Prospectus Part A Dated April 30, 1998
INSURED MUNICIPAL SECURITIES TRUST
NEW YORK NAVIGATOR INSURED
SERIES 3
The Trust is a unit investment trust designated Series 3 ("New
York Navigator Trust") with an underlying portfolio of long-term insured
tax-exempt bonds and was formed to preserve capital and to provide interest
income which, in the opinions of bond counsel to the respective issuers, is,
with certain exceptions, currently exempt from regular federal income tax under
existing law and from New York State and City personal income tax. There can be
no assurance that the Trust's investment objectives will be achieved. Although
the Supreme Court has determined that Congress has the authority to subject the
interest on bonds such as the Bonds in the Trust to federal income taxation,
existing law excludes such interest from regular federal income tax. Such
interest income may, however, be a specific preference item for purposes of the
federal individual and corporate alternative minimum tax. (See "Description of
Portfolio" in this Part A for a list of those Bonds, if any, which pay interest
income subject to the federal individual alternative minimum tax.) In addition,
capital gains are subject to tax. (See "Tax Status" and "The Trust--Portfolio"
in Part B of this Prospectus.) The Sponsors are Reich & Tang Distributors, Inc.
and Gruntal & Co., L.L.C. (sometimes referred to as the "Sponsor" or the
"Sponsors"). The value of the Units of the Trust will fluctuate with the value
of the underlying bonds. Minimum purchase: 1 Unit.
This Prospectus consists of two parts. Part A contains the
Summary of Essential Information as of December 31, 1997 (the "Evaluation
Date"), a summary of certain specific information regarding the Trust and
audited financial statements of the Trust, including the related portfolio, as
of the Evaluation Date. Part B of this Prospectus contains a general summary of
the Trust. Part A of this Prospectus may not be distributed unless accompanied
by Part B. Investors should retain both parts of this Prospectus for future
reference. The Securities and Exchange Commission ("SEC") maintains a website
that contains reports, proxy and information statements and other information
regarding the Trust which is filed electronically with the SEC. The SEC's
Internet address is http:www.sec.gov. Offering materials for the sale of these
units available through the Internet are not being offered directly or
indirectly to residents of a particular state nor is an offer of these units
through the Internet specifically directed to any person in a state by, or on
behalf of, the issuer.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE 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 TRUST. The Trust seeks to achieve its investment
objectives through investment in a fixed, diversified portfolio of long-term
insured bonds (the "Bonds") issued by or on behalf of states, municipalities and
public authorities which, because of irrevocable insurance, were rated "AAA" by
Standard & Poor's Rating Services, a division of The McGraw-Hill Companies. All
of the Bonds in the Trust were rated "AAA" by Standard & Poor's
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Corporation at the time originally deposited in the Trust (see "Portfolio").
This rating results from insurance relating only to the Bonds in the Trust and
not to Units of the Trust. The insurance does not remove market risk, as it does
not guarantee the market value of the Units. For a discussion of the
significance of such ratings, see "Description of Bond Ratings" in Part B of
this Prospectus. (See "Portfolio" in Part B of this Prospectus.)
Some of the aggregate principal amount of the Bonds in the
Trust may be "Zero Coupon Bonds," which are original issue discount bonds that
provide for payment at maturity at par value, but do not provide for the payment
of current interest (for the amount of Zero Coupon Bonds in each Trust, and the
cost of such Bonds to that Trust, see "Description of Portfolio" in this Part
A). The payment of interest and preservation of capital are, of course,
dependent upon the continuing ability of the issuers of the Bonds or the insurer
thereof to meet their obligations.
Investment in the Trust should be made with an understanding
of the risks which an investment in long-term fixed rate debt obligations may
entail, including the risk that the value of the underlying portfolio will
decline with increases in interest rates, and that the value of Zero Coupon
Bonds is subject to greater fluctuation than coupon bonds in response to such
changes in interest rates. A Trust designated as a long-term trust must have a
dollar-weighted average portfolio maturity of more than ten years. (See
"Portfolio" in Part B of this Prospectus.)
Each Unit in the Trust represents a 1/4577th undivided
interest in the principal and net income of the Trust. The principal amount of
Bonds deposited in the Trust per Unit is reflected in the Summary of Essential
Information. (See "Organization" in Part B of this Prospectus.) The Units being
offered hereby are issued and outstanding Units which have been purchased by the
Sponsors in the secondary market.
INSURANCE. Each of the Bonds in the New York Navigator Trust
is insured by a municipal bond guaranty insurance policy obtained by the
Sponsors (the "Navigator Sponsor-Insured Bonds") from MBIA Insurance Corporation
("MBIA Corp.") covering regularly scheduled payments of principal thereof and
interest thereon when such amounts become due for payment but shall not have
been paid. For discussion of the effect of an occurrence of non-payment of
principal or interest on any Bonds in the New York Navigator Trust see
"Portfolio Supervision" in Part B of this Prospectus. The premiums for the
Navigator Sponsor-Insured Bonds are obligations of the Sponsors. Additionally,
some of the Bonds in the New York Navigator Trust may be Pre-Insured Bonds (as
described below). The premium for the Pre-Insured Bonds is an obligation of the
issuers, underwriters or prior owners of those Bonds. The insurance policy or
policies relating to the Navigator Sponsor-Insured Bonds provides that, to the
extent that Bonds are both Pre-Insured Bonds and Navigator Sponsor-Insured
Bonds, coverage is effective after a claim has been made upon the insurer of the
Pre-Insured Bonds.
Some of the Bonds in the New York Navigator Trust may
additionally be insured by a municipal bond guaranty insurance policy obtained
by issuers, underwriters or prior owners of the Bonds ("Pre-Insured Bonds") and
issued by one of the insurance companies described under "Insurance on the
Bonds" in Part B of this Prospectus (the "Insurance Companies").
None of the insurance will cover accelerated payments of
principal or penalty interest or premiums unrelated to taxability of interest on
the Bonds. The insurance relates only to the prompt payment of principal of and
interest on the securities in the portfolios, and does not remove market risks
nor does it guarantee the market value of Units in the Trusts. The terms of the
insurance are more fully described herein. No representation is made
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herein as to any Bond insurer's ability to meet its obligations under a policy
of insurance relating to any of the Pre-Insured Bonds. In addition, investors
should be aware that subsequent to the Date of Deposit the rating of the
claims-paying ability of the insurer of an underlying Pre-Insured Bond may be
downgraded.
All of the Bonds in the New York Navigator Trust are covered
by insurance obtained by the Sponsors from MBIA Corp. and 47.7% of the Bonds in
the New York Navigator Trust are Pre-Insured Bonds. The approximate percentage
of the aggregate principal amount of the Portfolio that is insured by each
Insurance Company with respect to Pre-Insured Bonds is as follows: AMBAC
Indemnity Corp. ("AMBAC"), 10.0%; Bond Investors Guaranty ("BIG"), 5.3%; Capital
Guaranty Insurance Company ("Capital Guaranty"), 16.2%; and Municipal Bond
Investors Assurance Corporation ("MBIA"), 16.2%.
PUBLIC OFFERING PRICE. The secondary market Public Offering
Price of each Unit is equal to the aggregate offering price of the Bonds in such
Trust divided by the number of Units outstanding, plus a sales charge of 3.08%
of the Public Offering Price, or 3.178% of the net amount invested in Bonds per
Unit. In addition, accrued interest to the expected date of settlement is added
to the Public Offering Price. If Units had been available for sale on the
Evaluation Date, the Public Offering Price per Unit would have been $1,037.74
plus accrued interest of $8.40 under the monthly distribution plan, $13.84 under
the semi-annual distribution plan and $13.87 under the annual distribution plan,
for a total of $1,046.14, $1,051.58 and $1,051.61, respectively. The Public
Offering Price per Unit can vary on a daily basis in accordance with
fluctuations in the aggregate bid price of the Bonds. (See "Public
Offering--Offering Price" in Part B of this Prospectus.)
ESTIMATED LONG TERM RETURN AND ESTIMATED CURRENT RETURN. Units
of each Trust are offered to investors on a "dollar price" basis (using the
computation method described under "Public Offering--Offering Price" in Part B)
as distinguished from a "yield price" basis often used in offerings of tax
exempt bonds (involving the lesser of the yield as computed to maturity of bonds
or to an earlier redemption date). Since they are offered on a dollar price
basis, the rate of return on an investment in Units of each Trust is measured in
terms of "Estimated Current Return" and "Estimated Long Term Return".
Estimated Long Term Return is calculated by: (1) computing the
yield to maturity or to an earlier call date (whichever results in a lower
yield) for each Bond in the Trust's portfolio in accordance with accepted bond
practices, which practices take into account not only the interest payable on
the Bond but also the amortization of premiums or accretion of discounts, if
any; (2) calculating the average of the yields for the Bonds in the Trust's
portfolio by weighing each Bond's yield by the market value of the Bond and by
the amount of time remaining to the date to which the Bond is priced (thus
creating an average yield for the portfolio of the Trust); and (3) reducing the
average yield for the portfolio of the Trust in order to reflect estimated fees
and expenses of the Trust and the maximum sales charge paid by investors. The
resulting Estimated Long Term Return represents a measure of the return to
investors earned over the estimated life of the Trust. (For the Estimated Long
Term Return to Certificateholders under the monthly, semi-annual and annual
distribution plans, see "Summary of Essential Information".)
Estimated Current Return is a measure of the Trust's cash
flow. Estimated Current Return is computed by dividing the Estimated Net Annual
Interest Income per Unit by the Public Offering Price per Unit. In contrast to
the Estimated Long Term Return, the Estimated Current Return does not take into
account the amortization of premium or accretion of discount, if any, on the
Bonds in the portfolio of the Trust. Moreover, because interest rates on
A-3
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Bonds purchased at a premium are generally higher than current interest rates on
newly issued bonds of a similar type with comparable rating, the Estimated
Current Return per Unit may be affected adversely if such Bonds are redeemed
prior to their maturity.
The Estimated Net Annual Interest Income per Unit of the Trust
will vary with changes in the fees and expenses of the Trustee and the Evaluator
applicable to the Trust and with the redemption, maturity, sale or other
disposition of the Bonds in the Trust. The Public Offering Price will vary with
changes in the bid prices of the Bonds. Therefore, there is no assurance that
the present Estimated Current Return or Estimated Long Term Return will be
realized in the future. (For the Estimated Current Return to Certificateholders
under the monthly, semi-annual and annual distribution plans, see "Summary of
Essential Information". See "Estimated Long Term Return and Estimated Current
Return" in Part B of this Prospectus.)
A schedule of cash flow projections is available from the
Sponsors upon request.
DISTRIBUTIONS. Distributions of interest income, less
expenses, will be made by the Trust either monthly, semi-annually or annually
depending upon the plan chosen by the Certificateholder. Certificateholders
purchasing Units in the secondary market will initially receive distributions in
accordance with the elections of the prior owner and may thereafter change the
plan as provided under "Interest and Principal Distributions" in Part B of this
Prospectus. Distributions of principal, if any, will be made semi-annually on
June 15 and December 15 of each year. (See "Rights of
Certificateholders--Interest and Principal Distributions" in Part B of this
Prospectus. For estimated monthly, semi-annual and annual interest
distributions, see "Summary of Essential Information.")
MARKET FOR UNITS. The Sponsors, although not obligated to do
so, presently maintain and intend to continue to maintain a secondary market for
the Units at a price based on the aggregate bid price of the Bonds in the Trust
portfolio. The reoffer price will be based on the aggregate bid price of the
Bonds plus a sales charge of 3.08% of the Public Offering Price (3.178% of the
net amount invested), plus net accrued interest. If a market is not maintained a
Certificateholder will be able to redeem his or her Units with the Trustee at a
price based on the aggregate bid price of the Bonds. (See "Sponsor Repurchase"
and "Public Offering--Offering Price" in Part B of this Prospectus.)
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INSURED MUNICIPAL SECURITIES TRUST
NEW YORK NAVIGATOR INSURED
SERIES 3
SUMMARY OF ESSENTIAL INFORMATION AS OF DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Date of Deposit*: June 28, 1990 Weighted Average Life to
Principal Amount of Bonds ... $4,310,000 Maturity: 7.7 Years.
Number of Units ............. 4,577 Minimum Value of Trust:
Fractional Undivided Inter- Trust may be terminated if
est in Trust per Unit ..... 1/4577 value of Trust is less than
Principal Amount of $2,400,000 in principal amount
Bonds per Unit ............ $941.67 of Bonds.
Secondary Market Public Mandatory Termination Date:
Offering Price** The earlier of December 31,
Aggregate Bid Price 2039 or the disposition of the
of Bonds in Trust ....... $4,603,169+++ last Bond in the Trust.
Divided by 4,577 Units .... $1,005.72 Trustee***: The Chase Manhattan
Plus Sales Charge of 3.08% Bank.
of Public Offering Price $32.02 Trustee's Annual Fee: Monthly
Public Offering Price plan $.98 per $1,000; semi-
per Unit ................ $1,037.74+ annual plan $.52 per $1,000;
Redemption and Sponsors' and annual plan is $.34 per
Repurchase Price $1,000.
per Unit .................. $1,005.72+ Evaluator: Kenny S&P Evaluation
+++ Services.
++++ Evaluator's Fee for Each
Excess of Secondary Market Evaluation: Minimum of $8 plus
Public Offering Price $.25 per each issue of Bonds in
over Redemption and excess of 50 issues (treating
Sponsors' Repurchase separate maturities as separate
Price per Unit ............ $32.02++++ issues).
Difference between Public Sponsors: Reich & Tang
Offering Price per Unit Distributors, Inc. and Gruntal
and Principal Amount per & Co., L.L.C.
Unit Premium/(Discount) ... $96.07 Sponsors' Annual Fee: Maximum of
Evaluation Time: 4:00 p.m. $.25 per $1,000 principal
New York Time. amount of Bonds (see "Trust
Minimum Principal Distribution: Expenses and Charges" in Part B
$1.00 per Unit. of this Prospectus).
</TABLE>
PER UNIT INFORMATION BASED UPON INTEREST DISTRIBUTION PLAN ELECTED
<TABLE>
<CAPTION>
Monthly Semi-Annual Annual
Option Option Option
<S> <C> <C> <C>
Gross annual interest income# ......... $66.70 $66.70 $66.70
Less estimated annual fees and
expenses ............................ 2.07 1.51 1.26
Estimated net annual interest ______ ______ ______
income (cash)# ...................... $64.63 $65.19 $65.44
Estimated interest distribution# ...... 5.38 32.59 65.44
Estimated daily interest accrual# ..... .1795 .1810 .1817
Estimated current return#++ ........... 6.23% 6.28% 6.31%
Estimated long term return++ .......... 3.90% 3.95% 3.98%
Record dates .......................... 1st of Dec. 1 and Dec. 1
each month June 1
Interest distribution dates ........... 15th of Dec. 15 and Dec. 15
each month June 15
</TABLE>
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Footnotes to Summary of Essential Information
* The Date of Deposit is the date on which the Trust Agreement was signed
and the deposit of the Bonds with the Trustee made.
** For information regarding offering price per Unit and applicable sales
charge under the Total Reinvestment Plan, see "Total Reinvestment Plan"
in Part B of this Prospectus.
Certain amounts distributable as of December 31, 1997, may be reported
in the Summary of Essential Information as if they had been distributed
at year-end.
*** The Trustee maintains its principal executive office at 270 Park
Avenue, New York, New York 10017 and its unit investment trust office
at 4 New York Plaza, New York, New York 10004 (tel. no.:
1-800-882-9898). For information regarding redemption by the Trustee,
see "Trustee Redemption" in Part B of this Prospectus.
+ Plus accrued interest to the expected date of settlement (approximately
three business days after purchase) of $8.40 monthly, $13.84
semi-annually and $13.87 annually.
++ The estimated current return and estimated long term return are
increased for transactions entitled to a discount (see "Employee
Discounts" in Part B of this Prospectus), and are higher under the
semi-annual and annual options due to lower Trustee's fees and
expenses.
+++ Based solely upon the bid side evaluation of the underlying Bonds
(including, where applicable, undistributed cash from the principal
account). Upon tender for redemption, the price to be paid will be
calculated as described under "Trustee Redemption" in Part B of this
Prospectus.
++++ See "Comparison of Public Offering Price, Sponsor's Repurchase Price
and Redemption Price" in Part B of this Prospectus.
# Does not include income accrual from original issue discount bonds, if
any.
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each Unit outstanding for the periods listed below:
<TABLE>
<CAPTION>
Distribu-
tions of
Distributions of Interest Principal
During the Period (per Unit) During
Net Asset* Semi- the
Units Out- Value Monthly Annual Annual Period
Period Ended standing Per Unit Option Option Option (Per Unit)
- ------------ ---------- ---------- ------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995 5,446 $1,116.78 $74.66 $75.30 $75.50 -0-
December 31, 1996 4,728 1,085.93 70.89 71.50 71.54 $ 1.87
December 31, 1997 4,577 1,018.86 68.84 69.46 69.78 57.75
</TABLE>
- --------
* Net Asset Value per Unit is calculated by dividing net assets as
disclosed in the "Statement of Net Assets" by the number of Units
outstanding as of the date of the Statement of Net Assets. See Note 5
of Notes to Financial Statements for a description of the components of
Net Assets.
A-6
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INFORMATION REGARDING THE TRUST
AS OF DECEMBER 31, 1997
DESCRIPTION OF PORTFOLIO
The portfolio of the Trust consists of 9 issues representing
obligations of 9 issuers located in the State of New York. The Sponsor has
participated as a sole underwriter or manager, co-manager or member of an
underwriting syndicate from which 8.5% of the initial aggregate principal amount
of the Bonds were acquired. None of the Bonds are obligations of state and local
housing authorities; approximately 32.5%* are hospital revenue bonds; none were
issued in connection with the financing of nuclear generating facilities; and
none are "mortgage subsidy" bonds. All of the Bonds in the Trust are subject to
redemption prior to their stated maturity dates pursuant to sinking fund or
optional call provisions. The Bonds may also be subject to other calls, which
may be permitted or required by events which cannot be predicted (such as
destruction, condemnation, termination of a contract, or receipt of excess or
unanticipated revenues). Two of the issues representing $450,000 of the
principal amount of the Bonds are general obligation bonds. All seven of the
remaining issues representing $3,860,000 of the principal amount of the Bonds
are payable from the income of a specific project or authority and are not
supported by the issuer's power to levy taxes. The portfolio is divided for
purpose of issue as follows: Correctional Facility 2, Hospital 2, Transit
Facility 1 and University 2. For an explanation of the significance of these
factors see "The Trust--Portfolio" in Part B of this Prospectus.
As of December 31, 1997, $600,000 (approximately 13.9% of the
aggregate principal amount of the Bonds) were original issue discount bonds.
None of the Bonds were Zero Coupon Bonds. Approximately 16.9% of the aggregate
principal amount of the Bonds in the Trust were purchased at a "market" discount
from par value at maturity, approximately 63.4% were purchased at a premium and
approximately 5.8% were purchased at par. For an explanation of the significance
of these factors see "Discount and Zero Coupon Bonds" in Part B of this
Prospectus. All of the Bonds are subject to redemption prior to maturity
pursuant to sinking fund or call provisions.
None of the Bonds in the Trust are subject to the federal
individual alternative minimum tax under the Tax Reform Act of 1986. See "Tax
Status" in Part B of this Prospectus.
- --------
* A trust is considered to be "concentrated" in a particular category or
industry when the securities in that category or industry constitute
25% or more of the aggregate face amount of the portfolio. See Part B
for disclosure, including risk factors, regarding this concentration.
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Report of Independent Accountants
To the Sponsor, Trustee and Certificateholders of
Insured Municipal Securities Trust, New York Navigator
Insured Series 3
In our opinion, the accompanying statement of net assets, including the
portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Insured Municipal Securities Trust,
New York Navigator Insured Series 3 (the "Trust") at December 31, 1997, the
results of its operations, the changes in its net assets and the financial
highlights for the two years then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1997 by correspondence with the
Trustee, provide a reasonable basis for the opinion expressed above. The
financial statements for the year ended December 31, 1995 were audited by other
independent accountants whose report dated March 31, 1996 expressed an
unqualified opinion on those financial statements.
PRICE WATERHOUSE LLP
Boston, MA
March 18, 1998
<PAGE>
Insured Municipal Securities Trust,
New York Navigator Insured Series 3
Portfolio
December 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Redemption
Aggregate Coupon Rate/ Feature (2)(4)
Portfolio Principal Name of Issuer and Ratings Date(s) of S.F.-Sinking Fund
No. Amount Title of Bonds (1) Maturity (2) Ref.-Refunding
<S> <C> <C>
1 $ 500,000 N.Y. State Dorm. City Univ. Sys. Consldtd. AAA 5.000% No Sinking Fund
Second Gen. Resolution Rev. Bonds Series 1990 7/01/2017 7/01/00 @ 100 Ref.
C (MBIA)
2 230,000 Dorm. Auth. of the State of N.Y. Judicial Facs. AAA 7.375 7/01/00 @ 100 S.F.
Lease Rev. Bonds (Suffolk Cnty. Issue) 7/01/2016 None
Series 1986 (MBIA)
3 700,000 N.Y. State Dorm. Auth. State Univ. Ed. Facs. AAA 7.700 5/15/06 @ 100 S.F.
Rev. Bonds Series 1990 A (MBIA) 5/15/2012 5/15/00 @ 102 Ref.
4 700,000 N.Y State Med. Care Facs. Finc. Agncy. AAA 7.450 2/15/98 @ 100 S.F.
St. Luke's Roosevelt Hosp. Cntr. FHA Insrd. 2/15/2029 2/15/00 @ 102 Ref.
Mtg. Rev. Bonds Series B (MBIA)
5 700,000 N.Y. State Med. Care Facs. Finc. Agncy. Mental AAA 7.875 8/15/11 @ 100 S.F.
Hlth. Servs. Facs. Imprvmnt. Rev. Bonds 1988 8/15/2015 8/15/98 @ 102 Ref.
Series B (MBIA)
6 600,000 N.Y. State Urban Dev. Corp. Correc. Facs. Rev. AAA 6.000 1/01/18 @ 100 S.F.
Bonds Series G (MBIA) 1/01/2019 1/01/00 @ 100 Ref.
7 430,000 Metro. Trans. Auth. Transit Facs. Serv. Cntrct. AAA 7.500 7/01/09 @ 100 S.F.
Rev. Bonds Series K (MBIA) 7/01/2017 7/01/98 @ 102 Ref.
8a 125,000 City of N.Y. Gen. Oblig. Serial Rev. Bonds AAA 7.750 No Sinking Fund
Fiscal 1990 Series I (MBIA) 8/15/2024 8/15/99 @ 101.5 Ref.
8b 75,000 City of N.Y. Gen. Oblig. Serial Rev. Bonds AAA 7.750 No Sinking Fund
Fiscal 1990 Series I (MBIA) 8/15/2024 8/15/99 @ 101.5 Ref.
9 250,000 Yonkers N.Y. Gen. Oblig. Schl. Bonds AAA 7.375 12/01/04 @ 100 S.F.
Series 1990 C (MBIA) 12/01/2009 12/01/00 @ 102 Ref.
------------
$ 4,310,000 Total Investments (Cost $4,128,815)
============
</TABLE>
Portfolio Market
No. Value(3)
1 $ 491,445
2 290,515
3 771,092
4 761,117
5 731,451
6 619,002
7 446,555
8a 134,299
8b 80,327
9 277,345
----------
$ 4,603,148
==========
See accompanying footnotes to portfolio and notes to financial statements.
<PAGE>
Insured Municipal Securities Trust,
New York Navigator Insured Series 3
Footnotes to Portfolio
- -------------------------------------------------------------------------------
1. All ratings are by Kenny S&P Evaluation Services, a business unit of
J.J. Kenny Company, Inc., a subsidiary of The McGraw-Hill Companies,
Inc. A brief description of the ratings symbols and their meaning is set
forth under "Description of Bond Ratings" in Part B of the Prospectus.
2. See "The Trust - Portfolio" in Part B of the Prospectus for an
explanation of redemption features. See "Tax Status" in Part B of the
Prospectus for a statement of the Federal tax consequences to a
Certificateholder upon the sale, redemption or maturity of a bond.
3. At December 31, 1997, the net unrealized appreciation of all the bonds
was comprised of the following:
Gross unrealized appreciation $ 474,333
Gross unrealized depreciation -
----------------
Net unrealized appreciation $ 474,333
===============
4. The Bonds may also be subject to other calls, which may be permitted or
required by events which cannot be predicted (such as destruction,
condemnation, termination of a contract, or receipt of excess or
unanticipated revenues).
The accompanying notes form an integral part of the financial statements.
