File No. 33-37954
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
POST-EFFECTIVE
AMENDMENT NO. 3
TO
FORM S-6
For Registration Under the Securities Act of 1933 of Securities
of Unit Investment Trusts Registered on Form N-8B-2
THE FIRST TRUST COMBINED SERIES 125
(Exact Name of Trust)
NIKE SECURITIES L.P.
(Exact Name of Depositor)
1001 Warrenville Road
Lisle, Illinois 60532
(Complete address of Depositor's principal executive offices)
NIKE SECURITIES L.P. CHAPMAN AND CUTLER
Attn: James A. Bowen Attn: Eric F. Fess
1001 Warrenville Road 111 West Monroe Street
Lisle, Illinois 60532 Chicago, Illinois 60603
(Name and complete address of agents for service)
It is proposed that this filing will become effective (check
appropriate box)
: : immediately upon filing pursuant to paragraph (b)
: x : February 28, 1994
: : 60 days after filing pursuant to paragraph (a)
: : on (date) pursuant to paragraph (a) of rule (485 or 486)
Pursuant to Rule 24f-2 under the Investment Company Act of
1940, the issuer has registered an indefinite amount of
securities. A 24f-2 Notice for the offering was last filed on
December 10, 1993.
<PAGE>
THE FIRST TRUST COMBINED SERIES 125
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 198
14,101 UNITS
PROSPECTUS
Part One
Dated February 18, 1994
Note: Part One of this Prospectus may not be distributed unless accompanied by
Part Two.
In the opinion of Counsel, interest income to the Trust and to Unit holders,
with certain exceptions, is exempt under existing law from all Federal income
taxes, but may be subject to state and local taxes. Capital gains, if any,
are subject to tax.
The Trust
The First Trust of Insured Municipal Bonds, Series 198 (the "Trust") is an
insured and fixed portfolio of interest-bearing obligations issued by or on
behalf of municipalities and other governmental authorities, the interest on
which is, in the opinion of recognized bond counsel to the issuing
governmental authorities, exempt from all Federal income taxes under existing
law. At January 18, 1994, each Unit represented a 1/14,101 undivided interest
in the principal and net income of the Trust (see "The Fund" in Part Two).
The Units being offered by this Prospectus are issued and outstanding Units
which have been purchased by the Sponsor in the secondary market or from the
Trustee after having been tendered for redemption. The profit or loss
resulting from the sale of Units will accrue to the Sponsor. No proceeds from
the sale of Units will be received by the Trust.
Public Offering Price
The Public Offering Price of the Units is equal to the aggregate value of the
Bonds in the Portfolio of the Trust divided by the number of Units
outstanding, plus a sales charge of 4.3% of the Public Offering Price (4.493%
of the amount invested). At January 18, 1994, the Public Offering Price per
Unit was $1,079.10 plus net interest accrued to date of settlement (five
business days after such date) of $12.18 and $17.96 for the monthly and semi-
annual distribution plans, respectively (see "Market for Units" in Part Two).
Please retain both parts of this Prospectus for future reference.
______________________________________________________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
______________________________________________________________________________
NIKE SECURITIES L.P.
Sponsor
<PAGE>
Estimated Current Return and Estimated Long-Term Return
Estimated Current Return to Unit holders under the semi-annual distribution
plan was 6.43% per annum on January 18, 1994, and 6.38% under the monthly
distribution plan. Estimated Long-Term Return to Unit holders under the semi-
annual distribution plan was 4.22% per annum on January 18, 1994, and 4.17%
under the monthly distribution plan. Estimated Current Return is calculated
by dividing the Estimated Net Annual Interest Income per Unit by the Public
Offering Price. Estimated Long-Term Return is calculated using a formula
which (1) takes into consideration and determines and factors in the relative
weightings of the market values, yields (which take into account the
amortization of premiums and the accretion of discounts) and estimated
retirements of all of the Bonds in the Trust; (2) takes into account the
expenses and sales charge associated with each Unit of the Trust; and (3)
takes into effect the tax-adjusted yield from potential capital gains at the
Date of Deposit. Since the market values and estimated retirements of the
Bonds and the expenses of the Trust will change, there is no assurance that
the present Estimated Current Return and Estimated Long-Term Return indicated
above will be realized in the future. Estimated Current Return and Estimated
Long-Term Return are expected to differ because the calculation of the
Estimated Long-Term Return reflects the estimated date and amount of principal
returned while the Estimated Current Return calculations include only Net
Annual Interest Income and Public Offering Price. The above figures are based
on estimated per Unit cash flows. Estimated cash flows will vary with changes
in fees and expenses, with changes in current interest rates, and with the
principal prepayment, redemption, maturity, call, exchange or sale of the
underlying Bonds. See "What are Estimated Current Return and Estimated Long-
Term Return?" in Part Two.
<PAGE>
THE FIRST TRUST COMBINED SERIES 125
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 198
SUMMARY OF ESSENTIAL INFORMATION AS OF JANUARY 18, 1994
Sponsor: Nike Securities L.P.
Evaluator: Securities Evaluation Service, Inc.
Trustee: United States Trust Company of New York
<TABLE>
<CAPTION>
GENERAL INFORMATION
<S> <C>
Principal Amount of Bonds in the Trust $13,625,000
Number of Units 14,101
Fractional Undivided Interest in the Trust per Unit 1/14,101
Public Offering Price:
Aggregate Value of Bonds in the Portfolio $14,562,151
Aggregate Value of Bonds per Unit $1,032.70
Sales Charge 4.493% (4.3% of Public Offering Price) $46.40
Public Offering Price per Unit $1,079.10*
Redemption Price and Sponsor's Repurchase Price per Unit
($46.40 less than the Public Offering Price per Unit) $1,032.70*
Discretionary Liquidation Amount of the Trust (20% of the
original principal amount of Bonds in the Trust) $2,768,000
</TABLE>
Date Trust Established December 27, 1990
Mandatory Termination Date December 31, 2039
Evaluator's Fee: $4,152 annually. Evaluations for purposes of sale, purchase
or redemption of Units are made as of the close of trading (4:00 p.m. Eastern
time) on the New York Stock Exchange on each day on which it is open.
Supervisory fee payable to an Maximum of $.25
affiliate of the Sponsor per unit annually
[FN]
*Plus net interest accrued to date of settlement (five business days after
purchase) (see "Public Offering Price" herein and "Redemption of Units" and
"Purchase of Units by Sponsor" in Part Two).
<PAGE>
PER UNIT INFORMATION BASED ON VARIOUS DISTRIBUTION PLANS
<TABLE>
<CAPTION>
Semi-
Monthly Annual
<S> <C> <C>
Calculation of Estimated Net Annual Income:
Estimated Annual Interest Income $70.86 $70.86
Less: Estimated Annual Expense $2.05 $1.52
Estimated Net Annual Interest Income $68.81 $69.34
Calculation of Interest Distribution:
Estimated Net Annual Interest Income $68.81 $69.34
Divided by 12, 2 and 4, Respectively $5.73 $34.67
Estimated Daily Rate of Net Interest Accrual $.1911 $.1926
Estimated Current Return Based on Public
Offering Price 6.38% 6.43%
Estimated Long-Term Return Based on Public
Offering Price 4.17% 4.22%
</TABLE>
Trustee's Annual Fee: $1.05 and $.55 per $1,000 principal amount of Bonds for
those portions of the Trust under the monthly and semi-annual distribution
plans, respectively.
Computation Dates: Fifteenth day of the month as follows: monthly--each
month; semi-annual--June and December.
Distribution Dates: First day of the month as follows: monthly--each month;
semi-annual--January and July.
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Unit Holders of The First Trust Combined
Series 125, The First Trust of Insured Municipal
Bonds, Series 198
We have audited the accompanying statement of assets and liabilities,
including the portfolio, of The First Trust Combined Series 125, The First
Trust of Insured Municipal Bonds, Series 198 as of October 31, 1993, and the
related statements of operations and changes in net assets for each of the two
years in the period then ended and for the period from the Date of Deposit,
December 27, 1990, to October 31, 1991. These financial statements are the
responsibility of the Trust's Trustee. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of October 31, 1993,
by correspondence with the Trustee. An audit also includes assessing the
accounting principles used and significant estimates made by the Trustee, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The First Trust Combined
Series 125, The First Trust of Insured Municipal Bonds, Series 198 at
October 31, 1993, and the results of its operations and changes in its net
assets for each of the two years in the period then ended and for the period
from the Date of Deposit, December 27, 1990, to October 31, 1991, in
conformity with generally accepted accounting principles.
ERNST & YOUNG
Chicago, Illinois
January 4, 1994
<PAGE>
THE FIRST TRUST COMBINED SERIES 125
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 198
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1993
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Municipal bonds, at value (cost $13,394,260)
(Note 1) $14,608,698
Accrued interest 300,898
Cash 90,527
___________
15,000,123
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND NET ASSETS
<S> <C> <C>
Liabilities:
Distributions payable and accrued to unit holders 174,094
Unit redemtpions payable 2,073
___________
176,167
___________
Net assets, applicable to 14,105 outstanding
units of fractional undivided interest:
Cost of Trust assets (Note 1) $13,394,260
Net unrealized appreciation (Note 2) 1,214,438
Distributable funds 215,258
___________
$14,823,956
===========
Net asset value per unit $1,050.97
===========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
THE FIRST TRUST COMBINED SERIES 125
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 198
PORTFOLIO - See notes to portfolio.
October 31, 1993
<TABLE>
<CAPTION>
Coupon Standard
interest Date of Redemption & Poor's Principal
Name of issuer and title of bond(g) rate maturity provisions(a) Rating(b) amount Value
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
City of Albuquerque, New Mexico, Municipal
Collateralized Mortgage Obligations, Series
1989 (FGIC Insured) (c) -%(d) 5/15/2011 AAA $250,000 89,198
Black Hawk County, Iowa, Hospital Facilities
Revenue, Series 1990 (Allen Memorial
Hospital) (AMBAC Insured) (c) 7.375 2/01/2020 2000 @ 102 AAA 500,000 596,115
Brazos River Authority (Texas), Collateralized
Revenue Refunding (Houston Lighting &
Power Company Project), Series 1988A
(MBIA Insured) (c) 8.25 5/01/2019 1998 @ 102 AAA 1,000,000 1,160,360
City of Brownsville, Texas, Utilities System
Priority Revenue, Series 1990 (AMBAC 2000 @ 102
Insured) (c) 6.875 9/01/2020 2018 @ 100 S.F. AAA 500,000 556,670
Castle Pines Metropolitan District, Douglas
County, Colorado, General Obligation
Refunding and Improvement, Series 1990 2000 @ 102
(Capital Guaranty Insured) (c) 7.625 12/01/2015 2001 @ 100 S.F. AAA 900,000 1,063,629
District of Columbia (Washington, D.C.), Revenue
(The Howard University Issue), 1997 @ 102
Series A (MBIA Insured) (c) 8.00 10/01/2017 2005 @ 100 S.F. AAA 160,000 183,734
City of Haverhill, Massachusetts, General
Obligation Hospital Refunding (AMBAC
Insured) (c) (f) 8.875 12/01/2010 1995 @ 102 AAA 720,000 810,864
Illinois Health Facilities Authority, Health
Facilities Revenue (SSM Health Care Projects),
Series 1988B (MBIA Insured) (c) (f) 8.00 6/01/2014 1998 @ 102. AAA 250,000 294,695
Illinois Health Facilities Authority, Revenue
Refunding, Series 1989A (Michael Reese
Hospital and Medical Center) (Capital Guaranty 1999 @ 101
Insured) (c) 7.60 2/15/2019 2006 @ 100 S.F. AAA 125,000 142,398
Indiana Health Facility Financing Authority,
Hospital Revenue, Series 1989 (The Lutheran 1999 @ 102
Hospital of Indiana, Inc.) (AMBAC Insured) (c) 7.00 2/15/2019 2007 @ 100 S.F. AAA 750,000 828,375
City of Indianapolis, Indiana, Gas Utility System
Revenue, Series 1989 A (FGIC Insured) (c) (f) 7.10 6/01/2020 1996 @ 102 AAA 1,000,000 1,101,380
Kansas City, Missouri, Industrial Development
Authority, Hospital Revenue, Research 1995 @ 102
Health Savings Systems (MBIA Insured) (c) 9.375 4/15/2014 2001 @ 100 S.F. AAA 500,000 551,035
Lee County, Florida, Transportation Facilities
Revenue, Series 1987 (AMBAC Insured) (c) (f) 8.25 10/01/2017 1995 @ 102.5 AAA 1,000,000 1,111,180
Lexington County School District No. 1, South
Carolina, Certificates of Participation,
Series 1989D, White Knoll Middle School Project 1999 @ 102
(Capital Guaranty Insured) (c) 7.65 9/01/2009 2000 @ 100 S.F. AAA 1,000,000 1,151,290
Metropolitan Nashville Airport Authority (Tennessee), 1995 @ 102
Revenue, Series 1985 (FGIC Insured) (c) 9.70 7/01/2004 2001 @ 100 S.F. AAA 750,000 835,965
</TABLE>
<PAGE>
THE FIRST TRUST COMBINED SERIES 125
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 198
PORTFOLIO (continued) - See notes to portfolio.
October 31, 1993
<TABLE>
<CAPTION>
Coupon Standard
interest Date of Redemption & Poor's Principal
Name of issuer and title of bond(g) rate maturity provisions(a) Rating(b) amount Value
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
New York City, Municipal Water Finance Authority,
Water and Sewer System Revenue, Fiscal 1989 1998 @ 101.5
Series B (FGIC Insured) (c) (e) 7.00 % 6/15/2019 2018 @ 100 S.F. AAA $750,000 829,688
North Central Texas, Health Facilities Development
Corporation, Hospital Refunding Revenue
(Methodist Hospitals of Dallas), 1995 @ 102
Series 1987B (BIG Insured) (c) 9.50 10/01/2015 2011 @ 100 S.F. AAA 310,000 348,719
County of Trumbull, Ohio, Hospital Refunding
Revenue, Series 1985 (Trumbull Memorial
Hospital Project) (FGIC Insured) (c) (f) 9.625 11/01/2012 1995 @ 102 AAA 560,000 637,510
University of Alaska, Certificates of Participation,
Series 1990 (Capital Guaranty Insured) (c) 7.375 10/01/2007 2000 @ 102 AAA 250,000 292,457
Wisconsin State Health & Educational Facilities
Authority, Revenue, SSM Health Care
Project, Series B (MBIA Insured) (c) (f) 7.00 6/01/2020 2000 @ 102 AAA 750,000 872,303
Wisconsin Health Facilities Authority, Revenue,
Series 1987 (LaCrosse Lutheran Hospital) 1997 @ 102
(AMBAC Insured) (c) 7.25 12/01/2014 2002 @ 100 S.F. AAA 850,000 945,047
York City Sewer Authority, City of York,
Pennsylvania, Guaranteed Sewer Revenue, Series
of 1990 (MBIA Insured) (c) -(d) 12/01/2016 AAA 750,000 206,086
_______________________
$13,625,000 14,608,698
=======================
</TABLE>
[FN]
<PAGE>
THE FIRST TRUST COMBINED SERIES 125
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 198
NOTES TO PORTFOLIO
October 31, 1993
(a) Shown under this heading are the year in which each issue of Bonds is
initially redeemable and the redemption price in that year. Unless
otherwise indicated, each issue continues to be redeemable at declining
prices thereafter (but not below par value). "S.F." indicates a sinking
fund is established with respect to an issue of bonds. In addition,
certain bonds are sometimes redeemable in whole or in part other than by
operation of the stated redemption or sinking fund provisions under
specified unusual or extraordinary circumstances. Approximately 58% of
the aggregate principal amount of the Bonds in the Trust is subject to
call within five years.
(b) The ratings shown are those effective at October 31, 1993.
(c) Insurance has been obtained by the Bond issuer.
(d) These Bonds have no stated interest rate ("zero coupon bonds") and,
accordingly, will have no periodic interest payments to the Trust. Upon
maturity, the holders of these Bonds are entitled to receive 100% of the
stated principal amount. The Bonds were issued at an original issue
discount on the following dates and at the following percentages of
their original principal amount:
<TABLE>
<CAPTION>
Date %
<S> <C> <C>
City of Albuquerque 2/15/89 15.690
York City Sewer Authority 12/20/90 16.360
</TABLE>
(e) These Bonds were issued at an original issue discount on March 28, 1989
at a price of 90.000% of their original principal amount.
(f) This issue of Bonds is secured by, and payable from, escrowed U.S.
Government securities.
(g) The Trust consists of twenty-two obligations of issuers located in
sixteen states and the District of Columbia. Two of the Bonds in the
Trust, aggregating approximately 12% of the aggregate principal amount
of the Bonds in the Trust, are general obligations of a governmental
entity. The remaining issues are revenue bonds payable from the income
of a specific project or authority and are divided by purpose of issue
as follows: Health Care, 9; Electric, 1; Sewer, 1; Single Family
Housing, 1; Water and Sewer, 1; University and School, 3; Utility, 2;
Airport, 1; and Transportation, 1. Approximately 34% and 2% of the
aggregate principal amount of the Bonds consist of health care revenue
bonds and single family residential mortgage revenue bonds,
respectively. The four largest Bond issues in the Trust represent
approximately 7% each.
[FN]
See accompanying notes to financial statements.
<PAGE>
THE FIRST TRUST COMBINED SERIES 125
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 198
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
the Date
of Deposit,
Dec. 27,
Year ended Year ended 1990, to
Oct. 31, Oct. 31, Oct. 31,
1993 1992 1991
<S> <C> <C> <C>
Interest income $1,006,531 1,016,610 861,013
Expenses:
Trustee's fees and related expenses (16,600) (14,240) (9,221)
Evaluator's fees (4,152) (4,152) (3,147)
Supervisory fees (3,561) (3,586) (3,028)
__________________________________
Investment income - net 982,218 994,632 845,617
Net gain (loss) on investments:
Net realized gain (loss) (745) (185) -
Change in unrealized appreciation
or depreciation 751,312 139,871 323,255
__________________________________
750,567 139,686 323,255
__________________________________
Net increase in net assets resulting
from operations $1,732,785 1,134,318 1,168,872
==================================
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
THE FIRST TRUST COMBINED SERIES 125
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 198
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Period from
the Date
of Deposit,
Dec. 27,
Year ended Year ended 1990, to
Oct. 31, Oct. 31, Oct. 31,
1993 1992 1991
<S> <C> <C> <C>
Net increase in net assets resulting
from operations:
Investment income - net $982,218 994,632 845,617
Net realized gain (loss) on
investments (745) (185) -
Change in unrealized appreciation
or depreciation on investments 751,312 139,871 323,255
___________________________________
1,732,785 1,134,318 1,168,872
Distributions to unit holders:
Investment income - net (980,649) (989,639) (636,267)
Principal from investment
transactions - - -
___________________________________
(980,649) (989,639) (636,267)
Unit redemptions (104, 98 and 1 in
1993, 1992 and 1991, respectively):
Principal portion (143,819) (98,169) (1,102)
Net interest accrued (1,882) (1,599) (14)
___________________________________
(145,701) (99,768) (1,116)
___________________________________
Total increase (decrease) in net assets 606,435 44,911 531,489
Net assets:
At the beginning of the period 14,217,521 14,172,610 13,641,121
___________________________________
At the end of the period (including
distributable funds applicable to
Trust units of $215,258, $217,081
and $208,234 at October 31, 1993,
1992 and 1991, respectively) $14,823,956 14,217,521 14,172,610
===================================
Trust units outstanding at the end
of the period 14,105 14,245 14,343
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
THE FIRST TRUST COMBINED SERIES 125
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 198
NOTES TO FINANCIAL STATEMENTS
1. Significant accounting policies
Security valuation -
Bonds are stated at values as determined by Securities Evaluation Service,
Inc. (the Evaluator), certain shareholders of which are officers of the
Sponsor. The bond values are based on (1) current bid prices for the bonds
obtained from dealers or brokers who customarily deal in bonds comparable to
those held by the Trust, (2) current bid prices for comparable bonds, (3)
appraisal or (4) any combination of the above.
Security cost -
The Trust's cost of its portfolio is based on the offering prices of the bonds
on the Date of Deposit, December 27, 1990. The premium or discount (including
original issue discount) existing at the Date of Deposit is not being
amortized. Realized gain (loss) from bond transactions is reported on an
identified cost basis.
Federal income taxes -
The Trust is not taxable for Federal income tax purposes. Each unit holder is
considered to be the owner of a pro rata portion of the Trust and,
accordingly, no provision has been made for Federal income taxes.
Expenses of the Trust -
The Trust pays a fee for Trustee services to United States Trust Company of
New York which is based on $1.05 and $.55 per $1,000 principal amount of Bonds
for those portions of the Trust under the monthly and semi-annual distribution
plans, respectively. Additionally, a fee of $4,152 annually is payable to the
Evaluator and the Trust pays all related expenses of the Trustee, recurring
financial reporting costs and an annual supervisory fee payable to an
affiliate of the Sponsor.
2. Unrealized appreciation and depreciation
An analysis of net unrealized appreciation at October 31, 1993 follows:
<TABLE>
<S> <C>
Unrealized appreciation $1,268,649
Unrealized depreciation (54,211)
__________
$1,214,438
==========
</TABLE>
3. Insurance
All issues of bonds in the portfolio are insured under insurance obtained by
the issuer of the bonds (see Note (c) to portfolio). Such insurance coverage
continues in force so long as the bonds are outstanding and the insurer
remains in business.
<PAGE>
4. Other information
Cost to investors -
The cost to initial investors of units of the Trust was based on the aggregate
offering price of the bonds on the date of an investor's purchase, plus a
sales charge of 4.9% of the public offering price which is equivalent to
approximately 5.152% of the net amount invested.
Distributions of net interest income -
Distributions of net interest income to unit holders are made monthly or semi-
annually. Such income distributions per unit, on an accrual basis, were as
follows:
<TABLE>
<CAPTION>
Period from
the Date
of Deposit,
Dec. 27,
Type of Year ended Year ended 1990, to
distribution Oct. 31, Oct. 31, Oct. 31,
plan 1993 1992 1991
<S> <C> <C> <C>
Monthly $68.91 $69.01 $42.70*
Semi-annual 69.44 69.55 43.03
</TABLE>
[FN]
*Excludes $1.53 per unit distributed to the Sponsor as discussed below.
Accrued interest to the Date of Deposit, totaling $189,146, plus net interest
accruing to the first settlement date, January 4, 1991, totaling $21,946, were
distributed to the Sponsor as the unit holder of record. The initial
subsequent distribution, $2.45 per unit, was paid on April 1, 1991 to all unit
holders of record on March 15, 1991.
<PAGE>
Selected data for a unit of the Trust
outstanding throughout each period -
<TABLE>
<CAPTION>
Period from
the Date
of Deposit,
Dec. 27,
Year ended Year ended 1990, to
Oct. 31, Oct. 31, Oct. 31,
1993 1992 1991
<S> <C> <C> <C>
Interest income $70.97 71.08 60.03
Expenses (1.71) (1.54) (1.07)
________________________________
Investment income - net 69.26 69.54 58.96
Distributions to unit holders:
Investment income - net (69.13) (69.20) (44.36)
Principal from investment transactions - - -
Net gain (loss) on investments 52.77 9.61 22.52
________________________________
Total increase (decrease) in net assets 52.90 9.95 37.12
Net assets:
Beginning of the period 998.07 988.12 951.00
________________________________
End of the period $1,050.97 998.07 988.12
================================
</TABLE>
<PAGE>
THE FIRST TRUST COMBINED SERIES 125
THE FIRST TRUST OF INSURED MUNICIPAL BONDS, SERIES 198
PART ONE
Must be Accompanied by Part Two
_____________________
P R O S P E C T U S
_____________________
SPONSOR: Nike Securities L.P.
1001 Warrenville Road
Lisle, Illinois 60532
(800) 621-1675
TRUSTEE: United States Trust Company of New York
770 Broadway
New York, New York 10003
LEGAL COUNSEL Chapman and Cutler
TO SPONSOR: 111 West Monroe Street
Chicago, Illinois 60603
LEGAL COUNSEL Carter, Ledyard & Milburn
TO TRUSTEE: 2 Wall Street
New York, New York 10005
INDEPENDENT Ernst & Young
AUDITORS: Sears Tower
233 South Wacker Drive
Chicago, Illinois 60606
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, securities in any jurisdiction to any person to whom it is not
lawful to make such offer in such jurisdiction.
This Prospectus does not contain all the information set forth in the
registration statement and exhibits relating thereto, which the Trust has
filed with the Securities and Exchange Commission, Washington, D.C., under the
Securities Act of 1933 and the Investment Company Act of 1940, and to which
reference is hereby made.
The First Trust Combined Series
Supplement to the Part Two Propspectus Dated March 31, 1993
Subsequent to the date of this Part Two Prospectus, the Revenue
Reconciliation Act of 1993 (the "Tax Act") was enacted. The Tax
Act has altered the tax treatment of market discount received on
tax-exempt bonds. The Tax Act subjects tax-exempt bonds to the
market discount rules of the Code effective for bonds and/or
Units purchased after April 30, 1993. In general, market
discount is the amount (if any) by which the stated redemption
price at maturity exceeds an investor's purchase price (except to
the extent that such difference, if any, is attributable to
original issue discount not yet accrued). Accretion of market
discount, which is taxable as ordinary income under the Tax Act,
had been treated as capital gain under prior law. Market
discount that accretes while a Trust holds a Bond would be
recognized as ordinary income by the Unit holders when principal
payments are received on the Bond, upon sale or at redemption
(including early redemption) or upon the sale or redemption of
the Units, unless a Unit holder elects to include market discount
in taxable income as it accrues. The market discount rules are
complex and Unit holders should consult their tax advisers
regarding these rules and their application.
In addition, under the Tax Act, for taxable years beginning after
December 31, 1993, up to 85% of Social Security benefits are
includible in gross income to the extent that the sum of
"modified adjusted gross income" plus 50% of Social Security
benefits received exceeds an "adjusted base amount." The
adjusted base amount is $34,000 for unmarried taxpayers, $44,000
for married taxpayers filing a joint return, and zero for married
taxpayers who do not live apart at all times during the taxable
year and who file separate returns.
October 21, 1993
The First Trust Combined Series
PROSPECTUS NOTE: THIS PART TWO PROSPECTUS MAY
Part Two ONLY BE USED WITH PART ONE
Dated March 31, 1993
IN THE OPINION OF COUNSEL, INTEREST INCOME TO THE TRUSTS AND TO
THE UNIT HOLDERS, WITH CERTAIN EXCEPTIONS, IS EXEMPT UNDER EXISTING
LAW FROM ALL FEDERAL INCOME TAXES. IN ADDITION, THE INTEREST INCOME
TO THE TRUSTS IS, IN THE OPINION OF SPECIAL COUNSEL, EXEMPT TO
THE EXTENT INDICATED FROM STATE AND LOCAL TAXES WHEN HELD BY RESIDENTS
OF THE STATE IN WHICH THE ISSUERS OF THE BONDS IN SUCH TRUSTS ARE
LOCATED. CAPITAL GAINS, IF ANY, ARE SUBJECT TO TAX.
THE FIRST TRUST COMBINED SERIES (the "Fund") consists of underlying
separate unit investment trusts (the "Trusts"). The various trusts
are collectively referred to herein as the "Trusts" while all
Trusts that are not designated as "The First Trust Advantage"
are sometimes collectively referred to herein as the "Insured
Trusts" and a Trust with the name designation of "The First Trust
of Insured Municipal Bonds, Discount Trust" or "The First Trust
Advantage: Discount Trust" is sometimes referred to herein as
a "Discount Trust." Each Trust consists of a portfolio of interest-bearing
obligations (including delivery statements relating to contracts
for the purchase of certain such obligations and an irrevocable
letter of credit), issued by or on behalf of states and territories
of the United States, and political subdivisions and authorities
thereof, the interest on which is, in the opinion of recognized
bond counsel to the issuing governmental authorities, exempt from
all Federal income taxes under existing law. In addition, the
interest income of each Trust is, in the opinion of Special Counsel,
exempt to the extent indicated from state and local income taxes
when held by residents of the state in which the issuers of the
Bonds in such Trust are located. The securities in a Discount
Trust are acquired at prices which result in a Discount Trust
portfolio, as a whole, being purchased at a deep discount from
the aggregate par value of such Securities, although a substantial
portion of the Securities in a Discount Trust portfolio may be
acquired at a premium over the par value of such Securities. Gains
based upon the difference, if any, between the value of the Securities,
at maturity, redemption or sale and their purchase price at a
discount (plus earned original issue discount) will constitute
capital gains with respect to a Unit holder who is not a dealer
with respect to his Units. All of the Bonds in an Intermediate
Trust mature within 8 to 12 years of the Date of Deposit. All
of the Bonds in a Short Intermediate Trust mature within 3 to
6 years of the Date of Deposit. All of the Bonds in a Long Intermediate
Trust mature within 10 to 15 years of the Date of Deposit. The
portfolio for each Trust, essential information based thereon
and financial statements, including a report of independent auditors
relating to the series of the Fund offered hereby, are contained
in Part One to which reference should be made for such information.
INSURANCE GUARANTEEING THE SCHEDULED PAYMENTS OF PRINCIPAL AND
INTEREST ON ALL BONDS IN THE PORTFOLIO OF EACH INSURED TRUST HAS
BEEN OBTAINED FROM FINANCIAL GUARANTY INSURANCE COMPANY AND/OR
AMBAC INDEMNITY CORPORATION BY THE INSURED TRUSTS OR WAS DIRECTLY
OBTAINED BY THE BOND ISSUER, THE UNDERWRITERS, THE SPONSOR OR
OTHERS PRIOR TO THE DATE OF DEPOSIT FROM FINANCIAL GUARANTY INSURANCE
COMPANY, AMBAC INDEMNITY CORPORATION, OR OTHER INSURERS (THE "PREINSURED
BONDS"). INSURANCE OBTAINED BY AN INSURED TRUST APPLIES ONLY WHILE
BONDS ARE RETAINED IN SUCH TRUST, WHILE INSURANCE ON PREINSURED
BONDS IS EFFECTIVE SO LONG AS SUCH BONDS ARE OUTSTANDING. PURSUANT
TO AN IRREVOCABLE COMMITMENT OF FINANCIAL GUARANTY INSURANCE COMPANY,
AND/OR AMBAC INDEMNITY CORPORATION IN THE EVENT OF A SALE OF A
BOND INSURED UNDER AN INSURANCE POLICY OBTAINED BY AN INSURED
TRUST, THE TRUSTEE HAS THE RIGHT TO OBTAIN PERMANENT INSURANCE
FOR SUCH BOND UPON THE PAYMENT OF A SINGLE PREDETERMINED INSURANCE
PREMIUM FROM THE PROCEEDS OF THE SALE OF SUCH BOND. THE INSURANCE,
IN EITHER CASE, RELATES ONLY TO THE BONDS IN THE INSURED TRUSTS
AND NOT TO THE UNITS OFFERED HEREBY. AS A RESULT OF SUCH INSURANCE,
THE UNITS OF EACH INSURED TRUST HAVE RECEIVED A RATING OF "AAA"
BY STANDARD & POOR'S CORPORATION. SEE "WHY AND HOW ARE THE INSURED
TRUSTS INSURED?" ON PAGE 12. NO REPRESENTATION IS MADE AS TO ANY
INSURER'S ABILITY TO MEET ITS COMMITMENTS.
BOTH PARTS OF THE PROSPECTUS SHOULD BE RETAINED FOR FUTURE
REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Page 1
For convenience the Prospectus is divided into sections which
give general information about the Fund and specific information
such as the public offering price, distributions and tax status
for each Trust.
The Objectives of the Fund are conservation of capital through
investment in portfolios of tax-exempt bonds and income exempt
from Federal and applicable state and local income taxes although
interest on certain Bonds in certain Arkansas, Kansas, Maine,
Mississippi and Nebraska Trusts will be a preference item for
purposes of the Federal Alternative Minimum Tax. ACCORDINGLY,
CERTAIN ARKANSAS, KANSAS, MAINE, MISSISSIPPI AND NEBRASKA TRUSTS
MAY BE APPROPRIATE ONLY FOR INVESTORS WHO ARE NOT SUBJECT TO THE
ALTERNATIVE MINIMUM TAX. CERTAIN BONDS IN THE OKLAHOMA TRUSTS
ARE SUBJECT TO OKLAHOMA STATE INCOME TAXES. The payment of interest
and the preservation of principal are, of course, dependent upon
the continuing ability of the issuers, obligors and/or insurers
to meet their respective obligations.
Distributions to Unit holders may be reinvested as described herein.
See "How Can Distributions to Unit Holders be Reinvested?"
The Sponsor, although not obligated to do so, intends to maintain
a market for the Units at prices based upon the aggregate bid
price of the Bonds in the portfolio of each Trust. In the absence
of such a market, a Unit holder will nonetheless be able to dispose
of the Units through redemption at prices based upon the bid prices
of the underlying Bonds. See "How May Units be Redeemed?" With
respect to each Insured Trust, neither the bid nor offering prices
of the underlying Bonds or of the Units, absent situations in
which Bonds are in default in payment of principal or interest
or in significant risk of such default, include value attributable
to the portfolio insurance obtained by such Trust. See "Why and
How are the Insured Trusts Insured?"
Page 2
THE FIRST TRUST COMBINED SERIES
What is The First Trust Combined Series?
The First Trust Combined Series (the "Fund") is one of a series
of investment companies created by the Sponsor under the name
of The First Trust Combined Series, all of which are generally
similar but each of which is separate and is designated by a different
series number. This Series consists of underlying separate unit
investment trusts (such Trusts being collectively referred to
herein as the "Fund"). Each Series was created under the laws
of the State of New York pursuant to a Trust Agreement (the "Indenture"),
dated the Date of Deposit, with Nike Securities L.P., as Sponsor,
United States Trust Company of New York, as Trustee, Securities
Evaluation Service, Inc., as Evaluator and Nike Financial Advisory
Services L.P., as Portfolio Supervisor. On the Date of Deposit,
the Sponsor deposited with the Trustee interest-bearing obligations,
including delivery statements relating to contracts for the purchase
of certain such obligations and irrevocable letters of credit
issued by a financial institution in the amounts required for
such purchases (the "Bonds"). The Trustee thereafter credited
the account of the Sponsor for Units of each Trust representing
the entire ownership of the Fund which Units are being offered
hereby.
The objectives of the Fund are Federal tax-exempt income and state
and local tax-exempt income and conservation of capital through
investment in portfolios of interest-bearing obligations issued
by or on behalf of the state for which such Trust is named (collectively,
the "State Trusts"), and counties, municipalities, authorities
and political subdivisions thereof, the Commonwealth of Puerto
Rico and other territories or municipalities of the United States,
or authorities or political subdivisions thereof, the interest
on which obligations is, in the opinion of recognized bond counsel
to the issuing governmental authorities, exempt from all Federal
income tax and, where applicable, state and local taxes under
existing law although interest on certain Bonds in certain Arkansas,
Kansas, Maine, Mississippi and Nebraska Trusts will be a preference
item for purposes of the Alternative Minimum Tax and certain Bonds
in the Oklahoma Trusts are subject to Oklahoma State Income Taxes.
The current market value of certain of the obligations in a Discount
Trust were significantly below face value when the obligations
were acquired by such Trust. The prices at which the obligations
are acquired result in a Discount Trust's portfolio, as a whole,
being purchased at a deep discount from the aggregate par value
of such Securities, although a substantial portion of the Securities
in a Discount Trust portfolio may be acquired at a premium over
the par value of such Securities. Gains based upon the difference,
if any, between the value of the Securities at maturity, redemption
or sale and their purchase price at a discount (plus earned original
issue discount) will constitute capital gains with respect to
a Unit holder who is not a dealer with respect to his Units. Insurance
guaranteeing the scheduled payment of all principal and interest
on Bonds in the Trusts with the name designation of "The First
Trust of Insured Municipal Bonds," "The First Trust of Insured
Municipal Bonds-Intermediate" or "The First Trust of Insured Municipal
Bonds-Multi-State" (the "Insured Trusts") has been obtained by
such Trusts from Financial Guaranty Insurance Company ("Financial
Guaranty") and/or AMBAC Indemnity Corporation ("AMBAC Indemnity")
or was obtained directly by the Bond issuer, the underwriters,
the Sponsor or others prior to the Date of Deposit from Financial
Guaranty, AMBAC Indemnity, or other insurers (the "Preinsured
Bonds").NO PORTFOLIO INSURANCE POLICY HAS BEEN OBTAINED BY THE
TRUSTS WITH THE NAME DESIGNATION OF "THE FIRST TRUST ADVANTAGE"
(THE "ADVANTAGE TRUSTS"). The portfolio insurance obtained by
the Insured Trusts is effective only while the Bonds thus insured
are held in such Trusts, while insurance on Preinsured Bonds is
effective so long as such Bonds are outstanding. See "Why and
How are the Insured Trusts Insured?" THERE IS, OF COURSE, NO GUARANTEE
THAT THE FUND'S OBJECTIVES WILL BE ACHIEVED. AN INVESTMENT IN
THE FUND SHOULD BE MADE WITH AN UNDERSTANDING OF THE RISKS WHICH
AN INVESTMENT IN FIXED RATE LONG-TERM DEBT OBLIGATIONS MAY ENTAIL,
INCLUDING THE RISK THAT THE VALUE OF THE UNITS WILL DECLINE WITH
INCREASES IN INTEREST RATES.
Neither the Public Offering Price of the Units of an Insured Trust
nor any evaluation of such Units for purposes of repurchases or
redemptions reflects any element of value for the insurance obtained
by such Trust unless Bonds are in default in payment of principal
or interest or in significant risk of such default. See "Public
Offering-How is the Public Offering Price Determined?" On the
other hand, the value of insurance obtained by the Bond issuer,
the underwriters, the Sponsor or others is reflected and included
in the market value of such Bonds.
Page 3
Insurance obtained by an Insured Trust or by the Bond issuer,
the underwriters, the Sponsor or others is not a substitute for
the basic credit of an issuer, but supplements the existing credit
and provides additional security therefor. If an issue is accepted
for insurance, a noncancelable policy for the scheduled payment
of interest and principal on the Bonds is issued by the insurer.
A single premium is paid by the Bond issuer, the underwriters,
the Sponsor or others for Preinsured Bonds and a monthly premium
is paid by each Insured Trust for the insurance obtained by such
Trust except for Bonds in such Trust which are insured by the
Bond issuer, the underwriters, the Sponsor or others in which
case no premiums for insurance are paid by such Trust. Upon the
sale of a Bond insured under the insurance policy obtained by
an Insured Trust, the Trustee has the right to obtain permanent
insurance from Financial Guaranty and/or AMBAC Indemnity with
respect to such Bond upon the payment of a single predetermined
insurance premium from the proceeds of the sale of such Bond.
Accordingly, any Bond in an Insured Trust of the Fund is eligible
to be sold on an insured basis. Standard & Poor's Corporation
and Moody's Investors Service, Inc. have rated the claims-paying
ability of Financial Guaranty and AMBAC Indemnity "AAA" and "Aaa,"
respectively. See "Why and How are the Insured Trusts Insured?"
In selecting Bonds, the following facts, among others, were considered:
(i) the Standard & Poor's Corporation rating of the Bonds was
in no case less than "BBB" in the case of an Insured Trust (or
an Arkansas, Kansas or Maine Advantage Trust) and "A-" in the
case of other Advantage Trusts, or the Moody's Investors Service,
Inc. rating of the Bonds was in no case less than "Baa" in the
case of an Insured Trust (or an Arkansas, Kansas or Maine Advantage
Trust) and "A" in the case of other Advantage Trusts, including
provisional or conditional ratings, respectively, or, if not rated,
the Bonds had, in the opinion of the Sponsor, credit characteristics
sufficiently similar to the credit characteristics of interest-bearing
tax-exempt obligations that were so rated as to be acceptable
for acquisition by the Fund (see "Description of Bond Ratings");
(ii) the prices of the Bonds relative to other bonds of comparable
quality and maturity; (iii) with respect to the Insured Trusts,
the availability and cost of insurance of the principal and interest
on the Bonds and (iv) the diversification of Bonds as to purpose
of issue and location of issuer. Subsequent to the Date of Deposit,
a Bond may cease to be rated or its rating may be reduced below
the minimum required as of the Date of Deposit. Neither event
requires elimination of such Bond from the portfolio, but may
be considered in the Sponsor's determination as to whether or
not to direct the Trustee to dispose of the Bond. See "Rights
of Unit Holders-How May Bonds be Removed from the Fund?" The Portfolio
appearing in Part One contains Bond ratings, when available, for
the Bonds listed at the date shown.
Certain of the Bonds in the Trust may have been acquired at a
market discount from par value at maturity. The coupon interest
rates on the discount bonds at the time they were purchased and
deposited in the Trust were lower than the current market interest
rates for newly issued bonds of comparable rating and type. If
such interest rates for newly issued comparable bonds increase,
the market discount of previously issued bonds will become greater,
and if such interest rates for newly issued comparable bonds decline,
the market discount of previously issued bonds will be reduced,
other things being equal. Investors should also note that the
value of bonds purchased at a market discount will increase in
value faster than bonds purchased at a market premium if interest
rates decrease. Conversely, if interest rates increase, the value
of bonds purchased at a market discount will decrease faster than
bonds purchased at a market premium. In addition, if interest
rates rise, the prepayment risk of higher yielding, premium bonds
and the prepayment benefit for lower yielding, discount bonds
will be reduced. A discount bond held to maturity will have a
larger portion of its total return in the form of capital gain
and less in the form of tax-exempt interest income than a comparable
bond newly issued at current market rates. See "What is the Federal
Tax Status of Unit Holders?" Market discount attributable to interest
changes does not indicate a lack of market confidence in the issue.
Neither the Sponsor nor the Trustee shall be liable in any way
for any default, failure or defect in any of the Bonds.
Page 4
Certain of the Bonds in the Trusts may be original issue discount
bonds. Under current law, the original issue discount, which is
the difference between the stated redemption price at maturity
and the issue price of the Bonds, is deemed to accrue on a daily
basis and the accrued portion is treated as tax-exempt interest
income for Federal income tax purposes. On sale or redemption,
any gain realized that is in excess of the earned portion of original
issue discount will be taxable as capital gain. The current value
of an original discount bond reflects the present value of its
stated redemption price at maturity. The market value tends to
increase in greater increments as the Bonds approach maturity.
Certain of the original issue discount bonds may be Zero Coupon
Bonds (including bonds known as multiplier bonds, money multiplier
bonds, capital appreciation bonds, capital accumulator bonds,
compound interest bonds and money discount maturity payment bonds).
Zero Coupon Bonds do not provide for the payment of any current
interest and generally provide for payment at maturity at face
value unless sooner sold or redeemed. Zero Coupon Bonds may be
subject to more price volatility than conventional bonds. While
some types of Zero Coupon Bonds, such as multipliers and capital
appreciation bonds, define par as the initial offering price rather
than the maturity value, they share the basic Zero Coupon bond
features of (1) not paying interest on a semi-annual basis and
(2) providing for the reinvestment of the bond's semi-annual earnings
at the bond's stated yield to maturity. While Zero Coupon Bonds
are frequently marketed on the basis that their fixed rate of
return minimizes reinvestment risk, this benefit can be negated
in large part by weak call protection, i.e., a bond's provision
for redemption at only a modest premium over the accreted value
of the bond.
Certain of the Bonds in the Trusts may have been acquired at a
market premium from par value at maturity. The coupon interest
rates on the premium bonds at the time they were purchased and
deposited in the Trusts were higher than the current market interest
rates for newly issued bonds of comparable rating and type. If
such interest rates for newly issued and otherwise comparable
bonds decrease, the market premium of previously issued bonds
will be increased, and if such interest rates for newly issued
comparable bonds increase, the market premium of previously issued
bonds will be reduced, other things being equal. The current returns
of bonds trading at a market premium are initially higher than
the current returns of comparable bonds of a similar type issued
at currently prevailing interest rates because premium bonds tend
to decrease in market value as they approach maturity when the
face amount becomes payable. Because part of the purchase price
is thus returned not at maturity but through current income payments,
early redemption of a premium bond at par or early prepayments
of principal will result in a reduction in yield. Redemption pursuant
to call provisions generally will, and redemption pursuant to
sinking fund provisions may, occur at times when the redeemed
Bonds have an offering side valuation which represents a premium
over par or for original issue discount Bonds a premium over the
accreted value. To the extent that the Bonds were deposited in
the Fund at a price higher than the price at which they are redeemed,
this will represent a loss of capital when compared to the original
Public Offering Price of the Units. Because premium bonds generally
pay a higher rate of interest than bonds priced at or below par,
the effect of the redemption of premium bonds would be to reduce
Estimated Net Annual Unit Income by a greater percentage than
the par amount of such bonds bears to the total par amount of
Bonds in the Trust. Although the actual impact of any such redemptions
that may occur will depend upon the specific Bonds that are redeemed,
it can be anticipated that the Estimated Net Annual Unit Income
will be significantly reduced after the dates on which such Bonds
are eligible for redemption. The Trust may be required to sell
Zero Coupon Bonds prior to maturity (at their current market price
which is likely to be less than their par value) in the event
that all the Bonds in the portfolio other than the Zero Coupon
Bonds are called or redeemed in order to pay expenses of the Trust
or in case the Trust is terminated. See "Rights of Unit Holders:
How May Bonds be Removed from the Fund?" and "Other Information:
How May the Indenture be Amended or Terminated?" See the "Portfolio"
appearing in Part One for each Trust for the earliest scheduled
call date and the initial redemption price for each Bond or, for
the Bonds that are currently redeemable, the next scheduled call
date and the current redemption price.
Page 5
Certain of the Bonds in the Trusts may be general obligations
of a governmental entity that are backed by the taxing power of
such entity. All other Bonds in the Trusts are revenue bonds payable
from the income of a specific project or authority and are not
supported by the issuer's power to levy taxes. General obligation
bonds are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. Revenue
bonds, on the other hand, are payable only from the revenues derived
from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific
revenue source. There are, of course, variations in the security
of the different Bonds in the Fund, both within a particular classification
and between classifications, depending on numerous factors.
Certain of the Bonds in the Trusts may be health care revenue
bonds. Ratings of bonds issued for health care facilities are
sometimes based on feasibility studies that contain projections
of occupancy levels, revenues and expenses. A facility's gross
receipts and net income available for debt service may be affected
by future events and conditions including among other things,
demand for services, the ability of the facility to provide the
services required, physicians' confidence in the facility, management
capabilities, competition with other hospitals, efforts by insurers
and governmental agencies to limit rates, legislation establishing
state rate-setting agencies, expenses, government regulation,
the cost and possible unavailability of malpractice insurance
and the termination or restriction of governmental financial assistance,
including that associated with Medicare, Medicaid and other similar
third party payor programs. Pursuant to recent Federal legislation,
Medicare reimbursements are currently calculated on a prospective
basis utilizing a single nationwide schedule of rates. Prior to
such legislation Medicare reimbursements were based on the actual
costs incurred by the health facility. The current legislation
may adversely affect reimbursements to hospitals and other facilities
for services provided under the Medicare program.
Certain of the Bonds in the Trusts may be single family mortgage
revenue bonds, which are issued for the purpose of acquiring from
originating financial institutions notes secured by mortgages
on residences located within the issuer's boundaries and owned
by persons of low or moderate income. Mortgage loans are generally
partially or completely prepaid prior to their final maturities
as a result of events such as sale of the mortgaged premises,
default, condemnation or casualty loss. Because these Bonds are
subject to extraordinary mandatory redemption in whole or in part
from such prepayments of mortgage loans, a substantial portion
of such Bonds will probably be redeemed prior to their scheduled
maturities or even prior to their ordinary call dates. The redemption
price of such issues may be more or less than the offering price
of such Bonds. Extraordinary mandatory redemption without premium
could also result from the failure of the originating financial
institutions to make mortgage loans in sufficient amounts within
a specified time period or, in some cases, from the sale by the
Bond issuer of the mortgage loans. Failure of the originating
financial institutions to make mortgage loans would be due principally
to the interest rates on mortgage loans funded from other sources
becoming competitive with the interest rates on the mortgage loans
funded with the proceeds of the single family mortgage revenue
bonds. Additionally, unusually high rates of default on the underlying
mortgage loans may reduce revenues available for the payment of
principal of or interest on such mortgage revenue bonds. Single
family mortgage revenue bonds issued after December 31, 1980 were
issued under Section 103A of the Internal Revenue Code, which
Section contains certain ongoing requirements relating to the
use of the proceeds of such Bonds in order for the interest on
such Bonds to retain its tax-exempt status. In each case, the
issuer of the Bonds has covenanted to comply with applicable ongoing
requirements and bond counsel to such issuer has issued an opinion
that the interest on the Bonds is exempt from Federal income tax
under existing laws and regulations. There can be no assurances
that the ongoing requirements will be met. The failure to meet
these requirements could cause the interest on the Bonds to become
taxable, possibly retroactively from the date of issuance.
Certain of the Bonds in the Trusts may be obligations of issuers
whose revenues are primarily derived from mortgage loans to housing
projects for low to moderate income families. The ability of such
issuers to make debt service payments will be affected by events
and conditions affecting financed projects, including
Page 6
among other things, the achievement and maintenance of sufficient
occupancy levels and adequate rental income, increases in taxes,
employment and income conditions prevailing in local labor markets,
utility costs and other operating expenses, the managerial ability
of project managers, changes in laws and governmental regulations,
the appropriation of subsidies and social and economic trends
affecting the localities in which the projects are located. The
occupancy of housing projects may be adversely affected by high
rent levels and income limitations imposed under Federal and state
programs. Like single family mortgage revenue bonds, multi-family
mortgage revenue bonds are subject to redemption and call features,
including extraordinary mandatory redemption features, upon prepayment,
sale or non-origination of mortgage loans as well as upon the
occurrence of other events. Certain issuers of single or multi-family
housing bonds have considered various ways to redeem bonds they
have issued prior to the stated first redemption dates for such
bonds. In one situation the New York City Housing Development
Corporation, in reliance on its interpretation of certain language
in the indenture under which one of its bond issues was created,
redeemed all of such issue at par in spite of the fact that such
indenture provided that the first optional redemption was to include
a premium over par and could not occur prior to 1992. In connection
with the housing Bonds held by a Trust, the Sponsor has not had
any direct communications with any of the issuers thereof, but
at the date hereof it is not aware that any of the respective
issuers of such Bonds are actively considering the redemption
of such Bonds prior to their respective stated initial call dates.
However, there can be no assurance that an issuer of a Bond in
a Trust will not attempt to so redeem a Bond in a Trust.
Certain of the Bonds in the Trusts may be obligations of issuers
whose revenues are derived from the sale of water and/or sewerage
services. Water and sewerage bonds are generally payable from
user fees. Problems faced by such issuers include the ability
to obtain timely and adequate rate increases, population decline
resulting in decreased user fees, the difficulty of financing
large construction programs, the limitations on operations and
increased costs and delays attributable to environmental considerations,
the increasing difficulty of obtaining or discovering new supplies
of fresh water, the effect of conservation programs and the impact
of "no-growth" zoning ordinances. All of such issuers have been
experiencing certain of these problems in varying degrees.
Certain of the Bonds in the Trusts may be obligations of issuers
whose revenues are primarily derived from the sale of electric
energy. Utilities are generally subject to extensive regulation
by state utility commissions which, among other things, establish
the rates which may be charged and the appropriate rate of return
on an approved asset base. The problems faced by such issuers
include the difficulty in obtaining approval for timely and adequate
rate increases from the governing public utility commission, the
difficulty in financing large construction programs, the limitations
on operations and increased costs and delays attributable to environmental
considerations, increased competition, recent reductions in estimates
of future demand for electricity in certain areas of the country,
the difficulty of the capital market in absorbing utility debt,
the difficulty in obtaining fuel at reasonable prices and the
effect of energy conservation. All of such issuers have been experiencing
certain of these problems in varying degrees. In addition, Federal,
state and municipal governmental authorities may from time to
time review existing and impose additional regulations governing
the licensing, construction and operation of nuclear power plants,
which may adversely affect the ability of the issuers of such
Bonds to make payments of principal and/or interest on such Bonds.
Certain of the Bonds in the Trusts may be lease obligations issued
for the most part by governmental authorities that have no taxing
power or other means of directly raising revenues. Rather, the
governmental authorities are financing vehicles created solely
for the construction of buildings (schools, administrative offices,
convention centers and prisons, for example) or the purchase of
equipment (police cars and computer systems, for example) that
will be used by a state or local government (the "lessee"). Thus,
these obligations are subject to the ability and willingness of
the lessee government to meet its lease rental payments which
include debt service on the obligations. Lease obligations are
subject, in almost all cases, to the annual appropriation risk,
i.e., the lessee government is not legally obligated to budget
and appropriate for
Page 7
the rental payments beyond the current fiscal year. These obligations
are also subject to construction and abatement risk in many states
- - rental obligations cease in the event that delays in building,
damage, destruction or condemnation of the project prevents its
use by the lessee. In these cases, insurance provisions designed
to alleviate this risk become important credit factors. In the
event of default by the lessee government, there may be significant
legal and/or practical difficulties involved in the re-letting
or sale of the project. Some of these issues, particularly those
for equipment purchases, contain the so-called "substitution safeguard",
which bars the lessee government, in the event it defaults on
its rental payments, from the purchase or use of similar equipment
for a certain period of time. This safeguard is designed to insure
that the lessee government will appropriate, even though it is
not legally obligated to do so, but the legality of the safeguard
remains untested in most, if not all, states.
Certain of the Bonds in the Trusts may be industrial revenue bonds
("IRBs"), including pollution control revenue bonds, which are
tax-exempt securities issued by states, municipalities, public
authorities or similar entities to finance the cost of acquiring,
constructing or improving various industrial projects. These projects
are usually operated by corporate entities. Issuers are obligated
only to pay amounts due on the IRBs to the extent that funds are
available from the unexpended proceeds of the IRBs or receipts
or revenues of the issuer under an arrangement between the issuer
and the corporate operator of a project. The arrangement may be
in the form of a lease, installment sale agreement, conditional
sale agreement or loan agreement, but in each case the payments
to the issuer are designed to be sufficient to meet the payments
of amounts due on the IRBs. Regardless of the structure, payment
of IRBs is solely dependent upon the creditworthiness of the corporate
operator of the project or corporate guarantor. Corporate operators
or guarantors may be affected by many factors which may have an
adverse impact on the credit quality of the particular company
or industry. These include cyclicality of revenues and earnings,
regulatory and environmental restrictions, litigation resulting
from accidents or environmentally-caused illnesses, extensive
competition and financial deterioration resulting from a complete
restructuring pursuant to a leveraged buy-out, takeover or otherwise.
Such a restructuring may result in the operator of a project becoming
highly leveraged which may impact on such operator's creditworthiness,
which in turn would have an adverse impact on the rating and/or
market value of such Bonds. Further, the possibility of such a
restructuring may have an adverse impact on the market for and
consequently the value of such Bonds, even though no actual takeover
or other action is ever contemplated or affected. The IRBs in
a Trust may be subject to special or extraordinary redemption
provisions which may provide for redemption at par or, with respect
to original issue discount bonds, at issue price plus the amount
of original issue discount accreted to the redemption date plus,
if applicable, a premium. The Sponsor cannot predict the causes
or likelihood of the redemption of IRBs or other Bonds in the
Trusts prior to the stated maturity of such Bonds.
Certain of the Bonds in the Trusts may be obligations which are
payable from and secured by revenues derived from the ownership
and operation of facilities such as airports, bridges, turnpikes,
port authorities, convention centers and arenas. The major portion
of an airport's gross operating income is generally derived from
fees received from signatory airlines pursuant to use agreements
which consist of annual payments for leases, occupancy of certain
terminal space and service fees. Airport operating income may
therefore be affected by the ability of the airlines to meet their
obligations under the use agreements. The air transport industry
is experiencing significant variations in earnings and traffic,
due to increased competition, excess capacity, increased costs,
deregulation, traffic constraints and other factors, and several
airlines are experiencing severe financial difficulties. The Sponsor
cannot predict what effect these industry conditions may have
on airport revenues which are dependent for payment on the financial
condition of the airlines and their usage of the particular airport
facility. Similarly, payment on Bonds related to other facilities
is dependent on revenues from the projects, such as user fees
from ports, tolls on turnpikes and bridges and rents from buildings.
Therefore, payment may be adversely affected by reduction in revenues
due to such
Page 8
factors as increased cost of maintenance, decreased use of a facility,
lower cost of alternative modes of transportation, scarcity of
fuel and reduction or loss of rents.
Certain of the Bonds in the Trusts may be obligations of issuers
which are, or which govern the operation of, schools, colleges
and universities and whose revenues are derived mainly from ad
valorem taxes, or for higher education systems, from tuition,
dormitory revenues, grants and endowments. General problems relating
to school bonds include litigation contesting the state constitutionality
of financing public education in part from ad valorem taxes, thereby
creating a disparity in educational funds available to schools
in wealthy areas and schools in poor areas. Litigation or legislation
on this issue may affect the sources of funds available for the
payment of school bonds in the Trusts. General problems relating
to college and university obligations would include the prospect
of a declining percentage of the population consisting of "college"
age individuals, possible inability to raise tuitions and fees
sufficiently to cover increased operating costs, the uncertainty
of continued receipt of Federal grants and state funding and new
government legislation or regulations which may adversely affect
the revenues or costs of such issuers. All of such issuers have
been experiencing certain of these problems in varying degrees.
Certain of the Bonds in the Trusts may be obligations which are
payable from and secured by revenues derived from the operation
of resource recovery facilities. Resource recovery facilities
are designed to process solid waste, generate steam and convert
steam to electricity. Resource recovery bonds may be subject to
extraordinary optional redemption at par upon the occurrence of
certain circumstances, including but not limited to: destruction
or condemnation of a project; contracts relating to a project
becoming void, unenforceable or impossible to perform; changes
in the economic availability of raw materials, operating supplies
or facilities necessary for the operation of a project or technological
or other unavoidable changes adversely affecting the operation
of a project; administrative or judicial actions which render
contracts relating to the projects void, unenforceable or impossible
to perform; or, impose unreasonable burdens or excessive liabilities.
The Sponsor cannot predict the causes or likelihood of the redemption
of resource recovery bonds in the Trusts prior to the stated maturity
of the Bonds.
Interest on certain of the Bonds in certain Arkansas, Kansas,
Maine, Mississippi and Nebraska Trusts will be an item of tax
preference for purposes of the Alternative Minimum Tax ("AMT").
The investment by non-AMT individual taxpayers in AMT municipal
bonds generally results in a higher yield to such bondholders
than non-AMT municipal bonds. Since a portion of the interest
from certain Arkansas, Kansas, Maine, Mississippi and Nebraska
Trusts is an AMT preference item, certain Arkansas, Kansas, Maine,
Mississippi and Nebraska Trusts may be more appropriate for investors
who are not subject to AMT.
Investors should be aware that many of the Bonds in the Trusts
are subject to continuing requirements such as the actual use
of Bond proceeds or manner of operation of the project financed
from Bond proceeds that may affect the exemption of interest on
such Bonds from Federal income taxation. Although at the time
of issuance of each of the Bonds in the Trusts an opinion of bond
counsel was rendered as to the exemption of interest on such obligations
from Federal income taxation, there can be no assurance that the
respective issuers or other obligors on such obligations will
fulfill the various continuing requirements established upon issuance
of the Bonds. A failure to comply with such requirements may cause
a determination that interest on such obligations is subject to
Federal income taxation, perhaps even retroactively from the date
of issuance of such Bonds, thereby reducing the value of the Bonds
and subjecting Unit holders to unanticipated tax liabilities.
Because certain of the Bonds may from time to time under certain
circumstances be sold or redeemed or will mature in accordance
with their terms and because the proceeds from such events will
be distributed to Unit holders and will not be reinvested, no
assurance can be given that a Trust will retain for any length
of time its present size and composition. Neither the Sponsor
nor the Trustee shall be liable in any way for any default, failure
or defect in any Bond. Certain of the Bonds contained in the Trusts
may be subject to being called or redeemed in whole or in part
prior to their stated maturities pursuant to optional redemption
provisions
Page 9
and sinking fund provisions described in the section in Part One
for each Trust entitled "Portfolio" or pursuant to special or
extraordinary redemption provisions. A bond subject to optional
call is one which is subject to redemption or refunding prior
to maturity at the option of the issuer. A refunding is a method
by which a bond issue is redeemed, at or before maturity, by the
proceeds of a new bond issue. A bond subject to sinking fund redemption
is one which is subject to partial call from time to time at par
or, in the case of a zero coupon bond, at the accreted value from
a fund accumulated for the scheduled retirement of a portion of
an issue prior to maturity. Special or extraordinary redemption
provisions may provide for redemption at par (or for original
issue discount bonds at issue price plus the amount of original
issue discount accreted to redemption date plus, if applicable,
some premium) of all or a portion of an issue upon the occurrence
of certain circumstances. Generally, events that may permit the
extraordinary optional redemption of Bonds or may require mandatory
redemption of Bonds include, among others: a final determination
that the interest on the Bonds is taxable; the substantial damage
or destruction by fire or other casualty of the project for which
the proceeds of the Bonds were used; an exercise by a local, state
or Federal governmental unit of its power of eminent domain to
take all or substantially all of the project for which the proceeds
of the Bonds were used; changes in the economic availability of
raw materials, operating supplies or facilities or technological
or other changes which render the operation of the project, for
which the proceeds of the Bonds were used, uneconomic; changes
in law or an administrative or judicial decree which renders the
performance of the agreement under which the proceeds of the Bonds
were made available to finance the project impossible or which
creates unreasonable burdens or which imposes excessive liabilities,
such as taxes, not imposed on the date the Bonds are issued on
the issuer of the Bonds or the user of the proceeds of the Bonds;
an administrative or judicial decree which requires the cessation
of a substantial part of the operations of the project financed
with the proceeds of the Bonds; an overestimate of the costs of
the project to be financed with the proceeds of the Bonds resulting
in excess proceeds of the Bonds which may be applied to redeem
Bonds; or an underestimate of a source of funds securing the Bonds
resulting in excess funds which may be applied to redeem Bonds.
