Securities and Exchange Commission
Washington, D. C. 20549-1004
Post-Effective
Amendment No. 5
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, 57th Insured Multi-Series
(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 January 24, 1994 pursuant to paragraph (b) of Rule 485.
57th INSURED MULTI-SERIES
California/76
INSURED MUNICIPALS Florida/23
INCOME TRUST Georgia/40
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 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-Insured
Multi-Series (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 an insured 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 January 19, 1994
Van Kampen Merritt
Page 1
<PAGE>
INSURED MUNICIPALS INCOME TRUST, 57th MULTI-SERIES
Summary of Essential Financial Information
As of October 22, 1993
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>
California Florida Georgia
Trust Trust Trust
<S> <C> <C> <C>
- ------------------------------------------------------------------------ ------------------ ----------------- ------------------
General Information
Principal Amount (Par Value) of Securities ........................... $ 3,890,000 $ 2,870,000 $ 3,930,000
Number of Units ...................................................... 3,999 2,924 4,020
Fractional Undivided Interest in Trust per Unit ...................... 1/ 3,999 1/ 2,924 1/ 4,020
Public Offering Price:
Aggregate Bid Price of Securities in Portfolio ................... $ 4,304,825.35 $ 3,181,831.95 $ 4,295,395.10
Aggregate Bid Price of Securities per Unit ....................... $ 1,076.48 $ 1,088.18 $ 1,068.51
Sales charge 4.712% (4.5% of Public Offering Price excluding
principal cash) for the California Trust, 4.932% (4.7% of Public
Offering Price excluding principal cash) for the Florida Trust
and 5.374% (5.1% of Public Offering Price excluding principal
cash) for the Georgia Trust .................................... $ 50.58 $ 53.54 $ 57.29
Principal Cash per Unit .......................................... $ (2.96) $ (2.57) $ (2.46)
Public Offering Price per Unit <F1>............................... $ 1,124.10 $ 1,139.15 $ 1,123.34
Redemption Price per Unit ............................................ $ 1,073.52 $ 1,085.61 $ 1,066.05
Excess of Public Offering Price per Unit over Redemption Price
per Unit ........................................................... $ 50.58 $ 53.54 $ 57.29
Minimum Value of the Trust under which Trust Agreement may
be terminated ...................................................... $ 808,000 $ 594,000 $ 788,000
Annual Premium on Portfolio Insurance ................................ $ 1,168.51 $ 730.00 $ 3,001.70
Evaluator's Annual Fee <F4>........................................... $ 1,818 $ 1,326 $ 1,816
Special Information
Calculation of Estimated Net Annual Unit Income:
Estimated Annual Interest Income per Unit ........................ $ 69.74 $ 71.80 $ 72.10
Less: Estimated Annual Expense ................................... $ 2.21 $ 2.33 $ 2.24
Less: Annual Premium on Portfolio Insurance ...................... $ .29 $ .25 $ .75
Estimated Net Annual Interest Income per Unit .................... $ 67.24 $ 69.22 $ 69.11
Calculation of Estimated Interest Earnings per Unit:
Estimated Net Annual Interest Income ............................. $ 67.24 $ 69.22 $ 69.11
Divided by 12 .................................................... $ 5.60 $ 5.77 $ 5.76
Estimated Daily Rate of Net Interest Accrual per Unit ................ $ .18677 $ .19225 $ .19198
Estimated Current Return Based on Public Offering Price <F2><F3>...... 5.97% 6.06% 6.14%
Estimated Long-Term Return <F2><F3>................................... 3.75% 3.75% 4.40%
<FN>
<F1>Plus accrued interest to the date of settlement (five business days
after purchase) of $16.53, $16.14 and $17.17 for the California Trust, Florida
Trust and Georgia 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 Returns on an identical portfolio without the
insurance obtained by the California Trust, Florida Trust and Georgia Trust
would have been 6.04%, 6.14% and 6.26%, respectively, based on such
semi-annual distribution plan on such date, while the Estimated Long-Term
Returns on an identical portfolio without the insurance obtained by the
California Trust, Florida Trust and Georgia Trust would have been 3.83%, 3.82%
and 4.53%.
<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>
Page 2
<PAGE>
Summary of Essential Information (continued)
Evaluations for purpose of sale, 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>
<S> <C>
Minimum Principal Distribution ......$1.00 per Unit
Date of Deposit .....................October 27, 1988
Mandatory Termination Date ..........December 31, 2037
Evaluator's Annual Supervisory Fee ..Maximum of $0.25 per Unit
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Record and Computation Dates .FIRST day of the month as follows: monthly -
each month; semi-annual - January and July.
Distribution Dates ...........FIFTEENTH day of the month as follows: monthly -
each month; semi-annual - January and July.
Trustee's Annual Fee .........$1.19 and $.66 per $1,000 principal amount of
Bonds respectively, for those portions of the
Trusts under the monthly and semi-annual
distribution plans.
</TABLE>
Page 3
<PAGE>
PORTFOLIO
In selecting Bonds for the California Insured Municipals Income Trust,
Series 76, 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 September 30, 1993, 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, 6 (65%); Single Family, 2 (15%) and Wholesale Electric, 2 (20%).
See "Bond Portfolio" herein and "Description of Securities Ratings" in Part
Two.
<TABLE>
PER UNIT INFORMATION
<CAPTION>
1989<F1> 1990 1991 1992 1993
<S> <C> <C> <C> <C> <C>
------------ ----------- ----------- ----------- ------------
Net asset value per Unit at beginning of period ................ $ 951.00 $ 975.75 $ 958.89 $ 1,017.40 $ 1,044.68
============ =========== =========== =========== ============
Net asset value per Unit at end of period ...................... $ 975.75 $ 958.89 $ 1,017.40 $ 1,044.68 $ 1,096.45
============ =========== =========== =========== ============
Distributions to Unitholders of investment income including
accrued interest to carry paid on Units redeemed (average Units
outstanding for entire period) <F2>........................... $ 39.90 $ 68.17 $ 67.96 $ 67.96 $ 67.76
============ =========== =========== =========== ============
Distributions to Unitholders from Bond redemption proceeds
(average Units outstanding for entire period) ................ $ -- $ -- $ -- $ -- $ 4.76
============ =========== =========== =========== ============
Unrealized appreciation (depreciation) of Bonds (per Unit
outstanding at end of period) ................................ $ 2.36 $ (16.71) $ 58.62 $ 27.33 $ 56.36
============ =========== =========== =========== ============
Distributions of investment income by frequency of payment <F2>
Monthly ................................................... $ 44.68 $ 67.57 $ 67.56 $ 67.53 $ 67.24
Semiannual ................................................ $ 33.62 $ 68.24 $ 68.24 $ 68.24 $ 67.93
Units outstanding at end of period ............................. 4,118 4,066 4,045 4,042 4,009
<FN>
<F1>For the period from October 27, 1988 (date of deposit) through September
30, 1989.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
Page 4
<PAGE>
PORTFOLIO
In selecting Bonds for the Florida Insured Municipals Income Trust,
Series 23, 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 September 30, 1993, 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, 1 (18%); Health Care System, 1 (12%); Pre-refunded, 3
(33%); Retail Electric, 1 (17%); Water and Sewer, 1 (3%) and Miscellaneous, 1
(17%). See "Bond Portfolio" herein and "Description of Securities Ratings" in
Part Two.
<TABLE>
PER UNIT INFORMATION
<CAPTION>
1989<F1> 1990 1991 1992 1993
<S> <C> <C> <C> <C> <C>
------------ ----------- ----------- ----------- ------------
Net asset value per Unit at beginning of period ................ $ 951.00 $ 973.21 $ 958.42 $ 1,016.24 $ 1,048.62
============ =========== =========== =========== ============
Net asset value per Unit at end of period ...................... $ 973.21 $ 958.42 $ 1,016.24 $ 1,048.62 $ 1,105.99
============ =========== =========== =========== ============
Distributions to Unitholders of investment income including
accrued interest to carry paid on Units redeemed (average Units
outstanding for entire period) <F2>........................... $ 43.58 $ 69.71 $ 69.44 $ 69.45 $ 69.46
============ =========== =========== =========== ============
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) ................................ $ 2.33 $ (14.81) $ 57.75 $ 32.29 $ 57.52
============ =========== =========== =========== ============
Distributions of investment income by frequency of payment <F2>
Monthly ................................................... $ 46.41 $ 69.24 $ 69.24 $ 69.24 $ 69.24
Semiannual ................................................ $ 35.11 $ 70.00 $ 70.00 $ 70.00 $ 70.00
Units outstanding at end of period ............................. 2,978 2,931 2,931 2,924 2,924
<FN>
<F1>For the period from October 27, 1988 (date of deposit) through September
30, 1989.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
Page 5
<PAGE>
PORTFOLIO
In selecting Bonds for the Georgia Insured Municipals Income Trust,
Series 40, 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 or, if not rated, the Bonds had, in the opinion of the Sponsor,
credit characteristics sufficiently similar to the credit characteristics of
interest-bearing tax-exempt obligations that were so rated as to be acceptable
for acquisition by the Fund (see "Description of 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
September 30, 1993, 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: Higher Education, 1 (13%); Health Care System, 2 (25%);
Pre-refunded, 3 (39%); Single Family, 1 (10%) and Wholesale Electric, 1 (13%).
See "Bond Portfolio" herein and "Description of Securities Ratings" in Part
Two.
<TABLE>
PER UNIT INFORMATION
<CAPTION>
1989<F1> 1990 1991 1992 1993
<S> <C> <C> <C> <C> <C>
------------ ----------- ----------- ----------- ------------
Net asset value per Unit at beginning of period ................ $ 951.00 $ 982.40 $ 959.61 $ 1,014.69 $ 1,033.48
============ =========== =========== =========== ============
Net asset value per Unit at end of period ...................... $ 982.40 $ 959.61 $ 1,014.69 $ 1,033.48 $ 1,085.26
============ =========== =========== =========== ============
Distributions to Unitholders of investment income including
accrued interest to carry paid on Units redeemed (average Units
outstanding for entire period) <F2>........................... $ 42.83 $ 69.21 $ 69.23 $ 69.17 $ 69.28
============ =========== =========== =========== ============
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) ................................ $ 10.84 $ (23.09) $ 54.76 $ 18.60 $ 52.02
============ =========== =========== =========== ============
Distributions of investment income by frequency of payment <F2>
Monthly ................................................... $ 45.64 $ 69.00 $ 69.00 $ 69.00 $ 69.00
Semiannual ................................................ $ 34.40 $ 69.74 $ 69.74 $ 69.74 $ 69.74
Units outstanding at end of period ............................. 4,038 4,035 4,029 4,029 4,021
<FN>
<F1>For the period from October 27, 1988 (date of deposit) through September
30, 1989.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
Page 6
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of Van Kampen Merritt Inc. and the Unitholders of
Insured Municipals Income Trust, 57th Multi-Series:
We have audited the accompanying statements of condition (including the
analyses of net assets) and the related portfolio of Insured Municipals Income
Trust, 57th Multi-Series (California, Florida and Georgia Trusts) as of
September 30, 1993, and the related statements of operations and changes in
net assets for the three years ended September 30, 1993. 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 September
30, 1993 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,
57th Multi-Series (California, Florida and Georgia Trusts) as of September 30,
1993, and the results of operations and changes in net assets for the three
years ended September 30, 1993, in conformity with generally accepted
accounting principles.
GRANT THORNTON
Chicago, Illinois
October 29, 1993
Page 7
<PAGE>
<TABLE>
INSURED MUNICIPALS INCOME TRUST
57th MULTI-SERIES
Statements of Condition
September 30, 1993
<CAPTION>
California Florida Georgia
Trust Trust Trust
<S> <C> <C> <C>
------------------ ----------------- ------------------
Trust property
Cash ............................................................. $ 15,807 $ -- $ --
Tax-exempt securities at market value, (cost $3,791,911, $2,785,517
and $3,831,911, respectively) (note 1) ......................... 4,307,230 3,180,948 4,287,261
Accrued interest ................................................. 72,619 83,782 103,973
------------------ ----------------- ------------------
$ 4,395,656 $ 3,264,730 $ 4,391,234
================== ================= ==================
Liabilities and interest of Unitholders
Cash overdraft ................................................... $ -- $ 30,811 $ 27,412
Interest to Unitholders .......................................... 4,395,656 3,233,919 4,363,822
------------------ ----------------- ------------------
$ 4,395,656 $ 3,264,730 $ 4,391,234
================== ================= ==================
</TABLE>
<TABLE>
Analyses of Net Assets
<CAPTION>
<S> <C> <C> <C>
Interest of Unitholders (4,009, 2,924 and 4,021 Units, respectively of
fractional undivided interest outstanding)
Cost to original investors of 4,143, 3,039 and 4,040 Units,
respectively (note 1) .......................................... $ 4,143,000 $ 3,039,000 $ 4,040,000
Less initial underwriting commission (note 3) .............. 202,969 148,885 197,926
------------------ ----------------- ------------------
3,940,031 2,890,115 3,842,074
Less redemption of Units (134, 115 and 19 Units,
respectively) ............................................ 132,000 112,587 19,189
------------------ ----------------- ------------------
3,808,031 2,777,528 3,822,885
Undistributed net investment income
Net investment income ...................................... 1,357,234 1,008,012 1,374,602
Less distributions to Unitholders .......................... 1,267,743 947,548 1,289,237
------------------ ----------------- ------------------
89,491 60,464 85,365
Realized gain (loss) on Bond sale or redemption .................. 1,972 496 222
Unrealized appreciation (depreciation) of Bonds (note 2) ......... 515,319 395,431 455,350
Distributions to Unitholders of Bond sale or redemption proceeds .
(19,157) -- --
------------------ ----------------- ------------------
Net asset value to Unitholders .......................... $ 4,395,656 $ 3,233,919 $ 4,363,822
================== ================= ==================
Net asset value per Unit (Units outstanding of 4,009, 2,924 and 4,021,
respectively) ...................................................... $ 1,096.45 $ 1,105.99 $ 1,085.26
================== ================= ==================
</TABLE>
The accompanying notes are an integral part of these statements.