<PAGE>
Insured Municipal Securities Trust,
New York Navigator Insured Series 3
Statement of Net Assets
December 31, 1997
Investments in Securities,
at Market Value (Cost $4,128,815) $4,603,148
----------
Other Assets
Accrued Interest 109,914
----------
Total Other Assets 109,914
----------
Liabilities
Advance from Trustee 49,745
----------
Total Liabilities 49,745
----------
Excess of Other Assets over Total Liabilities 60,169
----------
Net Assets (4,577 Units of Fractional Undivided
Interest Outstanding, $1,018.86 per Unit) $4,663,317
==========
The accompanying notes form an integral part of the financial statements.
<PAGE>
Insured Municipal Securities Trust,
New York Navigator Insured Series 3
Statement of Operations
For the Years Ended December 31,
1997 1996 1995
Investment Income
Interest $323,408 $372,906 $404,240
-------- -------- --------
Expenses
Trustee's Fees 6,285 6,185 5,739
Evaluator's Fee 2,000 2,372 2,000
Sponser's Advisory Fee 1,190 1,353 1,386
-------- -------- --------
Total Expenses 9,475 9,910 9,125
-------- -------- --------
Net Investment Income 313,933 362,996 395,115
-------- -------- --------
Realized and Unrealized Gain (Loss)
Realized Gain (Loss)
on Investments (18,169) 21,676 4,505
Change in Unrealized Appreciation
(Depreciation) on Investments (20,172) (175,559) 311,690
-------- -------- --------
Net Gain (Loss) on Investments (38,341) (153,883) 316,195
-------- -------- --------
Net Increase
in Net Assets
Resulting From Operations $275,592 $209,113 $711,310
======== ======== ========
The accompanying notes form an integral part of the financial statements.
<PAGE>
Insured Municipal Securities Trust,
New York Navigator Insured Series 3
Statement of Changes in Net Assets
For the Years Ended December 31,
1997 1996 1995
Operations
Net Investment Income $313,933 $362,996 $395,115
Realized Gain (Loss)
on Investments (18,169) 21,676 4,505
Change in Unrealized Appreciation
(Depreciation) on Investments (20,172) (175,559) 311,690
---------- ---------- ----------
Net Increase in
Net Assets Resulting
From Operations 275,592 209,113 711,310
---------- ---------- ----------
Distributions to Certificateholders
Investment Income 319,788 362,240 413,714
Principal 264,928 8,841 ----
Redemptions
Interest 1,415 11,978 847
Principal 160,420 773,761 89,851
---------- ---------- ----------
Total Distributions
and Redemptions 746,551 1,156,820 504,412
---------- ---------- ----------
Total Increase (Decrease) (470,959) (947,707) 206,898
Net Assets
Beginning of Year 5,134,276 6,081,983 5,875,085
---------- ---------- ----------
End of Year (Including
Undistributed Net Investment
Income of $60,148, $67,418
and $78,640, Respectively) $4,663,317 $5,134,276 $6,081,983
========== ========== ==========
The accompanying notes form an integral part of the financial statements.
<PAGE>
Insured Municipal Securities Trust,
New York Navigator Insured Series 3
Notes to Financial Statements
1. Organization
Insured Municipal Securities Trust, New York Navigator Insured Series 3
(the "Trust") was organized on June 28, 1990 by Bear, Stearns & Co.
Inc. and Gruntal & Co., Incorporated under the laws of the State of New
York by a Trust Indenture and Agreement, and is registered under the
Investment Company Act of 1940. The Trust was formed to preserve
capital and to provide interest income.
Effective September 28, 1995, Reich & Tang Distributors L.P. ("Reich &
Tang") has become the successor sponsor (the "Sponsor") to certain of
the unit investment trusts previously sponsored by Bear, Stearns & Co.
Inc. As successor Sponsor, Reich & Tang has assumed all of the
obligations and rights of Bear, Stearns & Co. Inc., the previous
sponsor. Effective September 2, 1995, United States Trust Company of
New York was merged into The Chase Manhattan Bank ("Chase" or the
"Trustee"). Accordingly, Chase is the successor trustee of the Trust.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies
consistently followed by the Trust in preparation of its financial
statements. The policies are in conformity with generally accepted
accounting principles ("GAAP"). The preparation of financial statements
in accordance with GAAP requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual amounts could differ from those estimates.
Interest income is recorded on the accrual basis.
Security Valuation
Investments are carried at market value which is determined by Kenny
S&P Evaluation Services, a business unit of J.J. Kenny Company, Inc., a
subsidiary of The McGraw-Hill Companies, Inc. The market value of the
portfolio is based upon the bid prices for the bonds at the end of the
year, which approximates the fair value of the security at that date,
except that the market value on the date of deposit represents the cost
to the Trust based on the offering prices for investments at that date.
The difference between cost and market value is reflected as unrealized
appreciation (depreciation) of investments. Securities transactions are
recorded on the trade date. Realized gains (losses) from securities
transactions are determined on the basis of average cost of the
securities sold or redeemed.
<PAGE>
Insured Municipal Securities Trust,
New York Navigator Insured Series 3
Notes to Financial Statements
3. Income Taxes
No provision for federal income taxes has been made in the accompanying
financial statements because the Trust intends to continue to qualify
for the tax treatment applicable to Grantor Trusts under the Internal
Revenue Code. Under existing law, if the Trust so qualifies, it will
not be subject to federal income tax on net income and capital gains
that are distributed to unitholders.
4. Trust Administration
The Trustee has custody of assets and responsibility for the accounting
records and financial statements of the Trust and is responsible for
establishing and maintaining a system of internal control related
thereto. The Trustee is also responsible for all estimates of expenses
and accruals reflected in the Trust's financial statements.
The Trust Indenture and Agreement provides for interest distributions
as often as monthly (depending upon the distribution plan elected by
the Certificateholders).
The Trust Indenture and Agreement further requires that principal
received from the disposition of bonds, other than those bonds sold in
connection with the redemption of units, be distributed to
Certificateholders.
The Trust Indenture and Agreement also requires the Trust to redeem
units tendered. For the years ended December 31, 1997, 1996 and 1995,
151, 718 and 82 units were redeemed, respectively.
The Trust pays an annual fee for trustee services rendered by the
Trustee that ranges from $.34 to $.98 per $1,000 of outstanding
investment principal. In addition, a minimum fee of $8.00 is paid to a
service bureau for each portfolio valuation. A maximum fee of $.25 per
$1,000 of outstanding investment principal is paid to the Sponsor. For
the year ended December 31, 1997, the "Trustee's Fees" are comprised of
Trustee fees of $3,487 and other expenses of $2,798. For the year ended
December 31, 1996, the "Trustee's Fees" are comprised of Trustee fees
of $4,106 and other expenses of $2,079. The other expenses include
professional, printing and miscellaneous fees.
<PAGE>
Insured Municipal Securities Trust,
New York Navigator Insured Series 3
Notes to Financial Statements
5. Net Assets
At December 31, 1997, the net assets of the Trust represented the
interest of Certificateholders as follows:
Original cost to Certificateholders $6,183,780
Less Initial Gross Underwriting Commission 303,005
----------
5,880,775
Accumulated Cost of Securities Sold,
Matured or Called (1,751,960)
Net Unrealized Appreciation 474,333
Undistributed Net Investment Income 60,148
Undistributed Proceeds From Investments 21
----------
Total $4,663,317
==========
The original cost to Certificateholders, less the initial gross
underwriting commission, represents the aggregate initial public
offering price net of the applicable sales charge on 6,000 units of
fractional undivided interest of the Trust as of the date of deposit.
6. Concentration of Credit Risk
Since the Trust invests a portion of its assets in municipal bonds, it
may be affected by economic and political developments in the
municipalities. Certain debt obligations held by the Trust may be
entitled to the benefit of insurance, standby letters of credit or
other guarantees of banks or other financial institutions.
<PAGE>
Insured Municipal Securities Trust,
New York Navigator Insured Series 3
Notes to Financial Statements
7. Financial Highlights (per unit)*
Selected data for a unit of the Trust outstanding:
For the years ended December 31,
1997 1996
Net Asset Value, Beginning of Year** $1,085.93 $1,116.78
--------- ---------
Interest Income 69.51 73.31
Expenses (2.04) (1.95)
--------- ---------
Net Investment Income 67.47 71.36
--------- ---------
Net Gain or Loss on Investments(1) (8.57) (26.91)
--------- ---------
Total from Investment Operations 58.90 44.45
--------- ---------
Less Distributions
to Certificateholders
Income 68.73 71.21
Principal 56.94 1.74
for Redemptions
Interest .30 2.35
--------- ---------
Total Distributions 125.97 75.30
--------- ---------
Net Asset Value, End of Year** $1,018.86 $1,085.93
========= =========
(1) Net gain or loss on investments is a result of changes in outstanding
units since January 1, 1997 and 1996, respectively, and the dates of
net gain and loss on investments.
- ----------
* Unless otherwise stated, based upon average units outstanding during
the year of 4,653 ([4,577 + 4,728]/2) for 1997 and of 5,087 ([4,728 +
5,446]/2) for 1996.
** Based upon actual units outstanding
<PAGE>
Note: Part B of This Prospectus May Not Be Distributed
Unless Accompanied by Part A.
Please Read and Retain Both Parts
of This Prospectus For Future Reference.
INSURED MUNICIPAL SECURITIES TRUST
Prospectus Part B
Dated: April 30, 1998
THE TRUST
Organization. "Insured Municipal Securities Trust" (the
"Trust") consists of the "unit investment trust" designated as set forth in Part
A.* The Trust was created under the laws of the State of New York pursuant to
the Trust Indenture and Agreement** (collectively, the "Trust Agreement"), dated
the Date of Deposit, among Reich & Tang Distributors, Inc. or, depending on the
particular Trust, among Reich & Tang Distributors, Inc. and Gruntal & Co.,
L.L.C., as Co-Sponsors (the Sponsor or Co-Sponsors, if applicable, are referred
to herein as the "Sponsor"), Kenny S&P Evaluation Services, a business unit of
J.J. Kenny Company, Inc., a subsidiary of The McGraw-Hill Companies, as
Evaluator and The Chase Manhattan Bank, as Trustee. The name of the Sponsor for
a particular Trust is contained in the "Summary of Additional Information" in
Part A.
On the Date of Deposit, the Sponsor deposited with the Trustee
long-term insured bonds, and/or delivery statements relating to contracts for
the purchase of certain such bonds (the "Bonds") and cash or an irrevocable
letter of credit issued by a major commercial bank in the amount required for
such purchases. Thereafter, the Trustee, in exchange for the Bonds so deposited,
delivered to the Sponsor the Certificates evidencing the ownership of all Units
of the Trust. The Trust consists of the Bonds described under "The Trust" in
Part A, the interest (including, where applicable, earned original issue
discount) on which, in the opinions of bond counsel to the respective issuers
given at the time of original delivery of the Bonds, is exempt from regular
federal income tax under existing law.
Each "Unit" outstanding on the Evaluation Date represented an
undivided interest or pro rata share in the principal and interest of the
- --------
* This Part B relates to the outstanding series of Insured Municipal
Securities Trust, Insured Municipal Securities Discount Trust, Insured
Municipal Securities New York Navigator Insured Trust, and/or Insured
Municipal Securities New Jersey Navigator Insured Trust as reflected in
Part A attached hereto.
** References in this Prospectus to the Trust Agreement are qualified in
their entirety by the Trust Indenture and Agreement which is incorpo-
rated herein.
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Trust in the ratio of one Unit to the principal amount of Bonds in the Trust on
such date as specified in Part A of this Prospectus. To the extent that any
Units are redeemed by the Trustee, the fractional undivided interest or pro rata
share in the Trust represented by each unredeemed Unit will increase, although
the actual interest in the Trust represented by such fraction will remain
unchanged. Units will remain outstanding until redeemed upon tender to the
Trustee by Certificateholders, which may include the Sponsor or the Under
writers, or until the termination of the Trust Agreement.
Objectives. The Trust, one of a series of similar but separate
unit investment trusts formed by the Sponsor, offers investors the opportunity
to participate in a portfolio of long-term insured tax-exempt bonds with a
greater diversification than they might be able to acquire themselves. The
objectives of the Trust are to preserve capital and to provide interest income
(including, where applicable, earned original issue discount) which, in the
opinions of bond counsel given at the time of original delivery of the Bonds, is
exempt from regular federal income tax under existing law and exempt from state
and local income tax to the extent indicated herein when received by persons
subject to state and local taxation in a state in which the issuers of the Bonds
are located. Such interest income may, however, be subject to the corporate
alternative minimum taxes and to state and local taxes. (See "Description of
Portfolio" in Part A for a list of those Bonds which pay interest income subject
to federal individual alternative minimum tax. See also "Tax Status".)
Consistent with such objectives, the Sponsor has obtained bond insurance
guaranteeing the scheduled payment of principal and interest on certain of the
Bonds and have purchased, as to the remainder of each Trust Portfolio, Bonds
which are already covered by insurance. (See "Insurance on the Bonds".) An
investor will realize taxable income upon maturity or early redemption of the
market discount bonds in a Trust portfolio and will realize, where applicable,
tax-exempt income to the extent of the earned portion of interest, including
original issue discount earned on the Bonds in a Trust portfolio. Investors
should be aware that there is no assurance the Trust's objectives will be
achieved as these objectives are dependent on the continuing ability of the
issuers of the Bonds to meet their interest and principal payment requirements,
on the abilities of the Insurance Companies to meet their obligations under the
policies of insurance issued on the Bonds, on the continuing satisfaction of the
conditions required for the exemption of interest thereon from regular federal
income tax and on the market value of the Bonds, which can be affected by
fluctuations in interest rates and other factors.
Since disposition of Units prior to final liquidation of each
Trust may result in an investor receiving less than the amount paid for such
Units (see "Comparison of Public Offering Price, Sponsor's Repurchase Price and
Redemption Price"), the purchase of a Unit should be looked upon as a long-term
investment. Neither the Trust nor the Total Reinvestment Plan are designed to be
complete investment programs.
Portfolio. All of the Bonds in the Trust were rated "AAA" by
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies
("Standard & Poor's") at the time originally deposited in the Trust. (See
"Insurance on the Bonds.") The "AAA" rating was assigned to the Bonds by
Standard & Poor's because each Bond was insured by a municipal bond guaranty
insurance policy issued by a company whose claims-paying ability was rated "AAA"
by Standard & Poor's at that time. In the event of a downgrading of the
claims-paying ability of one of the insurers, as of the Evaluation Date, the
Bonds in the Trust which are insured by that company would no longer be rated
112677.7
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<PAGE>
"AAA" by Standard & Poor's. The Units of Trusts containing the downgraded
bonds are no longer rated "AAA."
For information regarding (i) the number of issues in the
Trust, (ii) the range of fixed maturities of the Bonds, (iii) the number of
issues payable from the income of a specific project or authority and (iv) the
number of issues constituting general obligations of a government entity, see
"Information Regarding the Trust" and "Portfolio" in Part A of this Prospectus.
When selecting Bonds for a Trust, the following factors, among
others, were considered by the Sponsor: (a) the quality of the Bonds and whether
such Bonds, whether Sponsor-Insured or Pre-Insured, were rated "AAA" by Standard
& Poor's, (b) the yield and price of the Bonds relative to other tax-exempt
securities of comparable quality and maturity, (c) income to the
Certificateholders of the Trust, (d) whether a bond was insured, or insurance
was available for the Bonds at a reasonable cost, (e) in connection with Bonds
for which bond insurance was obtained by the Sponsor, the quality of the Bonds
and whether they were rated, without regard to such bond insurance, "A" or
better by either Standard & Poor's or Moody's Investors Service, Inc.
("Moody's"), and (f) the diversification of the Trust portfolio, as to purpose
of issue and location of issuer, taking into account the availability in the
market of issues which meet the Trust's quality, rating, yield and price
criteria. Subsequent to the Date of Deposit, a Bond may cease to be rated or its
rating may be reduced below that specified above. Neither event requires an
elimination of such Bond from a Trust but may be considered in the Sponsor's
determination to direct the Trustee to dispose of the Bond. (See "Portfolio
Supervision".) For an interpretation of the bond ratings see "Description of
Bond Ratings".
Housing Bonds. Some of the aggregate principal amount of the
Bonds may consist of obligations of state and local housing authorities whose
revenues are primarily derived from mortgage loans to rental housing projects
for low to moderate income families. Since such obligations are usually not
general obligations of a particular state or municipality and are generally
payable primarily or solely from rents and other fees, adverse economic
developments including failure or inability to increase rentals, fluctuations of
interest rates and increasing construction and operating costs may reduce
revenues available to pay existing obligations. See "Description of Portfolio"
in Part A for the amount of rental housing bonds contained therein.
Hospital Revenue Bonds. Some of the aggregate principal amount
of the Bonds may consist of hospital revenue bonds. Ratings of hospital bonds
are often initially based on feasibility studies which contain projections of
occupancy levels, revenues and expenses. Actual experience may vary considerably
from such projections. A hospital's gross receipts and net income will be
affected by future events and conditions including, among other things, demand
for hospital services and the ability of the hospital to provide them,
physicians' confidence in hospital management capability, economic developments
in the service area, competition, actions by insurers and governmental agencies
and the increased cost and possible unavailability of malpractice insurance.
Additionally, a major portion of hospital revenue typically is derived from
third-party payors and government programs such as Medicare and Medicaid. Both
private third-party payors and government programs have undertaken cost
containment measures designed to limit payments. Furthermore, government
programs are subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings and government funding restrictions, all of
which may materially decrease the rate of program
112677.7
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<PAGE>
payments for health care facilities. There can be no assurance that payments
under governmental programs will remain at levels comparable to present levels
or will, in the future, be sufficient to cover the costs allocable to patients
participating in such programs. In addition, there can be no assurance that a
particular hospital or other health care facility will continue to meet the
requirements for participation in such programs.
The health care delivery system is undergoing considerable
alteration and consolidation. Consistent with that trend, the ownership or
management of a hospital or health care facility may change, which could result
in (i) an early redemption of bonds, (ii) alteration of the facilities financed
by the Bonds or which secure the Bonds, (iii) a change in the tax exempt status
of the Bonds or (iv) an inability to produce revenues sufficient to make timely
payment of debt service on the Bonds. 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 such bonds. See
"Description of Portfolio" in Part A for the amount of hospital revenue bonds
contained therein.
Nuclear Power Facility Bonds. Certain Bonds may have been
issued in connection with the financing of nuclear generating facilities.
Electric utilities which own or operate nuclear power plants are exposed to
risks inherent in the nuclear industry. These risks include exposure to new
requirements resulting from extensive federal and state regulatory oversight,
public controversy, decommissioning costs, and spent fuel and radioactive waste
disposal issues. While nuclear power construction risks are no longer of
paramount concern, the emerging issue is radioactive waste disposal. In
addition, nuclear plants typically require substantial capital additions and
modifications throughout their operating lives to meet safety, environmental,
operational and regulatory requirements and to replace and upgrade various plant
systems. The high degree of regulatory monitoring and controls imposed on
nuclear plants could cause a plant to be out of service or on limited service
for long periods. When a nuclear facility owned by an investor-owned utility or
a state or local municipality is out of service or operating on a limited
service basis, the utility operator or its owners may be liable for the recovery
of replacement power costs. Risks of substantial liability also arise from the
operation of nuclear facilities and from the use, handling, and possible
radioactive emissions associated with nuclear fuel. Insurance may not cover all
types or amounts of loss which may be experienced in connection with the
ownership and operation of a nuclear plant and severe financial consequences
could result from a significant accident or occurrence. The Nuclear Regulatory
Commission has promulgated regulations mandating the establishment of funded
reserves to assure financial capability for the eventual decommissioning of
licensed nuclear facilities. These funds are to be accrued from revenues in
amounts currently estimated to be sufficient to pay for decommissioning costs.
The Sponsor is unable to predict whether any such actions or whether any such
proposals or litigation, if enacted or instituted, will have an adverse impact
on the revenues available to pay the debt service on the Bonds in the portfolio
issued to finance such nuclear projects. See "Description of Portfolio" in Part
A for the amount of bonds issued to finance nuclear generating facilities
contained therein.
Mortgage Subsidy Bonds. Certain Bonds may be "mortgage subsidy
bonds" which are obligations of which all or a significant portion of the
proceeds are to be used directly or indirectly for mortgages on owner-occupied
residences. Section 103A of the Internal Revenue Code of 1954, as amended,
provided as a general rule that interest on "mortgage subsidy bonds" will not
112677.7
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<PAGE>
be exempt from Federal income tax. An exception is provided for certain
"qualified mortgage bonds." Qualified mortgage bonds are bonds that are used to
finance owner-occupied residences and that meet numerous statutory requirements.
These requirements include certain residency, ownership, purchase price and
target area requirements, ceiling amounts for state and local issuers, arbitrage
restrictions and (for bonds issued after December 31, 1984) certain information
reporting, certification, public hearing and policy statement requirements. In
the opinions of bond counsel to the issuing governmental authorities, interest
on all the Bonds in a Trust that might be deemed "mortgage subsidy bonds" will
be exempt from Federal income tax when issued. See "Description of Portfolio" in
Part A for the amount of mortgage subsidy Bonds contained therein.
Mortgage Revenue Bonds. Certain Bonds may be "mortgage revenue
bonds." Under the Internal Revenue Code of 1986, as amended (the "Code") (and
under similar provisions of the prior tax law) "mortgage revenue bonds" are
obligations the proceeds of which are used to finance owner-occupied residences
under programs which meet numerous statutory requirements relating to residency,
ownership, purchase price and target area requirements, ceiling amounts for
state and local issuers, arbitrage restrictions, and certain information
reporting certification, and public hearing requirements. There can be no
assurance that additional federal legislation will not be introduced or that
existing legislation will not be further amended, revised, or enacted after
delivery of these Bonds or that certain required future actions will be taken by
the issuing governmental authorities, which action or failure to act could cause
interest on the Bonds to be subject to federal income tax. If any portion of the
Bond proceeds are not committed for the purpose of the issue, Bonds in such
amount could be subject to earlier mandatory redemption at par, including issues
of Zero Coupon Bonds (see "Discount and Zero Coupon Bonds"). See "Description of
Portfolio" in Part A for the amount of mortgage revenue bonds contained therein.
Private Activity Bonds. The portfolio of the Trust may contain
other Bonds which are "private activity bonds" (often called Industrial Revenue
Bonds ("IRBs") if issued prior to 1987) which would be primarily of two types:
(1) Bonds for a publicly owned facility which a private entity may have a right
to use or manage to some degree, such as an airport, seaport facility or water
system and (2) facilities deemed owned or beneficially owned by a private entity
but which were financed with tax-exempt bonds of a public issuer, such as a
manufacturing facility or a pollution control facility. In the case of the first
type, bonds are generally payable from a designated source of revenues derived
from the facility and may further receive the benefit of the legal or moral
obligation of one or more political subdivisions or taxing jurisdictions. In
most cases of project financing of the first type, receipts or revenues of the
issuer are derived from the project or the operator or from the unexpended
proceeds of the bonds. Such revenues include user fees, service charges, rental
and lease payments, and mortgage and other loan payments.
The second type of issue will generally finance projects which
are owned by or for the benefit of, and are operated by, corporate entities.
Ordinarily, such private activity bonds are not general obligations of
governmental entities and are not backed by the taxing power of such entities,
and are solely dependent upon the creditworthiness of the corporate user of the
project or corporate guarantor.
The private activity bonds in the Trust have generally been
issued under bond resolutions, agreements or trust indentures pursuant to which
the
112677.7
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<PAGE>
revenues and receipts payable under the issuer's arrangements with the users or
the corporate operator of a particular project have been assigned and pledged to
the holders of the private activity bonds. In certain cases a mortgage on the
underlying project has been assigned to the holders of the private activity
bonds or a trustee as additional security. In addition, private activity bonds
are frequently directly guaranteed by the corporate operator of the project or
by another affiliated company. See "Description of Portfolio" in Part A for the
amount of private activity bonds contained therein.
Litigation. Litigation challenging the validity under state
constitutions of present systems of financing public education has been
initiated in a number of states. Decisions in some states have been reached
holding such school financing in violation of state constitutions. In addition,
legislation to effect changes in public school financing has been introduced in
a number of states. The Sponsor is unable to predict the outcome of the pending
litigation and legislation in this area and what effect, if any, resulting
changes in the sources of funds, including proceeds from property taxes applied
to the support of public schools, may have on the school bonds in a Trust.
To the Sponsor's knowledge, there was no litigation pending as
of the initial Date of Deposit with respect to any Bonds which might reasonably
be expected to have a material adverse effect on a Trust. Subsequent to the Date
of Deposit, litigation may be initiated on a variety of grounds with respect to
Bonds in a Trust. Such litigation, as, for example, suits challenging the
issuance of pollution control revenue bonds under recently-enacted environmental
protection statutes, may affect the validity of such Bonds or the tax-free
nature of the interest thereon. The Sponsor is unable to predict whether any
such litigation may be instituted or, if instituted, whether it might have a
material adverse effect on a Trust.