See also the discussion of single family mortgage and multi-family
mortgage revenue bonds above for more information on the call
provisions of such bonds. The exercise of redemption or call provisions
will (except to the extent the proceeds of the called Bonds are
used to pay for Unit redemptions) result in the distribution of
principal and may result in a reduction in the amount of subsequent
interest distributions; it may also affect the long-term return
and the current return on Units of each Trust. Redemption pursuant
to call provisions is more likely to occur, and redemption pursuant
to sinking fund provisions may occur, when the Bonds have an offering
side valuation which represents a premium over par or for original
issue discount bonds a premium over the accreted value. Unit holders
may recognize capital gain or loss upon any redemption or call.
To the best knowledge of the Sponsor, there is no litigation pending
as of the date hereof in respect of any Bonds which might reasonably
be expected to have a material adverse effect upon the Trusts.
At any time after the date hereof, 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. While the outcome of litigation
of such nature can never be entirely predicted, the Fund has received
opinions of bond counsel to the issuing authority of each Bond
on the date of issuance to the effect that such Bonds have been
validly issued and that the interest thereon is exempt from Federal
income taxes and state and local taxes. In addition, other factors
may arise from time to time which potentially may impair the ability
of issuers to meet obligations undertaken with respect to the
Bonds.
To the extent that any Units of a Trust are redeemed by the Trustee,
the fractional undivided interest in such Trust represented by
each unredeemed Unit will increase, although the actual interest
in such Trust represented by such fraction will remain substantially
unchanged. Units will remain outstanding until redeemed
Page 10
upon tender to the Trustee by any Unit holder, which may include
the Sponsor, or until the termination of the Trust Agreement.
What are Estimated Long-Term Return and Estimated Current Return?
At the date of this Prospectus, the Estimated Current Return and
the Estimated Long-Term Return, under the monthly, quarterly (if
applicable) and semi-annual distribution plans, are as set forth
in Part One attached hereto for each Trust. Estimated Current
Return is computed by dividing the Estimated Net Annual Interest
Income per Unit by the Public Offering Price. Any change in either
the Estimated Net Annual Interest Income per Unit or the Public
Offering Price will result in a change in the Estimated Current
Return. For each Trust, the Public Offering Price will vary in
accordance with fluctuations in the prices of the underlying Bonds
and the Net Annual Interest Income per Unit will change as Bonds
are redeemed, paid, sold or exchanged in certain refundings or
as the expenses of each Trust change. Therefore, there is no assurance
that the Estimated Current Return indicated in Part One for each
Trust will be realized in the future. Estimated Long-Term Return
is calculated using a formula which (1) takes into consideration
and determines and factors in the relative weightings of the market
values, yields (which takes into account the amortization of premiums
and the accretion of discounts) and estimated retirements of all
of the Bonds in the Trust; (2) takes into account the expenses
and sales charge associated with each Unit of a Trust; and (3)
takes into effect the tax-adjusted yield from potential capital
gains at the Date of Deposit. Since the market values and estimated
retirements of the Bonds and the expenses of the Trust will change,
there is no assurance that the Estimated Long-Term Return indicated
in Part One for each Trust will be realized in the future. Estimated
Current Return and Estimated Long-Term Return are expected to
differ because the calculation of Estimated Long-Term Return reflects
the estimated date and amount of principal returned while Estimated
Current Return calculations include only Net Annual Interest Income
and Public Offering Price. Neither rate reflects the true return
to Unit holders, which is lower, because neither includes the
effect of the delay in the first payment to Unit holders.
Record Dates for the distribution of interest under the semi-annual
distribution plan are the fifteenth day of June and December with
the Distribution Dates being the first day of the month following
each Record Date. It is anticipated that an amount equal to approximately
one-half of the amount of net annual interest income per Unit
will be distributed on or shortly after each Distribution Date
to Unit holders of record on the preceding Record Date. See Part
One for each Trust.
Record Dates for monthly distributions are the fifteenth day of
each month. Record Dates for quarterly distributions (if applicable)
are the fifteenth day of March, June, September and December.
The Distribution Dates for distributions of interest under the
monthly and quarterly distribution plans are the first day of
the month following that in which the related Record Date occurs.
All Unit holders will receive the first distribution of interest
regardless of the plan of distribution chosen and all Unit holders
will receive such distributions, if any, from the Principal Account
as are made as of the Record Dates for monthly distributions.
See Part One for each Trust.
How is Accrued Interest Treated?
Accrued interest is the accumulation of unpaid interest on a bond
from the last day on which interest thereon was paid. Interest
on Bonds in a Trust generally is paid semi-annually to the Trust.
However, interest on the Bonds in the Trust is accounted for daily
on an accrual basis. Because of this, the Trust always has an
amount of interest earned but not yet collected by the Trustee
because of non-collected coupons. For this reason, the Public
Offering Price of Units will have added to it the proportionate
share of accrued and undistributed interest to the date of settlement.
Except through an advancement of its own funds, the Trustee has
no cash for distribution to Unit holders until it receives interest
payments on the Bonds in a Trust. The Trustee will recover its
advancements without interest or other costs to such Trust from
interest received on the Bonds in the Trust. When these advancements
have been recovered, regular distributions of interest to Unit
holders will commence. See "Rights
Page 11
of Unit Holders-How are Interest and Principal Distributed?" Interest
account balances are established with generally positive cash
balances so that it will not be necessary on a regular basis for
the Trustee to advance its own funds in connection with interest
distributions.
Because of the varying interest payment dates of the Bonds, accrued
interest at any point in time will be greater than the amount
of interest actually received by the Trust and distributed to
Unit holders. Therefore, there will always remain an item of accrued
interest that is added to the value of the Units. If a Unit holder
sells or redeems all or a portion of his Units, he will be entitled
to receive his proportionate share of the accrued interest from
the purchaser of his Units. Since the Trustee has the use of the
interest held in the Interest Account for distributions to Unit
holders and since such Account is non-interest-bearing to Unit
holders, the Trustee benefits thereby.
Why and How are the Insured Trusts Insured?
THE FOLLOWING DISCUSSION IS APPLICABLE ONLY TO THE INSURED TRUSTS.
THE BONDS IN THE PORTFOLIO OF AN ADVANTAGE TRUST ARE NOT INSURED
BY INSURANCE OBTAINED BY THE FUND.
All Bonds in the portfolio of an Insured Trust are insured as
to the scheduled payment of interest and principal by policies
obtained by each Insured Trust from Financial Guaranty Insurance
Company ("Financial Guaranty" or "FGIC"), a New York stock insurance
company, or AMBAC Indemnity Corporation ("AMBAC Indemnity" or
"AMBAC"), a Wisconsin-domiciled stock insurance company, or obtained
by the Bond issuer, the underwriters, the Sponsor or others prior
to the Date of Deposit directly from Financial Guaranty, AMBAC
Indemnity or other insurers (the "Preinsured Bonds"). The insurance
policy obtained by each Insured Trust is noncancellable and will
continue in force for such Trust so long as such Trust is in existence
and the Bonds described in the policy continue to be held by the
Trust (see Part One for each Insured Trust). Nonpayment of premiums
on the policy obtained by each Insured Trust will not result in
the cancellation of insurance, but will permit Financial Guaranty
and/or AMBAC Indemnity to take action against the Trustee to recover
premium payments due it. Premium rates for each issue of Bonds
protected by the policy obtained by each Insured Trust are fixed
for the life of such Trust. The premium for any Preinsured Bonds
has been paid in advance by the Bond issuer, the underwriters,
the Sponsor or others and any such policy or policies are noncancellable
and will continue in force so long as the Bonds so insured are
outstanding and the insurer and/or insurers thereof remain in
business. If the provider of an original issuance insurance policy
is unable to meet its obligations under such policy, or if the
rating assigned to the claims-paying ability of such insurer deteriorates,
Financial Guaranty and/or AMBAC Indemnity has no obligation to
insure any issue adversely affected by either of the above described
events. A monthly premium is paid by each Insured Trust for the
insurance obtained by such Trust, which is payable from the interest
income received by such Trust. In the case of Preinsured Bonds,
beginning with Series 25 and subsequent Series, no premiums for
insurance are paid by the Insured Trust.
Financial Guaranty Insurance Company. Under the provisions of
the aforementioned portfolio insurance issued by Financial Guaranty,
Financial Guaranty unconditionally and irrevocably agrees to pay
to Citibank, N.A., or its successor, as its agent (the "Fiscal
Agent"), that portion of the principal of and interest on the
Bonds covered by the policy which shall become due for payment
but shall be unpaid by reason of nonpayment by the issuer of the
Bonds. The term "due for payment" means, when referring to the
principal of a Bond, its stated maturity date or the date on which
it shall have been called for mandatory sinking fund redemption
and does not refer to any earlier date on which payment is due
by reason of call for redemption (other than by mandatory sinking
fund redemption), acceleration or other advancement of maturity
and means, when referring to interest on a Bond, the stated date
for payment of interest, except that when the interest on a Bond
shall have been determined, as provided in the underlying documentation
relating to such Bond, to be subject to Federal income taxation,
"due for payment" also means, when referring to the principal
of such Bond, the date on which such Bond has been called for
mandatory redemption as a result of such determination of taxability,
and when referring to interest on such Bond, the accrued interest
at the rate
Page 12
provided in such documentation to the date on which such Bond
has been called for such mandatory redemption, together with any
applicable redemption premium. The term "due for payment" will
not include, when referring to the principal of the Bond or the
interest on a Bond, any acceleration of payment, unless such acceleration
is at the sole option of Financial Guaranty.
Financial Guaranty will make such payments to the Fiscal Agent
on the date such principal or interest becomes due for payment
or on the business day next following the day on which Financial
Guaranty shall have received notice of nonpayment, whichever is
later. The Fiscal Agent will disburse to the Trustee the face
amount of principal and interest which is then due for payment
but is unpaid by reason of nonpayment by the issuer but only upon
receipt by the Fiscal Agent of (i) evidence of the Trustee's right
to receive payment of the principal or interest due for payment
and (ii) evidence, including any appropriate instruments of assignment,
that all of the rights to payment of such principal or interest
due for payment shall thereupon vest in Financial Guaranty. Upon
such disbursement, Financial Guaranty shall become the owner of
the Bond, appurtenant coupon or right to payment of principal
or interest on such Bond and shall be fully subrogated to all
of the Trustee's rights thereunder, including the right to payment
thereof.
Pursuant to an irrevocable commitment of Financial Guaranty, the
Trustee, upon the sale of a Bond covered under a policy obtained
by an Insured Trust has the right to obtain permanent insurance
with respect to such Bond (i.e., insurance to maturity of the
Bonds regardless of the identity of the holder thereof) (the "Permanent
Insurance") upon the payment of a single predetermined insurance
premium from the proceeds of the sale of such Bond. Accordingly,
any Bond in an Insured Trust is eligible to be sold on an insured
basis. It is expected that the Trustee will exercise the right
to obtain Permanent Insurance only if upon such exercise the Insured
Trust would receive net proceeds (sale of Bond proceeds less the
insurance premium attributable to the Permanent Insurance ) from
such sale in excess of the sale proceeds if such Bonds were sold
on an uninsured basis. The insurance premium with respect to each
Bond eligible for Permanent Insurance is determined based upon
the insurability of each Bond as of the Date of Deposit and will
not be increased or decreased for any change in the creditworthiness
of such Bond.
Financial Guaranty is a wholly owned subsidiary of FGIC Corporation
("Corporation"), a Delaware holding company. The Corporation is
a wholly owned subsidiary of General Electric Capital Corporation
("GECC"). Neither the Corporation nor GECC is obligated to pay
the debts of or the claims against Financial Guaranty. Financial
Guaranty is domiciled in the State of New York and is subject
to regulation by the State of New York Insurance Department. As
of December 31, 1992, the total capital and surplus of Financial
Guaranty was approximately $621,000,000. Copies of Financial Guaranty's
financial statements, prepared on the basis of statutory accounting
principles, and the Corporation's financial statements, prepared
on the basis of generally accepted accounting principles, may
be obtained by writing to Financial Guaranty at 115 Broadway,
New York, New York 10006, Attention: Communications Department
(telephone number is (212) 312-3000) or to the New York State
Insurance Department at 160 West Broadway, 18th Floor, New York,
New York 10013, Attention: Properties Companies Bureau (telephone
number is (212) 602-0389).
In addition, Financial Guaranty is currently authorized to write
insurance in forty-nine states and in the District of Columbia.
The information relating to Financial Guaranty contained above
has been furnished by such corporation. The financial information
contained herein with respect to such corporation is unaudited
but appears in reports or other materials filed with state insurance
regulatory authorities and is subject to audit and review by such
authorities. No representation is made herein as to the accuracy
or adequacy of such information or as to the absence of material
adverse changes in such information subsequent to the date thereof.
AMBAC Indemnity Corporation ("AMBAC Indemnity"). The Insurance
Policy of AMBAC Indemnity obtained by an Insured Trust is noncancellable
and will continue in force for so long as the Bonds described
in the Insurance Policy are held by an Insured Trust. A monthly
premium is paid by an Insured Trust for the Insurance Policy obtained
by it. The Trustee will pay, when due, successively, the full
amount of each installment
Page 13
of the insurance premium. Pursuant to a binding agreement with
AMBAC Indemnity, in the event of a sale of a Bond covered by the
AMBAC Indemnity Insurance Policy, the Trustee has the right to
obtain permanent insurance for such Bond upon payment of a single
predetermined premium from the proceeds of the sale of such Bond.
Under the terms of the Insurance Policy, AMBAC Indemnity agrees
to pay to the Trustee that portion of the principal of and interest
on the Bonds insured by AMBAC Indemnity which shall become due
for payment but shall be unpaid by reason of nonpayment by the
issuer of the Bonds. The term "due for payment" means, when referring
to the principal of a Bond so insured, its stated maturity date
or the date on which it shall have been called for mandatory sinking
fund redemption and does not refer to any earlier date on which
payment is due by reason of call for redemption (other than by
mandatory sinking fund redemption), acceleration or other advancement
of maturity and means, when referring to interest on a Bond, the
stated date for payment of interest.
AMBAC Indemnity will make payment to the Trustee not later than
thirty days after notice from the Trustee is received by AMBAC
Indemnity that a nonpayment of principal or of interest on a Bond
has occurred, but not earlier than the date on which the Bonds
are due for payment. AMBAC Indemnity will disburse to the Trustee
the face amount of principal and interest which is then due for
payment but is unpaid by reason of nonpayment by the issuer in
exchange for delivery of Bonds, not less in face amount than the
amount of the payment in bearer form, free and clear of all liens
and encumbrances and uncancelled. In cases where Bonds are issuable
only in a form whereby principal is payable to registered holders
or their assigns, AMBAC Indemnity shall pay principal only upon
presentation and surrender of the unpaid Bonds uncancelled and
free of any adverse claim, together with an instrument of assignment
in satisfactory form, so as to permit ownership of such Bonds
to be registered in the name of AMBAC Indemnity or its nominee.
In cases where Bonds are issuable only in a form whereby interest
is payable to registered holders or their assigns, AMBAC Indemnity
shall pay interest only upon presentation of proof that the claimant
is the person entitled to the payment of interest on the Bonds
and delivery of an instrument of assignment, in satisfactory form,
transferring to AMBAC Indemnity all right under such Bonds to
receive the interest in respect of which the insurance payment
was made.
AMBAC Indemnity is a Wisconsin-domiciled stock insurance company,
regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin, and licensed to do business in fifty states,
the District of Columbia and the Commonwealth of Puerto Rico,
with admitted assets of approximately $1,503,000,000 (unaudited)
and statutory capital of approximately $862,000,000 (unaudited)
as of September 30, 1992. Statutory capital consists of AMBAC
Indemnity's policyholders' surplus and statutory contingency reserve.
AMBAC Indemnity is a wholly owned subsidiary of AMBAC Inc., a
100% publicly-held company. Moody's Investors Service, Inc. and
Standard & Poor's Corporation have both assigned a triple-A claims-paying
ability rating to AMBAC Indemnity.
Copies of AMBAC Indemnity's financial statements prepared in accordance
with statutory accounting standards are available from AMBAC Indemnity.
The address of AMBAC Indemnity's administrative offices and its
telephone number are One State Street Plaza, 17th Floor, New York,
New York 10004 and (212) 668-0340.
The information relating to AMBAC Indemnity contained above has
been furnished by AMBAC Indemnity. No representation is made herein
as to the accuracy or adequacy of such information, or as to the
existence of any adverse changes in such information, subsequent
to the date hereof.
In determining whether to insure bonds, Financial Guaranty and/or
AMBAC Indemnity has applied its own standards which are not necessarily
the same as the criteria used in regard to the selection of bonds
by the Sponsor. This decision is made prior to the Date of Deposit,
as bonds not covered by such insurance are not deposited in an
Insured Trust, unless such bonds are Preinsured Bonds. The insurance
obtained by an Insured Trust covers Bonds deposited in such Trust
and physically delivered to the Trustee in the case of bearer
Page 14
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. Contracts to purchase
Bonds are not covered by the insurance obtained by an Insured
Trust although Bonds underlying such contracts are covered by
insurance upon physical delivery to the Trustee.
Insurance obtained by each Insured Trust or by the Bond issuer,
the underwriters, the Sponsor or others does not guarantee the
market value of the Bonds or the value of the Units of such Trust.
The insurance obtained by an Insured Trust is effective only as
to Bonds owned by and held in such Trust. In the event of a sale
of any such Bond by the Trustee, the insurance terminates as to
such Bond on the date of sale. In the event of a sale of a Bond
insured by an Insured Trust, the Trustee has the right to obtain
Permanent Insurance upon the payment of an insurance premium from
the proceeds of the sale of such Bond. Except as indicated below,
insurance obtained by an Insured Trust has no effect on the price
or redemption value of Units. It is the present intention of the
Evaluator to attribute a value to such insurance obtained by an
Insured Trust (including the right to obtain Permanent Insurance)
for the purpose of computing the price or redemption value of
Units only if the Bonds covered by such insurance are in default
in payment of principal or interest or, in the Sponsor's opinion,
in significant risk of such default. The value of the insurance
will be equal to the difference between (i) the market value of
a Bond which is in default in payment of principal or interest
or in significant risk of such default assuming the exercise of
the right to obtain Permanent Insurance (less the insurance premium
attributable to the purchase of Permanent Insurance) and (ii)
the market value of such Bonds not covered by Permanent Insurance.
See "Public Offering-How is the Public Offering Price Determined?"
herein for a more complete description of the Evaluator's method
of valuing defaulted Bonds and Bonds which have a significant
risk of default. Insurance on a Preinsured Bond is effective as
long as such Bond is outstanding. Therefore, any such insurance
may be considered to represent an element of market value in regard
to the Bonds thus insured, but the exact effect, if any, of this
insurance on such market value cannot be predicted.
A contract of insurance obtained by an Insured Trust and the negotiations
in respect thereof represent the only relationship between Financial
Guaranty and/or AMBAC Indemnity and the Fund. Otherwise neither
Financial Guaranty nor its parent, FGIC Corporation, or any affiliate
thereof, nor AMBAC Indemnity nor its parent, AMBAC, Inc., or any
affiliate thereof has any significant relationship, direct or
indirect, with the Fund or the Sponsor, except that the Sponsor
has in the past and may from time to time in the future, in the
normal course of its business, participate as sole underwriter
or as manager or as a member of underwriting syndicates in the
distribution of new issues of municipal bonds in which the investors
or the affiliates of FGIC Corporation and/or AMBAC Inc. have or
will be participants or for which a policy of insurance guaranteeing
the scheduled payment of interest and principal has been obtained
from Financial Guaranty and/or AMBAC Indemnity. Neither the Fund
nor the Units of a Trust nor the portfolio of such Trust is insured
directly or indirectly by FGIC Corporation and/or AMBAC Inc.
Municipal Bond Investors Assurance Corporation. Municipal Bond
Investors Assurance Corporation ("MBIA Corporation" or "MBIA")
is the principal operating subsidiary of MBIA, Inc., a New York
Stock Exchange listed company. MBIA, Inc. is not obligated to
pay the debts of or claims against MBIA Corporation. MBIA Corporation
is a limited liability corporation rather than a several liability
association. MBIA Corporation is domiciled in the State of New
York and licensed to do business in all fifty states, the District
of Columbia and the Commonwealth of Puerto Rico.
As of December 31, 1991 MBIA had admitted assets of $2.0 billion
(audited), total liabilities of $1.4 billion (audited), and total
capital and surplus of $647 million (audited) determined in accordance
with statutory accounting practices prescribed or permitted by
insurance regulatory authorities. As of September 30, 1992, MBIA
had admitted assets of $2.3 billion (unaudited), total liabilities
of $1.6 billion (unaudited), and total capital and surplus of
$758 million (unaudited) determined in accordance with statutory
accounting practices
Page 15
prescribed or permitted by insurance regulatory authorities. Copies
of MBIA's financial statements prepared in accordance with statutory
accounting practices are available from MBIA. The address of MBIA
Corporation is 113 King Street, Armonk, New York 10504.
Effective December 31, 1989, MBIA Inc. acquired Bond Investors
Group, Inc. On January 5, 1990, MBIA acquired all of the outstanding
stock of Bond Investors Group, Inc., the parent of Bond Investors
Guaranty Insurance Company (BIG), now know as MBIA Insurance Corp.
of Illinois. Through a reinsurance agreement, BIG has ceded all
of its net insured risks, as well as its unearned premium and
contingency reserves, to MBIA and MBIA has reinsured BIG's net
outstanding exposure.
Moody's Investors Service, Inc. rates all bond issues insured
by MBIA "Aaa" and short-term loans "MIG 1," both designated to
be of the highest quality. Standard & Poor's Corporation rates
all new issues insured by MBIA "AAA."
Capital Guaranty Insurance Company. Capital Guaranty Insurance
Company ("Capital Guaranty") was incorporated in Maryland on June
25, 1986, and is a wholly-owned subsidiary of Capital Guaranty
Corporation, a Maryland insurance holding company.
Capital Guaranty Corporation is owned by the following investors:
Constellation Investments, Inc., an affiliate of Baltimore Gas
and Electric; Fleet/Norstar Financial Group, Inc.; Safeco Corporation;
Sibag Finance Corporation, an affiliate of Siemens A.G.; and United
States Fidelity and Guaranty Company and management.
Capital Guaranty, headquartered in San Francisco, is a monoline
financial guaranty insurer engaged in the underwriting and development
of financial guaranty insurance. Capital Guaranty insures general
obligation, tax supported and revenue bonds structured as tax-exempt
and taxable securities as well as selectively insures taxable
corporate/asset backed securities. Standard & Poor's Corporation
rates the claims paying ability of Capital Guaranty "AAA."
Capital Guaranty's insured portfolio currently includes over $9
billion in total principal and interest insured. As of December
31, 1990, the total policyholders' surplus of Capital Guaranty
was $103,802,396 (audited), and the total admitted assets were
$180,118,227 (audited) as reported to the Insurance Department
of the State of Maryland. Financial statements for Capital Guaranty
Insurance Company, that have been prepared in accordance with
statutory insurance accounting standards, are available upon request.
The address of Capital Guaranty's headquarters and its telephone
number are Steuart Tower, 22nd Floor, One Market Plaza, San Francisco,
CA 94105-1413 and (415) 995-8000.
Financial Security Assurance. Financial Security Assurance ("Financial
Security") is a monoline insurance company incorporated on March
16, 1984 under the laws of the State of New York. The operations
of Financial Security commenced on July 25, 1985, and Financial
Security received its New York State insurance license on September
23, 1985. Financial Security and its two wholly owned subsidiaries
are licensed to engage in financial guaranty insurance business
in 49 states, the District of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged exclusively
in the business of writing financial guaranty insurance, principally
in respect of asset-backed and other collateralized securities
offered in domestic and foreign markets. Financial Security and
its subsidiaries also write financial guaranty insurance in respect
of municipal and other obligations and reinsure financial guaranty
insurance policies written by other leading insurance companies.
In general, financial guaranty insurance consists of the issuance
of a guaranty of scheduled payments of an issuer's securities,
thereby enhancing the credit rating of those securities, in consideration
for payment of a premium to the insurer.
Financial Security is approximately 91.6% owned by US West, Inc.
and 8.4% owned by The Tokio Marine and Fire Insurance Co., Ltd.
("Tokio Marine"). US West, Inc. operates businesses involved in
communications, data solutions, marketing services and capital
assets, including the provision of telephone services in 14 states
in the western and mid-western United States. Tokio Marine is
the largest property and casualty insurance company in Japan.
No shareholder of Financial Security is obligated to pay any debt
of Financial
Page 16
Security or any claim under any insurance policy issued by Financial
Security or to make any additional contribution to the capital
of Financial Security.
As of December 31, 1992, the total policyholders' surplus and
contingency reserves and the total unearned premium reserve, respectively,
of Financial Security and its consolidated subsidiaries were,
in accordance with statutory accounting principles, approximately
$461,443,000 (audited) and $217,085,000 (audited), and the total
shareholders' equity and the unearned premium reserve, respectively,
of Financial Security and its consolidated subsidiaries were,
in accordance with generally accepted accounting principles, approximately
$609,196,000 (audited), and $198,848,000 (audited). Copies of
Financial Security's financial statements may be obtained by writing
to Financial Security at 350 Park Avenue, New York, New York,
10022, Attention Communications Department. Financial Security's
telephone number is (212) 826-0100.
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written by Financial Security of either of
its subsidiaries are reinsured among such companies on an agreed-upon
percentage substantially proportional to their respective capital,
surplus and reserves, subject to applicable statutory risk limitations.
In addition, Financial Security reinsures a portion of its liabilities
under certain of its financial guaranty insurance policies with
unaffiliated reinsurers under various quota share treaties and
on a transaction-by-transaction basis. Such reinsurance is utilized
by Financial Security as a risk management device and to comply
with certain statutory and rating agency requirements; it does
not alter or limit Financial Security's obligations under any
financial guaranty insurance policy.
Financial Security's claims-paying ability is rated "Aaa" by Moody's
Investors Service, Inc. and "AAA" by Standard & Poor's Corporation,
Nippon Investors Service Inc., Duff & Phelps Inc. and Australian
Ratings Pty. Ltd. Such ratings reflect only the views of the respective
rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time
by such rating agencies.
Connie Lee Insurance Company. Connie Lee Insurance Company ("Connie
Lee"), 2445 M Street, N.W., Washington D.C. 20037, is a stock
insurance company incorporated in Wisconsin and a wholly-owned
subsidiary of College Construction Loan Insurance Association
("CCLIA"), a District of Columbia insurance holding company. As
of December 31, 1992, the total policyholders' surplus of Connie
Lee was $101,453,116 (audited) and total admitted assets were
$161,134,828 (audited), as reported to the Commissioner of Insurance
of the State of Wisconsin.
Because the Bonds in each Insured Trust are insured as to the
scheduled payment of principal and interest and on the basis of
the financial condition of the insurance companies referred to
above, Standard & Poor's Corporation has assigned to units of
each Insured Trust its "AAA" investment rating. This is the highest
rating assigned to securities by Standard & Poor's Corporation.
See "Description of Bond Ratings." The obtaining of this rating
by each Insured Trust should not be construed as an approval of
the offering of the Units by Standard & Poor's Corporation or
as a guarantee of the market value of each Insured Trust or the
Units of such Trust. Standard & Poor's has indicated that this
rating is not a recommendation to buy, hold or sell Units nor
does it take into account the extent to which expenses of each
Trust or sales by each Trust of Bonds for less than the purchase
price paid by such Trust will reduce payment to Unit holders of
the interest and principal required to be paid on such Bonds.
There is no guarantee that the "AAA" investment rating with respect
to the Units of an Insured Trust will be maintained.
An objective of portfolio insurance obtained by such Insured Trust
is to obtain a higher yield on the Bonds in the portfolio of such
Trust than would be available if all the Bonds in such portfolio
had the Standard & Poor's Corporation "AAA" and/or Moody's Investors
Service, Inc. "Aaa" rating(s) and at the same time to have the
protection of insurance of scheduled payment of interest and principal
on the Bonds. There is, of course, no certainty that this result
will be achieved. Bonds in a Trust for which insurance has been
obtained by the Bond issuer, the underwriters, the Sponsor or
others (all of which were rated "AAA" by Standard & Poor's Corporation
and/or "Aaa" by Moody's Investors Service, Inc.) may or may not
have a higher yield than
Page 17
uninsured bonds rated "AAA" by Standard & Poor's Corporation or
"Aaa" by Moody's Investors Service, Inc. In selecting Bonds for
the portfolio of each Insured Trust, the Sponsor has applied the
criteria hereinbefore described.
Chapman and Cutler, Counsel for the Sponsor, has given an opinion
(if applicable) to the effect that the payment of insurance proceeds
representing maturing interest on defaulted municipal obligations
paid by Financial Guaranty or another insurer would be excludable
from Federal gross income if, and to the same extent as, such
interest would have been so excludable if paid by the issuer of
the defaulted obligations. See "What is the Federal Tax Status
of Unit Holders?"
What is the Federal Tax Status of Unit Holders?
At the respective times of issuance of the Bonds, opinions relating
to the validity thereof and to the exclusion of interest thereon
from Federal gross income were rendered by bond counsel to the
respective issuing authorities. Neither the Sponsor, Chapman and
Cutler, nor any of the Special Counsel to the Fund for State tax
matters have made any special review for the Fund of the proceedings
relating to the issuance of the Bonds or of the bases for such
opinions. Gain realized on the sale or redemption of the Bonds
by the Trustee or of a Unit by a Unit holder is, however, includable
in gross income for Federal income tax purposes as a capital gain.
(It should be noted in this connection that such gain does not
include any amounts received in respect of accrued interest or
accrued original issue discount, if any.) Such gain may be long
or short term, depending on the facts and circumstances.
At the time of the closing for each Trust, Chapman and Cutler,
Counsel for the Sponsor, rendered an opinion under then existing
law substantially to the effect that:
(1) the Trusts are not associations taxable as corporations for
Federal income tax purposes. Tax-exempt interest received by each
of the Trusts on Bonds deposited therein will retain its status
as tax-exempt interest, for Federal income tax purposes, when
distributed to a Unit holder except that (i) interest income on
certain Bonds in certain Arkansas, Kansas, Maine, Mississippi
and Nebraska Trusts will be included as an item of tax preference
in calculating the Alternative Minimum Tax applicable to both
individuals and corporations and (ii) the alternative minimum
tax and the environmental tax (the "Superfund Tax") applicable
to corporate Unit holders may, in certain circumstances, include
in the amount on which such tax is calculated, 75% of the interest
income received by the Trust. See "Certain Tax Matters Applicable
to Corporate Unit Holders";
(2) exemption of interest and accrued original issue discount
on any Bonds for Federal income tax purposes does not necessarily
result in tax exemption under the laws of the several states as
such laws vary with respect to the taxation of such securities
and in many states all or a part of such interest and accrued
original issue discount may be subject to tax;
(3) each Unit holder of a Trust is considered to be the owner
of a pro rata portion of such Trust under subpart E, subchapter
J of chapter 1 of the Internal Revenue Code of 1986 (hereinafter
the "Code") and will have a taxable event when the Trust disposes
of a Bond, or when the Unit holder redeems or sells his Units.
Unit holders must reduce the tax basis of their Units for their
share of accrued interest received, if any, on Bonds delivered
after the date the Unit holders pay for their Units and, consequently,
such Unit holders may have an increase in taxable gain or reduction
in capital loss upon the disposition of such Units. Gain or loss
upon the sale or redemption of Units is measured by comparing
the proceeds of such sale or redemption with the adjusted basis
of the Units. If the Trustee disposes of Bonds (whether by sale,
payment on maturity, redemption or otherwise), gain or loss is
recognized to the Unit holder. The amount of any such gain or
loss is measured by comparing the Unit holder's pro rata share
of the total proceeds from such disposition with his basis for
his fractional interest in the asset disposed of. In the case
of a Unit holder who purchases his Units, such basis is determined
by apportioning the tax basis for the Units among each of the
Trust assets ratably according to value as of the date of acquisition
of the Units. The basis of each Unit and of each Bond which was
issued with original issue discount must
Page 18
be increased by the amount of accrued original issue discount
and the basis of each Unit and of each Bond which was purchased
by a Trust at a premium must be reduced by the annual amortization
of Bond premium. The tax cost reduction requirements of said Code
relating to amortization of bond premium may, under some circumstances,
result in the Unit holder realizing a taxable gain when his Units
are sold or redeemed for an amount equal to or less than his original
cost; and
(4) any insurance proceeds which represent maturing interest on
defaulted obligations held by the Trustee will be excludable from
Federal gross income if, and to the same extent as, such interest
would have been so excludable if paid by the issuer of the defaulted
obligations.
Sections 1288 and 1272 of the Code provide a complex set of rules
governing the accrual of original issue discount. These rules
provide that original issue discount accrues either on the basis
of a constant compounded interest rate or ratably over the term
of the Bond, depending on the date the Bond was issued. In addition,
special rules apply if the purchase price of a Bond exceeds the
original issue price plus the amount of original issue discount
which would have accrued to prior owners. The application of these
rules will also vary depending on the value of the Bond on the
date a Unit holder acquires his Unit, and the price the Unit holder
pays for his Unit. Because of the complexity of these rules relating
to the accrual of original issue discount, Unit holders should
consult their tax advisers as to how these rules apply. See "Portfolio"
appearing in Part One for each Trust for information relating
to Bonds, if any, issued at an original issue discount.
Counsel for the Sponsor has also advised that under Section 265
of the Code, interest on indebtedness incurred or continued to
purchase or carry Units of a Trust is not deductible for Federal
income tax purposes. The Internal Revenue Service has taken the
position that such indebtedness need not be directly traceable
to the purchase or carrying of Units (however, these rules generally
do not apply to interest paid on indebtedness incurred to purchase
or improve a personal residence). Under Section 265 of the Code,
certain financial institutions that acquire Units generally would
not be able to deduct any of the interest expense attributable
to ownership of Units. Investors with questions regarding these
issues should consult with their tax advisers.
In the case of certain of the Bonds in a Trust, the opinions of
bond counsel indicate that interest on such securities received
by a "substantial user" of the facilities being financed with
the proceeds of these securities, or persons related thereto,
for periods while such securities are held by such a user or related
person, will not be excludable from Federal gross income, although
interest on such securities received by others would be excludable
from Federal gross income. "Substantial user" and "related person"
are defined under U.S. Treasury Regulations. Any person who believes
he or she may be a substantial user or related person as so defined
should contact his tax adviser.
In general, Section 86 of the Code provides that Social Security
benefits are includible in gross income in an amount equal to
the lesser of (1) 50% of the Social Security benefits received
or (2) 50% of the excess of "modified adjusted gross income" plus
50% of the Social Security benefits received over the appropriate
"base amount." It should be noted that under recently proposed
legislation, the proportion of Social Security benefits subject
to inclusion in taxable income would be increased. No prediction
is made as to the likelihood that this legislation or other legislation
with substantially similar effect will be enacted. The base amount
is $25,000 for unmarried taxpayers, $32,000 for married taxpayers
filing a joint return and zero for married taxpayers who do not
live apart at all times during the taxable year and who file separate
returns. Modified adjusted gross income is adjusted gross income
determined without regard to certain otherwise allowable deductions
and exclusions from gross income and by including tax-exempt interest.
To the extent that Social Security benefits are includible in
gross income, they will be treated as any other item of gross
income.
Although tax-exempt interest is included in modified adjusted
gross income solely for the purpose of determining what portion,
if any, of Social Security benefits will be included in gross
income, no tax-exempt interest
Page 19
including that received from a Trust, will be subject to tax.
A taxpayer whose adjusted gross income already exceeds the base
amount must include 50% of his Social Security benefits in gross
income whether or not he receives any tax-exempt interest. A taxpayer
whose modified adjusted gross income (after inclusion of tax-exempt
interest) does not exceed the base amount need not include any
Social Security benefits in gross income.
For purposes of computing the alternative minimum tax for individuals
and corporations and the Superfund Tax for corporations, interest
on certain private activity bonds (which includes most industrial
and housing revenue bonds) issued on or after August 8, 1986 is
included as an item of tax preference. Except as otherwise noted
in Part One for certain Arkansas, Kansas, Maine, Mississippi and
Nebraska Trusts, the Trusts do not include any such private activity
bonds issued on or after that date. EXCEPT AS OTHERWISE NOTED IN
PART ONE FOR CERTAIN ARKANSAS, KANSAS, MAINE, MISSISSIPPI AND
NEBRASKA TRUSTS, THE TRUSTS DO NOT INCLUDE ANY SUCH PRIVATE ACTIVITY
BONDS ISSUED ON OR AFTER THAT DATE.
For taxpayers other than corporations, net capital gains are presently
subject to a maximum stated marginal tax rate of 28%. However,
it should be noted that legislative proposals are introduced from
time to time that affect tax rates and could affect relative differences
at which ordinary income and capital gains are taxed. All taxpayers
are presently required to disclose to the Internal Revenue Service
the amount of tax-exempt interest earned during the year.
Certain Tax Matters Applicable to Corporate Unit Holders. Present
Federal income tax law also provides for an alternative minimum
tax for corporations levied at a rate of 20% of alternative minimum
taxable income. The alternative minimum tax and the environmental
tax (the "Superfund Tax") depend upon the corporation's alternative
minimum taxable income ("AMTI"), which is the corporation's taxable
income with certain adjustments. One of the adjustment items used
in computing AMTI of a corporation (excluding an S Corporation,
Regulated Investment Company, Real Estate Investment Trust, or
REMIC) is an amount equal to 75% of the excess of such corporation's
"adjusted current earnings" over an amount equal to its AMTI (before
such adjustment item and the alternative tax net operating loss
deduction). Although tax-exempt interest received by the Trusts
on Bonds deposited therein will not be included in the gross income
of corporations for Federal income tax purposes, "adjusted current
earnings" includes all tax-exempt interest, including interest
on all Bonds in the Trusts.
Unit holders are urged to consult their own tax advisers with
respect to the particular tax consequences to them, including
the corporate alternative minimum tax, the Superfund Tax and the
branch profits tax imposed by Section 884 of the Code.
At the time of the closing, Booth & Baron, Special Counsel to
Series 1-3 of the Fund for New York tax matters, rendered an opinion
under then existing income tax laws of the State and City of New
York, substantially to the effect that each Trust in Series 1-3
of the Fund is not an association taxable as a corporation and
the income of each such Trust will be treated as the income of
the Unit holder.
At the time of the closing, Winston & Strawn (previously named
Cole & Deitz), Special Counsel to Series 4-125 of the Fund for
New York tax matters, rendered an opinion under then existing
income tax laws of the State and City of New York, substantially
to the effect that each Trust in Series 4-125 of the Fund is not
an association taxable as a corporation and the income of each
Trust in Series 4-125 of the Fund will be treated as the income
of the Unit holder in the same manner as for Federal income tax
purposes (subject to differences in accounting for discount and
premium to the extent the State and/or City of New York do not
conform to current Federal law.
At the time of the closing, Carter, Ledyard & Milburn, Special
Counsel to the Fund for New York tax matters for Series 126 and
subsequent Series of the Fund, rendered an opinion under then
existing income tax laws of the State and City of New York, substantially
to the effect that each Trust will not constitute an association
taxable as a corporation under New York law, and accordingly will
not be subject to the New York State franchise tax or the New
York City general corporation tax. Under the income tax laws of
the State and City of New York, the income of each Trust will
be considered the income of the holders of the Units.
Page 20
For information with respect to exemption from state or other
local taxes, see the sections in the Prospectus pertaining to
each Trust.
All statements in the Prospectus concerning exemption from Federal,
state or other local taxes are the opinions of Counsel and are
to be so construed.
Alabama Tax Status. At the time of the closing for each Alabama
Trust, Special Counsel to the Fund for Alabama tax matters rendered
an opinion under then existing Alabama income tax law applicable
to taxpayers whose income is subject to Alabama income taxation
substantially to the effect that:
Each Alabama Trust is not taxable as a corporation for purposes
of the Alabama income tax.
Income of an Alabama Trust, to the extent it is taxable, will
be taxable to the Unit holders, not the Alabama Trust.
Each Unit holder's distributive share of an Alabama Trust's net
income will be treated as the income of the Unit holder for purposes
of the Alabama income tax.
Interest on obligations of the State of Alabama and subdivisions
thereof and on bona fide tax-exempt obligations of the United
States' Possessions held by an Alabama Trust, which is exempt
from the Alabama income tax will retain its tax-exempt character
when the distributive share thereof is distributed or deemed distributed
to each Unit holder. Any proceeds paid to an Alabama Trust under
insurance policies issued to the Sponsor or under individual policies
obtained by the Sponsor, the issuer or underwriter of the respective
obligations which represent maturing interest on defaulted obligations
held by the Trustee will be exempt from the Alabama income tax
if and to the same extent as such interest would be exempt from
such taxes if paid directly by the issuer of such obligations.
Each Unit holder will, for purposes of the Alabama income tax,
treat his distributive share of gains realized upon the sale or
other disposition of the Bonds held by the Alabama Trust as though
the Bonds were sold or disposed of directly by the Unit holders.
Gains realized on the sale or redemption of Units by Unit holders,
who are subject to the Alabama income tax, will be includable
in the Alabama income of such Unit holders.
Arizona Tax Status. At the time of the closing for each Arizona
Trust, Chapman and Cutler, Special Counsel to the Fund for Arizona
tax matters, rendered an opinion under then existing Arizona income
tax law applicable to taxpayers whose income is subject to Arizona
income taxation substantially to the effect that:
For Arizona State income tax purposes, each Unit holder will be
treated as the owner of a pro rata portion of the Arizona Trust,
and the income of the Trust therefore will be treated as the income
of the Unit holder under State law.
For Arizona State income tax purposes, interest on the Bonds which
is excludable from Federal gross income and which is exempt from
Arizona State income taxes when received by an Arizona Trust,
and which would be excludable from Federal gross income and exempt
from Arizona income taxes if received directly by a Unit holder,
will retain its status as tax-exempt interest when received by
an Arizona Trust and distributed to the Unit holders.
To the extent that interest derived from an Arizona Trust by a
Unit holder with respect to the Bonds is excludable from Federal
gross income, such interest will not be subject to Arizona State
income taxes.
Each Unit holder will realize taxable gain or loss for Arizona
State income tax purposes when Bonds held in an Arizona Trust
are sold, exchanged, redeemed prior to maturity or paid at maturity,
or when the Unit holder redeems or sells Units, at a price that
differs from original cost as adjusted for accretion of any discount
or amortization of any premium and other basis adjustments, including
any basis reduction that may be required to reflect a Unit holder's
share of interest, if any, accruing on Bonds during the interval
between the Unit holder's settlement date and the date such Bonds
are delivered to the Arizona Trust, if later.
Arizona law does not permit a deduction for interest paid or incurred
on indebtedness incurred or continued to purchase or carry Units
in an Arizona Trust, the interest on which is exempt from Arizona
State income taxes.
Page 21
Neither the Bonds nor the Units will be subject to Arizona State
property taxes, sales taxes or use taxes.
Arkansas Tax Status. At the time of the closing for each Arkansas
Trust, Special Counsel to the Fund for Arkansas tax matters rendered
an opinion under then existing Arkansas income tax law applicable
to taxpayers whose income is subject to Arkansas income taxation
substantially to the effect that:
Each Arkansas Trust is not an association taxable as a corporation
or otherwise for purposes of Arkansas income taxation;
Each Arkansas Unit holder will be treated as the owner of a pro
rata portion of an Arkansas Trust for Arkansas income tax purposes,
and will have a taxable event when an Arkansas Trust disposes
of a Bond or when the Unit holder sells, exchanges, redeems or
otherwise disposes of his Units;
Any gains realized upon the sale, exchange, maturity, redemption
or other disposition of Bonds held by an Arkansas Trust resulting
in the distribution of income to Arkansas Unit holders will be
subject to Arkansas income taxation to the extent that such income
would be subject to Arkansas income taxation if the bonds were
held, sold, exchanged, redeemed or otherwise disposed of by the
Arkansas Unit holders; and
Interest on Bonds, issued by the State of Arkansas, or by or on
behalf of political subdivisions, thereof, that would be exempt
from Federal income taxation when paid directly to an Arkansas
Unit holder will be exempt from Arkansas income taxation when
received by an Arkansas Trust and attributed to such Arkansas
Unit holder and when distributed to such Arkansas Unit holder.
California Tax Status. At the time of the closing for each California
Trust, Special Counsel to the Fund for California tax matters
rendered an opinion under then existing California income and
property tax law applicable to taxpayers whose income is subject
to California income taxation substantially to the effect that:
Each California Trust is not an association taxable as a corporation
and the income of a California Trust will be treated as the income
of the Unit holders under the income tax laws of California.
Interest on the underlying securities (which may include bonds
or other obligations issued by the governments of Puerto Rico,
the Virgin Islands, Guam or the Northern Mariana Islands) which
is exempt from tax under California personal income tax and property
tax laws when received by a California Trust will, under such
laws, retain its status as tax-exempt interest when distributed
to Unit holders. However, interest on the underlying securities
attributed to a Unit holder which is a corporation subject to
a California franchise tax laws may be includable in its gross
income for purposes of determining its California franchise tax.
Under California income tax law, each Unit holder in a California
Trust will have a taxable event when a California Trust disposes
of a security (whether by sale, exchange, redemption or payment
at maturity) or when the Unit holder redeems or sells Units. Because
of the requirement that tax cost basis be reduced to reflect amortization
of bond premium, under some circumstances a Unit holder may realize
taxable gain when Units are sold or redeemed for an amount equal
to, or less than, their original cost. The total tax cost of each
Unit to a Unit holder is allocated among each of the bond issues
held in a California Trust (in accordance with the proportion
of a California Trust comprised by each bond issue) in order to
determine his per unit tax cost for each bond issue; and the
tax cost reduction requirements relating to amortization of bond
premium will apply separately to the per unit cost of each bond
issue. Unit holders' bases in their Units, and the bases for their
fractional interest in each California Trust asset, may have to
be adjusted for their pro rata share of accrued interest received,
if any, on securities delivered after the Unit holders' respective
settlement dates.
Any proceeds paid under an insurance policy with respect to the
bonds in a California Trust as well as "regular-way" and "when-issued"
contracts for the purchase of bonds which represent maturing interest
on defaulted obligations held by the Trustee will be exempt from
California personal income tax if, and to the same extent as,
such interest would have been so exempt if paid by the issuer
of the defaulted obligations.
Page 22
Under a California personal property tax laws, bonds (including
the bonds in a California Trust as well as "regular-way" and "when-issued"
contracts for the purchase of bonds) or any interest thereon is
exempt from such tax.
Under Section 17280(b)(2) of a California Revenue and Taxation
Code, interest on indebtedness incurred or continued to purchase
or carry Units of a California Trust is not deductible for the
purposes of the California personal income tax. While there presently
is no California authority interpreting this provision, Section
17280(b)(2) directs the California Franchise Tax Board to prescribe
regulations determining the proper allocation and apportionment
of interest costs for this purpose. The Franchise Tax Board has
not yet proposed or prescribed such regulations. In interpreting
the generally similar Federal provision, the Internal Revenue
Service has taken the position that such indebtedness need not
be directly traceable to the purchase or carrying of Units (although
the Service has not contended that a deduction for interest on
indebtedness incurred to purchase or improve a personal residence
or to purchase goods or services for personal consumption will
be disallowed). In the absence of conflicting regulations or other
California authority, the California Franchise Tax Board generally
has interpreted California statutory tax provisions in accord
with Internal Revenue Service interpretations of similar Federal
provisions.
Colorado Tax Status. At the time of the closing for each Colorado
Trust, Chapman and Cutler, Special Counsel to the Fund for Colorado
tax matters, rendered an opinion under then existing Colorado
income tax law applicable to taxpayers whose income is subject
to Colorado income taxation substantially to the effect that:
Because Colorado income tax law is based upon the Federal law,
a Colorado Trust is not an association taxable as a corporation
for purposes of Colorado income taxation.
Each Colorado Unit holder will be treated as owning a pro rata
share of each asset of a Colorado Trust for Colorado income tax
purposes in the proportion that the number of Units of such Trust
held by the Unit holder bears to the total number of outstanding
Units of a Colorado Trust, and the income of a Colorado Trust
will therefore be treated as the income of each Colorado Unit
holder under Colorado law in the proportion described;
Interest on Bonds that would not be includable in income for Colorado
income tax purposes when paid directly to a Colorado Unit holder
will be exempt from Colorado income taxation when received by
a Colorado Trust and attributed to such Colorado Unit holder and
when distributed to such Colorado Unit holder;
Any proceeds paid under an insurance policy or policies issued
to a Colorado Trust with respect to the Bonds in a Colorado Trust
which represent maturing interest on defaulted obligations held
by the Trustee will be excludable from Colorado adjusted gross
income if, and to the same extent as, such interest would have
been so excludable if paid by the issuer of the defaulted obligations;
Any proceeds paid under individual policies obtained by the Bond
issuer, the underwriters, the Sponsor or others which represent
maturing interest on defaulted obligations held by the Trustee
will not be includable in income for Colorado income tax purposes
if, and to the same extent as, such interest would not have been
so includable if paid in the normal course by the issuer of the
defaulted obligations;
Each Colorado Unit holder will realize taxable gain or loss when
a Colorado Trust disposes of a Bond (whether by sale, exchange,
redemption, or payment at maturity) or when the Colorado Unit
holder redeems or sells Units at a price that differs from original
cost as adjusted for amortization of bond discount or premium
and other basis adjustments (including any basis reduction that
may be required to reflect a Colorado Unit holder's share of interest,
if any, accruing on Bonds during the interval between the Colorado
Unit holder's settlement date and the date such Bonds are delivered
to a Colorado Trust, if later);
Tax cost reduction requirements relating to amortization of bond
premium may, under some circumstances, result in Colorado Unit
holders realizing taxable gain when their Units are sold or redeemed
for an amount equal to or less than their original cost; and
Page 23
If interest on indebtedness incurred or continued by a Colorado
Unit holder to purchase Units in a Colorado Trust is not deductible
for Federal income tax purposes, it also will be non-deductible
for Colorado income tax purposes.
Unit holders should be aware that all tax-exempt interest, including
their share of interest on Bonds paid to the Colorado Trusts,
is taken into account for purposes of determining eligibility
for the Colorado Property Tax/Rent/Heat Rebate.
Connecticut Tax Status. The assets of a Connecticut Trust will
consist of obligations (the "Bonds"), some of which have been
issued by or on behalf of the State of Connecticut or its political
subdivisions or other public bodies created under the laws of
the State of Connecticut ("Connecticut Bonds") and the balance
of which have been issued by or on behalf of entities classified
for relevant purposes as territories or possessions of the United
States, including one or more of Puerto Rico, Guam, or the Virgin
Islands, the interest on the obligations of which Federal law
would prohibit Connecticut from taxing if received directly by
the Unit holders. Certain Connecticut Bonds in a Connecticut Trust
were issued prior to the enactment of the Connecticut income tax
on a Connecticut taxable income of individuals, trusts, and estates
(the "Connecticut Income Tax"); therefore, bond counsel to the
issuers of such Bonds did not opine as to the exemption of the
interest on such Bonds from such tax. However, the Sponsor and
special counsel to the Connecticut Trust for Connecticut tax matters
believe that such interest will be so exempt. Interest on Bonds
in a Connecticut Trust issued by other issuers, if any, is, in
the opinion of bond counsel to such issuers, exempt from state
taxation.
The Connecticut Income Tax was enacted in August 1991. Generally,
under this tax as enacted, a Unit holder would recognize gain
or loss for purposes of this tax upon the maturity, redemption,
sale, or other disposition by a Connecticut Trust of an obligation
held by it, or upon the redemption, sale, or other disposition
of a Unit of a Connecticut Trust held by the Unit holder, to the
same extent that gain or loss is recognized by the Unit holder
thereupon for Federal income tax purposes. However, on June 19,
1992, Connecticut legislation was adopted that provides that gains
and losses from the sale or exchange of Connecticut Bonds held
as capital assets will not be taken into account for purposes
of the Connecticut Income Tax for taxable years starting on or
after January 1, 1992. It is not clear whether this provision
would apply to gain or loss recognized by a Unit holder upon the
maturity or redemption of a Connecticut Bond held by a Connecticut
Trust or, to the extent attributable to Connecticut Bonds held
by a Connecticut Trust, to gain or loss recognized by a Unit holder
upon the redemption, sale, or other disposition of a Unit of a
Connecticut Trust held by the Unit holder. Unit holders are urged
to consult their own tax advisors in this regard.
At the time of the closing for each Connecticut Trust, Special
Counsel to the Fund for Connecticut tax matters, which relied
explicitly on the opinion of Chapman and Cutler regarding Federal
income tax matters, rendered an opinion under then existing Connecticut
income tax law applicable to taxpayers whose income is subject
to Connecticut income taxation substantially to the effect that:
1. A Connecticut Trust is not liable for any tax on or measured
by net income imposed by the State of Connecticut.
2. Interest income from a Bond issued by or on behalf of the State
of Connecticut, any political subdivision thereof, or public instrumentality,
state or local authority, district, or similar public entity created
under the laws of the State of Connecticut (a "Connecticut Bond"),
or from a Bond issued by United States territories or possessions
the interest on which Federal law would prohibit Connecticut from
taxing if received directly by a Unit holder from the issuer thereof,
is not taxable under the Connecticut tax on the Connecticut taxable
income of individuals, trusts, and estates (a "Connecticut Income
Tax") when such interest is received by a Connecticut Trust or
distributed by it to such a Unit holder.
3. Insurance proceeds received by a Connecticut Trust representing
maturing interest on defaulted Bonds held by a Connecticut Trust
are not taxable under a Connecticut Income Tax if, and to the
same extent as
Page 24
such interest would not be taxable thereunder if paid directly
to a Connecticut Trust by the issuer of such Bonds.
4. Gains and losses recognized by a Unit holder for Federal income
tax purposes upon the maturity, redemption, sale, or other disposition
by a Connecticut Trust of a Bond held by a Connecticut Trust or
upon the redemption, sale, or other disposition of a Unit of a
Connecticut Trust held by a Unit holder are taken into account
as gains or losses, respectively, for purposes of a Connecticut
Income Tax, except that, in the case of a Unit holder holding
a Unit of a Connecticut Trust as a capital asset, such gains and
losses recognized upon the sale or exchange of a Connecticut Bond
held by a Connecticut Trust are excluded from gains and losses
taken into account for purposes of such tax, and no opinion is
expressed as to the treatment for purposes of such tax of gains
and losses recognized upon the maturity or redemption of a Connecticut
Bond held by a Connecticut Trust or, to the extent attributable
to Connecticut Bonds, of gains and losses recognized upon the
redemption, sale, or other disposition by a Unit holder of a Unit
of a Connecticut Trust held by him.
5. The portion of any interest income or capital gain of a Connecticut
Trust that is allocable to a Unit holder that is subject to a
Connecticut corporation business tax is includable in the gross
income of such Unit holder for purposes of such tax.
6. An interest in a Unit of a Connecticut Trust that is owned
by or attributable to a Connecticut resident at the time of his
death is includable in his gross estate for purposes of the Connecticut
succession tax and the Connecticut estate tax.
Delaware Tax Status. At the time of the closing for each Delaware
Trust, Special Counsel to the Fund for Delaware tax matters rendered
an opinion under then existing Delaware income tax law applicable
to taxpayers whose income is subject to Delaware income taxation
substantially to the effect that:
Distributions of interest income to Unit holders that would not
be taxable if received directly by a Delaware resident are not
subject to personal income tax under the Delaware personal income
tax imposed by 30 Del. C. Section 1101 et seq.
Distributions of interest income to Unit holders which are estates
or trusts that would not be taxable if received directly by a
Delaware resident estate or trust are not subject to the personal
income tax imposed by 30 Del. C. Section 1101 et seq.
Distributions of interest income to Unit holders which are corporations
that would not be taxable for Delaware income tax purposes if
received directly by a corporation will not be subject to the
Delaware corporate income tax imposed by 30 Del. C. Section 1901
et seq.
Distributions of interest income on obligations of the Commonwealth
of Puerto Rico to Unit holders which are corporations should be
exempt from Delaware corporate income tax by reason of Federal
law, but there is no specific statutory exemption under Delaware
law and we understand the exemption is being challenged by another
state.
To the extent that any gain or loss from the sale of obligations
held by the Fund or from the sale of a Unit by a Unit holder is
includable or deductible in the calculation of a resident individual's,
estate's or trust's adjusted gross income for Federal income tax
purposes, any such gain or loss will be includable or deductible
in the calculation of taxable income for the purposes of Delaware
resident personal income taxes.
To the extent that any gain or loss from the sale of obligations
held by the Fund or from the sale of a Unit by a Unit holder is
includable or deductible in the calculation of taxable income
for purposes of Federal income tax imposed upon a corporation,
such gain or loss shall not be includable or deductible in the
calculation of taxable income for purposes of the Delaware corporate
income tax since gains or losses from the sale or other disposition
of securities issued by the State of Delaware or political subdivisions
thereof are not included in computing the taxable income of a
corporation for Delaware corporate income tax purposes. This exemption,
however, does not apply to the extent that any gain or loss is
attributable to obligations of the Commonwealth of Puerto Rico.
Page 25
Any proceeds paid under insurance policies obtained by issuers
or underwriters of the Bonds, the Sponsor, or others which represent
interest on defaulted obligations held by the Trustee will be
excludable from Delaware gross income for individuals, trusts
and estates, or corporations, if, and to the same extent as, such
proceeds would have been so excludable from Federal income taxation.
Interest income (with the possible exception of interest on obligations
of the Commonwealth of Puerto Rico) received by a Unit holder
is not exempt from the franchise tax imposed on banking organizations
under 5 Del. C. Section 1101 et seq. and the franchise tax imposed
on building and loan associations imposed under 5 Del. C. Section
1801 et seq.
The Units are not exempt from Delaware inheritance, estate and
gift tax.
Florida Tax Status. At the time of the closing for each Florida
Trust, Chapman and Cutler, Special Counsel to the Fund for Florida
tax matters, rendered an opinion under then existing Florida income
tax law applicable to taxpayers whose income is subject to Florida
income taxation substantially to the effect that:
Neither a Florida Trust nor Non-Corporate Unit holders will be
subject to the Florida income tax imposed by Chapter 220, Florida
Statutes. Any amounts paid to a Florida Trust or Non-Corporate
Unit Holders under an insurance policy issued to a Florida Trust,
the issuers, the underwriters, or the Sponsor thereof, or others,
which represent maturing interest on defaulted obligations held
by the Trustee will not be subject to the Florida income tax imposed
by Chapter 220, Florida Statutes.
Corporate Unit holders will be subject to Florida income taxation
under Chapter 220, Florida Statutes (a) on interest received by
a Florida Trust, (b) on payments of interest pursuant to any insurance
policy, (c) on gain realized when Bonds are sold, redeemed or
paid at maturity or when insurance payments with respect to principal
are received by a Florida Trust and (d) on gain on the sale or
redemption of Units, to the extent allocable to Florida as "adjusted
Federal income." Corporate Unit holders that have a commercial
domicile in Florida will also be subject to Florida income taxation
on 100% of the items of income described in clauses (a) through
(d) of the immediately preceding sentence to the extent that such
income constitutes "nonbusiness income."
Even if interest on indebtedness incurred or continued by a Unit
holder to purchase Units in a Florida Trust is not deductible
for Federal income tax purposes, it will reduce interest income
on the Bonds which is reportable by Corporate Unit holders for
Florida income tax purposes.
Where the application of Section 265 of the Code results in the
denial to a Unit holder of interest deductions, the interest may
also be nondeductible for Florida income tax purposes.
Trust Units held by a Florida resident will be includible in the
resident's estate for Florida estate tax purposes, but if such
estate is not subject to the Federal estate tax, the estate will
not be subject to the Florida estate tax. The Florida estate tax
is limited to the amount of the credit for state death taxes provided
for in section 2011 of the Code, less estate taxes paid to states
other than Florida.
Neither the Bonds nor the Units will be subject to the Florida
ad valorem tax, the Florida intangible personal property tax or
Florida sales or use tax.
Georgia Tax Status. At the time of the closing for each Georgia
Trust, Chapman and Cutler, Special Counsel to the Fund for Georgia
tax matters, rendered an opinion under then existing Georgia income
tax law applicable to taxpayers whose income is subject to Georgia
income taxation substantially to the effect that:
For Georgia income tax purposes, a Georgia Trust is not an association
taxable as a corporation, and the income of a Georgia Trust will
be treated as the income of the Unit holders. Interest on the
Georgia Bonds which is exempt from the Georgia income tax when
received by a Georgia Trust, and which would be exempt from Georgia
income tax if received directly by a Unit holder, will retain
its status as tax-exempt interest when distributed by a Georgia
Trust and received by the Unit holders.
If the Trustee disposes of a Georgia Bond (whether by sale, exchange,
payment on maturity, retirement or otherwise) or if a Unit holder
redeems or sells his Unit, the Unit holder will recognize gain
or loss for Georgia
Page 26
income tax purposes to the same extent that gain or loss would
be recognized for federal income tax purposes (except in the case
of the Georgia Bonds issued before March 11, 1987 issued with
original issue discount owned by a Georgia Trust, in which case
gain or loss for Georgia income tax purposes would be determined
by accruing said original issue discount on a ratable basis).
Due to the amortization of bond premium and other basis adjustments
required by the Internal Revenue Code, a Unit holder, under some
circumstances, may realize taxable gain when his or her Units
are sold or redeemed for an amount equal to their original cost.
Because obligations or evidences of debt of Georgia, its political
subdivisions and public institutions and bonds issued by the Government
of Puerto Rico are exempt from the Georgia intangible personal
property tax, a Georgia Trust will not be subject to such tax
as the result of holding such obligations, evidences of debt or
bonds. Although there currently is no published administrative
interpretation or opinion of the Attorney General of Georgia dealing
with the status of bonds issued by a political subdivision of
Puerto Rico, we have in the past been advised orally by representatives
of the Georgia Department of Revenue that such bonds would also
be considered exempt from such tax. Based on that advice, and
in the absence of a published administrative interpretation to
the contrary, we are of the opinion that a Georgia Trust would
not be subject to such tax as the result of holding bonds issued
by a political subdivision of Puerto Rico.