Page 8
<PAGE>
<TABLE>
CALIFORNIA INSURED MUNICIPALS INCOME TRUST, SERIES 76
Statements of Operations--Years ended September 30,
<CAPTION>
1991 1992 1993
<S> <C> <C> <C>
------------------ ----------------- ------------------
Investment income
Interest income .................................................. $ 283,814 $ 282,660 $ 280,431
Expenses
Trustee fees and expenses ..................................... 5,343 5,435 5,401
Evaluator fees ................................................ 838 917 1,818
Insurance expense ............................................. 1,207 1,204 1,175
Supervisory fees .............................................. 496 536 1,016
------------------ ----------------- ------------------
Total expenses .......................................... 7,884 8,092 9,410
------------------ ----------------- ------------------
Net Investment Income ......................................... 275,930 274,568 271,021
Realized gain (loss) from Bond sale or redemption
Proceeds ......................................................... 10,063 20,278 43,308
Cost ............................................................. 10,245 20,255 40,776
------------------ ----------------- ------------------
Realized gain (loss) .......................................... (182) 23 2,532
Net change in unrealized appreciation (depreciation)
of Bonds ........................................................... 237,131 110,470 225,936
------------------ ----------------- ------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS ............................................ $ 512,879 $ 385,061 $ 499,489
================== ================= ==================
</TABLE>
<TABLE>
Statements of Changes in Net Assets--Years ended September 30,
<CAPTION>
1991 1992 1993
<S> <C> <C> <C>
------------------ ----------------- ------------------
Increase (decrease) in net assets
Operations:
Net investment income ......................................... $ 275,930 $ 274,568 $ 271,021
Realized gain (loss) on Bond sale or redemption ............... (182) 23 2,532
Net change in unrealized appreciation (depreciation)
of Bonds .................................................... 237,131 110,470 225,936
------------------ ----------------- ------------------
Net increase (decrease) in net assets resulting
from operations .......................................... 512,879 385,061 499,489
Distributions to Unitholders from:
Net investment income ......................................... (275,725) (274,819) (272,873)
Bond sale or redemption proceeds .............................. -- -- (19,157)
Redemption of Units (note 4) ......................................... (20,622) (3,060) (34,382)
------------------ ----------------- ------------------
Total increase (decrease) .................................. 216,532 107,182 173,077
Net asset value to Unitholders
Beginning of period ........................................... 3,898,865 4,115,397 4,222,579
------------------ ----------------- ------------------
End of period (including undistributed net investment income of
$91,594, $91,343 and $89,491, respectively) .................
$ 4,115,397 $ 4,222,579 $ 4,395,656
================== ================= ==================
</TABLE>
The accompanying notes are an integral part of these statements.
Page 9
<PAGE>
<TABLE>
FLORIDA INSURED MUNICIPALS INCOME TRUST, SERIES 23
Statements of Operations--Years ended September 30,
<CAPTION>
1991 1992 1993
<S> <C> <C> <C>
------------------ ----------------- ------------------
Investment income
Interest income .................................................. $ 209,931 $ 209,931 $ 209,931
Expenses
Trustee fees and expenses ..................................... 4,510 4,567 4,465
Evaluator fees ................................................ 607 667 1,326
Insurance expense ............................................. 730 730 730
Supervisory fees .............................................. 357 388 735
------------------ ----------------- ------------------
Total expenses .......................................... 6,204 6,352 7,256
------------------ ----------------- ------------------
Net Investment Income ......................................... 203,727 203,579 202,675
Realized gain (loss) from Bond sale or redemption
Proceeds ......................................................... -- -- --
Cost ............................................................. -- -- --
------------------ ----------------- ------------------
Realized gain (loss) .......................................... -- -- --
Net change in unrealized appreciation (depreciation)
of Bonds ........................................................... 169,274 94,429 168,191
------------------ ----------------- ------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS ............................................ $ 373,001 $ 298,008 $ 370,866
================== ================= ==================
</TABLE>
<TABLE>
Statements of Changes in Net Assets--Years ended September 30,
<CAPTION>
1991 1992 1993
<S> <C> <C> <C>
------------------ ----------------- ------------------
Increase (decrease) in net assets
Operations:
Net investment income ......................................... $ 203,727 $ 203,579 $ 202,675
Realized gain (loss) on Bond sale or redemption ............... -- -- --
Net change in unrealized appreciation (depreciation)
of Bonds .................................................... 169,274 94,429 168,191
------------------ ----------------- ------------------
Net increase (decrease) in net assets resulting
from operations .......................................... 373,001 298,008 370,866
Distributions to Unitholders from:
Net investment income ......................................... (203,523) (203,360) (203,108)
Bond sale or redemption proceeds .............................. -- -- --
Redemption of Units (note 4) ......................................... -- (7,101) --
------------------ ----------------- ------------------
Total increase (decrease) .................................. 169,478 87,547 167,758
Net asset value to Unitholders
Beginning of period ........................................... 2,809,136 2,978,614 3,066,161
------------------ ----------------- ------------------
End of period (including undistributed net investment income of
$60,678, $60,897 and $60,464, respectively) .................
$ 2,978,614 $ 3,066,161 $ 3,233,919
================== ================= ==================
</TABLE>
The accompanying notes are an integral part of these statements.
Page 10
<PAGE>
<TABLE>
GEORGIA INSURED MUNICIPALS INCOME TRUST, SERIES 40
Statements of Operations--Years ended September 30,
<CAPTION>
1991 1992 1993
<S> <C> <C> <C>
------------------ ----------------- ------------------
Investment income
Interest income .................................................. $ 290,527 $ 289,855 $ 289,855
Expenses
Trustee fees and expenses ..................................... 5,809 5,929 5,879
Evaluator fees ................................................ 833 914 1,816
Insurance expense ............................................. 3,015 3,002 3,002
Supervisory fees .............................................. 494 533 1,013
------------------ ----------------- ------------------
Total expenses .......................................... 10,151 10,378 11,710
------------------ ----------------- ------------------
Net Investment Income ......................................... 280,376 279,477 278,145
Realized gain (loss) from Bond sale or redemption
Proceeds ......................................................... 10,385 -- --
Cost ............................................................. 10,163 -- --
------------------ ----------------- ------------------
Realized gain (loss) .......................................... 222 -- --
Net change in unrealized appreciation (depreciation)
of Bonds ........................................................... 220,641 74,951 209,171
------------------ ----------------- ------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS ............................................ $ 501,239 $ 354,428 $ 487,316
================== ================= ==================
</TABLE>
<TABLE>
Statements of Changes in Net Assets--Years ended September 30,
<CAPTION>
1991 1992 1993
<S> <C> <C> <C>
------------------ ----------------- ------------------
Increase (decrease) in net assets
Operations:
Net investment income ......................................... $ 280,376 $ 279,477 $ 278,145
Realized gain (loss) on Bond sale or redemption ............... 222 -- --
Net change in unrealized appreciation (depreciation)
of Bonds ...................................................... 220,641 74,951 209,171
------------------ ----------------- ------------------
Net increase (decrease) in net assets resulting
from operations .......................................... 501,239 354,428 487,316
Distributions to Unitholders from:
Net investment income ......................................... (279,204) (278,691) (278,980)
Bond sale or redemption proceeds .............................. -- -- --
Redemption of Units (note 4) ......................................... (5,887) -- (8,419)
------------------ ----------------- ------------------
Total increase (decrease) .................................. 216,148 75,737 199,917
Net asset value to Unitholders
Beginning of period ........................................... 3,872,020 4,088,168 4,163,905
------------------ ----------------- ------------------
End of period (including undistributed net investment income of
$85,414, $86,200 and $85,365, respectively) .................
$ 4,088,168 $ 4,163,905 $ 4,363,822
================== ================= ==================
</TABLE>
The accompanying notes are an integral part of these statements.
Page 11
<PAGE>
<TABLE>
57th INSURED MULTI-SERIES
CALIFORNIA INSURED MUNICIPALS INCOME TRUST
PORTFOLIO as of September 30, 1993
_________________________________________________________________________________________________________________________________
<CAPTION>
September
30, 1993
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 $ 325,000 California Housing Finance Agency Home AA* 1998 @ 102 $ 356,340
Mortgage Revenue Bonds, 1988 Series F 2004 @ 100 S.F.
7.750% Due 08/01/08
- ---------------------------------------------------------------------------------------------------------------------------------
B 465,000 City and County of San Francisco AAA 1997 @ 101.5 534,689
(California) General Purpose Sewer Revenue
Bonds, Series 1988B (AMBAC Indemnity
Insured)
7.600% Due 10/01/09
- ---------------------------------------------------------------------------------------------------------------------------------
C 480,000 M-S-R Public Power Agency (California) San AAA 1997 @ 102 505,608
Juan Project Revenue Bonds, Series C (BIG 2006 @ 100 S.F.
Insured)
6.625% Due 07/01/13
- ---------------------------------------------------------------------------------------------------------------------------------
D 475,000 Community Development Agency of The City of AAA 1996 @ 102 532,708
Simi Valley (Ventura County, California)
West End Community Development Project,
1988 Tax Allocation Bonds (BIG Insured)
7.550% Due 09/01/13
- ---------------------------------------------------------------------------------------------------------------------------------
E 110,000 County of San Bernardino, California, AAA 1996 @ 102 122,829
Certificates of Participation (County
Center/Jus-tice Center Refunding and
Capital Improvements Projects) MBIA
Insured
7.600% Due 07/01/15
- ---------------------------------------------------------------------------------------------------------------------------------
F 250,000 California Housing Finance Agency Home AAA 1996 @ 102 262,808
Mortgage Revenue Bonds, 1986 Series B (BIG 2007 @ 100 S.F.
Insured)
6.900% Due 08/01/16
- ---------------------------------------------------------------------------------------------------------------------------------
G 500,000 Sacramento (California) Municipal Utility AAA 1997 @ 102 550,490
District, Electric Revenue Bonds, Series S
(FGIC Insured)
6.625% Due 02/01/17
- ---------------------------------------------------------------------------------------------------------------------------------
H 500,000 The Regents of The University of California AAA 1996 @ 102 564,520
Group A Housing System Revenue Bonds,
Series X (MBIA Insured)
7.600% Due 11/01/18
- ---------------------------------------------------------------------------------------------------------------------------------
I 500,000 City of Industry (California) General AAA 1999 @ 102.5 590,360
Obligation Bonds, Issue of 1988 (MBIA
Insured)
7.375% Due 07/01/19
- ---------------------------------------------------------------------------------------------------------------------------------
J 285,000 Southern California Public Power Authority AA 1996 @ 100 286,878
Transmission Project Revenue Bonds, 1986 2019 @ 100 S.F.
Refunding Series A (Southern Transmission
Project)
6.000% Due 07/01/20
---------------- ----------------
$ 3,890,000 $ 4,307,230
================ ================
_________________________________________________________________________________________________________________________________
</TABLE>
The accompanying notes are an integral part of this statement.
Page 12
<PAGE>
<TABLE>
57th INSURED MULTI-SERIES
FLORIDA INSURED MUNICIPALS INCOME TRUST
PORTFOLIO as of September 30, 1993
_________________________________________________________________________________________________________________________________
<CAPTION>
September
30, 1993
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 $ 355,000 The Cape Canaveral Hospital District AAA 1997 @ 102 $ 404,927
(Florida) Refunding and Improvement
Revenue Certificates, Series 1988A (AMBAC
Indemnity Insured)
8.000% Due 01/01/13
- ---------------------------------------------------------------------------------------------------------------------------------
B 400,000 Escambia County (Florida) Utilities AAA 1999 @ 102 472,492
Authority, Utility System Revenue
Refunding Bonds, Series 1988 (FGIC Insured)
7.750% Due 01/01/15
- ---------------------------------------------------------------------------------------------------------------------------------
C 345,000 City of Tampa, Florida, Utilities Tax and AAA 1997 @ 102 404,899
Special Revenue Refunding Bonds, Series 2008 @ 100 S.F.
1988 (AMBAC Indemnity Insured)
8.125% Due 10/01/15
- ---------------------------------------------------------------------------------------------------------------------------------
D 500,000 City of Gulf Breeze (Florida) Local AAA 1998 @ 102 558,330
Government Loan Program Revenue Bonds,
Series 1985 B (FGIC Insured)
7.600% Due 12/01/15
- ---------------------------------------------------------------------------------------------------------------------------------
E 500,000 Jacksonville Electric Authority AA1* 1995 @ 100 500,875
(Jacksonville, Florida) St. Johns River 2015 @ 100 S.F.
Power Park System Refunding Revenue Bonds,
Issue Two, Series One
6.000% Due 10/01/16
- ---------------------------------------------------------------------------------------------------------------------------------
F 70,000 Clearwater, Florida, Water and Sewer Revenue AAA 1998 @ 24.760 12,920
Bonds, Series 1988 (MBIA Insured)
0.000% Due 12/01/17
- ---------------------------------------------------------------------------------------------------------------------------------
G 500,000 Orange County, Florida Capital Improvement AAA 1998 @ 102 590,865
Revenue Refunding Bonds, Series 1988 B
(MBIA Insured)
7.700% Due 10/01/18
- ---------------------------------------------------------------------------------------------------------------------------------
H 200,000 Hospital Board of Directors of Lee County, AAA 1998 @ 102 235,640
Florida, Hospital Revenue Bonds (Lee
Memorial Hospital Project) 1988 Series B
(BIG Insured)
8.000% Due 04/01/20
---------------- ----------------
$ 2,870,000 $ 3,180,948
================ ================
_________________________________________________________________________________________________________________________________
</TABLE>
The accompanying notes are an integral part of this statement.
Page 13
<PAGE>
<TABLE>
57th INSURED MULTI-SERIES
GEORGIA INSURED MUNICIPALS INCOME TRUST
PORTFOLIO as of September 30, 1993
_________________________________________________________________________________________________________________________________
<CAPTION>
September
30, 1993
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 $ 390,000 Douglasville-Douglas County Water and Sewer AAA* 1998 @ 102 $ 456,737
Authority (Georgia) Water and Sewerage
Revenue Bonds, Series 1988
7.700% Due 06/01/13
- ---------------------------------------------------------------------------------------------------------------------------------
B 500,000 Private Colleges and Universities Authority AAA 1998 @ 102 557,905
(Georgia) Revenue Bonds (Spelman College 2003 @ 100 S.F.
Project) Series 1988 (MBIA Insured)
7.750% Due 06/01/13
- ---------------------------------------------------------------------------------------------------------------------------------
C 500,000 The Hospital Authority of Fulton County AAA 1998 @ 102 562,860
(Georgia) Revenue Anticipation 2009 @ 100 S.F.
Certificates, Series 1988 (Northside
Hospital) BIG Insured
7.875% Due 10/01/13
- ---------------------------------------------------------------------------------------------------------------------------------
D 500,000 Hospital Authority of Cherokee County, AAA 1998 @ 102 561,925
Georgia, Revenue Certificates, Series 1988
(MBIA Insured)
8.000% Due 12/01/13
- ---------------------------------------------------------------------------------------------------------------------------------
E 650,000 Metropolitan Atlanta Rapid Transit Authority NR 1995 @ 102 698,048
(Georgia) Sales Tax Revenue Bonds, Series I
7.000% Due 07/01/16
- ---------------------------------------------------------------------------------------------------------------------------------
F 390,000 Georgia Residential Finance Authority, AA 1998 @ 103 405,346
Single Family Mortgage Bonds, 1988 Series 2008 @ 100 S.F.
B Bonds, Subseries B-1 (FHA Insured or VA
Guaranteed Mortgage Loans)
8.000% Due 12/01/16
- ---------------------------------------------------------------------------------------------------------------------------------
G 500,000 Municipal Electric Authority of Georgia AA- 1997 @ 100 459,940
Power Revenue Bonds, Series L
5.000% Due 01/01/20
- ---------------------------------------------------------------------------------------------------------------------------------
H 500,000 Fayette County (Georgia) Water Revenue AAA 1997 @ 102 584,500
Bonds, Series 1988 (AMBAC Indemnity
Insured)
8.000% Due 10/01/20
---------------- ----------------
$ 3,930,000 $ 4,287,261
================ ================
_________________________________________________________________________________________________________________________________
</TABLE>
The accompanying notes are an integral part of this statement.