Other Factors. The Bonds in the Trust, despite their optional
redemption provisions which generally do not take effect until 10 years after
the original issuance dates of such bonds (often referred to as "ten year call
protection"), do contain provisions which require the issuer to redeem such
obligations at par from unused proceeds of the issue within a stated period. In
recent periods of declining interest rates there have been increased redemptions
of bonds, particularly housing bonds, pursuant to such redemption provisions. In
addition, the Bonds in the Trusts are also subject to mandatory redemption in
whole or in part at par at any time that voluntary or involuntary prepayments of
principal on the underlying collateral are made to the trustee for such bonds or
that the collateral is sold by the bond issuer. Prepayments of principal tend to
be greater in periods of declining interest rates; it is possible that such
prepayments could be sufficient to cause a bond to be redeemed substantially
prior to its stated maturity date, earliest call date or sinking fund redemption
date.
The Bonds may also be subject to other calls, which may be
permitted or required by events which cannot be predicted (such as destruction,
condemnation, or termination of a contract).
In 1976 the federal bankruptcy laws were amended so that an
authorized municipal debtor could more easily seek federal court protection to
assist in reorganizing its debts so long as certain requirements were met.
Historically, very few financially troubled municipalities have sought court
assistance for reorganizing their debts; notwithstanding, the Sponsor is unable
to predict to what extent financially troubled municipalities may seek
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<PAGE>
court assistance in reorganizing their debts in the future and, therefore, what
effect, if any, the applicable federal bankruptcy law provisions will have on
the Trusts.
The Trust may also include "moral obligation" bonds. Under
statutes applicable to such bonds, if any issuer is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question. See "Description of
Portfolio" in Part A of this Prospectus for the amount of moral obligation bonds
contained therein.
Certain of the Bonds in the Trust are subject to redemption
prior to their stated maturity dates pursuant to sinking fund or call
provisions. A sinking fund is a reserve fund appropriated specifically toward
the retirement of a debt. A callable bond is one which is subject to redemption
or refunding prior to maturity at the option of the issuer. A refunding is a
method by which a bond is redeemed at or before maturity from the proceeds of a
new issue of bonds. In general, call provisions are more likely to be exercised
when the offering side evaluation of a bond is at a premium over par than when
it is at a discount from par. A listing of the sinking fund and call provisions,
if any, with respect to each of the Bonds is contained under "Portfolio".
Certificateholders will realize a gain or loss on the early redemption of such
Bonds, depending upon whether the price of such Bonds is at a discount from or
at a premium over par at the time Certificateholders purchase their Units.
Neither the Sponsor nor the Trustee shall be liable in any way
for any default, failure or defect in any of the Bonds. Because certain of the
Bonds from time to time may be redeemed or will mature in accordance with their
terms or may be sold under certain circumstances, no assurance can be given that
a Trust will retain its present size and composition for any length of time. The
proceeds from the sale of a Bond or the exercise of any redemption or call
provision will be distributed to Certificateholders on the next distribution
date, except to the extent such proceeds are applied to meet redemptions of
Units. (See "Trustee Redemption".)
Puerto Rico Bonds. Certain of the Bonds in the Trust may be
general obligations and/or revenue bonds of issuers located in Puerto Rico which
will be affected by general economic conditions in Puerto Rico. The economy of
Puerto Rico is fully integrated with that of the United States mainland. During
fiscal 1997, approximately 88% of Puerto Rico's exports went to the United
States mainland, which was also the source of approximately 62% of Puerto Rico's
imports. In fiscal 1997, Puerto Rico experienced a $2.7 billion positive
adjusted merchandise trade balance. The dominant sectors of the Puerto Rico
economy are manufacturing and services. Puerto Rico's more than decade-long
economic expansion continued throughout the five-year period from fiscal 1993
through fiscal 1997. Factors behind this expansion included government-sponsored
economic development programs, periodic declines in the exchange value of the
United States dollar, increases in the level of federal transfers, and the
relatively low cost of borrowing. Gross product in fiscal 1993 was $25.1 billion
($24.5 billion in 1992 prices) and gross product in fiscal 1997 was $32.1
billion ($27.7 billion in 1992 prices). This represents an increase in gross
product of 27.7% from fiscal 1993 to 1997 (13.0% in 1992 prices). Since fiscal
1985, personal income, both aggregate and per capita, has increased consistently
each fiscal year. In fiscal 1997, aggregate personal income was $32.1 billion
($30.0 billion in 1992 prices) and personal income per capita was $8,509 ($7,957
in 1992 prices). Personal income includes transfer payments to individuals in
Puerto Rico under various social
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programs. Total federal payments to Puerto Rico, which include transfers to
local government entities and expenditures of federal agencies in Puerto Rico,
in addition to federal transfer payments to individuals, are lower on a per
capita basis in Puerto Rico than in any state. Transfer payments to individuals
in fiscal 1997 were $7.3 billion, of which $5.2 billion, or 71.6%, represented
entitlements to individuals who had previously performed services or made
contributions under programs such as Social Security, Veterans' Benefits,
Medicare and U.S. Civil Service retirement pensions. Average employment
increased from 999,000 in fiscal 1993, to 1,128,300 in fiscal 1997. Average
unemployment decreased from 16.8% in fiscal 1993, to 13.1% in fiscal 1997.
According to the Labor Department's Household Employment Survey, during the
first eight months of fiscal 1998, total employment increased 0.4% over the same
period in fiscal 1997. Total monthly employment averaged 1,129,000 during the
first eight months of fiscal 1998, compared to 1,124,500 in the same period of
fiscal 1997. The Puerto Rico Planning Board's gross product forecast for fiscal
1998 projected an increase of 3.0% over fiscal 1997.
Discount And Zero Coupon Bonds. Some of the Bonds in a Trust
may be original issue discount bonds. The original issue discount, which is the
difference between the initial purchase price of the Bonds and the face value,
is deemed to accrue on a daily basis and the accrued portion will be treated as
tax-exempt interest income for regular federal income tax purposes. Upon sale or
redemption, any gain realized that is in excess of the earned portion of
original issue discount will be taxable as capital gain. (See "Tax Status".) The
current value of an original issue discount bond reflects the present value of
its face amount at maturity. The market value tends to increase more slowly in
early years and in greater increments as the Bonds approach maturity. Of these
original issue discount bonds, some of the aggregate principal amount of the
Bonds in the Trust may be Zero Coupon Bonds. (See "Description of Portfolio" in
Part A.) Zero Coupon Bonds do not provide for the payment of any current
interest and provide for payment at maturity at face value unless sooner sold or
redeemed. The market value of Zero Coupon Bonds is subject to greater
fluctuations than coupon bonds in response to changes in interest rates. Zero
Coupon Bonds generally are subject to redemption at compound accredit value
based on par value at maturity. Because the issuer is not obligated to make
current interest payments, Zero Coupon Bonds may be less likely to be redeemed
than coupon bonds issued at a similar interest rate, although certain zero
coupon housing bonds may be subject to mandatory call provisions.
Some of the Bonds in the Trust may have been purchased at a
"market" discount from par value at maturity. This is because the coupon
interest rates on the discount bonds at the time they were purchased and
deposited in each Trust were lower than the current market interest rates for
newly issued bonds of comparable rating and type. At the time of issuance the
discount bonds were for the most part issued at then current coupon interest
rates. The current yields (coupon interest income as a percentage of market
price) of discount bonds will be lower than the current yields of comparably
rated bonds of similar type newly issued at current interest rates because
discount bonds tend to increase in market value as they approach maturity and
the full principal amount becomes payable. Gain on the disposition of a Bond
purchased at a market discount generally will be treated as ordinary income,
rather than capital gain, to the extent of accrued market discount. A discount
bond held to maturity will have a larger portion of its total return in the form
of capital gain and less in the form of tax-exempt interest income than a
comparable bond newly issued at current market rates. Discount Bonds with a
large term to maturity tend to have a higher current yield and a lower current
market value than otherwise comparable bonds with a shorter term to
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maturity. If interest rates rise, the value of discount bonds will decrease; and
if interest rates decline, the value of discount bonds will increase. The
discount does not necessarily indicate a lack of market confidence in the
issuer.
Year 2000 Issue. The Trust, like other businesses and
entities, could be adversely affected if the computer systems used by the
Sponsor and Trustee or other service providers to the Trust do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Problem." The Sponsor and
Trustee are taking steps that they believe are reasonably designed to address
the Year 2000 Problem with respect to computer systems that they use and to
obtain reasonable assurances that comparable steps are being taken by the
Trusts' other service providers. However, there can be no assurance that the
Year 2000 Problem will be properly or timely resolved so to avoid any adverse
impact to the Trust.
Insurance On The Bonds. Each of the Bonds in the Trust is
insured by a municipal bond guaranty insurance policy obtained by either the
Sponsor with respect to Bonds which were not insured prior to their deposit in
the Trust ("Sponsor-Insured Bonds") or the issuer, underwriter or prior owner of
the Bonds ("Pre-Insured Bonds"), and issued by one of the insurance companies
described under "Insurance on the Bonds" in Part B (the "Insurance Companies").
The insurance policies are non-cancelable and will continue in force so long as
the Bonds are outstanding and the insurers remain in business. The insurance
policies guarantee the timely payment of principal and interest on the Bonds but
do not guarantee the market value of the Bonds or the value of the Units. No
representation is made herein as to any Bond insurer's ability to meet its
obligations under a policy of insurance relating to any of the Bonds. An
insurance company that is required to pay interest and/or principal in respect
of any Bond will succeed and be subrogated to the Trustee's right to collect
such interest and/or principal from the issuer and to other related rights of
the Trustee with respect to any such Bond.
Such insurance covers the scheduled payment of principal
thereof and interest thereon when such amounts shall become due for payment but
shall not have been paid by the issuer or any other insurer thereof. The
insurance, unless obtained by MBIA Insurance Corporation ("MBIA Corp."), will
also cover any accelerated payments of principal and any increase in interest
payments or premiums, if any, payable upon mandatory redemption of the Bonds if
interest on any Bonds is ultimately deemed to be subject to regular federal
income tax. Insurance obtained from MBIA Corp. only guarantees the full and
complete payments required to be made by or on behalf of an issuer of small
industrial revenue bonds and pollution control revenue bonds if there occurs an
event which results in the loss of tax-exempt status of the interest on such
Bonds, including principal, interest or premiums payments, if any, as and when
required. To the extent, therefore, that Bonds are only covered by insurance
obtained from MBIA Corp., such Bonds will not be covered for the full and
complete payments required to be made by or on behalf of an issuer of other than
small industrial revenue bonds or pollution control revenue bonds if there
occurs an event which results in the loss of tax-exempt status of the interest
on such Bonds. None of the insurance will cover accelerated payments of
principal or penalty interest or premiums unrelated to taxability of interest on
the Bonds. The insurance relates only to the prompt payment of principal of and
interest on the securities in the portfolios, and does not remove market risks
nor does it guarantee the market value of Units in the Trusts. The terms of the
insurance are more fully described herein. No representation is made herein as
to any Bond insurer's ability to meet its
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obligations under a policy of insurance relating to any of the Pre-Insured
Bonds. In addition, investors should be aware that subsequent to the Date of
Deposit the rating of the claims-paying ability of the insurer of an underlying
Pre-Insured Bond may be down-graded.
Navigator Insured Trusts
Sponsor-Insured Bonds. Each of the Bonds in the Navigator
Trusts is insured by a financial guaranty insurance policy obtained by the
Sponsor (the "Navigator Sponsor-Insured Bonds") from MBIA Corp. covering
regularly scheduled payments of principal thereof and interest thereon when such
amounts become due for payment but have not been paid. Such amounts shall be
reduced by any amounts received by the holders or the owners of the Bonds from
any trustee for the Bond issuers, any other Bond insurers or any other source
other than MBIA Corp. MBIA Corp. has issued such policy or policies covering
each of the Bonds in the Navigator Trusts and each such policy will remain in
force until the payment in full of such Bonds, whether or not such Bonds
continue to be held in the Navigator Trusts. The insurer's policies relating to
small industrial development bonds and pollution control revenue bonds also
guarantee any accelerated payments required to be made by or on behalf of an
issuer of Bonds pursuant to the terms of the Bonds if there occurs an event
which results in the loss of the tax-exempt status of the interest on such
Bonds, including principal, interest or premium payments, if any, as and when
required. Such insurance does not cover for any accelerated payments required to
be made by or on behalf of an issuer of other than small industrial revenue
bonds or pollution control revenue bonds if there occurs an event which results
in the loss of the tax exempt status of the interest on such Bonds nor will the
insurance cover accelerated payments of principal or penalty interest or
premiums unrelated to taxability of interest on any of the Bonds, including
pollution control revenue bonds or small industrial development bonds. In the
event of such an acceleration, the payments guaranteed by MBIA Corp. shall be
made in such amounts and at such times as such payments would have been made
absent any such acceleration. The insurance relates only to the prompt payment
of principal of and interest on the securities in the Navigator Portfolios and
does not remove market risk nor does it guarantee the market value of Units in
the Navigator Trusts. The terms of the insurance are more fully described
herein. For discussion of the effect of an occurrence of non-payment of
principal or interest on any Bonds in the Navigator Trusts see "Portfolio
Supervision" in Part B. No representation is made herein as to any bond
insurer's ability to meet its obligations under a policy of insurance relating
to any of the Bonds in the Navigator Trusts. In addition, investors should be
aware that subsequent to the Date of Deposit the rating of the claims-paying
ability of MBIA Corp. may be downgraded, which may result in a downgrading of
the rating of the Units in the Navigator Trusts. The premiums for the Navigator
Sponsor-Insured Bonds are obligations of the Sponsor. Additionally, some of the
Bonds in the Navigator Trusts may be Pre-Insured Bonds (as described below). The
premium for the Pre-Insured Bonds is an obligation of the issuers, underwriters
or prior owners of those Bonds. The insurance policy or policies relating to the
Navigator Sponsor-Insured Bonds provides that, to the extent that Bonds are both
Pre-Insured Bonds and Navigator Sponsor-Insured Bonds, coverage is effective
after a claim has been made upon the insurer of the Pre-Insured Bonds.
Upon notification from the trustee for any bond issuer or any
holder or owner of the Bonds that such trustee or paying agent has insufficient
funds to pay any principal or interest in full when due, MBIA Corp. will be
obligated to deposit funds promptly with Citibank, N.A., New York, New York, as
fiscal agent for MBIA Corp., sufficient to fully cover the
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deficit. If notice of nonpayment is received on or after the due date, MBIA
Corp. will provide for payment within one business day following receipt of
the notice. Upon payment by MBIA Corp. of any Bonds, coupons, or interest
payments, MBIA Corp. shall succeed to the rights of the owner of such Bonds,
coupons or interest payments with respect thereto.
Pre-Insured Bonds. Some of the Bonds in the Trusts which are
insured under policies obtained by the Bond issuers, underwriters or prior
owners of the Bonds ("Pre-Insured Bonds") are insured either by AMBAC Assurance
Corporation ("AMBAC"), Bond Investors Guaranty ("BIG"), Capital Guaranty
Insurance Company ("Capital Guaranty"), Connie Lee Insurance Company ("Connie
Lee"), Financial Guaranty Insurance Company ("Financial Guaranty"), Financial
Security Assurance, Inc. ("Financial Security"), Industrial Indemnity Company
("IIC") (which operates the Health Industry Board Insurance Program ("HIBI
Program") or Municipal Bond Insurance Association ("MBIA"), MBIA
Corp.(collectively the "Insurance Companies"). The cost of this insurance is
borne by the respective issuers, underwriters or prior owners of the Pre-Insured
Bonds. The percentage of each Portfolio insured by each insurance company, if
any, is set forth under "Insurance" in Part A of this Prospectus.
AMBAC is a Wisconsin-domiciled stock insurance corporation,
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Territory of Guam and the Commonwealth of Puerto Rico, with admitted assets
of approximately $2,813,000,000 (unaudited), and statutory capital of
approximately $1,605,000,000 as of September 30, 1997. Statutory capital
consists of AMBAC's policyholders' surplus and statutory contingency reserve.
Standard & Poor's, Moody's and Fitch Investors Service, L.P. ("Fitch") have each
assigned a triple-A claims paying ability rating to AMBAC.
AMBAC has obtained a ruling from the Internal Revenue Service
to the effect that the insuring of an obligation by AMBAC will not affect the
treatment for federal income tax purposes of interest on such obligation and
that insurance proceeds representing maturing interest paid by AMBAC under
policy provisions substantially identical to those contained in its municipal
bond insurance policy shall be treated for federal income tax purposes in the
same manner as if such payments were made by issuer of the Bonds.
Connie Lee Insurance Company ("Connie Lee"), a Wisconsin stock
insurance corporation, is wholly-owned subsidiary of Connie Lee Holdings, Inc.
(formerly Construction Loan Insurance Corporation, and herein, "Holdings"). On
December 18, 1997, AMBAC acquired all of the outstanding capital stock of
Holdings. Holdings and Connie Lee are now wholly-owned subsidiaries of AMBAC.
Connie Lee, which guaranteed bonds issued primarily for college and hospital
infrastructure projects, is not expected to write any new business. AMBAC and
Connie Lee have arrangements in place to assure that Connie Lee maintains a
level of capital sufficient to support Connie Lee's outstanding obligations and
for Connie Lee insured bonds to retain their triple-A rating.
As of December 31, 1997, the qualified statutory capital of
Connie Lee was $112,742,860 (unaudited) and total admitted assets were
$46,792,234 (unaudited), as reported to the Commissioner of Insurance of the
State of Wisconsin.
As of the Evaluation Date, the claims-paying ability of Connie
Lee has been rated "AAA" by Standard & Poor's.
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Financial Guaranty is a wholly-owned subsidiary of FGIC
Corporation ("FGIC"), a Delaware holding company. FGIC is a wholly-owned
subsidiary of General Electric Capital Corporation ("GECC"). Neither FGIC nor
GECC is obligated to pay the debts of or the claims against Financial Guaranty.
Financial Guaranty is a monoline financial guaranty insurer domiciled in the
State of New York and is subject to regulation by the State of New York
Insurance Department. As of December 31, 1997, the total capital and surplus of
Financial Guaranty was approximately $1,255,590.411. In addition, Financial
Guaranty is currently licensed to write insurance in 50 states and the District
of Columbia.
As of the Evaluation Date, the claims-paying ability of
Financial Guaranty has been rated "AAA" by Standard & Poor's.
Financial Security is a monoline insurance company
incorporated in 1984 under the laws of the State of New York and is licensed to
engage in the financial guaranty insurance business in all 50 states, the
District of Columbia and Puerto Rico.
Financial Security is a wholly owned subsidiary of Financial
Security Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed
company. Major shareholders of Holdings include Fund American Enterprises
Holdings, Inc., US WEST Capital Corporation and The Tokio Marine and Fire
Insurance Co., Ltd. No shareholder of Holdings is obligated to pay any debt of
Financial Security or any claim under any insurance policy issued by Financial
Security or to make any additional contribution to the capital of Financial
Security.
Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written or reinsured from third parties by
Financial Security or any of its domestic operating insurance company
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 other 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. As of
December 31, 1997, total shareholders equity of Financial Security and its
wholly-owned subsidiaries was (audited) $897,860,000 and total unearned premium
reserves was (audited) $422,073,000.
As of the Evaluation Date, Financial Security's claims-paying
ability has been rated "AAA" by Standard & Poor's, Fitch Investors Service,
L.P., Nippon Investors Service Inc. and Standard & Poor's (Australia) Pty.
Ltd. and "Aaa" by Moody's Investors Service.
MBIA is an association of five insurance companies which
joined together to insure severally (and not jointly) new issues of municipal
bonds. Each insurance company comprising Municipal Bond Insurance Association
("MBIA", also known as the "Association") will be severally and not jointly
obligated under the MBIA policy in the following respective percentages: The
Aetna Casualty and Surety Company, 33%; Fireman's Fund Insurance Company, 30%;
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The Travelers Indemnity Company, 15%; Aetna Insurance Company*, 12%; and The
Continental Insurance Company, 10%. As a several obligor, each such insurance
company will be obligated only to the extent of its percentage of any claim
under the MBIA policy and will not be obligated to pay any unpaid obligation of
any other member of MBIA. Each insurance company's participation is backed by
all of its assets. However, each insurance company is a multiline insurer
involved in several lines of insurance other than municipal bond insurance, and
the assets of each insurance company also secure all of its other insurance
policy and surety bond obligations.
Some of the members of the Association are among the
shareholders of MBIA, Inc. MBIA, Inc. is the parent of MBIA Insurance
Corporation (formerly known as Municipal Bond Investors Assurance Corporation)
("MBIA Corp.") and is the principal operating subsidiary of MBIA Inc., a New
York Stock Exchange listed company. MBIA Corp. commenced municipal bond
insurance operations on January 5, 1987. MBIA Corp. is a separate and distinct
entity from the Association. MBIA Corp. has no liability to the bondholders for
the obligations of the Association.
The following table sets forth certain financial information
with respect to the five insurance companies comprising MBIA. The statistics,
which have been furnished by MBIA, are as reported by the insurance companies to
the New York State Insurance Department and are determined in accordance with
statutory accounting principals. No representation is made herein as to the
accuracy or adequacy of such information or as to the absence of material
adverse changes in such information subsequent to the date thereof. In addition,
these numbers are subject to revision by the New York State Insurance Department
which, if revised, could either increase or decrease the amounts.
MUNICIPAL BOND INSURANCE ASSOCIATION ("MBIA")
FIVE MEMBER COMPANIES ASSETS, LIABILITIES
AND POLICYHOLDERS' SURPLUS
AS OF DECEMBER 31, 1996 (UNAUDITED)
(000's omitted)
<TABLE>
<CAPTION>
New York New York New York
Statutory Statutory Policyholder's
Assets Liabilities Surplus
------ ----------- -------
<S> <C> <C> <C>
The Aetna Casualty & Surety Company $11,550,399 $ 9,143,186 $2,407,213
Fireman's Fund Insurance Company 9,441,679 7,241,612 2,200,067
The Travelers Indemnity Company 10,737,808 8,538,425 2,199,383
Cigna Property and Casualty Company 2,533,882 1,809,370 724,512
(Formerly Aetna Insurance Company)
The Continental Insurance Company 2,663,233 1,994,375 668,858
----------- ----------- ----------
TOTAL $36,927,001 $28,726,968 $8,200,033
</TABLE>
MBIA Corp. is domiciled in the State of New York and licensed
to do business in and subject to regulation under the laws of all 50 states, the
District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the
Northern Mariana Islands, the Virgin Islands of the United States and the
- --------
* Now known as Cigna Property and Casualty Company.
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Territory of Guam. MBIA Corp. has two European branches, one in the Republic
of France and the other in the Kingdom of Spain.
As of December 31, 1996, MBIA Corp. had admitted assets of $4.4
billion (audited), total liabilities of $3.0 billion (audited), and total
capital and surplus of $1.4 billion (audited) prepared in accordance with
statutory accounting practices prescribed or permitted by insurance regulatory
authorities. As of September 30, 1997, MBIA Corp. had admitted assets of $5.1
billion (unaudited), total liabilities of $3.4 billion (unaudited), and total
capital and surplus of $1.7 billion (unaudited).
As of the Evaluation Date, the claims-paying ability of MBIA
Corp. has been rated "AAA" by Standard & Poor's and Fitch, and Aaa by Moody's.
Insured Municipal Securities Trust
Sponsor-Insured Bonds. For those Bonds which are not covered by
an insurance policy obtained by the issuers of such Bonds, the Sponsor has
obtained bond insurance from either BIG, Financial Guaranty, MBIA or MBIA Corp.
in an effort to protect Certificateholders against nonpayment of principal and
interest in respect of such Bonds (the "Sponsor-Insured Bonds"). The bond
insurance on the Sponsor-Insured Bonds covers the Sponsor-Insured Bonds
deposited in a Trust at the time that they are physically delivered to the
Trustee (in the case of bearer bonds) or registered in the name of the Trustee
or its nominee or delivered along with an assignment (in the case of registered
bonds) or registered in the name of the Trustee or its nominee (in the case of
bonds held in book-entry form). Accordingly, although contracts to purchase
Sponsor-Insured Bonds are not covered by the bond insurance obtained by the
Sponsor, such Bonds will be insured when they are deposited in the Trust. When
selecting Bonds for a Trust prior to obtaining insurance thereon, the Sponsor
considers the factors listed under "Portfolio", among others. The insurers of
the Sponsor-Insured Bonds apply their own standards in determining whether to
insure the Sponsor-Insured Bonds. To the extent that the standards of such
insurers are more restrictive than those of the Sponsor, the Sponsor's
investment criteria have been limited to the more restrictive standards.