Amounts paid by the insurer under an insurance policy or policies
issued to a Georgia Trust, if any, with respect to the Georgia
Bonds in a Georgia Trust which represent maturing interest on
defaulted obligations held by the Trustee will be exempt from
State income taxes if, and to the extent as, such interest would
have been so exempt if paid by the issuer of the defaulted obligations.
We express no opinion regarding whether a Unit holder's ownership
of an interest in a Georgia Trust is subject to the Georgia intangible
personal property tax. Although the application of the Georgia
intangible personal property tax to the ownership of the Units
by the Unit holders is not clear, representatives of the Georgia
Department of Revenue have in the past advised us orally that,
for purposes of the intangible personal property tax, the Department
considers a Unit holder's ownership of an interest in a Georgia
Trust as a whole to be taxable intangible property separate from
any ownership interest in the underlying tax-exempt Georgia Bonds.
Neither the Georgia Bonds nor the Units will be subject to Georgia
sales or use tax.
Idaho Tax Status. The assets of an Idaho Trust will consist of
interest-bearing obligations issued by or on behalf of the State
of Idaho ("Idaho") or counties, municipalities, authorities or
political subdivisions thereof (the "Idaho Bonds") or by the Commonwealth
of Puerto Rico, Guam and the United States Virgin Islands (the
"Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined
the Bonds to be deposited in and held in an Idaho Trust. However,
although no opinion is expressed herein regarding such matters,
it is assumed that: (i) the Bonds were validly issued, (ii) the
Idaho Bonds meet the classification and registration requirements
of Idaho Income Tax Regulation 22, (iii) the interest on the Bonds
is excludable from gross income for Federal income tax purposes
and (iv) the interest on the Bonds is exempt from taxation under
the provisions of the Idaho Income Tax Act (the "Idaho income
tax"). The opinion set forth below does not address the taxation
of persons other than full time residents of Idaho.
At the time of the closing for each Idaho Trust, Chapman and Cutler,
Special Counsel to the Fund for Idaho tax matters rendered an
opinion under then existing Idaho income tax law applicable to
taxpayers whose income is subject to Idaho income taxation substantially
to the effect that:
(1) Each Idaho Trust is not an association taxable as a corporation
for Idaho income tax purposes and each Unit holder of an Idaho
Trust will be treated as the owner of a pro rata portion of the
assets held by an Idaho Trust and the income of such portion of
an Idaho Trust will be treated as income of the Unit holder for
Idaho income tax purposes.
Page 27
(2) Income on the Bonds which is exempt from the Idaho income
tax when received by an Idaho Trust, and which would be exempt
from the Idaho income tax if received directly by a Unit holder,
will retain its status as exempt from such tax when received by
an Idaho Trust and distributed to such Unit holder.
(3) To the extent that interest income derived from an Idaho
Trust by a Unit holder with respect to Possession Bonds is excludable
from gross income for Federal income tax purposes pursuant to
48 U.S.C. Section 745, 48 U.S.C. Section 1423a or 48 U.S.C. Section
1403, such interest income will not be subject to the Idaho income
tax.
(4) In general, each Unit holder will recognize gain or loss
for Idaho income tax purposes if the Trustee disposes of a Bond
(whether by redemption, sale or otherwise) or if the Unit holder
redeems or sells Units of an Idaho Trust to the extent that such
a transaction results in a recognized gain or loss to such Unit
holder for Federal income tax purposes. However, Idaho income
tax law may prevent a Unit holder from taking a recognized loss
into account for Idaho income tax purposes, under certain circumstances.
(5) The Idaho income tax does not permit a deduction of interest
paid on indebtedness incurred or continued to purchase or carry
Units in an Idaho Trust to the extent that interest income related
to the ownership of Units is exempt from the Idaho income tax.
(6) Any insurance proceeds paid under policies which represent
maturing interest on defaulted obligations which are excludable
from gross income for Federal income tax purposes will be excludable
from the Idaho income tax to the same extent as such interest
would have been so excludable if paid by the issuer of such Bonds
held by an Idaho Trust.
Units may be subject to the Idaho estate and transfer tax. Idaho
has special rules regarding a taxpayer's ability to recognize
capital losses that apply in certain cases. Unit holders should
consult their tax advisers regarding these rules.
Indiana Tax Status. At the time of the closing for each Indiana
Trust, Chapman and Cutler, Special Counsel to the Fund for Indiana
tax matters, rendered an opinion under then existing Indiana
income tax law applicable to taxpayers whose income is subject
to Indiana income taxation substantially to the effect that:
Each Indiana Trust is not an association taxable as a corporation
for purposes of the Indiana State Adjusted Gross Income Tax, the
Supplemental Corporate Net Income Tax, the County Adjusted Gross
Income Tax and the Indiana Financial Institutions Tax (collectively,
the "State Income Tax").
Each Indiana Unit holder will be treated as owning a pro rata
share of each asset of an Indiana Trust for Indiana State Income
Tax purposes in the proportion that the number of Units of such
Trust held by the Unit holder bears to the total number of outstanding
Units of an Indiana Trust, and the income of an Indiana Trust
will therefore be treated as income of each Indiana Unit holder
for Indiana State Income Tax purposes in the proportion described.
Interest on Bonds that would not be includible in income for Indiana
State Income Tax purposes when paid directly to an Indiana Unit
holder will be exempt from the Indiana State Income Tax when received
by an Indiana Trust and attributed to such Indiana Unit holder
and when distributed to such Indiana Unit holder.
For purposes of both the Indiana State Income Tax and the Gross
Receipts Tax (in the case of taxpayers other than individuals
that are subject to such tax), each Indiana Unit holder will realize
taxable gain or loss when an Indiana Trust disposes of a Bond
(whether by sale, exchange, redemption, or payment at maturity)
or when an Indiana Unit holder redeems or sells Units at a price
that differs from original cost as adjusted for amortization of
bond discount or premium and other basis adjustments (including
any basis reduction that may be required to reflect an Indiana
Unit holder's share of interest, if any, accruing on Bonds during
the interval between the Indiana Unit holder's settlement date
and the date such Bonds are delivered to an Indiana Trust, if
later).
Page 28
Tax cost reduction requirements relating to amortization of bond
premium may, under some circumstances, result in Indiana Unit
holders realizing taxable gain when their Units are sold or redeemed
for an amount equal to or less than their original cost.
If interest on indebtedness incurred or continued by an Indiana
Unit holder to purchase Units in an Indiana Trust is not deductible
for Federal income tax purposes, it also will be non-deductible
for Indiana State Income Tax purposes.
Indiana imposes a Gross Receipts Tax generally applicable to taxpayers
other than individuals. No opinion is expressed herein as to whether
distributions from an Indiana Trust to a Unit holder are subject
to the Gross Receipts Tax. However, the Indiana Department of
Revenue has advised that distributions from an Indiana Trust will
be exempt from Indiana Gross Receipts Tax to the extent such distributions
relate to payments of interest received by an Indiana Trust on
bonds that would, if received directly by such Unit holder, be
exempt from such tax, provided that an Indiana Trust complies
with certain information reporting and certification requirements.
We have been advised that this merely represents the current position
of the Indiana Department of Revenue and is subject to change.
Indiana has recently imposed the Indiana Financial Institutions
Tax applicable to corporations transacting the business of a financial
institution in Indiana. It should be noted that taxable income
for purposes of computing such tax includes interest on bonds
that is excludible from gross income for federal income tax purposes.
Accordingly, interest income attributable to a Unit holder to
which the Indiana Financial Institutions Tax applies would generally
be subject to such tax.
Units will be subject to the Indiana inheritance tax when held
by a Unit holder subject to such tax.
Kansas Tax Status. At the time of the closing for each Kansas
Trust, Chapman and Cutler, Special Counsel to the Fund for Kansas
tax matters rendered an opinion under then existing Kansas income
tax law applicable to taxpayers whose income is subject to Kansas
income taxation, assuming interest on the Bonds is excludable
from gross income under Section 103 of the Internal Revenue Code
of 1986, as amended, substantially to the effect that:
Each Kansas Trust is not an association taxable as a corporation
for Kansas income tax purposes;
Each Unit holder of a Kansas Trust will be treated as the owner
of a pro rata portion of the Trust, and the income and deductions
of the Trust will therefore be treated as income of the Unit holder
under Kansas law;
Interest on Bonds issued after December 31, 1987 by the State
of Kansas or any of its political subdivisions will be exempt
from income taxation imposed on individuals, corporations and
fiduciaries (other than insurance companies, banks, trust companies
or savings and loan associations); however, interest on Bonds
issued prior to January 1, 1988 by the State of Kansas or any
of its political subdivisions will not be exempt from income taxation
imposed on individuals, corporations and fiduciaries (other than
insurance companies, banks, trust companies or savings and loan
associations); unless the laws of the State of Kansas authorizing
the issuance of such Bonds specifically exempt the interest on
the Bonds from income taxation by the State of Kansas;
Interest on Bonds issued by the State of Kansas or any of its
political subdivisions will be subject to the tax imposed on banks,
trust companies and savings and loan associations under Article
11, Chapter 79 of the Kansas statutes;
Interest on Bonds issued by the State of Kansas or any of its
political subdivisions will be subject to the tax imposed on insurance
companies under Article 40, Chapter 28 of the Kansas statutes
unless the laws of the State of Kansas authorizing the issuance
of such Bonds specifically exempt the interest on the Bonds from
income taxation by the State of Kansas; interest on the Bonds
which is exempt from Kansas income taxation when received by a
Kansas Trust will continue to be exempt when distributed to a
Unit holder (other than a bank, trust company or savings and loan
association);
Each Unit holder of a Kansas Trust will recognize gain or loss
for Kansas income tax purposes if the Trustee disposes of a Bond
(whether by sale, exchange, payment on maturity, retirement or
otherwise) or if the
Page 29
Unit holder redeems or sells Units of a Kansas Trust to the extent
that such transaction results in a recognized gain or loss for
federal income tax purposes;
Interest received by a Kansas Trust on the Bonds is exempt from
intangibles taxation imposed by any counties, cities and townships
pursuant to present Kansas law; and
No opinion is expressed regarding whether the gross earnings derived
from the Units is subject to intangibles taxation imposed by any
counties, cities and townships pursuant to present Kansas law.
Kentucky Tax Status. At the time of the closing for each Kentucky
Trust, Special Counsel to the Fund for Kentucky tax matters rendered
an opinion under then existing Kentucky income tax law applicable
to taxpayers whose income is subject to Kentucky income taxation
substantially to the effect that:
Each Kentucky Unit holder will be treated as the owner of a pro
rata portion of a Kentucky Trust for Kentucky income tax purposes,
and the income of a Kentucky Trust will therefore be treated as
income of the Kentucky Unit holders under Kentucky law;
Interest on Bonds that would be exempt from Federal income taxation
when paid directly to a Kentucky Unit holder will be exempt from
Kentucky income taxation when: (i) received by the Kentucky Trust
and attributed to such Kentucky Unit holder; and (ii) distributed
to such Kentucky Unit holder;
Each Kentucky Unit holder will realize taxable gain or loss when
a Kentucky Trust disposes of a Bond (whether by sale, exchange,
redemption, or payment at maturity) or when the Kentucky Unit
holder redeems or sells Units at a price that differs from original
cost as adjusted for amortization or accrual, as appropriate,
of bond discount or premium and other basis adjustments (including
any basis reduction that may be required to reflect a Kentucky
Unit holder's share of interest, if any, accruing on Bonds during
the interval between the Kentucky Unit holder's settlement date
and the date such Bonds are delivered to the Kentucky Trust, if
later);
Tax cost reduction requirements relating to amortization of bond
premium may, under some circumstances, result in Kentucky Unit
holders realizing taxable gain when their Units are sold or redeemed
for an amount equal to or less than their original cost;
Units of the Kentucky Trusts, to the extent the same represent
an ownership in obligations issued by or on behalf of the Commonwealth
of Kentucky or governmental units of the Commonwealth of Kentucky,
the interest on which is exempt from Federal and Kentucky income
taxation will not be subject to ad valorem taxation by the Commonwealth
of Kentucky or any political subdivision thereof; and
If interest on indebtedness incurred or continued by a Kentucky
Unit holder to purchase Units in a Kentucky Trust is not deductible
for Federal income tax purposes, it also will be nondeductible
for Kentucky income tax purposes.
Louisiana Tax Status. At the time of the closing for each Louisiana
Trust, Special Counsel to the Fund for Louisiana tax matters,
which relied explicitly on the opinion of Chapman and Cutler regarding
Federal income tax matters, rendered an opinion under then existing
Lousiana income tax law applicable to taxpayers whose income is
subject to Louisiana income taxation substantially to the effect
that:
The State of Louisiana imposes a tax upon the net income of resident
individuals, and with certain exceptions, resident corporations,
estates and trusts, and upon the income from Louisiana sources
of nonresident individuals, corporations, estates and trusts.
The mere ownership of Units will not subject a nonresident Unit
holder to the tax jurisdiction of Louisiana. Amounts received
by a nonresident Unit holder (who may for other reasons be subject
to the tax jurisdiction of Louisiana) with respect to Units held
outside of Louisiana will not constitute income from Louisiana
sources, upon which the Louisiana income tax would be imposed.
In the case of resident individuals, the calculation of Louisiana
tax table income begins with Federal adjusted gross income with
certain modifications, including the addition of interest on obligations
of a state or political subdivision thereof other than Louisiana.
However, Louisiana law specifically provides that interest on
obligations of the State of Louisiana, its political subdivisions,
public corporations created by them and
Page 30
constituted authorities thereof authorized to issue obligations
on their behalf, title to which obligations are vested with a
resident individual shall be excluded from tax table income and
are exempt from Louisiana income taxation. In addition, to the
extent that any such interest paid to a Unit holder is derived
from the proceeds of a bond insurance policy issued to the Trustee
of a Louisiana Trust or under individual policies obtained by
the issuer of the Bonds, the underwriter, the Sponsor or others,
such interest would be exempt from Louisiana income tax.
In the case of corporations, estates, trusts, insurance companies
and foreign corporations, interest received upon obligations of
the State of Louisiana, or any political or municipal subdivision
thereof, is exempt from Louisiana income taxation.
Each Louisiana Trust is not an "association" taxable as a corporation
under Louisiana law with the result that income of a Louisiana
Trust will be deemed to be income of the Unit holders.
Interest on the Bonds that is exempt from Louisiana income tax
when received by a Louisiana Trust will retain its tax-exempt
status when received by the Unit holders.
As a general rule, to the extent that gain (or loss) from the
sale of obligations held by a Louisiana Trust (whether as a result
of the sale of such obligations by a Louisiana Trust or as a result
of the sale of a Unit by a Unit holder) is includable in (or deductible
in the calculation of) the Federal adjusted gross income of a
resident individual or the Federal taxable income of a resident
corporation, estate or trust, such gain will be included (or loss
deducted) in the calculation of the Unit holder's Louisiana taxable
income.
The State of Louisiana does not impose an intangibles tax on investments,
and therefore, Unit holders will not be subject to Louisiana intangibles
tax on their Units of a Louisiana Trust.
Maine Tax Status. The assets of each Maine Trust will consist
of interest-bearing obligations issued by or on behalf of the
State of Maine (the "State") or counties, municipalities, authorities
or political subdivisions thereof (the "Maine Bonds") or by the
Commonwealth of Puerto Rico, Guam and the United States Virgin
Islands (the "Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined
the Bonds deposited in and held in a Maine Trust. However, although
no opinion is expressed herein regarding such matters, it is assumed
that: (i) the Bonds were validly issued, (ii) the interest thereon
is excludable from gross income for Federal income tax purposes,
(iii) interest on the Maine Bonds, if received directly by a Unit
holder, would be exempt from the Maine income tax applicable to
individuals, trusts and estates and corporations ("Maine Income
Tax") and (iv) interest on the Bonds will not be taken into account
by individuals and corporations in computing an additional tax
("Maine Minimum Tax") or, in the case of corporations, a surcharge
("Maine Corporate Income Tax Surcharge") imposed under the Maine
Income Tax. The opinion set forth below does not address the taxation
of persons other than full-time residents of Maine.
At the time of the closing for each Maine Trust, Chapman and Cutler,
Special Counsel to the Fund for Maine tax matters, rendered an
opinion under then existing Maine income tax law applicable to
taxpayers whose income is subject to Maine income taxation substantially
to the effect that:
(1) Each Maine Trust is not an association taxable as a corporation;
thus each Unit holder of a Maine Trust will be essentially treated
as the owner of a pro rata portion of the Trust and the income
of such portion of the Trust will be treated as the income of
the Unit holder for Maine Income Tax purposes;
(2) interest on the Bonds which is exempt from the Maine Income
Tax when received by a Maine Trust, and which would be exempt
from the Maine Income Tax and the Maine Minimum Tax if received
directly by a Unit holder, will retain its status as exempt from
the Maine Income Tax and the Maine Minimum Tax when received by
a Maine Trust and distributed to the Unit holder;
(3) to the extent that interest derived from a Maine Trust by
a Unit holder with respect to the Possession Bonds is excludable
from gross income for Federal income tax purposes pursuant to
48 U.S.C. Section 745, 48 U.S.C. Section 1423a and 48 U.S.C. Section
1403, such interest will not be subject to the Maine Income Tax;
Page 31
(4) each Unit holder of a Maine Trust will recognize gain or
loss for Maine Income Tax purposes if the Trustee disposes of
a bond (whether by redemption, sale or otherwise) or if the Unit
holder redeems or sells Units of the Trust to the extent that
such a transaction results in a recognized gain or loss to such
Unit holder for Federal income tax purposes; and
(5) the Maine Income Tax does not permit a deduction of interest
paid or incurred on indebtedness incurred or continued to purchase
or carry Units in a Maine Trust, the interest on which is exempt
from the Tax.
Prospective purchasers subject to the Maine Franchise Tax should
be advised that for purposes of the Maine Franchise Tax, interest
on the Bonds received by a Maine Trust and distributed to a Unit
holder subject to such tax will be added to the Unit holder's
Federal taxable income and therefore will be taxable.
Maryland Tax Status. At the time of the closing for each Maryland
Trust, Special Counsel to the Fund for Maryland tax matters rendered
an opinion under then existing Maryland income tax law applicable
to taxpayers whose income is subject to Maryland income taxation
substantially to the effect that:
For Maryland State and local income tax purposes, each Maryland
Trust will not be recognized as an association taxable as corporation,
but rather as a fiduciary whose income will not be subject to
Maryland State and local income taxation.
The income of a Maryland Trust distributed to Unit holders will
be treated as the income to the Unit holders. In light of the
opinions of recognized bond counsel referred to elsewhere in this
prospectus that interest on the Bonds is generally not includable
in Federal gross income for income tax purposes, interest income
derived from a Maryland Trust is generally not includable in the
Maryland taxable base for income taxation purposes. To the extent
that interest derived from a Maryland Trust by a Unit holder with
respect to the obligations of the State of Maryland and its political
subdivisions is excludable from Federal gross income, such interest
will not be subject to Maryland State or local income taxes, provided
that (i) profit realized by a "savings bank" or "savings and loan
association," as defined in Md. Ann. Code art. 81, #128(b), from
the sale or exchange of Bonds and (ii) interest paid to, and profit
realized on the sale or exchange of Bonds by, a "financial institution,"
as defined in Md. Ann. Code art. 81, #128(a), will be subject
to the Maryland State franchise tax on financial institutions.
A Unit holder will have a taxable event of capital gain or loss
when a Maryland Trust disposes of Bonds by sale, redemption, payment
at maturity, or otherwise. Capital gain will be included in the
Maryland taxable base of Unit holders for Maryland State and local
income taxation purposes. However, Maryland defines the taxable
net income of individuals as Federal adjusted gross income with
certain modifications. Likewise, the Maryland taxable net income
of corporations is Federal taxable income with certain modifications.
There is available to Maryland income taxpayers a modification
to Maryland net taxable income which allows those taxpayers to
subtract from the Maryland taxable base the gain included in Federal
adjusted gross income or Federal taxable income, as the case may
be, which is realized from the disposition of Bonds by a Maryland
Trust. Consequently, by making that modification, a Unit holder
will not be subject to Maryland State or local income tax with
respect to gain realized upon the disposition of Bonds by a Maryland
Trust.
Although the matter is not free from doubt, gain realized by a
Unit holder from the redemption, sale or other disposition of
a Unit is subject to Maryland State and local income taxation.
These opinions relate only to the treatment of a Maryland Trust
and the Units under the Maryland State and local income tax and
franchise tax laws. Unit holders should consult tax counsel as
to other Maryland tax consequences not specifically considered
in these opinions. For example, no opinion is expressed as to
the treatment of the Units under the Maryland inheritance and
estate tax laws.
Massachusetts Tax Status. At the time of the closing for each
Massachusetts Trust, Special Counsel to the Fund for Massachusetts
tax matters rendered an opinion under then existing Massachusetts
income tax law
Page 32
applicable to taxpayers whose income is subject to Massachusetts
income taxation and based on rulings of the Commissioner of Revenue
substantially to the effect that:
For Massachusetts income tax purposes, each Massachusetts Trust
will be treated as a corporate trust under Section 8 of Chapter
62 of the Massachusetts General Laws and not as a grantor trust
under Section 10(e) of Chapter 62 of the Massachusetts General
Laws.
Each Massachusetts Trust will not be held to be engaging in business
in Massachusetts within the meaning of said Section 8 and will,
therefore, not be subject to Massachusetts income tax.
Massachusetts Unit holders who are subject to Massachusetts income
taxation under Chapter 62 of Massachusetts General Laws will not
be required to include their respective shares of the earnings
of or distributions from the Massachusetts Trust in their Massachusetts
gross income to the extent that such earnings or distributions
represent tax-exempt interest for Federal income tax purposes
received by such Massachusetts Trust on obligations issued by
Massachusetts, its counties, municipalities, authorities, political
subdivisions or instrumentalities, or issued by United States
territories or possessions ("Obligations").
Any proceeds of insurance obtained by the Trustee of the Fund
or by the issuer of an Obligation held by a Massachusetts Trust
which are paid to Massachusetts Unit holders and which represent
maturing interest on defaulted obligations held by the Trustee
will be excludable from Massachusetts gross income of a Massachusetts
Unit holder if, and to the same extent as, such interest would
have been so excludable if paid by the issuer of the defaulted
Obligation.
A Massachusetts Trust's capital gains and/or capital losses realized
upon disposition of Obligations held by it will be includable
pro rata in the Federal gross income of Massachusetts Unit holders
who are subject to Massachusetts income taxation under Chapter
62 of the Massachusetts General Laws, and such gains and/or losses
will be included as capital gains and/or losses in the Massachusetts
Unit holders' Massachusetts gross income, except where capital
gain is specifically exempted from income taxation under acts
authorizing issuance of said Obligations.
Gains or losses realized upon sale or redemption of Units by Massachusetts
Unit holders who are subject to Massachusetts income taxation
under Chapter 62 of the Massachusetts General Laws will be includable
in their Massachusetts gross income.
In determining such gain or loss Massachusetts Unit holders will,
to the same extent required for Federal tax purposes, have to
adjust their tax bases for their Units for accrued interest received,
if any, on Bonds delivered to the Trustee after the Unit holders
pay for their Units and for amortization of premiums, if any,
on obligations held by a Massachusetts Trust.
The Units of a Massachusetts Trust are not subject to any property
tax levied by Massachusetts or any political subdivision thereof,
nor to any income tax levied by any such political subdivision.
They are includable in the gross estate of a deceased Massachusetts
Unit holder who is a resident of Massachusetts for purposes of
the Massachusetts Estate Tax.
Michigan Tax Status. At the time of the closing for each Michigan
Trust, Special Counsel to the Fund for Michigan tax matters rendered
an opinion under then existing Michigan income tax law applicable
to taxpayers whose income is subject to Michigan income taxation
substantially to the effect that:
Each Michigan Trust and the owners of Units will be treated for
purposes of the Michigan income tax laws and the Single Business
Tax in substantially the same manner as they are for purposes
of the Federal income tax laws, as currently enacted. Accordingly,
Special Counsel has relied upon the opinion of Messrs. Chapman
and Cutler as to the applicability of Federal income tax laws
under the Internal Revenue Code of 1986, as currently amended,
to a Michigan Trust and the Unit holders.
Under the income tax laws of the State of Michigan, a Michigan
Trust is not an association taxable as a corporation; the income
of a Michigan Trust will be treated as the income of the Unit
holders of a Michigan Trust and be deemed to have been received
by them when received by a Michigan Trust. Interest on the Bonds
Page 33
in a Michigan Trust which is exempt from tax under the Michigan
income tax laws when received by a Michigan Trust will retain
its status as tax-exempt interest to the Unit holders of a Michigan
Trust.
For purposes of the Michigan income tax laws, each Unit holder
of a Michigan Trust will be considered to have received his pro
rata share of interest on each Bond in a Michigan Trust when it
is received by a Michigan Trust, and each Unit holder will have
a taxable event when a Michigan Trust disposes of a Bond (whether
by sale, exchange, redemption or payment at maturity) or when
the Unit holder redeems or sells his Unit, to the extent the transaction
constitutes a taxable event for Federal income tax purposes. The
tax cost of each Unit to a Unit holder will be established and
allocated for purposes of the Michigan income tax laws in the
same manner as such cost is established and allocated for Federal
income tax purposes.
Under the Michigan Intangibles Tax, a Michigan Trust is not taxable
and the pro rata ownership of the underlying bonds, as well as
the interest thereon, will be exempt to the Unit holders to the
extent a Michigan Trust consists of obligations of the State of
Michigan or its political subdivisions or municipalities, or of
obligations of possessions of the United States.
The Michigan Single Business Tax replaced the tax on corporate
and financial institution income under the Michigan Income Tax,
and the intangible tax with respect to those intangibles of persons
subject to the Single Business Tax the income from which would
be considered in computing the Single Business Tax. Persons are
subject to the Single Business Tax only if they are engaged in
"business activity," as defined in the Act. Under the Single Business
Tax, both interest received by a Michigan Trust on the underlying
Bonds and any amount distributed from a Michigan Trust to a Unit
holder, if not included in determining taxable income for Federal
income tax purposes, is also not included in the adjusted tax
base upon which the Single Business Tax is computed, of either
a Michigan Trust or the Unit holders. If a Michigan Trust or the
Unit holders have a taxable event for Federal income tax purposes
when a Michigan Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or the Unit holder redeems
or sells his Unit, an amount equal to any gain realized from such
taxable event which was included in the computation of taxable
income for Federal income tax purposes (plus an amount equal to
any capital gain of an individual realized in connection with
such event but excluded in computing that individual's Federal
taxable income) will be included in the tax base against which,
after allocation, apportionment and other adjustments, the Single
Business Tax is computed. The tax base will be reduced by an amount
equal to any capital loss realized from such a taxable event,
whether or not the capital loss was deducted in computing Federal
taxable income in the year the loss occurred. Unit holders should
consult their tax advisor as to their status under Michigan law.
Any proceeds paid under an insurance policy issued to the Trustee
of a Michigan Trust, or paid under individual policies obtained
by issuers of Bonds, or by the underwriter of the Bonds, or the
Sponsor or others which, when received by the Unit holders, represent
maturing interest on defaulted obligations held by the Trustee,
will be excludable from the Michigan income tax laws and the Single
Business Tax if, and to the same extent as, such interest would
have been so excludable if paid by the issuer of the defaulted
obligations. While treatment under the Michigan Intangibles Tax
is not premised upon the characterization of such proceeds under
the Internal Revenue Code, the Michigan Department of Treasury
should adopt the same approach as under the Michigan income tax
laws and the Single Business Tax.
As the Tax Reform Act of 1986 eliminates the capital gain deduction
for tax years beginning after December 31, 1986, the Federal adjusted
gross income, the computation base for the Michigan Income Tax,
of a Unit holder will be increased accordingly to the extent such
capital gains are realized when a Michigan Trust disposes of a
Bond or when the Unit holder redeems or sells a Unit, to the extent
such transaction constitutes a taxable event for Federal income
tax purposes.
Minnesota Tax Status. At the time of the closing for each Minnesota
Trust, Special Counsel to the Fund for Minnesota tax matters rendered
an opinion under then existing Minnesota income tax law applicable
to taxpayers whose income is subject to Minnesota income taxation
substantially to the effect that:
Page 34
Each Minnesota Trust will have no income other than (i) interest
income on bonds issued by the State of Minnesota and its political
and governmental subdivisions, municipalities and governmental
agencies and instrumentalities and on bonds issued by possessions
of the United States which would be exempt from Federal and Minnesota
income taxation when paid directly to an individual, trust or
estate (and the term "Bonds" as used herein refers only to such
bonds), and (ii) gain on the disposition of such Bonds.
Based on the foregoing, and in reliance upon the opinion of Chapman
and Cutler with respect to the Federal tax treatment of a Minnesota
Trust and its Unit holders, it is our opinion that Minnesota tax
law applies to a Minnesota Trust and its Unit holders in the following
manner:
"Taxable income" for Minnesota income tax purposes is the same
as "taxable income" for Federal income tax purposes with certain
modifications that (with one exception) do not apply to the present
circumstances. The exception is that corporations must add to
Federal taxable income the amount of any interest received on
the obligations of states and their agencies and instrumentalities,
political and governmental subdivisions, and municipalities. The
terms "trust" and "corporation" have the same meanings for Minnesota
income tax purposes, as relevant to the Minnesota tax status of
a Minnesota Trust, as for Federal income tax purposes.
In view of the relationship between Federal and Minnesota law
described in the preceding paragraph and the opinion of Chapman
and Cutler with respect to the Federal tax treatment of a Minnesota
Trust and its Unit holders, (1) each Minnesota Trust will be treated
as a trust rather than a corporation for Minnesota income tax
purposes and will not be deemed the recipient of any Minnesota
taxable income; (2) each Unit holder of a Minnesota Trust will
be treated as the owner of a pro rata portion of a Minnesota Trust
for Minnesota income tax purposes, and the income of a Minnesota
Trust will therefore be treated as the income of the Unit holders
under Minnesota law; (3) interest on the Bonds will be exempt
from Minnesota income taxation of Unit holders who are individuals,
trusts and estates when received by a Minnesota Trust and attributed
to such Unit holders and when distributed to such Unit holders
(except as hereinafter provided with respect to "industrial development
bonds" and "private activity bonds" held by "substantial users");
(4) interest on the Bonds will be includable in the Minnesota
taxable income (subject to allocation and apportionment) of Unit
holders that are corporations; (5) each Unit holder will realize
taxable gain or loss when a Minnesota Trust disposes of a Bond
(whether by sale, exchange, redemption or payment at maturity)
or when the Unit holder redeems or sells Units at a price that
differs from original cost as adjusted for amortization of bond
discount or premium and other basis adjustments (including any
basis reduction that may be required to reflect a Unit holder's
share of interest, if any, accruing on Bonds during the interval
between the Unit holder's settlement date and the date such Bonds
are delivered to a Minnesota Trust, if later); (6) tax cost reduction
requirements relating to amortization of bond premium may, under
some circumstances, result in Unit holders realizing taxable gain
when their Units are sold or redeemed for an amount equal to or
less than their original cost; (7) net capital gains of Unit holders
attributable to the Bonds will be fully includable in the Minnesota
taxable income of Unit holders (subject to allocation and apportionment
in the case of corporate Unit holders); and (8) interest on bonds
includable in the computation of "alternative minimum taxable
income" for Federal income tax purposes will also be includable
in the computation of "alternative minimum taxable income" for
Minnesota income tax purposes.
Interest income attributable to Bonds that are "industrial development
bonds" or "private activity bonds," as those terms are defined
in the Internal Revenue Code, will be taxable under Minnesota
law to a Unit holder who is a "substantial user" of the facilities
financed by the proceeds of such Bonds (or a "related person"
to such a "substantial user") to the same extent as if such Bonds
were held directly by such Unit holder.
Mississippi Tax Status. At the time of the closing for each Mississippi
Trust, Special Counsel to the Fund for Mississippi tax matters
rendered an opinion under then existing Mississippi income tax
law applicable to taxpayers whose income is subject to Mississippi
income taxation substantially to the effect that:
Page 35
The assets of each Mississippi Trust will consist of interest-bearing
obligations issued by, or on behalf of, the State of Mississippi,
and counties, municipalities, authorities and other political
subdivisions thereof and by the Commonwealth of Puerto Rico (the
"Bonds").
For purposes of Mississippi income taxation, a Mississippi Trust
will be recognized as a trust and not as a corporation or as an
association taxable as a corporation. A Mississippi Trust will
not be subject to Mississippi income tax.
With respect to Unit holders who are residents of Mississippi,
the income of a Mississippi Trust which is allocable to each such
Unit holder will be treated as the income of such Unit holder
under the Mississippi income tax laws. Interest on the Bonds which
would be exempt from Mississippi income tax if directly received
by such Unit holder will retain its status as tax-exempt interest
when received by a Mississippi Trust and distributed to such Unit
holder.
To the extent that gain or loss is recognized for Federal income
tax purposes, each Unit holder of a Mississippi Trust will recognize
gain or loss for Mississippi income tax purposes if the Trustee
disposes of a Bond (whether by sale, payment on maturity, retirement
or otherwise) or if the Unit holder redeems or sells such Units.
Due to the amortization of Bond premium and other basis adjustments,
a Unit holder, under some circumstances, may realize taxable gain
when his or her Units are sold or redeemed for an amount equal
to their original cost.
The Units are not exempt from Mississippi estate tax and are subject
to assessment for Mississippi ad valorem tax purposes. (However,
it is not the current practice of the State of Mississippi to
assess intangible personal property owned by individuals or corporations,
other than certain financial institutions, for ad valorem tax
purposes.)
Missouri Tax Status. The assets of each Missouri Trust will consist
of interest-bearing obligations issued by or on behalf of the
State of Missouri (the "State") or counties, municipalities, authorities
or political subdivisions thereof (the "Missouri Bonds") or by
the Commonwealth of Puerto Rico, Guam and the United States Virgin
Islands (the "Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined
the Bonds deposited in and held in a Missouri Trust. However,
although no opinion is expressed herein regarding such matters,
it is assumed that: (i) the Bonds were validly issued, (ii) the
interest thereon is excludable from gross income for Federal income
tax purposes and (iii) interest on the Missouri Bonds, if received
directly by a Unit holder, would be exempt from the Missouri income
tax applicable to individuals and corporations ("Missouri State
Income Tax"). The opinion set forth below does not address the
taxation of persons other than full time residents of Missouri.
At the time of the closing for each Missouri Trust, Chapman and
Cutler, Special Counsel to the Fund for Missouri tax matters rendered
an opinion under then existing Missouri income tax law applicable
to taxpayers whose income is subject to Missouri income taxation
substantially to the effect that:
Each Missouri Trust is not an association taxable as a corporation
for Missouri income tax purposes, and each Unit holder of a Missouri
Trust will be treated as the owner of a pro rata portion of a
Missouri Trust and the income of such portion of a Missouri Trust
will be treated as the income of the Unit holder for Missouri
State Income Tax purposes.
Interest paid and original issue discount, if any, on the Bonds
which would be exempt from the Missouri State Income Tax if received
directly by a Unit holder will be exempt from the Missouri State
Income Tax when received by a Missouri Trust and distributed to
such Unit holder; however, no opinion is expressed herein regarding
taxation of interest paid and original issue discount, if any,
on the Bonds received by a Missouri Trust and distributed to Unit
holders under any other tax imposed pursuant to Missouri law,
including but not limited to the franchise tax imposed on financial
institutions pursuant to Chapter 148 of the Missouri Statutes.
Page 36
To the extent that interest paid and original issue discount,
if any, derived from a Missouri Trust by a Unit holder with respect
to Possession Bonds is excludable from gross income for Federal
income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a, and 48 U.S.C. Section 1403, such interest paid
and original issue discount, if any, will not be subject to the
Missouri State Income Tax; however, no opinion is expressed herein
regarding taxation of interest paid and original issue discount,
if any, on the Bonds received by a Missouri Trust and distributed
to Unit holders under any other tax imposed pursuant to Missouri
law, including but not limited to the franchise tax imposed on
financial institutions pursuant to Chapter 148 of the Missouri
Statutes.
Each Unit holder of a Missouri Trust will recognize gain or loss
for Missouri State Income Tax purposes if the Trustee disposes
of a bond (whether by redemption, sale, or otherwise) or if the
Unit holder redeems or sells Units of a Missouri Trust to the
extent that such a transaction results in a recognized gain or
loss to such Unit holder for Federal income tax purposes. Due
to the amortization of bond premium and other basis adjustments
required by the Internal Revenue Code, a Unit holder, under some
circumstances, may realize taxable gain when his or her Units
are sold or redeemed for an amount equal to their original cost.
Any insurance proceeds paid under policies which represent maturing
interest on defaulted obligations which are excludable from gross
income for Federal income tax purposes will be excludable from
Missouri State Income Tax to the same extent as such interest
would have been so excludable if paid by the issuer of such Bonds
held by a Missouri Trust; however, no opinion is expressed herein
regarding taxation of interest paid and original issue discount,
if any, on the Bonds received by a Missouri Trust and distributed
to Unit holders under any other tax imposed pursuant to Missouri
law, including but not limited to the franchise tax imposed on
financial institutions pursuant to Chapter 148 of the Missouri
Statutes.
The Missouri State Income Tax does not permit a deduction of interest
paid or incurred on indebtedness incurred or continued to purchase
or carry Units in a Missouri Trust, the interest on which is exempt
from such Tax.
A Trust will not be subject to the Kansas City, Missouri Earnings
and Profits Tax and each Unit holder's share of income of the
Bonds held by a Missouri Trust will not generally be subject to
the Kansas City, Missouri Earnings and Profits Tax or the City
of St. Louis Earnings Tax (except in the case of certain Unit
holders, including corporations, otherwise subject to the St.
Louis City Earnings Tax).
Nebraska Tax Status. The assets of each Nebraska Trust will consist
of interest-bearing obligations issued by or on behalf of the
State of Nebraska (the "State") or counties, municipalities, authorities
or political subdivisions thereof (the "Nebraska Bonds") or by
the Commonwealth of Puerto Rico, Guam and the United States Virgin
Islands (the "Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined
the Bonds to be deposited in and held in a Nebraska Trust. With
respect to certain Nebraska bonds which may be held by a Nebraska
Trust, the opinions of bond counsel to the issuing authorities
for such bonds have indicated that the interest on such bonds
is included in computing the Nebraska Alternative Minimum Tax
imposed by Section 77-2715 (2) of the Revised Nebraska Statutes
(the "Nebraska Minimum Tax") (the "Nebraska AMT Bonds"). However,
although no opinion is expressed herein regarding such matters,
it is assumed that: (i) the Bonds were validly issued, (ii) the
interest thereon is excludible from gross income for Federal income
tax purposes, (iii) none of the Bonds (other than the Nebraska
AMT Bonds, if any) are "specified private activity bonds" the
interest on which is included as an item of tax preference in
the computation of the Alternative Minimum Tax for Federal income
tax purposes, (iv) interest on the Nebraska Bonds (other than
the Nebraska AMT Bonds, if any), if received directly by a Unit
holder, would be exempt from both the Nebraska income tax, imposed
by Section 77-2714 et seq. of the Revised Nebraska Statutes (other
than the Nebraska Minimum Tax) (the "Nebraska State Income Tax")
and the Nebraska Minimum Tax imposed by Section 77-2715 (2) of
the Revised Nebraska Statutes (the "Nebraska Minimum Tax") and
(v) interest on the Nebraska AMT Bonds, if any,
Page 37
if received directly by a Unit holder, would be exempt from the
Nebraska State Income Tax. The opinion set forth below does not
address the taxation of persons other than full time residents
of Nebraska.
At the time of the closing for each Nebraska Trust, Chapman and
Cutler, Special Counsel to the Fund for Nebraska tax matters rendered
an opinion under then existing Nebraska income tax law applicable
to taxpayers whose income is subject to Nebraska income taxation
substantially to the effect that:
Each Nebraska Trust is not an association taxable as a corporation,
each Unit holder of a Nebraska Trust will be treated as the owner
of a pro rata portion of a Nebraska Trust, and the income of such
portion of a Nebraska Trust will therefore be treated as the income
of the Unit holder for both Nebraska State Income Tax and the
Nebraska Minimum Tax purposes;
Interest on the Bonds which is exempt from both the Nebraska State
Income Tax and the Nebraska Minimum Tax when received by a Nebraska
Trust, and which would be exempt from both the Nebraska State
Income Tax and the Nebraska Minimum Tax if received directly by
a Unit holder, will retain its status as exempt from such taxes
when received by a Nebraska Trust and distributed to a Unit holder.
Interest on the Nebraska AMT Bonds, if any, which is exempt from
the Nebraska State Income Tax but is included in the computation
of the Nebraska Minimum Tax when received by a Nebraska Trust,
and which would be exempt from the Nebraska State Income Tax but
would be included in the computation of the Nebraska Minimum Tax
if received directly by a Unit holder, will retain its status
as exempt from the Nebraska State Income Tax but included in the
computation of the Nebraska Minimum Tax;
To the extent that interest derived from a Nebraska Trust by a
Unit holder with respect to the Possession Bonds is excludable
from gross income for Federal income tax purposes pursuant to
48 U.S.C. Section 745, 48 U.S.C. Section 1423a and 48 U.S.C. Section
1403, such interest will not be subject to either the Nebraska
State Income Tax or the Nebraska Minimum Tax;
Each Unit holder of a Nebraska Trust will recognize gain or loss
for both Nebraska State Income Tax and Nebraska Minimum Tax purposes
if the Trustee disposes of a Bond (whether by redemption, sale,
or otherwise) or if the Unit holder redeems or sells Units of
a Nebraska Trust to the extent that such a transaction results
in a recognized gain or loss to such Unit holder for Federal income
tax purposes;
The Nebraska State Income Tax does not permit a deduction for
interest paid or incurred on indebtedness incurred or continued
to purchase or carry Units in a Nebraska Trust, the interest on
which is exempt from such Tax; and
In the case of a Unit holder subject to the State financial institutions
franchise tax, the income derived by such Unit holder from his
pro rata portion of the Bonds held by a Nebraska Trust may affect
the determination of such Unit holder's maximum franchise tax.
Special Counsel has not examined any of the Bonds to be deposited
and held in a Nebraska Trust or the proceedings for the issuance
thereof or the opinions of bond counsel with respect thereto,
and therefore express no opinion as to the exemption from either
the Nebraska State Income Tax or the Nebraska Minimum Tax of interest
on the Nebraska Bonds if received directly by a Unit holder.
New Jersey Tax Status. At the time of the closing for each New
Jersey Trust, Special Counsel to the Fund for New Jersey tax matters
rendered an opinion under then existing New Jersey income tax
law applicable to taxpayers whose income is subject to New Jersey
income taxation substantially to the effect that:
Each New Jersey Trust will be recognized as a trust and not an
association taxable as a corporation. The New Jersey Trusts will
not be subject to the New Jersey Corporation Business Tax or the
New Jersey Corporation Income Tax.
With respect to the non-corporate Unit holders who are residents
of New Jersey, the income of a New Jersey Trust which is allocable
to each such Unit holder will be treated as the income of such
Unit holders under the New Jersey Gross Income Tax. Interest on
the underlying Bonds which would be exempt from New Jersey Gross
Income Tax if directly received by such Unit holder will retain
its status as tax-exempt interest when received by a New Jersey
Trust and distributed to such Unit holder. Any proceeds paid under
the
Page 38
insurance policy issued to the Trustee of a New Jersey Trust with
respect to the Bonds or under individual policies obtained by
issuers of Bonds, the Sponsor, the underwriters or others which
represent maturing interest on defaulted obligations held by the
Trustee will be exempt from New Jersey Gross Income Tax if, and
to the same extent as, such interest would have been so exempt
if paid by the issuer of the defaulted obligations.
A non-corporate Unit holder will not be subject to the New Jersey
Gross Income Tax on any gain realized either when a New Jersey
Trust disposes of a Bond (whether by sale, exchange, redemption,
or payment at maturity), when the Unit holder redeems or sells
his Units, or upon payment of any proceeds under the insurance
policy issued to the Trustee of a New Jersey Trust with respect
to the Bonds or under individual policies obtained by issuers
of Bonds, the Sponsor, the underwriters or others which represent
maturing principal on defaulted obligations held by the Trustee.
Any loss realized on such disposition may not be utilized to offset
gains realized by such Unit holder on the disposition of assets
the gain on which is subject to the New Jersey Gross Income Tax.
Units of a New Jersey Trust may be taxable on the death of a Unit
holder under the New Jersey Transfer Inheritance Tax Law or the
New Jersey Estate Tax Law.
If a Unit holder is a corporation subject to the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax, interest from
the Bonds in a New Jersey Trust which is allocable to such corporation
will be includable in its entire net income for purposes of the
New Jersey Corporation Business Tax or New Jersey Corporation
Income Tax, less any interest expense incurred to carry such investment
to the extent such interest expense has not been deducted in computing
Federal taxable income. Net gains derived by such corporation
on the disposition of the Bonds of a New Jersey Trust or on the
disposition of its Units will be included in its entire net income
for purposes of the New Jersey Corporation Business Tax or New
Jersey Corporation Income Tax.
New Mexico Tax Status. At the time of the closing for each New
Mexico Trust, Chapman and Cutler, Special Counsel to the Fund
for New Mexico tax matters, rendered an opinion under then existing
New Mexico income tax law applicable to taxpayers whose income
is subject to New Mexico income taxation substantially to the
effect that:
The assets of the New Mexico Trusts will consist of interest-bearing
obligations issued by or on behalf of the State of New Mexico
("New Mexico") or counties, municipalities, authorities or political
subdivisions thereof the interest on which is expected to qualify
as exempt from New Mexico income taxes (the "New Mexico Bonds")
or by the Commonwealth of Puerto Rico, Guam or the United States
Virgin Islands (the "Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined
the Bonds to be deposited in and held in a New Mexico Trust. However,
although no opinion is expressed herein regarding such matters,
it is assumed that: (i) the Bonds were validly issued, (ii) the
interest thereon is excludable from gross income for Federal income
tax purposes and (iii) interest on the New Mexico Bonds, if received
directly by a Unit holder, would be exempt from the New Mexico
income taxes applicable to individuals and corporations (collectively,
the "New Mexico State Income Tax"). At the respective times of
issuance of the Bonds, opinions relating to the validity thereof
and to the exemption of interest thereon from Federal income tax
were rendered by bond counsel to the respective issuing authorities.
In addition, with respect to the New Mexico Bonds, bond counsel
to the issuing authorities rendered opinions as to the exemption
of interest from the New Mexico State Income Tax. Neither the
Sponsor nor its counsel has made any review for a New Mexico Trust
of the proceedings relating to the issuance of the Bonds or of
the bases for the opinions rendered in connection therewith. The
opinion set forth below does not address the taxation of persons
other than full time residents of New Mexico.
The New Mexico Trusts will not be subject to tax under the New
Mexico State Income Tax.
Page 39
Income on the Bonds which is exempt from the New Mexico State
Income Tax when received by a New Mexico Trust, and which would
be exempt from the New Mexico State Income Tax if received directly
by a Unit holder, will retain its status as exempt from such tax
when received by a New Mexico Trust and distributed to such Unit
holder.
To the extent that interest income derived from a New Mexico Trust
by a Unit holder with respect to Possession Bonds is excludable
from gross income for Federal income tax purposes pursuant to
48 U.S.C. Section 745, 48 U.S.C. Section 1423a or 48 U.S.C. Section
1403, such interest income will not be subject to the New Mexico
State Income Tax.
Each Unit holder will recognize gain or loss for New Mexico State
Income Tax purposes if the Trustee disposes of a bond (whether
by redemption, sale or otherwise) or if the Unit holder redeems
or sells Units of a New Mexico Trust to the extent that such a
transaction results in a recognized gain or loss to such Unit
holder for Federal income tax purposes.
The New Mexico State Income Tax does not permit a deduction of
interest paid on indebtedness incurred or continued to purchase
or carry Units in the Trusts to the extent that interest income
related to the ownership of Units is exempt from the New Mexico
State Income Tax.
Investors should consult their tax advisors regarding collateral
tax consequences under New Mexico law relating to the ownership
of the Units, including, but not limited to, the inclusion of
income attributable to ownership of the Units in "modified gross
income" for purposes of determining eligibility for and the amount
of the low income comprehensive tax rebate, the child day care
credit, the low income food and medical gross receipts tax rebate
and the elderly taxpayers' property tax rebate and the applicability
of other New Mexico taxes, such as the New Mexico estate tax.
New York Tax Status. At the time of the closing for Series 1,
2 and 3 of the Fund, Booth & Baron, Special Counsel to Series
1, 2 and 3 of the Fund for New York tax matters, rendered an opinion
under then existing New York income tax law applicable to taxpayers
whose income is subject to New York income taxation substantially
to the effect that:
Each New York Trust is not an association taxable as a corporation
and the income of a New York Trust will be treated as the income
of the Unit holders under the existing income tax laws of the
State and City of New York;
Individuals who reside in New York State or City will not be subject
to State and City personal income tax on interest income which
is exempt from Federal income tax under section 103 of the Internal
Revenue Code of 1986 and derived from the Bonds, although they
will be subject to New York State and City tax with respect to
any gains realized when such obligations are sold, redeemed or
paid at maturity or when any such Units are sold or redeemed;
and
Any proceeds paid under the insurance policy to the Trustee of
a New York Trust which represent maturing interest on defaulted
obligations held by the Trustee will be excludable from New York
State or City personal income tax if, and to the same extent as,
such interest would have been so excludable if paid by the issuer
of the defaulted obligations.
New York Tax Status. At the time of the closing for Series 4-125
of the Fund, Winston & Strawn (previously named Cole & Deitz),
New York, Special Counsel to Series 4-125 of the Fund for New
York tax matters, rendered an opinion under then existing New
York income tax law applicable to taxpayers whose income is subject
to New York income taxation substantially to the effect that:
Each New York Trust is not an association taxable as a corporation
and the income of a New York Trust will be treated as the income
of the Unit holders under the existing income tax laws of the
State and City of New York in the same manner as for Federal income
tax purposes (subject to differences in accounting for discount
and premium to the extent the State and/or City of New York do
not conform to current Federal law); and
Page 40
Individuals who reside in New York State or City will not be subject
to State and City personal income tax on interest income which
is excludable from Federal gross income tax under section 103
of the Internal Revenue Code of 1986 and derived from the Bonds,
although they will be subject to New York State and City personal
income tax with respect to any gains realized when such obligations
are sold, redeemed or paid at maturity or when any such Units
are sold or redeemed; and
For individuals who reside in New York State or City, any proceeds
paid to the Trustee under the applicable insurance policies which
represent maturing interest on defaulted obligations held by the
Trustee will be excludable from New York State or City personal
income tax if, and to the same extent as, such interest would
have been so excludable from Federal gross income tax under section
103 of the Internal Revenue Code of 1986 if paid by the issuer
of the defaulted obligations.
New York Tax Status. At the time of the closing for Series 126
and subsequent Series of the Fund, Carter, Ledyard & Milburn,
Special Counsel to Series 126 and subsequent Series of the Fund
for New York tax matters, rendered an opinion under then existing
New York income tax law applicable to taxpayers whose income is
subject to New York income taxation substantially to the effect
that:
Each New York Trust is not an association taxable as a corporation
and the income of a New York Trust will be treated as the income
of the Unit holders under the existing income tax laws of the
State and City of New York in the same manner as for Federal income
tax purposes (subject to differences in accounting for discount
and premium to the extent the State and/or City of New York do
not conform to current Federal law);
Individuals holding Units of a New York Trust who reside in
New York State or City will not be subject to State and City personal
income tax on interest income which is excludable from Federal
gross income under section 103 of the Internal Revenue Code of
1986 and derived from any obligation of New York State or a political
subdivision thereof, or of the Government of Puerto Rico or a
political subdivision thereof, or of the Government of Guam or
by its authority, although they will be subject to New York State
and City personal income tax with respect to any gains realized
when such obligations are sold, redeemed or paid at maturity or
when any such Units are sold or redeemed; and
For individuals holding Units of a New York Trust who reside
in New York State or City, any proceeds paid to the Trustee under
the applicable insurance policies which represent maturing interest
on defaulted obligations held by the Trustee will not be subject
to New York State or City personal income tax if, and to the same
extent as, such interest would not have been subject to New York
State or City personal income tax if paid by the issuer of the
defaulted obligations.
North Carolina Tax Status. At the time of the closing for each
North Carolina Trust, Special Counsel to the Fund for North Carolina
tax matters rendered an opinion under then existing North Carolina
income tax law applicable to taxpayers whose income is subject
to North Carolina income taxation substantially to the effect
that:
Upon the establishing of the North Carolina Trusts and the Units
thereunder:
Each North Carolina Trust is not an "association" taxable as a
corporation under North Carolina law, with the result that income
of a North Carolina Trust will be deemed to be income of the Unit
holders.
Interest on the Bonds that is exempt from North Carolina income
tax when received by a North Carolina Trust will retain its tax-exempt
status when received by the Unit holders.
Unit holders will realize a taxable event when a North Carolina
Trust disposes of a Bond (whether by sale, exchange, redemption
or payment at maturity) or when a Unit holder redeems or sells
his Units (or any of them), and taxable gains for Federal income
tax purposes may result in gains taxable as ordinary income for
North Carolina income tax purposes. However, when a Bond has been
issued under an act of the North Carolina General Assembly that
provides that all income from such Bond, including any profit
made from the sale thereof, shall be free from all taxation by
the State of North Carolina, any such profit received by a North
Carolina Trust will retain its tax-exempt status in the hands
of the Unit holders.
Page 41
Unit holders must amortize their proportionate shares of any premium
on a Bond. Amortization for each taxable year is accomplished
by lowering Unit holder's basis (as adjusted) in his Units with
no deduction against gross income for the year.
In order for the Units to be exempt from the North Carolina tax
on intangible personal property: (a) at all times either (i) the
corpus of the North Carolina Trusts must be composed entirely
of North Carolina Bonds or, pending distribution, amounts received
on the sale, redemption or maturity of the Bonds, or (ii) (if
Puerto Rico Bonds are included in the North Carolina Trusts) at
least 80% of the fair market value of the Bonds, excluding amounts
received on the sale, redemption or maturity of the Bonds, must
be attributable to the fair market value of the North Carolina
Bonds; and (b) the Trustee periodically must supply to the North
Carolina Department of Revenue at such times as required by the
Department of Revenue a complete description of each North Carolina
Trust and also the name, description and value of the obligations
held in the corpus of such North Carolina Trusts.
The opinion of Special Counsel is based, in part, on the opinion
of Chapman and Cutler regarding Federal tax status of the Fund
and upon current interpretations of the North Carolina Department
of Revenue, which are subject to change.
Ohio Tax Status. Each Ohio Trust is comprised of interest-bearing
obligations issued by or on behalf of the State of Ohio, political
subdivisions thereof, or agencies or instrumentalities thereof
("Ohio Obligations"), or by the governments of Puerto Rico, the
Virgin Islands or Guam (collectively, "Territorial Obligations").
At the time of the closing for each Ohio Trust, Special Counsel
to the Fund for Ohio tax matters rendered an opinion under then
existing Ohio income tax law applicable to taxpayers whose income
is subject to Ohio income taxation substantially to the effect
that:
Each Ohio Trust is not taxable as a corporation or otherwise for
purposes of the Ohio personal income tax, Ohio school district
income taxes, the Ohio corporation franchise tax, or the Ohio
dealers in intangibles tax.
Income of an Ohio Trust will be treated as the income of the Unit
holders for purposes of the Ohio personal income tax, Ohio school
district income taxes, Ohio municipal income taxes and the Ohio
corporation franchise tax in proportion to the respective interest
therein of each Unit holder.
Interest on Ohio Obligations and Territorial Obligations held
by an Ohio Trust is exempt from the Ohio personal income tax,
Ohio municipal income taxes and Ohio school district income taxes
and is excluded from the net income base of the Ohio corporation
franchise tax when distributed or deemed distributed to Unit holders.
Proceeds paid under insurance policies, if any, to the Trustee
of an Ohio Trust, representing maturing interest on defaulted
obligations held by an Ohio Trust will be exempt from the Ohio
personal income tax, Ohio school district income taxes, Ohio municipal
income taxes and the net income base of the Ohio corporation franchise
tax if, and to the same extent as, such interest would be exempt
from such taxes if paid directly by the issuer of such obligations.
Gains and losses realized on the sale, exchange or other disposition
by an Ohio Trust of Ohio Obligations are excluded in determining
adjusted gross and taxable income for purposes of the Ohio personal
income tax, Ohio municipal income taxes and Ohio school district
income taxes and are excluded from the net income base of the
Ohio corporation franchise tax when distributed or deemed distributed
to Unit holders.
Oklahoma Tax Status. The assets of each Oklahoma Trust will consist
of interest-bearing obligations issued by or on behalf of the
State of Oklahoma (the "State") or counties, municipalities, authorities
or political subdivisions thereof (the "Oklahoma Bonds") or by
the Commonwealth of Puerto Rico, Guam and the United States Virgin
Islands (the "Possession Bonds") (collectively, the "Bonds").
At the respective times of issuance of the Oklahoma Bonds, certain,
but not necessarily all, of the issues of the Oklahoma Bonds may
have
Page 42
been accompanied by an opinion of bond counsel to the respective
issuing authorities that interest on such Oklahoma Bonds (the
"Oklahoma Tax-Exempt Bonds") are exempt from the income tax imposed
by the State of Oklahoma that is applicable to individuals and
corporations (the "Oklahoma State Income Tax"). An Oklahoma Trust
may include Oklahoma Bonds the interest on which is subject to
the Oklahoma State Income Tax (the "Oklahoma Taxable Bonds").
SEE THE "OKLAHOMA PORTFOLIO" IN PART ONE WHICH INDICATES BY FOOTNOTE
WHICH OKLAHOMA BONDS ARE OKLAHOMA TAX-EXEMPT BONDS (ALL OTHER
OKLAHOMA BONDS INCLUDED IN THE PORTFOLIO ARE OKLAHOMA TAXABLE
BONDS).
Neither the Sponsor nor its counsel has independently examined
the Bonds to be deposited in and held in an Oklahoma Trust. However,
although no opinion is expressed herein regarding such matters,
it is assumed that: (i) the Bonds were validly issued, (ii) the
interest thereon is excludable from gross income for Federal income
tax purposes and (iii) interest on the Oklahoma Tax-Exempt Bonds,
if received directly by a Unit holder, would be exempt from the
Oklahoma State Income Tax. At the respective times of issuance
of the Bonds, opinions relating to the validity thereof and to
the exemption of interest thereon from Federal income tax were
rendered by bond counsel to the respective issuing authorities.
In addition, with respect to the Oklahoma Tax-Exempt Bonds, bond
counsel to the issuing authorities rendered opinions as to the
exemption of interest from the Oklahoma State Income Tax. Neither
the Sponsor nor its counsel has made any review for an Oklahoma
Trust of the proceedings relating to the issuance of the Bonds
or of the bases for the opinions rendered in connection therewith.
The opinion set forth below does not address the taxation of persons
other than full-time residents of Oklahoma.
At the time of the closing for each Oklahoma Trust, Chapman and
Cutler, Special Counsel to the Fund for Oklahoma tax matters,
rendered an opinion under then existing Oklahoma income tax law
applicable to taxpayers whose income is subject to Oklahoma income
taxation substantially to the effect that:
(1) For Oklahoma State Income Tax purposes, each Oklahoma Trust
is not an association taxable as a corporation, each Unit holder
of an Oklahoma Trust will be treated as the owner of a pro rata
portion of an Oklahoma Trust and the income of such portion of
an Oklahoma Trust will be treated as the income of the Unit holder.
(2) Interest paid and original issue discount, if any, on the
Bonds which would be exempt from the Oklahoma State Income Tax
if received directly by a Unit holder will be exempt from the
Oklahoma State Income Tax when received by an Oklahoma Trust and
distributed to such Unit holder. A Unit holder's pro rata portion
of any interest paid and original issue discount, if any, on the
Bonds which would be subject to the Oklahoma State Income Tax
if received directly by a Unit holder, including, for example,
interest paid and original issue discount, if any, on the Oklahoma
Taxable Bonds, will be taxable to such Unit holder for Oklahoma
State Income Tax purposes when received by an Oklahoma Trust.
(3) To the extent that interest paid and original issue discount,
if any, derived from an Oklahoma Trust by a Unit holder with respect
to Possession Bonds is excludable from gross income for Federal
income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a, and 48 U.S.C. Section 1403, such interest paid
and original issue discount, if any, will not be subject to the
Oklahoma State Income Tax.
(4) Each Unit holder of an Oklahoma Trust will recognize gain
or loss for Oklahoma State Income Tax purposes if the Trustee
disposes of a Bond (whether by redemption, sale, or otherwise)
or if the Unit holder redeems or sells Units of an Oklahoma Trust
to the extent that such a transaction results in a recognized
gain or loss to such Unit holder for Federal income tax purposes.
Due to the amortization of bond premium and other basis adjustments
required by the Internal Revenue Code, a Unit holder, under some
circumstances, may realize taxable gain when his or her Units
are sold or redeemed for an amount equal to their original cost.
(5) Although no opinion is expressed herein, we have been informally
advised by the Oklahoma Tax Commission that any insurance proceeds
paid under policies which represent maturing interest on defaulted
obligations which are excludable from gross income for Federal
income tax purposes should be excludable from the Oklahoma State
Income Tax to the same extent as such interest would have been
if paid by the issuer of such Bonds held by an Oklahoma Trust.
Page 43
(6) The Oklahoma State Income Tax does not permit a deduction
of interest paid or incurred on indebtedness incurred or continued
to purchase or carry Units in an Oklahoma Trust, the interest
on which is exempt from such tax.
(7) Although no opinion is expressed herein, we have been informally
advised by the Oklahoma Tax Commission that an Oklahoma Trust,
in part because of its status as a "grantor trust" for Federal
income tax purposes, should not be subject to the Oklahoma state
franchise tax.