Page 14
<PAGE>
INSURED MUNICIPALS INCOME TRUST
57th MULTI-SERIES
Notes to Financial Statements
September 30, 1991, 1992 and 1993
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 Trust maintains 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, this valuation 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 (California,
Florida and Georgia) was based on the determination by Interactive Data
Services, Inc. of the offering prices of the Bonds on the date of deposit
(October 27, 1988). Since the valuation is based upon the bid prices, such
Trusts (California, Florida and Georgia) recognized downward adjustments of
$28,643, $23,000 and $29,199, 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
reported in the financial statements for each Trust for the period ended
September 30, 1989.
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. and ratings marked # are by Fitch Investors Service,
Inc. The ratings shown represent the latest published ratings of the Bonds.
For a brief description of rating symbols and their 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.
Page 15
<PAGE>
NOTE 2--PORTFOLIO (continued)
Insurance--Insurance coverage providing for the timely payment when due
of all principal and interest on the Bonds in the 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 Trusts
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 September 30, 1993 is as follows:
<TABLE>
<CAPTION>
California Florida Georgia
Trust Trust Trust
<S> <C> <C> <C>
----------------- ------------------ -----------------
Unrealized Appreciation $ 515,319 $ 395,431 $ 455,350
Unrealized Depreciation -- -- --
----------------- ------------------ -----------------
$ 515,319 $ 395,431 $ 455,350
================= ================== =================
</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. 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 September 30,
1991 1992 1993
-------------- --------------- --------------
<S> <C> <C> <C>
California Trust 21 3 33
Florida Trust -- 7 --
Georgia Trust 06 -- 08
</TABLE>
Page 16
1
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, exemptto 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 ofthe 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 insurancefor 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. The secondary
market Public Offering Price of each Trust
will be equal to the aggregate bid price of the Securities in such Trust plus
the sales charge referred to under "Public Offering
General". 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.
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
<PAGE>
Each series of theFund 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 Stateissuers, 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 will terminate at the end of
the calendar year prior to the fiftieth
anniversary of its execution.
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 thediscount 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 ratesthan 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 Trus
t. 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. Uni
ts 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 fromFederal 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. There is, of course, no guarantee
thatthe 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 or a
prior owner of such Bonds 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. 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 or a prior owner
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, isissued by the insurer. A single premium is paid for bonds
insured by the issuer and a monthly premium is paid by a Trust for the
portfolio insurance obtained by such Trust. 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").
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 andare 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 completelyprepaid 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 ofmortgage 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 andregulations. 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. Included among such Bonds may be
bonds which are FHA insured. 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. Federal legislation has
been enacted which implemented a system of prospective Medicare reimbursement
for periods beginning on or after
October 1, 1983 whichmay restrict the flow of
revenues to hospitals and other facilities which are reimbursed for services
provided under the Medicare program.
Future legislation or changes in the areas
noted above, among other things, would affect all hospitals to varying degrees
and, accordingly, any adverse change in these areas may affect the ability of
such issuers to make payment of principal and interest on Securities held in
the portfolio of a Trust. 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 inthe 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 constructionprograms, 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, di
sposition 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, colleges and universities
and whose revenues are derived mainly from tuition, dormitory revenues, grants
and endowments. General problems of such issuers 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. See "General" for
each Trust.
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 whichare 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, tollson 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. See "General"
for each Trust.
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 understandingof 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 affectingthe 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 orlikelihood 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 thedistribution 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 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 bya 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 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.
Change of Distribution Option. The plan of distribution selected by a
Unitholder 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 an officer of a commercial bank or trust company, a
member firm of either the New York, American, Midwest or Pacific Stock
Exchange, or in such other manner as may be acceptable to the Trustee. In
certain instances the Trustee may
require additional documents such as, but not
limited to, trust instruments, certificates of death, appointments as executor
or administrator or certificates of corporate authority. Certificates will be
issued in denominations of one Unit or any multiple thereof. Certificates for
Units will bear appropriate notations on their face indicating which plan of
distribution has been selected in respect thereof. If a change in plan of
distribution is made, the existing certificate must be surrendered to the
Trustee and a new certificate will be issued, at no charge to the Unitholder,
to reflect the currently effective plan of distribution.
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; 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
isno 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 basedon 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. 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:
<TABLE>
<CAPTION>
Years to Maturity Sales Charge Years to Maturity Sales Charge
<S> <C> <C> <C>
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
</TABLE>
The sales charges in the above table are expressed as a percentage of the
net amount invested. Expressed as a percent of the Public Offering Price, the
sales charge on a Trust consisting entirely of a portfolio of Bonds with 15
years to maturity would be5.10%.
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 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 of Units 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 o
rder 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 of a Trust or if the Bonds in such Trust
are sold or otherwise removed or if such 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.
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 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.
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 forredemption, 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. 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.
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 and
which are covered by insurance obtained by
the Trust the value of the insurance guaranteeing interest and principal
payments as well as the market value of
the Bonds and the market value of bonds
of issuers whose bonds, if identifiable, carry identical interest rates and
maturities and are of a creditworthiness of minimum investment grade. If such
other bonds are not identifiable, the Evaluator will compare prices of bonds
which have substantially identical interest rates and maturities and which are
of a creditworthiness of minimum investment grade. In any case the Evaluator
will consider the ability of an insurer to meet its commitments under the
Trust's insurance policy. For example, if the Trust was to hold the defaulted
Bonds of a municipality, the Evaluator would first consider in its evaluation
the market price of the defaulted Bonds.
The Evaluator would ascribe a value to
the insurance feature of the defaulted Bonds which would be equal to the
difference between the market value of the defaulted Bonds insured by such
Trust and the market value of bonds of minimum investment grade as described
herein which were not in default in payment of interest or in significant risk
of such default. The Evaluator intends to use a similar valuation method with
respect to Bonds insured by the Trust if thereis a significant risk of default
and a resulting decrease in the market
value. 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. For a description of the circumstances under which a full or
partial suspension of the right of
Unitholders to redeem their Units may occur,
see "Redemption of Units" below.
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
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. 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 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. 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.
However, should the amount available for distribution in the Principal Account
equal or 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 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. Because interestpayments 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 distrib
ution.
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 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 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 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.
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, and (iii) 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
Offering Price." In determining the RedemptionPrice 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
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 salesmay be required at a time when Securities would not
otherwise be sold and might result in lower prices than might otherwise be
realized. Since the provisions of theinsurance policy obtained by a Trust
covering the timely payment of principal and interest, when due, on the Bonds
so insured do not permit transfer of such related insurance, the Bonds so
insured must be sold on an uninsured basis. To the extent that Bonds which are
current in payment of interest are sold from a Trust's portfolio 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 overallquality (and therefore value) of the Bonds remaining in such Trust
will tend to diminish. See "Trust Administration and Expenses
Portfolio Administration" for the effect of selling defaulted securities to
meet redemption requests.
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. Because
insurance obtained by a Trust terminates as to Bonds which are sold by the
Trustee and because the insurance obtained by a Trust does not have a
realizable cash value which can be used by the Trustee to meet redemptions of
Units, under certain 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 if a significant portion or the
Bonds in the portfolio of a Trust is indefault in payment of principal or
interest or in significant risk of such default.
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 reasonableperiod
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,
deductions for applicable taxes and for fees and
expenses of the Trust, for redemptions ofUnits, 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 calendaryear; (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
dollaramounts 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 itby 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.
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. 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 t
urn 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 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 providerof 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 af
fected 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. It does
not guarantee the market value of the Bonds or the value of the Units.
Insurance obtained by a Trust 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.
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 Offering
Offering 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 Offering
Offering 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. MGIC Indemnity and AMBAC were
each subsidiaries of MGIC Investment Corporation,Milwaukee, Wisconsin. MGIC
Indemnity and AMBAC were merged as of May 31, 1984. The surviving corporation,
MGIC Indemnity Corporation, was renamed AMBAC Indemnity Corporation as of June
1, 1984. AMBAC Indemnity has assumed all liabilities under any policies issued
by its predecessors.
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 $1,490,000,000 (unaudited) and statutory
capital of approximately $839,000,000 (unaudited) as of June 30, 1992.
Statutory capital consists of AMBAC Indemnity's policyholders' surplus and
statutory contingency reserve. AMBAC Indemnity is a wholly owned subsidiary of
AMBAC Inc., a 100% publicly-held company. Moody's Investors Service, Inc. and
Standard & Poor's Corporation have both assigned a triple-Aclaims-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.
The contract of insurance relating to each Trust and the negotiations in
respect thereof represent the only significant relationship between AMBAC
Indemnity and the Trusts which it insures. Otherwise neither AMBAC indemnity
nor its parent, AMBAC Inc., orany associate thereof has any material business
relationship, direct or indirect, with the Trusts or the Sponsor, except that
the Sponsor has in the past and may from time to time in the future, in the
normal course of its business,
participate as sole underwriter or as manager or
as a member of underwriting syndicates in the distribution of new issues of
municipal bonds for which a policy of
insurance guaranteeing the timely payment
of interest and principal has been obtained from AMBAC Indemnity.
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, 1991, MBIA had admitted assets of $2.0 billion
(audited), total liabilities of $1.4 billion (audited), and total capital and
surplus of$647 million (audited) prepared in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. As of September 30, 1992,
MBIA had admitted assets of $2.3 billion
(unaudited), total liabilities of $1.6 billion (unaudited), and total capital
and policyholders' surplus of $758
million (unaudited) determined in accordance
with statutory accounting practices prescribed or permitted by insurance
regulatory authorities. Copies of MBIA's financial statements preparedin
accordance with statutory accounting practices are available from MBIA. The
address of MBIA is 113 King Street, Armonk, New York 10504.
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,
1992, the total capital and surplus of Financial Guaranty was approximately
$602,000,000. 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 Guarantyat 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 49 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 Securityand 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 September 30, 1992, 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 $456,840,000 (unau
dited) 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 $615,376,000 (unaudited) and $213,838,000
(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.
The principal executive offices of Financial Security are located at 350
Park Avenue, New York, New York, 10022 and its telephone number is (212)
826-0100. At December 31, 1990, Financial Security and its subsidiaries had151
employees.
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 thefollowing 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 December 31, 1990, the total
policyholders' surplus of Capital Guaranty was $103,802,396 (audited), and the
total admitted assets were $180,118,227 (audited) 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 recommendati
ons 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 thatCapMAC 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 arerated 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 NewYork 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 FacilityCapMAC 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 generlaly 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 ina 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 Portfolio Insurers and the
Preinsured Bond Insurers 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 standardsof
the Portfolio Insurers and the Preinsured Bond Insurers 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 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. Bonds in a 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 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 a
nd 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 Xerox Corporation.
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 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 Certificateholder. The amount of any such
gain or loss is measured by comparing the Certificateholder's pro rata
share of the total proceeds from such dispositionwith the
Certificateholder's basis for his or her fractional interest in the
asset disposed of. In the case of a Certificateholder 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 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 o
bligations; 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 purchaseprice of a Bond exceeds the original issue price plus the
amount of original issue discount which accrued to prior owners. The
application of these rules will also
vary depending on the value of the Bond on
the date a 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.
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 Sup
erfund 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 alternativeminimum 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.
Counselfor 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 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 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.
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 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.
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 somerural 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 beforepaying 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 substantiallyto 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 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.
Arizona's main economic 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. The need to provide
services for these visitors has contributed substantially to employment gains
in the State.
In 1988, unemployment in the State was 6.3%. Unemployment in Arizona
decreased to 5.2% in 1989 and increased slightly to 5.3% in 1990. Arizona's
unemployment rates in 1989 and 1990 were very similar to the national rates of
5.3% and 5.4% respectively. Arizona's 5.2% unemployment rate in September of
1991 increased to 6.2% in October and
7.3% in November, surpassing the national
rate in November of 6.8%. The unemployment rate in Arizona for 1991 as a whole
is estimated at 5.5%, compared to a national rate estimated at 6.8%, and is
forecasted to remain relatively constant for the next two years.
On June 27, 1991, America West Airlines filed a Chapter 11 reorganization
petition in bankruptcy. America West is the sixth largest employer in Maricopa
County, employing approximately 10,000 persons within the county, and 15,000
nationwide. At the first meeting of creditors, representatives of the airline
stated that as many as 1,500 employees might be laid off over the next few
months, most in Phoenix and Las Vegas.
Over 300 employees have received lay-off
notices. 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.
Growth in the number of jobs in Arizona has been consistent for the last
few years at the rate of 2.4% to 2.5%. Job growth for 1991 is estimated at
1.8%, but should improve slightly in 1992. As of September of 1991, only
fifteen states were experiencing job growth greater than one percent, and
several were experiencing job losses at or near a three percent annualized
rate. In Arizona, the two sectors that
have been consistently strong during the
last several years are government and services. Jobs were lost in the
manufacturing sector, for the third straight year, and in the construction
industry, for the fifthconsecutive year.
The deterioration of Arizona banks
and savings and loans, apparent in 1988
and especially marked in 1989, continued through 1990. Slower construction and
real estate activity is at the heart of Arizona's financial industry's current
weakness. In the early 1980s, Phoenix and other metropolitan areas of Arizona
began experiencing an economic and population "boom," and Arizona's
institutions aggressively pursued many facets of real estate lending. By 1986,
the metropolitan areas of Arizonawere overbuilt in many categories of
construction and were burdened with excessive levels of completed inventory.
The tax law amendments in 1986 exacerbated the financial impact of the
saturated market. The elimination of certain tax benefits associated with
income-producing properties contributed to the decline in growth. Further, the
value of real estate in Arizona began a downward spiral, reflective of the
overbuilt market and inventory which
continues today. These problems translated
into a cumulative $488 million loss for Arizona banks and a cumulative $2.329
billion loss for Arizona savings and loans in 1989.
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. 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 place 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 $3.5 billion are expected during fiscal
year 1992. Approximately 43.2% of this budgeted revenue comes from sales and
use taxes, 36.0% from income taxes (both individual and corporate) and 5.3%
from property taxes. All taxestotal 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 $3.5 billion.
Major appropriation include $1.3 billion to the Department of Education (for
K-12), $369.9 million for the administration of the Arizona Health Care Cost
Containment System program ("AHCCCS") (the State's alternative to Medicaid),
$357.4 million to the Department of Economic Security, and $255.9 million to
the Department of Corrections. The budget for fiscal year 1991 also totalled
approximately $3.5 billion, and the
budget for fiscal year 1990 totalled $3.17
billion.
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,
improvementsand 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 generalobligation 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 fifty-four school districts
within the state, 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. The complaint alleges that some school districts have sufficient funds
to build outdoor swimming pools, while others have classrooms that leak in the
rain. 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 expansionsand 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 inc
reases 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 fivemonths of negotiations between Tucson
Electric and its creditors to restructure the utility's debts and other
obligations. After the dismissal of the bankruptcy petition, the Arizona
Corporation Commission approved a permanent 15% rate hike. The rate increase
had been approved by the Commission on
an interim basis several months earlier,
pending the dismissal or withdrawal of the bankruptcy petitions. 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 substantiallyto 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 extend as, such interest would have
been so exempt if paid by the issuer of thedefaulted 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 relating to) those
obligations.