Pre-Insured Bonds. The Bonds which are insured under policies
obtained by the Bond issuers are insured by AMBAC, BIG, Financial Guaranty,
MBIA, or MBIA Corp. (collectively, the "Insurance Companies") on the date the
Bonds were originally deposited in the Trust. The cost of this insurance is
borne by the respective issuers of the Pre-Insured Bonds. The percentage of the
Portfolio insured by each Insurance Company, if any, is set forth under
"Insurance" in Part A.
Ratings. As of the Date of Deposit for each of the respective
Trusts, Standard & Poor's had rated the claims-paying ability of each of the
above insurance companies "AAA" and had rated each of the Bonds in the Portfolio
"AAA" because the insurance companies had insured the Bonds. The assignment of
such "AAA" ratings was due to Standard & Poor's assessment of the
creditworthiness of the insurance companies and their ability to pay claims on
their policies of insurance. Subsequently, the rating of the claims-paying
ability of the insurer of an underlying Bond may cease to be rated or may be
downgraded which may result in a downgrading of the rating of the Units in the
Trust. For a discussion of the rating of the claims-paying ability of each of
the Bond insurers see "Insurance On The Bonds". For a list of Bond Ratings as of
the Evaluation Date see the "Portfolio" in Part A of this Prospectus. For a
discussion of the rating assigned to the Units of the
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Trusts, see "the Trust" in Part A of this Prospectus. The percentage of each
Trust portfolio insured by each Insurance Company, if any, is set forth under
"Insurance" in Part A.
The foregoing information relating to the above insurance
companies is from published documents and other public sources and/or
information provided by such insurance companies. 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,
but the Sponsor is not aware that the information herein is inaccurate or
incomplete.
RISK CONSIDERATIONS
Special Factors Affecting the Navigator Trusts. The Sponsor
believes the information summarized below describes some of the more significant
events relating to the Navigator Trusts. Sources of such information are the
official statements of issuers located in the states of the Navigator Trusts
which have been issued in connection with the debt offerings of such states, as
well as other publicly available documents and information. While the Sponsor
has not independently verified such information, they have no reason to believe
it is not correct in all material respects.
New York Navigator Trust
Special Factors Affecting New York. The information set forth
below is derived from the official statements and/or preliminary drafts of
official statements prepared in connection with the issuance of New York State
and New York City municipal bonds. The Sponsors have not independently verified
this information.
Economic Trends. Over the long term, the State of New York (the
"State") and the City of New York (the "City") face serious potential economic
problems. The City accounts for approximately 41% of the State's population and
personal income, and the City's financial health affects the State in numerous
ways. The State historically has been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation as
a whole, gradually eroding its relative economic affluence. Statewide, urban
centers have experienced significant changes involving migration of the more
affluent to the suburbs and an influx of generally less affluent residents.
Regionally, the older Northeast cities have suffered because of the relative
success that the South and the West have had in attracting people and business.
The City has also had to face greater competition as other major cities have
developed financial and business capabilities which make them less dependent on
the specialized services traditionally available almost exclusively in the City.
The State has for many years had a very high State and local
tax burden relative to other states. The State and its localities have used
these taxes to develop and maintain their transportation networks, public
schools and colleges, public health systems, other social services and
recreational facilities. Despite these benefits, the burden of State and local
taxation, in combination with the many other causes of regional economic
dislocation, has contributed to the decisions of some businesses and individuals
to relocate outside, or not locate within, the State.
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Notwithstanding the numerous initiatives that the State and its
localities may take to encourage economic growth and achieve balanced budgets,
reductions in Federal spending could materially and adversely affect the
financial condition and budget projections of the State and its localities.
New York City. The City, with a population of approximately 7.3
million, is an international center of business and culture. Its non-
manufacturing economy is broadly based, with the banking and securities, life
insurance, communications, publishing, fashion design, retailing and
construction industries accounting for a significant portion of the City's total
employment earnings. Additionally, the City is the nation's leading tourist
destination. The City's manufacturing activity is conducted primarily in apparel
and printing.
The national economic downturn which began in July 1990
adversely affected the local economy, which had been declining since late 1989.
As a result, the City experienced job losses in 1990 and 1991 and real Gross
City Product ("GCP") fell in those two years. Beginning in calendar year 1992,
the improvement in the national economy helped stabilize conditions in the City.
Employment losses moderated toward year-end and real GCP increased, boosted by
strong wage gains. After noticeable improvements in the City's economy during
calendar year 1994, economic growth slowed in calendar year 1995, and thereafter
improved during calendar year 1996, reflecting improved securities industry
earnings and employment in other sectors. The City's current four-year financial
plan assumes that moderate economic growth will continue through calendar year
2001, with moderating job growth and wage increases.
For each of the 1981 through 1996 fiscal years, the City
achieved balanced operating results as reported in accordance with generally
accepted accounting principles ("GAAP"). The City has been required to close
substantial budget gaps between forecast revenues and forecast expenditures in
order to maintain balanced operating results. There can be no assurance that the
City will continue to maintain a balanced budget as required by State law
without additional tax or other revenue increases or additional reductions in
City services or entitlement programs, which could adversely affect the City's
economic base.
Pursuant to the New York State Financial Emergency Act for the
City of New York, the City prepares an annual four-year financial plan, which is
reviewed and revised on a quarterly basis and which includes the City's capital,
revenue and expense projections and outlines proposed gap-closing programs for
years with projected budget gaps. The City's current four-year financial plan
projects a surplus in the 1998 fiscal year (before discretionary transfers) and
substantial budget gaps for each of the 1999, 2000 and 2001 fiscal years. This
pattern of current year surplus and projected subsequent year budget gaps has
been consistent through virtually the entire period since 1982, during which the
City has achieved balanced operating results for each fiscal year. The City is
required to submit its financial plans to review bodies, including the New York
State Financial Control Board ("Control Board").
The City depends on State aid both to enable the City to
balance its budget and to meet its cash requirements. There can be no assurance
that there will not be reductions in State aid to the City from amounts
currently projected or that State budgets in future fiscal years will be adopted
by the April 1 statutory deadline and that such reductions or delays will not
have adverse effects on the City's cash flow or expenditures. In addition, the
Federal Budget negotiation process could result in a reduction in or a delay
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in the receipt of Federal grants which could have additional adverse effects on
the City's cash flow or revenues.
The Mayor is responsible for preparing the City's four-year
financial plan, including the City's current financial plan for the 1998 through
2001 fiscal years (the "1998-2001 Financial Plan" or "Financial Plan"). The
City's projections set forth in the Financial Plan are based on various
assumptions and contingencies which are uncertain and which may not materialize.
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 condition
of the regional and local economies, the impact on real estate tax revenues of
the real estate market, wage increases for City employees consistent with those
assumed in the Financial Plan, employment growth, the ability to implement
proposed reductions in City personnel and other cost reduction initiatives, the
ability of the New York City Health and Hospitals Corporation ("HHC") and the
Board of Education ("BOE") to take actions to offset potential budget
shortfalls, the ability to complete revenue generating transactions, provision
of State and Federal aid and mandate relief and the impact on City revenues and
expenditures of Federal and State welfare reform and any future legislation
affecting Medicare or other entitlements.
Implementation of the Financial Plan is also dependent upon the
City's ability to market its securities successfully. The City's financing
program for fiscal years 1998 through 2001 contemplates the issuance of $4.9
billion of general obligation bonds and $7.1 billion of bonds to be issued by
the proposed New York City Infrastructure Finance Authority ("Finance
Authority") to finance City capital projects. The Finance Authority was created
as part of the City's effort to assist in keeping the City's indebtedness within
the forecast level of the constitutional restrictions on the amount of debt the
City is authorized to incur. In addition, the City issues revenue and tax
anticipation notes to finance its seasonal working capital requirements. The
success of projected public sales of City bonds and notes, New York Municipal
Water Finance Authority ("Water Authority") bonds and Finance Authority bonds
will be subject to prevailing market conditions. The City's planned capital and
operating expenditures are dependent upon the sale of its general obligation
bonds and notes, and the Water Authority and Finance Authority bonds. Future
developments concerning the City and public discussion of such developments, as
well as prevailing market conditions, may affect the market for outstanding City
general obligation bonds and notes.
The City's operating results for the 1996 fiscal year were
balanced in accordance with GAAP, after taking into account a discretionary
transfer of $224 million, the sixteenth consecutive year of GAAP balanced
results.
On June 10, 1997, the City submitted to the Control Board the
Financial Plan for the 1998 through 2001 fiscal years, which relates to the
City, BOE and the City University of New York ("CUNY") and reflects the City's
expense and capital budgets for the 1998 fiscal year, which were adopted on June
6, 1997. The Financial Plan projects revenues and expenditures for the 1998
fiscal year balanced in accordance with GAAP. The Financial Plan includes
increased tax revenue projections; reduced debt service costs; the assumed
restoration of Federal funding for programs assisting certain legal aliens;
additional expenditures for textbooks, computers, improved education programs
and welfare reform, law enforcement, immigrant naturalization, initiatives
proposed by the City Council and other initiatives; and a proposed
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discretionary transfer to the 1998 fiscal year of $300 million of debt service
due in the 1999 fiscal year for budget stabilization purposes. In addition, the
Financial Plan reflects the discretionary transfer to the 1997 fiscal year of
$1.3 billion of debt service due in the 1998 and 1999 fiscal years, and includes
actions to eliminate a previously projected budget gap for the 1998 fiscal year.
These gap closing actions include (i) additional agency actions totaling $621
million; (ii) the proposed sale of various assets; (iii) additional State aid of
$294 million, including a proposal that the State accelerate a $142 million
revenue sharing payment to the City from March 1999; and (iv) entitlement
savings of $128 million which would result from certain of the reductions in
Medicaid spending proposed in the Governor's 1997-1998 Executive Budget and the
State making available to the City $77 million of additional Federal block grant
aid, as proposed in the Governor's 1997-1998 Executive Budget. The Financial
Plan also sets forth projections for the 1999 through 2001 fiscal years and
projects gaps of $1.8 billion, $2.8 billion and $2.6 billion for the 1999
through 2001 fiscal years, respectively.
The Financial Plan assumes approval by the State Legislature
and the Governor of (i) a tax reduction program proposed by the City totaling
$272 million, $435 million, $465 million and $481 million in the 1998 through
2001 fiscal years, respectively, which includes a proposed elimination of the 4%
City sales tax on clothing items under $500 as of December 1, 1997, and (ii) a
proposed State tax relief program, which would reduce the City property tax and
personal income tax, and which the Financial Plan assumes will be offset by
proposed increased State aid totaling $47 million, $254 million, $472 million
and $722 million in the 1998 through 2001 fiscal years, respectively.
The Financial Plan also assumes (i) approval by the Governor
and the State Legislature of the extension of the 14% personal income tax
surcharge, which is scheduled to expire on December 31, 1999 and the extension
of which is projected to provide revenue of $166 million and $494 million in the
2000 and 2001 fiscal years, respectively, and of the extension of the 12.5%
personal income tax surcharge, which is scheduled to expire on December 31, 1998
and the extension of which is projected to provide revenue of $188 million, $527
million and $554 million in the 1999 through 2001 fiscal year, respectively;
(ii) collection of the projected rent payments for the City's airports, totaling
$385 million, $175 million, and $170 million in the 1999, 2000 and 2001 fiscal
years, respectively, which may depend on the successful completion of
negotiations with the Port Authority or the enforcement of the City's rights
under the existing leases through pending legal actions; and (iii) State
approval of the cost containment initiatives and State aid proposed by the City
for the 1998 fiscal year, and $115 million in State aid which is assumed in the
Financial Plan but was not provided for in the Governor's 1997-1998 Executive
Budget. The Financial Plan reflects the increased costs which the City is
prepared to incur as a result of welfare legislation recently enacted by
Congress. The Financial Plan provides no additional wage increases for City
employees after their contracts expire in fiscal years 2000 and 2001. In
addition, the economic and financial condition of the City may be affected by
various financial, social, economic and political factors which could have a
material effect on the City.
The City annually prepares a modification to its financial plan
in October or November which amends the financial plan to accommodate any
revisions to forecast revenues and expenditures and to specify any additional
gap-closing initiatives to the extent required to offset decreases in projected
revenues or increases in projected expenditures. The Major is expected to
publish the first quarter modification (the "Modification") for the 1998 fiscal
year in November. Since the preparation of the Financial
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Plan, the State has adopted its budget for the 1997-1998 fiscal year. The State
budget enacted a smaller sales tax reduction than the tax reduction program
assumed by the City in the Financial Plan, which will increase projected City
sales tax revenues; provided for State aid to the City which was less than
assumed in the Financial Plan; and enacted a State funded tax relief program
which begins a year later than reflected in the Financial Plan. In addition, the
net effect of tax law changes made in the Federal Balanced Budget Act of 1997
are expected to increase tax revenues in the 1998 fiscal year. These changes
will be reflected in the Modification.
The projections for the 1998 through 2001 fiscal years reflect
the costs of the settlements with the United Federation of Teachers ("UFT") and
a coalition of unions headed by District Council 37 of the American Federation
of State, County and Municipal Employees ("District Council 37"), which together
represent approximately two-thirds of the City's workforce, and assume that the
City will reach agreement with its remaining municipal unions under terms which
are generally consistent with such settlements. The settlement provides for a
wage freeze in the first two years, followed by a cumulative effective wage
increase of 11% by the end of the five year period covered by the proposed
agreements, ending in fiscal years 2000 and 2001. Additional benefit increases
would raise the total cumulative effective increase to 13% above present costs.
Costs associated with similar settlements for all City-funded employees would
total $49 million, $459 million and $1.2 billion in the 1997, 1998 and 1999
fiscal years, respectively, and exceed $2 billion in each fiscal year after the
1999 fiscal year. Subsequently, the City reached settlements, through agreements
or statutory impasse procedures, with bargaining units which, together with the
UFT and District Council 37, represent approximately 86% of the City's
workforce.
In 1975, Standard & Poor's suspended its A rating of City
bonds. This suspension remained in effect until March 1981, at which time the
City received an investment grade rating of BBB from Standard & Poor's. On July
2, 1985, Standard & Poor's revised its rating of City bonds upward to BBB+ and
on November 19, 1987, to A-. On July 10, 1995, Standard & Poor's revised its
rating of City bonds downward to BBB+.
Moody's ratings of City bonds were revised in November 1981
from B (in effect since 1977) to Ba1, in November 1983 to Baa, in December 1985
to Baa1, in May 1988 to A and again in February 1991 to Baa1. On July 17, 1997,
Moody's changed its outlook on City bonds to positive from stable. Since July
15, 1993, Fitch has rated City bonds A-. Since July 8, 1997, IBCA Limited has
rated City bonds A.
New York State and its Authorities. The State's budget for the
State's 1997-1998 fiscal year, commencing on April 1, 1997, was adopted by the
Legislature on August 4, 1997. Prior to adoption of the budget, the Legislature
enacted appropriations for disbursements for its 1997-1998 fiscal year
considered to be necessary for State operations and other purposes. The State
Financial Plan for the 1997-1998 fiscal year was formulated on August 11, 1997
and is based on the State's budget as enacted by the Legislature, as well as
actual results for the first quarter of the current fiscal year. The 1997-1998
State Financial Plan is expected to be updated in October and January. The
1997-1998 State Financial Plan is projected to be balanced on a cash basis.
Total General Fund receipts and transfers from other funds are projected to be
$35.09 billion, while total General Fund disbursements and transfers to other
funds are projected to be $34.60 billion. The adopted 1997-1998 budget projects
a year-over-year increase in General
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Fund disbursements of 5.2 percent. As compared to the Governor's proposed budget
amended in February 1997, the State's adopted budget for 1997-1998 increases
General Fund spending by $1.7 billion, primarily due to increases for local
assistance ($1.3 billion). Resources used to fund these additional expenditures
include increased revenues projected for the 1997-1998 fiscal year, increased
resources produced in the 1996-1997 fiscal year that will be utilized in
1997-1998, reestimates of social service, fringe benefit and other spending, and
certain non-recurring resources.
The 1997-1998 adopted budget includes multi-year tax
reductions, including a State funded property and local income tax reduction
program, estate tax relief, utility gross receipts tax reductions, permanent
reductions in the State sales tax on clothing, and elimination of assessments on
medical providers. The various elements of the State and local tax and
assessment reductions have little or no impact on the 1997-1998 Financial Plan,
and do not begin to materially affect the out-year projections until the State's
1999-2000 fiscal year.
The economic and financial condition of the State may be
affected by various financial, social, economic and political factors. Those
factors can be very complex, may vary from fiscal year to fiscal year, and are
frequently the result of actions taken not only by the State and its agencies
and instrumentalities, but also by entities, such as the Federal government,
that are not under the control of the State. In addition, the State Financial
Plan is based upon forecasts of national and State economic activity. Economic
forecasts have frequently failed to predict accurately the timing and magnitude
of changes in the national and the State economies. Actual results could differ
materially and adversely from projections and those projections may be changed
materially and adversely from time to time.
The State closed projected budget gaps of $5.0 billion, $3.9
billion and $2.3 billion for its 1995-1996, 1996-1997 and 1997-1998 fiscal
years, respectively. The 1998-1999 budget gap was projected at $1.68 billion
(before the application of any assumed efficiencies) in the out-year projections
submitted to the Legislature in February 1997. As a result of changes made in
the adopted budget, the 1998-1999 gap is now expected by the State to be about
the same or smaller than the amount previously projected, after application of
the $530 million reserve for future needs. The Governor has indicated that he
will propose to close any potential imbalance primarily through General Fund
expenditure reductions and without increases in taxes or deferrals of scheduled
tax reductions. The revised expectations for the 1998- 1999 fiscal year reflect
the loss of $1.4 billion in surplus resources from 1996-1997 operations that are
being utilized to finance current year spending, an incremental effect of
approximately $300 million in legislated State and local tax reductions in the
out-year and other factors.
In recent years, State actions affecting the level of receipts
and disbursements, the relative strength of the State and regional economy,
actions of the Federal government and other factors have created structural
budget gaps for the State. These gaps resulted from a significant disparity
between recurrent revenues and the costs of maintaining or increasing the level
of support for State programs. To address a potential imbalance in any given
fiscal year, the State would be required to take actions to increase receipts
and/or reduce disbursements as it enacts the budget for that year, and under the
State Constitution, the Governor is required to propose a balanced budget each
year. There can be no assurance, however, that the Legislature will enact the
Governor's proposals or that the State's actions
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will be sufficient to preserve budgetary balance in a given fiscal year or to
align recurring receipts and disbursements in future fiscal years.
Other actions taken in the 1997-1998 adopted budget add further
pressure to future State budget balance. For example, the fiscal effects of tax
reductions adopted in the 1997-1998 budget are projected to grow more
substantially beyond the 1998-1999 fiscal year. The full annual cost of the
enacted tax reduction package is estimated by the State at approximately $4.8
billion when fully effective in State fiscal year 2001-2002. In addition, the
1997-1998 budget included multi-year commitments for school aid and pre-
kindergarten early learning programs which could add as much as $1.4 billion in
costs when fully annualized in fiscal year 2001-2002. These spending commitments
are subject to annual appropriation.
On September 11, 1997, the New York State Comptroller issued a
report which noted that the ability to deal with future budget gaps could become
a significant issue in the State's 2000-2001 fiscal year, when the cost of tax
cuts increases by $1.9 billion. The report contained projections that, based on
current economic conditions and current law for taxes and spending, showed a gap
in the 2000-2001 State fiscal year of $5.6 billion and of $7.4 billion in the
2001-2002 State fiscal year. The report noted that these gaps would be smaller
if recurring spending reductions produce savings in earlier years. The State
Comptroller has also stated that if Wall Street earnings moderate and the State
experiences a moderate recession, the gap for the 2001- 2002 State fiscal year
could grow to nearly $12 billion.
In recent years, the State has failed to adopt a budget prior
to the beginning of this fiscal year. A prolonged delay in the adoption of the
State's budget beyond the statutory April 1 deadline without interim
appropriations could delay the projected receipt by the City of State aid, and
there can be no assurance that State budgets in future fiscal years will be
adopted by the April 1 statutory deadline.
On August 28, 1997, Standard & Poor's revised its ratings on
the State's general obligation bonds from A- to A and, in addition, revised its
ratings on the State's moral obligation, lease purchase, guaranteed and
contractual obligation debt. On January 6, 1992, Moody's reduced its ratings on
outstanding limited-liability State lease purchase and contractual obligations
from A to Baa1. On February 10, 1997, Moody's confirmed its A2 rating on the
State's general obligation long-term indebtedness.
Litigation. The court actions in which the State is a defendant
generally involve State programs and miscellaneous tort, real property, and
contract claims. While the ultimate outcome and fiscal impact, if any, on the
State of those proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
State's ability to maintain a balanced 1997-98 State Financial Plan.
The claims involving the City other than routine litigation
incidental to the performance of their governmental and other functions and
certain other litigation arise out of alleged constitutional violations, torts,
breaches of contract and other violations of law and condemnation proceedings.
While the ultimate outcome and fiscal impact, if any, on the City of those
proceedings and claims are not currently predictable, adverse determinations in
certain of them might have a material adverse effect upon the City's ability to
carry out the 1998-2001 Financial Plan. The City has estimated that its
potential future liability on account of outstanding claims against it as of
June 30, 1996 amounted to approximately $2.8 billion.
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New Jersey Navigator Trust
New Jersey Risk Factors
State Finance. New Jersey is the ninth largest state in
population and the fifth smallest in land area. With an average of 1,071 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 1995 the State ranked second among
the states in per capital personal income ($29,248).
The Trust is susceptible to political, economic or regulatory
factors affecting issuers of the New Jersey securities. The following
information provides only a brief summary of some of the complex factors
affecting the financial situation in New Jersey (the "State") and is derived
from sources that are generally available to investors and is believed to be
accurate. It is based in part on information obtained from various State and
local agencies in New Jersey. No independent verification has been made of any
of the following information.
The New Jersey Economic Policy Council, a statutory arm of the
New Jersey Department of Commerce and Economic Development, has reported in New
Jersey Economic Indicators, a monthly publication of the New Jersey Department
of Labor, Division of Labor Market and Demographic Research, that in 1988 and
1989 employment in New Jersey's manufacturing sector failed to benefit from the
export boom experienced by many Midwest states and the State's service sectors,
which had fueled the State's prosperity since 1982, lost momentum. In the
meantime, the prolonged fast growth in the State in the mid 1980s resulted in a
tight labor market situation, which has led to relatively high wages and housing
prices. This means that, while the incomes of New Jersey residents are
relatively high, the State's business sector has become more vulnerable to
competitive pressures.
The onset of the national recession (which officially began in
July 1990 according to the National Bureau of Economic Research) caused an
acceleration of New Jersey's job losses in construction and manufacturing. In
addition, the national recession caused an employment downturn in such
previously growing sectors as wholesale trade, retail trade, finance, utilities
and trucking and warehousing. Reflecting the downturn, the rate of unemployment
in the State rose from a low of 3.6% during the first quarter of 1989 to an
estimated 5.3% in May 1997, which is above the national average of 4.8% in May
1997. 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 as a result of continued excess capacity. In addition, employers
even in rebounding sectors can be expected to remain cautious about hiring until
they become convinced that improved business will be sustained. Also, certain
firms will continue to merge or downsize to increase profitability.
Debt Service. The primary method for State financing of capital
projects is through the sale of the general obligation bonds of the State. These
bonds are backed by the full faith and credit of the State tax revenues and
certain other fees are pledged to meet the principal and interest payments and,
if provided, redemption premium payments, if any, required to repay the
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bonds. As of June 30, 1996, there was a total authorized bond indebtedness of
approximately $10.31 billion, of which $3.69 billion was issued and outstanding,
$4.76 billion was retired (including bonds for which provisions for payment have
been made through the sale and issuance of refunding bonds) and $1.86 billion
was unissued. The debt service obligation of such outstanding indebtedness is
$446.9 million for Fiscal Year 1997.
On June 25, 1997, the New Jersey Economic Development Authority
(EDA) issued State Pension Funding Bonds (PFB) in the amount of $2.803 billion
to finance a portion of the unfunded accrued liability of the State administered
retirement systems. Under the authorizing legislation the bonds are limited
obligations of the EDA and are not a legal debt or liability of the State. The
following section, New Jersey Budget and Appropriation System, contains a full
description of the PFB.
New Jersey Budget and Appropriation System. The State operates
on a fiscal year beginning July 1 and ending June 30. At the end of Fiscal Year
1993 there was a surplus of $937.4 million. In 1994, New Jersey closed its
fiscal year with a surplus of $926.0 million, in 1995 New Jersey closed its
fiscal year with a surplus of $569.2 million and in 1996 New Jersey closed its
fiscal year with a surplus of $882 million and fiscal year 1997 with a surplus
of approximately $276.2 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, former 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 and 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 had contended that the income tax
package would help reduce local property tax increases by providing more state
aid to municipalities. Under the income tax legislation, the State would
assume approximately $289 million in social services costs that previously
were paid by counties and municipalities and funded by property taxes. In
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addition, under the new formula for funding school aid, an extra $1.1 billion
was proposed to be sent by the State to school districts beginning in 1991, thus
reducing the need for property tax increases to support education programs.