The scope of this opinion is expressly limited to the matters
set forth herein, and we express no other opinions of law with
respect to the state or local taxation of the Trust, the purchase,
ownership or disposition of Units or the Unit holders under Oklahoma
law.
Oregon Tax Status. At the time of the closing for each Oregon
Trust, Chapman and Cutler, Special Counsel to the Fund for Oregon
tax matters, rendered an opinion under then existing Oregon income
tax law applicable to taxpayers whose income is subject to Oregon
income taxation substantially to the effect that:
The assets of the Oregon Trusts will consist of interest-bearing
obligations issued by or on behalf of the State of Oregon (the
"State") or counties, municipalities, authorities or political
subdivisions thereof (the "Oregon Bonds") or by the Commonwealth
of Puerto Rico, Guam and the United States Virgin Islands (the
"Possession Bonds") (collectively, the "Bonds").
Each Oregon Trust is not an association taxable as a corporation
and based upon an administrative rule of the Oregon State Department
of Revenue, each Unit holder of an Oregon Trust will be essentially
treated as the owner of a pro rata portion of the Trust and the
income of such portion of the Trust will be treated as the income
of the Unit holder for Oregon Personal Income Tax purposes;
Interest on the Bonds which is exempt from the Oregon Personal
Income Tax when received by an Oregon Trust, and which would be
exempt from the Oregon Personal Income Tax if received directly
by a Unit holder, will retain its status as exempt from such tax
when received by an Oregon Trust and distributed to a Unit holder;
To the extent that interest derived from an Oregon Trust by a
Unit holder with respect to the Possession Bonds is excludable
from gross income for Federal income tax purposes pursuant to
48 U.S.C. Section 745, 48 U.S.C Section 1423a and 48 U.S.C Section
1403, such interest will not be subject to the Oregon Personal
Income Tax;
Each Unit holder of an Oregon Trust will recognize gain or loss
for Oregon Personal Income Tax purposes if the Trustee disposes
of a bond (whether by redemption, sale or otherwise) or if the
Unit holder redeems or sells Units of an Oregon Trust to the extent
that such a transaction results in a recognized gain or loss to
such Unit holder for Federal income tax purposes; and
The Oregon Personal Income Tax does not permit a deduction of
interest paid or incurred on indebtedness incurred or continued
to purchase or carry Units in an Oregon Trust, the interest on
which is exempt from such Tax.
In addition, prospective purchasers subject to the Oregon corporate
income tax should be advised that for purposes of the Oregon Corporate
Income (Excise) Tax, interest on the Bonds received by an Oregon
Trust and distributed to a Unit holder subject to such tax will
be added to the corporate Unit holder's Federal taxable income
and therefore will be taxable.
Pennsylvania Tax Status. At the time of the closing for each Pennsylvania
Trust, Special Counsel to the Fund for Pennsylvania tax matters
rendered an opinion under then existing Pennsylvania income tax
law applicable to taxpayers whose income is subject to Pennsylvania
income taxation substantially to the effect that:
Units evidencing fractional undivided interests in a Pennsylvania
Trust, which are represented by obligations issued by the Commonwealth
of Pennsylvania, any public authority, commission, board or other
agency created by the Commonwealth of Pennsylvania, any political
subdivision of the Commonwealth of Pennsylvania
Page 44
or any public authority created by any such political subdivision,
are not taxable under any of the personal property taxes presently
in effect in Pennsylvania;
Distributions of interest income to Unit holders are not subject
to personal income tax under the Pennsylvania Tax Reform Code
of 1971; nor will such interest be taxable under the Philadelphia
School District Investment Income Tax imposed on Philadelphia
resident individuals;
A Unit holder may have a taxable event under the Pennsylvania
state and local income taxes referred to in the preceding paragraph
upon the redemption or sale of his Units but not upon the disposition
of any of the Securities in a Pennsylvania Trust to which the
holder's Units relate. Units will be taxable under the Pennsylvania
inheritance and estate taxes;
A Unit holder which is a corporation may have a taxable event
under the Pennsylvania Corporate Net Income Tax when it redeems
or sells its Units. Interest income distributed to Unit holders
which are corporations is not subject to Pennsylvania Corporate
Net Income Tax or Mutual Thrift Institutions Tax. However, banks,
title insurance companies and trust companies may be required
to take the value of the Units into account in determining the
taxable value of their shares subject to tax; and
Any proceeds paid under insurance policies issued to the Trustee
or obtained by issuers of the Bonds with respect to the Bonds
which represent maturing interest on defaulted obligations held
by the Trustee will be excludable from Pennsylvania gross income
if, and to the same extent as, such interest would have been so
excludable if paid by the issuer of the defaulted obligations.
Tennessee Tax Status. At the time of the closing for each Tennessee
Trust, Chapman and Cutler, Special Counsel to the Fund for Tennessee
tax matters, rendered an opinion under then existing Tennessee
income tax law applicable to taxpayers whose income is subject
to Tennessee income taxation substantially to the effect that:
The assets of the Tennessee Trusts will consist of bonds issued
by the State of Tennessee (the "State"), or any county or any
municipality or political subdivision thereof, including any agency,
board, authority or commission, the interest on which is exempt
from the Hall Income Tax imposed by the State of Tennessee, ("Tennessee
Bonds") or by the Commonwealth of Puerto Rico or its political
subdivisions (the"Puerto Rico Bonds") (collectively, the "Bonds").
Under the recently amended provisions of Tennessee law, a unit
investment trust taxable as a grantor trust for federal income
tax purposes in entitled to special Tennessee State tax treatment
(as more fully described below) with respect to its proportionate
share of interest income received or accrued with respect to Tennessee
Bonds. The recent amendments also provide an exemption for distributions
made by a unit investment trust or mutual fund that are attributable
to "bonds or securities of the United States Government or any
agency or instrumentality thereof" ("U.S. Government, Agency or
Instrumentality Bonds"). If it were determined that a Tennessee
Trust held assets other than Tennessee Bonds or U.S. Government,
Agency or Instrumentality Bonds, a proportionate share of distributions
from a Tennessee Trust would be taxable to Unit holders for Tennessee
Income Tax purposes. Further, because the legislation only provides
an exemption for distributions that relate to interest income,
distributions by a Tennessee Trust that relate to capital gains
realized from the sale or redemption of Tennessee Bonds or U.S.
Government, Agency or Instrumentality Bonds are likely to be treated
as taxable dividends for purposes of the Hall Income Tax. However,
capital gains realized directly by a Unit holder when the Unit
holder sells or redeems his Unit will not be subject to the Hall
Income Tax. The opinion set forth below assumes that the interest
on the Tennessee Bonds, if received directly by a Unit holder,
would be exempt from the Hall Income Tax under State law. This
opinion does not address the taxation of persons other than full-time
residents of the State of Tennessee.
Because the recent amendments only provide an exemption for
distributions attributable to interest on Tennessee Bonds or U.S.
Government, Agency or Instrumentality Bonds, it must be determined
whether bonds issued by the Government of Puerto Rico qualify
as U.S. Government, Agency or Instrumentality Bonds. For Hall
Income Tax purposes, there is currently no published administrative
interpretation or opinion
Page 45
of the Attorney General of Tennessee dealing with the status of
distributions made by unit investment trusts such as the Tennessee
Trusts that are attributable to interest paid on bonds issued
by the Government of Puerto Rico. However, in a letter dated August
14, 1992 (the "Commissioner's Letter"), the Commissioner of the
State of Tennessee Department of Revenue advised that Puerto Rico
would be an "Instrumentality" of the U.S. Government and treated
bonds issued by the Government of Puerto Rico as U.S. Government,
Agency or Instrumentality Bonds. Based on this conclusion, the
Commissioner advised that distributions from a mutual fund attributable
to investments in Puerto Rico Bonds are exempt from the Hall Income
Tax. Both the Sponsor and Chapman and Cutler, for purposes of
its opinion (as set forth below), have assumed, based on the Commissioner's
Letter, that bonds issued by the Government of Puerto Rico are
U.S. Government, Agency or Instrumentality Bonds. However, it
should be noted that the position of the Commissioner is not binding,
and is subject to change, even on a retroactive basis.
The Sponsor cannot predict whether new legislation will be enacted
into law affecting the tax status of the Tennessee Trusts. The
occurrence of such an event could cause distributions of interest
income from the Trusts to be subject to Hall Income Tax. Additional
information regarding such proposals is currently unavailable.
Investors should consult their own tax advisors in this regard.
For purposes of the Hall Income Tax, the Tennessee Excise Tax
imposed by Section 67-4-806 (the "State Corporate Income Tax"),
and the Tennessee Franchise Tax imposed by Section 67-4-903, a
Tennessee Trust will not be subject to such taxes.
For Hall Income Tax purposes, a proportionate share of such distributions
from a Tennessee Trust to Unit holders, to the extent attributable
to interest on the Tennessee Bonds (based on the relative proportion
of interest received or accrued attributable to Tennessee Bonds)
will be exempt from the Hall Income Tax when distributed to such
Unit holders. Based on the commissioner's Letter, distributions
from the Trust to Unit holders, to the extent attributable to
interest on the Puerto Rico Bonds (based on the relative proportion
of interest received or accrued attributable to the Puerto Rico
Bonds) will be exempt from the Hall Income Tax when distributed
to such Unit holders. A proportionate share of distributions from
the Tennessee Trust attributable to assets other than the Bonds
would not, under current law, be exempt from the Hall Income Tax
when distributed to Unit holders.
For State Corporate Income Tax Purposes, Tennessee law does not
provide an exemption for interest on Tennessee Bonds and requires
that all interest excludible from Federal gross income must be
included in calculating "net earnings" subject to the State Corporate
Income Tax. Chapman and Cutler express no opinion regarding whether
such tax would be imposed on the earnings or distributions of
a Tennessee Trust (including interest on the Bonds or gain realized
upon the disposition of the Bonds by a Tennessee Trust) attributable
to Unit holders subject to the State Corporate Income Tax. However,
based upon prior written advice from the Tennessee Department
of Revenue, earnings and distributions from a Tennessee Trust
(including interest on the Bonds or gain realized upon the disposition
of the Bonds by a Tennessee Trust) attributable to the Unit holders
should be exempt from the State Corporate Income Tax. The position
of the Tennessee Department of Revenue is not binding, and is
subject to change, even on a retroactive basis.
Each Unit holder will realize taxable gain or loss for State Corporate
Income Tax purposes when the Unit holder redeems or sells his
Units, at a price that differs from original cost as adjusted
for accretion or any discount or amortization of any premium and
other basis adjustments, including any basis reduction that may
be required to reflect a Unit holder's share of interest, if any,
accruing on Bonds during the interval between the Unit holder's
settlement date and the date such Bonds are delivered to a Tennessee
Trust, if later. Tax basis reduction requirements relating to
amortization of bond premium may, under some circumstances, result
in Unit holders realizing taxable gain when the Units are sold
or redeemed for an amount equal to or less than their original
cost.
For purposes of the Tennessee Property Tax, each Tennessee Trust
will be exempt from taxation with respect to the Tennessee Bonds
it holds. As for the taxation of Units of the Tennessee Trusts
held by the Unit holders
Page 46
although intangible personal property is not presently subject
to Tennessee taxation, no opinion is expressed with regard to
potential property taxation of the Unit holders with respect to
the Units because the determination of whether property is exempt
from such tax is made on a county by county basis.
The Bonds and the Units will not be subject to Tennessee sales
and use taxes.
We have not examined any of the Bonds to be deposited and held
in a Tennessee Trust or the proceedings for the issuance thereof
or the opinions of bond counsel with respect thereto, and therefore
express no opinion as to the exemption from State income taxes
of interest on the Bonds if received directly by a Unit holder.
Texas Tax Status. At the time of the closing for each Texas Trust,
Special Counsel to the Fund for Texas tax matters rendered an
opinion under then existing Texas income tax law applicable to
taxpayers whose income is subject to Texas income taxation substantially
to the effect that:
Neither the State nor any political subdivision of the State currently
imposes an income tax. Therefore, no portion of any distribution
received by a Unit holder of a Texas Trust in respect of his Units,
including a distribution of the proceeds of insurance in respect
of such Units, is subject to income taxation by the State or any
political subdivision of the State;
Except in the case of certain transportation businesses, savings
and loan associations and insurance companies, no Unit of a Texas
Trust is taxable under any property tax levied in the State;
The "inheritance tax" of the State, imposed upon certain transfers
of property of a deceased resident individual Unit holder, may
be measured in part upon the value of Units of a Texas Trust included
in the estate of such Unit holder; and
With respect to any Unit holder which is subject to the State
corporate franchise tax, Units in a Texas Trust held by such Unit
holder, and distributions received thereon, will be taken into
account in computing the taxable capital of the Unit holder allocated
to the State, upon which such franchise tax is measured.
Vermont Tax Status. At the time of the closing for each Vermont
Trust, Special Counsel to the Fund for Vermont tax matters, rendered
an opinion under then existing Vermont income tax law applicable
to taxpayers whose income is subject to Vermont income taxation
substantially to the effect that:
Under Vermont personal and corporate income tax laws each Vermont
Trust will not be considered a separate taxable entity. Each Unit
holder of a Vermont Trust will be treated as the owner of a pro
rata portion of a Vermont Trust and income of a Vermont Trust
will be treated as income of the respective Unit holders. Interest
on Bonds in a Vermont Trust that is exempt from personal and corporate
income tax under the income tax laws of the State of Vermont when
received by a Vermont Trust will retain its tax exempt status
when distributed to the Unit holders.
Each Unit holder of a Vermont Trust will have a taxable event
when a Vermont Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or when the Unit holder redeems
or sells its Units. For purposes of determining gain or loss,
the total tax cost of each Unit to a Unit holder is allocated
among the Bonds in accordance with the proportion of a Vermont
Trust comprised by each Bond, to determine the Unit holder's per
Unit tax cost for each Bond.
Bonds, the interest on which is exempt under Vermont income tax
laws, include obligations of Vermont and its political subdivisions
to the extent that the interest of such Bonds is excludable from
adjusted gross income for Federal income tax purposes.
For purposes of the paragraph above, each Vermont Trust is considered
to be a grantor trust, such that distributions from the Trust
will be exempt from the Vermont personal and corporate income
tax laws.
Unit holders who are residents of states other than Vermont should
consult their local tax counsel or advisors regarding the tax
effect in their state or locality.
Virginia Tax Status. The assets of each Virginia Trust will consist
of interest-bearing obligations issued by or on behalf of the
Commonwealth of Virginia ("Virginia") or counties, municipalities,
authorities or political subdivisions thereof (the "Bonds"). Neither
the Sponsor nor its counsel have independently examined the
Page 47
Bonds to be deposited in and held in a Virginia Trust. However,
although no opinion is expressed herein regarding such matters,
it is assumed that: (i) the Bonds were validly issued, (ii) the
interest thereon is excludible from gross income for Federal income
tax purposes and (iii) the interest thereon is exempt from income
tax imposed by Virginia that is applicable to individuals and
corporations (the "Virginia Income Tax"). The opinion set forth
below does not address the taxation of persons other than full-time
residents of Virginia.
At the time of the closing for each Virginia Trust, Chapman
and Cutler, Special Counsel to the Fund for Virginia tax matters,
rendered an opinion under then existing Virginia income tax law
applicable to taxpayers whose income is subject to Virginia income
taxation substantially to the effect that:
(1) Each Virginia Trust is not an association taxable as a corporation
for purposes of the Virginia Income Tax and each Unit holder of
a Virginia Trust will be treated as the owner of a pro rata portion
of the assets held by a Virginia Trust and the income of such
portion of a Virginia Trust will be treated as income of the Unit
holder for purposes of the Virginia Income Tax.
(2) Income on the Bonds which is exempt from Virginia Income
Tax when received by a Virginia Trust, and which would be exempt
from Virginia Income Tax if received directly by a Unit holder,
will retain its status as exempt from such tax when received by
a Virginia Trust and distributed to such Unit holder.
(3) Each Unit holder will recognize gain or loss for purposes
of the Virginia Income Tax if the Trustee disposes of a Bond (whether
by redemption, sale or otherwise) or if the Unit holder redeems
or sells Units of a Virginia Trust to the extent that such a transaction
results in a recognized gain or loss to such Unit holder for Federal
income tax purposes, except as described in this paragraph. Virginia
has by law provided that all income from certain tax-exempt obligations
issued under the laws of Virginia, including any profits made
from the sale of such Bonds, shall be exempt from all taxation
by Virginia. Although no opinion is expressed herein, the Virginia
Department of Taxation has indicated that the gain on the sale
of such tax-exempt obligations, recognized for Federal income
tax purposes, would not be subject to Virginia income taxation.
Accordingly, any such gain relating to the disposition of any
Bond that would not be subject to Virginia Income Tax if the Bond
was held directly by a Unit holder will retain its tax-exempt
status for purposes of the Virginia Income Tax when the Bond is
disposed of by a Virginia Trust or when the Unit holder is deemed
to have disposed of his pro rata portion of such Bond upon the
disposition of his Unit, provided that such gain can be determined
with reasonable certainty and substantiated.
(4) The Virginia Income Tax does not permit a deduction of interest
paid on indebtedness incurred or continued to purchase or carry
Units in a Virginia Trust to the extent that interest income related
to the ownership of Units is exempt from the Virginia Income Tax.
In the case of Unit holders subject to the Virginia Bank Franchise
Tax, the income derived by such a Unit holder from his pro rata
portion of the Bonds held by a Virginia Trust may affect the determination
of such Unit holder's Bank Franchise Tax. Prospective investors
subject to the Virginia Bank Franchise Tax should consult their
tax advisors.
Washington Tax Status. At the time of the closing for each Washington
Trust, Special Counsel to the Fund for Washington tax matters
rendered an opinion under then existing Washington income tax
law applicable to taxpayers whose income is subject to Washington
income taxation substantially to the effect that:
Neither the State of Washington nor any of its political subdivisions
imposes an income tax.
The State imposes a business and occupation tax on the gross receipts
of all business activities conducted within the State, with certain
exceptions. A Washington Trust will not be subject to this tax.
Distributions of Trust income paid to Unit holders who are not
engaged in a banking, loan, securities, or other financial business
in the State (which businesses have been broadly defined) will
not be subject to the tax. Unit holders that are engaged in any
of such financial businesses will be subject to the tax. Currently
the business
Page 48
and occupation tax rate is 1.5%. Several cities impose comparable
business and occupation taxes on financial businesses conducted
within such cities. The current rate in Seattle is .415%.
The Units will not be subject to the State's ad valorem property
tax, nor will any sale, transfer or possession of the Units be
subject to State or local sales or use taxes.
Persons considering the purchase of Units should be aware that
proposals have recently been suggested by the Governor and other
officials of the State that would, if enacted, subject interest
income received by persons resident in (or doing business within)
the State to the business and occupation tax, whether or not such
persons are engaged in a banking, loan, securities, or other financial
business. It is unclear whether such proposals would exclude interest
income derived from obligations of the State and its political
subdivisions.
The foregoing is an abbreviated summary of certain of the provisions
of Washington statutes and administrative rules presently in effect,
with respect to the taxation of Unit holders of a Washington Trust.
These provisions are subject to change by legislative or administrative
actions, or by court decisions, and any such change may be retroactive
with respect to Trust transactions. Unit holders are advised to
consult with their own tax advisors for more detailed information
concerning Washington State and local tax matters. The foregoing
summary assumes that a Washington Trust will not conduct business
activities within Washington.
Certain Considerations.
The Alabama Trusts. Alabama Economy. Alabama's economy has experienced
a major trend toward industrialization over the past two decades.
By 1990, manufacturing accounted for 26.7% of Alabama's Real Gross
State Product (the total value of goods and services produced
in Alabama). During the 1960s and 1970s the State's industrial
base became more diversified and balanced, moving away from primary
metals into pulp and paper, lumber, furniture, electrical machinery,
transportation equipment, textiles (including apparel), chemicals,
rubber and plastics. Since the early 1980's, modernization of
existing facilities and an increase in direct foreign investments
in the State has made the manufacturing sector more competitive
in domestic and international markets.
Among several leading manufacturing industries have been pulp
and papers and chemicals. In recent years Alabama has ranked as
the fifth largest producer of timber in the nation. The State's
growing chemical industry has been the natural complement of production
of wood pulp and paper. Mining, oil and gas production and service
industries are also important to Alabama's economy. Coal mining
is by far the most important mining activity.
Major service industries that are deemed to have significant growth
potential include the research and medical training and general
health care industries, most notably represented by the University
of Alabama medical complex in Birmingham and the high technology
research and development industries concentrated in the Huntsville
area.
Real Gross State Product. Real Gross State Product (RGSP) is a
comprehensive measure of economic performance for the State of
Alabama. Alabama's RGSP is defined as the total value of all final
goods and services produced in the State in constant dollar terms.
Hence, changes in RGSP reflect changes in final output. From 1984
to 1990 RGSP originating in manufacturing increased by 22.99%
whereas RGSP originating in all the non-manufacturing sectors
grew by 17.88%.
Those non-manufacturing sectors exhibiting large percentage increases
in RGSP originating between 1984 and 1990 were 1) Services; 2)Trade;
3) Farming; and 4) Finance, Insurance, and Real Estate. From 1984
to 1990 RGSP originating in Services increased by 35.07%; Trade
grew by 21.53%; Farming increased by 19.78%; and the gain in Finance,
Insurance and Real Estate was 19.19%. The present movement toward
diversification of the State's manufacturing base and a similar
present trend toward enlargement and diversification of the service
industries in the State are expected to lead to increased economic
stability.
Page 49
Employment. The recent national economic recession was felt severely
in Alabama. The manufacturing growth described above reached a
peak in 1979, and was followed by a decrease in activity. The
national economic recession was principally responsible for this
decline. The State's industrial structure is particularly sensitive
to high interest rates and monetary policy, and the resulting
unemployment during 1981-1984 was acute. Unemployment rates have
improved as the impact of the national economic recovery has benefited
the State. The economic recovery experienced on the national level
since 1982 has been experienced in Alabama as well, but to a different
degree and with a time lag.
Among other risks, the State of Alabama's economy depends upon
cyclical industries such as iron and steel, natural resources,
and timber and forest products. As a result, economic activity
may be more cyclical than in certain other Southeastern states.
The national economic recession in the early 1980s caused a decline
in manufacturing activity and natural resource consumption, and
Alabama's unemployment rate was 14.4% in 1982, significantly higher
than the national average. Unemployment remains high in certain
rural areas of the State. A trend towards diversification of the
State's economic base and an expansion of service industries may
lead to improved economic stability in the future, although there
is no assurance of this.
Political subdivisions of the State of Alabama have limited taxing
authority. In addition, the Alabama Supreme Court has held that
a governmental unit may first use its taxes and other revenues
to pay the expenses of providing necessary governmental services
before paying debt service on its bonds, warrants or other indebtedness.
The State has statutory budget provisions which result in a proration
procedure in the event estimated budget resources in a fiscal
year are insufficient to pay in full all appropriations for that
year. Proration has a materially adverse effect on public entities
that are dependent upon State funds subject to proration.
Deterioration of economic conditions could adversely affect both
tax and other governmental revenues, as well as revenues to be
used to service various revenue obligations, such as industrial
development obligations. Such difficulties could adversely affect
the market value of the bonds held by the Alabama Trust and thereby
adversely affect Unit holders.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Alabama
Trusts are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which
are not within the control of the issuers of Bonds, could affect
or could have an adverse impact on the financial condition of
the State and various agencies and political subdivisions located
in the State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
Bonds, the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the Alabama
Trusts to pay interest on or principal of the Bonds.
The Arizona Trusts. Arizona's main economic sectors include services,
tourism and manufacturing. Mining and agriculture are also significant,
although they tend to be more capital than labor intensive. Services
is the single largest economic sector. Many of these jobs are
directly related to tourism.
According to Arizona economic indicators released as of June 1992,
unemployment figures show 7.2 percent of Arizona's population
are unemployed, compared to a national level of 7.5 percent unemployment
at the same time. Maricopa County reported 6.1 percent unemployment
and Pima County reported 5.0 percent unemployment. Significant
employers in the state include the government, the service industry
and the trade industry. Building permits were down in all areas
of the state except for Pima County. In addition, home sales were
down approximately 28 percent from the previous year, and retail
sales were down approximately 7 percent from the previous year.
On June 27, 1991, America West Airlines filed a Chapter 11 reorganization
petition in bankruptcy. America West was at one time the sixth
largest employer in Maricopa County, employing approximately 10,000
persons
Page 50
within the county, and 15,000 nationwide. The airline now employs
close to 7,000 employees nationwide. The effect of the America
West bankruptcy on the state economy and, more particularly, the
Phoenix economy, is uncertain.
Similarly, jobs will be lost by the anticipated closing of Williams
Air Force Base in Chandler, Arizona, in 1993. Williams Air Force
Base was selected as one of the military installations to be closed
as a cost-cutting measure by the Defense Base Closure and Realignment
Commission, whose recommendations were subsequently approved by
the President and the United States House of Representatives.
Williams Air Force Base injects approximately $340 million in
the local economy annually, and employs 1,851 civilians.
The deterioration of Arizona banks and savings and loans, apparent
in the late 1980s, continued through the early 1990s. Slower construction
and real estate activity is at the heart of Arizona's financial
industry's current weakness. In the early 1980's, Phoenix and
other metropolitan areas of Arizona began experiencing an economic
and population "boom," and Arizona's institutions aggressively
pursued many facets of real estate lending. By 1986, the metropolitan
areas of Arizona were overbuilt in many categories of construction
and were burdened with excessive levels of completed inventory.
The tax law amendments in 1986 exacerbated the financial impact
of the saturated market. The elimination of certain tax benefits
associated with income-producing properties contributed to the
decline in growth. Further, the value of real estate in Arizona
began a downward spiral, reflective of the overbuilt market and
inventory which continues today.
In the near future, Arizona's financial institutions are likely
to continue to experience problems until the excess inventories
of commercial and residential properties are absorbed. Longer-term
prospects are brighter, since population growth is still strong
by most standards, and Arizona's climate and tourist industry
still continue to stimulate the state's economy. However, the
previously robust pace of growth by financial institutions is
not likely to be repeated over an extended period.
Arizona operates on a fiscal year beginning July 1 and ending
June 30. Fiscal year 1992 refers to the year ending June 30, 1992.
Total General Fund revenues of $3.5 billion were expected during
fiscal year 1992. Approximately 43.2% of this budgeted revenue
comes from sales and use taxes, 36.0% from income taxes (both
individual and corporate) and 5.3% from property taxes. All taxes
total approximately $3.3 billion, or 93% of the General Fund revenues.
Non-tax revenue includes items such as income from the state lottery,
licenses, fees and permits, and interest. Lottery income totals
approximately 34.6% of non-tax revenue.
For fiscal year 1992, the budget called for expenditures of
$3.5 billion. Major appropriations included $1.3 billion to the
Department of Education (for K-12), $369.9 million for the administration
of the Arizona Health Care Cost Containment System ("AHCCCS",
the State's alternative to Medicaid), $357.4 million to the Department
of Economic Security, and $255.9 million to the Department of
Corrections.
Most or all of the Bonds of the Arizona Trusts are not obligations
of the State of Arizona, and are not supported by the State's
taxing powers. The particular source of payment and security for
each of the Bonds is detailed in the instruments themselves and
in related offering materials. There can be no assurances, however,
with respect to whether the market value or marketability of any
of the Bonds issued by an entity other than the State of Arizona
will be affected by the financial or other condition of the State
or of any entity located within the State. In addition, it should
be noted that the State of Arizona, as well as counties, municipalities,
political subdivisions and other public authorities of the state,
are subject to limitations imposed by Arizona's constitution with
respect to ad valorem taxation, bonded indebtedness and other
matters. For example, the state legislature cannot appropriate
revenues in excess of 7% of the total personal income of the state
in any fiscal year. These limitations may affect the ability of
the issuers to generate revenues to satisfy their debt obligations.
Although most of the Bonds in the Arizona Trusts are revenue obligations
of local governments or authorities in the State, there can be
no assurance that the fiscal and economic conditions referred
to above will not
Page 51
affect the market value or marketability of the Bonds or the ability
of the respective obligors to pay principal of and interest on
the Bonds when due.
The State of Arizona was recently sued by fifty-four school districts
within the state, claiming that the state's funding system for
school buildings and equipment is unconstitutional. The lawsuit
does not seek damages, but requests that the court order the State
to create a new financing system that sets minimum standards for
buildings and furnishings that apply on a statewide basis. The
complaint alleges that some school districts have sufficient funds
to build outdoor swimming pools, while others have classrooms
that leak in the rain. It is unclear, at this time, what affect
any judgement would have on state finances or school district
budgets.
The U.S. Department of Education recently determined that Arizona's
educational funding system did not meet federal requirements of
equity. This determination could mean a loss in federal funds
of approximately $50 million.
Certain other circumstances are relevant to the market value,
marketability and payment of any hospital and health care revenue
bonds in the Arizona Trusts. The Arizona Legislature attempted
unsuccessfully in its 1984 regular and special sessions to enact
legislation designed to control health care costs, ultimately
adopting three referenda measures placed on the November, 1984
general election ballot which in various ways would have regulated
hospital and health care facility expansions, rates and revenues.
At the same time, a coalition of Arizona employers proposed two
initiatives voted on in the November, 1984 general election which
would have created a State agency with power to regulate hospital
and health care facility expansions and rates generally. All of
these referenda and initiative propositions were rejected by the
voters in the November, 1984 general election. Pre-existing State
certificate-of-need laws regulating hospital and health care facilities'
expansions and services have expired, and a temporary moratorium
prohibiting hospital bed increases and new hospital construction
projects and a temporary freeze on hospital rates and charges
at June, 1984 levels has also expired. Because of such expirations
and increasing health care costs, it is expected that the Arizona
Legislature will at future sessions continue to attempt to adopt
legislation concerning these matters. The effect of any such legislation
or of the continued absence of any legislation restricting hospital
bed increases and limiting new hospital construction on the ability
of Arizona hospitals and other health care providers to pay debt
service on their revenue bonds cannot be determined at this time.
Arizona does not participate in the federally administered Medicaid
program. Instead, the state administers an alternative program,
AHCCCS, which provides health care to indigent persons meeting
certain financial requirements, through managed care programs.
In fiscal year 1992, AHCCCS was financed approximately 52.7% by
federal funds, 33.1% by state funds, and 13.6% by county funds.
Under state law, hospitals retain the authority to raise rates
with notification and review by, but not approval from, the Department
of Health Services. Hospitals in Arizona have experienced profitability
problems along with those in other states. At least two Phoenix
based hospitals have defaulted on or reported difficulties in
meeting their bond obligations during the past three years.
Insofar as tax-exempt Arizona public utility pollution control
revenue bonds are concerned, the issuance of such bonds and the
periodic rate increases needed to cover operating costs and debt
service are subject to regulation by the Arizona Corporation Commission,
the only significant exception being the Salt River Project Agricultural
Improvement and Power District which, as a Federal instrumentality,
is exempt from rate regulation. On July 15, 1991, several creditors
of Tucson Electric Power Company ("Tucson Electric") filed involuntary
petitions under Chapter 11 of the U.S. Bankruptcy Code to force
Tucson Power to reorganize under the supervision of the bankruptcy
court. On December 31, 1991, the Bankruptcy Court approved the
utility's motion to dismiss the July petition after five months
of negotiations between Tucson Electric and its creditors to restructure
the utility's debts and other obligations. After the dismissal
of the bankruptcy petition, the Arizona Corporation Commission
approved a permanent 15% rate hike. The rate increase
Page 52
had been approved by the Commission on an interim basis several
months earlier, pending the dismissal or withdrawal of the bankruptcy
petitions. Tucson Electric serves approximately 270,000 customers,
primarily in the Tucson area. Inability of any regulated public
utility to secure necessary rate increases could adversely affect,
to an indeterminable extent, its ability to pay debt service on
its pollution control revenue bonds.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete description of
all adverse conditions to which the issuers in the Arizona Trusts
are subject. Additionally, many factors including national economics,
social and environmental policies and conditions, which are not
within the control of the issuers of Bonds, could affect or could
have an adverse impact on the financial condition of the State,
various agencies and political subdivisions and private businesses
located in the State. The Sponsor is unable to predict whether
or to what extent such factors or other factors may affect the
issuers of Bonds, the market value or marketability of the Bonds
or the ability of the respective issuers of the Bonds acquired
by the Arizona Trusts to pay interest on or principal of the Bonds.
The Arkansas Trusts. The Constitution of Arkansas specifically
prohibits the creation of any State general obligation debt unless
authorized in a Statewide general election. Although the State
of Arkansas defaulted on some of its general obligation debt during
the depression in the later 1930s, it has not failed to pay the
principal and interest on any of its general obligations when
due since that time.
Act 496 of 1981, as amended, the "Arkansas Water Resources Development
Act of 1981," ("Act 496"), authorizes the issuance of State Water
Resources Development General Obligation Bonds by the State of
Arkansas, acting by and through the Arkansas Soil and Water Conservation
Commission. The issuance of bonds pursuant to Act 496 was approved
by the electors of the State at the general election on November
2,1982. The total principal amount of bonds issued during any
fiscal biennium may not exceed $15,000,000, and the total principal
of all bonds issued under Act 496 may not exceed $100,000,000.
All bonds to be issued under Act 496 shall be direct general obligations
of the State, the principal and interest of which are payable
from the general revenues of the State. The State of Arkansas
has outstanding two series of bonds in the aggregate principal
amount of approximately $37,075,000 under Act 496.
Act 686 of 1987, the "Arkansas Waste Disposal and Pollution Abatement
Facilities Financing Act of 1987" ("Act 686"), authorizes the
issuance of Arkansas Waste Disposal and Pollution Abatement Facilities
General Obligation Bonds by the State of Arkansas, acting by and
through the Arkansas Soil and Water Conservation Commission. The
issuance of bonds pursuant to Act 686 was approved by the electors
of the State at the general election on November 8, 1988. The
total principal amount of bonds issued during any fiscal biennium
may not exceed $50,000,000, and the total principal of all bonds
issued under Act 686 may not exceed $250,000,000. All bonds to
be issued under Act 686 shall be direct general obligations of
the State, the principal and interest of which are payable from
the general revenues of the State. The State of Arkansas has outstanding
two series of bonds in the aggregate principal amount of approximately
$25,100,000 under Act 686.
Act 683 of 1989, the "Arkansas College Saving Bond Act of 1989"
("Act 683"), authorizes the issuance of Arkansas College Savings
General Obligation Bonds by the State of Arkansas, acting by and
through the Arkansas Development Finance Authority. The issuance
of bonds pursuant to Act 683 was approved by the electors of the
State at the general election on November 6, 1990. The total principal
amount of bonds issued during any fiscal biennium may not exceed
$100,000,000, and the total principal of all bonds issued under
Act 683 may not exceed $300,000,000. All bonds to be issued under
Act 683 shall be direct general obligations of the State, the
principal and interest of which are payable from the general revenues
of the State. The State of Arkansas has outstanding three series
of bonds in the aggregate principal amount of approximately $74,855,000
under Act 683.
Page 53
Deficit spending has been prohibited by statute in Arkansas since
1945. The Revenue Stabilization Law requires that before any State
spending can take place, there must be an appropriation by the
General Assembly and there must be funds available in the fund
from which the appropriation has been made. The State is prohibited
from borrowing money to put into any State fund from which appropriations
can be paid.
Information regarding the financial condition of the State is
included for the purpose of providing information about general
economic conditions that may affect issuers of the Bonds in Arkansas.
The Arkansas economy represents approximately 2.0% of the total
United States' economy. Its small size causes the Arkansas economy
to follow the national economy. Fluctuations in the national economy
are often mirrored by coinciding or delayed fluctuations in the
Arkansas economy.
Arkansas' economy is both agricultural and manufacturing based.
Thus, the State of Arkansas feels the full force of the business
cycle and also sees the growth swing from positive to negative
as conditions in agriculture change.
Agriculture has had a depressant effect on the Arkansas economy
regardless of the phase the business cycle was in. Over 40% of
the land in Arkansas is devoted to agriculture. Arkansas ranks
first in the nation in rice production, first in commercial broilers,
and fourth in cotton. In recent years, agricultural employment
in Arkansas has been on the decline. From 1989 to 1990 and from
1990 to 1991, agricultural employment declined by 1.6%. Employment
in Arkansas' construction industry decreased by 1.8% from 1989
to 1990 and by 4.4% from 1990 to 1991. This followed a 2.3% decline
from 1987 to 1988 and a 2.3% decline from 1988 to 1989.
The population of Arkansas is 2,350,725 according to the 1990
federal census. Arkansas recorded an average annual increase of
.3% in population from 1980 to 1990.
During the past two decades, Arkansas' economic base has shifted
from agriculture to light manufacturing. Manufacturing employment
in Arkansas grew by 0.56% from 1990 to 1991 versus -3.7% at the
national level. The diversification of economic interests has
lessened Arkansas' cyclical sensitivity to impact by any single
sector. From 1990 to 1991, total employment decreased by 1.9%
and total nonagricultural wage and salary employment increased
by 1.4%. Total employment growth in Arkansas exceeded the growth
rate of total employment in the United States. The average unemployment
rate increased from 6.9% in 1990 to 7.3% in 1991. Total personal
income increased by 6.7% from 1989 to 1990 and by 4.7% from 1990
to 1991. Per capita personal income increased by 6.5% from 1989
to 1990 and by 4.2% from 1990 to 1991.
Counties and municipalities may issue general obligation bonds
(pledging an ad valorem tax), special obligation bonds (pledging
other specific tax revenues) and revenue bonds (pledging only
specific revenues from sources other than tax revenues). School
districts may issue general obligation bonds (pledging ad valorem
taxes). Revenue bonds may also be issued by agencies and instrumentalities
of counties, municipalities and the State of Arkansas but, as
in all cases of revenue bonds, neither the full faith and credit
nor the taxing power of the State of Arkansas or any municipality
or county thereof is pledged to the repayment of those bonds.
Revenue bonds can be issued only for public purposes, including,
but not limited to, industry, housing, health care facilities,
airports, port facilities and water and sewer projects.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete description of
all adverse conditions to which the issuers in the Arkansas Trusts
are subject. Additionally, many factors including national economic,
social and environmental policies and conditions, which are not
within the control of the issuers of Bonds, could affect or could
have an adverse impact on the financial condition of the State,
various agencies and political subdivisions and private businesses
located in the State. The Sponsor is unable to predict whether
or to what extent such factors or other factors may affect the
issuers of Bonds, the market value or marketability of the Bonds
or the ability of the respective issuers of the Bonds acquired
by the Arkansas Trusts to pay interest on or principal of the
Bonds.
Page 54
The California Trusts. Economic Factors. The California Trusts
are susceptible to political, economic or regulatory factors affecting
issuers of California municipal obligations (the "California Municipal
Obligations"). These include the possible adverse effects of certain
California constitutional amendments, legislative measures, voter
initiatives and other matters that are described below. The following
information provides only a brief summary of the complex factors
affecting the financial situation in California (the "State")
and is derived from sources that are generally available to investors
and are believed to be accurate. No independent verification has
been made of the accuracy or completeness of any of the following
information. It is based in part on information obtained from
various State and local agencies in California or contained in
Official Statements for various California Municipal Obligations.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local governmental
finances generally, will not adversely affect the market value
of California Municipal Obligations held in the portfolio of the
Trusts or the ability of particular obligors to make timely payments
of debt service on (or relating to) those obligations.
Economic Overview. California's economy is the largest among the
50 states and one of the largest in the world. The State's population
of over 31 million represents 12.3% of the total United States
population and grew by 27% in the 1980s. Total personal income
in the State, at an estimated $640 billion in 1991, accounts for
13% of all personal income in the nation. Total employment is
almost 14 million, the majority of which is in the service, trade
and manufacturing sectors.
Reports issued by the State Department of Finance and the Commission
on State Finance (the "COSF") indicate that the State's economy
is suffering its worst recession since the 1930s, with prospects
for recovery slower than for the nation as a whole. The State
has lost over 800,000 jobs since the start of the recession and
additional significant job losses are expected before an upturn
begins. The largest job losses have been in Southern California,
led by declines in the aerospace and construction industries.
Weakness statewide occurred in manufacturing, construction, services
and trade. Unemployment was 7.5% for 1991 (compared to 6.7% nationally),
and is expected to be around 10% in 1993. The State's economy
is only expected to pull out of the recession slowly, once the
national recovery has begun. The Department and the COSF project
a stagnant economy in California until 1994. Delay in recovery
will exacerbate shortfalls in State revenues.
Limitation on Taxes. Certain California municipal obligations
may be obligations of issuers which rely in whole or in part,
directly or indirectly, on ad valorem property taxes as a source
of revenue. The taxing powers of California local governments
and districts are limited by Article XIIIA of the California Constitution,
enacted by the voters in 1978 and commonly known as "Proposition
13." Briefly, Article XIIIA limits to 1% of full cash value the
rate of ad valorem property taxes on real property and generally
restricts the reassessment of property to 2% per year, except
upon new construction or change of ownership (subject to a number
of exemptions). Taxing entities may, however, raise ad valorem
taxes above the 1% limit to pay debt service on voter-approved
bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied
against the assessed value of property as of the owner's date
of acquisition (or as of March 1, 1975, if acquired earlier),
subject to certain adjustments. This system has resulted in widely
varying amounts of tax on similarly situated properties. Several
lawsuits have been filed challenging the acquisition-based assessment
system of Proposition 13 and on June 18, 1992 the U.S. Supreme
Court announced a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues
through ad valorem property taxes above the 1% limit; it also
requires voters of any governmental unit to give two-thirds approval
to levy any "special tax." Court decisions, however, allowed non-voter
approved levy of "general taxes" which were not dedicated to a
specific use. In response to these decisions, the voters of the
State in 1986 adopted an initiative statute which imposed significant
new limits on the ability of local entities to raise or levy general
taxes,except by receiving majority local voter approval. Significant
elements of this initiative, "Proposition 62,"
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have been overturned in recent court cases. An initiative proposed
to re-enact the provisions of Proposition 62 as a constitutional
amendment was defeated by the voters in November 1990, but such
a proposal may be renewed in the future.
Appropriations Limits. California and its local governments are
subject to an annual "appropriations limit" imposed by Article
XIIIB of the California Constitution, enacted by the voters in
1979 and significantly amended by Propositions 98 and 111 in 1988
and 1990, respectively. Article XIIIB prohibits the State or any
covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed.
"Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consist of tax revenues, and certain
other funds, including proceeds from regulatory licenses, user
charges or other fees, to the extent that such proceeds exceed
the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No
limit is imposed on appropriations of funds which are not "proceeds
of taxes," such as reasonable user charges or fees, and certain
other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized
prior to January 1, 1979, or subsequently authorized by the voters,
(2) appropriations arising from certain emergencies declared by
the Governor, (3) appropriations for certain capital outlay projects,
(4) appropriations by the State of post-1989 increases in gasoline
taxes and vehicle weight fees, and (5) appropriations made in
certain cases of emergency.
The appropriations limit for each year is adjusted annually to
reflect changes in cost of living and population, and any transfers
of service responsibilities between government units. The definitions
for such adjustments were liberalized in 1990, to follow more
closely growth in California's economy.
"Excess" revenues are measured over a two-year cycle. Local governments
must return any excess to taxpayers by rate reduction. The State
must refund 50% of any excess, with the other 50% paid to schools
and community colleges. With more liberal annual adjustment factors
since 1988, and depressed revenues since 1990 because of the recession,
few governments are currently operating near their spending limits,
but this condition may change over time. Local governments may
by voter approval exceed their spending limits for up to four
years. During fiscal year 1986-87, State receipts from proceeds
of taxes exceeded its appropriations limit by $1.1 billion, which
was returned to taxpayers. Appropriations subject to limitation
were under the State limit by $1.2 billion, $259 million, $1.6
billion, $7.5 billion and $5.2 billion for the five most recent
years ending with 1991-92. State appropriations are expected to
be $4.2 billion under the limit for fiscal year 1992-93.
Because of the complex nature of Articles XIIIA and XIIIB of the
California Constitution, the ambiguities and possible inconsistencies
in their terms, and the impossibility of predicting future appropriations
or changes in population and cost of living, and the probability
of continuing legal challenges, it is not currently possible to
determine fully the impact of Article XIIIA or Article XIIIB on
California Municipal Obligations or on the ability of California
or local governments to pay debt service on such California Municipal
Obligations. It it not presently possible to predict the outcome
of any pending litigation with respect to the ultimate scope,
impact or constitutionality of either Article XIIIA or Article
XIIIB, or the impact of any such determinations upon State agencies
or local governments, or upon their ability to pay debt service
on their obligations. Future initiative or legislative changes
in laws or the California Constitution may also affect the ability
of the State or local issuers to repay their obligations.
Obligations of the State of California. As of February 12, 1993,
California had approximately $17.0 billion of general obligation
bonds outstanding, and $8.3 billion remained authorized but unissued.
In addition, at June 30, 1992, the State had lease-purchase obligations,
payable from the State's General Fund, of approximately $2.9 billion.
Of the State's outstanding general obligation debt, 26% is presently
self-liquidating (for which program revenues are anticipated to
be sufficient to reimburse the General Fund for debt service payments).
Three general obligation bond propositions, totaling $3.7 billion
were approved by voters
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in 1992. In fiscal year 1991-92, debt service on general obligation
bonds and lease-purchase debt was approximately 3.2% of General
Fund revenues. The State has paid the principal of and interest
on its general obligations bonds, lease-purchase debt and short-term
obligations when due.
Recent Financial Results. The principal sources of General Fund
revenues are the California personal income tax (42% of total
revenues), the sales tax (39%), bank and corporation taxes (11%),
and the gross premium tax on insurance (3%). California maintains
a Special Fund for Economic Uncertainties (the "Economic Uncertainties
Fund"), derived from General Fund revenues, as a reserve to meet
cash needs of the General Fund, but which is required to be replenished
as soon as sufficient revenues are available. Year-end balances
in the Economic Uncertainties Fund are included for financial
reporting purposes in the General Fund balance. In most recent
years, California has budgeted to maintain the Economic Uncertainties
Fund at around 3% of General Fund expenditures but essentially
no reserve is budgeted for 1992-93.
Throughout the 1980s, State spending increased rapidly as the
State population and economy also grew rapidly, including increased
spending for many assistance programs to local governments, which
were constrained by Proposition 13 and other laws. The largest
State program is assistance to local public school districts.
In 1988, an initiative (Proposition 98) was enacted which (subject
to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college
districts a minimum share of State General Fund revenues (generally
about 37%).
Since the start of 1990-91 Fiscal Year, the State has faced adverse
economic, fiscal, and budget conditions. The economic recession
seriously affected State tax revenues. It also caused increased
expenditures for health and welfare programs. The State is also
facing a structural imbalance in its budget with the largest programs
supported by the General Fund (education, health, welfare and
corrections) growing at rates significantly higher than the growth
rates for the principal revenue sources of the General Fund. As
a result, the State entered a period of budget imbalance, with
expenditures exceeding revenues for four of the last five fiscal
years. Revenues declined in 1990-91 over 1989-90, the first time
since the 1930s. By June 30, 1992, the State's General Fund had
an accumulated deficit, on a budget basis, of approximately $2.2
billion.
1991-92 Fiscal Year. As the 1990-91 fiscal year ended in the midst
of a continuing recession and very weak revenues, the Governor
estimated that a "budget gap" of $14.3 billion would have to be
resolved in order to reconcile the excess of projected expenditures
for existing programs, at currently mandated growth rates, over
expected revenues, the need to repay the 1990-91 budget deficit,
and the need to restore a budget reserve. This budget gap was
closed through a combination of temporary and permanent changes
in laws and one-time budget adjustments. The major features of
the budget compromise were program funding reductions totalling
$5.0 billion; a total of $5.1 billion of increased State revenues;
savings of $2.1 billion from transferring certain health and welfare
programs to counties to be funded by increased sales tax and vehicle
license fees to be given directly to counties; and additional
miscellaneous savings and revenue gains and one time accounting
changes totalling $2.1 billion.
The 1991-92 Budget Act was based on economic forecasts that recovery
from the recession would begin in the summer or fall of 1991,
but as the severity of the recession increased, revenues lagged
significantly and continually behind projections from the start
of the fiscal year. As a result, revenues for the 1991-92 Fiscal
Year were more than $4 billion lower than originally projected
and expenditures were higher than originally projected.
As a consequence of the large budget imbalances built up over
two consecutive years, the State used up all of its available
cash resources. In late June, 1992, the State was required to
issue $475 million of short-term revenue anticipation warrants
to cover obligations coming due on June 30 and July 1. These warrants
were repaid on July 24, 1992.
1992-93 Fiscal Year. At the outset of the 1992-93 Fiscal Year,
the State estimated that approximately $7.9 billion of budget
actions would be required to end the 1992-93 Fiscal Year without
a budget deficit. The difficulty of taking these actions delayed
enactment of a budget for more than two months past the start
of the
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1992-93 Fiscal Year. With the failure to enact a budget by July
1, 1992, the State had no legal authority to pay many of its vendors
until the budget was passed; nevertheless, certain obligations
(such as debt service, school apportionments, welfare payments,
and employee salaries) were payable because of continuing or special
appropriations, or court orders. However, the State Controller
did not have enough cash to pay as they came due all of these
ongoing obligations, as well as valid obligations incurred in
the prior fiscal year.
Starting on July 1, 1992, the Controller was required to issue
"registered warrants" in lieu of normal warrants backed by cash
to pay many State obligations. Available cash was used to pay
constitutionally mandated and priority obligations. Between July
1 and September 3, 1992, the Controller issued an aggregate of
approximately $3.8 billion of registered warrants, all of which
were called for redemption by September 4, 1992 following enactment
of the 1992-93 Budget Act and issuance by the State of $3.3 billion
of Interim Notes.
The Legislature enacted the 1992-93 Budget Bill on August 29,
1992, and it was signed by the Governor on September 2, 1992.
The 1992-93 Budget Act provides for expenditures of $57.4 billion
and consists of General Fund expenditures of $40.8 billion and
Special Fund and Bond Fund expenditures of $16.6 billion. The
Department of Finance estimated there would be a balance in the
Special Fund for Economic Uncertainties of $28 million on June
30, 1993.
The $7.9 billion budget gap was closed through a combination of
increased revenues and transfers and expenditure cuts. The principle
reductions were in health and welfare, K-12 schools and community
colleges, State aid to local governments, higher education (partially
offset by increased student fees), and various other programs.
In addition, funds were transferred from special funds, collections
of State revenues were accelerated, and other adjustments were
made.
As in the prior year, the economic and fiscal assumptions on which
the 1992-93 Budget Act was based proved to be too optimistic.
As the recession in the State entered its third year, with no
real upturn predicted until 1994, State revenues again lagged
projections. The Governor's Budget Proposal for 1993-94, released
in January 1993, projects current-year revenues will be about
$2.5 billion below projections. As a result, the Governor predicts
the General Fund will end at June 30, 1993 with a deficit of about
$2.1 billion; however, this prediction assumes that the Legislature
will take about $900 million of cost-saving actions in the current
fiscal year, which may not all occur, and would thereby increase
the deficit. The Governor's Budget also predicts that the State's
cash resources will be depleted by May, 1993, which will necessitate
additional short-term cash flow borrowing.
1993-94 Budget. The Governor's Budget Proposal for 1993-94 recognizes
that the State will face a third consecutive year of extremely
difficult budget choices. Because several temporary revenue-raising
steps taken in 1991 are scheduled to expire on June 30, 1993,
which the Governor does not propose to extend, revenues for 1993-94
are projected to be about $1 billion lower than revenues in 1992-93
(the second consecutive year of actual decline). With the need
to repay a projected $2.1 billion accumulated deficit, the Governor
indicates that total General Fund expenditures must be limited
to about $37.3 billion, an 8.5% reduction from the prior year.
To achieve the necessary cost reductions, the Governor has proposed
cuts in may programs, a shift of about $2.5 billion of city,county,
and special district property taxes to school districts (which
offsets State funding requirements to the schools), and reliance
on receipt of about $1.5 billion in aid from the federal government
to pay for costs associated with foreign immigrants to the State.
If some of the Governor's proposals and assumptions are not achieved,
he proposed even greater cuts in health, welfare and higher education
funding. For the second year in a row, the Governor's Budget did
not propose to fund any reserve against adverse budgetary developments,
and projected an ending balance in the General Fund at June 30,
1994 of less than $50 million.
The Commission on State Finance, reviewing the Governor's Budget,
agreed with its pessimistic economic projections, but disagreed
with some of its budgetary estimates and assumptions. Assuming
that all
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of the Governor's proposals and assumptions were enacted or occurred,
the Commission projected the 1993-94 budget would still be about
$1 billion out of balance because of lower revenues and higher
expenditures than the Governor's predictions. The Commission also
indicated this estimate could vary by up to $2.5-$3 billion in
either direction if economic conditions in the State were significantly
worse or better than the current basic projection.
The State's severe financial difficulties for the current and
upcoming budget years will result in continued pressure upon almost
all local governments, particularly school districts and counties
which depend on State aid. Despite efforts in recent years to
increase taxes and reduce governmental expenditures, there can
be no assurance that the State will not face budget gaps in the
future.
Bond Rating. State general obligation bonds are currently rated
"Aa" by Moody's and "A+" by S&P. Both of these ratings were recently
reduced from"AAA" levels which the State held until late 1991.
There can be no assurance that such ratings will be maintained
in the future. It should be noted that the creditworthiness of
obligations issued by local California issuers may be unrelated
to the creditworthiness of obligations issued by the State of
California, and that there is no obligation on the part of the
State to make payment on such local obligations in the event of
default.
Legal Proceedings. The State is involved in certain legal proceedings
(described in the State's recent financial statements) that, if
decided against the State, may require the State to make significant
future expenditures or may substantially impair revenues.
Obligations of Other Issuers State Assistance. Property tax revenues
received by local governments declined more than 50% following
passage of Proposition 13. Subsequently, the California Legislature
enacted measures to provide for the redistribution of the State's
General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain
governmental functions by the State to assist municipal issuers
to raise revenues. Total local assistance from the State's General
Fund was budgeted at approximately $33.0 billion in fiscal year
1991-92 (about 75% of General Fund expenditures) and has been
budgeted at $31.1 billion for fiscal 1992-93, including the effect
of implementing reductions in certain aid programs. To reduce
State General Fund support for school districts, the 1992-93 Budget
Act caused local governments to transfer $1.3 billion of property
tax revenues to school districts, representing loss of almost
half the post-Proposition 13 "bail-out" aid. The Governor has
proposed in his 1993-94 Budget that local governments transfer
a further $2.5 billion of property taxes to school districts,
with the possibility that they could raise taxes at the local
level to make up some of the shortfall. To the extent the State
should be constrained by its Article XIIIB appropriations limit,
or its obligation to conform to Proposition 98, or other fiscal
considerations, the absolute level, or the rate of growth, of
State assistance to local governments may be reduced. Any such
reductions in State aid could compound the serious fiscal constraints
already experienced by many local governments, particularly counties.
At least one rural county (Butte) publicly announced that it might
enter bankruptcy proceedings in August 1990, although such plans
were put off after the Governor approved legislation to provide
additional funds for the county. Other counties have also indicated
that their budgetary condition is extremely grave. The Richmond
Unified School District (Contra Costa County) entered bankruptcy
proceedings in May 1991 but the proceedings have been dismissed.
Assessment Bonds. California Municipal Obligations which are assessment
bonds may be adversely affected by a general decline in real estate
values or a slowdown in real estate sales activity. In many cases,
such bonds are secured by land which is undeveloped at the time
of issuance but anticipated to be developed within a few years
after issuance. In the event of such reduction or slowdown, such
development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments
or taxes securing these bonds are not the personal liability of
the owners of the property assessed, the lien on the property
is the only security for the bonds. Moreover, in most cases the
issuer of these
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bonds is not required to make payments on the bonds in the event
of delinquency in the payment of assessments or taxes, except
from amounts, if any, in a reserve fund established for the bonds.
California Long Term Lease Obligations. Certain California long
term lease obligations, though typically payable from the general
fund of the municipality, are subject to "abatement" in the event
the facility being leased is unavailable for beneficial use and
occupancy by the municipality during the term of the lease. Abatement
is not a default, and there may be no remedies available to the
holders of the certificates evidencing the lease obligation in
the event abatement occurs. The most common cases of abatement
are failure to complete construction of the facility before the
end of the period during which lease payments have been capitalized
and uninsured casualty losses to the facility (e.g., due to earthquake).
In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance
proceeds and reserves are exhausted) and the certificates may
not be paid when due.
Several years ago the Richmond Unified School District (the "District")
entered into a lease transaction in which certain existing properties
of the District were sold and leased back in order to obtain funds
to cover operating deficits. Following a fiscal crisis in which
the District's finances were taken over by a State receiver (including
a brief period under bankruptcy court protection), the District
failed to make rental payments on this lease, resulting in a lawsuit
by the Trustee for the Certificate of Participation holders, in
which the State was named defendant (on the grounds that it controlled
the District's finances). One of the defenses raised in answer
to this lawsuit was the invalidity of the original lease transaction.
The case is still in very preliminary stages, and it is not known
how it will be resolved. If the case goes to trial, a judgement
against the Trustee may have adverse implications for lease transactions
of a similar nature by other California entities.
Other Issuers of California Municipal Obligations. There are a
number of state agencies, instrumentalities and political subdivisions
of the State that issue Municipal Obligations, some of which may
be conduit revenue obligations payable from payments from private
borrowers. These entities are subject to various economic risks
and uncertainties, and the credit quality of the securities issued
by them may vary considerably from the credit quality of obligations
backed by the full faith and credit of the State.
Other Considerations. The repayment of industrial development
securities secured by real property may be affected by California
laws limiting foreclosure rights of creditors. Securities backed
by health care and hospital revenues may be affected by changes
in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including
risks related to the policy of awarding exclusive contracts to
certain hospitals.
Limitations on ad valorem property taxes may particularly affect
"tax allocation" bonds issued by California redevelopment agencies.
Such bonds are secured solely by the increase in assessed valuation
of a redevelopment project area after the start of redevelopment
activity. In the event that assessed values in the redevelopment
project decline (e.g., because of a major natural disaster such
as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's
and S&P suspended ratings on California tax allocation bonds after
the enactment of Articles XIIIA and XIIIB, and only resumed such
ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires
that all revenues produced by a tax rate increase go directly
to the taxing entity which increased such tax rate to repay that
entity's general obligation indebtedness. As a result, redevelopment
agencies (which, typically, are the issuers of tax allocation
securities) no longer receive an increase in tax increment when
taxes on property in the project area are increased to repay voter-approved
bonded indebtedness.
The effect of these various constitutional and statutory changes
upon the ability of California municipal securities issuers to
pay interest and principal on their obligations remains unclear.
Furthermore, other measures affecting the taxing or spending authority
of California or its political subdivisions may be approved or
enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue-raising measures
or which either would further limit or, alternatively, would increase
the abilities
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of state and local governments to impose new taxes or increase
existing taxes. It is not presently possible to determine the
impact of any such legislation on California Municipal Obligations
in which the Trust may invest, future allocations of state revenues
to local governments or the abilities of state or local governments
to pay the interest on, or repay the principal of, such California
Municipal Obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Any California Municipal Obligation
in the California Insured Trust could be affected by an interruption
of revenues because of damaged facilities, or, consequently, income
tax deductions for casualty losses or property tax assessment
reductions. Compensatory financial assistance could be constrained
by the inability of (i) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (ii) an insurer to perform
on its contracts of insurance in the event of widespread losses;
or (iii) the Federal or State government to appropriate sufficient
funds within their respective budget limitations.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the California
Trusts are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which
are not within the control of the issuers of Bonds, could have
an adverse impact on the financial condition to predict whether
or to what extent such factors or other factors may affect the
issuers of Bonds, the market value or marketability of the Bonds
or the ability of the respective issuers of the Bonds acquired
by the California Trusts to pay interest on or principal of the
Bonds.
The Colorado Trusts. Restrictions on Appropriations and Revenues.
The State Constitution requires that expenditures for any fiscal
year not exceed revenues for such fiscal year. By statute, the
amount of General Fund revenues available for appropriation is
based upon revenue estimates which, together with other available
resources, must exceed annual appropriations by the amount of
the unappropriated reserve (the "Unappropriated Reserve"). The
Unappropriated Reserve has varied in recent fiscal years, having
been set at 5% for fiscal year 1986 and fiscal year 1987, 6% for
1988 and 4% thereafter. However, the State reduced the Unappropriated
Reserve requirement for fiscal years 1991, 1992, and 1993 to 3%
to enable it to respond to prison overcrowding. For fiscal year
1992 and thereafter, General Fund appropriations are also limited
by statute to an amount equal to the cost of performing certain
required reappraisals of taxable property plus an amount equal
to the lesser of (i) 5% of Colorado personal income or (ii) 106%
of the total General Fund appropriations for the previous fiscal
year. This restriction does not apply to any General Fund appropriations
which are required as a result of a new Federal law, a final state
or Federal court order or moneys derived from the increase in
the rate or amount of any tax or fee approved by a majority of
the registered electors of the State voting at any general election.
In addition, the statutory limit on the level of General Fund
appropriations may be exceeded for a given fiscal year upon the
declaration of a State fiscal emergency by the State General Assembly.
The 1991 fiscal year end fund balance was $16.3 million, which
was $862.8 million below the 3% Unappropriated Reserve requirement,
and the State estimates a balance of approximately $153.5 million
at the end of the 1992 fiscal year, which is $69.5 million over
the 3% Unappropriated Reserve requirement. State General Fund
reserves in the 1992 fiscal year included $96.3 million in "one
time" revenues. See "State Finances" below.
There is a statutory restriction on the amount of annual increases
in taxes that the various taxing jurisdictions in Colorado can
levy without electoral approval. This restriction does not apply
to taxes levied to pay general obligation debt.