California's economy is the largest among the 50 states and one of the
largest inthe world. The State's population of over 30 million represents 12%
of the total United States population and grew by 27% in the 1980s. Total
personal income in the State, at an estimated $630 billion in 1991, accounts
for 13% of all personal income in the nation. Total employment is almost 14
million, the majority of which is in the service, trade and manufacturing
sectors.
Reports issued by the State Department of Finance and the Commission on
State Finance (the "COSF") indicate that the State's economy is suffering its
worst recession since the 1930s, with prospects for recovery slower than for
the nation as a whole. The State has lost over 800,000 jobs since the start of
the recession and additional significant job losses are expected before an upt
urn begins. 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. Unemployment was
7.5% for 1991 (compared to 6.7% nationally), and is expected to be higher than
the national average in the near future. 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-approvedbonded 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 approval to levy any "special tax." However, court
decisions 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.
The State 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" i
n 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 of funds which are not "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 more closely follow 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 byvoter 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 limitationwere
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 $5.1 billion under the limit for Fiscal Year 1992-93.
Because of the complex nature of Articles XIIIA and XIIIB of the
California Constitution (described
briefly above), 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 November 6, 1992, California had approximately $16.7 billion of
general obligation bonds outstanding, and $8.6 billion remained authorized but
unissued. In addition, at June 30, 1992, the State had lease-purchase
obligations, payable from the State's General Fund, of approximately $2.9
billion. Of the State's outstanding general obligation debt, approximately 28%
is presently self-liquidating (for which
program revenues are anticipated to be
sufficient to reimburse the General Fund for debt service payments). Three
general obligation bond propositions, totalling $3.7 billion were approved by
voters in 1992. In fiscal year 1991-92, debt service on general obligation
bonds and lease-purchase debt was approximately 3.2% of General Fund revenues.
The State has paid the principal of and interest on its general obligation
bonds, lease-purchase debt and short-term obligations when due.
The principal sources of General
Fund revenues are the California personal
income tax (45% of total revenues), the sales tax (35%), bank and corporation
taxes (12%), and the gross premium tax
on insurance (3%). The State maintains a
Special Fund for Economic Uncertainties (the "Economic Uncertainties Fund"),
derived fromGeneral Fund revenues, as a reserve to meet cash needs of the
General Fund, but which is required to be replenished as soon as sufficient
revenues are available. Year-end balances in the Economic Uncertainties Fund
are included for financial reporting purposes in the General Fund balance. In
recent years, the State has budgeted to maintain the Economic Uncertainties
Fund at around 3% of General Fund expenditures but essentially no reserve is
budgeted in 1992-93.
Throughout the 1980s, State spending increased rapidly as the State
population and economy also grew
rapidly, including increased spending for many
assistance programs to local
governments, which were constrained by Proposition
13 and other laws. The largest State program is assistance to localpublic
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 StateGeneral Fund revenues (currently about 37%).
Since the start of 1990-91 Fiscal Year, the State has faced adverse
economic, fiscal and budget conditions. The economic recession seriously
affected State tax revenues. It also caused increased expenditures for health
and welfare programs. The State is also facing a structural imbalance in its
budget with the largest programs supported by the General Fund (education,
health, welfare and corrections) growing
at rates significantly higher than the
growth rates for the principal revenue sources of the General Fund. As a
result, the State entered a period of budget imbalance, with expenditures
exceeding revenues for four of the last
five fiscal years. Revenues declined in
1990-91 over 1989-90, the first time since the 1930s. By June 30, 1992, the
State's General Fund had an accumulated deficit, on a budget basis, of
approximately $2.2 billion.
As the 1990-91 fiscal year ended in the midst of a continuing recession
and very weak revenues, the Governor estimated that a "budget gap" of $14.3
billion would have to be resolved in
order to reconcile the excess of projected
expenditures for existing programs, at currently mandated growth rates, over
expected revenues, the need to repay the 1990-91 budget deficit, and the need
to restore a budget reserve. This budget gap was closed through a combination
of temporary and permanent changes in
laws and one-time budget adjustments. The
major features of the budget compromise were program funding reductions
totalling $5.0 billion; a total of $5.1 billion of increased State revenues;
savings of $2.1 billion from transferring certain health and welfare programs
to counties to be funded by increased sales tax and vehicle license fees to be
given directly to counties; and additional miscellaneous savings and revenue
gains and one time accounting charges totalling $2.1 billion.
The 1991-92 Budget Act was based on economic forecasts that recovery from
the recession would begin in the summer
or fall of 1991, but as the severity of
the recession increased, revenues lagged significantly and continually behind
projections from the start of the fiscal year. As a result, revenues for the
1991-92 Fiscal Year were more than $4 billion lower than originally projected
and expenditures werehigher than originally projected.
As a consequence of the large budget imbalances built up over two
consecutive years, the State used up all of its available cash resources. In
late June 1992, the State was required to issue $475 million of short-term
revenue anticipation warrants to cover obligations coming due on June 30 and
July 1. These warrants were repaid on July 24, 1992.
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. 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.
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 1992-93Budget Act and issuance by the State of $3.3 billion of Interim
Notes.
The Legislature enacted the 1992-93
Budget Bill on August 29, 1992, and it
was signed by the Governor on September 2, 1992. The 1992-93 Budget Act
provides for expenditures of $57.4billion 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 onJune 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.
The 1992-93 Budget was prepared and the estimate that it will be in
balance (with a reserve of $28 million at June 30, 1993) was based upon
economic assumptions made by the Department of Finance in May, 1992, which
projected, among other things, gradual
recovery beginning in the latter part of
1992. In October the COSF reported that conditions were worse than the May
forecast, with a stagnant economy now predicted for up to another two years.
The COSF predicted that, if no corrective actions were taken, the 1992-93
Fiscal Yearbudget could be approximately $2.4 billion out of balance.
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.
Property tax revenues received by
local governments declined more than 50%
following passage of Proposition 13. Subsequently, the California Legislature
enacted measures to provide for the redistribution of the State's General Fund
surplus to local agencies, the reallocation of certain State revenues to local
agencies and the assumption of certain governmental functions by the State to
assist municipal issuers to raise revenues. Total local assistance from the
State's General Fund totaled approximately $33billion in fiscal year 1991-92
(about 75% of General Fund expenditures)
and has been budgeted at $31.1 billion
for fiscal year 1992-93, including the effect of implementing reductions in
certain aid programs. To the extent the State should be constrained by its
Article XIIIB appropriations limit, or
its obligation to conform to Proposition
98, or other fiscal considerations, the absolute level, or the rate of growth,
of State assistance to local governments
may be reduced. Any such reductions in
State aid could compound the serious fiscal constraints already experienced by
many local governments, particularly counties. At least one rural county
(Butte) publicly announced that it might
enter bankruptcy proceedings in August
1990, although such plans were apparently 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 or Mello-Roos
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 bedelayed, 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
causes 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). Oneof the defenses raised in answer to
this lawsuit was the invalidity of the original lease transaction. The case is
still in very preliminary stages, and it is not known how it will be resolved.
If the case goes to trial, a 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. Health Care and Hospital Securities 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 beapproved 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 orthe
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 theincome 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 costof 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 eachTrust 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 has varied in
recent fiscal years, having been set by 5%
for fiscal year 1986 and fiscal year 1987, 6% for fiscal year 1988 and 4%
thereafter. However, the State reduced the Unappropriated Reserve requirement
for fiscal year 1991 and fiscal year 1992 to 3% to enable it to respond to
prison overcrowding. 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) fivepercent 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 orfederal 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.
Based on the State's December 1991 estimates, the 1991 fiscal year end
fund balance was $16.3 million, and the State estimates a balance of
approximately $56 million at the end of the 1992 fiscal year. For both years,
such fund balances are less than the3% Unappropriated Reserve requirement. See
"State Finances" below.
There is 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. Periodic attempts have been made to limit further the
amount of annual increases in taxes that can be levied without voter approval.
Initiated amendments to the State constitution affecting local government
financing were defeated at the general elections in 1986, 1988 and 1990.
Legislation is introduced in the Colorado GeneralAssembly from time to time
providing, in part, for similar limitations. Such initiated or legislative
proposals have contained provisions limiting increases in taxes as well as
rates and charges and imposing spending
limits on various levels of government.
Although no such proposal has been enacted to date at the State level, it is
possible that if such a proposal were
enacted, there would be an adverse impact
on State or local government financing. It is not possible to predict whether
any such proposals will be enacted in
the future or, if enacted, their possible
impact on State or local government financing.
On January 27, 1992, the Colorado Secretary of State certified initiated
petitions proposing a constitutional amendment (the "Amendment") for inclusion
on the ballot at the general election to be held on November 3, 1992. If
adopted by the voters, the Amendment would, in general, be effective December
31, 1992, and could severely restrict the ability of the State and local
governments to increase revenues and
impose taxes. The Amendment would apply 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 if adopted. Among other provisions, beginning November
4, 1992, the Amendment would require voter approval prior to tax increases,
creation of debt, or mill levy or
valuation for assessment ratio increases. The
Amendment would also limit increases in government spending and property tax
revenues to specified percentages. The Amendment would require 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)
changes in assessment rolls. School districts would be allowed to adjust tax
levies for changes in student enrollment. Pursuant to the Amendment, local
government spending would be limited by the same formula, and State spending
would be limited by inflation plus the
percentage change in State population in
the prior calendar year. The bases for future spending and revenue limits are
1992 fiscal year spending and 1991 property taxes collected in 1992. 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.
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 taxreductions and inter-fund borrowings. On a GAAP basis,
the State had unrestricted General Fund balances at June 30 of approximately
$4.4 million in fiscal year 1986, $45.1 million in fiscal year 1987, $100.3
million in fiscal year 1988, $134.8 million in fiscal year 1989 and $35.1
million in fiscal year 1990; for fiscal year1991, the State had a zero balance
for unrstricted funds in the General Fund.
The adopted budget for fiscal year 1993 projects General Fund revenues of
$3.1 billion and appropriated $3.0 billion. Based upon the estimated fiscal
year 1992 carryover surplus, the State has projected a $135.6 million year end
balance for fiscal year 1993. This amount is greater than the required 3.0%
reserve of $88.6 million. The principal General Fund revenue sources are the
individual income tax (53.8% of total estimated1992 fiscal year receipts),
excise taxes (33.8%) and the corporate income tax (4.2%).
The State Constitution prohibits the State from incurring debt except for
limited purposes, for limited periods of time and in inconsequential amounts.
The State courts have defined debt to mean any obligation of the State
requiring payment out of future years' general revenues. As a consequence, the
State has no outstanding general obligation debt.
The State's economy is reliant upon several significant factors such as
mining, tourism, agriculture, construction, manufacture of high technology
products and durable goods and trade. Activities related to tourism have grown
during the past several years, while sectors of the economy related to mining
and construction have contracted. Employment in manufacturing, transportation,
retail trade, services, government and finance, insurance and real estate have
shown modest gains from 1986 through 1990. Construction of the new
international airport in Denver is expected to have a positive effect on the
State's economy.
The growth of the State economy has historically exceeded that of the
national economy. Statewide, real personal income increased 1.6% between 1989
and 1990. According to the most current
information available from the Colorado
Department of Revenue, retail trade sales increased 6.4% from approximately
$42.6 billion to $45.4 billion from 1989 to 1990. For the first nine months of
1991, retail trade sales totaled $35.7
billion, an increase of 7.8% over sales
during the same time period in 1990.
Figures supplied by the Colorado Division of Employment and Training
indicate that for the years 1986 through 1989 the State's unemployment rate
exceeded the national rate; however,
this trend was reversed for 1990 and 1991.
In 1991, the State's annual average unemployment rate was 5.0% (compared to a
national unemployment rate of 5.5%). The seasonally adjusted unemployment rate
for April 1992 for the State was 5.6% as compared to 7.1% for the United
States.
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 Colorado adjusted gross income 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 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 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;
(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 1991 manufacturing accounted for only 20.4% of total non-agricultural
employment in Connecticut. Defense-related business represents a relatively
high proportion of the manufacturing
sector, and reductions in defense spending
couldhave a substantial adverse effect
on Connecticut's economy. 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 September 1992, the estimated rate of unemployment in
Connecticut on a seasonally adjusted basis was 7.2%, 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. There can be no assurance that general economic
difficulties orthe 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 $4,919,600,000. 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 andcertain 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 suchamount. 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 are expected to be
more than offset by a new general income
tax imposed at effective rates not to exceed 4.5% on the Connecticuttaxable
income of resident and non-resident individuals, trusts and estates. The
comptroller's annual report for the
1991-92 fiscal year reflects a General Fund
operating surplus of $110,000,000. A
General Fund budget for the 1992-93 fiscal
year has beenadopted anticipating General Fund expenditures of $7,372,062,859
and revenues of $7,372,210,000. 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 $7,600,000,000 are anticipated, the State's
share of which would be financed by bonds expected to total $3,200,000,000 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 Tempor
ary Notes. To fund the cumulative General Fund deficit for the 1989-90 and
1990-91 fiscal years, the legislation enacted August 22, 1991, authorizes 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 present one, and any unappropriated
surplus up to $205,000,000 in the General Fund at the endof each of the three
fiscal years commencing with the present one 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,
ofsuch Economic Recovery Notes, of which $805,610,000 was outstanding as of
October 31, 1992.
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 creditworthinessof 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 beenoperating.
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"); that certain of the Bonds have been issued by or on behalf of the
State of Connecticut or its political subdivisions or other public bodies
created under the laws of the Stateof Connecticut 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 Bonds in the Connecticut Trust
that were issued by the State of Connecticut or governmental authorities
located in Connecticut were issued prior to the enactment of a Connecticut tax
on the interest income of individuals; therefore, bond counsel to the issuers
of such Bonds did not opine as to the exemptionof 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, inthe
opinion of bond counsel to such issuers, exempt from state taxation.
The Connecticut income tax applicable to individuals, trusts, and estates
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 a Connecticut Trust of an obligation held by it, or upon the
redemption, sale, or other disposition
of a Unit of a Connecticut Trust held by
the Unitholder. However, certain Connecticut obligations that may be included
in a Connecticut Trust are issued pursuant to Connecticut statutes that
specifically exempt gains on the sale or other disposition of such obligations
from taxation by Connecticut.
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 taxableyears 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 ofa 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:
(1)
The Connecticut Trust is not liable
for any tax on or measured by net income imposed by the State of
Connecticut;
(2) Interest income 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 and held by the
Connecticut Trust that would not be taxable
under the Connecticut tax on the Connecticut taxable income of
individuals, trusts, and estates
if received directly by the Unitholder
from the issuer of the Bond is not taxable under such tax when such
interest is received by the Connecticut Trust or distributed by it to
such a Unitholder, and, while it
may not be entirely clear, income from
other Bonds held by the Connecticut Trust that would not betaxable
under such tax if received directly by the Unitholder from the issuer
of the Bond is not taxable under such tax when such interest is
received by the Connecticut Trust or distributed by it to such a
Unitholder;
(3) Insurance proceeds received by the
Connecticut Trust representing maturing interest on defaulted Bonds
held by the Connecticut Trust is not taxable under the Connecticut tax
on the Connecticut taxable income of individuals, trusts, and estates
if, andto the same extent as, such interest would not be taxable
thereunder if paid directly to the Connecticut Trust by the issuer of
such Bonds;
(4) 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;
(5) 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; and
(6) 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 10.6% of total U.S. housing starts
in 1990 while the State's population is 5.3% of the U.S. total population.