Effective July 1, 1992, the State's sales and use tax rate
decreased from 7% to 6%. Effective January 1, 1994, an across-the-board 5%
reduction in the income tax rates was enacted and effective January 1, 1995,
further reductions ranging from 1% to 10% in income tax rates took effect.
Governor Whitman recently signed into law further reductions up to 15% for some
taxpayers effective January 1, 1996, thus reducing income taxes by up to 30% for
most taxpayers within three years.
On June 27, 1997, Governor Whitman signed the New Jersey
Legislature's $16.8 billion budget for Fiscal Year 1998. The balanced budget,
which includes $442 million in surplus, is approximately $800 million more than
the 1997 budget. Projections and estimates of receipts from taxes have been
subject to variance in recent years as a result of several factors, most
recently a significant slowdown in the national, regional and State economies,
sluggish employment and uncertainties in taxpayer behavior as a result of actual
and proposed changes in Federal tax laws.
On June 25, 1997, the New Jersey Economic Development Authority
(EDA) issued State Pension Funding Bonds (PFB) in the amount of $2.803 billion
to finance a portion of the unfunded accrued liability of the State-
administered retirement systems. Under the authorizing legislation, the bonds
are limited obligations of the EDA and contain a statement that they are not a
legal debt or liability of the State. This is true even though the principal and
interest on the bonds will be paid through annual State appropriations from the
General Fund. Because the pension bonds are issued by an authority, they are not
General Obligation (G.O.) Bonds which are backed by the "full faith and credit"
of the State. G.O. bonds would require voter approval.
The PFB sold at an average interest rate of 7.64% after the
State purchased insurance against default. In concept, the proceeds of the PFB
are invested with the anticipation that the interest rate on investment earnings
will at least equal and, hopefully, exceed the interest rate cost of the bonds,
thereby lowering future State costs to fund the retirement systems. However,
there is always a risk of uncertainty in investing funds.
The unfunded accrued liability of the several
State-administered retirement systems is $3.2 billion, according to the
actuarial valuations prepared by Fiscal Year 1998. Of that amount, $2.75 billion
is funded from the sale of the Pension Bonds. The balance, an estimated $450
million, was made available through the passage of companion legislation. That
law authorized a one-time accounting change in the value of the assets of the
retirement systems to full-market value as of the valuation reports applicable
to Fiscal Year 1998. This one-time revaluation from the current market- related
value of assets (which recognizes 20% of full-market) to full-market value,
immediately recognizes all capital gains up to the validation date, resulting in
an increased value of the accumulated assets of the retirement systems. The
assets of the retirement systems at full-market value are approximately $2.4
billion greater than they are when measured at their market-related value.
Debt Ratings. For many years, both Moody's Investors Service,
Inc., and Standard & Poor's Corporation have rated New Jersey general
obligation bonds "Aaa" and "AAA", respectively. Currently, however, Moody's
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Investors Service, Inc. rates New Jersey general obligation bonds Aa1 and
Standard & Poor's Ratings Group rates such bonds AA+. On July 3, 1991, however,
Standard & Poor's Corporation downgraded New Jersey general obligation bonds to
"AA+." On June 4, 1992 Standard & Poor's Corporation placed New Jersey general
obligation bonds on Credit Watch with negative implications, citing as its
principal reason for its caution the unexpected denial by the Federal Government
of New Jersey's request for $450 million in retroactive Medicaid payments for
psychiatric hospitals. These funds were critical to closing a $1 billion gap in
the State's $15 billion budget for fiscal year 1992 which ended on June 30,
1992. Under New Jersey state law, the gap in the current budget must be closed
before the new budget year begins on July 1, 1992. Standard & Poor's Corporation
suggested the State could close fiscal 1992's budget gap and help fill fiscal
1993's hole by a reversion of $700 million of pension contributions to its
general fund under a proposal to change the way the State calculates its pension
liability. On July 6, 1992, Standard & Poor's Corporation reaffirmed its "AA+"
rating for New Jersey general obligation bonds and removed the debt from its
Credit Watch list, although it stated that New Jersey's long-term financial
outlook is negative. Standard & Poor's Corporation was concerned that the State
was entering the 1993 fiscal year that began July 1, 1992 with a slim $26
million surplus and remained concerned about whether the sagging State economy
would recover quickly enough to meet lawmakers' revenue projections. It also
remained concerned about the recent federal ruling leaving in doubt how much the
State was due in retroactive Medicaid reimbursements and a ruling by a federal
judge, now on appeal, of the State's method for paying for uninsured hospital
patients. However, on July 27, 1994, Standard & Poor's announced that it was
changing the State's outlook from negative to stable due to a brightening of the
State's prospects as a result of Governor Whitman's effort to trim spending and
cut taxes, coupled with an improving economy. Standard & Poor's reaffirmed its
"AA+" rating at the same time. 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 and political conditions.
On August 24, 1992, Moody's Investors Service, Inc. downgraded
New Jersey general obligation bonds to "Aa1", stating that the reduction
reflected 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 would persist. On August 5, 1994, Moody's reaffirmed its "Aa1" rating,
citing on the positive side New Jersey's broad-based economy, high income
levels, history of maintaining a positive financial position and moderate
(although rising) debt ratios, and, on the negative side, a continued reliance
on one-time revenue and a dependence on pension-related savings to achieve
budgetary balance.
Capital Construction. In addition to payment from bond
proceeds, capital construction can also be funded by appropriation of current
revenues on a pay-as-you go basis. Capital Construction expenditures for Fiscal
Year 1995 represent 1.9% of the total Fiscal Year 1995 expenditures. In Fiscal
Year 1995, total Capital Construction expenditures were $289.8 million, a
decrease of $83.4 million from Fiscal Year 1994. This amount reflects a
reduction of $136.4 million in capital projects and an increase of $53.0 million
in expenditures to the Transportation Trust Fund Authority.
All appropriations for capital projects and all proposals for
State bond authorizations are subject to the review and recommendation of the
New Jersey Commission on Capital Budgeting and Planning. This permanent
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commission was established in November 1975, and is charged with the preparation
of the State Capital Improvement Plan, which contains proposals for State
spending for capital projects.
Lease Financing. The State has entered into a number of leases
relating to the financing of certain real property and equipment. The State
leases the State Tax Processing Building and the Richard J. Hughes Justice
Complex in Trenton, both from the Mercer County Improvement Authority (the
"Authority"). On August 8, 1991 the Authority defeased outstanding bonds
originally issued to finance construction of the Richard J. Hughes Justice
Complex through the issuance of custody receipts (the "Custody Receipts") in the
aggregate principal amount of $95,760,000. The rental is sufficient to cover the
debt service on the Authority's Custody Receipts. Maximum annual rental payments
on these leases, including debt service, maintenance and payments in lieu of
taxes, will be approximately $11 million. The State's obligation to pay the
rentals is subject to appropriations being made by the State Legislature. The
Custody Receipts will mature in the years 1992 through 2018.
The State has also entered into a lease agreement, as lessee,
with the New Jersey Economic Development Authority, as lessor (the "EDA") to
lease (i) office buildings that are presently under construction and, when
finished, are expected to house the New Jersey Division of Motor Vehicles, New
Jersey Network (the State's public television station) and a branch of the
United States Postal Service and (ii) a parking facility that is also under
construction, all of which were financed by the EDA's $114,391,434.70 initial
aggregate principal amount of Trenton Office Complex Revenue Bonds, 1980 Series
dated December 1, 1989. The State has also entered into a lease agreement, as
lessee, with the EDA to lease approximately 13 acres of real property and
certain infrastructure improvements thereon located in the City of Newark. This
property is in a geographical area generally bounded by McCarter Highway,
Mulberry Street and Saybrook Place and its purchase was financed by $21,510,000
aggregate principal amount of New Jersey Economic Development Authority Revenue
Bonds, New Jersey Performing Arts Center Site Acquisition Project, 1991 Series,
issued on August 20, 1991. The rental payments required to be made by the State
under such lease agreements are sufficient to cover debt service on such bonds
and other amounts payable to the EDA, including certain administrative expenses
of the EDA, and such rental payments are subject to annual appropriation by the
State Legislature. Maximum annual debt service on such bonds is approximately
$12,200,000. All of such bonds are still outstanding and mature in the years
1992 through 2012.
The State has also entered into a sublease with the EDA to
lease two parking lots, certain infrastructure improvements and related elements
located at Liberty State Park in the City of Jersey City. These parking lots and
improvements have been financed by a $13,683,767.50 aggregate principal amount
of New Jersey Economic Development Authority Lease Rental Bonds, 1992 Series
(Liberty State Park Project) dated March 15, 1992. The rental payments that will
be required to be made by the State under such sublease agreement will be
sufficient to cover debt service on such bonds and other amounts payable to the
EDA, and such rental payments will be subject to appropriation by the State
Legislature.
In 1981, the Governor signed into law a bill creating the New
Jersey Building Authority (the "Building Authority") having the power to
construct facilities for leasing to the State (P.L. 1981, c. 120). The law
provides for leasing to the State on a basis similar to that described above.
The Building Authority is authorized to have not more than $250 million of its
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notes and bonds outstanding exclusive of refunded bonds and notes, provided that
if the Building Authority issues bonds or notes to finance the total cost of a
project based on estimates prepared by an independent consultant and the
consultant determines later that the costs of the project as initially approved
have increased, the Building Authority may issue additional bonds or notes to
finance the increased cost notwithstanding the $250 million limitation. In 1985
the Building Authority issued $129,635,000 of 1985 Series Bonds for five office
building projects in the Trenton area. During April 1987 the Building Authority
issued $103,760,000 of the 1987 Series Bonds to refund the outstanding term
bonds of the 1985 issue. On April 6, 1989 the Building Authority issued
$49,752,390.30 of 1989 Series Bonds for the renovation and historical
restoration of portions of the State Capital Complex in Trenton. On October 9,
1991 the Building Authority issued $74,999,815.75 of State Building Revenue
Bonds, 1991 Series (Garden State Savings Bonds, 1991A), as capital appreciation
bonds, under the Garden State Savings Act of 1991, for the continued renovation
and historical restoration of portions of the State Capital Complex in Trenton
and for the construction of a structured parking facility. As of December 31,
1991 the total amount of Building Authority Bonds outstanding was
$238,687,206.05. Outstanding Building Authority bonds are secured by annual
rentals from the State which are subject to annual appropriations by the State
Legislature. The State's combined annual rental payment for all leases with the
Building Authority will be (i) approximately $17.5 million per year for the
years ending June 15, 1992 through 1998, 2012 and 2013 and (ii) approximately
$31.0 million per year for the years ending June 15, 1999 through 2011.
Beginning in April 1984, the State, acting through the Director
of the Division of Purchase and Property, entered into a series of lease
purchase agreements which provide for the acquisition of equipment and real
property to be used by various departments and agencies of the State. To date,
the State has completed nine lease purchase agreements which have resulted in
issuance of Certificates of Participation totaling $541,085,000. A Certificate
of Participation evidences a proportionate interest of the owner thereof in the
lease payments to be made by the State under the terms of the agreement. As of
December 31, 1991, $305,400,000 Certificates of Participation remain
outstanding. The agreements relating to these transactions provide for
semiannual rental payments. The State's obligation to pay rentals due under
these leases is subject to annual appropriations being made by the State
Legislature. The final maturity of the outstanding Certificates of Participation
is December 15, 2013. The majority of proceeds from these transactions have been
or will be used to acquire equipment for the State and its agencies. The rentals
payable by the State will be made from monies appropriated by the State
Legislature. The State intends to continue to use this financing technique for a
substantial portion of its future equipment requirements.
"Moral Obligation" Financing. Aside from its general obligation
bonds, the State's "moral obligation" backs certain obligations issued by the
New Jersey Housing and Mortgage Finance Agency, the South Jersey Port
Corporation and the Higher Education Assistance Authority.
New Jersey Housing and Mortgage Finance Agency. Neither the New
Jersey Housing and Mortgage Finance Agency nor its predecessors, the New Jersey
Housing Finance Agency and the New Jersey Mortgage Finance Agency, have had a
deficiency in a debt service reserve fund which required the State to
appropriate funds to meet its "moral obligation". It is anticipated that this
agency's revenues will continue to be sufficient to cover debt service on its
bonds.
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South Jersey Port Corporation. The State provides the South
Jersey Port Corporation (the "Corporation") with funds to cover all debt service
and property tax requirements, when earned revenues are anticipated to be
insufficient to cover these obligations.
Higher Education Assistance Authority. The Higher Education
Assistance Authority has issued $24,996,064 aggregate principal amount of
revenue bonds, the interest on which has been capitalized to but not including
January 1, 1993. After the period of capitalized interest has ended, it is
anticipated that the authority's revenues will be sufficient to cover debt
service on its bonds.
Below are listed State appropriations made since 1986 which
covered deficiencies in revenues of the Corporation, for debt service and
property tax payments.
<TABLE>
<CAPTION>
Appropriation for Appropriation for
Calendar Year Debt Service Property Tax
------------- ------------ -------------
<S> <C> <C>
1986......................................... $ 0 $1,647,216.00
1987......................................... 0 1,647,216.00
1988......................................... 0 1,647,216.00
1989......................................... 1,281,793.58 1,745,917.00
1990......................................... 2,362,850.67 1,850,000.00
1991......................................... 2,770,851.00 1,850,000.00
</TABLE>
On April 2, 1987, the Corporation issued $31,580,000 aggregate principal
amount of Revenue Bonds, 1987 Series C (the "Series C Bonds"), a portion of the
proceeds of which will be used (i) on January 1, 1995, to refund all of the
Corporation's Marine Terminal Revenue Bonds, 1985 Refunding Series and (ii) to
pay interest on the Series C Bonds until January 1, 1995. Because of the funded
escrow, it is expected that there will not be any need for the State to provide
funds to pay debt service on the Series C Bonds through January 1, 1995. Also,
in addition to the bonded indebtedness of the Corporation set forth above, on
April 2, 1987, the Corporation issued $10,295,000 Marine Terminal Revenue Bonds,
1987 Series D, to provide funds for financing a portion of the costs of various
capital improvements. On February 10, 1989, the Corporation issued $4,085,000
Marine Terminal Revenue Bonds, 1989 Series E, to provide funds for financing a
portion of the costs of various capital improvements and additions to the
Corporation's marine terminal facilities. On November 21, 1989, the Corporation
issued $3,655,000 Marine Terminal Revenue Bonds, 1989 Series F, to provide for
the costs of acquiring land in the City of Camden, for the purpose of expanding
the Corporation's marine terminal facilities.
Municipal Finance. New Jersey's local finance system is
regulated by various statutes designed to assure that all local governments and
their issuing authorities remain on a sound financial basis. Regulatory and
remedial statutes are enforced by the Division of Local Government Services (the
"Division") in the State Department of Community Affairs.
Counties and Municipalities. The Local Budget Law (N.J.S.A.
40A:4-1 et seq.) imposes specific budgetary procedures upon counties and
municipalities ("local units"). Every local unit must adopt an operating
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budget which is balanced on a cash basis, and items of revenue and appropriation
must be examined by the Director of the Division (the "Director"). The accounts
of each local unit must be independently audited by a registered municipal
accountant. State law provides that budgets must be submitted in a form
promulgated by the Division and further provides for limitations on estimates of
tax collection and for reserves in the event of any shortfalls in collections by
the local unit. The Division reviews all municipal and county annual budgets
prior to adoption for compliance with the Local Budget Law. The Director is
empowered to require changes for compliance with law as a condition of approval;
to disapprove budgets not in accordance with law; and to prepare the budget of a
local unit, within the limits of the adopted budget of the previous year with
suitable adjustments for legal compliance, if the local unit is unwilling to
prepare a budget in accordance with law. This process insures that every
municipality and county annually adopts a budget balanced on a cash basis,
within limitations on appropriations or tax levies, respectively, and making
adequate provision for principal of and interest on indebtedness falling due in
the fiscal year, deferred charges and other statutory expenditure requirements.
The Director also oversees changes to local budgets after adoption as permitted
by law, and enforces regulations pertaining to execution of adopted budgets and
financial administration. In addition to the exercise of regulatory and
oversight functions, the Division offers expert technical assistance to local
units in all aspects of financial administration, including revenue collection
and cash management procedures, contracting procedures, debt management and
administrative analysis.
The local Government Cap Law (N.J.S.A. 40A:4-45.1 et seq.)
(the "Cap Law") generally limits the year-to-year increase of the total
appropriations of any municipality and the tax levy of any county to either 5%
or an index rate determined annually by the Director, whichever is less.
However, where the index percentage rate exceeds 5%, the Cap law permits the
governing body of any municipality or county to approve the use of a higher
percentage rate up to the index rate. Further, where the index percentage rate
is less than 5%, the Cap Law also permits the governing body of any municipality
or county to approve the use of a higher percentage rate up to 5%. Regardless of
the rate utilized, certain exceptions exist to the Cap Law's limitation on
increases in appropriations. The principal exceptions to these limitations are
municipal and county appropriations to pay debt service requirements; to comply
with certain other State or federal mandates; amounts approved by referendum;
and, in the case of municipalities only, to fund the preceding year's cash
deficit or to reserve for shortfalls in tax collections. The Cap Law, scheduled
to expire on December 31, 1990, was re-enacted with amendments and made a
permanent part of the Municipal Finance System.
State law also regulates the issuance of debt by local units.
The Local Budget Law limits the amount of tax anticipation notes that may be
issued by local units and requires the repayment of such notes within three
months of the end of the fiscal year (six months in the case of the counties) in
which issued. The local Bond Law (N.J.S.A. 40A:2-1 et seq.) governs the issuance
of bonds and notes by the local units. No local unit is permitted to issue bonds
for the payment of current expenses (other than Fiscal Year Adjustment Bonds
described more fully below). Local units may not issue bonds to pay outstanding
bonds, except for reflecting purposes, and then only with the approval of the
Local Finance Board. Local units may issue bond anticipation notes for temporary
periods not exceeding in the aggregate approximately ten years from the date of
first issue. The debt that any local unit may authorize is limited to a
percentage of its equalized valuation basis, which is the average of the
equalized value of all taxable real
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property and improvements within the geographic boundaries of the local unit, as
annually determined by the Director of the Division of Taxation, for each of the
three most recent years. In the calculation of debt capacity, the local Bond Law
and certain other statutes permit the deduction of certain classes of debt
("statutory deductions") from all authorized debt of the local unit ("gross
capital debt") in computing whether a local unit has exceeded its statutory debt
limit. Statutory deductions from gross capital debt consist of bonds or notes
(i) authorized for school purposes by a regional school district or by a
municipality or a school district with boundaries coextensive with such
municipality to the extent permitted under certain percentage limitations set
forth in the School Bond Law (as hereinafter defined); (ii) authorized for
purposes which are self-liquidating, but only to the extent permitted by the
Local Bond Law; (iii) authorized by a public body other than local unit the
principal of and interest on which is guaranteed by the local unit, but only to
the extent permitted by law; (iv) that are bond anticipation notes; (v) for
which provision for payment has been made; or (vi) authorized for any other
purpose for which a deduction is permitted by law. Authorized net capital debt
(gross capital debt minus statutory deductions) is limited to 3.5% of the
equalized valuation basis in the case of municipalities and 2% of the equalized
valuation basis in the case of counties. The debt limit of a county or
municipality, with certain exemptions, may be exceeded only with the approval of
the Local Finance Board.
Chapter 75 of the Pamphlet Laws of 1991 signed into law on
March 28, 1991 requires certain municipalities and permits all other
municipalities to adopt the State fiscal year in place of the existing calendar
fiscal year. Municipalities that change fiscal years must adopt a six month
transition budget for January to June. Since expenditures would be expected to
exceed revenues primarily because state aid for the calendar year would not be
received by the municipality until after the end of the transition year budget,
the act authorizes the issuance of Fiscal Year Adjustment Bonds to fund the one
time deficit for the six month transition budget. The act provides that the
deficit in the six month transition budget may be funded initially with bond
anticipation notes based on the estimated deficit in the six month transition
budget. Notes issued in anticipation of Fiscal Year Adjustment Bonds, including
renewals, can only be issued for up to one year unless the Local Finance Board
permits the municipality to renew them for a further period of time. The Local
Finance Board must confirm the actual deficit experienced by the municipality.
The municipality then may issue Fiscal Year Adjustment Bonds to finance the
deficit on a permanent basis. The purpose of the Act is to assist municipalities
that are heavily dependent on state aid and that have had to issue tax
anticipation notes to fund operating cash flow deficits each year. While the act
does not authorize counties to change their fiscal years, it does provide that
counties with cash flow deficits may issue Fiscal Year Adjustment Bonds as well.
State law authorizes State officials to supervise fiscal
administration in any municipality which is in default on its obligations; which
experiences severe tax collection problems for two successive years; which has a
deficit greater than 4% of its tax levy for two successive years; which has
failed to make payments due and owing to the State, county, school district or
special district for two consecutive years; which has an appropriation in its
annual budget for the liquidation of debt which exceeds 25% of its total
operating appropriations (except dedicated revenue appropriations) for the
previous budget year; or which has been subject to a judicial determination of
gross failure to comply with the Local Bond Law, the Local Budget Law or the
Local Fiscal Affairs Law which substantially jeopardizes its fiscal integrity.
State officials are authorized to continue
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such supervision for as long as any of the conditions exist and until the
municipality operates for a fiscal year without incurring a cash deficit.
There are 567 municipalities and 21 counties in New Jersey.
During 1987, 1988, and 1989 no county exceeded its statutory debt limitations or
incurred a cash deficit in excess of 4% of its tax levy. The number of
municipalities which have a cash deficit greater than 4% of their tax levies was
five for 1987, zero for 1988, and six for 1989. The number of municipalities
which exceeded statutory debt limits was six, five, and one as of December 31,
1987, 1988, and 1989, respectively. No New Jersey municipality or county has
defaulted on the payment of interest or principal on any outstanding debt
obligation since the 1930's.
School Districts. All New Jersey school districts are
coterminous with the boundaries of one or more municipalities. They are
characterized by the manner in which the board of education, the governing body
of the school district, takes office. Type I school districts, most commonly
found in cities, have a board of education appointed by the mayor or the chief
executive officer of the municipality constituting the school district. In a
Type II school district, the board of education is elected by the voters of the
district. Nearly all regional and consolidated school districts are Type II
school districts.
School Budgets. In every school district having a board of
school estimate, the board of school estimate examines the budget request and
fixes the appropriation amounts for the next year's operating budget after a
public hearing at which the taxpayers and other interested persons shall have an
opportunity to raise objections and to be heard with respect to the budget. This
board, whose composition is fixed by statute, certifies the budget to the
municipal governing bodies and to the local board of education. If either
disagrees, they must appeal to the State Commissioner of Education (the
"Commissioner") to request changes.
The Quality Education Act of 1990 (N.J.S.A. 18A:7D-1 et seq.)
limits the annual increase of a school district's net current expense budget.
The Commissioner certifies the allowable amount of increase for each school
district but may grant a higher level of increase in certain limited instances.
A school district may also submit a proposal to the voters to raise amounts
above the allowable amount of increase. If defeated, such a proposal is subject
to further review or appeal only if the Commissioner determines that additional
funds are required to provide a thorough and efficient education.
The Quality Education Act has been declared unconstitutional
by the New Jersey Supreme Court in 1994. The Supreme Court, while retaining
jurisdiction over this issue, has stated that the State was required to address
the "special education needs" of 30 special needs districts for which funding
was required in addition to that necessary to achieve parity for richer
districts. The Supreme Court stated that it will not immediately intervene if
substantial equivalence of the special needs districts and wealthier districts
is achieved by the State for the 1997-1998 school year. The Court further
ordered the State to adopt a law assuring such substantial equivalence by
September 1996.
In May, 1997, in its further review of school funding, the
Supreme Court in Abbott by Abbott v. Burke, 149 N.J. 145 (1997), held that the
Comprehensive Educational Improvement and Financing Act ("Act") which was
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enacted by the legislature in response to previous state Supreme Court orders
was unconstitutional as it applied to special needs districts.
The Court held that the Act's funding levels were insufficient
and failed to address problems of dilapidated, unsafe and overcrowded
facilities. As interim relief pending legislative solution, the Court ordered
increased funding on parity with per-pupil expenditures for regular education,
required the State Commissioner of Education to ensure that increased funding be
put to optimal educational use, required the State, commencing September 1997,
to provide special needs districts with money to enable such districts with
sufficient money to spend at the level of average budgeted per-pupil
expenditures in successful districts and remanded the case for a determination
of immediate implementation of programs to meet the needs of at-risk children.
As a result of this decision, the State's 1998 fiscal year
budget provided for an additional $246 million to special needs districts. Much
of this funding is attributable to the State Pension Fund Bonds sale.