On November 3, 1992, the voters in Colorado approved a constitutional
amendment (the "Amendment") which will in general, be effective
December 31, 1992, and could severely restrict the ability of
the State and local governments to increase revenues and impose
taxes. The Amendment applies to the State and all local governments,
including home rule entities ("Districts"). Enterprises, defined
as government-owned
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businesses authorized to issue revenue bonds and receiving under
10% of annual revenue in grants from all Colorado state and local
governments combined, are excluded from the provisions of the
Amendment.
The provisions of the Amendment are unclear and would probably
require judicial interpretation. Among other provisions, beginning
November 4, 1992, the Amendment requires voter approval prior
to tax increases, creation of debt, or mill levy or valuation
for assessment ratio increases. The Amendment also limits increases
in government spending and property tax revenues to specified
percentages. The Amendment requires that District property tax
revenues yield no more than the prior year's revenues adjusted
for inflation, voter approved changes and (except with regard
to school districts) changes in assessment ratios. School districts
are allowed to adjust tax levies for changes in student enrollment.
Pursuant to the Amendment, local government spending is to be
limited by the same formula, and State spending is to be limited
by inflation plus the percentage change in State population in
the prior calendar year. The bases for future spending and revenue
limits are 1992 fiscal year spending and 1991 property taxes collected
in 1992. Debt service changes, reductions and voter-approved revenue
changes are excluded from the calculation bases. The Amendment
also prohibits new or increased real property transfer tax rates,
new State real property taxes and local District income taxes.
State Finances. As the State experienced revenue shortfalls in
the mid-1980s, it adopted various measures, including impoundment
of funds by the Governor, reduction of appropriations by the General
Assembly, a temporary increase in the sales tax, deferral of certain
tax reductions and inter-fund borrowings. On a GAAP basis, the
State had unrestricted General Fund balances at June 30 of approximately
$4.4 million in fiscal year 1986, $45.1 million in fiscal year
1987, $100.3 million in fiscal year 1988, $134.4 million in fiscal
year 1989, $116.6 million in fiscal year 1990, $16.3 million in
fiscal year 1991 and $153.5 million in fiscal year 1992.
The adopted budget for fiscal year 1993 projects General Fund
revenues of $3.2 billion and appropriated approximately $3.0 billion.
Based upon the fiscal year 1992 carryover surplus, the State has
projected a $263.9 million year end balance for fiscal year 1993.
This amount is greater than the required 3.0% reserve of $88.6
million. The principal General Fund revenue sources are the individual
income tax (54.8% of total estimated 1993 fiscal year receipts),
excise taxes (32.9%) and the corporate income tax (4.2%).
State Debt. The State Constitution prohibits the State from incurring
debt except for limited purposes, for limited periods of time
and in inconsequential amounts. The State courts have defined
debt to mean any obligation of the State requiring payment out
of future years' general revenues. As a consequence, the State
has no outstanding general obligation debt.
State Economy. The State's economy is reliant upon several significant
factors such as mining, tourism, agriculture, construction, manufacture
of high technology products and durable goods and trade. Activities
related to tourism have grown during the past several years, while
sectors of the economy related to mining have contracted.
The growth of the State economy has historically exceeded that
of the national economy. Statewide, real personal income increased
by 1.5% between 1990 and 1991. According to the most current information
available from the Colorado Department of Revenue, retail trade
sales increased 7.6% from approximately $45.4 billion to $48.8
billion from 1989 to 1991. For the third quarter of 1992, retail
trade sales totaled approximately $13.7 billion, an increase of
8.3% over retail trade sales during the same time period in 1991.
Figures supplied by the Colorado Division of Employment and Training
indicate that for the years 1986 through 1989 the State's unemployment
rate exceeded the national rate; however, this trend was reversed
for 1990 and 1991. In 1991, the State's annual average unemployment
rate was 5.0% (compared to a national unemployment rate of 6.7%).
The seasonally adjusted unemployment rate for August 1992 for
the State was 6.1% as compared to 6% for the United States.
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Economic conditions in the State may have continuing effects on
other governmental units within the State (including issuers of
the Bonds in the Colorado Trusts), which, to varying degrees,
have also experienced reduced revenues as a result of recessionary
conditions and other factors.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Colorado
Trusts are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which
are not within the control of the issuers of Bonds, could have
an adverse impact on the financial condition to predict whether
or to what extent such factors or other factors may affect the
issuers of Bonds, the market value or marketability of the Bonds
or the ability of the respective issuers of the Bonds acquired
by the Colorado Trusts to pay interest on or principal of the
Bonds.
The Connecticut Trusts. Investors should be aware that manufacturing
was historically the most important economic activity within the
State of Connecticut but, in terms of number of persons employed,
manufacturing has declined in the last ten years while both trade
and service-related industries have become more important, and
in 1991 manufacturing accounted for only 20.4% of total non-agricultural
employment in Connecticut. Defense-related business represents
a relatively high proportion of the manufacturing sector, and
reductions in defense spending could have a substantial adverse
effect on Connecticut's economy. Connecticut is now in a recession,
the depth and duration of which are uncertain. Moreover, while
unemployment in the State as a whole has generally remained below
the national level, as of December 1992, the estimated rate of
unemployment in Connecticut on a seasonally adjusted basis reached
7.4%, and certain geographic areas in the State have been affected
by high unemployment and poverty. The State derives over 70% of
its revenues from taxes imposed by it, the most important of which
have been the sales and use taxes and the corporation business
tax, each of which is sensitive to changes in the level of economic
activity in the State, but the Connecticut income tax on individuals,
trusts, and estates enacted in 1991 is expected to supersede each
of them in importance. There can be no assurance that general
economic difficulties or the financial circumstances of the State
or its towns and cities will not adversely affect the market value
of the Bonds in the Connecticut Trusts or the ability of the obligors
to pay debt service on such Bonds.
The General Fund budget adopted by Connecticut for the 1986-87
fiscal year contemplated both revenues and expenditures of $4,300,000,000.
The General Fund ended the 1986-87 fiscal year with a surplus
of $365,200,000. The General Fund budget for the 1987-88 fiscal
year contemplated General Fund revenues and expenditures of $4,919,600,000.
However, the General Fund ended the 1987-88 fiscal year with a
deficit of $115,600,000. The General Fund budget adopted for the
1988-89 fiscal year anticipated that General Fund expenditures
of $5,551,000,000 and certain educational expenses of $206,700,000
not previously paid through the General Fund would be funded in
part from surpluses of prior years and in part from higher tax
revenues projected to result from tax laws in effect for the 1987-88
fiscal year and stricter enforcement thereof; a substantial deficit
was projected during the third quarter of the 1988-89 fiscal year,
but largely because of tax law changes that took effect before
the end of the fiscal year, the deficit was kept to $28,000,000.
The General Fund budget adopted for the 1989-90 fiscal year anticipated
expenditures of approximately $6,224,500,000 and, by virtue of
tax increase legislation enacted to take effect generally at the
beginning of the fiscal year, revenues slightly exceeding such
amount. However, largely because of tax revenue shortfalls, the
General Fund ended the 1989-90 fiscal year with a deficit for
the year of $259,500,000, wiping out reserves for such events
built up in prior years. The General Fund budget adopted for the
1990-91 fiscal year anticipated expenditures of $6,433,000,000,
but no significant new or increased taxes were enacted. Primarily
because of significant declines in tax revenues and unanticipated
expenditures reflective of economic adversity, the General Fund
ended the 1990-91 fiscal year alone with a further deficit of
$809,000,000.
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A General Fund budget for the 1991-92 fiscal year was not enacted
until August 22, 1991. This budget anticipated General Fund expenditures
of $7,007,861,328 and revenues of $7,426,390,000. Projected decreases
in revenues resulting from a 25% reduction in the sales tax rate
effective October 1, 1991, the repeal of the taxes on the capital
gains and interest and dividend income of resident individuals
for years starting after 1991, and the phase-out of the corporation
business tax surcharge over two years commencing with taxable
years starting after 1991 are expected to be more than offset
by a new general income tax imposed at effective rates not to
exceed 4.5% on the Connecticut taxable income of resident and
non-resident individuals, trusts, and estates. The Comptroller's
annual report for the 1991-92 fiscal year reflects a General Fund
operating surplus of $110,000,000. A General Fund budget for the
1992-93 fiscal year has been adopted anticipating General Fund
expenditures of $7,372,062,859 and revenues of $7,372,210,000.
In addition, expenditures of Federal, State, and local funds in
the ten years started July 1, 1984, for repair of the State's
roads and bridges now projected at $7,600,000,000 are anticipated,
the State's share of which would be financed by bonds expected
to total $3,200,000,000 and by direct payments both of which would
be supported by a Special Transportation Fund first created by
the General Assembly for the 1984-85 fiscal year.
To fund operating cash requirements, prior to the 1991-92 fiscal
year the State borrowed up to $750,000,000 pursuant to authorization
to issue commercial paper and on July 29, 1991, it issued $200,000,000
of General Obligation Temporary Notes. To fund the cumulative
General Fund deficit for the 1989-90 and 1990-91 fiscal years,
the legislation enacted August 22, 1991, authorized the State
Treasurer to issue Economic Recovery Notes up to the aggregate
amount of such deficit, which must be payable no later than June
30, 1996; at least $50,000,000 of such Notes, but not more than
a cap amount, is to be retired each fiscal year commencing with
the 1991-92 fiscal year, and any unappropriated surplus up to
$205,000,000 in the General Fund at the end of each of the three
fiscal years commencing with the 1991-92 fiscal year must be applied
to retire such Notes as may remain outstanding at those times.
On September 25, 1991, and October 24, 1991, the State issued
$640,710,000 and $325,002,000, respectively, of such Economic
Recovery Notes, of which $705,610,000 was outstanding as of February
1, 1993.
As a result of the State's budget problems, the ratings of its
general obligation bonds were reduced by Standard & Poor's from
AA+ to AA on March 29, 1990, and by Moody's from Aa1 to Aa on
April 9, 1990. Moreover, because of these problems, on September
13, 1991, Standard & Poor's reduced its ratings of the State's
general obligation bonds and certain other obligations that depend
in part on the creditworthiness of the State to AA-. On March
7, 1991, Moody's downgraded its ratings of the revenue bonds of
four Connecticut hospitals because of the effects of the State's
restrictive controlled reimbursement environment under which they
have been operating.
General obligation bonds issued by Connecticut municipalities
are payable primarily only from ad valorem taxes on property subject
to taxation by the municipality. Certain Connecticut municipalities
have experienced severe fiscal difficulties and have reported
operating and accumulated deficits in recent years. The most notable
of these is the City of Bridgeport, which filed a bankruptcy petition
on June 7, 1991. The State opposed the petition. The United States
Bankruptcy Court for the District of Connecticut has held that
Bridgeport has authority to file such a petition but that its
petition should be dismissed on the grounds that Bridgeport was
not insolvent when the petition was filed. Regional economic difficulties,
reductions in revenues, and increased expenses could lead to further
fiscal problems for the State and its political subdivisions,
authorities and agencies. Difficulty in payment of debt service
on borrowings could result in declines, possibly severe, in the
value of their outstanding obligations and increases in their
future borrowing costs.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Connecticut
Trusts are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which
are not within the control
Page 64
of the issuers of Bonds, could have an adverse impact on the financial
condition to predict whether or to what extent such factors or
other factors may affect the issuers of Bonds, the market value
or marketability of the Bonds or the ability of the respective
issuers of the Bonds acquired by the Connecticut Trusts to pay
interest on or principal of the Bonds.
The Delaware Trusts. Investors should be aware of certain factors
that might affect the financial condition of the State of Delaware.
The State ended fiscal 1989 with a cumulative cash balance of
$185.4 million, more than 15% of total expenditures for the year.
The Budgetary Reserve Fund was fully funded at the 5% level or
$62.5 million during the fiscal year. General Fund revenue grew
by 8.9% during fiscal 1989. General Fund expenditures were $1,092.2
million in fiscal 1989, an increase of 5.1% over fiscal 1988.
The increase funded additional spending in welfare programs, teacher
compensation, and a salary increase for State employees.
Projected General Fund revenue of $1,139.4 million for fiscal
1990 is 5.3% higher than fiscal 1989. This growth reflects the
continuing strength of the Delaware economy, although this estimate,
issued March 19, 1990, is $18.7 million less than an estimate
issued in December 1989, reflecting a cooling of the Delaware
economy and decreased franchise taxes because of mergers and acquisitions.
Taken with the unencumbered balance from 1989, $1,324.8 million
was available for expenditure in fiscal 1990. Projected General
Fund expenditures of $1,176.7 million were 9.7% greater than spending
in fiscal 1989.
The State Constitution was amended in May 1980 to limit tax increases.
Any tax increase or the imposition of any new tax must be passed
by a three-fifths vote of each house of the General Assembly,
rather than by a simple majority vote, except for tax increases
to meet debt service on outstanding obligations of the State for
which insufficient revenue is available when such debt service
is due. The intended impact of this amendment is to make it easier
to lower expenditures than to increase taxes. The amendment also
provides that the State shall appropriate, prior to each fiscal
year of the State, sums sufficient to meet debt service in the
following fiscal year, a practice the State has always followed.
The State Constitution limits annual appropriations by majority
vote of both houses of the General Assembly to 98% of estimated
General Fund revenue plus the unencumbered General Fund balance
from the previous fiscal year. Any appropriation exceeding this
limit may be made in the event of certain emergencies with the
approval of a three-fifths vote of the members of each house of
the General Assembly, but no appropriation may be made exceeding
100% of estimated General Fund revenue plus the unencumbered General
Fund balance from the previous fiscal year.
The State Constitution also provides that the excess of any unencumbered
General Fund revenue at the end of a fiscal year must be placed
in a reserve account ("Budgetary Reserve Account") within 45 days
following the end of the fiscal year. The Budgetary Reserve Account
is designed to provide a cushion against unanticipated deficits.
The money in the Budgetary Reserve Account accumulates until the
fund reaches a maximum of 5% of the General Fund estimated revenue
(including tax money that may be refunded) for the ensuing fiscal
year. Transfers of $9.2 million were made to fund the Budgetary
Reserve Account for fiscal 1989. Transfers are made in August
based on June projections. Access to these monies is authorized
with the approval of the three-fifths vote of the members of each
house of the General Assembly for use only in the event of the
necessity to fund an unanticipated General Fund deficit or to
provide funds required as a result of the enactment of legislation
reducing taxes.
There is no Constitutional debt limit of the State. The Delaware
Code presently provides that the total amount of authorized bonds
issued and unissued for the payment of which the full faith credit
of the State may be pledged shall not exceed 1.5 times the total
gross revenue deposited in the State's General Fund for the preceding
fiscal year. Applying that calculation, the current debt limit
is $1,799 million. As of May 1, 1990, the amount of general obligation
debt outstanding was $398.4 million, and the amount of authorized
but unissued general obligation bonds was approximately $72.0
million. Bonds or bond anticipation notes issued by the State
to provide the local share of the cost of school construction
are not included in the calculation
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of the aforesaid debt limit, nor are revenue anticipation notes
of the State. There is no debt limit applicable to issuance of
revenue anticipation notes; however there has not been a State
issue of revenue notes since fiscal 1977 and the State does not
plan to issue revenue notes in fiscal 1990.
Under Delaware Code, the authorization of general obligation debt
of the State is limited in any State fiscal year to an amount
equal to (a) 75% of the principal retirement of general obligation
debt of the State in the prior State fiscal year plus (b) the
amount of previously authorized and unissued general obligation
debt and/or guaranteed debt the authorization for which is repealed
in such fiscal year. This law can be supplemented, amended or
repealed by subsequently enacted legislation.
When the employment impact of the Financial Center Development
Act was initially felt in 1982, the Delaware unemployment rate
was below the national and regional average. The Delaware unemployment
rates for 1991 and 1992 were 6.2% and 5.3%, respectively, and
the seasonally adjusted rate for January 1993 was 4.3%.
There is no pending litigation attacking the constitutionality
of any Delaware revenue source or the method of collection from
that source.
The foregoing information constitutes only a brief summary of
some of the general factors which may impact certain issuers of
Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers of obligations
held by the Delaware Trusts are subject. Additionally, many factors
including national economic, social and environmental policies
and conditions, which are not within the control of the issuers
of Bonds, could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. The Sponsor is unable to predict
whether or to what extent such factors or other factors may affect
the issuers of the Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds
acquired by the Delaware Trusts to pay interest on or principal
of the Bonds.
The Florida Trusts. Florida's economy has in the past been highly
dependent on the construction industry and construction related
manufacturing. This dependency has declined in recent years and
continues to do so as a result of continued diversification of
the State's economy. For example, in 1980 total contract construction
employment as a share of total non-farm employment was just over
seven percent and in 1990 the share had edged downward to six
percent. This trend is expected to continue as Florida's economy
continues to diversify. Florida, nevertheless, has a dynamic construction
industry with single and multi-family housing starts accounting
for 9.48% of total U.S. housing starts in 1991 while the State's
population is 5.3% of the U.S. total population.
A driving force behind the State's construction industry has been
the State's rapid rate of population growth. Although Florida
currently is the fourth most populous state, its annual population
growth is now projected to decline as the number of people moving
into the State is expected to hover near the mid 200,000 range
annually well into the 1990s. This population trend should provide
plenty of fuel for business and home builders to keep construction
activity lively in Florida for some time to come. However, other
factors do influence the level of construction in the State. For
example, Federal tax reform in 1986 and other changes to the Federal
income tax code have eliminated tax deductions for owners of two
or more residential real estate properties and have lengthened
depreciation schedules on investment and commercial properties.
Economic growth and existing supplies of commercial buildings
and homes also contribute to the level of construction activity
in the State.
Since 1980, the State's job creation rate is well over twice the
rate for the nation as a whole, and its growth rate in new non-agricultural
jobs is the fastest of the 11 most populous states and second
only to California in the absolute number of new jobs created.
Contributing to the State's rapid rate of growth in employment
and income is international trade. Since 1980, the State's unemployment
rate has generally been below that of the U.S. Only in the last
two years has the State's unemployment rate moved ahead of the
national average. According to the U.S. Department of Commerce,
the Florida Department of Labor and Employment
Page 66
Security, and the Florida Consensus Economic Estimating Conference
(together the "Organization") the State's unemployment rate was
5.9% during 1990. As of April 1992, the Organization forecasts
that when final numbers are in, the unemployment rate for 1991
will be 7.3% and estimates that it will be 8.1% for 1992. The
State's non-farm employment is expected to decline 1.5% in 1991-92
and rise 1.8% in 1992-93, mirroring the path of employment growth
nationally. The State's two largest and fastest growing private
employment categories are the service and the trade sectors. Together,
they account for more than 50% of the total non-farm employment
growth between 1991-92 and 1992-93. Employment in these sectors
is expected to decline 3.6% for trade and growth and 1.5% for
services in 1991-92 and are expected to grow 0.7% and 3.7% in
1992-93, respectively. The service sector has overtaken the trade
sector and is now the State's largest employment category.
Tourism is one of the State's most important industries. By the
end of 1991-92, 38.8 million domestic and international tourists
are expected to have visited the State, a decrease of 4.9% from
the 40.8 million who visited in 1990-91. During 1992-93 tourist
arrivals are expected to approximate 40 million.
The State's per capita personal income in 1990 of $18,539 was
slightly below the national average of $18,696 and significantly
ahead of that for the southeast United States, which was $16,514.Growth
in real personal income in the State follows a course similar
to that of the nation, increasing 0.3% in 1991-92 and increasing
2.7% in 1992-93. Between 1990-91 and 1992-93, real personal income
per capita in the State is expected to average 0.5% less than
its 1990-91 level.
Compared to other states, Florida has a proportionately greater
retirement age population which comprises 18.3% (as of April 1,
1991) of the State's population and is forecast to grow at an
average annual rate of over 1.96% through the 1990s. Thus, property
income (dividends, interest, and rent) and transfer payments (Social
Security and pension benefits, among other sources of income)
are a relatively more important source of income. For example,
Florida's total wages and salaries and other labor income in 1990
was 54.9% of total income, while a similar figure for the nation
for 1990 was 64.8%. Transfer payments are typically less sensitive
to the business cycle than employment income and, therefore, act
as stabilizing forces in weak economic periods. While many of
the U.S.'s senior citizens choose the State as their place of
retirement, the State is also recognized as attracting a significant
number of working age people. Since 1980, the prime working age
population (18-44) has grown at an average annual rate of 3.6%.
In fiscal year 1990-91, approximately 64% of the State's total
direct revenue to its three operating funds will be derived from
State taxes, with Federal grants and other special revenue accounting
for the balance. State sales and use tax, corporate income tax,
and beverage tax amounted to 66%, 7%, and 5%, respectively, of
total receipts by the General Revenue Fund during fiscal 1990-91.
In that same year, expenditures for education, health and welfare,
and public safety amounted to 55%, 27% and 8%, respectively, of
total expenditures from the General Revenue Fund. At the end of
fiscal 1991, approximately $4.45 billion in principal amount of
debt secured by the full faith and credit of the State was outstanding.
In addition, since July 1, 1991, since July 1, 1991 through August
1992, the State issued about $965 million in principal amount
of full faith and credit bonds.
On August 24, 1992, the State was hit with a major hurricane,
Hurricane Andrew. Published speculation estimates total damage
to the southern portion of the State to be $20 billion or more.
The actual economic impact to the State is unknown at this time,
but, in published reports, the director of economic and demographic
research for the Joint Legislative Management Committee of the
State's Legislature estimates that the State's revenues from sales
tax collection will exceed the estimates prior to Andrew. The
director said that the State is expecting $7 to $8 billion of
insurance, and $10 billion in federal disaster assistance, and
up to $1 billion from other sources to repair the damage caused
by Andrew. The director estimates that a substantial portion,
maybe even half, of those monies will be spent over the next year
or two on items subject to the State's sales tax. In addition,
the director estimates that the State will collect documentary
stamp taxes in excess of the amount currently projected. The director
foresees property owners using insurance money to pay
Page 67
off mortgages on buildings that have been destroyed and then borrowing
to rebuild or remodel a home. The director estimates that the
additional spending will more than offset losses from tax revenues
as a result of the decline in sales in areas where businesses
have been destroyed and closed. In addition, a senior advisor
to the State's governor in published reports has said that the
State's nearly $30 billion budget may end up having to absorb
an additional $82 million as a result of Andrew.
The State Constitution and statutes mandate that the State budget,
as a whole, and each separate fund within the State budget, be
kept in balance from currently available revenues each fiscal
year. If the Governor or Comptroller believes a deficit will occur
in any State fund, by statute, he must certify his opinion to
the Administrative Commission, which then is authorized to reduce
all State agency budgets and releases by a sufficient amount to
prevent a deficit in any fund. Additionally, the State Constitution
prohibits issuance of State obligations to fund State operations.
Estimated fiscal year 1991-92 General Revenue plus Working Capital
funds available total $11,228.1 million. Compared to 1991-92 Estimated
General Revenues of $11,138.6 million, the State was left with
unencumbered reserves of $89.5 million at the end of its fiscal
year. Estimated fiscal year 1992-93 General Revenue plus Working
Capital funds available total $11,980.1 million, a 6.7% increase
over 1991-92. The $11,859.2 million in combined Estimated Revenues
and revenue generating measures represent an increase of 9.5%
over the previous year's Estimated Revenues. In a June 1992 Special
Session of the State Legislature, the Legislature passed a number
of tax rate and base increases to raise an additional $378.5 million
in the State's 1992-93 fiscal year. With effective General Revenue
appropriations at $11,861.9 million, unencumbered reserves at
the end of the fiscal year are estimated at $118.2 million. Current
estimates make it likely that this figure will increase when revenue
collections for 1991-92 are finalized.
The State's sales and use tax (6%) currently accounts for the
State's single largest source of tax receipts. Slightly less than
10% of the State's sales and use tax is designated for local governments
and is distributed to the respective counties in which collected
for such use by such counties and the municipalities therein.
In addition to this distribution, local governments may (by referendum)
assess a 0.5% or a 1.0% discretionary sales tax within their county.
Proceeds from this local option sales tax are earmarked for funding
local infrastructure programs and acquiring land for public recreation
or conservation or protection of natural resources as provided
under Florida law. Certain charter counties have other taxing
powers in addition, and non-consolidated counties with a population
in excess of 800,000 may levy a local option sales tax to fund
indigent health care. It alone cannot exceed 0.5% and when combined
with the infrastructure surtax cannot exceed 1.0%. For the fiscal
year ended June 30, 1991, sales and use tax receipts (exclusive
of the tax on gasoline and special fuels) totalled $8,152.0 million,
a decline of 0.9% over fiscal year 1989-90.
The State imposes an alcoholic beverage wholesale tax (excise
tax) on beer, wine, and liquor. This tax is one of the State's
major tax sources, with revenues totalling $445.4 million in fiscal
year ending June 30, 1991. Alcoholic beverage tax receipts declined
1.0% over the previous year. The revenues collected from this
tax are deposited into the State's General Revenue Fund.
The second largest source of State tax receipts is the tax on
motor fuels. However, these revenues are almost entirely dedicated
trust funds for specific purposes and are not included in the
State's General Revenue Fund.
The second largest source of State tax receipts is the tax on
motor fuels. However, these revenues are almost entirely dedicated
trust funds for specific purposes and are not included in the
State's General Fund.
The State's alcoholic beverage wholesale tax is an excise tax
on beer, wine and liquor. This tax is one of the State's major
tax sources, with revenues totalling $445.4 million in fiscal
year 1990-91. Alcohol beverage receipts declined by 1.0% over
the previous year.
The State imposes a corporate income tax. All receipts of the
corporate income tax are credited to the General Revenue Fund.
For the fiscal year ended June 30, 1990, receipts from this source
were $701.6 million, a decrease of 13.2% from fiscal year 1989-90.
Page 68
The State also imposes a stamp tax on deeds and other documents
relating to realty, corporate shares, bonds, certificates of indebtedness,
promissory notes, wage assignments, and retail charge accounts.
The documentary stamp tax collections totaled $470.0 million during
fiscal year 1990-91, a 9.4% increase from the previous fiscal
year. For the fiscal year 1990-91, 70.4% of the documentary stamp
tax revenues were deposited to the General Revenue Fund. Beginning
in fiscal year 1991-92, 76.21% of these taxes are to be deposited
to the General Revenue Fund.
On January 12, 1988, the State began its own lottery. State law
requires that lottery revenues be distributed 50% to the public
in prizes, 38.0% for use in enhancing education and the balance,
12.0% for costs of administering the lottery. Fiscal year 1990-91
lottery commissions for ticket sales totalled $2.19 billion, providing
education with $833.5 million.
Currently under litigation are several issues relating to State
actions or State taxes that put at risk substantial amounts of
General Revenue Fund monies. Accordingly, there is no assurance
that any of such matters, individually or in the aggregate, will
not have a material adverse effect on Florida's financial position.
In the wake of the U.S. Supreme Court decision holding that a
Hawaii law unfairly discriminated against out-of-state liquor
producers, suits have been filed in the State's courts contesting
a similar State law (in effect prior to 1985) that seek $384 million
in tax refunds. A trial court, in a ruling that was subsequently
upheld by the State's Supreme Court, found the State law in question
to be unconstitutional but made its ruling operate prospectively,
thereby denying any tax refunds. The issue of whether the unconstitutionality
of the tax should be applied retroactively was recently decided
by the United States Supreme Court. The Supreme Court found in
favor of the taxpayers. On remand from the U.S. Supreme Court,
the Florida Supreme Court, on January 15, 1991, mandated further
proceedings to fashion a "clear and certain remedy" consistent
with constitutional restrictions and the opinion of the U.S. Supreme
Court. The Florida Department of Revenue has proposed to the Florida
Supreme Court that the Department be allowed to collect back tax
from those who received a tax preference under the prior law.
If the Department's proposal is rejected and tax refunds are ordered
to all potential claimants, a liability of approximately $298
million could result. The case is now before the Florida Circuit
Court, Second Judicial District. That court will hear the affected
parties' response to the Department's proposed collection of the
tax at the higher rate charged to out-of-staters.
Florida law provides preferential tax treatment to insurers who
maintain a home office in the State. Certain insurers challenged
the constitutionality of this tax preference and sought a refund
of taxes paid. Recently, the State Supreme Court ruled in favor
of the State. Similar issues have been raised in other cases where
insurers have challenged taxes imposed on premiums received for
certain motor vehicle service agreements. These four cases and
pending refund claims total about $200 million.
Florida maintains a bond rating of Aa and AA from Moody's Investors
Service and Standard & Poor's Corporation, respectively, on the
majority of its general obligation bonds, although the rating
of a particular series of revenue bonds relates primarily to the
project, facility, or other revenue sources from which such series
derives funds for repayment. While these ratings and some of the
information presented above indicate that Florida is in satisfactory
economic health, there can be no assurance that there will not
be a decline in economic conditions or that particular Florida
Municipal Obligations purchased by the Trusts will not be adversely
affected by any such changes.
The sources for the information presented above include official
statements and financial statements of the State of Florida. While
the Sponsor has not independently verified this information, the
Sponsor has no reason to believe that the information is not correct
in all material respects.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Florida
Trusts are subject. Additionally, many factors including
Page 69
national economic, social and environmental policies and conditions,
which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition
of the State and various agencies and political subdivisions located
in the State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
Bonds, the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the Florida
Trusts to pay interest on or principal of the Bonds.
The Georgia Trusts. Georgia ended its 1992 fiscal year on June
30, 1992 with four straight months of strong revenue collections,
enabling the State to avoid spending cuts or worker layoffs. Georgia's
revenues in June 1992 were 6.3% above those in June 1991. This
performance followed three previous months with revenue collections
of more than 6% over the 1991 period. With final figures in for
the 1992 fiscal year, Georgia fell only $10 million, or 0.1%,
short of revenue expected to cover 1992 expenditures. This difference
was made up from money allocated for but not used by State agencies.
The Governor plans to reduce the budget for fiscal 1993 by $75
million, to $8.1 billion, with the cuts based on a new revenue
estimate for fiscal 1994. These reductions combined with $44 million
collected from a tax-amnesty program would give the State a surplus
of about $120 million for fiscal 1993.
The Georgia economy has performed relatively well during recent
years and generally has expanded at a rate greater than the national
average during that period. However, growth in 1988 through 1992
has slowed somewhat and was modest compared to the robust pace
of the early 1980's. Georgia's leading economic indicators currently
suggest that the rate of growth of the Georgia economy will continue
at the pace of 1988 and 1989 and more closely match the national
economy. According to November 1992 figures, the seasonably adjusted
unemployment rate in Georgia was 6.4%. Although many areas of
the economy are expected to continue to perform strongly, some
areas such as the primary metals, carpet and apparel industries
are still experiencing periods of weakness, and others, such as
construction and construction-related manufacturing activities
(e.g., lumber, furniture and stone/clay products), currently show
signs of weakening. In addition, aircraft manufacturers located
within the State are in a tenuous position due to reductions in
the Federal defense budget. Presently, Georgia continues to lead
the nation in the production of pulp, pulpwood and paper. Other
industries show potential for great expansion, but policy considerations,
tax reform laws, foreign competition, and other factors may render
these industries less productive. Since Bonds in the Georgia Trusts
(other than general obligation bonds issued by the State) are
payable from revenue derived from a specific source or authority,
the impact of a pronounced decline in the national economy or
difficulties in significant industries within the State could
result in a decrease in the amount of revenues realized from such
source or by such authority and thus adversely affect the ability
of the respective issuers of the Bonds in the Georgia Trusts to
pay the debt service requirements on the Bonds. Similarly, such
adverse economic developments could result in a decrease in tax
revenues realized by the State and thus could adversely affect
the ability of the State to pay the debt service requirements
of any Georgia general obligation bonds in the Georgia Trusts.
Currently, Moody's rates Georgia general obligation bonds Aaa
and Standard & Poor's rates such bonds AA+.
Several lawsuits have been filed against the State asserting that
the decision in Davis v. Michigan Department of Treasury, 489
U.S. 803 (1989), invalidates the State's tax treatment of Federal
Retirement Benefits for years prior to 1989. Under the State's
applicable three-year statute of limitation, the maximum potential
liability under these suits calculated to April 1, 1992 would
appear to be no greater than $128 million. The plaintiffs in these
suits, however, have requested refunds for a period from 1980
which could result in a maximum potential liability in the range
of $591 million. Any such liability would be predicated on a holding
by a State of Georgia court or the United States Supreme Court
that the Davis decision is applicable to the State's prior method
of taxing Federal Retirement Benefits, that the Davis decision
is to be given a retroactive effect, i.e., that the decision affects
prior tax years and that a refund remedy is appropriate. A trial
court
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decision in Georgia's "test case" has held that no refunds are
due; the Georgia Supreme Court has the case under consideration.
In this "test case," the plaintiff has dropped his claims for
1980-1984 refunds.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Georgia
Trusts are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which
are not within the control of the issuers of Bonds, could affect
or could have an adverse impact on the financial condition of
the State and various agencies and political subdivisions located
in the State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
Bonds, the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the Georgia
Trusts to pay interest on or principal of the Bonds.
The Idaho Trusts. Idaho has a growing economic base that continues
to diversify away from traditional agricultural and natural resource-related
industries with steady growth in the service and manufacturing
sectors, and strong overall financial performance. Strong economic
growth trends since 1988 have enabled the State to generate significant
cash balances in the general fund, which have been spent down
for various one-time capital projects. Idaho is constitutionally
limited to a total of $2 million of general obligation debt.
Idaho has exhibited sound and conservative fiscal management.
Sizable cash balances built up during the late 1980s were used
to fund various one-time expenditures rather than expansion of
ongoing programs. Balanced financial operations are budgeted in
fiscal 1993, with State spending levels reflecting a slowdown
in economic growth rates.
The Idaho economy has slowed as a result of the national economic
downturn, but the tourism, construction and manufacturing sectors
continue to expand. While agriculture and natural resource industries
remain important components of the overall state economy, growth
in these other areas has led to increased wealth and income levels
and better-than-average unemployment rates. The State's long-term
strengths are evidenced by its fairly diversified economic and
employment base.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Idaho Trusts
are subject. Additionally, many factors including national economic,
social and environmental policies and conditions, which are not
within the control of the issuers of Bonds, could affect or could
have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the
State. The Sponsor is unable to predict whether or to what extent
such factors or other factors may affect the issuers of Bonds,
the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the Idaho Trusts
to pay interest on or principal of the Bonds.
The Indiana Trusts. The economy of Indiana (the "State") is balanced
among diversified industry, services and agriculture. Durable
goods manufacturing in the State is comprised of such items as
lumber and wood, furniture, stone and glass, primary metals including
steel, fabricated metals, nonelectrical and electrical machinery
and transportation equipment. Nondurable goods manufacturing in
the State includes food, apparel and textiles, paper and printing,
chemicals and pharmaceuticals, petroleum derivatives, and rubber
and plastics. The non-manufacturing sector includes mining and
quarrying, contract construction, transportation and trucking,
wholesale and retail trade and service industries such as banking,
insurance and health care. The leaders in terms of total employment
are primary metals, transportation equipment, contract construction,
transportation and communications, wholesale and retail trade,
finance, insurance and real-estate related services, health services
and government and education. The foregoing is based upon information
supplied by the State's Department of Employment and Training
Services.
In accordance with the provisions of its constitution, the State
has no indebtedness and pays all of its expenditures, including
lease obligations, out of current revenues. For the biennium July
1, 1985 through June
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30, 1987, all State revenues totaled approximately $13,910,385,000,
and all State expenditures totaled approximately $14,034,666,000.
For the biennium July 1, 1987 through June 30, 1989, all State
revenues totaled approximately $15,140,470,000 and all State expenditures
totaled approximately $15,896,120,000. For the biennium July 1,
1989 through June 30, 1991, all State revenues were estimated
to total approximately $8,773,129,207 for 1989-1990 and approximately
$9,396,671,801 for 1990-1991, and all State expenditures were
estimated to total approximately $8,869,477,329 for 1989-1990
and $9,400,678,314 for 1990-1991. As of June 30, 1989 the State's
General Fund totaled approximately $257.3 million. The foregoing
is based on information provided by the State.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Indiana
Trusts are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which
are not within the control of the issuers of Bonds, could affect
or could have an adverse impact on the financial condition of
the State and various agencies and political subdivisions located
in the State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
Bonds, the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the Indiana
Trusts to pay interest on or principal of the Bonds.
The Kansas Trusts. Since the Fund will invest substantially all
of its assets in Kansas municipal securities, the Fund is susceptible
to political and economic factors affecting issuers of Kansas
municipal securities. According to the 1990 census, 2,477,574
people lived in Kansas, representing a 4.8% increase over the
1980 census. Based on these numbers, Kansas ranked thirty-second
in the nation in population size. Based on statistics provided
by the Kansas Department of Commerce, in 1990 Kansas ranked twenty-first
in the nation in terms of per capita income. Historically, agriculture
and mining constituted the principal industries in Kansas. Since
the 1950s, however, manufacturing, governmental services and the
services industry have steadily grown, and as of 1991 approximately
14% of Kansas workers were in the manufacturing sector, 17% in
the government sector and 19% in the services sector, while the
farming and mining sectors combined for approximately 5.5% of
the work force. The 1991 unemployment rate was 4.4%, and the seasonally
adjusted rate for December 1992 was 4.2%. By constitutional mandate,
Kansas must operate within a balanced budget and public debt may
only be incurred for extraordinary purposes and then only to a
maximum of $1 million. As of November 12, 1992, Kansas had no
general obligation bonds outstanding.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Kansas Trusts
are subject. Additionally, many factors including national economic,
social and environmental policies and conditions, which are not
within the control of the issuers of Bonds, could affect or could
have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the
State. The Sponsor is unable to predict whether or to what extent
such factors or other factors may affect the issuers of Bonds,
the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the Kansas
Trusts to pay interest on or principal of the Bonds.
The Kentucky Trusts. The Commonwealth of Kentucky leads the nation
in total tonnage of coal produced and ranks among the top 10 states
in the value of all minerals produced. Tobacco is the dominant
agricultural crop and Kentucky ranks second among the states in
the total cash value of tobacco raised. The manufacturing mix
in the state reflects a significant diversification. In addition
to the traditional concentration of tobacco processing plants
and bourbon distilleries, there is considerable durable goods
production, such as automobiles, heavy machinery, consumer appliances,
and office equipment. The State's parks systems and the horse
breeding and racing industry, symbolized by the Kentucky Derby,
play an important role in an expanding tourist business in the
State.
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Current economic problems, including particularly the continuing
high unemployment rate, have had varying effects on the differing
geographic areas of the State and the political subdivisions located
within such geographic areas. Although revenue obligations of
the State or its political subdivisions may be payable from a
specific source or project, there can be no assurance that further
economic difficulties and the resulting impact on State and local
governmental finances will not adversely affect the market value
of the Bonds in a Kentucky Trust or the ability of the respective
obligors to pay debt service of such Bonds.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete description of
all adverse conditions to which the issuers in the Kentucky Trusts
are subject. Additionally, many factors including national economic,
social and environmental policies and conditions, which are not
within the control of the issuers of Bonds, could affect or could
have an adverse impact on the financial condition of the Commonwealth,
various agencies and political subdivisions and private businesses
located in the Commonwealth. The Sponsor is unable to predict
whether or to what extent such factors or other factors may affect
the issuers of Bonds, the market value or marketability of the
Bonds or the ability of the respective issuers of the Bonds acquired
by the Kentucky Trusts to pay interest on or principal of the
Bonds.
The Louisiana Trusts. The following discussion regarding the financial
condition of the State government may not be relevant to general
obligation or revenue bonds issued by political subdivisions of
and other issuers in the State of Louisiana ("the State"). Such
information, and the following discussion regarding the economy
of the State, is based upon information about general economic
conditions that may or may not affect issuers of the Louisiana
obligations. The Sponsor has not independently verified any of
the information contained in such publicly available documents,
but is not aware of any facts which would render such information
inaccurate.
State Bond Rating: On December 19, 1990 the State received a rating
upgrade on its general obligation bonds to the current Standard
& Poor's rating of A from BBB+ and was placed on Standard & Poor's
Corporation's positive credit watch. Standard & Poor's cited improvements
in the State's cash flow and fiscal reforms approved by voters
in the fall of 1990. The current Moody's rating on the State's
general obligation bonds remains unchanged at Baa1. There can
be no assurance that the economic conditions on which these ratings
were based will continue or that particular bond issues may not
be adversely affected by changes in economic or political conditions.
Revenue Estimating Conference: The Revenue Estimating Conference
(the "Conference") was established by Act No. 814 of the 1987
Regular Session of the Legislature and given constitutional status
in 1990 (Article VII, Section 10 of the State Constitution). The
Conference was established to provide an official forecast of
anticipated State revenues upon which the executive budget shall
be based, to provide for a more stable and accurate method of
financial planning and budgeting and to facilitate the adoption
of a balanced budget as is required by Article VII, Section 10(E)
of the State Constitution. In developing the official forecast,
the Conference can only consider revenues that are projected to
accrue to the State as a result of laws and rules enacted and
in effect during the forecast period. The Conference is prohibited
from including revenues which would be raised by proposed legislation
or rules.
The Governor shall cause to be prepared an executive budget presenting
a complete financial and programmatic plan for the ensuing fiscal
year based only upon the official estimate of anticipated State
revenues as determined by the Conference. Louisiana Revised Statute
39:54 states that appropriations from the General Fund and dedicated
funds for any fiscal year shall not exceed the official forecast
in effect at the time the appropriations are made. The Conference
is composed of the following: the Governor, the President of the
Senate, the Speaker of the House of Representatives, or their
respective designees, and a faculty member with revenue forecasting
expertise from a public or a private university in the State selected
by the other three principals of the Conference from a list of
as many as five, but not less than three, such faculty members
submitted to them by the Louisiana Higher Education Advisory Committee,
all of whom serve as principals
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of the Conference. Louisiana Revised Statute 39:22 provides for
membership of the Conference to include as participants, along
with the above-mentioned principals, persons who are invited to
participate by a principal.
The Conference is required to prepare and publish initial and
revised estimates of money to be received by the General Fund
and dedicated funds for the current and next fiscal years which
are available for appropriation. All Conference decisions to adopt
these estimates must be by unanimous vote of its members who meet
four times annually: October 15, January 1, the third Monday in
March and August 15. The most recently adopted estimate of money
available for appropriation shall be the official forecast. Appropriations
by the Legislature from the General Fund shall not exceed the
official forecast in effect at the time the appropriations are
made.
Fiscal Year 1992-93 and Fiscal Year 1993-94 Budget Projections:
The current General Fund expenditure authorization necessary to
provide funds to continue all existing programs through Fiscal
Year 1992-93 is approximately $4.317 billion, while the official
revised revenue estimate adopted by the Revenue Estimating Conference
at its January 12, 1993 meeting for Fiscal Year 1992-93 is $4.249
billion producing a budgetary shortfall for Fiscal Year 1992-93
operations.
Under the provisions of Louisiana Revised Statute 39:75 the division
of administration is required to submit budgetary status reports
monthly to the Joint Legislative Committee on the Budget. The
Committee on notification that a deficit shortfall is projected
in turn shall immediately notify the governor of the projected
deficit. The governor then has 30 days within which to take corrective
actions to bring the budget into balance within the limitations
of the 10 per cent aggregate rule required in Louisiana Revised
Statute 39:75(C)(1). If within thirty days the necessary adjustments
are not made to eliminate the projected deficit, the governor
must call a special session of the legislature for this purpose.
In addition, the State must also address an additional $83 million
shortfall resulting from operations of the Fiscal Year 1991-92.
Louisiana Revised Statute 39:76 requires the elimination of year
end deficits within the next fiscal period.
At its January 12, 1993 meeting the Revenue Estimating Conference
adopted a base of $4.209 billion for its 1993-94 available general
fund appropriation base. This was a decrease of $62 million from
the previous conference estimate of October 15, 1992. Louisiana
Revised Statute 39:37 requires a completed executive budget be
submitted to the legislature 30 days prior to the regular session.
Based upon the current budgetary process a finalized executive
budget is not complete, however, based upon estimates to fund
continuation levels, the projected shortfall for Fiscal Year 1993-94
would be approximately $640 million.
State General Fund: The State General Fund is the principal operating
fund of the State, and was established administratively to provide
for the distribution of funds appropriated by the legislature
for the ordinary expenses of the State government. Revenue is
provided from the direct deposit of federal grants and the transfer
of State revenues from the Bond Security and Redemption Fund after
general obligation debt requirements are met.
Special Legislative Session: The governor called a meeting on
January 15, 1993 of all lawmakers to discuss the State's current
budget problems and to suggest resolutions to this problem. During
this "fiscal forum" the governor called a fifteen day special
session to begin March 14, 1993 to deal with State budget shortfalls.
The governor advocated freezing the State's budget while raising
revenue through a series of tax measures and the removing of certain
tax credits. The governor also submitted proposal cuts to the
State budget.
Transportation Trust Fund: The Transportation Trust Fund was established
pursuant to (i) Section 27 of Article VII of the State Constitution
and (ii) Act No. 16 of the First Extraordinary Session of the
Louisiana Legislature for the year 1989 (collectively the "Act")
for the purpose of funding construction and maintenance of state
and federal roads and bridges, the statewide flood-control program,
ports, airports, transit and state police traffic control projects
and to fund the Parish Transportation Fund. The Transportation
Trust Fund
Page 74
is funded by a levy of $0.20 per gallon on gasoline and motor
fuels and on special fuels (diesel, propane, butane and compressed
natural gas) used, sold or consumed in the State (the "Gasoline
and Motor Fuels Taxes and Special Fuels Taxes"). This levy was
increased from $0.16 per gallon (the "Existing Taxes") to the
current $0.20 per gallon pursuant to Act No. 16 of the First Extraordinary
Session of the Louisiana Legislature for the year 1989, as amended.
The additional tax of $0.04 per gallon (the "Act 16 Taxes") became
effective January 1, 1990 and will expire on the earlier of January
1, 2005 or the date on which obligations secured by the Act 16
Taxes are no longer outstanding. The Transportation Infrastructure
Model for Economic Development Account (the "TIME Account") was
established in the Transportation Trust Fund. Moneys in the TIME
Account will be expended for certain projects identified in the
Act aggregating $1.4 billion and to fund not exceeding $160 million
of additional capital transportation projects. The State issued
$263,902,639.95 of Gasoline and Fuels Tax Revenue Bonds, 1990
Series A, dated April 15, 1990 payable from (i) the Act 16 Taxes,
(ii) any Act 16 Taxes and Existing Taxes deposited in the Transportation
Trust Fund, and (iii) any additional taxes on gasoline and motor
fuels and special fuels pledged for the payment of said Bonds.
Louisiana Recovery District: The Louisiana Recovery District (the
"Recovery District") was created pursuant to Act No. 15 of the
First Extraordinary Session of the Legislature of Louisiana of
1988 to assist the State in the reduction and elimination of a
deficit existing at that time and the delivery of essential services
to its citizens and to assist parishes, cities and other units
of local government experiencing cash flow difficulties. The Recovery
District is a special taxing district the boundaries of which
are coterminous with the State and is a body politic and corporate
and a political subdivision of the State. The Recovery District
has issued sales tax bonds secured by (i) the revenues derived
from the District's 1% statewide sales and use tax remaining after
the costs of collection and (ii) all funds and accounts held under
the Recovery District's General Bond Resolution and all investment
earnings on such funds and accounts.
Ad Valorem Taxation: Only local governmental units levy ad valorem
taxes at present. Under the 1921 State Constitution a $5.75 million
ad valorem tax was being levied by the State until January 1,
1973 at which time a constitutional amendment to the 1921 Constitution
abolished the ad valorem tax. Under the 1974 State Constitution
a State ad valorem tax of up to $5.75 million was provided for
but is not presently being levied. The governor has suggested
that at the special legislative session called for March 14, 1993,
discussed above, that the $5.75 million State ad valorem tax be
renewed. The property tax is underutilized at the parish level
due to a constitutional homestead exemption from the property
tax applicable to the first $75,000 of the full market value of
single family residences. Homestead exemptions do not apply to
ad valorem property taxes levied by municipalities, with the exception
of the City of New Orleans. Since local governments are also prohibited
from levying an individual income tax by the constitution, their
reliance on State government is increased under the existing tax
structure.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers of the Louisiana
Trusts are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which
are not within the control of the issuers of Bonds, could affect
or could have an adverse impact on the financial condition of
the State and various agencies and political subdivisions located
in the State. The Sponsor is unable to predict whether or to what
extent such factors including possible changes to the laws of
Louisiana, may affect the issuers of Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers
of the Bonds acquired by the Louisiana Trusts to pay interest
on or principal of the Bonds.
Prospective investors should study with care the Portfolio of
Bonds in the Louisiana Trusts and should consult with their investment
advisors as to the merits of particular issues in the Trust's
portfolio.
The Maine Trusts. The State of Maine, which includes nearly one-half
of the total land area of the six New England states, currently
has a population of 1,213,000. The structure of the Maine economy
is quite similar
Page 75
to that of the nation as a whole, except that Maine has proportionately
more activity in manufacturing and tourism, and less activity
in finance and services.
During the 1980s Maine's economy grew rapidly. However, due largely
to an overheating of the New England construction/real estate
markets in 1987-88, the New England and Maine economies were much
softer in 1989 and the first portion of 1990. The last quarter
of strong growth in Maine was the first quarter in 1988. The Maine
Economic Growth Index, a broad measure of overall growth corrected
for inflation, rose only 0.7% in 1989. The United States Economic
Growth Index reflected an increase of 2.7% during the same period.
During the period 1980 through 1988 state employment increased
by 23%, resulting in an unemployment rate of 3.8% in 1988. The
unemployment rate for 1989 rose to 4.1%. Income growth exceeded
national averages for the period 1982 through 1986, with per capita
income increasing 36%, while the national average was a 28% increase.
The latest information available from the Maine State Planning
Office shows personal income growth remained strong for 1989,
although it was weakened substantially to 7-9%. Adjusted for inflation,
real income growth in 1989 is approximately 2-4%, which is well
below the 1988 figure of 5.3%.
The regional economic slowdown in the northeast is expected to
continue for the near to intermediate term. Prospects for some
of Maine's major industries are not optimistic in light of the
regional slowdown. The value of Maine construction contract awards
in 1989 was $260,000,000 below the awards for calendar year 1988,
off some 21%. This slowdown diminishes prospects for the wood
products industry, as well as construction employment.
As indicated above, the real estate market continues to be extremely
soft. Data collected by the Maine Real Estate Institute indicated
a shrinkage of roughly $230,000,000 in real estate sales volume
for calendar year 1989 from the previous year. Continued unavailability
of credit continues to affect this sector of the economy.
The economic slowdown has had resulting impact upon consumer spending
and the retail sector. Maine's retail sales declined by 1% in
1989, although that decline is attributable in its entirety to
two retail sectors suffering significant declines. The building
supply sector suffered a decline of 7.6% and the auto transportation
group suffered a decline of 6.5%.
The Constitution of the State of Maine provides that the Legislature
shall not create any debt which exceeds $2,000,000 except to suppress
insurrection, to repel invasion or for purposes of war except
when two-thirds of the Legislature and a majority of the voters
authorize the issuance of debt. The Constitution also provides
that tax anticipation loans must be repaid during the fiscal year
of issuance. Constitutional amendments have been adopted which
also allow the Legislature to authorize the issuance of bonds:
to insure payments on revenue bonds of up to $4,800,000 for local
public school building projects; in the amount of up to $4,000,000
to guarantee student loans; to insure payments on up to $1,000,000
of mortgage loans for Indian housing; to insure payments on up
to $4,000,000 of mortgage loans or small business loans to war
veterans; and to insure payments on up to $90,000,000 of mortgage
loans for industrial, manufacturing, fishing, agricultural, and
recreational enterprises. This last authorization has been limited
statutorily to a maximum of $87,500,000 available for issue through
the Finance Authority of Maine.
The State operates under a biennial budget which is formulated
in even-numbered years and presented for approval to the Legislature
in odd-numbered years. The economic strength evidenced during
the 1980s enabled the State to accumulate high levels of general
fund unappropriated surpluses. As of its fiscal year ended December
31, 1989, the State had an unappropriated general fund surplus
of $161,000,000. In order to balance the fiscal 1990 budget, the
State will draw down on the total balance to about $60,000,000
of general fund expenditures during 1990. Further, the State projects
a continued decrease in sales tax revenues. Since proposal of
its 1990-1991 budget the State has reduced estimates for sales
tax twice for the biennium. The estimates were reduced by $89,000,000
in June 1989 and $105,000,000 in January 1990. Corresponding reductions
were made in individual and corporate income tax projections.
The State's revenue
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and expenditure package established as of the close of the most
recent legislative session closed a $210,000,000 revenue shortfall
projected in January 1990 and allows for a 1% surplus at fiscal
year end. As of August 1990, State revenues were 0.1% ahead of
new budget estimates.
Maine's outstanding general obligations are currently rated AAA
by Standard & Poor's Corporation and Aa1 by Moody's Investors
Service, Inc. Maine has currently slowed its issuance of general
obligation debt as a result of the State's fiscal situation. Maine
has $355,500,000 of outstanding general obligation debt and $135,200,000
in authorized unissued debt. Nevertheless, due in large part to
the State's low debt burden and rapid debt amortization, the public
rating agencies do not consider debt burden a negative factor.
The Portfolios may contain obligations of the Maine Municipal
Bond Bank. All Maine Municipal Bond Bank debt is secured by loan
repayments of borrowing municipalities and the State's moral obligation
pledge. The state of the economy in Maine could impact the ability
of municipalities to pay debt service on their obligations. Maine
Municipal Bond Bank debt continues to carry a AA rating from Standard
& Poor's Corporation and a Aa rating from Moody's Investors Service,
Inc.
The Portfolios may contain obligations issued by Regional Waste
Systems, Inc., a quasi-municipal corporation organized pursuant
to an interlocal agreement among approximately 20 Southern Maine
communities ("RWS") or other quasi-municipal solid waste disposal
facilities. RWS and other similar solid waste disposal projects
operate regional solid waste disposal facilities and process the
solid waste of the participating municipalities as well as the
solid waste of other non-municipal users. The continued viability
of such facilities is dependent, in part, upon the approach taken
by the State of Maine with respect to solid waste disposal generally.
Pursuant to Public Law 1989 Chapter 585, the newly formed Maine
Waste Management Agency is charged with preparation and adoption
by rule of an analysis and a plan for the management, reduction
and recycling of solid waste for the State of Maine. The plan
to be developed by the Maine Waste Management Agency is based
on the waste management priorities and recycling goals established
by State law. Pursuant to State law, Maine has established minimum
goals for recycling and composting requiring that a minimum of
25% of the municipal solid waste stream be recycled or composted
by 1992 and 50% be recycled or composted by 1994. Although RWS
may participate in the mandated recycling activities, its principal
existing facility consists of a mass burn 250 ton per day furnace
boiler with associated equipment for production of electric energy.
Thus, the source material for the RWS' primary facility could
be substantially reduced as a result of implementation of the
State's recycling goals. Other mass burn solid waste disposal
facilities in the State have experienced seasonal shortages in
waste fuel.
Revenue bonds are issued by the Maine Health and Higher Education
Facilities Authority to finance hospitals and other health care
facilities. The revenues of such facilities consist, in varying
but typically material amounts, of payment from insurers and third-party
reimbursement programs, including Medicaid, Medicare and Blue
Cross. The health care industry in Maine is becoming increasingly
competitive. The utilization of new programs and modified benefits
by third-party reimbursement programs and the advent of alternative
health care delivery systems such as health maintenance organizations
contribute to the increasingly competitive nature of the health
care industry. This increase in competition could adversely impact
the ability of health care facilities in Maine to satisfy their
financial obligations.
Further, health care providers are subject to regulatory actions,
changes in law and policy changes by agencies that administer
third-party reimbursement programs and regulate the health care
industry. Any such changes could adversely impact the financial
condition of such facilities.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Maine Trusts
are subject. Additionally, many factors including national economic,
social and environmental policies and conditions, which are not
within the control of the issuers of Bonds, could affect or could
have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the
State. The Sponsor is unable to predict whether or to
Page 77
what extent such factors or other factors may affect the issuers
of Bonds, the market value or marketability of the Bonds or the
ability of the respective issuers of the Bonds acquired by the
Maine Trusts to pay interest on or principal of the Bonds.
The Maryland Trusts. Some of the significant financial considerations
relating to the investments of the Maryland Trusts are summarized
below. This information is derived principally from official statements
and preliminary official statements released on or before June
15, 1990, relating to issues of Maryland obligations and does
not purport to be a complete description. The State's total expenditures
for the fiscal years ending June 30, 1988 and June 30, 1989 were
$8.977 and $9.842 billion, respectively. The State's General Fund,
representing approximately 55% of each year's total budget, had
a surplus of $408 million in fiscal year 1988 and $390 million
in fiscal year 1989. The original appropriation for the total
budget adopted for fiscal year 1990 is $10.943 billion, and it
is currently estimated that total expenditures for fiscal year
1990 will be $11.316 billion. The original appropriation for the
total budget adopted for fiscal year 1991 is $11.471 billion.
It is currently estimated that General Fund surplus on a budgetary
basis at June 30, 1990, and June 30, 1991, will be approximately
$57 million and $2 million, respectively. The State Constitution
mandates a balanced budget.
The public indebtedness of Maryland and its instrumentalities
is divided into three basic types. The State issues general obligation
bonds for capital improvements and for various State-sponsored
projects. The Department of Transportation of Maryland issues
limited, special obligation bonds for transportation purposes
payable primarily from specific, fixed-rate excise taxes and other
revenues related mainly to highway use. Certain authorities issue
obligations payable solely from specific non-tax enterprise fund
revenues and for which the State has no liability and has given
no moral obligation assurance.
General obligations of the State of Maryland are rated Aaa by
Moody's and AAA by Standard & Poor's Corporation as are those
of the largest metropolitan counties of the State, i.e., Baltimore
County, a separate political entity surrounding Baltimore City,
and Montgomery County in the suburbs of Washington, D.C. All the
counties of the State whose general obligation bonds are rated
by Moody's carry an A rating or better except for Somerset County,
which is rated Baa-1 and Allegheny County which is rated Baa.
The most populous political subdivision in Maryland is Baltimore
City whose general obligation Bonds are now rated A1 by Moody's
and A by Standard & Poor's. Most Maryland Health and Higher Education
Authority and State Department of Transportation revenue bond
issues have received an A rating or better from Moody's.
In May 1985, the Maryland Legislature enacted emergency legislation,
since amended in various respects, creating the State of Maryland
Deposit Insurance Fund Corporation ("MDIFC") for the purpose of
insuring deposits in state chartered savings and loan associations.
The existing Maryland Savings-Share Insurance Corporation ("MSSIC"),
which was not an agency of the State, was merged into the MDIFC.
All assets of MSSIC became assets of MDIFC and, with certain limited
exceptions, all liabilities of MSSIC became liabilities of MDIFC.
The principal liabilities transferred from MSSIC to MDIFC were
those relating to insuring savings deposits of member institutions.
The savings accounts of all associations operating in the State
were required to be insured by either MDIFC or the Federal Savings
and Loan Insurance Corporation (FSLIC). MDIFC had assumed the
insurance liabilities of MSSIC with respect to deposits made prior
to May 18, 1985, and insured amounts deposited after that date
up to the amount insured by FSLIC. The legislation establishing
MDIFC provides that: "It is the policy of this State that funds
will be appropriated to the Maryland Deposit Insurance Fund to
the extent necessary to protect holders of savings accounts in
member associations." The enabling legislation also established
July 1, 1989, as the date by which all member associations must
obtain alternate deposit insurance or liquidate. As of July 1,
1989, of the 103 associations initially insured by MDIFC, all
but six had received Federal insurance, had been acquired by a
federally insured institution, had converted to a mortgage company
or credit union, or had voluntarily liquidated. The remaining
six institutions are currently in receivership.
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As of December 31, 1989, depositors of all insured accounts at
the institutions in receivership had been paid in full.
The emergency legislation authorized the issuance of general obligation
bonds up to $100,000,000. Substantial portions of the $100,000,000
borrowing authority had been committed in connection with a net
worth certificate program designed to assist former MSSIC member
associations in obtaining Federal deposit insurance and in connection
with the assumption by a bank of the deposit liabilities of an
insolvent savings and loan association. As of December 31, 1989,
none of the notes issued in connection with the net worth certificate
program remains outstanding.
While these ratings and the other factors mentioned above indicate
that Maryland and its principal subdivisions and agencies are
in satisfactory economic health, there can, of course, be not
assurance that this will continue or that particular bond issues
may not be adversely affected by changes in state or local economic
or political conditions.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Maryland
Trusts are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which
are not within the control of the issuers of Bonds, could affect
or could have an adverse impact on the financial condition of
the State and various agencies and political subdivisions located
in the State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
Bonds, the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the Maryland
Trusts to pay interest on or principal of the Bonds.
The Massachusetts Trusts. There has been a significant slowdown
in the Commonwealth's economy, as indicated by a rise in unemployment,
a slowing of its per capita income growth and the four-year trend
in declining state revenues. In fiscal 1991, the Commonwealth's
expenditures for state government programs exceeded current revenues.
Continuing a four-year trend of lower than expected tax revenues
in the face of growing state expenditures, actual fiscal 1991
revenues were less than estimated revenues.
Total expenditures for fiscal 1991 totalled approximately $13.899
billion, as against revenues of approximately $13.878 billion.
The Commonwealth suffered an operating loss of approximately $21.2
million. Application of the adjusted fiscal 1990 fund balances
of $258.3 billion resulted in a fiscal 1991 budgetary surplus
of $237.1 million. State law requires that approximately $59.2
million of the fiscal year ending balances of $237.1 million be
placed in the Stabilization Fund, a reserve from which funds can
be appropriated (i) to make up any difference between actual state
revenues in any fiscal year in which actual revenues fall below
the allowable amount, (ii) to replace state and local losses by
federal funds or (iii) for any event, as determined by the legislature,
which threatens the health, safety or welfare of the people or
the fiscal stability of the Commonwealth or any of its political
subdivisions.
