ratings Pty. Ltd. Such ratings
reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies.
Capital Guaranty Insurance Company ("Capital Guaranty") was incorporated in
Maryland on June 25, 1986, and is a wholly-owned subsidiary of Capital
Guaranty Corporation, a Maryland insurance holding company.
Capital Guaranty Corporation is owned by the following investors:
Constellation Investments, Inc., an affiliate of Baltimore Gas and Electric;
Fleet/Norstar Financial Group, Inc.; Safeco Corporation; Sibag Finance
Corporation, an affiliate of Siemens A.G.; and United States Fidelity and
Guaranty Company and management.
Capital Guaranty, headquartered in San Francisco, is a monoline financial
guaranty insurer engaged in the underwriting and development of financial
guaranty insurance. Capital Guaranty insures general obligation, tax supported
and revenue bonds structured as tax-exempt and taxable securities as well as
selectively insures taxable corporate/asset backed securities. Standard &
Poor's Corporation rates the claims paying ability of Capital Guaranty "AAA."
Capital Guaranty's insured portfolio currently includes over $9 billion in
total principal and interest insured. As of September 30, 1992, the total
policyholders' surplus of Capital Guaranty was $113,000,000 (unaudited), and
the total admitted assets were $220,000,000 (unaudited) as reported to the
Insurance Department of the State of Maryland. Financial statements for
Capital Guaranty Insurance Company, that have been prepared in accordance with
statutory insurance accounting standards, are available upon request. The
address of Capital Guaranty's headquarters and its telephone number are
Steuart Tower, 22nd Floor, One Market Plaza, San Francisco, CA 94105-1413 and
(415) 995-8000.
CapMAC is a New York-domiciled monoline stock insurance company which engages
only in the business of financial guarantee and surety insurance. CapMAC is
licensed in 48 states in addition to the District of Columbia, the
Commonwealth of Puerto Rico and the territory of Guam. CapMAC insures
structured asset-backed, corporate and other financial obligations in the
domestic and foreign capital markets. CapMAC may also provide financial
guarantee reinsurance for structured asset-backed, corporate and municipal
obligations written by other major insurance companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors Service,
Inc. ("Moody's"), "AAA" by Standard & Poor's Corporation ("Standard &
Poor's"), and "AAA" by Duff & Phelps, Inc. ("Duff & Phelps"). Such ratings
reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies.
CapMAC is wholly owned by CapMAC Holdings Inc. ("Holdings"), a company that is
owned by a group of institutional and other investors, including CapMAC's
management and employees. CapMAC commenced operations on December 24, 1987 as
an indirect, wholly-owned subsidiary of Citibank (New York State), a
wholly-owned subsidiary of Citicorp. On June 25, 1992, Citibank (New York
State) sold CapMAC to Holdings (the "Sale").
Neither Holdings nor any of its stockholders is obligated to pay any claims
under any surety bond issued by CapMAC or any debts of CapMAC or to make
additional capital contributions.
CapMAC is regulated by the Superintendent of Insurance of the State of New
York. In addition, CapMAC is subject to regulation by the insurance
departments of the other jurisdictions in which it is licensed. CapMAC is
subject to periodic regulatory examinations by the same regulatory
authorities.
CapMAC is bound by insurance laws and regulations regarding capital transfers,
limitations upon dividends, investment of assets, changes in control,
transactions with affiliates and consolidations and acquisitions. The amount
of exposure per risk that CapMAC may retain, after giving effect to
reinsurance, collateral or other security, is also regulated. Statutory and
regulatory accounting practices may prescribe appropriate rates at which
premiums are earned and the levels of reserves required. In addition, various
insurance laws restrict the incurrence of debt, regulate permissible
investments of reserves, capital and surplus, and govern the form of surety
bonds.
CapMAC's obligations under the Surety Bond(s) may be reinsured. Such
reinsurance does not relieve CapMAC of any of its obligations under the Surety
Bond(s).
THE [SURETY BOND(S)] [IS] [ARE] NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE
SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
In connection with the Sale, Holdings and CapMAC entered into an Ownership
Policy Agreement (the "Ownership Policy Agreement"), which sets forth
Holdings' intent with respect to its ownership and control of CapMAC and
provides for certain policies and agreements with respect to Holdings'
exercise of its control of CapMAC. In the Ownership Policy Agreement, Holdings
has agreed that, during the term of the Ownership Policy Agreement, it will
not, and will not permit any stockholder of Holdings to enter into any
transaction the result of which would be a change of control (as defined in
the Ownership Policy Agreement) of CapMAC, unless the long term debt
obligations or claims-paying ability of the person which would control CapMAC
after such transaction or its direct or indirect parent are rated in a high
investment grade category, unless Holdings or CapMAC has confirmed that
CapMAC's claims-paying ability rating by Moody's (the "Rating") in effect
immediately prior to any such change of control will not be downgraded by
Moody's upon such change of control or unless such change of control occurs as
a result of a public offering of Holdings' capital stock.
In addition, the Ownership Policy Agreement includes agreements (i) not to
change the "zero-loss" underwriting standards or policies and procedures of
CapMAC in a manner that would materially and adversely affect the risk profile
of CapMAC's book of business, (ii) that CapMAC will adhere to the aggregate
leverage limitations and maintain capitalization levels considered by Moody's
from time to time as consistent with maintaining CapMAC's Rating and (iii)
that until CapMAC's statutory capital surplus and contingency reserve
("qualified statutory capital") equal $250 million, CapMAC will maintain a
specified amount of qualified statutory capital in excess of the amount of
qualified statutory capital that CapMAC is required at such time to maintain
under the aggregate leverage limitations set forth in Article 69 of the New
York Insurance Law.
The Ownership Policy Agreement will terminate on the earlier of the date on
which a change of control of CapMAC occurs and the date on which CapMAC and
Holdings agree in writing to terminate the Ownership Policy Agreement;
provided that, CapMAC or Holdings has confirmed that CapMAC's Rating in effect
immediately prior to any such termination will not be downgraded upon such
termination.
As at December 31, 1992 and 1991, CapMAC had statutory capital and surplus of
approximately $148 million and $232 million, respectively, and had not
incurred any debt obligations. On June 26, 1992, CapMAC made a special
distribution (the "Distribution") to Holdings in connection with the Sale in
an aggregate amount that caused the total of CapMAC's statutory capital and
surplus to decline to approximately $150 million. Holdings applied
substantially all of the proceeds of the Distribution to repay debt owed to
Citicorp that was incurred in connection with the capitalization of CapMAC. As
of June 30, 1992, CapMAC had statutory capital and surplus of approximately
$150million and had not incurred any debt obligations. In addition, at
December 31, 1992 CapMAC had a statutory contingency reserve of approximately
$15 million, which is also available to cover claims under surety bonds issued
by CapMAC. Article 69 of the New York State Insurance Law requires that CapMAC
establishes and maintains the contingency reserve.
In addition to its capital (including contingency reserve) and other
reinsurance available to pay claims under its surety bonds, on June 25, 1992,
CapMAC entered into a Stop Loss Reinsurance Agreement (the "Stop Loss
Agreement") with Winterthur Swiss Insurance Company (the "Reinsurer"), which
is rated AAA by Standard & Poor's and Aaa by Moody's, pursuant to which the
Reinsurer will be required to pay any losses incurred by CapMAC during the
term of the Stop Loss Agreement on the surety bonds covered under the Stop
Loss Agreement in excess of a specified amount of losses incurred by CapMAC
under such surety bonds (Such specified amount initially being $100 million
and increasing annually by an amount equal to 66-2/3% of the increase in
CapMAC's statutory capital and surplus) up to an aggregate limit payable under
the Stop Loss Agreement of $50 million. The Stop Loss Agreement has an initial
term of seven years, is extendable for one-year periods and is subject to
early termination upon the occurrence of certain events.
CapMAC also has available a $100,000,000 standby corporate liquidity facility
(the "Liquidity Facility") provided by a syndicate of banks rated A1+/P1 by
Standard & Poor's and Moody's, respectively, having a term of 360 days. Under
the Liquidity Facility CapMAC will be able, subject to satisfying certain
conditions, to borrow funds from time to time in order to enable it to fund
any claim payments or payments made in settlement or mitigation of claims
payments under its surety bonds, including the Surety Bond(s).
Copies of CapMAC's financial statements prepared in accordance with statutory
accounting standards, which differ from generally accepted accounting
principles, and filed with the Insurance Department of the State of New York
are available upon request. CapMAC is located at 885 Third Avenue, New York,
New York 10022, and its telephone number is (212) 755-1155.
In order to be in a Trust, Bonds must be insured by one of the Preinsured Bond
Insurers or be eligible for the insurance being obtained by such Trust. In
determining eligibility for insurance, the Preinsured Bond Insurers, AMBAC
Indemnity and Financial Guaranty, have applied their own standards which
correspond generally to the standards they normally use in establishing the
insurability of new issues of municipal bonds and which are not necessarily
the criteria used in the selection of Bonds by the Sponsor. To the extent the
standards of the Preinsured Bond Insurers, AMBAC Indemnity and Financial
Guaranty, are more restrictive than those of the Sponsor, the previously
stated Trust investment criteria have been limited with respect to the Bonds.
This decision is made prior to the Date of Deposit, as debt obligations not
eligible for insurance are not deposited in a Trust. Thus, all of the Bonds in
the portfolios of the Trusts in the Fund are insured either by the respective
Trust, by the issuer of the Bonds, by a prior owner of such Bonds or by the
Sponsor prior to the deposit of the Bonds in a Trust.
Because the Bonds are insured by one of the Portfolio Insurers or one of the
Preinsured Bond Insurers 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 the Units of each Trust its
"AAA" investment rating. See "Description of Securities 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 such Trust or of the Units.
On the date indicated therein, the Estimated Current Return and the Estimated
Long-Term Return for the respective Trust is that percentage set forth in Part
One of this Prospectus. The Estimated Current Return and the Estimated
Long-Term Return on an identical portfolio without the insurance obtained by
the Trust would have been higher.
An objective of portfolio insurance obtained by a Trust is to obtain a higher
yield on the portfolio of such Trust than would be available if all the
Securities in such portfolio had Standard & Poor's Corporation "AAA" rating
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. Preinsured Bonds in a Trust (all
of which are rated "AAA" by Standard & Poor's Corporation) may or may not have
a higher yield than uninsured bonds rated "AAA" by Standard & Poor's
Corporation. In selecting such Bonds for a Trust, the Sponsor has applied the
criteria hereinbefore described.
In the event of nonpayment of interest or principal, when due, in respect of a
Bond, AMBAC Indemnity shall make such payment not later than 30 days and
Financial Guaranty shall make such payment within one business day after the
respective insurer has been notified that such nonpayment has occurred or is
threatened (but not earlier than the date such payment is due). The insurer,
as regards any payment it may make, will succeed to the rights of the Trustee
in respect thereof. All policies issued by the Portfolio Insurers and the
Preinsured Bond Insurers are substantially identical insofar as obligations to
a Trust are concerned.
The Internal Revenue Service has issued a letter ruling which holds in effect
that insurance proceeds representing maturing interest on defaulted municipal
obligations paid to holders of insured bonds, under policy provisions
substantially identical to the policies described herein, will be excludable
from Federal gross income under Section 103(a)(1) of the Internal Revenue Code
to the same extent as if such payments were made by the issuer of the
municipal obligations. Holders of Units in a Trust should discuss with their
tax advisers the degree of reliance which they may place on this letter
ruling. However, Chapman and Cutler, counsel for the Sponsor, has given an
opinion to the effect such payment of proceeds 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
"Federal Tax Status of the Trusts".
Each Portfolio Insurer is subject to regulation by the department of insurance
in the state in which it is qualified to do business. Such regulation,
however, is no guarantee that they will be able to perform on their contracts
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 any of the Portfolio Insurers
which would materially impair the ability of such company to meet its
commitments pursuant to any contract of bond or portfolio insurance.
The information relating to each Portfolio Insurer has been furnished by such
companies. The financial information with respect to each Portfolio Insurer
appears in reports 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 dates
thereof. Neither the Fund, the Units nor any portfolio is insured directly or
indirectly by the Sponsor.
FEDERAL TAX STATUS OF THE TRUSTS
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)Each Trust is not an association taxable as a corporation for Federal
income tax purposes and interest and accrued original issue discount on
Securities which is excludable from gross income under the Internal Revenue
Code of 1986 will retain its status when distributed to Unitholders, except to
the extent such interest is subject to the alternative minimum tax, an
additional tax on branches of foreign corporations and the environmental tax
(the "Superfund Tax") as noted below;
(2)Each Unitholder is considered to be the owner of a pro rata portion of the
respective Trust under subpart E, subchapter J of chapter 1 of the Internal
Revenue Code of 1986 (the "Code") and will have a taxable event when such
Trust disposes of a Security, or when the Unitholder redeems or sells his
Units. Unitholders must reduce the tax basis of their Units for their share of
accrued interest received by the respective Trust, if any, on Securities
delivered after the Unitholders pay for their Units to the extent that such
interest accrued on such Securities during the period from the Unitholder's
settlement date to the date such Securities are delivered to the respective
Trust and, consequently, such Unitholders 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 Bonds (whether by sale, payment on maturity, redemption or
otherwise), gain or loss is recognized to the Unitholder. The amount of any
such gain or loss is measured by comparing the Unitholder's pro rata share of
the total proceeds from such disposition with the Unitholder's basis for his
or her fractional interest in the asset disposed of. In the case of a
Unitholder who purchases Units, such basis (before adjustment for earned
original issue discount and amortized bond premium, if any) is determined by
apportioning the cost of the Units among each of the Trust assets ratably
according to value as of the date of acquisition of the Units. The tax cost
reduction requirements of said Code relating to amortization of bond premium
may, under some circumstances, result in the Unitholder realizing a taxable
gain when his Units are sold or redeemed for an amount equal to his original
cost;
(3)Any proceeds paid under an insurance policy issued to a Trust by AMBAC
Indemnity, Financial Guaranty or a combination thereof with respect to the
Bonds which represent maturing interest on defaulted obligations held by the
Trustee 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; and
(4)Any proceeds paid under individual policies obtained by issuers of Bonds
which represent maturing interest on defaulted obligations held by the Trustee
will be excludable from Federal gross income if, and to the same extent as,
such interest would have been so excludable if paid in the normal course by
the issuer of the defaulted obligations.
Sections 1288 and 1272 of the Internal Revenue Code of 1986 (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 compound 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 would have previously accrued
based on its issue price (its "adjusted issue price") to prior owners. The
application of these rules will also vary depending on the value of the Bond
on the date a Unitholder acquires his Units and the price the Unitholder pays
for his Units. Investors with questions regarding these Code sections should
consult with their tax advisers.
"The Revenue Reconciliation Act of 1993" (the "Tax Act") subjects tax-exempt
bonds to the market discount rules of the Code effective for bonds 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). Market discount can arise based on
the price a Trust pays for Bonds or the price a Unitholder pays for his or her
own Units. Under the Tax Act, accretion of market discount is taxable as
ordinary income; under prior law the accretion had been treated as capital
gain. Market discount that accretes while a Trust holds a Bond would be
recognized as ordinary income by the Unitholders when principal payments are
received on the Bond, upon sale or at redemption (including early redemption),
or upon the sale or redemption of his or her Units, unless a Unitholder elects
to include market discount in a taxable income as it accrues. The market
discount rules are complex and Unitholders should consult their tax advisers
regarding these rules and their application.
In the case of certain corporations, the alternative minimum tax and the
Superfund Tax for taxable years beginning after December 31, 1986 depend upon
the corporation's alternative minimum taxable income, which is the
corporation's taxable income with certain adjustments. One of the adjustment
items used in computing the alternative minimum taxable income and the
Superfund Tax of a corporation (other than 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 alternative minimum taxable income (before such adjustment
item and the alternative minimum tax net operating loss deduction). "Adjusted
current earnings" includes all tax exempt interest, including interest on the
Bonds in the Trust. Unitholders are urged to consult their tax advisers with
respect to the particular tax consequences to them resulting from the recent
legislation, including the corporate alternative minimum tax, the Superfund
Tax and the branch profits tax imposed by Section 884 of the Code.
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
the Fund 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 consider interest on indebtedness incurred to purchase or
improve a personal residence). Also, under Section 265 of the Code, certain
financial institutions that acquire Units would generally not be able to
deduct any of the interest expense attributable to ownership of such Units.
Investors with questions regarding this issue should consult with their tax
advisers.
In the case of certain of the Securities in the Fund, 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 excludible from Federal gross income,
although interest on such Securities received by others would be excludible
from Federal gross income. "Substantial user" and "related person" are defined
under U.S. Treasury Regulations. Any person who believes that he or she may be
a "substantial user" or a "related person" as so defined should contact his or
her tax adviser.
At the time of closing for each Trust, special counsel to the Fund for New
York tax matters have rendered opinions substantially to the effect that under
then existing law, the Fund and each Trust are not associations taxable as
corporations and the income of each Trust will be treated as the income of the
Unitholders under the income tax laws of the State and City of New York.
All statements of law in the Prospectus concerning exclusion from gross income
for Federal, state or other taxes are the opinions of counsel and are to be so
construed.
At the respective times of issuance of the Securities, opinions relating to
the validity thereof and to the exclusion of interest thereon from Federal
gross income are rendered by bond counsel to the respective issuing
authorities. Neither the Sponsor nor Chapman and Cutler has made any special
review for the Fund of the proceedings relating to the issuance of the
Securities or of the basis for such opinions.
In the case of corporations, the alternative tax rate applicable to long-term
capital gains to 35%, effective for long-term capital gains realized on or
after January 1, 1993. For taxpayers other than corporations, net capital
gains are subject to a maximum 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. Under the Code, taxpayers must disclose to
the Internal Revenue Service the amount of tax-exempt interest earned during
the year.
Section 86 of the Code provides, in general, that fifty percent of Social
Security benefits are includible in gross income to the extent that the sum of
"modified adjusted gross income" plus fifty percent of the Social Security
benefits received exceeds a "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 increased. 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 includible in gross
income, they will be treated as any other item of gross income.
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.
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 the respective Trust, will be subject to tax. A taxpayer
whose adjusted gross income already exceeds the base amount or the adjusted
base amount must include fifty percent or eighty-five percent, respectively,
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 a discussion of the state tax status of income earned on Units of a State
Trust, see "Tax Status" for the applicable Trust. Except as noted therein, the
exemption of interest on state and local obligations for Federal income tax
purposes discussed above does not necessarily result in exemption under the
income or other tax laws of any State or City. The laws of the several States
vary with respect to the taxation of such obligations.
DESCRIPTION AND STATE TAX STATUS OF THE TRUSTS
Alabama Trusts
Alabama's economy has experienced a major trend toward industrialization over
the past two decades. By 1990, manufacturing accounted for 26.7% of Alabama's
Real Gross State Product (the total value of goods and services produced in
Alabama). During the 1960s and 1970s the State's industrial base became more
diversified and balanced, moving away from primary metals into pulp and paper,
lumber, furniture, electrical machinery, transportation equipment, textiles
(including apparel), chemicals, rubber and plastics. Since the early 1980s,
modernization of existing facilities and an increase in direct foreign
investments in the State has made the manufacturing sector more competitive in
domestic and international markets.
Among several leading manufacturing industries have been pulp and papers and
chemicals. In recent years Alabama has ranked as the fifth largest producer of
timber in the nation. The State's growing chemical industry has been the
natural complement of production of wood pulp and paper. Mining, oil and gas
production and service industries are also important to Alabama's economy.
Coal mining is by far the most important mining activity.
Major service industries that are deemed to have significant growth potential
include the research and medical training and general health care industries,
most notably represented by the University of Alabama medical complex in
Birmingham and the high technology research and development industries
concentrated in the Huntsville area.
Real Gross State Product. Real Gross State Product (RGSP) is a comprehensive
measure of economic performance for the State of Alabama. Alabama's RGSP is
defined as the total value of all final goods and services produced in the
State in constant dollar terms. Hence, changes in RGSP reflect changes in
final output. From 1984 to 1990 RGSP originating in manufacturing increased by
22.99% whereas RGSP originating in all the non-manufacturing sectors grew by
17.88%.
Those non-manufacturing sectors exhibiting large percentage increases in RGSP
originating between 1984 and 1990 were 1) Services; 2) Trade; 3) Farming; and
4) Finance, Insurance and Real Estate. From 1984 to 1990 RGSP originating in
Services increased by35.07%; Trade grew by 21.53%; Farming increased by
19.78%; and the gain in Finance, Insurance and Real Estate was 19.19%. The
present movement toward diversification of the State's manufacturing base and
a similar present trend toward enlargement and diversification of the service
industries in the State are expected to lead to increased economic stability.
Employment. The recent national economic recession was felt severely in
Alabama. The manufacturing growth described above reached a peak in 1979, and
was followed by a decrease in activity. The national economic recession was
principally responsible for this decline. The State's industrial structure is
particularly sensitive to high interest rates and monetary policy, and the
resulting unemployment during 1981-1984 was acute. Unemployment rates have
improved as the impact of the national economic recovery has benefited the
State. The economic recovery experienced on the national level since 1982 has
been experienced in Alabama as well, but to a different degree and with a time
lag.
Among other risks, the State of Alabama's economy depends upon cyclical
industries such as iron and steel, natural resources, and timber and forest
products. As a result, economic activity may be more cyclical than in certain
other Southeastern states. The national economic recession in the early 1980s
caused a decline in manufacturing activity and natural resource consumption,
and Alabama's unemployment rate was 14.4% in 1982, significantly higher than
the national average. Unemployment remains high in some rural areas of the
State. A trend towards diversification of the State's economic base and an
expansion of service industries may lead to improved economic stability in the
future, although there is no assurance of this.
Political subdivisions of the State of Alabama have limited taxing authority.
In addition, the Alabama Supreme Court has held that a governmental unit may
first use its taxes and other revenues to pay the expenses of providing
governmental service before paying debt service on its bonds, warrants or
other indebtedness. The State has statutory budget provisions which result in
a proration procedure in the event estimated budget resources in a fiscal year
are insufficient to pay in full all appropriations for that year. Proration
has a materially adverse effect on public entities that are dependent upon
State funds subject to proration.
Deterioration of economic conditions could adversely affect both tax and other
governmental revenues, as well as revenues to be used to service various
revenue obligations, such as industrial development obligations. Such
difficulties could affect the market value of the bonds held by the Alabama
Trust and thereby adversely affect Unitholders.
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 Alabama Trust 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 Alabama Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Alabama Trust, Special Counsel to the Fund
for Alabama tax matters rendered an opinion under then existing Alabama income
tax law applicable to taxpayers whose income is subject to Alabama income
taxation substantially to the effect that:
(1)The Alabama Trust is not taxable as a corporation for purposes of the
Alabama income tax;
(2)Income of the Alabama Trust, to the extent it is taxable, will be taxable
to the Unitholders, not the Alabama Trust;
(3)Each Unitholder's distributive share of the Alabama Trust's net income will
be treated as the income of the Unitholder for purposes of the Alabama income
tax;
(4)Interest on obligations held by the Alabama Trust which is exempt from the
Alabama income tax will retain its tax-exempt character when the distributive
share thereof is distributed or deemed distributed to each Unitholder;
(5)Any proceeds paid to the Alabama Trust under insurance policies issued to
the Sponsor or under individual policies obtained by the Sponsor, the issuer
or underwriter of the respective obligations which represent maturing interest
on defaulted obligations held by the Trustee will be exempt from Alabama
income 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;
(6)Each Unitholder will, for purposes of the Alabama income tax, treat his
distributive share of gains realized upon the sale or other disposition of the
Bonds held by the Alabama Trust as though the Bonds were sold or disposed of
directly by the Unitholders; and
(7)Gains realized on the sale or redemption of Units by Unitholders, who are
subject to the Alabama income tax will be includable in the Alabama income of
such Unitholders. Arizona Trusts
Arizona Trusts
Arizona is the nation's sixth largest state in terms of area and ranks among
the leading states in three economic indices of growth. For the ten year
period 1978-88, Arizona ranked second nationally in both population growth and
growth in employment and third in growth of personal income. According to
figures reported by the Arizona Department of Economic Security, Arizona has
been one of the fastest growing states in the nation. While the United States'
population increased 11 percent between 1970 and 1980, Arizona realized a 53
percent growth rate. More recently this growth has slowed to a more manageable
rate. The population of Arizona has grown consistently at a rate between 2.2%
and 2.4% annually during the years 1988 through 1990, and is predicted to
remain in that range through 1992. The 1990 census results indicate that the
population of Arizona rose 35% between 1980 and 1990, a rate exceeded only in
Nevada and Alaska. Nearly 950,000 residents were added during this period.
General Economic Conditions. The following brief summary regarding the economy
of Arizona is based upon information drawn from publicly available sources and
is included for the purpose of providing the information about general
economic conditions that may or may not affect issuers of the Arizona
Municipal Obligations. The Sponsor has not independently verified any of the
information contained in such publicly available documents.
Arizona's main economic/employment sectors include services, tourism and
manufacturing. Mining and agriculture are also significant, although they tend
to be more capital than labor intensive.Services is the single largest
economic sector. Many of these jobs are directly related to tourism.
According to Arizona economic indicators released as of June 1992,
unemployment figures show 7.2 percent of Arizona's population are unemployed,
compared to a national level of 7.5 percent of unemployment at the same time.
Maricopa County reported 6.1 percent unemployment and Pima County reported 5.0
percent unemployment. Significant employers in the state include the
government, the service industry and the trade industry. Building permits were
down in all areas of the state except for Pima county. In addition, home sales
were down approximately 28 percent from the previous year, and retail sales
were down approximately 7 percent from the previous year.
On June 27, 1991, America West Airlines filed a Chapter 11 reorganization
petition in bankruptcy. America West was at one time the sixth largest
employer in Maricopa County, employing approximately 10,000 persons within the
county, and 15,000 nationwide. The airline now employs close to 7,000
employees nationwide. The effect of the America West bankruptcy on the state
economy and, more particularly, the Phoenix economy, is uncertain.
Similarly, jobs will be lost by the anticipated closing of Williams Air Force
Base in Chandler, Arizona, in 1993. Williams Air Force Base was selected as
one of the military installations to be closed as a cost-cutting measure by
the Defense Base Closure and Realignment Commission, whose recommendations
were subsequently approved by the President and the United States House of
Representatives. Williams Air Force Base injects approximately $340 million in
the local economy annually, and employs 1,851 civilians.
In 1986, the value of Arizona real estate began a steady decline, reflecting a
market which had been overbuilt in the previous decade with a resulting
surplus of completed inventory. This decline adversely affected both the
construction industry and those Arizona financial institutions which had
aggressively pursued many facets of real estate lending.
In the near future, Arizona's financial institutions are likely to continue to
experience problems until the excess inventories of commercial and residential
properties are absorbed. The problems of the financial institutions have
adversely affected unemployment and economic activity. Longer-term prospects
are brighter, since population growth is still strong by most standards, and
Arizona's climate and tourist industry still continue to stimulate the State's
economy. However, the previously robust pace of growth by financial
institutions is not likely to be repeated over an extended period.
Arizona operates on a fiscal year beginning July 1 and ending June 30. Fiscal
year 1992 refers to the year ending June 30, 1992.
Total General Fund revenues of $3.4 billion are expected during fiscal year
1992. Approximately 45.8% of this budgeted revenue comes from sales and use
taxes, 38.9% from income taxes (both individual and corporate) and 5.3% from
property taxes. All taxes total approximately$3.3 billion, or 93% of the
General Fund revenues. Non-tax revenue includes items such as income from the
state lottery, licenses, fees and permits, and interest. Lottery income totals
approximately 34.6% of non-tax revenue.
For fiscal year 1992, the budget calls for expenditures of $2.7 billion. These
expenditures fell into the following major categories: education (51.3%),
health and welfare (29.3%), protection and safety (9.8%), general government
(7.6%) and inspection and regulation, natural resources and transportation
(2.0%). The State's general fund revenues for fiscal year 1993 are budgeted at
$3.6 billion and total generated fund expenditures for fiscal year 1993 are
budgeted at $3.65 billion. Fiscal year 1993's proposed expenditures fall into
the following major categories: education (55.4%), health and welfare (27.8%),
protection and safety (9.0%), general government (6.2%) and inspection and
regulation and natural resources (1.6%).
Most or all of the Bonds of the Arizona Trust are not obligations of the State
of Arizona, and are not supported by the State's taxing powers. The particular
source of payment and security for each of the Bonds is detailed in the
instruments themselves and in related offering materials. There can be no
assurances, however, with respect to whether the market value of marketability
of any of the Bonds issued by an entity other than the State of Arizona will
be affected by the financial or other condition of the State or of any entity
located within the State. In addition, it should be noted that the State of
Arizona, as well as counties, municipalities, political subdivisions and other
public authorities of the state, are subject to limitations imposed by
Arizona's constitution with respect to ad valorem taxation, bonded
indebtedness and other matters. For example, the legislature cannot
appropriate revenues in excess of 7% of the total personal income of the state
in any fiscal year. These limitations may affect the ability of the issuers to
generate revenues to satisfy their debt obligations.
Local governments have experienced many of the same fiscal difficulties for
many of the same reasons and, in several cases, have been prevented by
Constitutional limitations on bonded indebtedness from securing necessary
funds to undertake street, utility and other infrastructure expansions,
improvements and renovations in order to meet the needs of rapidly increasing
populations. In this regard, the voters of the cities of Phoenix and Tucson in
1984 authorized the issuance of general obligation and revenue bonds
aggregating $525 million and $330 million, respectively, and in May 1986, the
voters of Maricopa County, in which the City of Phoenix is located, and Pima
County, in which the City of Tucson is located, authorized the issuance of
bonds aggregating $261 million and $219.4 million, respectively, to finance
various short- and long-term capital projects, including infrastructure
expansions, improvements and replacements. Also, in 1986, the voters in
Maricopa and Pima Counties voted a 1/2% increase in the State sales taxes to
pay for highway construction in those counties. In April 1988 the voters of
the City of Phoenix authorized the issuance of general obligations bonds
aggregating $1.1 billion.
Although most of the Bonds in the Arizona Trust are revenue obligations of
local governments or authorities in the State, there can be no assurance that
the fiscal and economic conditions referred to above will not affect the
market value or marketability of the Bonds or the ability of the respective
obligors to pay principal of and interest on the Bonds when due.
The State of Arizona was recently sued by four named school districts with an
additional fifty school districts within the State participating in the suit,
claiming that the State's funding system for school buildings and equipment is
unconstitutional. The lawsuit does not seek damages, but requests that the
court order the State to create a new financing system that sets minimum
standards for buildings and furnishings that apply on a statewide basis. A
superior court ruling has upheld the constitutionality of the State's school
funding system. This decision has been appealed and is currently in the State
Court of Appeals. It is unclear, at this time, what affect any judgment would
have on state finances or school district budgets. The U.S. Department of
Education recently determined that Arizona's educational funding system did
not meet federal requirements of equity. This determination could mean a loss
in federal funds of approximately $50 million.
Certain other circumstances are relevant to the market value, marketability
and payment of any hospital and health care revenue bonds in the Arizona
Trust. The Arizona Legislature attempted unsuccessfully in its 1984 regular
and special sessions to enact legislation designed to control health care
costs, ultimately adopting three referenda measures placed on the November
1984 general election ballot which in various ways would have regulated
hospital and health care facility expansions, rates and revenues. At the same
time, a coalition of Arizona employers proposed two initiatives voted on in
the November 1984 general election which would have created a State agency
with power to regulate hospital and health care facility expansions and rates
generally. All of these referenda and initiative propositions were rejected by
the voters in the November 1984 general election. Pre-existing State
certificate-of-need laws regulating hospital and health care facilities'
expansions and services have expired, and a temporary moratorium prohibiting
hospital bed increases and new hospital construction projects and a temporary
freeze on hospital rates and charges at June 1984 levels has also expired.
Because of such expirations and increasing health care costs, it is expected
that the Arizona Legislature will at future sessions continue to attempt to
adopt legislation concerning these matters. The effect of any such legislation
or of the continued absence of any legislation restricting hospital bed
increases and limiting new hospital construction on the ability of Arizona
hospitals and other health care providers to pay debt service on their revenue
bonds cannot be determined at this time.
Arizona does not participate in the federally administered Medicaid program.
Instead, the state administers an alternative program, AHCCCS, which provides
health care to indigent persons meeting certain financial eligibility
requirements, through managed care programs. In fiscal year 1992, AHCCCS will
be financed approximately 52.7% by federal funds, 33.1% by state funds, and
13.6% by county funds.
Under state law, hospitals retain the authority to raise rates with
notification and review by, but not approval from, the Department of Health
Services. Hospitals in Arizona have experienced profitability problems along
with those in other states. At least two Phoenix based hospitals have
defaulted on or reported difficulties in meeting their bond obligations during
the past three years.
Insofar as tax-exempt Arizona public utility pollution control revenue bonds
are concerned, the issuance of such bonds and the periodic rate increases
needed to cover operating costs and debt service are subject to regulation by
the Arizona Corporation Commission, the only significant exception being the
Salt River Project Agricultural Improvement and Power District which, as a
Federal instrumentality, is exempt from rate regulation. On July 15, 1991,
several creditors of Tucson Electric Power Company ("Tucson Electric") filed
involuntary petitions under Chapter 11 of the U.S. Bankruptcy Code to force
Tucson Power to reorganize under the supervision of the bankruptcy court. On
December 31, 1991, the Bankruptcy Court approved the utility's motion to
dismiss the July petition after five months of negotiations between Tucson
Electric and its creditors to restructure the utility's debts and other
obligations. In January 1993, Tuscon Electric asked the Arizona Corporation
Commission for a 9.6% average rate increase. Tucson Electric serves
approximately 270,000 customers, primarily in the Tucson area. Inability of
any regulated public utility to secure necessary rate increases could
adversely affect, to an indeterminable extent, its ability to pay debt service
on its pollution control revenue bonds.
At the time of the closing for each Arizona Trust, Special Counsel to the Fund
for Arizona tax matters rendered an opinion under then existing Arizona income
tax law applicable to taxpayers whose income is subject to Arizona income
taxation substantially to the effect that:
(1)For Arizona income tax purposes, each Unitholder will be treated as the
owner of a pro rata portion of the Arizona Trust, and the income of the Trust
therefore will be treated as the income of the Unitholder under State law;
(2)For Arizona income tax purposes, interest on the Bonds which is excludable
from Federal gross income and which is exempt from Arizona income taxes when
received by the Arizona Trust, and which would be excludable from Federal
gross income and exempt from Arizona income taxes if received directly by a
Unitholder, will retain its status as tax-exempt interest when received by the
Arizona Trust and distributed to the Unitholders;
(3)To the extent that interest derived from the Arizona Trust by a Unitholder
with respect to the Bonds is excludable from Federal gross income, such
interest will not be subject to Arizona income taxes;
(4)Each Unitholder will receive taxable gain or loss for Arizona income tax
purposes when Bonds held in the Arizona Trust are sold, exchanged, redeemed or
paid at maturity, or when the Unitholder 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 Unitholder's share of interest, if any, accruing on
Bonds during the interval between the Unitholder's settlement date and the
date such Bonds are delivered to the Arizona Trust, if later;
(5)Amounts paid by the Insurer under an insurance policy or policies issued to
the Trust, if any, with respect to the Bonds in the Trust which represent
maturing interest on defaulted obligations held by the Trustee will be exempt
from State income taxes if, and to the same extent as, such interest would
have been so exempt if paid by the issuer of the defaulted obligations;
(6)Arizona law does not permit a deduction for interest paid or incurred on
indebtedness incurred or continued to purchase or carry Units in the Arizona
Trust, the interest on which is exempt from Arizona income taxes; and
(7)Neither the Bonds nor the Units will be subject to Arizona property taxes,
sales tax or use tax.
California Trusts
The Trust will invest substantially all of its assets in California Municipal
Obligations. The Trust is therefore susceptible to political, economic or
regulatory factors affecting issuers of 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 Fund or the ability of particular
obligors to make timely payments of debt service on (or related to) those
obligations.
California's economy is the largest among the 50 states and one of the largest
in the world. The State's population of almost 32 million represents 12.8% 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 1992, 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 experienced the worst job losses of any
post-war recession and employment levels are not expected to stabilize until
late 1994 or 1995. The largest job losses have been in Southern California,
led by declines in the aerospace and construction industries. Weaknesses
statewide occurred in manufacturing, construction, services and trade.
Additional military base closures will have further adverse effects on the
State's economy later in the decade. Unemployment is expected to average 9% in
1993 and is expected to remain high in 1994. The State's economy is only
expected to pull out of the recession slowly once the national recovery has
begun. Delay in recovery will exacerbate shortfalls in State revenues.
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.
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 consists 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" excludes most State
subventions to local governments. No limit is imposed on appropriations or
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 by Proposition 111 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 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 million, $7.5 billion and $5.2 billion for the
five most recent fiscal 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 is 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.
As of January 1, 1994, California had approximately $17.7 billion of general
obligation bonds outstanding, and $6.3 billion remained authorized but
unissued. In addition, at June 30, 1993, the State had lease-purchase
obligations, payable from the State's General Fund, of approximately $4.0
billion. In Fiscal Year 1992-93, debt service on general obligation bonds and
lease-purchase debt was approximately 4.1% of General Fund revenues. The State
has paid the principal of and interest on its general obligation bonds,
lease-purchase debt and short-term obligations when due.
The principal sources of General Fund revenues in 1992-93 were the California
personal income tax (44% of total revenues), the sales tax (38%), bank and
corporation taxes (12%), 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.
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 (currently about
33%).
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
four of the five fiscal years ending in 1991-92; revenues were about equal in
1992-93. By June 30, 1993, the State's General Fund had an accumulated
deficit, on a budget basis, of approximately $2.2 billion.
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.
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 those
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 all of these ongoing
obligations as they came due, as well as valid obligations incurred in the
prior fiscal year.
Because of the delay in enacting the budget, the State could not carry out its
normal cash flow borrowing, and 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 1992-93 Budget Bill was signed on September 2, 1992. The 1992-93 Budget
Act provides for expenditures of $57.4billion 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.
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 continued for a third year, State revenues again lagged projections. The
Department of Finance projected revenues in 1992-93 $2.4 billion below
projections and expenditures $300 million higher. As a result, the Department
predicted the General Fund ended at June 30,1993 with a fund balance deficit
of about $2.2 billion, almost unchanged from June 30, 1992. The projected
negative balance of the Special Fund for Economic Uncertainties were $2
billion.
1993-94 Budget. The 1993-94 Budget represents the third consecutive year of
extremely difficult budget choices for the State, in view of the continuing
recession. The Budget Act, signed on June 30, 1993, provides for General Fund
expenditures of $38.5 billion, a 6.3% decline from the prior year. Revenues
are projected at $40.6 billion, about $400 million below the prior year. To
bring the budget into balance, the Budget Act and related legislation provided
for transfer of $2.6 billion of local property taxes to school districts, thus
relieving State support obligations; reductions in health and welfare
expenditures; reductions in support for higher education institutions; a
two-year suspension of the renters' tax credit; and miscellaneous cuts in
general government spending and certain one-time and accounting adjustments.
There were no general state tax increases, but a 0.5% temporary state sales
tax scheduled to expire on June 30 was extended for six months, and dedicated
to support local government public safety costs.
As part of the 1993-94 Budget, the Governor implemented a plan to repay the
accumulated $2.8 billion deficit in the Special Fund for Economic
Uncertainties over 18 months, funding the deficit with external borrowing
maturing not later than December 31, 1994. About $1.6 billion of the deficit
was repaid by December 1993, with the balance to be paid by December 31, 1994.