In Type I or Type II school districts which have failed
monitoring over a period of time by the State because of continued educational
deficiencies, and are implementing an approved corrective action plan, the
Commissioner is required to determine the cost to the school district of the
implementation of those portions of the corrective action plan which are
directly responsive to the district's deficiencies as identified in the
monitoring process. Where appropriate, the Commissioner is required to
reallocate funds within the district's budget to support the corrective action
plan. The Commissioner is also required to determine the amount of additional
revenue needed to implement the corrective action plan, and to recertify the
budget for the district.
In State operated school districts the State District
Superintendent has the responsibility for the development of the budget subject
to appeal by the governing body of the municipality to the Commissioner and the
Director of the Division of Local Government Services in the State Department of
Community Affairs. Based upon his review, the Director is required to certify
the amount of revenues which can be raised locally to support the budget of the
State operated district. Any difference between the amount which the Director
certifies, and the total amount of local revenues required by the budget
approved by the Commissioner, is to be paid by the State in the fiscal year in
which the expenditures are made subject to the availability of appropriations.
School District Bonds. School district bonds and temporary
notes are issued in conformity with N.J.S.A 18A:24-1 et seq. (the "School Bond
Law"), which closely parallels the Local Bond Law. Although school districts are
exempted from the 5% down payment provision generally applied to bonds issued by
municipalities and counties, they are subject to debt limits (which vary
depending on the type of school system provided) and to State regulation of
their borrowing. The debt limitation on school district bonds depends upon the
classification of the school district but may be as high as 4% of the average
equalized valuation basis of the constituent municipality. In certain cases
involving school districts in cities with populations exceeding 100,000 the debt
limit is 8% of the average equalized valuation basis of the constituent
municipality, and in cities with populations in excess of 80,000 the debt limit
is 6% of the aforesaid average equalized valuation.
School bonds are authorized by (i) an ordinance adopted by the
governing body of a municipality within a Type I school district;
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(ii) adoption of a proposal by resolution by the board of education of a Type II
school district having a board of school estimate; or (iii) adoption of a
proposal by resolution by the board of education and approval of the proposal by
the legal voters of any other Type II school district. If school bonds will
exceed the school district borrowing capacity, a school district (other than a
regional school district) may use the balance of the municipal borrowing
capacity. If the total amount of debt exceeds the school district's borrowing
capacity and any available remaining municipal borrowing capacity, the
Commissioner and the Local Finance Board must approve the proposed authorization
before it is submitted to the voters. All authorizations of debt in a Type II
school district without a board of school estimate require an approving
referendum, except where, after hearing, the Commissioner and the State Board of
Education determine that the issuance of such debt is necessary to meet the
constitutional obligation to provide a thorough and efficient system of public
schools. When such obligations are issued, they are issued by, and in the name
of, the school district.
In Type I and II school districts with a board of school
estimate, that board examines the capital proposal of the board of education and
certifies the amount of bonds to be authorized. When it is necessary to exceed
the borrowing capacity of the municipality, the approval of a majority of the
legally qualified voters of the municipality is required, together with the
approval of the Commissioner and the Local Finance Board. When such bonds are
issued for a Type I school district, they are issued by the municipality and
identified as school bonds. When bonds are issued by a Type II school district
having a board of school estimate, they are issued by, and in the name of, the
school district.
All authorizations of debt must be reported to the Division of
Local Government Services by a supplemental debt statement prior to final
approval.
School District Lease Purchase Financings. In 1982, school
districts were given an alterative to the traditional method of bond financing
capital improvements pursuant to N.J.S.A. 18A:20-4.2(f) (the "Lease Purchase
Law"). The Lease Purchase Law permits school districts to acquire a site and
school building through a lease purchase agreement with a private lessor
corporation. For Type II school districts, the lease purchase agreement does not
require voter approval. The rent payments attributable to the lease purchase
agreement are subject to annual appropriation by the school district and are
required, pursuant to N.J.A.C. 6:22-A-1.2(h), to be included in the annual
current expense budget of the school district. Furthermore, the rent payments
attributable to the lease purchase agreement do not constitute debt of the
school district and therefore do not impact on the school district's debt
limitation. Lease purchase agreements in excess of five years require the
approval of the Commissioner and the Local Finance Board.
Qualified Bonds. In 1976, legislation was enacted (P.L. 1976,
c. 38 and c. 39) which provides for the issuance by municipalities and school
districts of "qualified bonds." Whenever a local board of education or the
governing body of a municipality determines to issue bonds, it may file an
application with the Local Finance Board, and, in the case of a local board of
education, the Commissioner, to qualify bonds pursuant to P.L. 1976, c. 38 or c.
39. Upon approval of such an application and after receipt of a certificate
stating the name and address of the paying agent for such bonds, the maturity
schedule, interest rates and payment dates, the State Treasurer shall, in the
case of qualified bonds for school districts, withhold from the school aid
payable to such municipality or school district and in the case of
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qualified bonds for municipalities, withhold from the amount of business
personal property tax replacement revenues, gross receipts; tax revenues,
municipal purposes tax assistance fund distributions, State urban aid, State
revenue sharing, and any other funds appropriated as State aid and not otherwise
dedicated to specific municipal programs, payable to such municipalities, an
amount sufficient to cover debt service on such bonds. These "qualified bonds"
are not direct, guaranteed or moral obligations of the State, and debt service
on such bonds will be provided by the State only if the above mentioned
appropriations are made by the State. Total outstanding indebtedness for
"qualified bonds" consisted of $103,720,500 by various school districts as of
June 30, 1992 and $830,037,105 by various municipalities as of June 30, 1992.
New Jersey School Bond Reserve Act. The New Jersey School Bond
Reserve Act (N.J.S.A. 18A:56-17 et seq.) establishes a school bond reserve
within the constitutionally dedicated Fund for the Support of Free Public
Schools. Under this law the reserve is maintained at an amount equal to 1.5% of
the aggregate outstanding bonded indebtedness of counties, municipalities or
school districts for school purposes (exclusive of bonds whose debt service is
provided by State appropriations), but not in excess of monies available in such
Fund. If a municipality, county or school district is unable to meet payment of
the principal of or interest on any of its school bonds, the trustee of the
school bond reserve will purchase such bonds at the face amount thereof or pay
the holders thereof the interest due or to become due. On June 30, 1991, the
book value of the Fund's assets aggregated $59,352,429 and the reserve, computed
as of June 30, 1991, amounted to $19,668,349. There has never been an occasion
to call upon this Fund.
Local Financing Authorities. The Local Authorities Fiscal
Control Law (N.J.S.A. 40A:5A-l et seq.) provides for State supervision of the
fiscal operations and debt issuance practices of independent local authorities
and special taxing districts by the State Department of Community Affairs. The
Local Authorities Fiscal Control Law applies to all autonomous public bodies
created by counties or municipalities, which are empowered to issue bonds, to
impose facility or service charges, or to levy taxes in their districts. This
encompasses most autonomous local authorities (sewerage, municipal utilities,
parking, pollution control, improvement, etc.) and special taxing districts
(fire, water, etc.). Authorities which are subject to differing State or federal
financial restrictions are exempted, but only to the extent of that difference.
Financial control responsibilities over local authorities and
special districts are assigned to the Local Finance Board and the Director of
the Division of Local Government Services. The Local Finance Board exercises
approval power over the creation of new authorities and special districts as
well as their dissolution. The Local Finance Board also reviews, conducts public
hearings and issues findings and recommendations on any proposed project
financing of an authority or district, and on any proposed financing agreement
between a municipality or county and an authority or special district. The Local
Finance Board prescribes minimum audit requirements to be followed by
authorities and special districts in the conduct of their annual audits. The
Director reviews and approves annual budgets of authorities and special
districts.
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,
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condemnation proceedings and other alleged violations of State and Federal laws.
Included in the State's outstanding litigation are cases which challenge the
following: the funding of teacher's pension funds; the hospital assessment
authorized by the Health Care Reform Act of 1992; the State's role in a consent
order concerning the construction of a resource facility in Passaic County; the
State's actions regarding alleged chromium contamination of State-owned property
in Hudson County; the constitutionality of annual A- 901 hazardous and solid
waste licensure renewal fees collected by the Department of Environmental
Protection and Energy; the State's funding formula that attempts to close the
spending gap between poor urban school districts and wealthy suburban districts;
the use by the State assessments on certain insurances to retire debt of the
Market Transition Fund, the manner in which mental health services are provided
to inmates with serious mental disorders who are confined within the facilities
of the Department of Corrections; the spousal impoverishment provisions of the
Medicare Catastrophic Coverage Act; Medicaid hospital reimbursements since
February 1995; and the efforts to revitalize Atlantic City through the design
and construction of a highway and tunnel. 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.
PUBLIC OFFERING
Offering Price. The secondary market Public Offering Price per
Unit is computed by adding to the aggregate bid price of the Bonds in the Trust
divided by the number of Units outstanding, an amount based on the applicable
sales charge times the aggregate offering price of the Bonds (see "Public
Offering Price" in Part A for the applicable sales charge for the Trust). A
proportionate share of accrued interest on the Bonds to the expected date of
settlement for the Units is added to the Public Offering Price. Accrued interest
is the accumulated and unpaid interest on a Bond from the last day on which
interest was paid and is accounted for daily by the Trust at the initial daily
rate set forth under "Summary of Essential Information" in Part A of this
Prospectus. This daily rate is net of estimated fees and expenses. The Public
Offering Price can vary on a daily basis from the amount stated in Part A in
accordance with fluctuations in the prices of the Bonds and the price to be paid
by each investor will be computed as of the date the Units are purchased. The
aggregate bid price evaluation of the Bonds is determined in the manner set
forth under "Trustee Redemption."
The Evaluator may obtain current bid or offering prices for
the Bonds from investment dealers or brokers (including the Sponsor) that
customarily deal in tax-exempt obligations or from any other reporting service
or source of information which the Evaluator deems appropriate.
The sales charge computed by the Evaluator is based upon the
number of years remaining to maturity of each Bond. Bonds will be deemed to
mature on their stated maturity dates unless bonds have been called for
redemption, funds have been placed in escrow to redeem them on an earlier call
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date or are subject to a "mandatory put," in which case the maturity will be
deemed to be such other date.
The table below sets forth the various sales charges based on
the length of maturity of each Bond:
As Percent of Public
Time to Maturity Offering Price
- ---------------- --------------
less than 6 months 0%
6 mos. to 1 year 1%
over 1 yr. to 2 yrs. 1 1/2%
over 2 yrs. to 4 yrs. 2 1/2%
over 4 yrs. to 8 yrs. 3 1/2%
over 8 yrs. to 15 yrs. 4 1/2%
over 15 years 5 1/2%
Accrued Interest. An amount of accrued interest which
represents accumulated unpaid or uncollected interest on a Bond from the last
day on which interest was paid thereon will be added to the Public Offering
Price and paid by the Certificateholder at the time Units are purchased. Since
the Trust normally receives the interest on Bonds twice a year and the interest
on the Bonds in the Trust is accrued on a daily basis (net of estimated fees and
expenses), the Trust will always have an amount of interest accrued but not
actually received and distributed to Certificateholders. A Certificateholder
will not recover his proportionate share of accrued interest until the Units are
sold or redeemed, or the Trust is terminated. At that time, the Certifi
cateholder will receive his proportionate share of the accrued interest computed
to the settlement date in the case of a sale or termination and to the date of
tender in the case of redemption.
Employee Discounts. Employees (and their immediate families)
of Reich & Tang Distributors, Inc. and its affiliates, Gruntal & Co., L.L.C. and
of any underwriter of a Trust, pursuant to employee benefit arrangements, may
purchase Units of a Trust at a price equal to the offering side evaluation of
the underlying securities in a Trust during the initial offering period and at
the bid side thereafter, divided by the number of Units outstanding plus a
reduced charge. Such arrangements result in less selling effort and selling
expenses than sales to employee groups of other companies. Resales or transfers
of Units purchased under the employee benefit arrangements may only be made
through the Sponsor's secondary market, so long as it is being maintained.
Distribution Of Units. Certain banks and thrifts will make
Units of the Trust available to their customers on an agency basis. A portion of
the sales charge paid by their customers is retained by or remitted to the
banks. Under the Glass-Steagall Act, banks are prohibited from underwriting
Units; however, the Glass-Steagall Act does permit certain agency transactions
and the banking regulators have indicated that these particular agency
transactions are permitted under such Act. In addition, state securities laws on
this issue may differ from the interpretations of federal law expressed herein
and banks and financial institutions may be required to register as dealers
pursuant to state law.
The Sponsor intends to qualify the Units for sale in
substantially all States through the Underwriters and through dealers who are
members of the
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National Association of Securities Dealers, Inc. Units may be sold to dealers at
prices which represent a concession of up to (a) 4% of the Public Offering Price
for the Insured Municipal Securities Trust Series, (b) $25.00 per Unit for the
Insured Municipal Securities Trust Discount Series or (c) $33.00 per Unit, for
the Insured Municipal Securities Navigator Trust, subject to the Sponsor's right
to change the dealers' concession from time to time. In addition, for
transactions of 1,000,000 Units or more, the Sponsor intends to negotiate the
applicable sales charge and such charge will be disclosed to any such purchaser.
Such Units may then be distributed to the public by the dealers at the Public
Offering Price then in effect. The Sponsor reserves the right to reject, in
whole or in part, any order for the purchase of Units. The Sponsor reserves the
right to change the discounts from time to time.
Sponsor's Profits. The Sponsor will receive a gross commission
on all Units sold in the secondary market equal to the applicable sales charge
on each transaction. (See "Offering Price".) In addition, in maintaining a
market for the Units (see "Sponsor Repurchase") the Sponsor will realize profits
or sustain losses in the amount of any difference between the price at which
they buy Units and the price at which they resell such Units.
Participants in the Total Reinvestment Plan can designate a
broker as the recipient of a dealer concession (see "Total Reinvestment Plan").
Comparison of Public Offering Price, Sponsor's Repurchase
Price And Redemption Price. The secondary market Public Offering Price of Units
will be determined on the basis of the current bid prices of the Bonds in the
Trust, plus the applicable sales charge. The value at which Units may be resold
in the Secondary Market or redeemed will be determined on the basis of the
current bid prices of the Bonds without any sales charge. On the Evaluation
Date, the Public Offering Price and the Sponsor's initial Repurchase Price per
Unit (each based on the bid side evaluation of the Bonds in the Trust) each
exceeded the Redemption Price and the Sponsor's secondary market Repurchase
Price per Unit (based upon the current bid side evaluation of the Bonds in the
Trust) by the amounts shown under "Summary of Essential Information" in Part A
of this Prospectus. For this reason, among others (including fluctuations in the
market prices of such Bonds and the fact that the Public Offering Price includes
the applicable sales charge), the amount realized by a Certificateholder upon
any redemption of Sponsor repurchase of Units may be less than the price paid
for such Units.
ESTIMATED LONG TERM RETURN AND ESTIMATED CURRENT RETURN
The rate of return on an investment in Units of the Trust is
measured in terms of "Estimated Current Return" and "Estimated Long Term
Return".
Estimated Long Term Return is calculated by: (1) computing the
yield to maturity or to an earlier call date (whichever results in a lower
yield) for each Bond in a Trust's portfolio in accordance with accepted bond
practices, which practices take into account not only the interest payable on
the Bond but also the amortization of premiums or accretion of discounts, if
any; (2) calculating the average of the yields for the Bonds in each Trust's
portfolio by weighing each Bond's yield by the market value of the Bond and by
the amount of time remaining to the date to which the Bond is priced (thus
creating an average yield for the portfolio of each Trust); and (3) reducing the
average yield for the portfolio of each Trust in order to reflect estimated fees
and expenses of that Trust and the maximum sales charge paid by
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Unitholders. The resulting Estimated Long Term Return represents a measure of
the return to Unitholders earned over the estimated life of each Trust. The
Estimated Long Term Return as of the day prior to the Evaluation Date is stated
for the Trust under "Summary of Essential Information" in Part A.
Estimated Current Return is computed by dividing the Estimated
Net Annual Interest Income per Unit by the Public Offering Price per Unit. In
contrast to the Estimated Long Term Return, the Estimated Current Return does
not take into account the amortization of premium or accretion of discount, if
any, on the Bonds in the portfolios of the Trust. Moreover, because interest
rates on Bonds purchased at a premium are generally higher than current interest
rates on newly issued bonds of a similar type with comparable rating, the
Estimated Current Return per Unit may be affected adversely if such Bonds are
redeemed prior to their maturity. On the day prior to the Evaluation Date, the
Estimated Net Annual Interest Income per Unit divided by the Public Offering
Price resulted in the Estimated Current Return stated for the Trust under
"Summary of Essential Information" in Part A.
The Estimated Net Annual Interest Income per Unit of the Trust
will vary with changes in the fees and expenses of the Trustee and the Evaluator
applicable to the Trust and with the redemption, maturity, sale or other
disposition of the Bonds in the Trust. The Public Offering Price will vary with
changes in the bid prices of the Bonds. Therefore, there is no assurance that
the present Estimated Current Return or Estimated Long Term Return will be
realized in the future.
A schedule of cash flow projections is available from the
Sponsor upon request.
RIGHTS OF CERTIFICATEHOLDERS
Certificates. Ownership of Units of the Trust is evidenced by
registered Certificates executed by the Trustee and the Sponsor. Certificates
may be issued in denominations of one or more Units and will bear appropriate
notations on their faces indicating which plan of distribution has been selected
by the Certificateholder. Certificates are transferable by presentation and
surrender to the Trustee properly endorsed and/or accompanied by a written
instrument or instruments of transfer. Although no such charge is presently made
or contemplated, the Trustee may require a Certificateholder to pay $2.00 for
each Certificate reissued or transferred and any governmental charge that may be
imposed in connection with each such transfer or interchange. Mutilated,
destroyed, stolen or lost Certificates will be replaced upon delivery of
satisfactory indemnity and payment of expenses incurred.
Interest And Principal Distributions. Interest received by the
Trust is credited by the Trustee to an Interest Account and a deduction is made
to reimburse the Trustee without interest for any amounts previously advanced.
Proceeds representing principal received from the maturity, redemption, sale or
other disposition of the Bonds are credited to a Principal Account.
Distributions to each Certificateholder from the Interest
Account are computed as of the close of business on each Record Date for the
following Payment Date and consist of an amount substantially equal to
one-twelfth, one-half or all of such Certificateholder's pro rata share of the
Estimated Net Annual Interest Income in the Interest Account, depending upon the
applicable
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plan of distribution. Distributions from the Principal Account (other than
amounts representing failed contracts, as previously discussed) will be computed
as of each semi-annual Record Date, and will be made to the Certifi cateholders
on or shortly after the next semi-annual Payment Date. Proceeds representing
principal received from the disposition of any of the Bonds between a Record
Date and a Payment Date which are not used for redemptions of Units will be held
in the Principal Account and not distributed until the second succeeding
semi-annual Payment Date. No distributions will be made to Certificateholders
electing to participate in the Total Reinvestment Plan. Persons who purchase
Units between a Record Date and a Payment Date will receive their first
distribution on the second Payment Date after such purchase.
Because interest payments are not received by the Trust at a
constant rate throughout the year, interest distributions may be more or less
than the amount credited to the Interest Account as of a given Record Date. For
the purpose of minimizing fluctuations in the distributions from the Interest
Account, the Trustee will advance sufficient funds, without interest, as may be
necessary to provide interest distributions of approximately equal amounts. All
funds in respect of the Bonds received and held by the Trustee prior to
distribution to Certificateholders may be of benefit to the Trustee and do not
bear interest to Certificateholders.
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 Expenses and Charges"). The
Trustee also may withdraw from said accounts such amounts, if any, as it deems
necessary to establish a reserve for any applicable taxes or other governmental
charges that may be payable out of the Trust. Amounts so withdrawn shall not be
considered a part of the Trust's assets until such time as the Trustee shall
return all or any part of such amounts to the appropriate accounts. In addition,
the Trustee may withdraw from the Interest and Principal Accounts such amounts
as may be necessary to cover purchases of Replacement Bonds and redemptions of
Units by the Trustee.
The estimated monthly, semi-annual or annual interest
distribution per Unit will initially be in the amount shown under Summary of
Essential Information and will change and may be reduced as Bonds mature or are
redeemed, exchanged or sold, or as expenses of the Trust fluctuate. No
distribution need be made from the Principal Account until the balance therein
is an amount sufficient to distribute $1.00 per Unit.
Distribution Elections. Interest is distributed monthly,
semi-annually or annually, depending upon the distribution plan applicable to
the Unit purchased. Record Dates are the first day of each month for monthly
distributions, the first day of each June and December for semi-annual
distributions and the first day of each December for annual distributions.
Payment Dates will be the fifteenth day of each month following the respective
Record Dates.
Certificateholders purchasing Units in the secondary market
will initially receive distributions in accordance with the election of the
prior owner. Every October each Certificateholder may change his distribution
election by notifying the Trustee in writing of such change between October 1
and November 1 of each year. (Certificateholders deciding to change their
election should contact the Trustee by calling the number listed on the back
cover hereof for information regarding the procedures that must be followed in
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connection with this written notification of the change of election.) Failure to
notify the Trustee on or before November 1 of each year will result in a
continuation of the plan for the following 12 months.
Records. The Trustee shall furnish Certificateholders in
connection with each distribution a statement of the amount of interest, if any,
and the amount of other receipts, if any, which are being distributed, expressed
in each case as a dollar amount per Unit. Within a reasonable time after the end
of each calendar year the Trustee will furnish to each person who at any time
during the calendar year was a Certificateholder of record, a statement showing
(a) as to the Interest Account: interest received (including amounts
representing interest received upon any disposition of Bonds and earned original
issue discount, if any), amounts paid for purchases of Replacement Bonds and
redemptions of Units, if any, deductions for applicable taxes and fees and
expenses of the Trust, and the balance remaining after such distributions and
deductions, expressed both as a total dollar amount and as a dollar amount
representing the pro rata share of each Unit outstanding on the last business
day of such calendar year; (b) as to the Principal Account: the dates of
disposition of any Bonds and the net proceeds received therefrom (including any
unearned original issue discount but excluding any portion representing accrued
interest), deductions for payments of applicable taxes and fees and expenses of
the Trust, amounts paid for purchases of Replacement Bonds and redemptions of
Units, if any, and the balance remaining after such distributions and
deductions, expressed both as a total dollar amount and as a dollar amount
representing the pro rata share of each Unit outstanding on the last business
day of such calendar year; (c) a list of the Bonds held and the number of Units
outstanding on the last business day of such calendar year; (d) the Redemption
Price per Unit based upon the last computation thereof made such calendar year;
and (e) amounts actually distributed to Certificateholders during such calendar
year from the Interest and Principal Accounts, separately stated, expressed both
as total dollar amounts representing the pro rata share of each Unit outstanding
on the last business day of such calendar year.
The Trustee shall keep available for inspection by Certificate
holders at all reasonable times during usual business hours, books of record and
account of its transactions as Trustee, including records of the names and
addresses of Certificateholders, Certificates issued or held, a current list of
Bonds in the portfolio and a copy of the Trust Agreement.
TAX STATUS
All Bonds acquired by each Trust were accompanied by copies of
opinions of bond counsel to the issuing governmental authorities given at the
time of original delivery of the Bonds to the effect that the interest thereon
is exempt from regular federal income tax. Such interest may, however, be
subject to the federal corporate alternative minimum tax and to state and local
taxes. Neither the Sponsor nor the Trustee nor their respective counsel have
made any review of the proceedings relating to the issuance of the Bonds or the
bases for such opinion and express no opinion as to these matters, and neither
the Trustee nor the Sponsor nor their respective counsel has made an independent
examination or verification that the federal income tax status of the Bonds has
not been altered since the time of the original delivery of those opinions.
In rendering the opinion set forth below, counsel has examined
the Agreement, the final form of Prospectus dated the date hereof (the
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"Prospectus") and the documents referred to therein, among others, and has
relied on the validity of said documents and the accuracy and completeness of
the facts set forth therein.
In the opinion of Battle Fowler LLP, counsel for the Sponsor,
under existing law:
The Trusts are not associations taxable as corporations for federal
income tax purposes under the Internal Revenue Code of 1986 (the "Code"), and
income received by the Trusts that consists of interest excludable from federal
gross income under the Code will be excludable from the federal gross income of
the Certificateholders of such Trusts.
Each Certificateholder will be considered the owner of a pro rata
portion of the Trust under Section 676(a) of the Code. Thus, each Cer
tificateholder will be considered to have received his pro rata share of Bond
interest when it is received by that Trust, and the net income distributable to
Certificateholders that is exempt from federal income tax when received by that
Trust will constitute tax-exempt income when received by the Certificateholders.