A driving force behind the State's construction industry has been the
State's rapid rate of population growth. Although Florida currently is the
fourth most populous state, its annual population growth is now projected to
decline as the number of people moving
into the State is expected to hover near
the mid 200,000 range annually well into the 1990s. This population trend
should provide plenty of fuel for business and home builders to keep
construction activity lively in Florida for some time to come. However, other
factors do influence the level of construction in the State.
For example, Federal tax reform in 1986 and other changes to the Federal
income tax code have eliminated tax deductions for owners of two or more
residential real estate properties 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. 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
Florida Department of Labor and Employment Security and the Florida Consensus
Economic Estimating Conference (together the "Organization") the State's unemp
loyment rate was 5.9% during 1990. As of August 1991, the Organization
forecasts that when final numbers are in, the unemployment rate for 1991 will
be 7.2% and estimates that it will be 6.7% for 1992. The State's non-farm job
growth rate is expected to mirror the path of employment growth of the nation.
The State's two largest and fastest growing private employment categories are
the service and trade sectors. Together, they are expected to account for more
than 80% of the total non-farm employment growth between 1990-91 and 1992-93.
Employment in these sectors is expected to grow 0.8% and 3.7% in 1991-92 and
3.3% and 5.3% in 1992-93, respectively. The service sector has overtaken the
trade sector and is now the State's largest employment category.
Tourism is one of the State's most important industries. Tourist arrivals
by car and air in the State will
experience difficulties in 1991-92. By the end
of 1991-92, 38.8 million domestic and international tourists are expected to
have visited the State,a decrease of 4.9% from the 40.8 million who visited in
1990-91. During 1992-93 are expected to approximate 40 million.
The State's per capita personal income in 1990 of $18,539 was slightly
below the national average of $18,696 and significantly ahead of that for the
southeast United States, which was $16,514. Growth in real personal income in
the State 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 1990-91, approximately 64% of the State's total direct
revenue to its three operating funds will be derived from State taxes, with
federal grants and other special revenue accounting for the balance. State
sales and use tax, corporate income tax, and beverage tax amounted to 66%, 7%
and 5%, respectively, of total receipts by the General Revenue Fund during
fiscal 1990-91. In that same year,expenditures for education, health and
welfare, and public safety amounted to 55%, 27% and 8%, respectively, of total
expenditures from the General Revenue Fund. At the end of fiscal 1990,
approximately $4.45 billion in principal amount of debt secured by the full
faith and credit of the State was
outstanding. In addition, since July 1, 1991,
through August 1992, the State issued
about $965 million in principal amount of
full faith and credit bonds.
On August 24, 1992, the State was hit with a major hurricane, Hurricane
Andrew. Published speculation estimates
total damage to the southern portion of
the State to be $20 billion or more. The
actual economic impact to the State is
unknown at this time, but, in published reports, the director of economic and
demographic research for the Joint Legislative Management Committee of the
State's Legislature estimates that the State's revenues from sales tax
collection will exceed the estimates prior to Andrew. The director said that
the State is expecting $7 to $8 billion of insurance, and $10 billion in
federal disaster assistance, and up to $1 billion from other sources to repair
the damage caused by Andrew. The
director estimates that a substantial portion,
maybe even half, of those monies will be spent over thenext year or two on
items subject to the State's sales tax. In addition, the director estimates
that the State will collect documentary stamp taxes in excess of the amount
currently projected. The director foresees property owners using insurance
money to pay off mortgages on buildings that have been destroyed and then
borrowing to rebuild or remodel a home. The director estimates that the
additional spending will more than offset losses from tax revenues as a result
of the decline in sales in areas where businesses have been destroyed and
closed. In addition, a senior advisor to the State's governor in published
reports has said that the State's nearly $30 billion budget may end up having
to absorb an additional $82 million as a result of Andrew.
The State Constitution and statutes mandate that the State budget, as a
whole, and each separate fund within the State budget, be kept in balance from
currently available revenues each fiscal year. If the Governor or Comptroller
believes a deficit will occur inany
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.
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 fiscalyear 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 previousyear'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 salesand use tax (6%) currently accounts for the State's
single largest source of tax receipts. Slightly less than 10% of the State's
sales and use tax is designated for
local governments and is distributed to the
respective counties in which collected for such use by such counties and the
municipalities therein. In addition to
this distribution, local governments may
(by referendum) assess a 0.5% or a 1.0% discretionary sales tax within their
county. Proceeds from this local option sales tax are earmarked for funding
local infrastructure programs and acquiring land for public recreation or
conservation or protection of natural resources as provided under Florida law.
Certain charter counties have other taxing powers in addition, and
non-consolidated counties with a population in excess of 800,000 may levy a
local option sales tax to fund indigent health care. It alone cannot exceed
0.5% and when combined with the infrastructure surtax cannot exceed 1.0%. For
the fiscal year ended June 30, 1991, sales and use taxreceipts (exclusive of
the tax on gasoline and special fuels) totalled $8,152.0 million, a decline of
0.9% over fiscal year 1989-90.
The State imposes an alcoholic beverage wholesale tax (excise tax) on
beer, wine, and liquor. This tax is one of the State's major tax sources, with
revenues totalling $445.4 million in fiscal year ending June 30, 1991.
Alcoholic beverage tax receipts declined 1.0% over the previous year. The
revenues collected from this tax are
deposited into the State's General Revenue
Fund.
The second largest source of State
tax receipts is the tax on motor fuels.
However, these revenues are almost entirely dedicated trust funds for specific
purposes and are not included in the State's General Revenue Fund.
The State imposes a corporate income tax. All receipts of the corporate
income tax are credited to the General Revenue Fund. For the fiscal year ended
June 30, 1990, receipts from this source were $701.6 million, a decrease of
13.2% from fiscal year 1989-90.
The State alsoimposes a stamp tax
on deeds and other documents relating to
realty, corporate shares, bonds, certificates of indebtedness, promissory
notes, wage assignments, and retail charge accounts. The documentary stamp tax
collections totaled $470.0 million during fiscal year 1990-91, a 9.4% increase
from the previous fiscal year. For the fiscal year 1990-91, 70.4% of the
documentary stamp tax revenues were deposited to the General Revenue Fund.
Beginning in fiscal year 1991-92, 76.21% of these taxes are to be deposited to
the General Revenue Fund.
On January 12, 1988, the State began its own lottery. State law requires
that lottery revenues be distributed 50% to the public in prizes, 38% for use
in enhancing education, and the balance, 12.0% for costs of administering the
lottery. Fiscal year 1990-91 lottery commissions for ticket sales totalled
$2.19 billion, providing education with $833.5 million.
Currently under litigation are
several issues relating to State actions or
State taxes that put at risk substantial amounts of General Revenue Fund
monies. Accordingly, there is no assurance that any of such matters,
individually or in the aggregate, will not have a material adverse 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, ina 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 taxshould 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 tothe 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 incometaxation substantially to the effect that:
(1) 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;
(2) 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;
(3) 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;
(4) 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; and
(5) Neither the Bonds nor the Units
will be subject to the Florida ad valorem property tax, the Florida i
ntangible personal property tax or Florida sales or use tax.
Georgia Trusts
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 has slowed somewhat and was modest
compared to the robust pace earlier in the decade. Georgia's leading economic
indicators currently suggest that the rate of growth of the Georgia economy
will continue at the pace of 1988 and 1991 andmore closely match the national
economy. According to December 1991 figures, the seasonably adjusted
unemployment rate in Georgia, 3.9%, is
well below the national rate of 7.1% for
the same period. Population growth and increases in personal income flattened
in 1989 and have maintained that pattern through 1991. Georgia was the
tenth-fastest growing state in the
nation during the period from 1980-1988; the
population increased by 16.9%. Between
1990 and 1991 Georgia experienced a 1.5%
growth in population,slightly above the 1.1% National average growth rate for
the same period. 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 periodsof 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. Port activity
remained strong during 1989, and business revenues and retail sales (except
auto sales) sustained solid growth. Also, Georgia farmers experienced strong
markets in 1989 and 1990 and are expected to do well in 1991. 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 Bondsin a 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.
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, evidenc
es 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 IM-IT 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 Bonds; and
(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 politicalconditions.
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 Staterevenues 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 alevy 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 the 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 applic
able 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 isunable 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 principalof 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 taxpurposes. 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 ofobligations 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
residentindividual, 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 conse
quences resulting from any proposed or
future federal or state tax legislation.
Massachusetts Trusts
Between 1982 and 1988, the Massachusetts economy generally outperformed
the national economy. More recently, however, the Massachusetts economy has
been experiencing a slowdown. While
Massachusetts has benefitted from an annual
job growth rate of approximately 2%
since the early 1980's, by 1989, employment
had started to decline. Nonagricultural employment declined 0.7% in 1989 and
4.0% in 1990. A comparison of total, nonagricultural employment in January,
1991 with that in January, 1992
indicates a decline of 2.5%. The Commonwealth's
unemployment rate continues to exceed the national unemployment rate. Per
capita personal income growth has slowed, after several years during which the
per capita personal income growth rate in Massachusetts was among the highest
in the nation. Between the third quarter
of 1990 and the third quarter of 1991,
aggregate personal income in Massachusetts increased 0.2%, as compared to 2.8%
for the nation as a whole.
In part due to the onset of this slowdown, the Commonwealth's tax revenue
forecasting proved to be substantially more optimistic than the actual results
during each of fiscal years 1988 through 1991. This revenue shortfall combined
with steadily escalating costs during the same period 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 may have contributed to higher interest rates on debt
obligations recently issued.
While more conservative revenue forecasting for fiscal 1992 together with
significant efforts to restrain spending during fiscal 1991 and a reduction is
budged program expenditures for fiscal 1992 have moderated these difficulties,
the 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 a Massachusetts Trust are subject.
Additionally, many factors including national economic, social and environ
mental 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 a 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; and
(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, dueprimarily 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
adverseeffect 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 theimpact 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. 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 thedeferral of certain
scheduled cash payments. The State
borrowed $700 million for cash flow purposes
in the 1992 fiscal year. The State has a
Budget Stabilization Fund which, after
a transfer of $230 million to the General Fund for the 1991 State fiscal year,
had an accrued balance of $182 million as of September 30, 1991.
In the 1991-92 State fiscal year, mid-year actions were taken to avoid a
State general fund budget deficit, including expenditure reductions, deferrals
of scheduled payment dates of various
types of State aid into the 1992-93 state
fiscal year, a $150 million transfer from the State's Budget Stabilization
Fund, and accounting and retirement funding changes. While current estimates
indicate the State may have ended the 1991-92 fiscal year with a general fund
deficit in the range of $50 million to $100 million, the State has not yet
produced its year-end financial reports and the actual results are not known.
While the 1992-93 State budget has been adopted, current projections
indicate a deficit may occur without additional actions being taken, and
ongoing reviews of spending patterns will be conducted in departments (such as
Corrections, Social Services and
Military Affairs) that have been identified as
possibly underfunded. If later estimates match the initial assessments,
additional actions will be required to be taken to address any projected
negative balance in the 1992-93 fiscal year.
The Michigan Constitution of 1963 limits the amount of total revenues 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 April 1991, the State enacted legislation which temporarily froze
assessed values on existing real property in 1992 by requiring that the
assessment as equalized for the 1991 tax year be used on the 1992 assessment
roll and be adjusted only to
reflectadditions, losses, splits and combinations.
Additional property tax relief measures
have been proposed, some of which could
adversely affect either the amount or timing of the receipt of property tax
revenue by local units of government.
Although all or most of the Bonds in 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 inview 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 paymentsfrom 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 spe
cified later dates, similar future deferrals could have an adverse impact on
the cash position of some local governmental units. Additionally, the State
reduced revenue sharing payments to municipalities below that level provided
under formulas by $10.9 million in the 1991 fiscal year and $34.4 million in
the 1992 fiscal year.
The Michigan 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
chartertax 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:
(1) A 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 a Michigan Trust and the Holders of Units;
(2) Under the income tax laws of the
State of Michigan, a Michigan Trust is not an association taxable as a
corporation; the income of a Michigan Trust will be treated as the
income of the 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;
(3) 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 a 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;
(4)
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 ofMichigan or its political subdivisions or
municipalities, or of obligations of possessions of the United States;
(5) 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 whichwould 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 a Michigan Trust
or the Unitholders. If a 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;
(6) 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; and
(7) As the Tax Reform Act of 1986
eliminates the capital gain deduction for tax years beginning after
December 31, 1986, the federal adjusted gross income, the computation
base for the Michigan Income Tax, of a Unit Holder will be increased
accordingly tothe extent such capital gains are realized when the
Michigan Trust disposes of a
Bond or when the Unit Holder redeems or se
lls 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 theState's outstanding general obligation bonds from Aaa
to Aa in April 1982. The State's economy recovered in the July 1, 1983 to June
30, 1985 biennium, and substantial
reductions in the individual income tax were
enacted in 1984 and 1985. Standard & Poor's raised its rating on the State's
outstanding general obligation bonds to AA+ in January 1985. In 1986, 1987 and
1991, legislation was required to eliminate projected budget deficits by
raising additional revenue, reducing expenditures, including aid to political
subdivisions and higher education, and making other budgetary adjustments. A
budget forecast released by the
Minnesota Department of Finance on February 27,
1992 projected a $569 million budget shortfall, primarily attributable to
reduced income tax receipts, for the biennium ending June 30, 1993. Planning
estimates for the 1994-95 biennium projected a budget shortfall of $1.75
million (less a $300 million reserve). (The projections generally do not incl
ude increases for inflation or operating costs, except where Minnesota law
requires them.) The State responded by enacting legislation that made
substantial accounting changes, reduced the budget reserve by $160 million to
$240 million, reduced appropriations for state agencies and higher education,
and imposed a sales tax on purchases by local governmental units. A revised
forecast released by the Department of Finance on November 24, 1992 reflects
these legislative changes and projects a $217 million General Fund surplus at
the end of the current biennium, June 30, 1993, plus a $240 million cash flow
account, against a total budget for the biennium of approximately $14.6
billion, and planning estimates for the 1994-95 biennium project a budget
shortfall of $986 million (less the $217 million balance carried forward and
the $240 million cash flow account). Although Standard & Poor's affirmed its
rating on the State's general obligation bonds in connection with a July 1992
issue, it revised its outlook for the rating to "negative."
State grants and aids represent a large percentage of the total revenues
of cities, towns, counties and school
districts in Minnesota. Even with respect
to bonds that are revenue obligations and not general obligations of the iss
uer, 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:
(1) We understand that a 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 addto Federal taxable income the amount of any interest
received on the obligations of states
and their agencies and instrumentalities,
political and governmental subdivisions, and municipalities. The terms "trust"
and "corporation" have the same meanings for Minnesota income tax purposes, as
relevant to the Minnesota tax status of a Minnesota Trust, as for Federal
income tax purposes.