Taking this borrowing into account, the Department of Finance projected in
July, 1993 that the Special Fund for Economic Uncertainties would have a
balance of about $600 million at June 30, 1994, and about $100 million at June
30, 1995.
The 1994-95 Governor's Budget Proposal, released January 7, 1994, projects
that because of the continuation of the recession, the 1993-94 fiscal year
will end with a negative fund balance $1.7 billion worse than originally
planned, even though state revenues have been close to projections through the
first six months of the 1993-94 fiscal year.
To produce a balanced budget in 1994-95, the Governor proposes further cuts in
health and welfare costs, and requests additional federal aid of over $3
billion for costs associated with undocumented foreign immigrants and for
health and welfare programs. There is no assurance these funds will be
appropriated by the Congress.
On January 17, 1994 a major earthquake struck Los Angeles, causing widespread
property damage in public and private structures and facilities, estimated
preliminary at in excess of $15 billion. Large amounts of federal aid are
expected, and additional state resources will be made available. It is too
soon to assess the short or long term impacts of the earthquake on the
regional and state economies, and on the fiscal condition of local and state
government.
The State's severe financial difficulties for the current and upcoming budget
years will result in continued pressure upon various 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.
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.
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.
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.
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. Through 1990-91, local assistance
(including public schools) accounted for around 75% of General Fund spending.
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
"bailout" aid. The 1993-94 Budget Act transfers about $2.6 billion of local
property taxes to school districts, the largest share ($2 billion) coming from
counties, and the balance from cities ($288 million), special districts ($244
million) and redevelopment agencies ($65 million). In order to make up this
shortfall to cities and counties, the Legislature has dedicated 0.5% sales tax
to local public safety purposes through December 31, 1993. Voters at a
statewide election in November, 1993 will vote on a permanent extension of
this sales tax for local public safety. In addition, the Legislature has
changed laws to relieve local governments of certain mandates, allowing them
to reduce costs.
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 continue to 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.
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.
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 a 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 trial
court upheld the validity of the lease, and the case is expected to be
settled, but if it is not, further appeals may occur. Any ultimate judgment
against the Trustee may have adverse implications for lease transactions of a
similar nature by other California entities.
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 (for example, 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 Article XIIIA and Article 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 Fund 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 Portfolio
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.
At the time of the closing for each California Trust, Special Counsel to each
California Trust for California tax matters, rendered an opinion under then
existing California income tax law applicable to taxpayers whose income is
subject to California income taxation substantially to the effect that:
(1)the California Trust is not an association taxable as a corporation and the
income of the California Trust will be treated as the income of the
Unitholders under the income tax laws of California;
(2)amounts treated as interest on the underlying Securities in the California
Trust which are exempt from tax under California personal income tax and
property tax laws when received by the California Trust will, under such laws,
retain their status as tax-exempt interest when distributed to Unitholders.
However, interest on the underlying Securities attributed to a Unitholder
which is a corporation subject to the California franchise tax laws may be
includable in its gross income for purposes of determining its California
franchise tax. Further, certain interest which is attributable to a Unitholder
subject to the California personal income tax and which is treated as an item
of tax preference for purposes of the federal alternative minimum tax pursuant
to Section 57(a)(5) of the Internal Revenue Code of 1986 may also be treated
as an item of tax preference that must be taken into account in computing such
Unitholder's alternative minimum taxable income for purposes of the California
alternative minimum tax enacted by 1987 California Statutes, chapter 1138.
However, because of the provisions of the California Constitution exempting
the interest on bonds issued by the State of California, or by local
governments within the state, from taxes levied on income, the application of
the new California alternative minimum tax to interest otherwise exempt from
the California personal income tax in some cases may be unclear;
(3)under California income tax law, each Unitholder in the California Trust
will have a taxable event when the California Trust disposes of a Security
(whether by sale, exchange, redemption, or payment at maturity) or when the
Unitholder redeems or sells Units. Because of the requirement that tax cost
basis be reduced to reflect amortization of bond premium, under some
circumstances a Unitholder may realize taxable gains when Units are sold or
redeemed for an amount equal to, or less than, their original cost. The total
cost of each Unit in the California Trust to a Unitholder is allocated among
each of the Bond issues held in the California Trust (in accordance with the
proportion of the 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 tax cost of each Bond issue. Unitholders' bases in
their Units, and the bases for their fractional interest in each Trust asset,
may have to be adjusted for their pro rata share of accrued interest received,
if any, on Securities delivered after the Unitholders' respective settlement
dates;
(4)under the California personal property tax laws, bonds (including the
Securities in the California Trust) or any interest therein is exempt from
such tax;
(5)any proceeds paid under the insurance policy issued to the California Trust
with respect to the Securities 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; and
(6)under Section 17280(b)(2) of the California Revenue and Taxation Code,
interest on indebtedness incurred or continued to purchase or carry Units of
the 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.
At the respective times of issuance of the Securities, opinions relating to
the validity thereof and to the exemption of interest thereon from Federal
income tax and California personal income tax are rendered by bond counsel to
the respective issuing authorities. Except in certain instances in which
Special Counsel acted as bond counsel to issuers of Securities, and as such
made a review of proceedings relating to the issuance of certain Securities at
the time of their issuance, Special Counsel has not made any special review
for the California Trusts of the proceedings relating to the issuance of the
Securities or of the basis for such opinions.
Colorado Trusts
The State Constitution requires that expenditures for any fiscal year not
exceed revenues for such fiscal year. By statute, the amount of General Fund
revenues available for appropriation is based upon revenue estimates which,
together with other available resources, must exceed annual appropriations by
the amount of the unappropriated reserve (the "Unappropriated Reserve"). The
Unappropriated Reserve requirement for fiscal year 1991, 1992 and 1993 was set
at 3%. For fiscal year 1992 and thereafter, General Fund appropriations are
also limited to an amount equal to the cost of performing certain required
reappraisals of taxable property plus an amount equal to the lesser of (i)
five-percent of Colorado personal income or (ii) 106% of the total General
Fund appropriations for the previous fiscal year. This restriction does not
apply to any General Fund appropriations which are required as a result of a
new federal law, a final state or federal court order or moneys derived from
the increase in the rate or amount of any tax or fee approved by a majority of
the registered electors of the State voting at any general election. In
addition, the limit on the level of General Fund appropriations may be
exceeded for a given fiscal year upon the declaration of a State fiscal
emergency by the State General Assembly.
The 1991 fiscal year end fund balance was $16.3 million, which was $62.8
million below the 3% Unappropriated Reserve requirement. As of the end of the
1992 fiscal year, the fund balance was $133.3 million, which was $49.1 million
over the 3% Unappropriated Reserve requirement. Based on June 20, 1993
estimates, the 1993 fiscal year ending fund balance is expected to be $281.8
million, or $189.7 million over the 3% required Unappropriated Reserve.
On November 3, 1992, voters in Colorado approved a constitutional amendment
(the "Amendment") which, in general, became effective December 31, 1992, and
which could restrict the ability of the State and local governments to
increase revenues and impose taxes. The Amendment applies to the State and all
local governments, including home rule entities ("Districts"). Enterprises,
defined as government-owned businesses authorized to issue revenue bonds and
receiving under 10% of annual revenue in grants from all Colorado state and
local governments combined, are excluded
from the provisions of the Amendment.
The provisions of the Amendment are unclear and would probably require
judicial interpretation. Among other provisions, beginning November 4, 1992,
the Amendment requires voter approval prior to tax increases, creation of
debt, or mill levy or valuation for assessment ratio increases. The Amendment
also limits increases in government spending and property tax revenues to
specified percentages. The Amendment requires that District property tax
revenues yield no more than the prior year's revenues adjusted for inflation,
voter approved changes and (except with regard to school districts) local
growth in property values according to a formula set forth in the Amendment.
School districts are allowed to adjust tax levies for changes in student
enrollment. Pursuant to the Amendment, local government spending is to be
limited by the same formula as the limitation for property tax revenues. The
Amendment limits increases in expenditures from the State general fund and
program revenues (cash funds) to the growth in inflation plus the percentage
change in State population in the prior calendar year. The basis for initial
spending and revenue limits are fiscal year 1992 spending and 1991 property
taxes collected in 1992. The basis for spending and revenue limits for fiscal
year 1994 and later years will be the prior fiscal year's spending and
property taxes collected in the prior calendar year. Debt service changes,
reductions and voter-approved revenue changes are excluded from the
calculation basis. The Amendment would also prohibit new or increased real
property transfer tax rates, new State real property taxes and local District
income taxes.
According to the Colorado Economic Perspective, Fourth Quarter, FY 1992-93,
June 20, 1993 (the "Economic Report"), inflation for 1992 was 3.7% and
population grew at the rate of 2.7% in Colorado. Accordingly, under the
Amendment, increases in State expenditures during the 1994 Fiscal Year will be
limited to 6.4% over expenditures during the 1993 fiscal year. The 1993 fiscal
year is the base year for calculating the limitation for the 1994 fiscal year.
For the 1993 fiscal year, the Office of State Planning and Budgeting estimates
that general fund revenues will total $3,341.7 million and that program
revenues (cash funds) will total $1,753.4 million, or total estimated base
revenues of $5,095.1 million. Expenditures for the 1994 fiscal year,
therefore, cannot exceed $5,421.2 million. However, the 1994 fiscal year
general fund and program revenues (cash funds) are projected to be only
$5,220.4 million, or $200.8 million less than expenditures allowed under the
spending limitation.
There is also a statutory restriction on the amount of annual increases in
taxes that the various taxing jurisdictions in Colorado can levy without
electoral approval. This restriction does not apply to taxes levied to pay
general obligation debt.
As the State experienced revenue shortfalls in the mid-1980s, it adopted
various measures, including impoundment of funds by the Governor, reduction of
appropriations by the General Assembly, a temporary increase in the sales tax,
deferral of certain tax reductions and inter-fund borrowings. On a GAAP basis,
the State had unrestricted General Fund balances at June 30 of approximately
$100.3 million in fiscal year 1988, $134.8 million in fiscal year 1989, $116.6
million in fiscal year 1990, $16.3 million in fiscal year 1991 and $133.3
million in fiscal year 1992. The fiscal year 1993 unrestricted general fund is
currently estimated to be $281.8 million.
For fiscal year 1992, the following tax categories generated the following
respective revenue percentages of the State's $2,995.8 million total gross
receipts: individual income taxes represented 53.7% of gross fiscal year 1992
receipts; excise taxes represented 33.4% of gross fiscal year 1992 receipts;
and corporate income taxes represented 3.7% of gross fiscal year 1992
receipts. The final budget for fiscal year 1993 projects general fund revenues
of approximately $3,341.7 million and appropriations of approximately $3,046.7
million. The percentages of general fund revenue generated by type of tax for
fiscal year 1993 are not expected to be significantly different from fiscal
year 1992 percentages.
Under its constitution, the State of Colorado is not permitted to issue
general obligation bonds secured by the full faith and credit of the State.
However, certain agencies and instrumentalities of the State are authorized to
issue bonds secured by revenues from specific projects and activities. The
State enters into certain lease transactions which are subject to annual
renewal at the option of the State. In addition, the State is authorized to
issue short-term revenue anticipation notes. Local governmental units in the
State are also authorized to incur indebtedness. The major source of financing
for such local government indebtedness is an ad valorem property tax. In
addition, in order to finance public projects, local governments in the State
can issue revenue bonds payable from the revenues of a utility or enterprise
or from the proceeds of an excise tax, or assessment bonds payable from
special assessments. Colorado local governments can also finance public
projects through leases which are subject to annual appropriation at the
option of the local government. Local governments in Colorado also issue tax
anticipation notes. The Amendment requires prior voter approval for the
creation of any multiple fiscal year debt or other financial obligation
whatsoever, except for refundings at a lower rate or obligations of an
enterprise.
Based on data published by the State of Colorado, Office of State Planning and
Budgeting as presented in the Economic Report, over 50% of non-agricultural
employment in Colorado in 1992 was concentrated in the retail and wholesale
trade and service sectors, reflecting the importance of tourism to the State's
economy and of Denver as a regional economic and transportation hub. The
government and manufacturing sectors followed as the fourth and fifth largest
employment sectors in the State, representing approximately 18.3% and 11.5%,
respectively, of non-agricultural employment in the State in 1992.
According to the Economic Report, during the first quarter of 1993, 45,900 net
new jobs were generated in the Colorado economy, an increase of 24.4% over the
first quarter of 1992. However, the unemployment rate rose from an average of
5.5% during the first quarter of 1992 to 5.8% during the first quarter of
1993. Total retail sales increased by 9.8% during the first quarter of 1993 as
compared to the same period in 1992.
Personal income rose 6.6% in Colorado during 1992 and 5.5% in 1991. In 1992,
Colorado was the twelfth fastest growing state in terms of personal income
growth. However, because of heavy migration into the state and a large
increase in low-paying retail sector jobs, per capita personal income in
Colorado increased by only 3.8% in 1992, 0.1% below the increase in per capita
personal income for the nation as a whole.
Economic conditions in the State may have continuing effects on other
governmental units within the State (including issuers of the Bonds in the
Colorado Trust), which, to varying degrees, have also experienced reduced
revenues as a result of recessionary conditions and other factors.
At the time of the closing for each Colorado Trust, Special Counsel to the
Fund for Colorado tax matters rendered an opinion under then existing Colorado
income tax law applicable to taxpayers whose income is subject to Colorado
income taxation substantially to the effect that:
Because Colorado income tax law is based upon the Federal law, the Colorado
Trust is not an association taxable as a corporation for purposes of Colorado
income taxation.
With respect to Colorado Unitholders, in view of the relationship between
Federal and Colorado tax computations described above:
(1)Each Colorado Unitholder will be treated as owning a pro rata share of each
asset of the Colorado Trust for Colorado income tax purposes in the proportion
that the number of Units of such Trust held by the Unitholder bears to the
total number of outstanding Units of the Colorado Trust, and the income of the
Colorado Trust will therefore be treated as the income of each Colorado
Unitholder under Colorado law in the proportion described;
(2)Interest on Bonds that would not be includable in income for Colorado
income tax purposes when paid directly to a Colorado Unitholder will be exempt
from Colorado income taxation when received by the Colorado Trust and
attributed to such Colorado Unitholder and when distributed to such Colorado
Unitholder;
(3)Any proceeds paid under an insurance policy or policies issued to the
Colorado Trust with respect to the Bonds in the Colorado Trust which represent
maturing interest on defaulted obligations held by the Trustee will be
excludable from Colorado adjusted gross income if, and to the same extent as,
such interest would have been so excludable if paid in the normal course by
the issuer of the defaulted obligations;
(4)Any proceeds paid under individual policies obtained by issuers of Bonds in
the Colorado Trust which represent maturing interest on defaulted obligations
held by the Trustee will not be includable in income for Colorado income tax
purposes if, and to the same extent as, such interest would have been so
excludable if paid in the normal course by the issuer of the defaulted
obligations;
(5)Each Colorado Unitholder will realize taxable gain or loss when the
Colorado Trust disposes of a Bond (whether by sale, exchange, redemption, or
payment at maturity) or when the Colorado Unitholder 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 Colorado Unitholder's share of interest, if
any, accruing on Bonds during the interval between the Colorado Unitholder's
settlement date and the date such Bonds are delivered to the Colorado Trust,
if later);
(6)Tax cost reduction requirements relating to amortization of bond premium
may, under some circumstances, result in Colorado Unitholders realizing
taxable gain when their Units are sold or redeemed for an amount equal to or
less than their original cost; and
(7)If interest on indebtedness incurred or continued by a Colorado Unitholder
to purchase Units in the Colorado Trust is not deductible for federal income
tax purposes, it also will be
non-deductible for Colorado income tax purposes.
Unitholders should be aware that all tax-exempt interest, including their
share of interest on the Bonds paid to the Colorado Trust, is taken into
account for purposes of determining eligibility for the Colorado Property
Tax/Rent/Heat Rebate.
Connecticut Trusts
Investors should be aware that manufacturing was historically the most
important economic activity within the State of Connecticut but, in terms of
number of persons employed, manufacturing has declined in the last ten years
while both trade and service-related industries have become more important,
and in 1992 manufacturing accounted for only 20.1% of total non-agricultural
employment in Connecticut. Defense-related business represents a relatively
high proportion of the manufacturing sector; reductions in defense spending
have already had a substantial adverse effect on Connecticut's economy, and
the State's largest defense contractors have announced substantial planned
labor force reductions scheduled to occur over the next four years.
Connecticut is now in a recession, the depth and duration of which are
uncertain. Moreover, while unemployment in the State as a whole has generally
remained below the national level, as of May 1993, the estimated rate of
unemployment in Connecticut on a seasonally adjusted basis was 7.4% compared
to 6.9% for the United States as a whole, and certain geographic areas in the
State have been affected by high unemployment and poverty. The State derives
over 70% of its revenues from taxes imposed by it, the most important of which
have been the sales and use taxes and the corporation business tax, each of
which is sensitive to changes in the level of economic activity in the State,
but the Connecticut income tax on individuals, trusts, and estates enacted in
1991 is expected to supersede each of them in importance. There can be no
assurance that general economic difficulties or the financial circumstances of
the State or its towns and cities will not adversely affect the market value
of the Bonds in the Connecticut Trust or the ability of the obligors to pay
debt service on such Bonds.
The General Fund budget adopted by Connecticut for the 1986-87 fiscal year
contemplated both revenues and expenditures of $4,300,000,000. The General
Fund ended the 1986-87 fiscal year with a surplus of $365,200,000. The General
Fund budget for the 1987-88 fiscal year contemplated General Fund revenues and
expenditures of $4,915,800,000. However, the General Fund ended the 1987-88
fiscal year with a deficit of $115,600,000. The General Fund budget adopted
for the 1988-89 fiscal year anticipated that General Fund expenditures of
$5,551,000,000 and certain educational expenses of $206,700,000 not previously
paid through the General Fund would be funded in part from surpluses of prior
years and in part from higher tax revenues projected to result from tax laws
in effect for the 1987-88 fiscal year and stricter enforcement thereof; a
substantial deficit was projected during the third quarter of the 1988-89
fiscal year, but largely because of tax law changes that took effect before
the end of the fiscal year, the deficit was kept to $28,000,000. The General
Fund budget adopted for the 1989-90 fiscal year anticipated expenditures of
approximately $6,224,500,000 and, by virtue of tax increase legislation
enacted to take effect generally at the beginning of the fiscal year, revenues
slightly exceeding such amount. However, largely because of tax revenue
shortfalls, the General Fund ended the 1989-90 fiscal year with a deficit for
the year of $259,500,000, wiping out reserves for such events built up in
prior years. The General Fund budget adopted for the 1990-91 fiscal year
anticipated expenditures of $6,433,000,000, but no significant new or
increased taxes were enacted. Primarily because of significant declines in tax
revenues and unanticipated expenditures reflective of economic adversity, the
General Fund ended the 1990-91 fiscal year alone with a further deficit of
$809,000,000.
A General Fund budget for the 1991-92 fiscal year was not enacted until August
22, 1991. This budget anticipates General Fund expenditures of $7,007,861,328
and revenues of $7,426,390,000. Projected decreases in revenues resulting from
a 25% reduction in the sales tax rate effective October 1, 1991, the repeal of
the taxes on the capital gains and interest and dividend income of resident
individuals for years starting after 1991, and the phase-out of the
corporation business tax surcharge over two years commencing with taxable
years starting after 1991 were expected to be more than offset by a new
general income tax imposed at effective rates not to exceed 4.5% on the
Connecticut taxable income of resident and non-resident individuals, trusts
and estates. The General Fund ended the 1991-92 fiscal year with an operating
surplus of $110,000,000. The General Fund budget for the 1992-93 fiscal year
anticipated General Fund expenditures of $7,372,062,859 and revenues of
$7,372,210,000. The General Fund ended the 1992-93 fiscal year with an
operating surplus of $113,500,000. Balanced General Fund budgets for the
biennium ending June 30, 1995, have been adopted appropriating expenditures of
$7,828,900,000 for the 1993-94 fiscal year and $8,266,000,000 for the 1994-95
fiscal year. In addition, expenditures of Federal, State and local funds in
the ten years started July 1, 1984 for repair of the State's roads and bridges
now projected at $9,500,000,000 are anticipated, the State's share of which
would be financed by bonds expected to total $3,700,000,000 and by direct
payments both of which would be supported by a Special Transportation Fund
first created by the General Assembly for the 1984-85 fiscal year.
To fund operating cash requirements, prior to the 1991-92 fiscal year the
State borrowed up to $750,000,000 pursuant to authorization to issue
commercial paper and on July 29, 1991, it issued $200,000,000 of General
Obligation Temporary Notes, none of which temporary borrowings are currently
outstanding. To fund the cumulative General Fund deficit for the 1989-90 and
1990-91 fiscal years, the legislation enacted August 22, 1991, authorized the
State Treasurer to issue Economic Recovery Notes up to the aggregate amount of
such deficit, which must be payable no later than June 30, 1996; at least
$50,000,000 of such Notes, but not more than a cap amount, is to be retired
each fiscal year commencing with the 1991-92 fiscal year, and any
unappropriated surplus up to $205,000,000 in the General Fund at the end of
each of the three fiscal years commencing with the 1991-92 fiscal year must be
applied to retire such Notes as may remain outstanding at those times. On
September 25, 1991, and October 24, 1991, the State issued $640,710,000 and
$325,002,000, respectively, of such Economic Recovery Notes, of which
$705,610,000 was outstanding as of October 1, 1993.
As a result of the State's budget problems, the ratings of its general
obligation bonds were reduced by Standard & Poor's from AA+ to AA on March 29,
1990, and by Moody's from Aa1 to Aa on April 9, 1990. Moreover, because of
these problems, on September 13, 1991, Standard & Poor's reduced its ratings
of the State's general obligation bonds and certain other obligations that
depend in part on the creditworthiness of the State to AA . On March 7, 1991,
Moody's downgraded its ratings of the revenue bonds of four Connecticut
hospitals because of the effects of the State's restrictive controlled
reimbursement environment under which they have been operating.
General obligation bonds issued by Connecticut municipalities are payable
primarily only from ad valorem taxes on property subject to taxation by the
municipality. Certain Connecticut municipalities have experienced severe
fiscal difficulties and have reported operating and accumulated deficits in
recent years. The most notable of these is the City of Bridgeport, which filed
a bankruptcy petition on June 7, 1991. The State opposed the petition. The
United States Bankruptcy Court for the District of Connecticut has held that
Bridgeport has authority to file such a petition but that its petition should
be dismissed on the grounds that Bridgeport was not insolvent when the
petition was filed. Regional economic difficulties, reductions in revenues,
and increased expenses could lead to further fiscal problems for the State and
its political subdivisions, authorities, and agencies. Difficulty in payment
of debt service on borrowings could result in declines, possibly severe, in
the value of their outstanding obligations and increases in their future
borrowing costs.
The assets of the Connecticut Trust will consist of obligations (the "Bonds");
certain of the Bonds have been issued by or on behalf of the State of
Connecticut or its political subdivisions or other public instrumentalities,
state or local authorities, districts, or similar public entities created
under the laws of the State of Connecticut ("Connecticut Bonds") and the
balance of the Bonds have been issued by or on behalf of entities classified
for the relevant purposes as territories or possessions of the United States,
including one or more of Puerto Rico, Guam, or the Virgin Islands, the
interest on the obligations of which Federal law would prohibit Connecticut
from taxing if received directly by the Unitholders. Certain Connecticut Bonds
in the Connecticut Trust were issued prior to the enactment of the Connecticut
income tax on the Connecticut taxable income of individuals, trusts, and
estates (the "Connecticut Income Tax"); therefore, bond counsel to the issuers
of such Bonds did not opine as to the exemption of the interest on such Bonds
from such tax. However, the Sponsor and special counsel to the Trusts for
Connecticut tax matters believe that such interest will be so exempt. Interest
on Bonds in the Connecticut Trust issued by other issuers, if any, is, in the
opinion of bond counsel to such issuers, exempt from state taxation.
The Connecticut income tax was enacted in August, 1991. Generally, a
Unitholder recognizes gain or loss for purposes of this tax to the same extent
as he recognizes gain or loss for Federal income tax purposes. Ordinarily this
would mean that gain or loss would be recognized by a Unitholder upon the
maturity, redemption, sale, or other disposition by the Connecticut Trust of a
Bond held by it, or upon the redemption, sale, or other disposition of a Unit
of a Connecticut Trust held by the Unitholder.
However, on June 19, 1992, Connecticut legislation was adopted that provides
that gains and losses from the sale or exchange of Connecticut Bonds held as
capital assets will not be taken into account for purposes of the Connecticut
Income Tax for taxable years starting on or after January 1, 1992. It is not
clear whether this provision would apply to gain or loss recognized by a
Unitholder upon the maturity or redemption of a Connecticut Bond held by the
Connecticut Trust or, to the extent attributable to Connecticut Bonds held by
the Connecticut Trust, to gain or loss recognized by a Unitholder upon the
redemption, sale, or other disposition of a Unit of the Connecticut Trust held
by the Unitholder. Unitholders are urged to consult their own tax advisors
concerning these matters.
At the time of the closing for each Connecticut Trust, Special Counsel to the
Fund for Connecticut tax matters rendered an opinion under then existing
Connecticut income tax law applicable to taxpayers whose income is subject to
Connecticut income taxation substantially to the effect that:
The Connecticut Trust is not liable for any tax on or measured by net income
imposed by the State of Connecticut.
Interest income of the Connecticut Trust from a Bond issued by or on behalf of
the State of Connecticut, any political subdivision thereof, or public
instrumentality, state or local authority, district, or similar public entity
created under the laws of the State of Connecticut (a "Connecticut Bond"), or
from a Bond issued by United States territories or possessions the interest on
which Federal law would prohibit Connecticut from taxing if received directly
by a Unitholder from the issuer thereof, is not taxable under the Connecticut
tax on the Connecticut taxable income of individuals, trusts, and estates (the
"Connecticut Income Tax"), when any such interest is received by the
Connecticut Trust or distributed by it to such a Unitholder.
Insurance proceeds received by the Connecticut Trust representing maturing
interest on defaulted Bonds held by the Connecticut Trust is not taxable under
the Connecticut Income Tax if, and to the same extent as, such interest would
not be taxable thereunder if paid directly to the Connecticut Trust by the
issuer of such Bonds.
Gains and losses recognized by a Unitholder for Federal income tax purposes
upon the maturity, redemption, sale, or other disposition by the Connecticut
Trust of a Bond held by the Connecticut Trust or upon the redemption, sale, or
other disposition of a Unit of the Connecticut Trust held by a Unitholder are
taken into account as gains or losses, respectively, for purposes of the
Connecticut Income Tax, except that, in the case of a Unitholder holding a
Unit of the Connecticut Trust as a capital asset, such gains and losses
recognized upon the sale or exchange of a Connecticut Bond held by the
Connecticut Trust are excluded from gains and losses taken into account for
purposes of such tax and no opinion is expressed as to the treatment for
purposes of such tax of gains and losses recognized upon the maturity or
redemption of a Connecticut Bond held by the Connecticut Trust or, to the
extent attributable to Connecticut Bonds, of gains and losses recognized upon
the redemption, sale, or other disposition by a Unitholder of a Unit of the
Connecticut Trust held by him.
The portion of any interest income or capital gain of the Connecticut Trust
that is allocable to a Unitholder that is subject to the Connecticut
corporation business tax is includable in the gross income of such Unitholder
for purposes of such tax.
An interest in a Unit of the Connecticut Trust that is owned by or
attributable to a Connecticut resident at the time of his death is includable
in his gross estate for purposes of the Connecticut succession tax and the
Connecticut estate tax.
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.
Florida's housing starts since 1980 have represented an average of 11.5% of
the U.S.'s total annual starts, and except for the recession years 1980-82,
and the recession beginning 1990, starts have exceeded 160,000 a year.
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 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. Tourism is one of Florida's most important industries. Approximately
39.3 million tourists visited the State in 1991, as reported by the Florida
Department of Commerce. In terms of business activities and state tax
revenues, tourists in Florida in 1991 represented as estimated 4.4 million
additional residents. Visitors to the State tend to arrive equally by air and
car. The State's tourism industry over the years has become more
sophisticated, attracting visitors year-round and, to a degree, reducing its
seasonality. Tourist arrivals should be slightly negatively impacted as a
result of Hurricane Andrew, but should recover and approximate in 1993-94 the
number expected prior to the storm. When the final numbers are in, it is
expected that by the end of the State's current fiscal year, 41.9 million
domestic and international tourists will have visited the State, up 7.8% from
the 39 million tourists that visited Florida in 1991-92. In 1993-94, tourist
arrivals should approximate 43.2 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 is expected to follow a course similar to that of the nation,
growing at 0.3% in 1991-92 and 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 the 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 (Social Security and pension benefits, among other sources
of income) are relatively more important sources 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 1991-92, 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 68%, 7% and 5%,
respectively, of total receipts by the General Revenue Fund during fiscal
1991-92. In that same year, expenditures for education, health and welfare,
and public safety amounted to 53%, 30% and 13.3%, respectively, of total
expenditures from the General Revenue Fund.
Hurricane Andrew left some parts of south Florida devastated. Post-Hurricane
Andrew cleanup and rebuilding have changed the outlook for the State's
economy. Single and multi-family housing starts in 1992-93 are projected to
reach a combined level of 116,800, and to increase to 148,100 in 1993-94.
Lingering recessionary effects on consumers and tight credit are two of the
reasons for relatively slow core construction activity, as well as lingering
effects from the 1986 tax reform legislation discussed above. However,
construction is one of the sectors most severely affected by Hurricane Andrew.
The construction figures above include, over the two year period, more than
20,000 additional housing starts as a result of destruction by Hurricane
Andrew. Total construction expenditures are forecasted to increase 11.1% this
year and increase 23.7% next year.
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 1991-1992. The $11,859.2 million in combined Estimated
Revenues and revenue generating measures represents 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.
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, 1992, sales and use tax receipts (exclusive of
the tax on gasoline and special fuels) totalled $8,375.5 million, an increase
of 2.7% over fiscal year 1990-91.
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 $435.2 million in fiscal year ending June 30, 1992.
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 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, 1992, receipts from this source were $801.3 million, an increase of 14.2%
from fiscal year 1990-91.
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 $472.4 million during fiscal year 1991-92, a 0.5% increase
from the previous fiscal year. For the fiscal year 1990-91, 76.21% of the
documentary stamp tax revenues was deposited to the General Revenue Fund.
Beginning in fiscal year 1992-93, 71.29% 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% for use in
enhancing education, and the balance, 12.0% for costs of administering the
lottery. Fiscal year 1991-92 lottery ticket sales totalled $2.19 billion,
providing education with $835.4 million.
The State's severance tax applies to oil, gas, and sulphur production, as well
as the severance of phosphate rock and other solid minerals. Total collections
from severance taxes total $67.2 million during fiscal year 1991-92, down 6.9%
from the previous year. Beginning in fiscal year 1989-90, 60.0% of this amount
was transferred to the General Revenue Fund. The 60.0% allocation is expected
to continue.
Debt-Balanced Budget Requirement. At the end of fiscal 1992, approximately
$4.52 billion in principal amount of debt secured by the full faith and credit
of the State was outstanding. In addition, since July 1,1992, the State issued
about $274 million in principal amount of full faith and credit bonds.
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
believe 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.
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 affect 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 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 Municipal Obligations purchased by the Fund will not be adversely
affected by any such changes. The sources for the information 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.
At the time of the closing for each Florida Trust, Chapman and Cutler, Counsel
to each Florida Trust 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:
For Florida state income tax purposes, the Florida Trust will not be subject
to the Florida income tax imposed by Chapter 220, Florida Statutes. In
addition, Florida does not impose any income taxes at the local level.
Because Florida does not impose an income tax on individuals, non-corporate
Unitholders residing in Florida will not be subject to any Florida income
taxation on income realized by the Florida Trust. Any amounts paid to the
Florida Trust or to non-corporate Unitholders residing in Florida under an
insurance policy issued to the Florida Trust or the Sponsor 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 Unitholders with commercial domiciles in Florida will be subject to
Florida income or franchise taxation on income realized by the Florida Trust
and on payments of interest pursuant to any insurance policy. Other corporate
Unitholders will be subject to Florida income or franchise taxation on income
realized by the Florida Trust (or on payments of interest pursuant to any
insurance policy) only to the extent that the income realized does not
constitute "non-business income" as defined by Chapter 220.
Units will be subject to Florida estate tax only if held by Florida residents.
However, the Florida estate tax is limited to the amount of the credit for
state death taxes provided for in Section 2011 of the Internal Revenue Code.
Neither the Bonds nor the Units will be subject to the Florida ad valorem
property tax, the Florida intangible personal property tax or Florida sales or
use tax.
Georgia Trusts
Georgia ended its 1992 fiscal year on June 30, 1992 with four straight months
of strong revenue collections, enabling the State to avoid spending cuts or
worker layoffs. Georgia's revenues in June 1992 were 6.3% above those in June
1991. This performance followed three previous months with revenue collections
of more than 6% over the 1991 period. With final figures in for the 1992
fiscal year, Georgia fell only $10 million, or 0.1%, short of revenue expected
to cover 1992 expenditures. This difference was made up from money allocated
for but not used by State agencies. The Governor plans to reduce the budget
for fiscal 1993 by $75 million, to $8.10 billion, with the cuts based on a new
revenue estimate for fiscal 1994. These reductions combined with $44 million
collected from a tax-annuity program would give the state a surplus of about
$120 million for fiscal 1993.
The Georgia economy has performed relatively well during recent years and
generally has expanded at a rate greater than the national average during that
period. However, growth in 1988 and 1989 through 1992 has slowed somewhat and
was modest compared to the robust pace of the early 1980s. Georgia's leading
economic indicators currently suggest that the rate of growth of the Georgia
economy will continue at the pace of 1988 and 1989 and more closely match the
national economy. According to November 1992 figures, the seasonably adjusted
unemployment rate in Georgia is 6.4%. Although many areas of the economy are
expected to continue to perform strongly, some areas such as the primary
metals, carpet and apparel industries are still experiencing periods of
weakness, and others, such as construction and construction-related
manufacturing activities (e.g., lumber, furniture and stone/clay products),
currently show signs of weakening. In addition, aircraft manufacturers located
within the State are in a tenuous position due to reductions in the Federal
Defense budget. Presently, Georgia continues to lead the nation in the
production of pulp, pulpwood and paper. Other industries show potential for
great expansion, but policy considerations, tax reform laws, foreign
competition, and other factors may render these industries less productive.
Since Bonds in the Georgia Trust (other than general obligation bonds issued
by the state) are payable from revenue derived from a specific source or
authority, the impact of a pronounced decline in the national economy or
difficulties in significant industries within the state could result in a
decrease in the amount of revenues realized from such source or by such
authority and thus adversely affect the ability of the respective issuers of
the Bonds in the Georgia Trust to pay the debt service requirements on the
Bonds. Similarly, such adverse economic developments could result in a
decrease in tax revenues realized by the State and thus could adversely affect
the ability of the State to pay the debt service requirements of any Georgia
general obligation bonds in the Georgia Trust.
Currently Moody's rates Georgia general obligation bonds Aaa and Standard &
Poor's rates such bonds AA+.
Several lawsuits have been filed against the State asserting that the decision
in Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989), invalidates
the State's tax treatment of Federal Retirement Benefits for years prior to
1989. Under the State's applicable 3 year statute of limitation the maximum
potential liability under these suits calculated to April 1, 1992 would appear
to be no greater than 128 million dollars. The plaintiffs in these suits,
however, have requested refunds for a period from 1980 which could result in a
maximum potential liability in the range of 591 million dollars. Any such
liability would be predicated on a holding by a State of Georgia court or the
United States Supreme Court that the Davis decision is applicable to the
State's prior method of taxing Federal Retirement Benefits, that the Davis
decision is to be given a retroactive effect, i.e., that the decision affects
prior tax years and that a refund remedy is appropriate. A trial court
decision in Georgia's "test case" has held that no refunds are due; the
Georgia Supreme Court has the case under consideration. In this "test case"
the plaintiff has dropped his claims for 1980-1984 refunds.
At the time of the closing for each Georgia Trust, Special Counsel to the Fund
for Georgia tax matters rendered an opinion under then existing Georgia income
tax law applicable to taxpayers whose income is subject to Georgia income
taxation substantially to the effect that:
(1)For Georgia income tax purposes, the Georgia Trust is not an association
taxable as a corporation, and the income of the Georgia Trust will be treated
as the income of the Unitholders. Interest on the Georgia Bonds which is
exempt from Georgia income tax when received by the Georgia Trust, and which
would be exempt from Georgia income tax if received directly by a Unitholder,
will retain its status as tax-exempt interest when distributed by the Georgia
Trust and received by the Unitholders.
(2)If the Trustee disposes of a Georgia Bond (whether by sale, exchange,
payment on maturity, retirement or otherwise) or if a Unitholder redeems or
sells his Unit, the Unitholder will recognize gain or loss for Georgia income
tax purposes to the same extent that gain or loss would be recognized for
federal income tax purposes (except in the case of Georgia Bonds issued before
March 11, 1987 issued with original issue discount owned by the Georgia Trust
in which case gain or loss for Georgia income tax purposes would be determined
by accruing said original issue discount on a ratable basis.) Due to the
amortization of bond premium and other basis adjustments required by the
Internal Revenue Code, a Unitholder, under some circumstances, may realize
taxable gain when his or her Units are sold or redeemed for an amount equal to
their original cost.
(3)Because obligations or evidences of debt of Georgia, its political
subdivisions and public institutions and bonds issued by the Government of
Puerto Rico are exempt from the Georgia intangible personal property tax, the
Georgia Trust will not be subject to such tax as the result of holding such
obligations, evidences of debt or bonds. Although there currently is no
published administrative interpretation or opinion of the Attorney General of
Georgia dealing with the status of bonds issued by a political subdivision of
Puerto Rico, we have in the past been advised orally by representatives of the
Georgia Department of Revenue that such bonds would also be considered exempt
from such tax. Based on that advice, and in the absence of a published
administrative interpretation to the contrary, we are of the opinion that the
Georgia Trust would not be subject to such tax as the result of holding bonds
issued by a political subdivision of Puerto Rico.
(4)Amounts paid under an insurance policy or policies issued to the Georgia
Trust, if any, with respect to the Georgia Bonds in the Georgia Trust which
represent maturing interest on defaulted obligations held by the Trustee will
be exempt from State income taxes if, and to the extent as, such interest
would have been so exempt if paid by the issuer of the defaulted obligations.
(5)We express no opinion regarding whether a Unitholder's ownership of an
interest in the Georgia Trust is subject to the Georgia intangible personal
property tax. Although the application of the Georgia intangible property tax
to the ownership of the Units by the Unitholders is not clear, representatives
of the Georgia Department of Revenue have in the past advised us orally that,
for purposes of the intangible property tax, the Department considers a
Unitholder's ownership of an interest in the Georgia Trust as a whole to be
taxable intangible property separate from any ownership interest in the
underlying tax-exempt Georgia Bonds.
(6)Neither the Georgia Bonds nor the Units will be subject to Georgia sales or
use tax.