In July 1989, the Governor vetoed certain provisions included
in the budget legislation for fiscal 1990, including approximately
$273 million of the fiscal 1990 appropriations, including $100
million for local aid to the Commonwealth's cities and towns ("Local
Aid"). One of the Governor's vetoes occasioned a default by the
Commonwealth on a September 1, 1989 payment of $2.5 million on
a general obligation contract with the Massachusetts Community
Development Finance Corporation to which its full faith and credit
had been pledged, which payment was made on September 17, 1990
after a supplemental appropriation was proposed by the Governor
and passed by the legislature. The legislature overrode the Governor's
veto of $100 million of Local Aid and the Governor then indicated
that he was withholding the allotment for such expenditure. The
Supreme Judicial Court invalidated the Governor's withholding
of $210 million of appropriated funds for certain Local Aid purposes
in May 1990.
The budget for fiscal 1991 was signed into law by the Governor
on August 1, 1990 and included estimated spending of $13.922 billion,
representing an increase of 3.3% or $448.3 million above fiscal
1990 spending.
Page 79
Estimated tax revenues at the time of the budget's enactment were
$9.748 billion including $1.162 billion expected to result from
recently enacted tax legislation. Actual revenues, however, for
the first two months of fiscal 1991 were lower than anticipated
and revenue estimates for the remainder of the fiscal year were
subsequently revised downward twice during September, 1990.
Upon taking office in January, 1991, the new Governor proposed
a series of legislative and administrative actions, including
withholding of allotments under Section 9C of Chapter 29 of the
General Laws, intended to eliminate the projected deficits. The
new Governor's review of the Commonwealth's budget indicated projected
spending of $14.105 billion with an estimated $850 million in
budget balancing measures that would be needed prior to the close
of fiscal 1991. At that time, estimated tax revenues were revised
to $8.845 billion, $903 million less than was estimated at the
time the fiscal 1991 budget was adopted. The Legislature adopted
a number of the Governor's recommendations and the Governor took
certain administrative actions not requiring legislative approval,
including $65 million in savings from the adoption of a state
employee furlough program. It is estimated by the Commonwealth
that spending reductions achieved through savings initiatives
and withholding of allotments total approximately $484.3 million
in aggregate for fiscal 1991. However, these savings and reductions
may be impacted negatively by litigation pursued by third-parties
concerning the Governor's actions under Section 9C of Chapter
29 of the General Laws and with regard to the state employee furlough
program.
In addition, the new administration in May, 1991 filed an amendment
to its Medicaid state plan that enables it to claim 50% Federal
reimbursement on uncompensated care payments for certain hospitals
in the Commonwealth. As a result, in fiscal 1991, the Commonwealth
obtained additional non-tax revenues in the form of federal reimbursements
equal to approximately $513 million on account of uncompensated
care payments. This reimbursement claim was based upon recent
amendments of federal law contained in the Omnibus Budget Reconciliation
Act of 1990 and, consequently, on relatively undeveloped federal
laws, regulations and guidelines. At the request of the federal
Health Care Financing Administration, the Office of Inspector
General of the United States Department of Health and Human Services
has commenced an audit of the reimbursement. The administration,
which had reviewed the matter with the Health Care Financing Administration
prior to claiming the reimbursement, believes that the Commonwealth
will prevail in the audit. If the Commonwealth does not prevail,
the Commonwealth would have the right to contest an appeal, but
could be required to repay all or part of Medicaid reimbursements
with interest and to have such amount deducted from future reimbursement
payments.
After payment in full of the Local Aid distribution of $1.018
billion due on June 28, 1991, retirement of all the Commonwealth's
outstanding commercial paper and repayment of certain other short-term
borrowings, as of June 30, 1991, the end of fiscal 1991, the Commonwealth
had a cash balance of $182.3 million, as compared with the Commonwealth's
cash position at the end of the prior fiscal year, June 30, 1990,
when the Commonwealth's cash shortfall would have exceeded $1.1
billion had payment of Local Aid not been postponed.
As signed by the Governor on July 10, 1991, the budget for fiscal
1992 was based on estimated total revenue of $13.032 billion (including
estimated tax revenues of $8.292 billion) and total estimated
expenditures of $13.177 billion (including certain anticipated
supplemental appropriations). In the first five months of fiscal
1992, actual tax revenues have exceeded estimates, however, the
ability of the Commonwealth to achieve certain asset sales, expenditure
reductions and levels of non-tax revenues assumed in July 1991
have come to appear less certain. The Executive Office for Administration
and Finance revised its projections of budgetary revenues and
expenditures most recently on May 21, 1992. The estimate of the
fiscal 1992 budget is now based on projected total revenue of
$13.579 billion, including projected tax revenues of $9.225 billion,
and projected budgetary expenditures of $13.707 billion (which
does not include $15 million of the $30 million in yet to be enacted
supplemental appropriations). Overall, fiscal 1992 is expected
to end with an operating loss of $127.5 million.
Page 80
Expenditures for fiscal 1988, 1989 and 1990 totalled approximately
$11.8 billion, $12.9 billion and $13.5 billion, respectively.
Revenues for fiscal 1988, 1989 and 1990 totalled approximately
$11.5 billion, $12.2 billion and $12.2 billion respectively.
The unemployment rate in Massachusetts has been steadily decreasing
over the past few years. The rates in 1991 and 1992 were 9.0%
and 8.5%, respectively. The seasonally adjusted rate for January
1993 was 8.2%.
As of the date hereof, Standard & Poor's Corporation ("S&P") has
rated the Commonwealth's uninsured general obligation bonds at
BBB having downgraded the rating from A on December 13, 1989 citing
the Commonwealth's "poor financial operations" and "a paralyzing
budget process." At the same time, S&P lowered the rating of state
and agency notes from SP1 to SP2. On November 7, 1990, S&P removed
the Commonwealth's general obligation bonds from S&P CreditWatch,
where they were placed in June, 1990, citing the defeat of the
Citizens for Limited Taxation voter initiative petition (the "Petition").
If enacted, the Petition would have, among other things, repealed
the tax increases enacted in July 1990.
Prior to these actions by S&P, the Commonwealth had experienced
a steady decline in its S&P rating. In May 1989, S&P lowered its
rating on the State's general obligation bonds and other State
obligations from AA+ to AA. On June 27, 1989, S&P reduced the
Commonwealth's general obligation bonds and various agency issues
from AA to AA-. On July 14, 1989, S&P reduced the Commonwealth's
general obligation bonds and various agency issues from AA- to
A.
As of the date hereof, Moody's Investors Service ("Moody's")
rating of the Commonwealth's uninsured general obligation bonds
was at Baa. The Commonwealth has experienced a steady decline
in its rating by Moody's since May 1989. In May 1989, Moody's
Investors Service lowered its rating on the State's notes from
MIG-1 to MIG-2, and its rating on the State's commercial paper
from P-1 to P-2. On June 21, 1989 Moody's reduced the Commonwealth's
general obligation rating from Aa to A. On November 15, 1989,
Moody's reduced the rating of the Commonwealth's general obligations
from A to Baa1, citing the state's lowering of revenue estimates,
its fiscal year 1990 deficit and the legislature's apparent lack
of consensus on how to deal with it. On March 19, 1990, Moody's
reduced the rating of the Commonwealth's general obligation bonds
from Baa1 to Baa, citing "extended inaction" in resolving the
Commonwealth's growing budget deficit.
In recent years, the Commonwealth of Massachusetts and certain
of its public bodies and municipalities have faced serious financial
difficulties which have affected the credit standing and borrowing
abilities of Massachusetts and the respective entities and may
have contributed to higher interest rates on debt obligations.
The continuation of, or and increase in such financial difficulties,
could result in declines in the market values of, or a default
on, existing obligations including Bonds deposited in the Trusts.
Should there be during the term of a Trust a financial crisis
relating to Massachusetts, its public bodies or municipalities,
the market value and marketability of all outstanding bonds issued
by the Commonwealth and its public authorities or municipalities
including the Bonds in such Trust and interest income to such
Trust could be adversely affected.
The total general obligation bond indebtedness of the Commonwealth
as of May 1, 1992 was approximately $7.8 billion. There were also
outstanding approximately $491 million in general obligation notes.
The total bond and note liabilities of the Commonwealth as of
May 1, 1992, including guaranteed debt and contingent liabilities,
was approximately $12.2 billion.
During the 1980s, capital expenditures were increased substantially,
which has had a short term impact on the cash needs of the Commonwealth
and also accounts for a significant rise in debt service during
that period. Payments for debt service on Commonwealth general
obligation bonds and notes have risen at an average annual rate
of 15.9% from $524.1 million in fiscal 1987 to an estimated $942.3
million in fiscal 1991. Debt service payments in fiscal 1992 are
projected to be $935.4 million. Debt service payments for fiscal
1992 reflect a $261 million one-time reduction achieved as a result
of the issuance of the refunding bonds in
Page 81
September and October 1991. The amounts represented do not include
debt service on notes issued to finance the fiscal 1989 deficit
and certain Medicaid related liabilities, certain refunding bonds
in September and October 1991. The amounts represented do not
include debt service contract assistance to the Massachusetts
Bay Transportation Authority, the Massachusetts Convention Center
Authority and the Massachusetts Government Land Bank, as well
as grants to municipalities under the school building assistance
program to defray a portion of the debt service costs on local
school bonds.
In January 1990, legislation was passed to impose a limit on
debt service beginning in fiscal 1991, providing that no more
than 10% of the total appropriations in any fiscal year may be
expended for payment of interest and principal on general obligation
debt (excluding the Fiscal Recovery Bonds). The percentage of
total appropriations estimated to be expended from the budgeted
operating funds for debt service (excluding debt service on Fiscal
Recovery bonds) for fiscal 1992 is 4.6%.
Among the material future liabilities of the Commonwealth are
significant unfunded general liabilities of its retirement systems
and a program to fund such liabilities; a program whereby, starting
in 1978, the Commonwealth began assuming full financial responsibility
for all costs of the administration of justice within the state;
continuing demands to raise aggregate aid to cities, towns, schools
and other districts and transit authorities above current levels;
and Medicaid expenditures which have increased each year since
the program was initiated. The Commonwealth has signed consent
decrees to continue improving mental health care and programs
for the mentally retarded in order to meet federal standards,
including those governing receipt of federal reimbursements under
various programs, and the parties in those cases have worked cooperatively
to resolve the disputed issues.
As a result of comprehensive legislation approved in January,
1988, the Commonwealth is required, beginning in fiscal 1989 to
fund future pension liabilities currently and to amortize the
Commonwealth's unfunded liabilities over 40 years. Total pension
costs from fiscal 1987 to fiscal 1991 increased at an average
annual rate of 3.3%. The projected pension costs (inclusive of
current benefits and reserves) for fiscal 1992 are $746.2 million,
representing an increase of 6.0% over the $703.9 million cost
in fiscal 1991.
Litigation. The Commonwealth is engaged in various lawsuits
involving environmental and related laws, including an action
brought on behalf of the U.S. Environmental Protection Agency
alleging violations of the Clean Water Act and seeking to enforce
the clean-up of Boston Harbor. The Massachusetts Water Resource
Authority ("MWRA"), successor in liability to the Metropolitan
District Commission, has assumed primary responsibility for developing
and implementing a court-approved plan for the construction of
the treatment facilities necessary to achieve compliance with
federal requirements. Under the Clean Water Act, the Commonwealth
may be liable for costs of compliance in these or any other Clean
Water cases if the MWRA or a municipality is prevented from raising
revenues necessary to comply with a judgement. The MWRA currently
projects that the total cost of construction of the treatment
facilities required under the court's order is approximately $3.5
billion in current dollars.
There are also actions pending in which recipients of human
services benefits, such as welfare recipients, the mentally retarded,
the elderly, the handicapped, children, residents of state hospitals
and inmates of corrections institutions, seek expanded levels
of services and benefits and in which providers of services to
such recipients challenge the rates at which they are reimbursed
by the Commonwealth. To the extent that such actions result in
judgments requiring the Commonwealth to provide expanded services
or benefits or pay increased rates, additional operating and capital
expenditures might be needed to implement such judgments.
In December, 1988, nine municipalities of the Commonwealth which
claim to own substantial interests in a nuclear power plant in
Seabrook, New Hampshire, filed suit against the Commonwealth,
the Governor, the Attorney General and other state officials claiming
damages arising from their opposition to licensure of the plant.
The municipalities allege damages in the amount of $1 billion.
In addition there are several tax matters in litigation which
could result in significant refunds to taxpayers if decisions
Page 82
unfavorable to the Commonwealth are rendered. The amount of taxes
and interest at issue in those cases is approximately $195 million.
A variety of other civil suits pending against the Commonwealth
may also affect its future liabilities. These include challenges
to the Commonwealth's allocation of school aid and to the Governor's
authority to withhold or reduce allotments of appropriated funds
under Section 9C of Chapter 29 of the General Laws and to adopt
a state employee furlough program. No prediction is possible as
to the ultimate outcome of these proceedings.
Many factors, in addition to those cited above do or may have
a bearing upon the financial condition of the Commonwealth, including
social and economic conditions, many or which are not within the
control of the Commonwealth.
Expenditure and Tax Limitation Measures. Limits have been established
on state tax revenues by legislation approved by the Governor
on October 25, 1986, and by an initiative petition approved by
the voters on November 4, 1986. The Executive Office for Administration
and Finance currently estimates that state tax revenues will not
reach the limit imposed by either the initiative petition or the
legislative enactment in fiscal 1991.
Proposition 2 1/2, passed by the voters in 1980, led to large
reductions in property taxes, the major source of income for cities
and towns, and large increases in state aid to offset such revenue
losses. According to the Executive Office for Administration and
Finance, all of the 351 cities and towns have now achieved a property
tax levy of no more than 2.5% of full property values. Under the
terms of Proposition 2 1/2, the property tax levy can now be increased
annually for all cities and towns, almost all by 2.5% of the prior
fiscal year's tax levy plus 2.5% of the value of new properties
and of significant improvements to property. Legislation has also
been enacted providing for certain local option taxes. A voter
initiative petition approved at the statewide general election
in November, 1990, further regulates the distribution of Local
Aid and, among other matters, requires, subject to appropriation,
the distribution as Local Aid of no less than 40% of collections
from individual income taxes, sales and use taxes, corporate excise
taxes, and the balance of the state lottery fund. If implemented
in accordance with its terms (including appropriation of the necessary
funds), the petition as approved would shift several hundred million
dollars to direct Local Aid.
To provide revenue to pay debt service on both the deficit and
Medicaid related borrowings and to fund certain direct Medicaid
expenditures, legislation was enacted imposing an additional tax
on certain types of personal income for 1989 and 1990 taxable
years at rates of 0.375% and 0.75% respectively, effectively raising
the tax rate of 1989 from 5% to 5.375% and for 1990 from 5% to
5.75%. Recent legislation has effectively further increased tax
rates to 5.95% for tax year 1990 to 6.25% for tax year 1991 and
returning to 5.95% for tax year 1992 and subsequent tax years.
The tax is applicable to all personal income except income derived
from dividends, capital gains, unemployment compensation, alimony,
rent, interest, pensions, annuities and IRA/Keough distributions.
The income tax rate on other interest (excluding interest on obligations
of the United States and of the Commonwealth and its subdivisions),
dividends and net capital gains (after a 50% reduction) was increased
from 10% to 12% for tax year 1990 and subsequent years, by recently
enacted legislation.
The sources of information presented above are the official statements
of issuers located in the Commonwealth of Massachusetts as well
as other publicly available documents, and statements of public
officials. The Sponsor has not independently verified any of the
information contained in such statements and documents but the
Sponsor is not aware of facts which would render such information
inaccurate.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Massachusetts
Trusts are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which
are not within the control of the issuers of Bonds, could affect
or could have an adverse impact on the financial condition of
the State
Page 83
and various agencies and political subdivisions located in the
State. The Sponsor is unable to predict whether or to what extent
such factors or other factors may affect the issuers of Bonds,
the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the Massachusetts
Trusts to pay interest on or principal of the bonds.
The Michigan Trusts. Investors should be aware that the economy
of the State of Michigan has, in the past, proven to be cyclical,
due primarily to the fact that the leading sector of the State's
economy is the manufacturing of durable goods. While the State's
efforts to diversify its economy have proven successful, as reflected
by the fact that the share of employment in the State in the durable
goods sector has fallen from 33.1 percent in 1960 to 17.9 percent
in 1990, durable goods manufacturing still represents a sizable
portion of the State's economy. As a result, any substantial national
economic downturn is likely to have an adverse effect on the economy
of the State and on the revenues of the State and some of its
local governmental units.
In May 1986, Moody's Investors Service raised the State's general
obligation bond rating to "A1." In October 1989, Standard & Poor's
Corporation raised its rating on the State's general obligations
bonds to "AA."
The State's economy could continue to be affected by changes in
the auto industry, notably consolidation and plant closings resulting
from competitive pressures and overcapacity. Such actions could
adversely affect State revenues and the financial impact on the
local units of government in the areas in which plants are closed
could be more severe.
General Motors Corporation has announced the scheduled closing
of several of its plants in Michigan in 1993 and 1994. The impact
these closures will have on the State's revenues and expenditures
is not currently known. The impact on the financial condition
of the municipalities in which the plants are located may be more
severe than the impact on the State itself.
In recent years, the State has reported its financial results
in accordance with generally accepted accounting principles. For
the five fiscal years ending with the fiscal year ended September
30, 1989, the State reported positive year-end General Fund balances
and positive cash balances in the combined General Fund/School
Aid Fund. For the fiscal years ending September 30, 1990 and 1991,
the State reported negative year-end General Fund balances of
$310.4 million and $169.4 million, respectively. A positive cash
balance in the combined General Fund/School Aid Fund was recorded
at September 30, 1990. Since 1991 the State has experienced deteriorating
cash balances which have necessitated short-term borrowing and
the deferral of certain scheduled cash payments. The State borrowed
$700 million for cash flow purposes in the 1992 fiscal year. The
State has a Budget Stabilization Fund which, after a transfer
of $230 million to the General Fund for the 1991 State fiscal
year, had an accrued balance of $182 million as of September 30,
1991.
In the 1991-92 State fiscal year, mid-year actions were taken
to avoid a State General Fund budget deficit, including expenditure
reductions, deferrals of scheduled payment dates of various types
of State aid into the 1992-93 State fiscal year, a $150 million
transfer from the State's Budget Stabilization Fund, and accounting
and retirement funding changes. While current estimates indicate
the State may have ended the 1991-92 fiscal year with a General
Fund deficit in the range of $50 million to $100 million, the
State has not yet produced its year-end financial reports and
the actual results are not known.
While the 1992-93 State budget has been adopted, current projections
indicate a deficit may occur without additional actions being
taken, and ongoing reviews of spending patterns will be conducted
in departments (such as Corrections, Social Services and Military
Affairs) that have been identified as possibly underfunded. If
later estimates match the initial assessments, additional actions
will be required to be taken to address any projected negative
balance in the 1992-93 fiscal year.
The Michigan Constitution of 1963 limits the amount of total revenues
that the State can raise from taxes and certain other sources
to a level for each fiscal year equal to a percentage of the State's
personal income for
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the prior calendar year. In the event that the State's total revenues
exceed the limit by 1 percent or more, the Michigan Constitution
of 1963 requires that the excess be refunded to taxpayers.
In April 1991, the State enacted legislation which temporarily
froze assessed values on existing real property in 1992 by requiring
that the assessment as equalized for the 1991 tax year be used
on the 1992 assessment roll and be adjusted only to reflect additions,
losses, splits and combinations. Additional property tax relief
measures have been proposed, some of which could adversely affect
either the amount or timing of the receipt of property tax revenue
by local units of government.
Although all or most of the Bonds in the Michigan Trusts are revenue
obligations or general obligations of local governments or authorities
rather than general obligations of the State of Michigan itself,
there can be no assurance that any financial difficulties the
State may experience will not adversely affect the market value
or marketability of the Bonds or the ability of the respective
obligors to pay interest on or principal of the Bonds, particularly
in view of the dependency of local governments and other authorities
upon State aid and reimbursement programs and, in the case of
bonds issued by the State Building Authority, the dependency of
the State Building Authority on the receipt of rental payments
from the State to meet debt service requirements upon such bonds.
In the 1991 fiscal year, the State deferred certain scheduled
cash payments to municipalities, school districts, universities
and community colleges. While such deferrals were made up at specified
later dates, similar future deferrals could have an adverse impact
on the cash position of some local governmental units. Additionally,
the State reduced revenue sharing payments to municipalities below
that level provided under formulas by $10.9 million in the 1991
fiscal year and $34.4 million in the 1992 fiscal year.
The Michigan Trusts may contain general obligation bonds of local
units of government pledging the full faith and credit of the
local unit which are payable from the levy of ad valorem taxes
on taxable property within the jurisdiction of the local unit.
Such bonds issued prior to December 22, 1978, or issued after
December 22, 1978 with the approval of the electors of the local
unit, are payable from property taxes levied without limitation
as to rate or amount. With respect to bonds issued after December
22, 1978, and which were not approved by the electors of the local
unit, the tax levy of the local unit for debt service purposes
is subject to constitutional, statutory and charter tax rate limitations.
In addition, several major industrial corporations have instituted
challenges of their ad valorem property tax assessments in a number
of local municipal units in the State. If successful, such challenges
could have an adverse impact on the ad valorem tax bases of such
units which could adversely affect their ability to raise funds
for operation and debt service requirements.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Michigan
Trusts are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which
are not within the control of the issuers of Bonds, could affect
or could have an adverse impact on the financial condition of
the State and various agencies and political subdivisions located
in the State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
Bonds, the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the Michigan
Trusts to pay interest on or principal of the bonds.
The Minnesota Trusts. In the early 1980s, the State of Minnesota
experienced financial difficulties due to a downturn in the State's
economy resulting from the national recession. As a consequence,
the State's revenues were significantly lower than anticipated
in the July 1, 1979 to June 30, 1981 biennium and the July 1,
1981 to June 30, 1983 biennium.
In response to revenue shortfalls, the legislature broadened and
increased the State sales tax, increased income taxes (by increasing
rates and eliminating deductions), reduced appropriations and
deferred the payment of State aid, including appropriations for
and aid to local governmental units. The State's fiscal
Page 85
problems affected other governmental units within the State, such
as local governments, school districts and state agencies, which,
in varying degrees, also faced cash flow difficulties. In certain
cases, revenues of local governmental units and agencies were
reduced by the recession.
Because of the State's fiscal problems, Standard & Poor's Corporation
reduced its rating on the State's outstanding general obligation
bonds from AAA to AA+ in August 1981 and to AA in March 1982.
Moody's Investors Service, Inc. lowered its rating on the State's
outstanding general obligation bonds from Aaa to Aa in April 1982.
The State's economy recovered in the July 1, 1983 to June 30,
1985 biennium, and substantial reductions in the individual income
tax were enacted in 1984 and 1985. Standard & Poor's raised its
rating on the State's outstanding general obligation bonds to
AA+ in January 1985. In 1986, 1987 and 1991 legislation was required
to eliminate projected budget deficits by raising additional revenue,
reducing expenditures, including aid to political subdivisions
and higher education, and making other budgetary adjustments.
A budget forecast released by the Minnesota Department of Finance
on February 27, 1992 projected a $569 million budget shortfall,
primarily attributable to reduced income tax receipts, for the
biennium ending June 30, 1993. Planning estimates for the 1994-95
biennium projected a budget shortfall of $1.75 billion (less a
$300 million reserve). (The projections generally do not include
increases for inflation or operating costs, except where Minnesota
law requires them.) The State responded by enacting legislation
that made substantial accounting changes, reduced the budget reserve
by $160 million to $240 million, reduced appropriations for state
agencies and higher education, and imposed a sales tax on purchases
by local governmental units. A revised forecast released by the
Department of Finance on November 24, 1992 reflects these legislative
changes and projects a $217 million General Fund surplus at the
end of the current biennium, June 30, 1993, plus a $240 million
cash flow account, against a total budget for the biennium of
approximately $14.6 billion, and planning estimates for the 1994-95
biennium project a budget shortfall of $986 million (less the
$217 million balance carried forward and the $240 million cash
flow account). Although Standard & Poor's affirmed its rating
on the State's general obligation bonds in connection with a July
1992 issue, it revised its outlook for the rating to "negative."
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota.
Even with respect to bonds that are revenue obligations and not
general obligations of the issuer, there can be no assurance that
the fiscal problems referred to above will not adversely affect
the market value or marketability of the bonds or the ability
of the respective obligors to pay interest on and principal of
the bonds.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Minnesota
Trusts are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which
are not within the control of the issuers of Bonds, could affect
or could have an adverse impact on the financial condition of
the State and various agencies and political subdivisions located
in the State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
Bonds, the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the Minnesota
Trusts to pay interest on or principal of the bonds.
The Mississippi Trusts. Investors should be aware that the State
of Mississippi ranks 50th among the fifty states in per capita
total personal income, largely due to a lack of an educated work
force, a smaller percentage of the population in the work force,
and higher unemployment rates as compared to the national average.
Economic conditions in Mississippi are, however, improving, as
evidenced by an increase in per capita total personal income of
40% between 1985 and 1991 during which time the per capita total
personal income in the United States increased by 38%. In addition,
the Mississippi unemployment rate decreased from 12.4% in December,
1986 to 6.8% in November, 1991.
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The manufacturing sector, a substantial contributor to Mississippi's
economy, has experienced varied growth in recent years. Manufacturing
employment increased from 238,500 in 1988 to 243,400 in 1989 while
dropping to 241,800 in 1990, resulting in slow growth for the
State's economy. Job openings in the manufacturing sector are
projected to be very limited due to the substitution of more sophisticated
equipment for labor. However, manufacturing jobs increased to
246,400 in 1991, making manufacturing jobs in 1991 26.3% of Mississippi's
total non-agricultural employment. It is predicted that manufacturing
jobs will decline at an annual average rate of 0.4% through 1996,
with most of the losses occurring in the apparel industry. Mississippi's
strongest employment growth is expected to occur in such services
as finance, insurance and real estate.
The State of Mississippi has approximately $432,450,400 of outstanding
General Obligation Bonds payable from the General Fund or General
Fund revenues. In addition, the State has approximately $85,725,000
of self-supporting General Obligation Bonds which are also secured
by the full faith and credit of the State.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete description of
all adverse conditions to which the issuers in the Mississippi
Trusts are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which
are not within the control of the issuers of the Bonds, could
affect or could have an adverse impact on the financial condition
of the State, various agencies and political subdivisions and
private businesses located in the State. The Sponsor is unable
to predict whether or to what extent such factors or other factors
may affect the issuers of Bonds, the market value or marketability
of the Bonds or the ability of the respective issuers of the Bonds
acquired by the Mississippi Trusts to pay interest on or principal
of the Bonds.
The Missouri Trusts. The following discussion regarding constitutional
limitations and the economy of the State of Missouri is included
for the purpose of providing general information that may or may
not affect issuers of the Bonds in Missouri.
In November 1981, the voters of Missouri adopted a tax limitation
amendment to the constitution of the State of Missouri (the "Amendment").
The Amendment prohibits increases in local taxes, licenses, or
fees by political subdivisions without approval of the voters
of such political subdivision. The Amendment also limits the growth
in revenues and expenditures of the State to the rate of growth
in the total personal income of the citizens of Missouri. The
limitation may be exceeded if the General Assembly declares an
emergency by a two-thirds vote. The Amendment did not limit revenue
growth at the state level in fiscal 1982 through 1988 with the
exception of fiscal 1984. Management Report No. 85-20, which was
issued on March 5, 1985 by State Auditor Margaret Kelly, indicates
that state revenues exceeded the allowable increase by $30.52
million in fiscal 1984, and a taxpayer lawsuit has been filed
pursuant to the Amendment seeking a refund of the revenues in
excess of the limit.
The economy of Missouri is diverse and includes manufacturing,
retail and wholesale trade, services, agriculture, tourism, and
mining. In recent years, growth in the wholesale and retail trade
has offset the more slowly growing manufacturing and agricultural
sectors of the economy. According to the United States Bureau
of Labor Statistics, the preliminary average 1992 unemployment
rate in Missouri was 5.7%, which was lower than the unemployment
rate of 6.6% in 1991. There can be no assurance that the general
economic condition or the financial circumstances of Missouri
or its political subdivisions will not adversely affect the market
value of the Bonds or the ability of the obligor to pay debt service
on such Bonds.
Currently, Moody's Investors Service rates Missouri general obligation
bonds "Aaa" and Standard & Poor's Corporation rates Missouri general
obligation bonds "AAA." Although these ratings indicate that the
State of Missouri is in relatively good economic health, there
can be, of course, no assurance that this will continue or that
particular bond issues may not be adversely affected by changes
in the State or local economic or political conditions.
Page 87
The foregoing information constitutes only a brief summary of
some of the general factors which may impact certain issuers of
Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers of obligations
held by the Missouri Trusts are subject. Additionally, many factors
including national economic, social and environmental policies
and conditions, which are not within the control of the issuers
of the Bonds, could affect or could have an adverse impact on
the financial condition of the State and various agencies and
political subdivisions located in the State. The Sponsor is unable
to predict whether or to what extent such factors or other factors
may affect the issuers of the Bonds, the market value or marketability
of the Bonds or the ability of the respective issuers of the Bonds
acquired by the Missouri Trusts to pay interest on or principal
of the Bonds.
The New Jersey Trusts. The New Jersey Trusts consist of a portfolio
of New Jersey Bonds. The Trusts are therefore susceptible to political,
economic or regulatory factors affecting issuers of the New Jersey
Bonds. The following information provides only a brief summary
of some of the complex factors affecting the financial situation
in New Jersey (the "State") and is derived from sources that are
generally available to investors and is believed to be accurate.
It is based in part on information obtained from various State
and Local agencies in New Jersey. No independent verification
has been made of any of the following information. New Jersey
is the ninth largest state in population and the fifth smallest
in land area. With an average of 1,034 people per square mile,
it is the most densely populated of all the states. The State's
economic base is diversified, consisting of a variety of manufacturing,
construction and service industries, supplemented by rural areas
with selective commercial agriculture. Historically, New Jersey's
average per capita income has been well above the national average,
and in 1991 the State ranked second among the states in per capita
personal income ($25,372).
The New Jersey Economic Policy Council, a statutory arm of the
New Jersey Department of Commerce and Economic Development, has
reported in New Jersey Economic Indicators, a monthly publication
of the New Jersey Department of Labor, Division of Labor Market
and Demographic Research, that in 1988 and 1989 employment in
New Jersey's manufacturing sector failed to benefit from the export
boom experienced by many Midwest states and the State's service
sectors, which had fueled the State's prosperity since 1982, lost
momentum. In the meantime, the prolonged fast growth in the State
in the mid 1980s resulted in a tight labor market situation, which
has led to relatively high wages and housing prices. This means
that, while the incomes of New Jersey residents are relatively
high, the State's business sector has become more vulnerable to
competitive pressures. New Jersey is currently experiencing a
recession and, as a result of the factors described above, such
recession could last longer than the national recession, although
signs of a slow recovery both on the national and state levels
have been reported.
The onset of the national recession (which officially began in
July 1990 according to the National Bureau of Economic Research)
caused an acceleration of New Jersey's job losses in construction
and manufacturing. In addition, the national recession caused
an employment downturn in such previously growing sectors as wholesale
trade, retail trade, finance, utilities and trucking and warehousing.
Reflecting the downturn, the rate of unemployment in the State
rose from a low of 3.6% during the first quarter of 1989 to an
estimated 8.0% in December 1992, which is above the national average
of 7.3% in December 1992. Economic recovery is likely to be slow
and uneven in New Jersey, with unemployment receding at a correspondingly
slow pace, due to the fact that some sectors may lag due to continued
excess capacity. In addition, employers even in rebounding sectors
can be expected to remain cautious about hiring until they become
convinced that improved business will be sustained. Also, certain
firms will continue to merge or downsize to increase profitability.
Debt Service. The primary method for State financing of capital
projects is through the sale of the general obligation bonds of
the State. These bonds are backed by the full faith and credit
of the State tax revenues and certain other fees are pledged to
meet the principal and interest payments and if provided, redemption
premium payments, if any, required to repay the bonds. As of June
30, 1992, there was a total authorized bond
Page 88
indebtedness of approximately $6.96 billion, of which $3.32 billion
was issued and outstanding, $2.36 billion was retired (including
bonds for which provision for payment has been made through the
sale and issuance of refunding bonds) and $1.04 billion was unissued.
The debt service obligation for such outstanding indebtedness
is $444.3 billion for Fiscal Year 1993.
New Jersey's Budget and Appropriation System. The State operates
on a fiscal year beginning July 1 and ending June 30. At the end
of Fiscal Year 1989, there was a surplus in the State's general
fund (the fund into which all State revenues not otherwise restricted
by statute are deposited and from which appropriations are made)
of $411.2 million. At the end of Fiscal Year 1990, there was a
surplus in the general fund of $1 million. It is estimated that
New Jersey closed its Fiscal Year 1991 with a surplus of $1.4
million. It is estimated that New Jersey closed its Fiscal Year
1992 with a surplus of $762.9 million.
In order to provide additional revenues to balance future budgets,
to redistribute school aid and to contain real property taxes,
on June 27, 1990, and July 12, 1990, Governor Florio signed into
law legislation which was estimated to raise approximately $2.8
billion in additional taxes (consisting of $1.5 billion in sales
and use taxes and $1.3 billion in income taxes), the biggest tax
hike in New Jersey history. There can be no assurance that receipts
and collections of such taxes will meet such estimates.
The first part of the tax hike took effect on July 1, 1990, with
the increase in the State's sales and use tax rate from 6% to
7% and the elimination of exemptions for certain products and
services not previously subject to the tax, such as telephone
calls, paper products (which has since been reinstated), soaps
and detergents, janitorial services, alcoholic beverages and cigarettes.
At the time of enactment, it was projected that these taxes would
raise approximately $1.5 billion in additional revenue. Projections
and estimates of receipts from sales and use taxes, however, have
been subject to variance in recent fiscal years.
The second part of the tax hike took effect on January 1, 1991
in the form of an increased state income tax on individuals. At
the time of enactment, it was projected that this increase would
raise approximately $1.3 billion in additional income taxes to
fund a new school aid formula, a new homestead rebate program
and state assumption of welfare and social service costs. Projections
and estimates of receipts from income taxes, however, have also
been subject to variance in recent fiscal years. Under the legislation,
income tax rates increased from their previous range of 2% to
3.5% to a new range of 2% to 7%, with the higher rates applying
to married couples with incomes exceeding $70,000 who file joint
returns, and for individuals filing single returns with incomes
of more than $35,000.
The Florio administration has contended that the income tax package
will help reduce local property tax increases by providing more
state aid to municipalities. Under the income tax legislation
the State will assume approximately $289 million in social services
costs that previously were paid by counties and municipalities
and funded by property taxes. In addition, under the new formula
for funding school aid, an extra $1.1 billion is proposed to be
sent by the State to school districts beginning in 1991, thus
reducing the need for property tax increases to support education
programs.
Effective July 1, 1992, the State's sales and use tax rate decreased
from 7% to 6%.
On June 30, 1992, the New Jersey legislature adopted a $14.0 billion
State budget for fiscal year 1993 by overriding Governor Florio's
veto of the spending plan. The budget reflected a $1.1 billion
cut from Governor Florio's proposed $16 billion budget, including
a $385 million reduction in the State homestead rebate program
and $421 million in cuts in salaries and other spending by the
State bureaucracy and including the prospect of 1,400 to 6,300
layoffs of State employees. The budget also reflects the loss
of revenues, projected at $608 million, as a result of the reduction
in the sales and use tax rate from 7% to 6% effective July 1,
1992, and the use of $1.3 billion in pension savings to balance
the budget, with $770 million available only in fiscal 1993 and
$569 million that will recur annually in the future.
Litigation. The State is a party in numerous legal proceedings
pertaining to matters incidental to the performance of routine
governmental operations. Such litigation includes, but is not
limited to, claims asserted against the State arising from alleged
torts, alleged breaches of contracts, condemnation proceedings
and other
Page 89
alleged violations of State and Federal laws. Included in the
State's outstanding litigation are cases challenging the following:
the formula relating to State aid to public schools, the method
by which the State shares with its counties maintenance recoveries
and costs for residents in State institutions, unreasonably low
Medicaid payment rates for long-term facilities in New Jersey,
the obligation of counties to maintain Medicaid or Medicare eligible
residents of institutions and facilities for the developmentally
disabled, taxes paid into the Spill Compensation Fund (a fund
established to provide money for use by the State to remediate
hazardous waste sites and to compensate other persons for damages
incurred as a result of hazardous waste discharge) based on Federal
preemption, various provisions, and the constitutionality, of
the Fair Automobile Insurance Reform Act of 1990, the State's
method of funding the judicial system, certain provisions of New
Jersey's hospital rate-setting system, recently enacted legislation
calling for a revaluation of several New Jersey public employee
pension funds in order to provide additional revenues for the
State's general fund, and the exercise of discretion by State
agencies in making certain personnel reductions. Adverse judgments
in these and other matters could have the potential for either
a significant loss of revenue or a significant unanticipated expenditure
by the State.
At any given time, there are various numbers of claims and cases
pending against the State, State agencies and employees seeking
recovery of monetary damages that are primarily paid out of the
fund created pursuant to the New Jersey Tort Claims Act. In addition,
at any given time, there are various numbers of contract claims
against the State and State agencies seeking recovery of monetary
damages. The State is unable to estimate its exposure for these
claims.
Debt Ratings. For many years prior to 1991, both Moody's Investors
Service, Inc. and Standard and Poor's Corporation have rated New
Jersey general obligation bonds "Aaa" and "AAA", respectively.
On July 3, 1991, however, Standard and Poor's Corporation downgraded
New Jersey general obligation bonds to "AA+". On June 4, 1992,
Standard and Poor's Corporation placed New Jersey general obligation
bonds on Credit Watch with negative implications, citing as its
principal reason for its caution the unexpected denial by the
Federal Government of New Jersey's request for $450 million in
retroactive Medicaid payments for psychiatric hospitals. These
funds were critical to closing a $1 billion gap in the State's
$15 billion budget for fiscal year 1992 which ended on June 30,
1992. Under New Jersey state law, the gap in the current budget
must be closed before the new budget year begins on July 1, 1992.
Standard and Poor's Corporation suggested the State could close
fiscal 1992's budget gap and help fill fiscal 1993's hole by a
reversion of $700 million of pension contributions to its general
fund under a proposal to change the way the State calculates its
pension liability. On July 6, 1992, Standard and Poor's Corporation
reaffirmed its "AA+" rating for New Jersey general obligation
bonds and removed the debt from its Credit Watch list, although
it stated that New Jersey's long-term financial outlook is negative.
Standard and Poor's Corporation is concerned that the State is
entering the 1993 fiscal year that began July 1, 1992, with a
slim $26 million surplus and remains concerned about whether the
sagging State economy will recover quickly enough to meet lawmakers'
revenue projections. It also remains concerned about the recent
federal ruling leaving in doubt how much the State is due in retroactive
Medicaid reimbursements and a ruling by a federal judge, now on
appeal, of the State's method for paying for uninsured hospital
patients.
On August 24, 1992, Moody's Investors Service, Inc. downgraded
New Jersey general obligations bonds to "Aa1", stating that the
reduction reflects a developing pattern of reliance on nonrecurring
measures to achieve budgetary balance, four years of financial
operations marked by revenue shortfalls and operating deficits,
and the likelihood that serious financial pressures will persist.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete description of
all adverse conditions to which the issuers in the New Jersey
Trusts are subject. Additionally, many factors, including national
economic, social and environmental policies and conditions which
are not within the control of the issuers of Bonds, could affect
or could have an adverse impact on the financial condition of
the State, various agencies
Page 90
and political subdivisions and private businesses located in the
State. The Sponsor is unable to predict whether or to what extent
such factors or other factors may affect the issuers of Bonds,
the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the New Jersey
Trusts to pay interest on or principal of the Bonds.
The New Mexico Trusts. New Mexico is the nation's fifth largest
State in terms of area. As of 1989, the Federal government owned
34.1% of New Mexico's land, State government, 11.8% and Indian
tribes, 8.3%, leaving 45.8% in private ownership. New Mexico has
33 counties and 99 incorporated places.
Major industries in New Mexico are energy resources (crude petroleum,
natural gas, uranium and coal), tourism, services, arts and crafts,
agriculture-agribusiness, government (including military), manufacturing
and mining. Major scientific research facilities at Los Alamos,
Albuquerque and White Sands are also a notable part of the State's
economy. New Mexico has a thriving tourist industry.
According to the June 1991 report of the Bureau of Business and
Economic Research of the University of New Mexico ("BBER"), New
Mexico's recent economic growth has been "subdued" and it appears
that it will slow even further before a turnaround occurs. Economic
growth in New Mexico was strong in 1989 and the first half of
1990, but declined substantially in the third and fourth quarters
of 1990. Among the localized events impacting New Mexico's economy
during 1990 were the curtailment of government funding for fusion
research at Los Alamos National Laboratory and for the Star Wars
free-electron laser at White Sands Missile Range and Los Alamos
(loss of 600 jobs in the aggregate); the move from Kirtland Air
Force Base of a contract management unit (200 jobs); the generally
tight credit conditions, particularly for land development and
construction spending, which followed in the wake of Resolution
Trust Corporation takeovers of most of New Mexico's major savings
and loan associations; and oil prices which kept oil production
in the State on the decline.
Agriculture is a major part of the state's economy. As a high
relatively dry region with extensive grasslands, New Mexico is
ideal for raising cattle, sheep and other livestock. Because of
irrigation and a variety of climatic conditions, the State's farmers
are able to produce a diverse assortment of products. New Mexico's
farmers are major producers of alfalfa hay, wheat, chili peppers,
cotton, fruits and pecans. Agricultural businesses include chili
canneries, wineries, alfalfa pellets, chemicals and fertilizer
plants, farm machinery, feed lots and commercial slaughter plants.
New Mexico nonagricultural employment growth was only 2.3% in
1990. During the first quarter of 1991, it was 1.3% compared to
the first quarter of 1990 (net increase of 7,100 jobs), following
a 1.2% increase in the fourth quarter of 1990. These increases
are about half the long-term trend growth rate of 2.6% of the
1947-1990 period. Income growth remained relatively strong, increasing
7.1% in the fourth quarter of 1990 (compared to a national increase
of 5.9%).
The services sector continued to be the strongest in the State,
accounting for almost half of new jobs in the first quarter of
1991, a 2.7% growth. Business services, health services and membership
organizations provided the bulk of services growth. The trade
and government sectors had much weaker growth in the first quarter
of; 1991, with 1.2% and 1.0% growth rates, respectively.
The mining sector added more than 350 jobs during 1990, most in
oil and gas. Oil well completions increased, even though oil production
has been on a slow decline. Gas well completions and gas production
have also been growing, as producers continue to take advantage
of the coal seam gas tax credit, which will continue to be available
under current law through 1992.
Construction employment has declined for 21 consecutive quarters,
but was down only 0.4% in the first quarter of 1991, after having
averaged a 4.5% decline for each of the previous twenty quarters.
Housing construction remains depressed, with new housing unit
authorizations during 1990, both single family and multifamily,
at their lowest levels in more than fifteen years.
The manufacturing sector showed a small increase (1.3%), while
finance/insurance/real estate and transportation/communications/utilities
demonstrated small declines (1.0% and 0.9%, respectively).
Page 91
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete description of
all adverse conditions to which the issuers in the New Mexico
Trusts are subject. Additionally, many factors, including national
economic, social and environmental policies and conditions which
are not within the control of the issuers of Bonds, could affect
or could have an adverse impact on the financial condition of
the State, various agencies and political subdivisions and private
businesses located in the State. The Sponsor is unable to predict
whether or to what extent such factors or other factors may affect
the issuers of Bonds, the market value or marketability of the
Bonds or the ability of the respective issuers of the Bonds acquired
by the New Mexico Trusts to pay interest on or principal of the
Bonds.
The New York Trusts. The New York Trusts include obligations issued
by New York State (the "State"), by its various public bodies
(the "Agencies"), and/or by other entities located within the
State, including the City of New York (the "City").
Some of the more significant events relating to the financial
situation in New York are summarized below. This section provides
only a brief summary of the complex factors affecting the financial
situation in New York and is based in part on Official Statements
issued by, and on other information reported by the State, the
City, and their agencies in connection with the issuance of their
respective securities.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value
of New York Municipal Obligations held in the portfolio of the
Trusts or the ability of particular obligors to make timely payments
of debt service on (or relating to) those obligations.
The State. The State has historically been one of the wealthiest
states in the nation. For decades, however, the State economy
has grown more slowly than that of the nation as a whole, gradually
eroding the State's relative economic affluence. Statewide, urban
centers have experienced significant changes involving migration
of the more affluent to the suburbs and an influx of generally
less affluent residents. Regionally, the older Northeast cities
have suffered because of the relative success that the South and
the West have had in attracting people and business. The City
has also had to face greater competition as other major cities
have developed financial and business capabilities which make
them less dependent on the specialized services traditionally
available almost exclusively in the City.
The State has for many years had a very high State and local tax
burden relative to other states. The burden of State and local
taxation, in combination with the many other causes of regional
economic dislocation, has contributed to the decisions of some
businesses and individuals to relocate outside, or not locate
within, the State.
Slowdown of Regional Economy. A national recession commenced in
mid-1990. The downturn continued throughout the State's 1990-91
fiscal year and was followed by a period of weak economic growth
during the 1991 calendar year. For calendar year 1992, the national
economy continued to recover, although at a rate below all post-war
recoveries. For calendar year 1993, the economy is expected to
continue to grow faster than in 1992, but still at a very moderate
rate of growth. The national recession has been more severe in
the State because of factors such as significant retrenchment
in the financial services industry, cutbacks in defense spending,
and an overbuilt real estate market.
1993-94 Fiscal Year. The Governor released on January 19, 1993,
the recommended Executive Budget for the 1993-94 fiscal year which
commences on April 1, 1993 ("the Recommended 1993-94 State Financial
Plan"), which plan projects a balanced General Fund. General Fund
receipts and transfers from other funds are projected at $31.563
billion, including $184 million carried over from the 1992-93
fiscal year.
To achieve General Fund budgetary balance in the 1993-94 State
fiscal year, the Governor has recommended various actions requiring
legislative approval. These include: proposed spending reductions
and other actions that would reduce General Fund spending ($1.6
billion); continuing the freeze on personal income and corporate
tax reductions and on hospital assessments ($1.3 billion); retaining
moneys in the General
Page 92
Fund that would otherwise have been deposited in dedicated highway
and transportations funds ($516 million); a 21-cent increase in
the cigarette tax ($180 million); and new revenues from miscellaneous
sources ($91 million).
There can be no assurance that the Legislature will enact the
Recommended 1993-94 State Financial Plan as proposed nor can there
be any assurance that the Legislature will enact a budget for
the 1993-94 fiscal year prior to the beginning of the fiscal year.
In recent fiscal years, the State has failed to enact a budget
prior to the beginning of the State's fiscal year. Because the
Recommended 1993-94 State Financial Plan contains proposed spending
cuts from baseline projections that are greater than in most recent
fiscal years, delay in enactment of the 1993-94 fiscal year budget
could have greater consequences than similar delays in recent
years. Delay in legislative enactment of the 1993-94 fiscal year
budget may reduce the effectiveness of many of the actions proposed
to close the potential gap. The 1993-94 State Financial Plan,
when formulated after enactment of the budget, would have to take
into account any reduced savings arising from any late budget
enactment.
The Recommended 1993-94 State Financial Plan would result in sharp
reductions in aid to all levels of local government units, from
amounts expected. To offset a portion of such reduction, the Recommended
1993-94 State Financial Plan contains a package of mandate relief,
cost containment and other proposals to reduce the costs of many
programs for which local governments provide funding. There can
be no assurance, however, that localities that suffer cuts will
not be adversely affected, leading to further requests for State
financial assistance.
There can be no assurance that the State will not face substantial
potential budget gaps in the future resulting from a significant
disparity between tax revenues projected from a lower recurring
receipts base and the spending required to maintain State programs
at current levels. To address any potential budgetary imbalance,
the State may need to take significant actions to align recurring
receipts and disbursements.
1992-93 Fiscal Year. On January 21, 1992, the Governor released
the recommended 1992-93 Executive Budget which included the revised
1991-92 State Financial Plan (the "Revised 1991-92 State Financial
Plan") indicating a projected $531 million General Fund cash basis
operating deficit in the 1991-92 fiscal year. The projected $531
million deficit was met through tax and revenue anticipation notes
(the "1992 Deficit Notes") which were issued on March 30, 1992
and are required by law to be repaid in the State's 1992-93 fiscal
year. The $531 million projected deficit follows $407 million
in administrative actions taken by the governor to reduce 1991-92
disbursements and to increase revenues.
The recommended 1992-93 Executive Budget contained projections
for the 1992-93 State fiscal year which began on April 1, 1992.
The governor indicated that, for the 1992-93 fiscal year, the
State faced a $4.8 billion budget gap, including the $531 million
needed in the 1992-93 fiscal year to repay the 1992 Deficit Notes.
The recommended 1992-93 Executive Budget reflects efforts to achieve
budgetary balance by reducing disbursements by $3.5 billion and
increasing revenues by $1.3 billion, from levels previously anticipated.
The 1992-93 State budget was enacted by the Legislature on April
2, 1992 and was balanced through a variety of spending cuts and
revenue increases, as reflected in the State Financial Plan for
the 1992-93 fiscal year (the "1992-93 State Financial Plan") announced
on April 13, 1992. The 1992-93 State Financial Plan projects that
General Fund receipts and transfers from other funds will total
$31.382 billion, after provision to repay the 1992 Deficit Notes.
The 1992-93 State Financial Plan includes increased taxes and
other revenues, deferral of scheduled personal income and corporate
tax reductions, significant reductions from previously projected
levels in aid to localities and State operations and other budgetary
actions that limit the growth in General Fund disbursements.
Pursuant to Statute, the State updates the State Financial Plan
at least on a quarterly basis. The first quarterly revision to
the State Financial Plan for the State's 1992-93 fiscal year was
issued on July 30, 1992 (the "Revised 1992-93 State Financial
Plan").
Page 93
In February 1992, the Division of the Budget estimated the potential
budget imbalance for the State's 1993-94 fiscal year at approximately
$1.6 billion.
For a number of years the State has encountered difficulties in
achieving a balance of expenditures and revenues. The 1991-92
fiscal year was the fourth consecutive year in which the State
incurred a cash-basis operating deficit in the General Fund and
issued deficit notes. There can be no assurance that the State
will not continue to face budgetary difficulties in the future,
due to a number of factors including economic, fiscal and political
factors, and that such difficulties will not lead to further adverse
consequences for the State.
As a result of changing economic conditions and information, public
statements or reports may be released by the Governor, members
of the State Legislature, and their respective staffs, as well
as others involved in the budget negotiation process from time
to time. Those statements or reports may contain predictions,
projections or other items of information relating to the State's
financial condition, as reflected in the Recommended 1993-94 State
Financial Plan, that may vary materially and adversely from the
information provided herein.
Indebtedness. As of December 31, 1992, the total amount of long-term
State general obligation debt authorized but unissued stood at
$2.6 billion, of which approximately $1.5 billion was part of
a general obligation bond authorization for highway and bridge
construction and rehabilitation. As of the same date, the State
had approximately $5.1 billion in general obligation bonds and
$293 million in bond anticipation notes outstanding. The State
issued $3.9 billion in tax and revenue anticipation notes ("TRANs")
on June 21, 1991, $531 million in 1992 Deficit Notes on March
30, 1992 and $2.3 billion in TRANs on April 28, 1992. The Division
of the Budget also projects the issuance of $1.4 billion in TRANs
during the first quarter of the State's 1993-94 fiscal year.
The Governor has recommended the issuance of $761 million in borrowings
for capital purposes during the State's 1993-94 fiscal year. In
addition, the State expects to issue $140 million in bonds for
the purpose of redeeming outstanding bond anticipation notes.
The Governor has also recommended the issuance of up to $85 million
in certificates of participation during the State's 1993-94 fiscal
year for personal and real property acquisitions. The projection
of the State regarding its borrowings for the 1993-94 fiscal year
may change if actual receipts fall short of State projections
or if other circumstances require.
In June 1990, legislation was enacted creating the New York Local
Government Assistance Corporation ("LGAC"), a public benefit corporation
empowered to issue long-term obligations to fund certain payments
to local governments traditionally funded through the State's
annual seasonal borrowing. To date, LGAC has issued its bonds
to provide net proceeds of $3.02 billion. LGAC has been authorized
to issue additional bonds to provide net proceeds of $975 million
during the State's 1992-93 fiscal year, of which $621 million
has been issued to date.
Ratings. The $2.3 billion in TRANs issued by the State in April
1992 were rated SP-1 by S&P and MIG-2 by Moody's. The $3.9 billion
in TRANs issued by the State in June 1991 were rated the same.
S&P in so doing stated that the outlook has changed to "negative"
from "stable." The $4.1 billion in TRANs issued by the State in
June 1990 and the $775 million in TRANs issued by the State in
March 1990 were rated the same. In contrast, the $3.9 billion
of TRANs issued by the State in May 1989 had been rated SP-1+
by S&P and MIG-1 by Moody's.
As of the date of this Prospectus, Moody's rating of the State's
general obligation bonds stood at A, but under review for possible
downgrade and S&P's rating stood at A- with a negative outlook.
Moody's placed the bonds under review on January 6, 1992. Previously,
Moody's lowered its rating to A on June 6, 1990, its rating having
been A1 since May 27, 1986. S&P lowered its rating from A to A-
on January 13, 1992. S&P's previous ratings were A from March
1990 to January 1992, AA- from August 1987 to March 1990 and A+
from November 1982 to August 1987.
On September 18, 1992, Moody's, in placing the bonds under review
for possible downgrade, stated:
Page 94
Chronic financial problems weigh most heavily in the evaluation
of New York State's credit. In the past five years, the State
has been unable to maintain a balanced budget and has had to issue
deficit notes in each of the past four years. The budget for the
fiscal year which began April 1, 1992 was adopted nearly on time,
relies somewhat less on non-recurring actions, and provides for
some expenditure reductions, mainly due to a planned reduction
in the size of the State workforce. However, although growth in
major aid programs to local governments is modest, major structural
reform of State programs which would provide enduring budget relief
has not been enacted. The State budget is still narrowly balanced
and the State could face additional fiscal pressure if the economy
performs worse than anticipated or cost-reduction programs fail
to generate anticipated savings.
On November 16, 1992, S&P, in affirming its A- rating and negative
outlook of the State's general obligation bonds, stated:
The rating reflects ongoing weakness, four years of operating
deficits and a large accumulated deficit position.
The current economic environment and the State's financial complexion
still contain a significant amount of risk.
The ratings outlook is "negative," as the budget balance remains
fragile.
The City and the Municipal Assistance Corporation ("MAC"). The
City accounts for approximately 41% of the State's population
and personal income, and the City's financial health affects the
State in numerous ways.
In February 1975, the New York State Urban Development Corporation
("UDC"), which had approximately $1 billion of outstanding debt,
defaulted on certain of its short-term notes. Shortly after the
UDC default, the City entered a period of financial crisis. Both
the State Legislature and the United States Congress enacted legislation
in response to this crisis. During 1975, the State Legislature
(i) created MAC to assist with long-term financing for the City's
short-term debt and other cash requirements and (ii) created the
State Financial Control Board (the "Control Board") to review
and approve the City's budgets and the City's four-year financial
plans (the financial plans also apply to certain City-related
public agencies (the "Covered Organizations")).
Over the past three years, the rate of economic growth in the
City has slowed substantially, and the City's economy is currently
in recession. The City projects, and its current four-year financial
plan assumes, a continuation of the recession in the New York
City region in the1992 calendar year with a recovery early in
the 1993 calendar year. The Mayor is responsible for preparing
the City's four-year financial plan, including the City's current
financial plan. The City Comptroller has issued reports concluding
that the recession of the City's economy will be more severe and
last longer than is assumed in the financial plan.
For each of the 1981 through 1991 fiscal years, the City achieved
balanced operating results as reported in accordance with generally
accepted accounting principles ("GAAP"), and expects to achieve
balanced operating results for the 1992 fiscal year. During its
1991 fiscal year, as a result of the recession, the City experienced
significant shortfalls from its July 1990 projections in virtually
every major category of tax revenues. The City was required to
close substantial budget gaps in its 1990 and 1991 fiscal years
in order to maintain balanced operating results. There can be
no assurance that the City will continue to maintain a balanced
budget, or that it can maintain a balanced budget without additional
tax or other revenue increases or reductions in City services,
which could adversely affect the City's economic base. The City
Comptroller has issued reports that have warned of the adverse
effects on the City's economy of the tax increases that were imposed
during fiscal years 1991 and 1992.
Pursuant to State law, the City prepares a four-year annual financial
plan, which is reviewed and revised on a quarterly basis and which
includes the City's capital, revenue and expense projections.
The City is required to submit its financial plans to review bodies,
including the Control Board. If the City were to experience certain
adverse financial circumstances, including the occurrence or the
substantial likelihood of
Page 95
the occurrence of an annual operating deficit of more than $100
million or the loss of access to the public credit markets to
satisfy the City's capital and seasonal financial requirements,
the Control Board would be required by State law to exercise certain
powers, including prior approval of City financial plans, proposed
borrowings and certain contracts.
The City depends on the State for State aid both to enable the
City to balance its budget and to meet its cash requirements.
As a result of the national and regional economic recession, the
State's projections of tax revenues for its 1991 and 1992 fiscal
years were substantially reduced. For its 1993 fiscal year, the
State, before taking any remedial action reflected in the State
budget enacted by the State Legislature on April 2, 1992 reported
a potential budget deficit of $4.8 billion. If the State experiences
revenue shortfalls or spending increases beyond its projections
during its 1992-93 fiscal year or subsequent years, such developments
could result in reductions in projected State aid to the City.
In addition, there can be no assurance that State budgets in future
fiscal years will be adopted by the April 1 statutory deadline
and that there will not be adverse effects on the City's cash
flow and additional City expenditures as a result of such delays.
The City projections set forth in its financial plan are based
on various assumptions and contingencies which are uncertain and
which may not materialize. Changes in major assumptions could
significantly affect the City's ability to balance its budget
as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include
the timing of any regional and local economic recovery, the absence
of wage increases in excess of the increases assumed in such financial
plan, employment growth, provision of State and Federal aid and
mandate relief, State legislative approval of future State budgets,
levels of education expenditures as may be required by State law,
adoption of future City budgets by the New York City Council,
and approval by the Governor or the State Legislature and the
cooperation of MAC with respect to various other actions proposed
in such financial plan.
The City's ability to maintain a balanced operating budget is
dependent on whether it can implement necessary service and personnel
reduction programs successfully. The financial plan submitted
to the Control Board on June 11, 1992 contains substantial proposed
expenditure cuts for the 1993 through 1996 fiscal years. The proposed
expenditure reductions will be difficult to implement because
of their size and the substantial expenditure reductions already
imposed on City operations in the past two years.
Attaining a balanced budget is also dependent upon the City's
ability to market its securities successfully in the public credit
markets. The City's financing program for fiscal years 1993 through
1996 contemplates issuance of $13.3 billion of general obligation
bonds primarily to reconstruct and rehabilitate the City's infrastructure
and physical assets and to make capital investments. A significant
portion of such bond financing is used to reimburse the City's
general fund for capital expenditures already incurred. In addition,
the City issues revenue and tax anticipation notes to finance
its seasonal working capital requirements. The terms and success
of projected public sales of City general obligation bonds and
notes will be subject to prevailing market conditions at the time
of the sale, and no assurance can be given that the credit markets
will absorb the projected amounts of public bond and note sales.
In addition, future developments concerning the City and public
discussion of such developments, the City's future financial needs
and other issues may affect the market for outstanding City general
obligation bonds and notes. If the City were unable to sell its
general obligation bonds and notes, it would be prevented from
meeting its planned operating and capital expenditures.
The City Comptroller, the staff of the Control Board, the Office
of the State Deputy Comptroller for the City of New York (the
"OSDC") and other agencies and public officials have issued reports
and made public statements which, among other things, state that
projected revenues may be less and future expenditures may be
greater than those forecast in the financial plan. In addition,
the Control Board and other agencies have questioned whether the
City has the capacity to generate sufficient revenues in the future
to meet the costs of its expenditure increases and to provide
necessary services. It is reasonable to expect that such reports
and statements will continue to be issued and engender public
comment.
Page 96
Fiscal Years 1991 and 1992. The City achieved balanced operating
results as reported in accordance with GAAP for the 1991 fiscal
year. During the 1990 and 1991 fiscal years, the City implemented
various actions to offset a projected budget deficit of $3.2 billion
for the 1991 fiscal year, which resulted from declines in City
revenue sources and increased public assistance needs due to the
recession. Such actions included $822 million of tax increases
and substantial expenditure reductions.
The quarterly modification to the City's financial plan submitted
to the Control Board on May 7, 1992 (the "1992 Modification")
projected a balanced budget in accordance with GAAP for the 1992
fiscal year after taking into account a discretionary transfer
of $455 million to the 1993 fiscal year as the result of a 1992
fiscal year surplus. In order to achieve a balanced budget for
the 1992 fiscal year, during the 1991 fiscal year, the City proposed
various actions for the 1992 fiscal year to close a projected
gap of $3.3 billion in the 1992 fiscal year.
1993-96 Financial Plan. On June 11, 1992, the City submitted to
the Control Board the Financial Plan for the 1993 through 1996
fiscal years, which relates to the City, the Board of Education
("BOE") and the City University of New York ("CUNY") and is based
on the City's expenses and capital budgets for the City's 1993
fiscal year. The 1993-96 Financial Plan projects revenues and
expenditures for the 1993 fiscal year balanced in accordance with
GAAP.
The 1993-96 Financial Plan sets forth actions to close a previously
projected gap of approximately $1.2 billion in the 1993 fiscal
year. The gap-closing actions for the 1993 fiscal year include
$489 million of discretionary transfers from a City surplus in
the 1992 fiscal year.
The 1993-96 Financial Plan also sets forth projections and outlines
a proposed gap-closing program for the 1994 through 1996 fiscal
years to close projected budget gaps. On August 26, 1992, the
City modified the 1993-96 Financial Plan. As modified, the Financial
Plan projects a balanced budget for fiscal year 1993 based upon
revenues of $29.6 billion but projects budget gaps of $1.3 billion,
$1.2 billion and $1.7 billion, respectively, in the 1994 through
1996 fiscal years.