Gain (other than any earned original issue discount) realized on a sale
or redemption of the Bonds or on a sale of a Unit is, however, includable in
gross income for federal income tax purposes, generally as capital gain,
although gain on the disposition of a Bond or a Unit purchased at a market
discount generally will be treated as ordinary income, rather than capital gain,
to the extent of accrued market discount. (It should be noted in this connection
that such gain does not include any amounts received in respect of accrued
interest.) Such gain may be long-, mid- or short-term depending on the facts and
circumstances. Capital losses are deductible to the extent of capital gains; in
addition, up to $3,000 of capital losses of non-corporate Certificateholders may
be deducted against ordinary income. Capital assets held by individuals will
qualify for mid-term or long-term capital gain treatment if held for more than
12 months, and more than 18 months, respectively, and will be subject to reduced
tax rates of 28% and 20%, respectively, rather than the "regular" maximum tax
rate of 39.6%.
Each Certificateholder will realize taxable gain or loss when the Trust
disposes of a Bond (whether by sale, exchange, redemption or payment at
maturity), as if the Certificateholder had directly disposed of his pro rata
share of such Bond. The gain or loss is measured by the difference between (i)
the tax cost of such pro rata share and (ii) the amount received therefor. For
this purpose, a Certificateholder's per Unit tax cost for each Bond is
determined by allocating the total tax cost of each Unit among all the Bonds
held in the Trust (in accordance with the portion of the Trust comprised by each
Bond). In order to determine the amount of taxable gain or loss, the
Certificateholder's amount received is similarly allocated at that time. The
Certificate holder may exclude from the amount received any amounts that
represent accrued interest or the earned portion of any original issue discount
but may not exclude amounts attributable to market discount. Thus, when a Bond
is disposed of by a Trust at a gain, taxable gain will equal the difference
between (i) the amount received and (ii) the amount paid plus any original issue
discount (limited, in the case of Bonds issued after June 8, 1980, to the
portion earned from the date of acquisition to the date of disposition). Gain on
the disposition of a Bond purchased at a
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market discount generally will be treated as ordinary income, rather than
capital gain, to the extent of accrued market discount. No deduction is allowed
for the amortization of bond premium on tax-exempt bonds, such as the Bonds, in
computing regular federal income tax.
Discount generally accrues based on the principle of compounding of
accrued interest, not on a straight-line or ratable method, with the result that
the amount of earned original issue discount is less in the earlier years and
more in the later years of a bond term. The tax basis of a discount bond is
increased by the amount of accrued, tax-exempt original issue discount thus
determined. This method of calculation will produce higher capital gains (or
lower losses) to a Certificate holder, as compared to the results produced by
the straight-line method of accounting for original issue discount, upon an
early disposition of a Bond by the Trust or of a Unit by a Certificateholder.
A Certificateholder may also realize taxable gain or loss when a Unit is
sold or redeemed. The amount received is allocated among all the Bonds in a
particular Trust in the same manner as when that Trust disposes of Bonds, and
the Certificateholder may exclude accrued interest and the earned portion of any
original issue discount (but not amounts attributable to market discount). The
return of a Certificate holder's tax cost is otherwise a tax-free return of
capital.
A portion of social security benefits is includable in gross income for
taxpayers whose "modified adjusted gross income" combined with a portion of
their benefits exceeds a base amount. The base amount is $25,000 for an
individual, $32,000 for a married couple filing a joint return and zero for
married persons filing separate returns. Interest on tax-exempt bonds is to be
added to adjusted gross income for purposes of computing the amount of Social
Security benefits that are includable in gross income and determining whether an
individual's income exceeds the base amount above which a portion of the
benefits would be subject to tax.
Corporate Certificateholders are required to include in federal
corporate alternative minimum taxable income 75% of the amount by which the
adjusted current earnings (which will include tax-exempt interest) of the
corporation exceeds alternative minimum taxable income (determined without
regard to this item). In addition, in certain cases, Subchapter S corporations
with accumulated earnings and profits from Subchapter C years will be subject to
a minimum tax on excess "passive investment income" which includes tax-exempt
interest.
Under federal law, interest on Navigator Trust-held Bonds
issued by authority of the Government of Puerto Rico is exempt from regular
federal income tax, and state and local income tax in the United States and
Puerto Rico. The New York Navigator Insured Trust is not subject to the New York
State Franchise Tax on Business Corporations or the New York City General
Corporation Tax. Under the personal income tax laws of the State and City of New
York, the income of the New York Navigator Insured Trust will be treated as the
income of the Certificateholders. Interest on the Bonds of the New York
Navigator Insured Trust that is exempt from tax under the laws of the State and
City of New York when received by the Trust will retain its status as tax-exempt
interest to its Certificateholders. In addition, non-residents of New York City
will not be subject to the New York City personal income tax on gains derived
with respect to their Units of the
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New York Navigator Insured Trust. Non-residents of New York State will not be
subject to New York State personal income tax on such gains unless the Units are
employed in a business, trade or occupation carried on in New York State. A New
York State or New York City resident should determine his basis and holding
periods for his Units in the same manner for New York State and New York City
tax purposes as for federal tax purposes. For corporations doing business in New
York State, interest earned on state and municipal obligations that are exempt
from federal income tax, including obligations of New York State, its political
subdivisions and instrumentalities, must be included in calculating New York
State and New York City entire net income for purposes of calculating New York
State and New York City franchise (income) tax.
The Insured Municipal Securities Trust is not subject to the
New York State Franchise Tax on Business Corporations or the New York City
General Corporation Tax. For a Certificateholder who is a New York resident,
however, a pro rata portion of all or part of the income of the Trust will be
treated as the income of the Certificateholder under the income tax laws of the
State and City of New York. Similar treatment may apply in other states.
The exemption of interest on municipal obligations for federal
income tax purposes does not necessarily result in exemption under the income
tax laws of any state or political subdivision. In general, municipal bond
interest exempt from federal income tax is taxable income to residents of the
State or City of New York under the tax laws of those jurisdictions unless the
bonds are issued by the State of New York or one of its political subdivisions
or by the Commonwealth of Puerto Rico or one of its political subdivisions. For
corporations doing business in New York State, interest earned on state and
municipal obligations that are exempt from federal income tax, including
obligations of New York State, its political subdivisions and instrumental
ities, must be included in calculating New York State and New York City entire
net income for purposes of calculating New York State and New York City
franchise (income) tax. The laws of the several states and local taxing
authorities vary with respect to the taxation of such obligations and each
Certificateholder is advised to consult his own tax advisor as to the tax
consequences of his Certificates under state and local tax laws.
Any proceeds received pursuant to the terms of the insurance
on the Bonds that represent maturing interest on defaulted obligations will be
excludable from federal gross income if, and to the same extent that, such
interest would have been so excludable if paid by the issuers of such defaulted
obligations.
In the opinion of Zeller and Bryant, special counsel to the
Sponsor on New Jersey tax matters, which opinion is made in reliance upon
certain information and based on certain assumptions respecting the New Jersey
Navigator Trust, under existing New Jersey law applicable to individuals who are
New Jersey residents and New Jersey estates and trusts:
(1) The New Jersey Navigator Trust will be recognized
as a trust and not as an association taxable as a corporation.
The New Jersey Navigator Trust will not be subject to the New
Jersey Corporation Business Tax or the New Jersey Corporation
Income Tax.
(2) The income of the New Jersey Navigator Trust will
be treated as income of the Certificateholders who are
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individuals, estates or trusts under the New Jersey Gross
Income Tax Act, N.J.S.A. 54A: 1-1 et seq. (the "Act").
Interest on the Bonds that is exempt from tax under the Act
when received by the New Jersey Navigator Trust will retain
its status as tax-exempt interest under the Act when
distributed to Certificateholders who are individuals,
estates or trusts.
(3) Certificateholders, who are individuals, estates,
or trusts will not be subject to the Act on any gain realized
when the New Jersey Navigator Trust disposes of a Bond
(whether by sale, exchange, redemption, or payment at
maturity). Any loss realized on such disposition may not be
utilized to offset gains realized by such Certificateholder on
the disposition of assets the gain on which is subject to the
New Jersey Gross Income Tax.
(4) The sale, exchange or redemption of a Unit by a
Certificateholder shall be treated as a sale or exchange of a
Certificateholder's pro rata interest in the assets in the New
Jersey Navigator Trust at the time of the transaction and any
gain will be exempt from tax under the Act to the extent that
the price received by the selling Certificate-holder who is an
individual, estate or trust does not exceed the Redemption
Price. To the extent that the amount received by the
Certificateholder exceeds the Redemption Price, any such gain
will not be exempt from tax under the Act.
(5) All proceeds representing interest on defaulted
obligations derived by Certificateholders who are individuals,
estates or trusts from an insurance policy, either paid
directly to the Certificateholder or through the New Jersey
Navigator Trust, are exempt from tax under the Act.
(6) The Units of the New Jersey Navigator Trust may
be taxable in the estates of New Jersey residents under the
New Jersey Transfer Inheritance Tax Law or the New Jersey
Estate Tax Laws.
(7) If a Certificateholder is a corporation subject
to the New Jersey Corporation Business Tax or New Jersey
Corporation Income Tax, interest from the Bonds in the New
Jersey Navigator 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 the New Jersey Navigator Trust or on the disposition
of its Units will be included in its entire net income for
purposes of the New Jersey Corporation Business Tax or New
Jersey Corporation Income Tax. Any proceeds paid under the
insurance policy issued to the Trustee of the New Jersey
Navigator Trust with respect to the Bonds or under individual
policies obtained by issuers of Bonds which represent maturing
interest or maturing principal on defaulted
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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.
In the case of Bonds that are Industrial Revenue Bonds
("IRBs") or certain types of private activity bonds, the opinions of bond
counsel to the respective issuing authorities indicate that interest on such
Bonds is exempt from regular federal income tax. However, interest on such Bonds
will not be exempt from regular federal income tax for any period during which
such Bonds are held by a "substantial user" of the facilities financed by the
proceeds of such Bonds or by a "related person" thereof within the meaning of
the Code. Therefore, interest on any such Bonds allocable to a Certificateholder
who is such a "substantial user" or "related person" thereof will not be
tax-exempt. Furthermore, in the case of IRBs that qualify for the "small issue"
exemption, the "small issue" exemption will not be available or will be lost if,
at any time during the three-year period beginning on the later of the date the
facilities are placed in service or the date of issue, all outstanding
tax-exempt IRBs, together with a proportionate share of any present issue, of an
owner or principal user (or related person) of the facilities exceeds
$40,000,000. In the case of IRBs issued under the $10,000,000 "small issue"
exemption, interest on such IRBs will become taxable if the face amount of the
IRBs plus certain capital expenditures exceeds $10,000,000.
In addition, a Bond can lose its tax-exempt status as a result
of other subsequent but unforeseeable events such as prohibited "arbitrage"
activities by the issuer of the Bond or the failure of the Bond to continue to
satisfy the conditions required for the exemption of interest thereon from
regular federal income tax. No investigation has been made as to the current or
future owners or users of the facilities financed by the Bonds, the amount of
such persons' outstanding tax-exempt IRBs, or the facilities themselves, and no
assurance can be given that future events will not affect the tax-exempt status
of the Bonds. Investors should consult their tax advisors for advice with
respect to the effect of these provisions on their particular tax situation.
Interest on indebtedness incurred or continued to purchase or
carry the Units is not deductible for regular federal income tax purposes.
However, such interest is deductible for New York State and New York City income
tax purposes by corporations that are required to include interest on the Bonds
in New York State and New York City entire net income for purposes of
calculating New York State and City franchise (income) taxes. In addition, under
rules used by the Internal Revenue Service for determining when borrowed funds
are considered used for the purpose of purchasing or carrying particular assets,
the purchase of Units may be considered to have been made with borrowed funds
even though the borrowed funds are not directly traceable to the purchase of
Units. Also, in the case of certain financial institutions that acquire Units,
in general no deduction is allowed for interest expense allocable to the Units.
From time to time proposals have been introduced before
Congress to restrict or eliminate the federal income tax exemption for interest
on debt obligations similar to the Bonds in the Trust, and it can be expected
that similar proposals may be introduced in the future. In particular, Congress
may consider the adoption of some form of "flat tax," which could have an
adverse impact on the value of tax-exempt bonds.
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In South Carolina v. Baker, the U.S. Supreme Court held that
the federal government may constitutionally require states to register bonds
they issue and subject the interest on such bonds to federal income tax if not
registered, and that there is no constitutional prohibition against the federal
government's taxing the interest earned on state or other municipal bonds. The
Supreme Court decision affirms the authority of the federal government to
regulate and control bonds such as the Bonds in the Trust and to tax interest on
such bonds in the future. The decision does not, however, affect the current
exemption from taxation of the interest earned on the Bonds in the Trust in
accordance with Section 103 of the Code.
The opinions of bond counsel or special tax counsel to the
issuing governmental authorities to the effect that interest on the Bonds is
exempt from regular federal income tax may be limited to law existing at the
time the Bonds were issued, and may not apply to the extent that future changes
in law, regulations or interpretations affect such Bonds. Investors are advised
to consult their own tax advisors for advice with respect to the effect of any
legislative changes.
LIQUIDITY
Sponsor Repurchase. The Sponsor, although not obligated to do
so, intends to maintain a secondary market for the Units and continuously to
offer to repurchase the Units. The Sponsor's secondary market repurchase price,
after the initial public offering is completed, will be based on the aggregate
bid price of the Bonds in the Trust portfolio, determined by the Evaluator on a
daily basis, and will be the same as the redemption price. The aggregated bid
price, determined by the Evaluator on a daily basis, is computed on the basis
set forth under "Trustee Redemption". Certificateholders who wish to dispose of
their Units should inquire of the Sponsor as to current market prices prior to
making a tender for redemption. The Sponsor may discontinue repurchase of Units
if the supply of Units exceeds demand, or for other business reasons. The date
of repurchase is deemed to be the date on which Certificates representing Units
are physically received in proper form by Reich & Tang Distributors, Inc. 600
Fifth Avenue, New York, New York 10020 on behalf of the Sponsor. Units received
after 4 P.M., New York Time, will be deemed to have been repurchased on the next
business day. In the event a market is not maintained for the Units, a
Certificateholder may be able to dispose of Units only by tendering them to the
Trustee for redemption.
Prospectuses relating to certain other bond trusts indicate an
intention by the respective Sponsor, subject to change, to repurchase units on
the basis of a price higher than the bid prices of the bonds in the trusts.
Consequently, depending on the prices actually paid, the secondary market
repurchase price of other trusts may be computed on a somewhat more favorable
basis than the repurchase price offered by the Sponsor for units of this Trust,
although in all bond trusts, the purchase price of a unit depends primarily on
the value of the bonds in the trust portfolio.
Units purchased by the Sponsor in the secondary market may be
re-offered for sale by the Sponsor at a price based on the aggregate bid price
of the Bonds in the Trust plus the applicable sales charge (see "Public Offering
Price" in Part A) plus net accrued interest. Any Units that are purchased by the
Sponsor in the secondary market also may be redeemed by the Sponsor if it
determines such redemption to be in its best interest.
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The Sponsor may, under certain circumstances, as a service to
Certificateholders, elect to purchase any Units tendered to the Trustee for
redemption (see "Trustee Redemption"). Factors which the Sponsor will consider
in making a determination will include the number of Units of all Trust which it
has in inventory, its estimate of the salability and the time required to sell
such Units and general market conditions. For example, if in order to meet
redemptions of Units the Trustee must dispose of Bonds, and if such disposition
cannot be made by the redemption date (seven calendar days after tender), the
Sponsor may elect to purchase such Units. Such purchase shall be made by payment
to the Certificateholder not later than the close of business on the redemption
date of an amount equal to the Redemption Price on the date of tender.
Trustee Redemption. Units may also be tendered to the Trustee
for redemption at its corporate trust office as set forth in Part A of this
Prospectus, upon proper delivery of Certificates representing such Units and
payment of any relevant tax. At the present time there are no specific taxes
related to the redemption of Units. No redemption fee will be charged by the
Sponsor or the Trustee. Units redeemed by the Trustee will be cancelled.
Certificates representing Units to be redeemed must be
delivered to the Trustee and must be properly endorsed or accompanied by proper
instruments of transfer with signature guaranteed (or by providing satisfactory
indemnity, as in the case of lost, stolen or mutilated Certificates). Thus,
redemptions of Units cannot be effected until Certificates representing such
Units have been delivered by the person seeking redemption. (See
"Certificates".) Certificateholders must sign exactly as their names appear on
the faces of their Certificates. 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.
Within three business days following a tender for redemption,
the Certificateholder will be entitled to receive in cash an amount for each
Unit tendered equal to the Redemption Price per Unit computed as of the
Evaluation Time set forth under "Summary of Essential Information" in Part A on
the date of tender. The "date of tender" is deemed to be the date on which Units
are received by the Trustee, except that with respect to Units received after
the close of trading on the New York Stock Exchange, 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.
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 paid on redemption shall be withdrawn from
the Principal Account. The Trustee is empowered to sell Bonds in order to make
funds available for redemptions. Such sales, if required, could result in a sale
of Bonds by the Trustee at a loss. To the extent Bonds are sold, the size and
diversity of the Trust will be reduced.
The Redemption Price per Unit is the pro rata share of each
Unit in the Trust determined by the Trustee on the basis of (i) the cash on hand
in the Trust or moneys in the process of being collected, (ii) the value of the
Bonds in the Trust based on the bid prices of such Bonds and (iii) interest
accrued thereon, less (a) amounts representing taxes or other governmental
charges payable out of the Trust, (b) the accrued expenses of the Trust and (c)
cash allocated for the distribution to Certificateholders
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of record as of the business day prior to the evaluation being made. The
Evaluator may determine the value of the Bonds in the Trust (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 the Trust, (2) on the basis of bid
prices for bonds comparable to any Bonds for which bid prices are not available,
(3) by determining the value of the Bonds by appraisal, or (4) by any
combination of the above. The Evaluator will determine the aggregate current bid
price evaluation of the Bonds in the Trust, taking into account the market value
of the Bonds insured under the Bond Insurance Policy, in the manner described as
set forth under "Public Offering--Offering Price". Insurance does not guarantee
the market value of the Bonds or the Units, and while Bond insurance represents
an element of market value in regard to insured Bonds, its exact effect, if any,
on market value cannot be predicted.
The Trustee is irrevocably authorized in its discretion, if
the Sponsor does not elect to purchase a Unit tendered for redemption or if the
Sponsor tenders a Unit for redemption, in lieu of redeeming such Unit, to sell
such Unit in the over-the-counter market for the account of the tendering Cer
tificateholder at prices which will return to the Certificateholder an amount in
cash, net after deducting brokerage commissions, transfer taxes and other
charges, equal to or in excess of the Redemption Price for such Unit. The
Trustee will pay the net proceeds of any such sale to the Certificateholder on
the day he would otherwise be entitled to receive payment of the Redemption
Price.
The Trustee reserves the right to suspend the right of
redemption and to postpone the date of payment of the Redemption Price per Unit
for any period during which the New York Stock Exchange is closed, other than
customary weekend and holiday closings, or trading on that Exchange is
restricted or during which (as determined by the Securities and Exchange
Commission) an emergency exists as a result of which disposal or evaluation of
the Bonds is not reasonably practicable, or for such other periods as the
Securities and Exchange Commission may by order permit. The Trustee and the
Sponsor is not liable to any person or in any way for any loss or damage which
may result from any such suspension or postponement.
A Certificateholder who wishes to dispose of his Units should
inquire of his bank or broker in order to determine if there is a current
secondary market price in excess of the Redemption Price.
TRUST ADMINISTRATION
Portfolio Supervision. Except for the purchase of Replacement
Bonds or as discussed herein, the acquisition of any Bonds for the Trust other
than Bonds initially deposited by the Sponsor is prohibited. Although it is the
Sponsor's and Trustee's intention not to dispose of Bonds insured pursuant to
the Bond Insurance in the event of default, nevertheless, the Sponsor may direct
the Trustee to dispose of Bonds upon (i) default in payment of principal or
interest on such Bonds, (ii) institution of certain legal proceedings with
respect to the issuers of such Bonds, (iii) default under other documents
adversely affecting debt service on such Bonds, (iv) default in payment of
principal or interest on other obligations of the same issuer or guarantor, (v)
with respect to revenue Bonds, decline in revenues and income of any facility or
project below the estimated levels calculated by proper officials charged with
the construction or operation of such facility or project or (vi) decline in
price or the occurrence of other market or credit factors that in the opinion of
the Sponsor would make the retention of such
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Bonds in the Trust detrimental to the interests of the Certificateholders. If a
default in the payment of principal or interest on any of the Bonds occurs and
if the Sponsor fails to instruct the Trustee to sell or hold such Bonds, the
Trust Agreement provides that the Trustee may sell such Bonds. The Trustee shall
not be liable for any depreciation or loss by reason of any sale of bonds or by
reason of the failure of the Sponsor to give directions to the Trustee.
The Sponsor is authorized by the Trust Agreement to direct the
Trustee to accept or reject certain plans for the refunding or refinancing of
any of the Bonds. Any bonds received in exchange or substitution will be held by
the Trustee subject to the terms and conditions of the Agreement to the same
extent as the Bonds originally deposited. Within five days after such deposit,
notice of such exchange and deposit shall be given by the Trustee to each
Certificateholder registered on the books of the Trustee, including an
identification of the Bonds eliminated and the Bonds substituted therefor.
Trust Agreement, Amendment And Termination. The Trust
Agreement may be amended by the Trustee, the Sponsor and the Evaluator without
the consent of any of the Certificateholders: (1) to cure any ambiguity or to
correct or supplement any provision which may be defective or inconsistent; (2)
to change any provision thereof as may be required by the Securities and
Exchange Commission or any successor governmental agency; or (3) to make such
other provisions in regard to matters arising thereunder as shall not adversely
affect the interests of the Certificateholders.
The Trust Agreement may also be amended in any respect, or
performance of any of the provisions thereof may be waived, with the consent of
the holders of Certificates evidencing 66-2/3% of the Units then outstanding for
the purpose of modifying the rights of Certificateholders; provided that no such
amendment or waiver shall reduce any Certificateholder's interest in the Trust
without his consent or reduce the percentage of Units required to consent to any
such amendment or waiver without the consent of the holders of all Certificates.
The Trust Agreement may not be amended, without the consent of the holders of
all Certificates then outstanding, to increase the number of Units issuable or
to permit the acquisition of any bonds in addition to or in substitution for
those initially deposited in the Trust, except in accordance with the provisions
of the Trust Agreement. The Trustee shall promptly notify Certificateholders, in
writing, of the substance of any such amendment.
The Trust Agreement provides that the Trust shall terminate
upon the maturity, redemption or other disposition, as the case may be, of the
last of the Bonds held in the Trust but in no event is it to continue beyond the
end of the calendar year preceding the fiftieth anniversary of the execution of
the Trust Agreement. If the value of the Trust shall be less than the minimum
amount set forth under "Summary of Essential Information" in Part A, the Trustee
may, in its discretion, and shall when so directed by the Sponsor, terminate the
Trust. The Trust may also be terminated at any time with the consent of the
holders of Certificates representing 100% of the Units then outstanding. In the
event of termination, written notice thereof will be sent by the Trustee to all
Certificateholders. Within a reasonable period after termination, the Trustee
must sell any Bond remaining in the Trust, and, after paying all expenses and
charges incurred by the Trust, distribute to each Certificateholder, upon
surrender for cancellation of his Certificate for Units, his pro rata share of
the Interest and Principal Accounts.
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The Sponsors. The Sponsor, Reich & Tang Distributors, Inc.
("Reich & Tang") (successor to the Unit Investment Trust division of Bear,
Stearns & Co. Inc.), a Delaware limited partnership, is engaged in the brokerage
business and is a member of the National Association of Securities Dealers, Inc.
Reich & Tang is also a registered investment adviser. Reich & Tang maintains its
principal business offices at 600 Fifth Avenue, New York, New York 10020. The
sole shareholder of the Sponsor, Reich & Tang Asset Management, Inc. ("RTAM
Inc.") is wholly owned by NEIC Holdings, Inc. which, effective December 29,
1997, was wholly owned by NEIC Operating Partnership, L.P. ("NEICOP").
Subsequently, on March 31, 1998, NEICOP changed its name to Nvest Companies,
L.P. ("Nvest"). The general partners of Nvest are Nvest Corporation and Nvest,
L.P. Nvest, L.P. is owned approximately 99% by public unitholders and its
general partner is Nvest Corporation. Nvest, with a principal place of business
at 399 Boylston Street, Boston, MA 02116, is a holding company of firms engaged
in the securities and investment advisory business. These affiliates in the
aggregate are investment advisors or managers to over 80 registered investment
companies. Reich & Tang is Sponsor (and Co-Sponsor, as the case may be) for
numerous series of unit investment trusts, including New York Municipal Trust,
Series 1 (and Subsequent Series), Municipal Securities Trust, Series 1 (and
Subsequent Series), 1st Discount Series (and Subsequent Series), Multi-State
Series 1 (and Subsequent Series), Mortgage Securities Trust, Series 1 (and
Subsequent Series), Insured Municipal Securities Trust, Series 1 (and Subsequent
Series) and 5th Discount Series (and Subsequent Series), Equity Securities
Trust, Series 1, Signature Series, Gabelli Communications Income Trust (and
Subsequent Series) and Schwab Trusts.