Louisiana Trusts
The following discussion regarding the financial condition of the state
government may not be relevant to general obligation or revenue bonds issued
by political subdivisions of and other issuers in the State of Louisiana (the
"State"). Such information, and the following discussion regarding the economy
of the State, is based upon information about general economic conditions that
may or may not affect issuers of the Louisiana obligations. The Sponsor has
not independently verified any of the information contained in such publicly
available documents, but is not aware of any facts which would render such
information inaccurate. On December 19, 1990 the State received a rating
upgrade on its general obligation bonds to the current Standard & Poor's
rating of A from BBB-plus and was placed on Standard & Poor's Corporation's
positive credit watch. Standard & Poor's cited improvements in the State's
cash flow and fiscal reforms approved by voters in the fall of 1990. The
current Moody's rating on the State's general obligation bonds remains
unchanged at BBB-plus. There can be no assurance that the economic conditions
on which these ratings were based will continue or that particular bond issues
may not be adversely affected by changes in economic or political conditions.
The Revenue Estimating Conference (the "Conference") was established by Act
No. 814 of the 1987 Regular Session of the State Legislature. The Conference
was established by the Legislature to provide an official estimate of
anticipated State revenues upon which the executive budget shall be based, to
provide for a more stable and accurate method of financial planning and
budgeting and to facilitate the adoption of a balanced budget as is required
by Article VII, Section 10(B) of the State Constitution. Act No. 814 provides
that the Governor shall cause to be prepared an executive budget presenting a
complete financial and programmatic plan for the ensuing fiscal year based
only upon the official estimate of anticipated State revenues as determined by
the Revenue Estimating Conference. Act No. 814 further provides that at no
time shall appropriations or expenditures for any fiscal year exceed the
official estimate of anticipated State revenues for that fiscal year. During
the 1990 Regular Session of the Louisiana Legislature a constitutional
amendment was approved (Act No. 1096), which was approved by the State
electorate, granting constitutional status to the existence of the Revenue
Estimating Conference without altering its structure, powers, duties and
responsibilities which are currently provided by statute.
The State General Fund is the principal operating fund of the State, and was
established administratively to provide for the distribution of funds
appropriated by the State Legislature for the ordinary expenses of the State
government. Revenue is provided from the direct deposit of federal grants and
the transfer of State revenues from the Bond Security and Redemption Fund
after general obligation debt requirements are met. The Revenue Estimating
Conference met in February of 1991 and reported a projected $437.5 million
State General Fund surplus for the fiscal year ending June 30, 1991. This
surplus will be available for expenditures during the Fiscal Year 1991-92. The
beginning State General Fund surplus for fiscal year 1990-1991 was $702.3
million. The official recurring State General Fund estimate for Fiscal Year
1990-91 (Revenue Estimating Conference February 1991 as revised April 1991) is
$4,173.5 million.
The Transportation Trust Fund was established pursuant to (i) Section 27 of
Article VII of the State Constitution and (ii) Act No. 16 of the First
Extraordinary Session of the Louisiana Legislature for the year 1989
(collectively the "Act") for the purpose of funding construction and
maintenance of state and federal roads and bridges, the statewide
flood-control program, ports, airports, transit and state police traffic
control projects and to fund the Parish Transportation Fund. The
Transportation Trust Fund is funded by a levy of $0.20 per gallon on gasoline
and motor fuels and on special fuels (diesel, propane, butane and compressed
natural gas) used, sold or consumed in the state (the "Gasoline and Motor
Fuels Taxes and Special Fuels Taxes"). This levy was increased from $0.16 per
gallon (the "Existing Taxes") to the current $0.20 per gallon pursuant to Act
No. 16 of the First Extraordinary Session of the Louisiana Legislature for the
year 1989, as amended. The additional tax of $0.04 per gallon (the "Act 16
Taxes") became effective January 1, 1990 and will expire on the earlier of
January 1, 2005 or the date on which obligations secured by the Act No. 16
taxes are no longer outstanding. The Transportation Infrastructure Model for
Economic Development Account (the "TIME Account") was established in the
Transportation Trust Fund. Moneys in the TIME account will be expended for
certain projects identified in the Act aggregating $1.4 billion and to fund
not exceeding $160 million of additional capital transportation projects. The
State issued $263,902,639.95 of Gasoline and Fuels Tax Revenue Bonds, 1990
Series A, dated April 15, 1990 payable from the (i) Act No. 16 Taxes, (ii) any
Act No. 16 Taxes and Existing Taxes deposited in the Transportation Trust
Fund, and (iii) any additional taxes on gasoline and motor fuels and special
fuels pledged for the payment of said Bonds.
The Louisiana Recovery District (the "Recovery District") was created pursuant
to Act No. 15 of the first Extraordinary Session of the Legislature of
Louisiana of 1988 to assist the State in the reduction and elimination of a
deficit existing at that time and the delivery of essential services to its
citizens and to assist parishes, cities and other units of local government
experiencing cash flow difficulties. The Recovery District is a special taxing
district the boundaries of which are coterminous with the State and is a body
politic and corporate and a political subdivision of the State. The Recovery
District issued $979,125,000 of Louisiana Recovery District Sales Tax Bonds,
Series 1988, dated July 1, 1988, secured by (i) the revenues derived from the
District's 1% statewide sales and use tax remaining after the costs of
collection and (ii) all funds and accounts held under the Recovery District's
General Bond Resolution and all investment earnings on such funds and
accounts. As of June 30, 1990, the principal amount outstanding was
$851,880,000. The Legislature passed tax measures which are projected to raise
approximately $418 million in additional revenues for Fiscal Year 1990-91, the
most important of which include the following: sales tax $328.3 million;
hazardous waste tax $41.3 million; severance tax $39.2 million; income tax
$14.9 million; and tobacco tax $14.0 million. The Legislature also passed
several constitutional amendments which were approved by the state electorate,
resulting in comprehensive budgetary reforms mandating that: both proposed and
adopted budgets be balanced in accordance with the official forecast of the
Revenue Estimating Conference; any new tax proposal be tied to specific
expenditures; all mineral revenues earned by the State in excess of $750
million be placed in the Revenue Stabilization Mineral Trust Fund, to be used
as a "rainy day fund"; and, the regular legislative session must end prior to
the completion of the fiscal year in order to streamline budgetary reporting
and planning. The Legislature also adopted a proposed constitutional amendment
which was approved by the State electorate permitting the creation of a
Louisiana lottery. The lottery is projected to generate approximately $111
million per year in net revenues for the State. Only local governmental units
levy ad valorem taxes at present. Under the 1921 State Constitution a 5.75
mills ad valorem tax was being levied by the State until January 1, 1973 at
which time a constitutional amendment to the 1921 Constitution abolished the
ad valorem tax. Under the 1974 State Constitution a State ad valorem tax of up
to 5.75 mills was provided for but is not presently being levied. The property
tax is underutilized at the parish level due to a constitutional homestead
exemption from the property tax applicable to the first $75,000 of the full
market value of single family residences. Homestead exemptions do not apply to
ad valorem property taxes levied by municipalities, with the exception of the
City of New Orleans. Since local governments are also prohibited from levying
an individual income tax by the constitution, their reliance on State
government is increased under the existing tax structure.
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 Louisiana Trust 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 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 Louisiana Trust
to pay interest on or principal of the Bonds.
At the time of the closing for each Louisiana Trust Special Counsel to each
Louisiana Trust for Louisiana tax matters, rendered an opinion under then
existing Louisiana income tax law applicable to taxpayers whose income is
subject to Louisiana income taxation substantially to the effect that:
(1)The Louisiana Trust will be treated as a trust for Louisiana income tax
purposes and not as an association taxable as a corporation.
(2)The Louisiana income tax on resident individuals is imposed upon the "tax
table income" of resident individuals. The calculation of the "tax table
income" of a resident individual begins with federal adjusted gross income.
Certain modifications are specified, but no such modification requires the
addition of interest on obligations of the State of Louisiana and its
political subdivisions, public corporations created by them and constitutional
authorities thereof authorized to issue obligations on their behalf.
Accordingly, amounts representing interest excludable from gross income for
federal income tax purposes received by the Louisiana Trust with respect to
such obligations will not be taxed to the Louisiana Trust, or, except as
provided below, to the resident individual Unitholder, for Louisiana income
tax purposes. In addition to the foregoing, interest on the respective
Securities may also be exempt from Louisiana income taxes pursuant to the
statutes authorizing their issuance.
(3)To the extent that gain from the sale, exchange or other disposition of
obligations held by the Louisiana Trust (whether as a result of a sale or
exchange of such obligations by the Louisiana Trust or as a result of a sale
or exchange of a Unit by a Unitholder) is includable in the federal adjusted
gross income of a resident individual, such gain will be included in the
calculation of the Unitholder's Louisiana taxable income; and
(4)Gain or loss on the Unit or as to underlying bonds for Louisiana income tax
purposes would be determined by taking into account the basis adjustments for
federal income tax purposes described in this Prospectus.
As no opinion is expressed regarding the Louisiana tax consequences of
Unitholders other than individuals who are Louisiana residents, tax counsel
should be consulted by other prospective Unitholders. The Internal Revenue
Code of 1986, as amended (the "1986 Code"), contains provisions relating to
investing in tax-exempt obligations (including, for example, corporate minimum
tax provisions which treat certain tax-exempt interest and corporate book
income which may include tax-exempt interest, as tax preference items,
provisions reducing the deductibility of interest expense by financial
institutions) which could have a corresponding effect on the Louisiana tax
liability of the Unitholders.
In rendering the opinions expressed above, counsel has relied upon the opinion
of Chapman and Cutler that the Louisiana Trust is not an association taxable
as a corporation for Federal income tax purposes, that each Unitholder of the
Louisiana Trust will be treated as the owner of a pro rata portion of such
Louisiana Trust under the 1986 Code and that the income of the Louisiana Trust
will be treated as income of the Unitholders under the 1986 Code.
Tax counsel should be consulted as to the other Louisiana tax consequences not
specifically considered herein, and as to the Louisiana tax status of
taxpayers other than resident individuals who are Unitholders in the Louisiana
Trust. In addition, no opinion is being rendered as to Louisiana tax
consequences resulting from any proposed or future federal or state tax
legislation.
Massachusetts Trusts
The Massachusetts Economy. At the present time, the Massachusetts economy is
experiencing a slowdown. While Massachusetts had benefitted from an annual job
growth rate of approximately 2% since the early 1980s, by 1989, employment had
started to decline. Nonagricultural employment declined 0.7% in fiscal 1989,
4.0% in fiscal 1990, 5.5% in fiscal 1991,1.5% in fiscal 1992, and 0.8% in
fiscal 1993. A comparison of total, nonagricultural employment in August 1992
with that in August 1993 indicates a decline of 0.4%.
From 1980 to 1989, Massachusetts' unemployment rate was significantly lower
than the national average. By 1990, however, unemployment reached 6.0%,
exceeding the national average for the first time since 1977. Massachusetts'
unemployment rate averaged 9.0% in fiscal 1991 and 8.5% in fiscal 1992. The
Massachusetts unemployment rate was 8.2% as of January 1993, and 6.8% as of
July 1993.
In recent years, per capita personal income growth in Massachusetts has
slowed, after several years during which it was among the highest in the
nation. Between the first quarter of fiscal 1991 and the first quarter of
fiscal 1992, aggregate personal income in Massachusetts increased 2.6% as
compared to 4.1% for the nation as a whole. Between the second quarter of 1991
and the second quarter of 1992, aggregate personal income in Massachusetts
increased 3.9% as compared to 4.7% for the nation as a whole.
The Commonwealth, while the third most densely populated state according to
the 1990 census, has experienced only a modest increase in population from
1980 to 1990 at a rate equal to approximately one-half the rate of increase in
the United States population as a whole. Preliminary information compiled by
the Commonwealth suggests that out-migration has increased in recent years.
Massachusetts possesses a diversified economic base which includes traditional
manufacturing, high technology and service industries, served by an extensive
transportation system and related facilities. The Massachusetts service
sector, at approximately 33.5% of the state work force in August of 1993, is
the largest sector in the Massachusetts economy. Government employment is
below the national average, representing less than 14% of the Massachusetts
work force. In recent years, the construction, manufacturing and trade sectors
have experienced the greatest decreases in employment in Massachusetts, with
more modest declines taking place in the government, finance, insurance and
real estate, and service sectors. From 1990 to December of 1992, manufacturing
employment in Massachusetts declined by some 12.5%, and more recently, from
August 1992 to August 1993, declined by about 4.2%. At the same time, there
has occurred a reversal of the dramatic growth which occurred during the
1980's in the finance, insurance and real estate sector and in the
construction sector of the Massachusetts economy.
Over the next decade, Massachusetts has a very full public construction agenda
which is expected not only to improve mobility, but to provide a substantial
number of construction and related employment opportunities, including the six
billion dollar Central Artery Tunnel project involving the construction of a
third tunnel under Boston Harbor linking the MassPike and downtown Boston with
Logan International Airport, and the depression into tunnels of the Central
Artery than traverses the City of Boston. Federal funds are expected to cover
approximately 90% of the cost of this project. The Central Artery/Tunnel
project is expected to employ approximately 5,000 on-site workers and 10,000
auxiliary workers during the peak years of construction in the mid-1990s.
State Finances. In fiscal years 1987 through 1991, Commonwealth spending
exceeded revenues. Spending in five major expenditure categories-Medicaid,
debt service, public assistance, group health insurance and transit
subsidies-grew at rates well in excess of the rate of inflation for the
comparable period. During the same period, the Commonwealth's tax revenues
repeatedly failed to meet official forecasts. That revenue shortfall combined
with steadily escalating costs contributed to serious budgetary and financial
difficulties which have affected the credit standing and borrowing abilities
of Massachusetts and certain of its public bodies and municipalities, and
which may have contributed to higher interest rates on debt obligations issued
by them.
More conservative revenue forecasting for fiscal 1992 together with
significant efforts to restrain spending during fiscal 1991 and reductions in
budget program expenditures for fiscal 1992 and fiscal 1993 have moderated
these difficulties. Significant spending commitments for public education are
contained in recent education reform legislation enacted in June of 1993. In
July and August of 1993, the Executive Office for Administration and Finance
announced a series of actions affecting state workers (including a hiring
freeze, layoffs and the elimination of positions) intended to keep expected
fiscal 1994 expenditures with current appropriations. Notwithstanding these
actions, a continuation, or worsening, of the present slowdown and its effect
on the financial condition of the Commonwealth and its public authorities and
municipalities could result in a decline in the market values of, or default
on existing obligations including the Bonds deposited in the Massachusetts
Trust.
The foregoing information constitutes only a brief summary of some of the
general factors 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 obligations held by the Massachusetts Trust 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 Commonwealth and various agencies and political
subdivisions located in the Commonwealth. The Sponsor is unable to predict
whether or to what extent such factors or other factors may affect the issuers
of the Bonds, the market value or marketability of the Bonds or the ability of
the respective issuers of the Bonds acquired by the Massachusetts Trust to pay
interest on or principal of the Bonds.
At the time of the closing for each Massachusetts Trust Special Counsel to
each Massachusetts Trust 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 substantially to the effect
that:
(1)For Massachusetts income tax purposes, a 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.
(2)A 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.
(3)Massachusetts Unitholders 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 a
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 a Massachusetts Trust on obligations issued by
Massachusetts, its counties, municipalities, authorities, political
subdivisions or instrumentalities, or issued by United States territories or
possessions.
(4)Any proceeds of insurance obtained by the Trustee of the Trust or by the
issuer of a Bond held by a Massachusetts Trust which are paid to Massachusetts
Unitholders and which represent maturing interest on defaulted obligations
held by the Trustee will be excludable from Massachusetts gross income of a
Massachusetts Unitholder if, and to the same extent as, such interest would
have been so excludable if paid by the issuer of the defaulted Bond.
(5)A Massachusetts Trust's capital gains and/or capital losses realized upon
disposition of Bonds held by it will be includable pro rata in the federal
gross income of Massachusetts Unitholders 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 Unitholder's Massachusetts gross income, except where capital
gain is specifically exempted from income taxation under acts authorizing
issuance of said Bonds.
(6)Gains or losses realized upon sale or redemption of Units by Massachusetts
Unitholders who are subject to Massachusetts income taxation under Chapter 62
of the Massachusetts General Laws will be includable in their Massachusetts
gross income.
(7)In determining such gain or loss Massachusetts Unitholders 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 Unitholders pay for their Units and for amortization of
premiums, if any, on obligations held by a Massachusetts Trust.
(8)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 Unitholder who is a resident of
Massachusetts for purposes of the Massachusetts Estate Tax.
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
obligation 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 over-capacity. 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 each of 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, but ended the 1992 fiscal
year with its general fund in balance. In the 1993 fiscal year, the State took
actions to eliminate a projected year-end general fund deficit of $370
million, but the fund Financial Reports for the 1993 year have not yet been
released. 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 $900
million for cash flow purposes in the 1993 fiscal year. The State's budget
Stabilization Fund was nearly depleted with a $168 million transfer to the
General Fund for the 1992 State fiscal year.
The Michigan Constitution of 1963 limits the amount of total revenues of the
State raised 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 exceeds the limit
by 1 percent or more, the Michigan Constitution of 1963 requires that the
excess be refunded to taxpayers.
In December, 1993, the Michigan Legislature adopted school finance reform
legislation providing, among other things, for submission of a ballot proposal
on March 15, 1994, to amend the State's Constitution to increase the State
sales tax rate from 4% to 6% and to place a cap on property assessment
increases for all property taxes. The legislation further provides that if the
constitutional amendment is accepted by the State's voters, the State's income
tax rate will be cut from 4.6% to 4.4%, while if the proposal is rejected, the
income tax rate will be increased to 6%. In either case, some property taxes
will be reduced and school funding will be provided from a combination of
property taxes and state revenues, some of which will be provided from new or
increased State taxes. The legislation also contains other proposals that may
reduce or alter the revenues of local units of government, and tax increment
bonds could be particularly affected. While the ultimate impact of the
proposed constitutional amendment and related legislation cannot yet be
accurately predicted, investors should be alert to the potential effect of
such measures upon the operations and revenues of Michigan local units of
government.
Although all or most of the Bonds in the Michigan Trust 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 and froze the 1993 revenue sharing payments at the 1992
level.
The Michigan Trust 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
operating and debt service requirements.
At the time of the closing for each Michigan Trust, Special Counsel to each
Michigan Trust 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:
The 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, we have relied upon the opinion of Chapman and Cutler as
to the applicability of Federal income tax under the Internal Revenue Code of
1986 to the Michigan Trust and the Holders of Units.
Under the income tax laws of the State of Michigan, the Michigan Trust is not
an association taxable as a corporation; the income of a Michigan Trust will
be treated as the income of the Unitholders and be deemed to have been
received by them when received by the Michigan Trust. Interest on the
underlying Bonds which is exempt from tax under these laws when received by
the Michigan Trust will retain its status as tax exempt interest to the
Unitholders.
For purposes of the foregoing Michigan tax laws, each Unitholder will be
considered to have received his pro rata share of Bond interest when it is
received by the Michigan Trust, and each Unitholder will have a taxable event
when the Michigan Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or when the Unitholder redeems or sells his
Certificate to the extent the transaction constitutes a taxable event for
Federal income tax purposes. The tax cost of each unit to a Unitholder will be
established and allocated for purposes of these Michigan 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 Unitholders to the extent the 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 the Michigan Trust on the underlying Bonds and any
amount distributed from the Michigan Trust to a Unitholder, 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 the Michigan Trust or the Unitholders. If the Michigan
Trust or the Unitholders have a taxable event for Federal income tax purposes
when the Michigan Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or the Unitholder redeems or sells his
Certificate, 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.
Unitholders 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 Trust,
or paid under individual policies obtained by issuers of Bonds, which, when
received by the Unitholders, 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 Unitholder will be
increased accordingly to the extent such capital gains are realized when the
Michigan Trust disposes of a Bond or when the Unitholder redeems or sells a
Unit, to the extent such transaction constitutes a taxable event for Federal
income tax purposes.
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) and reduced
appropriations and deferred payment of State aid, including appropriations for
and aids to local governmental units. The State's fiscal problems affected
other governmental units within the State, such as local government, 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 biennium ending June 30, 1995 projected a
budget shortfall of $1.75 billion (less a $400 million reserve). The State
responded by enacting legislation in 1992 that made substantial accounting
changes, reduced the budget reserve (cash flow account) by $160 million to
$240 million, reduced appropriations for state agencies and higher education,
imposed a sales tax on purchases by local governmental units, and adopted
other tax and spending changes. The 1993 legislature enacted further tax and
spending changes. An end-of-legislative-session budget forecast released by
the Department of Finance on June 15, 1993 for the biennium ending June 30,
1995 projects a General Fund surplus of $16 million at the end of the
biennium, after applying a projected $297 million surplus from June 30, 1993
and after reserving $360 million for the cash flow account. Total budgeted
expenditures and transfers for the biennium are $16.5 billion.
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 of the issuer and not general
obligations of the State, 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.
At the time of the closing for the Minnesota Trust, Special Counsel to the
Minnesota Trust 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:
We understand that the 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), (ii) gain on the disposition of such Bonds,
and (iii) proceeds paid under certain insurance policies issued to the Trustee
or to the issuers of the Bonds which represent maturing interest or principal
payments on defaulted Bonds held by the Trustee.
"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 the
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
Federal tax treatment of the Minnesota Trust and its Unitholders: (1) the
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 Unitholder of a Minnesota Trust will be
treated as the owner of a pro rata portion of the Minnesota Trust for
Minnesota income tax purposes and the income of the Minnesota Trust will
therefore be treated as the income of the Unitholders under Minnesota law; (3)
interest on the Bonds will be exempt from Minnesota income taxation of
Unitholders who are individuals, trusts and estates when received by the
Minnesota Trust and attributed to such Unitholders and when distributed to
such Unitholders (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 includible in the Minnesota taxable income
(subject to allocation and apportionment) of Unitholders that are
corporations; (5) each Unitholder will realize taxable gain or loss when the
Minnesota Trust disposes of a Bond (whether by sale, exchange, redemption or
payment at maturity) or when the Unitholder redeems or sells Units at a price
which 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 Unitholder's share of interest, if any, accruing on
Bonds during the interval between the Unitholder's settlement date and the
date such Bonds are delivered to the Minnesota Trust, if later); (6) tax cost
reduction requirements relating to amortization of bond premium may, under
some circumstances, result in Unitholders realizing taxable gain when their
Units are sold or redeemed for an amount equal to or less than their original
cost; (7) any proceeds paid under the insurance policy issued to the Trustee
with respect to the Bonds which represent maturing interest on defaulted
obligations held by the Trustee will be excludible from Minnesota gross income
if, and to the same extent as, such interest would have been so excludible if
paid by the issuer of the defaulted obligations; (8) any proceeds paid under
individual insurance policies obtained by issuers of Bonds which represent
maturing interest on defaulted obligations held by the Trustee will be
excludible from Minnesota gross income if, and to the same extent as, such
interest would have been so excludible if paid in the normal course by the
issuer of the defaulted obligations; (9) net capital gains of Unitholders
attributable to the Bonds will be fully includible in the Minnesota taxable
income of Unitholders (subject to allocation and apportionment in the case of
corporate Unitholders); and (10) interest on Bonds includible in the
computation of "alternative minimum taxable income" for Federal income tax
purposes will also be includible 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 Unitholder 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 by such Unitholder.
Missouri Trusts
The following discussion regarding constitutional limitations and the economy
of the State of Missouri is included for the purpose of providing general
information that may or may not affect issuers of the Bonds in Missouri.
In November 1981, the voters of Missouri adopted a tax limitation amendment to
the constitution of the State of Missouri (the "Amendment"). The Amendment
prohibits increases in local taxes, licenses, or fees by political
subdivisions without approval of the voters of such political subdivision. The
Amendment also limits the growth in revenues and expenditures of the State to
the rate of growth in the total personal income of the citizens of Missouri.
The limitation may be exceeded if the General Assembly declares an emergency
by a two-thirds vote. The Amendment did not limit revenue growth at the state
level in fiscal 1982 through 1988 with the exception of fiscal 1984.
Management Report No. 85-20, which was issued on March 5, 1985 by State
Auditor Margaret Kelly, indicates that state revenues exceeded the allowable
increase by $30.52 million in fiscal 1984, and a taxpayer lawsuit has been
filed pursuant to the Amendment seeking a refund of the revenues in excess of
the limit.
The economy of Missouri is diverse and includes manufacturing, retail and
wholesale trade, services, agriculture, tourism and mining. In recent years,
growth in the wholesale and retail trade had offset the more slowly growing
manufacturing and agricultural sectors of the economy. In 1991, the
unemployment rate in Missouri was 6.6%, and according to preliminary
seasonally adjusted figures, the rate dropped to 5.4% in December 1992. There
can be no assurance that general economic conditions or the financial
circumstances of Missouri or its political subdivisions will not adversely
affect the market value of the Bonds or the ability of the obligor to pay debt
service on such Bonds.
Currently, Moody's Investors Service rates Missouri general obligation bonds
"Aaa" and Standard & Poor's Corporation rates Missouri general obligation
bonds "AAA". Although these ratings indicate that the State of Missouri is in
relatively good economic health, there can be, of course, no assurance that
this will continue or that particular bond issues may not be adversely
affected by changes in the State or local economic or political conditions.
The foregoing information constitutes only a brief summary of some of the
general factors 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 obligations held by the Missouri Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of the 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 the
Bonds, the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Missouri Trust to pay interest
on or principal of the Bonds.
At the time of the closing for each Missouri Trust, Special Counsel for
Missouri tax matters rendered an opinion under then existing Missouri income
tax law applicable to taxpayers whose income is subject to Missouri income
taxation substantially to the effect that:
The assets of the Missouri Trust will consist of debt obligations issued by or
on behalf of the State of Missouri (the "State") or counties, municipalities,
authorities or political subdivisions thereof (the "Missouri Bonds") or by the
Commonwealth of Puerto Rico, Guam and the United States Virgin Islands (the
"Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Missouri Trust. However, although no opinion
is expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludable from gross income
for Federal income tax purposes and (iii) interest on the Missouri Bonds, if
received directly by a Unitholder, would be exempt from the Missouri income
tax applicable to individuals and corporations ("Missouri state income tax").
The opinion set forth below does not address the taxation of persons other
than full time residents of Missouri.
In the opinion of Chapman and Cutler, counsel to the Sponsor under existing
law:
(1)The Missouri Trust is not an association taxable as a corporation for
Missouri income tax purposes, and each Unitholder of the Missouri Trust will
be treated as the owner of a pro rata portion of the Missouri Trust and the
income of such portion of the Missouri Trust will be treated as the income of
the Unitholder for Missouri state income tax purposes.
(2)Interest paid and original issue discount, if any, on the Bonds which would
be exempt from the Missouri state income tax if received directly by a
Unitholder will be exempt from the Missouri state income tax when received by
the Missouri Trust and distributed to such Unitholder; however, no opinion is
expressed herein regarding taxation of interest paid and original issue
discount, if any, on the Bonds received by the Missouri Trust and distributed
to Unitholders under any other tax imposed pursuant to Missouri law, including
but not limited to the franchise tax imposed on financial institutions
pursuant to Chapter 148 of the Missouri Statutes.
(3)To the extent that interest paid and original issue discount, if any,
derived from the Missouri Trust by a Unitholder with respect to Possession
Bonds is excludable from gross income for Federal income tax purposes pursuant
to 48 U.S.C. 48U.S.C. and 48 U.S.C. such interest paid and original issue
discount, if any, will not be subject to the Missouri state income tax;
however, no opinion is expressed herein regarding taxation of interest paid
and original issue discount, if any, on the Bonds received by the Missouri
Trust and distributed to Unitholders under any other tax imposed pursuant to
Missouri law, including but not limited to the franchise tax imposed on
financial institutions pursuant to Chapter 148 of the Missouri Statutes.
(4)Each Unitholder of the Missouri Trust will recognize gain or loss for
Missouri state income tax purposes if the Trustee disposes of a bond (whether
by redemption, sale, or otherwise) or if the Unitholder redeems or sells Units
of the Missouri Trust to the extent that such a transaction results in a
recognized gain or loss to such Unitholder for Federal income tax purposes.
Due to the amortization of bond premium and other basis adjustments required
by the Internal Revenue Code, a Unitholder under some circumstances, may
realize taxable gain when his or her Units are sold or redeemed for an amount
equal to their original cost.
(5)Any insurance proceeds paid under policies which represent maturing
interest on defaulted obligations which are excludable from gross income for
Federal income tax purposes will be excludable from Missouri state income tax
to the same extent as such interest would have been paid by the issuer of such
Bonds held by the Missouri Trust; however, no opinion is expressed herein
regarding taxation of interest paid and original issue discount, if any, on
the Bonds received by the Missouri Trust and distributed to Unitholders under
any other tax imposed pursuant to Missouri law, including but not limited to
the franchise tax imposed on financial institutions pursuant to Chapter 148 of
the Missouri Statutes.
(6)The Missouri state income tax does not permit a deduction of interest paid
or incurred on indebtedness incurred or continued to purchase or carry Units
in the Trust, the interest on which is exempt from such Tax.
(7)The Missouri Trust will not be subject to the Kansas City, Missouri
Earnings and Profits Tax and each Unitholder's share of income of the Bonds
held by the Missouri Trust will not generally be subject to the Kansas City,
Missouri Earnings and Profits Tax or the City of St. Louis Earnings Tax
(except in the case of certain Unitholders, including corporations, otherwise
subject to the St. Louis City Earnings Tax).
New Jersey Trusts
Each New Jersey Trust consists of a portfolio of Bonds. The Trust is therefore
susceptible to political, economic or regulatory factors affecting issuers of
the 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 1,050 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 1991the State ranked second among states in per
capita personal income ($26,457).
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.
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 7.1%
in December 1993, which is higher than the national average of 6.4% in
December 1993. 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 $8.98 billion, of which $3.6 billion was issued and outstanding,
$4.0 billion was retired (including bonds for which provision for payment has
been made through the sale and issuance of refunding bonds) and $1.38 billion
was unissued. The debt service obligation for such outstanding indebtedness is
$119.9 million for fiscal year 1994.
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. At the end of fiscal
year 1991, there was a surplus in the general fund of $1.4 million. New Jersey
closed its fiscal year 1992 with a surplus of $760.8 million. It is estimated
that New Jersey closed its fiscal year 1993 with a surplus of $361.3 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 services 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 to 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 29, 1993, Governor Florio signed the New Jersey Legislature's $15.9
billion budget for Fiscal Year 1994. The balanced budget does not rely on any
new taxes, college tuition increases or any commuter fare increases, while
providing a surplus of more than $400 million. Whether the State can achieve a
balanced budget depends on its ability to enact and implement expenditure
reductions and to collect the estimated tax revenues. The Fiscal Year 1994
Appropriations Act forecasts sales and use tax collections of $3.920 billion,
a 7.5% increase from receipts estimated in the Revised Revenue Estimates for
Fiscal Year 1993. It also forecasts gross income tax collections of $4.748
billion, a 10.6% increase from receipts estimated for Fiscal Year 1993, and
corporation business tax collections of $1.1 billion, a 15.4% increase from
receipts estimated for Fiscal Year 1993. However, projections and estimates of
receipts from taxes have been subject to variance in recent years as a result
of several factors, most recently a significant slowdown in the national,
regional and State economies, sluggish employment and uncertainties in
taxpayer behavior as a result of actual and proposed changes in Federal tax
laws.
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 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, the adequacy of Medicaid reinmbursement
for services rendered by doctors and dentists to Medicaid eligible children,
the Commissioner of Health's calculation of the hospital assessment required
by the Health Care Cost Reduction Act of 1991, refusal of the State to share
with Camden County federal funding the State recently received for
disproportionate share hospital payments made to county psychiatric
facilities, and 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. 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, both Moody's Investors Service, Inc. and
Standard and Poor's Corporation 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 CreditWatch 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 budget must be closed before
the new budget year begins on July 1, 1992. Standard and Poor's 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
CreditWatch list, although it stated that New Jersey's long-term financial
outlook was negative. Standard and Poor's Corporation was concerned that the
State was entering fiscal 1993 with only a $26 million surplus and remained
concerned about whether the sagging State economy would recover quickly enough
to meet lawmakers' revenue projections. It also remained concerned about the
recent federal ruling leaving in doubt how much the State was 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.
There can be no assurance that these ratings will continue or that particular
bond issues may not be adversely affected by changes in the State or local
economic or political conditions.
On August 24, 1992, Moody's Investors Service, Inc. downgraded New Jersey
general obligation 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.
Although New Jersey recently received $412 million in settlement of its $450
million dispute with the federal government for retroactive Medicaid
reimbursements, neither Moody's nor Standard and Poor's has revised its rating
for New Jersey general obligation bonds.
At the time of the closing for each New Jersey Trust, Special Counsel to each
New Jersey Trust 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:
(1)The New Jersey Trust will be recognized as a trust and not an association
taxable as a corporation. The New Jersey Trust will not be subject to the New
Jersey Corporation Business Tax or the New Jersey Corporation Income Tax.
(2)With respect to the non-corporate Unitholders who are residents of New
Jersey, the income of the New Jersey Trust which is allocable to each such
Unitholder will be treated as the income of such Unitholder 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
Unitholder will retain its status as tax-exempt interest when received by the
New Jersey Trust and distributed to such Unitholder. 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 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.
(3)A non-corporate Unitholder will not be subject to the New Jersey Gross
Income Tax on any gain realized either when the New Jersey Trust disposes of a
Bond (whether by sale, exchange, redemption, or payment at maturity), when the
Unitholder 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 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 Unitholder on the disposition of assets the gain on which is subject
to the New Jersey Gross Income Tax.
(4)Units of the New Jersey Trust may be taxable on the death of a Unitholder
under the New Jersey Transfer Inheritance Tax Law or the New Jersey Estate Tax
Law.
(5)If a Unitholder 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 by 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. Any proceeds paid under the insurance policy issued to the Trustee
of the New Jersey Trust with respect to the Bonds or under individual policies
obtained by issuers of Bonds which represent maturing interest or maturing
principal on defaulted obligations held by the Trustee will be included in its
entire net income for purposes of the New Jersey Corporation Business Tax or
New Jersey Corporation Income Tax if, and to the same extent as, such interest
or proceeds would have been so included if paid by the issuer of the defaulted
obligations.
New Mexico Trusts
New Mexico is the nation's fifth largest State in terms of area. As of 1989
the federal government owns 34.1% of New Mexico's land, State government,
11.8%, Indian tribes, 8.3%, leaving 45.8% in private ownership. New Mexico has
33 counties and 99 incorporated places. Major industries in New Mexico are
energy resources (crude petroleum, natural gas, uranium, and coal), tourism,
services, arts and crafts, agriculture-agribusiness, government (including
military), manufacturing, and mining. Major scientific research facilities at
Los Alamos, Albuquerque and White Sands are also a notable part of the State's
economy. New Mexico has a thriving tourist industry.
According to a June 1991 report of the Bureau of Business and Economic
Research of the University of New Mexico ("BBER"), New Mexico's recent
economic growth has been "subdued" and it appears that it will slow even
further before a turnaround occurs. Economic growth in New Mexico was strong
in 1989 and the first half of 1990, but declined substantially in the third
and fourth quarters of 1990. Among the localized events impacting New Mexico's
economy during 1990 were the curtailment of government funding for fusion
research at Los Alamos National Laboratory and for the Star Wars free-electron
laser at White Sands Missile Range and Los Alamos (loss of 600 jobs in the
aggregate); the move from Kirtland Air Force of a contract management unit
(200 jobs); the generally tight credit conditions, particularly for land
development and construction spending, which followed in the wake of
Resolution Trust Corporation takeovers of most of New Mexico's major savings
and loan associations; and oil prices which kept oil production in the State
on the decline.
Agriculture is a major part of the state's economy. As a high relatively dry
region with extensive grasslands, New Mexico is ideal for raising cattle,
sheep, and other livestock. Because of irrigation and a variety of climatic
conditions, the state's farmers are able to produce a diverse assortment of
products. New Mexico's farmers are major producers of alfalfa hay, wheat,
chili peppers, cotton, fruits, and pecans. Agricultural businesses include
chili canneries, wineries, alfalfa pellets, chemicals and fertilizer plants,
farm machinery, feed lots, and commercial slaughter plants.
New Mexico nonagricultural employment growth was only 2.3% in 1990. During the
first quarter of 1991, it was 1.3% compared to the first quarter of 1990 (net
increase of 7,100 jobs), following a 1.2% increase in the fourth quarter of
1990. These increases are about half the long-term trend growth rate of 2.6%
of the 1947-1990 period. Income growth remained relatively strong, increasing
7.1% in the fourth quarter of 1990 (compared to a national increase of 5.9%).
The services sector continued to be the strongest in the State, accounting for
almost half of new jobs in the first quarter, a 2.7% growth. Business
services, health services and membership organizations provided the bulk of
services growth. The trade and government sectors had much weaker growth in
the first quarter, with 1.2% and 1.0% growth rates, respectively.
The mining sector added more than 350 jobs during 1990, most in oil and gas.
Oil well completions increased, even though oil production has been on a slow
decline. Gas well completions and gas production have also been growing, as
producers continue to take advantage of the coal seam gas tax credit, which
will continue to be available under current law through 1992.
Construction employment has declined for 21 consecutive quarters, but was down
only 0.4% in the first quarter, after having averaged a 4.5% decline for each
of the previous twenty quarters. Housing construction remains depressed, with
new housing unit authorizations during 1990, both single family and
multifamily, at their lowest levels in more than fifteen years.
The manufacturing sector showed a small increase (1.3%), while
finance/insurance/real estate and transportation/communications/utilities
demonstrated small declines (1.0% and 0.9%, respectively).
The foregoing information constitutes only a brief summary of information
about New Mexico. It does not describe the financial difficulties which may
impact certain issuers of Bonds and does not purport to be a complete or
exhaustive description of adverse conditions to which the issuers in the New
Mexico Trust 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 New Mexico Trust to pay
interest on or principal of the bonds.
The assets of the New Mexico Trust consist of interest-bearing obligations
issued by or on behalf of the State of New Mexico ("New Mexico") or counties,
municipalities, authorities or political subdivisions thereof (the "New Mexico
Bonds"), and by or on behalf of the government of Puerto Rico, the government
of Guam, or the government of the Virgin Islands (collectively the "Possession
Bonds") (collectively the New Mexico Bonds and the Possession Bonds shall be
referred to herein as the "Bonds") the interest of which is expected to
qualify as exempt from New Mexico income taxes.
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the New Mexico Trust. However, although no opinion
is expressed herein regarding such matters, it is assumed that; (i) the Bonds
were validly issued, (ii) the interest thereon is excludable from gross income
for federal income tax purposes and (iii) interest on the Bonds, if received
directly by a Unitholder, would be exempt from the New Mexico income taxes
applicable to individuals and corporations (collectively, the "New Mexico
State Income Tax"). At the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exemption of interest thereon from
federal income tax were rendered by bond counsel to the respective issuing
authorities. In addition, with respect to the Bonds, bond counsel to the
issuing authorities rendered opinions as to the exemption of interest from the
New Mexico State Income Tax. Neither the Sponsor nor its counsel has made any
review for the New Mexico Trust of the proceedings relating to the issuance of
the Bonds or of the bases for the opinions rendered in connection therewith.
The opinion set forth below does not address the taxation of persons other
than full time residents of New Mexico.
In the opinion of Chapman and Cutler, Special Counsel to the Fund for New
Mexico tax matters, under existing law as of the date of this Prospectus and
based upon the assumptions set forth above:
(1)The New Mexico Trust will not be subject to tax under the New Mexico State
Income Tax.
(2)Income on the Bonds which is exempt from the New Mexico State Income Tax
when received by the New Mexico Trust, and which would be exempt from the New
Mexico State Income Tax if received directly by a Unitholder, will retain its
status as exempt from such tax when received by the New Mexico Trust and
distributed to such Unitholder provided that the New Mexico Trust complies
with the reporting requirements contained in the New Mexico State Income Tax
regulations.