In view of the relationship between
Federal and Minnesota law described in
the preceding paragraph and the opinion of Chapman and Cutler with respect to
Federal tax treatment of a Minnesota
Trust and its Unitholders: (1) a 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 a Minnesota Trust for Minnesota income tax purposes
and the income of a 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 a 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 a 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 a
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
defaultedobligations 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 limitationsand 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 infiscal 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 has 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 adverseimpact 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 issuedby
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. No opinion is expressed regarding whether the
gross earnings derived from the Units is
subject to intangible taxation imposed
by counties, cities and townships pursuant to present Kansas law.
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 IM-IT
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
IM-IT Trustand 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;and
(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. TheTrust 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 thefollowing information.
New Jersey is the ninth largest
state in population and the fifth smallest
in land area. With an average of 1,046 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 ($25,372).
The New Jersey Economic Policy Council, a statutory arm of the New Jersey
Department of Commerce and Economic Development, has reported in New Jersey
Economic Indicators, a monthly publication of the New Jersey Department of
Labor, Division of Labor Market and
Demographic Research, that in 1988 and 1989
employment in New Jersey's manufacturing sector failed to benefit from the
export boom experienced by many Midwest
states and the State's service sectors,
which had fueled the State's prosperity since 1982, lost momentum. In the
meantime, the prolonged fast growth in
the State in the mid 1980s resulted in a
tight labor market situation, which has led to relatively high wages and
housing prices. This means that, while the incomes of New Jersey residents are
relatively high, the State's business sector has become more vulnerable to
competitive pressures. New Jersey is
currently experiencing a recession and, as
a result of the factors described above, such recession could last longer than
the national recession, although signs of a slow recovery both on the national
and State level have been reported.
The onset of the national recession (which officially began in July 1990
according to the National Bureau of Economic Research) caused an acceleration
of New Jersey's job losses in construction and manufacturing. In addition, the
national recession caused an employment downturn in such previously growing
sectors as wholesale trade, retail trade, finance, utilities and trucking and
warehousing. Reflecting the downturn, the rate of unemployment in the State
rose from a low of 3.6% during the first quarter of 1989 to an estimated 8% in
December 1992, which is below the national averageof 7.3% in December 1992.
Economic recovery is likely to be slow and uneven in New Jersey, with
unemployment receding at a
correspondingly slow pace, due to the fact that some
sectors may lag due to continued excess capacity. In addition, employers even
inrebounding sectors can be expected to
remain cautious about hiring until they
become convinced that improved business will be sustained. Also, certain firms
will continue to merge or downsize to increase profitability.
Debt Service. The primary method for State financing of capital projects
is through the sale of the general obligation bonds of the State. These bonds
are backed by the full faith and credit of the State tax revenues and certain
other fees are pledged to meet the principal and interest payments and if
provided, redemption premium payments, if any, required to repay the bonds. As
of June 30, 1992, there was a total authorized bond indebtedness of
approximately $6.96 billion, of which
$3.32 billion was issued and outstanding,
$2.6 billion was retired (including bonds for which provision for payment has
been made through the sale and issuance of refunding bonds) and $1.04 billion
was unissued. The debt service obligation for such outstanding indebtedness is
$444.3 million for fiscal year 1993.
New Jersey's Budget and Appropriation System. The State operates on a
fiscal year beginning July 1 and ending June 30. At the end of fiscal year
1989, there was a surplus in the State's general fund (the fund into which all
State revenues not otherwise restricted
by statute are deposited and from which
appropriations are made) of $411.2 million. At the end of fiscal year 1990,
there was a surplus in the general fund
of $1 million. It is estimated that New
Jersey closed its fiscal year 1992 with a surplus of $762.9 million.
In order to provide additional revenues to balance future budgets, to
redistribute school aid and to contain real property taxes, on June 27, 1990,
and July 12, 1990, Governor Florio signed into law legislation which was
estimated to raise approximately $2.8 billion in additional taxes (consisting
of $1.5 billion in sales and use taxes and $1.3 billion in income taxes), the
biggest tax hike in New Jersey history.
There can be no assurance that receipts
and collections of such taxes will meet such estimates.
The first part of the tax hike took effect on July 1, 1990, with the
increase in the State's sales and use tax rate from 6% to 7% and the
elimination of exemptions for certain products and services not previously
subject to the tax, such as telephone calls, paper products (which has since
been reinstated), soaps and detergents, janitorial services, alcoholic
beverages and cigarettes. At the time of
enactment, it was projected that these
taxes would raise approximately $1.5
billion in additional revenue. Projections
and estimates of receipts from sales and use taxes, however, have been subject
to variance in recent fiscal years.
The second part of the tax hike took effect on January 1, 1991, in the
form of an increased state income tax on
individuals. At the time of enactment,
it was projected that this increase would raise approximately $1.3 billion in
additional income taxes to fund a new school aid formula, a new homestead
rebate program and state assumption of welfare and social 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 taxpackage 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 supporteducation programs.
Effective July 1, 1992, the State's sales and use tax rate decreased from
7% to 6%.
On June 30, 1992, the New Jersey
Legislature adopted a $14.9 billion State
budget for fiscal year 1993 by overriding Governor Florio's veto of the
spending plan. The budget reflected a $1.1 billion cut from Governor Florio's
proposed $16 billion budget, including a $385 million reduction in the State
homestead rebate program and $421 million in cuts in salaries and other
spending by the State bureaucracy and including the prospect of 1,400 to 6,300
layoffs of State employees. The budget also reflects the loss of revenue,
projected at $608 million, as a result of the reduction in the sales and use
tax rate from 7% to 6% effective July 1, 1992 and the use of $1.3 billion in
pension savings to balance the budget, with $770 million available only in
fiscal 1993 and $569 million that will recur annually in the future.
Litigation. The State is a party in numerous legal proceedings pertaining
to matters incidental to the performance of routine governmental operations.
Such litigation includes, but is not limited to, claims asserted against the
State arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations
of State and Federal laws. Included in
the State's outstanding litigation 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 andcosts 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, the various provisions, and the
constitutionality, of the Fair Automobile Insurance Reform Act of 1990, the
State's method of funding the judicial system, certain provisions of New
Jersey's hospital rate-setting system,
recently enacted legislation calling for
a revaluation of several New Jersey public employee pension funds in order to
provide additional revenues for the State's general fund, and the exercise of
discretion by State agencies in making certain personnel reductions. Adverse j
udgments in these and other matters could have the potential for either a
significant loss of revenue or a significant unanticipated expenditure by the
State. 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. Currently, Moody's Investors Service, Inc. rates New
Jersey general obligation bonds Aaa. 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 toclosing 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 is negative. Standard and Poor's Corporation is concerned that the
State is entering fiscal 1993 with a slim $26 million surplus and remains
concerned about whether the sagging State economy will recovery quickly enough
to meet lawmakers' revenue projections. It also remains concerned about the re
cent federal ruling leaving in doubt how much the State is due in retroactive
Medicaid reimbursements and a ruling by a federal judge, now on appeal, of the
State's method for paying for uninsured hospital patients. 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.
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) Each New Jersey Trust will be
recognized as a trust and not an association taxable as a corporation.
Each 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 a 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 a 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 an
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 a 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; and
(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 an 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 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% ofNew 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 andloan 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 increasesare 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 miningsector 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 subdivis
ions 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 heldin 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
opinionsrendered 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)
Each Unitholder will recognize gain
or loss for New Mexico State Income Tax purposes if the Trustee di
sposes of a bond (whether by redemption, sale or otherwise) or if the
Unitholder redeems or sells
Units of the New Mexico Trust to the extent
that such a transaction results in a recognized gain or loss to such
Unitholder for federal income tax purposes; and
(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 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, the low income food and medical gross receipts tax
rebate 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
The portfolio includes certain Bonds 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.
Thissection 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 withthe 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 New York 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
traditionaly 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 1991 calendar year. After
a period of modest growth in the first
half of calendar 1992, the Division of the Budget projects slower growth
thereafter in the 1992 calendar year and the first half of the 1993 calendar
year. The State has suffered a more severe economic downturn. 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.
On January 21, 1992, the Governor released the recommended 1992-93
Executive Budget which included the revised 1991-92 State Financial Plan (the
"Revised 1991-92 State Financial Plan") indicating a projected $531 million
General Fund cash basis operating deficit in the 1991-92 fiscal year. The
projected $531 million deficit was met through tax and revenue anticipation
notes (the "1992 Deficit Notes") which were issued on March 30, 1992 and are
required by law to be repaid in the State's 1992-93 fiscal year. The $531
million projected deficit follows $407 million in administrative actions taken
by the Governor intended to reduce 1991-92 disbursements and to increase
revenues.
The recommended 1992-93 Executive Budget contains projections for the
1992-93 State fiscal year which began on April 1, 1992. The Governor indicated
that, for the 1992-93 fiscal year, the State faced a $4.8 billion budget gap,
including the $531 million needed in the 1992-93 fiscal year to repay the 1992
Deficit Notes. The recommended 1992-93 Executive Budget reflects efforts to
achieve budgetary balance by reducing disbursements by $3.5 billion and
increasing revenues by $1.3 billion from levels previously anticipated.
The 1992-93 State budget was enacted by the Legislature on April 2, 1992
and was balanced through a variety of spending cuts and revenue increases, as
reflected in the State Financial Plan
for the 1992-93 fiscal year (the "1992-93
State Financial Plan") announced on
April 13, 1992. The 1992-93 State Financial
Plan projects that General Fund receipts and transfers from other funds will
total $31.382 billion, after provision to repay the 1992 Deficit Notes. The
1992-93 State Financial Plan includes increased taxes and other revenues,
deferral of scheduled personal income
and corporate tax reductions, significant
reductions from previously projected levels in aid to localities and State
operations and other budgetary actions that limit the growth in General Fund
disbursements.
Pursuant to statute, the State updates the State Financial Plan at least
on a quarterly basis. The first quarterly revision to the State Financial Plan
for the State's 1992-93 fiscal year was issued on July 30, 1992 (the "Revised
1992-93 State Financial Plan"). Although the Revised 1992-93 State Financial
Plan is based on an economic projection that the State's economy will perform
more poorly than the nation as a whole,
there canbe no assurance that the State
economy will not experience worse-than-predicted results in the 1992-93 fiscal
year, with corresponding material and adverse effects on the State's
projections of receipts and disbursements. This, in turn, could adversely aff
ect the State's ability to achieve a balanced budget on a cash basis for such
fiscal year.
In addition, the State's projections are subject to certain risks,
including adverse decisions in pending litigations, particularly those
involving Federal Medicaid reimbursements and payments by hospitals and health
maintenance organizations, potential changes in the timing of Federally
mandated estimated tax payments that would require parallel changes at the
State level, and further deterioration in the national economy.
The 1992-93 State Financial Plan
results in sharp reductions in aid to all
levels of local governmental units from amounts expected. 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 future years 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.
For a number of years the State has encountered difficulties in achieving
a balance of expenditures and revenues. The 1991-92 fiscal year was the fourth
consecutive year in which the State incurred a cash-basis operating deficit in
the General Fund and issued deficit notes. There can be no assurance that the
State will not continue to face budgetary difficulties in the future, due to a
number of factors including economic, fiscal and political factors, and that
such difficulties will not lead to further adverse consequences for the State.
As a result of changing economic conditions and information, public
statements or reports may be released by the Governor, members of the State
Legislature, and their respective staffs, as well as others involved in the
budget negotiation processfrom time to time. Those statements or reports may
contain predictions, projections or other items of information relating to the
State's financial condition as reflected in the 1992-93 State Financial Plan,
that may vary materially and adversely from the information provided herein.
As of June 30, 1992, the total amount of long-term State general
obligation debt authorized but unissued stood at $3.0 billion, of which
approximately $1.5 billion was part of a general obligation bond authorization
for highway and bridge construction and rehabilitation. As of the same date,
the State had approximately $5.0 billion in general obligation bonds and $224
million in bond anticipation notes outstanding. The State issued $3.9 billion
in tax and revenue anticipation notes ("TRANS") on June 21, 1991, $531 million
in 1992 Deficit Notes on March 30, 1992 and $2.3 billion in TRANS on April 28,
1992.
The State anticipates that its borrowings for capital purposes in 1992-93
will consist of approximately $863 million in general obligation bonds. The
State also expects to issue approximately $178 million in general obligation
bonds for the purpose of redeeming outstanding bond anticipation notes. The
Legislature has also authorized the issuance of up to $105 million in
certificates of participation for equipment purchases and real property
purposes during the State's 1992-93 fiscal year. The projection of the State
regarding its borrowings for the 1992-93 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 $2.75 billion.
LGAC has been authorized to issue additional bonds to provide net proceeds of
$975 million during the State's 1992-93 fiscal year, of which $350 million has
been issued to date.
The $2.3 billion in TRANs issued by the State in April 1992 were rated
SP-1 by S&P and MIG-2 by Moody's. The
$3.9 billion in TRANs issued by the State
in June, 1991 were rated the same. S&P in so doing stated that the outlook is
changed to "negative" from "stable." The $4.1 billion in TRANs issued by the
State in June, 1990 and the $775 million
in TRANs issued by the State in March,
1990 were rated the same. In contrast, the $3.9 billion of TRANs issued by the
State in May, 1989 had been rated SP-1+ by S&P and MIG-1 by Moody's.
As of the date of this prospectus, Moody's rating of the State general
obligation bonds stood at A, but under review for possible downgrade and S&P's
rating stood at A
with a negative outlook. Moody's placed the bonds under review on January 6,
1992. Previously, Moody's lowered its rating to A on June 6, 1990, its rating
having been A1 since May 27, 1986. S&P lowered itsrating from A to A
on January 13, 1992. S&P's previous ratings were A from March 1990 to January
1992, AA
from August, 1987 to March, 1990 and A+ from November, 1982 to August, 1987.
On September 18, 1992, Moody's in placing the bonds under review for
possible downgrade stated:
Chronic financial problems weigh most heavily in the evaluation of New
York State's credit. In the past five years, the State has been unable to
maintain a balanced budget and has had to issue deficit notes in each of the
past four years. The budget for the fiscal year which began April 1, 1992 was
adopted nearly on time, relies somewhat less on non-recurring actions, and
provides for some expenditure reductions, mainly due to a planned reduction in
the size of the State workforce.
However, although growth in major aid programs
to local governments is modest, major
structural reform of State programs which
would provide enduring budget relief has not been enacted. The State budget is
still narrowly balanced and the State could face additional fiscal pressure if
the economy performs worse than anticipated or cost-reduction programs fail to
generate anticipated savings.
On November 16, 1992, S&P, in affirming its A
rating and negative outlook of the State's general obligation bonds, stated:
The rating reflects ongoing economic weakness, four years of operating
deficits and a large accumulated deficit position.
The ratings outlook is 'negative,' as budget balance remains fragile.
The City accounts for approximately 41% of the State's population and
personal income, and the City's financial health affects the State in
numerous ways.