On February 9, 1993, the City issued a modification to the 1993-96
Financial Plan (the "February Modification"). The February Modification
projects budget gaps for fiscal years 1994, 1995 and 1996 of $2.1
billion, $3.1 billion and $3.8 billion, respectively.
Various actions proposed in the Financial Plan are subject to
approval by the Governor and approval by the State Legislature,
and the proposed increase in Federal aid is subject to approval
by Congress and the President. In addition, MAC has set conditions
upon its cooperation in the City's realization of the proposed
transitional funding contained in the Financial Plan for the 1994
fiscal year. If these actions cannot be implemented, the City
will be required to take other actions to decrease expenditures
or increase revenues to maintain a balanced financial plan.
The City is a defendant in a significant number of lawsuits. Such
litigation includes, but is not limited to, actions commenced
and claims asserted against the City arising out of alleged constitutional
violations, torts, breaches of contracts, and other violations
of law and condemnation proceedings. While the ultimate outcome
and fiscal impact, if any, on the proceedings and claims are not
currently predictable, adverse determinations in certain of them
might have a material adverse effect upon the City's ability to
carry out its financial plan. As of June 30, 1991, legal claims
in excess of $322 billion were outstanding against the City for
which the City estimated its potential future liability to be
$2.1 billion.
Ratings. As of the date of this prospectus, Moody's rating of
the City's general obligation bonds stood at Baa1 and S&P's rating
stood at A-. On February 11, 1991, Moody's had lowered its rating
from A.
On October 19, 1992, in confirming the Baa1 rating, Moody's noted
that:
Financial operations continue to be satisfactorily maintained[.]
. . . Nevertheless, significant gaps in the later years of the
[four year financial] plan remain and have not changed from prior
projections. The ability of the City to successfully close those
gaps, as well as fully implement all currently planned gap closing
measures without slippage will be a politically and financially
complex task.
Page 97
On October 19, 1992, S&P affirmed its A- rating, with a negative
outlook stating that:
Per capita debt remains high, and debt service as a portion of
total spending will continue to grow above 10% as the City issues
$3-$4 billion of new bonds for the next several years. Economically,
the City is in one of its deepest recessions, with additional
job losses this year expected to approach 130,000 before moderating
in 1993. Long-term job growth is expected to be slow.
City financial plans will continue to be burdened by weak economic
factors, and continued risks to State and federal actions that
the City is relying on to balance future budgets.
The outlook remains negative. Labor negotiations also present
some risk, given City assumptions of no wage increase in 1993-94.
Previously, Moody's had raised its rating to A in May 1988, to
Baa1 in December 1985, to Baa in November 1983 and to Ba1 in November
1981. S&P had raised its rating to A- in November 1987, to BBB+
in July 1985 and to BBB in March 1981.
On May 9, 1990, Moody's revised downward its rating on outstanding
City revenue anticipation notes from MIG-1 to MIG-2 and rated
the $900 million Notes then being sold MIG-2. On April 30, 1991
Moody's confirmed its MIG-2 rating for the outstanding revenue
anticipation notes and for the $1.25 billion in notes then being
sold. On April 29, 1991, S&P revised downward its rating on City
revenue anticipation notes from SP-1 to SP-2.
As of June 30, 1992, the City and MAC had, respectively, $19.5
billion and $5.9 billion of outstanding net long-term indebtedness.
The State Agencies. Certain Agencies of the State have faced substantial
financial difficulties which could adversely affect the ability
of such Agencies to make payments of interest on, and principal
amounts of, their respective bonds. The difficulties have in certain
instances caused the State (under so-called "moral obligation"
provisions which are non-binding statutory provisions for State
appropriations to maintain various debt service reserve funds)
to appropriate funds on behalf of the Agencies. Moreover, it is
expected that the problems faced by these Agencies will continue
and will require increasing amounts of State assistance in future
years. Failure of the State to appropriate necessary amounts or
to take other action to permit those Agencies having financial
difficulties to meet their obligations could result in a default
by one or more of the Agencies. Such default, if it were to occur,
would be likely to have a significant adverse effect on investor
confidence in, and therefore the market price of, obligations
of the defaulting Agencies. In addition, any default in payment
on any general obligation of any Agency whose bonds contain a
moral obligation provision could constitute a failure of certain
conditions that must be satisfied in connection with Federal guarantees
of City and MAC obligations and could thus jeopardize the City's
long-term financing plans.
As of September 30, 1992, the State reported that there were eighteen
Agencies that each had outstanding debt of $100 million or more.
These eighteen Agencies had an aggregate of $62.2 billion of outstanding
debt, including refunding bonds, of which the State was obligated
under lease-purchase, contractual obligation or moral obligation
provisions on $25.3 billion.
State Litigation. The State is a defendant in numerous legal proceedings
pertaining to matters incidental to the performance of routine
governmental operations. Such litigation includes, but is not
limited to, claims asserted against the State arising from alleged
torts, alleged breaches of contracts, condemnation proceedings,
and other alleged violations of State and Federal laws. Included
in the State's outstanding litigation are a number of cases challenging
the constitutionality or the adequacy and effectiveness of a variety
of significant social welfare programs primarily involving the
State's mental hygiene programs. Adverse judgments in these matters
generally could result in injunctive relief coupled with prospective
changes in patient care which would require substantial increased
financing of the litigated programs in the future.
The State is also engaged in a variety of claims wherein significant
monetary damages are sought. Actions commenced by several Indian
nations claim that significant amounts of land were unconstitutionally
Page 98
taken from the Indians in violation of various treaties and agreements
during the eighteenth and nineteenth centuries. The claimants
seek recovery of approximately six million acres of land as well
as compensatory and punitive damages.
Adverse developments in the foregoing proceedings or new proceedings
could adversely affect the financial condition of the State in
the 1992-93 fiscal year or thereafter.
Other Municipalities. Certain localities in addition to New York
City could have financial problems leading to requests for additional
State assistance. The Recommended 1993-94 State Financial Plan
includes significant reductions in State aid to localities in
such programs as revenue sharing and aid to education from projected
base-line growth in such programs. It is expected that such reductions
will result in the need for localities to reduce their spending
or increase their revenues. The potential impact on the State
of such actions by localities is not included in projections of
State revenues and expenditures in the State's 1993-94 fiscal
year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the
City of Yonkers (the "Yonkers Board") by the State in 1984. The
Yonkers Board is charged with oversight of the fiscal affairs
of Yonkers. Future actions taken by the Governor or the State
Legislature to assist Yonkers could result in allocation of State
resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1990, the total indebtedness
of all localities in the State was approximately $26.9 billion,
of which $13.5 billion was debt of New York City (excluding $7.1
billion in MAC debt). State law requires the Comptroller to review
and make recommendations concerning the budgets of those local
government units other than New York City authorized by State
law to issue debt to finance deficits during the period that such
deficit financing is outstanding. Seventeen localities had outstanding
indebtedness for state financing at the close of their fiscal
year ending in 1990. In 1992, an unusually large number of local
government units requested authorization for deficit financings.
According to the Comptroller, ten local government units have
been authorized to issue deficit financing in the aggregate amount
of $131.1 million.
Certain proposed Federal expenditure reductions could reduce,
or in some cases eliminate, Federal funding of some local programs
and accordingly might impose substantial increased expenditure
requirements on affected localities. If the State, New York City
or any of the Agencies were to suffer serious financial difficulties
jeopardizing their respective access to the public credit markets,
the marketability of notes and bonds issued by localities within
the State, including notes or bonds in the New York Trust, could
be adversely affected. Localities also face anticipated and potential
problems resulting from certain pending litigation, judicial decisions,
and long-range economic trends. The longer-range potential problems
of declining urban population, increasing expenditures, and other
economic trends could adversely affect localities and require
increasing State assistance in the future.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the New York
Trusts are subject. Additionally, many factors including national
economic, social, and environmental policies and conditions, which
are not within the control of the issuers of Bonds, could affect
or could have an adverse impact on the financial condition of
the State and various agencies and political subdivisions located
in the State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
Bonds, the market value or marketability of the Bonds, or the
ability of the respective issuers of the Bonds acquired by the
New York Trusts to pay interest on or principal of the Bonds.
The North Carolina Trusts. The economic profile of North Carolina
consists primarily of manufacturing, agriculture, tourism and
mining. The North Carolina Employment Security Commission's preliminary
figures indicate that non-agricultural payroll employment accounted
for approximately 3,108,200 jobs in April 1991
Page 99
the largest segment of which was the approximately 832,200 in
manufacturing. During the period 1980 to 1989, per capita income
in North Carolina grew from approximately $7,999 to approximately
$15,287, an increase of 91%.
Agriculture is a basic element in the economy of North Carolina.
Gross agricultural income in 1989 was $4.6 billion, which placed
North Carolina tenth in cash receipts in commodities. A strong
agribusiness sector also supports farmers with farm inputs (fertilizer,
insecticide, pesticide and farm machinery) and processing of commodities
produced by farmers (vegetable canning and cigarette manufacturing).
The North Carolina Department of Economic and Community Development,
Travel and Tourism Division, has reported that in 1989 approximately
$6.5 billion was spent on tourism in the State (up 4% from 1988).
The Department also estimated that approximately 252,000 people
as of 1988 were employed in tourism-related jobs.
The North Carolina Employment Security Commission estimated the
North Carolina unemployment rate in May 1991 to be 6.6% of the
labor force (not seasonably adjusted) and 6.7% (seasonably adjusted),
as compared with an unemployment rate nationwide of 6.6% (not
seasonably adjusted) and 6.9% (seasonably adjusted).
General obligations of the State are currently rated AAA and Aaa
by Standard & Poor's and Moody's, respectively. In August 1990,
Standard & Poor's lifted a CreditWatch that it had placed on the
State's general obligations in June 1990, subject to continuing
review of the imbalance in the State's budget. There can be no
assurance that the economic conditions in which these ratings,
or the ratings of the other bonds in the Portfolio, are based
will continue or that particular bond issues may not be adversely
affected by changes in economic or political conditions, by uncertainties
peculiar to the issuers thereof or the revenue sources from which
they are to be paid. The factual information provided above was
derived from publications of various North Carolina departments
or agencies and has not been independently verified.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the North Carolina
Trusts are subject. Additionally, many factors including national
economic, social, and environmental policies and conditions, which
are not within the control of the issuers of Bonds, could affect
or could have an adverse impact on the financial condition of
the State and various agencies and political subdivisions located
in the State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
Bonds, the market value or marketability of the Bonds, or the
ability of the respective issuers of the Bonds acquired by the
North Carolina Trusts to pay interest on or principal of the Bonds.
The Ohio Trusts. The Ohio Trusts will invest substantially all
of its net assets in securities issued by or on behalf of (or
in certificates of participation in lease purchase obligations
of) the State of Ohio, political subdivisions thereof, or agencies
or instrumentalities of the State or its political subdivisions
(Ohio Obligations). The Ohio Trusts are therefore susceptible
to general or particular political, economic or regulatory factors
that may affect issuers of Ohio Obligations. The following information
constitutes only a brief summary of some of the many complex factors
that may have an effect. The information does not apply to "conduit"
obligations on which the public issuer itself has no financial
responsibility. This information is derived from official statements
of certain Ohio issuers published in connection with their issuance
of securities and from other publicly available documents, and
is believed to be accurate. No independent verification has been
made of any of the following information.
The creditworthiness of Ohio Obligations of local issuers is generally
unrelated to that of obligations of the State itself, and the
State has no responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in
connection with investment in particular Ohio Obligations or in
those obligations of particular Ohio issuers. It is possible that
the investment may be in particular Ohio Obligations, or in those
of particular issuers, as to which those factors apply. However,
the information below is
Page 100
intended only as a general summary, and is not intended as a discussion
of any specific factors that may affect any particular obligation
or issuer.
The timely payment of principal of and interest on Ohio Obligations
has been guaranteed by bond insurance purchased by the issuers,
the Ohio Trusts or other parties. The timely payment of debt service
on Ohio Obligations that are so insured may not be subject to
the factors referred to in this section of the Prospectus.
Ohio is the seventh most populous state. Its 1990 Census count
of 10,847,000 indicates a 0.5% population increase from 1980.
While diversifying more into the service and other non-manufacturing
areas, the Ohio economy continues to rely in part on durable goods
manufacturing largely concentrated in motor vehicles and equipment,
steel, rubber products and household appliances. As a result,
general economic activity, as in many other industrially-developed
states, tends to be more cyclical than in some other states and
in the nation as a whole. Agriculture is an important segment
of the economy, with over half the State's area devoted to farming
and approximately 20% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported
1990 average monthly State rate was 5.7%, compared to the 5.5%
national figure. However, for both 1991 and 1992 that State rate
was below the national rate; the State rates were 6.4% and 7.2%,
and the national rates 6.7% and 7.4%. The unemployment rate and
its effects vary among particular geographic areas of the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local
government finances generally, will not adversely affect the market
value of Ohio Obligations held in a Trust's portfolio or the ability
of particular obligors to make timely payments of debt service
on (or lease payments relating to) those Obligations.
The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July
1 to June 30 fiscal year (FY) or fiscal biennium in a deficit
position. Most State operations are financed through the General
Revenue Fund (GRF), for which personal income and sales-use taxes
are the major sources. Growth and depletion of GRF ending fund
balances show a consistent pattern related to national economic
conditions, with the ending FY balance reduced during less favorable
and increased during more favorable economic periods. The State
has well-established procedures for, and has timely taken, necessary
actions to ensure a resource/expenditure balance during less favorable
economic periods. These procedures include general and selected
reductions in appropriations spending.
Key biennium ending fund balances at June 30, 1989 were $475.1
million in the GRF and $353 million in the Budget Stabilization
Fund (BSF, a cash and budgetary management fund). In FYs 1990-91,
the latest complete biennium, necessary corrective steps were
taken to respond to lower receipts and higher expenditures in
certain categories than earlier estimated. Those steps included,
in FY 1991, selected reductions in appropriations spending and
the transfer of $64 million from the BSF to the GRF. The State
reported June 30, 1991 ending fund balances of $135.3 million
(GRF) and $300 million (BSF).
To allow time to resolve certain Senate and House differences
in the budget and appropriations for the current biennium that
began July 1, 1991, an interim appropriations act was enacted
effective July 1, 1991; it included debt service and lease rental
appropriations for the entire 1992-93 biennium, while continuing
most other appropriations for 31 days at 97% of FY 1991 monthly
levels. The general appropriations act for the entire biennium
was passed on July 11, 1991 and signed by the Governor. Pursuant
to it, $200 million was transferred from the BSF to the GRF in
FY 1992.
Based on the updated FY financial results and economic forecast
in the course of FY 1992, both in light of the continuing uncertain
nationwide economic situation, there was projected and timely
addressed an FY 1992 imbalance in GRF resources and expenditures.
GRF receipts, significantly below original forecasts, resulted
primarily from lower collections of certain taxes, particularly
sales and use taxes. Higher expenditure levels resulted from higher
spending in certain areas, particularly human services, including
Medicaid. As
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an initial action, the Governor ordered most State agencies to
reduce GRF spending in the last six months of FY 1992 by a total
of approximately $196 million. As authorized by the General Assembly,
the $100.4 million BSF balance and additional amounts from certain
other funds were transferred late in the FY to the GRF, and adjustments
in the timing of certain tax payments made. Other administrative
revenue and spending actions resolved the remaining GRF imbalance.
A significant GRF shortfall (approximately $520 million) was projected
for FY 1993. It has been addressed by appropriate legislative
and administrative actions. As a first step, the Governor ordered,
effective July 1, 1992, $300 million in selected GRF spending
reductions. Executive and legislative action in December 1992,
a combination of tax revisions and additional appropriation spending
reductions, is projected by OBM to balance GRF resources and expenditures
in this biennium. No spending reductions have been applied to
appropriations needed for debt service or lease rentals on any
State obligations.
The State's incurrence or assumption of debt without a vote of
the people is, with limited exceptions, prohibited by current
State Constitutional provisions. The State may incur debt, limited
in amount to $750,000, to cover casual deficits or failures in
revenues or to meet expenses not otherwise provided for. The Constitution
expressly precludes the State from assuming the debts of any local
government or corporation. (An exception is made in both cases
for any debt incurred to repel invasion, suppress insurrection
or defend the State in war.)
By 12 constitutional amendments, the last adopted in 1987, Ohio
voters have authorized the incurrence of State debt to the payment
of which taxes or excises were pledged. At January 1, 1993, $516
million (excluding certain highway bonds payable primarily from
highway use charges) of this debt was outstanding. The only such
State debt then still authorized to be incurred are portions of
the highway bonds, and the following: (a) up to $100 million of
obligations for coal research and development may be outstanding
at any one time ($38.6 million outstanding); and (b) of $1.2 billion
of obligations authorized for local infrastructure improvements,
no more than $120 million may be issued in any calendar year ($432.5
million outstanding, $720 million remaining to be issued).
The Constitution also authorizes the issuance of State obligations
for certain purposes, the owners of which do not have the right
to have excises or taxes levied to pay debt service. Those special
obligations include obligations issued by the Ohio Public Facilities
Commission and the Ohio Building Authority, $3.7 billion of which
were outstanding at January 2, 1993.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision
of housing. The General Assembly may for that purpose authorize
the issuance of State obligations secured by a pledge of all or
such portion as it authorizes of State revenues or receipts (but
not by a pledge of the State's full faith and credit).
State and local agencies issue revenue obligations that are payable
from revenues from or relating to certain facilities (but not
from taxes). By judicial interpretation, these obligations are
not "debt" within constitutional provisions. In general, payment
obligations under lease-purchase agreements of Ohio public agencies
(in which certificates of participation may be issued) are limited
in duration to the agency's fiscal period, and are renewable only
upon appropriations being made available for the subsequent fiscal
period.
Local school districts in Ohio receive a major portion (on a state-wide
basis, recently approximately 46%) of their operating moneys from
State subsidies, but are dependent on local property taxes, and
in 94 districts from voter-authorized income taxes, for significant
portions of their budgets. Litigation similar to that in other
states is pending questioning the constitutionality of Ohio's
system of school funding. A small number of the State's 612 local
school districts have in any year required special assistance
to avoid year-end deficits. A current program provides for school
district cash need borrowing directly from commercial lenders,
with diversion of State subsidy distributions to repayment if
needed; in FY 1991, under this program, 26 districts borrowed
a total of $41.8 million (including over $27 million by one district)
and in FY 1992 borrowings totalled $61.9 million (including $46.6
million for one district).
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Ohio's 943 incorporated cities and villages rely primarily on
property and municipal income taxes for their operations, and,
with other local governments, receive local government support
and property tax relief moneys distributed by the State. For those
few municipalities that on occasion have faced significant financial
problems, there are statutory procedures for a joint State/local
commission to monitor the municipality's fiscal affairs, and for
development of a financial plan to eliminate deficits and cure
any defaults. Since inception in 1979, these procedures have been
applied to 22 cities and villages; for 16 of them the fiscal situation
was resolved and the procedures terminated.
At present the State itself does not levy ad valorem taxes on
real or tangible personal property. Those taxes are levied by
political subdivisions and other local taxing districts. The Constitution
has since 1934 limited the amount of the aggregate levy (including
a levy for unvoted general obligations) of property taxes by all
overlapping subdivisions, without a vote of the electors or a
municipal charter provision, to 1% of true value in money, and
statutes limit the amount of that aggregate levy to 10 mills per
$1 of assessed valuation (commonly referred to as the "ten-mill
limitation"). Voted general obligations of subdivisions are payable
from property taxes unlimited as to amount or rate.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Ohio Trusts
are subject. Additionally, many factors including national economic,
social, and environmental policies and conditions, which are not
within the control of the issuers of Bonds, could affect or could
have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the
State. The Sponsor is unable to predict whether or to what extent
such factors or other factors may affect the issuers of Bonds,
the market value or marketability of the Bonds, or the ability
of the respective issuers of the Bonds acquired by the Ohio Trusts
to pay interest on or principal of the Bonds.
The Oklahoma Trusts. Investors in the Oklahoma Trusts should consider
that the economy of the state has been experiencing difficulties
as a result of an economic recession largely attributable to a
decline in the agricultural industry and a rapid decline that
was experienced in the early and mid 1980s in the energy industry
which have, in turn, caused declines in the real estate industry,
the banking industry and most other sectors of the state's economy.
Continued low levels of economic activity, another decline in
oil and gas production prices, low growth in the state's major
industries or private or public financial difficulties could adversely
affect Bonds in the Portfolio and consequently the value of Units
in the Oklahoma Trusts.
Governmental expense budgeting provisions in Oklahoma are conservative,
basically requiring a balanced budget each fiscal year unless
a debt is approved by a vote of the people providing for the collection
of a direct annual tax to pay the debt. Certain limited exceptions
include: deficiency certificates issued in the discretion of the
Governor (however, the deficiency certificates may not exceed
$500,000 in any fiscal year); and debts to repel invasion, suppress
insurrection or to defend the State in the event of war.
To ensure a balanced annual budget, the State Constitution provides
procedures for certification by the State Board of Equalization
of revenues received in the previous fiscal year and amounts available
for appropriation based on a determination of revenues to be received
by the State in the General Revenue Fund in the next ensuing fiscal
year.
Beginning July 1, 1985, surplus funds were to be placed in a Constitutional
Reserve Fund until the Reserve Fund equals 10% of the General
Revenue Fund certification for the preceding fiscal year.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Oklahoma
Trusts are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which
are not within the control of the issuers of Bonds, could have
an adverse impact on the financial condition to predict whether
or to what extent such factors or other factors may affect the
issuers of Bonds, the market value or marketability
Page 103
of the Bonds or the ability of the respective issuers of the Bonds
acquired by the Oklahoma Trusts to pay interest on or principal
of the Bonds.
The Oregon Trusts. Oregon's nonagricultural employment growth
in 1988 exceeded the United States' rate for the third consecutive
year. While the decade of 1970 to 1980 marked a time of rapid
growth, the early years of the 1980s were a period of retrenchment
and job losses. Oregon finally regained pre-recessionary nonagricultural
employment levels (compared to 1979) in 1986, and continued growing
quickly through 1988.
The service and retail and wholesale trade sectors have contributed
most of the job gains. In 1979, services comprised 18% and retail
and wholesale trade 24% of total nonagricultural employment. Manufacturing
contributed 22%. By 1988, services grew to 23% and retail and
wholesale trade rose to 25%, but manufacturing shrank to 19%.
During the period 1979 to 1988, services and retail and wholesale
trade added 110,000 jobs while manufacturing jobs dropped by 14,000.
Total state population and personal income followed similar trends.
From 1975 to 1980, both population and personal income exceeded
national growth rates. In the late 1970s, Oregon's population
grew at a rate of two to three times the national average. The
early 1980s marked a reversal of this trend, and population and
personal income growth slowed to rates below the national average.
In 1991, the unemployment rate in Oregon was 6.0%, and in 1992
it increased to 7.5%. The seasonally adjusted rate for January
1993 dropped slightly to 7.3%. Increased demand for wood products,
primary metals and machinery and rapidly growing non-manufacturing
sectors helped to stimulate employment.
A mild climate, varied topography and rich soil support the nearly
100 agricultural commodities grown in Oregon and valued in terms
of gross farm sales at over $2.3 billion in 1988. Much of this
agricultural activity occurs in the Willamette River Valley in
the western portion of the State. This valley also contains most
of the State's population and much of the manufacturing activity.
Portland, located at the confluence of the Columbia and Willamette
Rivers, remains Oregon's largest city and the hub of economic
activity. The greater Portland area is a highly diversified manufacturing
center. It is also the home of the Port of Portland, a significant
seaport for trade between the western United States and the Pacific
Rim nations.
Outside the Willamette Valley, those areas not devoted primarily
to agriculture rely on the wood products industry and tourism.
Although the wood products industry is still sensitive to economic
fluctuations, increased automation and improved management are
enabling the industry to reach all-time high production levels
with fewer workers.
Oregon's economy grew moderately in the two decades immediately
following World War II. From 1950 to 1970, nonagricultural employment
growth averaged 2.7% per year. In the 1970s, however, the State
experienced rapid growth as population increased and economic
diversification continued. Oregon's growth significantly outpaced
the national average: from 1975 to 1980, nonagricultural employment
growth averaged 6.1% per year and per capita income rose above
the U.S. average.
The early 1980s' recessions hit Oregon hard. In 1982, nonagricultural
employment fell by 5.7% with much of the loss from the wood products
industry. Oregon remains slightly more sensitive to economic cycles
than the national average due to the forest products component
of its economy. Although recessionary periods continue to be somewhat
more pronounced in Oregon than in the nation as a whole, the higher
proportion of non-manufacturing jobs and restructuring of the
lumber and wood industry has provided more stability.
While the high technology industries added a significant number
of jobs in the late 1970s and early 1980s, the State has followed
national trends and lost jobs as a result of a slump in the semi-conductor,
electronics and instruments industries.
The high interest rates experienced early in the last decade had
a significant impact on certain sectors of the Oregon economy.
The recession-sensitive wood products, housing and construction
industries were
Page 104
particularly hard hit. Rural counties of eastern and southern
Oregon which depend on one or a combination of these industries
experienced the greatest impact. Many of these counties have since
diversified more and have benefited significantly from improved
tourism traffic. In urban areas generally, and in Portland in
particular, the diverse economic base has given a measure of insulation
from the impacts of the recession.
Tourism has been strong throughout the1980s, due in part to the
plentiful supplies of relatively low-cost automobile fuel and
improved national economy. Oregon's wood products industry is
undergoing a permanent restructuring, as many mills have automated
and improved their productivity greatly. The State has committed
itself to greater diversification of the economy by pursuing more
foreign trade in the considerable markets of the Pacific Rim countries.
Between 1979 and 1988, total nonagricultural wage and salary employment
in Oregon rose from1,056,200 to 1,152,300, an increase of 9.1%.
During this period, however, employment exhibited three different
trends.
In 1979, a dramatic rise in interest rates severely hurt credit-sensitive
industries such as construction and lumber and wood products and
plunged the Nation into the worst recession since the 1930s. Oregon's
housing-dependent economy was especially hard hit. Between 1979
and 1982, wage and salary employment plummeted by 9% to 960,000,
a loss of 95,400 jobs.
While the severity of the early 1980s recession eliminated many
jobs, both in manufacturing (-42,800) and non-manufacturing (-52,600),
it also caused interest rates and the inflation rate eventually
to drop significantly. This improvement, plus more stimulative
Federal monetary and fiscal policies, set the stage for another
period of economic expansion beginning in early 1983. In the six-year
period between 1982 and 1988, Oregon's wage and salary employment
increased by 20% to reach a new all-time high of 1,152,300, a
gain of 191,500 jobs.
The current expansion differs from previous recovery periods.
During the last six years, manufacturing employment has risen
by 28,600 jobs but is still about 14,200 below its 1979 pre-recession
peak of 228,500. This slow rate of recovery largely reflects increased
competition from foreign imports, automation and increased productivity.
In the first half of the 1980s, the rising foreign exchange value
of the dollar made U.S. exported goods more expensive overseas,
while foreign imports became cheaper to U.S. consumers. Manufacturing
firms in Oregon and the Nation have responded by reducing their
costs, restructuring their operations and automating production
processes wherever possible. In some cases, these efficiencies
have resulted in few jobs even though production volumes have
recovered and reached new all-time highs. Oregon's primary industry,
lumber and wood products, is one such example.
About 85% of the 191,500 new wage and salary jobs added in the
1982-1988 period came in non-manufacturing. Although every non-manufacturing
industrial category except mining, communications and utilities
increased employment, the service and trade industries accounted
for eight out of every ten new non-manufacturing jobs. Job growth
was especially strong in food stores, eating and drinking places,
health care and business services.
In its 1989 Regular Session, the Oregon Legislature approved General
Fund appropriations totally $4,585,476,617 for the 1989-1991 biennium.
This is a 22% increase compared to estimated 1987-1989 expenditures.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers in the Oregon Trusts
are subject. Additionally, many factors, including national economic,
social and environmental policies and conditions which are not
within the control of the issuers of Bonds, could affect or could
have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the
State. The Sponsor is unable to predict whether or to what extent
such factors or other factors may affect the issuers of Bonds,
the market value or marketability of
Page 105
the Bonds or the ability of the respective issuers of the Bonds
acquired by the Oregon Trusts to pay interest on or principal
of the Bonds.
The Pennsylvania Trusts. Investors should be aware of certain
factors that might affect the financial conditions of the Commonwealth
of Pennsylvania. Pennsylvania historically has been identified
as a heavy industry state although that reputation has changed
recently as the industrial composition of the Commonwealth diversified
when the coal, steel and railroad industries began to decline.
The major new sources of growth in Pennsylvania are in the service
sector, including trade, medical and the health services, education
and financial institutions. Pennsylvania's agricultural industries
are also an important component of the Commonwealth's economic
structure, accounting for more than $3.6 billion in crop and livestock
products annually, while agribusiness and food related industries
support $38 billion in economic activity annually.
Non-agricultural employment in the Commonwealth declined by 5.1
percent during the recessionary period from 1980 to 1983. In 1984,
the declining trend was reversed as employment grew by 2.9 percent
over 1983 levels. Since 1984, Commonwealth employment has continued
to grow each year, increasing an additional 9.1 percent from 1984
to 1991. The growth in employment experienced in Pennsylvania
is comparable to the growth in employment in the Middle Atlantic
Region which has occurred during this period. As a percentage
of total non-agricultural employment within the Commonwealth,
non-manufacturing employment has increased steadily since 1980
to its 1991 level of 80.8 percent of total employment. Consequently,
manufacturing employment constitutes a diminished share of total
employment within the Commonwealth. In 1991 the service sector
accounted for 28.6 percent of all non-agricultural employment
while the trade sector accounted for 22.8 percent.
While economic indicators in Pennsylvania have generally matched
or exceeded national averages since 1983, the Commonwealth is
currently facing a slowdown in its economy. Moreover, economic
strengths and weaknesses vary in different parts of the Commonwealth.
In November 1992 the seasonally adjusted unemployment rate for
the Commonwealth was 7.1 percent compared to 7.2 percent for the
United States.
It should be noted that the creditworthiness of obligations issued
by local Pennsylvania issuers may be unrelated to the creditworthiness
of obligations issued by the Commonwealth of Pennsylvania, and
there is no obligation on the part of the Commonwealth to make
payment on such local obligations in the event of default.
Financial information for the General Fund is maintained on a
budgetary basis of accounting. A budgetary basis of accounting
is used for the purpose of ensuring compliance with the enacted
operating budget and is governed by applicable statues of the
Commonwealth and by administrative procedures. The Commonwealth
also prepares annual financial statements in accordance with generally
accepted accounting principles ("GAAP"). The budgetary basis financial
information maintained by the Commonwealth to monitor and enforce
budgetary control is adjusted at fiscal year-end to reflect appropriate
accruals for financial reporting in conformity with GAAP.
Fiscal 1991 Financial Results:
GAAP Basis. During fiscal 1991 the General Fund experienced an
$861.2 million operating deficit resulting in a fund balance deficit
of $980.9 million at June 30, 1991. The operating deficit was
a consequence of the effect of a national recession that restrained
budget revenues and pushed expenditures above budgeted levels.
At June 30, 1991, a negative unreserved-undesignated balance of
$1,146.2 million was reported. During fiscal 1991 the balance
in the Tax Stabilization Reserve Fund was used to maintain vital
state spending and only a minimal balance remains in that fund.
Budgetary Basis. A deficit of $453.6 million was recorded by the
General Fund at June 30, 1991. The deficit was a consequence of
higher than budgeted expenditures and lower than estimated revenues
during the fiscal year brought about by the national economic
recession that began during the fiscal year. A number of actions
were taken throughout the fiscal year by the Commonwealth to mitigate
the effects of the recession
Page 106
on budget revenues and expenditures. Actions taken, together with
normal appropriation lapses, produced $871 million in expenditure
reductions and revenue increases for the fiscal year. The most
significant of these actions were a $214 million transfer from
the Pennsylvania Industrial Development Authority, a $134 million
transfer from the Tax Stabilization Reserve Fund, and a pooled
financing program to match federal Medicaid funds replacing $145
million of state funds.
Fiscal 1992 Financial Results:
GAAP Basis. During fiscal 1992 the General Fund reported a $1.1
billion operating surplus. This operating surplus was achieved
through legislated tax rate increases and tax base broadening
measures enacted in August 1991 and by controlling expenditures
through numerous cost reduction measures implemented throughout
the fiscal year. As a result of the fiscal 1992 operating surplus,
the fund balance has increased to $87.5 million and the unreserved-undesignated
deficit has dropped to $138.6 million from its fiscal 1991 level
of $1,146.2 million.
Budgetary Basis. Eliminating the budget deficit carried into fiscal
1992 from fiscal 1991 and providing revenues for fiscal 1992 budgeted
expenditures required tax revisions that are estimated to have
increased receipts for the 1992 fiscal year by over $2.7 billion.
Total revenues for the fiscal year were $14,516.8 million, a $2,654.5
million increase over cash revenues during fiscal 1991. Originally
based on forecasts for an economic recovery, the budget revenue
estimates were revised downward during the fiscal year to reflect
continued recessionary economic activity. Largely due to the tax
revisions enacted for the budget, corporate tax receipts totalled
$3,761.2 million, up from $2,656.3 million in fiscal 1991, sales
tax receipts increased by $302 million to $4,499.7 million, and
personal income tax receipts totalled $4,807.4 million, an increase
of $1,443.8 million over receipts in fiscal 1991.
As a result of the lowered revenue estimate during the fiscal
year, increased emphasis was placed on restraining expenditure
growth and reducing expenditure levels. A number of cost reductions
were implemented during the fiscal year and contributed to $296.8
million of appropriation lapses. These appropriation lapses were
responsible for the $8.8 million surplus at fiscal year-end, after
accounting for the required ten percent transfer of the surplus
to the Tax Stabilization Reserve Fund.
Spending increases in the fiscal 1992 budget were largely accounted
for by increases for education, social services and corrections
programs. Commonwealth funds for the support of public schools
were increased by 9.8 percent to provide a $438 million increase
to $4.9 billion for fiscal 1992. The fiscal 1992 budget provided
additional funds for basic and special education and included
provisions designed to help restrain the annual increase of special
education costs, an area of recent rapid cost increases. Child
welfare appropriations supporting county operated child welfare
programs were increased $67 million, more than 31.5 percent over
fiscal 1991. Other social service areas such as medical and cash
assistance also received significant funding increases as costs
have risen quickly as a result of the economic recession and high
inflation rates of medical care costs. The costs of corrections
programs, reflecting the marked increase in the prisoner population,
increased by 12 percent. Economic development efforts, largely
funded from bond proceeds in fiscal 1991, were continued with
General Fund appropriations for fiscal 1992.
The budget included the use of several Medicaid pooled financing
transactions. These pooling transactions replaced $135 million
of Commonwealth funds, allowing total spending under the budget
to increase by an equal amount.
Fiscal 1993 Budget.
The adopted fiscal 1993 budget is balanced within the official
revenue estimate and a planned draw-down of the $8.8 million beginning
budgetary basis surplus carried forward from fiscal 1992. The
budget appropriates $14.046 billion for spending during fiscal
1993, an increase of $32.1 million, or less than one-quarter of
one percent over total appropriations for fiscal 1992. This small
increase in expenditures was the result of revenues being constrained
by a personal income tax rate reduction effective July 1, 1992,
a low rate of economic growth, higher tax refund reserves to cushion
against adverse decisions on pending
Page 107
tax litigations, and $71.3 million of appropriation line-item
vetoes by the Governor. The appropriation line-item vetoes made
by the Governor prior to approving the fiscal 1993 budget were
made to meet the constitutional requirement for a balanced budget
by reducing spending in several programs from amounts authorized
by the General Assembly to amounts the Governor originally recommended
in his budget proposal, and by eliminating certain grants that
could not be funded within available resources. In approving the
fiscal 1993 budget, the Governor indicated that authorized spending
approved by the General Assembly for some programs was below his
recommendation and may be insufficient to carry costs for the
full fiscal year. Several of the Governor's cost containment proposals,
particularly those to contain expenditure increases in the medical
assistance and cash assistance programs were not enacted by the
General Assembly. Many of the cost containment efforts now are
being implemented through the regulatory process potentially reducing
budgeted current fiscal year savings.
The adopted fiscal 1993 budget eliminated funding for a number
of private educational institutions that normally receive state
appropriations. Also eliminated were certain grants to the counties
to help pay operating costs of the local judicial system. The
counties will need to replace these grant funds with other revenue
sources in order to pay judicial system costs. Any restoration
of these appropriations for the fiscal year or funding increases
to cover program cost shortfalls require action by the General
Assembly.
In December 1992, the Governor gave the General Assembly preliminary
estimates of projected fiscal 1993 supplemental appropriations
and proposed restorations of selective appropriations vetoed when
the fiscal 1993 budget was adopted. The projected supplemental
appropriations generally represent budget adjustments necessary
to offset amounts of savings included in the budget but not enacted
when the budget was adopted and to restore operating appropriations
to full year funding. These potential supplemental appropriations
and restorations total approximately $149 million and would be
funded, when enacted, by lapses of current and prior appropriation
balances and reductions of reserves for refunds due to revisions
to estimated refunds payable.
Commonwealth revenue sources are estimated for the fiscal 1993
budget to total $14.587 billion, a $69.9 million increase over
actual fiscal 1992 revenues, representing less than one-half of
one percent increase. The projected low revenue growth for fiscal
1993 is caused by the Commonwealth's expectation that current
weak growth in employment, consumer income, and retail sales will
continue, and by the reduction in the personal income tax rate
from 3.1% to 2.8% on July 1, 1992. In addition, tax refund reserves
were increased by $209 million to $548 million for fiscal 1993
to allow for potential tax refunds that might be payable from
any adverse judicial decision in a number of pending tax litigations.
Some of those reserves are believed to be in excess of amounts
that will be paid during fiscal 1993 and may be used to fund supplemental
appropriations for the fiscal year described above. Through November
1992, total General Fund collections of revenue were below estimated
revenues by one-third of one percent ($16.6 million). Small revenue
shortages were recorded from the sales tax and from the personal
income tax, but were mostly offset by higher collections from
corporation and liquor taxes and by higher miscellaneous revenue
collections. The Commonwealth believes its current fiscal 1993
General Fund revenue estimate is appropriate and does not expect
to substantially revise its estimate based on economic factors.
All outstanding general obligation bonds of the Commonwealth are
rated AA- by S&P and A1 by Moody's.
Any explanation concerning the significance of such ratings must
be obtained from the rating agencies. There is no assurance that
any ratings will continue for any period of time or that they
will not be revised or withdrawn.
The City of Philadelphia is the largest city in the Commonwealth
with an estimated population of 1,585,577 according to the 1990
Census. Philadelphia functions both as a City and a first-class
County for the purpose of administering various governmental programs.
Page 108
Legislation providing for the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA") to assist first-class
cities in remedying fiscal emergencies was enacted by the General
Assembly and approved by the Governor in June 1991. PICA is designed
to provide assistance through the issuance of funding debt to
liquidate budget deficits and to make factual findings and recommendations
to the assisted city concerning its budgetary and fiscal affairs.
An intergovernmental cooperation agreement between Philadelphia
and PICA was approved by City Counsel on January 3, 1992, and
approved by the PICA Board and signed by the Mayor on January
8, 1992. At this time, Philadelphia is operating under a revised
five-year fiscal plan approved by PICA on May 18, 1992. The five-year
plan is designed to produce a balanced budget over a five-year
period through a combination of personnel and budget initiatives,
productivity improvements, cost containments and revenue enhancements.
Full implementation of the five-year plan was delayed due to labor
negotiations that were not completed until October 1992, three
months after the expiration of the old labor contracts. The terms
of the new labor contracts are estimated to cost approximately
$144.0 million more than what was budgeted in the original five-year
plan. Philadelphia is presently amending the plan to bring it
back in balance.
Philadelphia experienced a series of operating deficits in its
General Fund beginning in fiscal year 1987. For the fiscal year
ended June 30, 1991, Philadelphia experienced a cumulative General
Fund balance deficit of $153.5 million. Philadelphia received
a grant from PICA in June 1992 which eliminated the deficit through
June 30, 1991. Philadelphia experienced a deficit through June
30, 1992 of $71.4 million (unaudited). Philadelphia is receiving
additional grants from PICA to eliminate the General Fund balance
deficit at June 30, 1992, $64.3 million, which is ninety percent
of the 71.4 million, was paid to Philadelphia on October 30, 1992,
and the remaining ten percent is expected to be paid to Philadelphia
once the final audit for the fiscal year ended June 30, 1992 has
been completed. Philadelphia is projecting a budget deficit for
fiscal year 1993 of $1.8 million.
As of the date hereof, the ratings on the City's long-term obligations
supported by payments from the City's General Fund are rated B
by Moody's and B by S & P. Any explanation concerning the significance
of such ratings must be obtained from the rating agencies. There
is no assurance that any ratings will continue for any period
of time or that they will not be revised or withdrawn.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers of the Bonds in
the Pennsylvania Trusts are subject. Additionally, many factors
including national economic, social and environmental policies
and conditions, which are not within the control of the issuers
of Bonds, could have an adverse impact on the financial condition
of the State and various agencies and political subdivisions located
in the State. The Sponsor is unable to predict whether or to what
extent such factors or other factors may affect the issuers of
Bonds, the market value or marketability of the Bonds or the ability
of the respective issuers of the Bonds acquired by the Pennsylvania
Trusts to pay interest on or principal of the Bonds.
The Tennessee Trusts. The following brief summary regarding the
economy of Tennessee is based upon information drawn from publicly
available sources and is included for the purpose of providing
the information about general economic conditions that may or
may not affect issuers of the Tennessee obligations. The Sponsor
has not independently verified any of the information contained
in such publicly available documents.
The State Constitution of Tennessee requires a balanced budget.
No legal authority exists for deficit spending for operating purposes
beyond the end of a fiscal year. Tennessee law permits tax anticipation
borrowing but any amount borrowed must be repaid during the fiscal
year for which the borrowing was done. Tennessee has not issued
any debt for operating purposes during recent years with the exception
of some advances which were made from the Federal Unemployment
Trust Fund in 1984. No such advances are now outstanding nor is
borrowing of any type for operating purposes contemplated.
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The State Constitution of Tennessee forbids the expenditure of
the proceeds of any debt obligation for a purpose other than the
purpose for which it was authorized by statute. Under State law,
the term of bonds authorized and issued cannot exceed the expected
life of the projects being financed. Furthermore, the amount of
a debt obligation cannot exceed the amount authorized by the General
Assembly.
The State budget for the fiscal year ending June 30, 1992 provides
for revenues and expenditures of approximately $8.48 billion.
Approximately 60% of budgeted State revenues are expected to be
generated from State taxes, with the balance from federal funds,
interdepartmental revenue, bond issues and fees from current services.
Through the first half of fiscal 1992, revenues were approximately
$60 million below budget projections. Since February of fiscal
1992, revenues have exceeded budget estimates, and it is expected
that revenues for the fiscal year will be in line with the original
budget. Sales tax revenues account for approximately 60% of State
tax revenue.
In February 1991, the Governor of Tennessee introduced to the
General Assemble a tax reform proposal intended to generate approximately
$627 million in new State revenue to upgrade the quality of Tennessee
public education. The tax program includes a 6% income tax on
dividends and bond interest received by individuals or other entities,
including partnerships and corporations, repeal of the State sales
tax on food, reduction of the combined State and local sales tax
rate to 6% from the current 8.25%, elimination of the local option
sales tax cap and a franchise tax of $.25 per $100 of issued and
outstanding stock, surplus, and undivided profits, apportioned
to Tennessee, at the end of the fiscal year.
The Tennessee economy generally tends to rise and fall in a roughly
parallel manner with the U.S. economy, although in recent years
Tennessee has experienced less economic growth than the U.S. average.
The Tennessee economy entered a recession in the last half of
1990 as the Tennessee index of leading economic indicators fell
throughout the period. Tennessee nominal gross State product rose
at a lower rate for 1990 and 1991 than the average annual rates
for the five year period 1985-89. GSP growth is expected to reach
3.9% in fiscal year 1992.
Tennessee's population increased 6.2% from 1980 to 1990, less
than the national increase of 10.2% for the same period. Throughout
1990, seasonally adjusted unemployment rates in Tennessee were
at or slightly below the national average but rose slightly above
the national average in December 1990. Beginning in the fourth
quarter of 1990, initial unemployment claims showed substantial
monthly increases. The unemployment rate for February 1991 stood
at 6.8% as compared to 5.4% for December 1990. The unemployment
rate for 1992 is expected to slowly drop relative to the 6.5%
average rate in 1991. A decline in manufacturing employment has
been partly offset by moderate growth in service sector unemployment.
Historically, the Tennessee economy has been characterized by
a greater concentration in manufacturing employment than the U.S.
as a whole. While in recent years Tennessee has followed the national
shift away from manufacturing toward service sector employment,
manufacturing continues to be the largest source of non-agricultural
employment in the state, and the state continues to attract new
manufacturing facilities. In addition to the General Motors Saturn
project and a major Nissan facility built in Tennessee in the
1980s, in January 1991, Nissan announced plans to develop a $600
million engine and component parts manufacturing facility in Decherd,
Tennessee. However, total planned investment in Tennessee's manufacturing
and service sectors was down sharply to $1.9 billion in 1990 from
$3.3 billion in 1989.
Non-agricultural employment in Tennessee is relatively uniformly
diversified, with approximately 24% in the manufacturing sector,
approximately 21% in the wholesale and retail trade sector, approximately
23% in the service sector and approximately 16% in government.
Tennessee's general obligation bonds are rated Aaa by Moody's
and AA+ by Standard & Poor's. Tennessee's smallest counties have
Moody's lowest rating due to these rural counties' limited economies
that make them vulnerable to economic downturns. Tennessee's four
largest counties have the second highest of Moody's nine investment
grades. There can be no assurance that the economic conditions
on which these
Page 110
ratings are based will continue or that particular obligations
contained in the Portfolio of the Tennessee Insured Trusts may
not be adversely affected by changes in economic or political
conditions.
The foregoing information does not purport to be a complete or
exhaustive description of all conditions to which the issuers
of Bonds in the Tennessee Trusts are subject. Many factors including
national economic, social and environmental policies and conditions,
which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition
of the State and various agencies and political subdivisions located
in the State. Since certain Bonds in the Tennessee Trusts (other
than general obligation bonds issued by the state) are payable
from revenue derived from a specific source or authority, the
impact of a pronounced decline in the national economy or difficulties
in significant industries within the state could result in a decrease
in the amount of revenues realized from such source or by such
authority and thus adversely affect the ability of the respective
issuers of the Bonds in the Tennessee Trusts to pay the debt service
requirements on the Bonds. Similarly, such adverse economic developments
could result in a decrease in tax revenues realized by the state
and thus could adversely affect the ability of the state to pay
the debt service requirements of any Tennessee general obligation
bonds in the Tennessee Trusts. The Sponsor is unable to predict
whether or to what extent such factors or other factors may affect
the issuers of Bonds, the market value or marketability of the
Bonds or the ability of the respective issuers of the Bonds acquired
by the Tennessee Trusts to pay interest on or principal of the
Bonds.
The Texas Trusts. This summary 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 Texas, including information provided in
official statements of recent Texas State issues. Historical data
on economic conditions in Texas is presented for background information
only, and should not be relied on to suggest future economic conditions
in the State.
Historically, the primary sources of the State's revenues have
been sales taxes, mineral severance taxes and Federal grants.
Due to the collapse of oil and gas prices in 1986 and a resulting
enactment by recent legislatures of new tax measures, including
those increasing the rates of existing taxes and expanding the
tax base for certain taxes, there has been a reordering in the
relative importance of the State's taxes in terms of their contribution
to the State's revenue in any year. Sales taxes remain the State's
main revenue source, accounting for 32.6% of State revenues during
fiscal year 1990, the highest percentage since the sales tax was
imposed in 1962. Federal grants remain the State's second largest
revenue source, accounting for approximately 25.5% of total revenue
during fiscal year 1990. Licenses, fees and permits, the State's
third largest revenue source, accounted for 6.8% of the total
revenue in fiscal year 1990. The motor fuels tax is now the State's
fourth largest revenue source and the second largest tax, accounting
for approximately 6.5% of total revenue during fiscal year 1990.
The remainder of the State's revenues are derived primarily from
other excise taxes. The State currently has no personal or corporate
income tax, although the State does impose a corporate franchise
tax based on the amount of a corporation's capital and surplus.
Persons considering the purchase of Units should be aware that
recently various proposals have been introduced in the Texas Legislature
the effect of which, if enacted in their present form, would be
among other things to impose (i) a Texas personal income tax on
the income of certain resident and nonresident individuals and
trusts, and (ii) a tax on certain incorporated and unincorporated
business entities doing business in Texas. It is impossible to
predict whether any such proposals will be enacted and, if enacted
will be in the same or substantially similar form as the present
proposals. Each potential purchaser of Units should consult its
own tax advisor concerning the impact these proposals would have
on such purchase.
Heavy reliance on the energy and agricultural sectors for jobs
and income resulted in a general downturn in the Texas economy
beginning in 1982 as those industries suffered significantly.
The effects of this downturn continue to adversely affect the
State's real estate industry and its financial institutions. As
a result of these problems, the general revenue fund had a $230
million cash deficit at the beginning of the 1987 fiscal year
and ended the 1987 fiscal year with a $744 million cash deficit.
In 1987, the Texas economy began to
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move toward a period of recovery. The expansion continued in 1988
and 1989. In fiscal year 1988, the State ended the year with a
general revenue fund cash surplus of $114 million. In fiscal year
1989, the State ended the year with a general revenue fund cash
surplus of $298 million. In fiscal year 1990, the State ended
the year with a general revenue fund surplus of $768 million.
The 71st Texas Legislature meeting in 1989 passed a record budget
totaling $47.4 billion in spending. Six special legislative sessions
in 1989 and 1990 relative to workers' compensation and school
financing resulted in the need to raise an additional $512.3 million
in revenue, the majority of which will come from an increase in
the State sales tax and taxes on tobacco products.
As part of the budget process, the Comptroller was required to
certify that sufficient revenue would be available over the 1990-1991
biennium (the State's budget period is a biennium of 24 months
beginning on September 1 in each odd-numbered year) to pay the
State's expenditures before the Governor could sign into law the
general appropriations bill passed by the Legislature. The Comptroller's
revenue estimates for fiscal 1991 biennium were based on the assumption
that the Texas economy will show a gradual, but steady growth.
Unemployment in Texas has been rising steadily. In 1991 and
1992, the unemployment rates were 6.6% and 7.5%, respectively.
The seasonally adjusted rate in January 1993 was 7.8%.
Sales taxes (both general and motor vehicle), which have become
the workhorse of the State's tax system, are predicted to continue
to grow. There can be no assurance, however, that the assumptions
about the Texas economy made by the Comptroller will prove accurate
or that the State will be able to realize its projected revenues.
Nor is it possible to predict what effect a failure to achieve
projected budget figures will have on the State's ability to meet
its general debt obligations. Moreover, recent projections from
the Comptroller predict a $5 billion deficit for the 1992-1993
biennium absent new taxes.
The Texas Constitution prohibits the State from levying ad valorem
taxes on property for general revenue purposes and limits the
rate of such taxes for other purposes to $.35 per $100 of valuation.
The Constitution also permits counties to levy, in addition to
all other ad valorem taxes permitted by the Constitution, ad valorem
taxes on property within the county for flood control and road
purposes in an amount not to exceed $.30 per $100 of valuation.
The Constitution prohibits counties, cities and towns from levying
a tax rate exceeding $.80 per $100 of valuation for general fund
and other specified purposes.
With certain specific exceptions, the Texas Constitution generally
prohibits the creation of debt by or on behalf of the State unless
the voters of the State, by constitutional amendment, authorize
the issuance of debt (including general obligation indebtedness
backed by the State's taxing power and full faith and credit).
To date, nearly $5 billion of general obligation bonds have been
authorized in Texas and almost $2.82 billion of such bonds are
currently outstanding. Of these, nearly half were issued by the
Veterans' Land Board. Other major issuers include the Texas Water
Development Board and the State's higher education systems.
Though the full faith and credit of the State are pledged for
the payment of all general obligations issued by the State, much
of that indebtedness is designed to be eventually self-supporting
from fees, payments, and other sources of revenues; in some instances,
the receipt of such revenues by certain issuing agencies has been
in sufficient amounts to pay the principal of and interest on
the issuer's outstanding bonds without requiring the use of appropriated
funds.
Pursuant to Article 717k-2, Texas Revised Civil Statutes, as presently
amended, the net effective interest rate for any issue or series
of Bonds in the Texas Trusts is limited to 15%.
From the time Standard & Poor's Corporation began rating Texas
general obligation bonds in 1956 until early 1986, that firm gave
such bonds its highest rating, "AAA." In April 1986, in response
to the State's economic problems, Standard & Poor's downgraded
its rating of Texas general obligation bonds to "AA+." Such rating
was further downgraded in July 1987 to "AA." Moody's Investors
Service, Inc. has rated Texas bonds since prior to the Great Depression.
Moody's upgraded its rating of Texas general obligation bonds
in 1962
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from "Aa" to "Aaa", its highest rating, following the imposition
of a statewide sales tax by the Legislature. Moody's downgraded
such rating to "Aa" in March 1987. No prediction can be made concerning
future changes in ratings by national rating agencies of Texas
general obligation bonds or concerning the effect of such ratings
changes on the market for such issues.
The same economic and other factors affecting the State of Texas
and its agencies also have affected cities, counties, school districts
and other issuers of bonds located throughout the State. Declining
revenues caused by the downturn in the Texas economy in the mid-1980s
forced these various other issuers to raise taxes and cut services
to achieve the balanced budget mandated by their respective charters
or applicable State law requirements. Standard & Poor's Corporation
and Moody's Investors Service, Inc. assign separate ratings to
each issue of bonds sold by these other issuers. Such ratings
may be significantly lower than the ratings assigned by such rating
agencies to Texas general obligation bonds.
A wide variety of Texas laws, rules and regulations affect, directly,
or indirectly, the payment of interest on, or the repayment of
the principal of, Bonds in the Texas Trusts. The impact of such
laws and regulations on particular Bonds may vary depending upon
numerous factors including, among others, the particular type
of Bonds involved, the public purpose funded by the Bonds and
the nature and extent of insurance or other security for payment
of principal and interest on the Bonds. For example, Bonds in
the Texas Trust which are payable only from the revenues derived
from a particular facility may be adversely affected by Texas
laws or regulations which make it more difficult for the particular
facility to generate revenues sufficient to pay such interest
and principal, including, among others, laws and regulations which
limit the amount of fees, rates or other charges which may be
imposed for use of the facility or which increase competition
among facilities of that type or which limit or otherwise have
the effect of reducing the use of such facilities generally, thereby
reducing the revenues generated by the particular facility. Bonds
in the Texas Trusts, the payment of interest and principal on
which is payable from annual appropriations, may be adversely
affected by local laws or regulations that restrict the availability
of monies with which to make such appropriations. Similarly, Bonds
in the Texas Trusts, the payment of interest and principal on
which is secured, in whole or in part, by an interest in real
property may be adversely affected by declines in real estate
values and by Texas laws that limit the availability of remedies
or the scope of remedies available in the event of a default on
such Bonds. Because of the diverse nature of such laws and regulations
and the impossibility of predicting the nature or extent of future
changes in existing laws or regulations or the future enactment
or adoption of additional laws or regulations, it is not presently
possible to determine the impact of such laws and regulations
on the Bonds in the Texas Trusts and, therefore, on the Units.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds in the Texas Trusts and does not purport to be a complete
or exhaustive description of all adverse conditions to which the
issuers in the Texas Trusts are subject. Additionally, many factors
including national economic, social and environmental policies
and conditions, which are not within the control of the issuers
of Bonds, could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. The Sponsor is unable to predict
whether or to what extent such factors or other factors may affect
the issuers of the Bond, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds
acquired by the Texas Trusts to pay interest on or principal of
the Bonds.
The Virginia Trusts. The Commonwealth's financial condition is
supported by a broad-based economy, including manufacturing, tourism,
agriculture, ports, mining and fisheries. Manufacturing continues
to be a major source of employment, ranking behind only services,
wholesale and retail trade, and government (Federal, state and
local). The Federal government is also a major employer in Virginia
due to the heavy concentration of Federal employees in the metropolitan
Washington, D.C., segment of Northern Virginia and the military
employment in the Hampton Roads area, which houses the nation's
largest concentration
Page 113
of military installations, although Federal and state deficit
reduction efforts could have a significant impact on growth in
the government sector, particularly in an era of low defense budgets.
For the past five years, per capita personal income in Virginia
has consistently been above the national average. In 1990, Virginia's
per capita personal income of $19,671 compared favorably with
that of the South Atlantic area ($18,112) and exceeded the national
average of $18,691. In 1990, Virginia ranked 12th in per capita
income, with an average approximately 5% greater than the national
average. Virginia unemployment rates have generally followed a
pattern similar to the national rate by have generally been at
least 10% lower than the national rate over the past five-year
period.
The Commonwealth of Virginia has historically operated on a fiscally
conservative basis and is required by its Constitution to have
a balanced biennial budget. At the end of the June 30, 1991 fiscal
year, the General Fund had an ending fund balance computed on
a budgetary cash basis of $45.5 million, of which $8.1 million
was in required reserve, with the remainder designated for the
completion of capital projects for the next fiscal year, leaving
no undesignated, unreserved fund balance. Computed on a modified
accrual basis in accordance with generally accepted accounting
principles, the General Fund balance at the end of the fiscal
year ended June 30, 1991, was minus $265.1 million, compared with
a General Fund balance of minus $139.6 million at the end of the
fiscal ended June 30, 1990. Contributing to the reduction were
$250.4 million in deferred credits, representing estimated tax
refunds associated with income taxes withheld for the period January
through June, 1991, and a shortfall of General Fund revenues of
$8.3 million below estimates, attributable in substantial part
to an economic slowdown in the economy. Nonetheless, the Commonwealth
met all of its obligations for the fiscal year and paid all bills
on a current basis.
Based on preliminary unaudited figures, the Commonwealth ended
its June 30, 1992 fiscal year with a revenue surplus of $44.2
million and a General Fund balance of $195.1 million, of which
$52.8 million was undesignated and available for future appropriations.
The surplus resulted from an austerity program that included budget
cuts but no general tax increase.
As of June 30, 1991, outstanding debt backed by the full faith
and credit of the Commonwealth aggregated $542.6 million. Of this
amount, $497.7 million was also secured by revenue producing capital
projects. Debt service on the balance equaled 0.2% of total General
Fund expenditures in fiscal year 1991.
The Virginia Constitution contains limits on the amount of general
obligation bonds which the Commonwealth can issue. These limits
are substantially in excess of current levels of outstanding bonds,
and at June 30, 1991 would permit an additional total of approximately
$5.00 billion of bonds secured by revenue-producing projects and
approximately $5.46 billion of unsecured general obligation bonds,
with not more than approximately $1.38 billion of the latter to
be issued in any four-year period. Bonds which are not secured
by revenue-producing projects must be approved in a State-wide
election.
The Commonwealth of Virginia has consistently maintained ratings
of AAA by Standard & Poor's Corporation and Aaa by Moody's Investors
Service on its general obligation indebtedness, reflecting in
part its sound fiscal management, diversified economic base and
low debt ratios. There can be no assurances that these conditions
will continue. Nor are these same conditions necessarily applicable
to securities which are not general obligations of the Commonwealth.
Securities issued by specific municipalities, governmental authorities
or similar issuers may be subject to economic risks or uncertainties
peculiar to the issuers of such securities or the sources from
which they are to be paid.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain issuers
of Bonds and does not purport to be a complete description of
all adverse conditions to which the issuers in the Virginia Trusts
are subject. Additionally, many factors including national economic,
social and environmental policies and conditions, which are not
within the control of the issuers of Bonds, could affect or could
have an adverse impact on the financial condition of the State,
various agencies and political subdivisions and private businesses
located in the State. The Sponsor is unable to predict whether
or to what extent such factors or other factors may affect the
issuers of Bonds, the market value or marketability
Page 114
of the Bonds or the ability of the respective issuers of the Bonds
acquired by the Virginia Trusts to pay interest on or principal
of the Bonds.
The Washington Trusts. General Information. Based on the U.S.
Census Bureau's 1990 Census, the State is the 18th largest by
population. From 1980 to 1990, the State's population increased
at an average annual rate of 1.8% while the United States' population
grew at an average annual rate of 1.1%. In 1991, the State's population
continued its growth at an annualized rate of 2%.
State Economic Overview. The State's economic performance over
the past few years has been relatively strong when compared to
that of the United States as a whole. The rate of economic growth
measured by employment in the State was 4.9% in 1990 slowing to
0.9% in 1991, compared with U.S. growth rates of 1.5% in 1990
and 0.9% in 1991. Based on preliminary figures and after adjusting
for inflation, growth in per capita income outperformed the national
economy during each year of the 1989-1991 period. A review of
employment within various segments of the economy indicates that
this growth in the State's economy was broadly based.
The economic base of the State includes manufacturing and service
industries as well as agricultural and timber production. Between
1987 and 1991, employment in the State experienced growth in both
manufacturing and non-manufacturing industries. Sectors of the
State's employment base in which growth exceeded comparable figures
reported for the United States during that period include durable
and non-durable goods manufacturing, services and government.
The State's leading export industries are aerospace, forest products,
agriculture and food processing. On a combined basis, the aerospace,
timber and food processing industries employ about 9% of the State's
non-farm workers. In recent years, however, the non-manufacturing
sector has played an increasingly significant role in contributing
to the State's economy.