(3)To the extent that interest income derived from the New Mexico Trust by a
Unitholder with respect to Possession Bonds in excludable from gross income
for federal income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a or 48 U.S.C. Section 1403, such interest income will not be
subject to New Mexico State Income Tax.
(4)The New Mexico State Income Tax does not permit a deduction of interest
paid on indebtedness or other expenses incurred (or continued) in connection
with the purchase or carrying of Units in the New Mexico Trust to the extent
that interest income related to the ownership of Units is exempt from the New
Mexico State Income Tax.
Investors should consult their tax advisors regarding collateral tax
consequences under New Mexico law relating to the ownership of the Units,
including, but not limited to, the inclusion of income attributable to
ownership of the Units in "modified gross income" for purposes of determining
eligibility for and the amount of the low income comprehensive tax rebate, the
child day care credit, and the elderly taxpayers' property tax rebate and the
applicability of other New Mexico taxes, such as the New Mexico estate tax.
New York Trusts
A resident of New York State (or New York City) will be subject to New York
State (or New York City) personal income tax with respect to gains realized
when New York Obligations held in the New York Trust are sold, redeemed or
paid at maturity or when his Units are sold or redeemed, such gain will equal
the proceeds of sale, redemption or payment less the tax basis of the New York
Obligation or Unit (adjusted to reflect (a) the amortization of premium or
discount, if any, on New York Obligations held in the Trust, (b) accrued
original issue discount, with respect to each New York Obligation which, at
the time the New York Obligation was issued had original issue discount, and
(c) the deposit of New York Obligations with accrued interest in the Trust
after the Unitholder's settlement date).
Interest or gain from the New York Trust derived by a Unitholder who is not a
resident of New York State or New York City) will not be subject to New York
State (or New York City) personal income tax, unless the Units are property
employed in a business, trade, profession or occupation carried on in New York
State (or New York City).
Amounts paid on defaulted New York Obligations held by the Trustee under
Policies of insurance issued with respect to such New York Obligations will be
excludable from Income for New York State and New York City income tax
purposes, if and to the same extent as, such interest Would have been
excludable if paid by the respective issuer.
For purposes of the New York State and New York City franchise tax on
corporations, Unitholders which are subject to such tax will be required to
include in their entire net income any interest or gains distributed to them
even though distributed in respect of New York obligations.
If borrowed funds are used to purchase Units in the Trust, all (or part) of
the interest on such indebtedness will not be deductible for New York State
and New York City tax purposes. The purchase of Units may be considered to
have made with borrowed funds even though such funds are not directly
traceable to the purchase of Units in any New York Trust.
The Portfolio of the New York Trust includes certain 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 the 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 Trust or the ability of particular
obligors to make timely payments of debt service on (or relating to) those
obligations.
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.
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 grow faster
than 1992, but still at a very moderate rate, as compared to other recoveries.
The national recession has been more severe in the State because of factors
such as a significant retrenchment in the financial services industry,
cutbacks in defense spending, and an overbuilt real estate market.
1993-94 Fiscal Year. On April 5,1993, the State Legislature approved a $32.08
billion budget. Following enactment of the budget the 1993-94 State Financial
Plan was formulated on April 16, 1993. This Plan projects General Fund
receipts and transfers from other funds at $32.367 billion and disbursements
and transfers to other funds at $32.300 billion. In comparison to the
Governor's recommended Executive Budget for the 1993-94 fiscal year as revised
on February 18, 1993, the 1993-94 State Financial Plan reflects increases in
both receipts and disbursements in the General Fund of $811 million.
While a portion of the increased receipts was the result of a $487 million
increase in the State's 1992-93 positive year-end margin at March 31, 1993 to
$671 million, the balance of such increased receipts is based upon (i) a
projected $269 million increase in receipts resulting from improved 1992-93
results and the expectation of an improving economy, (ii) projected additional
payments of $200 million from the Federal government as reimbursements for
indigent medical care, (iii) the early payment of $50 million of personal tax
returns in 1992-93 which otherwise would have been paid in 1993-94; offset by
(iv) the State Legislature's failure to enact $195 million of additional
revenue-raising recommendations proposed by the Governor. There can be no
assurances that all of the projected receipts referred to above will be
received.
Despite the $811 million increase in disbursements included in the 1993-94
State Financial Plan, a reduction in aid to some local government units can be
expected. To offset a portion of such reductions, the 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. Before giving effect to a 1992-93 year-end deposit to the
refund reserve account of $671 million, General Fund receipts in 1992-93 would
have been $716 million higher than originally projected. This year-end deposit
effectively reduced 1992-93 receipts by $671 million and made those receipts
available for 1993-94.
The State's favorable performance primarily resulted from income tax
collections that were $700 million higher than projected which reflected both
stronger economic activity and tax-induced one-time acceleration of income
into 1992. In other areas larger than projected business tax collections and
unbudgeted receipts offset the loss of $200 million of anticipated Federal
reimbursement and losses of, or shortfalls in, other projected revenue
sources.
For 1992-93, disbursements and transfers to other funds (including the deposit
to the refund reserve account discussed above) totalled $30.829 billion, an
increase of $45 million above projections in April 1992.
Fiscal year 1992-93 was the first time in four years that the State did not
incur a cash-basis operating deficit in the General Fund requiring the
issuance of deficit notes or other bonds, spending cuts or other revenue
raising measures.
Indebtedness. As of March 31,1993, the total amount of long-term State general
obligation debt authorized but unissued stood at $2.4 billion. As of the same
date, the State had approximately $5.4 billion in general obligation bonds.
The State issued $850 million in tax and revenue anticipation notes ("TRANS")
on April 28, 1993. The State does not project the need to issue additional
TRANS during the State's 1993-94 fiscal year.
The State projects that its borrowings for capital purposes during the State's
1993-94 fiscal year will consist of $460 million in general obligation bonds
and $140 million in new commercial paper issuances. In addition, the State
expects to issue $140 million in bonds for the purpose of redeeming
outstanding bond anticipation notes. The Legislature has authorized 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 during
the State's 1993-94 fiscal year. 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 $3.28 billion. LGAC has
been authorized to issue additional bonds to provide net proceeds of $703
million during the State's 1993-94 fiscal year.
Ratings. The $850 million in TRANS issued by the State in April 1993 were
rated SP-1-Plus by S&P on April 26, 1993, and MIG-1 by Moody's on April
23,1993, which represents the highest ratings given by such agencies and the
first time the State's TRANS have received these ratings since its May 1989
TRANS issuance. Both agencies cited the State's improved fiscal position as a
significant factor in the upgrading of the April 1993 TRANS.
Moody's rating of the State's general obligation bonds stood at A on April 23,
1993, and S&P's rating stood at A- with a stable outlook on April 26, 1993, an
improvement from S&P's negative outlook prior to April 1993. 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.
Moody's, in confirming its rating of the State's general obligation bonds, and
S&P, in improving its outlook on such bonds from negative to stable, noted the
State's improved fiscal condition and reasonable revenue assumptions contained
in the 1993-94 State budget.
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 response to the City's fiscal crisis in 1975, the State took a number of
steps to assist the City in returning to fiscal stability. Among other
actions, 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 City four-year financial plans (the financial
plans also apply to certain City-related public agencies (the "Covered
Organizations")).
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 City 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 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.
Fiscal Year 1993 and 1993-1996 Financial Plan. The City's 1993 fiscal year
results are projected to be balanced in accordance with generally accepted
accounting principles ("GAAP"). The City was required to close substantial
budget gaps in its 1990, 1991 and 1992 fiscal years in order to maintain
balanced operating results.
The City's modified Financial Plan dated February 9, 1993 covering fiscal
years 1993-1996 projects budget gaps for 1994 through 1996. The Office of the
State Deputy Controller for the City of New York has estimated that under the
modified Financial Plan budget gaps will be $102 million for fiscal year 1994,
$196 million for fiscal year 1995 and $354 million for fiscal year 1996,
primarily due to anticipated higher spending on labor costs.
However, the City's modified Plan is dependent upon, a gap-closing program,
certain elements of which the staff of Control Board identified on March 25,
1993 to be at risk due to projected levels of State and Federal aid and
revenue and expenditures estimates which may not be achievable. The Control
Board indicated that the City's modified Financial Plan does not make progress
towards establishing a balanced budget process. The Control Board's report
identified budget gap risks of $1.0 billion, $1.9 billion, $2.3 billion and
$2.6 billion in fiscal years 1994 through 1997, respectively.
On June 3, 1993, the Mayor announced that State and federal aid for Fiscal
Year 1993-1994 would be $280 million less than projected and that in order to
balance the City's budget $176 million of previously announced contingent
budget cuts would be imposed. The Mayor indicated that further savings would
entail serious reductions in services. The State Comptroller on June 14, 1993
criticized efforts by the Mayor and City Council to balance the City's budget
which rely primarily on one-shot revenues. The Comptroller added that the
City's budget should be based on "recurring revenues that fund recurring
expenditures." Given the foregoing factors, 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.
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 and imminence 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
financing 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.
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 1993 fiscal year or
subsequent years, such developments could also 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's 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 its
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. As discussed above, the City must identify additional
expenditure reductions and revenue sources to achieve balanced operating
budgets for fiscal years 1994 and thereafter. Any such 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
$15.7 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 to engender public comment.
The City achieved balanced operating results as reported in accordance with
GAAP for the 1992 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 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.
On November 19, 1992, the City submitted to the Control Board the Financial
Plan for the 1993 through 1996 fiscal years, which is a modification to a
financial plan submitted to the Control Board on June 11, 1992 (the "June
Financial Plan"), and which relates to the City, the Board of Education
("BOE") and the City University of New York ("CUNY"). The 1993-1996 Financial
Plan projects revenues and expenditures of $29.9 billion each for the 1993
fiscal year balanced in accordance with GAAP.
During the 1992 fiscal year, the City proposed various actions to close a
previously projected gap of approximately $1.2 billion for the 1993 fiscal
year. The gap-closing actions for the 1993 fiscal year proposed during the
1992 fiscal year and outlined in the City's June Financial Plan included $489
million of discretionary transfers from the 1992 fiscal year. The 1993-1996
City Financial Plan includes additional gap-closing actions to offset an
additional potential $81 million budget gap.
The 1993-1996 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 1993-1996 Financial Plan also sets forth projections and outlines a
proposed gap-closing program for the 1993 through 1996 fiscal years to close
projected budget gaps of $1.7 billion, $2.0 billion and $2.6 million,
respectively, in the 1994 through 1996 fiscal years. On February 9, 1993, the
City issued a modification to the 1993-1996 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 1993-1996 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. The State Legislature has in the past failed to approve certain
proposals similar to those that the 1993-1996 Financial Plan assumes will be
approved by the State Legislature during the 1993 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.
On March 9, 1993, OSDC issued a report on the February Modification. The
report expressed concern that the budget gaps projected for fiscal years 1994
through 1996 are the largest the City has faced at this point in the financial
planning cycle in at least a decade, and concluded that the February
Modification represented a step backward in the City's efforts to bring
recurring revenues into line with recurring expenditures.
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, 1992, legal claims in excess of $341 billion
were outstanding against the City for which the City estimated its potential
future liability to be $2.3 billion.
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 March 30, 1993, in confirming
its Baa1 rating, Moody's noted that:
The financial plan for fiscal year 1994 and beyond shows an ongoing imbalance
between the City's expenditures and revenues. The key indication of this
structural imbalance is not necessarily the presence of sizable out-year
budget gaps, but the recurring use of one-shot actions to close gaps.
One-shots constitute a significant share of the proposed gap-closing program
for fiscal year 1994, and they represent an even larger share of those
measures which the City seems reasonably certain to attain. Several major
elements of the program, including certain state actions, federal counter
cyclical aid and part of the city's tax package, remain uncertain. However,
the gap closing plan may be substantially altered when the executive budget is
offered later this spring.
On March 30, 1993, S&P affirmed its A- rating with a negative outlook, stating
that:
The City's key credit factors are marked by a high and growing debt burden,
and taxation levels that are relatively high, but stable. The City's economy
is broad-based and diverse, but currently is in prolonged recession, with slow
growth prospects for the foreseeable future.
The rating outlook is negative, reflecting the continued fiscal pressure
facing the City, driven by continued weakness in the local economy, rising
spending pressures for education and labor costs of city employees, and
increasing costs associated with rising debt for capital construction and
repair.
The current financial plan for the City assumes substantial increases in aid
from national and state governments. Maintenance of the current rating, and
stabilization of the rating outlook, will depend on the City's success in
realizing budgetary aid from these governments, or replacing those revenues
with ongoing revenue-raising measures or spending reductions under the City's
control. However, increased reliance on non-recurring budget balancing
measures that would support current spending, but defer budgetary gaps to
future years, would be viewed by S&P as detrimental to New York City's single
\xd4 A-' rating.
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 December 31, 1992, the City and MAC had, respectively, $20.3 billion and
$4.7 billion of outstanding net long-term indebtedness.
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 MACobligations 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.
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 could
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 and
nineteenth centuries. The claimants seek recovery of approximately six million
acres of land as well as compensatory and punitive damages.
The U.S. Supreme Court on March 30, 1993 referred to a Special Master for
determination of damages in an action by the State of Delaware to recover
certain unclaimed dividends, interest and other distributions made by issuers
of securities held by New York based-brokers incorporated in Delaware. (State
of Delaware v. State of New York.) The State had taken such unclaimed property
under its Abandoned Property Law. The State expects that it may pay a
significant amount in damages during fiscal year 1993-94 but it has indicated
that it has sufficient funds on hand to pay any such award, including funds
held in contingency reserves. The State's 1993-94 Financial Plan includes the
establishment of a $100 million contingency reserve fund which would be
available to fund such an award which some reports have estimated at $100-$800
million.
In Schulz v. State of New York, commenced May 24, 1993 ("Schulz 1993"),
petitioners have challenged the constitutionality of mass transportation
bonding programs of the New York State Thruway Authority and the Metropolitan
Transportation Authority. On May 24, 1993, the Supreme Court, Albany County,
temporarily enjoined the State from implementing those bonding programs. In
previous actions Mr. Schulz and others have challenged on similar grounds
bonding programs for the New York State Urban Development Corporation and the
New York Local Government Assistance Corporation. While there have been no
decisions on the merits in such previous actions, by an opinion dated May 11,
1993, the New York Court of Appeals held in a proceeding commenced on April
29, 1991 in the Supreme Court, Albany County (Schulz v. State of New York),
that petitioners had standing as voters under the State Constitution to bring
such action.
Petitioners in Schulz 1993 have asserted that issuance of bonds by the two
Authorities is subject to approval by statewide referendum. At this time there
can be no forecast of the likelihood of success on the merits by the
petitioners, but a decision upholding this constitutional challenge could
restrict and limit the ability of the State and its instrumentalities to
borrow funds in the future. The State has not indicated that the temporary
injunction issued by the Supreme Court in this action will have any immediate
impact on its financial condition or interfere with projects requiring
immediate action.
Adverse developments in the foregoing proceedings or new proceedings could
adversely affect the financial condition of the State in the future.
Certain localities in addition to New York City could have financial problems
leading to requests for additional State assistance. Both the Revised 1992-93
State Financial Plan and the recommended 1993-94 State Financial Plan include
a significant reduction 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 1991, the total indebtedness of all localities in the
State was approximately $31.6 billion, of which $16.8 billion was debt of New
York City (excluding $6.7 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. Fifteen localities had outstanding indebtedness for State
financing at the close of their fiscal year ending in 1991. 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.
At the time of the closing for each New York Trust, Special Counsel to each
New York 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:
The New York Trust is not an association taxable as a corporation and the
income of the New York Trust will be treated as the income of the Unitholders
under the 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 tax on
interest income which is exempt from Federal income tax under section 103 of
the Internal Revenue Code of 1986 and derived from obligations of New York
State or a political subdivision thereof, 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.
Ohio Trusts
The Ohio Trust 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 of the
State, or agencies or instrumentalities of the State or its political
subdivisions (Ohio Obligations). The Ohio Trust is therefore susceptible to
general or particular political, economic or regulatory factors that may
affect issuers of Ohio Obligations. The following information constitutes only
a brief summary of some of the complex factors that may have an effect. This
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 issued by 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 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 issue or issuer.
Ohio is the seventh most populous state. It's 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 also is an important
segment of the economy, with over half the State's area devoted to farming and
approximately 20% of total employment is 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 the State rates (6.4% and 7.2%) were below 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 the Ohio Trust 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 FY-ending 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 balances 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, necessary corrective steps were
taken to respond to lower receipts and higher expenditures in certain
categories than earlier estimated. Those steps included selected reductions 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 budget differences for the
latest complete biennium that began July 1, 1991, an interim appropriations
act was enacted effective July 1, 1991; it included State debt service and
lease rental GRF appropriations for the entire 1992-93 biennium, while
continuing most other appropriations for a month. 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 updated FY financial results and the 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 and personal income 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 appropriations spending in the final six months
of the FY 1992 by a total of approximately $184 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 then projected
for FY 1993. It was 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 appropriations
spending reductions, resulted in a balance of GRF resources and expenditures
in the 1992-93 biennium. OBM has reported an ending GRF fund cash balance at
June 30, 1993 of approximately $111 million, and, as a first step to BSF
replenishment, OBM has deposited $21 million in the BSF.
No spending reductions were applied to appropriations needed for debt service
or lease rentals on any State obligations.
The GRF appropriations act for the current 1994-95 biennium was passed and
signed by the Governor on July 1, 1993. It includes all necessary GRF
appropriations for biennial State debt service and lease rental payments.
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 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 in both cases is for any debt incurred to repel
invasion, suppress insurrection or defend the State in war.)
By 13 constitutional amendments, the last adopted in 1993, Ohio voters have
authorized the incurrence of State debt to which taxes or excises were
pledged. At December 7, 1993, $596.6 million (excluding certain highway bonds
payable primarily from highway use charges) of this debt was outstanding or
waiting delivery. 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 ($47.1 million outstanding); (b) $1.2 billion of obligations
authorized for local infrastructure improvements, no more than $120 million
may be issued in any calendar year ($525.2 million outstanding, $600 million
remaining to be issued); and (c) up to $200 million in general obligation
bonds for parks and recreation purposes may be outstanding at any one time (no
more than $50 million to be issued in any one year, and none have been
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; $4.14 billion of those obligations were outstanding or awaiting
delivery at December 7, 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.
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 issuer'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 97 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 totaled $68.6 million
(including $46.6 million for one district). FY 1993 loans totalled $94.5
million for 43 districts (including $75 million for one).
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 23
cities and villages; for 18 of them the fiscal situation was resolved and the
procedures terminated.
At present the State itself does not levy any 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.
Commencing in 1985, Ohio municipalities may be permitted under Ohio law to
subject interest on certain of the obligations held by the Ohio Trust to
income taxes imposed on their residents and entities doing business therein.
At the time of the closing for each Ohio Trust, Special Council to each Ohio
Trust 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:
(1) The Ohio Trust is not taxable as a corporation or otherwise for purposes
of the Ohio personal income tax, the Ohio corporation franchise tax or the
Ohio dealers in intangibles tax.
(2)Income of an Ohio Trust will be treated as the income of the Unitholders
for purposes of the Ohio personal income tax, Ohio municipal income taxes and
the Ohio corporation franchise tax in proportion to the respective interest
therein of each Unitholder.
(3)Interest on 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 ("Territorial Obligations") held by the 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 Unitholders.
(4)Proceeds paid to the Ohio Trust under insurance policies representing
maturing interest on defaulted obligations held by the Ohio Trust will be
exempt from Ohio income tax, 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.
(5)Gains and losses realized on the sale, exchange or other disposition by the
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 Unitholders.
Oklahoma Trusts
Investors in the Oklahoma Trust should consider that the economy of the State
has been experiencing difficulties as a result of an economic recession
largely attributable to a decline in the agricultural industry and a rapid
decline that was experienced in the early and mid 1980s in the energy industry
which have, in turn, caused declines in the real estate industry, the banking
industry and most other sectors of the State's economy. Continued low levels
of economic activity, another decline in oil and gas production prices, low
growth in the State's major industries or private or public financial
difficulties could adversely affect Bonds in the Portfolio and consequently
the value of Units in the Oklahoma Trust.
Governmental expense budgeting provisions in Oklahoma are conservative,
basically requiring a balanced budget each fiscal year unless a debt is
approved by a vote of the people providing for the collection of a direct
annual tax to pay the debt. Certain limited exceptions include: deficiency
certificates issued in the discretion of the Governor (however, the deficiency
certificates may not exceed $500,000 in any fiscal year); and debts to repel
invasion, suppress insurrection or to defend the State in the event of war.
To ensure a balanced annual budget, the State Constitution provides procedures
for certification by the State Board of Equalization of revenues received in
the previous fiscal year and amounts available for appropriation based on a
determination of revenues to be received by the State in the General Revenue
Fund in the next ensuing fiscal year.
Beginning July 1, 1985, surplus funds were to be placed in a Constitutional
Reserve Fund until the Reserve Fund equals 10% of the General Revenue Fund
certification for the preceding fiscal year.
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 Oklahoma Trust 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 Oklahoma Trust to pay interest on or principal of the Bonds.
The assets of the Oklahoma Trust will consist of interest-bearing obligations
issued by or on behalf of the State of Oklahoma (the "State") or counties,
municipalities, authorities or political subdivisions thereof (the "Oklahoma
Bonds") or by the Commonwealth of Puerto Rico, Guam and the United States
Virgin Islands (the "Possession Bonds") (collectively, the "Bonds"). At the
respective times of issuance of the Oklahoma Bonds, certain, but not
necessarily all, of the issues of the Oklahoma Bonds may have been accompanied
by an opinion of bond counsel to the respective issuing authorities that
interest on such Oklahoma Bonds (the "Oklahoma Tax-Exempt Bonds") are exempt
from the income tax imposed by the State of Oklahoma that is applicable to
individuals and corporations (the "Oklahoma State Income Tax"). The Trust may
include Oklahoma Bonds the interest on which is subject to the Oklahoma State
Income Tax (the "Oklahoma Taxable Bonds"). See "Portfolio in Part One" which
indicates by footnote which, if any, Oklahoma Bonds are Oklahoma Tax-Exempt
Bonds (all other Oklahoma Bonds included in the portfolio are Oklahoma Taxable
Bonds).
Neither the Sponsor nor its counsel has independently examined the Bonds to be
deposited in and held in the Trust. However, although no opinion is expressed
herein regarding such matters, it is assumed that: (i) the Bonds were validly
issued, (ii) the interest thereon is excludable from gross income for Federal
income tax purposes and (iii) interest on the Oklahoma Tax-Exempt Bonds, if
received directly by a Unitholder, would be exempt from the Oklahoma State
Income Tax. At the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exemption of interest thereon from
Federal income tax were rendered by bond counsel to the respective issuing
authorities. In addition, with respect to the Oklahoma Tax-Exempt Bonds, bond
counsel to the issuing authorities rendered opinions as to the exemption of
interest from the Oklahoma State Income Tax. Neither the Sponsor nor its
counsel has made any review for the Trust of the proceedings relating to the
issuance of the Bonds or of the bases for the opinions rendered in connection
therewith. The opinion set forth below does not address the taxation of
persons other than full time residents of Oklahoma.
At the time of closing for each Oklahoma Trust Special Counsel to each
Oklahoma Trust for Oklahoma tax matters rendered an opinion, based on the
assumptions above, under the existing Oklahoma income tax law applicable to
taxpayers whose income is subject to Oklahoma income taxation substantially to
the effect that:
(1)For Oklahoma State Income Tax purposes, the Trust is not an association
taxable as a corporation, each Unitholder of the Trust will be treated as the
owner of a pro rata portion of the Trust and the income of such portion of the
Trust will be treated as the income of the Unitholder.
(2)Interest paid and original issued discount, if any, on the Bonds which
would be exempt from the Oklahoma State Income Tax if received directly by a
Unitholder will be exempt from the Oklahoma State Income Tax when received by
the Trust and distributed to such Unitholder. A Unitholder's pro rata portion
of any interest paid and original issue discount, if any, on the Bonds which
would be subject to the Oklahoma State Income Tax if received directly by a
Unitholder, including, for example interest paid and original issue discount,
if any, on the Oklahoma Taxable Bonds, will be taxable to such Unitholder for
Oklahoma State Income Tax purposes when received by the Trust.
(3)To the extent that interest paid and original issue discount, if any,
derived from the Trust by a Unitholder with respect to Possession Bonds is
excludable from gross income for Federal income tax purposes pursuant to 48
U.S.C. 745, 48 U.S.C. and 48 U.S.C. such interest paid and original issue
discount, if any, will not be subject to the Oklahoma State Income Tax.
(4)Each Unitholder of the Trust will recognize gain or loss for Oklahoma State
Income Tax purposes if the Trustee disposes of a Bond (whether by redemption,
sale, or otherwise) or if the Unitholder redeems or sells Units of the Trust
to the extent that such a transaction results in a recognized gain or loss to
such Unitholder for Federal income tax purposes. Due to the amortization of
bond premium and other basis adjustments required by the Internal Revenue
Code, a Unitholder, under some circumstances, may realize taxable gain when
his or her Units are sold or redeemed for an amount equal to their original
cost.
(5)Although no opinion is expressed herein, we have been informally advised by
the Oklahoma Tax Commission that any insurance proceeds paid under policies
which represent maturing interest on defaulted obligations which are
excludable from gross income for Federal income tax purposes should be
excludable from the Oklahoma State Income Tax to the same extent as such
interest would have been if paid by the issuer of such Bonds held by the
Trust.
(6)The Oklahoma State Income Tax does not permit a deduction of interest paid
or incurred on indebtedness incurred or continued to purchase or carry Units
in the Trust, the interest on which is exempt from such tax.
(7)Although no opinion is expressed herein, we have been informally advised by
the Oklahoma Tax Commission that the Trust, in part because of its status as a
\xd2 grant or trust" for Federal income tax purposes, should not be subject to
the Oklahoma state franchise tax.
The scope of this opinion is expressly limited to the matters set forth
herein, and we express no other opinions of law with respect to the state or
local taxation of the Trust, the purchase, ownership or disposition of Units
or the Unitholders under Oklahoma law.
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.
Back to back recessions in the early 1980's reduced the manufacturing sector's
employment levels moderately during 1980 and 1981, sharply during 1982, and
even further in 1983. Non-manufacturing employment has increased steadily
since 1980 to its 1992 level of 81.3 percent of total Commonwealth employment.
Consequently, manufacturing employment constitutes a diminished share of total
employment within the Commonwealth. Manufacturing, contributing 18.7 percent
of 1992 non-agricultural employment, has fallen behind both the services
sector and the trade sector as the largest single source of employment within
the Commonwealth. In 1992 the services sector accounted for 29.3 percent of
all non-agricultural employment while the trade sector accounted for 22.7
percent.
From 1983 to 1989, Pennsylvania's annual average unemployment rate dropped
from 11.8 percent to 4.5 percent, falling below the national rate in 1986 for
the first time in over a decade. Pennsylvania's annual average unemployment
rate remained below the national average from 1986 until 1990. Slower economic
growth caused the unemployment rate in the Commonwealth to rise to 6.9 percent
in 1991 and 7.5 percent in 1992. In April 1993 the seasonally adjusted
unemployment rate for the Commonwealth was 6.6 percent compared to 7.0 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 statutes 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 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 latest budget estimates project expenditures from
Commonwealth funds for fiscal 1993 to be $13.857 billion, representing only a
$5.2 million increase over fiscal 1992 expenditures. The 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 Fiscal 1993 budget was amended on May 28, 1993, through the
enactment of $165.1 million of supplemental appropriations. This small
increase in expenditures is 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 the receipt of Federal funds for
expenditures previously paid out of Commonwealth funds. The amended fiscal
1993 budget restored partial funding for private educational institutions that
normally receive state appropriations but whose appropriations were
item-vetoed by the Governor from the originally adopted fiscal 1993 budget.
Also restored by the amended budget were certain grants to the counties to
help pay operating costs of the local judicial system.
Commonwealth revenue sources are estimated for the fiscal 1993 budget to total
$14.592 billion, a $74.9 million increase over actual fiscal 1992 revenues,
representing an increase of approximately one-half of one percent. 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 percent to 2.8 percent on July 1, 1992. In addition, tax refund
reserves were increased $209.0 million to $548.0 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. In January 1993, the
refund estimate was reduced to $530 million.
Through May 1993, fiscal 1993 total General Fund revenue collections were $7.1
million (0.05 percent) above estimate, as fiscal year-to-date shortfalls in
receipts of corporation taxes ($30.3 million) and personal income tax ($37.2
million) were offset mainly by above estimate sales tax and miscellaneous
revenue collections.
Fiscal 1994 Budget (Budgetary Basis). The enacted 1994 fiscal year budget
provides for $14.999 billion of appropriations of Commonwealth funds. The
largest increase in appropriations is for the Department of Public Welfare$235
millionto meet the increasing costs of medical care and rising case loads.
Other large increases are education$196 millionincluding $130 million to
increase state educational subsidies for the most needy school districts and
$104 million for correctional institutions to pay operating costs and lease
payments for five new prisons and to expand the capacity of two existing
facilities.
The budget estimates revenue growth of 4.0 percent over revised fiscal 1993
estimates. The revenue estimate is based on an expectation of continued
economic recovery, but at a slow rate. Sale tax receipts are projected to rise
5.1 percent over the fiscal 1993 estimate while personal income tax receipts
are projected to increase by 2.4 percent, a rate that is low because of the
tax rate reduction in July 1992.
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 April 6, 1992. Full implementation of the five-year 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. The Mayor and his
Administration have amended the plan to bring it back in balance and their
plan is presently being considered by PICA and City Council.
In June 1992, PICA issued $474,555,000 of its Special Tax Revenue Bonds to
provide financial assistance to Philadelphia and to liquidate the cumulative
General Fund balance deficit. In March 1993, Philadelphia filed an amended
five-year plan with PICA, in which the General Fund balance deficit for the
Fiscal Year ended June 30, 1993, is projected to be $6.6 million. The fiscal
1994 budget, approved by City Council, projects no deficit and a balanced
budget for the year ending June 30, 1994. PICA approved the fiscal 1994 budget
plan on April 14, 1993.
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 Ba 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 Trust 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 Trust to pay interest on or principal of
the Bonds.
At the time of the closing for each Pennsylvania Trust, Special Counsel to
each Pennsylvania Trust for Pennsylvania tax matters rendered an opinion under
then existing Pennsylvania income tax law applicable to taxpayers whose income
is subject to Pennsylvania income taxation substantially to the effect that:
(1)Units evidencing fractional undivided interest in the 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;
(2)distributions of interest income to Unitholders 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;
(3)a Unitholder 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 Unitholder's Units relate; Units will be
taxable under the Pennsylvania inheritance and estate taxes;
(4)Units are subject to Pennsylvania inheritance and estate taxes;
(5)a Unitholder 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 Unitholders 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 Shares Tax;
(6)any proceeds paid under the insurance policy issued to the Trustee or
obtained by the 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; and
(7)the Fund is not taxable as a corporation under Pennsylvania tax laws
applicable to corporations.
In rendering its opinion, Special Counsel has not, for timing reasons, made an
independent review of proceedings related to the issuance of the Bonds. It has
relied on Van Kampen Merritt Inc. for assurance that the Bonds have been
issued by the Commonwealth of Pennsylvania or by or on behalf of
municipalities or other governmental agencies within the Commonwealth.
Tennessee Trusts
The following brief summary regarding the economy of Tennessee is based upon
information drawn from publicly available sources and is included for the
purpose of providing information about general economic conditions that may or
may not affect issuers of the Tennessee obligations. The Sponsor has not
independently verified any of the information contained in such publicly
available documents.
The State Constitution of Tennessee requires a balanced budget. No legal
authority exists for deficit spending from operating purposes beyond the end
of a fiscal year. Tennessee law permits tax anticipation borrowing but any
amount borrowed must be repaid during the fiscal year for which the borrowing
was done. Tennessee has not issued any debt for operating purposes during
recent years with the exception of some advances which were made from the
Federal Unemployment Trust Fund in 1984. No such advances are now outstanding
nor is borrowing of any type for operating purposes contemplated.
The State Constitution of Tennessee forbids the expenditure of the proceeds of
any debt obligation for a purpose other than the purpose for which it was
authorized by statute. Under State law, the term of bonds authorized and
issued cannot exceed the expected life of the projects being financed.
Furthermore, the amount of a debt obligation cannot exceed the amount
authorized by the General Assembly.
The State budget for the fiscal year ending June 30, 1991 provides for
revenues and expenditures of approximately $8.6 billion. Approximately 60% of
budgeted State revenues are expected to be generated from State taxes, with
the balance from federal funds, interdepartmental revenue, bond issues and
fees from current services. Less than 2% of fiscal 1991 State revenues are
budgeted to come from bond issues and less than 2% of fiscal 1991 budgeted
expenditures are allocated for debt service. Through the first half of fiscal
1991, revenues were approximately $64.7 million below budget projections and
fiscal 1991 revenues were estimated by the Tennessee Department of Finance and
Administration to be approximately $150 million below projections, principally
due to lower than anticipated sales tax revenues. Sales tax revenues account
for approximately 51% of State tax revenue. Tennessee's Revenue Fluctuation
Reserve is approximately $100 million.
In February 1991, the Governor of Tennessee introduced to the General Assembly
a tax reform proposal intended to generate approximately $627 million in new
State revenue to upgrade the quality of Tennessee public education. The
proposed tax program includes a 4% flat rate personal income tax on adjusted
gross income with a $7,000 exemption (declining as income increases) for each
member of lower income families, repeal of the State sales tax on food,
reduction of the combined State and local sales tax rate to 6% from the
current 8.25%, elimination of the local option sales tax cap, a 20% reduction
in corporate franchise tax, and a repeal of the current 6% income tax on
dividend and interest income. The proposal has been subject to extensive
debate in both the Tennessee House and Senate, and no prediction can be made
as to whether all or any part of the proposed legislation will be enacted.
The Tennessee economy generally tends to rise and fall in a roughly parallel
manner with the U.S. economy, although in recent years Tennessee has
experienced less economic growth than the U.S. average. The Tennessee economy
entered a recession in the last half of 1990 as the Tennessee index of leading
economic indicators fell throughout the period. Tennessee nominal gross State
product rose at a lower rate for 1990, and is projected to rise at a lower
rate for 1991, than the average annual
rates for the five year period 1985-89.
Tennessee's population increased 6.7% from 1980 to 1990, less than the
national increase of 10.2% for the same period. Throughout 1990, seasonally
adjusted unemployment rates in Tennessee were at or slightly below the
national average but rose slightly above the national average in December
1990. Beginning in the fourth quarter of 1990, initial unemployment claims
showed substantial monthly increases. The unemployment rate for February 1991
stood at 6.8% as compared to 5.4% for December 1990. By 1992, Tennessee
unemployment had decreased to 6.1%, as compared to the national rate of 7.3%,
and has remained below the national rate throughout the first half of 1993.
The rates for January and June of 1993 stood at 6.6% and 6.0%, respectively,
as compared to the national rates of 7.1% and 7.0%. A decline in manufacturing
employment has been partly offset by moderate growth in service sector
employment.
Historically, the Tennessee economy has been characterized by a greater
concentration in manufacturing employment than the U.S. as a whole. While in
recent years Tennessee has followed the national shift away from manufacturing
toward service sector employment, manufacturing continues to be the largest
source of non-agricultural employment in the state, and the state continues to
attract new manufacturing facilities. In addition to the General Motors Saturn
project and a major Nissan facility built in Tennessee in the 1980s, in
January 1991, Nissan announced plans to develop a $600 million engine and
component parts manufacturing facility in Decherd, Tennessee. However, total
planned investment in Tennessee's manufacturing and service sectors was down
sharply to $1.9 billion in 1990 from $3.3 billion in 1989.
Non-agricultural employment in Tennessee is relatively uniformly diversified,
with approximately 24% in the manufacturing sector, approximately 23% in the
wholesale and retail trade sector, approximately 22% in the service sector and
approximately 16% in government.
Tennessee's general obligation bonds are rated Aaa by Moody's and AA+ by
Standard & Poor's. Tennessee's smallest counties have Moody's lowest rating
due to these rural counties' limited economies that make them vulnerable to
economic downturns. Tennessee's four largest counties have the second highest
of Moody's nine investment grades.
The foregoing information does not purport to be a complete or exhaustive
description of all the conditions to which the issuers of Bonds in the
Tennessee Trust are subject. 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. Since certain Bonds in the Tennessee Trust
(other than general obligation bonds issued by the State) are payable from
revenue derived from a specific source or authority, the impact of a
pronounced decline in the national economy or difficulties in significant
industries within the State could result in a decrease in the amount of
revenues realized from such source or by such authority and thus adversely
affect the ability of the respective issuers of the Bonds in the Tennessee
Trust to pay the debt service requirements on the Bonds. Similarly, such
adverse economic developments could result in a decrease in tax revenues
realized by the State and thus could adversely affect the ability of the State
to pay the debt service requirements of any Tennessee general obligation bonds
in the Tennessee Trust. 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 Tennessee Trust to pay interest on or
principal of the Bonds.
The assets of the Tennessee Trust will consist of bonds issued by the State of
Tennessee (the "State"), or any county or any municipality or political
subdivision thereof, including any agency, board, authority or commission, the
interest on which is exempt from the Hall Income Tax imposed by the State of
Tennessee ("Tennessee Bonds"), or by the Commonwealth of Puerto Rico or its
political subdivisions (the "Puerto Rico Bonds") (collectively, the "Bonds").
Under the recently amended provisions of Tennessee law, a unit investment
trust taxable as a grantor trust for federal income tax purposes is entitled
to special Tennessee State tax treatment (as more fully described below) with
respect to its proportionate share of interest income received or accrued with
respect to the Tennessee Bonds. The recent amendments also provide an
exemption for distributions made by a unit investment trust or mutual fund
that are attributable to "bonds or securities of the United States government
or any agency or instrumentality thereof" ("U.S. Government, Agency or
Instrumentality Bonds"). If it were determined that the Trust held assets
other than Tennessee Bonds or U.S. Government, Agency or Instrumentality
Bonds, a proportionate share of distributions from the Trust would be taxable
to Unitholders for Tennessee Income Tax purposes.
Further, because the recent amendments only provide an exemption for
distributions that relate to interest income, distributions by the Trust that
relate to capital gains realized from the sale or redemption of Tennessee
Bonds or U.S. Government, Agency or Instrumentality Bonds are likely to be
treated as taxable dividends for purposes of the Hall Income Tax. However,
capital gains realized directly by a Unitholder when the Unitholder sells or
redeems his Unit will not be subject to the Hall Income Tax. The opinion set
forth below assumes that the interest on the Tennessee Bonds, if received
directly by a Unitholder, would be exempt from the Hall Income Tax under
Tennessee State law. This opinion does not address the taxation of persons
other than full-time residents of the State of Tennessee.
Because the recent amendments only provide an exemption for distributions
attributable to interest on Tennessee Bonds or U.S. Government, Agency or
Instrumentality Bonds, it must be determined whether bonds issued by the
Government of Puerto Rico qualify as U.S. Government, Agency or
Instrumentality Bonds. For Hall Income Tax purposes, there is currently no
published administrative interpretation or opinion of the Attorney General of
Tennessee dealing with the status of distributions made by unit investment
trusts such as the Tennessee Trust that are attributable to interest paid on
bonds issued by the Government of Puerto Rico. However, in a letter dated
August 14, 1992 (the "Commissioner's Letter"), the Commissioner of the State
of Tennessee Department of Revenue advised that Puerto Rico would be an
"instrumentality" of the U.S. Government and treated bonds issued by the
Government of Puerto Rico as U.S. Government, Agency or Instrumentality Bonds.