In February 1975, the New York State Urban Development Corporation
("UDC"), which had approximately $1 billion of outstanding debt, defaulted on
certain of its short-term notes. Shortly after the UDC default, the City
entered a period of financial crisis.
Both the State Legislature and the United
States Congress enacted legislation in response to this crisis. During 1975,
the State Legislature (i) created the Municipal Assistance Corporation ("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 five-year
financial plan assumes, a continuation
of the recession in the New York City region in the 1992 calendar years with a
recovery early in the 1993 calendar year. The Mayor is responsible for
preparing the City's four-year financial plan, including the City's current
financial plan. The City Comptroller has issued reports concluding that the
recession of the City's economy will be more severe and last longer than is
assumed in the Financial Plan.
For each of the 1981 through 1991
fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP") and expects to achieve balanced operating results for the
1992 fiscal year. During its 1991 fiscal year, as a result of the recession,
the City experienced significant shortfalls from its July 1990 projections in
virtually every major category of tax revenues. The City was required to close
substantial budget gaps in its 1990 and 1991 fiscal years in order to maintain
balanced operating results. There can be no assurance that the City will
continue to maintain a balanced budget, or that it can maintain a balanced
budget without additional tax or other revenue increases or reductions in City
services, which could adversely affect the City's economic base. The City
Comptroller has issued reports that have warned of the adverse effects on the
City's economy of the tax increases that were imposed during fiscal years 1991
and 1992.
Pursuant to State law, the City
prepares a four-year annual financial plan
which is reviewed and revised on a quarterly basis and which includes the
City's capital, revenue and expense
projections. The City is required to submit
its financial plans to review bodies, including the Control Board. If the City
were to experience certain adverse financial circumstances, including the
occurrence or the substantial likelihood 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 onthe City's cash flow and
additional City expenditures as a result of such delays.
The City's projections set forth in the Financial Plan are based on
various assumptions and contingencies which are uncertain and which may not
materialize. 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. The financial plan submitted to the Control Board on June 11,
1992 contains substantial proposed expenditure cuts for the 1993 through 1996
fiscal years. The proposed expenditure reductions will be difficult to
implement because of their size and the substantial expenditure reductions
already imposed on City operations in the past two years.
Attaining a balanced budget is also dependent upon the City's ability to
market its securities successfully in the public credit markets. The City's
financing program for fiscal years 1993 through 1996 contemplates issuance of
$13.3 billion of general obligation bonds primarily to reconstruct and
rehabilitate the City's infrastructure and physical assets and to make
primarily 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
plannedoperating 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, statethat 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 1991 fiscal year. During the 1990 and 1991 fiscal years, the
City implemented various actions to offset a projected budget deficit of $3.2
billion for the 1991 fiscal year, which resulted from declines 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 most recent quarterly modification to the City's financial plan
submitted to the Control Board on May 7, 1992 (the "1992 Modification")
projects 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 June 11, 1992, the City submitted to the Control Board the Financial
Plan for the 1993 through 1996 fiscal years, which relates to the City, the
Board of Education ("BOE") and the City University of New York ("CUNY") and is
based on the City's expense and capital budgets for the City's 1993 fiscal
year. The 1993-1996 Financial Plan projects revenues and expenditures for the
1993 fiscal year balanced in accordance with GAAP.
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 Financial Plan also sets forth projections and outlines a proposed
gap-closing program for the 1994 through 1996 fiscal years to close projected
budget gaps. On August 26, 1992, the City modified the 1993-96 Financial Plan.
As modified, the Financial Plan projects
a balanced budget for fiscal year 1993
based upon revenues of $29.6 billion but projects budget gaps of $1.3 billion,
$1.2 billion and $1.7 billion, respectively, in the 1994 through 1996 fiscal
years.
Various actions proposed in the Financial Plan are subject to approval by
the Governor and approval by the State Legislature, and the proposed increase
in Federal aid is subject to approval by Congress and the President. In
addition, MAC has set conditions upon
its cooperation in the City's realization
of the proposed transitional funding contained in the Financial Plan for the
1994 fiscal year. If these actions cannot be implemented, the City will be
required to take other actions to
decrease expenditures or increase revenues to
maintain a balanced financial plan.
TheCity 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 determination in
certain of them might have a material
adverse effect upon the City's ability to
carry out its financial plan. As of June 30, 1991, legal claims in excess of
$322 billion were outstanding against
the City for which the City estimated its
potential future liability to be $2.1 billion.
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 lowered its rating from A.
On October 19, 1992, in confirming its Baa1 rating, Moody's noted that:
Financial operations continue to be satisfactorily maintained. . . .
Nevertheless, significant gaps in the later years of the [four year financial]
plan remain and have not changed from prior projections. The ability of the
City to successfully close those gaps,
as well as fully implement all currently
planned gap closing measures without slippage will be a politically and
financially complex task.
On October 19, 1992, S&P affirmed its A
rating with a negative outlook, stating that:
Per capita debt remains high, and debt service as a portion of total
spending will continue to grow above 10%
as the City issues $3-4 billion of new
bonds for the next several years. Economically, the City is in one of its
deepest recessions, with additional job losses this year expected to approach
130,000 before moderating in 1993.
Long-term job growth is expected to be slow.
City financial plans will continue
to be burdened by weak economic factors
and continued risks to State and federal
actions that the City is relying on to
balance future budgets.
The outlook remains negative. Labor negotiations also present some risk,
given City assumptions of no wage increase in 1993-1994.
The City projected balanced fiscal 1992 financial operations in the
financial plan presented to the Financial Control Board on November 6,
1991. Modification to the 1992-1996 plan fell short of establishing
structural balance over the plan period. It focused more on finding
additional monies to support current spendinglevels than on aligning the
scope of government services within the constraints of what is affordable
from ongoing revenues. City
officials are revising and expanding details of
the plan to be revealed in the preliminary budget submission scheduled for
January 16, 1992. S&P expects the plan to provide substantial details on
how the City will bring recurring expenditures more in line with recurring
revenues.
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
rasied 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, $15.6 billion
and $5.2 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 theirobligations 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 satisified in connection with Federal guarantees of City and MACobligations
and could thus jeopardize the City's long-term financing plans.
As of September 30, 1991, 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 $57.1 billion of outstanding debt, including
refunding bonds, of which the State was obligated under lease-purchase,
contractual obligation or moral obligation provisions on $23.6 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 f
uture.
The State is also engaged in a
variety of contract and tort 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.
Adverse developments in the
foregoing proceedings or new proceedings could
adversely affect the financial condition of the State in the 1992-93 fiscal
year or thereafter.
Certain localities in addition to New York City could have financial
problems leading to requests for
additional State assistance. The 1992-93 State
Financial Plan includes 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 1992-93 fiscal
year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the
Financial Control Board for the City of Yonkers
(the "Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the State Legislature to assist Yonkers could result in allocation
of State resources in amounts that cannot yet be determined.
Municipalities and school districts
have engaged in substantial short-term
and long-term borrowings. In 1990, the total indebtedness of all localities in
the State was approximately $26.9 billion, of which $13.5 billion was debt of
New York City (excluding $7.1 billion in MAC debt). State law requires the
Comptroller to review and make recommendations concerning the budgets of those
local government units other than New York City authorized by State law to
issue debt to finance deficits during
the period that such deficit financing is
outstanding. Seventeen localities had outstanding indebtedness for State
financing at the close of their fiscal year ending in 1990. In 1992, an
unusually large number of local government units requested authorization for
deficit financings. According to the Comptroller, ten local government units h
ave 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 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
economictrends. The longer-range potential problems of declining urban
population, increasing expenditures, and other economic trends could adversely
affect certain 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:
(1) Each New York Trust is not an
association taxable as a
corporation and the income of a New York Trust
will be treated as the income of the Unitholders under the income tax
laws of the State and the 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
obligations (or in certificates of participation in obligations) issued by or
on behalf of the State of Ohio, political subdivisions thereof, or agencies or
instrumentalities of the State or its political subdivisions (Ohio
Obligations). The Ohio Trust is
therefore susceptible to political, economic or
regulatory factors that may affect issuers of Ohio Obligations. (The timely
payment of principal of, and interest on, certain Ohio Obligations in the Ohio
Trust has been guaranteed by bond insurance purchased by the issuers, the Ohio
Trust or other parties. The timely payment of debt service on Ohio Obligations
that are so insured may not be subject to the factors referred to in this
section of the Prospectus.) The followinginformation constitutes only a brief
summary of some of the complex factors that may affect the financial situation
of issuers in Ohio, and is not
applicable to "conduit" obligations on which the
public issuer itself has no financial responsibility. Thisinformation is
derived from official statements published in connection with the issuance of
securities of certain Ohio issuers and
from other publicly available documents,
and is believed to be accurate. No independent verification has been made of
any ofthe following information.
The creditworthiness of Ohio Obligations of local Ohio issuers is
generally unrelated to that of obligations issued by the State itself, and
generally there is no responsibility on the part of the State to make payments
on those local obligations. There may be
specific factors that are from time to
time applicable in connection with
investment in particular Ohio Obligations or
in those obligations of particular Ohio issuers, and it is possible the
investment will be in particular Ohio Obligations or in those Obligations of
particular issuers as to which those factors apply. However, the information
set forth below is intended only as a general summary and not as a discussion
of any specific factors that may affect any particular issue or issuer of Ohio
Obligations.
Ohio is the seventh most populous state, with a 1990 Census count of
10,847,000 indicating a 0.5% population increase from 1980.
The Ohio economy, while diversifying more into the service and other
non-manufacturing areas, 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 in Ohio, 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.
The State's overall unemployment
rate is commonly somewhat higher than the
national figure (for example, the reported 1990 average monthly rate was 5.7%,
compared to the national figure of 5.5%; however, for both 1991 and 1992 that
State rate was below the national rate,
the State rates were 6.4% and 7.2%, and
the national rates 6.7% and 7.4%). The
unemployment rate, and its effects, vary
among particular geographic areas of the State.
There can be no assurance that future state-wide or regional 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 portfolio of the Ohio Trust or
the ability of the 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 completing a
fiscal year ending June 30 (FY) or 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
national economic periods and increased
during more favorable economic periods.
The State has established procedures for, and has timely taken, necessary ac
tions to ensure a resource/expenditure balance during less favorable economic
periods. These include general and selected reductions in appropriations
spending; none have been applied to appropriations needed for debt service or
lease rentals on any Stateobligations.
Key end of biennium fund balances at June 30, 1989 were $475.1 million
(GRF) and $353 million in the Budget Stabilization Fund (BSF, a cash and
budgetary management fund). In the latest complete biennium, necessary
corrective steps were taken in FY 1991 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 1991 biennium-ending fund balances
of $135.3 million (GRF) and $300 million (BSF).
To allow time to complete the resolution of certain Senate and House
differences in the budget and appropriations for the current biennium
(beginning July 1, 1991), aninterim appropriations act was enacted, effective
July 1, 1991; it included debt service and lease rental appropriations for the
entire 1992-93 biennium, while
continuing most other appropriations for 31 days
at 97% of FY 1991 monthly levels. The generalappropriations act for the entire
biennium was passed on July 11, 1991 and
signed by the Governor. It authorized
the transfer, which has been made, of $200 million from the BSF to the GRF and
provided for transfers in FY 1993 back
to the BSF if revenuesare sufficient for
the purpose (which the State Office of Budget and Management, OBM, at present
thinks unlikely).
Based on updated FY financial results and the economic forecast for the
State, both in light of the continuing
uncertain nationwide economic situation,
OBM projected, and there was timely addressed, an FY 1992 imbalance in GRF
resources and expenditures.GRF receipts were significantly below original
forecasts, a shortfall resulting primarily from lower collections of certain
taxes, particularly sales and use taxes. Higher than earlier projected
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 $196 million (debt service
and lease rental obligations were not affected). The General Assembly
authorized the transfer, made late in
the FY, to the GRF the $100.4 million BSF
balance and additional amounts from certain other funds, and made adjustments
in the timing of certain tax payments. Other administrative revenue and
spending actions resolved the remaining GRF imbalance. The administration and
the General Assembly are reviewing the longer term fiscal situation,
particularly that through the June 30, 1993 end of the current biennium; a
significant shortfall is currently projected for FY 1993, to be addressed by
appropriate legislative and administrative actions. As a first step the
Governor ordered, effective July 1, 1992, selected GRF appropriations spending
reductions totalling $315.6 million.
The incurrence or assumption of debt by the State without a popular vote
is, with limited exceptions, prohibited by current provisions of the State
Constitution. The State may incur debt to cover casual deficits or failures in
revenues or to meet expenses not otherwise provided for, but limited in amount
to $750,000. The Constitution expressly precludes the State from assumingthe
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 12 constitutional amendments (the last adopted in 1987), Ohio voters
have authorized the incurrence of State debt to which taxes or excises were
pledged for payment. At October 21, 1992, $396 million (excluding certain
highway bonds payable primarily from highway use charges) of this debt was
outstanding, with the only such Statedebt then still authorized to be incurred
being portions of the highway bonds, and the following: (a) up to $100 million
of obligations for coal research and development may be outstanding at any one
time ($38.6 million outstanding); and (b) of $1.2 billion of obligations for
local infrastructure improvements, no more than $120 million may be issued in
any calendar year ($312.5 million outstanding, $840 million remaining to be
issued.)
The Constitution also authorizes the issuance of State obligations for
certain purposes the owners of which are
not given the right to have excises or
taxes levied to pay debt service. Those special obligations include bonds and
notes issued by, among others, the Ohio Public Facilities Commission and the
Ohio Building Authority; $3.7 billion of those obligations were outstanding at
January 2, 1993.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation in the provision of individual and family housing,
including borrowing for that purpose.
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, although the
obligations may not be supported by the State's fullfaith and credit.
State and local agencies issue revenue obligations that are payable from
revenues from or relating to certain facilities, which obligations are not
"debt" within constitutional provisions or payable from taxes. 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 88 districts
income taxes, forsignificant portions of
their budgets. Litigation has recently
been filed, similar to that in other states, 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 26districts borrowed a
total of $41.8 million (including over $27 million by one district, and in FY
1992 borrowings totaled $61.9 million (including $46.6 million for one
district). FY 1993 loan approvals (through January 19, 1993) total $92 million
for 22 districts (including $75 million for one district).
Ohio's 943 incorporated cities and
villages rely primarily on property and
municipal income taxes for their
operations, and, with other local governments,
receive local government support and property tax relief moneys distributed by
the State. For those few municipalities
that on occasion have faced significant
financial problems, established procedures provide for a joint State/local
commission to monitor the municipality's
fiscal affairs, and for development of
a financial plan developed to eliminate deficits and cure any defaults. Since
inception in 1979, these procedures have been applied to 22 cities and
villages, in 16 of which the fiscal situation has been 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.
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) An 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 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 an 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; and
(5) Gains and losses realized on the
sale, exchange or other disposition by an Ohio Trust of Ohio
Obligations are excluded in determining adjusted gross and taxable
income for purposes of the Ohio personal income tax, Ohio municipal
income taxes and Ohio school district income taxes, and are excluded
from the net income base of the Ohio corporation franchise tax when
distributed or deemed distributed to Unitholders.