Nvest Corporation is wholly owned by MetLife New England
Holdings, Inc., a wholly-owned subsidiary of Metropolitan Life Insurance Company
("MetLife"). Effective December 30, 1997, MetLife owns approximately 47% of the
limited partnership interests of Nvest.
MetLife is a mutual life insurance company with assets of
$297.6 billion at December 31, 1996. It is the second largest life insurance
company in the United States in terms of total assets. MetLife provides a wide
range of insurance and investment products and services to individuals and
groups and is the leader among United States life insurance companies in terms
of total life insurance in force, which exceeded $1.6 trillion at December 31,
1996 for MetLife and its insurance affiliates. MetLife and its affiliates
provide insurance or other financial services to approximately 36 million people
worldwide.
For certain other Trusts as set forth in the "Summary of
Essential Information" in Part A, the Sponsors are Reich & Tang and Gruntal &
Co., L.L.C., both of whom have entered into an Agreement Among Co-Sponsors
pursuant to which both parties have agreed to act as Co-Sponsors for the Trust.
Reich & Tang has been appointed by Gruntal & Co., L.L.C. as agent for purposes
of taking any action required or permitted to be taken by the Sponsor under the
Trust Agreement. If the Sponsors are unable to agree with respect to action to
be taken jointly by them under the Trust Agreement and they cannot agree as to
which Sponsor shall act as sole Sponsor, then Reich & Tang shall act as sole
Sponsor. If one of the Sponsors fails to perform its duties under the Trust
Agreement or becomes incapable of acting or becomes bankrupt or its affairs are
taken over by public authorities, that Sponsor may be discharged under the Trust
Agreement and a new Sponsor may be appointed or the remaining Sponsor may
continue to act as Sponsor.
Gruntal & Co., L.L.C., a Delaware limited liability company,
operates a regional securities broker/dealer from its main office in New York
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City and branch offices in nine states. The firm is very active in the marketing
of investment companies and has signed dealer agreements with many mutual fund
groups. Further, through its Syndicate Department, Gruntal & Co., L.L.C. has
underwritten a large number of Closed-End Funds and has been Co- Manager on the
following offerings: Cigna High Income Shares; Dreyfus New York Municipal
Income, Inc.; Franklin Principal Maturity Trust and Van Kampen Merritt Limited
Term High Income Trust. The Sponsor is liable for the performance of its
obligations arising from its responsibilities under the Trust Agreement, but
will be under no liability to Certificateholders for taking any action, or
refraining from taking any action, in good faith pursuant to the Trust
Agreement, or for errors in judgment except in cases of its own willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties.
The information included herein is only for the purpose of
informing investors as to the financial responsibility of the Sponsor and its
ability to carry out its contractual obligations. The Sponsor will be under no
liability to Certificateholders for taking any action, or refraining from taking
any action, in good faith pursuant to the Trust Agreement, or for errors in
judgment except in cases of its own wilful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
Unless the Sponsor otherwise directs, the accounts of the
Trust shall be audited not less than annually by independent public accountants
selected by the Sponsor. The expenses of the audit shall be an expense of the
Trust. So long as the Sponsor maintains a secondary market, the Sponsor will
bear any audit expense which exceeds $.50 per 1,000 Units. Certificateholders
covered by the audit during the year may receive a copy of the audited
financials upon request.
The Sponsor may resign at any time by delivering to the
Trustee an instrument of resignation executed by the Sponsor.
If at any time the Sponsor shall resign or fail to perform any
of its duties under the Trust Agreement or becomes incapable of acting or
becomes bankrupt or its affairs are taken over by public authorities, then the
Trustee may either (a) appoint a successor Sponsor; (b) terminate the Trust
Agreement and liquidate the Trust; or (c) continue to act as Trustee without
terminating the Trust Agreement. Any successor Sponsor appointed by the Trustee
shall be satisfactory to the Trustee and, at the time of appointment, shall have
a net worth of at least $1,000,000.
The Trustee. For certain of the Trusts, as set forth in the
"Summary of Essential Information" in Part A, the Trustee is The Chase Manhattan
Bank with its principal executive office located at 270 Park Avenue, New York,
New York 10017 (800) 428-8890 and its unit investment trust office at 4 New York
Plaza, New York, New York 10004. The Trustee is subject to supervision by the
Superintendent of Banks of the State of New York, the Federal Deposit Insurance
Corporation and the Board of Governors of the Federal Reserve System.
The Trustee must be a banking corporation organized under the
laws of the United States or any state which is authorized under such laws to
exercise corporate trust powers and must have at all times an aggregate capital,
surplus and undivided profits of not less than $5,000,000. The duties of the
Trustee are primarily ministerial in nature. The Trustee did not participate in
the selection of Securities for the portfolio of the Trust.
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The Trustee shall not be liable or responsible in any way for
taking any action, or for refraining from taking any action, in good faith
pursuant to the Trust Agreement, or for errors in judgment; or for any
disposition of any moneys, bonds or Certificates in accordance with the Trust
Agreement, except in cases of its own willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties; provided,
however, that the Trustee shall not in any event be liable or responsible for
any evaluation made by the Evaluator. In addition, the Trustee shall not be
liable for any taxes or other governmental charges imposed upon or in respect of
the Bonds or the Trust which it may be required to pay under current or future
law of the United States or any other taxing authority having jurisdiction. The
Trustee shall not be liable for depreciation or loss incurred by reason of the
sale by the Trustee of any of the Bonds pursuant to the Trust Agreement.
For further information relating to the responsibilities of
the Trustee under the Trust Agreement, reference is made to the material set
forth under "Rights of Certificateholders".
The Trustee may resign by executing an instrument in writing
and filing the same with the Sponsor, and mailing a copy of a notice of
resignation to all Certificateholders. In such an event the Sponsor is obligated
to appoint a successor Trustee as soon as possible. In addition, if the Trustee
becomes incapable of acting or becomes bankrupt or its affairs are taken over by
public authorities, the Sponsor may remove the Trustee and appoint a successor
as provided in the Trust Agreement. Notice of such removal and appointment shall
be mailed to each Certificateholder by the Sponsor. If upon resignation of the
Trustee no successor has been appointed and has accepted the appointment within
thirty days after notification, the retiring Trustee may apply to a court of
competent jurisdiction for the appointment of a successor. The resignation or
removal of the Trustee becomes effective only when the successor Trustee accepts
its appointment as such or when a court of competent jurisdiction appoints a
successor Trustee. Upon execution of a written acceptance of such appointment by
such successor Trustee, all the rights, powers, duties and obligations of the
original Trustee shall vest in the successor.
Any corporation into which the Trustee may be merged or with
which it may be consolidated, or any corporation resulting from any merger or
consolidation to which the Trustee shall be a party, shall be the successor
Trustee. The Trustee must always be a banking corporation organized under the
laws of the United States or any State and have at all times an aggregate
capital, surplus and undivided profits of not less than $2,500,000.
The Evaluator. The Evaluator is Kenny S&P Evaluation Services,
a division of a business unit of J.J. Kenny Company, Inc., a subsidiary of The
McGraw-Hill Companies, with main offices located at 65 Broadway, New York, New
York 10006. The Evaluator is a wholly-owned subsidiary of McGraw Hill, Inc. The
Evaluator is a registered investment advisor and also provides financial
information services.
The Trustee, the Sponsor and the Certificateholders 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, the Sponsor or Certificateholders for errors in
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judgment, except in cases of its own willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
The Evaluator may resign or may be removed by the Sponsor and
Trustee, and the Sponsor and the Trustee are to use their best efforts to
appoint a satisfactory successor. Such resignation or removal shall become
effective upon the acceptance of appointment by the successor Evaluator. If upon
resignation of the Evaluator no successor has accepted appointment within thirty
days after notice of resignation, the Evaluator may apply to a court of
competent jurisdiction for the appointment of a successor.
TRUST EXPENSES AND CHARGES
At no cost to the Trust, the Sponsor has borne the expenses of
creating and establishing the Trust, including the cost of initial preparation
and execution of the Trust Agreement, registration of the Trust and the Units
under the Investment Company Act of 1940 and the Securities Act of 1933, the
premiums on the Sponsor-Insured Bonds, initial preparation and printing of the
Certificates, legal expenses, advertising and selling expenses, expenses of the
Trustee including, but not limited to, an amount equal to interest accrued on
certain "when issued" bonds since the date of settlement for the Units, initial
fees and other out-of-pocket expenses. The fees of the Evaluator, however,
incurred during the initial public offering are paid directly by the Trust.
The Sponsor will not charge the Trust a fee for its services
as such. (See "Sponsor's Profits".)
The Sponsor will receive for portfolio supervisory services to
the Trust an Annual Fee in the amount set forth under "Summary of Essential
Information" in Part A of this Prospectus. The Sponsor's fee may exceed the
actual cost of providing portfolio supervisory services for this Trust, but at
no time will the total amount received for portfolio supervisory services
rendered to all series of the Municipal Securities Trust in any calendar year
exceed the aggregate cost to the Sponsor of supplying such services in such
year. (See "Portfolio Supervision".)
The Trustee will receive for its ordinary recurring services
to the Trust an annual fee in the amount set forth under "Summary of Essential
Information" in Part A of this Prospectus. For a discussion of the services
performed by the Trustee pursuant to its obligations under the Trust Agreement,
see "Trust Administration" and "Rights of Certificateholders".
The Evaluator will receive, for each daily evaluation of the
Bonds in the Trust after the initial public offering is completed, a fee in the
amount set forth under "Summary of Essential Information" in Part A of this
Prospectus.
The Trustee's and Evaluator's fees are payable monthly as of
the Record Date from the Interest Account to the extent funds are available and
then from the Principal Account. Both fees may be increased without approval of
the Certificateholders by amounts not exceeding proportionate increases in
consumer prices for services as measured by the United States Department of
Labor's Consumer Price Index entitled "All Services Less Rent".
The following additional charges are or may be incurred by the
Trust: all expenses (including counsel fees) of the Trustee incurred and
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advances made in connection with its activities under the Trust Agreement,
including the expenses and costs of any action undertaken by the Trustee to
protect the Trust and the rights and interests of the Certificateholders; fees
of the Trustee for any extraordinary services performed under the Trust
Agreement; indemnification of the Trustee for any loss or liability accruing to
it without gross negligence, bad faith or willful misconduct on its part,
arising out of or in connection with its acceptance or administration of the
Trust; indemnification of the Sponsor for any losses, liabilities and expenses
incurred in acting as Sponsor of the Trust without gross negligence, bad faith
or willful misconduct on its part; and all taxes and other governmental charges
imposed upon the Bonds or any part of the Trust (no such taxes or charges are
being levied, made or, to the knowledge of the Sponsor, contemplated). The above
expenses, including the Trustee's fees, when paid by or owing to the Trustee are
secured by a first lien on the Trust. In addition, the Trustee is empowered to
sell Bonds in order to make funds available to pay all expenses.
The accounts of the Trust shall be audited not less than
annually by independent public accountants selected by the Sponsor. So long as
the Sponsor maintains a secondary market, the Sponsor will bear any audit
expense which exceeds 50 cents per Unit. Certificateholders covered by the audit
during the year may receive a copy of the audited financial statements upon
request.
EXCHANGE PRIVILEGE AND CONVERSION OFFER
Certificateholders will be able to elect to exchange any or
all of their Units of this Trust for Units of one or more of any available
series of Equity Securities Trust, Insured Municipal Securities Trust, Municipal
Securities Trust, New York Municipal Trust or Mortgage Securities Trust (the
"Exchange Trusts") subject to a reduced sales charge as set forth in the
prospectus of the Exchange Trust (the "Exchange Privilege"). Unit owners of any
registered unit investment trust for which there is no active secondary market
in the units of such trust (a "Redemption Trust") will be able to elect to
redeem such units and apply the proceeds of the redemption to the purchase of
available Units of one or more series of an Exchange Trust (the "Conversion
Trusts") at the Public Offering Price for units of the Conversion Trust subject
to a reduced sales charge as set forth in the prospectus of the Conversion Trust
(the "Conversion Offer"). Under the Exchange Privilege, the Sponsor's repurchase
price during the initial offering period of the Units being surrendered will be
based on the market value of the Securities in the Trust portfolio or on the
aggregate offer price of the Bonds in the other Trust Portfolios; and, after the
initial offering period has been completed, will be based on the aggregate bid
price of the securities in the particular Trust portfolio. Under the Conversion
Offer, units of the Redemption Trust must be tendered to the trustee of such
trust for redemption at the redemption price determined as set forth in the
relevant Redemption Trust's prospectus. Units in an Exchange or Conversion Trust
will be sold to the Certificateholder at a price based on the aggregate offer
price of the securities in the Exchange or Conversion trust portfolio (or for
units of Equity Securities Trust, based on the market value of the underlying
securities in the trust portfolio) during the initial public offering period of
the Exchange or Conversion Trust; and after the initial public offering period
has been completed, based on the aggregate bid price of the securities in the
Exchange or Conversion Trust Portfolio if its initial offering has been
completed plus accrued interest (or for units of Equity Securities Trust, based
on the market
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value of the underlying securities in the trust portfolio) and a reduced sales
charge.
Except for Certificateholders who wish to exercise the
Exchange Privilege or Conversion Offer within the first five months of their
purchase of Units of the Exchange or Redemption Trust, any purchaser who
purchases Units under the Exchange Privilege or Conversion Offer will pay a
lower sales charge than that which would be paid for the Units by a new
investor. For Certificateholders who wish to exercise the Exchange Privilege or
Conversion Offer within the first five months of their purchase of Units of the
Exchange or Redemption Trust, the sales charge applicable to the purchase of
units of an Exchange or Conversion Trust shall be the greater of (i) the reduced
sales charge or (ii) an amount which when coupled with the sales charge paid by
the Certificateholder upon his original purchase of Units of the Exchange or
Redemption Trust would equal the sales charge applicable in the direct purchase
of units of an Exchange Trust.
In order to exercise the Exchange Privilege the Sponsor must
be maintaining a secondary market in the units of the available Exchange Trust.
The Conversion Offer is limited only to unit owners of any Redemption Trust.
Exercise of the Exchange Privilege and the Conversion Offer by
Certificateholders is subject to the following additional conditions: (i) at the
time of the Certificateholder's election to participate in the Exchange
Privilege or Conversion Offer, there must be units of the Exchange or Conversion
Trust available for sale, either under the initial primary distribution or in
the Sponsor's secondary market, (ii) exchanges will be effected in whole units
only, (iii) Units of the Mortgage Securities Trust may only be acquired in
blocks of 1,000 Units and (iv) Units of the Equity Securities Trust may only be
acquired in blocks of 100 Units. Certificate holders will not be permitted to
advance any funds in excess of their redemption in order to complete the
exchange. Any excess proceeds received from a Certificateholder for exchange or
from units being redeemed per conversion will be remitted to such
Certificateholder.
The Sponsor reserves the right to suspend, modify or terminate
the Exchange Privilege and/or the Conversion Offer. The Sponsor will provide
Certificateholders of the Trust with 60 days' prior written notice of any
termination or material amendment to the Exchange Privilege and/or the
Conversion Offer, provided that no notice need be given if (i) the only material
effect of an amendment is to reduce or eliminate the sales charge payable at the
time of the exchange, to add one or more series of the Trust eligible for the
Exchange Privilege or the Conversion Offer, to add any new unit investment trust
sponsored by Reich & Tang or a sponsor controlled by or under common control
with Reich & Tang or to delete a series which has been terminated from
eligibility for the Exchange Privilege and/or the Conversion Offer, (ii) there
is a suspension of the redemption of units of an Exchange or Conversion Trust
under Section 22(e) of the Investment Company Act of 1940, or (iii) an Exchange
Trust temporarily delays or ceases the sale of its units because it is unable to
invest amounts effectively in accordance with its investment objectives,
policies and restrictions. During the 60-day notice period prior to the
termination or material amendment of the Exchange Privilege described above, the
Sponsor will continue to maintain a secondary market in the units of all
Exchange Trusts that could be acquired by the affected Certificateholders.
Certificateholders may, during this 60-day period, exercise the Exchange
Privilege in accordance with its terms then in effect.
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To exercise the Exchange Privilege, a Certificateholder should
notify the Sponsor of his desire to exercise his Exchange Privilege. To exercise
the Conversion Offer, a unit owner of a Redemption Trust should notify his
retail broker of his desire to redeem his Redemption Trust Units and use the
proceeds from the redemption to purchase Units of one or more of the Conversion
Trusts. If Units of a designated, outstanding series of an Exchange or
Conversion Trust are at the time available for sale and such Units may lawfully
be sold in the state in which the Certificateholder is a resident, the
Certificateholder will be provided with a current prospectus or prospectuses
relating to each Exchange or Conversion Trust in which he indicates an interest.
He may then select the Trust or Trusts into which he desires to invest the
proceeds from his sale of Units. The exchange transaction will operate in a
manner essentially identical to a secondary market transaction except that units
may be purchased at a reduced sales charge. The conversion transaction will be
handled entirely through the unit owner's retail broker. The retail broker must
tender the units to the trustee of the Redemption Trust for redemption and then
apply the proceeds to the redemption toward the purchase of units of a
Conversion Trust at a price based on the aggregate offer or bid side evaluation
per Unit of the Conversion Trust, depending on which price is applicable, plus
accrued interest and the applicable sales charge. The certificates must be
surrendered to the broker at the time the redemption order is placed and the
broker must specify to the Sponsor that the purchase of Conversion Trust Units
is being made pursuant to the Conversion Offer. The unit owner's broker will be
entitled to retail a portion of the sales charge.
Tax Consequences of the Exchange Privilege and the Conversion
Offer. A surrender of Units pursuant to the Exchange Privilege or the Conversion
Offer will constitute a "taxable event" to the Certificateholder under the
Internal Revenue Code. The Certificateholder will realize a tax gain or loss
that will be of a long-, mid- or short-term capital or ordinary income nature
dependent on the length of time the Units have been held and other factors. (See
"Tax Status".) A Certificateholder's tax basis in the Units acquired pursuant to
the Exchange Privilege or Conversion Offer will be equal to the purchase price
of such Units. Investors should consult their own tax advisors as to the tax
consequences to them of exchanging or redeeming units and participating in the
Exchange Privilege or Conversion Offer.
OTHER MATTERS
Legal Opinions. The legality of the Units offered hereby and
certain matters relating to federal tax law have been passed upon by Battle
Fowler LLP, 75 East 55th Street, New York, New York 10022, as counsel for the
Sponsor. Carter, Ledyard & Milburn, Two Wall Street, New York, New York 10005
have acted as counsel for The Chase Manhattan Bank. Certain matters relating to
New Jersey tax law have been passed upon by Zeller and Bryant, as special New
Jersey counsel to the Sponsor.
Independent Accountants. The financial statements of the
Trusts for the years ended December 31, 1996 and 1997 included in Part A of this
Prospectus have been examined by Price Waterhouse LLP, independent accountants.
The financial statements have been so included in reliance on their report given
upon the authority of said firm as experts in accounting and auditing. KPMG Peat
Marwick LLP has consented to the incorporation by reference of their report on
the statements of operations and changes in net assets for the Trusts included
in Part A of this Prospectus for the period ended December 31, 1995.
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Performance Information. Total returns, average annualized
returns or cumulative returns for various periods of this Trust may be included
from time to time in advertisements, sales literature and reports to current or
prospective investors. Total return shows changes in Unit price during the
period plus reinvestment of dividends and capital gains, divided by the original
public offering price as of the date of calculation. Average annualized returns
show the average return for stated periods of longer than a year. Sales material
may also include an illustration of the cumulative results of like annual
investments during an accumulation period and like annual withdrawals during a
distribution period. Figures for actual portfolios will reflect all applicable
expenses and, unless otherwise stated, the maximum sales charge. No provision is
made for any income taxes payable. Returns may also be shown on a combined
basis. Trust performance may be compared to performance on a total return basis
of the Dow Jones Industrial Average, the S&P 500 Composite Price Stock Index, or
performance data from Lipper Analytical Services, Inc. and Morningstar
Publications, Inc. or from publications such as Money, The New York Times, U.S.
News and World Report, Business Week, Forbes or Fortune. As with other
performance data, performance comparisons should not be considered
representative of a Trust's relative performance for any future period.
DESCRIPTION OF BOND RATINGS*
Standard & Poor's Ratings Services. A brief description of the
applicable Standard & Poor's rating symbols and their meanings is as follows:
A Standard & Poor's corporate or municipal bond rating is a
current assessment of the creditworthiness of an obligor with respect to a
specific debt obligation. This assessment of creditworthiness may take into
consideration obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase or sell a
security, inasmuch as it does not comment as to market price.
The ratings are based on current information furnished to
Standard & Poor's by the issuer and obtained by Standard & Poor's from other
sources it considers reliable. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
II. Nature of and provisions of the obligation.
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
- --------
* As described by Standard & Poor's.
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AAA -- This is the highest rating assigned by Standard &
Poor's to a debt obligation and indicates an extremely strong capacity to pay
principal and interest.
AA -- Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very strong, and they
differ from AAA issues only in small degrees.
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 principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay principal and interest for
bonds in this category than for bonds in the A category.
Plus (+) or Minus (-): To provide more detailed indications of
credit quality, the ratings from "AA" to "BB" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
Provisional Ratings (Prov.) following a rating indicates the
rating is provisional, which 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.
DESCRIPTION OF RATING ON THE UNITS*
A Standard & Poor's rating on the units of an investment trust
(hereinafter referred to collectively as "units" and "fund") is a current
assessment of creditworthiness with respect to the investments held by such
fund. This assessment takes into consideration the financial capacity of the
issuers and of any guarantors, insurers, lessees, or mortgagors with respect to
such investments. The assessment, however, does not take into account the extent
to which fund expenses or portfolio asset sales for less than the fund's
purchase price will reduce payment to the unit holder of the interest and
principal required to be paid on the portfolio assets. In addition, the rating
is not a recommendation to purchase, sell, or hold units, inasmuch as the rating
does not comment as to market price of the units or suitability for a particular
investor.
Funds rated "AAA" are composed exclusively of assets that are
rated "AAA" by Standard & Poor's or have, in the opinion of Standard & Poor's,
credit characteristics comparable to assets that are rated "AAA", or certain
short-term investments. Standard & Poor's defines its AAA rating for such assets
as the highest rating assigned by Standard & Poor's to a debt obligation.
Capacity to pay interest and repay principal is very strong.
- --------
* As described by Standard & Poor's Corporation.
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<TABLE>
<S> <C>
INDEX INSURED
MUNICIPAL SECURITIES TRUST
Title Page (Unit Investment Trust)
Prospectus
Summary of Essential Information..................................A-5
Financial and Statistical Information.............................A-6 Dated: October 31, 1997
Information Regarding the Trust...................................A-7
Audit and Financial Information...................................F-1 Sponsor:
Reich & Tang Distributors, Inc.
The Trust........................................................ 1 600 Fifth Avenue
Risk Considerations............................................... 15 New York, New York 10020
Public Offering................................................... 35 (212) 830-5200
Estimated Long Term Return and
Estimated Current Return........................................ 37
Rights of Certificateholders...................................... 38 (and for certain Trusts:)
Tax Status........................................................ 40 Gruntal & Co., L.L.C.
Liquidity......................................................... 46 14 Wall Street
Trust Administration.............................................. 48 New York, New York 10005
Trust Expenses and Charges........................................ 53 212-267-8800
Exchange Privilege and Conversion
Offer........................................................... 54 Trustee:
Other Matters..................................................... 56
Description of Bond Ratings....................................... 57 The Chase Manhattan Bank
Description of Rating on the Units................................ 58 4 New York Plaza
New York, New York 10004
Parts A and B of this Prospectus do not 800-882-9898
contain all of the information set forth in
the registration statement and exhibits Evaluator:
relating thereto, filed with the Securities
and Exchange Commission, Washington, D.C., Kenny S&P
under the Securities Act of 1933, and to Evaluation Services
which reference is made. 65 Broadway
New York, New York 10006
* * *
</TABLE>
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.
* * *
No person is authorized to give any information or to make any
representations not contained in Parts A and B of this Prospectus; and any
information or representation not contained herein must not be relied upon as
having been authorized by the Trust, the Trustee, the Evaluator, or the Sponsor.
The Trust is registered as a unit investment trust under the Investment Company
Act of 1940. Such registration does not imply that the Trust or any of its Units
have been guaranteed, sponsored, recommended or approved by the United States or
any state or any agency or officer thereof.
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