Based on this conclusion, the Commissioner advised that distributions from a
mutual fund attributable to investments in Puerto Rico Bonds are exempt from
the Hall Income Tax. Both the Sponsor and Chapman and Cutler, for purposes of
its opinion (as set forth below), have assumed, based on the Commissioner's
Letter, that bonds issued by the Government of Puerto Rico are U.S.
Government, Agency or Instrumentality Bonds. However, it should be noted that
the position of the Commissioner is not binding, and is subject to change,
even on a retroactive basis.
The Sponsor cannot predict whether new legislation will be enacted into law
affecting the tax status of Tennessee Trusts. The occurrence of such an event
could cause distributions of interest income from the Trust to be subject to
the Hall Income Tax. Additional information regarding such proposals is
currently unavailable. Investors should consult their own tax advisors in this
regard.
At the time of the closing for each Tennessee Trust, Special Counsel to the
Fund for Tennessee tax matters rendered an opinion under then existing
Tennessee income tax law applicable to taxpayers whose income is subject to
Tennessee income taxation substantially to the effect that:
For purposes of the Hall Income Tax, the Tennessee Excise Tax imposed by
Section 67-4-806 (the "State Corporate Income Tax"), and the Tennessee
Franchise Tax imposed by Section 67-4-903, the Tennessee Trust will not be
subject to such taxes.
For Hall Income Tax purposes, a proportionate share of such distributions from
the Tennessee Trust to Unitholders, to the extent attributable to interest on
the Tennessee Bonds (based on the relative proportion of interest received or
accrued attributable to Tennessee Bonds) will be exempt from the Hall Income
Tax when distributed to such Unitholders. Based on the Commissioner's Letter,
distributions from the Trust to Unitholders, to the extent attributable to
interest on the Puerto Rico Bonds (based on the relative proportion of
interest received or accrued attributable to the Puerto Rico Bonds) will be
exempt from the Hall Income Tax when distributed to such Unitholders. A
proportionate share of distributions from the Tennessee Trust attributable to
assets other than the Bonds would not, under current law, be exempt from Hall
Income Tax when distributed to Unitholders.
For Tennessee State Corporate Income Tax Purposes, Tennessee law does not
provide an exemption for interest on Tennessee Bonds and requires that all
interest excludable from Federal gross income must be included in calculating
"net earnings" subject to the State Corporate Income Tax. No opinion is
expressed regarding whether such tax would be imposed on the earnings or
distributions of the Tennessee Trust (including interest on the Bonds or gain
realized upon the disposition of the Bonds by the Tennessee Trust)
attributable to Unitholders subject to the State Corporate Income Tax.However,
based upon prior written advice from the Tennessee Department of Revenue,
earnings and distributions from the Tennessee Trust (including interest on the
Tennessee Bonds or gain realized upon the disposition of the Tennessee Bonds
by the Tennessee Trust) attributable to the Unitholders should be exempt from
the State Corporate Income Tax. The position of the Tennessee Department of
Revenue is not binding, and is subject
to change, even on a retroactive basis.
Each Unitholder will realize taxable gain or loss for State Corporate Income
Tax purposes when the Unitholder redeems or sells his Units, at a price that
differs from original cost as adjusted for accretion or any discount or
amortization of any premium and other basis adjustments, including any basis
reduction that may be required to reflect a Unitholder's share of interest, if
any, accruing on Bonds during the interval between the Unitholder's settlement
date and the date such Bonds are delivered to the Tennessee Trust, if later.
Tax basis reduction requirements relating to amortization of bond premium
may, under some circumstances, result in Unitholders realizing taxable gain
when the Units are sold or redeemed for an amount equal to or less than their
original cost.
For purposes of the Tennessee Property Tax, the Tennessee Trust will be exempt
from taxation with respect to the Tennessee Bonds it holds. As for the
taxation of the Units held by the Unitholders, although intangible personal
property is not presently subject to Tennessee taxation, no opinion is
expressed with regard to potential property taxation of the Unitholders with
respect to the Units because the determination of whether property is exempt
from such tax is made on a county by county basis.
No opinion is expressed herein regarding whether insurance proceeds paid in
lieu of interest on the Bonds held by the Tennessee Trust (including the
Tennessee Bonds) are exempt from the Hall Income Tax. Distributions of such
proceeds to Unitholders may be subject to the Hall Income Tax.
The Bonds and the Units held by the Unitholder will not be subject to
Tennessee sales and use taxes.
We have not examined any of the Bonds to be deposited and held in the
Tennessee Trust or the proceedings for the issuance thereof or the opinions of
bond counsel with respect thereto, and therefore express no opinion as to the
exemption from State income taxes of interest on the Bonds if received
directly by a Unitholder.
Texas Trusts
Historically, the primary sources of the State's revenues have been sales
taxes, mineral severance taxes and federal grants. Due to the collapse of oil
and gas prices in 1986 and a resulting enactment by recent legislatures of new
tax measures, including those increasing the rates of existing taxes and
expanding the tax base for certain taxes, there has been a reordering in the
relative importance of the State's taxes in terms of their contribution to the
State's revenue in any year. Sales taxes remain the State's main revenue
source, accounting for 28.8% of State revenues during fiscal year 1992.
Federal grants remain the State's second largest revenue source, accounting
for approximately 28.4% of total revenue during fiscal year 1992. The motor
fuels tax is now the State's third largest revenue source and the second
largest tax, accounting for approximately 6.6% of total revenue in fiscal year
1992. Licenses, fees and permits, the State's fourth largest revenue source,
accounted for 6.3% of the total revenue in fiscal year 1992. Interest and
investment income is the fifth largest revenue source also accounting for 6.3%
of total State revenue for fiscal year 1992. The remainder of the State's
revenues are derived primarily from other excise taxes. The State currently
has no personal or corporate income tax. The State does however impose a
corporate franchise tax based in certain circumstances in part on a
corporation's profits.
Heavy reliance on the energy and agricultural sectors for jobs and income
resulted in a general downturn in the Texas economy beginning in 1982 as those
industries suffered significantly. The effects of this downturn continue to
adversely affect the State's real estate industry and its financial
institutions. As a result of these problems, the general revenue fund had a
$231 million cash deficit at the beginning of the 1987 fiscal year and ended
the 1987 fiscal year with a $745 million cash deficit. In 1987, the Texas
economy began to move toward a period of recovery. The expansion continued in
1988 and 1989. In fiscal year 1988, the State ended the year with a general
revenue fund cash surplus of $113 million. In fiscal year 1989, the State
ended the year with a general revenue fund cash surplus of $297 million. In
fiscal year 1990, the State ended the year with a general revenue fund surplus
of $767 million. In fiscal 1991, the ending cash balance was $1.005 billion.
In fiscal year 1992, the ending cash balance was $609 million. Since fiscal
year 1987, however, these cash deficits and surpluses have included
approximately $300 million in dedicated oil overcharge funds, which can be
spent for only specific energy conservation projects.
The 71st Texas Legislature meeting in 1989 passed a record budget totaling
$47.4 billion in spending. Six special legislative sessions in 1989 and 1990
relative to workers' compensation and school financing resulted in the need to
raise an additional $512.3 million in revenue, the majority of which came from
an increase in the State sales tax and taxes on tobacco products.
The 72nd Legislature meeting in special session in the summer of 1991 approved
for the Governor's signature an approximately $9.4 billion budget increase for
the fiscal 1992-93 biennium to be financed in part by approximately $3.4
billion in new revenue measures.
The $3.4 billion in new revenues to finance the new budget came from several
new sources. A tax and fee bill raised a total of $2.1 billion in new revenues
for the state. A fiscal management bill added another $779 million.
Legislative approval of a lottery is expected to add another $462 million.
Finally, another $50 million was added through a change in the Permanent
School Fund investment strategy, which will make additional short-term
earnings available to help fund public schools during the biennium.
The most important component of the tax bill was a major overhaul of the
state's franchise tax, which includes a new measure of business activity
referred to as "earned surplus." A part of the change was a lowering of the
tax rate on capital from $5.25 to $2.50 per $1,000. An additional surtax on
"earned surplus," which includes federal net corporate income and officers'
and directors' compensation of 4.5 percent, was added. Essentially,
corporations pay a tax on capital or a tax on "earned surplus," whichever is
higher. The revised franchise tax is expected to raise an additional $789.3
million over currently projected franchise tax collections during the 1992-93
biennium.
The 73rd Legislature meeting in 1993 passed the 1994-1995 biennial all funds
budget of $71.2 billion without increasing state taxes. This was accomplished
by cutting spending in certain areas and increasing federal funding. The state
Comptroller has estimated that total state revenues from all sources would
total $65.3 billion for the 1994-1995 biennium.
The Texas Constitution prohibits the State from levying ad valorem taxes on
property for general revenue purposes and limits the rate of such taxes for
other purposes to $.35 per $100 of valuation. The Constitution also permits
counties to levy, in addition to all other ad valorem taxes permitted by the
Constitution, ad valorem taxes on property within the county for flood control
and road purposes in an amount not to exceed $.30 per $100 of valuation. The
Constitution prohibits counties, cities and towns from levying a tax rate
exceeding $.80 per $100 of valuation for general fund and other specified
purposes.
With certain specific exceptions, the Texas Constitution generally prohibits
the creation of debt by or on behalf of the State unless the voters of the
State, by constitutional amendment, authorize the issuance of debt (including
general obligation indebtedness backed by the State's taxing power and full
faith and credit). In excess of $8.28 billion of general obligation bonds have
been authorized in Texas and almost $2.89 billion of such bonds are currently
outstanding. Of these, approximately 70% were issued by the Veterans' Land
Board and the Texas Public Finance Authority.
Though the full faith and credit of the State are pledged for the payment of
all general obligations issued by the State, much of that indebtedness is
designed to be eventually self-supporting from fees, payments, and other
sources of revenues; in some instances, the receipt of such revenues by
certain issuing agencies has been in sufficient amounts to pay the principal
of and interest on the issuer's outstanding bonds without requiring the use of
appropriated funds.
Pursuant to Article 717k-2, Texas Revised Civil Statutes, as presently
amended, the net effective interest rate for any issue or series of Bonds in
the Texas Trust is limited to 15%.
From the time Standard & Poor's Corporation began rating Texas general
obligation bonds in 1956 until early 1986, that firm gave such bonds its
highest rating, "AAA". In April 1986, in response to the State economic
problems, Standard & Poor's downgraded its rating of Texas general obligation
bonds to "AA+". Such rating was further downgraded in July 1987 to "AA".
Moody's Investors Service, Inc. has rated Texas bonds since prior to the Great
Depression. Moody's upgraded its rating of Texas general obligation bonds in
1962 from "Aa" to "Aaa", its highest rating, following the imposition of a
statewide sales tax by the Legislature. Moody's downgraded such rating to "Aa"
in March 1987. No prediction can be made concerning future changes in ratings
by national rating agencies of Texas general obligation bonds or concerning
the effect of such ratings changes on the market for such issues.
The same economic and other factors affecting the State of Texas and its
agencies also have affected cities, counties, school districts and other
issuers of bonds located throughout the State. Declining revenues caused by
the downturn in the Texas economy in the mid-1980s forced these various other
issuers to raise taxes and cut services to achieve the balanced budget
mandated by their respective charters or applicable State law requirements.
Standard & Poor's Corporation and Moody's Investors Service, Inc. assign
separate ratings to each issue of bonds sold by these other issuers. Such
ratings may be significantly lower than the ratings assigned by such rating
agencies to Texas general obligation bonds.
On April 15, 1991, the Governor signed into law Senate Bill 351, the School
Finance Reform Bill. This bill sets a minimum local property tax rate which
guarantees the local school districts a basic state allotment of a specified
amount per pupil. The funding mechanism is based on tax base consolidation and
creates 188 new taxing units, drawn largely along county lines. Within each
taxing unit, school districts will share the revenue raised by the minimum
local property tax. Local school districts are allowed to "enrich" programs
and provide for facilities construction by levying an additional tax. In
January 1992 the Texas Supreme Court declared the School Finance Reform Bill
unconstitutional because the community education districts are in essence a
state property tax. The legislature was given until September 1, 1993 to pass
a new school finance reform bill. The Supreme Court said that, in the
meantime, the county education districts could continue to levy and collect
property taxes. Several taxpayers have filed suit challenging the right of
such districts to collect a tax that has been declared unconstitutional by the
Supreme Court. In March 1993, the Legislature passed a proposed constitutional
amendment which would allow a limited amount of money to be "recaptured" from
wealthy school districts and redistributed to property-poor school districts.
However, the amendment was rejected by the voters on May 1, 1993, requiring
the Legislature to develop a new school finance plan. At the end of May 1993,
the legislature passed a new school finance bill that provides school
districts with certain choices to achieve funding equalization. Although a
number of both poor and wealthy school districts have challenged the new
funding law, the trial judge has stated that the new law shall be implemented
for at least the 1993-1994 school year before considering any constitutional
challenges.
The Comptroller has estimated that total revenues for fiscal 1993 will be
$29.66 billion, compared to actual revenues of $27.56 billion for fiscal 1992.
The revenue estimate for fiscal 1993 is based on an assumption that the Texas
economy will show a gradual but steady growth.
A wide variety of Texas laws, rules and regulations affect, directly, or
indirectly, the payment of interest on, or the repayment of the principal of,
Bonds in the Texas Trust. The impact of such laws and regulations on
particular Bonds may vary depending upon numerous factors including, among
others, the particular type of Bonds involved, the public purpose funded by
the Bonds and the nature and extent of insurance or other security for payment
of principal and interest on the Bonds. For example, Bonds in the Texas Trust
which are payable only from the revenues derived from a particular facility
may be adversely affected by Texas laws or regulations which make it more
difficult for the particular facility to generate revenues sufficient to pay
such interest and principal, including, among others, laws and regulations
which limit the amount of fees, rates or other charges which may be imposed
for use of the facility or which increase competition among facilities of that
type or which limit or otherwise have the effect of reducing the use of such
facilities generally, thereby reducing the revenues generated by the
particular facility. Bonds in the Texas Trust, the payment of interest and
principal on which is payable from annual appropriations, may be adversely
affected by local laws or regulations that restrict the availability of monies
with which to make such appropriations. Similarly, Bonds in the Texas Trust,
the payment of interest and principal on which is secured, in whole or in
part, by an interest in real property may be adversely affected by declines in
real estate values and by Texas laws that limit the availability of remedies
or the scope of remedies available in the event of a default on such Bonds.
Because of the diverse nature of such laws and regulations and the
impossibility of predicting the nature or extent of future changes in existing
laws or regulations or the future enactment or adoption of additional laws or
regulations, it is not presently possible to determine the impact of such laws
and regulations on the Bonds in the Texas Trust and, therefore, on the Units.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds in the Texas
Trust and does not purport to be a complete or exhaustive description of all
adverse conditions to which the issuers in the Texas Trust 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 the
Bonds, the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Texas Trust to pay interest on
or principal of the Bonds.
At the time of closing for each Texas Trust, Special Counsel to the Fund for
Texas tax matters rendered an opinion under then existing Texas law
substantially to the effect that:
(1)Neither the State nor any political subdivision of the State currently
imposes an income tax on individuals. Therefore, no portion of any
distribution received by an individual Unitholder of the Trust in respect of
his Units, including a distribution of the proceeds of insurance in respect of
such Units, is subject to income taxation by the State or any political
subdivision of the State;
(2)except in the case of certain transportation businesses, savings and loan
associations and insurance companies, no Unit of the Trust is taxable under
any property tax levied in the State;
(3)the "inheritance tax" of the State, imposed upon certain transfers of
property of a deceased resident individual Unitholder, may be measured in part
upon the value of Units of the Trust included in the estate of such
Unitholder; and
(4)with respect to any Unitholder which is subject to the State corporate
franchise tax, Units in the Trust held by such Unitholder, and distributions
received thereon, will be taken into account in computing the "taxable
capital" of the Unitholder allocated to the State, one of the bases by which
such franchise tax is currently measured (the other being a corporation's "net
capital earned surplus," which is, generally, its net corporate income plus
officers and directors income).
The opinion set forth in clause (2), above, is limited to the extent that
Units of the Trust may be subject to property taxes levied in the State if
held on the relevant date: (i) by a transportation business described in
V.T.C.A., Tax Code, Subchapter A, Chapter 24; (ii) by a savings and loan
association formed under the laws of the State (but only to the extent
described in section 11.09 of the Texas Savings and Loan Act, Vernon's Ann.
Civ. St. art. 852a); or (iii) by an insurance company incorporated under the
laws of the State (but only to the extent described in V.A.T.S., Insurance
Code, Art. 4.01). Each Unitholder described in the preceding sentence should
consult its own tax advisor with respect to such matters.
Corporations subject to the State franchise tax should be aware that in its
first called 1991 session, the Texas Legislature adopted, and the Governor has
signed into law, certain substantial amendments to the State corporate
franchise tax, the effect of which may be to subject to taxation all or a
portion of any gains realized by such a corporate Unitholder upon the sale,
exchange or other disposition of a Unit. The amendments are applicable to
taxable periods commencing January 1991, and to each taxable period
thereafter. Because no authoritative judicial, legislative or administrative
interpretation of these amendments has issued, and there remain many
unresolved questions regarding its potential effect on corporate franchise
taxpayers, each corporation which is subject to State franchise tax and which
is considering the purchase of Units should consult its tax advisor regarding
the effect of these amendments.
Washington Trusts
Based on the U.S. Census Bureau's 1990 Census, the State is the 18th largest
by population. From 1980 to 1990, the State's population increased at an
average annual rate of 1.8% while the United States' population grew at an
average annual rate of 1.1%. In 1991, the State's population continued its
growth at an annualized rate of 2%.
State Economic Overview. The State's economic performance over the past few
years has been relatively strong when compared to that of the United States as
a whole. The rate of economic growth measured by employment in the State was
4.9% in 1990 slowing to 0.9% in 1991, compared with U.S. growth rates of 1.5%
in 1990 and 0.9% in 1991. Based on preliminary figures and after adjusting for
inflation, growth in per capita income outperformed the national economy
during each year of the 1989-1991 period. A review of employment within
various segments of the economy indicates that this growth in the State's
economy was broadly based.
The economic base of the State includes manufacturing and service industries
as well as agricultural and timber production. Between 1987 and 1991,
employment in the State experienced growth in both manufacturing and
non-manufacturing industries. Sectors of the State's employment base in which
growth exceeded comparable figures reported for the United States during that
period include durable and non-durable goods manufacturing, services and
government.
The State's leading export industries are aerospace, forest products,
agriculture and food processing. On a combined basis, the aerospace, timber
and food processing industries employ about 9% of the State's non-farm
workers. In recent years, however, the non-manufacturing sector has played an
increasingly significant role in contributing to the State's economy.
Recently, The Boeing Company ("Boeing"), the State's largest employer,
announced it will reduce production of its commercial aircraft by
approximately 35% over the next 18 months due to the financial problems of
many of the world's airlines which have resulted in deferred deliveries of
aircraft and fewer new orders. It is estimated that Boeing will cut at least
10,500 jobs in the State in 1993 and a total of 20,000 jobs in the State
during the next three years; this is expected to result in the loss of another
30,000 jobs in the rest of the State's economy, primarily in subcontracting,
trade and consumer-related services. While the specific impact of this
employment decrease on the State's economy cannot be quantified at this time,
some economists have predicted that a loss of up to $400 million in 1993-95
State revenues will result. No assurance can be given that additional losses
will not occur, or that the effect of the expected losses will not be more
adverse.
Weakness in the State's manufacturing sector, notably aerospace and lumber and
wood products, combined with a weak national recovery due to fiscal
constraints at the national level, are expected to restrain economic growth in
the State for the remainder of the 1991-93 biennium and into the 1993-95
biennium. Weakness in California's economy is also likely to adversely affect
the State's economic performance.
State Revenues, Expenditures and Fiscal Controls. The State's tax revenues are
primarily comprised of excise and ad valorem taxes. By constitutional
provision, the aggregate of all unvoted tax levies upon real and personal
property by State and local taxing districts may not exceed 1% of the true and
fair value of such property.
By law, State tax revenue growth is limited so that it does not exceed the
growth rate of State personal income averaged over a three-year period. To
date, State revenue increases have remained substantially below the State's
revenue limit.
Expenditures of general State revenues are made pursuant to constitutional and
statutory mandates. Most general State revenue is deposited in the State's
General Fund. During the 1991-93 biennium, money in the General Fund is
expected to be spent on public schools (37.5%), social and health services
(36.4%), higher education (7.0%), community colleges (3.5%), and corrections
(2.5%).
State law requires a balanced biennial budget. Whenever it appears that
disbursements will exceed the aggregate of estimated receipts plus beginning
cash surplus, the Governor is required to reduce expenditures of appropriated
funds. To assist in its financial planning, the State, through its Economic
and Revenue Forecast Council, prepares quarterly economic and revenue
forecasts.
State Debt. The State currently has outstanding general obligation and revenue
bonds in the aggregate principal amount of approximately $4.7 billion.
Issuance of additional general obligation bonds is subject to constitutional
and statutory debt limitations. By statute, additional general obligation
bonds (with certain exceptions) may not be issued if, after giving effect
thereto, maximum annual debt service would exceed 7% of the arithmetic mean of
general State revenues for the preceding three fiscal years. Based on certain
assumptions, the State's remaining general obligation debt capacity is
currently estimated at approximately $1.1 billion.
State Budget. The State operates on a July 1 to June 30 fiscal year and on a
biennial budget basis. The State began the 1991-93 biennium with a $468
million surplus in its General Fund and $260 million in its budget
stabilization account, a "rainy day fund." The original 1991-93 biennium
budget reflected expected revenue growth of 12.4%. Weaker than expected
revenue collections for the first six months of fiscal 1991 prompted the State
Economic and Revenue Forecast Council to reduce projected revenue growth to a
rate of 7.2%, resulting in a forecast General Fund cash deficit for the
1991-93 biennium. In addition, supplemental operating budget adjustments for
State and federally mandated funding of social and health service programs,
prisons and correctional facilities, and K-12 education contributed to the
projected shortfall.
In response to the forecast cash deficit, the Governor, in fulfillment of his
statutory duty to maintain a balanced budget, implemented a 2.5%
across-the-board reduction in General Fund appropriations, effective December
1, 1991. In 1992, a 1991-93 biennium supplemental budget was adopted. Actions
taken include expenditure reductions, selected tax increases and use of a
portion of the budget stabilization account. The result, when taken in
conjunction with the November 1992 revenue forecast, is a projected General
Fund State balance for June 1993 of $170 million with a $100 million balance
in the budget stabilization account. The next revenue forecast is scheduled to
be released in March 1993. There is no assurance that additional actions will
not be necessary to balance the State budget, particularly in light of the
recent unfavorable developments in the aerospace industry.
The 1993-95 biennium budget is currently being considered by the State
Legislature. A shortfall of $1.6 billion to $2.4 billion in a $17 billion
budget has been projected by some analysts. In response, the Governor has
proposed making $800 million in expenditure cuts, and recently has favored a
State income tax. An increase in general sales and business taxes has also
been discussed. No predictions can be made on what steps the State will be
required to take to address the potential deficit, nor can any assurance be
given that such measures will not adversely affect the market value of the
Bonds held in the portfolio of the Trust or the ability of the State (or any
other obligor) to make timely payments of debt service on (or relating to)
these obligations or the State's ability to service its debts.
State Bond Ratings. The State's most recent general obligation bond issue was
rated "Aa" by Moody's and "AA" by S&P and Fitch. No assurance can be given
that the State's recent or projected economic and budgetary problems will not
result in a review or downgrading of these ratings.
Supply System Bondholders' Suit. The Washington Public Power Supply System
(the "Supply System"), a municipal corporation of the State, was established
to acquire, construct and operate facilities for the generation and
transmission of electricity. In 1983, the Supply System announced it was not
able to pay debt service on $2.25 billion of bonds issued to finance two of
its nuclear generating projects. Chemical Bank, the trustee for such bonds,
then declared the entire principal and interest on the bonds due and payable
immediately. A substantial amount of litigation followed in various state and
federal courts. Various claims were made against the State, private and public
utilities, the Bonneville Power Administration, the Supply System,
underwriters, attorneys and others. In 1989, a federal court approved a
comprehensive settlement in respect of the securities litigation arising from
the default that involved the State. The State agreed to contribute $10
million to the settlement in return for a complete release, including a
release of claims against the State in a State court action. Based on the
settlement in federal court, the State anticipates that the State court action
will be dismissed, although no assurance can be given that such action will be
dismissed.
The foregoing information constitutes only a brief summary of some of the
general factors 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 obligations held by the Washington Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
Issuers of the 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 the
Bonds, the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Washington Trust to pay
interest on or principal of the Bonds.
At the time of closing for each Washington Trust, Special Counsel to the Fund
for Washington tax matters, rendered an opinion under then existing Washington
law substantially to the effect that:
Neither the State of Washington nor any of its political subdivisions imposes
an income tax.
The State imposes a business and occupation tax on the gross receipts of all
business activities conducted within the State, with certain exceptions. The
Washington Trust will not be subject to this tax. Distributions of the
Washington Trust income paid to Unit holders who are not engaged in a banking,
loan, securities, or other financial business in the State (which businesses
have been broadly defined) will not be subject to the tax. Unit holders that
are engaged in any of such financial businesses will be subject to the tax.
Currently the business and occupation tax rate is $1.5%. Several cities impose
comparable business and occupation taxes on financial businesses conducted
within such cities. The current rate in Seattle is .415%.
The Units will not be subject to the State's ad valorem property tax, nor will
any sale, transfer or possession of the Units be subject to State or local
sales or use taxes.
Persons considering the purchase of Units should be aware that proposals have
recently been suggested by the Governor and other officials of the State that
would, if enacted, subject interest income received by persons resident in (or
doing business within) the State to the business and occupation tax, whether
or not such persons are engaged in a banking, loan, securities, or other
financial business. It is unclear whether such proposals would exclude
interest income derived from obligations of the State and its political
subdivisions.
The foregoing is an abbreviated summary of certain of the provisions of
Washington statutes and administrative rules presently in effect, with respect
to the taxation of Unit holders of the Washington Trust. These provisions are
subject to change by legislative or administrative actions, or by court
decisions, and any such change may be retroactive with respect to Washington
Trust transactions. Unit holders are advised to consult with their own tax
advisors for more detailed information concerning Washington State and local
tax matters. The foregoing summary assumes that the Washington Trust will not
conduct business activities within Washington.
West Virginia Trusts
The assets of the West Virginia Trust will consist of interest-bearing
obligations issued by or on behalf of the State of West Virginia ("West
Virginia") or counties, municipalities, authorities or political subdivisions
thereof the interest on which is expected to qualify as exempt from West
Virginia income taxes (the "West Virginia Bonds") or by the Commonwealth of
Puerto Rico, Guam or the United States Virgin Islands (the "Possession Bonds")
(collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludable from gross income
for federal income tax purposes and (iii) interest on the West Virginia Bonds,
if received directly by a Unitholder would be exempt from the West Virginia
personal income tax applicable to individuals (the "West Virginia Personal
Income Tax"). At the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exemption of interest thereon from
Federal income tax were rendered by bond counsel to the respective issuing
authorities. In addition, with respect to the West Virginia Bonds, bond
counsel to the issuing authorities rendered opinions as to the exemption of
interest from the West Virginia Personal Income Tax. Neither the Sponsor nor
its counsel has made any review for the West Virginia Trust of the proceedings
relating to the issuance of the Bonds or of the bases for the opinions
rendered in connection therewith. The opinion set forth below does not address
the taxation of persons other than full-time residents of West Virginia.
At the time of closing for each West Virginia Trust, Special Counsel to the
Fund for West Virginia tax matters rendered an opinion, based upon the
assumptions set forth above, under then existing West Virginia law
substantially to the effect that:
(1)The West Virginia Trust will not be subject to tax under the West Virginia
Corporation Net Income Tax, the West Virginia Business Franchise Tax, or the
West Virginia Personal Income Tax.
(2)Each Unitholder will be treated as owning directly a pro rata portion of
each asset of the Trust. Accordingly, income on the Bonds which is exempt from
the West Virginia Personal Income Tax when received by the West Virginia
Trust, and which would be exempt from the West Virginia Personal Income Tax if
received directly by a Unitholder, will retain its status as exempt from such
tax when received by the West Virginia Trust and distributed to such
Unitholder.
(3)For Unitholders subject to the West Virginia Corporation Net Income Tax,
income of the West Virginia Trust received by them is not exempt from the West
Virginia Corporation Net Income Tax. However, such Unitholders may be entitled
to a credit against the tax imposed under the West Virginia Corporation Net
Income Tax Law based on their ownership of Units in the West Virginia Trust.
Unitholders should consult their own advisors regarding the applicability and
computation of any such credit.
(4)To the extent that interest income derived from the West Virginia Trust by
a Unitholder with respect to Possession Bonds is excludable from gross income
for federal income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a or 48 U.S.C. Section 1403, such interest income will not be
subject to West Virginia Personal Income Tax.
(5)Each Unitholder will recognize gain or loss for West Virginia Personal
Income Tax purposes if the Trustee disposes of a bond (whether by redemption,
sale or otherwise) or if the Unitholder redeems or sells Units of the West
Virginia Trust to the extent that such a transaction results in a recognized
gain or loss to such Unitholder for federal income tax purposes.
(6)Insurance proceeds paid under policies which represent maturing interest on
defaulted obligations which are excludable from gross income for federal
income tax purposes should be excludable from the West Virginia Personal
Income Tax to the same extent as such interest would have been if paid by the
issuer of such Bonds held by the West Virginia Trust.
(7)The West Virginia Personal Income Tax does not permit a deduction of
interest paid on indebtedness incurred or continued to purchase or carry Units
in the West Virginia Trust to the extent that interest income related to the
ownership of Units is exempt from the West Virginia Personal Income Tax.
We have not examined any of the Bonds to be deposited and held in the West
Virginia Trust or the proceedings for the issuance thereof or the opinions of
bond counsel with respect thereto, and therefore express no opinion as to the
exemption from federal income taxation of interest on the Bonds or from the
West Virginia Personal Income Tax of interest or profits on the West Virginia
Bonds if interest thereon had been received directly by a Unitholder.
Moreover, no opinion is expressed herein regarding collateral tax consequences
under West Virginia law relating to the ownership of the Units or the
applicability of other West Virginia taxes, such as the West Virginia property
and estate taxes. We have been informally advised by the Legal Division of the
West Virginia Department of Tax and Revenue that Units may be subject to the
West Virginia property tax (regardless of whether the Bonds held by the West
Virginia Trust would be exempt from such tax if held directly by a
Unitholder).
TRUST ADMINISTRATION AND EXPENSES
Sponsor. Van Kampen Merritt Inc., a Delaware corporation, is the Sponsor of
the Trust. Van Kampen Merritt Inc. is primarily owned by Clayton, Dubilier &
Rice, Inc., a New York-based private investment firm. Van Kampen Merritt Inc.
management owns a significant minority equity position. Van Kampen Merritt
Inc. specializes in the underwriting and distribution of unit investment
trusts and mutual funds. The Sponsor is a member of the National Association
of Securities Dealers, Inc. and has its principal office at One Parkview
Plaza, Oakbrook Terrace, lllinois 60181 (708-684-6000). It maintains a branch
office in Philadelphia and has regional representatives in Atlanta, Dallas,
Los Angeles, New York, San Francisco, Seattle and Tampa. As of September 30,
1993, the total stockholders' equity of Van Kampen Merritt Inc. was
$200,885,000 (unaudited). (This paragraph relates only to the Sponsor and not
to the Trusts. 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.)
As of November 30, 1993, the Sponsor and its affiliates managed or supervised
approximately $38.5 billion of investment products, of which over $25 billion
is invested in municipal securities. The Sponsor and its affiliates managed
$23 billion of assets, consisting of $8.2 billion for 19 mutual funds, $8.3
billion for 33 closed-end funds and $6.5 billion for 51 institutional
accounts. The Sponsor has also deposited over $23.5 billion of unit investment
trusts. Based on cumulative assets deposited, the Sponsor believes that it is
the largest sponsor of insured municipal unit investment trusts, primarily
through the success of its Insured Municipal Income Trust or the IM-IT trust.
The Sponsor also provides surveillance and evaluation services at cost for
approximately $15.5 billion of unit investment trust assets outstanding. Since
1976, the Sponsor has opened over one million retail investor accounts through
retail distribution firms. Van Kampen Merritt Inc. is the sponsor of the
various series of the trusts listed below and the distributor of the mutual
funds and closed-end funds listed below. Unitholders may only invest in the
trusts, mutual funds and closed-end funds which are registered for sale in the
state of residence of such Unitholder.
Van Kampen Merritt Inc. is the sponsor of the various series of the following
unit investment trusts: Investors' Quality Tax-Exempt Trust; Investors'
Quality Tax-Exempt Trust, Multi-Series; Insured Municipals Income Trust;
Insured Municipals Income Trust, Insured Multi-Series; California Insured
Municipals Income Trust; New York Insured Municipals Income Trust;
Pennsylvania Insured Municipals Income Trust; Insured Tax Free Bond Trust;
Insured Tax Free Bond Trust, Insured Multi-Series; Investors' Quality
Municipals Trust, AMT Series; Van Kampen Merritt Blue Chip Opportunity Trust;
Van Kampen Merritt Blue Chip Opportunity and Treasury Trust; Investors'
Corporate Income Trust; Investors' Governmental Securities-Income Trust; Van
Kampen Merritt International Bond Income Trust; Van Kampen Merritt Utility
Income Trust; Van Kampen Merritt Insured Income Trust; Van Kampen Merritt
Emerging Markets Income Trust; Van Kampen Merritt Global Telecommunications
Trust; and Van Kampen Merritt Global Energy Trust.
Van Kampen Merritt Inc. is the distributor of the following mutual funds: Van
Kampen Merritt U.S.Government Fund; Van Kampen Merritt California Insured Tax
Free Fund; Van Kampen Merritt Tax-Free High Income Fund; Van Kampen Merritt
Insured Tax-Free Income Fund; Van Kampen Merritt High Yield Fund; Van Kampen
Merritt Growth and Income Fund; Van Kampen Merritt Pennsylvania Tax-Free
Income Fund; Van Kampen Merritt Money Market Fund; Van Kampen Merritt Tax Free
Money Fund; Van Kampen Merritt Municipal Income Fund; Van Kampen Merritt
Adjustable Rate U.S. Government Fund; Van Kampen Merritt Short-Term Global
Income Fund; and Van Kampen Merritt Limited Term Municipal Income Fund.
Van Kampen Merritt is the distributor of the following closed-end funds: Van
Kampen Merritt Municipal Income Trust; Van Kampen Merritt California Municipal
Trust; Van Kampen Merritt Intermediate Term High Income Trust; Van Kampen
Merritt Limited Term High Income Trust; Van Kampen Merritt Prime Rate Income
Trust; Van Kampen Merritt Investment Grade Municipal Trust; Van Kampen Merritt
Municipal Trust; Van Kampen Merritt California Quality Municipal Trust; Van
Kampen Merritt Florida Quality Municipal Trust; Van Kampen Merritt New York
Quality Municipal Trust; Van Kampen Merritt Ohio Quality Municipal Trust; Van
Kampen Merritt Pennsylvania Quality Municipal Trust; Van Kampen Merritt Trust
for Investment Grade Municipals; Van Kampen Merritt Trust for Investment Grade
CA Municipals; Van Kampen Merritt Trust for Insured Municipals; Van Kampen
Merritt Trust for Investment Grade FL Municipals; Van Kampen Merritt Trust for
Investment Grade PA Municipals; Van Kampen Merritt Advantage Pennsylvania
Municipal Income Trust; Van Kampen Merritt Advantage Municipal Income Trust;
Van Kampen Merritt Municipal Opportunity Trust; Van Kampen Merritt Trust for
Investment Grade NY Municipals; Van Kampen Merritt Trust for Investment Grade
NJ Municipals; Van Kampen Merritt Strategic Sector Municipal Trust; Van Kampen
Merritt Value Municipal Income Trust; Van Kampen Merritt California Value
Municipal Income Trust; Van Kampen Merritt Massachusetts Value Municipal
Income Trust; Van Kampen Merritt New Jersey Value Municipal Income Trust; Van
Kampen Merritt New York Value Municipal Income Trust; Van Kampen Merritt Ohio
Value Municipal Income Trust; Van Kampen Merritt Pennsylvania Value Municipal
Income Trust; Van Kampen Merritt Municipal Opportunity Trust II; Van Kampen
Merritt Florida Municipal Opportunity Trust; Van Kampen Merritt Advantage
Municipal Income Trust II; and Van Kampen Merritt Select Municipal Trust.
If the Sponsor shall fail to perform any of its duties under the Trust
Agreement or become incapable of acting or become bankrupt or its affairs are
taken over by public authorities, then the Trustee may (i) appoint a successor
Sponsor at rates of compensation deemed by the Trustee to be reasonable and
not exceeding amounts prescribed by the Securities and Exchange Commission,
(ii) terminate the Trust Agreement and liquidate the Fund as provided therein
or (iii) continue to act as Trustee without terminating the Trust Agreement.
All costs and expenses incurred in creating and establishing the Fund,
including the cost of the initial preparation, printing and execution of the
Trust Agreement and the certificates, legal and accounting expenses,
advertising and selling expenses, expenses of the Trustee, initial evaluation
fees and other out-of-pocket expenses have been borne by the Sponsor at no
cost to the Fund.
Compensation of Sponsor and Evaluator. The Sponsor will not receive any fees
in connection with its activities relating to the Trusts. However, American
Portfolio Evaluation Services, a division of Van Kampen Merritt Investment
Advisory Corp., which is a wholly-owned subsidiary corporation of the Sponsor,
will receive an annual supervisory fee as indicated under "Summary of
Essential Financial Information" in Part One of this Prospectus for providing
portfolio supervisory services for such series. Such fee (which is based on
the number of Units outstanding on January 1 of each year) may exceed the
actual costs of providing such supervisory services for such series, but at no
time will the total amount received for portfolio supervisory services
rendered to all such series in any calendar year exceed the aggregate cost to
the Evaluator of supplying such services in such year. In addition, the
Evaluator shall receive an annual evaluation fee as indicated under "Summary
of Essential Financial Information" for regularly evaluating each Trust's
portfolio.Both of the foregoing fees may be increased without approval of the
Unitholders by amounts not exceeding proportionate increases under the
category "All Services Less Rent of Shelter" in the Consumer Price Index
published by the United States Department of Labor or, if such category is no
longer published, in a comparable category. The Sponsor and the dealers will
receive sales commissions and may realize other profits (or losses) in
connection with the sale of Units as described under \xd2 Public Offering".
Trustee. The Trustee is The Bank of New York, a trust company organized under
the laws of New York. The Bank of New York has its offices at 101 Barclay
Street, New York, New York 10286 (800-221-7668). 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 duties of the Trustee are primarily ministerial in nature. It did not
participate in the selection of Bonds for the portfolio of any Trust.