Recently, The Boeing Company ("Boeing"), the State's largest employer,
announced it will reduce production of its commercial aircraft
by approximately 35% over the next 18 months due to the financial
problems of many of the world's airlines which have resulted in
deferred deliveries of aircraft and fewer new orders. It is estimated
that Boeing will cut at least 10,500 jobs in the State in 1993
and a total of 20,000 jobs in the State during the next three
years; this is expected to result in the loss of another 30,000
jobs in the rest of the State's economy, primarily in subcontracting,
trade and consumer-related services. While the specific impact
of this employment decrease on the State's economy cannot be quantified
at this time, some economists have predicted that a loss of up
to $400 million in 1993-1995 State revenues will result. No assurance
can be given that additional losses will not occur, or that the
effect of the expected losses will not be more adverse.
Weakness in the State's manufacturing sector, notably aerospace
and lumber and wood products, combined with a weak national recovery
due to fiscal constraints at the national level, are expected
to restrain economic growth in the State for the remainder of
the 1991-1993 biennium and into the 1993-1995 biennium. Weakness
in California's economy is also likely to adversely affect the
State's economic performance.
State Revenues, Expenditures and Fiscal Controls. The State's
tax revenues are primarily comprised of excise and ad valorem
taxes. By constitutional provision, the aggregate of all unvoted
tax levies upon real and personal property by State and local
taxing districts may not exceed 1% of the true and fair value
of such property.
By law, State tax revenue growth is limited so that it does not
exceed the growth rate of State personal income averaged over
a three-year period. To date, State tax revenue increases have
remained substantially below the State's revenue limit.
Expenditures of general State revenues are made pursuant to constitutional
and statutory mandates. Most general State revenue is deposited
in the State's General Fund. During the 1991-1993 biennium, money
in the General Fund is expected to be spent on public schools
(37.5%), social and health services (36.4%), higher education
(7.0%), community colleges (3.5%), and corrections (2.5%).
Page 115
State law requires a balanced biennial budget. Whenever it appears
that disbursements will exceed the aggregate of estimated receipts
plus beginning cash surplus, the Governor is required to reduce
expenditures of appropriated funds. To assist in its financial
planning, the State, through its Economic and Revenue Forecast
Council, prepares quarterly economic and revenue forecasts.
State Debt. The State currently has outstanding general obligation
and revenue bonds in the aggregate principal amount of approximately
$4.7 billion. Issuance of additional general obligation bonds
is subject to constitutional and statutory debt limitations. By
statute, additional general obligation bonds (with certain exceptions)
may not be issued if, after giving effect thereto, maximum annual
debt service would exceed 7% of the arithmetic mean of general
State revenues for the preceding three fiscal years. Based on
certain assumptions, the State's remaining general obligation
debt capacity is currently estimated at approximately $1.1 billion.
State Budget. The State operates on a July 1 to June 30 fiscal
year and on a biennial budget basis. The State began the 1991-1993
biennium with a $468 million surplus in its General Fund and $260
million in its budget stabilization account, a "rainy day fund."
The original 1991-93 biennium budget reflected expected revenue
growth of 12.4%. Weaker than expected revenue collections for
the first six months of fiscal 1991 prompted the State Economic
and Revenue Forecast Council to reduce projected revenue growth
to a rate of 7.2%, resulting in a forecast General Fund cash deficit
for the 1991-1993 biennium. In addition, supplemental operating
budget adjustments for State and federally mandated funding of
social and health service programs, prisons and correctional facilities,
and K-12 education contributed to the projected shortfall.
In response to the forecast cash deficit, the Governor, in fulfillment
of his statutory duty to maintain a balanced budget, implemented
a 2.5% across-the-board reduction in General Fund appropriations,
effective December 1, 1991. In 1992, a 1991-93 biennium supplemental
budget was adopted. Actions taken include expenditure reductions,
selected tax increases and use of a portion of the budget stabilization
account. The result, when taken in conjunction with the November
1992 revenue forecast, is a projected General Fund State balance
for June 1993 of $170 million with a $100 million balance in the
budget stabilization account. The next revenue forecast is scheduled
to be released in March 1993. There is no assurance that additional
actions will not be necessary to balance the State budget, particularly
in light of the recent unfavorable developments in the aerospace
industry.
The 1993-1995 biennium budget is currently being considered by
the State Legislature. A shortfall of $1.6 billion to $2.4 billion
in a $17 billion budget has been projected by some analysts. In
response, the Governor has proposed making $800 million in expenditure
cuts, and recently has favored a State income tax. An increase
in general sales and business taxes has also been discussed. No
predictions can be made on what steps the State will be required
to take to address the potential deficit, nor can any assurance
be given that such measures will not adversely affect the market
value of the Bonds held in the portfolio of the Trust or the ability
of the State (or any other obligor) to make timely payments of
debt service on (or relating to) these obligations or the State's
ability to service its debts.
State Bond Ratings. The State's most recent general obligation
bond issue was rated "Aa" by Moody's and "AA" by S&P. No assurance
can be given that the State's recent or projected economic and
budgetary problems will not result in a review or downgrading
of these ratings.
Supply System Bondholders' Suit. The Washington Public Power Supply
System (the "Supply System"), a municipal corporation of the State,
was established to acquire, construct and operate facilities for
the generation and transmission of electricity. In 1983, the Supply
System announced it was not able to pay debt service on $2.25
billion of bonds issued to finance two of its nuclear generating
projects. Chemical Bank, the trustee for such bonds, then declared
the entire principal and interest on the bonds due and payable
immediately. A substantial amount of litigation followed in various
state and federal courts. Various claims were made against the
State, private and public utilities, the Bonneville Power Administration,
the Supply System, underwriters, attorneys and others. In 1989,
a federal court approved a comprehensive settlement in respect
of the securities litigation arising from the default that involved
the State. The State agreed to contribute
Page 116
$10 million to the settlement in return for a complete release,
including a release of claims against the State in a State court
action. Based on the settlement in federal court, the State anticipates
that the State court action will be dismissed, although no assurance
can be given that such action will be dismissed.
The foregoing information constitutes only a brief summary of
some of the general factors which may impact certain issuers of
bonds and does not purport to be a complete or exhaustive description
of all adverse conditions to which the issuers of obligations
held by the Washington Trusts are subject. Additionally, many
factors including national economic, social and environmental
policies and conditions, which are not within the control of the
Issuers of the Bonds, could affect or could have an adverse impact
on the financial condition of the State and various agencies and
political subdivisions located in the State. The Sponsor is unable
to predict whether or to what extent such factors or other factors
may affect the issuers of the Bonds, the market value or marketability
of the Bonds or the ability of the respective issuers of the Bonds
acquired by the Washington Trusts to pay interest on or principal
of the Bonds.
The Discount Trusts. The current yields 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. 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 longer term to maturity tend
to have a higher current yield and a lower current market value
than otherwise comparable bonds with a shorter term to maturity.
If interest rates rise, the value of 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.
Certain of the Bonds in the Discount Trusts may be original issue
discount bonds. Under current law, the original issue discount,
which is the difference between the stated redemption price at
maturity and the issue price of the Bonds, is deemed to accrue
on a daily basis and the accrued portion is treated as tax-exempt
interest income for Federal income tax purposes. On sale or redemption,
any gain realized that is in excess of the earned portion of original
issue discount will be taxable as capital gain. The current value
of an original issue discount bond reflects the present value
of its stated redemption price at maturity. The market value tends
to increase in greater increments as the Bonds approach maturity.
Certain of the original issue discount bonds in the Discount Trusts
may be Zero Coupon Bonds (including bonds known as multiplier
bonds, money multiplier bonds, capital appreciation bonds, capital
accumulator bonds, compound interest bonds and discount maturity
payment bonds). Zero Coupon Bonds do not provide for the payment
of any current interest and generally provide for payment at maturity
at face value unless sooner sold or redeemed.ZERO COUPON BONDS
DO NOT PROVIDE FOR THE PAYMENT OF ANY CURRENT INTEREST AND GENERALLY
PROVIDE FOR PAYMENT AT MATURITY AT FACE VALUE UNLESS SOONER SOLD
OR REDEEMED. Zero Coupon Bonds may be subject to more price volatility
than conventional bonds. While some types of Zero Coupon Bonds,
such as multipliers and capital appreciation bonds, define par
as the initial offering price rather than the maturity value,
they share the basic Zero Coupon Bond features of (1) not paying
interest on a semi-annual basis and (2) providing for the reinvestment
of the bond's semi-annual earnings at the bond's stated yield
to maturity. While Zero Coupon Bonds are frequently marketed on
the basis that their fixed rate of return minimizes reinvestment
risk, this benefit can be negated in large part by weak call protection,
i.e., a bond's provision for redemption at only a modest premium
over the accreted value of the bond.
Certain of the Bonds in the Discount Trusts may have been purchased
at a premium over par value. Certain of these Bonds are subject
to redemption pursuant to call provisions in approximately 5-8
years after the Date of Deposit. Redemption pursuant to call provisions
generally will, and redemption pursuant to sinking fund provisions
may, occur at times when the redeemed Bonds have an offering side
valuation which represents a premium over par or for original
issue discount Bonds a premium over the accreted value. To the
extent that the Bonds were deposited in the Fund at a price higher
than the price at which they are redeemed, this will represent
a loss of capital when compared to the original Public Offering
Price of the Units. Because premium Bonds generally pay a higher
rate of interest than Bonds priced at or below par, the effect
Page 117
of the redemption of premium Bonds would be to reduce Estimated
Net Annual Unit Income by a greater percentage than the par amount
of such Bonds bears to the total par amount of Bonds in a Trust.
Although the actual impact of any such redemptions that may occur
will depend upon the specific Bonds that are redeemed, it can
be anticipated that the Estimated Net Annual Unit Income will
be significantly reduced after the dates on which such Bonds are
eligible for redemption. See "Part One" for each Trust for the
earliest scheduled call date and the current redemption price
for each Bond.
What are the Expenses and Charges?
At no cost to the Trusts, the Sponsor has borne all the expenses
of creating and establishing the Fund, including the cost of the
initial preparation, printing and execution of the Indenture and
the certificates for the Units, legal and accounting expenses,
expenses of the Trustee and other out-of-pocket expenses. The
Sponsor will not receive any fees in connection with its activities
relating to any Trust. However, for Series 49 and all subsequent
Series, Nike Financial Advisory Services L.P., an affiliate of
the Sponsor, will receive an annual supervisory fee, which is
not to exceed the amount set forth in Part One for each Trust,
for providing portfolio supervisory services for the Trust. Such
fee is based on the number of Units outstanding in each Trust
on January 1 of each year except for Trusts which were established
subsequent to the last January 1, in which case the fee will be
based on the number of Units outstanding in such Trusts as of
the respective Dates of Deposit. The fee may exceed the actual
costs of providing such supervisory services for this Fund, but
at no time will the total amount received for portfolio supervisory
services rendered to unit investment trusts of which Nike Securities
L.P. is the Sponsor in any calendar year exceed the aggregate
cost to Nike Financial Advisory Services L.P. of supplying such
services in such year.
For each valuation of the Bonds in a Trust, the Evaluator will
receive a fee as indicated in Part One of this Prospectus. The
Trustee pays certain expenses of each Trust for which it is reimbursed
by such Trust. The Trustee will receive for its ordinary recurring
services to a Trust an annual fee computed at $1.05, $.80 and
$.55 per annum per $1,000 principal amount of underlying Bonds
in the Trusts for those portions of the Trusts representing monthly,
quarterly (if applicable) and semi-annual distribution plans,
respectively. For a discussion of the services performed by the
Trustee pursuant to its obligations under the Indenture, reference
is made to the material set forth under "Rights of Unit Holders."
The Trustee's and Evaluator's fees are payable monthly on or before
each Distribution Date from the Interest Account of each Trust
to the extent funds are available and then from the Principal
Account of such Trust. Since the Trustee has the use of the funds
being held in the Principal and Interest Accounts for future distributions,
payment of expenses and redemptions and since such Accounts are
non-interest-bearing to Unit holders, the Trustee benefits thereby.
Part of the Trustee's compensation for its services to the Fund
is expected to result from the use of these funds. Both fees may
be increased without approval of the Unit holders by amounts not
exceeding proportionate increases under the category "All Services
Less Rent of Shelter" in the Consumer Price Index published by
the United States Department of Labor.
The annualized cost of the portfolio insurance obtained by the
Fund for each Insured Trust is indicated in Part One for each
Trust in a Series of the Fund. The portfolio insurance continues
so long as such Trust retains the Bonds thus insured. Premiums
are payable monthly in advance by the Trustee on behalf of such
Trust. As Bonds in the portfolio are redeemed by their respective
issuers or are sold by the Trustee, the amount of premium will
be reduced in respect of those Bonds no longer owned by and held
in the Trust which were insured by insurance obtained by such
Trust. Preinsured Bonds for which insurance has been obtained
from Financial Guaranty and/or AMBAC Indemnity or, beginning with
Series 25 and all subsequent Series, other insurers, are not insured
by such Trust. The premium payable for Permanent Insurance will
be paid solely from the proceeds of the sale of such Bond in the
event the Trustee exercises the right to obtain Permanent Insurance
on a Bond. The premiums for such Permanent Insurance with respect
to each Bond will decline over the life of the Bond. An Advantage
Trust is not insured; accordingly, there are no premiums for insurance
payable by such Trust.
Page 118
The following additional charges are or may be incurred by a Trust:
all expenses (including legal and annual auditing expenses) of
the Trustee incurred in connection with its responsibilities under
the Indenture, except in the event of negligence, bad faith or
willful misconduct on its part; the expenses and costs of any
action undertaken by the Trustee to protect the Trust and the
rights and interests of the Unit holders; fees of the Trustee
for any extraordinary services performed under the Indenture;
indemnification of the Trustee for any loss, liability or expense
incurred by it without negligence, bad faith or willful misconduct
on its part, arising out of or in connection with its acceptance
or administration of the Trust; indemnification of the Sponsor
for any loss, liability or expense incurred without gross negligence,
bad faith or willful misconduct in acting as Depositor of the
Trust; all taxes and other government charges imposed upon the
Bonds or any part of the Trust (no such taxes or charges are being
levied or made or, to the knowledge of the Sponsor, are contemplated);
and expenditures incurred in contacting Unit holders upon termination
of the Trust. The above expenses and the Trustee's annual fee,
when paid or owing to the Trustee, are secured by a lien on the
Trust. In addition, the Trustee is empowered to sell Bonds of
a Trust in order to make funds available to pay all these amounts
if funds are not otherwise available in the Interest and Principal
Accounts of the Trust.
Unless the Sponsor determines that such an audit is not required,
the Indenture requires the accounts of each Trust to be audited
on an annual basis at the expense of the Trust by independent
auditors selected by the Sponsor. So long as the Sponsor is making
a secondary market for Units, the Sponsor shall bear the cost
of such annual audits to the extent such cost exceeds $.50 per
Unit. Unit holders of a Trust covered by an audit may obtain a
copy of the audited financial statements from the Trustee upon
request.
PUBLIC OFFERING
How is the Public Offering Price Determined?
Although it is not obligated to do so, the Sponsor intends to
maintain a market for the Units and continuously to offer to purchase
Units at prices, subject to change at any time, based upon the
aggregate bid price of the Bonds in the portfolio of each Trust
plus interest accrued to the date of settlement. All expenses
incurred in maintaining a market, other than the fees of the Evaluator
and the costs of the Trustee in transferring and recording the
ownership of Units, will be borne by the Sponsor. If the supply
of Units exceeds demand, or for some other business reason, the
Sponsor may discontinue purchases of Units at such prices. IF
A UNIT HOLDER WISHES TO DISPOSE OF HIS UNITS, HE SHOULD INQUIRE
OF THE SPONSOR AS TO CURRENT MARKET PRICES PRIOR TO MAKING A TENDER
FOR REDEMPTION TO THE TURSTEE. Prospectuses relating to certain
other bond funds indicate an intention, subject to change, on
the part of the respective sponsors of such funds to repurchase
units of those funds on the basis of a price higher than the bid
prices of the securities in the funds. Consequently, depending
upon the prices actually paid, the repurchase price of other sponsors
for units of their funds may be computed on a somewhat more favorable
basis than the repurchase price offered by the Sponsor for Units
of a Trust in secondary market transactions. As in the First Trust
Combined Series, the purchase price per unit of such bond funds
will depend primarily on the value of the securities in the Portfolio
of the applicable Trust.
The Public Offering Price of Units of a Trust will be determined
by adding to the Evaluator's determination of the aggregate bid
price of the Bonds in a Trust the appropriate sales charge determined
in accordance with the schedule set forth below, based upon the
number of years remaining to the maturity of each Bond in the
portfolio of the Trust, adjusting the total to reflect the amount
of any cash held in or advanced to the principal account of the
Trust and dividing the result by the number of Units of such trust
then outstanding. The minimum sales charge on Units will be 3%
of the Public Offering Price (equivalent to 3.093% of the net
amount invested). For purposes of computation, Bonds will be deemed
to mature on their expressed maturity dates unless: (a) the Bonds
have been called for redemption or funds or securities have been
placed in escrow to redeem them on an earlier call date, in which
case such call date will be deemed to be the date upon which they
mature; or (b) such Bonds are subject to a "mandatory tender,"
in which case such mandatory tender will be deemed to be the date
upon which they mature.
Page 119
The effect of this method of sales charge computation will be
that different sales charge rates will be applied to each of the
various Bonds in the Trusts based upon the maturities of such
bonds, in accordance with the following schedule:
<TABLE>
<CAPTION>
Secondary Offering Period
Sales Charge
________________________________
Percentage Percentage
of Public of Net
Offering Amount
Years to Maturity Price Invested
_________________ __________ __________
<S> <C> <C>
0 Months to 1 Year 1.00% 1.010%
1 but less than 2 1.50 1.523
2 but less than 3 2.00 2.041
3 but less than 4 2.50 2.564
4 but less than 5 3.00 3.093
5 but less than 6 3.50 3.627
6 but less than 7 4.00 4.167
7 but less than 8 4.50 4.712
8 but less than 9 5.00 5.263
9 but less than 10 5.50 5.820
10 or more 5.80 6.157
</TABLE>
There will be no reduction of the sales charges for volume purchases.
A dealer will receive from the Sponsor a dealer concession of
70% of the total sales charges for Units sold by such dealer and
dealers will not be eligible for additional concessions for Units
sold pursuant to the above schedule.
An investor may aggregate purchases of Units of two or more consecutive
series of a particular State, National, Discount, Intermediate,
Long Intermediate or Short Intermediate Trust for purposes of
calculating the discount for volume purchases listed above. Additionally,
with respect to the employees and officers (including their immediate
families and trustees, custodians or a fiduciary for the benefit
of such person) of Nike Securities L.P., the sales charge is reduced
by 2% of the Public Offering Price for purchases of Units during
the secondary offering period.
Any such reduced sales charge shall be the responsibility of the
selling Underwriter or dealer except that with respect to purchases
of Units of $500,000 or more, the Sponsor will reimburse the selling
Underwriter or dealer in an amount equal to $2.50 per Unit (in
the case of a Discount Trust, .25% of the Public Offering Price).
The reduced sales charge structure will apply on all purchases
of Units in a Trust by the same person on any one day from any
one Underwriter or dealer and, for purposes of calculating the
applicable sales charge, purchases of Units in the Fund will be
aggregated with concurrent purchases by the same person from such
Underwriter or dealer of units in any series of tax-exempt unit
investment trusts sponsored by Nike Securities L.P. Additionally,
Units purchased in the name of the spouse of a purchaser or in
the name of a child of such purchaser will be deemed, for the
purpose of calculating the applicable sales charge, to be additional
purchases by the purchaser. The reduced sales charges will also
be applicable to a trustee or other fiduciary purchasing securities
for a single trust estate or single fiduciary account.
Underwriters, dealers and others who, in a single month, sell
Units of any Series of The First Trust GNMA, The First Trust of
Insured Municipal Bonds, The First Trust Combined Series or any
other unit investment trust of which Nike Securities L.P. is the
Sponsor (the "UIT Units"), which sale of UIT Units are in the
aggregate following dollar amounts, will receive additional concessions
as indicated in the following table:
Page 120
<TABLE>
<CAPTION>
Aggregate Monthly
Dollar Amount of
UIT Units Sold at Additional Concession
Public Offering Price (per $1,000 sold)
_____________________ _____________________
<S> <C>
$1,000,000 - $2,499,999 $ .50
$2,500,000 - $4,999,999 $1.00
$5,000,000 - $7,499,999 $1.50
$7,500,000 - $9,999,999 $2.00
$10,000,000 - or more $2.50
</TABLE>
Aggregate Monthly Dollar Amount of UIT Units Sold at Public Offering
Price is based on settled trades for a month, net of redemptions,
and excludes trades without a sales charge at net asset value.
From time to time the Sponsor may implement programs under which
Underwriters and dealers of the Fund may receive nominal awards
from the Sponsor for each of their registered representatives
who have sold a minimum number of UIT Units during a specified
time period. In addition, at various times the Sponsor may implement
other programs under which the sales force of an Underwriter or
dealer may be eligible to win other nominal awards for certain
sales efforts, or under which the Sponsor will allow to any such
Underwriter or dealer that sponsors sales contests or recognition
programs conforming to criteria established by the Sponsor, or
participates in sales programs sponsored by the Sponsor, an amount
not exceeding the total applicable sales charges on the sales
generated by such person at the public offering price during such
programs. Also, the Sponsor in its discretion may from time to
time pursuant to objective criteria established by the Sponsor
pay fees to qualifying Underwriters or dealers for certain services
or activities which are primarily intended to result in sales
of Units of the Trusts. Such payments are made by the Sponsor
out of its own assets, and not out of the assets of the Trusts.
These programs will not change the price Unit holders pay for
their Units or the amount that the Trusts will receive from the
Units sold.
A comparison of tax-free and equivalent taxable estimated current
returns and estimated long-term returns with the returns on various
taxable investments is one element to consider in making an investment
decision. The Sponsor may from time to time in its advertising
and sales materials compare the then current estimated returns
on the Trust and returns over specified periods on other similar
Trusts sponsored by Nike Securities L.P. with returns on taxable
investments such as corporate or U.S. Government bonds, bank CDs
and money market accounts or money market funds, each of which
has investment characteristics that may differ from those of the
Trust. U.S. Government bonds, for example, are backed by the full
faith and credit of the U.S. Government and bank CDs and money
market accounts are insured by an agency of the federal government.
Money market accounts and money market funds provide stability
of principal, but pay interest at rates that vary with the condition
of the short-term debt market. The investment characteristics
of the Trust are described more fully elsewhere in this Prospectus.
The aggregate price of the Bonds in each Trust is determined by
whomever from time to time is acting as evaluator (the "Evaluator"),
on the basis of bid prices or offering prices as is appropriate,
(1) on the basis of current market prices for the Bonds obtained
from dealers or brokers who customarily deal in bonds comparable
to those held by the Trust; (2) if such prices are not available
for any of the Bonds, on the basis of current market prices for
comparable bonds; (3) by determining the value of the Bonds by
appraisal; or (4) by any combination of the above. Unless Bonds
are in default in payment of principal or interest or, in the
Sponsor's opinion, in significant risk of such default, the Evaluator
will not attribute any value to the insurance obtained by an Insured
Trust. On the other hand, the value of insurance obtained by the
issuer of Bonds in a Trust is reflected and included in the market
value of such Bonds.
The Evaluator will consider in its evaluation of Bonds which are
in default in payment of principal or interest or, in the Sponsor's
opinion, in significant risk of such default (the "Defaulted Bonds")
and which are covered by insurance obtained by an Insured Trust,
the value of the insurance guaranteeing interest and principal
payments. The value of the insurance will be equal to the difference
between (i) the market value of Defaulted
Page 121
Bonds assuming the exercise of the right to obtain Permanent Insurance
(less the insurance premium attributable to the purchase of Permanent
Insurance) and (ii) the market value of such Defaulted Bonds not
covered by Permanent Insurance. In addition, the Evaluator will
consider the ability of Financial Guaranty and/or AMBAC Indemnity
to meet its commitments under an Insured Trust's insurance policy,
including the commitments to issue Permanent Insurance. It is
the position of the Sponsor that this is a fair method of valuing
the Bonds and the insurance obtained by an Insured Trust and reflects
a proper valuation method in accordance with the provisions of
the Investment Company Act of 1940. For a description of the circumstances
under which a full or partial suspension of the right of Unit
holders to redeem their Units may occur, see "Rights of Unit Holders-How
May Units be Redeemed?"
The Evaluator may be attributing value to insurance for the purpose
of computing the price or redemption value of Units for certain
previous series of the First Trust of Insured Municipal Bonds,
an investment company sponsored by Nike Securities L.P. See Part
One for further information with respect to whether value is being
attributed to insurance in determining the value of Units for
that series of the Fund.
The Evaluator will be requested to make a determination of the
aggregate price of the Bonds in each Trust, on a bid price basis,
as of the close of trading on the New York Stock Exchange on each
day on which it is open, effective for all sales, purchases or
redemptions made subsequent to the last preceding determination.
The secondary market Public Offering Price of the Units will be
equal to the bid price per Unit of the Bonds in the Trust, plus
(less) any balance (overdraft) in the principal cash account of
such Trust, plus the applicable sales charge.
Although payment is normally made five business days following
the order for purchase, payment may be made prior thereto. Cash,
if any, made available to the Sponsor prior to the date of settlement
for the purchase of Units may be used in the Sponsor's business
and may be deemed to be a benefit to the Sponsor, subject to the
limitations of the Securities Exchange Act of 1934. Delivery of
Certificates representing Units so ordered will be made five business
days following such order or shortly thereafter. See "Rights of
Unit Holders-How May Units Be Redeemed?" for information regarding
the ability to redeem Units ordered for purchase.
How are Units Distributed?
It is the intention of the Sponsor to qualify Units of the Fund
for sale in a number of states. Sales will be made to dealers
and others at prices which represent a concession or agency commission
of 4.0% of the Public Offering Price per Unit for each State,
Discount or National Trust, 3.0% of the Public Offering Price
for an Intermediate or Long Intermediate Trust, and 2.5% of the
Public Offering Price per Unit for a Short Intermediate Trust,
but the Sponsor reserves the right to change the amount of the
concession or agency commission from time to time. Certain commercial
banks are making Units of the Fund available to their customers
on an agency basis. A portion of the sales charge paid by these
customers is retained by or remitted to the banks in the amounts
indicated in the second preceding sentence. Under the Glass-Steagall
Act, banks are prohibited from underwriting Fund Units; however,
the Glass-Steagall Act does permit certain agency transactions
and the banking regulators have not indicated that these particular
agency transactions are not permitted under such Act. In Texas
and in certain other states, any banks making Units available
must be registered as broker/dealers under state law.
What are the Sponsor's Profits?
The Sponsor and participating dealers will receive a maximum gross
sales commission equal to 5.8% of the Public Offering Price of
the Units of each State Trust (equivalent to 6.157% of the net
amount invested), 5.8% of the Public Offering Price of the Units
of a National or Discount Trust (equivalent to 6.157% of the net
amount invested), 4.7% of the Public Offering Price of the Units
of an Intermediate or Long Intermediate Trust (equivalent to 4.932%
of the net amount invested), and 3.7% of the Public Offering Price
of the Units of a
Page 122
Short Intermediate Trust (equivalent to 3.842% of the net amount
invested) less any reduced sales charge for quantity purchases
as described under "Public Offering-How is the Public Offering
Price Determined?"
In maintaining a market for the Units, the Sponsor will also realize
profits or sustain losses in the amount of any difference between
the price at which Units are purchased (based on the bid prices
of the Bonds in each Trust) and the price at which Units are resold
(which price is also based on the bid prices of the Bonds in each
Trust and includes a sales charge of 5.8% for a State Trust, 5.8%
for a National or Discount Trust, 4.7% for an Intermediate or
Long Intermediate Trust and 3.7% for a Short Intermediate Trust)
or redeemed. The secondary market public offering price of Units
may be greater or less than the cost of such Units to the Sponsor.
RIGHTS OF UNIT HOLDERS
How are Certificates Issued and Transferred?
The Trustee is authorized to treat as the record owner of Units
that person who is registered as such owner on the books of the
Trustee. Ownership of Units is evidenced by registered certificates
executed by the Trustee and the Sponsor. Delivery of certificates
representing Units ordered for purchase is normally made five
business days following such order or shortly thereafter. Certificates
are transferable by presentation and surrender to the Trustee
properly endorsed or accompanied by a written instrument or instruments
of transfer. Certificates to be redeemed must be properly endorsed
or accompanied by a written instrument or instruments of transfer.
A Unit holder must sign exactly as his name appears on the face
of the certificate with the signature guaranteed by an officer
of a commercial bank or trust company, a member firm of either
the New York, American, Midwest or Pacific Stock Exchange, or
in such other manner as may be acceptable to the Trustee. In certain
instances the Trustee may require additional documents such as,
but not limited to, trust instruments, certificates of death,
appointments as executor or administrator or certificates of corporate
authority. Record ownership may occur before settlement.
Certificates will be issued in fully registered form, transferable
only on the books of the Trustee in denominations of one Unit
or any multiple thereof, numbered serially for purposes of identification.
Certificates for Units will bear an appropriate notation on their
face indicating which plan of distribution has been selected in
respect thereof. When a change is made, the existing certificate
must be surrendered to the Trustee and a new certificate issued
to reflect the then currently effective plan of distribution.
There is no charge for this service.
Although no such charge is now made or contemplated, a Unit holder
may be required to pay $2.00 to the Trustee per certificate reissued
or transferred for reasons other than to change the plan of distribution,
and to pay any governmental charge that may be imposed in connection
with each such transfer or exchange. For new certificates issued
to replace destroyed, stolen or lost certificates, the Unit holder
may be required to furnish indemnity satisfactory to the Trustee
and pay such expenses as the Trustee may incur. Mutilated certificates
must be surrendered to the Trustee for replacement.
How are Interest and Principal Distributed?
Interest from each Trust will be distributed on or shortly after
the first day of each month on a pro rata basis to Unit holders
of record as of the preceding Record Date who are entitled to
distributions at that time under the plan of distribution chosen.
All distributions for a Trust will be net of applicable expenses
for such Trust.
The pro rata share of cash in the Principal Account of each Trust
will be computed as of the fifteenth day of each month, and distributions
to the Unit holders of such Trust as of such Record Date will
be made on or shortly after the first day of the following month.
Proceeds from the disposition of any of the Bonds of such Trust
(less any premiums due with respect to Bonds for which the Trustee
has exercised the right to obtain Permanent Insurance) received
after such Record Date and prior to the following Distribution
Date will be held in the Principal Account of such Trust and not
distributed until the next Distribution Date. The Trustee is not
required to pay interest on funds held in the Principal or Interest
Account of a Trust (but may itself earn interest
Page 123
thereon and therefore benefit from the use of such funds) nor
to make a distribution from the Principal Account of a Trust unless
the amount available for distribution shall equal at least $1.00
per Unit.
The Trustee will credit to the Interest Account of each Trust
all interest received by such Trust, including that part of the
proceeds (including insurance proceeds if any, paid to an Insured
Trust) of any disposition of Bonds which represents accrued interest.
Other receipts will be credited to the Principal Account of such
Trust. The distribution to the Unit holders of a Trust as of each
Record Date will be made on the following Distribution Date or
shortly thereafter and shall consist of an amount substantially
equal to such portion of the holder's pro rata share of the estimated
annual income of such Trust after deducting estimated expenses
as is consistent with the distribution plan chosen. Because interest
payments are not received by a Trust at a constant rate throughout
the year, such interest distribution may be more or less than
the amount credited to the Interest Account of such Trust as of
the Record Date. For the purpose of minimizing fluctuations in
the distributions from the Interest Account of a Trust, the Trustee
is authorized to advance such amounts as may be necessary to provide
interest distributions of approximately equal amounts. The Trustee
shall be reimbursed, without interest, for any such advances from
funds in the Interest Account of such Trust on the ensuing Record
Date. Persons who purchase Units between a Record Date and a Distribution
Date will receive their first distribution on the second Distribution
Date after the purchase, under the applicable plan of distribution.
The Trustee is not required to pay interest on funds held in the
Principal or Interest Account of a Trust (but may itself earn
interest thereon and therefore benefit from the use of such funds).
As of the fifteenth day of each month, the Trustee will deduct
from the Interest Account of each Trust and, to the extent funds
are not sufficient therein, from the Principal Account of each
Trust, amounts necessary to pay the expenses of such Trust. The
Trustee also may withdraw from said accounts such amounts, if
any, as it deems necessary to establish a reserve for any governmental
charges payable out of the Trust. Amounts so withdrawn shall not
be considered a part of the Trust's assets until such time as
the Trustee shall return all or any part of such amounts to the
appropriate account. In addition, the Trustee may withdraw from
the Interest Account and the Principal Account of a Trust such
amounts as may be necessary to cover redemption of Units of such
Trust by the Trustee.
Record Dates for monthly distributions will be the fifteenth day
of each month, Record Dates for quarterly distributions (if applicable)
will be the fifteenth day of March, June, September and December
and Record Dates for semi-annual distributions will be the fifteenth
day of June and December. Distributions will be made on the first
day of the month subsequent to the respective Record Dates.
The plan of distribution selected by a Unit holder will remain
in effect until changed. Unit holders purchasing Units in the
secondary market will initially receive distributions in accordance
with the election of the prior owner. Each year, approximately
six weeks prior to the end of May, the Trustee will furnish each
Unit holder a card to be returned to the Trustee not more than
thirty nor less than ten days before the end of such month. Unit
holders desiring to change the plan of distribution in which they
are participating may so indicate on the card and return same,
together with their certificate, to the Trustee. If the card and
certificate are returned to the Trustee, the change will become
effective as of June 16 of that year. If the card and certificate
are not returned to the Trustee, the Unit holder will be deemed
to have elected to continue with the same plan for the following
twelve months.
How Can Distributions to Unit Holders be Reinvested?
Universal Distribution Option. Unit holders may elect participation
in a Universal Distribution Option which permits a Unit holder
to direct the Trustee to distribute principal and interest payments
to any other investment vehicle of which the Unit holder has an
existing account. For example, at a Unit holder's direction, the
Trustee would distribute automatically on the applicable distribution
date interest income, capital gains or principal on the participant's
Units to, among other investment vehicles, a Unit holder's checking,
bank savings, money market, insurance, reinvestment or any other
account. All such distributions, of course, are subject to the
minimum investment and sales charges, if any, of the particular
investment vehicle
Page 124
to which distributions are directed. The Trustee will notify the
participant of each distribution pursuant to the Universal Distribution
Option. The Trustee will distribute directly to the Unit holder
any distributions which are not accepted by the specified investment
vehicle. A participant may at any time, by so notifying the Trustee
in writing, elect to terminate his participation in the Universal
Distribution Option and receive directly future distributions
on his Units.
Distribution Reinvestment Option. The Sponsor has entered into
an arrangement with First Trust Tax-Free Bond Fund (the "Tax-Free
Bond Fund"), which permits any Unit holder of a Trust to elect
to have each distribution of interest income or principal, including
capital gains, on his Units automatically reinvested in shares
of the Tax-Free Bond Fund. Oppenheimer Management Corporation
is the investment adviser of the Tax-Free Bond Fund. The Tax-Free
Bond Fund is an open-end, diversified management investment company
which currently offers shares of two Series. The investment objective
of First Trust Tax-Free Bond Fund-Income Series is to provide
a high level of current interest income exempt from Federal income
tax through the purchase of investment grade securities. The investment
objective of First Trust Tax-Free Bond Fund-Insured Series is
to provide as high a level of current interest income exempt from
Federal income tax as is consistent with the assurance of the
scheduled receipt of interest and principal through insurance
and the preservation of capital (the income of either series may
constitute an item of preference for determining the Federal alternative
minimum tax). The objectives and policies of each Series of the
Tax-Free Bond Fund are presented in more detail in the Tax-Free
Bond Fund prospectus.
Each person who purchases Fund Units may use the card attached
to this prospectus to request a prospectus describing the Tax-Free
Bond Fund and a form by which such person may elect to become
a participant in a Distribution Reinvestment Option with respect
to the Tax-Free Bond Fund. Each distribution of interest income
or principal, including capital gains, on the participant's Units
will automatically be applied by the Trustee to purchase shares
(or fractions thereof) of the Tax-Free Bond Fund without a sales
charge and with no minimum investment requirements.
The shareholder service agent for the Tax-Free Bond Fund will
mail to each participant in the Distribution Reinvestment Option
confirmations of all transactions undertaken for such participant
in connection with the receipt of distributions from The First
Trust Combined Series and the purchase of shares (or fractions
thereof) of the Tax-Free Bond Fund.
A participant may at any time, by so notifying the Trustee in
writing, elect to terminate his participation in the Distribution
Reinvestment Option and receive future distributions on his Units
in cash. There will be no charge or other penalty for such termination.
The Sponsor and the Tax-Free Bond Fund each have the right to
terminate the Distribution Reinvestment Option, in whole or in
part.
It should be remembered that even if distributions are reinvested
through the Universal Distribution Option or the Distribution
Reinvestment Option they are still treated as distributions for
income tax purposes.
What Reports Will Unit Holders Receive?
The Trustee shall furnish Unit holders of each Trust in connection
with each distribution a statement of the amount of interest,
if any, and the amount of other receipts, if any, which are being
distributed, expressed in each case as a dollar amount per Unit.
Within a reasonable time after the last business day of each calendar
year, the Trustee will furnish to each person who at any time
during the calendar year was a Unit holder of a Trust of record,
a statement as to (1) the Interest Account: interest received
by such Trust (including amounts representing interest received
upon any disposition of Bonds of such Trust), the amount of such
interest representing insurance proceeds (if applicable), deductions
for payment of applicable taxes and for fees and expenses of the
Trust, redemption of Units and the balance remaining after such
distributions and deductions, expressed both as a total dollar
amount and as a dollar amount representing the pro rata share
of each Unit outstanding on the last business day of such calendar
year; (2) the Principal Account: the dates of disposition of any
Bonds of such Trust and the net proceeds received therefrom (excluding
any portion representing interest and the premium attributable
to the exercise of the right, if applicable
Page 125
to obtain Permanent Insurance), deduction for payment of applicable
taxes and for fees and expenses of the Trust, redemptions of Units,
and the balance remaining after such distributions and deductions,
expressed both as a total dollar amount and as a dollar amount
representing the pro rata share of each Unit outstanding on the
last business day of such calendar year; (3) the Bonds held and
the number of Units of such Trust outstanding on the last business
day of such calendar year; (4) the Redemption Price per Unit based
upon the last computation thereof made during such calendar year;
and (5) the amounts actually distributed during such calendar
year from the Interest Account and from the Principal Account
of such Trust, separately stated, expressed both as total dollar
amounts and as dollar amounts per Unit outstanding on the Record
Date for such distributions.
In order to comply with Federal and state tax reporting requirements,
Unit holders will be furnished, upon request to the Trustee, evaluations
of the Bonds in their Trust furnished to it by the Evaluator.
Each distribution statement will reflect pertinent information
in respect of each plan of distribution so that Unit holders may
be informed regarding the results of the other plan or plans of
distribution.
How May Units be Redeemed?
A Unit holder may redeem all or a portion of his Units by tender
to the Trustee at its unit investment trust office in the City
of New York of the certificates representing the Units to be redeemed,
duly endorsed or accompanied by proper instruments of transfer
with signature guaranteed as explained above (or by providing
satisfactory indemnity, as in connection with lost, stolen or
destroyed certificates), and payment of applicable governmental
charges, if any. No redemption fee will be charged. On the seventh
calendar day following such tender, or if the seventh calendar
day is not a business day, on the first business day prior thereto,
the Unit holder will be entitled to receive in cash an amount
for each Unit equal to the Redemption Price per Unit next computed
after receipt by the Trustee of such tender of Units. The "date
of tender" is deemed to be the date on which Units are received
by the Trustee, except that as regards Units received after 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. Units so redeemed shall be cancelled.
Accrued interest to the settlement date paid on redemption shall
be withdrawn from the Interest Account of the Trust or, if the
balance therein is insufficient, from the Principal Account of
such Trust. All other amounts paid on redemption shall be withdrawn
from the Principal Account of the Trust.
The Redemption Price per Unit (Public Offering Price) will be
determined on the basis of the bid price of the Bonds in the Trust,
as of the close of trading on the New York Stock Exchange on the
date any such determination is made.The Redemption Price per Unit
is the pro rata share of each Unit determined by the Trustee on
the basis of (1) the cash on hand in the Trust or moneys in the
process of being collected, (2) the value of the Bonds in such
Trust based on the bid prices of the Bonds, except for those cases
in which the value of the insurance, if applicable, has been added,
and (3) interest accrued thereon, less (a) amounts representing
taxes or other governmental charges payable out of such Trust,
(b) the accrued expenses of such Trust, and (c) cash held for
distribution to Unit holders of record as of a date prior to the
evaluation then being made. The Evaluator may determine the value
of the 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 such Trust, (2) on the
basis of bid prices for bonds comparable to any Bonds for which
bid prices are not available, (3) by determining the value of
the Bonds by appraisal, or (4) by any combination of the above.
In determining the Redemption Price per Unit for an Insured Trust,
no value will be attributed to the portfolio insurance covering
the Bonds in such Trust unless such Bonds are in default in payment
of principal or interest or in significant risk of such default.
On the other hand, Bonds insured under a policy obtained by the
Bond issuer, the underwriters, the Sponsor or others are entitled
to the benefits of such insurance at all times and such benefits
are reflected and included in the market value of such Bonds.
See "Why and How are the Insured Trusts Insured?" For a description
of the situations in which the evaluator may value the insurance
Page 126
obtained by an Insured Trust, see "Public Offering-How is the
Public Offering Price Determined?"
The difference between the bid and offering prices of such Bonds
may be expected to average 1-2% of the principal amount. In the
case of actively traded bonds, the difference may be as little
as !@2 of 1% and, in the case of inactively traded bonds, such
difference usually will not exceed 3%. Therefore, the price at
which Units may be redeemed could be less than the price paid
by the Unit holder.
The Trustee is empowered to sell underlying Bonds in a Trust in
order to make funds available for redemption. To the extent that
Bonds are sold, the size and diversity of such Trust will be reduced.
Such sales may be required at a time when Bonds would not otherwise
be sold and might result in lower prices than might otherwise
be realized. The Trustee may obtain Permanent Insurance on the
Bonds in an Insured Trust. Accordingly, any Bonds so insured must
be sold on an insured basis (as will Bonds on which insurance
has been obtained by the Bond issuer, the underwriters, the Sponsor
or others).
The right of redemption may be suspended and payment postponed
for any period during which the New York Stock Exchange is closed,
other than for customary weekend and holiday closings, or during
which the Securities and Exchange Commission determines that trading
on that Exchange is restricted or an emergency exists, as a result
of which disposal or evaluation of the Bonds is not reasonably
practicable, or for such other periods as the Securities and Exchange
Commission may by order permit. Under certain extreme circumstances,
the Sponsor may apply to the Securities and Exchange Commission
for an order permitting a full or partial suspension of the right
of Unit holders to redeem their Units.
How May Units be Purchased by the Sponsor?
The Trustee shall notify the Sponsor of any tender of Units for
redemption. If the Sponsor's bid in the secondary market at that
time equals or exceeds the Redemption Price per Unit, it may purchase
such Units by notifying the Trustee before 12:00 p.m. Eastern
time on the next succeeding business day and by making payment
therefor to the Unit holder not later than the day on which the
Units would otherwise have been redeemed by the Trustee. Units
held by the Sponsor may be tendered to the Trustee for redemption
as any other Units.
The offering price of any Units acquired by the Sponsor will be
in accord with the Public Offering Price described in the then
currently effective prospectus describing such Units. Any profit
or loss resulting from the resale or redemption of such Units
will belong to the Sponsor.
How May Bonds be Removed from the Fund?
The Trustee is empowered to sell, for the purpose of redeeming
Units tendered by any Unit holder and for the payment of expenses
for which funds may not be available, such of the Bonds in each
Trust on a list furnished by the Sponsor as the Trustee in its
sole discretion may deem necessary. As described in the following
paragraph and in certain other unusual circumstances for which
it is determined by the Depositor to be in the best interests
of the Unit holders or if there is no alternative, the Trustee
is empowered to sell Bonds in a Trust which are in default in
payment of principal or interest or in significant risk of such
default and for which value has been attributed to the insurance,
if any, obtained by the Trust. See "Rights of Unit Holders-How
May Units be Redeemed?" The Sponsor is empowered, but not obligated,
to direct the Trustee to dispose of Bonds in a Trust in the event
of advanced refunding. The Sponsor may from time to time act as
agent for a Trust with respect to selling Bonds out of a Trust.
From time to time, the Trustee may retain and pay compensation
to the Sponsor subject to the restrictions under the Investment
Company Act of 1940, as amended.
If any default in the payment of principal or interest on any
Bond occurs and no provision for payment is made therefor, either
pursuant to the portfolio insurance, if any, or otherwise, within
thirty days, the Trustee is required to notify the Sponsor thereof.
If the Sponsor fails to instruct the Trustee to sell or to hold
such Bond within thirty days after notification by the Trustee
to the Sponsor of such default, the Trustee may, in its discretion,
sell the defaulted Bond and not be liable for any depreciation
or loss thereby incurred.
Page 127
The Sponsor shall instruct the Trustee to reject any offer made
by an issuer of any of the Bonds to issue new obligations in exchange
and substitution for any Bonds pursuant to a refunding or refinancing
plan, except that the Sponsor may instruct the Trustee to accept
such an offer or to take any other action with respect thereto
as the Sponsor may deem proper if the issuer is in default with
respect to such Bonds or in the written opinion of the Sponsor
the issuer will probably default in respect to such Bonds in the
foreseeable future. Any obligations so received in exchange or
substitution will be held by the Trustee subject to the terms
and conditions in the Indenture to the same extent as Bonds originally
deposited thereunder. Within five days after the deposit of obligations
in exchange or substitution for underlying Bonds, the Trustee
is required to give notice thereof to each Unit holder of the
affected Trust, identifying the Bonds eliminated and the Bonds
substituted therefor. Except as stated in this paragraph and under
"What is the First Trust Combined Series?" for Failed Bonds, the
acquisition by a Trust of any securities other than the Bonds
initially deposited is prohibited.
INFORMATION AS TO SPONSOR, TRUSTEE AND EVALUATOR
Who is the Sponsor?
Nike Securities L.P., the Sponsor, specializes in the underwriting,
trading and distribution of unit investment trusts and other securities.
Nike Securities L.P., an Illinois limited partnership formed in
1991, acts as Sponsor for successive series of The First Trust
Combined Series, The First Trust Special Situations Trust, The
First Trust Insured Corporate Trust, The First Trust of Insured
Municipal Bonds, The First Trust GNMA, Templeton Growth and Treasury
Trust, Templeton Foreign Fund & U.S. Treasury Securities Trust
and The Advantage Growth and Treasury Securities Trust. First
Trust introduced the first insured unit investment trust in 1974
and to date more than $7 billion in First Trust unit investment
trusts have been deposited. The Sponsor's employees include a
team of professionals with many years of experience in the unit
investment trust industry. The Sponsor is a member of the National
Association of Securities Dealers, Inc. and Securities Investor
Protection Corporation and has its principal offices at 1001 Warrenville
Road, Lisle, Illinois 60532; telephone number (708) 241-4141.
As of January 31, 1993, the total partners' capital of Nike Securities
L.P. was $12,256,319 (unaudited). (This paragraph relates only
to the Sponsor and not to the Trust or to any series thereof or
to any other Underwriter. The information is included herein only
for the purpose of informing investors as to the financial responsibility
of the Sponsor and its ability to carry out its contractual obligations.
More detailed financial information will be made available by
the Sponsor upon request.)
Who is the Trustee?
The Trustee is United States Trust Company of New York with its
principal place of business at 45 Wall Street, New York, New York
10005 and its unit investment trust offices at 770 Broadway, New
York, New York 10003. Unit holders who have questions regarding
the Fund may call the Customer Service Help Line at 1-800-682-7520.
The Trustee is a member of the New York Clearing House Association
and is subject to supervision and examination by the Comptroller
of the Currency, the Federal Deposit Insurance Corporation and
the Board of Governors of the Federal Reserve System.
The Trustee, whose duties are ministerial in nature, has not participated
in the selection of the Securities. For information relating to
the responsibilities of the Trustee under the Indenture, reference
is made to the material set forth under "Rights of Unit Holders."
The Trustee and any successor trustee may resign by executing
an instrument in writing and filing the same with the Sponsor
and mailing a copy of a notice of resignation to all Unit holders.
Upon receipt of such notice, the Sponsor is obligated to appoint
a successor trustee promptly. If 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 Indenture. If upon resignation
of a trustee no successor has accepted the appointment within
30 days after notification, the retiring trustee may apply to
a court of competent jurisdiction for the appointment of a successor.
The resignation or removal of a trustee becomes
Page 128
effective only when the successor trustee accepts its appointment
as such or when a court of competent jurisdiction appoints a successor
trustee.
Any corporation into which a Trustee may be merged or with which
it may be consolidated, or any corporation resulting from any
merger or consolidation to which a Trustee shall be a party, shall
be the successor Trustee. The Trustee must be a banking corporation
organized under the laws of the United States or any State and
having at all times an aggregate capital, surplus and undivided
profits of not less than $5,000,000.
Limitations on Liabilities of Sponsor and Trustee
The Sponsor and the Trustee shall be under no liability to Unit
holders for taking any action or for refraining from taking any
action in good faith pursuant to the Indenture, or for errors
in judgment, but shall be liable only for their own willful misfeasance,
bad faith, gross negligence (ordinary negligence in the case of
the Trustee) or reckless disregard of their obligations and duties.
The Trustee shall not be liable for depreciation or loss incurred
by reason of the sale by the Trustee of any of the Bonds. In the
event of the failure of the Sponsor to act under the Indenture,
the Trustee may act thereunder and shall not be liable for any
action taken by it in good faith under the Indenture.
The Trustee shall not be liable for any taxes or other governmental
charges imposed upon or in respect of the Bonds or upon the interest
thereon or upon it as Trustee under the Indenture or upon or in
respect of the Fund which the Trustee may be required to pay under
any present or future law of the United States of America or of
any other taxing authority having jurisdiction. In addition, the
Indenture contains other customary provisions limiting the liability
of the Trustee.
If the Sponsor shall fail to perform any of its duties under the
Indenture or become incapable of acting or become bankrupt or
its affairs are taken over by public authorities, then the Trustee
may (a) appoint a successor Sponsor at rates of compensation deemed
by the Trustee to be reasonable and not exceeding amounts prescribed
by the Securities and Exchange Commission, or (b) terminate the
Indenture and liquidate the Trusts as provided herein, or (c)
continue to act as Trustee without terminating the Indenture.
Who is the Evaluator?
The Evaluator is Securities Evaluation Service, Inc., 531 East
Roosevelt Road, Suite 200, Wheaton, Illinois 60187. The Evaluator
may resign or may be removed by the Sponsor and the Trustee, in
which event the Sponsor and the Trustee are to use their best
efforts to appoint a satisfactory successor. Such resignation
or removal shall become effective upon the acceptance of appointment
by the successor Evaluator. If upon resignation of the Evaluator
no successor has accepted appointment within thirty days after
notice of resignation, the Evaluator may apply to a court of competent
jurisdiction for the appointment of a successor.
The Trustee, Sponsor and Unit holders may rely on any evaluation
furnished by the Evaluator and shall have no responsibility for
the accuracy thereof. Determinations by the Evaluator under the
Indenture shall be made in good faith upon the basis of the best
information available to it, provided, however, that the Evaluator
shall be under no liability to the Trustee, Sponsor or Unit holders
for errors in judgment. This provision shall not protect the Evaluator
in any case of willful misfeasance, bad faith, gross negligence
or reckless disregard of its obligations and duties.
OTHER INFORMATION
How May the Indenture be Amended or Terminated?
The Sponsor and the Trustee have the power to amend the Indenture
without the consent of any of the Unit holders when such an amendment
is (1) to cure any ambiguity or to correct or supplement any provision
of the Indenture which may be defective or inconsistent with any
other provision contained therein, or (2) to make such other provisions
as shall not adversely affect the interest of the Unit holders
(as determined in good faith by the Sponsor and the Trustee),
provided that the Indenture is not amended to increase the number
of Units of any Trust issuable thereunder or to permit the deposit
or acquisition of securities either in addition to or in substitution
for any of the Bonds of any Trust initially deposited in a Trust,
except for the substitution
Page 129
of certain refunding securities for Bonds or New Bonds for Failed
Bonds. In the event of any amendment, the Trustee is obligated
to notify promptly all Unit holders of the substance of such amendment.
Each Trust may be liquidated at any time by consent of 100% of
the Unit holders of such Trust or by the Trustee when the value
of such Trust, as shown by any evaluation, is less than 20% of
the aggregate principal amount of the Bonds initially deposited
in the Trust or by the Trustee in the event that Units of a Trust
not yet sold aggregating more than 60% of the Units of such Trust
are tendered for redemption by the Underwriters, including the
Sponsor. If a Trust is liquidated because of the redemption of
unsold Units of the Trust by the Underwriters, the Sponsor will
refund to each purchaser of Units of such Trust the entire sales
charge paid by such purchaser. The Indenture will terminate upon
the redemption, sale or other disposition of the last Bond held
thereunder, but in no event shall it continue beyond December
31, 2042. In the event of termination, written notice thereof
will be sent by the Trustee to all Unit holders of such Trust.
Within a reasonable period after termination, the Trustee will
sell any Bonds remaining in the Trust, and, after paying all expenses
and charges incurred by such Trust, will distribute to each Unit
holder of such Trust (including the Sponsor if it then holds any
Units), upon surrender for cancellation of his Certificate for
Units, his pro rata share of the balances remaining in the Interest
and Principal Accounts of such Trust, all as provided in the Indenture.
Legal Opinions
The legality of the Units offered hereby and certain matters relating
to Federal tax law have been passed upon by Chapman and Cutler,
111 West Monroe Street, Chicago, Illinois 60603, as counsel for
the Sponsor. Booth & Baron, 122 East 42nd Street, Suite 1507,
New York, New York 10168, acts as special counsel for the Fund
for New York tax matters for Series 1, 2 and 3 of the Fund. Winston
& Strawn (previously named Cole & Deitz), 175 Water Street, New
York, New York 10038 acts as counsel for the Trustee and as special
counsel for the Fund for New York Tax matters for Series 4-125
of the Fund. Carter, Ledyard & Milburn, 2 Wall Street, New York,
New York 10005, will act as counsel for the Trustee and as special
counsel for the Fund for New York tax matters for Series 126 and
subsequent Series of the Fund. For information with respect to
state and local tax matters, including the State Trust special
counsel for such matters, see the section of the Prospectus describing
the state tax status of Unit holders appearing herein.
Experts
The statements of net assets, including the portfolios, of each
Trust contained in Part One of the Prospectus and Registration
Statement have been audited by Ernst & Young, independent auditors,
as set forth in their reports thereon appearing elsewhere therein
and in the Registration Statement, and are included in reliance
upon such reports given upon the authority of such firm as experts
in accounting and auditing.
DESCRIPTION OF BOND RATINGS*
Standard & Poor's Corporation. A brief description of the applicable
Standard & Poor's Corporation rating symbols and their meanings
follow:
A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect
to a specific debt obligation. This assessment may take into consideration
obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase, sell or hold
a security, inasmuch as it does not comment as to market price
or suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such
information, or for other circumstances.
- -----------------------------
* As published by the rating companies.
Page 130
The ratings are based, in varying degrees, on the following considerations:
l. 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;
ll. Nature of and provisions of the obligation;
lll. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangements
under the laws of bankruptcy and other laws affecting creditors'
rights.
AAA - Bonds rated AAA have the highest rating assigned by Standard
& Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.**
AA - Bonds rated AA have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues only
in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
bonds in higher rated categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for bonds in this category
than for bonds in higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "BBB" may be modified
by the addition of a plus or minus sign to show relative standing
within the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating
is provisional. A provisional rating assumes the successful completion
of the project being financed by the bonds being rated and indicates
that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent
to completion of the project, makes no comment on the likelihood
of, or the risk of default upon failure of, such completion. The
investor should exercise his/her own judgment with respect to
such likelihood and risk.
Credit Watch: Credit Watch highlights potential changes in ratings
of bonds and other fixed income securities. It focuses on events
and trends which place companies and government units under special
surveillance by S&P's 180-member analytical staff. These may include
mergers, voter referendums, actions by regulatory authorities,
or developments gleaned from analytical reviews. Unless otherwise
noted, a rating decision will be made within 90 days. Issues appear
on Credit Watch where an event, situation, or deviation from trends
occurred and needs to be evaluated as to its impact on credit
ratings. A listing, however, does not mean a rating change is
inevitable. Since S&P continuously monitors all of its ratings,
Credit Watch is not intended to include all issues under review.
Thus, rating changes will occur without issues appearing on Credit
Watch.
Moody's Investors Service, Inc. A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings
follow:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by
a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues. Their safety
is so absolute that with the occasional exception of oversupply
in a few specific instances, characteristically, their market
value is affected solely by money market fluctuations.
Aa - Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat large than in Aaa
securities. Their market value is virtually immune to all but
money market influences, with the occasional exception of oversupply
in a few specific instances.
- -----------------------------
** Bonds insured by Financial Guaranty Insurance Company, AMBAC
Indemnity Corporation, Municipal Bond Investors Assurance Corporation,
Connie Lee Insurance Company, Financial Security Assurance and
Capital Guaranty Insurance Company are automatically rated "AAA"
by Standard & Poor's Corporation.
Page 131
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future. The market value of A-rated
bonds may be influenced to some degree by economic performance
during a sustained period of depressed business conditions, but,
during periods of normalcy, A-rated bonds frequently move in parallel
with Aaa and Aa obligations, with the occasional exception of
oversupply in a few specific instances.
A 1 and Baa 1 - Bonds which are rated A 1 and Baa 1 offer the
maximum in security within their quality group, can be bought
for possible upgrading in quality, and additionally, afford the
investor an opportunity to gauge more precisely the relative attractiveness
of offerings in the market place.
Baa - Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length
of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well. The market
value of Baa-rated bonds is more sensitive to changes in economic
circumstances, and aside from occasional speculative factors applying
to some bonds of this class, Baa market valuations will move in
parallel with Aaa, Aa, and A obligations during periods of economic
normalcy, except in instances of oversupply.
Moody's bond rating symbols may contain numerical modifiers of
a generic rating classification. The modifier 1 indicates that
the bond ranks at the high end of its category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
Con.(---)-Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under construction,
(b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments
to which some other limiting condition attaches. Parenthetical
rating denotes probable credit stature upon completion of construction
or elimination of basis of condition.
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<TABLE>
<CAPTION>
CONTENTS:
<S> <C>
The First Trust Combined Series:
What is The First Trust Combined Series? 3
What are Estimated Long-Term Return and
Estimated Current Return? 11
How is Accrued Interest Treated? 11
Why and How are the Insured Trusts Insured? 12
What is the Federal Tax Status of Unit Holders? 18
Certain Considerations. 49
What are the Expenses and Charges? 118
Public Offering:
How is the Public Offering Price Determined? 119
How are Units Distributed? 122
What are the Sponsor's Profits? 122
Rights of Unit Holders:
How are Certificates Issued and Transferred? 123
How are Interest and Principal Distributed? 123
How can Distributions to Unit Holders be
Reinvested? 124
What Reports will Unit Holders Receive? 125
How May Units be Redeemed? 126
How May Units be Purchased by the Sponsor? 127
How May Bonds be Removed from the Fund? 127
Information as to Sponsor, Trustee and Evaluator:
Who is the Sponsor? 128
Who is the Trustee? 128
Limitations on Liabilities of Sponsor and Trustee 129
Who is the Evaluator? 129
Other Information:
How May the Indenture be Amended or
Terminated? 129
Legal Opinions 130
Experts 130
Description of Bond Ratings 130
</TABLE>
________________________
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, SECURITIES IN ANY JURISDICTION
TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION.
THIS PROSPECTUS DOES NOT CONTAIN ALL THE INFORMATION SET
FORTH IN THE REGISTRATION STATEMENTS AND EXHIBITS RELATING THERETO,
WHICH THE FUND HAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
WASHINGTON, D.C. UNDER THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, AND TO WHICH REFERENCE IS HEREBY MADE.
FIRST TRUST
The First Trust
Combined Series
Prospectus
Part Two
March 31, 1993
First Trust
1001 Warrenville Road, Suite 300
Lisle, Illinois 60532
1-708-241-4141
Trustee:
United States Trust Company
of New York
770 Broadway
New York, New York 10003
1-800-682-7520
This Part Two Must Be
Accompanied by Part One
PLEASE RETAIN THIS PROSPECTUS
FOR FUTURE REFERENCE
Page 136
CONTENTS OF POST-EFFECTIVE AMENDMENT
OF REGISTRATION STATEMENT
This Post-Effective Amendment of Registration Statement
comprises the following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Auditors
S-1
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the Registrant, The First Trust Combined Series 125, certifies
that it meets all of the requirements for effectiveness of this
Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Post-Effective
Amendment of its Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized in the
Village of Lisle and State of Illinois on February 28, 1994.
THE FIRST TRUST COMBINED SERIES 125
(Registrant)
By NIKE SECURITIES L.P.
(Depositor)
By Carlos E. Nardo
Senior Vice President
Pursuant to the requirements of the Securities Act of 1933,
this Post-Effective Amendment of Registration Statement has been
signed below by the following person in the capacity and on the
date indicated:
Signature Title* Date
Robert D. Van Kampen Sole Director of )
Nike Securities )
Corporation, ) February 28, 1994
the General Partner )
of Nike Securities L.P. )
)
) Carlos E. Nardo
) Attorney-in-Fact**
*The title of the person named herein represents his capacity in
and relationship to Nike Securities L.P., Depositor.
**An executed copy of the related power of attorney was filed wi
th the Securities and Exchange Commission in connection with
the Amendment No. 1 to Form S-6 of The First Trust Special
Situations Trust, Series 18 (File No. 33-42683) and the same
is hereby incorporated herein by this reference.
S-2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption
"Experts" and to the use of our report dated January 4, 1994 in
this Post-Effective Amendment to the Registration Statement and
related Prospectus of The First Trust Combined Series dated
February 18, 1994.
ERNST & YOUNG
Chicago, Illinois
February 17, 1994