Oklahoma Trusts
Investors 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
proceduresfor 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 ensuingfiscal 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 Trust are
subject. Additionally, manyfactors 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 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 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 independentlyexamined 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 subjectto 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
distributedto 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 issued 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 StateIncome 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 theextent
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; and
(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 "grantor 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 theservice
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 billionin crop and livestock products annually, while
agribusiness and food related industries support $38 billion in economic
activity annually.
Non-agricultural employment in the Commonwealth declined by 5.1 percent
during the recessionary period from 1980 to 1983. In 1984, the declining trend
was reversed as employment grew by 2.9 percent over 1983 levels. Since 1984,
Commonwealth employment has continued to grow each year, increasing an
additional 9.1 percent from 1984 to 1991. The growth in employment experienced
in Pennsylvania is comparable to the growth in employment in the Middle
Atlantic Region which has occurred
during this period. As a percentage of total
non-agricultural employment within the Commonwealth, non-manufacturing
employment has increasedsteadily since 1980 to its 1991 level of 80.8 percent
of total employment. Consequently, manufacturing employment constitutes a
diminished share of total employment within the Commonwealth. In 1991, the
service sector accounted for 28.6 percent of all non-agricultural employment
while the trade sector accounted for 22.8 percent.
While economic indicators in Pennsylvania have generally matched or
exceeded national averages since 1983, the Commonwealth is currently facing a
slowdown in its economy. Moreover, economic strengths and weaknesses vary in
different parts of the Commonwealth. In November 1992 the seasonally adjusted
unemployment rate for the Commonwealth was 7.1 percent and 7.2 percent for the
United States.
It should be noted that the creditworthiness of obligations issued by
local Pennsylvania issuers may be unrelated to the creditworthiness of
obligations issued by the Commonwealth of Pennsylvania, and there is no
obligation on the part of the Commonwealth to make payment on such local obl
igations 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 provisionsdesigned to help restrain the annual increase of special
education costs, an area of recent rapid cost increases. Child welfare
appropriations supporting county
operated child welfare programs were increased
$67 million, more than 31.5 percent over fiscal 1991. Other social service
areas such as medical and cash assistance also received significant funding
increases as costs have risen quickly as
a result of the economic recession and
high inflation rates of medical care costs. The costs of corrections programs,
reflecting the marked increase in the prisoner population, increased by 12
percent. Economic development efforts, largely funded from bond proceeds in
fiscal 1991, were continued with General Fund appropriations for fiscal 1992.
The budget included the use of several Medicaid pooled financing
transactions. These pooling transactions replaced $135 million of Commonwealth
funds, allowing total spending under the
budget to increase by an equal amount.
Fiscal 1993 Budget.The adopted fiscal 1993 budget is balanced within the
official revenue estimate and a planned
draw-down of the $8.8 million beginning
budgetary basis surplus carried forward from fiscal 1992. The budget
appropriates $14.046 billion for spending during fiscal 1993, an increase of
$32.1 million, or less than one-quarter of one percent over total
appropriations for fiscal 1992. This small increase in expenditures was the
result of revenues being constrained by a personal income tax rate reduction
effective July 1, 1992, a low rate ofeconomic growth, higher tax refund
reserves to cushion against adverse decisions on pending tax litigations, and
$71.3 million of appropriation line-item vetoes by the Governor. The
appropriation line-item vetoes made by the Governor prior to approving the
fiscal 1993 budget were made to meet the constitutional requirement for a
balanced budget by reducing spending in several programs from amounts
authorized by the General Assembly to amounts the Governor originally
recommended in his budget proposal, and by eliminating certain grants that
could not be funded within available resources. In approving the fiscal 1993
budget, the Governor indicated that
authorized spending approved by the General
Assembly for some programs was below his recommendation and maybe insufficient
to carry costs for the full fiscal year. Several of the Governor's cost
containment proposals, particularly those to contain expenditure increases in
the medical assistance and cash assistance programs were not enacted by the
General Assembly. Many of the cost containment efforts now are being
implemented through the regulatory process potentially reducing budgeted
current fiscal year savings.
The adopted fiscal 1993 budget eliminated funding for a number of private
educational institutions that normally receive state appropriations. Also
eliminated were certain grants to the counties to help pay operating costs of
the local judicial system. The counties will need to replace these grant funds
with other revenue sources in order to pay judicial system costs. Any
restoration of these appropriations for
the fiscal year or funding increases to
cover program cost shortfalls require action by the General Assembly.
In December 1992, the Governor gave the General Assembly preliminary
estimates of projected fiscal 1993 supplemental appropriations and proposed
restorations of selective appropriations
vetoed when the fiscal 1993 budget was
adopted. The projected supplemental appropriations generally represent budget
adjustments necessary to offsetamounts of savings included in the budget but
not enacted when the budget was adopted
and to restore operating appropriations
to full year funding. These potential supplemental appropriations and
restorations total approximately $149
million and would befunded, when enacted,
by lapses of current and prior appropriation balances and reductions of
reserves for refunds due to revisions to estimated refunds payable.
Commonwealth revenue sources are estimated for the fiscal 1993 budget to
total $14.587 billion, a $69.9 million increase over actual fiscal 1992
revenues, representing less than one-half of one percent increase. The
projected low revenue growth for fiscal 1993 is caused by the Commonwealth's
expectation that current weak growth in
employment, consumer income, and retail
sales will continue, and by the reduction in the personal income tax rate from
3.1% to 2.8% on July 1, 1992. In addition, tax refund reserves were increased
by $209 million to $548 million for fiscal 1993 to allow for potentialtax
refunds that might be payable from any
adverse judicial decision in a number of
pending tax litigations. Some of those
reserves are believed to be in excess of
amounts that will be paid during fiscal 1993 and may be used to fund
supplemental appropriations for the fiscal year described above. Through
November 1992, total General Fund collections of revenue were below estimated
revenues by one-third of one percent ($16.6 million). Small revenue shortages
were recorded from the sales tax and from the personal income tax, but were
mostly offset by higher collections from corporation and liquor taxes and by
higher miscellaneous revenue
collections. The Commonwealth believes its current
fiscal 1993 General Fund revenue
estimate is appropriate and does not expect to
substantially revise its estimate based on economic factors.
All outstanding general obligation bonds of the Commonwealth are rated AA
by S&P and A1 by Moody's.
Any explanation concerning the significance of such ratings must be
obtained from the rating agencies. There is no assurance that any ratings will
continue for any period of time or that
they will not be revised or withdrawn.
The City of Philadelphia is the largest city in the Commonwealth with an
estimated population of 1,585,577 according to the 1990 Census. Philadelphia
functions both as a City and a first-class County for the purpose of
administering various governmental programs.
Legislation providing for the establishment of the Pennsylvania Intergo
vernmental 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
May 18, 1992. The five year plan is designed to produce a balanced budget over
a five-year period through a combination of personnel and budget initiatives,
productivity improvements, cost containments and revenue enhancements. Full
implementation of the five-year plan was
delayed due to labor negotiations that
were not completed until October 1992,
three months after the expiration of the
old labor contracts. The terms of the
new labor contracts are estimated to cost
approximately $144.0 million more than what was budgeted in the original
five-year plan. Philadelphia is
presently amending the plan to bring it back in
balance.
Philadelphia experienced a series of operating deficits in its General
Fund beginning in fiscal year 1987. For the fiscal year ended June 30, 1991,
Philadelphia experienced a cumulative General Fund balance deficit of $153.5
million. Philadelphia received a grant from PICA in June 1992 which eliminated
the deficit through June 30, 1991. Philadelphia experienced a deficit through
June 30, 1992 of $71.4 million (unaudited). Philadelphia is receiving
additionalgrants from PICA to eliminate the General Fund balance deficit at
June 30, 1992. $64.3 million, which is
ninety percent of the $71.4 million, was
paid to Philadelphia on October 30, 1992, and the remaining ten percent is
expected to be paid to Philadelphiaonce the final audit for the fiscal year
ended June 30, 1992 has been completed. Philadelphia is projecting a budget
deficit for fiscal year 1993 of $1.8 million.
As of the date hereof, the ratings on the City's long-term obligations
supported by payments from the City's
General Fund are rated B by Moody's and B
by S&P. Any explanation concerning the significance of such ratings must be
obtained from the rating agencies. There is no assurance that any ratings will
continue for any period of time or that they will not be revised or withdrawn.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of bonds and does not
purport to be a complete or exhaustive
description of all adverse conditions to
which the issuers of the Bonds in the Pennsylvania 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 a Pennsylvania Trust, which are represented by
obligations issued by the Commonwealth of Pennsylvania, any public
authority, commission, board or other agency created by the
Commonwealth of Pennsylvania, any political subdivision of the
Commonwealth of Pennsylvania or any public authority created by any
such political subdivision are not taxable under any of the personal
property taxes presently in effect in Pennsylvania;
(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 insurancecompanies 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 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 for operating purposes beyond the end of
a fiscal year. Tennessee law permits tax anticipation borrowing but any amount
borrowed must be repaidduring 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. 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 manufacturingfacilities. In addition to the General Motors Saturn
project and a major Nissan facility built in Tennessee in the 1980's, 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 theTennessee 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 theTennessee
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 Tennnessee, ("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.
More importantly, because the recent amendments only provide an exemption
for distributions that relate to interest income,distributions by the Trust
that relate to capital gains attributable to 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 qualifyas 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 treatedbonds 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:
(1)
For purpose 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;
(2) 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;
(3) 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;
(4) 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 ba
sis 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;
(5) 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 presentlysubject 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;
(6) 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;
(7)
The Bonds and the Units held by the
Unitholder will not be subject to Tennessee sales and use taxes; and
(8) 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 largestrevenue source and the second largest tax,
accounting for approximately 6.6% of total revenue during fiscal year 1992.
Licenses, fees and permits, the State's
third largest revenue source, accounted
for 6.4% of the total revenue in fiscal year 1991. Interest and investment
income is the fourth largest revenue source accounting for 5.9% of total State
revenue for fiscal year 1991. Interest and investment income is the fifth
largest revenue source also accounting for 6.3% of total State revenues for
fiscal year 1992. The remainder of the State's revenues are derived primarily
from other excise taxes. The State 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 Stateended
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, theending 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 totalof $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 Texas Constitution prohibits
the State from levying ad valoremtaxes 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'sInvestors 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 c
onsolidation 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 providefor 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 connection with
formulating a new school finance bill the
legislature is expected to consider several proposals, some of which could
fundamentally change the State's tax structure including a state income tax.
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 onan 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 prncipal, 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 orregulations, 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 Bond, 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 proceedsof 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).
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%.
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 rolein 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 remainderof 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.
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.
The State currently has outstanding
general obligation and revenuebonds 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 debtcapacity is currently estimated at
approximately $1.1 billion.
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 socialand 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. Thenext 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
orthe State's ability to service its debts.
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.
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 inreturn 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 thatsuch 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 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 couldhave 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 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:
(1)
Neither the State of Washington nor
any of its political subdivisions imposes an income tax;
(2) The State imposes a business and
occupation tax on the gross receipts of all business activities
conducted within the State, with
certain exceptions. The Trust will not
be subject to this tax. Distributions of the Trust income paid to
Unitholders 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. Unitholders 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%;
(3) The Units will not be subject to
the State's ad valorem property tax, norwill any sale, transfer or
possession of the Units be subject to State or local sales or use
taxes; and
(4)
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 Unitholders of the 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 Trust transactions. Unitholders
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 au
thorities. 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 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 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 Trust and distributed to such Unitholder;
(3)
For Unitholders subject to the West
Virginia Corporation Net Income Tax, income of the 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
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 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 extentas such interest would have been if paid by the issuer of
such Bonds held by the Trust; and
(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 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
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 Trust would be exempt from such tax if held directly by a Unitholder).
TRUST ADMlNlSTRATlON 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 ofunit 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 December 31, 1992, the total
stockholders' equity of Van Kampen Merritt Inc. was $299,865,984 (audited).
(This paragraph relatesonly 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 December 31, 1992, the Sponsor managed, or conducted surveillance
and evaluation services with respect to, approximately $34 billion of
investment products. The Sponsor managed $18.5billion of assets, consisting of
$6.9 billion for 12 mutual funds, $6.1
billion for 22 closed-end funds and $5.5
billion for 38 institutional accounts. The Sponsor has also deposited over $22
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 billion of unit investment trust assets outstanding.
Since 1976, the Sponsor has opened over one million retail investor accounts
through retail distribution firms. Van
KampenMerritt 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; and Van Kampen Merritt Insured Income 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 KampenMerritt 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; and Van Kampen Merritt Short-Term Global 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 MerrittTrust 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 PennsylvaniaM
unicipal 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; and Van Kampen Merritt Strategic Sector 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 ofLabor 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. 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 officefor 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 busi
ness 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 appoin
tment 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 an annual fee based on
the largest aggregate amount of Securities in each Trust at any time during
such period. Such fee will be computed at the amounts set forth in Part I to
this Prospectus for that portion of each Trust under the semi-annual
distribution plan and under the monthly distribution plan. 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. 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".
Portfolio Administration. The Trustee is empowered to sell, for the purpose of
redeeming Units tendered byany 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 whichit 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
forwhich 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 prem
ium 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
amountspayable 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, isless 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. 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 liq
uidation 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 eachUnitholder 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 dete
rmine 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 agencytransactions 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 inwhich 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 certainservices 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 Matters.On January 20, 1993, a lawsuit was commenced by a unitholder of
one of the unit investment trusts sponsored by Van Kampen Merritt Inc.,
purportedly on behalf of all persons who purchased or held units in any
tax-exempt unit investment trust sponsored by Van Kampen Merritt Inc., in the
U.S. District Court for the Northern District of Illinois, alleging
overcharging of evaluation and supervisory fees with respect to the unit
investment trusts in violation of Sections 26 and 36 of the Investment Company
Act of 1940 (Robert W. Barrett v. Van Kampen Merritt Inc. and Van Kampen
Merritt Investment Advisory Corp.). The complaint seeks to require the
defendants to account for all excessive fees paid and to pay to the unit
investment trusts any damages suffered from such alleged overcharging. The
Sponsor has not had the opportunity to make a detailed review of thismatter,
although it preliminarily believes the lawsuit is without merit.
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 g
uarantors, 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 andobtained 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 ofthe 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. Capacityto 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 adequateprotection 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 provisionalrating ("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 issecure. 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 generallyknown 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
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 f
ulfillment 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.
<PAGE>
INTENTIONALLY LEFT BLANK
No person is authorized to give any information or tomake 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.
<TABLE>
<CAPTION>
Title TABLE OF CONTENTS
<S> <C>
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
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 Matters .............................. 100
Legal Opinions ...............................100
Auditors .....................................100
Description of Securities Ratings ...............101
</TABLE>
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.
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, 57th Insured Multi-Series,
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 24th
day of January, 1994.
Insured Municipals Income Trust,
57th Insured Multi-Series
(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 January 24, 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 December 17, 1993 accompanying the
financial statements of Insured Municipals Income Trust, 57th Insured
Multi-Series as of September 30, 1993, and for the period then ended,
contained in this Post-Effective Amendment No. 5 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
January 24, 1994