In accordance with the Trust Agreement, the Trustee shall keep proper books of
record and account of all transactions at its office for the Fund. Such
records shall include the name and address of, and the certificates issued by
the Fund to, every Unitholder of the Fund. Such books and records shall be
open to inspection by any Unitholder at all reasonable times during the usual
business hours. The Trustee shall make such annual or other reports as may
from time to time be required under any applicable state or Federal statute,
rule or regulation (see "Public Offering Reports Provided"). The Trustee is
required to keep a certified copy or duplicate original of the Trust Agreement
on file in its office available for inspection at all reasonable times during
the usual business hours by any Unitholder, together with a current list of
the Securities held in the Fund. Under the Trust Agreement, the Trustee or any
successor trustee may resign and be discharged of the Trusts created by the
Trust Agreement by executing an instrument in writing and filing the same with
the Sponsor. The Trustee or successor trustee must mail a copy of the notice
of resignation to all Fund Unitholders then of record, not less than 60 days
before the date specified in such notice when such resignation is to take
effect. The Sponsor upon receiving notice of such resignation is obligated to
appoint a successor trustee promptly. If, upon such resignation, no successor
trustee has been appointed and has accepted the appointment within 30 days
after notification, the retiring Trustee may apply to a court of competent
jurisdiction for the appointment of a successor. The Sponsor may remove the
Trustee and appoint a successor trustee as provided in the Trust Agreement at
any time with or without cause. Notice of such removal and appointment shall
be mailed to each Unitholder by the Sponsor. Upon execution of a written
acceptance of such appointment by such successor trustee, all the rights,
powers, duties and obligations of the original trustee shall vest in the
successor. The 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.
Trustee's Fee. For its services the Trustee will receive a fee based on the
aggregate outstanding principal amount of Securities in each Trust as of the
opening of business on January 2 and July 2 of each year as set forth under
"Per Unit Information" in Part I of this Prospectus. The Trustee's fees are
payable monthly on or before the fifteenth day of each month from the Interest
Account of each Trust to the extent funds are available and then from the
Principal Account of each Trust, with such payments being based on each
Trust's portion of such expenses. Since the 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 Unitholders, the Trustee benefits thereby. Part of the Trustee's
compensation for its services to each Trust is expected to result from the use
of these funds. Such fees may be increased without approval of the Unitholders
by amounts not exceeding proportionate increases under the category "All
Services Less Rent of Shelter" in the Consumer Price Index published by the
United States Department of Labor or, if such category is no longer published,
in a comparable category. The Trustee's fees will not be increased in future
years in order to make up any reduction in the Trustee's fees described under
"Per Unit Information" in Part I of this Prospectus for the applicable Trust.
For a discussion of the services rendered by the Trustee pursuant to its
obligations under the Trust Agreement, see "Rights of Unitholders Reports
Provided" and "Trust Administration".
Portfolio Administration. The Trustee is empowered to sell, for the purpose of
redeeming Units tendered by any Unitholder, and for the payment of expenses
for which funds may not be available, such of the Bonds designated by the
Evaluator as the Trustee in its sole discretion may deem necessary. The
Evaluator, in designating such Securities, will consider a variety of factors,
including (a) interest rates, (b) market value and (c) marketability. To the
extent that Bonds are sold which are current in payment of principal and
interest in order to meet redemption requests and defaulted Bonds are retained
in the portfolio in order to preserve the related insurance protection
applicable to said Bonds, the overall quality of the Bonds remaining in a
Trust's portfolio will tend to diminish. Except as described below and in
certain other unusual circumstances for which it is determined by the Trustee
to be in the best interests of the Unitholders or if there is no alternative,
the Trustee is not empowered to sell Bonds which are in default in payment of
principal or interest or in significant risk of such default and for which
value has been attributed for the insurance obtained by a Trust. Because of
such restrictions on the Trustee under certain circumstances the Sponsor may
seek a full or partial suspension of the right of Unitholders to redeem their
Units. See "Public Offering Redemption of Units". The Sponsor is empowered,
but not obligated, to direct the Trustee to dispose of Bonds in the event of
an advanced refunding.
The Sponsor is required to instruct the Trustee to reject any offer made by an
issuer of any of the Securities to issue new obligations in exchange or
substitution for any Security pursuant to a refunding or refinancing plan,
except that the Sponsor may instruct the Trustee to accept or reject such an
offer or to take any other action with respect thereto as the Sponsor may deem
proper if (1) the issuer is in default with respect to such Security or (2) in
the written opinion of the Sponsor the issuer will probably default with
respect to such Security in the reasonably foreseeable future. Any obligation
so received in exchange or substitution will be held by the Trustee subject to
the terms and conditions of the Trust Agreement to the same extent as
Securities originally deposited thereunder. Within five days after the deposit
of obligations in exchange or substitution for underlying Securities, the
Trustee is required to give notice thereof to each Unitholder of the Trust
thereby affected, identifying the Securities eliminated and the Securities
substituted therefor. Except as provided herein, the acquisition by the Fund
of any securities other than the Securities initially deposited is not
permitted.
If any default in the payment of principal or interest on any Security occurs
and no provision for payment is made therefor within 30 days, the Trustee is
required to notify the Sponsor thereof. If the Sponsor fails to instruct the
Trustee to sell or to hold such Security within 30 days after notification by
the Trustee to the Sponsor of such default, the Trustee may in its discretion
sell the defaulted Security and not be liable for any depreciation or loss
thereby incurred.
Sponsor Purchases of Units. 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 the close of business on the second
succeeding business day and by making payment therefor to the Unitholder 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 as any other Units.
The offering price of any Units acquired by the Sponsor will be in accord with
the Public Offering Price described in the then currently effective prospectus
describing such Units. Any profit resulting from the resale of such Units will
belong to the Sponsor which likewise will bear any loss resulting from a lower
offering or Redemption Price subsequent to its acquisition of such Units.
Insurance Premiums. Insurance premiums, which are obligations of each Trust,
are payable monthly by the Trustee on behalf of the respective Trust so long
as such Trust retains the Bonds. The cost of the portfolio insurance obtained
by the respective Trust is set forth in footnote (5) in "Notes to Portfolio"
in Part One of this Prospectus. As Bonds in the portfolio of a Trust are
redeemed by their respective issuers or are sold by the Trustee, the amount of
the premium will be reduced in respect of those Bonds no longer owned by and
held in such Trust. If the Trustee exercises the right to obtain permanent
insurance, the premiums payable for such permanent insurance will be paid
solely from the proceeds of the sale of the related Bonds. The premiums for
such permanent insurance with respect to each Bond will decline over the life
of the Bond. A Trust does not incur any expense for Preinsured Bond Insurance,
since the premium or premiums for such insurance have been paid by the
respective issuers or the Sponsor prior to the deposit of such Preinsured
Bonds in a Trust. Preinsured Bonds are
not additionally insured by such Trust.
Miscellaneous Expenses. The following additional charges are or may be
incurred by the Trusts: (a) fees of the Trustee for extraordinary services,
(b) expenses of the Trustee (including legal and auditing expenses) and of
counsel designated by the Sponsor, (c) various governmental charges, (d)
expenses and costs of any action taken by the Trustee to protect the Trusts
and the rights and interests of Unitholders, (e) indemnification of the
Trustee for any loss, liability or expenses incurred by it in the
administration of the Fund without negligence, bad faith or willful misconduct
on its part, (f) any special custodial fees payable in connection with the
sale of any of the bonds in a Trust and (g) expenditures incurred in
contacting Unitholders upon termination of the Trusts.
The fees and expenses set forth herein are payable out of the Trusts. When
such fees and expenses are paid by or owing to the Trustee, they are secured
by a lien on the portfolio or portfolios of the applicable Trust or Trusts. If
the balances in the Interest and Principal Accounts are insufficient to
provide for amounts payable by the Fund, the Trustee has the power to sell
Securities to pay such amounts.
GENERAL
Amendment or Termination. The Sponsor and the Trustee have the power to amend
the Trust Agreement without the consent of any of the Unitholders when such an
amendment is (a) to cure an ambiguity or to correct or supplement any
provision of the Trust Agreement which may be defective or inconsistent with
any other provision contained therein or (b) to make such other provisions as
shall not adversely affect the interest of the Unitholders (as determined in
good faith by the Sponsor and the Trustee), provided that the Trust Agreement
may not be amended to increase the number of Units 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 the Fund, except
for the substitution of certain refunding securities for such Securities. In
the event of any amendment, the Trustee is obligated to notify promptly all
Unitholders of the substance of such amendment.
A Trust may be terminated at any time by consent of Unitholders of 51% of the
Units of such Trust then outstanding or by the Trustee when the value of such
Trust, as shown by any semi-annual evaluation, is less than that indicated
under "Summary of Essential Financial Information" in Part One of this
Prospectus. The Trust Agreement provides that each Trust shall terminate upon
the redemption, sale or other disposition of the last Security held in such
Trust, but in no event shall it continue beyond the end of the year preceding
the fiftieth anniversary of the Trust Agreement (except in the case of a State
Intermediate Laddered Maturity Trust which shall in no event continue beyond
the end of the year preceding the twentieth anniversary of the Trust
Agreement). In the event of termination of the Fund or any Trust, written
notice thereof will be sent by the Trustee to each Unitholder of such Trust at
his address appearing on the registration books of the Fund maintained by the
Trustee, such notice specifying the time or times at which the Unitholder may
surrender his certificate or certificates for cancellation. Within a
reasonable time thereafter the Trustee shall liquidate any Securities then
held in such Trust and shall deduct from the funds of such Trust any accrued
costs, expenses or indemnities provided by the Trust Agreement, including
estimated compensation of the Trustee and costs of liquidation and any amounts
required as a reserve to provide for payment of any applicable taxes or other
governmental charges. The sale of Securities in the Trust upon termination may
result in a lower amount than might otherwise be realized if such sale were
not required at such time. For this reason, among others, the amount realized
by a Unitholder upon termination may be less than the principal amount of
Securities represented by the Units held by such Unitholder. The Trustee shall
then distribute to each Unitholder his share of the balance of the Interest
and Principal Accounts. With such distribution the Unitholder shall be
furnished a final distribution statement of the amount distributable. At such
time as the Trustee in its sole discretion shall determine that any amounts
held in reserve are no longer necessary, it shall make distribution thereof to
Unitholders in the same manner.
Notwithstanding the foregoing, in connection with final distributions to
Unitholders, it should be noted that because the portfolio insurance obtained
by a Trust is applicable only while Bonds so insured are held by a Trust, the
price to be received by such Trust upon the disposition of any such Bond which
is in default, by reason of nonpayment of principal or interest, will not
reflect any value based on such insurance. Therefore, in connection with any
liquidation, it shall not be necessary for the Trustee to, and the Trustee
does not currently intend to, dispose of any Bond or Bonds if retention of
such Bond or Bonds, until due, shall be deemed to be in the best interest of
Unitholders, including, but not limited to, situations in which a Bond or
Bonds so insured are in default and situations in which a Bond or Bonds so
insured have a deteriorated market price resulting from a significant risk of
default. Since the Preinsured Bonds 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 Preinsured Bonds after the date of termination.
All proceeds received, less applicable expenses, from insurance on defaulted
Bonds not disposed of at the date of termination will ultimately be
distributed to Unitholders of record as of such date of termination as soon as
practicable after the date such default ed Bond or Bonds become due and
applicable insurance proceeds have been received by the Trustee.
Limitation on Liabilities. The Sponsor, the Evaluator and the Trustee shall be
under no liability to Unitholders for taking any action or for refraining from
taking any action in good faith pursuant to the Trust Agreement, or for errors
in judgment, but shall be liable only for their own willful misfeasance, bad
faith or gross negligence in the performance of their duties or by reason of
their reckless disregard of their obligations and duties hereunder. The
Trustee shall not be liable for depreciation or loss incurred by reason of the
sale by the Trustee of any of the Securities. In the event of the failure of
the Sponsor to act under the Trust Agreement, the Trustee may act thereunder
and shall not be liable for any action taken by it in good faith under the
Trust Agreement.
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 Trust Agreement or upon or in respect of the Fund
which the 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 Trust Agreement contains other customary
provisions limiting the liability of the Trustee.
The Trustee, Sponsor and Unitholders may rely on any evaluation furnished by
the Evaluator and shall have no responsibility for the accuracy thereof.
Determinations by the Evaluator under the Trust Agreement 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 Unitholders 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.
Unit Distribution. Units repurchased in the secondary market, if any, may be
offered by this Prospectus at the secondary Public Offering Price in the
manner described.
Broker-dealers or others will be allowed a concession or agency commission in
connection with secondary market transactions in the amount of 70% of the
applicable sales charge as determined using the table found in "Public
Offering General". Certain commercial banks are making Units of the Fund
available to their customers on an agency basis. A portion of the sales charge
paid by these customers (equal to the agency commission referred to above) is
retained by or remitted to the banks. Under the Glass-Steagall Act, banks are
prohibited from underwriting Units of the Fund; 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 addition, state securities laws on this issue may differ
from the interpretations of federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to
state law. The minimum purchase in the secondary market will be one Unit.
Broker-dealers of a Trust, banks and/or others may be eligible to participate
in a program in which such firms receive from the Sponsor a nominal award for
each of their registered representatives who have sold a minimum number of
units of unit investment trusts created by the Sponsor during a specified time
period. In addition, at various times the Sponsor may implement other programs
under which the sales forces of brokers-dealer, banks and/or others may be
eligible to win other nominal awards for certain sales efforts, or under which
the Sponsor will reallow to any such broker-dealers, banks and /or others 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
brokers-dealers, banks and/or others for certain services or activities which
are primarily intended to result in sales of Units of the Trust. Such payments
are made by the Sponsor out of its own assets, and not out of the assets of
the Trust. These programs will not change the price Unitholders pay for their
Units or the amount that the Trust will receive from the Units sold.
The Sponsor reserves the right to reject, in whole or in part, any order for
the purchase of Units and to change the amount of the concession or agency
commission to dealers and others from time to time.
Sponsor and Dealer Compensation. Dealers will receive the gross sales
commission as described under "Public Offering General".
As stated under "Public Offering Market for Units", the Sponsor intends to,
and certain of the dealers may, maintain a secondary market for the Units of
the Fund. In so maintaining a market, such person or persons will also realize
profits or sustain losses in the amount of any difference between the price at
which Units are purchased and the price at which Units are resold (which price
is based on the bid prices of the Securities in such Trust and includes a
sales charge). In addition, such person or persons will also realize profits
or sustain losses resulting from a redemption of such repurchased Units at a
price above or below the purchase price for such Units, respectively.
OTHER MATTERS
Legal Opinions. The legality of the Units offered hereby has been passed upon
by Chapman and Cutler, 111 West Monroe Street, Chicago, Illinois 60603, as
counsel for the Sponsor. The counsel which has provided a state tax opinion to
the respective Trust under "Description and State Tax Status of the Trusts"
has acted as special counsel to the Fund for the tax matters of such state.
Various counsel have acted as counsel for the Trustee and as special counsel
for the Fund for New York tax matters. None of the special counsel for the
Fund has expressed any opinion regarding the completeness or materiality of
any matters contained in this Prospectus other than the tax opinions set forth
by such special counsel.
Auditors. The statements of condition and the related securities portfolios
included in this Prospectus have been audited at the date indicated therein by
Grant Thornton, independent certified public accountants, as set forth in
their report in Part One of this Prospectus, and are included herein in
reliance upon the authority of said firm as experts in accounting and
auditing.
DESCRIPTION OF SECURITIES RATINGS*
*As published by the rating companies.
Standard & Poor's Corporation. A Standard & Poor's Corporation ("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 of creditworthiness may take into consideration obligors such
as guarantors, insurers or lessees.
The bond rating is not a recommendation to purchase or sell a security,
inasmuch as it does not comment as to market price.
The ratings are based on current information furnished to Standard & Poor's by
the issuer and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information.
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 arrangements under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree. A--Bonds rated A have a
strong capacity to pay principal and interest, although they are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions. BBB--Bonds rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits 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 debt in this category than in higher rated categories.
Plus (+) or Minus (-): To provide more detailed indications of credit quality,
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: A provisional rating ("p") assumes the successful
completion of the project being financed by the issuance of 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, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion. Accordingly, the investor should exercise his own
judgment with respect to such likelihood and risk. Moody's Investors Service,
Inc. A brief description of the applicable Moody's Investors Service, Inc.
("Moody's") rating symbols and their meanings follow:
Aaa--Bonds which are rated Aaa are judged to be 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. With the occasional
exception of oversupply in a few specific instances, the safety of obligations
of this class is so absolute that 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 fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities. These Aa bonds are high grade, their market value virtually immune
to all but money market influences, with the occasional exception of over
supply in a few specific instances.
A--Bonds which are rated A possess many favorable investment attributes and
are considered as higher 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 credit
circumstances during a sustained period of depressed business conditions.
During periods of normalcy, bonds of this quality frequently move in parallel
with Aaa and Aa obligations, with the occasional exception of oversupply in a
few specific instances.
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.
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 operating 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.
No person is authorized to give any information or to make any representations
not contained in this Prospectus; and any information or representation not
contained herein must not be relied upon as having been authorized by the
Trust, the Sponsor or any dealer. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, securities in any state to any
person to whom it is not lawful to make such offer in such state.
Title TABLE OF CONTENTS Page
The Fund 1
Objective and Securities Selection 2
Trust Portfolio 3
Portfolio Concentrations 3
Bond Redemptions 6
Distributions 7
Change of Distribution Option 7
Certificates 7
Estimated Current Returns and
Estimated Long-Term Return 8
Public Offering 8
General 8
Accrued Interest (Accrued Interest to Carry) 9
Purchased and Accrued Interest 9
Offering Price 9
Market for Units 10
Distributions of Interest and Principal 10
Reinvestment Option 11
Redemption of Units 12
Reports Provided 13
Insurance on the Bond 14
Federal Tax Status of the Trusts 21
Description and State Tax Status of the Trusts 23
Alabama Trusts 23
Arizona Trusts 25
California Trusts 29
Colorado Trusts 36
Connecticut Trusts 39
Florida Trusts 42
Georgia Trusts 46
Louisiana Trusts 47
Massachusetts Trusts 50
Michigan Trusts 52
Minnesota Trusts 55
Missouri Trusts 57
New Jersey Trusts 59
New Mexico Trusts 63
New York Trusts 65
Ohio Trusts 72
Oklahoma Trusts 76
Pennsylvania Trusts 78
Tennessee Trusts 82
Texas Trusts 86
Washington Trusts 89
West Virginia Trusts 92
Trust Administration and Expenses 94
Sponsor 94
Compensation of Sponsor and Evaluator 95
Trustee 95
Trustee's Fee 96
Portfolio Administration 96
Sponsor Purchases of Unit 97
Insurance Premiums 97
Miscellaneous Expenses 98
General 98
Amendment or Termination 98
Limitation on Liabilities 99
Unit Distribution 99
Sponsor and Dealer Compensation 100
Other Matters 100
Legal Opinions 100
Auditors 100
Description of Securities Ratings 101
This Prospectus contains information concerning the Trust and the Sponsor, but
does not contain all of 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.
STATE INSURED TRUSTS + INSURED MUNICIPALS INCOME TRUST PROSPECTUS PART TWO
Note: This Prospectus May Be Used Only When Accompanied By Part One. Both
Parts Of This Prospectus Should Be Retained For Future Reference.
Dated as of the date of the Prospectus Part I accompanying this Prospectus
Part II.
Sponsor: Van Kampen Merritt
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
and
Mellon Bank Center
1735 Market Street, Suite 1300
Philadelphia, Pennsylvania 19103
Please retain this Prospectus for future reference.
FIRST FAMILY OF TRUSTS
INSURED MUNICIPALS
INCOME TRUST
PROSPECTUS
Part Two
In the opinion of counsel, interest income to the Trust and to Unitholders,
with certain exceptions, is excludable under existing law from gross income
for Federal income taxes, but may be subject to state and local taxes. Capital
gains, if any, are subject to Federal tax.
The Trust. The Trust consists of a series of National unit investment trusts
issued under the name Insured Municipals Income Trust (and including the
various series of the Discount Series, the Limited Maturity Series, the
Intermediate Series and the Short Intermediate Series) or under the name The
First National Dual Series Tax-Exempt Bond Trust. Each Trust consists of
interest- bearing obligations issued by or on behalf of municipalities and
other governmental authorities or issued by certain United States territories
or possessions and their public authorities, the interest on which is, in the
opinion of recognized bond counsel to the issuing governmental authority,
exempt from all Federal income taxes under existing law (the "Bonds" or
"Securities"). The objectives of the Trust are Federally tax-exempt income and
conservation of capital through an investment in a diversified, insured
portfolio of tax-exempt Bonds. The payment of interest and the preservation of
principal are, of course, dependent upon the continuing ability of the issuers
and/or obligors of the Bonds and of the insurers thereof to meet their
respective obligations. There is no assurance that the Trust's objectives will
be met. The Securities in the Discount Series were acquired at prices which
resulted in each Discount Series portfolio, as a whole, being purchased at a
deep discount from the aggregate par value of such Securities. Gains based
upon the difference, if any, between the value of the Securities at maturity,
redemption or sale and their purchase price at a discount (plus earned
original issue discount) will constitute capital gains with respect to a
Unitholder who is not a dealer with respect to his Units.
The Trust and "AAA" Rating. Insurance guaranteeing the payments of principal
and interest, when due, on the Securities in the portfolio of the Trust has
been obtained from a municipal bond insurance company either by the Trust, by
a prior owner of the Bonds, by the issuer of the Bonds involved or by the
Sponsor prior to the deposit of the Bonds in the Trust. All issues of the
Trust are insured under one or more insurance policies obtained by the Trust,
if any, except for certain issues of certain Trusts for which insurance has
been obtained by the issuer of the Bonds involved, by a prior owner of the
Bonds or by the Sponsor prior to the deposit of such Bonds in the Trust.
Insurance obtained by the Trust, if any, applies only while Bonds are retained
in the Trust while insurance obtained by a Bond issuer is effective so long as
such Bonds are outstanding. The Trustee, upon the sale of a Bond insured under
an insurance policy obtained by the Trust, has a right to obtain from the
insurer involved permanent insurance for such Bond upon the payment of a
single predetermined insurance premium and any expenses related thereto from
the proceeds of the sale of such Bond. Insurance relates only to the Bonds in
the Trust and not to the Units offered hereby or to the market value thereof.
As a result of such insurance, the Units of the Trust received a rating of
"AAA" by Standard & Poor's Corporation on the date the Trust was created.
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 the Trust or sales by the Trust of Bonds for less
than the purchase price paid by the Trust will reduce payment to Unitholders
of the interest and principal required to be paid on such Bonds. See
"Insurance on the Bonds" on page 8. No representation is made as to any
insurer's ability to meet its commitments.
Public Offering Price. The secondary market Public Offering Price will be
equal to the aggregate bid price of the Securities in the Trust and cash, if
any, in the Principal Account held or owned by the Trust plus the sales charge
referred to under "Public Offering". In addition, for Insured Municipals
Income Trust 152nd Insured Multi-Series and subsequent series' and Insured
Municipals Income Trust and Investors' Quality Tax-Exempt Trust, Multi-Series
213 and subsequent series', the Public Offering Price will include Purchased
Interest and accrued interest, if any. If the Bonds in the Trust were
available for direct purchase by investors, the purchase price of the Bonds
would not include the sales charge included in the Public Offering Price of
the Units.
NOTE: THIS PROSPECTUS MAY BE USED ONLY WHEN ACCOMPANIED BY PART ONE
Both parts of this 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.
This Prospectus is dated as of the date of the Prospectus Part I accompanying
this Prospectus Part II.
Van Kampen Merritt
THE TRUST
Each series of Insured Municipals Income Trust and The First National Dual
Series Tax-Exempt Bond Trust (Insured Series) (the "Trust") was created under
the laws of the State of New York pursuant to a Trust Agreement (the "Trust
Agreement"), between Van Kampen Merritt Inc., as Sponsor, American Portfolio
Evaluation Services, a division of Van Kampen Merritt Investment Advisory
Corp., as Evaluator, and The Bank of New York, as Trustee, or their respective
predecessors.
The Trust consists of a portfolio of interest bearing obligations issued by or
on behalf of states and territories of the United States, and political
subdivisions and authorities thereof, the interest on which is, in the opinion
of recognized bond counsel to the issuing authorities, excludable from gross
income for Federal income tax under existing law, but may be subject to state
and local taxes. Unless otherwise terminated as provided therein, the Trust
Agreement for all series except the Limited Maturity, Intermediate and Short
Intermediate Series will terminate at the end of the calendar year prior to
the fiftieth anniversary of its execution, while the Trust Agreement for the
Limited Maturity, Intermediate and Short Intermediate Series will terminate at
the end of the calendar year prior to the twentieth anniversary of its execute
on.
The portfolio of the Discount Series may consist of bonds that were purchased
at a "market" discount from par value at maturity. A primary reason for the
market values of the Securities having been less than their par values is that
the coupon interest rates on the Securities at the time they were purchased
and deposited in the Discount Series were lower than the current market
interest rates for newly issued bonds of comparable rating and type. The
current yields (coupon interest income as a percentage of market price) of
discount bonds are lower than the current yields of comparably rated bonds of
similar type newly issued at current interest rates because discount bonds
tend to increase in market value as they approach maturity and the full
principal amount becomes payable. Under present law, a discount bond held to
maturity will have a larger portion of its total return in the form of capital
gain and less in the form of tax-exempt interest income than a comparable bond
newly issued at current market rates. See "Federal Tax Status." Discount bonds
with a longer term to maturity tend to have a higher current yield and a lower
current market value than otherwise comparable bonds with a shorter term to
maturity. If interest rates rise, the market discount of discount bonds will
increase and the value of the bonds will decrease; and if interest rates
decline, the market discount of discount bonds will decrease and the value of
the bonds will increase. Market discount attributable to interest rate changes
does not necessarily indicate a lack of market confidence in the issuer.
Certain of the Bonds in the Trust are "zero coupon" bonds. Zero coupon bonds
are purchased at a deep discount because the buyer receives only the right to
receive a final payment at the maturity of the bond and does not receive any
periodic interest payments. The effect of owning deep discount bonds which do
not make current interest payments (such as the zero coupon bonds) is that a
fixed yield is earned not only on the original investment but also, in effect,
on all discount earned during the life of such obligation. This implicit
reinvestment of earnings at the same rate eliminates the risk of being unable
to reinvest the income on such obligation at a rate as high as the implicit
yield on the discount obligation, but at the same time eliminates the holder's
ability to reinvest at higher rates in the future. For this reason zero coupon
bonds are subject to substantially greater price fluctuations during periods
of changing market interest rates than are securities of comparable quality
which pay interest currently. See note (6) in "Notes to Portfolio" in Part One
of this Prospectus.
Each Unit initially offered represents a fractional undivided interest in the
principal and net income of the Trust. To the extent that any Units are
redeemed by the Trustee, the fractional undivided interest in the Trust
represented by each unredeemed Unit will increase, although the actual
interest in the Trust represented by such fraction will remain unchanged.
Units will remain outstanding until redeemed upon tender to the Trustee by
Unitholders, which may include the Sponsor or the Underwriters, or until the
termination of the Trust Agreement.
OBJECTIVES AND SECURITIES SELECTION
The objectives of the Trust are income exempt from Federal income taxation and
conservation of capital through an investment in a diversified, insured
portfolio of Federal tax-exempt obligations. There is, of course, no guarantee
that the Trust will achieve its objective. The Trust may be an appropriate
investment vehicle for investors who desire to participate in a portfolio of
tax-exempt fixed income securities with greater diversification than they
might be able to acquire individually. In addition, securities of the type
deposited in the Trust are often not available in small amounts.
Insurance guaranteeing the timely payment, when due, of all principal and
interest on the Bonds in the Trust has been obtained by the Trust from either
AMBAC Indemnity Corporation ("AMBAC Indemnity"), Financial Guaranty Insurance
Company ("Financial Guaranty") or a combination thereof (collectively, the
"Portfolio Insurers") or by the issuer of such Bonds, by a prior owner of such
Bonds, or by the Sponsor prior to the deposit of such Bonds in the Trust from
(1) AMBAC Indemnity or one of its subsidiaries, American Municipal Bond
Assurance Corporation ("AMBAC") or MGIC Indemnity Corporation ("MGIC
Indemnity"), (2) Financial Guaranty, (3) Municipal Bond Insurance Association
("MBIA"), (4) Bond Investors Guaranty Insurance Company ("BIG"), (5) National
Union Fire Insurance Company of Pittsburgh, PA. ("National Union"), (6)
Capital Guarantee Insurance Company ("Capital Guaranty"), (7) Capital Market
Assurance Corporation ("CapMAC") and/or (8) Financial Security Assurance Inc.
("Financial Security" or "FSA") (collectively, the "Preinsured Bond Insurers")
(see "Insurance on the Bonds"). Insurance obtained by the Trust is effective
only while the Bonds thus insured are held in the Trust. The Trustee has the
right to acquire permanent insurance from a Portfolio Insurer with respect to
each Bond insured by the respective Portfolio Insurer under a Trust portfolio
insurance policy. Insurance relating to Bonds insured by the issuer, by a
prior owner of such Bonds or by the Sponsor is effective so long as such Bonds
are outstanding. Bonds insured under a policy of insurance obtained by the
issuer, by a prior owner, or by the Sponsor from one of the Preinsured Bond
Insurers (the "Preinsured Bonds") are not additionally insured by the Trust.
No representation is made as to any
insurer's ability to meet its commitments.
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 Trust, if any, unless Bonds are in default in payment of
principal or interest or in significant risk of such default. See "Public
Offering Price". On the other hand, the value, if any, of Preinsured Bond
insurance is reflected and included in the market value of such Bonds.
In order for bonds to be eligible for insurance, they must have credit
characteristics which would qualify them for at least the Standard & Poor's
Corporation rating of "BBB " or at least the Moody's Investors Service, Inc.
rating of "Baa", which in brief represent the lowest ratings for securities of
investment grade (see "Description of Bond Ratings"). 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 non-cancellable policy for the prompt payment of interest and
principal on the bonds, when due, is issued by the insurer. Any premium or
premiums relating to Preinsured Bond insurance is paid by the issuer, by a
prior owner of such Bonds or by the Sponsor, and a monthly premium is paid by
an Insured Trust for the portfolio insurance, if any, obtained by such Trust.
The Trustee has the right to obtain permanent insurance from a Portfolio
Insurer in connection with the sale of a Bond insured under the insurance
policy obtained from the respective Insurer by the Trust upon the payment of a
single predetermined insurance premium from the proceeds of the sale of such
Bond. Accordingly, any Bond in the Trust is eligible to be sold on an insured
basis. All bonds insured by the Portfolio Insurers and the Preinsured Bond
Insurers received a "AAA" rating by Standard & Poor's Corporation on the date
such bonds were deposited in the Trust. See "Insurance on the Bonds".
In selecting Bonds for the Trust, the following facts, among others, were
considered by the Sponsor: (a) either 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" 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 Trust (see "Description of
Bond Ratings"), (b) the prices of the Bonds relative to other bonds of
comparable quality and maturity, (c) the diversification of Bonds as to
purpose of issue and location of issuer, and (d) the availability and cost of
insurance for the prompt payment of principal and interest, when due, on the
Bonds. 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 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 the Bond (see "Trust Administration Portfolio
Administration").
To the best knowledge of the Sponsor, there was no litigation pending as of
the Date of Deposit in respect of any Securities which might reasonably be
expected to have a material adverse effect upon the Fund or any of the Trusts.
At any time after the Date of Deposit, litigation may be initiated on a
variety of grounds with respect to Securities in the Fund. Such litigation,
as, for example, suits challenging the issuance of pollution control revenue
bonds under environmental protection statutes, may affect the validity of such
Securities 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 or will receive opinions of bond counsel to the issuing authorities
of each Security on the date of issuance to the effect that such Securities
have been validly issued and that the interest thereon is exempt from Federal
income tax. In addition, other factors may arise from time to time which
potentially may impair the ability of issuers to meet obligations undertaken
with respect to the Securities.
TRUST PORTFOLIO
Portfolio Concentrations. Certain of the Bonds in the Trust may be general
obligations of a governmental entity that are backed by the taxing power of
such entity. In view of this an investment in the Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. All other Bonds in the Trust 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. See
"General" for each Trust.
Certain of the Bonds in the Trust may be obligations which derive their
payment from mortgage loans. Certain of such housing bonds may be FHA insured
or may be single family mortgage revenue bonds issued for the purpose of
acquiring from originating financial institutions notes secured by mortgages
on residences located within the issuer's boundaries and owned by persons of
low or moderate income. In view of this an investment in the Trust should be
made with an understanding of the characteristics of such issuers and the
risks which such an investment may entail. Mortgage loans are generally
partially or completely prepaid prior to their final maturities as a result of
events such as sale of the mortgaged premises, default, condemnation or
casualty loss. Because these bonds are subject to extraordinary mandatory
redemption in whole or in part from such prepayments of mortgage loans, a
substantial portion of such bonds will probably be redeemed prior to their
scheduled maturities or even prior to their ordinary call dates. Extraordinary
mandatory redemption without premium could also result from the failure of the
originating financial institutions to make mortgage loans in sufficient
amounts within a specified time period. Additionally, unusually high rates of
default on the underlying mortgage loans may reduce revenues available for the
payment of principal of or interest on such mortgage revenue bonds. These
bonds were issued under Section 103A of the Internal Revenue Code, which
Section contains certain requirements relating to the use of the proceeds of
such bonds in order for the interest on such bonds to retain its tax-exempt
status. In each case the issuer of the bonds has covenanted to comply with
applicable requirements and bond counsel to such issuer has issued an opinion
that the interest on the bonds is exempt from Federal income tax under
existing laws and regulations. Certain issuers of housing bonds have
considered various ways to redeem bonds they have issued prior to the stated
first redemption dates for such bonds. In connection with the housing Bonds
held by the Trust, the Sponsor at the Date of Deposit was not aware that any
of the respective issuers of such Bonds were actively considering the
redemption of such Bonds prior to their respective stated initial call dates.
Certain of the Bonds in the Trust may be health care revenue bonds. In view of
this an investment in the Trust should be made with an understanding of the
characteristics of such issuers and the risks which such an investment may
entail. Ratings of bonds issued for health care facilities are often based on
feasibility studies that contain projections of occupancy levels, revenues and
expenses. A facility's gross receipts and net income available for debt may
service be affected by future events and conditions including, among other
things, demand for services and the ability of the facility to provide the
services required, physicians' confidence in the facility, management
capabilities, competition with other health care facilities, efforts by
insurers and governmental agencies to limit rates, legislation establishing
state rate-setting agencies, expenses, the cost and possible unavailability of
malpractice insurance, the funding of Medicare, Medicaid and other similar
third party payor programs, government regulation 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. Such adverse changes also may adversely
affect the ratings of the Securities held in the portfolio of the Trust;
however, because of the insurance obtained by the Trust, the "AAA" rating of
the Units of the Trust would not be affected.
Certain of the Bonds in the Trust may be obligations of public utility
issuers, including those selling wholesale and retail electric power and gas.
In view of this an investment in the Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. General problems of such issuers would include the
difficulty in financing large construction programs in an inflationary period,
the limitations on operations and increased costs and delays attributable to
environmental considerations, the difficulty of the capital market in
absorbing utility debt, the difficulty in obtaining fuel at reasonable prices
and the effect of energy conservation. 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 portfolio to make
payments of principal and/or interest on such Bonds.
Certain of the Bonds in the Trust may be obligations of issuers whose revenues
are derived from the sale of water and/or sewerage services. In view of this
an investment in the Trust should be made with an understanding of the
characteristics of such issuers and the risks which such an investment may
entail. Such bonds are generally payable from user fees. The problems of such
issuers include the ability to obtain timely and adequate rate increases,
population decline resulting in decreased user fees, the difficulty of
financing large construction programs, the limitations on operations and
increased costs and delays attributable to environmental considerations, the
increasing difficulty of obtaining or discovering new supplies of fresh water,
the effect of conservation programs and the impact of "no-growth" zoning
ordinances. All of such issuers have been experiencing certain of these
problems in varying degrees.
Certain of the Bonds in the Trust may be industrial revenue bonds ("IRBs"). In
view of this an investment in the Trust should be made with an understanding
of the characteristics of such issuers and the risks which such an investment
may entail. IRBs have generally been issued under bond resolutions pursuant to
which the revenues and receipts payable under the arrangements with the
operator of a particular project have been assigned and pledged to purchasers.
In some cases, a mortgage on the underlying project may have been granted as
security for the IRBs. Regardless of the structure, payment of IRBs is solely
dependent upon the creditworthiness of the corporate operator of the project
or corporate guarantor. Corporate operators or guarantors may be affected by
many factors which may have an adverse impact on the credit quality of the
particular company or industry. These include cyclicality of revenues and
earnings, regulatory and environmental restrictions, litigation resulting from
accidents or environmentally-caused illnesses, extensive competition and
financial deterioration resulting from a corporate restructuring pursuant to a
leveraged buy-out, takeover or otherwise. Such a restructuring may result in
the operator of a project becoming highly leveraged which may impact on such
operator's creditworthiness which in turn would have an adverse impact on the
rating and/or market value of such Bonds. Further, the possibility of such a
restructuring may have an adverse impact on the market for and consequently
the value of such Bonds, even though no actual takeover or other action is
ever contemplated or effected.
Certain of the Bonds in the Trust may be obligations that are secured by lease
payments of a governmental entity (hereinafter called "lease obligations").
Lease obligations are often in the form of certificates of participation. In
view of this an investment in the Trust should be made with an understanding
of the characteristics of such issuers and the risks which such an investment
may entail. Although the lease obligations do not constitute general
obligations of the municipality for which the municipality's taxing power is
pledged, a lease obligation lease is ordinarily backed by the municipality's
covenant to budget for, appropriate and make the payments due under the lease
obligation. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease
payments in future years unless money is appropriated for such purpose on a
yearly basis. A governmental entity that enters into such a lease agreement
cannot obligate future governments to appropriate for and make lease payments
but covenants to take such action as is necessary to include any lease
payments due in its budgets and to make the appropriations therefor.A
governmental entity's failure to appropriate for and to make payments under
its lease obligation could result in insufficient funds available for payment
of the obligations secured thereby. Although "non-appropriation" lease
obligations are secured by the leased property, disposition of the property in
the event of foreclosure might prove difficult.
Certain of the Bonds in the Trust 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. In view of
this an investment in the Trust should be made with an understanding of the
characteristics of such issuers and the risks which such an investment may
entail. 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 Trust. General problems relating to college and
university obligations include the prospect of a declining percentage of the
population consisting of "college" age individuals, possible inability to
raise tuitions and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of Federal grants and state funding, and
government legislation or regulations which may adversely affect the revenues
or costs of such issuers. All of such issuers have been experiencing certain
of these problems in varying degrees.
Certain of the Bonds in the Trust 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. In view of this an investment in the Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. 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 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 the Trust may be obligations which are payable from
and secured by revenues derived from the operation of resource recovery
facilities. In view of this an investment in the Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. Resource recovery facilities are designed to process
solid waste, generate steam and convert steam to electricity. Resource
recovery bonds may be subject to extraordinary optional redemption at par upon
the occurrence of certain circumstances, including but not limited to:
destruction or condemnation of a project; contracts relating to a project
becoming void, unenforceable or impossible to perform; changes in the economic
availability of raw materials, operating supplies or facilities necessary for
the operation of a project or technological or other unavoidable changes
adversely affecting the operation of a project; administrative or judicial
actions which render contracts relating to the projects void, unenforceable or
impossible to perform; or impose unreasonable burdens or excessive
liabilities. The Sponsor cannot predict the causes or likelihood of the
redemption of resource recovery bonds in such a Trust prior to the stated
maturity of the Bonds.
Bond Redemptions. Because certain of the Bonds in the Trust may from time to
time under certain circumstances be sold or redeemed or will mature in
accordance with their terms and because the proceeds from such events will be
distributed to Unitholders and will not be reinvested, no assurance can be
given that the Trust will retain for any length of time its present size and
composition. Neither the Sponsor nor the Trustee shall be liable in any way
for any default, failure or defect in any Bond.
Certain of the Bonds in the Trust may be subject to redemption prior to their
stated maturity date pursuant to sinking fund provisions, call provisions or
extraordinary optional or mandatory redemption provisions or otherwise. A
sinking fund is a reserve fund accumulated over a period of time for
retirement of debt. A callable debt obligation is one which is subject to
redemption or refunding prior to maturity at the option of the issuer. A
refunding is a method by which a debt obligation is redeemed, at or before
maturity, by the proceeds of a new debt obligation. In general, call
provisions are more likely to be exercised when the offering side valuation is
at a premium over par than when it is at a discount from par. The exercise of
redemption or call provisions will (except to the extent the proceeds of the
called Bonds are used to pay for Unit redemptions) result in the distribution
of principal and may result in a reduction in the amount of subsequent
interest distributions and it may also offset the current return on Units of
the Trust. The portfolio contains a listing of the sinking fund and call
provisions, if any, with respect to each of the debt obligations.
Extraordinary optional redemptions and mandatory redemptions result from the
happening of certain events. Generally, events that may permit the
extraordinary optional redemption of Bonds or may require the mandatory
redemption of Bonds include, among others: a final determination that the
interest on the Bonds is taxable; the substantial damage or destruction by
fire or other casualty of the project for which the proceeds of the Bonds were
used; an exercise by a local, state or Federal governmental unit of its power
of eminent domain to take all or substantially all of the project for which
the proceeds of the Bonds were used; changes in the economic availability of
raw materials, operating supplies or facilities or technological or other
changes which render the operation of the project for which the proceeds of
the Bonds were used uneconomic; changes in law or an administrative or
judicial decree which renders the performance of the agreement under which the
proceeds of the Bonds were made available to finance the project impossible or
which creates unreasonable burdens or which imposes excessive liabilities,
such as taxes, not imposed on the date the Bonds are issued on the issuer of
the Bonds or the user of the proceeds of the Bonds; an administrative or
judicial decree which requires the cessation of a substantial part of the
operations of the project financed with the proceeds of the Bonds; an
overestimate of the costs of the project to be financed with the proceeds of
the Bonds resulting in excess proceeds of the Bonds which may be applied to
redeem Bonds; or an underestimate of a source of funds securing the Bonds
resulting in excess funds which may be applied to redeem Bonds. The issuer of
certain Bonds in a Trust may have sold or reserved the right to sell, upon the
satisfaction of certain conditions, to third parties all or any portion of its
rights to call Bonds in accordance with the stated redemption provisions of
such Bonds. In such a case the issuer no longer has the right to call the
Bonds for redemption unless it reacquires the rights from such third party. A
third party pursuant to these rights may exercise the redemption provisions
with respect to a Bond at a time when the issuer of the Bond might not have
called a Bond for redemption had it not sold such rights. The Sponsor is
unable to predict all of the circumstances which may result in such redemption
of an issue of Bonds. See "Trust Portfolio" and note (3) in "Notes to
Portfolio" in Part One of this Prospectus. See also the discussion of single
family mortgage and multi-family revenue bonds above for more information on
the call provisions of such bonds.
ESTIMATED CURRENT RETURNS AND ESTIMATED LONG-TERM RETURNS
As of the opening of business on the date indicated therein, the Estimated
Current Returns and the Estimated Long-Term Returns for each Trust under the
monthly and semi-annual distribution plans were as set forth under "Per Unit
Information" for the applicable Trust in Part One of this Prospectus.
Estimated Current Returns are calculated by dividing the Estimated Net Annual
Interest Income per Unit by the Public Offering Price. The Estimated Net
Annual Interest Income per Unit will vary with changes in fees and expenses of
the Trustee and the Evaluator and with the principal prepayment, redemption,
maturity, exchange or sale of Securities while the Public Offering Price will
vary with changes in the offering price of the underlying Securities and with
changes in Purchased Interest for those series which contain Purchased
Interest; therefore, there is no assurance that the present Estimated Current
Returns will be realized in the future. Estimated Long- Term Returns are
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 Securities in the Trust and
(2) takes into account the expenses and sales charge associated with each
Trust Unit. Since the market values and estimated retirements of the
Securities and the expenses of the Trust will change, there is no assurance
that the present Estimated Long-Term Returns will be realized in the future.
Estimated Current Returns and Estimated Long-Term Returns are expected to
differ because the calculation of Estimated Long-Term Returns reflects the
estimated date and amount of principal returned while Estimated Current
Returns calculations include only Net Annual Interest Income and Public
Offering Price.
TRUST OPERATING EXPENSES
Compensation of Sponsor and Evaluator. The Sponsor will not receive any fees
in connection with its activities relating to the Trust. However, in
connection with certain series of the Trust, American Portfolio Evaluation
Services, a division of Van Kampen Merritt Investment Advisory Corp.,which is
a wholly-owned subsidiary of the Sponsor (the "Evaluator"), will receive an
annual supervisory fee, which is not to exceed the amount set forth under
"Summary of Essential Financial Information" in Part One of this Prospectus,
for providing portfolio supervisory services for such series. Such fee (which
is based on the number of Units outstanding in the Trust on January 1 of each
year) may exceed the actual costs of providing such supervisory services for
such series, but at no time will the total amount received for portfolio
supervisory services rendered to Series 65 and subsequent series of Insured
Municipals Income Trust in any calendar year exceed the aggregate cost to the
Evaluator of supplying such services in such year. In addition, the Evaluator
shall receive an annual evaluation fee in the amount set forth in "Summary of
Essential Financial Information" (which is based on the outstanding principal
amount of Securities on January 1 of each year) for regularly evaluating the
Trust's portfolio. Both of the foregoing fees may be increased without
approval of the Unitholders by amounts not exceeding proportionate increases
under the category "All Services Less Rent of Shelter" in the Consumer Price
Index published by the United States Department of Labor or, if such category
is no longer published, in a comparable category. The Sponsor and the dealers
will receive sales commissions and may realize other profits (or losses) in
connection with the sale of Units as described under "Public Offering".
Trustee's Fee. For its services, the Trustee will receive a fee from the Trust
based on the largest aggregate outstanding principal amount of Securities in
the Trust as of the opening of business on January 2 and July 2 of each year
as set forth under "Per Unit Information" for the applicable Trust in Part One
of this Prospectus. Such fee will be computed at the amounts set forth in Part
I to this Prospectus for that portion of the Trust under the semi-annual
distribution plan and for those portions of the Trust representing monthly and
quarterly distribution plans. The Trustee's fees are payable monthly on or
before the fifteenth day of each month from the Interest Account to the extent
funds are available and then from the Principal Account. Such fees may be
increased without approval of the Unitholders by amounts not exceeding
proportionate increases under the category "All Services Less Rent of Shelter"
in the Consumer Price Index published by the United States Department of Labor
or, if such category is no longer published, in a comparable category. Since
the 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 Unitholders, the Trustee
benefits thereby. Part of the Trustee's compensation for its services to the
Trust is expected to result from the use of these funds. For a discussion of
the services rendered by the Trustee pursuant to its obligations under the
Trust Agreement, see "Rights of Unitholders Reports Provided" and "Trust
Administration".
Insurance Premiums. The cost of the portfolio insurance obtained by the Trust,
if any, is the amount shown in "Summary of Essential Financial Information" in
Part One of this Prospectus. The premium is payable each year that the Trust
retains the Bonds. Premiums, if any, which are Trust obligations, are payable
monthly by the Trustee on behalf of the Trust. As Bonds in the portfolio are
redeemed by their respective issuers or are sold by the Trustee, the amount of
the premium will be reduced in respect of those Bonds no longer owned by and
held in the Trust. If the Trustee exercises the right to obtain permanent
insurance, the premiums payable for such permanent insurance will be paid
solely from the proceeds of the sale of the related Bonds. The premiums for
such permanent insurance with respect to each Bond will decline over the life
of the Bond. The Trust does not incur any expense for insurance which has been
obtained by an issuer of a Bond, since the premium or premiums for such
insurance have been paid by the respective issuers of such bonds. Bonds for
which insurance has been obtained by the issuer from one of the Preinsured
Bond Insurers are not additionally insured by the Trust. See "Objectives and
Securities Selection".
Miscellaneous Expenses. The following additional charges are or may be
incurred by the Trust: (a) fees of the Trustee for extraordinary services, (b)
expenses of the Trustee (including legal and auditing expenses) and of counsel
designated by the Sponsor, (c) various governmental charges, (d) expenses and
costs of any action taken by the Trustee to protect the Trust and the rights
and interests of Unitholders, (e) indemnification of the Trustee for any loss,
liability or expenses incurred by it in the administration of the Trust
without negligence, bad faith or willful misconduct on its part and (f)
expenditures incurred in contacting
Unitholders upon termination of the Trust.
The fees and expenses set forth herein are payable out of the Trust. When such
fees and expenses are paid by or owing to the Trustee, they are secured by a
lien on the portfolio of the Trust. If the balances in the Interest and
Principal Accounts are insufficient to provide for amounts payable by the
Trust, the Trustee has the power to sell Securities to pay such amounts.
INSURANCE ON THE BONDS
Insurance has been obtained by the Trust or by the issuer of such Bonds, or by
a prior owner of such Bonds, or by the Sponsor prior to the deposit of such
Bonds in the Trust guaranteeing prompt payment of interest and principal, when
due, in respect of the Bonds in the Trust. See "Objectives and Securities
Selection". An insurance policy obtained by the Trust, if any, is
non-cancellable and will continue in force so long as the Trust is in
existence, the respective Portfolio Insurer is still in business and the Bonds
described in such policy continue to be held by the Trust. Any portfolio
insurance premium for the Trust, which is an obligation of the Trust, is paid
by the Trust on a monthly basis. Non-payment of premiums on a policy obtained
by the Trust will not result in the cancellation of insurance but will force
the insurer to take action against the Trustee to recover premium payments due
it. The Trustee in turn will be entitled to recover such payments from the
Trust. Premium rates for each issue of Bonds protected by a policy obtained by
the Trust, if any, are fixed for the life of the Trust. The premium for any
Preinsured Bond insurance has been paid by such issuer, by a prior owner of
such Bonds or the Sponsor and any such policy or policies are non-cancellable
and will continue in force so long as the Bonds so insured are outstanding and
the respective Preinsured Bond Insurer remains in business. If the provider of
an original issuance insurance policy is unable to meet its obligations under
such policy or if the rating assigned to the claims-paying ability of any such
insurer deteriorates, the Portfolio Insurers have no obligation to insure any
issue adversely affected by either of the above described events.
The aforementioned portfolio insurance obtained by the Trust, if any,
guarantees the timely payment of principal and interest on the Bonds as they
fall due. For the purposes of insurance obtained by the Trust, "when due"
generally means the stated maturity date for the payment of principal and
interest. However, in the event (a) an issuer of a Bond defaults in the
payment of principal or interest on such Bond, (b) such issuer enters into a
bankruptcy proceeding or (c) the maturity of such Bond is accelerated, the
affected Portfolio Insurer has the option, in its sole discretion, after
receiving notice of the earliest to occur of such a default, bankruptcy
proceeding or acceleration to pay the outstanding principal amount of such
Bond plus accrued interest to the date of such payment and thereby retire the
Bond from the Trust prior to such Bond's stated maturity date. The insurance
does not guarantee the market value of the Bonds or the value of the Units.
Insurance obtained by the Trust, if any, is only effective as to Bonds owned
by and held in the Trust. In the event of a sale of any such Bond by the
Trustee, such insurance terminates as to such Bond on the date of sale.
Pursuant to an irrevocable commitment of the Portfolio Insurers, the Trustee,
upon the sale of a Bond covered under a portfolio insurance policy obtained by
the Trust, has the right to obtain permanent insurance with respect to such
Bond (i.e., insurance to maturity of the Bonds regardless of the indemnity of
the holder thereof) (the "Permanent Insurance") upon the payment of a single
predetermined insurance premium and any expenses related thereto from the
proceeds of the sale of such Bond. Accordingly, any Bond in the Trust is
eligible to be sold on an insured basis. It is expected that the Trustee would
exercise the right to obtain Permanent Insurance only if upon such exercise
the Trust would receive net proceeds (sale of Bond proceeds less the insurance
premium and related expenses 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 eligible for
Permanent Insurance would be determined based upon the insurability of each
Bond as of the Date of Deposit and would not be increased or decreased for any
change in creditworthiness of each Bond.
The Sponsor believes that the Permanent Insurance option provides an advantage
to the Trust in that each Bond insured by a Trust insurance policy may be sold
out of the Trust with the benefits of the insurance attaching thereto. Thus,
the value of the insurance, if any, at the time of sale, can be realized in
the market value of the Bond so sold (which is not the case in connection with
any value attributable to an Insured Trust's portfolio insurance). See "Public
Offering Price". Because any such insurance value may be realized in the
market value of the Bond upon the sale thereof upon exercise of the Permanent
Insurance option, the Sponsor anticipates that (a) in the event the Trust were
to be comprised of a substantial percentage of Bonds in default or significant
risk of default, it is much less likely that the Trust would need at some
point in time to seek a suspension of redemptions of Units than if the Trust
were to have no such option and (b) at the time of termination of the Trust,
if the Trust were holding defaulted Bonds or Bonds in significant risk of
default the Trust would not need to hold such Bonds until their respective
maturities in order to realize the benefits of the Trust's portfolio
insurance.
Except as indicated below, insurance obtained by the Trust, if any, has no
effect on the price or redemption value of Units. It is the present intention
of the Evaluator to attribute a value for such insurance (including the right
to obtain Permanent Insurance) for the purpose of computing the price or
redemption value of Units if the Bonds covered by such insurance are in
default in payment of principal or interest or in significant risk of such
default. The value of the insurance will be the difference between (i) the
market value of a Bond which is in default in payment of principal or interest
or in significant risk of such default assuming the exercise of the right to
obtain Permanent Insurance (less the insurance premium and related expenses
attributable to the purchase of Permanent Insurance) and (ii) the market value
of such Bonds not covered by Permanent Insurance. 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 value
attributable to the insurance cannot be realized upon sale. See "Public
Offering Price" herein for a more complete description of the Trust's method
of valuing defaulted Bonds and Bonds which have a significant risk of 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 portfolio insurance policy or policies obtained by the Trust, if any, with
respect to the Bonds in the Trust were issued by one or more of the Portfolio
Insurers. Any other Preinsured Bond insurance policy (or commitment therefor)
was issued by one of the Preinsured Bond Insurers. See "Objectives and
Securities Selection".
AMBAC Indemnity Corporation ("AMBAC Indemnity") is a Wisconsin-domiciled stock
insurance corporation regulated by the Office of the Commissioner of Insurance
of the State of Wisconsin and licensed to do business in 50 states and the
District of Columbia and the Commonwealth of Puerto Rico, with admitted assets
of approximately $936,000,000 (unaudited) and statutory capital of
approximately $1,096,000,000 (unaudited) as of September 30, 1993. 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.
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.
AMBAC Indemnity has entered into quota share reinsurance agreement under which
a percentage of the insurance underwritten pursuant to certain municipal bond
insurance programs of AMBAC Indemnity has been and will be assumed by a number
of foreign and domestic unaffiliated reinsurers.
Municipal Bond Investors Assurance Corporation ("MBIA") is the principal
operating subsidiary of MBIA Inc., a New York Stock Exchange listed company.
MBIA, Inc. is not obligated to pay the debts of or claims against MBIA. MBIA
is a limited liability corporation rather than a several liability
association. MBIA is domiciled in the State of New York and licensed to do
business in all fifty states, the District of Columbia and the Commonwealth of
Puerto Rico. As of December 31, 1992, MBIA had admitted assets of $2.6 billion
(audited), total liabilities of $1.7 billion (audited), and total capital and
surplus of $896 million (audited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. As of September 30, 1993, MBIA had admitted assets of $3.0
billion (unaudited), total liabilities of $2.0 billion (unaudited), and total
capital and policyholders' surplus of $951 million (unaudited) determined in
accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities. Copies of MBIA's year end financial
statements prepared in accordance with statutory accounting practices are
available from MBIA. The address of MBIA is 113 King Street, Armonk, New York
10504.
Effective December 31, 1989, MBIA Inc. acquired Bond Investors Group, Inc. On
January 5, 1990, MBIA acquired all of the outstanding stock of Bond Investors
Group, Inc., the parent of Bond Investors Guaranty Insurance Company (BIG),
now known as MBIA Insurance Corp. of Illinois. Through a reinsurance
agreement, BIG has ceded all of its net insured risks, as well as its unearned
premium and contingency reserves, to MBIA and MBIA has reinsured BIG's net
outstanding exposure.
Moody's Investors Service, Inc. rates all bond issues insured by MBIA "Aaa"
and short term loans "MIG 1," both designated to be of the highest quality.
Standard and Poor's Corporation rates all new issues insured by MBIA "AAA"
Prime Grade.
The Moody's Investors Service rating of MBIA should be evaluated independently
of the Standard & Poor's Corporation rating of MBIA. No application has been
made to any other rating agency in order to obtain additional ratings on the
Bonds. The ratings reflect the respective rating agency's current assessment
of the creditworthiness of MBIA and its ability to pay claims on its policies
of insurance. Any further explanation as to the significance of the above
ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Bonds, and
such ratings may be subject to revision or withdrawal at any time by the
rating agencies. Any downward revision or withdrawal of either or both ratings
may have an adverse effect on the market price of the Bonds.
Financial Guaranty ("Financial Guaranty" or "FGIC") 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 September 30, 1993, the total
capital and surplus of Financial Guaranty was approximately $744,722,000.
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 statutory accounting principles, and the Corporations
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: (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.
In addition, Financial Guaranty Insurance Company is currently authorized to
write insurance in all 50 states and the District of Columbia.
Financial Security Assurance ("Financial Security" or "FSA") is a monoline
insurance company incorporated on March 16, 1984 under the laws of the State
of New York. The operations of Financial Security commenced on July 25, 1985,
and Financial Security received its New York State Insurance license on
September 23, 1985. Financial Security and its two wholly owned subsidiaries
are licensed to engage in the financial guaranty insurance business in 49
states, the District of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged exclusively in the
business of writing financial guaranty insurance, principally in respect of
asset-backed and other collateralized securities offered in domestic and
foreign markets. Financial Security and its subsidiaries also write financial
guaranty insurance in respect of municipal and other obligations and reinsure
financial guaranty insurance policies written by other leading insurance
companies. In general, financial guaranty insurance consists of the issuance
of a guaranty of scheduled payments of an issuer's securities, thereby
enhancing the credit rating of those securities, in consideration for payment
of a premium to the insurer.
Financial Security is 91.6% owned by US West, Inc. and 8.4% owned by The Tokio
Marine and Fire Insurance Co., Ltd. ("Tokio Marine"). Neither U S WEST, Inc.
nor Tokio Marine is obligated to pay the debts of or the claims against
Financial Security. Financial Security is domiciled in the State of New York
and is subject to regulation by the State of New York Insurance Department. As
of March 1, 1993, the total policyholders' surplus and contingency reserves
and the total unearned premium reserve, respectively, of Financial Security
and its consolidated subsidiaries were, in accordance with generally accepted
accounting principles, approximately $479,110,000 (unaudited) and $231,686,000
(unaudited), and the total shareholders' equity and the total unearned premium
reserve, respectively, of Financial Security and its consolidated subsidiaries
were, in accordance with generally accepted accounting principles,
approximately $628,119,000 (unaudited) and $202,493,000 (unaudited). Copies of
Financial Security's financial statements may be obtained by writing to
Financial Security at 350 Park Avenue, New York, New York 10022, Attention:
Communications Department. Its telephone number is (212) 826-0100.
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written by Financial Security or either of its subsidiaries are
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, Financial Security
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with unaffiliated reinsurers under various quota share
treaties and on a transaction-by-transaction basis. Such reinsurance is
utilized by Financial Security as a risk management device and to comply with
certain statutory and rating agency requirements; it does not alter or limit
Financial Security's obligations under any financial guaranty insurance
policy.
Financial Security's claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc., and "AAA" by Standard & Poor's Corporation, Nippon Investors
Service Inc., Duff & Phelps Inc. and Australian Ratings Pty. Ltd. Such ratings
reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies.
Capital Guaranty Insurance Company ("Capital Guaranty") was incorporated in
Maryland on June 25, 1986, and is a wholly-owned subsidiary of Capital
Guaranty Corporation, a Maryland insurance holding company.
Capital Guaranty Corporation is owned by the following investors:
Constellation Investments, Inc., an affiliate of Baltimore Gas and Electric;
Fleet/Norstar Financial Group, Inc.; Safeco Corporation; Sibag Finance
Corporation, an affiliate of Siemens A.G.; and United States Fidelity and
Guaranty Company and management.
Capital Guaranty, headquartered in San Francisco, is a monoline financial
guaranty insurer engaged in the underwriting and development of financial
guaranty insurance. Capital Guaranty insures general obligation, tax supported
and revenue bonds structured as tax-exempt and taxable securities as well as
selectively insures taxable corporate/asset backed securities. Standard &
Poor's Corporation rates the claims paying ability of Capital Guaranty "AAA".
Capital Guaranty's insured portfolio currently includes over $9 billion in
total principal and interest insured. As of September 30, 1992, the total
policyholders' surplus of Capital Guaranty was $113,000,000 (unaudited), and
the total admitted assets were $220,000,000 (unaudited) as reported to the
Insurance Department of the State of Maryland. Financial statements for
Capital Guaranty Insurance Company, that have been prepared in accordance with
statutory insurance accounting standards, are available upon request. The
address of Capital Guaranty's headquarters and its telephone number are
Steuart Tower, 22nd Floor, One Market Plaza, San Francisco, CA 94105-1413 and
(415) 995-8000.
CapMAC is a New York-domiciled monoline stock insurance company which engages
only in the business of financial guarantee and surety insurance. CapMAC is
licensed in 48 states in addition to the District of Columbia, the
Commonwealth of Puerto Rico and the territory of Guam. CapMAC insures
structured asset-backed, corporate and other financial obligations in the
domestic and foreign capital markets. CapMAC may also provide financial
guarantee reinsurance for structured asset-backed, corporate and municipal
obligations written by other major insurance companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors Service,
Inc. ("Moody's"), "AAA" by Standard & Poor's Corporation ("Standard &
Poor's"), and "AAA" by Duff & Phelps, Inc. ("Duff & Phelps"). Such ratings
reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies.
CapMAC is wholly owned by CapMAC Holdings Inc. ("Holdings"), a company that is
owned by a group of institutional and other investors, including CapMAC's
management and employees. CapMAC commenced operations on December 24, 1987 as
an indirect, wholly-owned subsidiary of Citibank (New York State), a
wholly-owned subsidiary of Citicorp. On June 25, 1992, Citibank (New York
State) sold CapMAC to Holdings (the "Sale").
Neither Holdings nor any of its stockholders is obligated to pay any claims
under any surety bond issued by CapMAC or any debts of CapMAC or to make
additional capital contributions.
CapMAC is regulated by the Superintendent of Insurance of the State of New
York. In addition, CapMAC is subject to regulation by the insurance
departments of the other jurisdictions in which it is licensed. CapMAC is
subject to periodic regulatory examinations by the same regulatory
authorities.
CapMAC is bound by insurance laws and regulations regarding capital transfers,
limitations upon dividends, investment of assets, changes in control,
transactions with affiliates and consolidations and acquisitions. The amount
of exposure per risk that CapMAC may retain, after giving effect to
reinsurance, collateral or other security, is also regulated. Statutory and
regulatory accounting practices may prescribe appropriate rates at which
premiums are earned and the levels of reserves required. In addition, various
insurance laws restrict the incurrence of debt, regulate permissible
investments of reserves, capital and surplus, and govern the form of surety
bonds.
CapMAC's obligations under the Surety Bond(s) may be reinsured. Such
reinsurance does not relieve CapMAC of any of its obligations under the Surety
Bond(s).
THE [SURETY BOND(S)] [IS] [ARE] NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE
SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
In connection with the Sale, Holdings and CapMAC entered into an Ownership
Policy Agreement (the "Ownership Policy Agreement"), which sets forth
Holdings' intent with respect to its ownership and control of CapMAC and
provides certain policies and agreements with respect to Holdings' exercise of
its control of CapMAC. In the Ownership Policy Agreement, Holdings has agreed
that, during the term of the Ownership Policy Agreement, it will not, and will
not permit any stockholder of Holdings to enter into any transaction the
result of which would be a change of control (as defined in the Ownership
Policy Agreement) of CapMAC, unless the long term debt obligations or
claims-paying ability of the person which would control CapMAC after such
transaction or its direct or indirect parent are rated in a high investment
grade category, unless Holdings or CapMAC has confirmed that CapMAC's
claims-paying ability rating by Moody's (the "Rating") in effect immediately
prior to any such change of control will not be downgraded by Moody's upon
such change of control or unless such change of control occurs as a result of
a public offering of Holdings' capital stock.
In addition, the Ownership Policy Agreement includes agreements (i) not to
change the "zero-loss" underwriting standards or policies and procedures of
CapMAC in a manner that would materially and adversely affect the risk profile
of CapMAC's book of business, (ii) that CapMAC will adhere to the aggregate
leverage limitations and maintain capitalization levels considered by Moody's
from time to time as consistent with maintaining CapMAC's Rating and (iii)
that until CapMAC's statutory capital surplus and contingency reserve
("qualified statutory capital") equal$250 million, CapMAC will maintain a
specified amount of qualified statutory capital in excess of the amount of
qualified statutory capital that CapMAC is required at such time to maintain
under the aggregate leverage limitations set forth in Article 69 of the New
York Insurance Law.
The Ownership Policy Agreement will terminate on the earlier of the date on
which a change of control of CapMAC occurs and the date on which CapMAC and
Holdings agree in writing to terminate the Ownership Policy Agreement;
provided that, CapMAC or Holdings has confirmed that CapMAC's Rating in effect
immediately prior to any such termination will not be downgraded upon such
termination.
As at December 31, 1991 and 1990, CapMAC had statutory capital and surplus of
approximately $232 million and $223 million, respectively, and had not
incurred any debt obligations. On June 26, 1992, CapMAC made a special
distribution (the "Distribution") to Holdings in connection with the Sale in
an aggregate amount that caused the total of CapMAC's statutory capital and
surplus to decline to approximately $150 million. Holdings applied
substantially all of the proceeds of the Distribution to repay debt owed to
Citicorp that was incurred in connection with the capitalization of CapMAC. As
of June 30, 1992, CapMAC had statutory capital and surplus of approximately
$150 million and had not incurred any debt obligations. In addition, at June
30, 1992 CapMAC had a statutory contingency reserve of approximately $13
million, which is also available to cover claims under surety bonds issued by
CapMAC. Article 69 of the New York State Insurance Law requires that CapMAC
establishes and maintains the contingency reserve.
In addition to its capital (including contingency reserve) and other
reinsurance available to pay claims under its surety bonds, on June 25, 1992,
CapMAC entered into a Stop Loss Reinsurance Agreement (the "Stop Loss
Agreement") with Winterthur Swiss Insurance Company (the "Reinsurer"), which
is rated AAA by Standard & Poor's and Aaa by Moody's, pursuant to which the
Reinsurer will be required to pay any losses incurred by CapMAC during the
term of the Stop Loss Agreement on the surety bonds covered under the Stop
Loss Agreement in excess of a specified amount of losses incurred by CapMAC
under such surety bonds (such specified amount initially being $100 million
and increasing annually by an amount equal to 66-2/3% of the increase in
CapMAC's statutory capital and surplus) up to an aggregate limit payable under
the Stop Loss Agreement of $50 million. The Stop Loss Agreement has an initial
term of seven years, is extendable for one-year periods and is subject to
early termination upon the occurrence of certain events.
CapMAC also has available a $100,000,000 standby corporate liquidity facility
(the "Liquidity Facility") provided by a syndicate of banks rated A1+ /P1 by
Standard & Poor's and Moody's, respectively, having a term of 360 days. Under
the Liquidity Facility CapMAC will be able, subject to satisfying certain
conditions, to borrow funds from time to time in order to enable it to fund
any claim payments or payments made in settlement or mitigation of claims
payments under its surety bonds, including the Surety Bond(s).
Copies of CapMAC's financial statements prepared in accordance with statutory
accounting standards, which differ from generally accepted accounting
principles, and filed with the Insurance Department of the State of New York
are available upon request. CapMAC is located at 885 Third Avenue, New York,
New York 10022, and its telephone number is (212) 755-1155.
In order to be in the Trust, Bonds must be insured by one of the Preinsured
Bond Insurers or be eligible for the insurance being obtained by the Trust. In
determining eligibility for insurance, the Preinsured Bond Insurers; AMBAC
Indemnity and Financial Guaranty, have applied their own standards which
correspond generally to the standards they normally use in establishing the
insurability of new issues of municipal bonds and which are not necessarily
the criteria used in the selection of Bonds by the Sponsor. To the extent the
standards of the Preinsured Bond Insurers; AMBAC Indemnity and Financial
Guaranty, are more restrictive than those of the Sponsor, the previously
stated Trust investment criteria have been limited with respect to the Bonds.
This decision is made prior to the Date of Deposit, as debt obligations not
eligible for insurance are not deposited in the Trust. Thus, all Bonds in the
portfolio are insured either by the Trust or by the issuer of the Bonds, by a
prior owner of such Bonds, or by the Sponsor prior to the deposit of such
Bonds in the Trust.
Because the Bonds are insured by one of the Portfolio Insurers or one of the
Preinsured Bond Insurers 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 the Units of the Trust its "AAA"
investment rating. See "Description of Bond Ratings". The obtaining of this
rating by the 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 the Trust or of the Units.
The Estimated Current Return and the Estimated Long-Term Return on an
identical portfolio without the insurance obtained by the Trust would have
been higher than the Estimated Current Return and the Estimated Long-Term
Return on the Securities in the Trust after payment of the insurance premium.
An objective of portfolio insurance obtained by the Trust is to obtain a
higher yield on the Trust portfolio than would be available if all the
Securities in such portfolio had Standard & Poor's Corporation "AAA" rating
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. Preinsured bonds in the Trust
which have been insured by the issuer (all of which are rated "AAA" by
Standard & Poor's Corporation) may or may not have a higher yield than
uninsured bonds rated "AAA" by Standard & Poor's Corporation. In selecting
such Bonds for the portfolio, the Sponsor has applied the criteria
hereinbefore described.
In the event of nonpayment of interest or principal, when due, in respect of a
Bond, AMBAC Indemnity shall make such payment not later than 30 days and
Financial Guaranty shall make such payment within one business day after the
respective insurer has been notified that such nonpayment has occurred or is
threatened (but not earlier than the date such payment is due). The insurer,
as regards any payment it may make, will succeed to the rights of the Trustee
in respect thereof. All policies issued by the Portfolio Insurers and the
Preinsured Bond Insurers are substantially identical insofar as obligations to
the Trust are concerned.
The Internal Revenue Service has issued a letter ruling which holds in effect
that insurance proceeds representing maturing interest on defaulted municipal
obligations paid to holders of insured bonds, under policy provisions
substantially identical to the policies described herein, will be excludable
from Federal gross income under Section 103(a)(1) of the Internal Revenue Code
to the same extent as if such payments were made by the issuer of the
municipal obligations. Holders of Units in the Trust should discuss with their
tax advisers the degree of reliance which they may place on this letter
ruling. However, Chapman and Cutler, counsel for the Sponsor, has given an
opinion to the effect such payment of proceeds 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
"Tax Status".
Each Portfolio Insurer 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 each Portfolio Insurer will be able to perform
on its contracts 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 any of the Portfolio
Insurers which would materially impair the ability of such company to meet its
commitments pursuant to any contract of bond or portfolio insurance.
The information relating to each Portfolio Insurer has been furnished by such
companies. The financial information with respect to each Portfolio Insurer
appears in reports 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 dates
thereof.
TAX STATUS
At the time of the closing for each Trust, Chapman and Cutler, counsel for the
Sponsor, rendered an opinion substantially to the effect that:
the Trust is not an association taxable as a corporation for Federal income
tax purposes and interest and accrued original issue discount on Securities
which is excludable from gross income under the Internal Revenue Code of 1986
(the \xd2 Code\xd3 ) will retain its status, except to the extent such
interest is subject to the alternative minimum tax and the environmental tax
(the "Superfund Tax") as noted below, when distributed to Unitholders;
each Unitholder is considered to be the owner of a pro rata portion of the
Trust under subpart E, subchapter J of chapter 1 of the Internal Revenue Code
of 1986 and will have a taxable event when the Trust disposes of a Security,
or when the Unitholder redeems or sells his Units. Unitholders must reduce the
tax basis of their Units for their share of accrued interest received by the
Trust, if any, on Securities delivered after the Unitholders pay for their
Units to the extent that such interest accrued on such Securities during the
period from the Unitholder's settlement date to the date such Securities are
delivered to the Trust and, consequently, such Unitholders 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 Bonds (whether by sale, payment on
maturity, redemption or otherwise), gain or loss is recognized to the
Unitholder. The amount of any such gain or loss is measured by comparing the
Unitholder's pro rata share of the total proceeds from such disposition with
the Unitholder's basis for his or her fractional interest in the asset
disposed of. In the case of a Unitholder who purchases Units, such basis
(before adjustment for earned original issue discount and amortized bond
premium, if any) is determined by apportioning the cost of the Units among
each of the Trust assets ratably according to value as of the date of
acquisition of the Units. The tax cost reduction requirements of said Code
relating to amortization of bond premium may, under some circumstances, result
in the Unitholder realizing a taxable gain when his Units are sold or redeemed
for an amount equal to his original cost;
any proceeds paid under an insurance policy issued to the Trust by one of the
Portfolio Insurers with respect to the Bonds which represent maturing interest
on defaulted obligations held by the Trustee 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; and
any proceeds paid under individual policies obtained by issuers of Bonds which
represent maturing interest on defaulted obligations held by the Trustee will
be excludable from Federal gross income if, and to the same extent as, such
interest would have been so excludable if paid in the normal course by the
issuer of the defaulted obligations.
Sections 1288 and 1272 of the Internal Revenue Code of 1986 (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 compound 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 would have previously accrued
based upon its issue price (its "adjusted issue price") to prior owners. The
application of these rules will also vary depending on the value of the Bond
on the date a Unitholder acquires his Units and the price the Unitholder pays
for his Units. Investors with questions regarding these Code sections should
consult with their tax advisers.
"The Revenue Reconciliation Act of 1993" (the "Tax Act") subjects tax-exempt
bonds to the market discount rules of the Code effective for bonds 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). Market discount can arise based on
the price a Trust pays for Bonds or the price a Unitholder pays for his or her
Units. Under the Tax Act, accretion of market discount is taxable as ordinary
income; under prior law the accretion had been treated as capital gain. Market
discount that accretes while a Trust holds a Bond would be recognized as
ordinary income by the Unitholders when principal payments are received on the
Bond, upon sale or at redemption (including early redemption), or upon the
sale or redemption of his or her Units, unless a Unitholder elects to include
market discount in taxable income as it accrues. The market discount rules are
complex and Unitholders should consult their tax advisers regarding these
rules and their application.
In the case of certain corporations, the alternative minimum tax and the
Superfund Tax for taxable years beginning after December 31, 1996 depend upon
the corporation's alternative minimum taxable income, which is the
corporation's taxable income with certain adjustments. One of the adjustment
items used in computing the alternative minimum taxable income and the
Superfund Tax of a corporation (other than 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 alternative minimum taxable income (before such adjustment
item and the alternative minimum tax net operating loss deduction). "Adjusted
current earnings" includes all tax exempt interest, including interest on the
Bonds in the Trust. Corporate unitholders are urged to consult their tax
advisers with respect to the particular tax consequences to them resulting
from purchasing Units of the Trust, including the corporate alternative
minimum tax, the Superfund Tax and the branch profits tax imposed by Section
884 of the Co de.
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
the 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 consider interest on indebtedness incurred to purchase or
improve a personal residence). Also, under Section 265 of the Code, certain
financial institutions that acquire Units would generally not be able to
deduct any of the interest expense attributable to ownership of such Units.
Investors with questions regarding this issue should consult with their tax
advisers.
In the case of certain of the Bonds in the 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 exempt from Federal income taxes, although
interest on such securities received by others would be exempt from Federal
income taxes. "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.
At the time of closing, special counsel to the Trust for New York tax matters,
have rendered opinions substantially to the effect that the Trust is not an
association taxable as a corporation and the income of the Trust will be
treated as the income of the Unitholders under the then existing income tax
laws of the State and City of New York.
All statements in the Prospectus concerning exclusion from gross income for
Federal, state or other taxes are the opinions of counsel and are to be so
construed.
At the respective times of issuance of the Bonds, opinions relating to the
validity thereof and to the exclusion of interest thereon from Federal gross
income are rendered by bond counsel to the respective issuing authorities.
Neither the Sponsor nor Chapman and Cutler has made any special review for the
Trust of the proceedings relating to the issuance of the Bonds or of the basis
for such opinions.
In the case of corporations, the alternative tax rate applicable to long-term
capital gains is 34%, effective for long-term capital gains realized after
December 31, 1986. For taxpayers other than corporations, net capital gains
are subject to a maximum marginal stated 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. Under the Code, taxpayers must disclose to
the Internal Revenue Service the amount of tax-exempt interest earned during
the year.
Section 86 of the Internal Revenue Code provides, in general, that fifty
percent of Social Security benefits are includible in gross income to the
extent that the sum of "modified adjusted gross income" plus fifty percent of
the Social Security benefits received exceeds a "base amount". 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.
In addition, Under the Tax Act, for taxable years beginning after December
3'1,1993, 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,ooo 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.
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 the Trust, will be subject to tax. A taxpayer whose
adjusted gross income already exceeds the base amount must include fifty
percent 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.
PUBLIC OFFERING
General. Units are offered at the Public Offering Price. In the secondary
market the Public Offering Price is based on the aggregate bid price of the
Securities in the Trust and includes a sales charge determined in accordance
with the table set forth below, which is based upon the dollar weighted
average maturity of each trust. In addition, for Insured Municipals Income
Trust, 152nd Insured Multi-Series and subsequent series' and Insured
Municipals Income Trust and Investors' Quality Tax-Exempt Trust, Multi-Series
213 and subsequent series', the Public Offering Price will also include
Purchased Interest. 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 Trust based upon the dollar
weighted average maturity of such Trust's Portfolio, in accordance with the
following schedule:
Years To Maturity Sales Charge Years To Maturity Sales Charge
1 1.523% 9 4.712%
2 2.041 10 4.932
3 2.564 11 4.932
4 3.199 12 4.932
5 3.842 13 5.374
6 4.058 14 5.374
7 4.275 15 5.374
8 4.493 16 to 30 6.045
The sales charges in the above table are expressed as a percentage of the
aggregate bid prices of the securities in the Trust. Expressed as a percent of
the Public Offering Price (excluding Purchased Interest for those Trusts which
contain Purchased Interest), the sales charge on a Trust consisting entirely
of a portfolio of Bonds with 15 years to maturity would be 5.10%.
THE FOLLOWING SECTION: "ACCRUED INTEREST (ACCRUED INTEREST TO CARRY)," APPLIES
TO INSURED MUNICIPALS INCOME TRUST, 151st INSURED MULTI-SERIES AND ALL PRIOR
SERIES, AND TO INSURED MUNICIPALS INCOME TRUST AND INVESTORS' QUALITY
TAX-EXEMPT TRUST, MULTI-SERIES 212 AND ALL PRIOR SERIES ONLY.
ACCRUED INTEREST (ACCRUED INTEREST TO CARRY)
Accrued interest to carry consists of two elements. The first element arises
as a result of accrued interest which is the accumulation of unpaid interest
on a bond from the last day on which interest thereon was paid. Interest on
Securities in each Trust is actually paid either monthly, quarterly, if
applicable, or semi-annually to such Trust. However, interest on the
Securities in each Trust is accounted for daily on an accrual basis. Because
of this, each Trust always has an amount of interest earned but not yet
collected by the Trustee because of coupons that are not yet due. For this
reason, the Public Offering Price will have added to it the proportionate
share of accrued and undistributed interest to the date of settlement.
The second element of accrued interest to carry arises because of the
structure of the Interest Account. The Trustee has no cash for distribution to
Unitholders of a Trust until it receives interest payments on the Securities
in such Trust. The Trustee is obligated to provide its own funds, at times, in
order to advance interest distributions. The Trustee will recover these
advancements when such interest is received. Interest Account balances are
established so that it will not be necessary on a regular basis for the
Trustee to advance its own funds in connection with such interest
distributions. The Interest Account balances are also structured so that there
will generally be positive cash balances and since the funds held by the
Trustee may be used by it to earn interest thereon, it benefits thereby. If a
Unitholder sells or redeems all or a portion of his Units or if the Bonds in a
Trust are sold or otherwise removed or if a Trust is liquidated, he will
receive at that time his proportionate share of the accrued interest to carry
computed to the settlement date in the case of sale or liquidation and to the
date of tender in the case of redemption.
THE FOLLOWING SECTION: "PURCHASED AND ACCRUED INTEREST," APPLIES TO INSURED
MUNICIPALS INCOME TRUST, 152nd INSURED MULTI-SERIES AND ALL SUBSEQUENT SERIES,
AND TO INSURED MUNICIPALS INCOME TRUST AND INVESTORS' QUALITY TAX-EXEMPT
TRUST, MULTI-SERIES 213 AND ALL SUBSEQUENT SERIES ONLY.
PURCHASED AND ACCRUED INTEREST
Purchased Interest. Purchased Interest is a portion of the unpaid interest
that has accrued on the Securities from the later of the last payment date on
the Securities or the date of issuance thereof through the First Settlement
Date and is included in the calculation of the Public Offering Price.
Purchased Interest will be distributed to Unitholders as Units are redeemed or
Securities mature or are called. See "Summary of Essential Financial
Information" in Part One of this Prospectus for the amount of Purchased
Interest per Unit for each Trust. Purchased Interest is an element of the
price Unitholders will receive in connection with the sale or redemption of
Units prior to the termination of a Trust.
Accrued Interest. Accrued Interest is an accumulation of unpaid interest on
securities which generally is paid semi-annually, although a Trust accrues
such interest daily. Because of this, a Trust always has an amount of interest
earned but not yet collected by the Trustee. For this reasons, the Public
Offering Price of Units will have added to it the proportionate share of
accrued interest to the date of settlement. Unitholders will receive on the
next distribution date of a Trust the amount, if any, of accrued interest paid
on their Units.
As indicated in "Purchased Interest", accrued interest as of the First
Settlement Date includes Purchased Interest. In an effort to reduce the amount
of Purchased Interest which would otherwise have to be paid by Unitholders,
the Trustee may advance a portion of such accrued interest to the Sponsor as
the Unitholder of record as of the First Settlement Date. Consequently, the
amount of accrued interest to be added to the Public Offering Price of Units
will include only accrued interest from the First Settlement Date to the date
of settlement (other than the Purchased Interest already included therein),
less any distributions from the Interest Account subsequent to the First
Settlement Date. See "DistributionsDistribution of Interest and Principal."
Because of the varying interest payment dates of the Securities, accrued
interest at any point in time will be greater than the amount of interest
actually received by a Trust and distributed to Unitholders. If a Unitholder
sells or redeems all or a portion of his Units, he will be entitled to receive
his proportionate share of the Purchased Interest and accrued interest from
the purchaser of his Units. Since the Trustee has the use of the funds
(including Purchased Interest) held in the Interest Account for distributions
to Unitholders and since such Account is non-interest-bearing to Unitholders,
the Trustee benefits thereby.
Offering Price. The Public Offering Price of the Units will vary from the
amounts stated under "Summary of Essential Financial Information" in Part One
of this Prospectus in accordance with fluctuations in the prices of the
underlying Securities in the Trust. The price of the Units as of the opening
of business on the date of Part One of this Prospectus was determined by
adding to the determination of the aggregate bid price of the Bonds the amount
of the sales charge expressed as a percentage of the aggregate bid price of
the Securities plus Purchased Interest for those Trusts which contain
Purchased Interest, and dividing the sum so obtained by the number of Units
outstanding. This computation produced a gross profit equal to the sales
charge expressed as a percentage of the Public Offering Price (excluding
Purchased Interest). For secondary market purposes an appraisal and adjustment
with respect to the Trust will be made by the Evaluator as of 4:00 P.M.
Eastern time on days on which the New York Stock Exchange is open for each day
on which any Unit of the Trust is tendered for redemption, and it shall
determine the aggregate value of the Trust as of 4:00 P.M. Eastern time on
such other days as may be necessary.
The aggregate price of the Securities in the Trust has been and will be
determined on the basis of bid prices: (a) on the basis of current market
prices for the Securities obtained from dealers or brokers who customarily
deal in bonds comparable to those held by the Trust; (b) if such prices are
not available for any particular Securities, on the basis of current market
prices for comparable bonds; (c) by causing the value of the Securities to be
determined by others engaged in the practice of evaluation, quoting or
appraising comparable bonds; or (d) by any combination of the above. Market
prices of the Securities will generally fluctuate with changes in market
interest rates. Unless Bonds are in default in payment of principal or
interest or in significant risk of such default, the Evaluator will not
attribute any value to the insurance obtained by the Trust.
The Evaluator will consider in its evaluation of Bonds which are in default in
payment of principal or interest or, in the Sponsor's opinion, in significant
risk of such default (the "Defaulted Bonds") 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 premiums and related expenses 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 the affected Portfolio Insurer to meet its commitments under any
Trust insurance policy, including the commitments to issue Permanent
Insurance. It is the position of the Sponsor that this is a fair method of
valuing the Bonds and the insurance obtained by the Trust and reflects a
proper valuation method in accordance with the provisions of the Investment
Company Act of 1940.
Although payment is normally made five business days following the order for
purchase, payment may be made prior thereto. However, delivery of certificates
representing Units so ordered will be made five business days following such
order or shortly thereafter. A person will become the owner of Units on the
date of settlement provided payment has been received. Cash, if any, made
available to the Sponsor prior to the date of settlement for the purchase of
Units may be used in the Sponsor's business and may be deemed to be a benefit
to the Sponsor, subject to the limitations of the Securities Exchange Act of
1934. See "Rights of Unitholders-Redemption of Units" for information
regarding the ability to redeem Units ordered for purchase.
Unit Distribution. Units repurchased in the secondary market, if any, may be
offered by this Prospectus at the secondary Public Offering Price in the
manner described.
Broker-dealers or others will be allowed a concession or agency commission in
connection with secondary market transactions in the amount of 70% of the
applicable sales charge as determined using the table found in "Public
Offering General". Certain commercial banks are making Units of the Trust
available to their customers on an agency basis. A portion of the sales charge
(equal to the agency commission referred to above) is retained by or remitted
to the banks. Under the Glass-Steagall Act, banks are prohibited from
underwriting Trust 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 addition,
state securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law. The minimum purchase in
the secondary market will be one Unit.
Broker-dealers of the Trusts and/or others may be eligible to participate in a
program in which such firms receive from the Sponsor a nominal award for each
of their registered representatives who have sold a minimum number of units of
unit investment trusts created by the Sponsor during a specified time period.
In addition, at various times the Sponsor may implement other programs under
which the sales forces of brokers, dealers, and/or others may be eligible to
win other nominal awards for certain sales efforts, or under which the Sponsor
will reallow to any such brokers, dealers, and/or others that sponsor sales
contests or recognition programs conforming to criteria established by the
Sponsor, or participate in sales programs sponsored by the Sponsor, an amount
not exceeding the total applicable sales charges on the sales generated by
such persons at the public offering price during such programs. Also, the
Sponsor in its discretion may from time to time pursuant to objective criteria
established by the Sponsor pay fees to qualifying brokers, dealers or others
for certain services or activities which are primarily intended to result in
sales of Units of the Trust. Such payments are made by the Sponsor out of its
own assets, and not out of the assets of the Trust. These programs will not
change the price Unitholders pay for their Units or the amount that the Trust
will receive from the Units sold.
The Sponsor reserves the right to reject, in whole or in part, any order for
the purchase of Units and to change the amount of the concession or agency
commission to dealers and others from time to time.
Sponsor and Dealer Profits. Dealers will receive the gross sales commission as
described under "Public Offering General" above.
As stated under "Market for Units" below, the Sponsor intends to, and certain
of the dealers may, maintain a secondary market for the Units of the Trust. In
so maintaining a market, the Sponsor or any such dealer will realize profits
or sustain losses in the amount of any difference between the price at which
Units are purchased and the price at which Units are resold. In addition, the
Sponsor or any such dealer will also realize profits or sustain losses
resulting from a redemption of such repurchased Units at a price above or
below the purchase price for such Units, respectively.
Market for Units. Although they are not obligated to do so, the Sponsor
intends to, and certain of the dealers may, maintain a market for the Units
offered hereby and to offer continuously to purchase such Units at prices,
subject to change at any time, based upon the aggregate bid prices of the
Securities in the portfolio of the Trust, plus Purchased Interest, if any,
plus interest accrued to the date of settlement plus any principal cash on
hand, less any amounts representing taxes or other governmental charges
payable out of the Trust and less any accrued Trust expenses. If the supply of
Units exceeds demand or if some other business reason warrants it, the Sponsor
and/or the dealers may either discontinue all purchases of Units or
discontinue purchases of Units at such prices. In the event that a market is
not maintained for the Units and the Unitholder cannot find another purchaser,
a Unitholder desiring to dispose of his Units may be able to dispose of such
Units only by tendering them to the Trustee for redemption at the Redemption
Price, which is based upon the aggregate bid price of the Securities in the
portfolio of such Trust, plus Purchased Interest, if any, and any accrued
interest. The aggregate bid prices of the underlying Securities in the Trust
are expected to be less than the related aggregate offering prices. See
"Rights of Unitholders Redemption of Units." A Unitholder who wishes to
dispose of his Units should inquire of his broker as to current market prices
in order to determine whether there is in existence any price in excess of the
Redemption Price and, if so, the amount thereof.
RIGHTS OF UNITHOLDERS
Certificates. 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 of the Trust is evidenced by separate registered
certificates executed by the Trustee and the Sponsor. Certificates are
transferable by presentation and surrender to the Trustee properly endorsed or
accompanied by a written instrument or instruments of transfer. A Unitholder
must sign exactly as his name appears on the face of the certificate with the
signature guaranteed by a participant in the Securities Transfer Agents
Medallion Program ("STAMP") or such other signature guaranty program in
addition to, or in substitution for, STAMP, as may be accepted by the Trustee.
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.
Although no such charge is now made or contemplated, the Trustee may require a
Unitholder to pay a reasonable fee for each certificate reissued (other than
as a result of a change in plan of distribution) or transferred and to pay any
governmental charge that may be imposed in connection with each such transfer
or interchange. Destroyed, stolen, mutilated or lost certificates will be
replaced upon delivery to the Trustee of satisfactory indemnity, evidence of
ownership and payment of expenses incurred. Mutilated certificates must be
surrendered to the Trustee for replacement.
Distributions of Interest and Principal. Interest received by the Trust,
including that part of the proceeds of any disposition of Securities which
Purchased Interest and/or represents accrued interest, is credited by the
Trustee to the Interest Account. Other receipts are credited to the Principal
Account. All distributions will be net of applicable expenses. The pro rata
share of cash in the Principal Account will be computed as of the semi-annual
record date, and distributions to the Unitholders as of such record date will
be made on or shortly after the fifteenth day of such month. For Insured
Municipals Income Trust, 152nd Insured Multi-Series and subsequent series' and
for Insured Municipals Income Trust and Investors' Quality Tax-Exempt Trust,
Multi-Series 213 and subsequent series', such computation and distribution
will occur monthly. Proceeds received from the disposition of any of the
Securities after such 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 (but may itself earn interest thereon
and therefore benefits from the use of such funds) nor to make a distribution
from the Principal Account unless the amount available for distribution
therein shall equal at least $1.00 per Unit.
The distribution to the Unitholders as of each record date will be made on the
following distribution date or shortly thereafter and shall consist of an
amount substantially equal to such portion of the Unitholders' pro rata share
of the Estimated Net Annual Unit Income in the Interest Account after
deducting estimated expenses attributable as is consistent with the
distribution plan chosen. Only monthly distributions are available for Insured
Because interest payments are not received by the Trust 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 fluctuation 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.
As of the first day of each month, the Trustee will deduct from the Interest
Account and, to the extent funds are not sufficient therein, from the
Principal Account, amounts necessary to pay the expenses of the Trust (as
determined on the basis set forth under "Trust Operating Expenses"). The
Trustee also may withdraw from said accounts such amounts, if any, as it deems
necessary to establish a reserve for any governmental charges payable out of
the 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 accounts. In addition, the Trustee may withdraw
from the Interest and Principal Accounts such amounts as may be necessary to
cover redemptions of Units by the Trustee.
Distribution. Distributions of interest received by the Trust, prorated on an
annual basis, will be made semi-annually unless the Unitholder has elected to
receive them monthly or quarterly. Distributions of funds from the Principal
Account will be made on a semi-annual basis, except under the special
circumstances outlined in "Rights of Unitholders Distribution of Interest and
Principal" above. Record dates for monthly distributions will be the first day
of each month, record dates for quarterly distributions will be the first day
of March, June, September and December, and record dates for semi-annual
distributions will be the first day of June and December. Distributions will
be made on the fifteenth day of the month subsequent to the respective record
dates. Unitholders of Insured Municipals Income Trust, 152nd Insured
Multi-Series and subsequent series', and Insured Municipals Income Trust and
Investors' Quality Tax-Exempt Trust, Multi- Series 213 and subsequent series'
will receive distributions of income and principal, if any, on a monthly
basis.
Change of Distribution Option. The plan of distribution selected by a
Unitholder of Insured Municipals Income Trust, 151st Insured Multi-Series and
prior series' and Insured Municipals Income Trust and Investors' Quality
Tax-Exempt Trust, Multi-Series 212 and prior series'; will remain in effect
until changed. Unitholders purchasing Units in the secondary market will
initially receive distributions in accordance with the election of the prior
owner. Unitholders may change the plan of distribution in which they are
participating. For the convenience of Unitholders, the Trustee will furnish a
card for this purpose; cards may also be obtained upon request from the
Trustee. Unitholders desiring to change their plan of distribution may so
indicate on the card and return it, together with their certificate and such
other documentation that the Trustee may then require, to the Trustee.
Certificates should be sent only by registered or certified mail to minimize
the possibility of their being lost or stolen. If the card and certificate are
properly presented to the Trustee, the change will become effective for all
subsequent distributions.
Reinvestment Option. Unitholders of the Trust may elect to have each
distribution of interest income, capital gains and/or principal on their Units
automatically reinvested in shares of any of the open ended mutual funds
(except for B Shares) listed under "Trust Administration Sponsor" which are
registered in the Unitholder's state of residence. Such mutual funds are
hereinafter collectively referred to as the "Reinvestment Funds."
Each Reinvestment Fund has investment objectives which differ in certain
respects from those of the Trust. The prospectus relating to each Reinvestment
Fund describes the investment policies of such fund and sets forth the
procedures to follow to commence reinvestment. A Unitholder may obtain a
prospectus for the respective Reinvestment Funds from Van Kampen Merritt Inc.
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181. Texas residents who
desire to reinvest may request that a broker-dealer registered in Texas send
the prospectus relating to the respective fund.
After becoming a participant in a reinvestment plan, each distribution of
interest income, capital gains and/or principal on the participant's Units
will, on the applicable distribution date, automatically be applied, as
directed by such person, as of such distribution date by the Trustee to
purchase shares (or fractions thereof) of the applicable Reinvestment Fund at
a net asset value as computed as of the close of trading on the New York Stock
Exchange on such date, plus a sales charge of $1.00 per $100 of reinvestment
except if the participant selects the Van Kampen Merritt Money Market Fund or
the Van Kampen Merritt Tax Free Money Market in which case no sales charge
applies. A minimum of one-half of such sales charge would be paid to Van
Kampen Merritt Inc.
Confirmations of all reinvestments by a Unitholder into a Reinvestment Fund
will be mailed to the Unitholder by such Reinvestment Fund.
A participant may at any time prior to five days preceding the next succeeding
distribution date, by so notifying the Trustee in writing, elect to terminate
his or her reinvestment plan and receive future distributions on his or her
Units in cash. There will be no charge or other penalty for such termination.
Each Reinvestment Fund, its sponsor and investment adviser shall have the
right to terminate at any time the reinvestment plan relating to such fund.
Reports Provided. The Trustee shall furnish Unitholders in connection with
each distribution a statement of the amount of interest and, if any, the
amount of other receipts (received since the preceding distribution) being
distributed expressed in each case as a dollar amount representing the pro
rata share of each Unit outstanding. For as long as the Trustee deems it to be
in the best interests of the Unitholders, the accounts of the Trust shall be
audited, not less frequently than annually, by independent certified public
accountants and the report of such accountants shall be furnished by the
Trustee to Unitholders upon request. Within a reasonable period of time after
the end of each calendar year, the Trustee shall furnish to each person who at
any time during the calendar year was a registered Unitholder a statement (i)
as to the Interest Account: interest received (including amounts representing
interest received upon any disposition of Securities) and the percentage of
such interest by states in which the issuers of the Securities are located,
the amount of Purchased Interest, deductions for applicable taxes and for fees
and expenses of the Trust (including insurance costs), for redemptions of
Units, if any, and the balance remaining after such distributions and
deductions, expressed in each case both as a total dollar amount and as a
dollar amount representing the pro rata share of each Unit outstanding on the
last business day of such calendar year; (ii) as to the Principal Account: the
dates of disposition of any Securities and the net proceeds received therefrom
(excluding any portion representing accrued interest), the amount paid for
redemptions of Units, if any, deductions for payment of applicable taxes and
fees and expenses of the Trustee, the amount of "when issued" interest treated
as a return of capital, if any, and the balance remaining after such
distributions and deductions expressed both as a total dollar amount and as a
dollar amount representing the pro rata share of each Unit outstanding on the
last business day of such calendar year; (iii) a list of the Securities held
and the number of Units outstanding on the last business day of such calendar
year; (iv) the Redemption Price per Unit based upon the last computation
thereof made during such calendar year; and (v) amounts actually distributed
during such calendar year from the Interest and Principal Accounts, separately
stated, expressed both as total dollar amounts and as dollar amounts
representing the pro rata share of each Unit outstanding.
In order to comply with Federal and state tax reporting requirements,
Unitholders will be furnished, upon request to the Trustee, evaluations of the
Securities in the Trust furnished to it by the Evaluator.
Redemption of Units. A Unitholder may redeem all or a portion of his Units by
tender to the Trustee at its Unit Investment Trust Division, 101 Barclay
Street, 20th Floor, New York, New York 10286, of the certificates representing
the Units to be redeemed, duly endorsed or accompanied by proper instruments
of transfer with signature guaranteed (or by providing satisfactory indemnity,
as in connection with lost, stolen or destroyed certificates) and by payment
of applicable governmental charges, if any. Thus, redemption of Units cannot
be effected until certificates representing such Units have been delivered to
the person seeking redemption or satisfactory indemnity provided. No
redemption fee will be charged. On the seventh calendar day following such
tender, or if the seventh calendar day is not a business day, on the first
business day prior thereto, the Unitholder 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 Trustee of such tender of Units. The "date of tender" is
deemed to be the date on which Units are received by the Trustee, except that
as regards Units received after 4:00 P.M. Eastern time on days of trading on
the New York Stock Exchange, the date of tender is the next day on which such
Exchange is open for trading and such Units will be deemed to have been
tendered to the Trustee on such day for redemption at the redemption price
computed on that day.
Under regulations issued by the Internal Revenue Service, the Trustee will be
required to withhold a specified percentage of the principal amount of a Unit
redemption if the Trustee has not been furnished the redeeming Unitholder's
tax identification number in the manner required by such regulations. Any
amount so withheld is transmitted to the Internal Revenue Service and may be
recovered by the Unitholder only when filing a return. Under normal
circumstances the Trustee obtains the Unitholder's tax identification number
from the selling broker. However, at any time a Unitholder elects to tender
Units for redemption, such Unitholder should provide a tax identification
number to the Trustee in order to avoid this possible "back-up withholding" in
the event the Trustee has not been previously provided such number.
Purchased Interest, if applicable, and accrued interest paid on redemption
shall be withdrawn from the Interest Account of the Trust or, if the balance
therein is insufficient, from the Principal Account. All other amounts will be
withdrawn from the Principal Account. The Trustee is empowered to sell
underlying Securities in order to make funds available for redemption. Units
so redeemed shall be cancelled.
The Redemption Price per Unit will be determined on the basis of the bid price
of the Securities in the Trust as of 4:00 P.M. Eastern time on days of trading
on the New York Stock Exchange on the date any such determination is made.
While the Trustee has the power to determine the Redemption Price per Unit
when Units are tendered for redemption, such authority has been delegated to
the Evaluator which determines the price per Unit on a daily basis. The
Redemption Price per Unit is the pro rata share of each Unit in the Trust
determined on the basis of (i) the cash on hand in the Trust or monies in the
process of being collected, (ii) the value of the Securities in the Trust
based on the bid prices of the Securities, except for those cases in which the
value of insurance has been included, (iii) Purchased Interest for each Trust
and (iv) interest accrued thereon, less (a) amounts representing taxes or
other governmental charges payable out of the Trust and (b) the accrued
expenses of the Trust. The Evaluator may determine the value of the Securities
in the Trust by employing any of the methods set forth in "Public Offering
Price". In determining the Redemption Price per Unit no value will be assigned
to the portfolio insurance maintained by the Trust on the Bonds in the Trust
unless such Bonds are in default in payment of principal or interest or in
significant risk of such default. On the other hand, 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. For a description of the situations in which the
Evaluator may value the insurance obtained by the Trust, see "Public Offering
Price".
The price at which Units may be redeemed could be less than the price paid by
the Unitholder. As stated above, the Trustee may sell Securities to cover
redemptions. When Securities are sold, the size and diversity of the 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.
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 in the Trust 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 Unitholders to redeem their Units.
TRUST ADMINISTRATION
Sponsor Purchases of Units. 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 the close of business on the second
succeeding business day and by making payment therefor to the Unitholder 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 as any other Units.
The offering price of any Units acquired by the Sponsor will be in accord with
the Public Offering Price described in the then currently effective prospectus
describing such Units. Any profit resulting from the resale of such Units will
belong to the Sponsor which likewise will bear any loss resulting from a lower
offering or redemption price subsequent to its acquisition of such Units.
Portfolio Administration. The Trustee is empowered to sell, for the purpose of
redeeming Units tendered by any Unitholder, and for the payment of expenses
for which funds may not be available, such of the Bonds designated by the
Evaluator as the Trustee in its sole discretion may deem necessary. The
Evaluator, in designating such Bonds, will consider a variety of factors,
including (a) interest rates, (b) market value and (c) marketability. To the
extent that Bonds are sold which are current in payment of principal and
interest in order to meet redemption requests and defaulted Bonds are retained
in the portfolio in order to preserve the related insurance protection
applicable to said Bonds, the overall quality of the Bonds remaining in the
Trust's portfolio will tend to diminish. Except as described below and in
certain other unusual circumstances for which it is determined by the Trustee
to be in the best interests of the Unitholders or if there is no alternative,
the Trustee is not empowered to sell Bonds which are in default in payment of
principal or interest or in such significant risk of such default and for
which value has been attributed for the insurance obtained by the Trust.
Because of such restrictions on the Trustee under certain circumstances the
Sponsor may seek a full or partial suspension of the right of Unitholders to
redeem their Units. See "Rights of Unitholders Redemption of Units". The
Sponsor is empowered, but not obligated, to direct the Trustee to dispose of
Bonds in the event of an advanced refunding.
The Sponsor is required to instruct the Trustee to reject any offer made by an
issuer of any of the Bonds to issue new obligations in exchange or
substitution for any Bond pursuant to a refunding or refinancing plan, except
that the Sponsor may instruct the Trustee to accept or reject such an offer or
to take any other action with respect thereto as the Sponsor may deem proper
if (1) the issuer is in default with respect to such Bond or (2) in the
written opinion of the Sponsor the issuer will probably default with respect
to such Bond in the reasonably foreseeable future. Any obligation so received
in exchange or substitution will be held by the Trustee subject to the terms
and conditions of the Trust Agreement 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 Unitholder, identifying the Bonds eliminated and the
Bonds substituted therefor. Except as stated herein, the acquisition by the
Trust of any securities other than the Bonds initially deposited is not
permitted.
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 30 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 30 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.
Amendment or Termination. The Sponsor and the Trustee have the power to amend
the Trust Agreement without the consent of any of the Unitholders when such an
amendment is (a) to cure an ambiguity or to correct or supplement any
provision of the Trust Agreement which may be defective or inconsistent with
any other provision contained therein or (b) to make such other provisions as
shall not adversely affect the interest of the Unitholders (as determined in
good faith by the Sponsor and the Trustee), provided that the Trust Agreement
may not be amended to increase the number of Units 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 the Trust,
except for the substitution of certain refunding securities for such Bonds. In
the event of any amendment, the Trustee is obligated to notify promptly all
Unitholders of the substance of such amendment.
All Trusts other than those indicated in the next sentence may be terminated
at any time by consent of Unitholders representing 100% of the Units of the
Trust then outstanding. Each series of Insured Municipals Income Trust, Series
98 and subsequent series may be terminated at any time by consent of the
Unitholders representing 51% of the Units of such Trust then outstanding. In
addition, a Trust may be terminated by the Trustee when the value of the
Trust, as shown by any semi-annual evaluation, is less than that indicated
under "Summary of Essential Financial Information" in Part One of this
Prospectus.
The Trust Agreement provides that the Trust shall terminate upon the
redemption, sale or other disposition of the last Security held in the Trust,
but in no event shall it continue beyond the end of the year indicated under
"The Trust". In the event of termination of the Trust, written notice thereof
will be sent by the Trustee to each Unitholder thereof at his address
appearing on the registration books of the Trust maintained by the Trustee.
Within a reasonable time thereafter the Trustee shall liquidate any Securities
then held in the Trust and shall deduct from the funds of the Trust any
accrued costs, expenses or indemnities provided by the Trust Agreement,
including estimated compensation of the Trustee and costs of liquidation and
any amounts required as a reserve to provide for payment of any applicable
taxes or other governmental charges. The sale of Securities in the Trust upon
termination may result in a lower amount than might otherwise be realized if
such sale were not required at such time. For this reason, among others, the
amount realized by a Unitholder upon termination may be less than the
principal amount of Securities represented by the Units held by such
Unitholder. The Trustee shall then distribute to each Unitholder his share of
the balance of the Interest and Principal Accounts. With such distribution the
Unitholders shall be furnished a final distribution statement of the amount
distributable. At such time as the Trustee in its sole discretion shall
determine that any amounts held in reserve are no longer necessary, it shall
make distribution thereof to Unitholders in the same manner.
Notwithstanding the foregoing, in connection with final distributions to
Unitholders, it should be noted that because the portfolio insurance obtained
by the Trust is applicable only while Bonds so insured are held by the Trust,
the price to be received by the Trust upon the disposition of any such Bond
which is in default, by reason of nonpayment of principal or interest, will
not reflect any value based on such insurance. Therefore, in connection with
any liquidation, it shall not be necessary for the Trustee to, and the Trustee
does not currently intend to, dispose of any Bond or Bonds if retention of
such Bond or Bonds, until due, shall be deemed to be in the best interest of
Unitholders, including, but not limited to situations in which a Bond or Bonds
so insured are in default and situations in which a Bond or Bonds so insured
have a deteriorated market price resulting from a significant risk of 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 defaulted Bonds not disposed of at the date of termination will
ultimately be distributed to Unitholders of record as of such date of
termination as soon as practicable after the date such defaulted Bond or Bonds
become due and applicable insurance proceeds have been received by the
Trustee.
Limitation on Liabilities. The Sponsor, the Evaluator and the Trustee shall be
under no liability to Unitholders for taking any action or for refraining from
taking any action in good faith pursuant to the Trust Agreement, or for errors
in judgment, but shall be liable only for their own willful misfeasance, bad
faith or negligence (gross negligence in the case of the Sponsor) in the
performance of their duties or by reason of their reckless disregard of their
obligations and duties hereunder. The Trustee shall not be liable for
depreciation or loss incurred by reason of the sale by the Trustee of any of
the Securities. In the event of the failure of the Sponsor to act under the
Trust Agreement, the Trustee may act thereunder and shall not be liable for
any action taken by it in good faith under the Trust Agreement.
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 Trust Agreement or upon or in respect of the
Trust which the Trustee maybe 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 Trust Agreement contains other customary
provisions limiting the liability of the Trustee.
The Trustee, Sponsor and Unitholders may rely on any evaluation furnished by
the Evaluator and shall have no responsibility for the accuracy thereof.
Determinations by the Evaluator under the Trust Agreement shall be made in
good faith upon the basis of the best of information available to it,
provided, however, that the Evaluator shall be under no liability to the
Trustee, Sponsor or Unitholders for errors in judgment. This provision shall
not protect the Evaluator in any case of willful misfeasance, bad faith, gross
negligence or reckless disregard to its obligations and duties.
Sponsor. Van Kampen Merritt Inc., a Delaware corporation, is the Sponsor of
the Trust. Van Kampen Merritt Inc. is primarily owned by Clayton, Dubilier &
Rice, Inc., a New York-based private investment firm. Van Kampen Merritt Inc.
management owns a significant minority equity position. Van Kampen Merritt
Inc. specializes in the underwriting and distribution of unit investment
trusts and mutual funds. The Sponsor is a member of the National Association
of Securities Dealers, Inc. and has its principal office at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181 (708) 684-6000. It maintains a branch
office in Philadelphia and has regional representatives in Atlanta, Dallas,
Los Angeles, New York, San Francisco, Seattle and Tampa. As of September 30,
1993, the total stockholders' equity of Van Kampen Merritt Inc. was
$200,885,000 (unaudited). (This paragraph relates only to the Sponsor and not
to the Trust. 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.)
As of November 30, 1993, the Sponsor and its affiliates managed, or supervised
approximately $38.5 billion of investment products, of which over $25 billion
is invested in municipal securities. The Sponsor managed $23 billion of
assets, consisting of $8.2 billion for 19 open end mutual funds, $8.3 billion
for 33 closed-end funds and $6.5 billion for 51 institutional accounts. The
Sponsor has also deposited over $23.5 billion of unit investment trusts. Based
on cumulative assets deposited, the Sponsor believes that it is the largest
sponsor of insured municipal unit investment trusts, primarily through the
success of its Insured Municipal Income Trust or the IM-IT trust. The Sponsor
also provides surveillance and evaluation services at cost for approximately
$15.5 billion of unit investment trust assets outstanding. Since 1976, the
Sponsor has opened over one million retail investor accounts through retail
distribution firms. Van Kampen Merritt Inc. is the Sponsor of the various
series of the trusts listed below and the distributor of the mutual funds and
closed-end funds listed below. Unitholders may only invest in the trusts,
mutual funds and closed-end funds which are registered for sale in the state
of residence of such Unitholder. In order for a Unitholder to invest in the
trusts, mutual funds and closed-end funds listed below, such Unitholder must
obtain a prospectus relating to the trust or fund involved. A prospectus is
the only means by which an offer can be delivered to investors.
If the Sponsor shall fail to perform any of its duties under the Trust
Agreement or become incapable of acting or become bankrupt or its affairs are
taken over by public authorities, then the Trustee may (i) appoint a successor
Sponsor at rate of compensation deemed by the Trustee to be reasonable and not
exceeding amounts prescribed by the Securities and Exchange Commission, (ii)
terminate the Trust Agreement and liquidate the Trust as provided therein or
(iii) continue to act as Trustee without terminating the Trust Agreement.
Trustee. The Trustee is The Bank of New York, a trust company organized under
the laws of New York. The Bank of New York has its offices at 101 Barclay
Street, New York, New York 10286 (800) 221-7668. 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 duties of the Trustee are primarily ministerial in nature. It did not
participate in the selection of Securities for the Trust portfolio.
In accordance with the Trust Agreement, the Trustee shall keep proper books of
record and account of all transactions at its office for the Trust. Such
records shall include the name and address of, and the certificates issued by
the Trust to, every Unitholder of the Trust. Such books and records shall be
open to inspection by any Unitholder at all reasonable times during the usual
business hours. The Trustee shall make such annual or other reports as may
from time to time be required under any applicable state or Federal statute,
rule or regulation (see "Unitholders Explanations - Public Offering - Reports
Provided"). The Trustee is required to keep a certified copy or duplicate
original of the Trust Agreement on file in its office available for inspection
at all reasonable times during the usual business hours by any Unitholder,
together with a current list of the Securities held in the Trust.
Under the Trust Agreement, the Trustee or any successor trustee may resign and
be discharged of the Trust created by the Trust Agreement by executing an
instrument in writing and filing the same with the Sponsor. The Trustee or
successor trustee must mail a copy of the notice of resignation to all
Unitholders then of record, not less than 60 days before the date specified in
such notice when such resignation is to take effect. The Sponsor upon
receiving notice of such resignation is obligated to appoint a successor
trustee promptly. If, upon such resignation, no successor trustee has been
appointed and has accepted the appointment within 30 days after notification,
the retiring Trustee may apply to a court of competent jurisdiction for the
appointment of a successor. The Sponsor may remove the Trustee and appoint a
successor trustee as provided in the Trust Agreement at any time with or
without cause. Notice of such removal and appointment shall be mailed to each
Unitholder by the Sponsor. Upon execution of a written acceptance of such
appointment by such successor trustee, all the rights, powers, duties and
obligations of the original trustee shall vest in the successor. The
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.
OTHER MATTERS
Legal Opinions. The legality of the Units offered hereby has been passed upon
by Chapman and Cutler, 111 West Monroe Street, Chicago, Illinois 60603, as
counsel for the Sponsor. Various counsel have acted as counsel for the Trustee
and as special counsel for the Trust for New York tax matters.
Independent Certified Public Accountants. The statement of condition and the
related securities portfolio included in Part One of this Prospectus have been
audited by Grant Thornton, independent certified public accountants, as set
forth in their report in Part One of this Prospectus, and are included herein
in reliance upon the authority of said firm as experts in accounting and
auditing.
DESCRIPTION OF SECURITIES RATINGS*
Standard & Poor's Corporation. A Standard & Poor's Corporation ("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 of creditworthiness may take into consideration obligors such
as guarantors, insurers or lessees.
The bond rating is not a recommendation to purchase or sell a security,
inasmuch as it does not comment as to market price.
The ratings are based on current information furnished to Standard & Poor's by
the issuer and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information. The ratings are based, in
varying degrees, on the following considerations:
*As published by the rating companies.
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.
Nature of and provisions of the obligation.
Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization or other arrangements under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
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 debt in this category than in higher rated categories.
Plus (+) or Minus (-): To provide more detailed indications of credit quality,
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: A provisional rating "(p)" assumes the successful
completion of the project being financed by the issuance of 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, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion. Accordingly, the investor should exercise his own
judgment with respect to such likelihood and risk.
Moody's Investors Service, Inc. A brief description of the applicable Moody's
Investors Service, Inc. ("Moody's")
rating symbols and their meanings follows:
Aaa Bonds which are rated Aaa are judged to be 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. With the occasional
exception of oversupply in a few specific instances, the safety of obligations
of this class is so absolute that their market value is affected solely by
money market fluctuation.
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 grad e bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities. These Aa bonds are high grade, their market value 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 higher 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
credit circumstances during a sustained period of depressed business
conditions. During periods of normalcy, bonds of this quality frequently move
in parallel with Aaa and Aa obligations, with the occasional exception of
oversupply in a few specific instances.
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.
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 operating 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.
INTENTIONALLY LEFT BLANK
No person is authorized to give any information or to make any representation
not contained in this Prospectus; and any information or representation not
contained herein must not be relied upon as having been authorized by the
Trust, the Sponsor or the dealers. This Prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy, securities in any state
to any persons to whom it is not lawful to make such offer in such state.
TABLE OF CONTENTS
Title Page
The Trust 2
Objectives and Securities Selection 2
Trust Portfolio 3
Estimated Current Returns and Estimated Long-Term Returns 6
Trust Operating Expenses 6
Insurance on the Bonds 7
Tax Status 12
Public Offering 13
Rights of Unitholders 16
Trust Administration 19
Other Matters 21
Description of Bond Ratings 21
This Prospectus does not contain all the information set forth in the
registration statements and exhibits relating thereto, which the Trust has
filed with 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.
INSURED MUNICIPALS
INCOME TRUST
PROSPECTUS PART TWO
Note: This Prospectus May Be Used Only When Accompanied by Part One. Both
Parts of this Prospectus should be retained for future reference.
The Prospectus is dated as of the date of the Prospectus Part I accompanying
this Prospectus Part II.
Sponsor: Van Kampen Merritt
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
and
Mellon Bank Center
1735 Market Street Suite 1300
Philadelphia, Pennsylvania 19103
Contents of Post-Effective Amendment
to Registration Statement
This Post-Effective Amendment to the Registration Statement
comprises the following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Accountants
Signatures
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, Insured Municipals Income Trust and Investors' Quality Tax-
Exempt Trust, Multi-Series 54, 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 to its Registration Statement to be signed on
its behalf by the undersigned thereunto duly authorized, and its seal to
be hereunto affixed and attested, all in the City of Chicago and State of
Illinois on the 26th day of September, 1994.
Insured Municipals Income Trust and
Investors' Quality Tax-Exempt
Trust, Multi-Series 54
(Registrant)
By Van Kampen Merritt Inc.
(Depositor)
By: Sandra A. Waterworth
Vice President
(Seal)
Pursuant to the requirements of the Securities Act of 1933, this
Post Effective Amendment to the Registration Statement has been signed
below by the following persons in the capacities on September 26, 1994:
Signature Title
John C. Merritt Chairman, Chief Executive )
Officer and Director )
)
William R. Rybak Senior Vice President and )
Chief Financial Officer )
)
Ronald A. Nyberg Director )
)
William R. Molinari Director )
) Sandra A. Waterworth
) (Attorney in Fact)*
____________________
* An executed copy of each of the related powers of attorney was filed
with the Securities and Exchange Commission in connection with the
Registration Statement on Form S-6 of Insured Municipals Income
Trust, 113th Insured Multi-Series (File No. 33-46036) and the same
are hereby incorporated herein by this reference.
Consent of Independent Certified Public Accountants
We have issued our report dated July 22, 1994 accompanying the
financial statements of Insured Municipals Income Trust and Investors'
Quality Tax-Exempt Trust, Multi-Series 54 as of May 31, 1994, and for the
period then ended, contained in this Post-Effective Amendment No. 7 to
Form S-6.
We consent to the use of the aforementioned report in the Post-
Effective Amendment and to the use of our name as it appears under the
caption "Auditors".
Grant Thornton
Chicago, Illinois
September 26, 1994
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<EXPENSES-NET> 11916
<NET-INVESTMENT-INCOME> 211347
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